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.

My Retail Naughty & Nice Lists

Of late, I've had a very bearish view on the markets.  For the most part, I still do.  However, in the near term, I think the post-holiday earnings season will have some upside surprises as well as some well-deserved precipitous falls.  After reviewing some conference call transcripts, earnings reports, trends within those, and some personal observations, I think the wheat and the chaff will get distinctly separated in the next round.

Among retail, I think the following companies (by no means a complete list) will surprise to the upside in their next quarterly earnings reports (in no particular order):

Kohl's (KSS)
Macy's (M)
Target (TGT)
Walmart (WMT)
JC Penney (JCP)
Best Buy (BBY)

The following is my Naughty List.  These are companies late to the on-line migration game and poorly managed such that they are, in my opinion, in a free-fall.

Nordstrom (JWN)
Sears (SHLD)

I know there are lots of reports of Walmart and Target having lack-luster crowds, but the Target stores in West Michigan that I saw had full parking lots when I passed them.  Walmart seemed eerily quiet, but their online shopping site was so burdened with traffic that they had problems keeping it working properly.  That likely means that traffic merely shifted to on-line.  Given the history of Walmart on Black Fridays Past, I certainly understand the sentiment - great deals, but unruly crowds.  JC Penney is reporting better than average e-sales, and their stores in West Michigan appear plenty busy.  They's been turning their operations around for some time now and it's showing.  Even their on-line presence is easy to navigate and they offer the brands my family likes to buy.

I was actually shocked at how full the Macy's (M) parking lots were.  They were getting slammed at 10:00 Saturday morning, and Best Buy was almost equally busy.  Nordstrom Rack had an anemic showing at that same time with an all-but-baron parking lot.  The only parking lot more empty was our local Chipotle (CMG) who I don't think was open for business yet, but I typically find that Chipotle low on traffic (in all fairness - location is likely the issue there).  Nordstrom Rack near my home is typically a ghost town, and it seemed even lighter on "Small Business Saturday."  Ouch!

As for Nordstrom proper, nearly everything they offer is either cheaper elsewhere.  They didn't even discount the Fitbit (FIT) Surge that is $199.95 everywhere else on the net (WMT, TGT, KSS, AMZN, etc.).  It's full price ($249.95) at Nordstrom (JWN).  Their management says they've noticed a slowdown in sales and foresee a continuation in these trends.  As for what's working and what's not, they've, "got nothing to point to.  It's just foot traffic."  As to what led to the foot traffic slowdown, They admitted to not knowing why.

I have a few ideas.  They are bested by the likes of Macy's, JC Penney, L Brands, Hudson's Bay, and others.  For goodness sake, herroom.com is better equipped on line.  Listen to the Q&A session.

Sears has been on a downward slide for some time now.  A look at their online trend data compared to others, it's apparent that they're just not functioning toward an ongoing future.

While Kohl's is getting its footing in the e-commerce arena, they are VERY well managed.  I've noticed a general drop in foot-traffic over the years, but in looking at their financial data I can see that their management has done a great job at managing costs while still managing a competitive retail environment.

So those are my lists, naughty and nice.

Disclaimer:  I trade stocks and options so I may at any time have positions, long or short or equivalent, in any of the companies mentioned in this piece.