Bearish News

There are a lot of nasty catalysts on the horizon: Stress test results next week, car companies going bankrupt, and more. Plus, the S&P 500 has run about 28% from March lows.

So I bought back into Grizzly Short Mutual Fund (GRZZX) on Friday. If you don’t have the cash for a hedge fund, Grizzly provides an easy way to purchase a  diversified basket of shorts, managed by a team of professionals.

I think all investors should have some exposure to short equities. A short mutual fund can be a good choice. It’s insurance for bad times. When the economy gets whalloped, stocks go down. You might lose your job. But with exposure to shorts, you have an extra cushion. If things are bleak, and you need cash, sell the short fund. Voila, some extra cash in your pocket just when you need it most. When times are good, short funds will drop in value. But you should still have a job. And your longs and bonds (which are probably a larger % of your portfolio) will make up for the losses on your shorts, if chosen well.

I like short funds because I don’t have time to monitor my portfolio all day. I do own some individual shorts, but just a few. My portfolio isn’t big enough to justify round-the-clock attention, anyway. Hopefully one day it will be large enough to warrant nurturing like that.

Prudent Bear is another good fund. It’s a long-short fund, with the majority being short. They also own some gold miners. But I’m looking for more of a pure play right now, so I chose GRZZX. I sold my Prudent Bear back in March, which proved to be lucky timing. But I’m not buying any for now.

I did a detailed writeup of these two funds in January, if you want more info.

Disclaimer: This is NOT investment advice. Always talk to a professional when making investment decisions. Disclosure: Long GRZZX. I have no affiliation with the mutual fund companies mentioned.

Simon Property Group, the nation’s largest retail REIT, reports Q1 earnings tomorrow morning before the bell. It should be interesting. The brutal short-squeeze (which I think was orchestrated by Goldman Sachs, among others) sure hasn’t stopped.

SPG is up about 100% from their March 9 low. S&P, who lists Simon as a Client, also did yet another strong buy reiteration today. It’s so nice of them, to reiterate their strong buy (which was initiated at $107) every single week.

The funny thing is, I’m not seeing the upcoming earnings report mentioned anywhere. This is the largest mall owner in America, which will provide priceless insight into the REIT and retail environment (on a lagging basis). That’s a big deal. None of the wires have it on their news page. I only found it here, on Simon’s investor relations page.

A skeptic might think management told the PR dept not to submit any releases or advertise earnings at all. Maybe they did submit the stories, but no one picked them up? Doubt it. Simon’s has a great PR department. Read this this Forbes piece for proof, where one of the quotes is “David Simon refused to prop his REIT atop a mountain of debt. Now he’s ready to feast on fallen rivals.” HAH! Simon has a debt/equity ratio of 6, with $19b of debt on their balance sheet, plus another $6b off-sheet. Any cash they can scrounge will go to pay off their debt. They’re paying out their dividend in common stock, for the love of god.

Questions I have include:

• Will retail weakness start to show up in their results?
• How are vacancy levels?
• Will mgmt lower guidance, or provide any at all?
• Will they write-off the Liberty PLC investment (british reit they invested in, which has plummeted in value)

This could be the quarter where things start to break down for CRE – rising vacancies, write-downs, higher cost of capital, etc. Consumer spending habits have changed, and I don’t think it’s temporary. This will be brutal for Retail REITs. Especially highly-leveraged ones like Simon (6x debt/equity).

I expect a nasty report and conference call. But so far Simon has been able to maintain strong institutional support (95% institutional ownership). Until that erodes, they could float along for a while, like a big ass debt-laden Zeppelin.

But if they start to lose that support, things could get bad quickly. Will it happen this quarter? Maybe. But I strongly believe that it will eventually. What are the other options? Debt has to go, consumer spending will decrease, commercial property values will fall. I suppose they could get bailed out by a combination of government assistance and inflation. Inflation would make all their assets rise, and debt shrink in relative dollars.

Sorry Simon. You do have some great properties. But like GGP, you have too much debt. Your debt just has a better maturity schedule. And you have strong institutional support, which means a lot. But they’re starting to ask more for your debt. And I bet the share offering cost a pretty penny too.

Link to my comments on SPG’s Q4 2008 earnings call.

disclosure: short SPG

This interview with Noam Chomsky is a good one (if a bit slow). He touches on the moral hazards of bank bailouts, war, and the IMF.

The juicy stuff starts around 7:30. He offers a good overview of how Obama has basically put the foxes in charge of the financial henhouse (ie Larry Summers and his issue with derivatives.)

Last week Simon properties got a big pop after being added to Goldman Sachs’ list of conviction buy recommendations. I decided to check on how stocks perform after being added to this elite list. Here are a few of their past picks:

6/23/2008 – Added X (United States Steel Corp.) @ $191
Later went on to reach a low of $17
Now trading at $28.5

6/26/2008 – Added MON (Monsanto) @ $134.90
Later went on to reach a low of $68
Now trading at $79

6/9/2008 – Added MOS (Mosaic Co.) @ $141
Later went on to reach an all time low of $29
Now trading at $44

5/23/2008 – Added AAPL (Apple, Inc.) @ $181
Later went on to reach an all time low of $80
Now trading at $121

3/25/2008 – Added ERTS (Electronic Arts, Inc.) @ $49
Later went on to reach an all time low of $15
Now trading at $18.70

3/4/2008 – Added RCL (Royal Caribbean Cruises Ltd.) @ $35
Later went on to reach an all time low of $5.65
Now trading at $10.80

5/19/2008 – Added AMZN (Amazon.com Inc.) @ $82
Later went on to reach an all time low of $35
Now trading at $77

7/11/2008 – Added QCOM (QUALCOMM Inc.) @ $48
Later went on to reach an all time low of $28
Now trading at $39

6/11/2008 – Added STT (State Street Corp.) @ $68
Later went on to reach an all time low of $17
Now trading at $33

7/8/2008 – Added TEVA (Teva Pharmaceutical Industries Ltd.) @ $45
Later went on to reach an all time low of $36
Now trading at $44

2/11/2008 – Added CAKE (The Cheesecake Factory, Inc.) @ $21
Later went on to reach an all time low of $5
Now trading at $14

Note: Most of these stocks are no longer on Goldman’s list. I did not include data on when a stock was removed from the conviction buy list. This list is not complete.

Could it be that Goldman adds stocks to their conviction buy list when their trading desk needs to unload a bunch of shares on someone? It’s possible, but I have no proof of this. It’s pure speculation. They got into trouble in 2003 for what were basically conflicts of interests between their various desks, as I understand it. The SEC document is here. Also see my post on the SPG squeeze.

Oh yeah, and what about those $200 oil calls by Goldman analysts? Could that have anything to do with their possible conflict of interest? Again, we have no proof of any wrongdoing. It just looks suspicious, to this amateur at least.

I couldn’t find a definitive page that lists all of their conviction buy ratings on Goldman’s site, but this one seems to be fairly accurate.

Disclaimer: Nothing on this site is meant as investment advice. Please don’t trade off any of it. This is a crazy market. Always use a finance professional when making decisions.

If any of this information is incorrect, please contact me and I’ll change it. I try to only post solid information that is verifiable by reliable sources.