Manufacturing Data Bombs, And So Does CIT

First, a surprise drop in a manufacturing indicator:

The Chicago Purchasing Managers Index fell to 46.1 in September rather than rising to the 52 that economists expected. The index, considered a precursor to the national Institute for Supply Management index to be released on Thursday, pointed to a Midwestern manufacturing industry than is weaker than had been expected.

Well, it's not weaker than what I expected! Ha, seriously, the whole green shoots meme was a cute little bullet from some Fedster's talking points memo. Those green shoots are drying up pretty fast at places like CIT Group:

CIT Group Inc. shares plunged Wednesday as the commercial lender is reportedly trying to craft an exchange that would cut its debt and offer bondholders an equity stake in the company in a bid to avoid bankruptcy.

Weaker than expected manufacturers . . . and a weakening lender to those same types of manufacturers. Come on, folks, admit that we're moving through the eye of this economic hurricane and back into the gale force winds of a renewed credit crunch.

The Haiku of Finance for 09/28/09

Pimp-Co sees savings
That means less cash will be spent
Prolonging downturn

Misleading Pemex Headline

Sometimes I think financial writers want to make investors become stupid. Judge for yourself with this one:

Mexican oil production fell again in August but state oil company Pemex said it had some early indications the rapid fall in output at its giant Cantarell field may be slowing.

Notice the headline doesn't do the text justice, as it lacks nuance with nary a mention of the oilfield's "rapid fall." Cantarell will deplete sooner or later. Why imply otherwise?

Durable Goods Decline Mows Down Green Shoots

The evidence mounts that the U.S. economy is not in recovery mode:

Demand for U.S. durable goods unexpectedly fell in August, signaling companies are planning to curb spending on concern gains in sales will not be sustained.

The lasting damage of programs like Cash for Clunkers is to fool pundits and consumers into thinking we can borrow our way out of an insolvency-induced contraction. Purchasing managers and operations managers should know better, hence their realism in trimming orders.

The Haiku of Finance for 09/24/09

Fed musings aside
Buyup programs won't subside
They chose inflation

Wall Street and Fed Overestimate The Recovery

At least money managers are starting to mention that a wall of worry just might exist:

“There’s a little bit of a wall of worry right now, but the market just feels like it wants to go up,” said Michael Mullaney, a Boston-based fund manager at Fiduciary Trust Co., which oversees $9 billion. “There’s going to be a very strong near-term economic rebound greater than expectations. I think we’ll end the year higher.”

The first part of that quote is an understatement. Just a little wall, you think? The second part of the quote makes me sad. Wall Streeters are going to stake a whole bunch of other people's money on the hope for a continued rebound through the Christmas shopping season. They're not alone in their misplaced optimism for a fast recovery; the Fed is planting the same meme in the media:

Federal Reserve officials may signal that the U.S. economy has started to recover while maintaining their pledge to keep the benchmark interest rate near a record low for an “extended period.”

Actions always speak louder than words. The Fed is keeping interest rates low because the economy is not at all out of danger. I'm not shorting anymore because all this stimulus action is pushing stocks into blowoff top territory. I may have been a few weeks premature by calling a market top recently but I'm convinced I'll be vindicated soon enough.

Refreshing The Alpha-D For Sep.-Oct. '09

I'm not doing uncovered shorts anymore. That was too risky as my short calls on some widely traded ETFs went against me in a big way this month. Furthermore, the risk of not being able to access my account in a timely manner to cover those shorts is a real risk management threat that I realize I must now mitigate. I would like to take positions in the major indexes at some point, which is why I've written a couple of OTM puts (covered by cash) on SPY that expire before the end of the year. The worst that could happen is that I'll have to go long a small amount of SPY at a discount of more than 20% from last Friday's closing price. I am still quite bearish on the major indexes, but I am willing to risk owning a little SPY for many years as long as I get it at a big haircut.

I have renewed my covered calls on all of my holdings of IAU and FXI. I also sold a few calls on GDX because I am willing to risk some but not all of those holdings getting called away. If there is one gold security I wish to retain through this long economic crisis, it the one that represents established gold miners (GDX) rather than gold contracts (IAU) which may turn out to be merely paper.

I am not selling any puts under VWO, EFA, or IWM. I'll be patient and wait for large declines in each of those.

A Very Bad September For The Alpha-D

I unwound my expiring uncovered calls on Sept. 17 when I bought them to close . . . at big losses. Although I still have decent unrealized gains from my long equity holdings, this was a disastrous month compared to the rest of 2009.

This month’s realized loss has wiped out all of my realized gains for this year, and then some. That sucks. If I were a hedge fund manager I’d probably be fired. That’s the great thing about working for myself – no one can fire me based on poor short term performance. I truly believe it will be at least a decade for my investment philosophy to show measurable results. That’s fine with me, because I don’t have to prove anything to anyone.

I’ve said all along that I’m a long term investor, and like Warren Buffett I’d have a hard time getting hired or keeping a job today with money management firms that measure themselves by the month rather than by the decade. Lately I’ve been too focused on the short term myself, taking short-term profits from uncovered calls while broad indexes have been climbing a wall of worry. I have also underestimated the stupidity of professional investment managers who are all too eager to bid into an overvalued market in their never-ending quest to beat the other guy’s alpha.

I’ll remind myself of Uncle Warren’s wisdom: Be fearful when others are greedy. Investors jumping back into the market are getting greedy, so I need to be more fearful. I’ll lay off the uncovered ETF calls for a while and instead focus on finding some long-term value plays for my focus portfolio. Those are things I can measure with much more mathematical precision than the broad market sentiment that drives index prices.

Debt Bomb Fuse Is Lit

So, did the stimulus end the recession? If you think so, read this:

The Federal Housing Administration said Friday that its financial cushion will sink below mandatory levels for the first time in its history, but officials insisted the agency won't need to be rescued.

They may be denying the need for a bailout now, but their tune will probably change in a few months. Speaking of bailouts, read this:

The chairman of the Federal Deposit Insurance Corp. says she is "considering all options, including borrowing from Treasury," to replenish the dwindling fund that insures bank deposits.

Just as I had predicted last month! The next leg of the downturn is a little behind schedule due to the stimulus but it cannot be delayed indefinitely. The more debt we run up to delay its onset, the more we worry our foreign creditors:

Russia's Prime Minister Vladimir Putin on Friday said other currencies besides the dollar should be used as global reserves to reduce the risks posed by swelling U.S. debt.

Putin, who spoke at an international investment forum in the Black Sea resort of Sochi, chided the United States for "an uncontrolled issue of dollars" and said the American currency's dominance had been "one of the triggers" of the global crisis.

The nightmare for the U.S. economy should come around the middle of the Christmas shopping season as retailers and their landlords start to panic. I am preparing to raise cash for the next couple of months in anticipation of some major bargains in the stock market.

The Haiku of Finance for 09/17/09

Go for massive debt?
You've gotta be kidding me
No way would that work

Ken Fisher's Contrarian Call to Bankrupt Everyone

I once respected Ken Fisher. I thought he had some interesting things to say about arbitrage pricing when he spoke at the San Francisco Money Show in 2002. I lost all respect for him when he spoke there again in 2006 after he claimed that American's home equity was a good substitute for savings in the bank.

Ken Fisher has now given me a reason to never consider respecting his opinion again with his call for massive increases in Americans' debt:

The U.S. has too little debt, not too much, Fisher says. The U.S.'s return on assets is high and interest rates are low, so our borrowing capacity is much higher than our current debt levels.

Also, Fisher says, you have to look at the U.S. in the context of the world, because the U.S. is only 25% of world GDP. The world is way under-leveraged, so one country's particular debt-to-GDP ratio doesn't matter.

Some financial icons manage to outlive their reputations for brilliance. Warren Buffett and Alan Greenspan come to mind. Now it's Ken Fisher's turn to be ignored. Apparently he hasn't watched I.O.U.S.A. or visited Perot Charts. Maybe he's still stuck in the 1980s when his acumen as a portfolio manager and analyst was at its peak.

Folks, please don't listen to Ken Fisher if you want to survive the next few years of malaise. Just stay out of debt for the foreseeable future. That's my own plan.

The Haiku of Finance for 09/16/09

Warren calls bottom
Says recession won't get worse
I say he's way wrong

Uncle Warren Gets Bottom Call Wrong

Sorry, Mr. Buffett, but you're premature in calling the bottom of this Depression:

Warren Buffett, the billionaire investor who last year called the financial crisis an “economic Pearl Harbor,” said the U.S. economy has “hit a plateau at bottom.”

The Sage of Omaha is getting slow in his old age, as evidenced by the languishing performance of his railroad stocks and ConocoPhillips. The railroads he owns violate his preference for avoiding investments in companies with small debt loads.

Come on, Warren. You're smart enough to check rail car loading data. Have your staff look up container traffic from Asian ports and make note of the decline from last year. The Christmas shopping season will be a disaster for retailers and we'll be right back into a credit crunch for a not-so-happy new year.

Warren Buffett has been buying stocks, and I've been shorting the U.S. indexes. I've made a little money this year and Warren has lost a lot. I've also missed the big S&P rally because I'm convinced it's a prelude to a very large decline.

The Haiku of Finance for 09/14/09

Change regulation?
That's change we can believe in
So let's get it done

Alfidi Capital Special Report: IPO Filing Price Range Valuations

I've been busy for quite some time working on a very large project, but I have made time to publish a special report on valuation methodologies for IPOs. Check it out at Alfidi Capital.