Doug Kass fills his blog on RealMoney every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:
- How the market's optimism is misplaced.
- How to fashion an investment strategy from the retail market's wreckage.
Click here for information on RealMoney, where you can see all the blogs, including Doug Kass'--and reader comments--in real time.
- Allergan (AGN - Get Report) (updated earlier) up by another six beaners (that's up $6 to those that understand my slang) to over $221.80. This favorite large-cap stock for 2017 was put on my Best Ideas List (only recently) in late December at $194.
- Some normal profit taking in both DuPont (DD) and Radian (RDN - Get Report) .
- Oaktree Capital (OAK - Get Report) grows more Miighty and is advancing for the third day in a row (up 2% in the session).
- Shorts Metlife (MET - Get Report) and Lincoln National (LNC - Get Report) are lovely--to the downside and Hartford Financial (HIG - Get Report) holding in and maintaining recent gains. So are the financials.
- Trade of the Week--short Apple (AAPL - Get Report) --has rallied, unfortunately.
- Caterpillar (CAT - Get Report) is still a DOG (and I added to my short over the last week as posted).
- Campbell Soup (CPB - Get Report) holds in well despite its recent rally.
- JCPenney (JCP - Get Report) sucks in a decimated retail space.
- From an asset class standpoint, gold is the cat's meow.
- QQQs over Rrrs and Sss.
Long: AGN, HIG large, CPB large, GLD large, OAK, DD small, RDN, JCP large
Short: MET, LNC, CAT, GLD puts, AAPL, JCP puts, SPY, QQQ, IWM small
Position: See above.
I continue to believe the domestic economy will disappoint and that the U.S. stock market will suffer as expectations for GDP and corporate profit growth remain too optimistic.
Watch the fixed-income market--it is a reflection of growth expectations and its movement will have a bearing on financials (I am short small Financial Select Sector SPDR ETF (XLF - Get Report) ) and on the broader markets.
As I have mentioned this week, I expect the 10-year U.S. note yield to drop back to around 2.25% over the near term--a non-consensus view.
Thursday morning the yield is approaching 2.4%--down by almost five basis points. The yield peaked at about 2.6% recently.
Position: Short XLF small.
For apparel-centric (department store) retailers, the news releases issued after Wednesday's close by Macy's (M - Get Report) and Kohl's (KSS - Get Report) suggest a disappointing holiday season, with comps falling 1% to 2% below plan.
The retail apparel group in general and M and KSS in particular are down meaningfully in price after both retailers lowered guidance.
- Most of the weakness apparently was in November, especially before the election. Thanks to Rule FD, this data is not released on a timely basis.
- Stock charts of VF Corp. (VFC) and PVH (PVH - Get Report) had suggested weakness in apparel, although M suggested handbags and watches in its release. This would be the second year in a row of poor apparel sales. (Some reversion to the mean should be expected in the quarter ahead).
- The consumer's economic situation remains quite strong. The first quarter will be helped by a late Easter.
Macy's also announced yesterday a restructuring in recognition of being "over-stored." It is closing 100 stores; it has identified 68 of them that will shut their doors. I sense most of the comp shortfall at the retailer was in stores that will be closed. In a trip I recently made to soon-to-be-shuttered Macy's CityPlace store in West Palm Beach, the stores clearly were not replenished in a timely manner and I had heard that many of the associates knew something was up. A lot of the problems here should not recur next year and the company remains financially strong. I do not expect a cut in the dividend. Macy's also noted that its large online business grew more than 10%.
Retail's Technological Obsolescence Is on Display; Is It Soon to Be Discounted?
"Price is what you pay, value is what you get."
Amazon (AMZN - Get Report) remains a significant problem for any store-based retailer. Several speakers at the Citi TMT Conference noted AMZN is a threat to everyone as the company has no constraints on its strategy and does not need to deliver good quarterly earnings. AMZN clearly wreaked havoc with apparel merchants this holiday, but it is not going to get all the business.
At some point the share gains of Amazon and its peers will be discounted in retail share prices. We could be approaching that point sooner than later as the taste of buying after Wednesday's disappointments will be so sour as to dampen most investors' appetites. Moreover, who doesn't recognize by now the threats to traditional brick-and-mortar retailers? It is now universally assumed, so buying at the sound of trumpets could soon make sense.
As I posted Wednesday in "Ta Ta to Macy's and Kohl's," I sold my trading long rentals in M and KSS early yesterday morning at or near the day's price highs.
Thursday morning, Macy's common share price will probably open at 5x to 6x 12-month trailing Ebitd. Kohl's will open below that. These firms are not going away and, though I won't be participating, deep-value buyers--and maybe even some activist investors--will have a field day with retail merchandise "going on sale."
The issue, of course, is how long and how deep that sale will go on!
Two additional comments:
- The aforementioned problems may have limited impact on my only long in the space, JCPenney (JCP - Get Report) , which is trading at around $8 in the pre-market. The JCP stores I recently have visited look fresh and clean, the appliance initiative is gaining traction and the sale of the corporate headquarters will strengthen the company's financials, but it should be noted it was expected. I remain a buyer on weakness, with a time frame measured in months and years and not days and weeks.
- The mess at Sears Holdings (SHLD) probably should unwind quickly, as I suggested in my 15 Surprises for 2017. It is hard to believe it had anything but a devastatingly bad fourth quarter. I doubt vendors will choose to support it in 2017 in spite of CEO Ed Lampert's latest injection of funds. Sears' sales of $20 billion is a lot of market share for JCP and others to take.
Position: Long JCP large; short JCP puts.