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Peter George Psaras, has been investing for over 40 years and has expertise in the following: 1) Quantitative Analysis 2) Qualitative Analysis 3) Macro Economic Analysis 4) Technical Analysis 5) Stock Market History He is the CEO and Portfolio Manager at Conservative Equity Investment Advisors,... More
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  • The Markets have entered "The Twilight Zone" 2 comments
    Oct 16, 2011 8:32 PM | about stocks: MA, GPS, BKE, ARO, URBN, AEO, AMZN, GOOG, YHOO, MSFT, FDX, UPS, CNVR, NFLX, AAPL

    Last week’s market action can only meet Rod Serlings definition of the Twilight Zone:

     

    "You're traveling through another dimension -- a dimension not only of sight and sound but of mind. A journey into a wondrous land whose boundaries are that of imagination. That's a signpost up ahead: your next stop: the Twilight Zone! You unlock this door with the key of imagination. Beyond it is another dimension: a dimension of sound, a dimension of sight, a dimension of mind. You're moving into a land of both shadow and substance, of things and ideas. You've just crossed over into... the Twilight Zone. There is a fifth dimension beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. It is the middle ground between light and shadow, between science and superstition, and it lies between the pit of man's fears and the summit of his knowledge. This is the dimension of imagination. It is an area which we call "The Twilight Zone".

     

    Basically the way the market reacted last week it seems that the unemployment rate is now 0%, the messiah has finally arrived, the government has decided to shut down and give everyone's taxes (that they paid over their lifetimes) back as a sign of good will.  Greece also has become the world’s #1 economic superpower and will pay off every other countries debt down to zero and Cancer, AIDS and Poverty where eradicated.

     

    Unfortunately this is the way some traders actually think when they go and bet the farm every day with huge amounts of leverage. You can see why your average day trader loses his entire portfolio on average within three years of starting operations.

     

    Now for some reality.

     

    1) I recently spoke to my Mother, Sister and Brother in Law in Greece and the garbage has not been collected in front of their homes for over two weeks. My mother does not carry cash anymore or go shopping alone, but got a MasterCard(NYSE:MA) Credit Card as crime is rampant and seniors are easy targets and are getting mugged in record numbers.  This is in a country where crime was non-existent ten years ago and when I traveled there, I used to go out until 3 AM with zero concern. My cousin got carjacked a mile south of the Parliament building with her baby on board, so they can say what they want in the press, but reality tells a different story.  I am sure things in Portugal, Italy, Ireland and Spain are not much better.   Greece according to my Brother in Law is in a Depression that is only getting worse every day.

     

    2) President Obama's jobs bill got rejected in the Senate, which is controlled by his own party and millions of Americans are out of work for over a year now, with not much hope of finding work. 

     

    3) The government reports show that retail sales are getting better, but the reality is that 47 million Americans are on food stamps (150% the entire population of Canada) and one of the largest apparel chains, The Gap (NYSE:GPS) is closing 34% of their stores in the USA and concentrating on Latin American and Asian expansion instead.   http://www.bizjournals.com/triad/news/2011/10/14/gap-brand-closing-34-of-us-stores.html?ana=yfcpc   If retail sales were so good then why is The Gap doing this?  With The Gap such a power in the industry stores like The Buckle (NYSE:BKE), Aeropostale (NYSE:ARO), Urban Outfitters (NASDAQ:URBN) and American Eagle (NYSE:AEO) have management and directors doing some serious soul searching in their boardrooms.

     

     Internet competition is fierce as the American consumer is tightening their belts.  I have seen the power of the Internet as the future in retail and have opened two stores myself, http://www.mycroftonline.com where I sell over 1 million separate products and http://www.mycroftoutletcenter.com where I have signed up over 8000 retail partners to become part of my Outlet Center.  The internet allows me to basically just write some code and add a retail partner to my store in a few minutes, instead of me having to spend $100,000 and open a physical store, I can now open 1000’s on the internet for basically nothing but my time programming.  My Mycroft Online is partnered with Amazon (NASDAQ:AMZN) as my wholesaler so basically all I have to do is get Microsoft (NASDAQ:MSFT),  Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO) to run my advertising and FedEx (NYSE:FDX) and UPS (NYSE:UPS) to make my deliveries and thus everything becomes automated.  The effort involved is just my time to do the programming, but once I do it, my websites basically run by themselves 24/7, 7 days a week with no buildings for warehousing or stores and zero employees,  except, me, myself and I.  The future of retail is on the internet and companies like ValueClick (VCLK) , which owns affiliate marketer Commission Junction should do very well over the next few decades.

     

    4)  The markets went up last week as there is "Hope" that Europe will fix their mess soon, but analyzing markets for more than three decades now, I learned that one should have hope only when it is backed up with cold hard facts as the numbers don't lie.  Jobless claims are still high, unemployment is still 9.1%, we have record foreclosures, Wall Street is looking to lay off 10,000 people soon and all the big banks are wards of the state, even though 90% of all Bankers are expected to get bonuses this year (Thanks Uncle Ben)???

     

    The Europeans are determined to reward failure just as Paulson did in 2008. The crisis may end, but will only build up to a greater one down the road. When that will be I don't know, but interest rates must stay low as governments cannot afford to pay their bills, if they were raised. Companies are taking advantage of this by borrowing a war chest of money at near zero interest rates and consumers are slowly repaying their debts and are scared to death of losing their homes and jobs. Fear is a real motivating factor.

    We are involved in roller coasters market swings due to macro events, but eventually government will reward failure and taxpayers will get killed, resulting in a long term stagnation that will occur. Study Fractal Geometry and you will see that everything is inter-related in some way but by printing money that is backed by the good faith of a government, failure can be masked over. Eventually we will have a Weimar Republic again but this time it will be global as Europe and the USA are falling stars and Asia which will have 75% of the world’s population will be the next stage of economic evolution.

     

    5) Interest rates are at zero, yet no one can get a loan and bonds are trading similar to what a stock would trade at 50 times earnings, so don't expect much good to come out of bonds anytime soon.

     

    Being a student of the markets, October has historically been a bad month as most big banks report their earnings in the last two weeks of the month.  So instead of following the lemmings last week, I decided to wait and see how the banks will report in the week coming up. 

     

    Over the last few years everyone has witnessed with their own eyes that the markets have become roller coasters influenced by Hedge Funds who now are backed with the money from underwater pension plans that are so underfunded that they now need to increase their risks to just break even.  Therefore there is a ton of money moving quickly in and out of stocks, based on the Macro-Economic "event of the day".  The market moved down the other day as the Slovakia Parliament voted against the EU plan.  Slovakia?  Ask most people about Slovakia and they will either answer that is the last name of a Hockey Player or some weird Vodka drink.  Slovakia's GDP is smaller than 38 of our States here in America but it never the less has the power to move global markets, which should concern everyone.

     

    But having said all that above, I am sure each of you are pleased that we went up last week, but we still need to be very careful as traders have put the cart before the horse and there is no reason for us to join in the madness that happened last week, as it is all an illusion and I don't invest in illusions.  One should be reactive and not proactive when companies report because one earnings miss and your stock is down 10-15% in a millisecond.  Why not wait and let companies report and then act accordingly.  Obviously since markets are fed by fear and greed we saw some serious greed show up last week as the lemmings did not want to miss the boat, which may potentially go up. 

     

    One example is how everyone jumped on the Apple(NASDAQ:AAPL) bandwagon last week, but very sadly the reality is that Steve Jobs is no longer with us and as any Football Fan knows what can happen to a team when a star player gets injured, the news in not promising. Sure the team might do well, but reality eventually shows up and those who bet on the team (just like nothing happened) usually end up losing more than their share of money.  Apple is a great company and Steve Jobs (one of my idols) left an amazing team behind, but their new phone is not much different from their previous model and Jeff Bezos of Amazon has come out with an IPad killer in the new Kindle Fire that sells for $199 that he is selling it at a loss.  Why is he doing it?  To go after his main competitor Apple as he knows the products and the stock are experiencing cult worship and he wants to bring everyone down to reality, similar to what happened recently with Netflix (NASDAQ:NFLX) shareholders as the stock tanked 65% in a little over a few months.  In the insurance business they have a policy called "Key Man" insurance, which firms take out to protect their business from a loss of a key CEO.  There is not enough money in the world to replace a guy like Steve Jobs at Apple.  Sure they have billions in cash on the sidelines, but that money is returning near zero % in return on invested capital.  To sustain such a lofty market cap the company must start using that money and start making 30%+ ROIC’s on it otherwise gravity may start showing up in the share price.

     

    The strategy I have now with my Clients is that I have them still in a large position of cash and have a long list of stocks that I want to buy.  But I will only buy those that miss and then get crushed 10-15%.  I refuse to join the lemming behavior that we witnessed last week as it all based on air and nothing of substance.

     

    "Life is short, the truth is everlasting, so let us speak the truth" - Arthur Schopenhauer



    Disclosure: I am long MA.
    Themes: economy, growth, value, policy Stocks: MA, GPS, BKE, ARO, URBN, AEO, AMZN, GOOG, YHOO, MSFT, FDX, UPS, CNVR, NFLX, AAPL
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Comments (2)
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  • JordanRed
    , contributor
    Comments (24) | Send Message
     
    Great article Peter, you hit the nail on the head on a great number of issues. The simple truth of the matter is that there is a ton of debt to be worked out of the system and until it's worked out we're not going to be sailing smoothly. The political confusion in America and Europe only makes matters worth. Hopefully prudent investors will be able to pick up true bargains in the chaos, avoiding unfounded speculation and falling knives alike.
    21 Oct 2011, 08:48 AM Reply Like
  • Golden Oxen
    , contributor
    Comments (667) | Send Message
     
    Of course you are correct about the real situation Peter, but I would not forget about the torrential amount of funny money that has been created lately when trying to understand stock prices.
    21 Oct 2011, 10:56 AM Reply Like
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