NEWS #81

From June 18, 2008 to August 3, 2008

August 3, 2008

"I say this is an 'avalanche.' I am anticipating a fall in equity prices in the range of 40 to 50% relative to the peak--- much more severe than the 25% fall which we see in a recession.. Two main reasons are that major economies other than the US will have severe interruptions in growth and that the consumer - especially US. consumers who most likely have gone further into debt than their credit cards would allow by making a home equity loan or taking on the second mortgage will most likely be under pressure to repay. It appears that the U.S. consumer's debt burdened situation will put him in a "no way out" financial quandary with a fall in home prices, fall in equity prices, rising inflation and a reduction in jobs. I expect this scenario to unfold over the next 12 to 18 months.

In no way can this be seen as a normal bear market. This is undoubtedly the worst financial crisis in the developed world since the 1930s. The only period remotely similar was the bear market of 1973-75, which was itself a part of the extended 1966-82 bear market in US shares. That bear market was driven in part by a 13 fold increase in oil prices from 1972 to 1980. This time we have had a 14 fold increase in oil prices from the $10 low of 1999. Last time we had massive inflation of 20 percent per annum. That has not yet arrived but may well be in the pipeline.

However, in my view, the situation is far worse this time since the US financial system is extraordinarily stretched and stressed. Last time we only had the minor bankruptcies of Franklin National Bank and Continental Bank to contend with. Then there were no derivatives. This time, they amount to more than 10 times world GDP and a greater multiple of bank capital. Within that total the most toxic ones are those unlisted, opaque, over the counter variety amounting to over $50 trillion, again multiples of US bank capital.

The revolution in market finance that began with the deregulation of the 1980s may be about to eat its young, as we have seen with the putative bailouts of Fannie Mae and Freddie Mac; if nationalization goes ahead the US visible national debt increases by $5 trillion and is effectively double. The US would no longer qualify to join the Euro!

The US budget deficit could be on the verge of exploding upwards. Including war costs, it is already over 4 percent of GDP. The economic slowdown and Presidential candidate Obama's plans for healthcare, whist noble and justifiable, even after tax increases, could send the deficit north of $1 trillion or 7 percent of GDP by 2010."

When I was growing up I learned that one should never spend on rent or house payments more than 25% of one's take-home. Now millions of new home-owners are learning that lession the hard way. What the freemarketers and anti-regulators don't ever want to talk about is just how much pain is caused by the bursting of bubbles that were caused by deregulation of financial institutions. What they REALLY don't want to talk about is how much each bail out is going to cost the Average American. I am sorry. But this is where I and my fellow Republicans part company. If I am expected to pay for the bailout of Fannie Mae, then I want some stern regulations imposed on Fannie's behavior. And that is not to punish Fannie, it is to insure that the bailout does not happen twice more in my lifetime.

Just as there is a debt service rule-of-thumb for households, there is also one for nations. I hear and read various numbers of what that should be. It appears to me that the U.S. is getting close, or has already surpassed that number. See the article quoted above.

July 30, 2008

Red and White D sends along this link to:

http://marketplace.publicradio.org/ display/web/2008/07/29/merrill_lynch/

I quote Red and White D:

"This is an interesting read on Merril Lynch dumping their crummy mortgage paper at market and getting 22 cents on the dollar.

This may portend some kind of liquid market for this kind of asset class is setting up, which also suggests that these crummy mortgages will finally find a base and the holders of the paper can actually evaluate thier portfolios realisticly.

Is this the beginning of the end?

Those of us that went through the bust here in Casper in the 80s will recall the same effect. Home sellers and banks holding out and holding out and finally capitulating to reality taking what they can actually get.

Isn't capitulation the first sign of the bottom of a market?"

I think it actually is a healthy sign. But there is more bad news out there...at least another 7 months of bad news.

July 23, 2008

Red and White D sent this link to 'Get Shorties' , by James Cramer on NYMag.Com. I quote it below.

"Lehman, long run by Dick Fuld, as respected as Jimmy Cayne before he took his intellectual leave of absence, shares too many of these same qualities. It has borrowed way too much, issued way too many bad mortgages, kept way too many of them, bought way too many of them from clients, and had equally wretched controls. So now the hedgies are performing the same drill on Lehman they did on Bear. Given that Lehman has repeatedly had to raise money to finance its miserable mortgage portfolio, as well as some crummy private-equity investments that need commercial real estate to appreciate 'good luck!' the company can't mount a credible defense. Gone are the days when Fuld could pick up the phone and say, 'I bid $31 for 1 million shares of Lehman,' as he did to me in 1998 to quell that raid on his firm in the wake of Long Term Capital's demise."

What this article points out is that every financial institution in our country is basically insolvent. That's how they operate. It's how they have always operated. They lend out more than they have in hard assets. Therefore all are subject to Bear Raids.

The Orange Section just got a new job. He wrote this short note.

"Bender,

I don't have much insight into the markets at this time. My advice to your readers would be to prepare for the storm and make sound decisions with their personal finances. My guess is that after Housing and Finance go through recapitalization the American Consumer will be next. The best defense against such a thing is liquidity. A rare commodity these days..."

July 21, 2008

Here is a link to a good read: 'Real Estate Isn't Dead, It's Just Different', by Kevin Depew of Minyanville.Com. I quote it below.

'Right now Freddie Mac is cooking up a way to raise $5.5 billion, probably by selling stock to the government. But record delinquencies are ongoing. The latest shell game being played by banks is to simply reclassify what constitutes a delinquent loan. That way the numbers look better and people don't notice as much how they remain inadequately capitalized for the real rate of defaults. Even so-called workout loans are defaulting at an unimaginable pace."

July 20, 2008

Red and White D sends this link to 'Short-selling reveals corporate realities', by John Gapper of the Financial Times.

Then Red and White D contiuned.

"Dear Bender,

As a species our demonstrated ability to learn lessons, from even recent experience, has proven to be pathetically poor.

I'm sure this time it will be different! My guess: this innoculation will last 5 or so years.

Regluators have a bad habit of becoming as much a part of the problem as the perpetrators because they give the public a false sense of security. The shepherd will keep the big bad wolf away from the sheep. Sure!

I agree, if no one watched the ranch, we would have a lot more bad experiences than we already do.

However, without completely transparent accounting rules, using standards that everyone (who wants to) can understand, and that make some kind or sense, the poor little investor is almost guaranteed a nice haircut every few years by the high rollers. Good clean accounting is the answer.

I know, I should keep quiet.

Be well."

July 19, 2008

Financials are certainly going to take some more hits well into next year. But I am optimistic for the longer term. I think the Financials, Treasury, SEC, and the Federal Reserve have all learned some lessons. I don't think they will be as rash for some years to come.

What is needed is more time. Bernanke is wisely trying to spread the pain out over more time. That will give our system the ability to adapt and rethink. If he can keep the balls up in the air long enough, we will get through this without a deep depression. From what I see right now, I think he is going to get the job done.

July 17, 2008

July 15, 2008

July 12, 2008

Anatomy of a Disaster: Lee Enterprises (NYSE: LEE)

For nine and a half years I worked for the Casper Star-Tribune. It is now one of many papers owned by Lee. Here is a recent headline written by AP:

'Lee shares hit 27-year low after downgrade'

This is a disaster of a company that is only one step ahead of delisting by the NYSE and two steps ahead of bankruptcy.

Here is one message from the Yahoo message board.

"At March 30, 2008, the Company’s weighted average cost of debt (including the effect of interest rate swaps and collars) was 4.78%.

Aggregate maturities of debt during the five years ending March 2013 are $118,750,000, $448,500,000, $213,750,000, $308,750,000 and $276,125,000, respectively.

Where is Lee going to come up with $448 mil next year?"

Background for the discussion:

Lee is a company that used to be relatively small. It owned numerous papers across the upper Midwest that typically had 5,000 to 10,000 circulation and a whole mess of small weekly papers in the same region.

Then Lee got the aquisition bug. One of its aquisitions was the Howard chain of papers, one of which was the Casper Star-Tribune. The Howard papers were generally bigger than the typical Lee paper. The Lee chain then aquired the Pulitzer papers which had some really big papers in it, including the St. Louis Dispatch.

Now, the Lees were competent at running the two different sizes of newpapers they generally owned. But their aquisitions brought some real difficulties. For one thing they paid top dollar for those new papers at a time when the industry was already starting to shrink. Now that shrinkage is occurring at a breakneck pace as people get their news from more and more sources for free, and as the U.S. economy goes through a spasm of decline.

The Lees face a dilema that the message above touches on. They need to raise cash to pay debt. Their revolving line of credit is not adequate to make the payments they are going to have to make, particularly not if they keep up the dividend. When they sell newspapers to pay debt they do two bad things to the financial numbers. One thing is that they will have less income, and they will sell at a substantial loss. No one is going to give them top dollar for the papers they will sell. That loss will have to show up on the balance sheets as a reduction in assets.

The Lees faced problems with the larger papers they aquired. For instance, the paper I worked for was and is the state-wide newspaper for Wyoming. Some things don't scale out well. For instance, while the Casper Star-Tribune may have about three times the circulation of one of the old Lee 10,000 circulation papers, its circulation area is (and I am not exagerating) about 2,000 times larger than the one-Iowa-county newspaper Lee is used to. The circulation problems facing the Casper Star-Tribune are perhaps unique to any newspaper in the U.S. outside of Alaska.

Another problem encountered by the Lees is that their management style is very different from the Howard or Pultizer organizations. Lee long ago adopted the management style of McDonalds. McDonalds believes it can teach anyone off the street to flip burgers, take orders, or clean and take out the garbage. No one with brains need apply. Lee likes to do the same thing, and it does not like to pay anyone very much money for the job they do. Lee would rather replace one employee making $32,000 a year with two who are paid $23,000 a year to do the same work. Lee would rather have employees with fewer skills and less drive. Employees with skills and drive might have opinions that run counter to what headquarters in Davenport, Iowa 'knows'. Only Davenport should have ideas. Davenport knows best. The result is that talent has been driven out of the old Howard and Pulitzer papers, and every position has been 'dummied down.' Knowing the Lee style of management, and knowing the level of competence of the current employees, who would want to buy one of their existing properties?

Problems with the Financial Numbers:

Here are the financial numbers obtained at Finance.Yahoo.Com:

Last Trade - July 11:		$3.37
Market Cap:		$151,300,000
Profit Margin (ttm):		-58.44%
Return on Equity (ttm):		-93.55%
Diluted EPS (ttm):		-14.24
Shares:		44,900,000
Float:		41,670,000
% Held by Insiders:		41.97%
% Held by Institutions:		85.20%
Short % of Float:		36.00%
Total Debt:		$1,380,000,000
Total Debt/Equity:		3.878
Short % of Float:		36.00%

My readers should be looking at numbers like these before they ever purchase or short a stock. Here are some pointers.

DEBT

Debt, all by itself, is not necessarily bad. If the company in question is an Amazon and is growing at a tremendous rate, that debt has a chance eventually of being repaid. But in a company whose income is shrinking, like Lee, debt is really bad. Debt, in a healthy and growing company should actually make the Return on Equity be larger. The debt, in theory, helped the company operate on a larger scale, with more profit, than if it did not have the debt. When a company, like Lee, takes on debt and then makes less profit you see horrible numbers like the Total Debt/Equity listed above (3.878). When you see a number like this, run for the exit. Note that in the case of Lee, the Debt is starting to approach 10 times the Market Cap. Ouch!

Note: Return on Equity is one of the many factors in my system. It is something I pay attention to. LEE's Return on Equity is one of worst I have ever seen. And oh yes, the scuttlebutt is that the President of Lee Enterprises, one Mary Junck, earned some $3.2 million last year. That does not sound like much until you consider that $3.2 million is over 2 percent of the market cap now.

SHARES

Look closely at the Shares, Float, % Held by Insiders, % Held by Institutions, and Short % of Float. Lee stock is mostly held by insiders, some of whom are institutions. What these numbers also imply is that some of the institutions are either doing some of that shorting themselves or allowing their shares to be borrowed by others to do that shorting. These numbers tell you that there is a power struggle going on, that there is a dagger being pointed at the existing management in the form of massive shorts. The fact that the shorts are not covering at this low price tells you, or should tell you, that the folks doing the shorting don't care if the share price goes to zero. They are playing a different kind of game than I, an average small investor, could ever dream of playing. It is the kind of game where a small investor could get hurt really badly on either the long or the short side. Avoid this stock!

Justice for Employees of Lousy or Not-so-Lousy companies:

Lar and I have long held the belief that publicly traded companies, particularly companies, like Lee, that offer their employees the opportunities to buy company stock at what appear to be reasonable prices, with automatic deductions, and companies that use their own shares as the basis for their employees' retirement funds, should have to create a short fund specifically for the company so that employees could also have the chance to bet against the company. Employees would buy their shares in the short fund through their own brokers with the same advantages from the company that it offers their employees to go long. But by going through their own brokers, companies would be unable to find out which of their own employees are shorting them.

Think of what would have happened to Enron stock if there had been such a short fund in existence. Enron's share price would have been trimmed much earlier than it was. The added benefit would have been that Enron employees would at least have been given the chance to profit from the destruction of the company they worked for to offset the loss of all their retirement funds (which was all in Enron stock).

Short funds are an idea whose time has come. It is an idea that just has not been applied enough. I have been reading recently of some online discussions about which accounting standard should be imposed upon U.S. companies to gain more 'transparency'. Hogwash. Every accounting system has holes that can be exploited by companies. But if every large company had a shorting fund for its employees, those numbers could be added to every company's online numbers. If, for instance, a significant percent of the total amount of shares being shorted were from the Employees' Shorting Fund, and the public had access to that fact, it would dramatically affect share price. If you knew that all the janitors in the company were shorting it, would you much care how rosy a picture the President of the company was painting?

July 9, 2008

Here is a short note from Richard Kolon.

"I suspect that stocks have hit a bottom for now. The advance-decline numbers were a very positive 2165 vs 1037 Tuesday. New lows were near a bottom-making 651 Monday (700 to 1100 is more like it), and has now 'climbed' to 470."

Ben Smith sent this link to 'Comments For Energy And Metal Producers', by Bob Hoye on 321Gold.Com. Here is a quote.

"The weekly charts are producing the first exhaustion alerts since the invasion of Kuwait in the summer of 1990. The monthly chart is at extremes not seen since 1980."

Here is another link Red and White D sent. Under the label: Well, Duh! here is a link to 'SEC works to rein in raters'. No way them horses is gettin' back into this barn. We'll nail that blasted door shut, now that they're gone!

Another link sent by Red and White D is: 'My Plan to Escape the Grip of Foreign Oil', by T. BOONE PICKENS on OnlineWSJ.Com. I quote it below.

"The U.S. uses nearly a quarter of the world's oil, with just 4% of the population and 3% of the world's reserves. This year, we will spend almost $700 billion on imported oil, which is more than four times the annual cost of our current war in Iraq."

I am in complete agreement with T. Boone on this one. The greatest problem we face as a nation is our dependence on foreign oil, period. I am ever so bothered by the fact that neither major candidate is really addressing this gravest of all threats to our national security.

I loved this last link so much I am making it permanent on this page. It is all about how badly the government has been lying to us about the economy. This is, of course, precisely what I have been saying on these pages for well over 10 years now.

'Numbers racket: Why the economy is worse than we know', by Kevin P. Phillips on Harpers.Org.

July 3, 2008

Well here I am basking in the glow of a four-day weekend. One of my regular followers has been pestering me to go semi-pro. In theory I could put out a newsletter in the form of a timely email that would alert paying subscribers to what my next moves in the market would be. In that news letter would be a legal disclaimer.

I am not going to do that. I have a real 40 hour per week job that is a very responsible position and which is also rewarding. In my spare time, I do stocks, garden, and work on my book. I have 42 chapters done and I am on the last leg of it...with about seven more chapters to write before the book is complete. I am a busy guy and do not need yet one more thing I just HAVE to do in my day. That being said, I will try to give readers some more insight into my thinking about the markets in general and about specific stocks.

ON THE GENERAL MARKETS:

Here is a link to an excellent article I read in my doctor's waiting room today: 'Let's Shoot the Speculators!', by Robert J. Samuelson of Newsweek. I quote one paragraph below.

"'We've had a demand shock,' says analyst Joel Crane of Deutsche Bank. 'No one foresaw that China would grow at a 10 percent annual rate for over a decade. Commodity producers just didn't invest enough.' In industry after industry, global buying has bumped up against production limits. In 1999, surplus world oil capacity totaled 5 million barrels a day (mbd) on global consumption of 76mbd, reckons the U.S. Energy Information Administration. Now the surplus is about 2mbd—and much of that in high-sulfur oil not wanted by refiners—on consumption of 86mbd."

Samuelson is right. The idea that speculators have driven up commodity prices all by themselves is ridiculous. A consumer, somewhere, still had to decide he would pay that higher price anyway.

But what I am here to tell you is that the commodity party may be over for now. Today may have been 'The High' for oil.

Please go to Stockcharts.Com and look at FXI, a China Exchange Traded Fund. This effort will confirm what Todd Harrison, of MinyanVille.Com, told us in 'Recipe For a Market Meltdown' when he said:

"Last week we touched on the importance of Shanghai Composite 3000. It's where the bubble first broke out in early 2007, a 50% retracement since October—fifty percent!—and where China must hold, particularly if it's gonna light an upside torch into the Olympics."

As Samuelson's article points out, it has been Chinese growth that has been the main growth engine for the world for the past ten years. Now that engine is slowing. What do you think that will do to commodity prices? Yep, they have to fall a bit before they flatten out. And yes, a tip of the hat is due here to Richard Kolon, because he called for a top in oil last week.

July 1, 2008

June 28, 2008

Richard Kolon sent along this note recently.

Bender,

Wind stocks are well off their highs, but the evidence points to points to increased interest in this form of energy.

http://www.greentechmedia.com/articles/ duke-energy-buys-more-wind-power-1056.html

So this week I added more Broadwind (BWEN.OB) shares to my portfolio and initiated a small position in Woodward Governor (WGOV), while retaining my Zoltek position (ZOLT0.

To do this I sold some oil and natgas stocks. The sector has been very hot, while the wind sector has cooled off greatly. An attempt to sell high and buy low on a long term theme.

http://www.engineeringnews.co.za/article.php?a_id=135843

*****

Separately, while the QQQQ 20 week signal has just gone negative, sentiment amongst investment advisors has also done so. Investor's Intelligence poll now reads just 33.7% bullish and 39.3% bearish. Except during a bad bear market decades ago, this tends to be TEMPORARY condition where bears exceed bulls, often portending a major bottom.

Now I am convinced that this is a bear market. But there exists the good possibility of an explosive rally soon, probably on some half-ass announcement by the government to stem the credit fiasco. If such a rally occurs, I expect the leading sectors (oil and natgas) to be dumped in the rally. I don't think any government solution will really work, but it is election year, so watch out on any bearish bets you make on stocks.

In other words a major bear market rally can occur yet again, only to fail below the recent high of 50 on the QQQQ.

Rich"

June 24, 2008

Richard Kolon sent a link to: 'Analysts Backtrack on Banking Stocks After Saying Worst Is Over', by Josh Fineman. I quote it below.

"Merrill's Guy Moszkowski, the top-ranked brokerage analyst in Institutional Investor's annual survey, on June 11 changed his rating on Lehman to 'neutral' from 'buy' and cut his target price to $28 from $36. It was Moszkowski's fourth call on Lehman this month. He shifted to 'underperform' from 'neutral' on June 2 and recommended investors buy the stock twice, on June 4 and then on June 10, the day before he moved back to 'neutral.'"

And then I found this related article: 'The Joke's On Us. Also, the Tab.', by Kevin Depew of Minyanville.Com. I quote it below.

You know that plan awaiting action in the Senate to help ease the foreclosure crisis and how it's not really a bailout of banks? It turns out it's really a bailout of banks.

...Equities will eventually recognize that their future path is credit-contingent and that share prices are a manifestation of financial market health and stability, not a driver of it. That process of recognition may be happening even now."

June 24, 2008

June 23, 2008

Here are links to two great articles on Minyanville.Com.

Financial Tsunami Ahead, by Bennett Sedacca. I quote it below.

"But what if we experienced a financial tsunami, where we get the worst of both worlds? In other words, where deflationary fears and credit market troubles are expressed in the very front end of the yield curve (Federal Funds and Treasury Bill rates) remain very low as they are the main most influential tool in the Fed's Toolbox, but the longer end of the Treasury curve reflects the inflationary concerns that are at the least, mispriced relative to actual inflation?

Could the Fed have painted itself in a corner, a corner where it can't raise rates as 'option-ARM's' are about to begin to reset and would crush those borrowers, leading to even more delinquencies? But if it lowers rates, this could harm the dollar further, stoking even higher commodity prices and more inflation fears?

This is the double-edged sword that no one wants, present company included. The last thing that we need now is a sickeningly steep yield curve, but that is exactly what the market seems to be signaling to us.

Credit Crunch Puts the Heat on the Street; Main Street, by Kevin Depew. I quote it below.

"If consumer risk aversion becomes entrenched then we will see a long-term shift in market leadership away from financials and consumer discretionary-dependent sectors, and toward consumer staples and sectors with less exposure to consumer purchasing decisions.

And what about time preferences? Markets are too large for any central bank or group of central banks to control for long. And ironically, the more they act to try and prop up or even slow the decline in asset prices, the larger the market becomes. Think about it. If people begin to suspect that asset prices won't really be allowed to go down, what is the rational response to that? It's to increase the size of the bet.

So by targeting asset prices and attempting to 'manage the economy' the Fed ironically creates the conditions for a market that is too large for it to control. As a result, crashes, unwindings of speculative bubbles, become more devastating, and affect far more people in the real economy."

June 18, 2008

Here are two links to articles at MinyanVille.com, and quotes.

'Next Stop: Desperation Station', by Bennett Sedacca.

"This means that corporations will now do whatever they must in order to stay solvent? They'll slash jobs and dividends and attempt to raise capital by issuing common equity. The problem is that they're too late; they should have done this already. Instead they were stubborn and 'hoped' they would be OK and the economy would recover. But as they say 'hope is a poor roadmap to success'."

'Recipe For a Market Meltdown', by Todd Harrison.

"Last week we touched on the importance of Shanghai Composite 3000. It's where the bubble first broke out in early 2007, a 50% retracement since October—fifty percent!—and where China must hold, particularly if it's gonna light an upside torch into the Olympics.

...Since the back of the tech bubble—and contrary to stated public policy—the lower greenback has been the rising tide that lifted all asset class boats. It stands to reason that when this dynamic reverses, equities will not be immune from the swoon."

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