PHIL TOWN

Retail & Housing Stocks In Driver's Seat

Stock Market Review: August 13, 2010

This is the final week of the busy portion of earnings season. After the worst week for U.S. exchanges in over a month, housing and retail will direct trading with both corporate and economic data due up.

Last week, the Dow Jones Industrial Average shed 3.29% to close at 10,303. Wednesday's greater-than 2% decline, stemming in large part from the U.S. trade deficit surging from $42 billion in May to $49.9 billion in June, comprised the bulk of the weekly loss. The S&P 500 dipped 3.7%, finishing at 1,079, and the Nasdaq Composite plunged 5%.

The NAHB's housing market index and earnings from home improvement retailer Lowe's (LOW) are on tap this morning, followed on Tuesday by July housing starts and quarterly results from Home Depot (HD).

We'll get a really good look this week at how loose the consumer purse strings actually are. A wide range of retailers, from Wal-Mart (WMT) and Williams-Sonoma (WSM) to Dollar Tree (DLTR) and The Gap (GPS), are scheduled to report earnings. Retail stocks suffered last week; JCPenney dropped sharply on Friday despite beating second quarter profit expectations. Investors chose to focus instead on the clothing chain's cautious outlook.

Retail sales actually improved in July, bouncing back 0.4%. But without the impact of strong auto sales and higher gas prices, sales actually fell 0.1%. Prior to the July rebound, consumer spending appeared to have plateaued based on several downbeat sentiment and outlays reports.

In addition to a bevy of retail earnings on Thursday, tech stocks will be in focus with Hewlett-Packard (HPQ), Dell (DELL), and Intuit (INTU) reporting. Last week, technology joined financials and industrials as the worst performing sectors.

Good news for gas prices; oil retreated amid the equity selloff. After briefly topping $80 per barrel, the front-month crude oil contract settled down near $75.39.  

 

DUE UP FOR THE UPCOMING WEEK:

• MONDAY – NAHB Housing Market Index (August), Empire State Manufacturing Survey (August), Treasury International Capital (June), earnings from Lowe's (LOW),  Agilent (A), Urban Outfitters (URBN)
• TUESDAY – Housing Starts (July), Industrial Production (July), Producer Price Index (July), earnings from Wal-Mart (WMT), Home Depot (HD), Abercrombie & Fitch (ANF)
• WEDNESDAY – Oil Inventories (Weekly), MBA Purchase Applications (Weekly), earnings from BJ's (BJ), Target (TGT), Deere (DE), Limited Brands (LTD), Hot Topic (HOTT), PetSmart (PETM)
• THURSDAY – Jobless Claims (Weekly), Philadelphia Fed Survey (August), Leading Indicators (July), earnings from Hewlett-Packard (HPQ), Dell (DELL), Intuit (INTU), Sears (SHLD), Williams-Sonoma (WSM), Aeropostale (ARO), Ross Stores (ROST), The Buckle (BKE), Dollar Tree Stores (DLTR), Gap (GPS), Staples (SPLS), Gamestop (GME)
• FRIDAY – Earnings from AnnTaylor (ANN), J.M. Smucker (SJM), Hormel (HRL), Hibbett Sports (HIBB)

Join me Aug 5th for an exciting business opportunity with my friend, Bill Bartmann!

Hey guys, I need to tell you about something that is happening tomorrow night and see if you want to jump in on this.

 

Here’s the deal…

During the last government bailout of banks (the Savings & Loan crisis) my friend, Bill Bartmann, went from bankruptcy-to-billionaire. In case you don’t know Bill, he’s lived one of the most amazing “rags to riches” stories in U.S. history. He went from being a homeless teenage alcoholic high school drop-out to one of America’s 25 wealthiest business leaders.

 

But here is what is most relevant to you. The business opportunity that made Bill wealthy is now back with a vengeance after being dormant for more than 10 years. Even better, this same opportunity is now available to individuals who know about it and how to potentially take advantage of it.

 

This coming Thursday (as in tomorrow, August 5), Bill will be my guest on a special invitation-only webinar session for my clients. During our hour together, Bill will make a major announcement that for some on the call may be life-altering.

 

In addition, Bill has agreed to explain the specifics of how you can potentially make money from this “down” economy (while helping others). He’s someone to pay attention to, because in one year during a similar “bad” economy, he amassed $182 million dollars in personal earnings.

 

Interested? Here’s how to get registered:

 

Registration:

 

The Billionaire Nobody Knows: The Astounding Story of How Bill Bartmann Went from Bankrupt-to-Billionaire During the Last Banking Crisis and how he’s doing it again today (this time with partners like you!)

 

Date: Thursday, August 5th

Time: 8:00 PM EDT/7:00 PM CDT/6:00 PM MDT/5:00 PM PDT

Limit: 1,000 attendees (first come, first served)

 

CLICK HERE TO REGISTER

Or go to http://bit.ly/philandbill

See you tomorrow!

- Phil

P.S.  While I promise you will leave this program motivated and with a potential new path to wealth, I unfortunately can’t accommodate everyone. Our service provider limit is 1,000, so if you want to be included, go to  http://bit.ly/philandbill right now and get registered. And please exercise the professional courtesy to not take up a spot that someone else would want if you’re not going to definitely attend. Thanks so much!

 

 

Phil Town joins elite group of entrepreneurs on AOL Small Business Board of Directors

AOL Small Business has been re-launched by a friend of mine, Rod Kurtz, from the Your Business TV show at MSNBC. Also Rod is the former editor of Inc Magazine.  Rod and I have done several shows together and I’ve enjoyed his banter and brain on every one of them. So when he called about joining the AOL Small Business Board of Directors, I said absolutely! The Board is made up of a number of very successful entrepreneurs including Sir Richard Branson, the legendary founder of Virgin Group,  Bob Parsons, the founder of Go Daddy, Rob Dyrdek, the entrepreneurial skateboarder and Lexy Funk, the founder of lifestyle clothier Brooklyn Industries.

 

Unlike many Boards, this one is quite active. Rod regularly sends us a question or two and we all put our personal spin on answering it. Then he posts the answers on the website.  For example, Rod asked us what we thought about President Obama firing General McCrystal and, by extension, how a CEO should handle a similar situation. Here’s what I said:

 

“If your employee is really a superstar, then you don't let them go over some idle chatter, because you'll be playing against them tomorrow. Have a constructive chat and try to build a more respectful relationship... until you just can't take it anymore. Then you fire them. Meanwhile, start finding their replacement. In the president's situation, personal stardom over military stardom with a superstar on call. No-brainer.”

 

My reply is up there with a whole bunch of other replies. I try to keep it short and keep it on brand - which means I answer the questions from the point of view of a Rule One Investor.

 

Check out the site. The things you have to do to become a successful entrepreneur are the same things your public business should be doing to make your investment successful. The more you learn about what Small Business should be doing, the greater your potential for becoming a better investor.

 

Now go play!

 

- Phil Town

A view from Singapore

I spoke yesterday at an investors conference in Singapore. What surprised me a bit here is the fear level. Asians have been on a roll and Singapore, a financial island in a sea of statist thieves, benefits disproportionately. Good times in Asia are very good times in Singapore. So why all the concern. Perhaps they know something we don't. What if the Dragon is slowing down dramatically? What if the PIGS overfeeding (Portugal, Italy, Greece, Spain) has spread to Hungary, France and others? What if the USA is found to be the biggest Hog of all?

 

Who knows, right? But watch out if you are still not in cash. Lots of red arrows out there signaling money sneaking out the door. Is the theater on fire?

 

Well, there is certainly some smoke. Unemployment numbers are not good. Industrial numbers are sliding. In my opinion, US debt is on a track to hit Greek levels in 2 years and is already 50% above what the Eurozone would consider dangerous.

 

Obama wants more unions, more regulators, higher energy prices. He is now criminalizing oil drilling errors and derivative mistakes on Wall Street. He is penalizing small biz job creation with taxes and health care while misleading the public about GM repaying its loan. The stimulus money created zero jobs net but it nationalized a car company to the detriment of its competitors.

 

The world is watching. And it's starting to get scared of what all this means. What does that mean for us? I think it's time for us to tighten our requirements, know your 4Ms and be happy in cash if you're not certain you are buying $10 for $5.

 

Now go play!

- Phil Town

 

Answer the critics with your own Rule One success

Warren Buffett once said that people either get this Rule One type strategy right away or they never do. Paul Brown, a book critic for the New York Times, falls into the latter category. His review, published in the NY Times in April 2010, basically argues the book is ‘intriguing’ but ‘almost nothing here registers as new.’

 

This sort of passive aggression reminds me of a story Dr. Jonas Salk told me a long time ago when I was investing in a business he had an interest in. I was at his home in La Jolla, California, for dinner and Dr. Salk was explaining how critics react to a radical new view of anything. He said, “When I was beginning work on a cure for polio, I learned that when you start something new you’ll go through three phases of interaction with your critics. The first phase happens when you begin to do something most people don’t do. In my case, I believed it was possible to produce a cure for polio with a killed virus. It had been tried before by other researchers unsuccessfully so critics told me I was throwing away my career by wasting my time and funding on something that everyone knew wouldn’t work. So the first phase for your critics is when they say, ‘It can’t be done.’”

 

Dr. Salk went on, “But I believed I had found a way to make it work. I kept at it and trials began to show some good results. Then the critics changed to Phase Two. They said, “Well, okay you have some data but really it’s just trivial and won’t make any difference in the long run.” So the Second Phase for your critics is to say, ‘It’s trivial.’”

 

Dr. Salk smiled mischievously. He said, “Then I was successful and they went to the Third Stage. They said, ‘We knew it all the time.’”

 

I think this may be the evolution of Rule One investing critics. Certainly, the greatest Rule One type investors – Buffett, Graham, Lambert, Ruane and many others – were once regularly blasted by critics for being out of touch, over the hill or just plain lucky. One of the most enduring books on investing ever written – which I dislike so much I won’t even write the title – claims Mr. Buffett is no more skilled at investing than a monkey picking stocks randomly and that his apparent skill and high rates of return are the result of a “statistical abnormality” rather like a guy who tosses a coin and gets 100 heads in a row.

 

Today, however, many experts agree that the market often prices businesses irrationally and if you can buy a business when its stock is priced irrationally low, as Rule One investors attempt to do, you position yourself to potentially make a significant  rate of return. (For an explanation of why that is the case, read Yale professor Robert Shiller’s Irrational Exuberance.)  Today, I believe few experts would go so far as to say Rule One-type investing is wrong and won’t work.

 

What they will say is what Paul Brown said. That we’ve heard it all before. That we know that already. That it’s trivial. In Dr. Salk’s terms – he is in Phase Two.

 

The truth is – we haven’t heard it all before really. Most people I talk to are shocked at the idea that one should buy a stock and then hope the price goes down. They can’t believe they’ve heard me correctly. It is a completely counterintuitive concept and Mr. Brown shrugs it off like it’s the heart and soul of value investing. But in fact, it’s everything. If you can’t do it… If you have done the appropriate analysis and valuation of a company you have determined to be “wonderful” and then can’t buy a piece of it and be ecstatic that the price continues to drop, then you really don’t know what you are doing when it comes to investing.

 

This simple but fundamental gut-check can tell you more about whether you are doing your homework and investing or just gambling by investing in stocks than anything else I can think of. Yet, really now, who does it?  A handful of great investors. I imagine that everyone else, and I mean almost every single mutual fund manager and pension fund manager, experience the exact opposite emotion when their stock picks drop in price. The press rush to judge the manager as having lost his touch. His investors scream and then bail. And if his stock picks keep dropping, the last thing he will feel is ecstatic. He may feel like vomiting maybe, or jumping off a ledge, but ecstatic?  Not so much.

 

Don’t believe the Phase Two critics who try to trivialize the central core of my approach to great long-term investing. There is nothing Phase Two about it.. Learn it, consider doing it. And if and when you start making money, watch the critics move on to Phase Three and tell you they knew it all the time.

 

Now go play!

 

- Phil Town

FINALLY – HERE’S WHAT HAPPENED TO OUR ECONOMY

As a Payback Time investor you should always be aware of what is happening in the market so that you can try to foresee when the market is being set up for a potential crisis. A while back I wrote that the blame for the credit crisis and the subsequent affect it had on the stock market should land on the shoulders of the people who didn’t repay their loans and the lenders who lent them the money. Everything else followed from those two sets of players. Many of you objected that I was letting Wall Street off easy. You were right. I was right. We were both right. Read on because here’s what happened. And if you want to know more, read a great book called The Big Short, by Michael Lewis.

 

1. The Federal Reserve lowered the cost of borrowing to prevent a recession. These cheap loans made real estate payments go down and real estate prices to go up because for the same money per month borrowers could afford bigger, more expensive houses. Real estate prices shot up and made real estate speculation seem like investing as people borrowed and bought houses to sell them and make profits.
2. At the same time, the Feds encouraged banks and mortgage companies to lend to marginal borrowers by threatening to sue banks for discrimination and by pushing Fannie Mae to buy more marginal loans.
3. Investment banks discovered they could bundle these loans and sell the cash flows from them as different mortgage securities with different risk and return levels. With the help of the rating agencies and the supposed subordination of the bonds some of these cash flows were even rated AAA. These bonds were a big hit with investors because they had a high rate of return and the (supposed) low level risk of a government bond. The big demand for these mortgage bonds encouraged lenders to do even more lending to even less qualified borrowers because they weren’t holding the mortgage — they were selling it to investment banks or the federal government and then using the cash to make more loans.
4. The worst of the pool of mortgages - the subprime mortgages - were harder to sell. The investment banks solved that problem by pooling all of the worst mortgages together into a mortgage bond and got it rated AAA as well. As Lewis puts it, “This was financial alchemy, turning lead into gold.” It was accomplished by the use of a mathematical formula that had worked for many years. The formula ‘proved’ that if you combine a lot of unrelated high risk loans into one big bond, the risk of the bond as a whole was quite low. The rating agencies and investment banks didn’t realize that subprime loans in California were, in fact, related to subprime loans in Florida by the fact that both were owed by speculators and the moment real estate started to level off, the borrowers would stop paying their mortgages. Formula in hand, the investment bankers convinced the rating agencies these bonds were AAA and then convinced AIG to insure them. The demand for these types of mortgage bonds worsened the problem as now there was a great deal of money earmarked to lend to just about anyone. (If you want to know more, Lewis really lays out the details on how the investment banks turned low quality loans into high quality mortgage backed securities.)
5. Still, there was no real problem yet because if these bonds failed, the investors would lose and then there would be less money to lend, which would shut down the machine. Not a good situation, but not a crisis.
6. Here comes the problem: Some very smart insiders saw the writing on the wall and knew that these risky bonds would default as soon as the real estate bubble burst. These investors wanted a way to profit if these bonds failed completely. But… at the time there was no good way to do that.
7. Several clever investment banks created an insurance policy against the default of the bonds and got AIG to write it for a small premium. AIG didn’t understand the risk these bonds represented, because they are in the business of insuring investments that rarely go bad. By buying insurance against the bonds defaulting, these investors would make a fortune when the bonds defaulted. Because they knew they were going to default.
8. Then these investment banks realized the insurance policy was just like the original bond. If the bond was good, then the insurance wouldn’t pay off. So they created a derivative of the bond insurance policy (which was already a kind of derivative of the mortgage bond, which was already a derivative of the original mortgages). This derivative acted just like the bond except with massive leverage. If the bond goes down, you lose beyond huge. This derivative was taking the other side of the smart guy’s short. In other words, they were betting that the bonds would stay solvent.
9. Just as they securitized the original mortgages, investment banks sold securities on these derivatives of derivatives of derivatives and got a portion of them rated AAA, too. The bond sales guys sold these things everywhere because they were AAA low risk and had a high return. They ate their own cooking and bought billions of dollars of these things for their own firms.
10. Then real estate did the inevitable and stopped going up. Subprime mortgage borrowers did what they had to do and started defaulting almost immediately, surprising almost everyone except the guys who saw it coming and had insured against it (went short). And the bonds started failing.
11. Investment banks lost billions and suddenly had no money to pay off their daily investing trades, which threatened to boil into a worldwide credit freeze. The situation became worse because the bonds that had been guaranteed by AIG weren’t so guaranteed after all because AIG didn’t have the money to pay up on the insurance policies.
12. Nearly every single major financial company threatened to go bankrupt, either because it made investments in securities that went bad, or because they could not get paid on their investments held by institutions becoming insolvent.
13. Our federal government decided to save all these firms and we now owe trillions.

The moral of the story? Depends on who you talk to, but as an investor I think we can conclude that the mere fact that everyone is doing something is a huge sign to not do it. Watch for signs. Is there a stampeding crowd? Think before you follow it. There’s a good chance it doesn’t know where it is going. When strippers in Las Vegas are paying mortgages on 5 houses (see the book), you might want to short real estate.

Just remember what we’ve learned over and over from history: Where there is massive greed, run the opposite way.

Now go play!

- Phil Town