In Search of the Perfect Investment

America created just 88,000 jobs in March — the smallest gain in nine months — and more people dropped out of the labor force. MarketWatch said the news “added to a fresh pile of evidence that the pace of hiring in the United States has slowed.”

Don Luskin, an eminent economist, said this morning’s news “is proof that the U.S. economy is not inflecting toward more rapid growth and is indeed still mired in the Not So Great Expansion.”

Wall Street has a tough time fighting the government’s official numbers and the market is down.

The government’s numbers don’t tell the full story of the booming underground economy — people getting paid in cash,  not paying taxes and not filing paperwork.

Obviously I don’t have any numbers to underscore my belief in this new wrinkle. But I see it all around. I’m somewhat sensitive to it since I grew up in Australia just after the end of WWII when lived “white” and “black” money all the time. White money was legit money that taxes had been paid on. Black money was cash that taxes weren’t paid on.

Prices paid with black money were always cheaper than prices paid with white money — which included credit cards and bank loans. I remember friends of my parents bragging about how much cheaper houses were if you paid all or part in black money. I remember the huge army of people who worked for cash — it seemed they never had a legitimate job. This black market just got bigger and bigger as the government got creative with new higher taxes that it tried to collect.

It’s happening here. Pay cash in many New York stores, they happily knock of the sales tax and often more. Pay cash to contractors, the price drops. Cash has become the new oil that lubricates the economy. Pity that the stockmarket doesn’t recognize it. Good luck trying to find it  or tax it.

My stocks took a big hit this morning. They’re coming back a little. It’s a good day to load up on some of your favorites.

How to know when to short. It’s as legitimate to short a stock as it is to buy and hold one. Shorting doesn’t mean you’re unAmerican and support raping and pillaging. It just means you think the company’s stock is going down — for whatever reason. There are zillions of stocks you wouldn’t consider shorting because they’re in stable, boring, growing businesses — e.g. the stocks  Warren Buffett favors. But there are others you might consider shorting because they smell.

Yesterday I sat with a friend and noodled The Sixteen Reasons to Short a Stock. This is a first iteration and not the final word:

1. Fundamental changes in technology of an industry. The explosion of natural gas production that occurred after the invention of fracking has had a major impact on the energy industry. No one wants PCs or laptops now. They want tablets or ultrabooks.

2. Shopping patterns change. For example, from bricks and mortar to online. Think Amazon benefiting, while Barnes and Noble is not.

3. The management once had a great strategy that no longer works. Think Dell and its just in time manufacturing and erstwhile low prices. Suddenly customers want to see and touch. HP at one stage outshone Dell, by selling in retail stores. And others like Lenovo figured how to make cheaper PCs and laptops.

4. The company has outgrown the management’s ability to manage it. That’s LuluLemon today. That’s Microsoft. That’s Intel.

5. The company made some large acquisition/s that had you scratching your head. Why do that? HP is the king of the failed acquisitions. There have been others.

6.  The buzz has changed. Only a few months ago, every article anywhere on Apple talked ecstatically about the company, its products and its stock going to $1,100. You don’t find those articles any longer. You find articles talking about challenges.

7. The trade press (and the Wall Street Journal) review your new product/s poorly. Windows 8 is not brilliant. It’s lacking features Apple OS has. Windows Surface Tablet has its problems, etc. Check out PC Worlds “6 killer Mac features we’d love to see in Windows PCs”. Click here.

8. There’s a failure to regularly introduce new products. You can’t accuse 3M of that. But you can accuse Apple. You can accuse Radio Shack which has sold the same old tired batteries for eons. There’s no excitement in their stores.

9.  At one point, they had the market to themselves. Now everyone and their uncle is coming after them. That’s Apple and their wonderful iPhone. Or it was wonderful until Samsung introduced their Galaxy Note collection and BlackBerry introduced their latest phone. the Z10.

10. Growth has ebed. They earn below what Wall Street expected. And they keep missing expectations. For whatever reasons. The dumber reasons are the ones to watch for.

11. Cockroach events start to happen. They’re late with a report. They’re having some auditing problems. You can’t predict cockroach events. But you can identify them. They’re not normal events. They’re failures of management. Lululemon’s embarrassing problems with transparent pants were not a legitimate mistake, but a stupid management decision to save a few pennies by using a cheaper fabric.

12. The stock is trading at too high a multiple —  for example, when the P/E is more than three times the growth rate.

13. The company has never made a profit and is trading on pure hype. For example Pandora. Its window is closing as rumors of an imminent Apple Radio are blossoming.

14. The founder leaves and the new management is a disaster. Think Intel. Think Microsoft. Think JCP. Think Apple.

15.The economy craters. Expensive house builders like Toll don’t enjoy that. Ditto for Tiffanys.

16.  Government promoted industries are always good to short. Think ethanol and solar.

I have mentioned in previous columns some shorts I like, including Barnes and Noble. You might also look at Verifone (PAY), Blackberry
Ericsson, LuluLemon and Radio Shack.

My friend and I are refining our list this weekend. Meantime I do notice that Business Insider has a list of The 25 Stocks Investors Are Shorting Like Crazy. Click here.

More on this on Monday. Please add some of your thoughts in the Comments section below.

Harry Newton who’s seriously eyeing a little more shorting, less longing (going long). This week has not been easy. But it’s not been a cause for despair. We live in a very volatile world. And that’s hard on the psyche. Sorry about being late with the column this morning. I try every morning for 9:00 AM And usually make it by 9:10 AM. It’s harder on the west coast.