FLYING HIGH - Airlines (LCC), PALM, Not: AAPL, JPM

Late this afternoon an emergency landing by a US Airways (LCC) flight from NY (LGA) to NC (CLT) in the Hudson River was executed to perfection upon engine failure (flock of birds). As accidents go, the circumstances could not have been more ideal as the pilot adroitly landed the plane intact and a slew of commuter ferries readying for the PM rush were immediately available to assist in the rescue. Apparently everybody got off the plane safely. The ultimate cost to the company not covered by insurance should be de minimus. The positive PR boost ($1-3 MMs?), on the other hand, probably more than offset said cash cost. What a great story to bump Mad-off from the news (re)cycle. My hat's off to responders.

Source: CNN.com, Inset: Pilot Chelsey B. "Sully" Sullenberger

The immediate investment implication for the airline sector at-large, and LCC in particular, would seem to be very positive as investors have an incentive to check-in on the industry. Many are in the Warren Buffett camp of forsaking the sector altogether, but I consider George Soros a better role model as he embraces the roles of investor, trader, or speculator as context dictates; he was an original investor in JetBlue. Therefore, it seems timely to reiterate my strong intermediate-term support for buying the airlines (as long as the overall market isn’t tanking).

The story is straightforward for the “bad” airlines (e.g. not LUV). The companies coming out of bankruptcy over the last few years face what appears to be a minimal threat of labor strife and have been manic about controlling costs ex-fuel; capital restructuring (less debt) opens the door for consolidation; and the gigantic headwind of last year’s jet fuel costs are going to drop off the cliff in 2H09 as hedges expire. Further, the airlines have pricing power right now as the industry can cut suppoly at a rate on par with the fall in demand. Passengers may sometimes find it more economical to ship luggage ahead via UPS, but people still have to put up with the a la carte pricing schemes as seat capacity is limited. Also, first/business-class is being filled by full fare customers (except morons like Stephon Marbury) that were previously flying chartered jets, which crowds out the “upgrade” crowd; massive airline mile deflation also support margins. If only OPEC could be so successful.

If you care to geek out on the analysis further consider a visit to this analyst/ex-pilot’s site.

PALM. Being long a high-beta, heavily shorted name in the midst of a terrible market was no fun on WED especially since the stock closed below the post-CES pop from last FRI. Not good, but being a slave to technical analysis on a fundamental idea isn’t my style and I didn’t panic; it’s the wrong move when a company reaches an inflection point. Today’s +35% move was a sweet confidence boost, but taking profits now would be too early. Data from ShortSqueeze.com indicates that 38% of the float is short (12.7 days relative to average daily volume), and you can bet more was added amidst the high volume yesterday. The whipsaw bounce today accelerated into the close so I can virtually guarantee that the stock gaps up tomorrow. At $8.50/sh I would sell at least 1/2 the position. Place the limit order now, because PALM may hit that tomorrow.

AAPL. Acted well despite my screed yesterday, but this company needs to join the world of dividend-players. Growth stocks with decelerating growth rates are “value traps.” This goes for GOOG as well, who just axed 100 people from HR.

JPM. Opening above yesterday’s close was a “win” on my preview prediction, but I would have sold all trading longs at the open today. C is rumored to be promoting the bad/good bank idea. The last prominent company to do so was Lehman Brothers; I’m just saying. Financials remain firmly in day-trading territory at least until Treasury/FED hammers out a more definitive game plan. Bernanke suggested revisiting TARP on Tuesday, which is fine with me, but let’s see what happens in Congress.

INTC. After pre-announcing results twice this Q, they managed to "meet" consensus EPS of $0.04. If things are that bad for INTC think just how much worse the outlooks are for NVDA & AMD.

Disclosures: Long PALM.

NFL CONFERENCE CHAMPIONSHIPS

Year-to-date NFL: 7-1. +5.5 units; Cumulative 10-3. +6.5 units

At this point in the road to the Superbowl attrition due to injury, self-inflicted or otherwise, is a major factor. The Ravens may have won the battle last week, but could have sacrificed the war if LB Terrell Suggs (bad shoulder) and CB Samari Rolle (groin) can't go full-bore on Sunday. Sometimes a team can exceed expectations by showing an ability to "rally" around a fallen leader for a game or so, but I expect the Ravens will need every ounce of its talent on D to finally beat the Steelers this season. My experience suggests not to expect much from these impact players even if they play; painkillers won't do much for these injuries. On the other sideline stud S Troy Polamalu's bum ankle offsets things a little. In the other matchup, I expect WR Anquan Boldin (hip/hamstring) to be recovered in time to play the Eagles. Three seasons ago the Cincinnati Bengals rose from the ashes of NFL purgatory and may have reached (and won) Superbowl XL if Carson Palmer wasn't injured by a dirty play. That's why we watch the game.

Eagles vs. CARDINALS (+4). 1 unit. Taking the points ["Don’t forget to put a little aside for an outright upset."] last week was a winning contrarian call that admittedly still gives me a warm and fuzzy for being an early supporter of the Cardinals quixotic quest. The line opened +3 as I expected, but the fact it creeped up to +4 has me scratching my head. A home dog situation this late in the playoffs is completely unheard of as it is! Perhaps the turmoil in the financial markets has people applying a de-risking mentality to sports speculation as well. [I note the herd is usually punished; underdogs are 5-3 in the playoffs to date]. I consider the 48-20 result in the regular season matchup mostly a product of circumstances that are irrelevant this week. If anything, it raises the probability of an Eagles letdown, especially after an emotional victory over a hated division rival.

For the Cards, a game played at home (7-2) in 70 degree weather in January is the dream scenario as they feature a HOF-caliber QB with a triumvirate or WR that gained 1000+ yards, including a Jerry Rice-like Larry Fitzgerald, at his disposal. The Eagles may have the personnel in the secondary to stick with its blitzing scheme, but I'm optimistic that the Cardinals coach (an ex-Steelers O-coordinator) will be able to counter effectively. Ultimately, I have confidence in the Redbirds mettle as demonstrated by the way they responded to allowing a soft opening drive TD last week. 33 unanswered points on the road against a heavily favored team is no mean feat.

Phoenix was the first victim of QB Donovan McNabb's redemption run since being benched for poor play. However, something bothers me about how he feigns his nonchalance since the benching (let alone the overtime rule fiasco) with his improved play. Donovan deserves credit for rallying, but he still has lots to prove while the stakes are highest and conditions are presumably in his favor. It's been a problem since starring at Syracuse. It's just a hunch, but I think he harbors too much bitterness to make a psychological breakthrough. The vastly improved organization and confidence of Arizona's defense has enabled this historic franchise run, but is still the worst of the remaining contenders. I'm just betting that McNabb will fail to exploit it. No PA-only Superbowl for you Governor Rendell, especially if RB Brian Westbrook’s knee ailment is a limiting factor. Follow-up: First off I'm glad McNabb is blameless. Arizona simply played one helluva game utilizing an A+ gameplan.  The middle screen TD in the red zone was emblematic of sticking with low-risk, quick-hitting plays against an aggressive blitzing D. Running as much as possible to preserve balance was key. S-W-E-E-T.

Ravens vs. STEELERS (-6). 1 unit. Playing Round 3 between these like-minded teams would suggest another highly competitive brawl as the prior two outings were decide by a cumulative seven points. 0-2 thusfar, the Ravens revenge factor needs to be considered, but not blind the bigger issues at hand. Most worrisome is that the Ravens D is not only hobbled as mentioned above, but the Steelers are more than capable of marching down the field like the Titans did the week before. The O-line and RB are not as good, but the QB/WR/TE threats help offset that. Moreover, I find it improbable the Ravens get lucky again creating turnovers while backed near its own goal. Baltimore's D is high class, but nowhere close to the Superbowl-winning 2000 vintage.

On the other side of the ball I expect the difference in playoff experience to finally catch up with the Ravens rookie head coach-QB tandem. Flacco is due for a less-than-efficient outing, and Harbaugh may be tempted to rely on play-calling that I found way too conservative against a strong defense. While the game is still close, Baltimore must not simply rely too heavily on playing for field position and leaning on its defense; playing "not to lose" won't work. I forecast an favorable turnover differential for the Steelers leaas to a comfortable win, especially since the NFL's best pass rush can handily stifle the Ravens catchup offense. Follow-up: To paraphrase the illustrious ex-Cardinals coach Dennis Green, "The Ravens were who I thought they were." The Steelers were underwhelming and sloppy. My intial reaction is that the Cardinals will be installed as a very small (under 3) dog.

JOBS WAS OUT OF TOUCH

After months of speculation surrounding the true condition of his health, Apple CEO Steve Jobs is taking a leave of absence through the end of June (at least) after suggesting everything was under control a few days ago.  Despite the tremendous performance of AAPL stock since iPOD and iTUNES et al. captured the public's consciousness the company was short-sighted in allowing a Cult of the CEO environment to thrive.

For AAPL reluctant disclosure, obfuscation, and misdirection may be good marketing tactics for a product launch to keep its fanboys on edge, but was completely irresponsible in regards to Jobs' health; of course shareholder should have received an honest and timely appraisal when the issue first arose.  The stock is being punished after-hours and deservedly so.  If Jobs' prognosis is to never return, than $60/sh is not out of the question, especially with such a sour market backdrop.  Bullish analyst loudly protest that AAPL has a deep bench, a fat balance sheet, and growing robustly, but so what? Most shareholders are putting as much faith in the CEO/Visionary that favors black clothing as in the product line.  Steve Jobs, rightly or wrongly, was considered the company's economic moat.

More Repurcussions.  Not to say that there are not ample reasons for gloom being confirmed basis (real estate, financials, retail, advertising, blah-blah-blah), but I'm afraid the outsized mindshare AAPL has will offer the perfect excuse for a another wave of major selling tomorrow. Hopefully investors avoided being fully invested (long) while the hypothetical road to stabilization in our financial system remains unclear. Selling all (or completely hedging) longs at the open may prove to be a prudent response all things considered. This is a trader's market and this possibility should not be beyond comprehensible.

Above: King Sanford Weill Medical Center

Citigroup.  It's funny how little flack empire builder Sandy Weill has taken recently despite the official death of the Citi financial supermarket business model. Here's a reminder that when you, fair reader, become a billionaire don't forget to get out before the market turns, and spread your wealth to every worthy charity you come across, especially hospitals and schools. Of the two the latter is the more important part of your legacy.  It also helps to have a villain like Bernie Madoff heavily occupy media coverage. 

Disclosures: No position. 

4Q08.1 EARNINGS - ZEP, Bullish: INFY, SCHW, JPM

Last Friday's "sell into the close" call has been timely as SRS was up nearly 12% yesterday, while airlines (~5%) and dry bulk shippers (~10%) sold off in high volume.  AMD continues its death march, and PALM gapped up 10% before finishing with a small loss.  We expect the market to stay negative this week, with CPI, capacity utilization, and consumer sentiment data on FRI collectively punctuating the negative news.  If the selloff is severe enough, however, I am inclined to go long hope/Obama into the long weekend heading into inauguration day.

MONDAY review.  Alcoa (AA) has the undeserved honor of kicking off earnings season.  The reults disappointed as usual, but a poorly managed company is not a good barometer of answering the question: “How bad are things really?”  Zep (ZEP) was spun-out of Acuity Brands (AYI) in Nov/07 and provides cleaning/maintenance products mainly to industrial customers including autobody shops.  The huge earnings miss based on raw material expense and a revenue miss was one thing, but the utter lack of confidence in a short-term outlook caused 25% to be lopped off the stock (closed weak).  The company wasn’t cheap prior, but I expected more benefit from the trend of longer car ownership and DIY maintenance.

TUESDAY.  The premier IT outsourcing company in India, Infosys (INFY), beat on earnings and revenues overnight to provide some relief in the Bombay SENSEX after the Satyam (SAY) accounting scandal rocked the country. With its 0.65 PEG ratio and very solid balance sheet it seems to be a worthy proxy for buying India and will probably be the primary beneficiary of market share gain from the SAY fallout. Worth a trade or start building a LT position as a proxy for the country.

WEDNESDAY.  Judging from last year, Charles Schwab (SCHW) is expected to release earnings and DEC activity this day.  Despite getting knocked down with the rest of the Financial sector lately, I'm expecting a very upbeat call (all things considering). The pool of potential independent advisors grows substantially for SCHW if the “Morg-ue”-Barney j.v. goes through as expected.  Apologies for the cynicism, but a Salomen Smith Barney executive will probably head the j.v. as s/he would know how to cut most effectively.  Meanwhile, as I noted on Jan 7, I expect SCHW's Institutional Services business to continue to drive growth.  In November total assets had only fallen 4% Q/Q while net new assets actually grew by $5.9B (vs. $1.1T total).  SCHW gained 30K new customers in October (+88% y/y).  The new marketing campaign launched last SEP has clearly been resonating with investors. Lastly, I expect mgmt denies any speculation of its interested in buying optionXpress (OXPS) in the aftermath of TD Ameritrade (AMTD) acquiring ThinkOrSwim (SWIM). 

THURSDAY.  I am bullish on JPM (vs its peers) after moving up its earnings six days to get in front of the BAC’s on 1/20.  My interpretation is they want to be able to distinguish its recent Q performance as “acceptably poor” by simply being able to confirm CEO Jaime Dimon’s recent public statements that the Q was terrible.  I only recommend a quick trade as there may be a capital raise in the works this weekend as well.  If you believe Oppenheimer banking analyst Meredith Whitney, it’s actually inevitable.  Meanwhile, the probability of acquisition-happy CEO Ken Lewis of BAC announcing disastrous results seems very high.  How smoothly could the Merrill Lynch integration be going in this market? There are already signs that Charlotte and NYC cultures are incompatible as the head of the Thundering Herd’s financial advisors is leaving to attend Yale law school.

FRIDAY.  All about the aforementioned economic data. Gold and other commodities sell off if deflation fears take hold going into MLK weekend.

Disclosure: No positions.

CELTICS @ CAVALIERS, 8pm on ESPN

Year to date: 7-1. +5 units

The NBA regular season is a 82-game grind.  Knowing which team is better is one thing, but factors like player interest and travel are very important (and difficult to assess).  Also, what incentive does a coach have to exploit an opponent mismatch or tendency to the best of his ability this early in the season?  Tonight's marquee matchup on ESPN between the defending champion Celtics visiting the undefeated-at-home Cavaliers, however, is a statement game where you can be sure both squads will attempt to perform to its respective potential.

CELTICS (+4) vs. Cavaliers. 1 unit.  Whenever a lesser team is favored by more than 4 points in the NBA, it is sending a major message in sentiment, and is a contrarian opportunity I seek to exploit.  The Celtics may have been struggling since failing to preserve its franchise-record 19 game winning streak against the Lake Show on Christmas, but I think Boston prevails tonight in hostile territory because of its balanced offensive attack, superior defense, and a winner's pedigree. I hardly expect LeBronBron to choke, but, to me, there's more pressure on the home Cavs to prove they are an elite team that can actually win the championship. Although the speculation of LeBron's impending 2010 free agency departure has cooled since playing the Knicks, that doesn't mean his supporting cast doesn't face any less pressure today. Follow-up: LBJ was great all over the court, but this game was more of a farce for Boston. I can see the players actually lobbying to bring Stephon Marbury, as has already been rumored as his next team, after this performance. Rajon Rondo shouldn't be a starter in this league; he doesn't make anybody better and is pathetic on offense.

THE HOPE [aka OBAMA] TRADE IS OVER

The market temporarily put in a meaningful bottom in mid-November after Obama was elected, and we are fast approaching the next major catalyst date: the inauguration.  As it takes place after the long MLK weekend. The indexes have already risen over 20%+ off the bottom on weak volume so it's time to take profits. The leaders of the rally have been poor-quality companies and early-cyclical industries. Count your blessings and don't get hung up on original cost basis: it's a Sunk Cost!  Reversing the trade to begin short exposure is appropriate as the fundamentals are on your side.  It's difficult to see this earnings season providing a major short covering opportunity due to the recent gains, and the rate of change in 4Q EPS revisions continue on the eve of Alcoa officially kicking off earnings season next week rendering the consensus number somewhat moot. Obama may provide a refreshingly candid assessment of the challenges ahead on a regular basis, but ultimately the best he can do is mitigate the rate of impending job losses with sound policy.  He may have a serviceable jump shot, but the scouting report says he can't drive to the rim with his offhand, let alone turn water into wine.

Last Hour Tactics: Take Profits!  I'm pretty sure the market will continue rallying toward the close and finish positive on the day (maybe not Nasdaq), but that will only reflect light shorts covering IMO. Let's not forget the U.S. employment data the last two days was horrendous and hitting 10% is not baked in yet.  This doesn't even factor the magnitude of the U6 figure ("discouraged" and "underemployed" ... Google it).  How can the international markets not open terribly next week?  Major retailers like Macy's are announcing store closings, and there is no chance January gift card sales will assuage anything.  Internet sales were even down.  Commercial real estate will be the next big industry facing a wave of bankruptcy concerns following the retailers:

• Client customers crippled? Check
• Overleveraged? Check
• Late(r) cycle victim. Check
• Benefitted from recent rally?  Check

You can invest in SRS: an ultrashort REIT ETF.  Take profits in all trading ideas I liked (airlines, dry bulk shipping).  There's probably a short opportunity in the semiconductor industry, and a bankruptcy bet on AMD seems like a chalk bet.  Despite the massive run, I would only start building positions in high yield (HYG) or corporate bond (LQD) indexes in anticipation of a selloff in US Treasuries that has been even more pronounced on a risk/reward POV.  After all I don't see a major shift of bond money flowing into equities, only a rebalancing.  It's only a matter of time when our Treasury auctions start to fail (not sell out) like Germany.  I said Germany, not Botswana.

Is PALM the next APPLE?  If you have to have a long, I would venture into PALM, by and away the star of this week's Consumer Electronics Show in Las Vegas.  Sure the massive short-covering spike is already behind us, but there is always room for a legitimate step-up device in the smartphone industry especially one that stands out in the crowd.  To me, the new phone, exlusively offered with Sprint (S) service, delivers a clear improvement over the iPhone.  PALM is a turnaround story in an area of major secular growth. How many stories like that are out there these days?  Ride the wave.

Left: PALM Pre

Disclosures: Long PALM. 

DR. SUBLIME & mR. rIDicuLOus V090109

1. PAPER HORTICULTURE was 7-1 in its football picks.
2. Freida Pinto is gorgeous in Slumdog Millionaire. She’d better damn well be considering what her suitor goes through. Hype-worthy story of love, hope, and [welcome] Bollywood cheesiness at the very end.
3. Would-be Senator Roland Burris has the audacity of a young Don King.
4. Porn industry profits are not tumescent.
5. A divorce can cost an arm and a leg, but a kidney too?
6. The pinnacle of modern British cuisine: Squirrel.  Would it be so hard to simply copy cassoulet?
7. NYers have a more palatable, recession-friendly marriage option.
8. The stench of hoops coach Tommy Amaker's aggressive recruiting tactics (for the Ivies) may actually be paying off at Harvard.  That Jeremy Lin can play ball!
9. To celebrate a birthday there's no other steakhouse.

NFL DIVISIONAL PLAYOFFS

Year to date: 6-1. +4 units

In case you haven’t been able to pay attention closely, there is not a single noteworthy team in the NFL this year.  Sure, somebody had to earn No.1 seeds in each conference, but that’s purely semantics.  Recent history also has demonstrated that the bye week is nice to have, but hardly provides an insurmountable edge.  It also wasn’t too long ago when the best team in the NFL was the NY Jets(!).  They had just defeated the Patriots and Titans (on the road!) in a span of 10 days prior to Thanksgiving, and had maintained a healthy squad.  Now the head coach’s job, let alone the moniker “Mangenius,” has been revoked, and nobody (read: me) would shed tears if legendary QB Favre finally retires.  From top to bottom, with exception of the Lions, it’s all about “Any Given Sunday” so one’s default bias should be to take the points!  Go Cards!

RAVENS (+3) vs. Titans. 1 unit.  Besides K Rod Bironas, the Titans offense does not match up well against the Ravens.  No WR playmakers and an immobile QB means the Thunder and Lightning running attack will probably be stifled by my favorite defense.  Titans like to go to its TEs, but the Raven’s LB corps is the strongest in the league.  The injury status of ancient C Kevin Mawae doesn’t help prospects and he was deemed a Pro Bowler this year.  I like the Ravens skilled players just a little more, and as long as continually improving QB Joe Flacco holds his own, the birds should win a black and blue type game. Follow-up: Forecast didn't account for total lack of discipline by the home Titans. Ravens D is nowhere close to prime vintage. That being said I hope Rex Ryan is next Jets head coach.

CARDINALS (+10) vs. Panthers. 1 unit.   The oft-quoted stat you’ve been hearing is thatArizona was 0-5 while playing in the East Coast this year; blown out three times. So what?Football players don’t specialize in geography, cartography, or anything to do with Rand McNally.  Psychology is the only thing that really matters at this level.  What’s important is that one of those games was a 4-point loss to Carolina that could have gone the other way.  The injury to WR Anquan Boldin dampens my spirits if he can’t play at full strength, but nobody is giving the DL and secondary the credit they deserve for last week; they have a shot at taking away Steve Smith this time.  A team playing with confidence and zero pressure is extremely dangerous.  That’s enough for me to disregard the line that simply reflects a dearth of Arizona Cardinal fans.  Don’t forget to put a little aside for an outright upset.  Follow-up: Combination of Cards making plays and Jake Delhomme stinking up the joint was all she wrote. While 'Zona's D met my expections, the Panthers DC should be fired for not taking away Larry Fitzgerald.

EAGLES (+4) vs. Giants. 1 unit.   The remarkable 180 degree reversal in perception of Coach Tom Coughlin and QB Eli Manning is breathtaking.  Last year was a fairy tale run.  This time around upholding the role of defending Champs and lacking the services of Plaxico "Sure Shot" Burress will be major burdens. Another big one is a hobbled Justin Tuck. The only reason why they had a chance against the Pats last season was that the pass rush simultaneously featured 3 DEs playing at a Pro Bowl level. What happens this year if the Eagles seize an early lead, and they have to abandon their dominating run attack? Depending on Eli Manning is still something to be avoided methinks. The Eagles D has been very solid over the past month+: It’s not like trying to stop Adrian Peterson last week was an easy task.  And forget about being intimidated by a familiar division rival.  If the Eagles shoot out of the gate early like I think they will and take advantage of the Giants’ rust, the consensus opinion of Coughlin will soon join mine again. The Donovan McNabb redemption run rolls on. Y’know kind of like Manning’s last year.  Bring on the renewal of Chunky Soup commercials! Follow-up: When you face a great D, you have to try passing earlier in the game. Eli has always preferred up-tempo so why not explore that earlier?  Coughlin needed to give Eli a chanve to get into rhythm despite the bad early INT.  

CHARGERS (+6) vs. Steelers. 0.5 units.  My take the points mantra is suffering a crisis of confidence for this matchup.  I don't see superstar RB LaDainian Tomlinson playing with his injury, and last week's hero Darren Sproles is unlikely to provide a similar impact.  It's just hard to repeat, the little man's probably beat up, and Heinz field conditions is unfavorable to benefit a "cutter."  SD will need a big game from 3rd string speedster Michael Bennett.  Said crappiness of field has always been a bane to opposing kickers, too.  K Nate Kaeding is very talented, but also has a choking problem in the playoffs.  Lastly, whenever a player is arrested during the playoffs (WR Vincent Jackson's DUI) the team has not played well.  Despite the negatives I think Phillip Rivers should continue to be a major difference maker while I'm expecting less-than-stellar play from Ben Roethlisberger who is returning from a recent concussion.  I would also think Steelers opt for a more conservative to protect its QB.  Watch out for the trick plays in this game. Follow-up: The Chargers hardly embarassed themselves, and even snuffed out that trick play I was looking for.  Steelers were both solid and opportunistic.  I particularly liked how often they threw the ball deep with max protection. Controlling the ball 98.11% of the 3Q was all she wrote.

GOING TO DELPHI: Financial Sector

The U.S. markets finally fell in 2009, but in the context of the last few months it was just a run-of-the-mill bad day: S&P 500 was down 3%.  If you’re with me and sense that this rally has legs, I want to sift through the wreckage of the financials sector that probably suffered most from indiscriminant selling.  Specifically I would want to build exposure in no-brainer intermediate-term trends like mutual funds companies capable of delivering institutional services, the accelerated rise of the independent advisor, and boutique investment banks.

Between charlatan extraordinaire Bernie Madoff, train menace Adolf Merckle (the German Warren Buffett we’re told), and the Satyam (accounting scandal (India's Enron), it is a minor miracle there hasn’t been a popular backlash of some sort.  My theory is that schadenfreude is playing a large role as for the first time in recent memory the richest (and aspirational) have been disproportionately affected.  When the zeitgeist is to help everyone but, hedge fund victims are probably deemed acceptable collateral damage.  After all, although the wealthy are much less experienced in handling humiliation, frustration or distress, but are hardly helpless.

To clarify, I am not advocating a net-long position within financials as a goal, but I think it’s still too early to short the investment banks-cum-bank holding companies, credit cards, and REITs, especially chasing a big down day.  Also, during the upcoming earnings season, it will still be premature to be able to challenge management’s veracity when everybody is going more or less get away with a) pleading ignorance about when to forecast a market bottom; b) confident in its ability to execute the business model [although conditions have changed dramatically]; c) is cautiously optimistic; and d) recently favored with a government-sponsored backstop. 

Market Share Winners are Better Than Nothing.  People still need to reach retirement, but today’s priorities are liquidity and transparency over the opaque hedge fund structure.  No matter how much value they typically add, the arbitrary gate policy could not have been exercised at a worst time.  Even though the limited partners should have better scrutinized the contracts they signed before handing off the money, LT legacy was sacrificed for ST expediency by the fund operators.  That's expected, though.  However, many fund-of-fund (FoF) managers were apparently collecting override fees for not doing what they were paid to do: conduct manager due diligence and provide strategy diversification.   Whoopsie.  Some long ideas:

Mutual Funds.  In the aftermath, why can’t the bigger and better managed mutual fund complex fill this void?  They already have pseudo FoFs with the popular target date funds. Bulking up their long/short offerings and adding market-neutral strategies should be easy as would be adding hedge fund refugees on the cheap.  Talent probably would even consider relocating outside the Greenwich-Wall St. corridor to places like Valley Forge, PA (Vanguard) or Baltimore, MD (TROW, LM, setting of HBO's The Wire)! 

Independent Advisors.  Since people have neither time, capability, or inclination to manage personal wealth the role of the financial advisor has only strengthened now that the robustness of the buy-and-hold myth has been sufficiently debunked.  Recently the only things keeping advisors or brokers from fleeing in droves from the brand name wire-houses were golden handcuffs and the benefit of prestige.  Both have been rendered moot now and a well run independent asset manager with an appetite for entrepreneurship (and fatter profits) will put out there own shingle.   Charles Schwab (SCHW) has a rapidly growing business servicing this precise cohort. 

Boutique Investment Banks.  How the mighty have fallen.  In a market where the only M&A partners seem to be cash-rich strategic buyers, the league tables are going to be turned-upside down.  Literally.  I suspect an old brand name like Lazard (LAZ), which also has a well-established asset management business, is capable of returning to its prior eminence and newer upstarts like Greenhill (GHL) and Evercore Partners (EVR) can grow beyond their niche.  I’m less sanguine on the public private equity or hedge funds for obvious reasons, but the consensus view of inevitable industry consolidation keeps me cautious right now until we see more developments at BX, OGM, FIG or GLGs of the world.

Lender Processing Services.  LPS was spun-off from Fidelity National Financial (FNF) last July, and is theleading provider of integrated technology and services to the mortgage industry. Its default services business within its Loan Transaction Services segment is grew 97% y/y in the 3Q and is as anti-cyclical as you can get.

Net 1 UEPS Technologies.  If you're looking for a spec long I suggest a look at UEPS. The company provides universal electronic payment systems using a proprietary smart card/reader platform.  The target market is provide an alternative payment system for the unbanked and under-banked populations in South Africa and other frontier markets.  Fast growing with plenty of cash, and no liquidity issues.

Disclosures: No position. 

1H09 OUTLOOK: BE TRIGGER HAPPY

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way--in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."  -Charles Dickens, A Tale of Two Cities

When one pauses and considers that the novel was published in 1859 and takes place in 1775 on the eve of the French Revolution, it serves as an eloquent reminder that crisis is an integral part of the human condition.  The good news is that we’re all clearly better off living today, than anytime in the past Technology, hardly a stifling Big Brother, has served as an agent that both enables competition and innovation, and facilitates checks and balances.  Ultimately, I interpret the election of Barack Obama as a referendum on the perception that President George W. Bush didn’t respect these norms. 

[History will probably at least credit Bush for achieving his primary objective of preventing another domestic 9/11-style attack; it’s still way too early to keep score on the can of worms he opened in Iraq/Afghanistan]. 

Personally, I voted for Obama not because I believed what he said to egg on Liberals or naïve and relatively youthful base on the campaign trail, but what his non-political leadership track record indicated: he is driven by a sense of pragmatism first and compassion second.  The miracle was not that a bi-racial man was elected, but someone of Obama’s intellect and character, having had to sully himself, albeit briefly, in the highest (and lowest) levels of politics could flourish in such a cynical ecosystem.  This development surely is not a prelude to the disintegration of the United States of America vis-à-vis Emperor Caligula’s Rome.  Not even close.  So as everybody braces themselves for the first full week of trading in 2009, the contrarian perspective is to embrace the (relatively) positive developments that helped avert a total collapse of global capitalism.

The Great Recession.  This is not to say that my current outlook isn’t grim.  A Great Depression II scenario (e.g. peak unemployment of 25%) may be improbable, but still can’t be entirely dismissed as impossible.  If the main source of global growth, China, suffers a hard landing the subsequent takedown of commodity-based economies like Australia and Brazil (Czar Putin's empire is already gasping for air) will be problematic. Dire outlooks are the norm globally with the possible exception of under-banked Africa. Although the consensus expects the U.S. economy bottoming around September, the odds are that this credit-led recession will last longer than the standard consumer-led variant as it normally does.  The biggest problem is we’re probably in the early innings in a multi-year (decade?) credit deflationary cycle.  Lower mortgage rates in the absence of demand by a credit-strapped, job-loss fearing consumer are no panacea for the oversupply of housing stock.  FED Chairman Bernanke and Treasury Secretary Paulson were hardly prophetic handling the market meltdown, but reversing the commitment to a TARP-heavy strategy to one that emphasized shoring up the capital reserves of our major banks (and bank-like entities) and guaranteeing time deposits definitely qualifies as better late than never.  There are times to police against the risks of moral hazard and now is not the time.

Sell in May and Go Away.  Although the triage process appears to be making some progress as Libor spreads are at less than insane levels, there is only so much (inefficient) government stimulus can be expected to deliver while simultaneously crowding out private capital. Our economy is like Tiger Woods intensively rehabilitating his ACL: when healthy its capable of doing amazing things, but is just as feeble as the weekend duffer when seriously wounded.  Hence, I believe sentiment will shift from relief back to a sense of prudent fear in anticipation of a brutal 1Q earnings season. The script of grim reality already seems clear; consumer discretionary spending is stalled as thrift is already being seen as “cool” while cautious CEOs dramatically scale back 2009 capital expenditure plans.  In this environment there is no such thing as conviction and the market eventually revisiting last November’s lows seem inevitable.  There may be brief stock specific short covering rallies during earnings season where strong managers will be able to distinguish themselves.

Bernie Madoff is Going to Hell.  The sheer audacity of the Madoff Ponzi scheme should earn him the re-naming of the crime.  After all, his last name is pronounced “Made-off.”  Even if by some miracle the markets recover to pre-Lehman bankruptcy levels the painful reminder why Cash is King means one suspects the backlog of hedge fund redemption requests won’t abate soon.  Unfortunately, the equivalent to a run on the bank is so destructive because of the negative self-fulfilling prophecy dynamic.  This significant overhang of selling pressure cannot be ignored, and may last a long time if the net outflows during the mid-1970’s are instructive.  Then again things seem to develop in a much more compressed time frame these days.  And to the credit of the hedge fund industry, still did outperform the main indexes by a gigantic margin.

Why Bother?  If you can adopt a bias that the U.S. equity markets will be bound by a wide-range for a multitude of years, not unlike Japan since 1990, there is still a massive opportunity to make good risk/reward decisions. If “investing” means you’re agnostic about going long or short that’s even better for the time being.  If we’re lucky, our chosen leaders will apply the lessons of history and at least avoid repeating critical mistakes; I think we’re doing that.  And lastly, the U.S. still has the trump card: we operate the world’s reserve currency, and nobody else has the stature to seize that from us. See how the vicissitudes of crude oil affects the arrogance and reach of hostile nations (e.g. Russia, Iran, & Venezuela).  The audacity of hope at least makes it easier to get up every morning. 

DO CHINESE-MADE CARS COME WITH CRASH HELMETS?

During Winter 07/08 when the first spasms of a credit-driven recession was affecting the U.S., emerging market bulls suggested the rest of the world, especially China, would maintain high single digit GDP growth and continue climbing inexorably toward its destiny besides the U.S. as a superpower; maybe even usurp the leader completely faster than could be possibly imagined a year earlier.  Meanwhile, the flaws of Communist-styled capitalism went unquestioned and the gold rush mentality persisted.  Unfortunately, the effectiveness of directing capital by top-down command is like gauging the value of a car strictly based on its top speed.  Steering, brakes, and air bags are almost superfluous while speeding on the Autobahn, but what happens when you encounter a steep, downhill, tortuous mountain pass without those features?  Disaster.

The collapse of the commodity markets from the West’s POV, particularly crude oil falling from $147/bl to under $40, has been considered a welcome relief for consumers, but I’m afraid this is a pyrrhic victory.  It only seems to confirm that the official explanation for China’s industrial slowdown preceding the Summer Olympics in order to alleviate air pollution is utter B.S. as the “on” switch has apparently broke.

While GDP was marching along at a low double digit clip China’s central government had only limited success controlling the local provincial power brokers from moderating its small-scale industrial ambitions, let alone heed environmental/pollution controls.  The only measure that can possibly rationalize this wasteful overcapacity is an extended period of economic retribution.  Purchase of materials need to be curbed at least until material stockpiles are consumed even if everybody suffers.  Taking this bitter medicine appears may be a wise choice in the LT, but also reveals the extent that China’s growth was as primed by easy global financing dynamics as anybody else.

In November the IMF already lowered its 2009 GDP forecast to 8.5%, but this would appear to discount a best case scenario where the government perfectly manages the overcapacity and based on the assumption that the government's GDP statistics are robust; what if the results are less-than-perfect?  As it is, many China observers suggest that an 8% GDP growth rate is the minimum needed to sustain civil stability as the mass migration from rural to urban centers continues en masse.  If China’s GDP were to cross the proverbial Rubicon the negative consequences could factor geometrically and an actual GDP rate of 0-5%(!) comes into play.  Unfortunately, I think this “very very bad” scenario can’t just be easily dismissed.

The big question then becomes: Will China cease buying U.S. Treasuries as a way to recycle its export profits?  China already announced in November a $586B stimulus plan (~16% of GDP) to be spent over 2 years, and subsequent plans to restock base metals inventories.  Unlike Obama who has the benefit of taking advantage of playing with the world’s reserve currency, China's spending is more or less a zero-sum game in a dead credit environment.  During the Asian IMF crisis the above was a fruitful choice so I’m inclined to believe it bears repeating, but it’s hardly a no-brainer in a much more tightly integrated global economy.  After all, they can’t possibly depend on a immature domestic consumer market with its savers mentality (no social safety nets) to spend its way out of a slowdown since a sell-off in U.S.Treasuries hurts the purchasing power of its best customer.

The Bottom Line: I don’t see a Goldilocks scenario.  To date, the Treasury market has defied all expectations as a safe-haven asset class, but when a crowded trade reverses the consequences may be severe, including the US government’s inability to continue finance bailout funds at extraordinarily cheap cost.  If the collective global stimuli plans are successful, going long commodities (TCK), seaborne transportation (NM), construction-related equipment (TEX) and consulting (ACM) could rally for the next three-six months, but if we fail to see confirmation (e.g. dry bulk shipping chartering activity - Baltic Dry Index - is a good proxy) or a sustained recovery in commodity prices soon, one should be prepared to not move cash to the sidelines, but reverse the trade.  In the meantime staying long with limited gross exposure is the aggressive tactic.

Note: Representative small cap equities in ( ).

Disclosure: No positions. 

FOOTBALL FRENZY

Year to date: 1-0, +1 unit.

MAJOR COLLEGE BOWL GAMES

[Sugar Bowl] Utah vs. ALABAMA (-9.0). 1 unit.  Despite suspending All-American left tackle Andre Smith, Alabama should comfortably control the line of scrimmage on both sides of the ball.  That means by the second half the Tide the will have worn the Utes down and “Roll” into victory.  In fact, I see the high profile suspension, along with playing in the Louisiana Superdome, as helpful toward keeping Alabama focused throughout.  Follow-up: 'Bama forced to reshuffle entire O-line after backup LT when down early with injury.

[Fiesta Bowl] OHIO STATE (+8.0) vs. Texas. 1 unit.  I’m taking the points, and wouldn’t be shocked to see an outright upset.  Let’s face it: this is not the game Texas was looking to compete in.  Without the carrot of winning the national championship due to the shortcomings of the infamous BCS system, I expect a battle-tested super frosh QB Terrelle Pryor wish the Longhorns still had Vince Young; VY probably wouldn’t mind being back in Austin either. Follow-up: RB Beanie Wells 2H concussion forced OSU to adjust, and it took just a little too long to figure it out.  Almost pulled off the upset.

[BCS National Championship] FLORIDA (-3.0) vs. Oklahoma. 1 unit.  Florida is more balanced, has the been-there-done-that leadership advantage of QB Tim Tebow, and playing in-state.  The little things and an unending supply of speed demons should carry the day. Follow-up: Gator defense was outstanding.  Tebow was resilient after chucking the early INT.  Congrats.

NFL WILDCARD WEEKEND

The first round of the NFL features an unprecedented number of three “home dogs” and one pick’em.  This weekend is normally good for two outright underdog victories, and for whatever reason the Sunday games usually seem to be blowouts.

Falcons vs. CARDINALS (+1.5). 0.5 units.  Neither side has recent playoff pedigree so I’m focusing on likely QB performance.  To me all Kurt Warner has to do is play within himself and take advantage of his receiver mismatches over a under-sized secondary, and avoid gambling and fumbling (not an easy task, I know).  Offensive ROY QB Matt Ryan has tremendous poise, but he is still a rookie with no playoff experience that tried to do too much in the Big East championship versus Virginia Tech last fall.  Remember?  Follow-up: In the 'Zona! Congrats to its 1st home playoff victory since 1947!

Colts vs. CHARGERS (Pick’em). 0.5 units.  The Colts offense is not as explosive as it used to be, which is why QB Peyton Manning was just awarded his third League MVP award.  The Chargers also deserve lots of credit for showing tons of tenacity and salvaging a potential playoff run.  LT is clearly not the same player [and may not play], but I love QB Philip Rivers’ development as a leader.  Playing on a busted ACL in the AFC Championship Game last year is an indelible memory; they almost won, too.  Follow-up: Punter Mike Scifres and a 5'6" RB Darren Sproles stole the show! Awesome OT game.

RAVENS (-3.5) vs. Dolphins. 1 unit.  Kudos to Chad Pennington’s achieving Comeback Player of the Year for the second time, but I doubt the Wildcat offense will  generate big-plays against the Ravens ball-hawking D.  Let’s not forget that D-coordinator Rex Ryan is trying to impress so he can finally earn a head coaching job. Baltimore’s style of play also travels well, especially down to sunny Miami.  I could even see the Ravens defense outscoring its offense; watchout for S Ed Reed.  Follow-up: Ravens didn't allow a TD off an early fumble, and Reed had 2 INT, including a TD return.  QB Joe Flacco showed impressive mobility.

EAGLES (-3) vs. Vikings. 1 unit.   I think people typically ascribe too much credit to momentum in the NFL, but the Eagles performance against division rival Cowboys to secure the final wildcard berth in week 17 made a major statement.  Donovan McNabb has been (rightfully) much maligned, but playing away from the infamous Philly fans provides the ideal conditions to build playoff confidence as the NY Giants did last year.  Mediocre Minnesota QB Tarvaris Jackson will probably be running for his life against a relentless blitz.  Very favorable Philly match-up, especially if Adrian Peterson can’t rush for 150 yards.  Follow-up: A one-dimensional offense is not going to cut it during the playoffs.