Friday, October 10, 2008

Now People Are Worried about Retail Stocks?

Gotta tell you (and long time readers can attest) we were very frustrated throughout the 1st half of the year as we were screamed at by pundits about the "2nd half 2008 recovery" - I think at least 5x a week for months on end I used that line along with the term "Kool Aid thinking"during late winter and spring. After that thesis proved to fail, the Kool Aid pundits turned to "as gas drops 50 cents the consumer will be back" - hedge funds ran into retail stocks to run them up on "that thesis" - I said that one will be proven to be wrong but we looked foolish those weeks/months as we held none of the stocks that people were running into on false pretenses. Remember, in the stock market - perception is reality. It does not matter if reality is wrong as long as enough people believe it.

As I think how the stock market can turn so suddenly, one must step out of one's own shoes and realize so many people were drinking the Kool Aid and this "wash of reality" we've experienced the past few months must be such a shocker to them. They were still living in a cocoon of "everything will be fine by the back half of 2008 and this will at worst be a short, shallow recession if a recession at all" In that vein, I can understand why the market has turned so suddenly and without relent. The critical mass of investors has finally woken up to ideas a very few (hand raised) have been preaching. One tends to believe most everyone has similar views as yourself, or at least you extrapolate that onto the market - that was not the case as the "market" had much more of a benign outlook and someone like myself sounded like a mad man alarmist ;) I wrote over and over, most everyone running the "big money" in America in their hot shot levered "new age" hedge funds had never lived through a consumer led recession. The stock jockeys in their 30s (20s??!) and 40s - for them the 1970s to early 80s is when they were born or went to elementary school. Not traded. Apparently none of them read about history (because we are apt to repeat it eh?) So all they were conditioned to was the short and sweet corporate led recessions of early 90s and early 00s - while we went on a 25 year of binge spending as consumers. Hence they were using the wrong playbook entirely - a consumer led recession is a very different think - especially in a country where 70% of GDP is consumerism. I'm only peeved at myself for watching the stock action and not sticking to my convictions longer - when the masses move stocks in completely opposite direction than you believe for months on end, it does lead to some doubts. In April 2008 I wrote

I cannot continue to stress enough how wrong analysts are on 2008 estimates and any company with focus on the US consumer is simply going to be blown apart in due time - if not this earnings season - then in the future. We are told daily how "cheap" these stocks are; this is based on the fictional body of work called "analysts 2008 estimates". Don't believe the hype. The subprime nation (us) is in trouble. Consumers make 70% of GDP. Its a consumption culture where the consumer is being drowned in negative wealth effect from housing, inflation from the Federal Reserve/global forces, and underemployment if not outright unemployment. [Apr 2: The Underemployment Rate is Rising] It is bad out there in the bottom 60% and it's creeping up to the formerly immune 20-40 percentile as well. So now it "matters" because that starts cutting into the bottom part of CNBC's audience. It is the perfect storm and I will utter the most dangerous words a financial commentator can ever utter - it *IS* different this time. Or at least it's certainly not like it's been in a long time...

People were asking me for individual names for shorts - I continue to stress the same themes I've stated since last summer - anything consumer related or based on American conspicuous consumption - it will all go. I was looking at a chart of Whole Foods (WFMI) and that's a perfect candidate - its held up "ok" because it relies on the upper middle class who can afford to pay $7.00 for organic milk. Well, when economics start to hit, people are going to have to stop being so "healthy" and buy what they can afford. That's just reality. Hence this looks like the prototypical short. As is Harley Davidson (HOG) [Jan 25: I Can't Believe this Pig...err HOG was up Today] [Sep 7: More Retail Tells? Harley Davidson and Office Depot], as is just about every restaurant in America [Sep 19: Tough Times Ahead? Restaurants] - even magical Chipotle Mexican Grill (CMG), as if just about every retailer in America ex-Walmart (WMT), etc. These stocks bounce every time the bulls pass their... well bull... that the consumer will be back any moment now and just "trust us" because in 6 months they'll be back in the malls spending like mad. Just. Plain. Wrong. These are going to be shorts for a long time.

Next to go on the food chain will be entertainment - think casinos - Wynn (WYNN), Las Vegas Sands (LVS), MGM (MGM) - it is all going to suffer [Nov 1: A Top in Casino Names? Wynn and Las Vegas Sands] - that's an "extra" you don't "need". So when you ask for specific names from me - its simple - what can you do without? What would you give up first, second, and third as your budget closes in on you? What will you sacrifice to pay for food, gasoline, heating, and air conditioning? Whatever you will skip on - short that stock each time the "early cycle" proponents run them up for a 5-7 day cycle, on wishful thinking.

We're heading into a long, drawn out recession... I've said it since last summer and as each month/week/quarter passes more denial will turn into acceptance and more earning cuts will have to happen across the board. The people in denial rely on government reports, which are for the most part another pile of fiction work.

Ironically, I looked very foolish writing that because during periods of July - August 2008 (although it was a correct thesis in fall of 07 when those consumer stocks first fell off a cliff) as those were among the "hottest stocks" during that "summer 08" period as gasoline prices fell 50 cents and that was of course ALL that was ailing the US consumer. At least to hedge fund computers. In a touch of irony, NOW we see the alarm over retail in this country. Again - this is what makes running a portfolio difficult - even if you are correct in the end, you need to have to survive the running herd moving a stock in completely the opposite direction on an ill fated thesis - as anyone who was short some of these retail stocks when they were being run up 30,40,50% this summer. Being "early" on a thesis in the stock market can be a very dangerous thing... I picked Macy's as one of countless examples from this week in retail as previous month sales were reported - it was a bloodbath pretty much across the board (Buckle (BKE) and BJ's Wholesale (BJ) two of our former holdings did well by the way)
  • U.S. department store operator Macy's Inc (M) slashed its full-year forecast on Friday, warning that its sales could fall sharply in the back half of its fiscal year as shoppers stick to buying necessities.
  • For months, U.S. consumers have avoided shopping at department stores as rising food and fuel prices pressure household budgets also hurt by the housing market slump, job losses and a credit crunch. Shoppers cut spending even more in September, as a global financial crisis took a turn for the worse. Department stores such as mid-tier J.C. Penney Co Inc (JCP) and more upscale Saks Inc (SKS) said this week that their same-store sales languished, forcing some to slash profit and sales forecasts. (again - these were among the hottest stocks this summer and a great part of the reason we lagged the indexes week after week - we didn't own this stuff)
  • Some analysts are concerned that Macy's, which also operates the Bloomingdale's chain, could face weak sales into the beginning of 2009 given the general shock to U.S. consumer sentiment. "We expect 2008 and early 2009 to be difficult periods for the US consumer, and are reluctant to recommend a stock that is so dependent on (comparable store sales) for growth," wrote Merrill Lynch retail analyst Lorraine Maikis in a note.
What is the true shame is those same folks who screamed at us from the TVs (and websites) about the 2nd half 2008 recovery, and that once gasoline comes down 50 cents the US consumer will be "back" (along with housing sales recovering this past spring) still have their reporting posts and "cache", and still are the people we rely on as "experts" to tell us why things are bad today, and "assure" us when things will be better. Their track record is abysmal - why keep trotting them out? Credibility = shot.

No position

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