So Sorry, The Consumer is Still Dead

Look, look, look, look.

Oil can tank all it wants; it will not put people back into [[M]] , in order to buy another Polo shirt.

Take a look at the retailers. They are getting taken to the woodshed today, despite government stimulus.

Wal-Mart Stores, Inc. [[WMT]] , Target Corporation [[TGT]] , Citi Trends, Inc. [[CTRN]] , Zumiez Inc. [[ZUMZ]] , Sears Holdings Corporation [[SHLD]] , Abercrombie & Fitch Co. Abercrombie & Fitch Co. Abercrombie & Fitch Co. Abercrombie & Fitch Co. [[ANF]] , [[BONT]] , The Dress Barn, Inc. [[DBRN]] , [[CHS]] , American Eagle Outfitters [[AEO]] , The Gymboree Corporation [[GYMB]] and J. Crew Group, Inc. [[JCG]] are all down.

In order for the market to run, what exactly will you hang your hat on?

The banks? Are you serious?

With oil weakening, remember that oil stocks have been the best performers in the S&P. And, on top of that, money managers, worldwide, are heavily overweight the names.

So, ironically, a steep dip in energy related equities may in fact hurt the financials, instead of buoying them.

I refuse to sell [[FXP]] , until it breaks $100. It is a fact that both China Mobile Ltd. (ADR) [[CHL]] and China Life Insurance Company Ltd. (ADR) [[LFC]] (biggest holdings in FXP) have serious headwinds in front of them. For one, LFC is a big investor in China’s stock market, which is down more than 50%, year to date. And, CHL has been forced into China’s hardline business, a slow growth endeavor.

However, for the time being, the market is obsessed with the daily ticks of crude. The market is always obsessing on things, like monolines, Bear Stearns, Lehman, Fannie, Countrywide and now crude. Like I said before, soon this will pass and the market will begin to focus on earnings.

Remember, we are in the middle of the summer. Most of the heavy hitters are out drinking whiskey, while gobbling monstrous pieces of shrimp cocktail.

In short, this market is behaving like an amateur, run by rookies. Don’t follow them off the plank, into the shark infested waters below.

NOTE: The news out of Citigroup Inc. [[C]] today is far from over, regarding Auction Rate Securities. All of the big banks were players in this space. Expect this to be the first of many settlements. Even little Calamos Asset Management, Inc [[CLMS]] has funds tied to that market.

UPDATE: Mr. Mortgage breaks down today’s housing numbers. They’re not as good as you think.

Martin Marietta Materials, Inc. [[MLM]] just cut their 2009 forecast by a whopping 2 dollars, from $7 to $5. Again, seeing Vulcan Materials Company [[VMC]] up at $68 is like seeing a horror film on the Disney channel: it just doesn’t belong there. From Texas Industries, Inc. [[TXI]] to Eagle Materials, Inc. [[EXP]] to Vulcan Materials Company [[VMC]] to Martin Marietta Materials, Inc. [[MLM]] , they all have significant downside left, as their business models rely on the prospects of Congress passing an ‘infrastructure bailout’ bill.

This is ridiculous.

I mean, they’re still banking coin, yet they are going to get bailed out too? That makes no sense to me.

Back in the 1930’s, during the Great Depression, they did the same thing. It did not work. The economy is being mismanaged now, as it was back then.

It appears American International Group, Inc. [[AIG]] is having a bit of trouble this morning, knifing lower by more than 15%. There is nothing positive to say about them, other than it is dragging China Life Insurance Company Ltd. (ADR) [[LFC]] lower, causing [[FXP]] to spike (my largest position).

However, regional banks are strong, yet again. I could run a list, but who cares?

Just know, the bull is still very much alive and has no intentions of leaving the party, until forcefully escorted out.

I know some of you love the health care stocks, like Humana Inc. [[HUM]] , WellPoint, Inc. [[WLP]] and UnitedHealth Group Inc. [[UNH]] . However, keep in mind, the reason why those stocks have been hammered is due to health care inflation and their inability to raise prices. Also, as unemployment creeps higher, they lose more customers. Finally, all of them need to increase prices by 10%, over the next 6 months, in order to hold margins.

I would not be a buyer of managed health care. Look for their customer base to dwindle, as prices go up.

Lastly, go get a nice list of oil stocks to buy. Don’t buy them yet. But, have it ready, in the event crude spikes again. It’s almost comical to hear people say “oil is in a bear market.” Right, tell that to me while I’m filling up my tank and I’ll punch your jaw loose for you.

Seriously, what if oil heads back to its former highs? Is that really impossible?

I don’t think so.

Have that list ready and prepare to buy it, much to the oil graveyard dancers chagrin.

Top pick: short VMC

This one comes from the joyous communist state of China (no offense to socialists).

WuXi PharmaTech (Cayman) Inc. (ADR) [[WX]]

I would explain what they do; but it’s entirely too non-specific and rather vague. Just know, they test drugs on dogs and sell them to people in China.

According to a recent Piper report, WX is trading about 17x 2009 numbers, making them one of the cheaper biotech plays in a very hot space. There is less than 10% institutional ownership in the name and more than 2.5 million shares are sold short. The stock can “giddy-up” here, if it can break out above $20. My apologies to Peter Najarian for borrowing that quaint phrase.

Now to the charts:

As you can see from the above chart, WX has not been a very pristine performer. As a point in fact, it has been downright dreadful. Now, into tomorrow’s tape, expect weakness due to the American International Group, Inc. [[AIG]] numbers. However, as in all infantile bull markets, expect the shorts to scramble and the bulls to eat them.

If possible, get involved, buying a small piece of WX into a .50 cent decline, then giddy up. Sorry Peter, once again.

My price target, based upon the above chart, is $25 or a test of the 200 day moving average.

[youtube:http://www.youtube.com/watch?v=qQIO3pBFfXI 450 300]

Triple the loss for Freddie Mac [[FRE]] means triple the fun for the banks.

Thomas Brown, a well accomplished banking analyst/philosopher, who’s work parallels those of historic men like Socrates and Hamsandwich, called the bottom in both MBIA Inc. [[MBI]] and Ambac Financial Group, Inc. [[ABK]] . Well done, Sir.

As for me, respectfully, I’d like to protest the closing price of Vulcan Materials Company [[VMC]] . According to my excel spreadsheets and diligent research into their field, it appears VMC is $30 too expensive. Cordially, I invite all shareholders of VMC to quietly exit the stock, in order to avoid minor economic hardship.

Thank you.

In addition, my bet against TCF Financial Corporation [[TCB]] has proven to be a money loser. It’s my fault. I thought the housing market was slowing. I shall re-read all of my research and attempt to be persuaded otherwise.

Apparently, I find myself saddled with lots of cancerous short positions. This, as you know, was an error by the “foul mouthed Fly.” The new, kinder, more sophisticated Fly is thinking about getting long biotechs, retail, internets and other “non-risky” endeavors.

In addition, I have many stocks on my monitor, worth sharing with you good folks, such as Auxilium Pharmaceuticals, Inc. [[AUXL]] , Valeant Pharmaceuticals International [[VRX]] , Gilead Sciences, Inc. [[GILD]] , Wachovia Corporation [[WB]] and Agrium Inc. (USA) [[AGU]] .

However, keep in mind, I am in AGU for a short term trade, whereas WB is a keeper. Longer term, it makes sense to bet on America and applaud the work of fine men, like Dick Bove and Henry Paulson.

Off to watch my favorite show: CNBC.

A Most Unfortunate Update: Bad news for us 300 point chasers. Off to watch Mr. Fast Money.

A Most Unfortunate News Tidbit: Sadly, American International Group, Inc. [[AIG]] might have missed revenue projections too, by more than 10 billion dollars. Let’s all say a prayer for the good folks running AIG, a fine American franchise.

The world’s largest insurer lost $5.36 billion in the April-to-June period, or $2.06 per share. In the same period last year the company earned $4.28 billion, or $1.64 per share.

After excluding one-time items, the loss per share came to 51 cents — much worse than the 63-cent gain that analysts were anticipating.

Shares of AIG fell more than 7 percent in after-hours trading, having fallen 80 cents, or 2.7 percent, to close Wednesday at $29.09.

AIG’s net loss included a $3.62 billion after-tax write-down in the value of what are called super-senior credit default swaps. Before taxes, this write-down amounted to $5.56 billion.

Commodity related stocks have great balance sheets, great businesses and good pricing power.

Banks have heinous balance sheets, terrible businesses and zero pricing power.

Both sectors have loads of shorts in them. Mostly, people are short commodities, due to the belief of a ‘global growth’ slowdown; whereas they’re short banks, well, because they’re banks.

The flaw in being short commodity stocks is parallel to being long banks.

Companies like Agrium Inc. (USA) [[AGU]] , CF Industries Holdings, Inc. [[CF]] , The Mosaic Company [[MOS]] and Potash Corp./Saskatchewan (USA) [[POT]] have displayed zero signs of slowdown. In no way has growth or pricing power deteriorated. Therefore, if you are betting against them, you’re either guessing or just trying to catch “a quick trade.”

On the other hand, buying banks here means you believe there will be an uptick in business, despite seeing zero signs of a respite. Again, you’re guessing or trying to catch “a quick trade.”

At the moment, everything is reliant upon the minute by minute moves of crude. However, I guarantee you, this will soon pass. Eventually, businesses are evaluated on their supply/demand statistics. In my opinion, if forced to choose, I’d stick with names like FCX , Southern Copper Corporation (USA) [[PCU]] , AGU and MOS, while avoiding banks like the plague.

Naturally, market participants are trying to catch an early turn in both sectors, hoping to be rewarded for their early entry points. But, more often than not, timing tops and bottoms is a low percentage bet. You’re better off throwing sticks of dynamite at your life savings, than mess around with banks, following 40% spikes, or shorting commodities, following a 40% decline.

Following this post, “The Fly” will cease his foul mouthed rants, until the Dow touches 11,000 again.

In other words, I will not curse until this God forsaken market drops 600 points from here.

So, either I will be a clean mouthed poor guy, or an egregiously rich-er foul mouthed malcontent.

Developing…

UPDATE: Bill Miller from Legg Mason, Inc. [[LM]] got fired from a pension fund today. Good news, as always.

Tick by tick, oil is in control of your economic destiny.

Nothing really matters. Not earnings, economic forecasts or sentiment, just oil.

As oil weakens here, the market melts up, it’s that simple.

The quick advice is to avoid energy related names, during this sit storm. However, their valuations are extremely cheap and do not deserve to be trading at current prices. Remember, oil north of $100 is still fucking kickass for every single oil producer/driller.

For some reason, the sentiment has knee capped oil stocks to the point of mockery. Nonetheless, for now, it’s safer to wait for oil to bounce, prior to stepping in.

Agrium Inc. (USA) [[AGU]] crushed numbers by .85 cents and the stock is only up $3. Conversely, Vulcan Materials Company [[VMC]] missed by 30 football fields, and that fucker is running. I just broke a monitor, out of sheer hatred for stocks.

Freddie Mac [[FRE]] offered funny numbers this morning, which initially hurt the bank stocks. However, on the dip in oil, banks are running again.

Wake me up when this shit makes sense. I’m going to take a nap now.

Here’s the bear case for Vulcan Materials Company [[VMC]] :

The company is a producer of asphalt, concrete and cement in a depressed U.S. construction environment.

Major inputs include diesel fuel and liquid asphalt. Both have soared in recent months.

In addition, the company levered up into a downturn and acquired Florida Rock (think Florida real estate), effectively making matters worse. Not only is Florida Rock a drag on them, from an operating standpoint, but they are laden with debt because of it. Currently, VMC has over $3.5 billion in debt.

VMC will get hit hard when municipalities cease their infrastructure projects, due to high material cost. The fact of the matter is, most municipalities are unprepared for the inflationary storm, about to hit their tax payers. Most, if not all, pegged their budgets to the erroneous cpi index, which does not reflect the mind numbing (double digit) increases in raw materials. In short, cities and states will be forced to delay or cancel numerous projects. That will be a huge blow to VMC.

via VMC‘s earnings report:

“Our earnings outlook reflects a prolonged downturn in residential construction, weakness in non-residential and highway construction activity and energy-related costs remaining at the current high levels. Leading indicators such as contract awards weakened in most construction categories in the second quarter. We now estimate full year aggregates shipments, including Florida Rock operations for the full year, to be down 2 to 5 percent versus the prior year.

“During this time of weaker demand, our focus is on those aspects of the business we can control. During the first half of this year, we have reduced operating hours, maintained relatively flat unit variable production costs excluding energy-related costs and decreased cash fixed costs. We will continue aggressively managing costs in all areas. We expect higher selling prices for our products to help offset the earnings effects of lower volumes and higher energy-related costs. For aggregates, we continue to expect full year price improvement of approximately 8 percent.

Regarding valuation:

Their peers include Martin Marietta Materials, Inc. [[MLM]] , Texas Industries, Inc. [[TXI]] and Eagle Materials, Inc. [[EXP]] .

VMC is a repeat offender of missing earnings estimates, as demand and cost controls hit the company hard from every angle.

Their new guidance is for a profit range of $2.85-$3.25. However, I am very skeptical they can even hit that bottom number. I do not believe they are anticipating a drastic slowdown in municipal spending.

However, let’s say they hit $2.85. At current levels, that gives them a PE of 24. The average PE for their peers is 15x. However, that’s assuming they will hit their numbers too, which they will not.

At 15x 2009 earnings, VMC should be trading at $42. If their numbers come in short, due to a further economic slowdown, I believe the stock should trade 10x 2009 earnings or $28.

The only way VMC comes out smelling like roses is if residential real estate upticks, diesel fuel and liquid asphalt drop or the government implements an “infrastructure bailout,” allocating money to the construction of highways, bridges and tunnels.

In short, I believe none of that will occur and the stock is 36% overvalued, at current levels. With 20 million shares sold short or 18% of the float, expect large swings in the stock. Nonetheless, there is no fucking way this stock deserves to be up today, recovering from an early 6 point deficit.

Disclaimer: I am short egregious amounts of VMC.

NOTE: The conference call begins at 11 am, eastern.

Fuck fat folks.

No offense to obese people, of course.

Coming soon to iBC: Why Vulcan Materials Company [[VMC]] is a piece of shit and who should be selling it short.

Here now Update: