The Consumer - Dead, Alive, or Still?

(Sources below image - click to enlarge)

This week we had several "mixed signals" that created some selling. One of these events were the disappointing information from FedEx and the poor results from Best Buy. I believe that the 666 lows on the S&P will NOT be re-tested; however, going forward with be very volatile as the fears remain about two economic indicators: jobs and the consumer. Today, let's discuss the consumer.

Looking at the consumer, we see that credit card debt outstanding is shrinking (shown in exhibit 1). During the 1991 recession, credit card debt outstanding actually grew, about 14%, so this is a "green shoot" in some way; however, let's approach it from another angle - how much debt does the consumer have now, compared to that time period.

The evidence shows in Chart 3, that nearly 47% of households have credit card balances. This is up 6% from the recession in the 1990's. In addition, the average household carries a $7,600 credit card balance, which is a 89% increase from the recession in 1990! And that is inflation adjusted amounts, not just a flat average! This is clear evidence that the consumer is highly levered compared to the 1990's and needs to delever, which explains the process we are entering. Now the question remains, will this create deflation? or are just leaving deflation?

The consumer is the key component of our economic engine and the suppliment to the consumer is jobs, which we all know are weak now. However, when valuing consumer discretionary and staples stocks, are earnings truly trough? or do we have further room to the downside? Let's investigate the consumer's future further.

Charts 4, 5, and 10 tell a big story. From this we are seeing that banks are reducing credit to the consumer. In addition, the consumer has raised their savings rates to early 2000 levels. Now with this reduction in consumer spending, many economists believe this will "stall" or create a "slower" economic recovery. The banks are also reducing the credit that is available, as well as many retail outlets, so from a finanicial standpoint of the consumer, that will be good as they get their "personal balance sheet" in order; however, many retail outlets and general plays around the consumer may suffer some weakness. Both Wal-Mart and Target have seen credit card usage decline.

Now this raises the question: how can I make some money of this? My best advice is to find retail plays that don't depend on credit card facilities nor are too niche. Some niche retail will survive; however, some won't.

I personally own COST and LOW (LOW in two accounts). I will continue to accumulate HD and LOW in accounts that I manage, as well as WMT. Goldman took WMT off the Conviction Buy List and added TGT but frankly, I disagree with that call becausae I believe WMT will do better and TGT relies heavily on their credit card arm. COST is a play on the higher income consumer that is frugal. In addition, many people will go to costco with higher gas prices and also the weaker dollar will help their numbers. The stock is at $46 and may go up or down but I believe it's worth $53 - $56. AZO is another good pick because people will likely to fixup their cars instead of buying new ones, as well as do the work own their own, to save money.

Ann Taylor, Blue Nile, Macy's, and Abercombie are some I will personally avoid but probably will NOT short.

RIMM

Remember this video

Market Wrapup

I'm off and ready to begin a weekend. As for the market, I feel uneasy as summer volume is back. Many funds made their years are in 100% cash, as I should be. I added some short exposure to lockin upside gains and will buy stocks that are cheap. The banks is my favorite sector because of the core earnings power with the inverted yield curve and I believe commodities are overowned and will pullback a bit.

This weekend I will provide research on some stocks and focus on the consumer. The biggest problem with this market is that it is starting to feel fake as jobs are weak and the consumer has less credit. I will reveal some facts in my research tomorrow.

Have a good weekend.

RF Buys

Got short exposure

QID TWM and BGZ

RF Profits

Naked 24 puts expire in my favor, 100% gain!

Sold all SSO at 26.30

RF cover SKF

Covered at 42.38

1% wins

RF Sell FNSR

Sold all at .695

7% loss

AAPL

New iPhone 3G S preimeres today! AAPL strong in pre-market!

RF's sell list

Below are the stocks I am looking to sell to raise cash, if need be:

DELL, FNSR, FTK, LUV, MWA, TRID, and TWM (hedge and will see into market weakness since it will go up)


GME is also on the list - we need sony price cuts!

SLW

Will buy today

Position Update: MSFT

Bought this for an account but NOT my personal one Monday.

Just got added to Goldman Sachs Conviction Buy List - New Price Target $29

Microsoft's BING

(Source: Credit Suisse-click to enlarge)

Above is a chart that shows the "Bing effect" on Search Market Share

Position Update: RIMM

http://www.businessweek.com/technology/content/jun2009/tc20090618_113962.htm?chan=top+news_top+news+index+-+temp_technology

Ags

For a longer term perspective, I really like these sectors. I have discussed banks in the past but now let me elaborate on ag products.

During the past week, ags have sold off across the board for several reasons in my view:

1. The biggest seems to the production cuts made by POT signals slower demand forthcoming. Hot money (aka hedge funds) invest with a 3 month time horizon because they play quarter-by-quarter to keep funds in their account, etc. Therefore, I believe there has been liquidation in the sector as hot money is leaving (due to dim short-term earnings prospects) and heading into industrials (again my personal opinion). This may create good entry points; however, it is like catching a falling knife.

2. Discussions with China. This will determine pricing power for many of the Potash suppliers. Phosphate should increase 20% by next year, while Nitrogen seems to be an overlooked "quite sleeper" with slow-single digit growth.

3. Back to pricing, there seems to be more investor fear that many firms will reduce prices. For example, BPC cut Brazilain Potash prices by 25% and Monstanto's glyphosate guidance was rather weak.

Going forward, the big cloud in the sky remain China negotiations with Canpotex as investors have uncertainity about future output and pricing. In addition, grains and energy prices (well commodities in general) need to stay on a uptrend. This should happen in the next year; however, it is far from a guarantee. If we "double-dip" this recession, which many bears believe, commodities will tank. Inflation is tame but the deflation camp begs to differ. Here is why:

There arguement center around the consumer:

1. The average HH savings rate has increase to 5% of disposable income.

2. The consumer is in the process of deleverging. The average HH has $7500 in credit card debt and over 60% of banks have reduce credit lines. This create a lack of liquidity for the consumer, therefore, spending is not as easy. For ags, the lack of credit hurts farmers as well as they have to negiotatie deals in order to get fertilizer.

3. Unemployment will continue to put downward pressure on spending.

Regardless of this economic viewpoint, these factors effect all commodities, as well as valuations for these firms. The firm's book values are very low, so in my view you can attached EV to EBITDA multiples or EBITDAs to individual business segments and derived a multiple based on demand per sector (hence, vast demand creates multiple expansion).

I have seen numerous discounted cash flow models on these firms but the problem i see is that the growth estimates are too agressive for my liking. However, these valuation metrics will be used to determine price objectives (well that is what I will use, i don't know what analysts will use) and believe if the economy can recover next year, commodities stay strong, this selloff will create opporuntiy in the sector for a 6-18 month trade. I'll give names later in time....

RIMM

If there are any updates on the quarter, I will post the report from Goldman Sachs tomorrow.

POT

I might be a little early on this stock, may cut for a tiny loss and buy back cheaper. Shorts are going to try to take this one down.

Market Wrapup

Sorry for the delay.

As for the day, my portfolio was about breakeven but nothing special. Had some good gains in ENTR and KEY but AMD and MWA killed me. I am loosing my patience in AMD but am stuck because I don't want to sell it at a loss. I sold my POT today for a $15 loss because I am not trying to catch a falling knife. As for my RIMM play, I added 10 more shares in AH to reduce my cost average to $76. I plan on holding and will analyze the detail further but if RIMM reverses and heads higher tomorrow, the market will RIP higher. I added to my banks via BAC and will look to buy some PNC on dips. I also added to EXM, which is poised to rip in time. I will buy more as it drops down. FTK is acting pathetic once again; however, if oil starts pressing, higher it will go. CHU is another firm I am looking at and may have a partial fill on (i gotta check). This is a chinese telecom that will benefit via the 3G WCDMA technology and it has the rights to the iPhone.

I am hoping we can get a bounce of some of my dead stocks will rise, so i can kick them and refocus my strategy for better things. I knew last week I should have taken more profits but oh well, I made my bed, so I will lay.

Lastly, I will tell you about a cool thing I doing, called the "vacation pot"

I bought 5 stocks and will hold for 3 weeks. I put $1k in each and the returns will provide me vacation spending money. If I fail to make returns, I am will go on vacation poor and broke.

Here are the bets:

$1k in UA at $21.55
$1k in EXM at $7.85
$1k in DAL at $5.98
$1k in BAC at $12.85
$1k short the IWM at $51

we shall see if I have spending money!

RF Buy RIMM

Bought 20 shares for earnings dice roll

Buyer beware but 77 isn't a bad entry in my view.

68 worst case. 90 best case

Updates

RF Buy 70 BAC at 12.80


RF Buy 75 EXM at 7.80

Nice trade on MPEL anonymous

HIMX

.28 cents deducted from stock price to be paid to you in July, hence the low stock price.

Market Wrapup

Another weird day for the market, as the seas are getting more difficult to navigate. I feel we are not out of the woods yet but I am deploying capital like a mad man. I bought TWM as a ultrashort on the Russell index for a hedge, in case we tank. In addition, I bought some stuff that I thought was on sale. Goldman is trying to bury POT and the ags and frankly they may sell off due to weaker fall, however, I believe ags are going to be hot come spring 2010. I will buy ags on dips and sell next year. I think POT is worth 150 but carries the highest risk and may require some wait time. I took a sizeable stake in EXM and will buy more on dips. I sold my pwav and fig for losses and plan on selling other stocks like FTK, FNSR, LUV, MWA, TRID, CaL, and maybe DELL in order to raise cash. AMD is pissing me off so I am stuck. DXO and UNG will be holds for now but I may kick DXO if things get nasty since I about a 35% gain.

All in all, I got too agressive and it seems as if fund managers don't have the "fear of missing the rally" instead they are sitting back, watching the indexes drop, which makes their losses seem smaller. Regardless, I will continue to research stocks and hold off on technical buys. However, if I had to play a techincal breakout stock, it would be SIRI (daytraded this today and it looks poised for a 10-20% gain with a .30 cent stop)

RF Buys

Pot at 97

EXM more at 7.95

STI more at 15.02

BAC more at 12.20


Thank you s and p for the discount on banks!

RF Buy EXM

My old friend, I come to your rescue.

Bought 500 at 7.78

RF Sell PWAV and FIG

Sold both for

RF Buy TWM

Bought 100 in premarket at 43.96

Market Wrapup

The futures are down again, which doesn't surprise me. The short sellers are taking down the market and the volume in the market is very thin, as the buyers are hiding in the woods. This disappoints me; however, CPI data comes out at 8:30a and will be the "do or die" for the market. Let's see how this pans out...

I am 80% long 20% cash

If I have to I will see 5-10% of my longs and buy SDS or TWN to get short exposure, incase we go to 880.

Market Wrapup From Special Guest Paul Bearer

Paul: "The Rally is Dead.....OOOOOOOOOOOOOOOOOOOOOOOOOOO"

(RF Steps in, kicks him in the stomach, and DDT's him)

RF: Today's action makes me sick and I took big hits across the board. However, I bought some stocks that I have some confidence in with the exception of FIG. FIG is a technical play that has a chance to bust loose and frankly, I would like a nice large % gainer. I will look to clean some junk out of the next few days and buy stocks that I understand and have ideas about their earnings. The stocks below are the ones that I will be looking to sell:

GFG, PWAV, FNSR, FIG, FTK, LUV, CAL, TRID, ENTR.

Position Update: FNSR

A link below explains the selloff in FNSR today.

http://online.wsj.com/article/BT-CO-20090616-714059.html

RF Buy TQNT

Bought 250 at 5.30

RF actions

Shorted skf at 42.73

Bought June 13 calls on bac at .23 (dice roll)

Market

The scope of this market needs to widen. The charts indicate a move to 880. I just don't feel comfortable short but may force myself to. Ill wait to 245ish to make a decision.

GIGM

I sell and now its up two days in a row.

RF Buy FIG

Bought 500 FIG at 4.08

UNG

Traders may take some off table but I will hold this. If hurricane season is really bad, I believe this can print 20 or 25 depending on severity of the hurricanes.

BBY

Missed by 6 cents, shows signs of weak consumer. If GLW sells off hard because of this, ill buy more!

RF Sell ATHR

Sold all at 18.85

22% gain

Market Outlook

After yesterday's selloff, today will be a interesting day as the market will need to regain momentum. If we look at historical bear markets, we see that the market "could" be forming a market top and be due for a 13% correction to the downside. This is possible; however, I remain bullish because the selloff yesterday seemed more like a panic sell than true capitulation. We have key economic data today, with housing starts and PPI at 8:30a. This data can move the markets, so let's hope the data is good.

Oil is up which is good, so let's see if AAPL can regain strength, as well as GS. If all three look strong, the market will go higher.

RF's Long Portfolio Views

I rarely do this; however, I like my blog visitors and I am in a good mood tonight. Below is the S&P current weighting, highlighting current weights per sector. Below are some ideas per sector. Come third quarter, I will be allocating more funds with the accounts I manage, so I will use this as a guide and apply a new weight to each of the sectors, that differ from the S&P weights. For example, tech represents a 18% in the S&P but in my model portfolio, it might represent 15%. Below is a list of longs and also a ETF list that I have on my radar. Of course, I can’t tilt my entire hand but some of my watchlists have over 100 stocks, so it would take a long to write up. 75% of these stocks I would buy now, but some I would hold off on. If you have any questions, drop a question in the comment section.

Current S&P Weighting:
Technology (18%), Financials (13%), Energy (13%), Healthcare (13%), Consumer Staples (12%), Industrials (10%), Consumer Discretionary (9%), Materials (4%), Utilities (4%), Telecom (4%)

Tech: GLW, CSCO, DELL, EMC, SAP, MSFT, QCOM, BRCM, OPWV, OTVI, YHOO, XLK, HIMX, TSM, XLNX, TER, and AMD for a spec play on improve fundamentals in PCs.

Financials: BAC, WFC, SLM, PNC, STT, STI, KEY, BRK.B. Life insurers look interesting; however, carry high risk due to the complexity of their financial instruments. I like MET and for a spec maybe HIG.

Energy: CVX, COP, HES, DVN, APC, APA, and RIG. (Sector needs to cool a little, I wouldn’t buy any at these levels)

Healthcare: HUM or UNH but the sector is at serious risk due to the government healthcare plan. I would weight this 3 or 4%.

Consumer Staples: PG, JNJ, or UN.

Industrials: VMI, UTX, UNP, BHI, and EMR

Consumer Discretionary: GME, LOW, HD, COST, WMT, FDO, TGT, UA, EBAY.

Materials: ACH, PCU, BHP, POT, AGU, IPI, MON, CLF, MT (sector needs a pullback)

Utilities: Don’t like the sector. Reminds me of tobacco because the government can make one big decision that can impact profitability for years. If I had to buy one, it would be FPL or D.

Telecom: VZ, T, and maybe S for a spec.

That is my sector buy list if I was forced to put 100% in the market tomorrow. Below are some ETFs that are also on my buy/watch list:

DXO (double long oil), UNG (natural gas etf), JJC (copper etf), FXA (austrialian currency trust), FXC (Canadian currency trust), DBA (soft commodities etf), DBC (commodities index etf), EWZ (Brazilian etf), CAF (Chinese A shares fund), MXI (basic materials etf), DGP (double long gold), AGQ (double long silver).

CNBC's Fast Money

It's official....the best trade on Fast Money is gone and left CNBC. In honor of Jeff Macke, I leavve you his best work. LOLLLLLLLLLLLLLLLLLLLLLLLLLL

Market wrap up

Brutial day but small rally at the end. However I was down for the day. Be back later with protfolio long list.

RF Buy COST

Bought 50 at 46.13

RF Buy

Bought 75 more BAC

Bought 75 STI

Daytraders

For you day traders, I'm long the QLD at 36.68

MPEL

Getting attractive but I feeling we got a little time.

NEPH

This make FEED look like a donkey! Only two weeks ago I was accumlsting at 50 cents! Unreal

RF Sold NEPH

I sold the rest. This is an animal, too risky for my taste beyound 1.60. Trigger sale at 1.75 this am.

199% gain

RF Sell BDSI

Sold rest for 74% gains

bdsi

We win once again

My Strategy for This Week & 3rd Qtr

A new week is here, so let the fun begin! This will be a long write, as I discuss a few views on the market and third quarter.

I suspect this week will be rather choppy as the bulls and bears fight out the tape, in addition to options expiration this Friday. The bearish sentiment is back but this rally is not over, so don’t go run for the flood gates yet. Personally, I think we have another 5-10% left on the indices. The pros have been calling for a pullback for the past 3 weeks, while your boy RF laughed and racked up a 290.47% YTD performance. All I can say is that we win again. (Note: If I say things like RF wins or I will not be denied, I am not bragging or trying to be cocky in any fashion. I post all of this for free, to help yall out. I just like to give some of my buddies who run funds a hard time.)

I sold some stuff Friday because honestly, I got to raise cash to preserve the gains and I am a little uneasy about July. I think we have a few weeks left in this rally then we will develop a wider trading range that will be difficult to navigate. A side of me wants to purchase more conservative plays, while the other side wants me to load up on cyclical and press the pedal. I am unsure on what I will do but I will be traveling a lot in July, both on vacation and work, and will not be around my desk.

As for a roadmap for third quarter, I will stay in technology and banks (in specific plays, not broad). I will look at commodities but will not chase them because if the dollar begins to gain some strength, commodity prices will be lower; however, timing will be the trade. I listened to GNK’s Chairman the other day and he believes commodity prices will continue to rise and I agree but the destruction of our dollar is a very serious matter. In addition, treasury yields are rising; however, I believe they are peaking. The 10-year may get to 4.20% but I think we will see a reduction. Lastly comes the big fear – a rate hike. The question on everyone’s mind is “Will Bernanke raise rates this year?” Many believe no but many are saying yes. Watch for the equity markets to play games and try to price it in beginning in third quarter. Personally, I believe there is a 20% chance of a rate hike by September and a 60% chance by December. It truly depends on inflation and the speed of our economic recovery. The concern of this rally is that it is a “jobless recovery” however, jobs lag the market during a recession normally by 9 months. In addition, some bears are saying that the Michigan Sentiment report shows signs of a future decline in consumer confidence, so that is something to watch.

Now, I will give a little advice. This small cap lotto that has been going is something that I have never seen in my entire duration of trading. However, due to the sharp risk of these stocks, I will begin to position myself to stocks that have better balance sheets, lower betas, and larger market caps. So anotherwards, as sad as it is, the 25% day gains will be over soon but will be remember this for years. And that brings me to another point, remember these times. Last year was absolute hell and things look so much better now. Will the market do a “double dip recession”… I honestly don’t know. At first I was bearish around 800 and then I just came to the point there is no reason to fight the tape and I went with the flow. I would avoid the ultrashort ETFs and keep more cash than short positions (then again that is me). I don’t know if this is a bearmarket rally or a birth of a new bull…but I am prepared for both in case we shoot down or up. I will say that the VIX is interesting at these levels and seems to be showing some complacency (in my view). This market rally is over two standard deviations from the annual average (mean return) of the past 100 years..a little alarming.

As my view for the economy or the market in general, I am more bullish on the market than the economy. We have printed a boatload of money and the job births don’t seem to be coming. In addition, unemployment is high, which is a problem since jobs are the key driver for the consumer. However, I believe many investors are more confident in the market and the question will be if the ‘fear’ will comeback in the market. Only time will tell I guess but the money we are printing is terrifying. Many firms will frown upon this regulation and if the government raises corporate taxes, firms will move jobs overseas and also make investments offshore as well.

As for investing/trading ideas, I will look at banks, commodities, emerging markets, select retail, energy, and some basic materials. My bank purchases will be viewed as investments, not trades. I have 5-6 banks that I really digged into and believe over the next 2-3 years will double if not triple (or maybe quadruple). WFC, KEY, and BAC are three of them, which I own and are on the less. There are three more that I have not bought yet and will wait a little while to see which ones will dip and buy 1 or 2 of them. Ultimately, my goal is to have between $10-15k in 3-5 banks and if it works in my favor that investment will be worth $20-40k by the end of 2011; however, this is far from risk-free. As for BAC – I am hearing good things…suspect a rip tomorrow

Oil

From a techincal (chart) perspective, oil looks very strong. You can see "v" bottom from the Mid April lows and since that point a "stair-step" chart pattern forming. Note the two pink circles. It looks like a similar formation, where oil will have another "leg" up. From looking at the crude futures, oil looks like it can hit $78-80 on technicals. From a fundamental view, it's a bit rich at these levels.

I will be back later with my strategy for this week and next quarter.