Guzzo the Contrarian

Recession: It’s Official

If there’s one thing that my frequent (or infrequent) readers should know about me, it’s that I don’t like blindly following the herd. By posting this news, I’m not reporting anything that can’t be found on the other 25 million financial sites out there. However, in this case, “official” word of recession cements the point I’ve made when I first started Guzzo the Contrarian in 2006, that the economy was headed for a significant downturn.

According to the pseudo-governmental organization who officiates these things, National Bureau of Economic Research (NBER):

The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

I can’t tell you how many friends and associates I’ve told (unconvincingly) that the recession began at the end of 2007. I also can’t tell you how many financial pundits, perceived experts, and financial professionals adamantly predicted just the opposite. I also can’t tell you how many people told me that I was crazy, or dismissed my opinions based on a perceived lack of credibility because I’m not a financial professional.

So, while I’d like to say that I’m posting this news in order to justify my own independent analyzes or to prove my credibility, posting an “I told you so” doesn’t do any good. I’m also not in the business of providing individual investment advice nor am I trying to convince you that I have all of the answers. In all honesty, while I did predict this recession, I didn’t predict that the recession would be this bad.

I’m actually writing this post to try to make a couple of points.

My first point is:

BELIEVE IN YOURSELF. YOU CAN SUCCESSFULLY MANAGE YOUR OWN FINANCES AND INVESTMENTS BETTER THAN MOST OTHERS CAN MANAGE THEM FOR YOU.

You can do it! It just takes motivation, persistence and patience. To be successful, you’ll have to think outside the box, believe in yourself and your analyzes, and be confident with your own decisions. You must persevere in the face of numerous adversity; people telling you that you can’t do it, or trying to convince you that they are more knowledgeable. Always question whose interests are being served when analyzing such advice.

No one is perfect. They’ll be intermittent failures, times when you’re wrong, time when you lose money, and times filled with self-doubt. Don’t let these occasional failures discourage you from achieving overall financial success.

I hope my successful experiences encourage you to take charge of your financial situation and lead you on your own quest to conquer the markets. Believe in yourself. Live, learn and listen and you’ll be successful.

My second point is:

OFFICIAL RECOGNITION OF A RECESSION IS THE FIRST STEP IN REVERSAL OF A RECESSION.

It’s good news to finally read of an officially recognized recession.

While it’s often been said that earnings move the markets, it’s actually investors’ behavior towards those earnings that move the markets.

Unknowns tend to cause investor anxiety and now that the recession has become officially recognized, that “unknown” has been removed from the equation. Acceptance of a recession often signifies a psychological stage where investors start looking towards resolution.

According to William Hester, CFA, of Hussman Funds:

The typical recession-induced bear market goes through three stages. The first stage is where stock prices grind lower as the economic data begins to suggest a developing recession. The depth of the declines and the volatility increase as more investors begin to price in the probability of a recession. This recognition comes slowly. On average, the first 100 trading days of recession-induced bear markets contain only a quarter of the bear market losses and have lower volatility compared with the full downturn.

The second stage is where the majority of investors recognize that the economy is in recession. This period usually coincides with deep and abrupt declines, with very high volatility.

The final stage is a work-out period, where stock investors struggle to determine the depth and duration of the recession. It’s a period that’s been marked by both strong rallies and continued declines, partly determined by beginning valuation. Rallies often retrace. And the early stages of this work-out period almost always contain above-average volatility. But once a recession has been recognized, and valuations become reasonable, the prospects for longer term returns typically improve.

According to today’s NBER report, we’ve been in a recession for a full year. Not including the Great Depression of the 1930’s, the average duration of time for all recessions thereafter is only 10 months.

While it’s possible that this recession may turn out to be atypical, I’m of the opinion that we are probably in the second to third stage of a typical recession. I tend to agree with John Hussman, PhD, that the stock market is not in uncharted territory, and that we should be seeing a turnaround soon.

¶ Posted 01 December 2008 † Mike § Commentary § Economic ‡ Comments (2) ° Tagged: NBER, recession

Once In A Lifetime Event

According to a CNNMoney.com headline, Paulson: Crisis of the century:

Treasury Secretary Henry Paulson called the financial crisis now plaguing the world economy a “once or twice” in a 100 years event, even as he warned Thursday against imposing too-strict regulations to prevent a repeat calamity.

Treasury Secretary says the current financial crisis is rare, but warns against harsh regulations. Here’s breaking video of him reeling from the backlash after explaining what may happen if we ignore his concerns, and describing how the economy could easily fall underwater if we dismiss his warnings.

¶ Posted 21 November 2008 † Mike § Economic ‡ Comments (2) ° Tagged: Henry Paulson, video

The Crash of 1929

As described by the PBS television show, American Experience:

In 1929, while the stock market was rising, seemingly without limits, there were few critics. Based on eight years of continued prosperity, presidents and economists alike confidently predicted that America would soon enter a time when there would be no more poverty, no more depressions — a “New Era” when everyone could be rich. Instead it was the rich who became became richer.

The Crash of 1929 captures the unbounded optimism of the age and the shocking consequences when reality finally hit, exploring a fateful year through the words and experiences of the descendants of several titans of finance. The film features the recollections of people whose families experienced the crash. In one interview, Groucho Marx’s son, Arthur, remembers how his famous father detested gambling, yet put his entire life savings in stocks.

With the markets continuing to reach record lows, I’m sure that there are many Americans worrying that we may be falling into a major Depression (both literally and figuratively). While anything is possible, I believe our economy will rebound from this recession, hopefully with lessons learned. But, on the other hand, like they said in the movie: “We were wonderfully capable of self-delusion”.

So, if you haven’t seen it just yet, this may be an appropriate time to watch the online video, American Experience: The Crash of 1929.

The Crash of 1929 does a great job of explaining the crisis, but from a personal point of view, with interviews from investors and families who experienced the repercussions firsthand. I found it very interesting how many of the issues and behaviors associated with our current economic crisis parallel similar ones that led to The Great Depression.

I found the movie both educational and entertaining.

¶ Posted 20 November 2008 † Mike § Commentary § Stock Market ‡ Comments (1) ° Tagged: The Great Depression, video

Chico’s FAS

It’s stock price just reached my limit order for Chico’s FAS (CHS) at close of market. I now own 1000 shares at $1.75/share.

I’ve been following CHS, and the apparel sector, for a few years. As a matter of fact, it’s been almost one year since my first post about CHS and about six months since my follow-up post.

The economy has taken it’s toll of Chico’s FAS, but I believe it’s gotten to the point that the upside potential of CHS far outweighs any potential it has to fall to zero.

So, I took a position with the intention of trading it. However, it’s possible that I could fall into the trap that my friend HarleyDog at Prudens Speculari uses as a tagline after each of his blog posts, and might hold onto it as an investment.

For those unfamiliar with the name:

Chico’s FAS, Inc. (together with its subsidiaries, the “Company”), in business since 1983, is a specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items under the Chico’s, White House | Black Market (”WH | BM”) and Soma Intimates (”Soma”) brand names.

The Company is a specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items. The Company operates 1,077 women’s specialty stores, including stores in 48 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico operating under the Chico’s, White House | Black Market and Soma Intimates names. The Company has 619 Chico’s front-line stores, 41 Chico’s outlet stores, 327 White House | Black Market front-line stores, 19 White House | Black Market outlet stores, 70 Soma Intimates front-line stores and 1 Soma Intimates outlet store.

The once high-flying retailer which once traded in the upper $40.00 range as late as 2006, now trades at less than $2.00 per share. Sales have been falling dramatically year over year.

According to their August, 2008 10Q:

Since fiscal 2005, the Company’s rate of growth (measured by overall growth in sales, growth in comparable store sales, and other factors) has decreased from the rate of overall sales growth experienced in earlier years (which had been in the range of 30-40%), reflecting in large part the Company’s significantly increased size, its decision to adopt more manageable net square footage growth goals (7-8% for fiscal 2008 and 2-4% for fiscal 2009) and the more recent experience of negative same store sales.

As of October, the company also now views itself in defensive mode, while comparable store sales are still falling.

I’d like to believe that tightening purse strings in a worsening economy is what’s mostly contributing to decreasing sales, especially now, but the economy was still chugging along in 2005-06. I suspect that perhaps poor management may also be contributing a portion. We’ll find out much more on this Tuesday’s 3rd quarter earnings announcement. However, I don’t want to delve into this area, important as it is.

The reasons why I bought CHS are twofold.

1. Chico’s FAS is a very fundamentally sound company, currently trading at less than half of it’s book value. CHS carries almost as much cash as it’s current trading price, it has no long term debt, a price/sales of 0.2, price/cash flow of 2, and still manages to eke out a profit. With a large amount of cash on hand, no debt and a current ratio of 3.4, CHS can survive a very long economic downturn.

2. I believe a panicking market has severely undervalued it’s stock price. Any amount of good news could easily cause it’s stock price to quickly double. With time, an improving economy and improving sales, CHS could also easily and quickly climb back over $10.00/share.

So, like I first said, the upside potential far outweighs any downside potential. It’s worth the risk to me.

BTW: Morningstar.com is offering unlimited FREE access to their premium membership services this week if there are any stocks or funds you want to research there.

¶ Posted 19 November 2008 † Mike § Sectors § Stock Market ‡ Comments (1) ° Tagged: CHS

Uwharrie Capital Corporation

I just added to my position in Uwharrie Capital Corporation (UWHR) today. I bought another 500 shares at $3.20/share.

Uwharrie Capital Corporation is a microcap three banking system located in the Uwharrie Lakes Region of North Carolina, located east of Charlotte. It’s headquartered in Albemarle, NC.

I originally wrote about UWHR back in 2006, when Guzzo the Contrarian first started, but that post is long gone. My last post about UWHR only briefly touched upon the stock. So, let me recap the reasons why I bought UWHR and what I like about the company.

My initial interest in UWHR stemmed from screening and researching the varied small cap banks located in the piedmont regions of central North Carolina and Virginia.

I lived a portion of my young life in Charlotte, and recently spent a few years living and working in the region. I found it interesting that this area of the country had so many micro cap community banks, but yet investment in these banks was of interest mostly to those who lived those communities. As such, I though this might be a good sector to find some wallflower stocks at undervalued prices.

UWHR appealed to me for a few reasons, foremost being it’s stock price. At that time, trading around $6.00/share, it was the lowest-priced profitable banking stock in North Carolina. Trading today at less than $3.00/share, it’s STILL the lowest-priced profitable banking stock in NC.

UWHR has also always been a fundamentally sound company and continues to remain a well-capitalized bank holding company. According to excerpts from it’s November 7th 10Q:

Uwharrie Capital Corp reported net income of $1.9 million or $0.25 per basic share, for the nine months ended September 30, 2008, as compared to $2.1 million, or $0.29 per basic share, for the nine months ended September 30, 2007, a decrease of $259 thousand, or $0.04 per share.

At September 30, 2008, total shareholders’ equity was $31.8 million, an increase of $205 thousand from December 31, 2007. Net income for the period was $1.9 million and the Company received $300 thousand from the exercise of stock options. These increases were offset by the repurchase of 76,598 shares of the Company’s common stock at a cost of $412 thousand and unrealized losses on investment securities, net of tax, of $1.4 million. The Company also recorded a $273 thousand one-time cumulative adjustment to undivided profits for the adoption of EITF 06-4. At September 30, 2008, the Company and its subsidiary banks exceeded all applicable regulatory capital requirements.

Both the Company and its subsidiary banks have maintained capital levels exceeding minimum levels for “well capitalized” banks and bank holding companies. The Company expects to continue to exceed these minimums without altering current operations or strategy.

Like most of it’s competitors, the worsening economy has negatively impacted Uwharrie Capital Corporation’s bottom line. It’s had it’s share of setbacks: write-offs, impaired loans, non-performing assets, and unrealized investment losses.

But, unlike many of it’s competitors, UWHR has had no subprime exposure and other portions of it’s diversified portfolio have had gains that offset some of the losses. Even though this quarter’s profits were down, they still managed to generate a profit.

According to Uwharrie Capital Corporation’s latest press release:

ALBEMARLE, N.C. – Uwharrie Capital Corp, parent company for Bank of Stanly, Anson Bank and Trust and Cabarrus Bank and Trust, reported earnings from operations of $1.0 million during third quarter of 2008 compared to $1.1 million in the same period last year. During the quarter ended September 30, 2008, the Company prudently expensed additional reserves to its loan loss provision in light of increased economic risk. Third quarter earnings, after this provision and taxes were $343 thousand compared to $774 thousand for the same period last year.

I was also drawn to this stock by the location of it’s banks. Charlotte has been, and IMO, will continue to be a fast growing city. People will continue to move into the area because the city offers reasonably low real estate prices, a low cost-of-living, and a growing job bank. Charlotte has a well-built highway system with easy access to many cultural and recreational amenities. The area also offers four distinct, but temperate seasons.

The Charlotte metropolitan area has grown tremendously over the last few decades, with most growth occurring along the highways north and northeast towards Lake Norman, Kannapolis and Concord, west towards Gastonia, and south, extending into South Carolina. The city’s slowest rate of growth has occurred eastward because there isn’t a major highway built in that direction.

However, as time progresses, I think expansion will continue at a greater rate eastward into the counties that Uwharrie Capital Corporation represents, as close and buildable land becomes more scarce. UWHR’s business will grow along with this expansion.

What also interested me to invest in Uwharrie Capital Corporation is it’s core values and it’s community mission. Unlike many in the banking industry, UWHR realizes that the key to their success lies in the success of the people living in their communities. Their mission is to “Make a Difference While Making a Profit”. UWHR measure success by how much they contribute to the quality of life and economic well-being of their communities. The success of their community is equally as important as the success of their business. As a matter of fact, their first core value is: We will never put profits before the welfare of people.

IMO, lost focus of the dual importance of business and community is what’s led to many of the problems associated with our current economy. So, when I find a well-run company that realizes the importance of this concept, I see a company being run by a bunch of smart folks. I like to invest my money with smart folks.

These are the reasons for my initial and continued investment in Uwharrie Capital Corporation.

There are some drawbacks to investing in UWHR. The company actually prefers it’s shareholders to be local investors. Entering or leaving a position can be difficult. It’s very thinly-traded, so buying and selling can often test one’s patience. Until it becomes more well known, it wouldn’t be a good stock to trade. One could get locked into a position for a long time.

The stock’s price may not also climb as quickly as desired. I’ve had my position for a few years now, and although I believe it to be a profitable long-term investment, I’m currently in the red. UWHR’s stock price tends to move in tandem with sector prices and may remain in the cellar until the whole sector (and economy) turns around. But, this also makes it’s a good time to buy.

Uwharrie Capital Corporation pays an annual 3% stock dividend. They announce their stock dividend around this time of the year, every year. According to their latest press release:

Uwharrie Capital Corp has declared a 3% stock dividend to be paid to shareholders on December 4, 2008. Mike Snyder, Board of Directors’ Chairman commented, “The Board of Directorsis pleased to make this announcement. Our shareholders continue to show their support by doing business with us and referring their friends. This allows our company to continue creating value and serving our communities well by empowering local people to control their economic destiny.” Shareholders of Uwharrie Capital Corp as of the record date, November 17, 2008, will receive the dividend. Only whole shares of stock will be issued. Shareholders who hold stock certificates will receive a new certificate by mail, representing the 3% stock dividend shares. Certificates will be electronically delivered directly to the appropriate accounts if the stock is being held in brokerage accounts. If applicable, a check for payment of a fractional share may also be enclosed with the new stock certificate.

This was the reason why I was able to buy 500 shares of UWHR today. I noticed that every year, on the record date, a lot of shares usually become available. This year’s record date was 11/17. So, a few days ago I placed a low-ball limit-order in hopes that either the bank or another shareholder would be unloading some shares on 11/18. My strategy paid off.

So, will my investment in Uwharrie Capital Corporation turn out to be a profitable investment, or am I just falling into a value trap? I believe in the former, but only time will time if I’m right or wrong.

I’ll post updates of my investment as they occur. But, you can also visit their SEC filing website if you prefer to keep up with UWHR yourself.

¶ Posted 18 November 2008 † Mike § Sectors § Stock Market ‡ Comments (0) ° Tagged: UWHR

The SEC Follies

The Securities and Exchange Commission posted the following press release today - SEC Files Insider Trading Charges Against Mark Cuban. According to excerpt of this notice:

The Securities and Exchange Commission today charged Dallas entrepreneur Mark Cuban with insider trading for selling 600,000 shares of the stock of an Internet search engine company on the basis of material, non-public information concerning an impending stock offering.

Now I don’t know about you, but I was struck dumb (more than usual) when I read this press release. Does this sound crazy?

Of all the BILLIONS of dollars in recent sub-prime losses caused by Wall Street corporate criminals, mortgage brokers, and investment banks, the SEC decides that it’s in the public’s best interest to focus their energy, money and resources going after Mark Cuban.

Raise your hand if you think this smells of political influence.

I’m not a lawyer and can’t very well decipher the legal minutia, but if you read the SEC complaint (pdf) posted online, you’ll realize just how ridiculous their charges sound. If I was a shareholder, I wouldn’t hold Mr. Cuban responsible for my losses, I’d hold company management accountable.

In my opinion, although Mr. Cuban was Mamma.com’s largest shareholder, he wasn’t an insider. According to the SEC complaint, he also didn’t share the information he was given with anyone else. The only thing he did was to sell his shares when he was given the news.

It would seem to me that if the SEC wants to use it’s resources to prevent insider trading, they should prosecute the real insider for sharing private placement plans to Mr. Cuban beforehand: Mamma.com, Inc.’s CEO and President. If anything, it looks like the CEO may have intentionally tried to entrap Mr. Cuban into not being able to sell his shares by informing him of the PIPE placement beforehand.

If I had to bet on this situation, I’d place all of my money on Mark Cuban. This is just a PIPE dream. I can’t see how he could possibly be found guilty of any of these charges, especially if it happens to progress into a jury trial.

It’s unfortunate, but I wonder if we’ll be reading more of these types of things during the last month of the Bush administration? Personally, I hope the new administration make some big changes at the SEC, and they start to go after the real criminals.

Disclosure: I don’t know Mark Cuban, I don’t work for him, nor am I affiliated with any of his enterprises. Heck, I’m even a Phoenix Suns fan.

¶ Posted 17 November 2008 † Mike § Commentary § Miscellaneous ‡ Comments (1) ° Tagged: Mark Cuban, SEC

Weekly Wrap-up

The various weekly reviews that I usually read are looking pretty bleak right now. According to Vanguard’s Economic Week in Review:

This week showed no signs of a healing economy. Shaken by accelerated job losses, consumers continued to cut back on spending, bringing retail sales to their lowest level in more than 20 years. The U.S. trade deficit narrowed as both imports and exports decreased because of worldwide economic turmoil. Business inventories were also down for the month of September, experiencing their first drop since March 2007. For the week, the S&P 500 Index fell 6.2% to 873.3 (for a year-to-date total return of –40.6%). The yield of the 10-year U.S. Treasury note dropped 11 basis points to 3.72% (for a year-to-date decrease of 32 basis points).

YOWZA!

Usually the Bastion of Bulldom, Briefing.com’s Weekly Wrap also reports dismal news. According to an excerpt from this week’s report:

This week had its ups and downs; unfortunately for investors, there were more downs than ups. The end result was another week of sizable losses for the major indices. There was a fundamental perspective at the root of the losses as a slate of disappointing earnings news and economic data raised concerns that the market, down 32% since the end of August, may not have already adequately discounted the bad news.

OOOCH!

So, is all this doom and gloom a contrarian sign that things are due for a near-term turnaround? I don’t think so.

But, to be certain, I turned to a few experts whom experienced the market turmoils of the 1970’s. This is their view of where the market’s headed in the near-term, and most-likely the rest of the year. (turn up the volume)