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."

Ouch

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.

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.

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.

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.

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!!"

::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.