Saturday, December 10, 2016

Post-Election Humility and a Vulnerable Market

We ask you, gentle reader, after indulging in some well-earned schadenfreude, to print this epistle, burn it and let its incense waft heavenward to be inhaled by St. Thomas More, the patron saint of politicians, who, among other achievements, was beheaded for dismaying Henry VIII.  We should be so lucky.

This sacrificial rite is called for, we believe, after our premise on election eve was neatly defenestrated by the stunning victory of Donald Trump and the upending of our expectation that divided government would persist in these United States.

The upshot in financial markets has been a rout in debt on expectations of a Trumpian agenda that includes more spending on infrastructure and defense, meaning more bond supply; fewer workers via mass deportations, meaning wage inflation; and, perhaps more importantly, the expectation of significant tax cuts for corporations and the one-percenters.  Stocks, meanwhile, have climbed ever higher, anticipating brisker economic growth on the back of the aforementioned government outlays, tax cuts and business-friendly government.

The irony in all this, of course, is that the hot-under-the-blue collar class (no snarky ripostes, please; we’re a working man ourselves) is likely to cede even more slices of the pie to capital.  If you’re a lefty, you should be happy; after all, to paraphrase Lenin, “It has to get worse before it gets better.”  How much worse (or better, if you’re so inclined)?  As the network correspondents say, only time will tell, but Trump’s recent selections for the Labor and Environmental Protection portfolios suggest coddling for capital and nose-thumbing for workers.

We all live in the meantime, though, and we are reminded of a line from our favorite Christmas movie, It’s a Wonderful Life.  When Clarence the angel remarks no money is needed in heaven, George replies, “Comes in pretty handy down here, bub.”

With the warning that the cake that Trump bakes will be heavily salted with surprise, we attempt to reconfigure our outlook.

  • Obamacare is dead! Long live Obamacare!  Republicans will not return healthcare for the poor back to the emergency room.  Neither will they get rid of the pre-existing condition guarantee or parental coverage for young adults.  They’ll just call it something else.
  • With Trumpian inflation on the way and the U.S. economy at full employment, the market expects the Federal Reserve to ratchet up the Fed Funds rate another quarter to one-half percentage point at the Open Market Committee’s meeting in five days. Indeed, futures contracts assign a 97% probability of a rate hike.  But don’t expect another unless the Fed wants to pop the equity bubble.
  • And a prodigious bubble we think it is. The ratio of stock market capitalization to gross domestic product is over 125%, significant overvaluation by historical standards.
  • Which means we believe that it’s wise to focus on individual trees, not the forest.  We pick two consumer retail names at opposite ends of the income target spectrum.  We still like J.C. Penney (JCP), despite its recent rapid run-up, believing it undervalued at a price-to-sales ratio of 0.25 compared with 0.50 for flailing Macy’s (M).  And more disposable income for the wealthy should favor luxury names.  We recommend Coach (COH), the handbag, shoes and fashion house. Superior operating margins and a safe dividend that yields 3.49% justify its trailing 12 months’ price-to-earnings ratio of 22, in our view.
Meanwhile, gentle reader, we pause in this season of light to count our manifold blessings and, at the risk of squandering our remaining brain capital, cogitate in peace about the year ahead.  We called the election of Trump last year (albeit as a jape), so we’re confident of your attention to our 2017 predictions.  Coming soon.

Saturday, November 5, 2016

We Have No Angst On Election Eve

Where have you gone, H.L. Mencken?  You are much needed in this year of “Hamilton” ascendant on Broadway, Trump triumphant with your “booboisie” and Clinton winning the hearts of all who have told cops or spouses: “That’s my story and I’m sticking to it.”

Now, hip-hop “music” not being our cup of tea, we confess we have not rushed to see the runaway hit, and thus are at a cultural disadvantage to our more with it peers.  So, we are left to wonder if its creators and players captured the contempt with which Washington’s aide-de-camp so full-throatedly held full-throated democracy.  “Your people, sir — your people is a great beast!”  In other words, Hillary’s basket of deplorables; or Donald’s Mexican Muslims.  We have met the enemy and he is us! Pogo declared from the comic pages of the Sixties.

On second thought, that old scold Jeremiah put it best: “The harvest is past, the summer is ended, and we are not saved!”

But enough of sages profane and sacred.  You, dear reader, come to us, for practical wisdom this weekend before the election.

Those of you anxious about domestic policy under either candidate should not be so – anxious, that is.  With little chance of either party controlling executive and legislative branches, changes to tax policy or healthcare are unlikely.

Far from perfect, Obamacare is here to stay.  Though premium increases have startled and high deductibles mean you’re really only covered if hit by a bus, it has not proven the job destroyer its critics foretold.  Indeed, labor has become scarce enough to force wages to finally respond.

Thus, as far as the home front figures into it, the expansion will continue, only vulnerable, as it always has been, to a Federal Reserve pulling the tightening trigger too soon and too often.  We think it a mistake to raise rates in December, as the Fed has indicated it will do; if it continues to squeeze money supply in 2017, recession will follow no matter who’s in the oval office.  In our forecast for 2016, The Happy Few of 2016, we japed that Donald Trump would win. It remains a jape.

Among the names we cover, we remain buyers of J.C. Penney (JCP), which we believe is taking share in a smaller pie for brick-and-mortar retail chains.  We still like Amazon (AMZN) because, well, it doesn’t sit still and has no significant challenger on-line.

On the avoid side, we still think Whole Foods Market (WFM) won’t command a premium PE again.  There’s just too much competition to expand margins much beyond a regular old grocery store.  Other retail and fashion names we’ve told you to avoid or sell – Michaels Kors (KORS), Under Armour (UA), L Brands (LB) and Macy’s (M) – remain unappealing to us on a long-term outlook.

We still think, as we explicated in “The Happy Few,” that there are few home runs in a market that is fairly to over-valued.

Neither Trump nor Clinton will have the power to affect market valuations either way.  For all Trump’s bluster, a Smoot-Hawley like return to protectionism would likely be allowed by the corporate interests that rule us for better or for worse.  And Clinton’s late-hour critique of the Pacific trade pact is an obvious pose.

Indeed, the real threat to prosperity is something we think both candidates would avoid – another military adventure as misguided as W’s fiasco in Iraq.

Rest assured, gentle reader, something bad is bound to happen, but political fortune or misfortune for those who want to be the big dog won’t matter. 






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:

Oil


                                                                           ’16

Wilshire 5000
                                                                           ’16

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.