In 2008 we saw some of the most dramatic financial events in a century:

• Trillions of dollars of subprime mortgage implosion, which bankrupted the entire U.S. banking system .
• Lehman's fallout with entangling positions in equities, futures, real estate, and derivatives in the hundreds of billions. The magnitude dwarfed LTCM.
• Biggest squeeze on the dollar. Despite worsening fundamentals, dollar rallied 20% in the second half of 2008 as banks refused to loan and assets are sold to pay dollar debts.
• Largest deleveraging process. Margin calls caused severe corrections (-50% or more) in broad equities and commodities.
• Unprecedented intervention with multi-trillion dollar financial bailouts and record-low interest rates of near 0%.

What's in Store for 2009?

We will make our calls with the aid of the following charts (click to enlarge images).

In a September 25 article titled, “0.25% Trading Fee”, members of Congress are considering a 0.25% fee on all transactions. That’s a’%’ and not a ‘$’.

Here’s the article:

It was announced Thursday, after-hours, that the FDIC is taking control of Washington Mutual (WM) and selling its deposits as well a number of branches to JP Morgan (JPM) for $1.9 billion.

Losing $6.3 billion in the last three quarters and getting cut to "junk" status didn't give WM many options to choose from. $19 billion in losses is projected through 2011, but some say the number could be as high as $30 billion.

Osiris Therapeutics Inc.

Osiris Therapeutics (OSIR) is a biotech based in Maryland which specializes in bone marrow stem cell products that treat inflammatory, orthopedic, and cardiovascular areas of medicine.

On Tuesday, September 23, OSIR announced that it enrolled 62 patients in the Phase 2 trial to treat pulmonary disease through its Prochymal product formulated from adult mesenchymal stem cells.

Look at what the SEC started! We are now in the midst of the largest artificial global short squeeze in history. So far, the US, UK, and Canada issued orders to ban short-selling in certain financial stocks, but now Germany, Ireland, Australia, France, and Portugal have joined the global war against shorts! This is insanity. Traders have been talking about the end to free market capitalism in the US, but this has turned into something even more ridiculous. Welcome to the end of free markets in the entire industrialized world.

Germany announced that they have halted short-selling in the following financials:

The US, the UK, and now Canada. Incredible! Which country is next and why is the world starting to team up against the small group of short-sellers who are not the reason for the recent troubles? This is officially a war that will prove to be disastrous for global financial markets.

After the U.S. markets closed on September 19, the Ontario Securities Commission [OSC], supported by the Canadian Securities Administrators [CSA], issued a temporary order to ban short-selling effective until October 3. The following financial securities are affected:

Gibraltar Industries Inc. (ROCK)

• A component of the steel & iron industries. Unlike many of its peers, ROCK has been going up instead of getting crushed. ROCK’s stock performance is the complete inverse of companies such as Rio Tinto (RTP), Arcelor Mittal (MT), POSCO (PKX), and Tenaris (TS).
• On August 8, ROCK reported Q2 earnings of $0.67 per share vs. $0.40 per share a year ago. Analysts were expecting $0.38 per share, crushing estimates. ROCK also surprised in Q1, reporting earnings of $0.27 while estimates were at $0.14 per share, a nearly 100% surprise. Turns out that ROCK made significant improvements in their cost structure. They also raised guidance for the full fiscal 2008 year.
• ROCK was upgraded by Robert W. Baird to “Outperform” and RBC Capital Markets raised their price target to $21 from $15.
• ROCK made two continuation gaps, both from exceptional earnings. The trend is highly likely to continue higher, divergent from the steel & iron sector’s performance. 

Questcor Pharmaceuticals Inc. (QCOR)

• This company has only two products, but they command the market for childhood neurological disorders. Although the diseases are rare, QCOR’s extremely effective products are the first in line for treatment.
• QCOR has also been reporting positive earnings for the past six quarters.
• In addition, QCOR has been repurchasing shares all year, with a total of 2.7 million common shares valued at $11.8 million and all of its outstanding A-series preferred shares for $10.3 million. On September 4, QCOR repurchased 1.8 million shares at $5.06 per share from Iverlochy Consultadoria & Servicos L.D.A. They won’t be stopping here though; QCOR has an additional 3.5 million shares able to be repurchased under its program.
• On September 11, Stanford Research and Soleil initiated coverage, both issuing “Buy” ratings.
• As of August, 13.4% of shares (float) were short. I suspect that the number has sharply declined.
• QCOR spiked out of its multi-month consolidation, having broken through numerous support levels, aided by substantial short-covering. I expect a pullback as soon as buying momentum subsides.

Alpharma Inc. (ALO)

• Drug manufacturer for humans and animals.
• King Pharmaceuticals (KG) started a $1.6 billion tender offer on September 11 for $37 per share. This is up from KG’s $1.4 billion offer in August.
• ALO condemns the hostile takeover attempt and took on a shareholder rights plan which should make it more difficult for KG.
• Jefferies & Co. downgraded ALO from “Buy” to “Hold” on September 12.
• ALO formed its second continuation gap indicating that the stock is heading higher.

Covidien Ltd. (COV)

• A healthcare company specializing in devices, drugs, imaging, and supplies.
• COV reported positive earnings this entire year and beat estimates in their latest four quarters (Q308 reported: $0.72, estimate: $0.66. Q208 reported: $0.66, estimate: $0.59, Q108 reported $0.59, estimate: $0.57, Q407 reported: $0.63, estimate: $0.60).
• BMO Capital Markets upgraded COV from “Market Perform” to “Outperform” on September 11.
• COV continues its uptrend having broken through $55.50 resistance (prior high). Major moving averages continue to slope upward.

On Thursday, September 11 pre-market, Campbell Soup Co. (CPB) reported Q4 earnings of $0.24 per share or $89 million on $1.7 billion in revenue vs. $0.16 per share or $61 million on $1.5 billion in revenue a year ago, up 46% in profit (see conference call transcript). Excluding the sales of its Godiva and Australian salty snacks businesses, CPB would have earned $0.26 per share. Analysts expected $0.25 per share on $1.7 billion in revenue, beating estimates by $0.01 per share and coming in-line with revenue targets. Shares dropped at the open, filled its gap, and drifted higher to close at $39, up 3.8% or $1.42.

CPB’s U.S. sales were impressive, rising 15% compared to a year ago. The introduction of new, healthier products won the hearts (and mouths) of consumers, especially through its Chunky soups. Later this month, CPB will introduce the Select Harvest brand of soups, dedicated toward natural vegetables and grains and another V8 soup. Given that Q4 is typically the weakest quarter for CPB (summer is not soup season, obviously), CPB performed well despite the fact that 8% of sales came from an extra week for the quarter and 4% came from favorable currency rates.

On Thursday, September 4 pre-market, UTi Worldwide (UTIW) reported Q2 earnings of $0.33 per share or $33.7 million on $1.26 billion in revenue vs. $0.28 per share or $27.7 million on $1.04 billion in revenue (see conference call transcript). Excluding the sale of its art packing business representing a gain of $5.3 million, UTIW earned $0.28 per share. Analysts were expecting $0.27 per share on $1.24 in revenue, beating both earnings estimates and revenue targets.

Operating expenses increased 16% to $372.4 million vs. a year ago. However, the rate slowed down on UTIW’s cost restructuring plan. I believe that the plan will be successful, but also believe that that revenue growth will grow at a modest rate. Operating margins should widen due to the plan, which would be partially offset by fuel surcharges.

On Thursday, September 4, pre-market, Movado Group Inc. (MOV) announced Q2 earnings of $0.32 per share or $8.1 million on $129.7 million in revenue vs. $0.45 per share or $12.3 million on $139.5 million in revenue, a drop of 34% in income and a drop of 7% in revenue compared to a year ago (see conference call transcript). Excluding the expense reduction plan charge of $2.2 million, MOV would have earned $0.39 per share or $9.8 million. Analysts were expecting $0.41 per share on $133.5 million in revenue, missing both earnings estimates and revenue targets. Shares were down 5% after gapping down and opening at $22.61, reaching a low of $21.03, but closing at $22.41. Shares are currently up over 1% YTD.

The reduction plan is designed to save $25 million, annualized, which amounts to 8% of operating expenses with about 25% of the savings expected to be realized for this fiscal 2009 year. Cost of sales dropped 18% to $45.8 million from $56.1 million. However, SG&A expenses were up 9% to $72.8 million for the quarter vs. $67 million a year ago. Inventories increased 16% to $238.7 million from $205.1 million a year ago. 

On Thursday, September 4 after-hours, Cooper Co.’s (COO) reported Q3 earnings of $0.39 per share or $17.9 million on $285.9 million vs. $0.18 per share or $8.1 million a year ago. Excluding restructuring costs, COO would have earned $0.67 per share or $31.5 million vs. $0.71 per share or $33.7 million a year ago. Analysts were expecting $0.65 per share on $285.2 million, beating earnings estimates and revenue targets. On September 5, shares closed at $34.01, down $2.16 or 6% on 1.84 million shares traded (over 3x the average daily volume).

I wear contact lenses and I had to see if they were from CooperVision, and they were! I didn’t even know that until I checked. I have to wear the toric lenses for astigmatism. When I visited the corporate site, it mentioned that 160 million people or 50% of the world’s population still need vision correction, 33 million people already wear contact lenses, and the rate of growth for lens wearers increases 4% per year. As more countries become industrialized, I expect the number of lens wearers to increase. If you had money and you wear glasses, you would get contact lenses. COO opened up a direct sales office in China in July 2007 and Hong Kong in March 2008, giving COO plenty of opportunity in the future.

On Thursday, September 4 pre-market, Blyth Inc. (BTH) reported Q2 earnings of $0.08 per share or $3 million on $236.8 million in revenue vs. earnings of $0.08 per share or $3.2 million on $234.9 million in revenue a year ago. Excluding items, BTH earned $0.09 per share vs. $0.16 per share a year ago. Analysts were expecting $0.15 per share before items, on $236.7 million in revenue, widely missing expectations. Shares gapped down opening at $13.74, declined sharply, but recovered during the day to close at $12.07, down $3.81 or 24%, on 937,000 shares traded (3x the average daily volume).

International sales represented 39% of total sales vs. 30% a year ago and the majority of growth came from the PartyLite international and Wholesale Food Service businesses. The PartyLite U.S. business declined 16%. The Direct Selling business increased sales by 9% to $141.4 million vs. $130.2 million a year ago. The bottom-line: the businesses operating internationally did well, but U.S. businesses suffered.

On Wednesday, September 3, intra-day, Jos. A. Bank Clothiers (JOSB) reported Q2 earnings of $0.48 per share or $89 million on $152.7 million in revenue vs. $0.44 per share or $8.2 million on $134.3 million in revenue a year ago. Analysts were expecting $0.45 - $0.46 per share on $147.4 million in revenue, beating both earnings and revenue estimates. Share broke out at 2PM, up $2.93 or 11%, to close at $28.69 on 2.2 million shares.

Revenue grew 13.7% as same-store sales grew 6.8%. An increase of 6.8% is extremely positive given the difficult consumer spending environment that each retailer must tackle. Direct catalog and internet sales rose 10.2%, evidence of consumers’ desire to stay indoors and spend less on fuel. The increase in sales for Q2 was largely attributed to the Father’s Day holiday on June 15th.

Yesterday, the markets dropped 3% on heavy volume signaling a major one-day reversal, and a break in the nice, comfortable rally we’ve had since mid-July. Investors and traders should not try to hope for anything this time. I’ve been calling for the rally to end since I wrote An Investor’s Guide to Bear Markets.  

The Economic Picture

On Wednesday, September 3 after-hours, Hovnanian Enterprises (HOV) reported a Q3 ’08 loss of $2.67 per share or $202.5 million on $716.5 million in revenue vs. a loss of $1.27 per share or $80.5 million on $1.1 billion in revenue a year ago. Excluding pre-tax land charges of $11.7 million, the loss would amount to $87.7 million. Analysts were expecting a loss of $1.57 per share on $703 million in revenue. Shares were down $0.65 or 8.4% to $7.10 in after-hours trading and should gap down today.

Home deliveries declined 31% to 2,185 homes vs. 3,179 a year ago. The number of net contracts declined 38% to 1,584 homes. The cancellation rate declined to 32% vs. 35% a year ago. Contract backlogs ended at with a sales value of $1 billion totaled to 2,976. At the end of July 31, HOV operated in 354 communities. At the end of April 20, HOV operated in 379 communities, and in fiscal 2007, 431 communities in 47 markets in 19 states.

Yesterday, September 3 after-hours, H&R Block Inc. (HRB) reported a Q1 ‘09 loss of $0.41 per share or $132.7 million on $339.6 million in revenue vs. a loss of $0.93 per share or $302.6 million on $381.2 million in revenue a year ago (see conference call transcript). Analysts expected a loss of $0.35 per share on $378.3 - $381.2 million in revenue, missing both earnings estimates and revenue targets. Tax Services increased 7.7% to $75.3 million vs. $69.9 million a year ago. Shares were down about 3.5% after-hours and the previous session’s close marked the highest that HRB’s stock traded at since November 23, 2005 when it hit $26.66. Shares should see some weakness in today’s morning trading. 

Revenue dropped 11% mostly due to the off tax season. Loss from continuing operations was $0.40 per share or $129.4 million vs. a loss of $0.34 per share a year ago, up 15%. Loss from discontinued operations was $3.4 million vs. a loss of $192.8 million a year ago due to ending operations in the subprime market. Income was offset by $20.4 million in loss reserves and write-downs at H&R Bank. The effects of the subprime crisis can still be seen as H&R Bank reported a loss of $14.1 million vs. earnings of $4.8 million a year ago.  

Yesterday’s closing of Ospraie Management LLC’s Ospraie Fund Ltd. prompted me to open up my collection of investors letters from numerous hedge funds that blew up. If you want all the letters, I’ll be happy to share.

Ospraie Management LLC letter to investors (9/2/2008):

A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. Conversely, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don't pan out. Avoiding investments in over-hyped investments reduces the risk of such drops. – Wikipedia

There’s a lot of talk about whether investors should think like contrarians, and that is only for you to decide. There’s so much information on this topic that I could probably write a book, but I will only cover the meat of it. You won’t get my personal bias or opinions, but only facts, backed up with additional support and I hope that this will aid each and every one of you.

On Wednesday August 27, after-hours, Men's Wearhouse (MW) reported Q2 earnings (see conference call transcript) of $0.63 per share or $32.8 million on $545.3 million in revenue vs. $1 per share or $54.2 million on $569.3 million in revenue a year ago, a drop of 39% in income and a drop of 4.2% in revenue. Excluding a one-time item, MW would have earned $0.72 per share. Analysts expected earnings of $0.70 - $0.71 per share on $553.2 - $554.6 million in revenue. Shares gapped up $1.18, opened at $21.19 and closed at $21.61, up 8%.

Total sales for individual brands: