I am not going to review the earnings for fund holding, homebuilder DR Horton (DHI) because they stink, we all know they stink, and we all know they will stink. But the stock goes up no matter what bad news. “everything is priced in”

Fannie Mae (FNM) – as I wrote in the preview yesterday they will be horrid (check!), but as long as it’s “not as bad as expected” the stock could go up. Check! Up almost 10%.

MGM Mirage (MGM) – bad earnings, decreasing revenue but “not as bad as expected“, the stock was up 6%. Check! Let’s look at this one a bit closer since it’s one of my favorite industries to watch – now the thesis is foreigners will come to Vegas since it’s so cheap for them with our weak currency (true), but I don’t think it will offset the slowdown from those darn Americans (also true). As airline prices only increase, and inflation continues to ramp (assured by the Federal Reserve policies of easy money printing) – this will only be the beginning of the slowdown in “recession proof” Vegas. Unless we start importing Asians and Middle Easterners whole sale into the city to spend their riches.

• MGM Mirage posted low single-digit percentage decreases in both gaming and non-gaming revenues – a sign that the slowdown has taken hold in Sin City. Revenue per available room, a key industry metric, on the Strip was down 4%, falling from $162 to $155. Total casino revenue decreased 3% as the result of lower table game volume, even as the hold percentage was at the high end of the normal range.
• Room revenue fell 6%, with a 4% drop on the Las Vegas Strip. Average room rates were down 2%, while average occupancy levels were 93%, down from 96%.
• “The results in gaming markets throughout the country this year have cracked the long-held belief that this industry is recession-resistant,” said Joe Weinert, vice president at consultancy Spectrum Gaming. “Casinos and racinos are feeling the pinch as players keep a firmer grip on their discretionary dollars.”

Cisco (CSCO) tonight, is showing year over year decreases in profit but that’s ok – its “not as bad as expected“- stock is up in after hours. Of course what CEO Chambers says on conference call always moves this stock.

Disney (DIS) - too many moving parts (TV, movies, amusement parks) but it looks good on first glance – unlike local theme park operators, a lot of foreigners will fly due to the cheap US peso, have a good time, and fly back out to their home country… meanwhile fewer Americans will be able to afford the flight/hotels/tickets – but that’s ok – we don’t need no stinkin’ Americans – we’re a multinational.

So you’ll notice a pattern here outside of Disney – degradation of profits year over year, but since expectations were so low – and the belief so high that things will improve soon – the stocks go up. That’s the only reason I own these 2 homebuilders; because I anticipate this illusionary belief and we can make some money in the meantime. Now my open question is how much should stocks be valued that show year over year decreases in profits? Not very highly. But since the current euphoria is everything will be fine in 6 months – these stocks retain their old multiples (or in fact their multiples EXPAND as earnings DECLINE) because of the belief in a few quarters we’ll be back to normal. It’s all about timeline folks – as long as the belief is a rebound is within sight we can keep pushing these stock valuations higher and higher; even on a retraction of profits. And this is why shorting anything is very tricky – not only do you need to be correct in thesis, you need to place your bets when reality overtakes hope. We are currently in hope phase, an area we revisit from time to time.

I mentioned James River Coal (JRCC) as a potential lottery ticket for earnings yesterday – cha ching.

So off we go to tomorrow, of note…

Devon Energy (DVN) – yet another major natural gas player

Fund holding Foster Wheeler (FWLT) – I expect expectations to be low and the stock has been weak since last quarter’s “miss”, so the stock could potentially have a very nice reaction if they can come through – this business is very lumpy from one quarter to another so there is no way to really model the earnings. Either way I had reduced my exposure last week, realizing that in return for less risk we could be giving up some gains on this one; still my favorite name in the space.

Refiner Frontier Oil (FTO) – the best house in a terrible neighborhood

Fund holding FTI Consulting (FCN) - we just talked about this one today – I didn’t realize earnings were today but I reduced for other reasons (technical action in the chart) – very pricey stock so that carries a lot of risk, but it always seems to make its numbers

Transocean (RIG) – deep sea driller; I mentioned when I sold Diamond Offshore (DO) in this space I would probably buy Noble (NE) to take it’s space on a pullback – instead I went with Pride International (PDE) as a buyout candidate – Noble has been flying since as I grit my teeth watching. Either way, this group is going to prosper for years to come or at least until Uncle Ben and his merry band of “paper money pushers” (take some more, it’s good for you) is able to get crude to fall back to $50 (cough). RIG is the big fish of the space.

Last 5 posts by Trader Mark

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