Byron Wien Is Having a Terrible Year At The Plate

Market predictions for the year ahead are a bit like assholes in that everyone has one and they generally stink. But in the history of offering guesses for what lies in store, I am not sure anyone has ever failed as badly Byron Wien is failing right now.

By my calculation, Wien, who used to call plays for Morgan Stanley before moving over to Blackstone, is working on o’fer as we hit the half-mile mark and by year-end, he stands only a slight shot at converting on two of his 10 pre-season predictions. Let’s take a look.

1) The continuation of the Bush tax cuts coupled with the extension of unemployment benefits has put all working Americans in a better mood. Real Gross Domestic Product rises close to 5% in 2011 driven by improved trade and capital spending in addition to stronger retail sales. Unemployment drops below 9%.  First off; unemployment has crept back over 9.0% and figures to move higher through the summer. Meanwhile “real” GDP growth, once you adjust for wildly under-reported inflation, looks no better than flat and is perhaps negative. Technically, Byron had unemployment right for a couple of months but he has been so far off on GDP that this still qualifies as a strikeout.  

More Bad News For Beer

The following is a line from today’s earnings pre-announcement from glass behemoth Owens-Illinois. Explaining a 2Q earnings hiccup, this is what OI had to say about bottle sales down under ….

“Beer consumption in Australia also is down as consumer sentiment is extremely conservative due to high interest rates leading to lower disposable incomes.”

Perhaps we now have a reason for why Molson Coors (and Modelo) may be shying away from buying Fosters. Now Austrailian beer consumption has been pretty resilient since 2005. So says Stifel Nicolaus beverage analyst Mark Swartzman in a report issued yesterday that downgraded the shares of Molson (TAP). But with the Aussie interest rates moving up and consumer confidence down under at two year lows, perhaps not even beer consumption is safe. That is a damn shame.

But before we single out the Aussies for cutting back on their beer, OI had this to say about North America ……

“While shipments to beer customers have been lower than anticipated due to a continued sluggish U.S. beer market, demand for the wine, spirits and food segments remains strong.”

With gasoline prices still stubbornly high and unemployment benefits running out for thousands each week in this country, it is no surprise that beer consumption is punk. This blog had nothing nice to say about Molson Coors (TAP) a few weeks back when it issued its 1Q earnings and given this news from OI, there doesn’t seem to be much reason to get more constructive on the summer drinking season. That said, give me two or three more dollars of downside in Molson and I am a buyer of all that free cash flow.

The Shadow Banking System Is Once Again Cracking

Two pieces of news caught the attention of The Bear this morning. First, there is this story that the Federal Reserve is having all sorts of trouble selling the assets it took from AIG as collateral when the insurance company was circling the drain. Judging from today’s report, it seems that this one seller is simply overwhelming current demand for these mortgage-backed securities.

The second piece of news comes courtesy of Clusterstock which points out that prices on both residential and commercial mortgage backed securities have been plummeting over the past month. AAA-rated subprime residential paper has moved from the low 40s to the mid-30s while some AA-rated commercial junk has dropped from the low-70s into the high-50s. That folks, is a rout.

Obviously, these two news items are related as selling pressure from the Fed is at least partly responsible for falling MBS prices. In fact, these stories probably belong under the same headline. Something like …. “Shadow Banking System is Still Busted.”

I say that because taken together, this news suggests that private investors – hedge funds, investment banks, insurers and pensions – are hardly itching to buy mortgage-backed securities and certainly not at the prices that the Fed has been buying them for two years. And now that the Fed is long a ton of this stuff and wants to unwind hundreds of billions worth of securities, nobody is willing to stick their toe in the water, let alone step up with big bets.

The consequences of this buy-sell imbalance is profound because it means the only thing standing in the way of much tighter credit is the Fed’s balance sheet. And if the Fed isn’t willing to support these issues with added purchases (QEIII and IV and V ….), prices will fall, financial institutions will have to mark down their trading books, and credit figures to get much more expensive, if obtainable at all. This is not a recipe for growing the economy. In fact, it is a rather foul concoction that may go a long way toward contracting the economy in the not so distant future.

Are Retailers Scaling Back Christmas As Skies Darken?

Abercrombie’s CFO told an investors conference this morning that the second quarter would “not be good.” Yesterday, Talbots and a retailer named G3 Apparel went a step further and said the second quarter looked awful. Newell Rubbermaid has said the same thing. May sales at The Limited, Target and Kohl’s were crap. And the Gap is bracing for problems all year.

Now some of this newsflow is obviously company specific and the investment banks will tell you that high gasoline prices are complicating matters in a big way. But the truth of the matter is the consumer looks gassed. And that has me wondering if Retailers are suddenly having trouble sleeping as they put the finishing touches on their holiday buys.

The bet that planners have to make is as follows: either Q2 is stuck in a transitory soft patch and holiday will be fine. Or this string of bad macro and micro news portends a sluggish back-half and perhaps even a double dip. If planners bet on the former and they are right, they look like heroes. But if they go big on Holiday and all this Q2 news proves to be a harbinger of things to come, then they blow this year and dig themselves a new hole to begin 2012.

My gut tells me some will decide to play it safe and adjust their Holiday plans accordingly. Better to give up a little upside than risk a real debacle in December when years and careers are on the line. Accordingly, it wouldn’t surprise me to see many “adjust” guidance during the 2Q earnings season as CEOs and CFOs begin tipping their bets to the street. There hasn’t been much of this to date but that is because companies are still operating under their pre-May expectations. Give it a couple of months and I think you will see an uptick in warnings, albeit trims and not full-on buzzcuts.

In some respects, retailers may have caught a break as they got some good intel just in time to avoid a disaster. Had some of this weakness showed up in July and August, it would have been too late to dial back on Christmas. But coming in May and June, when plans are being locked down and crap is being bought, the dark clouds have given planners an opportunity to dodge a bullet. Whether they choose to capitalize on the opportunity is another story but my sense is most will decide to shave their orders and avoid the knockout.

Regardless of how companies decide to wager, it seems that 2Q conference calls will be more interesting than normal this year. Because one way or another, retailers will be forced to tip their Christmas bets. For those staying in the hand, all I can say is good luck.

Does This All Add Up?

So here is today’s question ………

The ten year pierced 3.00% this morning and now trades 2.96%.

Bank stocks are in the toilet as Citi tries to hold 40 and BAC tries to hold 11 and a quarter.

The Case Shiller Home Price Index confirmed yesterday that we have a double dip in home prices and the market is basically back to 2002.

ADP reported this morning that it saw punk employment growth in May. This, in turn, had every economist on the street scrambling to lower their jobs forecast for Friday.

The Institute for Supply Management factory index for May showed the largest fall in twenty-seven years and the forward look on manufacturing looks downright horrifying.

Auto sales from Ford and GM came in flattish and inventory continues to build at GM. Which makes perfect sense for a company that is expecting to make it’s year on higher prices and fewer incentives.

Oil is holding $100

Gold is $1550

The House of Representatives voted last night to not raise the U.S. debt ceiling. Which is fine because 150 of our nation’s “top” economists have blessed such a move unless trillions in spending cuts are agreed to over the next two months.

Bees are attacking New York City.

The Fed bought another $8 billion in treasuries today.

Lebron is coming up on Michael quickly and it now looks like nothing will be able to stop the Heat.

The Japanese are radiating the Pacific.

Adele is cancelling tour dates.

Ohio State is in ruins.

So here is the question ….. Does all that add up to 1325 on the S&P?

Some Vermont Widows Wake Up To Some Great News

Imagine you are some widow up in Burlington Vermont. And for years you have owned this dog of a stock named Central Vermont Public Service Corporation (CV), the local utility for the Green Mountain State.

Each year, you clip your coupons, you collect your .92/sh in dividends and you go on your way. Until this morning, that is. And that is because over the weekend, Fortis – a big Canadian Utility – decided to make you forty percent wealthier, at least on the shares you own of CV. So that $24 stock you own? Well, it is now worth $35.

People, a forty percent takeout pop is some “kiss” in the world of utilities. And that takeout multiple of ~20x looks awfully juicy right? So it might make sense to set up a screen of smallish utilities and investigate whether there are some other CV’s out there right?

Well, hold on one second. I’m not saying there aren’t. But given some of the details in the Fortis release, this looks like a fairly unique case. So be careful before you start using CV as a benchmark to justify the purchase of any other sub-billion dollar utility.

I say that because it looks from the release like CV has a pretty depressed rate base. Or put another way, there is some room to grow the rate base, which in turn, will grow earnings. And that is why Fortis is involved. It believes it can grow the rate base by nine percent through 2015 and if the PUC doesn’t demand any concessions, that should boost earnings to somewhere around $3, at least according to my envelope and rusty utility math. Throw a 13x multiple on that and you get a $39 stock in 2015. Factoring all that in, today’s takeout price hardly seems exorbitant.

That said, congratulations to our widow who probably woke up to the best news she has received since Vermont beat Syracuse in the 2005 NCAA Tournament. And kudos to a handful of small cap guys who were in there for the windfall. But word of caution here before you run and buy one of the few remaining small utes like EE or AVA or NWE …. Not all these names are created equal and guys already earning normal returns aren’t in line for sweet takeouts.

Editor’s Note: EE and NWE were both very strong today ….. maybe somebody did take notice of little old Vermont Public Service.

Gap Stores Heads To The Disabled List And Will Be Out For The Year

Gap Stores is being taken out to the woodshed today and with good reason after the retailer had some awfully dour things to say about its business through the end of the year. As such, Gap’s stock will undergo the equivalent of Tommy John surgery, meaning it will spend the next nine to twelve months on the shelf.

Ok, I admit it. I was wrong when I predicted back in November – when the stock was at $20 – that I thought Gap could “fill the gap” and trade $26. That prediction was based on some encouraging signs on the sales front and an expectation that the company would produce a $1.90 in 2011 income. Given some of the company’s success on the ecommerce front and the progress it had made on expenses, this seemed doable, particularly in light of an uptick in comps.

That analysis, however, did not account for two things. First, the sales momentum turned out to be completely illusory as the Fall uptick in comps could not be confirmed during the first quarter. And two, Gap got whacked in the face by higher sourcing costs. That all adds up to a minor tsunami where Gap can’t raise prices because its stuff is too ordinary and thus, they face huge margin compression as higher costs can’t be offset. Back to the baseball metaphor, this is the equivalent of a blown out elbow.

The damage this storm will cause to Gap’s income statement over the next year is nothing short of devastating. Heading into yesterday, the company had been guiding to about $1.90 in EPS. The Street was a bit lower and some had been trimming numbers into this event. But Gap is now guiding to $1.40-1.50 in 2011 income, which is basically a fifty-cent haircut. The cause, according to the company …. twenty percent higher unit costs in the back half of the year.

So the stock is being punked to the tune of about seventeen percent and now trades nineteen and a quarter. Assuming the company is able to hit the low end of guidance, which is debatable given high inventory and zero momentum, GPS now trades a bit under 14x earnings. And that raises the question …. Does it make some sense to buy a chunk as a long-term investment?

I will tell you … it is tempting. And that is because this is still an incredible cash flow story. I mean, is 13x an obscene multiple to pay for a company that generates Free Cash Flow returns of eight or nine percent? Plus, this company continues to buy back tons of stock. So much, in fact, that JPM mentioned this morning that the entire public float could be gone in six years.

Listen, this story is clearly a mess. And it will be rehabbing for some time as Team Gap works to improve its offerings and get through this difficult cost environment. On top of that, they need a new coach, or at least a new offensive coordinator to replace Patrick Robinson who was fired moments after this debacle came into perfect relief. But give this story a year and I think Gap will be able to pitch again. Maybe not at an elite level but the stock now has an opportunity to lift as earnings normalize down the road. With almost twenty percent of downside now in the stock, I think this is a pretty safe name to own and I wound bet some value guys will come to the same conclusion shortly.

Target’s Earnings Report: Is that a Retailer or a Bank?

Tell me if you have heard this story somewhere. Earnings come out. Headlines say earnings “beat” expectations. But a big part of that beat is due to a tailwind from lower credit losses. And the rest of the business looks awfully ….. meh!

Sounds like a typical bank right? Wells? JPM? Suntrust? Maybe BBT? Nope, today’s winner of the award for “non-financial company whose earnings report looks like it came from a bank” goes to Target which used gains on credit cards to mask a rather uninspiring quarter.

If you are even mildly interested in TGT, you will hear a lot of this today: “results were broadly in line with expectations.” And they were. But that shouldn’t come as a big surprise as TGT announced it’s “comp” sales for the quarter on May 5 and once that number is out, expectations are usually reset at appropriate levels. So the fact that the quarter was in line with post-May 5 expectations is hardly a reason to get excited.

And that is because the numbers are really not that exciting. Yes, comp sales were up (2.0%) over decent 2010 comparisons and given Walmart’s recent numbers, that is nothing to sneeze at. But margins are down ~50 basis points and operating income would be decidedly down year-over-year if it weren’t for the fact that credit costs from TGT’s cards business are down “huge” from 2010.

Just to get a sense of how huge, TGT recorded a credit expense of just $12M this quarter, down from $197M in 2010. You back those credit card gains out and you see TGT’s core operating income (EBIT) was down four percent from a year ago. Is that something to celebrate?

I realize that the negative 4% was expected but that doesn’t mean it’s good. And that is my point. Can anyone get real jacked over a company whose core business is basically turning in punk results? Moreover, the mix of its sales is headed in the wrong direction. By that I mean TGT’s prices are down, and the number of transactions it processes is headed toward “flattish.” That means the thing goosing the overall comp number is customers are buying more “units” each time they pull into the store. Translation … they were stocking up. Well, this isn’t great for gross margins and it suggests that the customer is starting to get pinched by inflation, whether it be the food kind or the energy kind.

TGT is hardly an expensive stock. And compared to WMT, these results don’t look all that bad. But I wouldn’t go mistaking “good” for “inline.” Because while these earnings may have been compliant with the latter, they can hardly be mistaken for the former. And if we don’t reward Banks for driving profits with lower credit costs, why should we treat TGT any differently?

[I am posting before the earnings call and for some reason, I am not able to access the call online. So if TGT guides to ~5% comps in the second quarter .... never mind what you just read ....... or mind it, but buy anyways cause TGT is a pretty cheap stock]

Did “Dicks” Get Rained Out Or is Something Else Going On?

Just a hunch, but I suspect Goldman Sachs Analyst Matt Fassler’s voicemail is full this morning as his baby, Dicks Sporting Goods, swung and missed with today’s first quarter earnings release. And Fassler isn’t alone as it seems analysts up and down the street didn’t see this “whiff” coming.

But Fassler was the one who upgraded DKS last week so he is in the spotlight this morning as Dicks trades down four percent on some disappointing 1Q sales figures. Just to recap, this is what Fassler had to say on May 11: “We expect DKS to exceed guidance and match our Street-high forecast when it reports 1Q on May 17.” Pretty bullish, right?

Well, Dicks didn’t hit Fassler’s thirty-one cent estimate. Instead, it printed thirty cents but much more importantly, the company’s same store sales came to rest far short of expectation. Some bulls, like Fassler were expecting comps to come in north of six percent but the sporting goods retailer was only able to post a 1.4% gain in this category. That folks, is a screaming whiff.

Now the company (and Fassler) is blaming the miss on bad weather in April, which is hardly a surprise as every other retailer seems addicted to the same story. And assuredly, the rain last month probably played a role in DKS miss. But 450 basis points? Sorry guys, this seems a bit much given the fact we are talking about two or three weeks of shitty weather buried in a thirteen week quarter. Further, didn’t Fassler (and others) know about the weather when he decided to up the ante on the quarter?

But if weather wasn’t entirely to blame, what alternative theory might explain the sizable shortfall. Well, here is one …. Maybe high gas prices have convinced thousands of beer leaguers to play out 2011 with their old gloves and their old spikes. Didn’t Big Five Sporting Goods tell us a “gas story” on May 4 when they puked their 1Q earnings report to the street? I KNOW. I KNOW. Different company. Different target consumer. Less regional diversity.

But last time I checked, they do sell sporting goods. So their opinion should count for something, NO? And if $4 gasoline is hurting running shoe sales in California, is it a stretch to think it is doing the same thing in the Northeast where gas prices are similarly high?

My point today is not to rip Fassler. Or try to poke a hole in DKS. Quite the contrary, DKS remains a pretty interesting story in retail. A bit expensive perhaps, but a retail standout in that it can potentially generate some organic growth.

But that doesn’t mean the street wasn’t too bulled up on this name, at least heading into earnings. And while DKS has a good story to tell, today is clearly a strike. Sitting 0-1, DKS might rip the next pitch into left-center field and the stock will go to $50. But count me in the camp that gets a bit worried when a company pukes and blames it all on the Tequilla. And add me to the list of those who are interested in hearing why Lone Pine Capital recently (1Q) exited their rather sizable DKS position.

Dicks has been a great stock and admittedly, it is a difficult short. But perhaps today is a signal to get off this train at the next stop. Because expense management is great and all but it won’t be enough to support a lofty multiple if the top-line starts coming in lite.

Community Health Breaks Off the Attack

The word out of Dallas is Community Health (CYH) has broken off its five-month attack on Tenet Healthcare and is now retreating back to Tennessee with a banged up stock price and some thorny legal issues on its plate. The defeat doesn’t qualify as a rout but that is probably little comfort to CYH shareholders who lost a small bundle of change during this hunting expedition and now find themselves long a company that may (or may not) have a small bill to settle with the U.S. Government.

Just in case you weren’t following this little hospital fight, here are the details:

CYH bid $6 in cash and stock for THC back in December while CYH was trading around 32 and THC was mired in the low fours. THC balked, saying the bid was woefully low. CYH came back with an all cash bid and THC went asymmetrical by charging in Federal Court that CYH was guilty of fraudulently bilking Medicare out of several hundred million dollars and it didn’t want to be gobbled up by a company with such sketchy billing practices. At least not for $6 a share.

So CYH came back last week with an offer of $7.25 which was rejected by THC yesterday. CYH had said this would be its last offer and holding true to their word, they decided last night to pull their troops back.

Now at first glance, CYH shareholders don’t seem too much worse for the wear. After all, when this deal was announced, the stock was $32 and today it trades just a buck lower. That said, the S&P is up ~eight percent since the first offer was announced and CYH has had two passable earnings releases since December. Given that, it isn’t too hard to imagine CYH would be trading five or six dollars north of where it is today if CYH had never attacked.

But it did attack and the fact of the matter is THC’s charges have done damage to CYH’s stock price. Time will tell if CYH is really guilty of raping Medicare and if so, by how much. But at this moment, the possibility that something along those lines actually happened is a headwind for CYH.

I may be giving THC too much credit here as the Feds may have been able to figure some of this stuff out on their own or been tipped off by a qui tam plaintiff under the Federal False Claims Act. But the fact of the matter is the accusations were raised in direct response to CYH’s attack on THC and therefore it seems sensible to chalk this one up as a self-inflicted wound.

So what happens from here? Just a hunch, but I suspect CYH now becomes an interesting long. This is hardly precise analysis, but it strikes me that these types of headline grabbing issues are never quite as bad as they seem at first and if CYH is guilty, the damages are likely to be far less than that implied by THC. So while CYH may have to pay a fine or modestly amend its practices, this would not cause irreparable damage to the business model. And once there is some resolution, CYH will be able to recover the losses that it incurred during this campaign.

Meanwhile, THC now seems to be trading a little rich, implying that there might be another bid out there. Some stubborn arbs are probably still around, hoping for something along these lines. If that is the case, I would offer this suggestion to the stalker (HCA) … bid at least $8 or make sure your hospital admission rates are within industry norms before you strike.