Globe Trotting newsletter writer Marc Faber went on CNBC this morning to issue his most chilling prophecy of doom yet.
How nervous should you be? Not very. A brief history of Faber’s recent calls for a “1987-style” crash:
Abercrombie & Fitch reports in the morning. The shares have been running like a male model on Branding Night in the Top Secret ANF dungeon formerly rumored to be located near company HQ.
As the long term chart shows, ANF was an absolute disaster for years. I’m long since last fall, based on respect for the execs, better merchandise and it being literally impossible for the company to be worse than it was during the last few years of the former CEO.
The Rounded Belly Low I detailed last year has turned out pretty well but expectations are higher with the stock up 40%.
I don’t have a trade suggestion. I’m staying long and immediately regret the decision. Trading is largely about having more accurate expectations than other analysts. I don’t think it’s about estimates at all, if ANF has a good message.
Strictly in the interest of sharing the process, here are my notes going into the call. My hope is the company beats and guides down hugely then explains the shortfall in a conference call. That way I can buy lower.
Frankly I’ll take anything better than horrible. This isn’t even kind of a good company yet. I’m simply betting on them getting a tiny bit better than people expect. A bad miss will send this back to the low 20’s in a heartbeat…
A hedge fund hotel is generally defined as a company with an unusually concentrated group of shareholders.
Valeant is more like the Ravenite Social Club. The stock routinely trades lower ahead of bad news, the CEO comes and goes and results have been restated, adjusted or simply retracted 3 times in the last few weeks.
Why would a self-described “value-based” mutual fund, one with roots to Warren Buffett, keep more than 20% of its assets in any stock, let alone a shifty Pharma roll-up dumpster like Valeant? What the hell is Ackman doing with such a huge portion of Pershing Sq in this mess? How is Paulson still a billionaire?
I can’t answer any of that. No idea. I only know two things: 1) this whole thing stinks 2) I wouldn’t touch this stock with anything I wasn’t willing to burn
In response to The Butcher of Sears Holdings It is Showtime writes
I could write a whole history of retailers failing due to leverage and / or being run by financial gurus, if I thought anyone would read them.
I was a senior in high school when the Haft Family made its early push for Dayton Hudson / TGT. I left for college the next year and never really moved back to MN. That was 1987. My earliest memories of tagging along on store visits with my dad (he worked for Dayton’s) are mixed in with Ali – Foreman which puts them in 1974 and 5. By that math “Asshole Bankers Don’t Understand Retail” was the final lesson of a 12 and a half year live-in retail apprenticeship under the guy who was central to the creation of the modern Target.
Which is nothing I did. I was just lucky as hell to be raised by (and get along with) a very unusual guy who was certainly one of the top 10 merchants from 1950-2000. He’s wildly underrated but I’ll argue his placing with anyone.
(Forgive the digression. Quite a bit of coffee is involved in these Sunday morning columns and visits to the comment section.)
Ken’s problem with retail LBOs was the debt. He wasn’t afraid of the risk. He loved risk. What he hated were cheap, dirty stores. Or empty cash stands when there was a line. Or flimsy displays… Wow, did Ken Macke hate flimsy displays. You end up with all of those when you lever up retailers whether it’s to do an LBO or buyback or dividend.
Retail margins are terrible. 10% is about your cap. There’s no room to add excessive debt payments without cutting spending. Cutting spending leads to sloppy execution which becomes a messy store. So help me God if a Target store was dirty my dad would grab the nearest flimsy display and use it as a staff to Smite the store manager dead like Ken was Moses himself (I may be conflating that memory… I was a kid).
The Haft family ended up crapping out of Daytons. The Hafts had been front-running their own press clipping. They’d get long, announce a bid then sell down the position in the ensuing ramp. (Did you honestly think Ackman invented the idea?) Lather-rinse-repeat. In the summer of 87 the Hafts were out. By the time of the article, October 15 1987, the Hafts were long up to 4.9% at $50. They’d bought huge in the fall of 1987.
Which means the Hafts were levered long into about $300m of DH right into the crash of 87. The stock fell somewhere around 40%. So Endeth the lesson on mixing leverage and actual business.
(Another funny point on the article… Check the part where it says Daytons sent a “tersely worded 2 page fax”. The original draft of the fax was 2 words. “F— you”. The lawyer wouldn’t let Ken send it. I was listening to my dad on the call when he complained “Which part of ‘f*** you’ do you think the Hafts won’t understand?”)
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I’ve met Warren Buffett. I’ve spent a tiny bit of time with the man in social settings. I’ve heard him sing to a small room.
It is very fun to have a conversation with Warren Buffett but let us be very clear on one thing: He is not your sweetheart uncle who just happens to be kinda savvy.
Warren Buffett is an Apex Predator. He has shark eyes. He sizes everything up, all the time, including you. If he thinks you’re worth talking to…if you can be taught or show him something fresh… He’s all-in. Once he senses someone is out of their depth or without value he’s gone, probably calculating the correct depreciation rate of the passing catering truck.
Ruthlessness in no way diminishes his greatness. We are right to worship this man. Just not for the reasons we think. Buffett can use his bare hand to rip the beating heart out of a banker’s chest and hold it in the air before the guy even hits the ground. Warren Buffett is a Worlock.
Worlocks are less avuncular and sweet than how Buffett comes across but, really, do you want to study a financial man-witch or the old guy in Up?
In 2008 Buffett was the voice of reason in the storm. He took huge stakes in GE and Goldman Sachs and sort of implied… Strongly… That Americans should jump in alongside him:
Of course, Buffett wasn’t actually buying shares like the unwashed masses. When the public sucked up a Goldman Secondary at $123 Warren was cutting a deal that would get Berkshire paid about $2 billion in dividends before Goldman bought him out early at a huge premium.
Buffett hammered Goldman in exchange for an endorsement that walked Americans into a crap investment and emerged from the crisis as the closest thing to a hero left standing in finance. Because he’s Warren Buffett and no one else is.
Since Warren didn’t break down the accounting in his must-read letter I did so for him, in graphical form.
The week is over and America won.
Yes, things seemed dark just 2 mornings ago. I myself may have seemed pessimistic to outsiders.
But note well that there was always a contingency plan. We had our levels (1920 close) we drew colorful pictures so even the illiterate could understand the stakes. Dystopian Hellscape below 1920, butterflies and puppy kisses between 1920 and 1950. A close above 1950 confirms a double bottom (defeating the evil Head & Shoulders and bringing peace to Narnia and equities).
Yesterday we closed above 1950 by more than 1pt. Suddenly all ambiguous news is good (as long as you don’t own WTW). Hot GDP? Bring it. Election chaos? Just an American tradition (or does Hamilton not include all the sex scandal and Burr Presidency stuff?).
You’ve heard me say this before but it can’t be repeated too often: someday the world will end but it’s a crappy trade.
The war isn’t over but the week is. Unless the Bears make a huge, YUGE stand at the open financial media is going to be reduced to a series of fights over who is the most cautious in the near term but bullish over the long-haul. “We’ve had a heck of run, host. I’m not chasing this rally but I want to put money to work on dips”.
I’ll be popping in and out but, if we’re totally honest, trades made at the tail end of moves like this usually end in tears. DM me if we hit any of the levels listed below that aren’t “>1950”. I’ve got meetings then I might play some golf. We’ll talk about the hundreds of stocks that are still broken on Monday.
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Ten years ago Sears Holdings Corp boss Eddie Lampert was widely regarded as the best investor of his his generation. Already a billionaire at 43, Lampert had levered a sweetheart, bizarre deal for Kmart into ownership of the once mighty Sears. He seemed poised to reverse the fortunes of both chains and turn the combined entity into a retail juggernaut.
The financial press salivated.
“Eddie Lampert is the Steve Jobs of retail: he thinks differently and acts differently, with extraordinary results” raved Fortune.
As it turns out, not every aspect of retail needed a rethinking. Take for instance the notion of investing in the stores. Lampert proudly shot down minor investments on store maintenance, sneering at the lack of ROI in providing customers a clean, safe place to shop. He spun off real estate and gutted the balance sheet with buybacks.
“The pushback I get is, ‘he’s a hedge fund guy’. Full stop. Some places, that can be a badge of honor. In others, it’s almost a term of derision.”
10 years later it’s easy to be more specific. As far as retailers are concerned calling someone a “hedge fund manager” is tantamount to hate speech.
Since those remarks were published shares of SHLD are down more than 85%. The company has posted net losses of $3.8b, including results announced this morning. Same store sales have fallen every year, including a stunning -9.2% for the year just ended.
SHLD’s top-line has dropped by more than 50%, accounting for more than 100% of the entire decline in total US department store revenues over the last 10 years (based on census data).
Meticulous Cannibal or Bumbling Fool?
What makes Sears interesting isn’t the abject failure of the stores but the mystery of whether this is the story of a bumbling retail exec or a masterfully cold-blooded, lucrative vivisection of what was the once the biggest company in the world.
People in finance discuss Lampert in hushed tones. A former Goldman Sachs employee and Richard Rainwater protege, Lampert is more connected than Keyser Soze. For years anyone daring to bash the company could expect to be pressured by Lampert acolytes for inaccuracies real and imagined. (Not a rumor… actually happened to me several times).
Such murkiness only fuels the legend. My former colleague Mike Santoli put together this back-of-the-napkin family tree for the Sears corporation. It’s a starting point for calculating ESL’s ROI but it doesn’t tell nearly the full story.
Lampert has been taking control of Sears assets and cutting questionable lending deals using assorted companies under his control since the early stages of stealth liquidation.
Is it illegal to tell thousands of investors and employees that you’re pushing them into the future even as you slowly chip out the ice from beneath their feet? No. The not-so-hidden secret of finance is that the line between crime and opportunism is defined by who has the best lawyers.
Here’s the link to an SEC filing describing a deal between Sears and ESL in which Lampert loaned Sears $400 million. For collateral ESL forced Sears to put up “25 locations of the lender’s choice”. The value of the real estate in question would be anywhere between $500 million and $1.5 billion, based on prior transactions.
Lampert has been both sugar daddy enabler and butcher to SHLD for years. Once the company’s cash had been spent on buybacks Sears started requiring emergency funding on a semi-regular basis. ESL shell companies have been there to make the loans every time. Altruism or usury is in the eye of the beholder. Since he’s on both sides of every deal it’s all but impossible to figure out whether or not Lampert has been abusing his position.
The Cavalry
Today Sears announced that Bruce Berkowitz of Fairholme is joining the board. Berkowitz is a savvy investor, despite being a SHLD holder. Previously supportive of Lampert, Berkowitz signaled a change of tone, and increased position size, late last year. He now controls over 20% of the company and is ready to start flexing.
At this point Berkowitz is likely to focus on making sure his investors get a fair cut of whatever meat is left on the bone. Sears has been doing everything it can to drive away customers for the last decade. After this much damage Berkowitz’ goal isn’t a recovery but a dignified end.
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Restoration Hardware shares are down 20% after the company issued the Magna Carta of whiny, red-flag, specialty retail death trap warnings.
I’ve never seen anything quite like this. It’s almost a cry for help on a personal level. It’s a Geometric proof that that RH shares are logically an unsound investment under any conditions. Three “key factors” and a cloud of smoke that used to be shareholder money…
I’m going to the gym.
Here’s their version. My edits are below.
Target had a great quarter. Digital grew 34% and the CFO has spent the last 15 minutes on the conference call waxing rhapsodic on the improvement in in-stock position. Customer facing. Beautiful.
I love it so very much when management hits exactly the right tone.
Here’s my initial breakdown of the quarter. Check back for updates as the call warrants.
Brexit fears and oil yadda yadda yadda are weighing on stocks, sending the S&P500 back into the dystopian hellscape that is Correction Territory.
I love the English. As an insomniac on social media I work the same hours as UK Finance Twitter (smart, aggressive, super analytical and presumably violent drunks after hours).
I say this directly to the English people with whom I share this budding love affair: if you guys don’t get your shit together Trump will Brexit your asses right out of NATO next January. I’m serious. He’s nuts and we’re going to elect him anyway. It started as a joke and things just kind of spiraled out of control. None of us have any idea what’s going to happen. Not even him.
We were there for you through that Nazi King and the whole Diana mess. Now we need you to pick up some slack.
Thanks in advance. Give my best to Princess Kate.
Here are some key levels.
