How long can markets continue to be insane?

Since 2007, central banks have saved everyone’s ass. Central banks have injected almost $20 trillion and have gone so far as to buy up stocks, bonds and anything else to delay the impacts of the Global Financial Crisis. The markets are no longer about fundamentals and instead seem to react to whatever Yellen, Draghi, Kuroda-san and Zhou have to say.

According to the IMF, total global debt has increased from around $142 trillion to $230 trillion since the GFC, an increase of over 60%! In the U.S., we are talking about $63 trillion in combined public and private debt. That’s $200,000 of debt for every single U.S. citizen! Yet, the dollar is still viewed as a “safe haven” currency and treasuries are still popular. Not that other fiat currencies are any better.

At what point do the masses get tired of fiat currencies and realize that we’ve all been had for the last 30 years? Do we transition to gold, silver, bitcoin, ethereum, or other cryptocurrencies? What happens to all of the current bubbles we have in nearly all asset classes from property, debt to equities? We can’t afford even the increase in interest costs on our national debt, much less the impact of retiring Boomers with related social security, pension, and healthcare costs and lower tax revenues. How do you reconcile this with the automation of much of what we do through AI, robotics and software?

We desperately need leaders in government who are there to help their city, county, state and country and not focused on helping themselves and their friends. Leaders more like Governor Jerry Brown here in California who has pushed climate change, budget cuts and many other common sense policies for the good of the public. Leaders who will plan for the future and not continue to consume our future today. Government is cyclical and we seem to have peaked, but I hope we can avoid sliding to the depths of democracy before we realize what is desperately needed.

Retail Malls Buying Tenants?

Image source: Raysonho

Late last year, the largest retail mall owners, Simon Property Group and GGP invested alongside Authentic Brands Group to buy out the assets of troubled teen retailer, Aéropostale. As part of the restructuring, Aeropostale cut the number of stores to 240 from 800, and Simon believes that this is a good investment that can double the number of stores to 500 locations. While this is a good move by Authentic Brands to bring in the two largest retail mall landlords, it is a questionable use of capital given the retail implosion happening to traditional retailers. Some speculate that Simon and GGP invested to maintain their occupancy levels which seems more likely given that maintaining face with the equity market is much more important than any IRR on a relatively small investment for these large owners. It will be interesting to see how the traditional retail mall implosion plays out. Since the announcement of this investment in October, both Simon and GGP stocks are down ~15% and down approximately 40% since their recent highs in July.

Morningstar Recommends Retail REITs as a Contrarian Play?

A few weeks ago, analyst Edward Mui of Morningstar recommended three large retail REITs: “High-quality, well located, and compelling physical retail environments will still be successful even as online shopping grows.”

This in the midst of The Retail Apocalypse is Officially Descending Upon America with an expected 3,500 stores expected to close down in the next couple of months. The American consumer is tapped out, and while certain retail locations will still perform as consumers want experiences of dining out, strolling through nice areas, etc., according to the U.S. Census Bureau, national department store revenue is down by $7.2 billion than what it was in 2001.

Legacy retailers are getting hit hard right now. According to Bloomberg, Payless Shoes is expected to announce 500-1,000 store closures next week. On the other hand, Amazon and other online retailers continue to expand.

Retail Death Spiral with 5,000+ Store Closures

It is clear that the American consumer is tapped out, losing interest in big brands and moving towards shopping online. According to Cushman & Wakefield, mall traffic declined by 50% from 2010 to 2013!  Over the last 18 months, the following department store retailers and mall stores have announced (or in the case of Payless Shoes soon to be announced) the closure of over 5,000 stores!  How is that going to help Trump’s employment plan?  Thousands of low-skilled jobs will be lost in this wreck not to mention the shuttering of more retail malls as anchor tenants fail.  Smaller retailers at malls sometimes have co-tenancy clauses that allow them to leave or pay a reduced rent if the mall’s anchor tenant leaves.  It’s a vicious cycle that has started and is only going to benefit Amazon and other online retailers.

Department Stores

• JCPenney: 138 of 1,000 stores
• Macy’s: 168 of 730 stores
• Sears & Kmart: 150 stores
• Kohl’s: 650 of 1,150 stores
• Target: 13 stores
• hhgreg: 88 of 210 stores (Ch. 11)

Where are Schools for the Real World?

I wish life were a multiple choice, Scantron Form 882-E test. I would crush it.

In my years of formal education, I became a rockstar of Scantron tests. After you had been through enough multiple choice exams, you almost didn’t have to know the subject to eliminate three of the answers. It was then down to the last two, so you at least had a 50/50 probability. Not bad! All you had to do was show up with a sharpened No. 2 pencil and make sure you had enough runway of clean eraser. I was always one of the first to hand in my form and skip out the door to freedom.

What happened to those cozy, green and white forms? Sadly, I have not held a slim one since college. They were surprisingly so rigid. I loved holding them horizontally as they defied gravity and never seemed to bend!

If only work had more Scantron Form 882-e’s, I would be amazingly wealthy and a lot of people would report into me.

How solid are car companies?

Record low interest rates have fueled asset bubbles in pretty much every sector. Since 2010, auto sales have benefited from low interest rates as well. As of late last year, nearly 1 in 5 subprime auto loan borrowers are at least 60 days behind on payments (S&P).

Ford recently announced softer auto sales and is trying to make the move away from lower margin fleet sales. With net income of $4.6bn and massive annual investment of nearly $38bn a year (which has been consistent the last few years), Ford is making some big bets on the future of automotive. As self-driving technology ramps up, the number of vehicle sales may drop quite substantially. Will Ford, GM and Fiat Chrysler be able to compete with Tesla? I wouldn’t necessarily short the auto companies with the strong dollar/Trump effects, but I wouldn’t go long either.

Short Physical Retail

Last summer, we took a short position on GGP, one of the largest retail mall owners in the U.S. The rationale was American consumers are (i) tapped out, (ii) shifting to online purchases and (iii) looking for more niche, high-quality products and experiences (decline of big brands). GGP does have some well located malls in areas that won’t get hit so hard (i.e., Ala Moana in Honolulu); however, it also has broad exposure to big box retailers including Sears, JC Penney, and Macy’s, that no doubt will affect its portfolio and relatively high levels of debt. GGP went so far as to invest in one of its tenants, Aeropostale, to save the company from shutting down. How many tenants can it save?

Can airlines soar higher?

Southwest (LUV) is near its all-time high. Yes, President Trump seems to be talking up more fiscal stimulus, but LUV is trading at 14-15x PE and has run up 45% in the last six months. The weird part is Warren Buffett who hates airlines as a business has made a big bet on the domestic airline sector. Should be interesting to see how things play out over the next 18 months.

Disclosure: long LEAP put options on LUV.

 

“Disconnect between financial markets and fundamentals”

Disconnect between financial markets and fundamentals, potential market volatility, financial vulnerabilities and policy uncertainties could, however, derail the modest recovery. The positive assessment reflected in market valuations appears disconnected from real economy prospects.  – OECD

Ray Dalio

The risks are asymmetric to the downside.