“Once you have excluded all that is impossible, whatever is left, however improbable, must therefore be the truth”. – Sherlock Holmes

Can you imagine a business more vulnerable to this downturn than one that owns thousands of trucks and industrial real estate (warehouses) and whose demand relies on the housing market, the job market and discretionary spending? All of these are falling at double digit annual rates.

Unbelievably, there are still real estate businesses yielding 5% cap rates, and investors gullible enough to accept this.

SBA Communications (SBAC) owns and leases cell tower sites to cellular operators with multi-year long term (often 10 or more) triple net leases. Its business is effectively industrial real estate with predictable cash-flows. SBAC and its competitors allow cellular operators to keep these assets and its financing off balance sheets, and in some cases share the cost among different carriers. The separation of the real estate and the cellular service operation business should, in theory, allow catering the businesses to different types of investors and therefore reduce overall cost of capital.

In my article on October 7 (“Will the Euro survival be at risk"), I sought to explain the threat to the European Monetary Union that the current crisis is posing and under what circumstances countries could pull out of the Euro.

Since that article, spreads on different sovereign bonds in the Euro region have accentuated greatly their divergence and in the past couple of weeks S&P has downgraded Greece and Spain and put under negative watch Ireland and Portugal.

Lamar Advertising (LAMR) is a family controlled company headquartered in Baton Rouge, Louisiana, with operations nationwide and focused on the outdoor (billboard) advertising business.

The company has revenues of $1.2 billion, an enterprise value of $4.1 billion and a market cap of also $1.2 billion.

Since my last bearish article on October 17, Salesforce.com (CRM) stock has fallen from about $32 (previous day close) to about $26, a drop of about 18%, underperforming the S&P and the NASDAQ by 11 and 8 percentage points respectively.

The next quarter may bring a drop in deferred revenues.  Earnings inertial growth from recognizing a part of the $0.5 billion of deferred revenues is likely to be more than off-set by a foreign exchange loss (the company has about 30% of their business coming from overseas) so the company's net income should be close to nil.  Moving past this quarter, sales are likely to stagnate and eventually fall due to longer sales cycles and price competition.  Netsuite (N) has launched a campaign offering a 50% price cut for customers willing to change from Salesforce.com to its CRM. 

The first casualty of a crash is innocence.  Salesforce.com (CRM) has been in a freefall, the stock is down about 47% YTD and 57% from the peak in June, but it is still trading at a ridiculous multiple of 112 P/E (4 x Google (GOOG) and 5 x Apple (AAPL)), 26X EV to EBITDA (2 x Google and 2.3 x Apple) and, even using the analysts surreal “pre recession” forecasts, it trades at a 1.5 PEG (with Google and Apple both at 0.7).

Suffice it to say that I still see a lot of room to fall.  Amidst a universe of 1330 companies listed in US exchanges with market caps over 1 billion, Salesforce.com is amongst the 5 highest P/Es. 

“Lehman CDS auction went smoothly, ISDA CEO says” (article by Alistair Barr, Oct. 10, 2008, on MarketWatch).

“Smoothly? Death by lethal injection can go smoothly as well, I suppose.”
(Comment posted by bubblybubbles).

“The euro will disappear within 20 years because of the inability of member states to stick to the rules underpinning the European Union's single currency.”
-- Jim Rogers, 2006.

"Prodi's euro has screwed everybody."
-- Silvio Berlusconi, Prime Minister of Italy, July 2005.

Interactive Brokers' (IBKR) stock is down 28% since my bullish article on Seeking Alpha. The volatility on the stock has been substantial, hitting a low of $19 on 9/17 and since recovering to close $24 on 9/26. I’m still bullish on the company.

Reasons behind the fall

Introduction

Oil is a non-renewable resource. Hydrocarbons such as oil require millions of years to form. We can consider that the existing stock of oil in Earth’s subsoil a given; we cannot "increase" the reserves, just discover those that we still do not know of.

Ladenbrug Thalman's Richard X. Bove stirred the market on Friday by speculating on the attractiveness of Lehman (LEH) as a target for an hostile take over. 

“If one assumes that the Neuberger Berman subsidiary is worth somewhere between $9 to $13 billion, the rest of the company is being valued at less than zero. A valuation of this nature would only make sense if the company were to go out of business and then still owe money to its creditors, which of course could not happen. Once it is bankrupt, it is bankrupt.”

"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." - Friedrich Von Hayek

I’m not advocating a return to the gold standard but when governments lose on printing money, as is the case today, investors should buy gold.

What is the market telling us about the outlook for Lehman Brothers (LEH)? 

On the credit markets, the company’s CDS spreads for its senior debt was trading last week at around 400 bps, very close to the peak reached during the Bear Stearns (BSC) crisis and trending higher.  This is indicative of “stress,” although not yet of extreme distress (i.e., elevated likelihood of default).  Clearly, if it were not for Lehman’s access to the Fed’s discount window, these spreads would have been much wider, or, quite possibly, LEH could have failed by now.

Fannie (FNM) and Freddie (FRE) are levered more than 50 to 1 (considering their assets on their book, and about 200 to 1 considering also their off balance sheet guarantees). These are levels that would make a Peloton or Bear Stearns portfolio manager blush. 

Consider their precarious situation: 

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."(Charles MacKay)

What is the best way to ride the inflation wave?

There are some alternatives to hedge against inflation. The best know are buying TIPS (still a good opportunity but with limited upside and pegged to core inflation – a measure that does not include the ever growing food and gasoline), buying gold, or, even better, buying into timber assets, particularly international ones, as in the U.S timber assets are quite possibly overpriced already (look at the multiples at which Plum Creek Timber (PCL) is trading, for example).

You can still make money on longs in the financial sector these days.

Interactive Brokers (IBKR) is an online broker offering some of the lowest transaction costs and access to more international markets than any of the larger brokers, but most of its profits actually come from being a market maker in stock derivatives through a wholly owned subsidiary, Timber Hill. The company uses sophisticated proprietary trading and risk management models, and sees itself as a technology company.