One down, how many left?
Repentant Short Sellers
By ALAN ABELSON | MORE ARTICLES BY AUTHOR
Egypt burns, Wall Street yawns—after a bit. Or is the Street just too accustomed to gallows humor? Also, the case for Microsoft, and the unemployment crisis.
Some anonymous wag once described a revolution as a successful effort to get rid of a bad government and set up a worse one. That’s not, of course, invariably true — you needn’t look beyond our own proud nation to find an exception — but if you had a dollar for every rebellion since men first gathered together in a communal cave that was inspired by bright promise only to end mired in misery, you’d be rich as old Croesus.
Certainly, it explains in no small part the hazy ambivalence among foreign governments and ordinary blokes like us toward what’s happening in Egypt and elsewhere in the suddenly seething Middle East. Diluting in various degrees the sympathy for the aspirations of the protesters to throw off the shackles of oppression is the fear that whoever replaces the current regime, however odious, will prove at least as bad and maybe worse.
At this writing, it’s still not clear who among the milling, myriad protestors will emerge as the guiding force should Egyptian President Hosni Mubarak be forced to quit. What is clear is that, under new rulers, the cozy relationship we had with Egypt is destined to change, and that will have consequences — many of which can’t be foretold but, it’s a safe bet, won’t be entirely benign.
We’re mildly amazed by the insouciance of Wall Street when confronted by portentous events, like these eruptions in the Middle East. After an initial quiver, investors seemingly decided that Egypt et. al. weren’t worth fretting too much about — certainly not enough to cool their bullish fervor. So amid the mayhem in the streets of Cairo, and Washington’s frantic efforts to push a reluctant Mubarak out the door, the market calmly backed and filled.
Or, it may be that investors are taking a leaf from the gallows humor that has popped up in some profusion on the Arabian Internet, reports the New York Times.
Q: What happens if the protestors in Egypt win?
A. They advance to the finals against Tunisia.
Or: President Obama supposedly suggesting to Mubarak that “you write a farewell message to the Egyptian people.” “Why?” asks Mubarak; “Where are they going?”
Our own take is that these extraordinary uprisings have the potential to turn the world upside down, something that might be worth investors’ sparing a minute or two to ponder.
T2 PARTNERS. DOES THAT CONCISE moniker ring a bell? On the odd chance it doesn’t, we’ll refresh your memory. It’s a hedge fund, run by two guys, Whitney Tilson and Glenn Tongue, who are blessed with both Street smarts and real-world smarts, a rare combination, especially in the securities biz. They made their first appearance in this sacrosanct space in early 2008, when they were heavily short housing. Talk about auspicious timing!
Since hanging out their “Open for Business” sign back in January 1999, their fund has racked up a handsome appreciation of 177.3% net of all fees (251.3% gross), compared with a gain of 29.5% by the Standard & Poor’s 500, 70.4% by the Dow and 27.1% by Nasdaq during the same stretch. The last few years haven’t been gangbusters for Whitney and Glenn, although they’ve managed until the past five months to outperform the averages.
You’re probably just dying to know what happened in the past five months, so we’ll tell you: The fund lost 4.3% net, while the Standard & Poor’s 500 Index was up 23.5%. Ugh! And the reason for their uncharacteristically sorry performance is simple: They overstayed, and overweighted their short positions — and, perhaps more to the point, they picked the wrong kinds of stocks to short.
As they reflect with an almost audible sigh in their recent letter to partners: “Over time, we’ve been quite successful shorting fads, frauds, promotions, declining businesses and bad balance sheets.” But they haven’t had much luck lately in shorting good growing businesses, even when valuations seem extreme. So they have decided to give wide berth to that sort of short, which strikes us as eminently sensible, since there’s never a paucity of fads, frauds, etc. As a wise friend points out, valuations have become rather an unreliable measure in a market goosed by the Federal Reserve.
And because they also expect the economy to muddle through and gradually get better in the next few years, and, while cautious, they don’t think equities are primed for another big bust, they are trimming the proportion of their portfolio devoted to shorts. But rest easy: They pledge to keep an eye cocked for the next big bubble that holds the promise of providing a batch of gloriously rewarding short sales.
What we found interesting, too, is that, according to the communiqué, Whitney and Glenn have been adding to one of their biggest positions — Microsoft. Once a growth favorite, the stock has lost much of its pizazz for Wall Street, outshone by the likes of Apple and Google. But as the T2 chaps point out, there’s much to commend it.
To wit: Microsoft recently reported smashing results, as revenue rose 15%, operating income, 20%, and earnings per share, 28%. The balance sheet is “Fort Knox,” with net cash of more than $31.5 billion (or $3.68 a share), and Microsoft has been buying back tons of stock: $5 billion worth in the latest quarter. At roughly $24 a share, net of cash, the shares trade at 10.1 times trailing earnings, and at 9.3 times Street estimates for the next 12 months — estimates that Whitney and Glenn believe are “much too low.”
Moreover, they take strong issue with the notion that Microsoft is “a fading giant, doomed to a future of lower market share,” disappointing sales, margins and profits. “It is, of course,” they slyly say, “possible to concoct such a scenario — people have been doing it for well over a decade — but there’s no current evidence to support it.”
To the contrary, they see robust growth in store for Microsoft. And they point out that “while the company has now sold over 300 million Windows 7 licenses, the operating system is running on only slightly more than 20% of the world’s interconnected PCs, so there’s huge growth embedded here.”
Lest we’ve somehow given you the mistaken impression that the T2 chaps have abandoned the short side of the market, we should make clear that they haven’t.
They remain bearish, for example, on St. Joe, a Florida-based land outfit whose stock has been propelled by the assumption that “it’s an open-end growth situation.” Our T2 duo asserts it isn’t. St. Joe’s burning off cash, and time, they insist, is working against it. They reckon the stock is trading a mere three or four times what it’s really worth.
THIS WAS A WEEK OF ABUNDANT confusion. Besides the Middle East, the Bureau of Labor Statistics released its January jobs report — and what a confounding document it was. The fault lies not in our stars, or even with the statistical wizards at the BLS (they can turn dross into gold in a wink), but seemingly in the heavens that showered down all that rain, sleet and snow on us poor souls.
There was something for everyone in the report. The bulls can cite the unusually large drop in the unemployment rate, from 9.4% to 9%. Bears can counter with the meager job additions, all of 36,000, compared with the consensus guesstimate of 140,000 to 150,000. The average workweek over all was off 0.1 hours, while the manufacturing workweek rose that much.
Our own favorite indicator of unemployment, U-6, which includes the underemployed as well, came in at 16.1%; that’s the lowest in a couple of years. But without seasonal adjustment, U-6 weighed in at 17.3%.
Moreover, as gimlet-eyed Doug Kass of Seabreeze Partners notes, the number of people who are without a job but would dearly love one climbed by 431,000 in January, to a formidable 6.65 million. If these folks were counted as part of the labor pool, Doug reckons the unemployment rate would swell from 9% to 12.8%.
On this score, Gluskin Sheff’s Dave Rosenberg says the labor force has contracted by a massive 504,000, “and the participation rate continues to slide fully 19 months into the economic expansion, which is just an off-the-charts development.” More specifically, it shrank from 64.7% in September to 64.5% in November to 64.3% in December and 64.2% in January.
That means the participation rate is at a new low since gosh!, March 1984. “So,” he asks,” in what way can we really characterize the labor market as being anything remotely close to normal?” No answer necessary.
The household survey showed 117,000 job additions, down quite a cut from December’s 297,000. But at least, as Dave comments, the jobs added last month were full-time.
The miniboom in manufacturing posted a hardly shabby 49,000 new jobs in January and they were pretty well spread across the sector. But the wicked weather took its toll on construction and transportation.
What strikes us most is that, at this rather advanced stage in the recovery, jobs are still hard to come by. Fed chief Ben Bernanke is probably right: It’ll take another four to five years to repair the damage wrought to employment by the recession — if we’re lucky.