Friday's Bear Alert - 2016-02-12

There's always a bear market somewhere, and bears eat well.

    My last Bear Alert for this week is HR.  This may be heading into a bounce but it has broken its upward trend.  Like all the REITs I've discussed this week, and there are many more like it, it has high multiples:

    Beyond that, they have a debt-to-equity greater than one, and the EPS while expect to rise this year, is expected to fall next year, and it still trades at a P/E multiple of over 50.

The analyst target price is now lower than the current trading price.

So let's take a look at the chart:

    As you can see from here, the price has broken below the daily MA50 and has closed below it for the last 3 days.  Now this changed in after hours trading yesterday with some sizable purchases:

    There was more volume after hours than there was the rest of the day, which wasn't small either.  This might be a short seller covering, or a bull going VERY long.  The thing is, when I did some Fibonacci work on this I don't see the bottom happening until next Friday, and the overall market trends are likely to weigh on this.

    I'm seeing a price range of $26.92 - $26.97 by February 19th.  After that I expect to see a rally that but strong resistance at that Daily MA50, and certainly at the weekly MA10 (below) as it has broken its upward trend bottom.

    Good luck with your own paper trades.  I'll have to finish my special post on NIRP this weekend, but you can trust that it will be a worthwhile read.

Disclaimer: This blog is for informational purposes only.  I may or may not have positions, long or short, in any stock or security mentioned anywhere on this site or elsewhere at any time.  It is the sole responsibility of the reader to interpret the contents here, and to seek the advice of a qualified financial professional before engaging in any trade.

Thursday's Bear Alert - 2015-02-11

(** UPDATED - See Bottom **)
(** UPDATE - 2/12/2016 - See Bottom**)

My Bear Alert for today is Realty Income Inc (O - NYSE).  I can't call it a bad company, at least not yet.  But it still trades at a high premium.

P/E = 51.62
Forward P/E = 53.07
PEG = 11.39
P/Sales = 14.08

I'm going to save the compelling piece for last, the 2 things that made it today's alert.  With a market of Fed tightening, there's no way I can see that multiples like this will be sustainable.  don't kid yourself, Janet NEEDS to tighten and very soon (more on that in my special post later today).  The PEG ratio says that by this time next year the earnings will be 453% higher than what they are today.  How?

Do they expect to raise rents by that much? Will they be able to accumulate that much more realty in that time while paying out at least 90% of taxable earnings as dividends.

Call me a Descartian skeptic, but I'm not buying these share prices.  Assume you bought shares today.  If you took your portion of the sales alone as cash, it wold take 14 years to get your money back.  To me, that's priced for perfection.

So here are the two reasons it's on today's alert:

1: O is trading at it's all time highs, in a market that shuns high multiples, with looming bankruptcies in the oil market, and credit stress around the globe - risking bank failures, and economic slow-downs in many countries.

2: (The most compelling item) - The PRICE TO CASH Ratio is nearly ONE THOUSAND NINE HUNDRED AND NINETY SEVEN (Share Price = 1997 * CASH).  It almost seems ironic, no?  If there are problems, there isn't enough liquidity to help.

While I haven't looked over the balance sheet, there are plenty of reasons for this to be a short term paper-swing as a short.


As always, this blog is about PAPER TRADING, so don't go throwing your money into any investment long or short without doing your own homework and Due Diligence.

UPDATE (2/11/2016):
I just looked through last night's reported balance sheet, and need to uupdate a few pieces of information:

1) The Price to Cash ratio now looks to be only about 345 rather than the 1997 from prior to their earnings report.

2) The debt of the company has come down and the net shareholders' equity has increased by just over $900M from last year.

This certainly looks to be a well managed company, with growth - just like Netflix (NFLX).  Netflix just expanded to 130 new countries versus 3-5 expected.  Take a look at how the market reacted to their price multiples.  

So, the question is: Did last night's earnings report by O changes my bearish thesis?

My answer is:  No.  My bearish thesis is only short term.  They are trading at a peak with high multiples in a market that is spurning such numbers.  O is Oversold.  So for a short term swing, I would paper-trade the short sell or Put options.

***********************************
UPDATE (2/11/2016):

Right now the Feb19 $60 Puts are trading at about $0.50.

Now look at this WEEKLY chart:

It looks like EVERY TIME it jumps like this for a full week, the next week is a STUNNING AND PRECIPITOUS TUMULT.  And it tends to go for WEEKS afterward.  

I'd say to set your paper-trade RIGHT NOW.  You could try it as a short, or your could paper-trade the PUT options.

Have a great long weekend everyone!

Wednesday Bear Alert - 2016-02-10

There's always a BEAR market somewhere, and I'm here to help you find it.  OK, I'm chiding Jim Cramer a little, but I do appreciate the hard work that he and his most excellent team does in finding good companies and opportunities for the investing public.  But moreover his explaining how these things work better that anyone can be expected.  Hats off to you, Jim.  You're a gentleman and a scholar.

EDIT:  I was terribly remiss!  HAPPY BIRTHDAY JIM CRAMER ! ! !

Bear Alert:

    UDR make look like a bounce play but wait a little and it will fall again.  This thing trades with a P/E multiple of over 90, a Forward P/E of almost 90, a PEG ratio of over 12, and ten times their sales.  But what struck me about THIS REIT is that it is trading at over SIX THOUSAND TIMES ITS CASH.

  That's what I'm seeing.  They just reported on Feb 2, 2016 and their Price to Cash ratio is 6735.93 as I'm reading it off of Finviz.  Now, no one keeps perfect records all the time, but it shocked me seeing this and then that they have a Dividend payout ratio of 120%.  Their Price to Free Cash Flow ratio is 621.  Their Long Term Debt to Equity ratio is 1.24 which seems a bit high given that this is a residential REIT.

    To know more about REITs, I suggest reading a little here.  If this is a Mortgage REIT they may be holding direct mortgages, or they could be holding mortgage-backed securities.  Why is proverbial bell ringing?  I suppose I don't need to tell you that aside from the government, we really don't know where all that debt from 2008 went.  People are flocking to rental units according to some recent news reports and the new home purchases are being made by the wealthy.  Let's hope we don't see a return to sub-prime mortgages, but not all of those ever really got resolved and due to a change in bankruptcy laws in 2005, there was a very sudden spike and then plummet in bankruptcy rates in the US.

    As we can see, even from corporate filings, the rates in the first quarter of 2006 dropped to all time lows, but that didn't mean that there weren't problems as we can see the sudden rise in filings immediately thereafter and leading right into the housing collapse.  Because the bankruptcy laws changed to favor indenture over relief (made it much harder to liquidate, and reorganization left far more debt on the debtor after the bankruptcy than before the change, people and businesses started walking away from their debts.  If we see a return to that, these REITs will see a very sudden drop in rents.

    So all this begs the question, why are REITs trading at such high multiples.  I have nothing against the business model.  In fact I think it's a great way to structure it, but the premiums being paid today represent a terrible risk in my opinion.

    As for UDR's chart, they've broken below their trend.  The daily chart shows a possible bounce materializing, but I think this may be short lived.

    So far, I don't see it as a broken company so much as an over-priced stock.  You might paper-trade the bounce for a little gain, but one bad news announcement could trash that trade.  I wouldn't swing trade (hold over night) UDR - not even a paper trade.

    I plan to release a special post, in addition to my theme this week, about the new NIRP environment we find ourselves in.  Warning: it won't be pretty.

Disclaimer: This blog is for informational purposes only.  I may or may not have positions, long or short, in any stock or security mentioned anywhere on this site or elsewhere at any time.  It is the sole responsibility of the reader to interpret the contents here, and to seek the advice of a qualified financial professional before engaging in any trade.

Tuesday's Bear Alert

(** UPDATE - 2/12/2016 - See Bottom **)

In keeping with this week's theme, REITs, here's my next Bear Alert:

The markets are becoming ever-more skeptical of high ratio stocks.  Just look at the tech sector and see the carnage in the FANG stocks (FB, AMZN, NFLX, GOOGL).  These are good companies and they are well run, but their share price has become to bloated for conditions where interest rates are tightening and global economies are slowing.  But one sector has been bucking this trend, or has it?

The financial sector has a large number of companies who are trading at very high multiples.  That was the basic gist of my last post.  One particular multiple I'm going to focus on today, because I think it NEEDS saying (no one publishes this ratio outright).  The ratio I'm using is the Dividend to Sales ratio.  Yep.  A company can only spend as much as it takes in, right?

I'm just a humble engineer, not a financial guru of Wall Street, so perhaps I'm just not understanding all the financial slight-of-hand at play here and perhaps there is a perfectly good explanation for what I found...

BUT...

I found ONE company that can seem to mystically pay out more in DIVIDENDS than it makes in SALES.  How is that even possible?  How do they pay their bills?  Salaries?  Nah!  Forget all that!

They're paying shareholders up to nearly 13% based on today's prices.  This company is trading at a P/E ratio of 123.27, a forward P/E of 57.07, holding a PEG ratio of 4.35, a Book/Sh of -7.29, Cash/Sh of 1.39 and pays a dividend of a whopping $2.40/share.

To me that sounds too good to be true.  SO, let's do a little math:
With a market capitalization of $2.78B and paying a dividend of 12.98% they're paying $360,844,000 in DIVIDEND annually.  They have SALES of $318,900,000 annually.  All this and with a NEGATIVE Book/Share ratio to boot.  Does the ghost of Arthur Anderson do their books?

While the Forward P/E may look a lot better than the current, do remember that future earnings are NEVER guaranteed.

So, who is this mysterious and miraculous company?  It's Communications Sales & Leasing, Inc. (CSAL [NASD]).

Let's take a look at a chart...
S H A L L    W E?

Here's a daily chart for the last year (they've only been trading publicly less than a year).

Aside from the obvious trend and the fact that every time a new moving average is introduced the stock gets hit like a glass punching bag, The missing data from the beginning of July seems to be a glitch in E-Trade Pro as FinViz has daily data from that time frame.  

Today, however, I'm concerned that the dividend to sales ratio is telling us something disturbing.  There are other REITs with high ratios (more than 0.3) but this is the ONLY company I've ever seen so far with a ratio greater than 1 (1.13 to be specific).

If this is something you're paper-trading as a long, your might want to shorten-up your bet. The 200-Day SMA has just recently been introduced and in keeping with past instances, it's shattering to all new lows again.

If you're trading or investing in this thing for real, you should seek the advice of a licensed financial professional immediately and make sure your trade or investment is really safe.  To me, the volume bars in that chart say a lot right at the end there (in the last week).

Update:  After looking at CSAL's Balance Sheet and Income Statement, it looks like they have 10-11 years before the assets are worth zero (rough calc).  With being a REIT, they have to pay out 90% of net income as dividends, so raising cash to replace assets may be problematic. They can only hope their assets will last longer than their expected life.  If their rents are Bonded Leases it would offset costs for repair and replacement to the tenants, but I still find the price multiples particularly unsavory.

Disclaimer: This blog is for informational purposes only.  I may or may not have positions, long or short, in any stock or security mentioned anywhere on this site or elsewhere at any time.  It is the sole responsibility of the reader to interpret the contents here, and to seek the advice of a qualified financial professional before engaging in any trade.

UPDATE (2/12/2016):
Some data on this company has been updated on FinViz this week.  The Earnings for the trailing 12 months has been updated to reflect $0.15/sh as opposed to $0.01/sh from the date this post was published.  This still reflects a 100+ P/E multiple and the dividend still exceeds the quoted sales.

Here's the updated chart with daily Heikin-Ashi candles as of the end of Friday 2/12/2016.

Have a safe and happy long weekend everyone.

This Week's Bear Alert and Focus - REITs.

I think the next segment to get it from the Bear Market, after Tech, will be REITs.  I've been looking over the fundamentals and to say the least, it's shocking to me.  I'm not a financial professional, I'm an engineer, but when there are several companies in a sector who are paying 1.14, 1.45, 3.21, 3.00, 6.36, 8.5, and 16 (that's right SIXTEEN) times earnings in dividends this simply cannot be ignored.

 The P/E ratios for the companies I've identified range from over 32 to OVER 1,600.  Their forward P/E ratios stretch well into the hundreds.  Several of them have recent insider selling happening, and many have very high institutional ownership.  I have to wonder... How many of these REITs are bundled into ETF and ETN products?  I think that when the music stops, which may be very soon, we'll find out that the properties in these REITs may very well be over-valued and the share prices will fall like comets.

I'm going to post at least one company each day this week to highlight what I see as trash in this sector - not because the company is necessarily bad, but because the stock is trading at WAY TOO HIGH a price.  If you're paper-trading these stocks, you might want to get out, short it, or just steer clear.

I'll start with REXR.
BEAR ALERT

    Let's just start with the fact that REXR is trading at a 1,690 P/E ratio.  They pay a healthy 3.23% dividend so they're good, right?  But that dividend is 34% of their sales which might be OK for a REIT, but it's 54 times their earnings.  FIFTY FOUR!

    REXR is currently trading at the top of it's channel at $16.74 and is just off of its all time high.  Not bad for a company with a book value of $12.30 per share.

With it being an industrial REIT and the World's economies slowing, how well will the property valuations hold up?  Will they still be able to get income from their tenants if we go into a recession?

    REXR may or may not be a well managed company, but with market sentiment being what it is today the valuation seems a bit too high.  I would paper-trade this as a short sell or with buying Put options. If I bought 10 of the $17.50 Puts expiring on Feb 19th for $0.81 a piece, I'm taking rather low risk, but I would gain $1000 for every dollar it drops below $16.69 at expiration or I could sell those puts when I reach a 100% profit ($1.62 per contract - doubling my money).  This is better than I could do by shorting but the position is smaller than what I would have by shorting the stock.  It's a trade-off.

    For those not familiar with options pricing, the contract price is multiplied by the number of shares in the contract (100) so the REAL price per contract is 100 times the quoted price.  10 contracts represents a lever of 1,000 shares.


Happy trading everyone.

2016 January Non-Farm Payroll Report

The Non-Farm Payroll numbers are out.  We added 151,000 jobs in January.  Unemployment is at 4.9%.  So what does this report tell us?

The good news is that there will be competition for workers and increases in minimum wage will add to many companies' earnings.  The U.S, economy is strong and growing.

The bad news is that this means that the Fed will most likely raise rates, which seems fine on the face of it, but the debt markets will likely get roiled over it.  Another rise in rates will stress the high-yield bond markets first as they are weighed with risky debt.  This will spread through oil and as we all know, as oil goes so does the market - at least for now.  Once the MLPs start cutting dividends we'll see a crash in oil stock prices, and this will drag indices down with them.

Then come the bankruptcies.  They'll start as Chapter 11 filings because the laws became much more creditor-friendly and debtor-onerous in 2005 when the laws changed.  Some companies will restructure and come out relatively OK, but most share holders will get hosed in the deal, if not completely washed out.  Then comes the really bad news when Chapter 11 restructurings get converted to Chapter 7 liquidations.  THEN we will see what those assets are REALLY worth.

We're probably 6 months from the start of the worst of this, but chapter 11 restructurings have already been going on.  If the courts get flooded all at once, there won't be enough buyers for assets at the current valuations to be a significant part of any restructuring and creditors will get skittish about taking equity to replace debt in a market where wells are being capped to help stop the crash in oil prices.

Those predictions of $10 oil may not be so far off the mark.  We may not get all the way there, but we're hardly done falling.

What we don't know yet, and what we won't know until chapter 7 filings spike, is how bad the write-offs will be, and if/how far they'll spread to other business debt.

Don't be Fooled - Oil Will Drop Again

The two-day rally we've been seeing looks suspiciously like a Wall Street Rope-A-Dope.  Someone cashed in a $600M position in DWTI (3X Inverse ETN for Oil).  Essentially, this Exchange Traded Note uses Put options to short the market and profit by more than the proportional moves in the actual securities it's trading.  This is one of those sources of the "Wag the Dog" effect we are seeing in our markets today, and is a huge source of volatility as the leverage is extreme.

An article from Reuters cites this transaction as a reason for the apparent counter-intuitive rally in oil Wednesday and Thursday.  The fact of the matter is that supply is up roughly eight million barrels, and this will affect prices negatively.   While the Dow Jones partied today, the DWTI partied as well, and that's not good for the bulls tomorrow.

If we look at the SDOW (3X Inverse ETF tracking the DJIA) we see the pullback based on the rally in the Dow.  Today, that pullback slowed a little.

Now look at the DWTI.  Sure, it pulled back on Wednesday, and the short covering I'm sure had a lot to do with sparking the rally but today's accumulation is going to show up in tomorrow's performance.  There will be a lot more short positions in oil tomorrow and this will stunt the rally.

The thing that bothers me, and I even took a defensive stance in my own 401k over it, is this:

The tops in the Dow's chart are not making a bullish long term pattern, but the lows and the averages are telling me that this is likely to be a protracted trend rather than the sharp but quick painful ripping off of a band-aid.  This is more of a sprained ankle or worse.  The biggest problem is that we have people talking about "buying opportunities" just a day or two after cautioning people to, "sell the rallies."  I do hope my readers a PAPER TRADING right now because this is going to get ugly.

Reasons?

1) European banks are under funded (liquidity is seriously low).

2) Collateralized debt has valuations that may be suspect (A spike in BK filings may reveal far lower asset values than we're assuming in Oil as well as other sectors like Commercial Retail who seem to think they'll spin off their properties into REITs.  Really?

3) A lot of cash left the market over the last year and it seems to be appearing in ETFs.

4) ETFs loaded full of High Yield Bonds will have great troubles if the banks in Europe become ground zero of the next Lehman Brothers Event (like the TNT that sets off the plutonium in the Fat Man bomb).

5) I still wonder where all the CDOs went from 2008.  ??

For anyone still hanging on to HOPE in this rally, I'll leave you with this image:

This is the Daily plot of the DJIA over the last 100 trading days.  Those last two candles are looking pretty hopeful, but I'm not putting money on it - not even a paper-trade.

Disclaimer: This blog is for informational purposes only.  I may or may not have positions, long or short, in any stock or security mentioned anywhere on this site or elsewhere at any time.  It is the sole responsibility of the reader to interpret the contents here, and to seek the advice of a qualified financial professional before engaging in any trade.

Update on KITE Bear Alert and Others

KITE:
I had previously alerted that KITE was due for a fall.  Here's how that panned out:

On November 18, I published a post about turning bear on these markets.  I found a particularly frothy stock in a company called Kite Pharma (KITE).  You can read the details here.

So how did this call turn out?

Had I shorted this at $87.55 at the open on Thursday Nov 19, 2015 (Paper Trade), then I could buy to cover today at $44.98 for a profit of 51% or $42.57 per share (Net Profit $4,257 per Put Contract minus Premium).  The main problem was the over-valuation of the stock with no real sales and a looming possible rate hike from the Fed which did come to pass.

CMG:
On Twitter, I had warned in a tweet on Friday November 13 that Chipotle Mexican Grill (CMG), based on weekly candles, had fallen firmly into bear territory.  I doubted myself over the following days and weeks, but I did note that $470 was likely support and could go as low as $430.  I even pointed out some suspicious behaviors in the trading of that stock here, and here.  I don't know if any of that is part of the newly expanded criminal investigation, but I'll be waiting to see.

Here's what's happened since:

Until they resolve their issues, CMG is for me a toxic stock, and I plan to wait until I know more about what they're doing to prevent illness (beyond blanching onions or sending tomatoes and onions to a central location for chopping and processing).  I would HIGHLY recommend to the company to adopt the use of the Process Failure Modes and Effects Analysis (PFMEA) as a tool for evaluating rick in their process as a restaurant chain.  One cannot inspect quality into any product.  This is why we have "Process Control."  The PFMEA and a detailed Process Control Plan are used together to insure the quality of products in many industries including the manufacture of automobiles.  The Automotive Industry Action Group (AIAG) has training materials and classes for this.  I used to write  and update these things (they are living documents) for manufacturing processes on a daily basis when I was a manufacturing engineer some years ago.  I'd even be happy to help them learn how to use this tool assess risk and get ahead of future outbreaks.  Even NASA uses the FMEA.

Possible New Bear Alert (Watch):
UPS:

UPS is setting up as a POSSIBLE Evening Star formation.  This is a three-candle pattern and today is the third day.  Depending on how today goes, UPS could be in for a big drop.  They have significant debt both long term and near term, and the Fed seems to be happily marching on to auto-mechanical rate-hikes.  I expect that this is due to them seeing the data that we may be headed for a REAL recession and they desperately need to reload their toolbox before it REALLY hits.  With Amazon stating that they plan to have their own fleet of trucks, and new Brick & Mortar stores, will UPS get cut out of their own future?


"New" Alert:
S&P 500:

While I've tweeted about the major stock indices last summer and recently, I think I NEED to make this Bear Alert (although a little late).  The markets are overdue for a significant correction; we all know that.  If you haven't re-balanced your paper-portfolio (recall that this blog is about paper-trading), you should do that as soon as possible.  I told Jim Cramer in a tweet on September 1 that the Dow Jones could hit as low as $12,500 before this pullback is over.

This 25-year chart of the S&P 500 (SPX) using monthly candles shows a worrying pattern for bulls:

Looking at this chart, we can see that it's time for that full pull back.  There are 3 price-confluence zones illustrated:
1) $1,760 - $1,765
2) $1,450 - $1,462
3) $1,034 - $1,039

This makes cash look like an appealing position for the volatility-averse.

There are geopolitical concerns well discussed in the media (Saudi & Iranian oil surplus as well as US oil glut and now international selling of US oil, High Yield Debt in Oil, Russian aggression, Chinese markets slowing, Russian and Chinese state-sponsored data security breaches, North Korea detonating their "Q-Bomb" (sic - RE: The Mouse that Roared), European Debt in the banking industry, currency deflation around the World while the US Dollar strengthens perhaps too much, too quickly, ...   and the list goes on).

All this leads me to ask some questions (ESPECIALLY given the release of the movie "The Big Short" which I HIGHLY RECOMMEND seeing):

1) What ever happened to all that debt from 2008 that was crushing our economy?
2) In 2013 CDOs came back on the scene in banking; does anyone remember MORAL HAZARD?
3) If CDOs were the last way to launder risk, what NEW instruments have these financial engineers devised?
4) Have CDOs found their way to foreign shores?  If so, can they re-infect our markets?
5) With the emergence and popularity of ETFs and Inverse ETFs, is there something lurking?
6) Are World currencies headed toward a Global-Weimar-Republic?  Could DEFLATION actually be ... GOOD???

I'm going to have a string of posts over the coming weeks discussing what I'm finding about these questions and how this might impact your paper-trading.

Look for it.


Disclaimer: This blog is for informational purposes only.  I may or may not have positions, long or short, in any stock or security mentioned anywhere on this site or elsewhere at any time.  It is the sole responsibility of the reader to interpret the contents here, and to seek the advice of a qualified financial professional before engaging in any trade.