January 9, 2017

Amazon a threat to traditional store based retailers

For apparel-centric (department store) retailers, the news releases issued after Wednesday's close by Macy's (M) and Kohl's (KSS) suggest a disappointing holiday season, with comps falling 1% to 2% below plan. (Real Money technical analyst Bruce Kamich also took a look at Macy's and Kohl's this morning and analyzes what may lie ahead for both names.)

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 had suggested weakness in apparel, although Macy's 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%.

Amazon (AMZN) 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 his 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.

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, JC Penney (JCP) , which is trading below $8.00 this morning. 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.

via thestreet

January 4, 2017

2017 could be the year of GOLD

The broad consensus is to own stocks and to sell gold. 

But, as I have discussed since 2003 in my annual Surprise Lists, the broad consensus of investors is often wrong. Indeed, it is often the case that the very coalescing of popular opinion behind an investment tends to eliminate its profit potential.

As Howard Marks writes:
"First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in: 'The outlook for the company is favorable, meaning the stock will go up.'

Second-level thinking is deep, complex and convoluted. The second-level thinker takes many things into account: 
-    What is the range of likely future outcomes?
-    Which outcome do I think will occur?
-    What's the probability I'm right?
-    What does the consensus think?
-    How does my expectation differ from the consensus?
-    How does the current price for the asset comport with the consensus view of the future and with mine?
-    Is the consensus psychology that's incorporated in the price too bullish or bearish?
-    What will happen to the asset's price if the consensus turns out to be right, and what if I'm right?"

While the animal spirits may have taken over the equity markets and have ignored the gold market, we should recall that there is a reason why Keynes called them animal and not human spirits. That's because animals are a lot dumber than humans!

As excited as investors are about stocks, they are now uninterested in gold.

I remain a minority and outside of consensus regarding gold. However, given the developing and concerning conditions -- and lack of credible policy responses -- that I now see falling into place, the uncertainty premium should be rising and gold may be a beneficiary this year.

What is most surprising to me is that the price of gold has not responded to these uncertainties, providing a potentially favorable upside/downside ratio for the yellow metal.

I wanted to start today's opening missive with the way in which I concluded my 15 Surprises for 2017 -- the major theme being that "Donald Trump will make volatility and uncertainty great again."

I especially would pay attention to the three questions at the end of my column as they relate to the prospects for a higher gold price. Answer them yourself -- I have my own responses -- and act accordingly:

Some final words.
My outlook for 2017 is more gloomy than in years.

To me, the biggest surprises are (1) the abundance of complacent sheep that populate our financial markets today, (2) the rapidity in which the bloom comes off the Trump flower next year, and (3) that the market actually may do what is unexpected in 2017.

The Republican Party becomes divided and Trump's policy support loosens. Even the newly elected president's "A Team of Rivals" cabinet with vastly different philosophies and backgrounds becomes splintered, full of tension and conflicted, much like an episode of "The Apprentice." Unlike President Lincoln (who neither lacked for self-confidence nor needed to be the only voice in the room) and his ornery set of advisers, Trump's management style of an "Apprentice-like" administration does not produce constructive and cohesive policy.

With little strategic vision and a limited ability to effectively govern, the Trump administration's popularity quickly wanes as the trade-off from a slower growth world to a late-cycle policy experiment to stimulate growth fails.

Off of Twitter, absent regular press conferences and the delay/failure of policy, Donald Trump by year-end 2017 will be less ubiquitous and harder to find than he has been for the last 18 months and more like Where's Waldo? 

All of which gets me back to the three questions that I have asked myself every morning over the last two to three years. These questions seem more appropriate to ask today than ever:
- In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
- In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
- With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?

Think about these questions as you approach investing in 2017 and consider embracing the contrary and even some of my "probable improbables" for a portion of your invested assets.


Risk happens fast in 2017.


As a possible manifestation of some of the concerns expressed above, the price of Bitcoin recently has ripped higher ($1,130), and Bitcoin, for the second year in a row, is the best performing "currency."

Finally, I would note that we have ransomed our economy because our policies have favored debt over equity and speculation over productive investment, placing gold in a more envious position:

-    There is a federal debt load of $20 trillion, an annual on balance sheet deficit of more than $500 billion and a total annual deficit of over $1 trillion.
-    There is nearly $49 trillion of public and private sector debt in the U.S. Every increase of 100 basis points in rates boosts debt service by $470 billion annually (that's 2.5% of GDP). This money that can't be spent growing the economy because it is paid to holders of U.S. debt.

Though it is always hard for me to value gold as I cannot produce an intrinsic value calculation, I believe the odds that gold will shine brightly this year are growing, and that the commodity may go from goat in 2016 to hero in 2017.

I have moved to a large holding in gold.

Position: Long GLD large; short GLD puts

via ZH

December 29, 2016

Carl Icahn warning on ETFs

What is dangerous are those ETFs that consist of relatively illiquid instruments--for example, municipal bond funds, junk bond funds and/or small-cap funds in biotech and in other areas--that are expected by many investors to be liquid.

But, an ETF cannot be more liquid than its component holdings.

So, when liquidity dries up--particularly in illiquid asset classes and industry-specific or market ETFs--there can be dangerous dislocations and markets easily can be disrupted. And these disruptions can have a tendency to build on themselves.

We have seen these sort of flash crashes of illiquid ETFs in the past; they are now starting to occur with greater frequency.

They almost never occur when markets are rising. They usually occur when stocks are sold off hard.

And, sometimes that sort of hard selloff/crash can be further exacerbated, as we have witnessed, by panicky ETF holders. When this occurs, the ETF manager can be forced to sell illiquid holdings in order to rebalance the portfolios. When selling intensifies, this causes illiquid ETFs to fall further.

In its extreme, this response even could cause selling in the more liquid ETFs as investors more broadly panic and sell.

Bottom Line

The risk of ETFs is that too many assume their ETFs are as liquid as or more liquid than their component holdings--not that they are inherently too popular, as Carl Icahn has suggested.

December 27, 2016

Shorting the NASDAQ

My trade of the year for 2017 is to short the PowerShares QQQ Trust ETF (QQQ) , which tracks the Nasdaq 100 index.

Here's my investment thesis for this play:

The Nasdaq 100 Already Has Rallied
QQQ already has risen from about $96 a share at the market's February 2016 low to around $120 today. That's about a 25% gain in 10-1/2 months, which beats the Dow Industrials, the S&P 500 and other key indices.

A Trump Presidency Brings Uncertainty
Tech companies in particular need a predictable, forecast-able, non-threatening U.S. trade policy and a consistent set of rules for their health and profits. But for now, that doesn't look like it's in the cards under the coming Donald Trump administration.

Indeed, Trump's relationship with Silicon Valley (save for Peter Thiel) appears to be strained, with tech pioneers and executives conspicuously absent from the president-elect's initial cabinet choices and other political appointments.

Sour Apple
Apple is the Nasdaq 100's largest components, representing about 10.8% of QQQ's holdings. But, of course, I'm of the view analytically that Apple Is Crapple.

Other Techs Seem Overvalued
Beyond Apple, other Nasdaq 100 components that I see as overbought include:

-    Microsoft, which makes up about 8.6% of the index.

-    Amazon, which has about a 6.4% weighting.

-    Cisco, which accounts for about 2.7% on QQQ. I've previously written that I'm bearish on Cisco on an intermediate-term basis.

Non-Tech QQQ Stocks Look Iffy, Too
Some non-tech QQQ components could weigh down the ETF in 2017 as well. These include biotech and health care companies such as Amgen, Biogen, Celgene, Express Scripts and others, which all could suffer if Trump tries to limit drug-price increases.

Comcast also represents a relatively large QQQ weighting (about 3%), but the cable giant could suffer from continued "cord cutting" by consumers.

Tax Cuts Won't Help QQQ Stocks
Trump's plan to lower the effective U.S. corporate tax rate won't materially benefit QQQ components.

After all, large tech and health care firms in the Nasdaq 100 already generally pay low effective rates (under 20%). That's far lower than the 35% statutory rate that Trump is talking about reducing.

The Bottom Line
The Nasdaq 100 has had a stellar year in 2016, but the index's prospects for 2017 have deteriorated for reasons listed above.

As a result, my 12-month risk range for QQQ is $124 on the upside and $105 to $110 on the downside vs. the ETF's current price of around $120. Shorting here would make you about 12.5% if QQQ goes down to my $105 target, but only cost you some 3.3% if the security hits my $124 upper price range. That's nearly a 4-1 positive ratio.

That's why I suggest shorting QQQ for 2017, with a $125 stop on the position.

via thestreet.com