Top Gun FP Client Note: The Forest And The Trees

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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.  Here is this week’s.


I feel the mantra from even cautious money managers has become ‘Don’t ask questions as to what or why, just vote yea and join the fray’.  And I am about to do that.  Waiting for a prudent entry point in this advance may destine us to sit on the curb for too long a time.
Dennis Slothower, On The Money Newsletter, this past weekend
That quote from Dennis Slothower really captures the current moment pretty well.  Either you believe or you don’t.  Reason and evidence are not playing much of a role at the moment.  Which doesn’t mean the rally can’t keep rolling.
But I prefer to focus on the forest as opposed to the trees.  If I’m right that we’re in the middle stages of a long term secular bear market, a 5, 6 or even 7 month rally, even one as powerful as the current one, will in the end be nothing more than a fleeting countertrend rally in the context of a long, grinding bear market.  It is hard not to get caught up in the powerful rally, all the money being made on the long side and all the talk about the end of the recession and recovery.  But by focusing on the forest and not getting lost among the trees, we can keep a level headed perspective and deliver the solid long term returns that are our aim.
Because from a fundamental perspective, the 2nd quarter earnings season continues to strike me as rather lackluster.  Last Wednesday after the market close, Cisco (CSCO) reported an 18% drop in revenues and a 23% drop in net income for the quarter ended July 25, 2009.  CEO John Chambers talked about a potential tipping point during the quarter but I fail to see any evidence of that in the report.
Another company I follow, Whole Foods Markets (WFMI), also reported earnings last Tuesday after the close.  Comparable stores were off 2.5% for the 12 week quarter ended July 5, 2009.  Whole Foods did a good job controlling expenses resulting in a 23% increase in operating income and a solid bottom line.  But the top line continues to suggest that consumers are under pressure.
Core Top Gun holding Comcast (CMCSA) also reported earnings last Thursday before the open.  Revenues increased 4.5% and operating cash flow 5.5% for the quarter ended June 30, 2009.  Comcast lost 213,000 basic cable subscribers during the quarter out of a base of 24.1 million.  Clearly, the economic environment is having some effect on cable subscriptions at the margin.  But for the most part most people are not even thinking about cancelling their cable TV.  Digital Cable and High Speed Internet subscribers continue to grow. 
At its current price, Comcast is trading for just more than 9 times trailing free cash flow.  Free cash flow is the actual cash generation of the business, free of accounting gimmicks, including all operating expenses, capital expenditures and taxes.  So we are able to hold a market dominating company in an industry with inelastic product demand with a 1.80% dividend at a bargain price.  This is the kind of thing I want to own in this environment.  I’ve also sold Jan 2010 $17.50 and $20 calls on our holdings to juice our returns.  This way we can return 8-10% annually even if the stock does nothing.
Bulls have drawn encouragement from recent economic reports on GDP and Jobs.  Two Friday’s ago The Bureau of Economic Analysis reported that 2nd quarter GDP dropped at 1% annualized rate.  That suggested to many that the pace of the decline is easing. 
Similarly, last Friday’s Jobs Report showed a 247,000 loss in jobs and a 9.4% unemployment rate.  That was below expectations and less bad than recent reports, encouraging many in believing that the worst is past and a recovery around the corner (for a number of bullish comments on the jobs report from economists see my “Buy! Buy! Buy!”, Top Gun FP, August 7).
My sense is that some of you are worried that I might have missed the boat on this one.  With big name commentators coming out every day saying that the recession is over and a new bull market upon us, it’s natural to think that maybe I was right for the last two years but I’m wrong now.  It’s natural to worry that you’re missing out on making money and that by the time I figure it out much opportunity will have been lost.
Clearly that is a possibility as there is no certainty in this game.  I am watching developments on a daily basis, as always, and am doing my best to to consider the evidence for the bull case.  But I’ve seen these kinds of countertrend rallies before and have been proven right many times in due course.  Know that I have no ego involved and if I do become convinced that the tide has turned I will not hesitate to admit my mistake and change course. 
But as of the current moment, I am resolute in my belief that the totality of the evidence strongly supports the premise that this is a bear market rally in the context of a long and grinding bear market that is still very much in the process of unfolding.
Please let me know about your thoughts and concerns as I am always only a phone call or e-mail away.
Weekly Returns (8/3-8/7)
S&P: +2.33%
Wilshire: +2.65%
Top Gun: -0.94%
YTD Returns (through 8/7)
S&P: +11.87%
Wilshire: +14.63%
Top Gun: +6.63%
Greg Feirman
Founder & CEO
Top Gun Financial (
A Registered Investment Advisor
9700 Village Center Drive #50H
Granite Bay, CA 95746
(916) 224-0113

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