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Friday, December 26, 2008


The Post Christmas Post

The numbers are not fully compiled, but based on credit card data, this Christmas season was about as bad as it ever gets for retailers, notwithstanding the bracing figures from Amazon.com. The stats bear out the anecdotal evidence we all heard - agreements within extended families to forgo exchanging gifts, the downsizing, the hunt for things on sale, etc. Yet, the kids seemed as happy as ever. It wouldn't be the worst thing if one lesson we all take away is that you don't have to go overboard spending to have a very nice holiday. But it's a hard lesson for retailers.

Apparently, the public took its savings from lower gas prices...and banked it, or used it to pay down older credit card debts. If so, people are getting smarter.

The next thing we will hear and see are retailers shutting down in droves. The economics are pretty simple. Retailers operate in the red all year but come out between Thanksgiving and Christmas. A lousy Christmas means a clearance sale and red figures for the year. Then, to continue in operation, the store has to restock, but those with losses, and most operations of any scale, need to borrow to finance the new inventory. However, in case you've been lying under a rock for the last nine months or so, the usual lenders have retreated and are nowhere to be found. If you can't finance inventory, the doors simply close. Bad news for retail employees and bad news for commercial real estate landlords and their lenders. That's what makes for a deeper recession.

Right now, I am expecting to see this thing bottom out sometime in mid to late 2009, maybe early 2010 with several quarters, possibly a full year of negative GDP and 10% unemployment. Ouch you say, but to put things in perspective, the mild recessions we have "enjoyed" the last twenty years with unemployment topping out around 6% are not historically typical. The bad recessions I remember, like 1974 and 1981-82 usually saw 8% unemployment as I recall, and were probably higher because all of the folks who give up looking for work aren't counted in the stats. People forget that in the 60's and 70's, 5% unemployment was considered full employment. We have been very spoiled by the free market driven economic boom since 1983. Because of that, 10% will feel like a depression, but it's really nothing like it; unemployment hit 25% in the 1930's.

This is bad enough for stocks, but I think you just look the other way where stocks are concerned for a while, because a real bull market can not take hold until the bond market begins acting normally. Right now, even good credits can't find a bid, so we are nowhere near resolving the deleveraging mess, though we've come a long way. But this credit bubble was just huge. That's why I am tweaking my formula again to put in a preferred stock buy for my IRA at the start of each quarter. Preferred stocks act like little bonds. The dividend yields are just too good to pass up, particularly in a tax deferred account.

When bubbles pop, Ponzi schemes also flame out since people want their money back, which the operators have either lost, stolen or both. So it's no coincidence that after two or three decades, Bernie Madoff finally was found out at the bottom of this lousy market. Of course, this was a game of "see no evil" played by regulators, fund of funds managers, institutional money managers, and wealthy investors who preferred to believe the impossible -that steady, almost non - varying returns could be achieved through up and down markets by means of some kind of black box hedging program. Of course, it's easy to see how silly this all was in retrospect, but some had the good sense to avoid this guy and they are deserving of our grudging admiration. As for me, I doubt I could have been eligible to be a Madoff investor, but I never would have wanted to be - I don't trust funds or money managers, I don't like them, I like to control my portfolio and when to take gains, etc.

One other thing - no way could Madoff have pulled this swindle alone. It's just way too big a job, creating phony statements, keeping track of hypothetical account values that don't exist, etc. So other employees, possibly family members, are sure to be implicated.

By the way, one should also be suspicious of companies that always seem to report right on their number, quarter after quarter, through good times and bad, a la the GE of the Welch days. The securities analysts love predictability of earnings, but to me, it's a red flag that the earnings are being managed and are the result of stupid accounting tricks.

Sports is a lighter pastime than stocks, though if you are a Jets fan, we are learning yet a new way to be tortured. My prediction for this team was 8-8, but how could you not believe that this team was playoff bound when they were alone in first place with a pitifully easy schedule ahead. So now they are 9-6 and needing an improbable sequence of events to win the division, the only way they can get in the playoffs. The Jets must hope Buffalo beats New England in the 1 PM game, which I think is no more than a 10% chance, and if they do, they must beat the improving Dolphins at 4 PM. At least they are home, but I think that gives them roughly a 40% chance in that game. Mathematically that makes the odds about 24-1 against both events happening. I am happy for Chad Pennington of the Dolphins who has proven that he can throw enough to execute a sensible game plan, something the Jets were afraid to give him last year since they believed he could not throw downfield at all. That becomes a self fulfilling prophecy when you don't allow your receivers to cross the line of scrimmage.

By the way, the scenario is not good for New England either since once they win, the Jets motivation to beat the Dolphins may be lacking, and that will put New England out too, if the Dolphins win.


Then there are the Yankees, for whom recessions apparently don't exist. They have brought in three talented free agents as their new hired guns. Yes, that will help them, but those Yankee diehards who believe that this constitutes an automatic ticket to the playoffs need a little rethink. The two guys who made this team what they were are aging at shortstop and in the bullpen closer role, the catcher has had it, and there is still no centerfielder. You know what they say about teams that are weak up the middle. And the Yankees arguably play in baseball's toughest division. No matter how good they are, they still have to displace either the Red Sox or the Rays, and that is not a given.

Well we may have thrown some good money after bad, but that's what our formula does on occasion, what with its tendency to average down. On Monday, I bought 400 shares of I2 technology (ITWO) at 6.04, the low price coming because its planned takeover fell through (no surprise there). Maybe, if the credit crunch ever ends, another offer will materialize. I can wait, and wait, and wait....

Please explain the math behind your Jets prediction (24-1 against both events happening). Remember to show your work.
Hail Freedonia!!
Rufus T. Firefly

ps I caught your GE comment but we & the Street have already beat that dog to death.
Here's the math:
If the Pats have only a ten per cent chance of losing and the jets only a 40% chance of winning, the likelihood of both events occurring (necessary to win the division) is .1(.4) or .04. .)4 translates to 4/100 or 1 chance in 25, making the odds 24-1 against.

Hope I get a passing grade!

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