Crocs anyone?

Clearly more work is needed but a friend forwarded this to me today.(From the Crocs (CROX-US) quarterly)

As the Company continues to re-evaluate its operating plans for 2009 and beyond, it has undertaken certain restructuring and right-sizing activities to address the potential for continued decreases in revenues. The Company's ability to continue as a going concern is dependent upon achieving a cost structure which supports the levels of revenues the Company is able to achieve. There can be no assurance that any actions taken by the Company will result in a return to profitability. As discussed in the previous paragraphs, the Company faces various uncertainties that raise substantial doubt about its ability to continue as a going concern.


I don't know the company but I do know the product and I can say that as with nearly all fashion, things come and go. Judging by the pounding this stock took it seems the market agrees and and now they are having trouble getting up off the mat, maybe a good short candidate. The stock behaves very well technically also, which makes sense if the momentum guys are on board. Maybe short with a stop just above the 50d average, and hope for a slide when Christmas sales disappoint. Life is tough when you are a one trick pony!

Disclosure: no positions

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
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Santa Claus Rally

Latest thinking says we could get a little Santa Claus rally here. Trying to call the trend of the overall market though is a mug's game, and nowhere is this more evident than in this blog where I have already been humbled in recent days/weeks! Unfortunately the need to make the right call on the broader markets is self-evident even if one only plays individual stocks, as we are constantly reminded that total return comprises alpha AND beta components.

Back to Santa. 2009 has been infinitely better than '08 and most money managers are still so shell shocked they chose to do nothing rather than risk blowing the gains already in the book. Seasonally we are entering the time of year when large unexplained price swings are common. At least this year we don't have to contend with huge tax loss selling as most accounts are sitting on gains for year. We bounced off the 50d average in Toronto, which is a good sign (for the longs). A major IPO in the junior resource space was canceled recently, which is indicative of selective risk appetite out there.

I will close today with this quote (and I paraphrase):
"Never has so much data been so poorly analyzed by so many people" - Norman Fosback (from the book, Stock Market Logic)

Enjoy the weekend!

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

Reversal Time?

I have been speaking to a lot of people lately about specific TSX stocks, as everyone is asking the same question: Why is the stock down? What don't we know? Thus far my answer has been mostly "profit taking" or "end of year jitters", and I will keep with this explanation until I have reason to change it. No sooner did I make my bold proclamation on this blog for the TSX to hit 12,000 then the momentum abruptly died with no staying power to follow through. While I have mixed views on technical indicators, sometimes they can adequately capture the prevailing sentiment and as a result serve as a good guide to what is happening in the market. Pictured below is the TSX daily chart with the momentum reversal.

Whether the TSX can hold support at the 50d average will be a key test for the market, and so far today is not looking so good. Another troubling indicator is the rising wedge formation on the TSX, typically a bearish indicator. This same pattern presented itself on the Dow Jones average in the late spring this year just prior to a 9% reversal.

One doesn't have to look very far to find negative sentiment indicators out there, and whether the markets keep trending up or not it probably makes sense to take some profits.

Markets. Business. Life. by LoneRngr (screen name) is licensed under a Creative Commons Attribution 2.5 Canada License. Based on a work at marketsbusinesslife.blogspot.com.
Permissions beyond the scope of this license may be available at http://marketsbusinesslife.blogspot.com/.

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We Have Learned Nothing

The longer I am in this business, the more convinced I am that we have learned nothing when it comes to the markets. We go too high on the upside and too low on the downside. Boom turns to bust and the cycle keeps repeating itself. Or the old adage, "those who don't know history are doomed to repeat it".

The classic examples are often cited: the South Seas bubble, the tulip craze and of the course the '29 crash. The railway boom. The electronics/laser boom. In more recent history there are countless other examples, the debt boom of the 60s follwed by the painful recession of the 70s. The LBO craze in the 80s that died with the RJR Nabisco deal and the 87 crash. (And the early 90s recession that followed that was probably more severe as a result). The dot com boom of 99-00 and the ensuing bust during the 02-03 recession. We can now add the subprime meltdown of '07 and the Great Recession of '08. The list goes on.

So why don't we learn? Because "it's different this time" (the most dangerous words in investing, according to John Templeton.) In other words, there are an infinite number of variables that keep changing to produce different situations. But the end result is the same. Prices become inflated, before crashing. The problem everyone faces is the same: trying to pick the top. There were signs in '05 and '06 of a debt meltdown, but it didn't manifest until '07. Similarly, during the Dot-com all the signs of overvaluation were there but the markets kept moving higher. "Close your eyes and buy" became the industry mantra, as people talked of a "new paradigm" that was changing equity valuations forever. Investors built castles in the sky only see new castles built bigger and higher. When the tide turns though the stampede for the exits crushes nearly everyone. Being a porfolio manager who wasn't long commodities in '06 or tech stocks in '99 was a painful experience. (one that might have gotten you fired.) You have to play the game. At the same time, few people were able to resist the urge to sell in the Fall of '08, perhaps because they were newly unemployed or feared not having cash on hand to make mortgage payments if they became unemployed.

As George Soros said, the "job of the markets is to fool people". Thus the cycle continues.

Six Tips for Investment Success

Investment success can be a tricky thing. Following considerable research on the subject (and the best research of all: risking my own capital!), I've compiled a few consistent themes here from highly successful money managers.

1) Humans aren’t wired for investment success. We get too carried away by fads and try to chase last year’s best performers. We take comfort in following the crowd when we need to be a contrarian, we get sucked into the hype no matter how much we know it not to be true, and invariably we get burned in the end. To block this out though is exceedingly difficult. Trends can persist for long periods of time and will smash even the greatest of skeptics. To “go against the grain” can be a lonely and unforgiving process. Only time will prove you right, and if you don’t have time (ie. A portfolio manager who needs to perform every year regardless) then you will get crushed. Those who succeed (Buffet for example) are likely more adept at blocking out the human emotion than they are at picking stock market winners (which of course is also important, and the combination of the two can lead to phenomenal returns).

2) History repeats itself. The stock market is a fickle beast, and goes through cycles over and over again. Stocks in certain sectors become overvalued, stay overvalued, and then become more overvalued as more people jump on board and come up with ever smarter and seemingly sound arguments as to why “it’s different this time” and why stocks will remain overvalued. (Or why investors build bigger and taller castles in the air). A hot IPO market is often a confirming indicator of a market top. Inevitably that nasty thing called mean reversion takes hold and brings the high-fliers back to earth, at which point everything gets crushed—growth, value, bonds, commodities, currencies—correlations all go to one in an extreme down market and there is nowhere to hide. Invariably the fall is faster and harder than the upward progression. Thus begins a period of rebuilding where people swear off stocks, which can persist for several years until the next new fad comes along and gets pumped up by Wall Street with similarly smart arguments as to why the fundamentals support a new rally in _______________ (insert new fad/trend here).

3) Keep your winners. Most people sell after a double or "triple-bagger". That’s great but doesn’t pay for the losers that drag down returns. You need the big wins to make money after compensating for the mistakes.

4) Only three outcomes of a trade are acceptable: i) big gain, ii) small gain or iii) small loss. NO big losses. Ever. Read this again until it sinks in. Taking big losses means there is a psychological barrier (in you) that needs to be fixed.

5) Get out of the quarterly grind. Too often we get caught up in the quarter by quarter focus on whether the company beat or missed expectations. Choose longer term themes that play out over many quarters or even years and don't get too hung up on the daily fluctuations in the stock price. Over the long term if your research is correct and a theme plays out as it should the stock price should move higher.

6) The market is a humbling place. It can humble even the most astute investment pros and shake the confidence of the most stalwart investors. As George Soros said, “The job of the market is to fool people”.

There are countless other gems but these are just a few of the common themes.

As an aside, I can say that after last year (2008) I am skeptical of investment "pros" offering investment advice as to how to be successful in the markets. Much of this as we know is time and place - those who made a bullish call on equities in the 80s and held the position to somewhere in the mid 2000s look like superstars. After last year however, these same pros gave back much of the gains, such that their five and ten year returns were in many cases modest to negative (an 80% loss in one year applies to ALL prior gains, such that you only have 20% of your money at the end of the year and most people who got in within the last few years are virtually wiped out). 2022 Update: This comment continues to ring true after the retracement of so many high fliers. Beware of bull-market geniuses dispensing investment advice.

However, in forming my own definition of investment success I figure that anyone capable of generating double digit returns over a 10 year period or more is worthy of taking note. During that time frame there would have been likely one or more market corrections, fads, trends or other themes that played out. Ten years is also a good round number for professional success, as a portfolio manager capable of generating strong returns over ten years (ie. say 35 years old to 45 years old, or 40 years old to 50 years old, etc) will be able to write his/her own ticket. And to grow personal net worth, one doesn't need many ten year stretches of 20%+ returns to build some decent wealth. For example, $100,000 compounded over 10 years at 25% is about $750,000, over 12 years is $1.2 million. Even $50,000 at 25% a year is $1.1 million in 15 years. Thus stick to people who have been there, done that, so to speak. Do it once and presumably you can do it again. These are people I have time for. The rest is merely noise!

Be sure to check out my post Stop Counting Turkeys for more on this subject!

And check out this post for a recommendation on what I think is the all-time best article on investing! (but don't be fooled by its simplicity) All-Time Best Investing Article 

Quote - Idiot Proof

"Make something idiot proof and they'll make a better idiot"
-Anon

Inflation or Deflation?

There is a war waging right now, between those who say deflation is coming and those who say inflation is coming. The cost of getting the call wrong is very expensive. On the one hand, central bankers are flooding the system with cash, as Bernanke in particular doesn't want to make the same mistake as governments did during the Great Depression. Then again, a contrarian would say that everyone is on the wrong side of the trade (betting for inflation) so it makes sense to bet on deflation. There are strong points in favour, namely a rising unempolyment rate, no wage pressures in sight, deleveraging that still has to run its course, and the prospect for asset bubbles cropping up all over the place with the flood of cheap money. Noted money managers are saying that there is "nothing on the horizon that gives cause for concern". (Isn't that how all corrections start?)

At the same time, it's hard to argue against the facts of the market. (There is only one side to a trade as Jesse Livermore would say, and that is the right side). The right side now is saying inflation is coming. TIPs are back at new interim highs. The forward curves are back in contango, and showing parallel upward shifts over 3 and 6 month horizons. And the bad news asset, gold, is hitting new highs. Seems like inflation is the place to be!

What does this mean for investments? Get long base metals equities, gold equities, agriculture equities, and stay away from long bonds.

Of course the market could reverse on a dime as it has been prone to do in the past. If the market changes course, the correction will be fast and swift. But for now inflation is where it's at!

Imperial Grades!

One of the best intercepts in recent memory - in the comfortable jurisdiction of BC!

Imperial Metals Corporation (III-T): Red Chris Drill Hole Returns 4.12% Copper and 8.83 g/t Gold Over 152.5 Metres.

Disclosure: No position

Markets Looking for Direction

Markets are struggling to find direction with Q3 earnings in full swing. Dow Jones flirts with 10,000 but breaks down- the Dow Jones Transports look sick, which is never a good sign. Technically it seems like the weekly MACD on Toronto wants to break down- the next few days/week will be critical to see if this pattern completes. If it does, look for a short-lived rally followed by the much awaited next leg down. Oil seems like it's gone too far too fast; as with the Canadian dollar- a little retracement would probably be healthy to put things back in balance. Even gold has cooled off here and not surprisingly, the TIPs are down from recent highs. It's hard to get real conviction out there right now. Of note, AAM-V showed some life last week on the granting of potash drilling permits in Brazil, nice to see the stock get some recognition! The Ag theme is still intact with POT-T reporting this week (a non event) and a very wet crop slowly coming off the field in the Mdwest - the sector is poised to bounce here but to listen to the Elliot Wave camp the grains will bottom early next year so we could still be in for some rough times ahead!

Disclosure: Long AAM-V.

Ventana Mania!

Great grades out of Ventana Gold (VEN-T), 84 Metres of 13.66 Grams Per Tonne Gold at the La Bodega project in Columbia. Stock reacted well. $740M market cap now!

Disclosure: No position.

Colossal

Check out the spectacular grades on Colossus Minerals (CSI-T). 70.70 Metres @ 53.59 g/t Gold, 20.77 g/t Platinum and 31.30 g/t Palladium. Not surprisingly the stock responded well (although perhaps not as well as one might think). And big surprise, the company does a bought deal to raise some cash. Bravo.

Interesting sidebar, there are 10,000 artesianal miners working at the site (down from 40,000 in the 1980's). 60 Minutes did a great story: Click here for Video

Disclosure: no position.

Auto Manufacturing: An Industry Whose Time is Up

(Original article appeared on my seekingalpha blog)

It looks like GM has tentatively agreed to sell its Saturn brand, only days after agreeing to sell its Hummer brand to a Chinese company. Finally it seems GM is taking steps in the right direction, shedding non-core assets and brands and closing dealerships. I’m sure that the current economic crisis and the heavy hand of government played no small part in helping encourage these transactions. The question of the day is, “Why didn’t they do this sooner?”. I’m by no means an expert on the subject but it seems obvious that the auto industry has been in trouble for years. Anecdotal stories of unsold cars piling up in parking lots, 0% financing, cash back incentives, free OnStar/satellite radio, years of free warranty coverage, etc, have been used for some time now to move cars from the factory floor into the hands of consumers. These do not seem to be signs of a healthy industry, poised to relive the glory days at any moment.

Of course it’s easy to judge managers with the benefit of hindsight, but it does beg the question of what was the fallback plan? Did management really think that sunny days for the industry were just ahead? Why didn’t management pay down debt during the “good times” to put this company in a better position? We don’t know what GM is getting for the sale of the Hummer and Saturn brands, but odds are it is near fire-sale prices. Why GM didn’t take action sooner to reduce debt (by selling assets at far higher prices), restructure the business and re-steer this Titanic in a new direction is worthy of question. Maybe the unions are to blame? Or maybe a version of the Greenspan/Bernanke put was just too tempting to resist for highly paid managers that didn’t want to “rock the boat”? Sadly I think Tom Velk of McGill University said it best:

“The auto industry today is like the textile industry in the UK in the 19^th century. It’s bound to go to the emerging nations: India, China. India has a $4,000 car. […] It’s an industry whose time is up.”

(See video here)

The government has made it clear that it wants to see auto manufacturing stay in North America, and in the end, a solution likely will be found. But bailouts and rescue packages are merely prolonging the inevitable in my opinion (as much as it saddens me to say it).

Disclosure: no positions.

Musings from a Market Meltdown

They say keeping a diary during times of extreme market crisis can be useful for reflection purposes. Let me just say that the crash in the fall of 2008 was enormously stressful. I can’t begin to describe the stress of watching this market from the front row seats, gory day in and gory day out. It started out bad and then got worse. No one called how bad it would get (well, almost no one). It began when the markets dropped by 20% and everyone said it was the technical definition of a bear market. Then every day it seemed the market would go down by 200, 300, 400, 500 points or more. One day the TSX index was down over 1,000 points in one day! I emailed a friend and said “Black Monday, in our lifetime”. This crash was every bit as severe as the 1929 stock market crash, only the timing was different. Instead of one big crash it was a series of cascading crashes, or “death by a thousand cuts” as some say. The problem is, everyone also knew that the rebound would be swift and violent. 80% of the gains in a new bull market are made off the bottom, everyone says. But trying to pick a bottom was an exercise in futility. The VIX index was over 80, daily volatility was 400 points or more. I can’t count the number of times I placed a long trade, trying to pick a bottom, only to get stopped out and then have to try again. I liquidated much of my holdings but not enough. I still lost a lot money, as did many people. It seemed like nothing worked anymore. The Bollinger bands, at 2 standard deviations from the moving average no longer worked anymore. The market would break on the downside, then break some more. As they say, the market can stay wrong longer than most people can stay solvent. Everything got hammered. I started to think that nothing worked anymore. Technical analysis, fundamental analysis, everything seemed broken. The market could go to zero, the experts would say. The VIX could go over 100 or more. But part of me wanted to buy. A very smart portfolio manager I know said, “If you just landed here from Mars with money in your pocket, you would feel like a kid in a candy store when looking at valuations of solid blue-chip companies.” Valuations had come way down in a short amount of time (but many said they would go down further). Dividend yields were high (on a relative basis). Forecasts were so dire, everything looked so bleak. Hedge funds were liquidating. Debt was abhorred. It was thought that all companies with large debt levels (relative to cash flow) would simply go out of business. I knew it was irrational. I made some good purchases in corporate debt at the time. The problem too is that all correlations go to one in a crisis as everything goes down, and large caps rebound far more quickly than the small caps. Tax loss selling was rampant. People were scared, they didn’t know whether to buy or sell (but mostly they sold). Margin calls were rampant. Forced liquidation. Warren Buffet’s, “Be fearful when others are greedy and be greedy when others are fearful” rang in my head. But to act on it was nearly impossible. Working in the finance industry and trying to invest in it seemed counter-intuitive. We all feared we would lose our jobs at any day. Cash was king to fund the seemingly inevitable unemployment and mortgage payments (that have a surprising regularity about them). It seemed the entire capital markets system was thrown on its head. Forecasts of the Dow sub 600 were published and believed by many (similar to Dow 100,000 on the upside). Then, without warning the market snapped back. Thanksgiving Day (in Canada) the market was up over 1,000 points in a single day. In January 2009 the weekly technical indicators flashed a buy signal, but I didn’t believe it, and the market went down some more. Then in March 2009, when it seemed like the market would go down forever, it turned sharply upwards. No one believed it at first. As usual, the markets “climbed the wall of worry”. More forecasts came out, saying the entire finance and insurance industry was going bankrupt. Just like that, a few points at a time, the market climbed higher. Up 30%, then 40%!! Still people didn’t believe it. “The next leg down is coming” people would say. But the smart money made money. Those who were willing to put up risk capital during the most dire of times made money. Big money. 200%, 300% or 500% in some cases! I too underestimated the impact of tax loss selling, particularly in the junior sector. Canada was an especially interesting case, as the markets rallied here stronger and longer than in the US. While the markets topped in July 2008, the US topped out earlier. With the devastation that took place in the fall of 2008 it created a unique situation. Gains from earlier in the year had been replaced by paper losses, hence triggering a larger tax loss selling season. Thus the predictable response, with the small caps rallying immediately and violently in the beginning of 2009 as investors bought back everything that had been dumped more than 31 days earlier (the minimum amount of time prescribed by the tax code to declare a capital loss). It was a time of opportunity but I didn’t capitalize nearly enough. Governments continued to throw money at the problem, and were quick to proclaim that things were on the mend at the first sign of positive indicators on the horizon. It was an experience that I'm not eager to repeat any time soon. Post Script (Sep 2010): I remember Jim O'Shaughnessy on BNN saying, "This is a once in a lifetime opportunity to buy stocks" and looking at the charts it seems easy. I can imagine my kids looking at an old stock index chart and asking "Dad why didn't you just buy at the lows - everyone knows the stock market will go back up one day." And yet to buy then was exceedingly hard. No one knew how long it would last. Like Buffett who started buying in the early 80's, it took over five years for his position to be validated. A lot can happen in 5 years. It's really really hard to ignore the dire media reports and buy. Hence I did not capitalize on the situation as much as could or should have in hindsight!

Banking Won't be Fun for Awhile...

(original article appeared on my seekingalpha blog)

I'm not a bank analyst but I'm interested in comments on some rough numbers. US banks were levered about 33:1, and as we all found out that number was clearly too high. Not surprisingly, since that means that only $3 in equity backed $97 in debt. Said differently, this allowed only a 3% "cushion" to absorb any extraneous losses, and as we know the write-downs were far greater than 3%.

Therefore, what is the "proper" leverage number for an average "new" bank? It's probably not zero, or even 1X. Maybe 10X? If we assume 10X leverage, the new capital base is $33. (assuming $3 in equity + $30 in debt).

Let's then say a bank made $1.00 per share in profits on an "old" capital base of $100. If we strip out $97 in debt and replace it with $30 instead (the "new" 10X leverage factor), and keep profit level the same (say 1% for simplicity, or $1.00 per $100), this implies $0.33 in earnings. Keeping P/E multiple the same, which we assume to be 10X for simplicity (arguably a stretch since the sector is now out of favor and is no longer considered a "growth" industry) and this implies a $3.30 stock price. (which is down from $10 previously (10X $1.00 EPS), which is a haircut of 67%)

Now lets' look at what the new bank looks like. Gone (or significantly scaled back) are the sexy derivatives trades, highly leveraged asset backed financing & trading, etc and the new "in" thing is boring old retail and commercial banking. Even with aggressive fee hikes, I would suggest that a 10% y/y profit growth is aggressive. That means our new $0.33 in earnings grows to $0.36, and with a 10X P/E the new share price is $3.60.

Using these back-of-the-envelope numbers it appears that banking is not going to be much fun for a long time. Consequently, it seems like it will also be a long time until we see the September 2008 share prices again.

Disclosure: No positions at this time