Quick Notes

Blog Link - Mike Morgan Behind Enemy Lines - My Quick Notes are also posted on my blog, where you can search the Archives and Review Reader Posts and Comments - Blog Link - Click Here


Quick Notes - Nothing fancy here.  I have been receiving so many emails since I stopped putting my research and updates on my blog and website, that I finally agreed to start putting some brief comments up.  I'll try to put something unique up a couple of times a week.  If you want additional information on anything you see below, it is reserved for my clients.  Conference calls are also reserved for clients.  If you are interested in becoming a client, please email me at Mike@MorganFlorida.org    Basic clients receive a comprehensive Weekly Update ranging from 10-20 pages, as well as access to a Monthly Conference Call and commission rebates on real estate transactions throughout the United States.

Weekly Reports - Prior to November 2007, I posted comprehensive Weekly Updates.  You can read these reports on this website - Click Here

Quick Notes - Below you will find this month's Quick Notes and links for prior month's.  If you would like to receive my Quick Notes as I post them via email, please send me an email request - Mike@MorganFlorida.org

Blog Link - My Quick Notes are also posted on my blog -Mike Morgan Behind Enemy Lines -  Blog Link - Click Here

June and July 2008 - Quick Notes - Click Here

May 2008 - Quick Notes - Click Here

April 2008 - Quick Notes - Click Here

March 2008 - Quick Notes - Click Here

February 2008 - Quick Notes - Click Here

August 15, 2008 - Trade Update 

We closed out one trade Friday (8-15):

1 - 5.08% GAIN on Genentech (DNA)
Purchased on July 22 at $93.50
Sold on August 15 at $98.25

We opened and/or added to six positions on Friday (8-15):

1 - 5 Option Positions
2 - 1 Long ETF Position

August 14, 2008 - The Boogey Man - Yesterday I left off with a promise to talk about the Boogey Man.  Well, the Boogey Man is the dark side of the pension funds.  Let’s start off with our dear friend Hank Paulson and his latest plan to allow Wall Street to acquire and manage pension funds.  I swear to you, I didn’t make that up.  Paulson actually sent a plan to Congress to allow Wall Street firms to buy and manage pension funds.  These are the same guys that brought us Auction Rate Securities (ARS), Credit Default Swaps (CDS), Collateralized Mortgage Obligations (CMO) and Structured Investment Vehicles (SIV) and all the derivatives and funny-money plans to extort fees from you and me.
 
Busted Pension Funds – Most pension funds are underfunded and Read More - Click Here

August 14, 2007 - Trade Update - For Wednesday (13th) and Thursday (14th) we only made one trade, a new Put position on a retailer.

August 13, 2008 - Financial Crisis 201 - Unwinding of Hedge Funds - One of the most frequently asked questions I hear is, where did all the money come from to fuel the housing bubble? The answer is very complicated but here are the three big sources of funds that fueled the housing bubble and the financial crisis we are experiencing.

August 12, 2008 - It seems like we have lost focus . . . or better yet our focus has been diverted. Nothing has changed when it comes to the outcome of the housing bubble. We still move into a Depression.

BASICS - Home prices are still falling, and housing markets are seizing up and failing. Seizing up . . . because financing has swung from Anybody and Everybody to Nobody. Failing . . . because affordability has not gotten better, but worse. Interest rates are higher. Incomes are lower. Mortgages are tougher to qualify for. And trying to by a foreclosure or short sale property comes with many hidden traps. But overall, less homes are selling and they are selling for lower and lower prices. Moreover, entire communities are being written off as empty homes plague neighborhoods. And it gets worse.

August 4, 2008 - The World’s Grandest Ponzi Scheme Unravels 

Pathetic Piping Puppets - When I see some of today’s financial “experts” telling us why there was a housing meltdown and why there was a mortgage crisis and why we now see the financial system crumbling . . . I find myself yelling at the TV, eventually launching the clicker at the screen.  It’s an expensive habit, but I don’t yell as much at the guys like Mozilla, Paulson, Greenspan, Schwartz or any of the other guys that ran the Ponzi scheme.  No, those guys were bad, but not nearly as bad as the ABC, CBS, NBC, FOX, CNN and CNBC financial experts who had the ability to do something, because today it is all about media.  Instead, the clowns like Cramer, Kudlow, Glen Beck, Wolf Blitzer and even sweet Miss Becky and innocent Erin continued to fuel the fire.  Instead of reporting on what was happening under the dirty sheets, they only reported on the “happy times” as they all bellied up to the bar and fed like pigs.

To Catch A Predator - Just think about it . . . MSNBC Dateline ran child molester stings until we cried Uncle.  What would have happened if they did the same about the financial crisis.  If they had done that, they would have all lost their jobs, because Paulson’s fraternity of Goldman Sachs brothers would have eviscerated the advertising of the media through strong-arm tactics on their clients.  Why was it OK to run To Catch A Predator until we puked?  Because the sexual predators were not buying air time.   Do you realize, Dateline would not even have had to change the name of the show.  They could have just changed the format from sexual predators to Wall Street’s financial predators.  If they want to call it like it is, start calling it where it hurts.  By the way, the answer to the most frequently asked questions I receive is, Yes.  I do wear a bullet proof Kevlar vest.  I hired another body guard last week.  And I never sleep in the same place twice. 

            With that out of the way, let me ask the question no one wants to ask.  What in the world were our politicians and attorneys general doing?  Well, they all knew what was going on, including Senator Bunning.  And they were the only ones that could have really stopped it, but they were too busy dining and dancing with Paulson’s frat boys here and abroad on lavish junkets.  I’m going to get emails about that, but luckily I have an enlarged fluorescent orange delete key.

            The BOSS Speaks - If you really want to laugh and cry at the same time, you must listen to Greenspan.  Now he’s telling us “this was an accident waiting to happen.”  Hold on a minute.  He was the guy with the keys.  He was the guy with the car and the money to put the gas in the car.  He also wrote the rules on how to drive the car.  And . . . he waived all restrictions on who could drive the car.  The Greenspan rules state . . . and I read them again a few minutes ago to confirm:  Drivers Include - Anybody, Everybody, Somebody and Nobody . . . but not me. 

            This week Greenspan told us we crashed.  The car is a total wreck and the only survivors are on life support . . . with severe brain and limb damage.  The question still remains, who was driving.  Was it Nobody or Everybody?  Or was it just Anybody?  Maybe it was Somebody, but we know it wasn’t Greenspan.  Or at least that’s what he says now. 

            The Cleaner - Just like all gangster movies have cleaners to get rid of the dead bodies, we have Paulson.  Think about that.  We had a typical “old time” gangster boss (Greenspan) totally out of touch with reality, but surrounded by “yes-men” sucking off the money created by his directives.  Kind of like the generation of gangsters that moved from a no-drug policy, into cocaine and heroin at the urging of his young lieutenants (Paulson, Steele, Schwartz, Rubin, et al).  The old bosses were clueless, and it all ended in collapsed gangster families, bloodshed and now chaos.  So now we bring in The Cleaner, Paulson.  And he immediately calls in one of his lieutenants, Wilson.  These are the guys that belonged to the global fraternity that created and executed the Ponzi scheme.  As for the “bail-out.”  It’s restricted to friends and family.  There is no bail-out for the public or for the pension funds that bought into the Ponzi scheme.   But I am not going to re-hash it all.  I’ve written about it long enough, and I took a lot of heat in my professional career and my personal life.  You can read much of what I have written on my blog and institutional website.

            Let’s talk about what is happening now . . .

            Depression - Totally unavoidable.  Bank on it.  Well . . . you won’t be able to bank on it, but you can bet on it.  We are not only headed for a Depression, but a violent Depression that will be far worse than 1929.  Some experts believe the United States will fall into the chaos, bedlam and anarchy that tore apart Yugoslovia.  I am not going that far, but I know our morals and ethics are not the same as they were in 1929.  Moreover, we are a far more violent society and totally dependent upon a well oiled system for delivery of food and basic services. 

            Bank Failures - I warned that Fridays would become known as F3 - FDIC Failure Fridays.  And Voilá . . . two bank failures on Friday, July 25.  Then another bank failure a week later, after the market closed, on August 1.  Next week?   Maybe none, but maybe 10 . . . or more.  And here’s why. 

            I am on the ground, in the trenches, and behind enemy lines.  To repeat for those new to my information, I own a real estate brokerage in Florida and I serve as a consultant to banks, financial institutions, mutual funds and hedge fund managers . . . as well as builders and developers.  So when I talk, I talk from Behind Enemy Lines.  Unfortunately for clients and readers, I can’t always share as much detail as I would like because of confidentiality concerns.  My institutional clients appreciate that, because they can feel comfortable discussing their portfolios, problems and potential outs. 

            I can tell you this.  We will see at least 100 bank failures before the end of the year.  What’s important about that statement, is it is not another rear-view mirror statement from one of the financial experts on TV or some of the others that write blogs and columns . . . but never venture out into the world of reality.  I will share what I am seeing on the ground and hearing from my institutional clients here and abroad.

            US Banks - I work with banks on two levels.  One, we offer services to banks selling foreclosed properties to consumers.  Two, we offer services to banks trying to determine what they own, what it’s worth and what to do with it.    The latter includes evaluating portfolios for bulk sales and trying to coordinate these transactions.  Let me start with the first level of services.

            Banks and lenders that are foreclosing on properties have managed to bumble the process of disposing of foreclosed properties.  Then again, as I have noted many times, banks are not in the real estate business, and I warned that they would be the group to drive prices into the ground, finally collapsing the entire system.  That is exactly what is happening.

            The systems developed by banks and lenders are horribly convoluted or they have farmed the process out to asset managers that often are “totally” incompetent.  I thought we might see this start to correct itself, but it is actually getting worse . . . and now banks and lenders are the ones throwing jet fuel on the fire.  For my residential brokerage, we have reached the point where we must carefully evaluate whether we even want to take these listings.  You heard it right.

            Most brokers would kill for listings of foreclosed properties.  These properties are often priced below the market so they can sell fast, but that is rare.   Most of these properties come with a laundry list of headaches and expenses.  And when they do sell, the asset managers are skimming a full third of the commission off for themselves. 

            Real estate agents still vie for these listings, because we have an industry that is not regulated, with a low barrier of entry, and 98% of our industry is part-time.  Agents don’t understand what is involved with the sale of foreclosure properties, and lenders don’t take the time to develop procedures to avoid incompetent real estate agents . . . just as the lenders ignored the issues with mortgage brokers during the development of this crisis. 

            I will shed a little light on this for those not in the industry.  Foreclosure listings come with a laundry list of Things To Do.  This begins with occupancy reports and rekeying of the property, that can quickly escalate into initiating the eviction process if there is an owner or tenant in the property.  And once you gain possession, there is the trash-out, clean-up and repairs.  This process alone can take several weeks and cost the agent thousand of dollars.  Listing agents must pay for all of these expenses, as well as place utilities in their own name.  Even after getting over these hurdles, which on average takes a month, the property then must be priced.  That process can take 2-3 weeks, and it is so riddled with inefficiencies that most properties are overpriced because of the time it takes to complete this process, and the level of competence of those providing the Broker Price Opinions. 

            100% Loss = Busted Banks - To get to the stage where we have a price on a listing, the lender has already spent tens of thousand of dollars. Here’s a basic example for a $400,000 mortgage.  The property is most likely only worth $250,000 now.  I have previously written about the process and expense involved in property disposition, so I will cut to the chase.   A lender will be lucky to clear $125,000 on this property.  This is not a typical example.  The typical example is a $250,000 mortgage where the property is now worth less than $150,000 and by the time you carve out all the expenses . . . the bank has a zero or negative.  The reason for the zero on the lower priced property, is because many of the expenses (i.e. foreclosure process) are the same for a million dollar property as they are for a $100,000 property. 
            So here is the question for Paulson, Bernanke and Bair.  How can any of our banks survive when they are taking 70% -100%+  hits on mortgages?  PB&B will tell you these problem mortgages make up less than 2% of total mortgages.  Huh?  What?  I’ve got news for them.  I have no idea where they are getting their numbers, but you don’t even have to go behind enemy lines to see through the numbers they are trying to feed us.  Drive around and count For Sale signs.  Now multiply that by a factor of 2-10 depending upon where you live and whether signs are allowed in all neighborhoods.  Now double that number for the homes that are moving into the foreclosure process, and then double it again because things are getting worse (quicker), not better.

            Admitting Defeat - The lenders I speak with know they are dead.  They have no problem admitting it now.  They realize their jobs are over, and they are on borrowed time.  They are nothing more than liquidators now, and they are doing a lousy job at it.

            We built too many homes and have too many builders.  The markets are correcting that.  We have too many mortgages and too many mortgage brokers.  The markets are correcting that.  And we have too many banks.  The markets are correcting that as well.  Paulson’s tinkering with the ability to short his Fav19 will come back to mark him in history.  It was un-American.  This is not Russia or Venezuela.  If the markets were not working because of naked shorting, then put the bastards in jail that were violating the rules.  Unfortunately, that would mean Paulson was going to have to throw his frat boys in jail.  Paulson knew what he was doing with the Fav19, just as he did with the Housing Bill.  Paulson had one purpose, and one purpose only in both the Fav19 and the Housing Bill . . . to bail-out his buddies.  That’s it.  Full Stop.  The Housing Bill is a complete, absolute and autarchic ploy by a man that has far too much power and control.  I am not going to write about the Housing Bill.  I am going to save that for our August 7^th Conference Call.  If you are interested in the Conference Call you can purchase a dial in code - Mike@MorganFlorida.org  Clients receive free access codes and will receive the replay link. 

            I’m going to share some things that I am doing in my model portfolios as well as some of the trading we are doing in our trading portfolios, but you will find sections below that are only a portion of what I wrote, and the portion not visible publicly is what my clients are receiving. There are sections below where I refer to “more info for clients,” and this simply means you are only seeing a portion of what I wrote.  The balance is reserved for clients only.  It is not meant to anger anyone, but if I don’t provide my clients with added value, there is no reason to pay for my services.  In addition to updates, trade alerts and model portfolios, my clients receive additional information and access to all conference calls at no charge.  If you are interested in asset protection and asset growth as we move into the Greater Depression, I suggest you become a client . . . or at least try it for a month or two.

            Short the Banks - We are short a number of banks, including Wachovia and Banc of America.  Some people question why these two, but we’ve already been short many of the smaller banks that have tumbled 60-90%.  WB and BOA have multiple mea culpas to come.  I like other banks for short positions, but WB might just be my favorite.  Over the past few weeks, as we see more and more clowns like Cramer call a bottom, the issues plaguing the big banks have been ignored.  Here’s a few things to remember. 

            Bob Steel, another Goldman Sachs frat boy, just took over at WB and he pompously purchased a million shares.  Bob Steel can’t fix WB, not even with his buddy Paulson pulling strings.  Wachovia has Auction Rate Securities problems that they cannot hide.  I love one of the Wachovia responses to a question about their ARS problem.  A Wachovia spokesman said, “Many securities firms, including Wachovia, are responding to inquiries from regulators about the auction rate securities industry. The discussions that are occurring today are a part of this ongoing process.”  So, does that make it OK.  Is it OK because everyone was doing it?  Isn’t that exactly why we are where we are at?  Yes.  And if you had to think more than three seconds, you deserve to follow Cramer off the cliff . . . except he’s not going over the cliff.  He’s just making sure everyone else stampedes off the cliff. 

            Wachovia also has CDO and CDS exposure.  How soon we forget that one bold hedge fund actually sued Wachovia on an allegedly fraudulent CDS contract.  That one involved Citigroup as well.  The really cool part about all of this for short traders, is that most of the banks still have no clue what they own, what it’s worth or how much trouble they are in.  Personally, I’ve got to think most of these big banks are broken and broke.  As Greenspan said, it is not a liquidity problem, it is a solvency problem.   B-I-N-G-O

            We are short a number of other banks, and my trading clients are looking at tremendous opportunities trading puts on banks that you might think are safe . . . but are doomed to failure along with many of the smaller regionals that are failing.  More on this and Golden West for clients . . .        

            Clients Only . . .

            Short the Financials - We are short the financials, even Merrill and Goldman.  But this discussion will remain reserved for clients only.  I have to remind some of my clients of how to behave at the buffet.  You don’t short everything just because it is a bank, builder or financial.  Do you load your plate with one of everything at the buffet?  Of course not.  You take the lobster, the prime rib, the caviar and the ice cream.  Always take the ice cream.  I have had clients call me, boasting about shorting Wells Fargo or Boston Properties and dozens of other companies that they think are fungible.  Why risk Warren Buffet announcing he’s going to take a larger stake in Wells Fargo, simply because he has $40B in cash sitting around?  But there are other reasons we are avoiding Wells Fargo.  The same holds true for Boston Properties.  Yes, it’s a REIT, but what kind of REIT?  What are they doing differently?  Who’s the boss?  Mort Zuckerman.  Why fight a stand up guy like Zuckerman and a company like Boston Properties, when you can pick from a dozen others that are in far more trouble.  I realize I got off track there, but I hope I made the point about not shorting all the financials or all the builders, etc.  In my model portfolios, we only short the juicy stuff.  More for clients . . .

            Clients only. . .

            Merrill Marks the Market - Finally, we have a firm bold enough to “attempt” to mark the market, not myth.  Well . . . almost, because we are not really sure what they did or how or even exactly when.   Merrill sold (maybe sold) CDOs with a nominal value of $30.6B to Lone Star funds.  The deal closed, or should I say “mythically booked” at 22 cents on the dollar.  Mythically Booked?  Yes, because Merrill financed 75% of the purchase.  It was a deal that has the Street so perplexed that Merrill will have to make an SEC filing to clear the air. Otherwise, John Thain is going to destroy the credibility he has worked so hard to build for 30 years. 

            Here’s how crazy this deal is.  We are not sure when it was done.  Some say it was done June 27^th, but kept back-pocket secret until this week.  Why?  With John Thain’s silence on this and other Merrill issues, you’ve got to wonder if he got into something he is now finding a lot stinkier than he ever imagined.  I for one think John Thain will exit Merrill as soon as he sees and open window. 
            Then again, he’s a Paulson frat boy from Goldman Sachs, so he might just be another plug in the dike like Bob Steel at Wachovia.  If you put together a list of all of the Goldman Sachs boys and girls, that are at various levels of private business, public office and international office, you would not be able to comprehend the web they have knitted.  So, the real question here is whether Paulson can hold it all together.  Not a chance.  Zip. Nada. Nope. No Way.  And when it unravels, it is Humpty Dumpty. 

            My clients are short Merrill and have increased their short and put positions even after the deal was announced.  More discussion for clients about the National Australia Bank issues and how this triggers other write downs . . .

            Clients only. . .

            Back to the Banks - I will reserve most of this for clients, but let me share a little of what I am seeing over the last few weeks.  Make that 2-3 weeks.  Fear is clearly in the air, along with desperation and a huge dose of stupidity.  I often use the term banks, financials and lenders interchangeably.  I’m not going to apologize for it, but I will try to explain it.  Some of these players are involved in all three areas.  Some are hybrids.  BOA is a bank.  It is a financial.  It is a lender.  And I am seeing the fear at all levels. 

            At the street level, we see more properties coming to market.  As this unravels, the process grinds itself into dysfunction.  Are there any smart banks left?  Easy answer, but I am going to reserve that for my clients.  I will share one more point with you.  The dysfunction of the disposition of the foreclosure properties is just the tip of the iceberg.  It is enough to sink the banks, but you must consider what banks do.  They loan money.  I have news for you, they are not loaning money, so as I have said for far too long, the problems simply feed on themselves now.  If you are a butcher and you are not selling meat, you are not a butcher.  If you are a bank and you are not loaning money, you are not a bank.  You may think you are a butcher or a bank, but you’re not.

            Probes and Lawsuits - I think the word probe should be used a bit more physically on some of the financial wizards that concocted the Credit Default Swaps and Auction Rate Securities that are finally being “probed” by a few states and more seriously by New York Attorney General Andrew Cuomo.  Read the news.  It’s not one institution.  It’s not one investigation.  It’s not a slap on the wrist.  No need to repeat the news here, but for my trading clients, the institutions involved in this mess are prime targets for shorting and puts.  Moreover, this takes a bit of research to see who boasted about these deals over the last few years.  Because with that research, you’ll understand who is going to be targeted.  The lawsuits racing at the institutions from attorneys general . . . and very soon, coming to a theater near you, are some huge lawsuits from the private-sharks representing pension funds and other fiduciary accounts mismanaged by the fraternity boys and girls.  Attorney General Cuomo has already made it quite clear that he is just getting started.

            Housing Prices - Let me touch on this briefly.  Prices are going to drop another 20-50% without a Depression.  As we move into Depression, it will be an event we have never experienced at the scale we are entering.  Much, much, much more info and color on housing prices and specific markets for clients, as this is critical to our decisions on the builders . . .

            Clients only. . .

            Builders - Without a doubt my favorite area and one I understand better than any analyst I have yet met.  In fact, there is only one analyst left standing without egg on his face.  Alex Barron, Senior Analyst with Agency Trading, is the only analyst that has dared to call it like it is.  He stuck his neck out and took a lot of abuse along the way.  As the builders slid along the roller coaster, tempers often flared from hedge funds and investors that thought I was a jackass.  When the builders rallied early this year, things were bleak for the shorts.  But nothing has changed, and most of the builders will be out of business or nothing more than a shell of what they are.  For the hedge funds that stayed short, they reaped huge rewards.  And for the idiots that stayed long, they were crushed.
            Shorting the Builders - I apologize to general readers on the Internet, but I am going to reserve this for clients only.  I often get emails and phone calls about what the analysts are writing about.  A lot of that stuff floats around the Internet for free.  If you think you can listen to the big girls, like Ivy Zelman, you should run a tape on her advice.  You’d be a very UN-happy camper right now.  And for those that remember me noting she was too close to Lennar??? If you listened to her with her $30 target, you’d be about 60% short of your target right now.  The same holds true for any of the big boys still left in the game, with the exception of Alex Barron.  In fact, he is the only analyst that can rightfully brag, his clients are all smiling broadly . . .  if they listened to him. 

            It is only fair to my clients, that I reserve my builder thoughts for my clients.  But I will share one more item with you publicly.  In addition to not being able to rely on the analysts, you can’t simply bag the builders with the ETF, unless you are okay with the fact that the XHB includes paint companies, furniture companies, carpet companies, Lowes, Home Depot, etc.  I will agree, these also follow the builders down to some extent, but the XHB is not a pure play on the builders.  Far, far from it.  So if you want to go to the buffet and eat one of everything, XHB is for you.  If you want to go to the buffet and enjoy the lobster and prime rib, there are builders to short and builders to ignore.  Are there any builders to buy?  That depends.  More detail on builders below for clients . . .

            Clients only. . .

            A House for Everyone - Very quickly on this one.  I was always afraid to use the word Depression, because it sounded crazy.  Now it’s reality.  One thing that bugged me over the last year was the level of inventory and the NAR numbers.  Nothing seemed to add up, but I kept this to myself.  I believe we have more homes (apartments and single family) than we have people to live in them.  Absorption rate is not a function of historical sales numbers.  We are looking at a new dimension of absorption . . . and the builders are still building . . . because the banks are still lending . . . and then foreclosing . . . and the unsinkable Titanic eventually sank, even though the band kept playing. 

            Back to the Banks . . . Again - Actually, this is a side-step to FHA, but ties back to the banks.  You see, the mortgage market right now is basically FHA and FHA and FAH.  Sorry about that, I meant FHA, not FAH . . . because there is no one else left to make mortgages.  Traditional banks can’t make loans because they don’t have any money to loan, and they are too busy foreclosing on millions of mortgages they have on the books that are sour.  The few banks that are still issuing mortgages are few and far between.  Moreover, the hoops the buyer must jump through are just about insurmountable.  But there is still the lender of last resort, which is actually the lender of first and only resort . . . FHA.  Keep reading if you are a client.  If you’re not a client, you’re going to miss the meaty part of immediate negative equity and the FHA torpedo on steroids.

            Clients only. . .  

            Asset Protection - It has become next to impossible to open a “reliable” Swiss bank account to hold foreign currency or gold.  Even the banks we were working with have refused to discuss new accounts from the United States.  There are some opportunities available for hard asset protection.  We will be sharing this with clients.  For now, we are concentrating on increasing our dollars as the market crumbles, but will eventually need to place the dollars in alternative assets.  If you are considering a foreign account, my advice is to be very careful.  There will be tremendous scams in this arena.  Remember . . . the mortgage and financial guys are all out there looking for the next easy mark.

            Pawning for Potatoes - I have a few clients and readers are in the pawn shop and/or jewelry business.  There emails are great - Behind Enemy Lines - information.  Let me share a few with you, because people are now selling what’s left just to put a meal on the table:

1 - 3/4 kt round diamond ring, vs1, color G, 14kt gold setting with 8 diamonds.....lady needed $200 because her water got shut off

2 - I had a guy come in with his wife. She was crying because they were selling her engagement ring. It was all they had left. He walked out crying and I wanted to shut the shop down for the day. Its getting gut wrenching.

3 - The BMW 7 Series people are showing up with goods.

4 - Today a financial planner with sterling candlesticks.   This is crazy.

5 - This week we had our busiest week in the history of our company. All three locations. My cousin in California has six shops and he has doubled the size of his staff since the first of the year. Where does it end.

6 - The people coming in lately are not what we saw a year ago. I have to say more than half of my business is white collar and when you consider dollar value it is 80% or more. You have been right on the money Mike.

7 - July was a record month and a very tough month emotionally. I have been doing this for 30 years. I never seen so many people coming in just to pay for food. What do they do next?

Bye Bye Benigans - Cracker Barrel Next? - There are two points to this treat.  Yes, it is a treat for those of us short the REITs.  Benigans filed Chapter 7 this week, which means they shut the doors and walked away.  That means 150 company owned store vacancies for REITs and similar owners throughout the country, with the potential of 138 additional vacancies when the franchisees shut down.   While Benigans is not that big a hit to the REITs, the future of Linens ‘n Things 600 stores is still up in the air with their Chapter 11 filing.  I’m betting on Linens ‘n

Things not making it.  It is poorly run through Leon Black’s Apollo Global Management. Our field research tells us the winner is Bed Bath and Beyond, and Linens ‘n Things closes the doors once GE and other creditors put the squeeze on Black’s huge miss with Linens ‘n Things.  Unfortunately, there is no way to play the Linens ‘n Things failure against the success of Bed Bath and Beyond, as we did with Office Depot and Staples.

            Speaking of successful paired trades, this was the best.  Moreover, we believe Office Depot will be closing stores this coming quarter but there is a wild card that keeps us on the sidelines.  More for clients below. . . .

            Clients only. . .

            As usual, I got off track again.  The Cracker Barrel discussion will be reserved for clients below.  I am making a trading call on Cracker Barrel.  I am not meaning to offend any public readers, but I must provide my clients with value above what they can also read for free on the Internet.

            Clients Only - Cracker Barrel  . . .

Supermarkets Hurting Too - This was by far my favorite field research.  Whenever ice cream is involved, it is good.   The other day the GreenPaulKenites (GPKs) really had me down, so I decided I needed an ice cream fix.  As I was checking out in the supermarket, with several pints of Hagen Daz, the gal packing my treats made a comment about her vacation next week.  She sounded about as down as I felt, so I said, “I sure could use a vacation.”  Her response was, “Not me.  I’m broke.”  My brain kicked into field research mode and I started asking her a few questions.  There was no one in back of me, so I took my time and the young lady checking me out also chimed in.  Here’s the scoop.  Seems like this unnamed supermarket chain is forcing employees to take vacations.  As the ladies eloquently put it, they were being laid off.  Why?  Business is off.  Did you hear that?  Business is off in a supermarket selling food and water!

            That started me thinking so I took it to another level, considering the effects of gas prices and combining trips to the supermarket, as well as what was going on at BJs, Sam’s, Costco and Wal-Mart.  If you’re a client, you will be surprised.  If you are not a client, try the Hagen Daz Toasted Coconut Sesame Brittle.  It will truly make your day. More for clients below . . .

            Clients only - Big Box - Big Bets . . .

Mervyn’s Moving Out - Maybe?  Most likely, yes.  But for now they’re going to do the drag it routine so the boys at the top can keep sucking out the dollars.  Mervyn’s filed Chapter 11 this week with 176 stores.  And that’s just the beginning for the retail sector.  The big opportunities here are shorting specific retailers, shorting very specific REITs and even considering some paired trades for best of breed and worst of breed.  Nah, strike that.  It’s all going lower. 

Retailers v. REITs - I’ve written about the commercial sector of the housing crisis, as well as REITs.  What is most interesting here, are the dividends.  We get a double bang here.  Some of the REITs are in huge trouble because of overbuilding and now a soft retail sector that is getting downright mushy.  I say some of the REITs because this is the best example of being careful not to short the entire sector.  There are some REITs that are going to outperform other REITs and the market.  There are some REITs that may be in position to benefit from what is unraveling.  So here is a sector that ground zero, field research is critical.  Here are a few that we are shorting CLB, DDR, KIM and WRI.  The other bang from the REITs is their dividends.  One of the reasons they have held up, are the dividends.  But just like we saw with the banks and the builders, once the dividends go, it will be another round of haircuts.  For the REITs it is important to stay focused on those with exposure to strip, smaller regional malls and some of big box mix.  This is an interesting group that is a must-short in any crisis investing portfolio, with more info for clients. 

            Clients only – Short These REITs . . . but

And to close out just why our favorite REITs in our portfolio and the new ones referenced above are so, so hot as shorts, here is a list of retail closures effecting REITs:

Ann Taylor closing 117 stores
Eddie Bauer to close more stores
Cache - closing 20 to 23 stores this year

Lane Bryant, Fashion Bug, Catherines closing 150 stores

Gap Inc. closing 85 stores

Foot Locker to close 140 stores

Zales, Piercing Pagoda plans to close 105 stores

Home Depot closing 15 stores

Macy's - 9 stores closed

Movie Gallery – plans to close 400 stores

Hollywood Video closed 500+ locations

Pacific Sunwear - 153 Demo stores closing

Pep Boys - 33 stores of auto parts supplier closing

Sprint Nextel - 125 retail locations

Wilsons the Leather Experts – closing 158 stores

Bombay Company - closing all 384 stores

KB Toys closing 356 stores

Dillard's Inc. will close another six stores this year.

Glossary of GreenPaulKe Speak

It has become obvious that we need a definitive glossary for so many of the new coined financial terms that are taking on new meaning in a world of three-card Monte and shell games at the highest levels of banking.  Here are just a few.       And these are all actual terms that have been used by the “experts” and talking heads over the past week. 

Aspirational Value - This is one of the most common.  It’s basically synonymous with Mythical Value or my favorite . . . Optative Value from the Greek form wishful thinking.  And if you dig a little further look at Optative v. Opium and the effects of the latter.  Ah, ha . . . yes, now maybe you are starting to put it all together.  This may sound like tongue-in-cheek to you, but it is not.  This is real stuff that you will hear everyday from GPKs.

Risk Absorption - I heard this one from a talking head yakking about how we will know we are at the bottom or when we are getting close.  He seemed to throw around “risk absorption” as a catch-all for when we have absorbed all the risk we will be coming out of the rubble.  But he was speaking GreenPaulKe when he was quizzed on how the risk was going to be absorbed.  And that is exactly the point for moving into a Depression.  The money is gone.  There is not risk left.  The horse has left the barn . . . died . . . and is now pushing up beautiful flowers for the guys that killed the horse (Paulson and Pals, The GSC, The Fraternity Boys). 

Visibility of Value - Oh yes, yes, yes.  This one is very special.  You will only hear this from the most advanced GreenPaulKenites.  You see, the value is there, but the visibility is different for the general public (suckers) and the GPKs.  The GPKs see value where we can’t.  They see value in banks and financial institutions, even though these institutions are leveraged at 30:1 and their assets have declined by double digit percentages.  The trick is for the GPKs to convince sovereign wealth funds and pension funds that they must learn to trust the GPKs regarding their VOV . . . visibility of value.  Got it?  Call me if you don’t, because this is critical to recapitalization.  You see you need VOV to be able to capitalize.  Without VOV, there is no reason to recapitalize, because there is nothing to recapitalize.  I want you all to realize, I am having fun with this, but I am also make very serious points.  And once again, I remind you, these are terms the talking heads used just this past week.

One Picture Says It All - The following chart is from the Economic Research Department of the St. Louis Federal Reserve Bank. Here is the link: http://research.stlouisfed.org/fred2/series/BORROW. This long-term chart illustrates the amount of money banks have borrowed from the Federal Reserve from 1910 to the present.