Wednesday, December 31, 2008

Hasta la vista, Baby

I'd be remiss if I didn't offer a hearty and heartfelt so long and farewell to 2008.

It's been a year where we've seen stupidity and incredible hubris revealed, resulting trials in the markets and financial companies, rather interesting and unexpected events unfolding themselves in local financial companies, and health challenges for some very dear friends of mine. Through it all, I've been blessed in ways I couldn't have possibly imagined. Even so, I'm ready for a continuation of the new that is underway.

Cheers everyone. Let's make some money in 2009, shall we?

One of the reasons why

A little over a year ago Credit Suisse put out an amazing graph that struck fear into my heart. It certainly had a lot to do with me looking more seriously at Wal-Mart as an investment (thank you, CS!) because of their focus on lower income consumers.

One look at this graph, combined with the knowledge that it is more and more difficult to get a mortgage (i.e. refinance some of these beasts), should make you rethink any rosy scenarios you might be harboring in your heart. Oh yes, and I hear that as many as 50% of the mortgages that reset in 2009 are already behind on their payments... at the teaser rates. Want to bet on a fabulous 2009? I'll take the other side of that bet!

It's not over until the fat lady sings, and she's not even starting to warm up yet.

Tuesday, December 30, 2008

That's why we invited you...

When I was a little girl, one of the songs my mother used to sing to me when I was being cranky went something like:

"Every party has a pooper, that's why we invited you, Party Pooper."

I'm finding that this is a role I'm taking on more and more lately. It's not that I enjoy being a wet blanket, really. I'm actually quite fun to be around, as long as we're not talking about the economy. So, what's set me off this time?

The International Council of Shopping Centers has recently released a report calling for 73,000 stores to close their doors during the first half of 2009. The first HALF. Six months. Not shocking to me or you, if you've been reading this blog.

In light of that, though, could someone please explain to me (using small words) how some of the portfolio managers on television can possibly be excited about the market going forward? 73,000 store closings is a little bit more than a pebble dropping in the ocean. If you truly think about everything and everyone that goes into running a single mom & pop type shop, you will quickly realize that we're talking about a lot of unemployed people and lost GDP.

There are roughly 600 good malls in America. Obviously not all of the possible stores closing are in malls, but humor me for a minute. Let's say the average mall has 200 stores, which is probably high. So in my example there are 120,000 mall stores in my world... and 73,000 are turning up their toes and dying. Hmmm. That's not ugly. ::cough::

I'm all about the Darwinian evolution of retail. I have absolutely no problem with bad retailers failing. The culling of the herd is a good thing. What I have a problem with is folks not realizing that those failings will have an impact on the economy. The thought that one guy floated today (had I been more awake I would have noted his name, but it was early out here and I was suffering from a caffeine deficit) was that it was already priced into the market because these were the lowest valuations he'd seen in his thirty year career.

Here I go again, but just because it's the lowest valuations that you've seen in your career doesn't mean that it's as low as they go. A sense of history is important. And a realization that the past 10 years (or more) have been extraordinary times and valuations in the market is also rather useful. With all that the consumer is still facing, I just don't understand how anyone can believe that we're in for any sort of a rebound to recently normal valuation levels. While the US market has traded at roughly 14x earnings in recent history, the longer term valuation level is closer to 10x. And when the pendulum swings, it always goes past center in the other direction.

I understand the theory that you buy stocks before the end of the recession. Retail in particular starts to rally 6 months before the end of the recession. But given the landscape, I just don't see how we are out of this recession in 2009, which means that keeping powder dry is still in order for private clients. We're going to play this rally for as long as it holds, but I don't expect that to be longer than March. Trades to go to majorly defensive positions are going to be teed up and ready to go.

Monday, December 29, 2008

Okay. That's a real number.

There's a rumor that one of the retail industry associations expects 73,000 stores to close their doors in the new year.

Given that I had a friend pick up a dress for $5.60 (that's NOT a typo) yesterday at a major retailer, perhaps that number is right.

More later.

Wednesday, December 24, 2008

The most important things around the tree

I know I spend a lot of time focusing on the consumer, what they're buying, how the capitalist in me wishes they were buying more, and the somewhat dire circumstances I'm expecting based on that lack of consumption.

But at the end of the day, it's not about the things you have, it's about the people you have. It's about the family, the friends, the memories you create, and the times you enjoy.

Take some time, enjoy your family, and remember that there's a reason for this season - and it isn't Santa Claus.

Merry Christmas to you and yours from me and mine.

Sunday, December 21, 2008

Let's blame the weather

I almost feel sorry for the retailers at this point. In an already exquisitely horrid environment, they can't seem to catch a break. Business has been bad. Discounts have been huge. Margins have been microscopic. And now Mother Nature is dealing what will surely be a death blow for at least a few firms: seemingly 3/4 of the United States is blanketed in snow and miserable shopping weather.

I usually laugh at weather as an excuse from retailers, but this time, I've got to commmiserate with them. I mean, even Las Vegas kids got a snow day this week! This week, this weekend in particular, is usually the biggest shopping weekend of the holiday season. And now what shoppers there are can't get to the stores.

I feel like I should bake some hot dishes for the retail wakes that are surely coming.

The Retail Wave

If you've been reading long, you know that I'm convinced that there are more retail bankruptcies coming... soon. Here's an article from the Cape Cod Times that quotes me extensively on this phenomenon.

Friday, December 19, 2008

Marketplace Radio

I had the opportunity to chat a bit with Jeremy Hobson of Marketplace Radio today about the amazing discounts that are in retail today... and the even greater discounts that are coming. You can listen to it here.

What if they sold a holiday and nobody bought?

It finally happened. They've discounted Christmas to the point where the retailers are praying for breakeven and consumers still aren't buying with both hands. Of course, part of the problem is that one hand is busy just keeping the shirts on their backs.

I'll be out in the malls this weekend again, checking the discounts. One of the concerns that I'm hearing is a dirth of gift card sales. I'm sure part of the reason for this is that you have to pay full price for gift cards... when you can get full 'gift credit' with your friends and family for a sweater bought at 70% off.

The rise of gift cards has helped to extened the holiday shopping season through January as folks redeem them for heavily discounted or new season merchandise. The worry now being floated is that a drop in gift card purchases will cause the holiday shopping season to end December 24th at 7pm. The stuff left after the last elf packs up Santa's bag on Christmas Eve will sell... but I have a feeling I'll see pricing on December 26th like I've never seen before.

Money saving tip of the day? Have your holiday gathering with extended family on December 27th... and do your shopping the day after Christmas.

Friday, December 12, 2008

What I'm thinking today... video edition

Sometimes re-typing what you've already said just doesn't make any sense. In that spirit, I present to you my recent appearance on Bloomberg TV:

Thursday, December 11, 2008

Try to keep up, please

Times, they are a changin'. It was just about 6 months ago that I sat down with Costco management and heard things that gave me chills. Part of it, I'm sure, was the fact that it was the day before they preannounced a Q4 (August fiscal year end) earnings shortfall, so they were glum anyway (although we didn't know about that until 12 hours later).

Back in July the discussion was all about inflation: food inflation, gas inflation. Remember that it was mid-July that gas prices peaked nationwide. Gas prices are now down 58% from that level. Fifty. Eight. Percent. Today on their first quarter conference call Costco confirmed that they are now also getting price concessions from suppliers on goods that had gone up significantly just a few months ago. While I want to be clear that they didn't specify where they are currently getting concessions, some of the major price increases had been for goods that used petroleum products (plastics, etc). You can bet those prices are headed down. In fact, it was a source of great pain for them that they had to take the price on their rotesserie chickens up from $4.99 to $5.49 to $5.99 all within the course of 6 weeks because of food price inflation. Guess what? They're back down again.

Gas, which was a source of huge LIFO charges because of inflation (if you want an explanation of how and why that accounting even exists, you'll need to find someone smarter to explain it), has now swung completely the other way. And whereas it was at best a teeny profit margin (perhaps even sometimes a bit of an unintentional loss leader) in July and August, it was for a bit of time these last few months 'wildly profitable' according to Costco. (Because they sell so much gas, they buy gas cheaper faster as the price is dropping, but can still stay at really cheap prices to consumers while their cost drops faster.)

There's been a lot of consternation about the huge amount of economic stimulus the government has been pumping into the economy in the name of stabilization, mostly because the great fear of further inflation. Eventually that may happen. Heck, look at what happen when they took interest rates down and flooded cash into the market at the turn of the century (see my August 2008 Post Modern fairy tale for more information). But I'm here to tell you, we can't see the whites of inflation's eyes from this vantage point. We'll remain vigilant. But in a really quick turn of events, we're much more troubled by the looming deflation at this point.

Another one bites the dust

It's official, KB Toys is facing liquidation. They've had quite the interesting road over the past 8 years, but they haven't been a force in the toy world for awhile. Wal-Mart and electronics have certainly changed that landscape.

As I've said for awhile, the weaker retail hands are going to have to fold. The game continues, fewer players each round. A partial list of the dearly (and somewhat recently) departed:
  • Steve & Barry's
  • Linens & Things
  • Sharper Image
  • Boscov's
  • Lillian Vernon
  • Mervyn's
  • Whitehall Jewelry
  • Circuit City
  • KB Toys

There's more to come. I'd post it here, but then I'd be the subject of hate mail from management teams. That's no fun. Feel free to email me if you want to know my thoughts, though.

Carry on. You probably won't even notice they're gone.

Sunday, December 7, 2008

Not your father's recession

Maybe I'm a total pessimist. Maybe. But I don't think so.

Last week I watched so much financial TV that my head came close to exploding. The message, repeated ad nauseum, was that it's time to buy because things are so cheap and the recession must be close to over. Okay. If you think so. But let me give you a few things to think about before you bet your entire retirement account on black.

Yes, the last two recessions have lasted about 8 months. And yes, we're already 12 months into this little piece of recessional happiness. So, that means we're almost done, right? Nope. Why not? Keep reading.

Most recessions come from inventory build-ups. Think back to the year 2000. What tanked technology? All the parts everyone needed to build out the internet were in short supply, so everyone double/triple/quadruple ordered. And then the factories were actually able to deliver what had been ordered... and those who had ordered only needed a fraction of the stuff the other companies were trying to deliver to them. In other words lots of inventory, few corporate buyers. This usual scenario then leads to companies cutting jobs because they have to make less stuff. At this point, the consumer starts feeling the pain and cutting back... and we're almost out of the woods.

This time it's different. Really. It is. Let's look at this recession. Corporate inventory levels haven't been an issue, at least until recently. We got here differently this time. This time what fell apart first? Homes. Who owns homes? Consumers. So, instead of starting with industry and then having the issues filter through to the consumers at the end, we're leading with the consumer.

Let's review what Joe and Jane Consumer have had to deal with over the past couple of years:

  • Their home has lost at least 15% of it's value... but more likely somewhere between 25-50% of it's value.
  • Their retirement accounts have lost 40% or more of their value.
  • The company holding their home equity loan has put the kibosh on further withdrawals.
  • Their credit card companies have cut their credit limits and/or raised their interest rates... unless the darn things just got canceled outright.
  • Gas and food prices went up astronomically. I'll give you that gas prices are now down at 5 year lows, but with their balance sheets evaporated and their credit essentially maxed out, low gas prices are nice but not enough to make much of a difference at all for the majority of U.S. consumers.
  • Oh yeah, and then there was the (un)employment report last Friday. Worst in 30-some-odd years. Sure, employment is a lagging indicator. But it's still falling. And more companies are laying people off.

So, while Black Friday sales were up nicely and Cyber Monday sales were up even better, my interviews with consumers ... and my common sense... tell me that they're buying on deep deep sales when they buy. Holiday sales (oh, heck, can we just call if Christmas please?) are probably going to fall this year. Fall. That's not good. And it will have ripple effects throughout the economy.

Hmmm. Then there's the problems in Detroit. And the still-mostly-frozen credit markets. I'm not very political. But I've been impressed by what Mr. Obama has been putting in place for the future... and by his pragmatic approach to this whole mess. But I have a very strong feeling that around March or so everyone is going to figure out that he doesn't have a magic wand, he can't make it all better quickly... and this market is going to take another dive for the floor.

Remember, stocks are only cheap on a Price/Earnings basis if you know what the earnings are going to be. Forward P/Es are based on someone's best guess of the future. But if that future isn't getting better, it's getting worse, are you really sure about that valuation?

Enjoy this Santa Claus rally. Play it if you want. But don't stay too long at the party, 'cause despite the hair of the dog that everyone seems to think is yummy right now, the hangover isn't anywhere near done.

Tuesday, December 2, 2008

Just lovely

This morning Sears Holdings (Sears & K-Mart) reported a third quarter loss of $1.16 per share or a loss of $0.90 if you excluded one time items. Analysts (who have been routinely wrong... but to be fair Sears gives no guidance whatsoever) were expecting a loss of $0.51 per share. Sales were lower than expected. Comparable store sales were a lovely -10.6% for the quarter. November comps were -7.8%.

What I loved most was the commentary from management: “Given the current economic and retail environment, we will carefully evaluate alternatives that provide financial flexibility in the near-term, while enhancing shareholder value in the long-term,” said W. Bruce Johnson, Sears Holdings’ interim chief executive officer and president. “These actions may include additional store closings or divestitures, remodels or repositioning of existing stores, acquisitions, and repurchases of our debt and common stock.” (emphasis added)

Acqusitions. Lovely. If there's anyone I want to see buying up other companies in a retail environment like this, it's the retailer who can't manage their way out of a paper bag. Can you imagine the conversaation that must be flowing around that board room? 'The economy stinks. Our business stinks. We have major operational issues. Let's buy someone else and bring them into our muck and mire.'

I am giving them the benefit of the doubt here. I'm believing that they understand how badly the retail business stinks and that they understand that their odor is even more pungent.

I recognize, by the way, that the stock is up over $5 or 15%. But can you say 'short covering'? I knew you could.

Put this one in the 'not even with someone else's money' category for me.

Monday, December 1, 2008

Thanks, that was helpful

Today we have been treated to what my husband calls a blinding glimpse of the obvious: the National Bureau of Economic Research has officially declared this economic malaise to be a recession. Even better? The recession started in December 2007. Today is the first day of December 2008. The insight that the NBER has provided is astounding. The whole thing brings to mind women who supposedly never knew they were pregnant until they gave birth. Quite literally unbelievable.

So, how does this information change your life and mine? Well, I suppose the upside is that now that a recession has actually been declared, we're certainly closer to the end than we were before. Don't mistake what I just wrote - I am NOT saying the end of the recession is near. What I am saying is that getting past denial is the first step to recovery. How long recovery takes depends on the severity of the original illness.

Beyond that? Carry on. Nothing much to see here.

Lovely, shiny pyrite

The talking heads on TV are blathering about how retail sales over the weekend were up higher than expected and don't seem to understand why that number is a false tell. It's simple, really. Yes, people bought more than expected last week. But they were buying the stuff that was on sale, and folks, the discounts that were offered were amazing. Beyond that, and this is probably the most important point, many many people I talked to on Friday morning were doing all their shopping this weekend. Period. Done. Those who weren't going to be finished on Friday were going to wait for more sales. Not a good sign.

Look for all the glimmers of hope you can in the retail reports, folks, but just because it's shiny doesn't mean it's gold.