DEPRESSION NOT YET GREAT

Last week I was mildly positive about the market and consider the subsequent action, albeit volatile, as pretty decent confirmation as there was ample opportunities to go long. Right now I feel GE is the stock to watch because it best reflects the challenges of an AAA-rated industrial company hounded by overarching concerned of “financial” exposure. To wit, it has backed into regaining its status as an important market bell-weather company.

I always find it very instructive to constantly review my own“trader mentality” since nothing goes straight down/up, which is why, on occasion, I offer a market view diametrically opposed to my intermediate term views (6-24 months). When I’m ready to publish a book is when I’ll start commenting on my longer term visions (for suckers to buy).

Bull in a China Shop: Buying on the Rumor.  The bull case right now lies in the hope that China’s stimulus plan is the Real McCoy. It stands to reason that due to its relative size (vs GDP) and mechanism (Hu Jintao doesn’t have to deal with Congress) it should be more timely and effective. Therefore it must work before we get really excited by Obama’s plan. Until this view is discredited I think we can at least take a market meltdown off the table. For the brave few with market exposure remaining I believe that is substantial enough of a reason to look for a rally. Does anybody believe there is any meaningful selling pressure overhead between 700 and 800 on the S&P 500? I think not. I’m definitely open to dinner wagers that we see 800 before 600.

Nonetheless, I note that under more normalized conditions the collective size of the myriad entitlements offered in the U.S. is generous while China’s is still effectively nil (explains the savings rate). Without 8% GDP growth China is very concerned about social stability, and the consensus estimate is 20+ million have recently lost jobs , and the hope still is to encourage more domestic consumption to offset the global slowdown?! I fear that a higher proportion of the monies set aside for economic stimulus (short-term) will soon be shunted over to China’s nascent entitlement programs, as has already been initiated with basic healthcare. Meanwhile Chinas leadership disappointed markets last week by (tacitly) insisting a supplement to stimulus planned announced last November was unnecessary. Let’s hope so, but I’m not holding my breath.

Brace Yourself for Depression.  Yesterday, the World Bank announced it predicted global economy would be negative for the first time since WWII. To me this is an adequate proxy for declaring that we’re entering a period of Depression (term should always be capitalized). And although a spot check at the Federal Reserve will reveal that M2 money supply continues to grow at a rapid clip  (signaling possible major inflation) we can’t lose sight of the fact that credit (personal or commercial) is what is most precious these days. My strongest recommendation for those still employed remains unchanged: Aggressively pay down high yielding debt (e.g. credit cards) after leaving enough liquidity available to satisfy minimum payments in lower yielding debt and an emergency cash cushion.

Don’t Forget We’re in a Buyer’s Market.  Right now cash is king so those with the ability to pay in cold hard currency (especially before it may devalue!) should try to convert it to assets. Obviously great deals can be had not only in the housing market, but in autos and anything else that was formerly lubricated by easy money. Anybody shopping for a car not checking into LeaseTrader.com is doing themselves a disservice. And if even that’s a luxury, at least try renegotiating your rent. Landlords are always most concerned with “headline price” and utilization rate.  Use this information to your advantage to negotiating a favorable extension (you have to give back a little); that’s some major pre-tax dinero to be saved. Be aggressive. Play up everybody’s worst fears to your benefit (for a change). If successful, you will know exactly what every banker in the world is doing these days. Good luck.

 

BEARD LUCK CHARM

Issues of veracity notwithstanding, the only thing that has remotely "worked" for the market recently took place last Tuesday when FED Chairman Bernanke asserted that our major banks did not need anything remotely resembling nationalization. Today he's speaking again at 10 a.m. and all eyes will be glued on everyone's new favorite lucky charm. Believe me, the markets want to be seduced by anything or anyone to break this negative feedback selloff. Tim Geithner is also due to me making public comments at 12:30. If he, as Treasury Secretary, can give ANY indication that this administration is adequately chipping away at the herculean task at hand of saving the economy it will be off to the races this afternoon; UP! Unfortunately, it's hard to say what he's going to say, but Wall Street loves when expectations are surpassed! I wish I was joking.

I usually don't pay much attention to pre-market futures except when market psychology is very frail; I've been worried about market capitulation, though, especially after yesterday. However, futures are actually up right now so I think it indicates that the market receptive to the possibily of some good news. Since everybody and their mother is looking toward technical analysis to provide some guidance (and gaining little) I believe the conditions are ripe for a little rally. Finally.

I'm afraid that it appears the China, for the most part, has finished restocking on commodities (note how the dry bulk charter rates have moderated again), but I would expect the cyclicals/commodity plays to work best if the market rallies. There also has been increased chatter (of hope) that India is primed to take the mantle of driving commodity demand from the Chinese (gimme a break, they have huge national debt problems). Just getting dipping your foot into the shallow end of the pool with general market exposure would be my recommendation for right now though.

In the meantime, Legg Mason Value Trust (LMVTX) manager Bill Miller is eating some more crow after getting another another major market call wrong. I'm, of course, referring to his declaration that we reached a market bottom last fall. I think the odds that he is ousted (or retire if you want to call it that) by the end of summer has risen to 80%. How much damage will one man be allowed to inflict upon a firm? Why on earth would he make a market-timing call as a purported value investor? Just goes to show that the energy of developing a strong top-down view or and assessing the magnitude of near-term catalysts can't ever be overlooked.

SNOWED IN

The major snowstorm that has converged upon the U.S. eastern seaboard overnight appears to be a sign that U.S. equity markets are far from removed from the carnage experienced YTD; March is unlikely to herald anything new and accordingly, the risk of the S$P 500 hurtling toward 600 (from 735.09 today) only increases. The signs of the apocalyse are legion: the U.S. dollar is the strongest currency in the planet (laymen would be shocked), a major financial institution requires capital injections (today, HSBC), and our Captains of industry (GE reversed it stance on a dividend cut within weeks) and a Legendary investor (Warren Buffett) plea mea culpa like its going out of style.

I even here the term depression being uttered on television to describe the current state of afffairs. I say when the three biggest economic zones (US, EU, Japan) are in a bad recession we have successfully achieved depression. All depressions need not be "Great".

All about the Benjamin. Benjamin Franklin noted long ago the inevitability of citizens confronting death and taxes. And if there is one certainty right now it is that taxes are going to be increasing. For the investor class the $200,000 annual income breakpoint is not a gigantic hurdle, let alone $250,000 for families. With the taste for equities souring and the trillions of wealth destruction that need to be recouped in order to become whole again (don't hold your breath) I strongly believe that the fixed income asset classes will be the first to recover. In particular, the municipal bond market due to its relatively favorable risk/reward profile, tax-adjusted yields, and the strong presumable support of local investment funding by the Obama administration. After all there is no more "shovel-ready" spending initiative than existing ones.

Normally I prefer to recommend specific securities, but right now I think people should be investigating bond funds because of the double discount factor. Funds own discounted to net present value (NPV) issues, which is the opportunity a value-oriented investor seek. This discount is fairly meaningful because bondholders are most interested in cash flow generation; capital appreciation is secondary. However, the demand for liquidity has caused many closed end funds (trade like stocks, not mutual funds) to trade at much steeper than normal discount to net asset value (NAV). Net asset value is a much more tangible metric than sentiment influenced ones such as price/earnings. I'm enough of an optimist to suggest that a) I do believe that normalcy will eventually return, and b) there is no reason to think successful, long-tenured fund managers have collectively become worthless so the double discount factor of NPV and NAV is the "fat pitch" a hitter is looking for. Trolling in this formerly unsexy corner of the investment universe today is appropriate for any investor. Cash is King; especially, the U.S. Dollar.

STRESS (TESTS)

I opened the month of February noting the malfunction in the stimulus approval process, and since then little has been done to assuage the number one concern for investors: the likelihood of stabilizing our banking system in short order. The only thing we now know for sure is that Treasury Secretary Tim Geithner is a policy eunuch; he’s not even allowed to lie on behalf of the administration any more. Viva Hank Paulson!

President Obama’s de facto state of the union speech earlier this week also did little to calm the investor class. Although I acknowledge its true purpose was to provide a badly needed booster shot of confidence, his track record of boosting the markets from the bully pulpit is eerily similar to GWB’s. The public’s appetite for soaring rhetoric and grandiose plans of a Liberal utopia will lose its potency soon enough. As I recall this country’s competitive advantage was its ability to empower anybody to become wealthier than what one’s station in life at birth would suggest. The 35-hour workweek is in France.

Closing the month the operative word is “no” as in: No, we’re not going to nationalize banks. However, this morning it’s pretty clear that Citi (C) is now essentially under the aegis of government protection despite the Bernanke comment-induced rally earlier this week. And even worse, we now have to wait 6-8 weeks for the bank stress tests to be concluded. Since the lack of available credit is centered on the health of our banks, waiting for an updated diagnosis should dim the probability of any noteworthy rally occurring prior to 1Q09 earnings season. Just say "no" to a rally, too, I guess.

This is a major problem because without building up a buffer of short-term gains, the market is at greater risk of another major selloff as the indexes are already perilously close to technically significant levels. With quarterly index figures being substantially lower than the prior one, the specter of an early close cannot be dismissed either.

What to do?  Without a no-compromise “stimulus” plan providing stimulus, deflation becomes a much bigger worry than I sense the consensus is anticipating. When deflation becomes a concern even gold is unlikely to do much other than lose its value at a slower rate than other asset classes. In the trading portion of one’s gold position I would take profits if one hasn’t already done so since it failed to break through $1,000/oz. Deflation is particularly scary for those carrying debt. Whether one’s financial condition is secure or not, paying down debt is really the best investment move to make right now bar none. On that note, I remain bullish on Treasuries as a safe haven (not TIPS!).  And by no means was I suggesting earlier selling off one’s core D-Day position in Au.

THE YANKEES BETTER WIN

Yesterday the 2009 New York Yankees debuted in their first spring training exhibition game. I may have noted recently why the team’s “gigantic edge in financial resources” is hardly the end-all be-all factor to assure a championship, but, in my view, they have no excuse not to win the World Series this year.

Of all years, the Yankees ability to outspend should “guarantee” a ticker tape parade in the Canyon of Heroes this November. I even consider it their patriotic duty considering the carnage Wall Street has been experiencing (tongue in cheek!). When the well-funded Boston Red Sox balk at making any serious attempt to acquire Mark Teixeira, an ideal long-term fit for their roster, things have clearly gone out of whack. At least for now the Yankees continue to operate in their own economic stratosphere, aided in no small part by the tailwind of opening the new stadium (beyond 2009 is anyone's guess). The Steinbrenner family has shown disdain for fiscal prudence before so I still expect them to wield there almighty pocketbook to procure any necessary parts as the season progresses; relinquishing young talent won't be required this year! This stands to reason becuse the family wealth is primarily concentrated in baseball and not other interests (like commodities trading) so they should be less affected by the economy (for now).

Even as a Yankee fan, however, I readily agree that the current system is perverse and not healthy for the sport despite the irritating fact that the Red Sox have been most vociferous in the call for a salary cap. Why are the Milwaukee Brewers, Oakland Athletics or Pittsburgh Pirates not pounding the table? Like I said before, the probability of contraction is not insignificant as this global depression will probably end in tears.

Without further ado, I would like to see the following lineup be the primary version by June:

1. LF – L, DAMON, Johnny (playing for a contract)
2. SS – R, JETER, Derek (can’t move left, so he better still hit)
3. 1B – S, TEIXEIRA, Mark (nice to have Alex around to occupy the media, eh)
4. 3B – R, A-ROID (sigh, please win the MVP again)
5. 2B – L, CANO, Robinson (capable of besting Pedroia’s 2008 MVP campaign)
6. DH – L, MATSUI, Hideki (a nice luxury item to have around if knees hold up)
7. CF – S, SWISHER, Nick (great value signing, I project to outperform Nady)
8. RF – R, NADY, Xavier (playing for a contract)
9.   C  – S, POSADA, Jorge (38, I expect a new starter by year-end)

The Yankees are an old bunch so there will be plenty of AB’s for the bench, and I obviously have no faith in the stability at the catcher position.  I also don't think there is a need to insert a mediocre offensive player to start the game at CF, like Brett Gardner, especially when a GB pitcher is on the mound or when facing a top caliber opposing pitcher. If healthy, this team should comfortable score over 900 runs.

I would like to see the following rotation by June:

L, C.C. Sabathia (it’s nice to have Alex around to occupy the media, eh)

R, Chien-Ming Wang (power GB pitcher to break up the power K guys)

R, A.J. Burnett (should thrive with a gaggle of bigger stars around)

R, Phil Hughes (we know he has it)

L, Andy Pettitte (still a huge mismatch vs other team’s #5s)

Clearly the omission of Joba Chamberlain from the above list is glaring. However, I believe he is still too immature to serve in an already well-stocked rotation. The Yankees are MUCH better served using him to firm up the end-game bridge to Mariano Rivera. At best, guys like Brian Bruney and Damaso Marte are suited for the 6^th or 7^th innings. There is also that minor issue of Rivera coming off of surgery at 39 and Joba being shut down last year himself with injury. He’s still a baby, and his arm needs to be protected until he grows up figuratively and literally. Please.

Conclusion:  This year we should see a much worse-than-normal disparity between the haves and have-nots in MLB so I expect a healthy 2009 Yankees to sweep the floor with its AL rivals. In particular, I don’t expect the AL East to be nearly as competitive as most would expect by merely extrapolating last year’s results. The Yankees made massive upgrades while I forecast Red Sox offensive production to decline, and Rays to buckle from loftier expectations; not exactly wild predictions. All of the above suggests a realistic shot at a 108-victory regular season campaign.

WELCOME BACK TIGER

As a golf aficionado it’s with awe I welcome back Eldrick “Tiger” Woods to competition to defend his WGC-Accenture Match Play Championship around noon. His past feats are, without a hint of hyperbole, truly legendary.  If Woods was never to raise another trophy over his head again, he could eventually take satisfaction knowing that his 2008 U.S. Open victory would probably be considered the most remarkable achievement in the history of the sport while hobbled with a stress fracture and torn ACL in his left leg. However, as we all know, this week’s field is unlikely to enjoy such a luxury.

Despite the nearly nine month layoff, the prospect of Woods winning is offered at +400 on the moneyline at Sportsbook.com (info purposes only!). The next tier of favorites (Phil Mickelson, Sergio Garcia, and Anthony Kim) is each going at +1500, and Mickelson just won last week at Riviera. That’s [well-deserved] respect.

In a low-stakes “February Madness” game I’m participating in, my final four is: Tiger, Phil, Ian Poulter, and Robert Karlsson. Considering the unintended consequence of Mr. Cablasian 's layoff was an opportunity to improve his short game while regaining the facility to swing hard without pain, I don’t see any reason not to anoint him the winner right now. His ability to use golf-appropriate intimidation is yet another skill that is probably not as appreciated by the casual fan; in a 1-on-1 match play format in particular.

Winning a stroke play tournament is so difficult because no matter how good the best players are, on any given week one is also competing with “hot” players. This is the same reason why the Yankees can’t be expected to be fairly considered an overwhelming favorite to win the World Series despite the gigantic edge in financial resources at the franchise’s disposal. However, how can you not love Tiger’s chance to dispatch opponents one at a time? A little research will make the not-so-surprising revelation that he dominates in the match play format for just that reason.

Common Sense.  Even Tiger’s return won’t solve the economic headwinds facing the PGA Tour this year, if not longer, so it’s good to hear former #1 Greg Norman suggest a pay cut for the players by lowering purses.  Sports is typically a recession-resistant industry, but in this economic cycle discretionary income is like a unicorn; it exists only in fantasy. The major sports leagues – MLB, NFL, and NBA – have all had layoffs, and NASCAR’s growth trajectory has taken a dramatic reversal. Playing golf, let alone regularly and well, is still beyond the reach of most and to ignore today’s zeitgeist of thrift would be retarded. Hopefully PGA Commissioner Tim Finchem has rabbit ears on this matter.

SPORTS LEAGUE PAIR TRADE: Short MLB, Long MLS

A-Rod/A-Fraud/A-Roid is in the news again, and in desperate need for some brilliant PR help. As paparazzi cannon fodder goes, he makes Tom Cruise look like Machiavelli.

At the end of the day, however, A-Rod still has his guaranteed millions to collect, if not the public adoration he desperately seeks. The real loser here appears to be MLB. Ultimately, I would not be surprised if the league’s special monopoly exemption gets revoked within the span of Obama’s administration unless it dramatically reforms itself. I envision the NFL league capitalism/franchise socialism model will be the only alternative. In other words, the Yankee spendthrift payroll strategy is about to come to an end.

Out of Touch.  The demand for escapist entertainment is escalating with every passing day, but MLB has effectively conceded its ability to cement itself in the minds of an already highly distracted younger generation by doing its best to disgust the adults that currently support the sport. Even "better," both player union and league management is culpable for allowing the American Pastime become so vulnerable. The SI article (see A-Roid) makes it clear that union leadership probably tipped off players about to be “randomly” tested for banned substances, so any breach of ethics is imaginable. Regarding league management, Commissioner Bud Selig collected a $17.5 million base salary for the 2007 fiscal year ending October 31, 2007, and signed a three-year extension through 2012. I think we all know the direction, if not magnitude, of his future compensation. For what seems to be an absentee job relative to the visibility and engagement of NFL commissioner Roger Goodell, Selig’s income, the most lucrative among the major sports leagues by wide margin, is revolting. How is that acceptable for a league enjoying such a luxury as no competition? Considering the mood in Washington, I can’t see how this lasts much longer. The public should have access to the detailed financial condition of the league and all of its franchises.

It's the Economy, Stupid.  Greed, impropriety and apathy aside, MLB has another problem: the economy. Sports may be recession-resistance, but hardly anything can withstand a depression. [The IMF has just reported that the global economy may be already in a depression] During the Great Depression baseball attendance fell dramatically. This time around it doesn’t even have the availability of a national icon like Babe Ruth. The nature of media and entertainment being so “long-tailed” as it is, that caliber of hero may only be reserved for a [successful] war-time President. In any case, the probability of at least one team contracting from the league seems better than even.

The Bigger They Are...  The fallout of the financial and economic crisis disproportionately affects the NY Metro region so it will be very interesting to see how well the four new stadia opening will perform: new Yankee Stadium, Citi Field (Mets), new Meadowlands Stadium (Jets/Giants) and Red Bulls Arena (soccer team). I suspect Year 1 will be o.k., but disastrous for years following. After all, the impetus of all these fields was to capitalize on luxury boxes that catered to [formerly] deep-pocketed corporations. Now, I suspect I’ll soon be able to afford to rent one of these boxes for personal use.

Soccer is the Big Winner.  The best a business can realistically hope for over the prolonged difficult economic period ahead is to gain market share. And within the sports leagues it would seem that Major League Soccer is positioned to be the big winner. Soccer is not only a global sport that Americans are rapidly becoming more fond of, but attending games is still family-friendly and affordable. Its popularity from the top-down is driven by the growing quality of the men’s national team; from the grassroots by the millions of kids playing the sport from a young age.

Over the course of his three month loan to AC Milan, MLS’ top (read: only) celebrity, David Beckham, has brought the league millions of dollars worth of free advertising as speculation of a permanent transfer took a life of its own. Whether he leaves or not is not that important; the L.A. Galaxy, and by extension MLS, is being mentioned in the same breath as a world famous club such as AC Milan of Serie A. As a player, Becks is not the caliber of LeBron James anyway, a bottom dwelling team like the Galaxy can lose just as many games without him. Sure, the reported $15m transfer fee (goes to the league) is being refused for now, but one superstar celebrity does not a team make, and saying no now is rule #1 in the art of negotiation (especially while you’re scrambling to construct a backup plan)

In a cash strapped environment, this is just the type of excitement, albeit somewhat insulting, a marginal league needs in spades. Besides, the election of Barack Obama could be a major consideration for FIFA to award Chicago the 2016 World Cup and thereby providing a turbo boost to the sports domestic popularity. Yes, if I had a few million to allocate toward an investment in a sports franchise, it would probably be toward one in the MLS.

4Q08.4 EARNINGS – STIMULUS MALFUNCTION, BUY GOLD

“In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.” -Ronald Reagan, Inaugural Address, January 20, 1981

Rightly or wrongly one needn’t sing the praises of Reaganomics other than in the privacy of one’s home for at least the next four years. Under Barack Obama’s administration the new speed limit for Wall Street is 25 MPH: no more autobahn; yield to all pedestrians. Accepting the spirit of this new world order, along with short term trading/risk management is the only constructive way to navigate the markets right now as the stability of our global economic infrastructure remains in jeopardy. The irony of this situation is that the clarion call of populism is being heeded when it’s least needed. The financial gulf between the middle class from the elite has taken a sharp reversal, and everybody is in a terrible bind; worrying about the top 1% is not constructive in this discussion, and they were the predominant victims of Madoff anyway.

A bigger message could not have been sent last Thursday when Obama declared that Wall Street’s behavior was “shameful” with an hour still remaining in the trading day; how about all the calls to cap "bonuses." Needless to say the market sold off heavily into the close as any number of his advisors could have predicted for him beforehand. Clearly, when it comes to strengthening the Mind, Body, and Spirit of our overall domestic economy, our largest most innovative industry, financial services, is going to suffer at least a few lashes for past sins. This is not to say profits (and bonuses) formerly inflated by financial engineering was an ideal foundation of growth, but an entire generation of our best and brightest (or at least most ambitious) has been disrupted, and probably forced to reinvent themselves. This may be a blessing in the long-run, but how does this possibly help expedite recovery in the short run? How does a TARP-funded firm like Goldman Sachs (GS) sustain its legendary reputation that driven by its risk/reward-loving culture? 

To me the only short term remedies that should be funded are based on the principals of providing food and mortgage workouts of existing homeowners. Obama may intellectually understand that our banking system requires emergency surgery, but he's still insisting on bootstrappin more entitlement spending. How original to waste political capital on repaying your political allies. Considering the prospect of requiring more funds (preferably smart infrastructure related) down the road, we've got to preserve the health of our Treasury market as long as possible. His own prominent economic advisors (of note Larry Summers) preached a prescription of Timely, Targeted & Temporary measures, which earned him the trust of financial conservatives. To the credit of every Republican and about a dozen Democrats who voted against the House version of the Stimulus bill, a loud message was sent to Mr. Post-Partisan, and provided the necessary fodder for the Senate to fulfill its traditional role of breathing in some prudence to the process. As of late Sunday it seems that the Democrats won't be able to bully there way just yet.

Buy Gold.  As was the case last week, there may be earning reports galore to ponder, but all eyes need to be fixed on Washington. However, “selling on the news” is not as straightforward proposition as it was for our anticipated Aggregator/Bad Bank rally (ended at 2:15 last Wednesday after the Fed held rates steady). This week it’s anyone’s guess what new plan Treasury Secretary Tim Geithner will unveil. There is a large risk that the Aggregator Bank idea may be rejected because it would require more taxpayer money to purchase illiquid, toxic assets. Under this administration, the nationalization route (wiping out equity shareholders) as was adopted by Sweden in the early 90’s may be prescribed for the likes of Citigroup (C) and Bank of America (BAC). After all, the Resolution Trust Corporation created to unwind troubled assets from the S&L crisis in the 1980’s was a Republican solution. The lack of policy consensus, the continuation of poor corporate and economic results around the globe, and especially the rapid deterioration of all non USD or JPY currencies (most recently the Mexican peso) suggests the conditions are ripe for a major rally in Gold (GLD) and other precious metals (e.g. SLV, PTM) is ahead of us. I will add this doesn't automatically suggests its time to short Treasuries: there's still plenty of demand for capital presercation, and the U.S. won't hesitate to meet it. However, Obama will soon learn that there is a limit to everything which is why Senate Republicans must find a may to hold the line on social entitlement dollars masquerading as stimulus.

Disclosure: No positions.

Super Game V.43

Year-to-date NFL: 10-1, +8.5 units; Cumulative 13-3, +9.5 units

Considering the Cardinals had to play uphill the entire game, my strong conviction that they were capable of winning was more than justified. The Cardinals were almost too content to utilize Larry Fitzgerald as a decoy at first, but the deficit stemming from a huge penalty imbalance and that INT returned for a TD at the end of the half changed everything. Ultimately, Ben Roethlisberger's uncanny escapability, which seems to have a high component of luck, versus Kurt Warner's, or lack thereof, was most prominent in my mind. I couldn't even begin to handicap next year's favorite's so hopefully that bodes well for another wacky season. An entertaining game for all. Time to study for March Madness and the Masters.

DR. SUBLIME & mR. rIDicuLOus V090130

1. Doomsday coming on 21 DEC, 2012? Even my economic outlook isn't that dour.
2. Use Facebook, because Craigslist doesn’t have assassins under “services”
3. I can help you Michael Vick. I welcome referral business, too.
4. Isaiah Thomas has solidified his new niche. Stick to it.
5. Mashup: Best of 2008 pop. (hat tip)
6. Kiera's naughty little secret. (hat tip)
7. My secret PPP economic indicator: Big Mac index.
8. Bacon Explosion recipe. Have a cardiologist on standby before gorging.

THE NEXT LARRY LEGEND?

My conviction that the Cardinals should win Superbowl 43 has not changed one iota since the inst-analysis following the conference championship games. Speaking of conviction, an obscure Steelers player managed to get arrested last week, thus bolstering my confidence level according to my police blotter indicator, as will the forecast of sunny and humid weather.

Its also been shocking to learn that part of the Cardinals vast defensive improvement is being attributed to extra player film study. The lack of commitment is in the past; a team that believes is dangerous. In the end we still have 2 fairly weak teams in a Superbowl matchup so neither should be able to withstand a negative turnover differential.

Money Management. Assuming Cardinals are +210 to win, and -115 to cover (+7) I advocate a 53.5%/46.5% split on the two plays, respectively. A bettor would gain 144% if Arizona wins, but still breakeven if Arizona just covers. I see Cardinals winning 24-16 (o/u 46.5). MVP: Kurt Warner; major reputation boost: SS Adrian Wilson.

Larry Legend. Since I also dared to compare Larry Fitzgerald to Jerry Rice, the undisputable best receiver in NFL history, and perhaps even the best player overall, I found some interesting parallels:

• Both were highly regarded out of college, but hardly considered freakishly gifted physically;
• Both earned first Pro-Bowl appearance in their second year in the league, although Fitzgerald is 2 years younger at that stage;
• Rice didn’t score the Superbowl XXIII-winning TD on the famous 92-yard drive in the 49ers 20-16 victory over the Bengals, but he did win the MVP after gaining 215 yards on 11 receptions, including 1 TD. At age 26, his reputation as a dominant performer in the most important/visible games would only grow;
• Fitzgerald, now 25, is also at the top of his game and has been having his way against opponents throughout the Cardinals previously unimaginable playoff run while already breaking a total receiving yardage record fomerly held by Rice. The argument that "genius" Steelers defensive coordinator Dick LeBeau will be able to neutralize Fitzgerald (while not compromising the defense altogether) is magical thinking - everybody knew long ago he's their primary threat. Fitz is simply unstoppable right now. Scheme is very important from week to week, but talent and confidence should triumph where both sides has ample time for preparation;
• One last factoid: the losing defensive coordinator that allowed Jerry Rice to first establish himself as a NFL immortal in the aforementioned Superbowl XXIII was no other than Dick LeBeau.

Update: 7 receptions for 127 yards including 2 TDs. Yup, Larry did his job.

4Q08.3 EARNINGS – STIMULUS, WHERE ART THOU?

All eyes will be on the U.S. this week as the East celebrates Lunar New Year for the week (or so) as of yesterday.

We are now entering the teeth of earnings season for the cyclical industries including coal, steel, machinery, energy exploration & production, and paper/packaging. Since current conditions are punk, and the outlook is impossible to discern without added clarity from Washington, anything that contributes to sharpening our forecasting confidence will be deemed as a positive, albeit very short-term. Ultimately, we will have to rationalize a much lower “fair value” for the S&P 500 as 2009 and 2010 operating earnings continue to ratchet down; then there’s always the question of a proper P/E multiplier.

In the meantime, bad company results will be viewed as a positive since it will help ensure the expedient passage of the Stimulus package. As we saw with drillers Noble (NE) and Schlumberger (SLB) last week, it will therefore be hard to disappoint investors in the aforementioned industries. As long as a company doesn’t have short-term solvency issues I expect lots of pops.  Missing consensus EPS estimates, suspending revenue forecasts, cutting dividends, anything short of declaring bankruptcy may be swept under the table. Collectively, none of the above violates the great (false) hope of a 2H recovery. That being said more listening versus acting is warranted this week.

Wednesday afternoon’s FOMC rate cut announcement may be a wildcard even though the 0-0.25% rate range is expected to be reiterated. In a speech in London couple weeks ago Chairman Bernanke expounded on the differences of the current situation in the U.S. with the Japanese quantitative easing policy of 2001-2006; ours is much worse and he favored calling our current tactics “credit easing.” In light of the growing support for creating an Aggregator Bank, I see a high probability that financials can enjoy a big relief rally if Bernanke reveals further support for purchasing toxic assets.  You want to own the garbage for this trade: C, BAC, and STT.

Gaming the Indices.  The Dow Jones Industrial Average (DJIA) index of 30 price-weighted stocks utilizes a dubiouus methodology as it is, and now a Bianco Research finding makes it apparent to me that it needs to be reconstituted post-haste. Better yet some traditions need to simply die - it's an absolute failure as useful market barometer.

For those who insist on relying on passive investing and want stock market exposure, I recommend going long of QQQQ. The “Qs”  gains exposure of the top-100 non-financial Nasdaq stocks.

Disclosure: No positions.

THE GOOGLE OF MY EYE

Buy GOOG.  After reviewing the recent earnings conference call transcript and financial statements I think it’s time to start paying attention to the stock as a technology sector or media industry-related GARP investment.

In a word Google has chutzpah, but it ain’t bragging if you can back it up, right?  From the beginning the internet search pioneer gave Wall Street the proverbial finger by using a Dutch auction for its 2004 IPO. Ultimately, the actual mechanics of that deal were slightly modified that enabled an otherwise impossible (theoretically) first day pop, but they still sent a clear message by giving the investment bankers at Goldman Sachs (GS) the shaft.

However, any stock capable of rising above $700 from $85 within 3.5 years is quickly forgiven. Even after the spectacular collapse of the Tech Bubble indelibly seared into every investor’s memory, we still saw analysts leaning on bespoke valuation methods versus traditional cash flow to justify GOOG’s ascent. Analysts may know deep down in their hearts geometric growth rates are unsustainable, but few are incentivized to be the party pooper. Besides, why fight the rising tide of a stock that is the favorite of retail investors, traders, growth managers, and above all, freshly-minted Ivy League MBA’s? 

Retail can be forgiven for being brainwashed that buy-and-hold is a robust strategy, and is the surest way to achieve early retirement if you can just hit that one grand slam stock; GOOG’s prospects were obviously peerless, right?Traders are just renting the stock and following the action. The smarter ones at least seek some insight from bona fide tech geeks online (they would not be found amongst their circle of friends, of course), and the brightest of the lot may even be capable of constructing some plausible industry comparisons. Meanwhile, PM’s of growth funds, in my view, are the true pioneers of behavioral finance since they utilize an awareness of the above, and the existence of other growth-style managers, to employ the greater fool theory. And lastly (sadly?), the prototypical MBA suffers from all of the above afflictions to some degree. There is a reason why someone has already created the contrarian “Harvard MBA" indicator. And it was even invented by an alum. 

Getting Back to Basics.  While playing hard to get may be a good tactic for a beautiful young woman with many suitors, it’s not a sustainable strategy to find true love. It would seem that GOOG has finally matured into young adulthood. Namely, the company is finally forthright that its business is not recession-proof. Cost control has been a major issue since the stock started to tumble over a year ago, and now there is finally some concrete evidence that a quaint metric like operating margin is foremost in the mind of management. Measuring performance of continuing operations by this metric sure comes in handy when you announce a gigantic investment write-down (or two).

On the subject of management, it was also announced in the earnings call that “Larry and Sergei” will no longer be a featured every quarter. Good. If they ever want to convince the world that CEO Eric Schmidt has a meaningful role beyond a figurehead the engineers need to be off the call. More importantly, the tacit suggestion that the founders are going to be sticking to “engineering” suggests GOOG's deal-making track record has a chance of improvement. Who can be impressed by the major deals done so far in the equity investments of AOL and Clearwire, or acquisitions of YouTube and DoubleClick? To wit, the easiest way to gain a small fortune is by starting with a large one.

The Real Economic Moat.  Instead I much rather see the company continue to preserve its reputation as a great place to work for the best engineering talent available. Its human capital is the true wealth creating engine, maybe more so than financial firms, if it can maintain its entrepreneurial culture. If offering the options exchange program was deemed to be the most effective way to bolster employee morale than so be it; it’s not shareholder friendly per se, but the intangible benefits should be the payback down the road when the market for its most valuable employees opens up more broadly again. At worst, it enhances its budding alumni culture that highly respected firms in other industries like Goldman and McKinsey flog however they can. I also object to the Silicon Valley truism that publicly traded Internet companies can only “lead” for four years. In this case, the recession/low-growth economic climate, which I believe will persist for a long time, should insulate GOOG's incumbency, especially as MSFT, YHOO, EBAY, IACI, NWS, et al. fumble about. 

MHP Pair Trade.  When market conditions are this challenging, however, I still favor a market-neutral strategy. Shorting an old media stock such as McGraw-Hill (MHP) to offset long exposure to GOOG would be my recommendation. MHP not only has a stable of magazines, but also owns a market leading bond rating agency franchise, Standard & Poors. This is hardly breaking news, but it doesn’t seem plausible that S&P’s business, along with Moody’s (MCO), not become potentially crippled by conflict of interest reform pursued by the Obama administration. I would short MHP now, but save some some buying powder on GOOG in case it pulls back to $280-300 amidst a general market selloff; GOOG is susceptible to be hurt as an easy source of fund-raising.

Disclosure: No positions.

DR. SUBLIME & mR. rIDicuLOus V090123

1. Why men are better... dieters.
2. Apparently everybody may have a stable skinny weight and fat weight. Does it matter, though, if you're always dissatisfied?
3. L.A. homeowner promiscuity. 
4. Hooker free-zone?  I would have thought fluffed prices during inauguration week.
5. Next time Charles Barkley gets pulled over for suspected DUI he may want to offer a more tasteful excuse.
6. Look good, feel good. Obama vanity takes charge (card).
7. Jon Favreau: Hollywood actor; screenwriter; director; fat; and Obama's speechwriter?! haha. 
8. Donovan McNabb knows no home-field advantage. Poor guy.
9. Add shady to the list of Dolan family superlatives.
10. Stephon Marbury-opoulos?