Tuesday, October 23, 2007

Retail & Transportation And More Rantings About The Wall Street Mess

"The current freight environment continues as one of the most challenging we have ever seen. For the second consecutive year, we have experienced virtually no fall peak shipping season."
--USA Truck

American consumers sure do love high oil prices. I heard some professional money manager say that because oil was priced in dollars, it wasn't affecting global consumers. Huh? And, that it would take some astronomical price to impact American consumers. I believe he mentioned $140 a barrel. We've really got a crew of Einsteins working Wall Street. After thirty years of bull markets, we now have so much bloat on Wall Street that the janitor is running mutual funds. Let me take that back. I believe the janitor would probably make better investment decisions as he'd know what it actually meant to work for a living and that savings were precious. What do you think it's like buying oil in China on less than $2 of income a day? Oh, that's right. They don't. Or, if you are rich, on $20,000 a year? The U.S., Japan and Europe still disproportionately consume the world's oil and all three are slowing rapidly. If anyone has any doubts oil is a bubble, that perspective should be gone by now. Demand in the U.S. is negative, we have a supply glut, Wall Street's participation in the energy futures markets is incredibly almost 50% now and the narrowing of what "works" in U.S. investments has caused a concentration of buying in energy futures by Wall Street firms. I said last year Wall Street wouldn't quit ramming oil prices until they killed the economy. If you learn to think like them, they are so predictable. Unfortunately, this recent oil move looks very bearish from the futures profile. Just at a time when many large Wall Street institutions are levered as much or more than little ole Long Term Capital Management was in 1998. (Go buy the just published Portfolio magazine and read the reprehensible article about Goldman Sachs and others.)

Some may disagree with my position but I am quite confident the facts speak for themselves; as I have said time and again this is the biggest bubble the world has ever seen. What truly worries me is that the size of the bubble has grown so much incrementally larger over the last seventeen months alone that it now threatens a chance of intermediate term recovery. What might have been a manageable outcome seventeen months ago has now become a global nuclear bomb. The world will literally shudder and shake when this cycle ends. And, China is at incredibly high risk of an economic disaster with the potential to dwarf the U.S. industrialization bubble ending in 1929. Talk about macro volatility developing. Risk is at levels not seen since 1929 as measured by many metrics. Some are even more heightened than 1929. Now, this will all pass and the sun will shine again but not before tremendous problems present themselves. I still believe the biggest problem will likely be China but that in no way minimizes the other major issues facing global economies. To top it off, if you are concerned about global rhetoric by political leaders now, wait for the interactions that will likely develop when things start hitting the fan. That's nothing new as we've talked about these concerns for quite a long time.

USA Truck was one of the top performing stocks this cycle up 600% from its low in 2000. USA Truck outperformed the S&P by five times this cycle. Is this a poorly run company? A problem with USA Truck? I know the answer but I'll let you be the judge. (By the way the USA Truck Chairman is something like 900 years old so when they say a long time, they mean a long time.) So, how much does the American consumer love high oil prices? I'd say a little less than is generally believed on insular Wall Street. The plumber or entrepreneur or farmer who needs a pickup truck and must drive forty miles to work each day is getting killed with high oil prices. This is a difficult economic environment for many regardless of the employment rate. These seers who divine the future of the stock market are the same crew who charges us massive management fees so that they can buy Ferraris while underperforming the market indices as over 80% of fund managers do. That would include hedge fund managers as well. I actually received a notice recently telling investors not to try to time the markets because of the redemptions a fund organization was seeing. Is this another potential problem? A run on mutual funds as Paul Farrell writes about? Now, don't try to time the markets or I won't be able to make my Ferrari payment or buy that third house in the Hamptons. They are so removed from reality that it is truly amazing we put up with their fee structure and shenanigans for sub par performance. And, according to Paul Farrell's article link above, quite a bit of seamy behavior. But, we knew that. It is a prime driver for a lack of confidence in American consumer polls. Confidence is eroding very quickly and the cumulative consciousness of society isn't "fixed" with fractional rate cuts. More likely, not fixed by any rate cut. Just a small point missed by monetarists. Can you say deflation? Especially with Paulson's confidence eroding scheme as I wrote about last week. But many keep on believing the Fed is omnipotent as they incessantly ramble on that stocks are cheap. Here's an off topic remark to think about. If long term rates in the U.S. were half of one percent as they are in Japan and you applied the Fed valuation model, what would the fair value of the S&P be at current earnings? These people are so foolishly incompetent.

Most retailers get 40-70% of their profits in the back to school and Christmas season. Most specifically Christmas. The mix and amount depends on the category. Obviously a food retailer is not a good example. But, discretionary categories are: department stores, specialty apparel, home goods, electronics, etc.

And retailers ship to the stores by truck. Now, some without regional distribution might be piggybacking trucks on trains for long distance replenishment given fuel prices but retail is tied to trucking. Even with so many retail goods coming from Asia. Some goods may be coming from LA or the west coast to distribution centers in train cargo containers but the merchandise is shipped to stores via truck. And most fashion clothing retailers ship from offshore factories by large cargo jets given fashion has a limited shelf life. Again, to the stores by truck.

So, how might I ask is the Christmas season going to be great if trucking companies are not seeing any seasonal load improvements? How might I ask is the consumer continuing to spend as I hear? Have you ever had a wish sandwich? We talked about some of the retail sales data points being the worst in modern history earlier in the year. Most talking heads said it was an anomaly or the weather or changes to Easter or all three. Well, we can all wish for happy times but it doesn't help deal with what is going on in the real world. I've spent fifteen years working with retail clients. Not talking about them on television but working with them as a consulting partner who understands their business. Some people I've talked to and many others I respect greatly with decades in the retail business haven't witnessed anything like this environment. What makes this environment worse is that it is happening at peak profit cycle for retailers. And, that means projects are being kiboshed, new store openings are being delayed, inventories will have to be discounted or written down and capital spending is coming under the knife. Retail CFOs are likely the most ruthless of any industry on costs. They will take no prisoners or get left holding the bag as financial company CFOs have. And, yet the pumpers are telling you to buy retailers because that is what you do when the Fed cuts interest rates. I guess their chart of "If the Fed does this, you invest in that" needs a little revisioning because it's not happening. Or we can pray for a miracle. Since when does investing involve prayers?

By the way, it's ironic a top stock stock in the Nasdaq 100 on Monday was retailer Sears Holdings. Traders love this stock. That is a dead company waiting for burial. It might have been a good trade while Lampert was imitating Gordon Gecko and raiding the company of wealth to sell commercial properties during the real estate boom but now it's just a poorly run, has-been retailer with poor retail locations and negative brand equity. Sears still has some life in it but K-mart is dead. I believe it's reasonable to conclude Wal-mart could be the next K-mart from an investment perspective because of a change in trend and their failure to react to it constructively. Not that Wal-mart is going out of business for a long time, if ever, but Wal-mart has a tremendous amount of problems that are not easily fixed. Especially when they are not even acknowledged. Remember, K-mart once was just as invincible as Wal-mart is perceived to be today. But, that's for another post.
posted by TimingLogic at 12:30 PM

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