Saturday, March 28, 2009

Are We Headed For A Credit Card Meltdown?

Everybody likes to point their fingers at the government, or blame the banks for the economic mess that we currently find ourselves in, but maybe we as consumers have helped facilitate things more than most of us like to admit. Everybody likes to accuse the banks of being greedy, but ultimately they are in the business to make money for themselves and their shareholders, not to be charitable to the general public. We are all grown adults, and those of us that have made poor financial choices should take responsibility for them, learn from them, and move on.

The current financial crisis stems in part from people over extending themselves in the real estate market, obtaining mortgages that they couldn't really afford to pay, for assets that were declining in value. Not to mention the individuals using their property as an ATM to fund their indulgent lifestyles. The rapidly depreciating real estate market led to many individuals being in way over their heads, leading to foreclosures, short sales and the like. Many of us want to blame the banks, but they didn't force anyone to buy a house they couldn't really afford, they didn't force anyone to borrow beyond what they could feasibly pay back based on their incomes, they didn't force anyone to take equity out of the homes to spend on luxuries they didn't need, they simply helped facilitate what the consumer demanded.

Now don't get me wrong, I am not supporting some of the banks actions - they were irresponsible and reckless at times. I believe that if we knew more of what goes on behind the scenes and off the balance sheets at many banks, then the markets would fall much more than we have already witnessed, but I do think we need to take part of the responsibility.

Now we are left with a situation where those of us that were responsible with our finances, and made "smart" choices, are the people having to bail out the irresponsible and greedy! The scariest part of the situation is where we are headed from here.

The government and the media seem to be painting an overly optimistic picture of the current economic environment, saying that the worst is over and that the Federal Reserve has everything under control. I don't think we could be further from the truth, as two further bubbles are readying themselves to pop. I have already touched on the treasury bubble in a previous post, so I will not discuss it here, but the other bubble that is looming large is the credit card bubble.

Credit card companies have been seen to be raising interest rates, cutting credit lines, and closing inactive accounts. This serves to reduce consumer spending and confidence, and is a self-feeding cycle as it leads to reduced FICO scores, leading to reduced access to credit which in turn causes a further reduction in spending, hurting the economy further in the process.

The worrying thing is that with the level of unemployment still rising, we are seeing more and more people using credit just to survive and make essential purchases. People have already cut back significantly on large purchases such as houses, cars and vacations, they have also cut back on luxuries, electronics and the like. People are now relying on credit for essential, day to day purchases such as food, clothing and energy. Now, I don't know about you but I find this scary! Credit card companies have been reporting increasing numbers of delinquencies, and I fear the worst is still to come.

The Federal Reserve already has it's hands full with the banks, auto makers, insurance companies and the like, it cannot start bailing out individuals too! With rising unemployment, and reduced access to credit, the economy is close to a tipping point where the whole house of cards could come down at any minute.

Disclosure - At the time of writing the author held shares in
ProShares Ultrashort 20+ Year Treasury ETF (TBT) and Direxion Financial Bear 3X ETF (FAZ).

Sunday, March 22, 2009

Musings About Treasuries - Can We Make Sense Of Them Anymore?

A term which you are going to hear a lot in the coming weeks is "quantitative easing" which, put very simply, refers to the practice of central banks creating money. On March 6th, The Bank of England announced £150bn of quantitative easing, increasing the risk of inflation in the UK and now the US is following suit. The FOMC announced this week that it would purchase $300 billion worth of longer term US treasuries over the next six months. Unsurprisingly, this announcement caused the US dollar (USD) to fall, particularly against the euro (EUR), and the price of gold to jump.

The Chinese government has the world's largest holding of US treasuries and has recently openly expressed their discontent over the devaluing nature of the US government's activities toward their investment. If they were to fear that the value of their holdings was going to decline, they would most likely be obliged to sell them off and salvage whatever value they can before the market for US treasuries crashes. Which leads me to an interesting supposition, that the Federal Reserve is not going to be buying freshly created treasuries, which would have a strong inflationary effect, but in actual fact is going to buying existing treasuries from China! This in turn carries with it the implication that the Chinese will not be purchasing any more new treasuries from the US in the near future, increasing speculation that the Federal Reserve is set on devaluing the US dollar (USD), thus inflating asset values.

Of course, there are deeper implications to this as this effectively gives China the chance to increase its share of the global market and continue with its incredible economic growth. The credibility and influence of the US government over China is weakening, and attempts to coerce China into allowing the yuan (CNY) to appreciate will likely fall on deaf ears. There is even the scary possibility that China may decide to devalue the yuan (CNY) as the US dollar (USD) begins to slide. This will effectively bolster the Chinese economy and increase global market share. Of course, in practice it cannot be that simple, as the US government can always retaliate by increasing import taxes on Chinese goods and before you know it, the global depression is worse than it was to start with!

I believe that the discussion of the Chinese yuan's (CNY) valuation is going to be high on everyone's agendas in the coming weeks, particularly following the FOMC's move to devalue the US dollar (USD). Added to which we are likely to see some real fireworks in the treasury market. The outrage following the AIG bonus scandal will soon pale into insignificance in the light of more important events with much more dire consequences. I don't for one second buy into the heavily touted deflation banter and think that we're in for steady paced inflation in the upcoming months.

I expect continuing increases in the price of oil, gold and other commodities, and I ultimately fear a collapse in the treasury market. The collapse when it comes leaves me with the fear in the back of my mind that there is a strong probability that the US will have to default on its debts, as they cannot keep on printing money indefinitely. I do anticipate that the eurozone will crash first, which may somehow enable the US to crawl from the wreckage intact, but either way I don't believe the ride is close to being over.

Disclosure: At the time of writing the author held shares in ProShares Ultrashort 20+ Year Treasury ETF (TBT).

How To Win Friends & Influence People - Dale Carnegie

Originally published back in 1937, How To Win Friends & Influence People by Dale Carnegie is a book which, despite its age, retains its usefulness today. The study of human nature is an essential element in finding success in life. There will always be someone smarter than you, stronger than you, faster than you, better at this skill or that one, but that should not halt your success. If you can learn to express ideas in a way that fosters enthusiasm, or know how to assume leadership in a sincere way, then you will go far.

Dale Carnegie was a firm believer in soft skills which could use a revival in this day and age, such as making people feel appreciated, being a good listener, smiling, and remembering people names. I hope these things don't sound too trivial to you, because remembering to do these little things right could be the difference between winning or losing a promotion, a big sale or a contract. This is a very insightful book that provides techniques you can use to get to know the people you interact with on a daily basis. For some people, being open, friendly and honest doesn't necessarily come naturally, but there is more to it than that, it's about identifying what makes a person tick and then using that knowledge to communicate more effectively with them.

The book has gone on to become an international bestseller, and a book that in my opinion should be an essential read for just about everyone. Whatever your position in life, there is something in there for you - unless you are a total recluse and never have to interact with another person for the rest of your life, you will no doubt learn something from this book! I highly recommend it.

Sunday, March 15, 2009

Reasons To Short Stocks

I was recently asked by a Mostly Money Musings reader about reasons that I would look for in order to consider shorting a stock. Rather than just post a comment reply, I thought this raised an interesting thought for a regular posting.

Put simply, when an investor goes long on an investment, it means they have bought a stock believing that its price will rise in the future. Conversely, when an investor goes short, they are anticipating a decrease in the share price.

Shorting is the process of borrowing a security, then selling it with the belief that it will fall in value so you can buy it back at a lower price before returning it to its rightful owner. The security will be loaned to you by your brokerage, either from their own inventory or from another client. It will be sold and the proceeds credited to your account, and after a time you will be required to buy the shares back and return them. A lot of the time, you can hold a short for as long as you want. However, you can be forced to cover if the lender wants the stock back for any reason.

The key difference between going long and going short is the potential loss in each case. If you go long, your potential for loss is limited solely to the money invested in the stock should its value fall to zero. If you go short, your potential for loss is unlimited, since the price of a security can (in theory at least) rise forever. In practice, this does not happen, however a shorted stock can easily rise enough to wipe somebody out! I'm sure that many short sellers lost their shirts during the technology stock bubble.

So, why short any stocks at all? The most common reason to short is to profit from an overvalued stock or market, although some will use shorting as a means of hedging - to protect their long positions.

What should you look for when considering a short sale? I believe that the most important factor to look at is deteriorating fundamentals. Ultimately, it is strong fundamentals that cause a stock price to rise, as they are the foundation of a company or market, conversely deteriorating fundamentals damage the foundations of the company or market.

In particular, you may wish to consider factors such as rising debts, rising inventories, falling sales and revenues, over-valuation. You may also wish to look for outdated technologies, companies that fail to keep up with the times. You may wish to consider the effects of changes in management or keep a watch on the amount of insider ownership.

In addition to looking at deteriorating fundamentals, it also pays to look at technical factors too, as they offer a clue that all the buyers have bought and there is no-one left to hold up the security. In this case, a price drop would be expected, and a short sale could be possible.

Disclosure: At the time of writing the author did not hold any short positions.

Wednesday, March 11, 2009

China Fire & Security Group - CFSG

China Fire & Security Group (CFSG) supplies industrial fire safety products and systems to companies in the iron and steel, power and petrochemical industries in China. The company today announced fourth quarter results which beat analyst estimations, showing increased revenue and earnings. The company is in a strong financial position with no debt and a healthy cash flow.

In the past, China has not been known for its strong track record in the arena of health and safety, but as the country continues to show tremendous growth, it makes sense that they will endeavor to protect their investments. Companies like China Fire & Security Group (CFSG) should flourish as a result. Interestingly, the company has a high insider ownership
and yet has almost a 10% short interest.

China Fire & Security Group (CFSG) has been on my watchlist for several months as it is in a strong position to benefit from any government infrastructure spending and stimulus efforts in China.

Disclosure: At the time of writing the author did not hold shares in China Fire & Security Group (CFSG).

80% Discount at

For those of you that like to eat, but missed your chance to get the certificates last month, you now have another chance. is offering $25 gift certificates for just $2. Just use the discount code:MENU when you go to check out. The offer runs until March 15th and the certificates are valid for a year once purchased.

Disclosure: At the time of writing the author still loves food!

Saturday, March 7, 2009

Ann Taylor Stores - ANN

Ann Taylor Stores (ANN), one of my short picks for 2009, reported a set of pretty appalling results yesterday, including a staggering loss of $6.66 per share. This hardly came as a surprise to me, as I feel the company caters mostly to the section of the population most affected by the current economic climate. It is significantly more expensive than a number of discount retailers, but it is also far from high-end fashion. I don't see things improving for the company for some time yet as people seem to have significantly less disposable income available at present. Investors greeted the news by sending the stock price down 38%!

Prior to these results, Ann Taylor Stores (ANN) was the only one of my short picks to have posted a stock price gain for the year, now all of the picks are in negative territory.

Disclosure: At the time of writing the author did not hold shares in Ann Taylor Stores (ANN).

Monday, March 2, 2009

AIG - A Money Pit

Ok, so I don't know about you but my head is spinning! Not only has American International Group (AIG) posted the worst quarterly results in the history of the stock market, but it has been rewarded with more government bailout money! The insurance group managed to lose an historic $61 billion in just three months, and has just been granted access to a further $30 billion from the US government.

It is a mystery to me that American International Group (AIG) can still be a publicly listed company, it is a mystery to me than any single individual would go anywhere near their shares, and it is a mystery to me how they didn't see this coming!

Only the government can provide insurance where private companies cannot - after all, they are the only ones with enough resources available. Essentially, American International Group (AIG) got into the business of insuring a significant amount of the world's financial system against the consequences of a global financial meltdown. The US government had to step in and bail them out because AIG was totally incapable of delivering on that insurance. Ultimately, American International Group's (AIG) business of selling credit default swaps was a huge scam, as there was no way they could ever pay out on them.

The total bailout for AIG so far is in the region of $170 billion, which blows my mind. The worst part of the whole thing is that, I very much doubt that that will be enough. With American International Group (AIG) so intertwined in the global economy, they pretty much have the US government held at gunpoint whenever they need more money because of the disasterous repercussions following potentially bankruptcy of the company. Simply put, the government cannot afford not to bail them out, which is a really scary thought! If AIG were to fail, then the entire global economy would end up in a lot of pain, and very very few individuals would not feel it in some way or another.

Disclosure: At the time of writing the author would not touch shares in American International Group (AIG) with someone else's barge pole.

Sunday, March 1, 2009

2009 - Ideas For The Year Performance Update

At the beginning of the year I made a list of picks and pans for the year which I planned to review at the end of each month. I started out posting further thoughts about some of the picks, but failed quite miserably to add much new stuff over the past month. I'll try to fix this over this next month! The purpose of this exercise is to provide ideas for your own research, some potential opportunities for 2009, as well as some companies I feel are best avoided. At this point I am just going for a brief overview, I may get into some more in depth analysis later in the year. I will focus on specific companies in this instance, although later in the year I may look in more depth at specific sectors, or the economy as a whole.

So here are the performances for 2009 to date.

My Long Picks for 2009, with 02/28/09 closing prices

Anadys Pharmaceuticals (ANDS) - $6.12 (+289.81%)
Quicksilver Gas Services LP (KGS) - $12.20 (+28.69%)
Natural Resources Partners LP (NRP) - $20.73 (+18.80%)
Urban Outfitters (URBN) - $16.64 (+11.08%)
Ecology & Environment (EEI) - $12.49 (+4.26%)
Dorchester Minerals LP (DMLP) - $16.31 (+2.77%)
Himax Technologies (HIMX) - $1.65 (+2.48%)
Highveld Steel and Vanadium (HSVLY) - $6.742 (-12.21%)
Chase Corporation (CCF) - $9.12 (-19.22%)
UFP Technologies (UFPT) - $4.10 (-22.50%)
Yanzhou Coal (YZC) - $5.68 (-24.47%)
Raven Industries (RAVN) - $18.18 (-24.56%)
Hugoton Royalty Trust (HGT) - $9.93 (-38.13%)
Versar, Inc. (VSR) - $2.44 (-40.78%)

A pretty dismal performance from my picks this month. Shares in Anadys Pharmaceuticals (ANDS) skyrocketed last month following the release of promising HCV data and have maintained a steady run. Highveld Steel and Vanadium (HSVLY) was the best performer of the month, although still sitting at a loss for 2009.

My Short Picks for 2009, with 02/28/09 closing prices

Ann Taylor Stores (ANN) - $6.58 (+30.56%)
Red Robin Gourmet Burgers (RRGB) - $14.21 (-15.57%)
Build-A-Bear Workshop (BBW) - $3.62 (-25.51%)
LaCrosse Footwear (BOOT) - $8.5185 (-31.74%)
Mercantile Bancorp (MBR) - $5.94 (-43.70%)
La-Z-Boy (LZB) - $0.90 (-58.53%)
Converted Organics (COIN) - $1.27 (-64.12%)
Office Depot (ODP) - $1.05 (-64.77%)
Bank of America (BAC) - $3.95 (-71.95%)
Citigroup (C) - $1.50 (-77.65%)
Circuit City (CCTYQ) - $0.007 (-94.62%) - Bankrupt
Smurfit Stone Container Corporation (SSCC) - $0.00 (-100%) - Bankrupt

Well, as a group my short picks worked out a whole lot better than the long picks. The banks in particular had a rough month, with Bank of America (BAC), Citigroup (C) and Mercantile Bancorp (MBR) all suffering big drops. The one jewel among the short picks is Ann Taylor Stores (ANN) which is up over 30% since the beginning of the year. In fact despite the economy, certain retailers seem to be holding up a lot better than most people expected.

Well, I will review the list again at the end of March to see how my picks and pans are performing. Until then, happy investing!

Disclosure: At the time of writing the author held shares in Highveld Steel and Vanadium (HSVLY), Himax Technologies (HIMX), Hugoton Royalty Trust (HGT), UFP Technologies (UFPT), and Versar, Inc. (VSR).