Best Buy is Closing 50 Big Box Stores In 2012, Here is Their Store Strategy (BBY)

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After Blockbuster (update), Borders and Sears dumped square footage all over the retail commercial real estate market, now Best Buy is closing 50 big box stores in 2012. Here's the list of stores closing. Going forward, Best Buy plans to roll out more smaller stores ("Best Buy Mobile") and their new "Connected Store" format. I found the details in Best Buy's Q4/FY 2012 earnings release:

"U.S. Store Format Improvements
Best Buy's retail store strategy is to increase points of presence, while decreasing overall square footage, for increased flexibility in a multi-channel environment. The company intends to remodel key stores with a new Connected Store format in fiscal 2013, and to continue to build out the successful Best Buy Mobile small format stores throughout the U.S.

    Janet Tavakoli on Bank "Control Fraud", Credit Default Swaps, MF Global's Total Return Swap-to-Maturity Trade (and Missing Money)

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    If you want to know everything that's going on in the illiquid, opaque world of OTC derivatives and bank/broker-dealer fraud, Janet Tavakoli, founder and president of Tavakoli Structured Finance, is the one to listen to. She was interviewed by Lauren Lyster on RT's Capital Account on 3/26/2012 and discussed the shadow banking system, how "control fraud" blew up the investment banks during the credit bubble, how Jon Corzine's $11.5 billion (gross notional value) "total return swap-to-maturity" trade on risky European sovereign debt bankrupted MF Global via margin calls and ended up misappropriating $1.6 billion of client funds, and how credit default swaps are essentially leveraged bets with little money down and big upside potential (example: John Paulson's ABX trade betting against subprime MBS). She also said derivatives are now dominated by speculators that are distorting markets (example: JPMorgan lost money on a coal derivatives bet in 2010).

    Understanding the Risk of Synthetic CDOs (By Federal Reserve Economist in 2004, Where Was Greenspan?)

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    I found a research report that was written by Federal Reserve economist Michael S. Gibson in 2004 titled "Understanding the Risk of Synthetic CDOs". Did Alan Greenspan read this?

    img: FCIC/Wikipedia
    "The paper highlights key issues for investors in synthetic CDO tranches as well as for dealers who structure synthetic CDOs for clients. Investors in mezzanine CDO tranches are taking on leveraged exposures to the underlying credit risk of the reference portfolio. A tranche's credit rating does not convey all aspects of the tranche's risk. If investors disclose the notional amounts of their portfolio, broken down by credit rating, the leveraged nature of a mezzanine tranche's risk exposure would not be obvious.

    The paper also touches on some of the risks to dealers who structure and make markets in synthetic CDO tranches for clients. A complete set of synthetic CDO tranches may not be fully hedged by selling single-name credit default swap protection on the CDO's reference portfolio if the CDO tranches are structured as swaps whose payouts do not depend on the flow of income from the reference portfolio. Dealers in CDO tranches, including those who structure single-tranche CDOs, are exposed to model risk and, because of the dynamic hedging required, liquidity risk that are not present in traditional cash CDOs."

    Duolingo Lets You Learn a Language For Free Online

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    Finally, an easy way to learn a new language. I'm going to try this out. Visit Duolingo's website here and watch the video below.

    Gary Shilling: S&P 500 Falls 43% to 800 (SPX 6-year Weekly Chart)

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    After Gary Shilling, president of A. Gary Shilling & Co, was interviewed on Daily Ticker on 3/22, he then discussed his market outlook and S&P 500 target in more detail on Bloomberg TV on 4/11. Gary Shilling thinks the S&P 500 will fall 43% to 800 (or 41.6% below Friday's closing price of 1,370.27) as U.S. consumers "retrench", China sees a hard landing, and the sovereign debt crisis and recessions in Europe lower earnings and boost the U.S. dollar. Here are Gary Shilling's targets summed up from the video: $80 EPS (earnings per share) + 10 P/E (price/earnings multiple) = $800 S&P 500 target. He also mentioned that consensus analyst estimates are calling for S&P 500 EPS at $102. So, if he's right, expect major downside revisions ahead for S&P EPS. And remember that corporate profit margins are currently at record highs (via John Hussman).

    Gary Shilling Predicts Huge Drop In S&P Earnings, Lower House Prices and Treasury Yields (Deflation)

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    Gary Shilling, president of A. Gary Shilling & Co., was interviewed by Henry Blodget on Daily Ticker on 3/22 and said he expects deflation, lower house prices, lower Treasury bond yields (higher prices), and a huge negative surprise for S&P operating earnings going forward. And to top it off, he sees a new recession in 2012. Get ready...

    On the 30 year Treasury bond bull market (not from an official transcript):

    "I don't think it's over. I still think that we're probably more headed for deflation than inflation. That the world is going to see a lot slower economy, if not recessions, and Treasuries will be their usual safe haven. So I'm holding out for 2.5% on the 30-year, and probably 1.5% on the 10-year. The 2.5 is where they got at the end of 2008 after Lehman collapsed."

    On stocks and a possible huge negative surprise for S&P earnings:

    German Bund Yields Make New Lows, Spanish Bond Yields Spike, CDS at New Record High

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    Sovereign debt fears are back in the eurozone again and money is piling back into German bunds as a safe haven. At what point do the eurozone bailouts start to affect the German bund market? The 10-year Spanish government bond yield is currently at 5.978%, 75 basis points below the previous high of 6.729% on 11/25/2011. The 10-year Spanish-German bond yield spread is at 4.33 (433bps), 36 basis points below the high of 4.69 (469bps) on 11/22/2011. Keep an eye on Portuguese, Italian, and French bond yields as well.

    Technicals: SPY Broke Uptrend Line, 2011 Support, and 50DMA

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    When SPY tripped on the uptrend line, that was a decent signal to protect against downside risk, imo. It broke the uptrend line at around $140, and is now trading at 136.63, which is below 2011 support (the high, now support) and the 50 day moving average. Is the market falling because of the disappointing employment report on Friday? Spanish sovereign debt and bank risk rising in Europe? Poor S&P earnings ahead? If there isn't a positive market catalyst, SPY (the S&P ETF) could trade in a channel between the the pre-flash crash high (around $121) and the high May 2011 high ($137).


    Winning or Losing Equals Winning With Empty Creditors

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    So, is this why business schools train their students so hard in finance/accounting? To learn how to insure every credit with the banks taxpayers? How hard is this?!:

    "The truly troublesome feature, though, has to do with the “empty creditor” problem. Empty creditors are lenders (to a corporation or government) that cease to be concerned about whether the borrower fares well or poorly." (Another troublesome feature of CDS usage - Financial Times).

    Basis Trader Says Credit Default Swaps Are Fatally Flawed, Replace With Bond Futures

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    source: Adamt4 (flickr)
    While I'm on the topic of
    credit default swaps, on March 19, CDS trader (or basis trader, where they own both the bonds and CDS) Ben Heller told Reuters blogger Felix Salmon on Felix TV that credit default swaps are a "fatally flawed product" and should be replaced by bond futures. He thinks CDS are flawed, not because of the spike in systemic counterparty risk CDS created in 2008, or that CDS encourages a creditor to pull the plug on a company to collect an insurance payout (credit default swaps = tradable financial life insurance only available to banks, institutional investors), but because the Greek "restructuring credit event", which occurred when Greek government bond holders (PSI) took a 53% haircut on their bonds in exchange for new bonds so Greece would avoid a "payment default", almost didn't trigger Greek CDS payments. First, here is ISDA's (International Swaps and Derivatives Association) reaction to the credit event in a blog post. The ISDA governs the OTC derivative markets and the documentation. They have a committee made up of banks and investment funds that determine credit events, which is interesting.

    VIX Option Traders Are Selling Puts, VIX Cash Around 2-year Low (16.44)

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    VIX (
    Today on the 
    OptionMonster Volatility Sonar Report, Jamie Tyrrell, of Group One Trading, said traders were selling VIX puts yesterday and today. Watch the video below. It looks like the VIX, or volatility index, which uses S&P 500 option prices to measure forward looking (implied) expectations of market volatility, closed around the 2010 and 2011 lows today at 16.44. In 2010, the VIX bottomed at 15.23 and spiked to 48.20 during the flash crash, and in 2011, the VIX bottomed at 14.27 and spiked to 48 when Standard & Poor's downgraded the United States' credit rating. Last month (March 2012) the VIX hit a new low of 13.66.

    The VIX is interesting because when the index is this low, it's all about timing the next eruption in volatility. The market can do nothing for months, like it did in the first half of 2011 ex-the earthquake/tsunami in Japan. But a low VIX can also mean, or present the idea, that volatility is cheap (S&P option premiums) to hedge against a fearful move in the S&P 500 index.

    Bank CDS Indexes Added To S&P/ISDA CDS Sector Indices, Are CDS Index Futures Coming Soon?

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    Lehman Brothers, Merrill Lynch, Morgan Stanley, Goldman, 
    Citi, JP Morgan CDS in 2008 (Bloomberg chart via Mish)
    CreditLime, a blog that covers the credit default swap market, reported that S&P/ISDA added two bank indexes to its family of CDS Sector Indices, the S&P/ISDA CDS U.S. Financials Select 10 Index and S&P/ISDA CDS European Banks Select 15 Index. On ISDA's website you can track the daily activity of the S&P/ISDA CDS indices, the most active single name reference entities (with some historical percent change data), and Markit's CDX and Itraxx indices (there are short-term charts available at Markit's site). So, when do CDS index futures start trading on exchanges? And what about exchange traded credit protection (insurance, hedges, or whatever you want to call it) on single name corporate bonds and sovereign debt? More on this later. Here is more info on the new CDS indices via

    Update on Terrafugia's Flying Car (Video)

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    Here's an update on Terrafugia's flying car that I blogged about in 2010 and 2009. The "Transition Street-Legal Airplane" had its first flight on 3/23/2012. It looks really simple, watch the video below.

    "New York, NY & Woburn, MA – (April 2, 2012):
    The Transition® Street-Legal Airplane is now a significant step closer to being a commercial reality. The production prototype of the Transition® Street-Legal Airplane completed its successful first flight at Plattsburgh International Airport in Plattsburgh, NY on March 23, 2012. The same vehicle has also successfully conducted initial drive and conversion testing, demonstrating the Transition’s capability to provide unmatched freedom, flexibility and fun in personal aviation. Developed by Terrafugia, Inc., the Transition® is a two seat personal aircraft capable of driving on roads and highways, parking in a single car garage, and flying with unleaded automotive fuel. (Terrafugia)

    Marc Faber: Massive Wealth Destruction Coming Down The Line (CNBC Video)

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    via CNBC
    Marc Faber, editor and publisher of the "Gloom Boom Doom" report, shared his gloom and doom views on the market and economy in an interview with CNBC's Andrew Ross Sorkin this morning on Squawk Box.

    "Well, basically I think that the whole bailout and the money printing will not create long-lasting wealth, nor will it create healthy economic growth. And if I look at the world, then i see essentially well-to-do people that have done unbelievably well and I see the middle class and working class that hasn't done well. And I think somewhere down the line we will have a massive wealth destruction that usually happens either through very high inflation, or through social unrest, or through war, or a credit market collapse. Maybe all of it will happen but at different times."

    "I would say that well-to-do people may lose up to 50% of their total wealth. They'll still be well-to-do; instead of a billion, they'll have say 500 million. But, I think there is a massive wealth destruction coming down the line. I'm not saying it's coming tomorrow, but looking at the bailouts and the money printing, they have postponed the problems and actually made them larger in the sense that the government debt has increased dramatically, and somewhere a solution will have to be found for this government debt."

    Home Price Index Makes New Low in January, Annual Decline Possibly Leveling Off (ITB)

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    S&P/Case-Shiller Home Price Index (pdf)
    The S&P/Case Shiller Home Price Index
    made a new low in January (chart on the right), which isn't a good sign for the $717 billion in negative home equity outstanding.

    "S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed annual declines of 3.9% and 3.8% for the 10- and 20-City Composites, respectively. Both composites saw price declines of 0.8% in the month of January."

    I guess you could say it is positive that the annual decline seems to be leveling off (chart below). Detroit led the composite with a 1.7% annual gain, followed by Phoenix and Denver with gains of 1.3% and 0.2%, respectively. I wonder if anyone made money on that IndyMac foreclosed home in Detroit that was going for $600.

    Break Up The Big Banks! End Too Big To Fail! Where's The Transparency? (Dallas Fed)

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    Finally, some good news out of the Federal Reserve system. The Dallas Fed wants to break up the big banks, which is the main topic of their annual report. I don't understand why there aren't online "social" Wall Street banks yet where people actually have control over the credit market. Google should create a social bank. Look, the same players who made hundreds of millions or billions shorting subprime CDOs via credit default swaps, John Paulson, Greg Lippmann, Kyle Bass, and Goldman Sachs, are back in the game: Goldman Bets on Property Rebound With New Fund: Mortgages; Big Long Is New Big Short as Bass Joins Subprime Bet: Mortgages. And even AIG is buying mortgages, is this a joke?

    "Goldman Sachs Group Inc. (GS) and American International Group Inc. (AIG) have also emerged as buyers this year as trading more than doubled for non-agency mortgage notes." (Bloomberg)

    Why aren't Fab Tourre, Greg Smith, and thousands of other investment bankers, brokers, and analysts that worked during the mortgage bubble period leading a multi-trillion dollar investment banking revolution? If online infrastructure like SecondMarket (revise the accredited investor rule), Prosper and Covestor, combined with these investment bankers, analysts, and transparent real-time credit data, it would create Wall Street banks that have incentives to fuel non-fraudulent credit growth and manage systemic risk, and would be held accountable in real-time.

    McClellan: Eurodollar COT Predicts S&P One Year In Advance (Economy One Year and Six Months In Advance)

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    Source: Lillian Cameron (Flickr)
    This is a disruption alert for economists and analysts. According to Tom McClellan of McClellan Financial Publications, the Eurodollar futures commercial traders COT can predict where the S&P 500 trades one year in advance. And if it's true that the S&P 500 prices in economic growth six months in advance, then the Eurodollar futures COT can predict the economy one year and six months in advance. Magic.

    Eurodollar futures move inversely with 3-month LIBOR, which is an interbank lending rate set by banks that measures the health of the banking system. In October 2008, when Lehman Brothers went bankrupt and the credit market froze,
    1-month and 3-month LIBORs spiked above 4.5%, which meant that the supply of short-term U.S. Dollar liquidity was scarce (expensive). Banks were fearing for their lives at that point (and their counterparties). You can find 1-year, 2-year, and 5-year COT charts at Schaeffers Research. The commitment of traders report shows how net-long (or short) large speculators, commercial hedgers, and small speculators are in the futures contracts. This CME paper has more information on Eurodollar futures: Hedging borrowing costs with Eurodollar futures and options. I have a question: why couldn't the banks predict their own crisis one year and six months in advance? It would have saved the U.S. government big money.

    So, where is the market headed now? McClellan mentioned on Bloomberg TV yesterday that the Eurodollar futures COT chart (from last year) sees the S&P 500 correcting until June, but then rallying hard. Watch the video below. He mentioned in early February that the Eurodollar COT chart topped out between February 8-24 in 2011, so the market is late.

    Eurozone Crisis is Far From Over

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    From the Reuters article: "Greek prime minister does not rule out new bailout package", this quote stood out about leaving the euro.

    "The return of the drachma would trigger high inflation, exchange instability and a fall in the real value of bank deposits," he said."
    Something to keep in mind if the sovereign debt crisis in Greece flares up again. The head of European economics at Roubini Economics believes "Greece will restructure its debt and leave the euro zone by the end of 2014" and then Portugal in 2015. Spain has issues as well: Analysis: Spain's banks may need more public cash. The euro-zone crisis is not over yet.

    Photo: Drachmas on Wikipedia

    Perfect $SPY Uptrend Line From October (S&P 500 ETF)

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    Careful when it trips! SPY=mx+b.

    Hussman on Record High Profit Margins vs. Stock Valuations

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    John Hussman, president of the Hussman Investment Trust (Hussman Funds), has an interesting note out this week titled "A False Sense of Security", which discusses market valuation methods, corporate profit margins, secular/cyclical markets, the Fed, and the current market climate. I think he's on to something with corporate profit margins. He mentioned that the stock market, which is valued using a multiple on forward earnings estimates (EPS), could get spooked if record high profit margins start to revert back to historical norms. He showed a chart of Corporate Profits (after tax)/GDP, which is currently at a record high above 10% (since 1947).

    Bernanke's Frightening Charts Showing Unemployment Duration, Long-Term Unemployed (27 Weeks+)

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    Federal Reserve Chairman Ben Bernanke gave a speech today on the labor market at the National Association for Business Economics Annual Conference and mentioned that the current unemployment situation is worse than any other post-World War II recession. A few charts he provided are actually frightening, see below. I created a new "long-term unemployed" chart that goes back to 1948.

    "In this episode, both the median and average durations of unemployment have reached levels far outside the range of experience since World War II (figure 11). And the share of unemployment that represents spells lasting more than six months has been higher than 40 percent since December 2009 (figure 12). By way of comparison, the share of unemployment that was long term in nature never exceeded 25 percent or so in the severe 1981-82 recession."

    KB Home (KBH) Sees Largest Trading Volume Ever After Earnings Release

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    After KB Home (KBH) reported a loss and spike in cancellations on Friday (3/23), the stock closed at $10.29, down 8.45%, on record trading volume (33.2 million shares). I glanced at the earnings release, and it looks like KBH is chugging along hoping that the housing recovery gains traction. From the KB Home Q1 earnings release, revenues during the quarter increased 29% to $254.6 million, but they still lost 45.8 million or 0.59 per share. Shareholders' equity was down 11% at 393.8 million, and its debt balance was at $1.59 billion, up $1 million. Cancellations rose during the quarter:

    "Net orders totaled 1,197 in the first quarter of 2012, down 8% from 1,302 net orders in the year-earlier quarter, as a 22% increase in the Company's Central region was more than offset by decreases in each of the Company's three other regions. Though gross orders were up 3%, an increase in the cancellation rate to 36% from 29% in the year-earlier quarter led to the year-over-year decrease in net orders."

    According to headlines, the cancellation rate was the reason why KBH tanked, and Business Insider noted that the CEO said it was due to problems with mortgage lenders. Since economists at Bank of America/Merrill Lynch believe home prices are bottoming, I'm going to start watching homebuilder stocks and ETFs. Some economists still believe home prices are headed lower.

    CFPB: Total Student Debt Tops $1 Trillion, Tuition CPI Chart vs. Wage Growth, Housing CPI, Medical, All (FRED)

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    Oh man, remember when the New York Fed upgraded the total outstanding student loan balance to $870 billion with a delinquency rate of 10%, and noted how the delinquency rate excluding loans deferred until after graduation was at 21%? I just read at the Consumer Financial Protection Bureau's blog (via WSJ) that it "hit the trillion dollar mark several months ago". From the CFPB release, Too Big to Fail: Student debt hits a trillion:

    "Our initial findings on the size of the private student loan market are sobering. When we add in the outstanding debt in the federal student loan program, it appears that outstanding student loan debt hit the trillion dollar mark several months ago – much larger than estimates from other recent reports. It seems that this market is too big to fail.

    Unlike other consumer credit products, student debt keeps growing at a steady clip. Students borrowed $117 billion in just federal student loans last year. And students continue to borrow private student loans, which lack the income-based repayment and deferment options of federal student loans. If current trends continue, there will be consequences not just for young people, but for all of us."

    Quadrocopters Can Play Ping Pong, But Will Not Deliver You Tacos (Yet)

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    In non-
    financial fraud and destruction news, you first saw how quadrotors could fly in formation through obstacles. Well, now the video below (h/t tip shows quadrocopters, built by the Institute for Dynamic Systems and Control in Zurich, playing ping pong in flight. But, there's another quadrotor in the news that I think I'd use tomorrow if I could. According to PC Magazine, the site, which claims they will soon be able to deliver you tacos from a quadrocopter in SF, is a hoax. But, if quadrocopters can fly in formation through obstacles and play ping pong, how hard is it to deliver a taco? Use google maps and a camera? Look what the app looks like. I don't buy it, I think the hoax is a hoax. Now I'm hearing that it would be impossible to get a commercial FAA permit for this.

    In other interesting robot news (h/t PC World), the robot can map out its environment in real-time in 3D. In conclusion, if you're a food delivery associate or waiter/waitress, keep an eye on your potential competitors.

    The House Memo on MF Global's $200 Million Transfer From a Segregated Customer Account

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    I embedded the House memo after the jump.

    Renting Out Foreclosed Homes Is The New Hot Trend, Bank of America's "Mortgage to Lease" Program

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    Courtesy of Richard Elzey - Flickr
    Bank of America released some interesting news for homeowners facing foreclosure. It said 1,000 customers will be "invited to participate" in their new "Mortgage to Lease" program, which will allow homeowners to avoid foreclosure by converting their home into a rental. Renting out foreclosed homes is the hot trend these days. From
    Bank of America (full press release below):

    "Pilot participants will transfer title to their properties to the bank and have their outstanding mortgage debt forgiven. In exchange, they may lease their home for up to three years at or below the current market rental rate. The rental payment will be less than the existing mortgage payment, and the customer will be relieved from certain other homeowner financial obligations, including property taxes and hazard insurance.

    Initially, Bank of America will retain ownership of the properties, working with property management companies to oversee the rental properties. Properties in the pilot program will be transitioned to investor ownership. If the Mortgage to Lease program proves viable, it may lead to a broader program, potentially involving selected real estate investors who would purchase properties that meet their predetermined specifications and keep the previous homeowners in place as tenants.

    Insight: The Wall Street gold rush in foreclosed homes (Reuters):

    "The Federal Housing Finance Agency, which regulates Fannie and Freddie Mac, expects it will receive a considerable number of bids in April for the initial round of 2,500 Fannie-owned homes in cities like Atlanta, Chicago, Los Angeles and Phoenix."

    Will Graphene Touchscreens Revolutionize Mobile Technology? (Videos)

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    Wow, forget the iPad. Are thin, bendable, foldable, graphene sheets the future of mobile technology and telecom? In the second video, Samsung even showed an example of holograms popping out of the sheet. It looked like a game, but imagine communicating with someone or watching a basketball game. Apple products are too heavy, this would be amazing. Watch the videos after the jump.

    HSBC China Flash PMI Hits 4-Month Low (48.1), AUD/USD Falls to 1.0370

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    Articles on the Chinese economy and HSBC Flash PMI (and some news on Japan):

    HSBC Flash China Manufacturing PMI: "New order book weakness contributes to renewed decline in manufacturing output." 48.1 vs. 49.6 in February (full press release at

    "Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

    “Weakening domestic demand continued to weigh on growth, as indicated by a slowdown in new orders which came in at a four-month low. External demand remained in contraction territory, but the decline was at a slower pace, implying that there are no improvements in the demand outlook. More worryingly, employment recorded a new low since March 2009, suggesting slowing manufacturing production was hindering enterprises' hiring desire. The soft-patch in manufacturing was in line with the recent downside surprise in industrial production growth. Growth momentum could slow down further amid a combination of sluggish export new orders and softening domestic demand. This calls for further easing steps from the Beijing authority.”"

    David Tice: S&P Falls To $1,000, Gold Rises To $2,500, Likes Silver Even More (Video)

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    Here's some doom and gloom for your morning. In an interview with Fox Business on 3/20, David Tice, president of Tice Capital, and founder/former manager of the Prudent Bear Fund (acquired by Federated Investors), said the S&P will fall to $1,000 in the next 18 months, and gold will rise to $2,500 as central banks (Fed, ECB and... BoJ?) "destroy their currencies." Keep an eye on the
    long term chart of gold. He said he liked silver more than gold, and sees big problems ahead when interest rates rise.

    "It's really irresponsible how short our duration is of our government debt. The administration is going out and borrowing at 80 basis points for paper under 2 years. And when rates do go up, and rates are going to go up, our fiscal deficit is going to explode."

    Goldman's Oppenheimer Says Buy Stocks Relative To Bonds (SPX/USB Since 1993)

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    courtesy of
    Read Peter Oppenheimer's report at
    Zero Hedge, and watch Matt Nesto and Jeff Macke's reaction at Breakout. To take the other side, Business Insider posted that SocGen's Albert Edwards expects "new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011." To build on this, I thought I'd chart out the S&P 500 (SPX), the 30-year Treasury bond price ($USB), and SPX/USB ratio since 1992.

    Looking at this strictly as a ratio call, you'd essentially be taking the other side of the 30-year bull market in bonds relative to stocks trading sideways or breaking out from here. Look how SPX/USB rose in tandem with the S&P during the 1990's while the 30-year bond chopped around. You'd want to see the same trajectory in the ratio, but going forward it could be the result of bonds getting killed. It's all about timing the breakdown though.

    Einhorn on Equities That Trade Like Options, "Levered Stubs" (Punch Taverns Call)

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    Source: Reuters Blogs
    First, some background on what happened between GreenLight Capital and Punch Taverns.
    David Einhorn's hedge fund GreenLight Capital was recently fined £7.2 million by the U.K Financial Services Authority for trading off inside information that was disclosed during a (non-wall crossed) conference call with former Punch Taverns (PUB.LSE) CEO, its CFO, and Punch's Merrill Lynch broker Andrew Osborne in 2009, who was also fined (read the full transcript at (pdf), and read Greenlight Capital's response to the fine).

    At the time, Punch wanted to raise capital to repay £220 million of convertible bonds, and have "10% headroom" on covenant ratios attached to securitization vehicles. For more info on how pub securitization works, read this paper by Fitch Ratings (2003). Osborne mentioned in the call that Punch would need to issue £350 million, which would dilute Einhorn's 13.3% position in the company significantly. So, Einhorn dumped his shares after the call, avoided a £5.8 million loss when the stock tanked, and was fined for insider dealing. So that happened. But the whole point of this post is to show you what Einhorn said during the conference call.

    Einhorn, one of the top value fund managers out there, who publicly releases extensive research at times (recently GreenLight and T2 Partners went publicly short St. Joe Co. and defeated the Fairholme Fund), gave his views on how to manage Punch Taverns' capital structure during the call, and explained how highly levered equities "trading at less than 50% of the face value of debt" are essentially "options on the debt-side of the capital structure", which was interesting. The blog Distressed Debt Investing had an interesting post on this as well. He mentioned that Einhorn made a successful investment in a "Levered Stub Basket" at the end of 2008, which ended up making 227%. I actually found GreenLight's year-end 2009 letter that mentioned this (courtesy of DealBreaker):

    On the Dow falling to 6,000, Charles Biderman's recent Video

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    Market crashing on 10/9/2008, features bailout squad
    Remember in 2010 when Robert Prechter called for the Dow to hit 1,000 in the next 5-6 years? Or in 2010-2011 when Charles Nenner called for the
    Dow to hit 5,000 in the next few years? Well, there are still bears out there. Charles Biderman, founder of TrimTabs Investment Research, a firm that specializes in market liquidity flows, told his viewers on 3/13 that he sees the Dow falling to 6,000 when the Fed stops propping up the market with liquidity (or when "the Fed fix stops working"). And it's not just about the Fed, Biderman thinks the cyclically adjusted price/earnings ratio, or Shiller P/E, should be lower to reflect lower income growth and historical comparables. Another interesting thing he said was income growth and P/E expansion, since 1904, have been led by technological breakthroughs in communications, which he says is currently lacking. I somewhat agree. When will we see household holographic communications take off, or household humanoid Watson-bots? Or a crazy energy breakthrough that hits the masses? That should do it. I embedded Biderman's Youtube video below (originally saw it on Zero Hedge - hat tip). If you can't watch the video, you can read the transcript at TrimTab's blog at the link below.

    Biderman’s Daily Edge 3/13/2012: Stocks Could Drop More Than 50% When Fed Fix Ends (TrimTab blog post with video):

    "Historically stock prices sold at a 10 PE when income growth was 3% or less and with the Dow at 13,000 the PE is 23 today using Robert Shillers 10 year earnings PE.

    Historically there have been three major bull markets since 1900 each lasting 24 to 25 years. During each bull run income growth averaged over 5% after inflation; and as a result of that rapid income growth the price to earnings ratio, or PE, grew rapidly.

    On the other hand, during the 1930’s bear market and from 1967 to 1982 when stocks did nothing, income growth averaged 3% net of inflation or less. During those low growth times, the PE dropped to 10 or less."