Bearish News

Below is a snapshot of CNBC from November 27, 1999. The Nasdaq closed at 3447 that Friday. We were still 3.5 months away from the March 10 peak of 5100, but remain 41% lower today.

Source: archive.org. You can go dig around Archive’s Wayback Machine, if you’re so inclined. Plug in an interesting URL and scan through archived pages. Share anything good with us.

There are countless tech-boom-era sites to explore. Imagine all the embarassing headlines to be cherry-picked. There might be a forgotten article titled “Dow to 350k” lurking out there, just waiting for long-due ridicule and scorn.

Citron Research (formerly StockLemon) offers some of the best short-research around. Their latest target is VistaPrint (VPRT). The company offers small biz printing services, and has seen solid growth. That part of the company appears to be on solid footing.

Their “Referral” division, which generates 44% of profits, is where Citron sees problems. It’s currently the target of 7 class-action lawsuits. And similar businesses have  recently attracted the attention of Senator David Rockefeller. CR explains:

The word “referral” sounds innocent enough, but in real terms, as a consumer, when you complete an online purchase, you are shown a button saying something like “Save $10 on your Next Purchase from this Company”.  Beware!  If you click, even accidentally, your full contact info, but worse, your credit card information, is sent on without your permission to a 3rd party company you haven’t given your permission to.  From that point, the debate rages about how many of these charges represent trickery, and how many more are simply fabricated without the consumer’s consent or knowledge.

They then preemptively counter the bull case, and blast Vistapoint’s lofty valuation:

Vistaprint’s cheerleaders will have you believe referral is not a problem because even if it goes away, it only represents a bit more than 5% of revenue last quarter. What they don’t tell you is that with the margin it carries, this type of business, which according to the company’s own disclosures is generated with zero operational costs, represents close to 44% of Vistaprint’s net income.  If you compare the past two quarters you will see that the company is becoming increasingly dependent on that income.  Vistaprint’s already aggressive 36.5 PE balloons to an unsupportable 64.75 for its non-referral business.

Citron Research has a solid track record. VPRT is down about 5% today as of posting, and that’s not likely a coincidence. The last thing a small/mid-cap company wants is coverage from Citron. Their research has infuriated dozens of CEOs, and proved to be very valuable in some cases for those on the short side. You should always assume they’re talking their book, of course. And remember, this market is too bizzarre to short anything unless you’re a pro.

Disclosure: No position in any companies mentioned.
This is NOT investment advice. Always consult an investment professional when making financial decisions.

Plan accordingly. See last month’s post “Watch Out Bears, Inflation and Bailouts Loom”. I exited most shorts in March, and April hit most other stops. The shorts I still do hold burnt me like a scalded chimp, as Jeff Macke would say. But good longs have absorbed that damage. As I wrote then:

That’s the problem with being short this market, it’s completely dependent on the whims of Geithner, Bernanke, and whoever else is whispering in Obama’s ear. Some might even describe the situation as akin to stabbing Adam Smith’s invisible hand with a rusty screw-driver. But investors have to deal the cards we’re dealt, so we’ll move on…

I dipped my toe back into short funds last Friday, as noted here. Fundamentally the market is extremely overbought and overvalued. We all (consumers, gov, corporations) are bloated with debt. That has to be resolved, eventually. And there will be some serious pain. There are really only two ways to take care of this debt: higher taxes (and less consumer spending), or massive inflation.

Inflation is much easier to pull off politically. Nobody likes sky-high taxes. Inflation is makeup for a crap economy. That’s why I’ve been bullish on gold/silver. The inflation argument has thoroughly won me over.

On that note, I bought some Goldcorp (GG) today. Balance sheet and valuation look good, and Bill Fleckenstein likes it. I have a feeling there’s a lot more Quantitative Easing coming, and gold is arguably best hedge available. Silver’s good too, and platinum, and palladium (though the last two are exposed to car manufacturing).

If Geithner gets canned, watch out below

#1 – If Geithner gets fired and replaced by a realist, or someone who understands the dangers of moral hazards, watch out below equities. Sometimes it’s necessary to take pain in the short term to have an honest long-term market. Right now our economy is corrupt and skewed. For now, Obama has been taken in by the bankers. He’s supporting their destructive mission. But if his belief in their crooked ways falters, and I think it might, watch out below.

Standard and Poors is dedicated to their clients. No one can deny them that. I’m talking about the clients who pay them for ratings and services, not guys like me who indirectly pay for their worthless research via Etrade, of course.

S&P has reiterated their “Strong Buy” position on Simon Property Group (SPG) no less than 8 times in 6 weeks. And even though Simon has $8.4 billion in debt maturing by 2012, according to Bloomberg, S&P isn’t worried. This is their deep thinking on the matter:

Although the company has sizeable debt maturing, we think recent equity and debt offerings enhance SPG’s liquidity.

ZING! Nothing about maturity schedules, increased costs of borrowing, plummeting property values, property bankruptcies, etc. They are either morons, lazy, or in the pocket of Simon. I don’t know which, and have no proof of any impropriety.

But Simon has $19b of debt on-balance sheet, and another $6b or so off-sheet. And they act like these guys have a strong balance sheet?

Even if you look at competitors, the “relatively strong balance sheet” doesn’t hold up at all (maybe if you compare them to GGP, but that’s it). Guys like Realty Income Trust (O) have much much better balance sheets. That’s why I’m long O against my Simon short. O has debt/equity of .86x and pays a CASH DIVIDEND. Simon has debt/equity of 6.0x and pays an almost entirely STOCK DIVIDEND. It’s insane.

Here’s the tiny disclaimer at the bottom of S&P’s “research report” on Simon Property:

S&P and/or one of its affiliates has performed services for and received compensation from this company during the past twelve months.

Previous and related:

• Are S&P ratings biased towards clients?

disclosure: short SPG, long O