Tuesday, July 28, 2009

'If you knew Retail like I knew Retail ...."

OK, I get it...the consumer is dead...retail is dead...whe're all gonna burn and die and go to hell. But before you go short the RTH (Retail holder ETF) you should understand what drives retail - and it is not just consumer consumption....

I have had the luxury of owning, or working in DOZENS of totally different industries in my 30 year professional life (do NOT date me). One of the benefits is to understand the dynamics of what drives an industry - Trust me, it is a different perspective than the same old recent headline that retail is dead.

It was the late seventies, and fresh out of school, I joined my brother and we started a retail clothing store. We rented space in Roxbury Massachusetts (the ghetto) because rent was dirt cheap. Ultimately after making many mistakes, and learning along the way, we determined we would have more success being a specialty retailer operating in a 'closed area' (neighborhood not mall). So we jettisoned Junior and Missy and became a plus size store for *gulp* FAT* women. It was the perfect strategy- after all our then racist view was that 'women of color' ate a lot of fried chicken- thus lots of fatties in the ghetto - Fat women were less likely to steal (only the ultra skinny crack whores were stealing to pay for their habits), and our only competition - Lane Bryant would never have the balls to open a store in the ghetto. Well as wrongly bigoted as we were, we thrived, and subsequently expanded the chain to over a dozen stores (I subsequently sold my interest when I met my wife and went to work for Lehman Brothers in New York City).

So while it is easy to just make the statement that retail is dead, it is actually more complex than that. The first thing I will share with you is in my opinion, the most important;

Retailers make their money by 'inventory turns'... (huh?) Think of it this way... In Retail, you are buying your inventory using other peoples money...You order the goods...They get delivered, and then you have either 'net 30,net 60 or net 90' day terms to pay for them depending on your credit status. So what is making retailing so attractive, is that you are using 'other peoples money'. As a result, he more times you are able to turn your inventory over, the more money you will make.

Now do NOT get me wrong, I believe that we are in a decade of retail where there are just too many doors (too many stores competing for the same dollar) . But just as I make a case for the IYR (Commercial RealEstate Index) in my previous post - the same economic logic applies to the RTH. Our economic debacle will wipe out the week sisters ... Johny retailer who has not ordered LEAN is GONE. For that matter, even public companies that do not have excellent balance sheets will be gone.

Should CIT go bankrupt this will actually HELP the RTH index...why? First, understand what function CIT provides. I know that S&P reports describe them as providing credit to small business - but let's translate that into English. If you are a small mom & pop retailer a wholesaler will NOT ship good to you unless one of two things take place;

1) You pay cash up front (NOT they way a retailer will survive - remember retail makes money using OTHER peoples money).

2) You order your goods through a 'factor' such as CIT, where CIT pays the wholesaler, and jacks up the price to the retailer, effectively becoming the middleman.

You need to think 'big-pic' here...who does this help/hurt the most? Johnny Retailer is the one who will loose here... Remember the nationals have access to the capital markets, and thus can finance their inventories via banks till the smoke clears... all the while, Johnny Retail can NOT , and eventually closes his doors - hence removing one of those many extra doors that exists today.

Macro thesis number two for retailers is that if you are a national (or even strong regional) chain, you are in a position to re-negotiate your lease. From my retail days, I can recall signing a 2 year - with a 10 year option that I desperately wanted out of when I realized the location (college town) just wasn't working for my type of biz. Outcome? I sold it as a sub-lease to a jewelry store that actually PAID me $50k to assume my lease! The same thesis works in reverse for retailers of clout when dealing with landlords. Make no mistake about it, if the Limited is hurting, one phone call to Simon properties cuts one of their largest expenses by 30%!

Most publicly traded retailers also do a build-out over years...thus leases come up for renewal every year...do not think that every lease is automatically renewable at the same time (this works for them, and against them but is ultimately neutral for most).

Last point I will make is that aside from the biggest factors affecting retailers...ability to run lean inventories...negotiate leases.... Look at their workforces... Now more often than that, the MAJORITY of the workforce is part time ...a MUCH smaller expense dollar for dollar than a full time employee...

In summation Retail is no different than any business in this economy...there was (AND IS) a lot of fat that could be cut... and that is what we are seeing. When you cut fat, you see a surprisingly bigger 'E' in the P/E' of corporate America and this is why I am a bull...

Debate me on Stocktwits .... I am @A_F

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Commercial Real Estate - The New Black

2o many shorts continue to salivate over the upcoming Trillion dollar implosion of the commercial real estate market. After all - Who is renting all the vacate millions of NEW Square feet coming to market. For that matter, who will rent all the soon to be vacant existing square footage? Of course we all know that since the consumer is dead, retailers will start closing doors en mass, creating an even bigger tsunami for CRE, right? Today alone, Bank of America announced the closing of a whopping 10% of all their bank branches. We will likely not see un-occupied rates peak before 20% (in major metro markets)...still a ways off. Lastly, if you're a landlord, how are you rolling over those trillions in debt coming due, when financing has all but tried up for CRE??

Before you start getting short the IYR (The CRE ETF), or heaven forbid going long the SRS (2x short of IYR index) at least understand the underlying dynamics here;

1) Your first tell should be that the IYR is currently in the 30's ...down from a high in the eighties. Even if your thesis is that the average piece of commercial real estate will see it's cash flow, value, etc cut in half consider that IYR's price already KNOWS that...remember the stock market has an excellent track record of looking ahead.

2) Consider that the IYR is not made up of your typical local real estate yuppie investor, over-leveraged, overly greedy, and unable to refi. The IYR is instead made up of very LIQUID PUBLICLY TRADED COMPANIES ( Simon Property Group,Boston Properties, Public Storage, Vornado Realty, Annaly Capital by themselves represent over 30% of the IYR index - ALL strong franchises and easily able to raise funds as needed, or wanted.)

3) Consider that should the bulk of these companies be not able to refi, the group as a whole would likely be classified as a 'catastrophic' asset class (Think BACKSTOPPED), eligible for everything the Obama administration has afforded the other banking institutions.

4) Lastly, for those locked out of the credit market that are over levered, and likely mom and pop regional guys NOT represented by the IYR consider the following; These larger IYR component companies will benefit by buying Johnny Local's properties on the cheap. Debate me on Stocktwits? I am @A_F

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The Consumer is Dead - Long live the Consumer

When I was young, I worked in Roxbury Massachusetts. For anyone who knows Roxbury, it is a Ghetto. I still to this day recall ALL the brand new Cadillacs parked in the driveways of all these run down 'shacks', and in the parking lots of the low income housing projects.

Some parts of our human nature have not changed. Just as that generation sacrificed living in a good home in order to drive a brand new Cadillac - the consumer of today still drink their Iced Chai Lattes, even as they live on the streets.

In this post, I want to explain just some of the ways that the *new* consumer 'Cheats'. These are a few reasons why the consumer is still alive and well even in the face of 15% + (Actual) unemployment.

1) Take an example of the average Joe in a $300k home that has just been forclosed on. Where he likely had been paying a $3000 per month mortgage, he is now more likely paying $1500 a month in rent. Most of that $1500 difference is disposable income. Likely, some pays down the debt he did not default on, and the rest goes to buy a new flat screen TV, or Starbucks coffee habit.

2) Jr. moves back with his parents. Now junior might not be buying a new flatscreen to use with his new Xbox360, but since mom and dad are paying his biggest expense (rent) - ANY income is free and clear to feed his bar and restaurant bills.

3) Don't want to move back in with the parents (or more than likely they don't want you)? Just cash the monthly check that they send to you...after all, mom and dad's of the largest populous (baby boomers) are largely retired, and likely have 100's of thousands, or millions in mutual funds, 2nd homes etc. They LIVE to give to their children.

4) Speaking of demographics, many of those baby boomer's parents are at that ripe old age where one dies. All that inheritance money can go a long way.

5) Laid off? Credit shut-off? Time to pick at those six figure 401k's and IRA's. Doesn't matter that there is an early withdrawal penalty - after all we have been taught to consume for many decades.

Old habits don't die fast, they play out over time. I am not saying this is a healthy, nor a sustainable method for consumption. But just like in that Ghetto, people will want to look good, want to consume at any cost. The aforementioned is just some of the methods being used now days.

I am @A_F on Stocktwits should you want to follow or just "@" me.

Tuesday, July 14, 2009

Look at the BIG picture

If you follow Macro trends, there still can be a case made for being a 'Buy & Hold' investor. So while we see 30 point swings in stocks like APPL, RIMM, AMZN et al - Do NOT take your eyes off the big picture. A few examples follow...

Who will win the Smart Phone race - Apple? Rimm? PAAALLLM? - There are currently over 1 Billion cell phones worldwide, and the Market is expected to grow to over 3 Billion cell phones in just the next few years. Of these current 1 Billion phones, only 100 Million are 'Smart Phones'. So who will win? Me thinks there is room for more than one player in this space, and longer term, all three of the aforementioned stocks will be winners.

Who will win in the search space - Google? Microsoft? Yahoo? - Google currently controls a whopping 69% of online ad spend. BUT only 7.5% of all advertising is currently spent online. While this number only represents (only said tongue and cheek) 25 billion today, by 2011 this will double to 50 billion dollars, as 15% of ad dollars are spent online. So who will win? Me thinks there is room for more than one player in this space, and longer term, all three of the aforementioned stocks will be winners.

LOOK AT THE BIG PICTURE and start thinking of investment returns in 1000's %, and not 30 points here and there.

*disclaimer - I am a short term trader, and hold NOTHING long term. The aforementioned advice is intended for people who DO hold quality market leaders, in growing markets - to help keep this stock market in perspective.

Market at Pivotal Point

When I first mentioned (weeks ago) that many chart patterns were starting to look like they were forming potential Head & Shoulders patterns - I hadn't seen them mentioned by anyone. I was really feeling good about getting short. Fast forward to a week ago, and you can not escape EVERYONE talking about these H&S setups. With so many people watching the same thing, can shorting the indexes possibly work out? For now, I think not, and am mostly long the market again (albeit I go long and short on a daily trading basis).

Regardless of what I think today, I can not help but feel like we are currently in 'no-mans land', with no clear market direction in my sights. So what am I watching as my market tell? Not Goldman Sachs earnings, not even Intels earnings (which I believe will be taken positively). I am watching Oil as my market tell. If Oil closes difinatively under $60, I believe we will have more downside in the market, and will likely get heavily short again. Should oil close over $62 I think the bulls will be back in control.