Thursday, July 21, 2016

These Times

We were recently shocked – shocked! – to discover there are men and women running the world who don’t remember watching the Beatles on the Ed Sullivan Show.  They don’t remember, it turns out, because they weren’t alive. 

As you can imagine, gentle reader, this has discombobulated your correspondent, who has been much bewildered as 2016 charges ahead without him.  Much as Brian Wilson felt 50 years ago, “I guess I just wasn’t made for these times” (Pet Sounds, The Beach Boys, 1966).

We hear you, Brian.  Consider these irruptions on the usually smooth felt of our space-time pool table:

  • Outrageously low interest rates.  The republic has never been held in such high regard by creditors.  The 10-year U.S. Treasury note yields just 1.58%, which is pretty darn low.
  • Stubbornly high U.S. stock prices.  The market capitalization of U.S. equities is 119% of nominal gross domestic product, which is pretty darn rich.
  • Striking correlation of oil prices and stock prices in 2016, which is pretty darn (pun alert) crude.  See the charts below:



Wilshire 5000

Now, these phenomena are not without explanations.  A global savings glut and central bank largesse are keeping interest rates depressed, we are told.  With fixed-income yields so low, investors are forced into equities, boosting stock prices even as corporate earnings decline.  

Brexit proved a brief scare, even though Great Britain is the world’s fifth largest economy, but recent employment and retail sales data have made the case that the U.S. can resist the drag from sclerotic Europe and a slowing China.

All this leads us to believe it could be different this time.  This, we hear you say, is the bell rung at the top, a sign that the final fool has rushed in and all must be spanked vigorously by a market god that cannot be mocked for long.

Nevertheless, as we have sighed before, we can’t call a top, so we can’t let go.  Given the apparent spending propensity of the American consumer and signs in the latest jobs numbers that wages are at last perking up, we still like two disparate retail names – Amazon (AMZN), the online velociraptor, and J.C. Penney (JCP), the undervalued brick and mortar dinosaur.

As a disclaimer, we confess to remaining one bewildered baby boomer.  Just the other day we drove our golf cart to the first tee without loading our clubs.  However, once we retrieved the sticks, we sweetly striped our Titleist, splitting the fairway and convincing us we were infallible -- until we four-putted for double bogey.

Thursday, February 25, 2016

J.C. Penney Can't Rebound? Of Course It Can, Old Sport

Can't time the market? To quote Jay Gatsby when "old sport" Nick Carraway tells him he can't repeat the past: "Of course you can." In fact, those who say they don't try to time the market do it anyway. What else is buying low and selling high but timing? Well, OK, maybe not the market, but timing sure comes in handy in finding the stock of a company on the cusp of surprising the crowd.
We've been JCP bulls for some time (click here for our last article on JCP) and put our money where our mouth has been the other day, buying a stake in the company at $7.50 per share ahead of tomorrow's fiscal fourth quarter earnings release.
Here's why:
  • Holiday comps came in 3.9% higher, way better than competitors, which makes us think...
  • JCP will continue to take market share from competitors like Macy's, which should help convince skeptics and short sellers that...
  • JCP will achieve its EBITDA and free cash flow goals in 2016.
We'll be back with a deeper analysis after the fiscal fourth quarter results are released.

Thursday, December 31, 2015

The Happy Few of 2016

Oil, bonds, and ROW -- the "rest of the world" -- tell us all is not well.        

Index investors will lag.

I'm sticking with JCP and AMZN.

The signs are everywhere: The answer to "sixty something" was "boomer" in The Times crossword puzzle we were solving last week. And just today, when we revisited Pandora to enjoy some of our favorite tunes while sorting a month's worth of dirty laundry, we glanced at the laptop screen and espied a Cialis ad. It was followed by a reverse mortgage come-on and a suggestion that Junior and his sister would welcome some burial cash from a life insurer down the road.

OK, we get it. Tempus fugit, old boy; a sixty-something needs to start shoring things up. Alas, it may be too late; nevertheless, we are compelled at this time every year to look ahead. Regrets have their place, but these words offered by Jane Austen's Lizzy Bennet to Mr. Darcy in Pride and Prejudice guide us: "You must learn some of my philosophy. Think only of the past as its remembrance gives you pleasure." We fervently hope, gentle reader, you can remember 2015 with much pleasure.

Our task, though, is to forecast the seminal events and eventful surprises of the upcoming anno domini. Let's jump to it: (Gentle reader, our paymaster requests you click here for the rest of our outlook.  Happy new year!).

Thursday, March 19, 2015

A Very Few Words on This Sporting Life

Vanity Fair

We played golf like Tiger Woods and Brian Williams the other day.  That’s right, the glutes failed to activate and an RPG disabled our cart, baby!  We still managed to finish our usual 20 over par despite buttery buttocks and the Navy SEAL team training in the water hazard on 18.

You gotta shake your head at those SEAL guys.  What cards!  They tried to bring down our approach shot with .45s and ended up clipping the wings of a bald eagle, which we rushed to the vet after finishing the round with our own eagle. Oh, the humanity! The doc saved him, though, and to this day we keep the crippled big bird in a cage on our desk as a reminder of our service to the sporting life of America.

Which reminds us of a nugget from Victorian novelist Anthony Trollope (full disclosure: we are an unabashed devotee and have 34 of his books on our Nook).

More weak and foolish . . . he had been, but not to my knowledge more wicked. 
But it is to the vain and foolish that the punishments fall -- and to them they fall so thickly and constantly that the thinker is driven to think that vanity and folly are of all sins those which may be the least forgiven. 

– The Small House at Allington

Lesley Gore: An Appreciation

In 1963, just before the Beatles conquered America, a 16-year-old New Jersey girl in a honey-blonde bouffant told us all to go to hell; her Johnny was gone and we could play her records and keep dancing all night without her.  It was her party, and ours was beginning about the same time. As we said, it was the early’60s and it was going to be a lot of fun.

There was a throaty tartness in Lesley Gore’s voice, and the songs she sang, even the nominally happy ones, seemed laced with the make-believe love of the lonely, as in:

Rain goes, disappears, dear

And I feel so fine

Just to know that you are mine


My life is sunshine, lollipops and rainbows

That’s how this refrain goes

So come on, join in, Everybody!


Sunshine, lollipops and rainbows, everything

That’s wonderful is sure to come your way

When you’re in love to stay.

Sure you are, Leslie. 

She sang that tune sashaying down the aisle of a bus in Ski Party, a favorite of ours featuring our favorite teen cutie Deborah Walley.

We saw the late Miss Gore in a free concert sometime in the ‘80s, somewhere in lower Manhattan.  Our dusty memory of those early New York days tells us it was the South Street Seaport, but it could have been elsewhere on the southern edge of that isle of dreams.  All that is gone now, but once in a while it comes to mind like a rainbow.  The rain goes, disappears, dear, and I feel so fine.


The closing of the American mind

This just in.  Parents, kids and teachers are revolting against the Common Core because -- gasp! -- it’s too hard.  You know, we think they may be right.  We feel awful when we don’t understand something.  And we’d rather not know we don’t get it than feel stupid.


Monday, February 2, 2015

Super Stupidity

You know the look.  It’s the one that tries to tell the world all is fine inside. I can live with the outcome.  It’s one of those things.  It’s part of the game.  Easy come, easy go.  No regrets.

This look tries to say all that, but it cannot.

The straight-ahead stare that cannot stop the eyes from darting, the sternly jutting jaw that cannot help but quiver, the pathetic chest-out imitation of a young cadet – it is all a transparent cartoon.  In the emotional intelligence category on Jeopardy this visual clue would result in a correct answer of “What does ‘How could I be so stupid?’ look like.”

We are intimate with this look, having felt it draped on our own handsome self too often to be funny anymore.  It was the one worn by Pete Carroll, the Seattle Seahawks’ head coach, and Russell Wilson, the team’s quarterback, at the conclusion of Supe 49 last night. They weren’t fooling anybody.

But to get to the look, we are required to set the stage of a melodrama that a hundred million people watched in high definition.  A tumbling, juggling on-the-back catch by Seahawks receiver Jermaine Kerse on a heave from Wilson in the waning moments of the game.  Omigosh, the ghosts of David Tyree and Mario Manningham were hovering over the New England Patriots!

Second and goal at the two-yard line with under a minute to play and “the beast” Marshawn Lynch in the backfield.  All were wondering if Bill Belichik, the Pats’ head coach, would direct his squad to let the Seahawks score so that his stalwarts could get the ball back with enough time to come back.

With runaway train Lynch and read-option magician Wilson in the backfield, Wilson takes the snap, retreats a couple of steps and fires a pass, snatched by the Pats’ Malcolm Butler on the goal line.  What?!!  The look is as inevitable as the play call was inexplicable.  We know; we’ve been there.

Thursday, January 22, 2015

We Give Amazon Two Thumbs Up

As we always wanted to say in our days on the police beat: Get me rewrite!

Just when Amazon (AMZN) was being written off, it is writing itself a new script, announcing a plan to enter feature film production with streaming to customers available soon after theatrical release. We think it's a big deal, big enough to start coverage of the on-line retailing-entertainment behemoth with a buy recommendation.

Amazon Original Movies creative development will be led by independent film maker Ted Hope, who co-founded and ran the production company Good Machine. Production will begin this year and titles will be released to Amazon's Prime Video customers 30-60 days after theatrical release. A press release can be found here.

The movie-making business can be feast or famine, but we think Amazon has proven it can create popular and critically praised content by virtue of its recent Golden Globe award for the comedy-drama TV series Transparent. Its likely focus on "indy" films should keep costs in check.

It's impossible to predict the financial outcome of Amazon's foray into movie making, but a few examples can lend some perspective. The general rule of thumb is that a movie needs a box office take of double the cost of production and marketing to start making money. "Boyhood," the Oscar-nominated coming-of-age film directed by Richard Linklater cost about $2.4 million or more to make (about $200,000 a year over 13 years, according to Linklater) and has grossed $28.9 million worldwide, according to At the other end of the budget spectrum, Sony's Amazing Spider-Man 2 cost $255 million to produce and $190 million to market and grossed about $708 million worldwide, "just enough worldwide to save the current regime at Sony," according to Deadline.

Of course it's anyone's guess what the percentage of hits, break-evens and flops will be, but creating content as well as just purveying it has certainly served Amazon (and Netflix and cable channels) well on the small screen.

Meanwhile, valuing Amazon shares is difficult if not impossible given startling revenue growth and equally startling lack of profitability. We'll take a stab at it anyway. Since we can't use price-to-earnings multiples, price-to-cash flow multiples could help, but they are by any perspective way rich. In the 12 months ending Sept. 30, Amazon reported $1.077 billion in free cash flow compared with the $388 million in the 12 months ended Sept. 30, 2013. At yesterday's closing price, the company traded at a whopping 124 times trailing 12 months' free cash flow. But the case can be made that Amazon is reasonably priced and even cheap at a price-to-sales ratio of 1.56. In the last 52 weeks, Amazon shares have traded between $408 and $284. Its current price is just $5 above that low.

A pithy rundown of the Amazon cash machine and investors' disenchantment with the model can be found here at the Harvard Business Review. In sum, Amazon's cash conversion cycle, that is, the difference between when it gets paid and when it pays suppliers and retail partners, though still wide, has nevertheless been shrinking.

We'll spare you the tables and charts; you can find them in a million places if pictures speak to you more than they do to us. The chief investor concern, in our view, is stalling growth. In the latest reported quarter, revenue increased 20% year-over-year, compared with 24% growth in the 2013 period. For the nine months reported so far, revenue has grown 22% compared with 23% in 2013. The fourth quarter will be reported Jan. 29. According to Yahoo, analysts are expecting $29.73 billion vs. $25.59 billion last year, a 16% year-over-year growth rate.

Another headwind is the tax inquiry by the European Union into Amazon's Luxembourg unit that could result in steep penalties. The unit had a net turnover of about one-fifth of Amazon's worldwide sales, according to Reuters.

The shares have skidded in the past 52 weeks, down 27.6%. Through the first 20 days of 2015 they have shed 6.7%. Our assumption is that once the movie production and streaming business delivers a hit and recharges growth, investors will reward the company with a more "Amazonian" stock price. Hurray for Hollywood.


Monday, December 22, 2014

We Are Infallible: Predictions and Advice for 2015

Forgive us if we don’t wax nostalgic, but auld lang syne never resonated with our predilection to look ahead.  Looking back is un-American, we believe, so we’ll let the weepy old world take a cup o' kindness while we get a leg up on the new year.

Here are 10 things, in no order of particular importance, to expect in 2015:

  • Stocks will have a subpar year as corporate profit growth gives way to wage growth.  Our stock of the year is unloved Elizabeth Arden (RDEN).  You can read about it here and here.

  • Wait until mid-year to buy Treasury bonds, after the Fed raises the Fed Fund rate target and coupons adjust upward on new debt.  Inflation will be nowhere in sight.

  • Oil prices will stabilize as producers halt uneconomic drilling.  Big oil stocks with plump dividends look cheap.

  • The Republican Senate will fail to pass any bill to repeal Obamacare as it comes to the realization that healthcare insurance is already baked into the welfare state cake, on its way to becoming a new “third rail.”

  • Chris Christie will look increasingly ridiculous as Jeb Bush becomes the preferred nominee of adult Republicans.

  • Elizabeth Warren will make Hillary Clinton look like a Republican, setting her up for failure against the real thing in 2016 (see above).

  • The Seattle Seahawks will keep cheating and keep winning.  They will line up offside and manhandle receivers all the way to a repeat Super Bowl championship on Feb. 1.

  • Jeff Samardzija will prove a better acquisition for the South Side White Sox than Jon Lester for the North Side Cubs.

  • Oregon will beat Ohio State in the NCAA football championship after Marcus Mariota takes the randy Florida State scholars to school and the Buckeyes’ third-string QB exposes Alabama’s faux SEC swagger.

  • The University of Oklahoma, led by Bahamian point guard Buddy Hield, will win the NCAA men’s basketball championship.
There you have them, our fearless calls ex cathedra.  Merry Christmas and happy New Year, gentle reader.  We’re off to the driving range as soon as the UPS guy shows up.