Top Gun Financial Planning

Top Gun FP Client Note: Out Here In California

Greg Feirman — Wed, 17 Mar 2010 17:37:05 +0000

NOTE: Every week I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive the Client Note. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a 24-48 hour delay from time to time. Here is this week’s.

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We want to stay as far away as possible from bonds that depend on the politicians and general funds of financially shaky states and smaller issuers unless the price is right. You ask California Treasurer Bill Lockyer, one of the greatest bond salesman ever, about the state’s pension situation and all you get back is a thousand-yard stare and a quick change of subject. That’s concerning.

- John Cummings, Head of Municipal Debt, PIMCO, quoted in “The $2 Trillion Hole”, Barron’s, March 13

By now, most of us are familiar with the massive deficits, debt and off balance sheet obligations of our federal government - including $100 trillion in unfunded Social Security and Medicare liabilities. Less attention, however, has been devoted to the similar predicament of our states. This weekend’s cover story in Barron’s, “The $2 Trillion Hole”, on unfunded state pension liabilities, compelled me to address this subject.

Take California. Over the last 12 months ending February 2010, the state of California has taken in $83.2 billion in tax revenues and spent $89.3 billion for a $6 billion deficit. If you look at the attached chart of California’s General Fund 12-month rolling deficit, that’s actually a big improvement from the depths of the recession in early 2009.

But it doesn’t encompass unfunded pension liabilities and $74 billion in outstanding General Obligation bonds. How do these future liabilities get met when current spending outpaces current revenues and therefore there are no savings?

According to the latest Pew Center on the States report cited by Barron’s, 87% of California’s pension liabilities are funded leaving only a $60 billion deficit. But that report used fiscal year 2008 numbers when CALPRS had $238 billion in assets. They lost $57 billion on their investments last fiscal year. A good chunk of that has been made back in the last eight months, but not all of it. A rough estimate of current unfunded pension liabilities is probably somewhere around $90 billion.

A big part of the problem is the stranglehold public employee unions have over state government which they have used to negotiate incredible pay, benefit and retirement packages. The average pay and benefits package for a firefighter in Orange County is $175,000/year (“Plundering California”, Steven Greenhut, The Wall Street Journal, December 8, 2009).

In 1999, California sharply increased benefits for retirees. A survey by the California Foundation for Fiscal Responsibility found that 15,000 retired California state employees have pensions over $100,000 a year.

State employees go to all kinds of lengths to spike their pensions. Earlier this year, Contra Costa Times reporter Daniel Borenstein wrote a shocking article explaining how retired County Administrator John Cullen had manipulated his final year earnings to spike his pension to $240,000/year (“Short Term Contract, Long Term Gain”, Daniel Borenstein, Contra Costa Times, January 10, 2010).

Politically, there is a lot of resistance on the part of those benefitting from the status quo to reform and fiscal discipline. The UC student protests on March 4, 2010 including confrontations with police in Oakland, Berkeley and Sacramento are one example.

For now, everything continues as usual. There was so much demand for new CA General Obligation bonds last week that the offering was raised to $2.5 billion. The improvement in the economy and the stock market has eased the stress on the general fund and CALPRS to some extent. But longer term, I would be seriously worried about the creditworthiness of the state of California.

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YTD Returns (through 3/12)

S&P: +3.13%

DJ Total: +4.23%

Top Gun: +0.77%

Greg Feirman

Founder & CEO

Top Gun Financial (www.topgunfp.com)

A Registered Investment Advisor

9700 Village Center Dr. #50H

Granite Bay CA 95746

(916) 224-0113

CALL NOW FOR A FREE INVESTMENT REVIEW!

Hussman: Wave Of Mortgage Resets Coming

Greg Feirman — Wed, 17 Mar 2010 16:09:19 +0000

To reiterate what the reset curve looks like here, the 2010 peak doesn’t really get going until July-Sep (with delinquencies likely to peak about 3 months later, and foreclosures about 3 months after that). A larger peak will occur in the second half of 2011. I remain concerned that we could quickly accumulate hundreds of billions of dollars of laon resets in the coming months.

- John Hussman, “Ordinary Outcomes of Extraordinary Recklessness”, Weekly Market Comment, March 15

NYT: The Debt Comes Due In A Big Way Starting In 2012

Greg Feirman — Wed, 17 Mar 2010 15:36:14 +0000

An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this.

- Kevin Cassidy, Senior Credit Officer, Moody’s

The companies have nearly two years to push out the 2012 maturity wall.

- Martin Fridson, veteran high yield expert

Interesting front page NYT article yesterday on the avalanche of debt coming due in 2012 and after: “Corporate Debt Coming Due May Squeeze Credit”, Nelson Schwartz, The New York Times, March 16, A1.

From $21 billion in junk bond maturities in 2010, the number jumps to $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014. That’s because many junk bonds were issued in 2005-2007 at 5 to 7 year maturities.

For example, HCA, which was taken private in an LBO by KKR and Bain in 2006, has $13.3 billion in debt coming due between 2012 and 2014. TXU, also taken private by KKR, has $20.9 billion in debt coming due over the same period.

Over the same time period, many commercial mortgage backed securities will be maturing as well. $59.7 billion in Commercial MBS come due in 2012.

Hayek Vs. Keynes Battle Rap

Greg Feirman — Mon, 15 Mar 2010 07:32:36 +0000

Top Gun FP Client Note: 1150

Greg Feirman — Fri, 12 Mar 2010 17:46:22 +0000

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How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?

- Alan Greenspan, December 5, 1996

Over the past decade, it has been an uncomfortable lesson to accept that investors can be relied on to behave in ways that are ultimately unsustainable and destructive to their wealth, as long as market internals are temporarily supportive. It’s one thing to say, “From every historical precedent, we know that this is going to end badly, and investors will lose a great deal of their wealth, but for now, they are speculating anyway.” It’s another thing to add, “and since they are, we are actually going to rely on investors to continue behaving dangerously, and join them.”

- John Hussman, “The Rubber Hits The Road”, March 8, 2010

I was reminded of Alan Greenspan’s famous “Irrational Exuberance” speech by a couple items this week. The first was the appearance of tech bubble cheerleader Abby Joseph Cohen on CNBC Tuesday morning. Cohen said fair value for the S&P was between 1250-1300.

The second was a fascinating Weekly Market Comment by John Hussman “The Rubber Hits The Road”. The thing that caught my attention from this piece was Hussman’s claim, based on extensive quantitative analysis, that the stock market has become increasingly speculative over the last 15 years. Trends, technicals and market internals have played a far greater role in driving the market since 1995. Valuation and fundamentals have declined in importance. This coincides nicely with Greenspan’s 1996 speech.

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Returning to the present, the bull market celebrated its one year anniversary on Tuesday and is approaching its recovery high of 1150. Just last Friday I suggested that the S&P was probably in a range defined by the recent highs and lows between 1050 and 1150. Almost before the ink dried on the page, however, the S&P was pressing up against 1150 having closed yesterday (Wed 3/10) at 1146.

As I pointed out last week, volume has been pathetically weak during this five week rally. Nevertheless, if the S&P can convincingly break through 1150 it would suggest another leg up in this relentless bull market. As Hussman writes, we know this will end badly in the long term, but perhaps it makes sense to participate in the madness in some limited way for the short term given the fact that financial markets are now indistinguishable from casinos.

I’m not convinced that will happen because 1150 is substantial resistance. Either way, we should see some kind of resolution in the next few weeks.

YTD Returns (through 3/5)

S&P: +2.12%

DJ Total: +3.04%

Top Gun: +1.14%

Greg Feirman

Founder & CEO

Top Gun Financial (www.topgunfp.com)

A Registered Investment Advisor

9700 Village Center Dr. #50H

Granite Bay CA 95746

(916) 224-0113

CALL NOW FOR A FREE INITIAL CONSULTATION!

Netflix Shares Go Parabolic

Greg Feirman — Fri, 12 Mar 2010 17:25:48 +0000

Admittedly, Netflix (NFLX) is kicking butt. Its fundamentals are superb with 20%+ quarterly subscriber, revenue and earnings growth. But mightn’t the stock have gotten a little ahead of itself after a 250% run over the last 18 months?

I’m not the only one who thinks the shares have gotten a little pricey. Last Wednesday, three Wall Street firms downgraded shares.

Disclosure: Top Gun is short Netflix (NFLX) shares.

Abby Joseph Cohen On CNBC: Sell Signal????

Greg Feirman — Tue, 09 Mar 2010 19:08:28 +0000

One of the tech bubble’s biggest cheerleaders was back on CNBC today being interviewed. This strikes me as a sentiment tell and potential sell signal……

Top Gun FP Client Note: Impressive 4th Quarter Earnings II - Retailers

Greg Feirman — Mon, 08 Mar 2010 16:43:30 +0000

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Last week I wrote about how impressive 4th quarter tech earnings were from Intel, Cisco, Hewlett Packard and EMC. A bunch of retailers reported recently and the same thing applies there.

One quick tell I use on consumer spending is to compare same store sales for Walmart versus Target. If you look at the attached chart, you can see that Target notably outperformed Walmart during the boom with consistent quarterly same store sales growth around 5%. The Wall Street Journal took note of this trend in a fascinating front page story, “Walmart Era Wanes Amid Big Shifts In Retail”, on October 3, 2007.

However, calls for the death of Walmart were premature as shoppers flocked back to the price leader during the Great Recession. As Target’s same store sales plunged beginning in the 4th quarter of 2007, Walmart’s surged as consumers tried to stretch scarce dollars.

That trend is now beginning to reverse itself again over the last few quarters, with Target’s same store sales rallying, including their first positive same store sales quarter in the 4th quarter in 2 years, and Walmart’s declining, including three straight negative US same store sales quarters.

The trend is confirmed when we look at other retailers who have reported in the last week. Lowe’s and Home Depot both reported improving same store sales trending towards flat. Nordstrom’s and Starbuck’s reported 6.9% and 4% US same store sales increases after more than 2 years of declining same store sales. Whole Foods reported a strong number.

All this clearly confirms that consumers are feeling better and willing to trade up and spend some money. Combined with the tech reports and overall 4th quarter reports, it is undeniable that we are experiencing a recovery.

However, there were recoveries during the Great Depression too, notably the 1936-37 surge which peaked in August 1937 after which things spiralled downward again.

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I want to say a quick word about the market action. Since hitting an intraday low beneath 1050 on Friday February 5, the S&P 500 has put together a nice rally, up about 80 points (8%) over the last four weeks.

However, the volume has been pathetic. Only one day during the entire rally has had above average NYSE Composite volume (Tuesday February 9). Therefore, the action lacks real conviction and suggests we are in a short term range between 1050 and 1150 defined by the January 19 high and February 5 low.

YTD Returns (through 2/26/10)

S&P: -0.95%

DJ Total: -0.38%

Top Gun: +0.37%

Greg Feirman

Founder & CEO

Top Gun Financial (www.topgunfp.com)

A Registered Investment Advisor

9700 Village Center Dr. #50H

Granite Bay, CA 95746

(916) 224-0113

CALL NOW FOR A FREE INITIAL CONSULTATION!

Top Gun FP Client Note: Impressive 4th Quarter Earnings

Greg Feirman — Thu, 25 Feb 2010 19:21:19 +0000

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Client: What would it take for you to change your view?

Me: Revenue growth.

Conversation, December 2009

After reviewing 4th quarter earnings, the conclusion is undeniable: there has been a surge in business activity over the last six months which is reflected in companies top and bottom lines.

Take a look at the following data for the S&P 500 as a whole:

Period Operating EPS

4Q09 (88%)* $17.34

3Q09 $15.78

2Q09 $13.81

1Q09 $10.11

4Q08 -$00.09

3Q08 $15.96

2Q08 $17.02

1Q08 $16.62

4Q07 $15.22

3Q07 $20.87

2Q07 $24.06

1Q07 $22.39

Now take a look at the data from an index I created of four of the biggest tech companies in the world (Hewlett Packard, Intel, Cisco, EMC) with a combined market cap in excess of $400 billion:

Big Tech Index

Period	Revenues**	% Change	Net Income	% Change

4Q 2009	$45,046	*14.1%*	$8,795	*56.3%*
3Q 2009	$41,875	-11.5%	$7,216	-5.2%
2Q 2009	$37,112	*-17.2%*	$5,486	*-17.9%*
1Q 2009	$35,494	*-20.5%*	$4,827	*-25.1%*
4Q 2008	$39,477	*-15.2%*	$5,627	*-26.1%*
3Q 2008	$47,314	18.6%	$7,615	7.7%
2Q 2008	$44,798	23.9%	$6,678	13.4%
1Q 2008	$44,656	24.6%	$6,441	6.9%
4Q 2007	$46,564	28.2%	$7,609	28.4%
3Q 2007	$39,884	16.8%	$7,074	28.2%
2Q 2007	$36,152	16.4%	$5,889
1Q 2007	$35,830	12.3%	$6,026
4Q 2006	$36,314		$5,926
3Q 2006	$34,145		$5,517
2Q 2006	$31,069
1Q 2006	$31,908

* 88% of S&P 500 companies reported through 2/17, the time this data was updated.

** Revenues excludes HP Services and some very small items from HP Personal Systems

Revenues for the big four tech companies are again showing year over year gains after nasty declines for the previous four quarters. Likewise for net income which is up 56.3% year over year and 82% from the 1Q09 trough.

While less pronounced, operating earnings for the S&P 500 as a whole support the trend: companies sold more and earned more in the latter half of 2009. There has been a significant bounce off the bottom.

We saw the same thing in the second half of 2003 with revenues and earnings picking up in the wake of the March 2003 low and all the monetary and fiscal stimulus. The analogy to 2003-04 that I talked about two weeks ago continues to impress me.

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While 4th quarter earnings have been impressive, the question remains how much of it was driven by unprecedented government stimulus. 0% Fed Funds Rate, $700 billion TARP, $1.25 trillion in agency MBS purchases, the $787 billion stimulus; all of this has clearly flushed the economy and financial markets with cash and jump started economic activity.

But now government officials are talking exit strategies. The Fed tested the waters on Thursday by increasing the discount rate by 1/2 a percent. Many of the Fed’s special programs expired on February 1 and the MBS purchase program ends on March 31. Obama is talking about a deficit reduction committee. (However toothless such talk might be, the fact that he is talking about it is important as an insight into the current mindset).

Without all this stimulus can the economy stand on its own?

The late January/early February selloff can be interpreted as a response to these issues. {That selloff was on heavy volume and hit the riskiest, best performing assets, hardest. The bounce the last two weeks has been on light volume and the riskiest assets have underperformed).

For now, it looks like we are in a range as life support is gradually reduced and it is hoped that the nascent recovery can stand on its own two feet.

YTD Returns (through 2/19)

S&P: -0.53%

DJ Total: +0.02%

Top Gun: +0.61%

Greg Feirman

Founder & CEO

Top Gun Financial (www.topgunfp.com)

A Registered Investment Advisor

9700 Village Center Dr. #50H

Granite Bay CA 95746

(916) 224-0113

CALL NOW FOR A FREE INITIAL CONSULTATION!

Mark Hart, The 37 Year Old Texas Hedge Fund Manager Who Bet Against Europe’s Debt And Won

Greg Feirman — Wed, 24 Feb 2010 18:18:50 +0000

Bloomberg (“Corriente Said to Pay Backers After Europe Debt Bets”, Bloomberg, February 23) and The Wall Street Journal (“How A Texan Bagged Europe”, Gregory Zuckerman, The Wall Street Journal, February 24, C1) reported, and the internet is abuzz with talk, about Mark Hart III, the 37 year old Fort Worth, Texas hedge fund manager who bet against Europe’s sovereign debt and won.

According to the articles Hart III is trying to keep a low profile for fear of political fallout from his trades. But an internet search I performed turned up some revealing information. Hart sponsored two Mises Circle events in 2009:

The Great Depression: Then And Now, Fort Worth, Texas, May 30, 2009

Recovery or Stagnation? San Francisco, CA, August 29, 2009

How come most of the people who forecast and profited from what we just went through have studied Austrian Economics? Makes you wonder if there isn’t something to it