The Market Downdraft Is Politically Bad, But Fiscally Sound

The White House is probably a very uncomfortable place of employment of late. Unemployment is rising, state and local layoffs loom, two wars continue to drain the Treasury, and the stock market is behaving terrible. The loose money induced market has been, along with private sector job growth, the two bright spots of Obama's presidency. Both have changed negatively. An overly political White House cannot be happy about the situation.

But the market decline may actually be good for the country's deficit and, ultimately, Obama. After the past 18 month's performance, selling is producing capital gains that will begin showing up in quarterly tax estimates. There probably aren't a lot of losses to set the gains off against given the markets rise. Therefore, tax receipts up and deficit down. Now hopefully the Republicans can tie firm spending cuts into any debt ceiling increase before the Democrats figure out they have some increased revenue heading their way.

Once the selling stops, that cash will need to be redeployed. There aren't many good alternatives available. The economy isn't as robust as previously thought, but companies are still lean and profits good. Commodities are stretched and bonds subject to the potential effects of inflation. Cash earns nothing. The money will find its way back into equities and that pressure will elevate the indexes.

Like all investors, I haven't enjoyed the past six weeks, but the world's not coming to an end and other than a little portfolio adjusting, I believe it wise to stand pat. A bright spot in this bleak period is that none of my covered calls are going to be called away and I get to keep the premiums. As the market hopefully recovers, I haven't been sold out and won't have capital gains to pay. There's a positive aspect to bad markets, for both Crusty and Obama.

I'm In The House Of Blues

I haven't enjoyed the last several days. Yard work and investment declines put me in a foul mood. More than crusty, foul. Cutting limbs and trimming bushes is bad enough, but watching the Market panic over employment numbers is numbing. That big ape is really starting to shake the tree and investor resolve is waning. So far, I remain resolved but feel low.

Before long the crusty credit analyst may be channeling Blind Lemon Jefferson and the other blues greats. Moaning and howling may be necessary to stand firm until the "market professionals" hear a random statistic that renews their faith and the buying resumes.

Here goes:

My mama ain't left me, but I still feelin low

The cookie jar gettin empty and I gots years to go

Oooow, deep cotton keeps a risin, but I don't own none

I gots stocks and day goin down

I needs a new roof, I gots bills to pay

Oooow, the market man's shakin da tree today

The dog and mama done holdin on to me

But we be staying in the tree

Oooow, I don't wantsa be poor, I just wants a roof

Mama, the dog, and me wants a new roof, woof

Oooow, it never ends.

Big Mama Thorton I'm not, so hang on as the world isn't ending.

Near Miss On Diamond

Yikes! I turned on the computer a few minutes ago and Diamond Foods was up $4.61 or 6.7%. Yesterday I played golf out of town and I spent today catching up on home ownership projects. Procrastination saved me. No shorting or put positions started on Diamond. Money still in the bank.

Why the performance boost? B of A/Merrill raised DMND from Neutral to Buy and Diamond had a great day. All the ratios that encouraged me to be negative on Diamond are more extended today. There's more money to be made, but after a near miss I'll wait a few days and see if there is more buying. A reading of the Merrill research will also be in order, although I don't expect any deep insight.

Families Are Under Increasing Pressures

The commercial correctly says that "depression hurts". Beyond that human tragedy is the economic toll. Galloping food costs, spiraling gasoline prices, and increasingly expensive imported products sold at Wal-Mart are pummeling the world psyche. Whether it's the Chinese, American, Greek, or Arab worker, they are all feeling the pressure of rising prices.

Several years ago, when prices were rising but at a slower pace, consumers had a few coping mechanisms. Rising home values, home equity lines of credit, and credit cards were available to minimize the pain. European and American middle class members enjoyed a life style that they couldn't afford. Those cashflow avenues have painfully shut for millions while daily living costs have accelerated annually. The world's citizens are becoming increasingly depressed.

How do you financially cope if you do not have access to credit? First, you nix any thoughts of discretionary purchases and make do with what you already own. Second, you travel less or differently and you trade down on daily product purchases. House brands will gather steam and brand names will see margins erode to compete. Third, debt payments will be stretched, defaulted, compromised, or eventually discharged in bankruptcy. Lastly, throughout the ordeal, consumers will agitate for pay increases and look for other, higher paying, employment. Even with high unemployment, employee churn will result in some wage pressure.

The foregoing scenario is damaging to individuals, governments, companies, and the world economy. Unless consumers find more cash, problems lay ahead. Corporations, so far, aren't handing out large increases in pay as the emphasis is still on cost control and the labor pool is far from tight. The US has determined that a .7% increase in Social Security is appropriate for its senior citizens; not a lot of extra cash to help offset rising prices. We all know the problems that the European countries face attempting to bail out their member states and keeping their banks solvent, thereby leaving little to improve lifestyles. The Chinese have been raising wages, but far less than the inflation they are experiencing.

Where am I going with this rant? It's time to be very careful, but an investor will probably still be wrong. Some galloping commodities, like silver, after parabolic rises will revert to the mean. Lighten up on those parabolic performers. If inflation isn't here yet, per the Fed, it sure is developing fast. Faster than economies are recovering. Get real confident about a company's ability to sustain margins and volumes or jettison the position. Buy some protection: inverse ETFs or puts or institute some short positions.

I sold Brunswick, boats/motors/bowling, short a couple of weeks ago and am toying with doing the same to Diamond Foods. DMND has been growing by acquisition and just announced a deal for Pringles. I suspicion that P & G got the best of the deal as DMND is assuming $850MM of debt and giving P & G shareholders 57% of the resulting company. Commodity input costs are going to impact margins, the debt load will be a lot larger, the company more complex to manage, and there will be lots of selling shareholders once the stock is distributed. Diamond will also likely reduce debt by selling some additional shares. I haven't pulled the trigger yet, but I'm pretty sure i will shortly. The stock has been a darling, but it is now selling for a very extended valuation and that's before the Pringles component is added and P & G wouldn't be disposing of the division if it was a barn burner with a stellar future.

Brunswick is counting on consumers to return to the boating market and Diamond is hoping that consumers keep buying snack foods at their current pace and practice. I don't think either will happen. Someone once said " A conclusion is the place where you got tired of thinking" and I'm tired. The end.

Smart Balance Is Behaving Better

Smart Balance's heart healthy regimen hasn't been a financial winner for Al and Crusty. My game-plan has been buy it and tuck it away for 5 years and let Steve Hughes do his magic. Hughes has done it several times before and the bet was that he'd build a billion dollar consumer products lineup and dispose of it profitably. I'm several years into that plan and it hasn't gone smoothly, especially 2010.

After being as low as $3.35 several months ago, its share price has marched up to $5.50. I wish I could justify the rise by significantly improved operational performance, but I can't. The country's milk leader, Dean Foods [DF] has awakened during the same period and enjoyed a similar trajectory. I don't care if SMBL rides DF's coattails as I'm elated that I'm finally in the black again.

The company's recent conference call was positive and their current advertising strategy of combining products in each ad is effective. Milk is doing well, spreads are struggling somewhat, and their Whole Foods venture is promising. They remain upbeat about extending the brand.

Since I've got a couple of years left in my original plan, I'm staying the course. $5.50 makes it easier, as does my new found environmental wacko-ness. Healthy, natural, and organic brands have been able to grow in spite of the economy and I continue to believe that Hughes and his team are on the right track. I hope I prove to be as smart as Al.

Crusty Is Turning Into A Tie-Dyed, Environmental Wacko

Of late I've been listening to Dead CDs, wondering if the Fish will do a Midwestern tour this summer, and thinking about joining Nebraskans for Peace. I can trace the beginning of this behavior back to my purchase of Power-One, a leading manufacturer of solar/wind power inverters. That investment led to a position in JA Solar, a Chinese solar panel manufacturer. I'm in danger of morphing into an environmental wacko. Since I'm not a total convert yet, I hope I've bought my two alternative energy positions cheap enough to make me a prosperous wacko. Also, to keep this behavior from becoming religion, I remain very happy with my nuke related investment in Shaw Engineering and a passel of oil and gas producers.

The stock market appears to hate the alternative energy space. After a number of years as "high flyers", solar companies have fallen out of flavor. Markets are concentrating on the possibility of less governmental subsidy due to budgetary restraints and have killed valuations. Companies can be had for a couple multiples of cashflow. Even if inventory gluts, reduced margins, and falling sales do materialize and cut last years earnings in half, a purchase today represents only 5-6 times EBITDA and since solar is not going away, that's a very attractive entry point.

JASO sells for 3 X EBITDA, 1 X Book, has a 30% ROE, and very little debt. It has been around for a long time and is well respected. As a local company, it will do well as China builds out its solar plans and has facilities and joint ventures in all other areas of the globe. It has been a big player in Europe, solar's number one locale, and will be a big player as the rest of the world picks up any slack from European retrenching. They just reported 1st quarter results which were excellent and the guidance was positive as well.

Renewability, high oil prices, Mid-East tensions, and cheap valuations are all working in this wacko's favor. Peace.

Religion And Investments Don't Mix

Zealotry may have a place in religion or social causes, but I prefer my beliefs to be rooted more in logic. Reason should triumph over dogma, but it won't faze the fanatic.

Investing should be driven by reason, not any other discipline. Obtaining good, consistent investment results is difficult and, over the long haul, impossible if clear thinking isn't the main driver of financial decisions. There's no place for religious zealotry in investing. Blind Faith leads to the poorhouse.

I intend on never visiting the poorhouse. That doesn't mean that bad investment decisions aren't in my future. I make them regularly, but they won't be mistakes of a major magnitude. Logic, financial analysis, and fear will keep losses to a minimum. I try hard to not turn any investment thesis into religion. I'm open to different opinions and criticism and if my thinking is proven to be flawed I'll exit. Not so for many investors.

I run across religious fervor daily for various investments. Irrational fervor and devotion for their positions. It's generally present in niche investments that have done extremely well and that performance has a missionary's impact on the converted. Nothing fazed the high-tech devotee during the bubble, the sub-prime/housing guru several years ago, the rare earth minerals fanatic, and the all-in commodities speculator of today. Logic is of little value when weighed against a continuing uptrend. Belief in continued success is paramount and that thesis is to be defended, no matter how weak the argument.

Miracles happen in connection with organized religion and they can happen also in investing. Timing is unpredictable and an irrational investment trend can go on for much longer than it should. But, investing results shouldn't be dependent on miracles and that is what is required if logic is taken out of the process.

Sell a security short, write an article detailing the reasoning, and wait for the attacks. The faithful respond with vitriol and very few facts supporting their position. They are in the investment because it has gone up, they have become converts, and they believe it will always go up. It won't and they will be in the poorhouse. Investing, long term, is about making analytical decisions, not miracles. There's no place for religion in investments.

Today I will Experience Anti-Inflation

The mid-to-late 1960s were a colorful era, to say the least. Dayglo concert posters and strobe lighting symbolize that period of acid rock music. LSD was a mind expanding [per Timothy Leary], intensely color laden experience. I grew the hair, liked the music, but preferred the tamer indulgences.

My Macbook has been treating me to a late in life hallucinogenic show as it slowly dies. I've always been annoyed before as PCs crash and die after a few years. Vastly slowed performance, then a bunch of white numbers, letters, and symbols set against a black backdrop. Then I need to go to the electronics store for a replacement. Not the Mac.

My original Macbook, purchased when they came out in 1996, has been a work horse. It's been dropped twice onto hard flooring and the edges were held together by tape. But it always continued to work perfectly. The cursed colorwheel didn't even spin too often. Truly a good product and well worth the money spent.

But it now seems to be on it's last legs. Each morning it has been putting on a psychedelic light show of flickering, pastel lines. The show is so pretty that I don't even mind the inconvenience. After the performance, it lasts about 5 minutes, the Mac takes a bow and functions admirably the remainder of the day. I thought today might be the overdose as the performance lasted longer than usual, but I'm typing!

If it quits this afternoon, or the next day, I'll experience anti-inflation. We a regularly told that the USA has inflation well in check and the cost of living remains low in spite of galloping food and energy prices. In fact, since those two components are volatile, we should remove them from our core inflation calculation. How can this be? I'm about to actually benefit from anti-inflation and reduce my cost of living.

The Fed tells me that my new Macbook will have much more memory, speed, and features that its predecessor so that equates to a falling price. It won't feel like a lower cost when I write the check, but I will be able to take some solace in knowing that my personal rate of inflation isn't charging upward as it will have been tempered by all of the new Mac features. When I fill my tank I'll know that due to my buying a new computer my gas isn't really impacting me as much as it did at my last fill-up.

I'm rooting for the Macbook to survive even if it means I continue to be ravaged by food and energy costs without my electronics cost of living offset.

I Stands Corrected

Some wag just informed me that my cartoon memory is faulty. Popeye used to say I can't stands no more rather than stans. Sounds plausible, but I always thought he slurred stans.

It's a good thing I'm a critically acclaimed financial blogger rather than a critically aclaimed linguist with a specialty in cartoon speech because I stands corrected after checking wikipedia.

I Can't Stans No More

Popeye had it right when he used to say " I can't stans no more" and then light into Bluto. He'd be pushed to the brink and then explode. Crusty has been pushed to the brink by the stupid financial press.

I can't stans no more talk about needing a rebound in housing and new home construction. It's idiotic to hope for or expect that they work together. They pull at opposite directions. The last thing America needs is a rebound in new home construction. Now, contractors and construction workers may need a rebound in new construction, but underwater homeowners sure don't. They need a reduction in supply and you don't achieve that by building new homes [the same rant applies to strip malls and commercial flex space].

Years of over building, over speculating, and over leveraging got us into our present situation and the sooner we stop adding to supply the better. We may stop adding to supply sooner if the financial media begins to understand the situation and ceases lamenting the poor new home statistics. What's good for Lennar and Dr Horton isn't good for American home owners.

Home prices aren't going to rise, in over built parts of the country, until those parts are no longer over built. Simple! At present, in process foreclosures, vacancies, and shadow inventory remain excessive. A better economy and population growth will help. So will better reporting and conservative lending.

Since government's pump priming hasn't helped and builders continue to build, what else may be a possible solution to static home prices? It's not an original thought, but the following makes sense. We currently give green cards to immigrants that follow the rules and come to American with substantial cash to open a business. The concept isn't new. If we want to jump start home pricing we need to stimulate purchasing from new buyers. Let's expand our current program that accelerates green card ownership if the immigrant not only opens the business, but also buys a home. Greatly expand the requirements for cash invested in the country and value of the home; and most of all, the number of new, qualifying immigrants we will allow. Our housing overhang and price problems will start to mend as supply contracts.

If we can stans no more we need to quit lamenting poor new home construction until supply recedes and we should consider expanding our immigration pool as a means of reducing supply.