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.   Continue reading


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.