Bookkeeping: Initiating Polo Ralph Lauren (RL)

The American consumer is back! Remember, we don't have to believe it as long as enough hedge funds and their computers believe it - since they will drive the stock price up. Polo Ralph Lauren (RL) is a name acting very well, and has now pulled back 10%+ from its recent high - we discussed its latest impressive earnings report here [Aug 6: Bookkeeping: Starting Big Lots - interested in Walmart and Polo Ralph Lauren] I did not pull the trigger post earnings because I was hoping the gap in the chart would fill but this stock has been a horse since giving no easy opportunities to get in.

Now if I were using any sort of fundamental logic, I'd argue that as Europe slows down RL would lose momentum overseas, but since fundamentals mean nothing I can just point to the chart and say HAL9000 is buying, so should I.

Since the last earnings report analysts have bumped up March 2009 full year estimates from $3.98 to $4.12, which is a rare situation in the retail space. But really it comes down to the chart which is the only safety valve and "map" that works to any degree in this completely random and without logic market.

We're starting with a 1.05% stake here in the $72s, and I've just noticed I have somehow compiled a group of 4 retailers as I drink Kool Aid. Sadly this is one group "working" of late....

Again at this point "every" stock is in the same sector to me, since fundamentals don't really matter anymore. When financials are hot one day, but sold off 4 days later, as hedgies run to commodities for a 2 day trade, before they sell off that sector to run into healthcare for 3 days, before selling off that sector to run into housing for 3 days... well you get the picture. This market has been taken hostage so any chart that shows strength for more than 3 days is one we have to consider. Regardless of sector. The Wall Street Journal has a story today right up this alley by the way - and specific to the retail "strength". Remember, I will keep repeating this - perception is reality. Just like technology stocks were the place to hide out 90 days ago because they were "safe" and "had no exposure to oil" (that fantasy was blown to pieces) so now is the fantasy of the consumer coming back in a few months. That is where the hedgies are running to, so to make any money in this market you have to ride their coattails. Even if you don't believe one iota in their hair brained theories.

Since everyone is trying to jump ahead of everyone else in "bottom calling" and "buying ahead of the turn" to gain any sort of advantage this (in my opinion) leads to these moves.

"What?? you think retailers will bounce fall 2009? Then I better buy spring 2009"

"What's that?? Joe at Hedge fund 'Rocky Balboa Partners' is buying spring 2009? Then I better buy winter 2008-2009"

"What? Larry at 'I Ran My Last Hedge Fund into the Ground but they gave me another $2 Billion - I love America!' Partners is buying retailers in winter 08-09 for the fall 09 rebound? Well I better buy this fall!"

"What? Jeff at 'Holy Smoke I love the Lack of Uptick Rule - the SEC is giving Me a Free Way to Make Money' Partners is buying retail in fall 08 for the rebound in fall 09? That's nuts *smack forehead* no wait - that's brilliant! I better get in NOW!"

And so it goes - and no I am not being facetious. (ok maybe a little)

• Retailing stocks are primed for a closeout sale. Shares of retailers have climbed more than 11% since July 15, even as the Standard & Poor's 500 has risen just 2%.
• What is behind the sharp moves? Investors, seizing on the recent drop in energy prices, are beginning to anticipate an improved economy by next year led by a re-energized consumer. That would lead to healthier profits for retailers.
• Analysts have stopped slashing earnings projections, and the poor performance of many retailers last fall will make for easier comparisons in the months ahead. At the same time, retailers have been reducing inventories and slowing price markdowns, helping profit margins.
• Some expect a new stimulus package if Sen. Barack Obama wins the presidential election. And recent comments by Home Depot chief Frank Blake, who said that "we're getting awfully close to the bottom" of the housing slump, cheered investors. Even if a retail recovery doesn't materialize until next year, the bounce in profits may be so big when it comes that the stocks are worth buying now, bulls maintain. (yee haw, socialism on one hand as a reason to buy, retailers calling bottoms on their own business - no bias there folks - is another reason - the Kool Aid is everywhere)
• But even if the slowdown ends next year, it is hard to see why big-time profits will materialize. Easy lending helped drive discretionary spending in recent years. Now credit-card, mortgage, home-equity and other kinds of lending has become more restrictive, and it probably will be for the foreseeable future. Gasoline prices are 33% higher than a year ago, unemployment is rising and the global economy is slowing, so there is little reason to think consumer pressures are actually easing. (this is how I used to think, when I used logic - the charts and recent experiences say logic loses)
• Here is the dirty secret about the recent rally: Much of the buying isn't coming from retail-focused investors sensing a turnaround. Rather, some hedge funds are closing out commodity trades and international plays and searching for something that might work, if only for a few weeks. (wait, you mean to tell me hedge funds are running in and out of sectors for a few days to a few weeks, squeezing stocks they have no belief in just to make money so they can get their quarterly payouts? Nah! Never! Impossible! The stock market is about logical and efficient pricing of securities based on instrinsic value! Benjamin Graham promised me)
  

Again - this is what our casino... err stock market - has become - exchanges dominated 2/3rds by institutions as they have driven out the common individual investor [Individual Investors Own Only 1/3rd of US Equities - Record Low] who is giving up trying to buy stocks on logical things such as fundamental.... and tries to think out past a holding period of 3 days or 3 weeks. It's a changed game - the hedgies don't own the most assets but their assets do the most minute to minute, day to day flipping and churning so their influence is growing by the ... minute. They are the drivers of direction and magnitude of stock price. And hence you get random, nonsensical moves on a daily basis for months on end. When this game ends or what causes is, is the thing I am mulling over. I hope this is not a permanent condition.

Long Polo Ralph Lauren in fund, no personal position