"As long as I can see the puck, I don't think you can beat me."
-Alec Richards (Yale Hockey's Senior starting goaltender)
In 2006, when Alec Richards broke my classmate, Alex Westlund's, single season saves record for a Yale goalie, I started paying attention. While people and their politics might lie, the numbers never do. President Obama had better figure this out - and soon.
At 6'4, 200 and something pounds, this young man takes up a lot of net, and he's extremely difficult to beat. If you'd like to take him to task on his comment above, he'd be the first in line to let you try. He knows how good he is. He has a repeatable process. He's 14-2 this year for the nationally ranked Bulldogs.
Alec spent this past summer working for us as an intern at Research Edge. He'd sit in our morning research meetings very quietly, taking it all in. As anyone on our team would assure you, I suck the oxygen out of that meeting room talking ... and I always anchor on someone's eyes to see if they really get it or not. Alec had that look in his eyes - that look of someone who gets it.
Why do I call this out this morning? Simply because the only thing left in this market is hope - and while hope is not an investment process, sometimes that is all that's left. Betting on America's financial future is much more tolerable when I can trust that we have a world class goalie behind us. Metaphorically, America's last line of defense needs to have a legitimate and proactive risk management process. What the financial savants on Obama's team have right here and now is basically a joke.
A joke? Yes, when it comes to risk management, as sad as that is to say, that's exactly what we have at the US Treasury. Timmy Geithner can't even manage the accounting of his own personal taxes, never mind the tail risk associated with an increasingly interconnected global market place of interacting factors. Does the man even know what global macro is? Timmy, other than looking like a deer in headlights on CNBC, what is it that you do?
After one summer in this Wall Street league, Alec Richards knows more about what a real "stress test" is than Geithner or whoever that 2-year Goldman man in investment banking that Coach Hank Paulson appointed to oversee the TARP net. America needs to get serious about finding a world class goalie - and soon.
While its all good and fine for Jaime Dimon at JP Morgan to proclaim his mystery of faith suggesting that he doesn't need a stress test, what does that really mean? What did you expect him to say? What is a stress test worth if it doesn't actually test the thresholds of maximum pain? What does a stress test mean if it is based on the economic forecasts of a government who is perpetually reacting to economic news on a revisionist basis? Is this some kind of a joke? Does our new government think we are stupid? Or, when it comes to understanding how markets really trade, are they?
I would love to wake Vikram Pandit up each morning and take him through the paces of what I would consider a global risk management stress test. Mr. Pandit, I must warn you in advance, not proactively preparing yourself for this might make it a real ugly exercise. And by the way, as long as I can see you, I don't think you can beat me.
When you consider the US government owning 36% of Citigroup, America becomes a much scarier place, and in a hurry (we are short Citigroup in our virtual portfolio). The only thing worse than Pandit and his crony from the hedge fund he blew up running risk management at Citigroup is Timmy Geithner checking their math, and Jimmy Cramer signing off on it!
Don't remind Larry Summers of this, but markets are much smarter than people. This is probably one more reason why the US Treasury market has gone from shaking to breaking. Why should the Chinese trust American-backed bonds if this is who we have standing in front of our net?
Unlike the current said leaders of Big Broker, Big Auto, and Bit Stress, Alec, like American Idol's Kris Allen (who got America's vote last night), knows who "The Man In the Mirror" is. He's responsible for his own actions. He's accountable to his teammates. He doesn't point fingers, and he has definitely never begged for a bailout.
Tonight Alec will lead the Top 10 Nationally Ranked Yalies into the final weekend of the regular season. His teammates expect him to win, because that's what they wakeup expecting of themselves. That's what winners do.
It's been well over a year of my going off on this lack of competence in our leadership, and I'm rather tired of focusing on the losers who have brought this great country's financial system to its knees. So... as of this Early Look note... please be advised that as this market makes new lows, I'm shifting gears. I am going to go back to focusing on and dealing with winners. America has a lot of them, and I am going to do my small part in making sure they are at the table of this country's leadership debate by the time my son grows up.
My downside target for the SP500 is now 730 (-3% downside in the immediate term). Like the confidence that Americans have in our financial system's leadership, that would be a lower low. That will be bearish.
I have sold down my long position in America to 9% of my Asset Allocation, and while that's higher than in any other country where we have an invested position, that pales in comparison to the 76% position that I have re-built in Cash this week. My Cash is American. For my family and firm, my Cash is king. I don't want the government's moneys. I just want the economic freedom to wake up every morning and take my shot at winning. Thank God for that.
Have a great weekend - go Bulldogs!
CURRENT ETF ALLOCATION
"As long as I can see the puck, I don't think you can beat me."
For so many other reasons, RL is one of my top investable names today.
Business really fell off a cliff for these guys beginning in September. However, there has been no deterioration since the tough Q4. Pricing is probably down 10-15% but consumers are responding, which is serving to stabilize the market. On the margin, the wave season and pace of forward bookings are probably a bit better than what the market is expecting. Here are some observations about current trends:
• Near term yield, revenue, and earnings guidance still looks reasonable
• Looks like industry has restored booking volume and price equilibrium (granted at lower pricing) post last quarter. That has gotten the ball rolling again for a more normalized pace of business
• Wave season, seems to not have tapered off yet and bookings are going at a healthy pace (again at lower prices with greater incentives being offered).
• Europe has been surprisingly robust, especially the UK, despite the large capacity additions.
• There will be a big mix shift towards cheaper cruise options (shorter, inner cabin booking vs balcony, closer ports).
• Alaska is faring poorly because of this mix shift and due to the short booking window. People are just not booking for Q3 yet.
• Agent commissions are being pressured higher, but not by much. RCL is providing an extra 1% incentive to travel agents in January and a bit towards February, which has benefitted volumes but this extra incentive isn’t material enough to matter. Two very small brands have gotten aggressive including Regent.
None of this changes our intermediate and longer term concerns surrounding capacity increases, demographics, and the sustainability of the decent European trends. However, the stocks are ripe for a potentially big move given stabilizing business levels. The high leverage and short interest probably makes RCL the more interesting near term trade.
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a. We’re looking at about $7 per share in earnings, but this includes $10.5mm in stock comp expense and $10mm of added marketing expenses for its Simple and TSUBO brands. We can’t ignore these P&L events, but they each account for $0.50 in EPS that management could have averted if it so chose. In my mind, $8 in EPS is closer to the core earnings number here.
b. The market cap is down to $620mm, but DECK has an astonishing $175mm in cash ($15/shr). Yes, $175mm in cash and $175mm in EBIT next year if you believe mgmt can actually forecast its business and hold core EBIT flat. Net it all out and this thing is at 2.5x EBIT. If you trust this management team, you can’t ignore this name here. I don’t think that management is anything to write home about in the grand scheme of retail, but I’d go as far as to say that it is a better team than a company the size of DECK probably deserves…
2. Let’s say that the US business rolls over, proves to have already hit its point of saturation, but remains a well-run, tightly distributed relevant brand in key consumer segments (a realistic bear case, I think). Then we’re likely looking at earnings closer to $6. No – not the direction of revisions I want to see. But that suggests that this name is trading at 8x earnings today.
I know you can’t make valuation calls in this market, but once real capitalists creep back onto the scene some of these small – but relevant – brands will be plucked away.
As it relates to his company’s hiring plans in the current environment versus the government’s plans, Wynn stated:
“I mean, everybody is letting everybody go. I created 4,000 or 5,000 new jobs here, does that make us a bad guy? How many new jobs did Uncle Sam create? Zero.”
This point is important because it is indicative of business leadership on the part of Wynn. Good companies will take share at the bottom and often this requires maintaining staff levels and capacity, or in the case of WYNN actually adding employees during the downturn. If a company is furiously reducing headcount, cutting costs, and selling assets at the bottom, they probably were not proactively prepared for the cycle. Nor will they be taking share in the downturn. I’m not expressing an opinion on Wynn’s stock (you can email Todd for that at ), but rather the strategy.
The other point I wanted to highlight from Wynn’s call, which we believe is an emerging TREND to watch, is the battle between capitalists and the government. As an aside, the point of this note is to not make a political statement against President Obama or President Bush, but rather to emphasize that successful capitalists like Steve Wynn are not going to stand on the sidelines, while the government makes repeated and costly mistakes. Specifically, his quote about the first TARP was:
“I don’t mean to go on, I will address your question technically but the political leadership from Washington was completely lacking in the first $350 or $400 billion they spent last year. So, that money went down the drain and didn’t produce the kind of result it was suppose to. Theoretically there was supposed to be some smart people on the job paying attention to this like the Secretary of Treasury and people like that, the former chairman of Goldman Sachs.”
This is a question all of America should be asking about this $350+ billion and hopefully will be asking with the stimulus and spending plans of the new administration. This isn’t a Republican or Democrat thing – this is an American Free Market Capitalist thing.
To the extent that the US government thinks capitalists will stand idly by while their hard earned money is misallocated, they are likely sadly mistaken. We see evidence in this anecdotally from Steve Wynn’s diatribe below, but also in the numbers of opinion polls, like the recent Rasmussen poll that showed only 34% of those polled believed the stimulus plan would help the economy.
Daryl G. Jones
Excerpted Comments from Steve Wynn on the WYNN Q4 2008 Conference Call:
“When I told you about the business we lost, it was a company that was one of the healthiest companies in the United States of America, much more healthy than the government of the United States of America. That is disturbing to me when a chairman of such a company feels intimidated. If that’s that class warfare or as I mentioned earlier that capitalism needs to be punished, if that is part of the mentality of this administration we’re in for a worse time than we expected.
President Obama got swept in to office on a wave of optimism about a better future. If we’re going to have increased welfare government we’re not going to create jobs and we’re not going to get out of this recession quickly. If we really have an intelligent, brilliant, sensitive government that understands how the country works and job creation is at the smaller business level. I mean, everybody is letting everybody go. I created 4,000 or 5,000 new jobs here, does that make us a bad guy? How many new jobs did Uncle Sam create? Zero.
So, I’m saying to myself, look there are certain times when the rhetoric from Washington is appropriate and if Northern Trust is taking money then they don’t need to go to a golf tournament, not at this point in their career. I would have to agree with those Congressmen. On the other hand, if this kind of rhetoric is not very enlightened and very sophisticated it can lead to an unintended consequence like the cancellation of a wonderful company’s educational forum where they teach salesmen the new programs. They need to go somewhere to do that. Las Vegas was the cheapest place for them to go. It’s the greatest value for conventions and meetings in the United States of America.
We consistently are the best value because we’ve got slot machines and crap tables we can afford to sell finer rooms for less money. We give better meeting facilities in terms of technology and in terms of the services available to the delegates. We serve the convention and meeting public the best of anyone in the United States of America. We’re more accessible in terms of our airport and for that to get torque or perverted because of political flap jaw or political speech would be unfortunate. So, let’s hope that the government grows up and does a good job and gets us out of trouble instead of putting us in a deeper hole than we’re in already.
On political leadership in Washington
I don’t mean to go on, I will address your question technically but the political leadership from Washington was completely lacking in the first $350 or $400 billion they spent last year. So, that money went down the drain and didn’t produce the kind of result it was suppose to. Theoretically there was suppose to be some smart people on the job paying attention to this like the Secretary of Treasury and people like that, the former chairman of Goldman Sachs.
You think well, they ought to know what to do. It got away from them a little bit and this last stimulus program that has come out of Washington is more of a welfare program than a real jobs creation program in spite of what the President says. Fixing bridges and roads are technically demanding jobs that require technical help, good drawings and substantial lead time. That may be a proper thing for us to do as Americans to fix the infrastructure but to think it’s a quick fix jobs program is a naïve and insincere and incorrect statement.”
Daryl G. Jones
In the chart below I have outlined my playbook for trading gold. As prices change, I will… but right here and now I’m a seller at $1,008/oz (dotted red line), and a buyer in the range of $921-935/oz (shaded green). Massive support remains at the $840/oz line (thick green), and if gold bulls were to capitulate further from today’s lows, that’s where I suspect the real selling stops.
For now, given that I think global equity markets will come under further selling pressure from here (I am short Asia and the Dow), I am long gold again… at my price.
Keith R. McCullough
CEO / Chief Investment Officer
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