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View Full Version : Fishing for shorts: Two we caught, two that got away, and what we learned - Eric Janszen



EJ
11-12-08, 12:06 AM
http://itulip.com/images/fishing.jpgFishing for shorts: Two we caught, two that got away, and what we learned

A year ago this month I wrote As goes Starbucks and Home Depot, so goes the nation (http://www.itulip.com/forums/showthread.php?t=2450), a play on Dwight Eisenhower's “As goes General Motors, so goes the nation.” It was my notice of the impending death of the Monthly Payment Consumer (http://www.itulip.com/glossary.htm#monthly_payment_consumer), the backbone of the 35 year American Consumer Fantasy, and the retailers that both satisfied the consumer demand and supplied a steady, albeit modest, income for the innocent young and the older and savings poor. Starbucks and Home Depot were two short fish on the hook. Two big ones got away, but there are more where they came from.

How has Starbucks fared since Oct 15, 2007?


http://itulip.com/images/starbucks.gif

Since Oct. 2007, off 75%


The cloying appeal of sitting with strangers in a space modeled after the living room set from Friends, sipping coffee you can make yourself for a quarter of the price and drink in the quiet and comfort of your own living room, was lost around the time real disposable incomes started to plummet Q4 2007.

How about Home Depot, that mecca of cash-out refi spending during the housing bubble where home flippers and mortgage owers expressed their steadfast commitment to the fiction of continuous home price inflation by roaming the isles in roiling herds, paying prices for kitchens and bathrooms that exceeded the median price of an entire home ten years earlier.

They were told, "It'll pay for itself!" Not quite. March 2006 we warned that all home improvements are negative return investments, also known as an "expense":
Here are the home improvement return on investment facts: minor kitchen face lift: 81%; additional bath: 72%; bathroom remodeling: 84%; family room addition: 71%; kitchen remodeling: 70%; master room addition: 91%; attic bedroom: 65%; two-story addition: 62%; siding replacement: 60%; window replacement: 56%; deck addition: 54%; home office: 65%. Best case you lose only 9% and worse case up to 46% but in no case are you going to make money. Oh, by the way, these data were collected when housing prices were rising.
These economics hit mortgage owers like a ton of bricks a few months before we started to play taps for the Monthly Payment Consumer.


http://itulip.com/images/HomeDepot.gif

Since Oct. 2007, off 57%


The stock is holding up better than you might expect, likely due to demand for material needed to convert MacMansions into multifamily homes so renters can help defray the un-affordable mortgage, a development we saw coming in January 2005 (http://www.itulip.com/housingbubblecorrection.htm), plus the do-it-yourselfers trying to save a few bucks rather than pay Joe the Plumber his $22 per hour.

Two that got away

Those were two good catches. What did I miss in my forecast of the demise of the Monthly Payment Consumer?

I should have said, "As goes Starbucks, Home Depot, General Motors, and MGM, so goes the nation.”


http://itulip.com/images/generalmotors.gif

Since Oct. 2007, off 87%


When an indebted Consumer is facing unemployment, the last thing on his or her mind is committing a big chunk of the next four to six years' household cash flow to a poorly engineered American gas hog. The gas hog manufacturer's financing arm, not thrilled about lending money to the indebted, soon to be unemployed Consumer, has raised lending standards so high that fewer than half as many applicants can make the hurdle as could this month last year.

In retrospect shorting GM was like shooting fish in a barrel. But the really big one that got away was a slew of stocks that could be caught like school of salmon with a stick of dynamite.


"The only way to make money in a casino is to own one."
- Steve Wynn, founder of Bellagio and the Mirage
It should have been obvious. I'm surprised I missed this one because I'd recently been in Las Vegas to give the Hard Assets Conference keynote. It's Peter Schiff's turn in San Fransisco.

I don't envy him. In my August 2007 keynote I put in a strong plug for gold the day before gold broke out of its $650 rut and never looked back until making a run for $1000. Peter gets the other end of the stick; everything is down in today's cold, dark post-nuclear investment climate. (See Janszen's Hard Assets Las Vegas Conference 2007 Keynote Presentation (http://itulip.com/forums/showthread.php?t=1992) $ubscription.) Of course, we at iTulip don't hang onto gold through the inevitable disinflation to make money, we keep it to hedge the risk that our government will reflate the economy by means that cause the currency to suddenly weaken, and are unlikely to send out a memo before they do.

That summer Las Vegas was crowds speaking Japanese, Mandarin, German, French, any language not denominated in dollars, all enjoying the great American fire sale. I recall thinking, "What happens when the recession goes global and all these tourists stay home?"


http://itulip.com/images/mgm.gif

Since Oct. 2007, off 90%


Eighty five per cent of Las Vegas visitors gamble and they lose an average of $665 each. The gambling industry and the media that advertises, I mean, reports on it has for years claimed that casino gambling is "recession-proof" as if the the Monthly Payment Consumer cannot possibly find more pleasant and less expensive entertainment than dropping six bills in a bright, noisy, airless, windowless adult amusement dungeon. One look at MGM's stock tells us the Consumer gave up on gambling at precisely the time of his retreat from GM, Chrysler, and Ford. Anyone for a spread bet on the chances of a government bailout of MGM versus GM?

Moral: When The Monthly Payment Consumer goes into hibernation, the credit-based FIRE Economy sputters. But when the 35 year American Consumer Fantasy comes to an end, you cannot be too pessimistic about the prospects for businesses that depend on non-essential household spending.

I'm often asked, "How will we know when the transition out of the American Consumer Fantasy Economy is over?" As I explained in Upside Down to Right Side Up (http://www.itulip.com/forums/showthread.php?p=9055#post9055) April 2007, when the upside down relationship between savers and lenders reverses.

Upside Down Signs

Lenders pursue borrowers
Lenders mail more than 4 billion credit card solicitations per year, often to the least credit-worthy borrowers
Lenders prefer borrowers with poor credit
Borrowers who repay are "deadbeats"
A mortgage is "wealth"
A house is an "investment"
Revolving credit is used to finance all purchases, such as food and clothing
Banks need to be given specific guidance by the FDIC "To make reasonable efforts to determine a borrower's income"

Right Side Up Signs

Borrowers pursue lenders for loans
Lenders mail credit card solicitations per year to only the most credit-worthy borrowers
Lenders prefer credit-worthy borrowers
Borrowers who do not repay are "deadbeats"
A mortgage is a debt
A house is a place to live, the price rises no faster than the inflation rate
Revolving credit is used to finance major purchases, such as autos
Banks don't need to be given specific guidance by the FDIC "To make reasonable efforts to determine a borrower's income"

In the mean time, if you are looking to short what remains of the fantasy economy, there's plenty of fish in the sea. Cast a wide net. Just make sure you don't pick anything that's "too big to fail" and get caught holding a whale that Paulson and Pelosi decide to put into the US Treasury's Aquarium Museum of Extinct Businesses. If you do, you'll lose twice: the money you lost betting against the government and the money the government took from you to bail out the company you were shorting. To limit your risk, stick with ETFs and companies that are too small to bail.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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Jim Nickerson
11-12-08, 12:23 AM
Nice, Eric, and here is something to a degree along the same line, bearing out my opinion that there are no "no-brainers" and that making money most of the time by investing requires intelligence, timing, and good luck.



MARK HULBERT Getting it right and still losing 11/12/08
Commentary: You can get a lot of things right and still lose big

Sometimes you can't win for losing.
Just ask Harry Schultz. Or Howard Ruff. Or Jim Dines.

All three advisers, each of whom has been editing an investment newsletter at least since the 1970s, have built their investment careers by questioning conventional wisdom's trust in the soundness of the financial system. Not surprisingly, all three have been vociferous champions of gold and other precious metals.

You'd think that they would have cleaned up over the last year, since the disintegration of the financial system in recent months is almost exactly what they have been warning us about for decades.

But you'd be wrong.

Of the 181 newsletters on the Hulbert Financial Digest's monitored list, these three advisers' newsletters are in 173rd, 175th, and 176th places for year-to-date performances through October 31, with losses ranging from minus 64.9% to minus 70.0%.

How can this be?




The rest of the story: http://www.marketwatch.com/news/story/Some-advisers-lose-big-despite/story.aspx?guid=%7BD1D98B9B%2DF8A6%2D4174%2D9563%2 D38B2439A6090%7D

FRED
11-12-08, 12:45 AM
Gee, money supply is collapsing and gold prices go down.

shocking.

Yes, exactly as Ka-Poom Theory says. First disinflation, then inflation.

phirang
11-12-08, 12:47 AM
Yes, exactly as Ka-Poom Theory says. First disinflation, then inflation.

I say, Ka-Ching:

deflation then theft.

FRED
11-12-08, 12:49 AM
I say, Ka-Ching:

deflation then theft.

That's old school.

metalman
11-12-08, 01:27 AM
taking ain't inflating.

now you and EJ get to work!

every nation on earth is inflating and spending. they always overdo it.

santafe2
11-12-08, 01:45 AM
"The only way to make money in a casino is to own one."
- Steve Wynn, founder of Bellagio and the Mirage
Eighty five per cent of Las Vegas visitors gamble and they lose an average of $665 each.

When will Las Vegas return to dust and sand with a few miners cabins at the edge of the old town? I would add this to your list of changes. Las Vegas serves as nothing more than a cautionary tale.

Chris
11-12-08, 02:48 AM
Nice synopsis, EJ. But it does seem to me that most of the comments on this piece are entirely unrelated to the thread.

nathanhulick
11-12-08, 03:06 PM
It's Peter Schiff's turn in San Fransisco.

I don't envy him. In my August 2007 keynote I put in a strong plug for gold the day before gold broke out of its $650 rut and never looked back until making a run for $1000. Peter gets the other end of the stick; so far this year his fund is down more than the S&P (http://finance.yahoo.com/q/bc?t=2y&s=AEPGX&l=on&z=m&q=l&c=&c=%5EGSPC).

I dont know why people here keep saying this. Peter Schiff owns a brokerage business called "Euro Pacific Capital". He is not affiliated at all with the "EuroPacific Growth Fund" run by the company "American Funds".

I agree that many of his stock picks have lagged the return someone could have received from gold, but he recommended gold as well.

BobH
11-12-08, 04:27 PM
Why doesn't EJ's quote above match the original EJ write-up?

Also there wee a couple of other posts that flamed EJ hee where did they go?

If this source is editing on the fly you should let subscribers know.

Thanks

FRED
11-12-08, 04:50 PM
Why doesn't EJ's quote above match the original EJ write-up?

Also there wee a couple of other posts that flamed EJ hee where did they go?

If this source is editing on the fly you should let subscribers know.

Thanks

We have a few rules here. We call them the iTulip Bar and Grill rules. I'll repeat them.

1. Imagine you are all together in an actual physical space together.
2. Do not say anything to any of your fellow members on this board that you'd not say to their face.
3. Drunken brawls are not permitted. The bouncer will deal with such infractions accordingly.
4. Flames and other disrespectful exchanges that involve personal attacks or name calling will be deleted without notice.
5. Dissent is encouraged but respect is not optional.
6. One strike rule on spam.

Our members find it unpleasant to go to the iTulip Bar and Grill and find a few members very actively walking around saying, in effect, "This place stinks." If they don't like, they are encouraged to go someplace they do like, If they keep it up, they will be more than encouraged, they will be ejected.

I'll add that as the economy and markets get worse and worse and tensions increase and put more stress on our members, we will enforce an even higher degree of decorum here than usual. The civility level needs to rise now, not fall.

Someone asked what EJ's allocation is. As has been expressed in various posts here: As of Dec. 2007 80% Treasury securities and CDs, 20% PMs, no debt.

BobH
11-12-08, 05:00 PM
Ed, no problem with the rules ... just never saw them posted!

Regarding my first question, could you please explain?

FRED
11-12-08, 05:07 PM
Ed, no problem with the rules ... just never saw them posted!

Regarding my first question, could you please explain?

What version are you referring to? We will often post an (Update 1), (Update 2), (Update 3), Final as Bloomberg, Yahoo!, and others do. Reason is new data come in, spelling and other errors are found and corrected, etc. However, we will not make changes that significantly alter the meaning of an article; if it asserts "The stock market will go down!" we will not edit it to "The stock market will go up! after the market opens up. :)

dbarberic
11-12-08, 05:52 PM
So... what ideas can we use to play this.

I found the Proshares Ultrashort ETFs.

SCC - Ultrashort Consumer Services

Holdings (based on index that SCC shorts):
13.63% WAL-MART STORES INC
6.51% MCDONALD'S CORP
4.22% CVS CAREMARK CORP
3.91% THE WALT DISNEY CO.
3.55% HOME DEPOT INC
3.54% TIME WARNER INC
3.06% COMCAST CORP-CL A
2.84% LOWE'S COS INC
2.58% TARGET CORP
2.39% WALGREEN CO

Sectors (based on index that SCC shorts):
45.30% General Retailers
23.51% Media
16.36% Travel & Leisure
14.77% Food & Drug Retailers
0.05% S-T Securities

SZK - Ultrashort Consumer Goods

Holdings (based on index that SZK shorts):
18.22% PROCTER&GAMB LE CO
9.11% COCA-COLA CO/THE
8.35% PHILIP MORRIS INTERNATIONAL
8.30% PEPSICO INC
4.60% ANHEUSER-BUSCH COS INC.
4.37% MONSANTO CO
3.63% KRAFT FOODS INC-A
3.44% ALTRIA GROUP INC
3.03% COLGATE-P ALMOLIVE CO
2.30% KIMBERLY-CLARK CORP

Sectors (based on index that SZK shorts):
24.73% Beverages
23.38% Household Goods & Home Construction
20.14% Food Producers
14.51% Tobacco
10.33% Personal Goods
3.43% Leisure Goods
3.22% Automobiles & Parts
0.09% S-T Securities


I don't like the fact that for both of these shorting options the top retailer is Walmart for SCC and for SZK the top holding is P&G. Both of these seem to me would benefit from a consumer slow down.

Is anyone else aware of better EFTs options to play this game?

nathanhulick
11-12-08, 07:54 PM
We have a few rules here. We call them the iTulip Bar and Grill rules. I'll repeat them.

1. Imagine you are all together in an actual physical space together.
2. Do not say anything to any of your fellow members on this board that you'd not say to their face.
3. Drunken brawls are not permitted. The bouncer will deal with such infractions accordingly.
4. Flames and other disrespectful exchanges that involve personal attacks or name calling will be deleted without notice.
5. Dissent is encouraged but respect is not optional.
6. One strike rule on spam.

Our members find it unpleasant to go to the iTulip Bar and Grill and find a few members very actively walking around saying, in effect, "This place stinks." If they don't like, they are encouraged to go someplace they do like, If they keep it up, they will be more than encouraged, they will be ejected.

I'll add that as the economy and markets get worse and worse and tensions increase and put more stress on our members, we will enforce an even higher degree of decorum here than usual. The civility level needs to rise now, not fall.

Someone asked what EJ's allocation is. As has been expressed in various posts here: As of Dec. 2007 80% Treasury securities and CDs, 20% PMs, no debt.

I hope that wasnt addressed to me. I was just pointing out the Schiff doesnt have anything to do with that mutual fund. Ive seen other people mention that his "fund" has lost money, but I always just thought they were referring to his stock recommendations.

I wasnt trying to insult anyone and I hope it didnt come off that way in my first post.

FRED
11-12-08, 10:44 PM
I hope that wasnt addressed to me. I was just pointing out the Schiff doesnt have anything to do with that mutual fund. Ive seen other people mention that his "fund" has lost money, but I always just thought they were referring to his stock recommendations.

I wasnt trying to insult anyone and I hope it didnt come off that way in my first post.

Absolutely not addressed to you. Civilized criticism and well documented specific errors are what make iTulip tick!

dbarberic
11-13-08, 11:37 AM
So... what ideas can we use to play this.

I found the Proshares Ultrashort ETFs.

SCC - Ultrashort Consumer Services

Holdings (based on index that SCC shorts):
13.63% WAL-MART STORES INC
6.51% MCDONALD'S CORP
4.22% CVS CAREMARK CORP
3.91% THE WALT DISNEY CO.
3.55% HOME DEPOT INC
3.54% TIME WARNER INC
3.06% COMCAST CORP-CL A
2.84% LOWE'S COS INC
2.58% TARGET CORP
2.39% WALGREEN CO

Sectors (based on index that SCC shorts):
45.30% General Retailers
23.51% Media
16.36% Travel & Leisure
14.77% Food & Drug Retailers
0.05% S-T Securities

SZK - Ultrashort Consumer Goods

Holdings (based on index that SZK shorts):
18.22% PROCTER&GAMB LE CO
9.11% COCA-COLA CO/THE
8.35% PHILIP MORRIS INTERNATIONAL
8.30% PEPSICO INC
4.60% ANHEUSER-BUSCH COS INC.
4.37% MONSANTO CO
3.63% KRAFT FOODS INC-A
3.44% ALTRIA GROUP INC
3.03% COLGATE-P ALMOLIVE CO
2.30% KIMBERLY-CLARK CORP

Sectors (based on index that SZK shorts):
24.73% Beverages
23.38% Household Goods & Home Construction
20.14% Food Producers
14.51% Tobacco
10.33% Personal Goods
3.43% Leisure Goods
3.22% Automobiles & Parts
0.09% S-T Securities


I don't like the fact that for both of these shorting options the top retailer is Walmart for SCC and for SZK the top holding is P&G. Both of these seem to me would benefit from a consumer slow down.

Is anyone else aware of better EFTs options to play this game?
I guess no one wants to talk investment opportunities.... rather they want to nitpick EJ's comments.

we_are_toast
11-13-08, 12:23 PM
I guess no one wants to talk investment opportunities.... rather they want to nitpick EJ's comments.

Thanks for the post. I like your etf's. These are Ultra shorts and the Walmart and P&G might be good if you want to be kinda ultra short.

Here are some more that others have posted in other threads.

Ultra short bonds;
PST TBT

Long 20 yr
TLT

Ultra long oil stocks:
DIG

Ultra short dow
DXD

short financials:
SKF

But with things so crazy, EJ's allocation looks pretty good.

RebbePete
11-13-08, 12:27 PM
Is anyone else aware of better EFTs options to play this game?

I've been in the Proshares Ultrashort Financials ETF (SKF) for a while, but it's been a bit of a roller coaster with all the bailouts and prohibitions against shorting some of the big fish. I've still doubled my money (as of this minute of this day :cool:), so it's been a good buy. I just wish I had put more money into it, and a little less into PMs (and a lot less into Canadian junior minors)!

Then again, if I were a genius, I could have traded SKF and made quite a bit more.

ax
11-13-08, 03:13 PM
Don't forget a third one you "got" along with Phirang, CRE. GGP is ready to declare bankruptcy. And I thought I did well by shorting it for a 50% gain. Hah! My worst case scenarios have not been bad enough....

bpr
11-14-08, 04:00 AM
I don't like the fact that for both of these shorting options the top retailer is Walmart for SCC and for SZK the top holding is P&G. Both of these seem to me would benefit from a consumer slow down.

You're right. I think the only way to play this is as a long-short hedge, long PG and WMT as well as the short ETFs. The longs in PG and WMT would work as the hedges, of course.


I've been in the Proshares Ultrashort Financials ETF (SKF) for a while, but it's been a bit of a roller coaster with all the bailouts and prohibitions against shorting some of the big fish. I've still doubled my money (as of this minute of this day :cool:), so it's been a good buy. I just wish I had put more money into it, and a little less into PMs (and a lot less into Canadian junior minors)!

Then again, if I were a genius, I could have traded SKF and made quite a bit more.

This is another one where you want to lok at the major holdings. I've done well with SKF hedging my bet on USB. I think there may be more banks at reasonable prices now with SKF as the hedge.

walenk
11-14-08, 06:46 PM
Harley's down, double Doh!
But it will be one of my pivots. Trophy/toy in good times, transportation in bad times.

Big bottom, big bottom
Talk about your mud-flaps
My ride's gottem'
How can I leave that behind?

http://biz.yahoo.com/ap/081114/movers_roundup_harley_davidson.html?.v=1

Nicolasd
11-14-08, 07:34 PM
Harley's down, double Doh!
But it will be one of my pivots. Trophy/toy in good times, transportation in bad times.

Big bottom, big bottom
Talk about your mud-flaps
My ride's gottem'
How can I leave that behind?

http://biz.yahoo.com/ap/081114/movers_roundup_harley_davidson.html?.v=1


Perhaps they should consider moving their production facility to India
Here is what they would sound like--No offense to our Indian brethrens