In my previous post, I gave a quick snapshot of the retail sector macro environment.  In this post I will present a list of potential shorts for subscribers as well as the entire universe of companies used for those who don't subscribe.

Below is a list of 141 retail companies whose market cap is greater than$500 million and share price is over $10 that we used to create a universe of potential retail shorts.

[iframe http://spreadsheets.google.com/pub?key=t-O2vhJY5LECZgfPgzCuSMQ&single=true&gid=0&output=html&widget=true 600 600]

Then we:

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We have started picking new companies for forensic analysis, along with the ongoing study of the Pan-European Debt Crisis. Below you will find a sneak peak of what we have unearthed but first, the obligatory romp through recent news...

Bankrupt Consumers LOVE iPads: WSJ

  • Consumers are filing for Chapter 7 bankruptcy more than ever, choosing to liquidate their assets and be free of their debtors over signing debt repayment plans as encouraged under Chapter 13 bankruptcy
  • Personal bankruptcies reached 1.41 million last year, up nearly a third from 2008 (but the recession is over, don’t worrythis particular stat is a non-issue in a jobless, V shaped recovery)
  • Regulations that sought to keep consumers from liquidating at the expense of keeping some debt are not working, as the consumer is clearly rejecting the opportunity cost of having any debt

Consumers Deleverage: Reuters

  • Consumer credit unexpectedly took a sharp turn lower, and revolving credit fell at a 13% annual rate
  • Consumers are throwing away credit cards, yet retail sales data continues to rise, watch pending homes data on Monday for further development.
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Prepaid Legal Services, the company that I believe is a publicly traded Ponzi scheme (this is my opinion, although I believe my research backs this opinion up), released  preview of earnings as well as an update to its SEC inquiry.ppd_4-15-10.png

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I will start posting more news topics of interest and welcome readers to forward research and investment ideas at will. Here is the crop from last week. I will post topics from the weekend later on today, and as usual will randomly comment on daily news events.

From Alliance Bernstein:

  • Core Intermediate Producer Prices have taken 6 months to rise 5.2% annualized, recession of 2002 took 2 years to reach same level
  • Operating Rate hit low of 65.4% last year and has only risen to 69.4%, still short of historical threshold causing rise in raw material prices (74%)
  • Increases in foreign operating rates have started to indicate US may now be a price follower instead of price leader
  • The Fed cited lack of resource utilization as reasoning for maintaining record low rates, as these concerns begin to wane Alliance Bernstein sees easing of emergency Fed policy

Bloomberg.com:

  • Christina Romer, Peter Orszag, and Tim Geithner have predicted unemployment will settle in 2010 at around 9.7%, citing poor job conditions
  • Federal deficit projections for 2011 & 2015 are $1.5 trillion & $751 billion respectively, White House officials cite Bush's medicare and income tax cuts for allowing deficit insanity
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As you recall, my take on the deflation vs inflation debate is much less crystal ball-ish than many other pundits on the web. I never was very much into fortune telling or forecasting the future. From what I observed and researched, if I had to make a call that call would be stagflation.

On that note, here is an interesting note from one of my site's subscribers on how China is exporting to what is amounting to stagflation to the United States, now!

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As you recall, my take on the deflation vs inflation debate is much less crystal ball-ish than many other pundits on the web. I never was very much into fortune telling or forecasting the future. From what I observed and researched, if I had to make a call that call would be stagflation.


On that note, here is an interesting note from one of my site's subscribers on how China is exporting to what is amounting to stagflation to the United States, now!

As you recall, my take on the deflation vs inflation debate is much less crystal ball-ish than many other pundits on the web. I never was very much into fortune telling or forecasting the future. From what I observed and researched, if I had to make a call that call would be stagflation.


On that note, here is an interesting note from one of my site's subscribers on how China is exporting to what is amounting to stagflation to the United States, now!

When I first came out with the PPD research (which I released for free as a public service, may I add), many were doubtful as the market was literally manipulated upward. I feel by blog's patrons were confusing the alleged "scam's" fundamental viability over time (and ability to avoid regulatory discipline) with the overall movement of the market. As you can see below, things are not going well for this company. If one had faith in the research and rolled puts and protected shorts over, one should start seeing some decent gains. If I am right and this market is simply in a bubblicious bear market rally, any aggressive action by the SEC will drive this beta driven stock into the ground, making what you see today and last month look like an actual rally. Hey, it couldn't have happened to a better company.

Prepaid Legal press release:

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From Bloomberg: Sears Holdings Reports Unexpected Loss After Pension Plan, Severance Costs

Aug. 20 (Bloomberg) -- Sears Holdings Corp., the biggest U.S. department-store company, reported an unexpected second- quarter loss on pension-plan expenses, severance payments to fired employees and costs to close stores.

The net loss was $94 million, or 79 cents per share, compared with a profit of $65 million, or 50 cents, a year earlier, Hoffman Estates, Illinois-based Sears said today in a statement distributed by PR Newswire. Analysts had projected earnings of 35 cents per share, the average of six estimates compiled by Bloomberg.

The “severe decline” in capital markets last year increased Sears’ pension expenses by an estimated $160 million to $175 million for 2009, the company said. Sales fell to $10.6 billion, below the $10.7 billion average estimate of analysts, as consumers spent less on home appliances and clothing. Like other retailers, Sears suffered as consumer spending declined in the face of rising joblessness.

“The overall retail market remains difficult,” Bruce Johnson, the company’s interim chief executive officer, said in the statement.

Expenses rose to $103 million in the 13 weeks ended Aug. 1, Sears said, after the company closed 28 outlets..

From CNBC: Sears Posts Loss, Badly Misses Forecasts

Sears Holdings badly missed expectations Thursday, when it posted a loss per share of 17 cents excluding items for the second quarter, as its US comparable store sales fell by 8.6 percent on aggregate.

I have warned my subscribers about Sears for quite some time. See:

Sears Holdings Research Report - Retail Sears Holdings Research Report - Retail 2009-01-27 01:13:07 50.42 Kb

Sears Holdings Research Report - Pro Sears Holdings Research Report - Pro 2009-01-27 01:11:41 313.25 Kb

I also commented on the very short term nature of their "alleged" beat last quarter, based on extensive cost cutting which could not mask steadily declining revenues. Revenues are where economic profits come from, not cost cutting. SeeSears Q1 2009 Update Sears Q1 2009 Update 2009-06-01 12:28:26 398.99 Kb.

Despite my being absolutely right about Sears, their share price attempted to prove me wrong...

shld_ytd_chart.gif

As you can see, Sears has actually doubled from its March lows. There are absolutely no fundamentals that justify that level of share price movement. As I type this, Sears is down more than 12% ($8.92) in pre-market trading. What makes Sears so difficult to profit from is the two fold phenomenon: a) the US and global equity markets are in a full blown bubble, and b) Sears puts trade with EXTREME implied volatility, making them overpriced up and down nearly every expiration series and strike price. Thus, it is possible to have been right about Sears's prospects and situation, and still unable to turn a profit from a bearish position in it despite having the heart and fortitude to stick out a rough ride.

Of course, I have encountered this problem in my own portfolio, and have taken steps to rectify it. For those loyal subscribers that have followed my research and believe in it, I have (reluctantly) started analyzing various trade strategies to work around the irrational behavior of markets until profits, losses, assets and liabilities start to mean something again.

Last week and yesterday before earnings were released today, I analyzed and illustrated a bear spread strategy on this stock which had a very limited statistical downside, taking advantage of the high implied volatility (over pricing) of the puts to fund a bearish position. See Recent strategy analysis sample available to the public, wherein I gave away as a free sample a very limited risk strategy analysis detailing how to benefit from Sears fall without getting bit by a bubble pop. Basically, we used the high IV (overpricing of puts) to fund the bearish stance.

Below you will find a recent Sears Holding Strategy Analysis. Sear's is hard to hold a bearish position on using put options due to their extreme implied volatility - they are almost always consistently overpriced, hence the breakeven band for a market neutral strategy is usually impractically wide. These are the solutions we came up with for the January 2010 option series (subscribers usually get a full forensic analysis and a selection of strategies along several expiry series, as well as supporting data via excel spreadsheets):

SHLD Option Strategy Analysis SHLD Option Strategy Analysis 2009-08-19 03:38:19 173.90 Kb

Public Copy of SHLD Option Strategy Analysis Output sheet Public Copy of SHLD Option Strategy Analysis Output sheet 2009-08-19 03:37:24 293.00 Kb

Hopefully, those non-paying readers took the opportunity to benefit from the free intelligence. This brings me to my final point. There are literally dozens of companies in my Downloads Section that are overdue for a 20% to 70% haircut, fundamentally. I know it is quite frustrating to sit through the market skyrocketing with a bearish stance, but math is math, and the fundamentals of these companies simply do not come anywhere near supporting their share prices, or in many cases, even a fraction thereof. Just think about the technically insolvent media company with $6 billion of NEGATIVE equity that I covered not too long ago. Since, for the time being, this is a traders market and not a stock pickers market, I have instituted the recent, and sometimes apparently complex, trade strategy analyses to benefit from market neutral tactics. As you all know, I am not market neutral, I am bearish, but I am also at the mercy of the markets just like everyone else. Consider these strategies a bearish position with an active hedge. We shall see how well the Sears strategy worked out in a couple of hours assuming one unwinds the position at market open.

For those that wonder, it ain't even close to over for Sears. From CNBC: Jobless Claims Show Surprise Gain Amid Fears on Economy


The number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week, as companies continued to cut payrolls amid uncertainty over the economic outlook.

Retailers don't do well when shoppers don't have jobs. Sears is a hobbled company, at best, even when macro conditions were better. Now, fuhget about it.

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S&P futures are down 17 points as I type this. Here are more strategy analysis documents for subscribers. Wells Fargo and Sears have very expensive put options due to significant implied volatility, which make a pure market neutral strategy yield a prohibitively high breakeven point. We have calculated the optimal risk adjusted bear plays using spreads, and detailed them in the following documents. Keep in mind that once the matket does break, one is free to leg out of market neutral and spread positions to take full advantage. Since I don't offer trading advice here, I won't go into detail, but I welcome all discussion in which I will participate.

I consider the spread and neutral strategies' legs hedges.

SHLD Option Strategy Analysis SHLD Option Strategy Analysis 2009-08-17 05:46:12 173.99 Kb

WFC January 2010 series WFC January 2010 Series Option Strategy Analysis 2009-08-17 05:52:27 165.88 Kb

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