Michael Shulman

Being Thankful for Bullish Economic Data

I am not sure where you find comfort -- or bullishness - in recent data. If you take a look at the GDP revisions and combine them with changes in the calculation of the GDP deflator, it is easy to argue economic growth us at zero. National income, the driver of consumer spending, which in turn drives business capital spending, continues to fall -- it is not just jobs lost but also people dropping out of the work force and average work weeks that matter. The stability in housing prices will be disrupted when the "pig in the python" -- the 800,000 plus foreclosed homes banks have yet to put on the market - hit the market. Not to mention the 1.6 million they will add in the next 12-18 months, further depressing prices and national wealth. Although I write a shorting newsletter, ChangeWave Shorts, I am not a perma-bear -- I just stick to the third grade math.

If This Is a Recovery...

A narrow answer to the question of retail sales is the confusion among investors -- and of course, blow dried media pundits -- about retail sales and consumer spending. Government statistics on consumer spending include spending health care -- typically exempt from state taxes. Health care spending, doing very simple math, 17% of the economy or 17 into 65, the percent of the economy that is consumer spending and you can see health care spending is at least 25% of consumer spending. And expenditures are rising monthly due to medical cost inflation. You can do the math and see why retail sales are much worse off than consumer spending. And retail sales drive many kinds of employment, drive rents on retail space and so on, shipping, manufacturing and so on. Bottom line: the fall of retail sales is much worse than consumer spending in general and, in my opinion, not recover to previous levels, holding down employment, especially at the lower end go the job market. Recent surveys by ChangeWave (changewave.com) show consumer spending is flattening out. That being said, do not short the retailers, the Street continues to love them, if you want to short traditional retail, go long Amazon as I recently wrote in my service, ChangeWave Shorts (also ChangeWave.com.

Blue Nile's Strong Q3: The Outlook Just Got Brighter

Your note was amusing since it relied on data and numbers rather than hope and hype -- but how can you be bullish on a company so grossly overvalued facing 2% growth? They have experienced margin expansion due to cost controls and reductions -- a one time event -- and sales are essentially stagnant. They are selling for 80 times earnings -- if they grew profits 20% a year it would still take them four years to grow into the premium the market is assigning to them. I have recommend shorting NILE in my newsletter, ChangeWave Shorts, not just for valuation reasons but Santa is going to have a hard time coming down the chimney this year -- and there will not be as many diamonds in his bag as people believe.

Macy's, J.C. Penney Get Bearish Gifts

Macys is also a long term short -- they have a horrible balance sheet and when interest rates rise in the next 9-18 months and spreads widen again on sub-par corporate debt, their debt service will approach unsustainable levels.

Amazon: Be Fearful While Others Are Greedy

It is clear you are not an Amazon customer nor do you speak with them. Superb site, superb selection -- in the past month I have bought books, coffee, china, telephones, coffee maker filters, tee shirts, printer cartridges and toiletries from them. No tax -- and no one will be able to impose one - and no shipping charges, I am an Amazon Prime customer. Did I mention I own a Kindle? And through the Kindle I have canceled one newspaper and three magazine subscriptions, replacing them with Kindle versions and now buy 75% of my books for the Kindle. Including my own, Sell Short (published by John Wiley) - I write a newsletter on shorting stocks. I have also sold three used books through them this past month. Please, talk to more customers -- troll their site - and, more importantly, look at their cashflow and average number of orders and order size per customer. Did I mention UPS and Fedex are looking at 8% increases in shipments in Q4 due to online sales? Guess what company will lead the way?

7 Dividend Stocks to Prove Buy-and-Hold Isn't Dead

Add TAXI to the list -- 9% plus dividend, 0.3% default rate on taxi medallion loans, overall loan portfolio default rate of 2.2%, tiny in this environment, they are de-leveraging in anticipation of rising interest rates next year and moving to service the loans they have sold to improve the return on capital and improve margins.

Why Wells Fargo Is a Great Buy

Have you looked at their balance sheet? See my post on Seeking Alpha -- they are short many tens of billions of core capital and are using purchase accounting to get through 2009 - and this must end on December 31 of this year. Their addition to reserves is coming at a significantly slower pace than their loan losses. They own the world's largest chunk or awful sub-prime loans not yet written down because they are on their books -- Wachovia wrote them, they are not in the form of bonds - and they also have almost $350 billion in commercial real estate loans on their books. Before writing about their operating earnings, which are mythical due to purchase accounting, you need to re-examine their balance sheet -- oh, and you failed to mention their $2 trillion in off balance sheet obligations, they claim only $115 billion must come on balance sheet in January due to new FASB regulations.

Four Biotech Stocks to Play the Sector Pullback

Several of these stocks -- notably Generex -- are trading vehicles, not investment vehicles. I have followed this and several of the other companies on your list and sadly do not think they have real potential given the paucity of marketing and trial partnerships. Antigenics is a fascinating play on intellectual property and will spike if Dendreon gets an approval for Provenge or collapse.

Still Missing the Last Green Shoot: Jobs

Why would you suggest the other green shoots are real? All the optimism and talk of "green shoots" revolves around the new buzzword on Wall Street -- the second derivative. Optimism based on the rate of decline slowing is based on a false premise.

More importantly, I urge yo to read publicly available data and take a look at mortgages, when they were let, when they reset and the slope of their defaults. Simple math says peak mortgage resets occur in July of 2011; the same math then puts peak defaults 305 months later; peak foreclosures 3-5 months after that; and peak additions of foreclosed homes to housing inventory 3-5 months after that. Translation - no stability in home prices and therefore consumer confidence until late 2012/2013. An exaggeration? The Fed's own data shows 95% of homeowner equity was wiped out in the past 2.5 years.

U.S. Housing: Are Better Days Ahead?

With all due respect, analysts who are unfamiliar with housing should not write about housing -- we are not close to a bottom. The key to home prices and values is supply, and that has three legs -- new homes, existing homes and the new leg, foreclosed homes. We are building half a million new homes a year -- halff of what used ot be called a "bottom" yet inventories are rising. Existing home sales perked up a bit - -and at the June rate of growth they will equal 2007 sales in 2020 -- more than one third of homeowners have listed or want to list their home for sales and that backlog is growing. Foreclosures have yet to peak -- they ar rising and will rise until 6-9 months after peak defaults, which in turn occurs 306 months after peak mortgage resets, and that occurs in July of 2011. This is all public information, by the way......

Has Housing Reached Bottom?

A housng bottom can only occur when foreclosures abate -- and foreclosures will peak in 2012. The math is simple -- peal mortgage resets will occur in July 2011; peak defaults three months later; please foreclosures three months after that; peak listings of foreclosed homes three months after that. The math is simple -- you actually back this stuff. Also, historically, home builder stocks bottom at a million starts -- and when the Street sees what I see in foreclosures and home prices and inventory - lions an tigers and bears, oh my - they will find the current and projected levels of housing starts more of a reason to short the builders rather than buy them. In my newsletter I recently shorted the XHB -- is it technically rolling over and the Street is beginning to wake up to housing reality.

The Citigroup Anomaly Lives On

The difference in price between the common and the preferred is quite simple -- short covering, the purchase of stock based on a value different than the calculation you are making.

Pending Home Sales Better: Is it Time to Buy Homebuilders?

I find the optimism amusing -- given the low base, existing inventory and the gigantic inventory overhang that is building. There are nineteen million vacant housing units in the US - only six million are listed. Banks are sitting on more than 600,000 homes they gave foreclosed but not listed, I am assuming they do not like current prices. Mortgage re-sets of funky mortgages - options ARMs and ALT-As - do not peak until mid- 2011 and these have unreal default rates -- Goldman Sachs puts the default rate for option ARMs at more than 60%. And defaults mean more foreclosures. Inventory will not stabilize until 2012 -- maybe -- this is a statistical anomaly. A green shoot. I have twin boys, and when they were infants you could see green shoots coming through their diapers -- seems to me they are the same thing.

Biotech Opportunities: Look for Decent Pipeline, Big Pharma Partnerships

You may have missed the common with the best partnership imaginable, very promising technology extensive to many cancer tumor types with several trials underway - Curis (CRIS). The partner is Genentech/Roche and the normally button downed biotech giant is so confident of Curis Hedgehog technology it has listed its first indication -- basal cell melanoma - as a 2011 launch based on a successful Phase II -- yes, Phase II - pivotal trial. Curis is also on the verge of licensing another molecule. For purposes of disclosure I own the stock.

The Anti-Stock Rhetoric Is Overblown

John:

C'mon, John, you are one of the smartest men I have met in our business with little ego and a true concern for clients. You are talking markets, and markets alone -- what about economic fundamentals? They are weak to bad to terrible,l depending on your industry and where you live, and they are getting worse. Bulls continue to emphasize the "second derivative" -- the rate of decline is slowing -- is that a reason to think things are getting better? And your historical analyses did not include one simple fact -- markets always regress to the mean of corporate earnings, and they are going down and even though the market may not stay there, the market has to do this, based on HISTORICAL comparisons, so that means an S+P 600 or much worse.

Let's argue this over drinks at the Money Show in Las Vegas, if possible.

Michael Shulman