Monday, December 21, 2009

Opps, the weather did it again

I'm not a fan of excuses. I screw up, I own it. You screw up, you own it. Retailers seem to constantly play the weather card - it was too cold, too warm, too dry, too wet, too snowy, etc. And that frankly pisses me off. But this weekend, I kind of have to give them the benefit of the doubt, at least those with a concentration of stores on the East Coast.

I had the opportunity to chat with NBC Nightly News today about this weekend's fun, although only about 3.5 of the best seconds from my 15 minutes of tape made it to air. (Not complaining, that's just how TV works. I just find it ironic.) Anyway, a couple of take aways:

* Yes, Christmas will still come on Friday. And yes, kids will still expect to have presents under the tree on Christmas morning, regardless of the weather. Santa, after all, has Rudolph and shouldn't be hindered by inclement weather.

* I don't care how much people shop this week, they'll be under more pressure because they have less time. And given that, expect fewer impulse buys, fewer instances of self-gifting. Put another way, sales might be okay, but not as good as they might have been had the weather been better.

* Companies with smaller presence on the east coast will have done better (all things being equal)than those based heavier in the south or west. That being said, the southern most portion of the country (ala Florida... JT Smith territory) wasn't as affected.

* If you're holding out for 70% discounts... you're either going to end up empty handed or with lime green jumpsuits in size 2. Face the facts, reailers have generally speaking managed their inventories very well this season. Panic was last year. Stupid merchandising, however, is omnipresent if you look hard enough. You can buy it though, I don't want it.

Monday, December 14, 2009

Pardon me if this is obvious...

Those of you who already got this, tune back in tomorrow. For the rest of you:

It was announced today that both Wells Fargo and Citicorp were going to pay back TARP, joining Goldman Sachs and Bank of America. Think that it's great that these banks are so healthy that they can pay back the money? Uh huh. If that's what you think it is, I've got some land in Florida for sale(right by JT Smith, who wanted to be mentioned in this post).

So now these banks don't have to listen to the government on pay. That's the real reason they've forked over the cash. It's not that I blame them, mind you. The government has no business setting pay for the private sector. Yeah, I understand that the banks got government bailout money, and for that they need to be accountable to the government. But 'the government' didn't (doesn't) have a clue about what people should be paid for ANY job, let alone top positions in banking. Remember, these are the folks who pay clerks 20% above the going rate in the private sector and yet make sure that folks in the military are still able to qualify for food stamps.

The big problem with all this is that if the banking sector were truly healthy, they'd be starting to loan on their own. And yet their fists are closed tight, hanging on to almost all the capital that wasn't needed to get the government to butt out. Obama's meeting today with bankers at the White House where he sternly scolded them about their 'responsibility' to the American public to lend since the public had bailed the banks out? BOGUS.

See, this is how it works if you're a bank: you loan your excess capital to the creditworthy and turn down those who don't qualify. That means that 1) you have to have excess capital, and 2) you have to find someone creditworthy to loan said capital. I don't care how cranky the government folks get, it's a bunch of blowhard posturing that messes with capitalism as we know it. And guess what - if you give people money who can't pay it back, you just create bigger problems... but hopefully not until after the next election.

Color me cynical.

Sunday, December 13, 2009

They're not all equal

I have two boys whom I love equally, but differently. They each have strengths and weaknesses. It would be wrong to treat them exactly the same since they aren't exactly the same.

Walking the mall today, it became so apparent that this holiday season is going to have it's share of winners AND losers, even though so many would like to paint all retail with the same brush.

There were a number of teen retailers full of merchandise that was marked down offering an additional savings of 25-33% with purchases of $75-100. It amused me that a couple of these retailers belong to a company that swore they weren't going to discount because it would damage the brand. I could report that these discounts drove scores of customers and purchases into their stores, but my parents taught me early that lying was the wrong thing to do. The mall I was at didn't have an Aeropostale, but I'm pretty sure that they had to be doing better business than what I saw at their competition.

On the other side of the equation, J Crew was running with a moderate amount of inventory at most, had some sales going which projected value, and all of it made me want to buy.

Certain large national department stores with more than 850 stores had a lot of merchandise, few clerks, and not a lot of purchasers among the folks wandering through the store. Those cash registers are more profitable if people line up to buy things at them.

Oh yeah, and if you're at the mall with your significant other and just can't take the hustle and bustle anymore... fear not. There's plenty of peace and quiet in just about any jewelry store in the mall.

There's a lot more detail rattling inside my head about this, but my bottom line is simple: don't believe all the hype that "The Consumer" is back. "The Consumer" doesn't exist, just like "The Retailer" doesn't. Unlike the Borg (yeah, I've been known to watch some sci-fi, so what?), there are differing levels of consumer rebounds and retailers' success isn't homogeneous. If you're not going to do your own homework, or pay to peek at someone else's... stay out of the game.

Be careful out there.

Sunday, November 29, 2009

With apologies to Clement Clarke Moore

Twas the eve'n after Turkey Day and all through the mall,
There were creatures a-stirring, but not buying all.
The discounts were posted in the stores with care,
In hopes that the shoppers soon would be there.

The security teams were nestled all snug at their posts,
While visions of safety were bigger than most.
Shoppers in PJs, some with hot plates,
Had just settled in for a cold morning's wait.

When out in the parking lot there arose such a clatter,
Security sprang to attention to see what was the matter.
Away to stores I flew like a flash,
Held on to my credit cards, I'd only pay cash.

The fluorescent lights gleamed on the newly arrived stuff,
Gave a glimmer of hope to the retailers who'd had it so tough.
When what to my wondering eyes should appear,
But a whole slew of shoppers, with Christmas lists for those dear.
They clutched at the flyers, all glossy and slick,
And I knew in an instant that it was bargains that would stick.

More rapid than hordes, the shoppers they came,
Crowding home and electronics, gotta get that new game.
Now toasters, now iPods, now board games and toys,
Grab discounts, grab bargains, can't afford to be coy.
To Kohls and to Target, To Walmart and the mall,
Shop away, shop away, shop away all.

As dry leaves that before the wild hurricane fly,
Grew the lines at the checkouts with items to buy.
So up to the next floor, the hordes they plain flew,
They wanted those bargains, apparently more than did you.
And then in a twinkling, I heard from the clerks,
'Next in line please,' they were glad to have work.

As I talked with consumers, the people in line,
It was really apparent they weren't feeling too fine.
They were clutching their wallets, a glaze in their eyes,
'No credit left for me this year,' was often their cry.
Their choices were careful, each item a find,
Yet the retailers had obviously kept margins in mind.

Their steps they were quick, but eyes were quite bleery,
Still yawns they were stifled, due to caffeine with dairy.
Their bags didn't bulge, despite purchases paid,
A few less per family than they'd previously made.
Still some shopped for sport and had good fun,
Twas quite the excitement to watch where they'd run.

A quick look through stores when I should be in bed,
Soon gave me to know retailers might have a tough time ahead.
The customers they shopped where stuff was on sale,
But no discount equaled no purchase despite their avail.
And leaving the mall to hit the next store,
The consumers weren't confined to stores they adore.

The shoppers want value, not just cheap price.
And retailers win who know naughty from nice.
We're still not done with the shopping this season,
But retailers will win who use their good reason.

Saturday, November 28, 2009

NBC Nightly News

Did a little work for my friend Brian Williams on Black Friday. Okay, I don't know Brian, but I'm sure we'd be friends if I did. Anyway, watch the results of 4 hours with a camera crew starting at 3:15am:

Tuesday, November 17, 2009

Sandbagging or realism?

Interesting debate going on today after more retailers reported earnings. Several folks insinuated that management teams are sandbagging earnings expectations for Q4 so they can knock it out of the park. Let's be sane retail management team is going to be pumping up expectations when headline unemployment is 10.2% and the more realistic U-6 number that includes discouraged workers and the under employed is 17.5%. If people can't get jobs, they can't spend.

Yes, last year things were so dire, folks were so scared, that the sales were totally abysmal. It almost seemed Apocalyptic. And we have absolutely come back from that brink. But this time last year unemployment was only 6.8%, most folks had credit cards that hadn't had limits reduced, retailers had way too much inventory that they sold to us at 60% off, and we were still in the mindset that retail therapy worked.

But this year, we don't have the same level of inventories so there won't be the same sales. Oh sure, expect retailers to have promotions. Just don't expect that there will be the smell of fear when you walk in the stores. Retailers know you expect a discount, and they've procured items at costs that will allow them to put them "On Sale" while they still make decent margins. And if you buy it when it isn't "On Sale", they'll make even more.

The major retailers are saying November is starting weak. Smaller retailers are saying November is starting weak. JC Penney, Kohl's and Walmart have all started Black Friday discounting earlly. If I was managing a retailer, I wouldn't be enthusiastic about what's happening out there.

Caveat - one semi bright spot came from the CEO of American Express this morning when he said on CNBC that his cardholders spent 3% more in October. Maybe it will continue to holiday... maybe it won't. Most major outlets are expecting a fall in sales.

The trick right now is to find the best operators in retail and cling to them if you feel you must own a retailer. Discounters will do better than mainline departmetn stores. Higher end stores seem to be stronger than mainline too. Whatever you do, don't be tempted to lower your standards.

Bottom line: If you want to own these stocks do your research. Watch monthly retail sales. Walk the stores and watch trends. Talk to people about what they're doing for the holidays this year. Or just keep following me here, on CNBC and on Twitter and see what I'm seeing. Be careful out there.

Wednesday, September 30, 2009

What is a successful career anyway?

Some interesting moves today after the close... moves that made me think about the difference between being famous or infamous.

First, Ken Lewis announced his retirement from Bank of America as of the end of this year. The stock immediately rose in after hours trading, even though Cuomo says he's still coming after BoA. How humilitating it must be to know that investors think your company will be better off without you. Ken Lewis had a huge part in building up the financial supermarket concept... and yet all he'll be remembered for is his flame out at the end.

At least that's better than John Thain's fate - he'll always be the guy with a penchant for decorating... and an exquisite commode. Oh yeah, and didn't he do something in the investment business too?

Michael Vick, on the other hand, was given yet another shot at redemption today. Nike has decided to take what I hope is an educated gamble on Vick... again. This could either be very very good for them... or end in a greater-than-Thainsian blaze of glory.

At least this business is never boring.

Thursday, September 17, 2009

What's driving this thing?

I've been doing a lot of research with my friend JT Smith (CIO of Aristar Funding), trying to figure out exactly what was driving this market.

The 'this market is cheap' argument hasn't made any sense to me for some time. Cheap does NOT refer to stock prices relative to where they've been, contrary to what is implied by a lot of folks. Historically, bear markets have bottomed at roughly 7-8x earnings. We only got to 10.2x forward earnings at the bottom in March - not low enough for my liking. Now we're trading at... sit down... 17.8x FORWARD earnings. Put another way, the S&P is more expensive than it has been in the past FIVE YEARS or more.

I might be 'of a certain age,' but my memory isn't so weak that I can't remember that the economy at least appeared to be much more robust at almost any time in 2004, 2005 or 2006 than it does now. And yet we're paying significantly more for a dollar of next year's S&P earnings now? Makes no sense. Unless...

What if this market isn't discounting future earnings right now? It's my belief that a lot of times the animal spirits of the market discount things without really knowing what it is they're discounting. So, what if... just what if... this market is actually discounting the inflation that almost certain to come? Gold over $1000 an ounce is telling us that either everyone is scared to death of this market (not confirmed by the VIX), or that inflation might be rearing it's ugly head. And yesterday's rumors that two Fed officials were ready to vote to tighten! Even today's Philly Fed numbers pointed out that the Prices Paid component is ticking up. Inflation.

Yeah, I know we've been seeing deflation in food and consumables. But that can turn quickly. And more importantly... how else are we going to dig ourselves out of this debt pit unless we pay it off with cheaper dollars?

If we're heading into inflation, folks, the game plan changes.

Tuesday, September 8, 2009

Bet you dollars to donuts

Actually, if the dollar keeps sliding, donuts might be the better investment soon. Yeah, the DXY Index was lower when Lehman collapsed last year, but beyond that, we're at pretty much the lowest levels we've seen in a long time.

What's it mean? Well, first of all it means that those commodities valued in dollars become more expensive for the American consumer. If you're a Middle Eastern country selling oil, you need the same buying power when you jaunt off to Paris regardless of what the dollar is doing vs the Euro... so the price of oil and gold go up. For that reason alone, I'm a little skeptical of the folks who are saying that the rise in the oil price is a reflection of stronger economic activity. But I'm a skeptic.

And let's look at the poor consumer again. So now energy prices are going up. And home prices still stink. And they have no credit available. And their retirement accounts are worth 40% less than at the top of the market. But those retail stocks are going to have earnings rebounds just like a coiled spring because of cost cutting. Whatever.

One more thought on the whole dollar/hard commodities thing - could people be piling into those commodities because of a fear of inflation? Yep. Does it make sense? In my mind, yes. How else are we going to pay off this amazing amount of federal debt that we have but to create inflation and pay it with cheaper dollars? And what holds value in inflationary times? Hard commodities.

Yeah, you can guess where I've got client money right now. Go ahead. If you get it right, I'll buy you a donut.

Tuesday, September 1, 2009

View from the Top

For those of you who haven't been to the Seattle area, that's Mount Rainier up there, taken from the SE side of the mountain. I took the picture a couple of weeks ago. Mountain tops are beautiful, aren't they? Problem is you can't stay at the top forever, you eventually have to go back down the other side.

In my opinion, today's sell off has been a long time coming. Of course, if you've read this blog at all, seen me on TV, heard me on radio, or seen me quoted in print... you already knew that.

What really killed me this morning was listening to some folks trying to hype the economic releases as positive. Look, we're in a pretty down time right now. If you don't think that the folks who put out those releases are trying to highlight the happiest stuff they can, you're naive. Let's take them one by one.

ISM Manfacturing: Headline number was better than expected, coming in at 52.9 vs expectations for 50.5. HOWEVER, you have to look behind the headline number. Looks like Cash for Clunkers is part of the pop – drew down inventories and there’s some restocking going on there. Is it sustainable? No, but the lower level wasn’t sustainable either. Employment is still declining – manufacturers aren’t confident about this or they’d be hiring. Prices paid is going up, which could mean that inflation is coming down the road, perhaps at a faster pace than most expect.

Yes, right now we're dealing more with deflation than inflation. But what if we can't sell bonds and need to increase interest rates? Yes, the dollar has been getting stronger. For me, that's a head scratcher. I certainly don't think the US is the safety currency or economy at this point. In fact, for our clients, I'm deliberately betting that the dollar gets weaker, strengthening commodities.

Pending Home Sales: Those are sales contracts... NOT completed sales. People still have to get loans, which are darn hard to get these days. Which leads to my next topic...

Construction Spending: This is the one that kills me... Year over year residential spending is down 26.4% (not-seasonally adjusted). But everything's okay folks. Really.

If you need a reason that the market tanked today, part of it was the stuff above. Part of it was what's coming down the pike at us. If you want more insight into what joy may be coming, follow jtsmith24 on Twitter - smart guy, good insights into the economy. You can follow me there too (PattyEdwards) for more timely, intraday, updates.

Take some profits folks. There's no reason to be a hero.

Thursday, August 27, 2009

Adult beverage recommended before reading

Someone asked me the other day via Twitter if I'd seen Dick Hoey's comments on the Kudlow show where he asserted that bulls follow forward-looking indicators while (and I'm paraphrasing here) bears are looking in the rear-view mirror. PUHLEASE.

At this point, I'd say that it's the bears who have some sembelance of reality in their view points, and not just because I am one. But let's walk through some points one by one.

Home Prices
Yes, I'm worried about home prices. I'm a little concerned that they're 33% below the peak. But not so much because of the lost wealth (which is a tragedy) but because of how that will affect consumers, banks, builders, and a host of others. Let's see, consumers can't take money off their home equity loans to buy stuff in the future because many of them are underwater. Consumers also can't sell those homes because they won't come out whole, ruining the whole set of industries that really thrived on the idea that homes were meant as an investment instead of shelter.

Let's not forget that banks are stuck with ever-increasing amounts of Real Estate Owned on balance sheets because they can't sell them without tanking the housing market even further.

Builders, well there's a bit of insanity going on there, just because they still exist in the size they do. Prices start to stabilize (a false tell in my eyes because of the REO from the banks, not to mention the homes that were on the market, got pulled because they didn't sell for months on end and are now back on the market) and the builders start to build again. An article on Bloomberg this week said they're buying land again. The only analogy that I can come up that fits this lunacy is that it's like cooking Thanksgiving dinner 7 nights in a row, even though the refrigerator is so full that you don't know how you'll EVER get through all those leftovers.

Retirement Savings
Even after the 'Rally of the Century' that we've had since March, the S&P is down 40% from the October 2007 high. My client base is mostly individuals... individuals who came to my firm after seeing their retirement savings cut in half, in many cases within 10 years of when they had at least hoped to retire. Guess what kids - those folks aren't going to be spending the way they were in the past. They can't! They're saving every last penny they can at this point, hoping to build that nest egg back up so that they can at least retire within a few years of when they had originally hoped. And you know what... their money that we currently have in places other than the stock market? They're not so excited to put it back in. These folks have been burned a lot in the past few years. The stock market just doesn't have the allure it used to for them.

Consumer Debt Levels
Not only are consumers trying to save everything they can right now, but many of them are in debt up to their eyeballs. I know I've shown this chart before, but it's such a lovely picture, let's put it up again (Parental Warning: not suitable for small children):

Yeah. Pretty, eh? Household debt at the level of GDP. Think it's changed much in the past few months? Nah. Me neither. If it took years to get it to a sustainable/decent level back in the 30's why would we expect anything different now? Because it's different this time? Right. Tell it to someone else.

This debt is going to be a ball and chain around the ankle of the consumer for a long time to come. A LONG TIME. Those "coiled springs" that so many analysts keep talking about in reference to the retailers who have cut costs and just need the consumer back before earnings take off like rockets... BUNK. By the way, can I remind everyone that at least until recently the consumer drove 70% or so of the economy. Guess what is also probably going to change? Yeah. That.

Coming Mortgage Resets
I've shown this graph before too... but just in case anyone missed it...

Please notice all the resets of Alt-A and Option ARMS that are coming in the next 18 months or so. Any (honest) mortgage broker will tell you that both of those categories have the capability of being even worse than the Subprime mortgages. I've heard that up to 50% of the folks with those loans that haven't even reset yet can't make their payments. Guess what happens when they DO reset? Yep. Ugly. Really ugly.

But there's no housing problem.

And I haven't even gotten to the accounting changes coming for the banks that put all the toxic waste back on the balance sheets. But that's another post.


Sunday, August 23, 2009

Happy Happy, Joy Joy

Tonight Jack Welch (yes, that Jack Welch) said that it's a 50/50 chance that we go down again. Watching Twitter is important folks, 'cause that's where he said it... right after a diatribe about the Red Sox. Glad to know that even someone who might know a little about the financial world doesn't think I'm totally out in left field. (All puns intended... all the time.)

What is most interesting to me is that both Meredith Whitney and Dick Bove, two of the top bank analysts out there, believe that there are somewhere around another 200+ banks to go under before this whole whatever-we're-calling-it is over. As of Friday night, we're over 80 failures this year. And the thing that I don't think Wall Street gets is that each of these 'too little to care if they fail' banks affects a lot of folks on Main Street. Want everyone else back in the market, Wall Street? Start to care if other peoples' pools are polluted.

The biggest announcement of the past week, though, and one that got virtually no press, was the announcement that the FDIC is looking to relax the rules for Private Equity getting involved in the banking sector. Gee, color me cynical, but why would they do that? Ummmm, maybe because they already know that based on the losses they already know about they need to raise fees to banks. And ummm... maybe because they know there are lot of other failures to come?

But everything is just fabulous out there. Go long in the market folks. Go ahead, I dare you. I'll even sell you the stock you want to buy. Color me generous.

Tuesday, August 18, 2009

What goes up... must come down...

All of the sudden, I find myself with increasing company in the bear camp. I don't know whether to dance the bear dance with my new found friends, or defect to the bull camp. But I'm pretty sure that I heard some dancing music warming up.

So the market is trading at 16.8x 2010 earnings. That seem extreme to anyone else? And not only does no one in the bull camp seem to expect any revenue growth this year, it seems like maybe not much is expected next year. So we're cost cutting our way to properity then? Right. Pardon my skepticism, but I just can't help myself - probably the fault of my parents that taught me that thinking for myself might not be such a bad idea.

I run a number of different valuation models that I've developed over the last ::bleep:: (substitute 'many', it will do just as well) years in the industry. Last night my earnings momentum model that usually gives me 100 or more stocks on which I can do more fundamental work rendered a list of ... wait for it... nineteen (19) stocks. NINETEEN. On another growth model that I developed over the past 3 years or so, a multifactor model that requires revenue growth to support the earnings growth, I usually get a list of 300+ names. This week? Right around 100.

So what can I take from this? As of right now, given today's valuations and earnings/revenue prospects for stocks, revenue growth is an almost extinct animal.

If you're good with cost cutting as the only way of getting out of this lovely little economic scenario, good for you. But don't use my money to invest, 'k?

Sunday, August 16, 2009


Here's something to think about.




Wall Street vs Main Street

I guess Alan Abelson of Barron's and I are thinking a bit alike lately. I don't know whether to be comforted or scared about that.

I mentioned last week on CNBC that I thought this was coming down to a struggle between Wall Street and Main Street. Aparently Alan (you don't mind if I call you Alan, do you Alan?) agrees with me.

Go ahead, tell me the story about how good things are again. My opinion, for whatever it's worth, is that the market just isn't worth 16.8x next year's earnings. I know all the bulls think that we're going to have company after company guiding earnings upward and that earnings will be like a huge coiled spring that launches us into the next realm of the market. I also know that the market is a discounting mechanism, and that you really want to buy in some cases as much as 6-9 months before we expect to be out of the recession. But someone forgot to tell 70% of the economy that things were better.

Let's look at life for Joe and Jane Consumer for a moment. Not only is unemployment off the charts, but we're seeing people use all their benefits and drop off the backside of the statistic. The backside, you know, the part where there isn't any more money? Yeah. Comfy place. Doesn't tend to inspire a rebound in spending.

Despite there being a slight pick up in the number of homes being sold, Joe & Jane's home isn't worth anymore today than it was a month or two ago. And statistically it's probably worth somewhere around 33% less than it was a couple of years ago. Since Joe & Jane put 20% down (at most), that means it's worth less than they paid for it in many cases. And all those foreclosures going on down the block, not helpful. Luckily, though, their Alt-A mortgage doesn't reset for another few months. Oh, and that checkbook that wrote against the home equity line of credit? Might as well use it for fire starter this winter (especially if you can't afford the traditional heating bill), 'cause it's quite literally not worth the paper it is printed on.

If it comes down to choosing one payment over another, the credit cards aren't getting paid just so the mortgage can be made for one more month. That's not good for the banks or retailers. If they are making card payments still, chances are their interest rates have risen and their credit limits have fallen - can't use the revolving card for spending anymore because the only revolving it's doing is spinning in the grave of consumer spending.

Luckily, in order to help the car companies yet again stimulate the economy and help consumers drive more fuel efficient cars, the government launched Cash for Clunkers. Fabulous idea. Sold lots of cars. Also gave something like 300,000 people who had a paid off clunker of a car a gift that goes on giving - A CAR PAYMENT! So there goes another $400 a month out of discretionary income.

Yes, there's a lot of the stimulus bill that hasn't been issued yet. Why issue it when people really need it? Better to wait so that any positive effects come just a few months before the election... not that I'm saying the government planned it that way... Oh. Wait. I am saying that. I guess I have little skepticism as far as the benefits of this. Sure, our roads out here in the Seattle area are much better now that road construction projects are coming through. But I'm still waiting for the trickle up effect to show through. Geez, even beer isn't selling the way it was. What more of a sign do you need?

I guess the thing that tickles my oh-so-ironic funny bone the most is the belief from the Wall Street pundits (you know, those OTHER people who flap their lips on TV all the time) who think all the money on the sidelines is going to come pouring back in the market. A couple of thoughts on this:

First - if you're a baby boomer who just saw 40% of your savings evaporate before your eyes, you're panicked and not likely to want to jump back in the overheated market.

Second - and I think this is the part that those on Wall Street who never walk around in the rest of the country will never get - when your friends, family, boss, neighbor has their job, savings or future hit by the closing of one of those little banks that is NOT 'too big to fail', confidence errodes really quickly. No, it's not about the deposits so much because the FDIC has those covered. I'm talking about the business and construction loans that are not being picked up by the acquiring banks, leaving projects halfway completed with no further funding. I'm talking about grown men in tears because their lives as they know it have just evaporated. Doesn't tend to make for a lot of trust for those folks that got the bailout money, know what I mean?

If you totally disagree with me, so be it. But remember this one piece of information if nothing else: in a bear market rally it doesn't take a selling climax to end the rally - it just takes a lack of further buyers.

Be careful out there.

Wednesday, August 12, 2009

It's been a big month here at Lake Woebegon...

Let me start by apologizing for a month of silence. Some of you, no doubt, found it refreshing that I'd shut up for a bit.

We at Storehouse have been somewhat gratefully busy converting our firm from one platform to another. It's a goood move over all, but painful.

But enough of all that. I've been doing a lot of CNBC lately, and if you're following you probably know that I'm pretty much the Princess of Darkness right now. No, I don't believe the rally. No, I don't think it's supported by fundamentals. I certainly don't think the valuation of the market is warranted. At all. Revenue growth is beyond anemic. But most importantly...


There are a myriad of reasons why we're happily playing the market using chicken methodologies. I intend to post those over the next few days. In the meantime, here are today's two appearances on CNBC, which should give you some insight into what I'm thinking. In the afternoon appearance (first one below), Scott Wapner had all the finese of a pit bull with rabies, in my humble opinion. Of course, I was on the receiving end of the questions. I'm just saying, from my perspective, he was out of line.

Wednesday, July 8, 2009

I'm on the Vice Squad

Today's best...

and the start of the morning...

Wednesday, July 1, 2009

I had hoped to talk about healthcare...

We were going to talk about healthcare on the Fast Money Halftime Report today - specifically about Pfizer's little problem with Chantix, their smoking cessation drug. Apparently something isn't right there, so the FDA is requiring what they call a 'black box' warning label. But we didn't.

And frankly, I'm bummed. Because I have the perfect way to play this little problem. Big warning label = equals fewer sales of the drug. Fewer people quitting smoking means more cigarettes get sold. So, I bought Philip Morris International (PM) for myself today. I like the 5% dividend. The chart looks good. The valuation isn't extreme. Their emerging markets exposure is growing at 20%. What's not to like?

Now, without further ado, today's Halftime report, sans healthcare.

Monday, June 29, 2009

Halftime Again

So much to talk about, nowhere near enough time. I wanted to talk about the slow death of the bear market rally due to lack of interest, my "smoke 'em if you've got 'em" trade, and so much more. Oh well. Maybe Wednesday.

Sunday, June 28, 2009

Follow through or failure?

I'm watching a lot of stocks as well as the major indexes right now. The tea leaves are mixed, but it's looking to me like we might be lurching toward a continued summer rally. The next couple of days will probably seal the deal - either up for awhile or a continued grinding in this range. The funny thing is that there's no real support for it in the economy that I can see. But since when has the market demanded logic?

The good news is that we're used to market corrections in the Fall. At least it will be familiar.

Wednesday, June 24, 2009

A quick minute or two on the consumer

Less bad = good? Nah.

So the Federal Reserve just left interest rates (Fed Funds) exceptionally low, saying that "substantial resource slack" will keep costs low thus inflation will remain subdued for some time. They expect that the exceptional efforts that they are taking/making on behalf of the markets to purchase mortgage back securities remain necessary.

Bottom line, the consumer is still in a world of hurt and won't be bouncing back anytime soon.

We really need to figure out what the new normal is going to look like. I'm fairly certain that we're overvaluing stocks expecting growth that isn't going to be there to validate these multiples.

Wednesday, June 17, 2009

Today on the Fast Money Halftime Report...

Spin Central

So yesterday our fearless leader (Obama, in case that statement sparked a rousing round of "Who?") said “Wall Street seems to maybe have a short memory about how close we were to the abyss than I would have expected.”

It was just March 13th that I was complaining because of all the economic cheerleading by the administration. Bernanke was on 60 minutes that week. Obama was telling us we were going to get through this. Summers flapped his lips too.

I'm a cynic when it comes to politicians anyway. But I can't help but think that maybe, just maybe, the administration doesn't want the market to do well now because they haven't 'saved' it yet. And if they don't save us, will we vote for them next year?

Monday, June 15, 2009

The market rebound... all done

It's just me chatting about what I'm seeing these day. If you read often, you'll know what I'm going to say before I say it.

Saturday, June 13, 2009

Heads they win, tails we lose

Anyone, please tell me where I'm wrong in the following analysis. I'd love to be proven stupid in this case.

I'm having a hard time imagining a scenario in which the American consumer doesn't get hosed even worse than their current not-so-pretty predicament. The dollar has been weak. The US govt can either let that continue or work to bring about a stronger dollar.

What makes a stronger dollar? The dollar has to be a more attractive investment ... which translates rather simply to higher interest rates. Hmmm, higher interest rates would slow (stop?) home buyers in their tracks, harm the already over-extended consumer with higher debt payments, and slow the rumored-to-be-happening-but-I'm-not-seeing-it-here economic recovery as companies think twice (or three times) before borrowing funds... assuming the banks will lend money in the first place. That would be bad.

Of course, choice number two would be to leave the dollar weak. But if that's the government's choice, it comes with its own set of problems. A weak dollar means that we will most likely have trouble selling those lovely government obligations that are keeping our collective heads above water right now. Because oil is denominated in dollars no matter where it is traded, you can count on higher oil prices. The sheiks in the Middle East will still want to maintain their lives in the style to which they have become accustom, even if that now costs 5 barrels of dollar-denominated oil per hour instead of the previous 3 barrels. A weak dollar also means that goods imported from overseas cost more - price inflation on pretty much everything sold in American stores. These things would also be bad.

In either case the consumer gets violated, but at least with a stronger dollar we have the chance to sell more bonds and further enslave our children's children whilst avoiding immediate bankruptcy.

Anyone want to bet on scenario #1 being the final outcome? I just don't see how it won't be.

I had just hoped to be kissed first.

Thursday, June 11, 2009

Data data everywhere and quite a lot to think

Interesting conundrums coming from this morning's retail sales and unemployment numbers. The two are closely linked - if you don't have a job, you can't spend money.

So on the unemployment front, jobless claims were better than expected but still came in at 601,000 new claims. Let's put that into perspective: if all those newly unemployed folks were in Alaska, the state would have an 87% unemployment rate.

Continuing unemployment claims, the number of those people who have been unemployed for awhile, has now climbed to 6.8 million people. Once again, putting that into perspective: the population of the state of Washington is 6.5 million people. The continuing claims, then, could be visualized by taking the entire population of the state of Washington and adding half of the Alaskans.

I understand those two states are way over on the left coast and not top of mind for many people other than those of us who live there, but even if you live in NYC, you have to admit that it is a lot of people who aren't going to be spending money.

So what's up with the retail sales numbers then? The headline number came in up 0.5% as expected. But... that's a month over month number, meaning that May sales were a little bit better than April sales. But May 2009 sales were 9.6% BELOW May 2008 sales. And the biggest sales increases came from gasoline and building materials. If you own a car, you know that gas prices are up recently, so that shouldn't be a shock.

What's the explanation for the building materials results? Lumber prices were up 8.4% for the month of May, so that's a big part of it. Buying a foreclosure? You can bet that the previous evictees didn't leave the place in pristine condition. Plus, if you are going to be spending more time in your home, you spruce it up. Those little niggling items on the Honey-Do lists are often a cheap way to spend the weekend.

It seems to me that commodities might have driven more of the retail sales numbers than some sort of a magical rebound by the consumer. And given May comp store sales results and my mall walks over the past few weeks, I can tell you that the consumer isn't spending like they have money... they're spending like every dollar in their pockets might be their last.

I'm not feeling giddy about any of this. But if you are, more power to you.

Sunday, June 7, 2009


For something new, I thought I'd start today's blathering with a clarification of sorts. My last two posts have been of me sharing my opinion on CNBC and Bloomberg television. However, I *did* previously say that I didn't recommend watching financial news. Let me clarify: obviously, I believe in the financial press or I wouldn't be appearing on there. But I talk daily to folks who alternate between freaked out and thrilled by what they're hearing on television. They get wound-up because don't know what to believe and they hear conflicting information all day long. If you like watching financial television, by all means watch (especially when I'm on!) But if you're getting bothered by stuff, remember that your friendly local investment professional is there to answer questions and give advice. Better yet, they should know your personal situation and relate the current news to your life.

The other bit of clarity that I want to share today is that going down less is NOT the same as going up. Apparently this is hard for some folks who like grazing on green shoots to grasp. Take Friday's data, for example: unemployment came in 0.2% worse than expected at 9.4%, the worst reading in 25 years. So what's the market do? It stays flat. Why? Because of the good news in the unemployment data. What good news you ask? Well, we "only" lost 345k jobs last month. Party on! Yeah, I know we were expecting to have lost over 500k jobs, and that the April numbers were adjusted upward ("only" lost 504k instead of the original 539k.) And yeah, I know that the market trades on expectations, but PEOPLE this is still bad. Bad bad bad. Yucky even. And don't get me started on the housing market. Instead, read the Alan Abelson column in this week's Barron's. You might want to make sure you don't read it over lunch if you have a sensitive stomach.

Saturday, June 6, 2009

Thursday, June 4, 2009

Wednesday, May 27, 2009

Gardening 101

Unemployment is capitalism's way of getting you to plant a garden. ~ Orson Scott Card

If you spend much time watching financial news (which frankly, I don’t recommend), you have probably heard the term ‘green shoots’ too many times to count in recent weeks. For those of you who have been saved from the financial news media, green shoots is the term de juer for glimmers of hope that pundits are trying to find in the dismal economic data, the implication being that before the economy can blossom we have to see signs that the economy will come back like a garden after a hurricane. Hope springs eternal and I don’t begrudge anyone their fantasies but, ignoring reality isn’t going to do anyone any good either.

The stock market’s rally off the March bottoms has been significant but, not unprecedented. In bear markets such as this, explosive rallies are actually quite normal. The problem is that once the general population begins to believe it might be a real rally based on economic fact instead of feelings and false hopes, the professional traders take their profits and head to the sidelines, leaving the Mom & Pop investors holding stocks that are too expensive given the still dismal economic condition.

Two of the economic indicators that the green shoot brigade has cited as reasons to uncork the champagne are both from the Conference Board: the index of leading economic indicators (LEI) and consumer confidence. The biggest positive contributor to the LEI in April, interestingly, was stock prices, which we’ve already discussed. Consumer confidence has also risen in April and May, but until the May reading the level would still be the lowest of any since 1970 if it weren’t for the worse readings in February and March! The ‘high’ May confidence level is now at roughly the same level where some of the nasty recessions of the past 40 years bottomed out. Put another way, the outlook isn’t as bad as it was a few months ago but there’s still a lot of rebuilding to do before we can expect everything in the economic garden to come up roses.

I've said this before, but one of the things that continues to give me pause (really, it pretty much makes me stutter) is the consumer’s debt level. The US economy is almost 70% consumer related expenditures. This has been posted before, but bears reposting: imagine my dismay when I discovered this chart from an ex-banker turned Columbia Business School professor:

The personal debt of U.S. consumers equals U.S. Gross Domestic Product today - for the first time since 1929 – which makes us pretty certain that leaf rot on those green shoots is at least likely if not a sure thing.

The garden in the form of the stock market might look healthy for the next several months – until second quarter earnings are announced and expectations for the rest of the year are given by corporate management teams. It should be a little like waiting for plants to grow and produce fruit, just to find out that we’d been pinning our hopes on weeds.

While I'm not a professional gardener (honestly, I have a black thumb), even I know that in order to have a successful future harvest, the land has to be tilled, the seeds planted, young plants fertilized, the garden weeded and then after an appropriate amount of time, the fruits can be enjoyed. My problem with current circumstances is that it is apparent that fertilizer has been spread far and wide but, over rocky soil that harbors an abundance of weeds. I believe that the economic soil isn’t really ready to grow healthy plants and the plentiful government fertilizer has kept alive numerous noxious weeds (banks, car companies, insurance companies) that are stealing nutrients from companies that managed their businesses well enough for normal times but were caught up in extraordinary circumstances. Eventually the weeding out will happen and some good companies will be thrown on the burn pile along with the nasty weeds, an unfortunate reality of capitalism. Until that weeding is finished however, why not stay out of harm's way? When the garden is full of weeds, it’s time to go to the orchards and other locales for food.

Monday, May 11, 2009

Those who forget history... may be on TV

Wouldn't you think that knowing a bit of financial history would be required for those wishing to anchor on a financial network? I'm a bit flumoxed by the following statement from a certain anchor on a certain network (both of whom will remain nameless): "Come on! Bear market rally? 37% on the S&P? That's one enormous bear." Why yes, darling, this IS one enormous bear. Glad you noticed.

I've prattled enough about all the problems that this economy is facing... deeply rooted systemic problems that can't be overcome so quickly... so I won't do it again. This is what other people much smarter than me have referred to as a super bear market... aka a secular bear market. One of the hallmarks of a super bear market is violent moves to the upside followed by a continuation to the downside. If you want to talk about previous bear market rallies that were bigger, I offer one example out of many possible: May 26, 1970 through April 28, 1971 the market was up 51.2% (not including dividends), yet it was still very much a bear market through 1981.

Moral of the story? A rally doesn't a bull market make. What goes up may come down - harder and faster than you think.

Thursday, May 7, 2009

A steeplechase for Shetland ponies

When I woke up before the crack of dawn this morning to review April's retail sales, I was expecting that things would be better than expected. I didn't get it posted to the blog, but if you're following me on Twitter (see the side bar to the right) you saw my notes from last weekend's mall walk. For the first time in months, malls were busy last weekend. People were parting with cash. Not large amounts of cash. But parking lots were fuller and more bags were being carried in greater quantity than I'd seen in my last 2 months of mall walks. Call it a smallish bounce off the bottom, but whatever you do, don't call it a return to a need for Spendaholics Anonymous.

My view is born out in this morning's comparable store sales numbers. Wal-Mart, bastion of the 'Save Money, Live Better' crowd beat expectations handily. Aeropostale, the poor man's value-conscious shopper's Abercrombie & Fitch, hit it out of the park with a 20% comp gain on the back of a 25% gain this time last year. Amazing. Oh, and the real Abercrombie? Down -22%. Price/value matters, folks. The shopper is spending, but they're being careful about how much and where.

Case in point on that value thingy? Sak's same store sales down over 31%. Nordstrom was 'only' down 10.8%, better than expected and more in line with Macy's (down 9.1%) because JWN has added more offerings at lower price points. Ross, TJX - both up nicely. Kohl's & JCP? Sales down, but not as much as expected... Q1 guidance raised. Thing is, you can only manage inventory and costs so much, eventually you have to have sales or make more drastic adjustments that will cause hate and discontent amongst the shoppers and perhaps shareholders.

The big questions now surround guidance for the second quarter and beyond as well as healthy scrutiny of Wall Street analyst's earnings estimates. The latter worries me more than the former. I've never known a group of folks more likely to take two data points and draw a straight line than the lemmings of Wall Street. It should be intersting to see how many different ways folks can justify owning these stocks at these valuations in this economic environment.

But if the retailers and analysts set the bar low enough, it will be just like a steeplechase for Shetland ponies - such an easy hurdle that almost anyone can get over it. I suppose in that environment you should consider shorting those that still trip themselves up.

By the way, if you're interested in hearing this morning's Bloomberg interview, click here.

Friday, May 1, 2009

No traffic jams here

I spent a number of hours walking a mall and a lifestyle center last Friday and Saturday. What I saw was certainly at odds with what the oh-so-cheerful talking heads are nattering about these days.

Sure, consumer confidence was better than expected yesterday. But it's still more than 5 points below where it most recently peaked in September 08. And I'm not seeing many signs of that confidence in the malls.

Friday I walked the region's best mall with a reporter friend. Between the already empty store fronts, some of which had been vacant for months, and the stores in the process of closing there are roughly 12 vacancies in a mall that has roughly 160 stores. Historically this mall has immediately put up "Coming Soon" signs as soon as a tenant has left. Not so much these days. In fact, the new highly touted Hugo Boss store is going into a store front that has been vacant save for seasonal holiday shops for at least a year.

Some of the stores that were closing had the big bold signs in the windows advertising the fabulous discounts - put Ritz Cameras and Babystyle in this category. Babystyle, by the way, is the last of the maternity stores in the mall as Motherhood vacated awhile ago. Illuminations was trying to play it cool, advertising 50 - 70% off but not announcing their departure (they're part of Yankee Candle and all the Illumnations stores are closing.)

Another thing I noticed was that the only folks that we saw carrying larger bags seemed to have come from stores with major sales going. Gymboree was clearing out old merchandise at 60% off, and the mommy brigade was definitely buying, albeit not as rabidly as we might have seen a year ago. Most of the other bags we saw were small... and lonely. Many shoppers had one little bag, perhaps holding something the size of a headband or scarf, but certainly not anything approaching a whole outfit. JC Penney continues to have their fans - more than the other department stores it seems. There were certainly a number (although not a large number) of medium sized JCP bags being toted about.

In the misses category, the stronger merchandise was earning sales, but where colors or styles were off, sales were missing. Chico’s seems to be doing okay – I’d put this season’s fashion in the ‘okay’ category. J Jill’s current offerings were beautiful, and shoppers seemed to be responding even though the merchandise was clearly meant for warmer weather than we’re currently experiencing up here. Coldwater Creek… ::sigh:: Let’s just call the current offering a miss in my eyes and move on.

Biggest shock of the trip? Abercrombie, which has sworn that they don’t want to be promotional, is apparently eating their own words. Normally the far back corner room of the store is sale merchandise and everything else is full price. Over the last 6-9 months I’d noticed that clearance merchandise had crept out into the back quarter of the store, almost doubling the floor space devoted to it. I almost had to pick my jaw off the ground on Friday, however, when literally 75% of the total floor space was marked down. April sales reported next week should be interesting.

I know there are a lot of folks who have been playing the retail space on the rebound off desperately low levels. And with Macy’s 146% rebound off the November 19th bottom, that’s been a good trading call. This happiness and joy with retail may even last through the next few weeks of earnings season since a lot of the expectations have been set really low. But I think you really need to ask yourself at this point if the consumer is really any healthier than they were 6 months ago … and if these stocks are worth the kind of mutltiples we’re looking at today. Macy’s at 24x forward earnings? Nordstrom at almost 19x forward earnings? Aeropostale, one of the amazing poster children of this recession who has been kicking tush and taking names in the teen space, is up 162% off the bottom and trading at 14x forward earnings.

All I’m saying is an exit strategy isn’t a bad thing to have in your hip pocket.

Thursday, April 16, 2009

Gotta go through it

So the American consumer bought way too much stuff with money that wasn't really theirs in the malls that have appeared everywhere across our landscape. And now the bill is due, consumers aren't spending, and those malls dotting the landscape aren't looking so pretty any more.

How ironic that General Growth Properties who bought way too many malls with money that wasn't really theirs is now having problems of the Chapter 11 variety. You have to give them credit (perhaps a bad word choice in light of the circumstances), but they had done everything possible to work out something with their bondholders to get through this without having to file.

So what happens now? Well, this isn't liquidation, it's just restructuring. General Growth will continue to operate their more than 200 malls... until they can sell some of them off. It's considered likely that Simon Properties will be able to pick up some of the properties at literally fire sale prices.

I'm fairly certain that more than a couple of the nation's malls need to go dark. In fact I talked about that for an hour in October with NPR. Here in the Seattle metropolitan area we have eight malls for 3.2 million people. Sounds like a lot of potential shoppers, but the malls are just too close together. We could easily cull three or more of those from the herd and improve the local gene pool.

So now it gets interesting. It's now not just the retailers but the property owners that are having issues. And the consumer isn't at a point they should be spending like drunken sailors again. Call me funny, but I'm not seeing how the current stimulus plans fix this. It's like that song we used to sing at camp where a refrain went something like: "can't go under it, can't go around it, gotta go through it."

Tuesday, April 14, 2009


Last week's comparable store sales weren't awe inspiring by any stretch of the imagination. In fact, for the most part they were down right ugly. And yet the market responded well to numbers like Nordstrom's -13.5% because it wasn't as bad as it could have been. Heck, Nordstrom was up 10% on the day, and I don't think it was just because I mentioned them on television and radio. Apparently down is the new up.

If you looked at the patterns in last week's data, it was pretty easy to see that the consumer isn't having a good time. The best results and the only positive comps continue to come from the value avenues: Wal-Mart, Aeropostale, Fred's, Ross, TJX. On my store checks, the store with the most bags in the mall is continually JC Penney - even in the high end malls, and they still are experiencing negative comps. And among the higher priced outlets, the only place I'm seeing truly strong response to product is J Crew. Bravo to Mickey Drexler and friends. If my budget was better (and I lost 20 lbs), I'd be shopping there too.

So this morning's dismal retail sales report shouldn't have come as too much of a surprise. And yet... This was a little worse than even those who think the glass is two-thirds empty had to have been expecting. I'd heard a lot of buzz that auto sales were going to be positive this month... ummmm no. Scanning the internals of the report, the only positive numbers came from food and health stores. Electronics were down over 5%.

Maybe I'm being stubborn here, but I continue to fail to see any reason to get excited about this market or economy as of yet. Yes, I know the market climbs a wall of worry. And yes, I know the old adage that you don't fight the Fed. But there are more boooby traps in this economy than in a bad spy thriller. Geithener and Bernanke aren't Bond or Indiana Jones. We're not getting to happily ever after without more bloodshed.

Monday, April 13, 2009

Dismal and Deleterious

No, not the economy this time.

I have received word that George Springman, the Chief Investment Officer of my former firm (WHV), passed Thursday. George wasn't just a man, he was an institution. I'm no spring chicken, but George started in the business the year I was born. No one, and I mean NO ONE, knew how to take care of clients like George. Today a former colleague who is talented in his own right mentioned that he sat in awe in December as George held an investment board in the palm of his hand for the entire meeting.

Investment strategy meetings with George were always an adventure. Agree or disagree with his position, he would always have an amazing retinue of information to support his view.

George suffered from cancer over the past year, but nothing could keep him from the office. He officially retired at the end of March, and had only 9 days of official retirement. We always joked that he'd stay in the business to the end, but I don't suppose any of us believed it would be so true.

I'll miss his deep whiskey and cigarettes voice (the result, I'm fairly certain, of an interesting past prior to his conversion to Mormonism) rumbling "Well, Patty, you know..." as he launched into a long story. But the thing I'll miss the most is his vocabulary. I mean this with total love and affection, but someone should have taken away his word-a-day calendar a long time ago, or at least provided the correct pronunciation for some of the more obscure words. His signature phrase, heard on a regular basis during crummy times in the market was "dismal and deleterious."

Vaya con Dios, George Springman. We're richer for having known you and poorer from having lost you.

Wednesday, April 8, 2009

So maybe I'm not crazy

I realize I've been a bit quiet lately. Sometimes you just have to step back, take a deep breath, and examine the parade of data marching past your desk.

Honestly, I'd been wondering if I'd lost my touch. I mean, what had everyone cheering on the stock market see that I was missing? Don't get me wrong, I'm good with short-term trading, taking advantage of technicals, making money without making a long-term investment. Ask Schwab - I'm guilty of day trading my IRA on occasion.

But come on folks... the bulls were acting like the entire economic crisis was a figment of my imagination. I have my delusional moments, but even I can't keep it up for months at a time. Bad economic numbers? BUY BUY BUY. Bad earnings? BUY BUY BUY. Piffle.

So today we hear that the Fed sees no glimmer of hope for a recovery until next year. That's pretty pessimistic. Last Friday we got horrible employment numbers (8.5% unemployment rate) which many have shrugged off as a lagging indicator that doesn't matter. Okay, may not matter to you, but to retailers and the consumers themselves, it's still a bit on the important side. Maybe that's why consumer credit dropped by a huge amount, although I continue to believe that it was only partially voluntary... more likely driven by encouragement (euphemism for pressure) from the card companies themselves. And can you imagine my joy when George Soros even joined me in the bear camp?

I truly get that the market rebounds prior to the economy showing signs of life. But just because the freefall stops doesn't that 1) there's a bounce back up to the prior highs (actually physics and calculus tell us that is pretty much impossible) or 2) the ball can't bounce once or twice then fall into another hole in the floor. And since we've got all sorts of rot in our economic foundation right now, expecting that there won't be any more holes is pretty naive.

By the way, did anyone see the NY Times article today talking about how Moody's put ALL municipalities on negative credit watch? All of them. Something about systematic problems in the economy.

You know, sometimes reality sucks. This might be one of those times.

Thursday, April 2, 2009

When it happens to the strong...

... You have to believe it is a real trend.

Costco announced this morning that they will be closing their two Costco Home stores. I was just up there a couple of weeks ago, and it was certainly a quieter visit than a couple of years ago when we all were spending way too much money. There's no financial impact to the company: the leases are ending, the employees will transfer to other places, and it will all just go away.

These guys are a strong company financially, and management is amongst the best in retail. If they're making this kind of decision to rationalize their stores and extension brands, it reinforces my belief that we're going to see a lot more of this from the weaker hands in retail. UBS finally published on this topic in the past week, the first that I've really heard from any of the major Wall Street analysts.

Prepare to wave buh bye to brand extensions like RUEHL, Martin + Osa, and others. They haven't been announced yet, but it's got to be close.

Monday, March 30, 2009

Well hmmmm

Go figure... the Treasury buys Treasuries (driving prices up and yields down, for those of you who are playing the at home game) and the professional money managers move to buying Corporates and Mortgage-backs.

What's the phrase I'm thinking of? Oh yeah... "Come to mama!!"

Tuesday, March 24, 2009

::thwap:: ::thwap:: ::thwap:: ::thwap:: ::thwap::

You might have heard that President Obama is getting a brand-spanking new helicopter That noise overhead? That's just the sound of Helicopter Ben Bernanke doing a test flight while dropping a couple trillion dollars over the landscape.

Bernanke said Friday that the purchases of Treasuries and mortgage securities were meant to address the widening credit spreads. Honestly, that doesn't hold much water with me. As a client rightly pointed out, the Fed is out of their normal arsenal of bullets and is having to bring in other artillery to try to kill the beast. Through the purchase of these securities, they drive the prices up, the yields down - a good move for the mortgage securities, but not really a big deal on the Treasuries. Thirty year Treasuries are trading at a yield of 3.66%, not exactly a problem. On the other hand, the spread between Corporates (high quality and high yield) and the Treasuries is just out of hand. As of 3/31/06, the spread between the 9 year Treasury and the AAA Corporates was 1%, between Treasuries and High Yield Corporates it was 3%. Today, three years and a little credit crisis later, it's 3.5% for Treasury/AAA and 12% for the Treasury/High Yield spread.

I have to believe that part of what they're trying to do is buy in the Treasuries so money managers will migrate those $$ to bonds with more credit risk. However, it puts a lot of currency into circulation really fast. All the stimulus prior to this led me to believe that if we were going to have inflation we'd see it sometime in late 2010 (if at all), given that so much of the money being thrown at the crisis would be used by consumers to pay down their amazingly high debt loads. This new addition has me certain that there's no way that this won't be inflationary at some point, and that point has moved significantly closer - best guess now is early 2010.

I'd suggest that sometime between now and when that inflation hits going to gold might not be a bad idea. Other hard commodities should also do well in that type of environment. The trick, however, is that between now and whenever the inflation hits, I expect a continuation of the deflationary trend we're currently seeing.

In light of the Treasury's announcement Monday, there's obviously another layer of complexity to things, although not much more clarity. The announcement on Monday of a public-private partnership to help clear the toxic waste off of the banks' balance sheets has some good points and some bad points. Essentially, five yet-to-be-named private firms will be approved to bid on "assets" that banks want to sell. The private firm who bids the most for the asset will have to put up a small amount (roughly 7%), the Fed will put up an equal amount and the FDIC will guarantee up to 78%. If the asset goes up in value, the private firm and the government split the profit. If the asset goes down in value from whatever the purchase price is the private firm and the Fed can lose their entire investment and the FDIC steps in to absorb any further losses.

While this will help set some sort of a market price for the toxic assets, the private firms have very little skin in the game and obviously the potential for pretty impressive returns. On the other hand, it uses the expertise of the private firms to set appropriate prices and keeps the government from overpaying (too much anyway) for the assets and they won't be 100% responsible.

Monday's market rally was in my mind more of a "oh, thank goodness they finally at least came up with SOMETHING!" rally rather than specific expectation that this plan will be the saving grace for the economy. I still expect that the significant systemic problems in the economy will take time to unwind themselves. While I know that I'm going against some pretty impressive market experts on this, I don't believe that this is the beginning of the next bull market - I'm firmly in the bear market rally camp. Valuations are still too high. Just because the banks will be more able to lend after the toxic waste is off their balance sheets doesn't mean that a) they will lend or b) that the American consumer really should take them up on any loans offered. The over consumption by American consumers has led to personal balance sheets bloated by debt and lacking in savings. Add to that a 45% reduction in the value of their retirement accounts and at least a 20% reduction in the value of their homes, and I don't see how this economy that is 70% fueled by the consumer can bounce back in a healthy way in the short term. The stock market may bounce... but the underlying economy has more pain to come.

Friday, March 20, 2009

A squeeze around the middle

Sometimes a squeeze around the middle is a nice thing. I personally like it when my husband or kids come up and give me a hug. But when the squeeze is put on me in a business sense, not so much.

One of my loyal readers asked in the comments of another post how credit terms had changed for some of the retailers recently. Interesting question, and one that I have spent some time working on recently. In the interest of full disclosure, I'm discussing this from an outside perspective. I've not worked in the credit area of a supplier or in the buying organization for a retailer... but I know people who have and/or do.

Under normal times retailers (we're talking big retailers here, not the mom & pops) order goods from a supplier. The supplier produces the goods and when they ship they bill. Terms differ, but are usually net 30, net 45, something like that. The retailers usually negotiate additional other terms they want such as markdown allowances, etc.

From what I'm hearing on multiple fronts, the retailers are getting more than a little bit bolder on the terms that they're demanding. They're not only asking for higher allowances, but they're also extending out their payments. In fact, numerous retailers are actually highlighting their accounts payable as a percentage of inventories on their earnings calls. Additionally, for goods shipped from overseas historically the retailer was said to have possession of the goods when they shipped, so the time on the ocean counted in the payment terms. That just got changed by a number of large retailers recently.

Suppliers have a few ways to fight back. Some retailers are obviously cash strapped, and that's taken into account by the credit managers at the suppliers when orders are placed. I'm hearing that credit terms are especially strict these days. Credit managers are pouring through financials, trying to make sure that they're not taking on too much risk. As one friend put it, "Just because you're a big company doesn't mean you can't go bankrupt on me." I know of one particularly fiesty credit manager who refused to sell to a certain large retailer because they were asking for ridiculous terms. The line "you have to sell to us because we're _______" doesn't hold much weight right now. Also, JP Morgan (and others, I'm sure) have developed some financial hedging products to allow suppliers to protect themselves against the potential bankruptcy of retailers with whom they do business.

Cheery, no?

Thursday, March 19, 2009

Ironic: rhymes with moronic

I'm not a political person. I really just don't have any interest in the whole realm, generally speaking. But that doesn't stop me from appreciating good irony.

The furor over the AIG bonuses has been all over the news of late. The whole thing goes beyond stupid into realms of idiocy.

The argument that AIG was contractually obligated to pay the bonuses? Bogus.

The exaggerated attempts by politicians all over the Eastern seaboard who actually put specific language into legislation that approved the bonuses to look innocent of any misdeeds? Bogus.

The administration's posturing regarding the bonuses when they obviously had a responsibility to be watching over this kind of stuff? Bogus.

The article published by Bloomberg yesterday that shows that Freddie Mac and Fannie Mae, currently run by the US government, have retention bonuses in place not unlike those being decried at AIG? Priceless.

One foot on the banana peel

Oh dear, here we go again. More announced store closings, and the prospect of others.

Ritz Cameras, currently in bankruptcy proceedings, got permission today to liquidate their 129 Boater's World stores. They will also be closing roughly half of their 800 camera stores. The small (5 stores) shopping center right across the street from my office has a Boater's World. The owner of the center just had to replace Computer City with a PetSmart. Now the space next to PetSmart will soon be open. The pain for commercial real estate is starting to get real.

Also, Eddie Bauer just announced that things aren't looking so good in their neck of the woods (all puns intended). They've apparently agreed to new terms on their debt, and those terms rarely come with an interest rate reduction. The CEO says it gives them more flexibility regarding loan covenants through first quarter of 2010. I hope that's long enough. The market apparently isn't sure either - the stock was down a mere 48% today.

Are we having fun yet?

Wednesday, March 18, 2009


As you might remember, I was confounded by the retail sales numbers last week. The number was higher than I expected, especially for apparel which was +2.8% from January.

Today the clouds parted and all became clear. Turns out the culprit was inflation. The apparel component in the consumer price index was up 1.3% for the month of February. I'm not 100% sure WHERE the prices were up, since it sure seems like apparel prices where I'm looking are falling... or at least discounted by huge amounts.

Friday, March 13, 2009

Factoids and cheerleading

In the midst of preparing a talk for a recession workshop next Tuesday morning, I came across an updated factoid that made my stomach turn. Never one to keep pain to myself, I had to share with all y'all.

My friends at the Mortgage Bankers Association (okay, they're not really friends, especially lately, but I'm trying to be nice here) track seriously delinquent loans as a percentage of total loans outstanding. Even through early 2007 the percentage was right around 2%. Unfortunately, then it decided that it wasn't afraid of heights. The number as of the end of the year (it's a delayed but quarterly release) is... sit down... 6.3%.

I could say more, but do I really have to? Okay, if you insist. Can I remind you of this graph that shows how many ugly loans still have to be worked through over the next year or two? Okay. Now I'm done with that.

I was never a cheerleader in school. It just wasn't me. At all. (Those of you who knew me will say "duh.") So I still have a problem with excessive enthusiasm, especially when it's totally misplaced ... and I don't care if it's a bad football team or an even worse economy. So you can imagine my joy as I watch the rah-rah antics of the current administration.

Larry Summers was quoted today saying "It is modestly encouraging that since it began to take shape, consumer spending in the United States, which was collapsing during the holiday season, appears, according to a number of indicators, to have stabilized." Ummm, dude, it didn't fall as much as expected, but it did fall. And the consumer is so far in debt that they shouldn't be spending at all!

President Obama was waving his pom-poms today too. "If we are keeping focused on all of the fundamentally sound aspects of our economy, all the outstanding companies, workers, all of the innovation and dynamism in this economy then we're going to get through this. I'm very confident about that."

And if I hear one more talking head blather about how wonderful it is for the market that Uncle Ben is going to be on 60 Minutes this Sunday, I'm going to burn somebody's pom-poms in protest.

It all kind of reminds me of this quote:

"I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States—that is, prosperity."

Who said that last bit of verbosity?

Oh, that was just Herbert Hoover in May of 1930.

Thursday, March 12, 2009

Scratching my head

There are times in this business that are rougher than others. Watching the market go up from the sidelines this week is one of those times. It feels like it would be great to jump in, but I'm not sure that the water is a comfortable temperature. I'd just dip a toe in to test the temperature, but I'm not sure that aren't piranhas waiting to nibble off an appendage or two.

Despite the "good" retail sales report this morning, I'm still very much of the belief that this crisis isn't over yet. I think I might have said that once or twice before. The retail sales numbers were better than expected. But if you looked deeply, a lot of the happiness came from retail sales of gasoline. Since the PRICE of gasoline was up over 5% during the month and sales were only up 3.4%, perhaps we should rein in some of that enthusiasm. I'll admit though that the 2.7% increase in clothing purchases has me a bit flummoxed, given how lackluster the same store sales were last week. For now, I'm going to consider it a bit of fluke, but watch it carefully.

One of the reasons that I'm pretty certain that we're not anywhere near out of the woods was the release of the Federal Reserve's measure of U.S. household wealth. During Q4 it only dropped $5.1 trillion. A trillion here, a trillion there... pretty soon we're talking real money. Is it any wonder that consumers are cutting back, saving more, and scared to death? Nah, I didn't think so either.

In other news, there's still a lot of short covering going on in the market. Tonight I did a survey of the short interest on the individual stocks within the S&P 500. (Have I mentioned lately how much I love my Bloomberg terminal? I do. Truly I do.) Anyway, doesn't matter if you take the average or the median of the number of days needed to cover the short positions, it comes out to about 2 days. Anyone want to be that the rally continues for another day or two before fizzling when reality sets in?

Tuesday, March 10, 2009

One day does not a bull market make

I suppose I now know what the bulls have felt like for the past 6+ months. I don't know about them, but for me today made me question what I believe. I suppose a bit of healthy skepticism is a good thing, but it sure doesn't feel so good.

I hear that a lot of what happened on the floor today was short-covering, thanks to Barney Frank saying that he wants to reinstate the uptick rule as well as the threat to make short sellers show their hands. I totally agree with both of those moves, by the way.

If we are indeed in the Super Bear Market that I believe we're in, this isn't going to be long-lived. Reality will rear its ugly head, the economy will still suck, and we'll put in the lows down where I think they belong.

I don't know if anyone caught this, but Jeremy Grantham who had been known as a perma-bear is telling everyone that will listen that it's time to get into the market before you miss the big rally, while Benjamin Graham's methodology says the market is still overvalued by about 27% (that was yesterday... so I suppose it's closer to 33% now).

I'm going with the dead cat bounce theory for now, but I'm watching it all pretty closely.

Be careful out there.

Tuesday, March 3, 2009

It's only worth what someone else will pay for it

One of my pet peeves has been all the talking heads... including the President this morning... trying to tell me (and you) that the valuation of the stock market is amazingly low and needs to be bought at these levels because it's 50% lower than it was last year.

Let's have a little lesson on valuation:

* The long-term Price/Earnings ratio for the stock market is 10x.
* The trough market valuation in the 1980-82 recession (as well as other recessions) was 6.8x earnings.
* The earnings estimates for the S&P 500 have dropped almost $2 over the past week.
* The current forward P/E ratio for the S&P 500 is 11.3x

What's that all that mean?

* Assuming earnings do not drop further, the market is still currently valued at 13% above median long-term valuations.
* Assuming earnings do not drop further, the market is 40% above trough valuations. That means we could see the S&P get close to 400 and the Dow get close to 4000.
* My assumptions include this recession/whatever-you-want-to-call-this-pain not being any worse than the 1980-82 downturn and EARNINGS NOT DROPPING ANY FURTHER.

You might have picked up on the fact that the assumption that earnings will not drop any further is a big stretch for me. And if earnings do drop... then what? Well, if earnings drop by 25% from here? Hmmmm. That means that the forward P/E would currently be 15x... meaning it would be 55% above the trough valuation.

Sleep well tonight.