Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Santa Got Runover By a Reindeer (by Fayssoux)

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Friday 8:30am we get the November retail sales report.
 Gaming expectations and reactions to a reported number like
this one is always very hard, as there is so much noise in day to day equity
movements.  

Nonetheless, my hypothesis is that:  a) the number will
be less than expectation; b) this surprise is not embedded in current equity
prices; and c) the disappointment will catalyze a selloff in retailers.
 That's how I am positioned; we will see if I am right or wrong.

Why might it disappoint?  Black Friday was underwhelming.
 Online retail sales are up marginally, and online should grow faster than
brick and mortar (8-10% sales taxes in CA, IL, NY).  I posted before that
Google search data is down for many retailers, signifying intent to shop is down
as well.  Neiman Marcus and Abercrombie have had dreadful sales results.

The best supermarket chain in the business (Kroger) was taken to the
woodshed yesterday.  Videogame sales have been weak.  There is a fair
amount of anecdotal evidence that higher stock prices are not driving consumers
to spend more freely than last year. 
Consumers see unemployment all around them.  They know the amount of shadow inventory in
housing and the trajectory of house prices. 
They are deleveraging.

XRT is a good vehicle for betting against retail.  An individual idea mentioned on the Slope sometimes
is DECK.  My strong anecdotal teen
evidence says UGGs are on the way out. DECK market cap assumes otherwise.

Deck

Is RTH Worth Shorting?

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Perhaps the most confounding trading instrument to me this year has been the RTH, the retail holders trust. Of all sectors you think would be weak, it would be retail. We have record joblessness, crushed consumer confidence, evaporating credit…………and yet Americuhns just keep buying crap they don't need with money they don't have. Incredible.

I am frankly reluctant to touch this hot stove again, but I bring it to your attention nonetheless.

1130-rth

I’m Gettin’ Nuttin’ for Christmas (by Fayssoux))

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Retail stocks have been a tear since the March lows.  Conventional wisdom in the financial media is that leaner inventories combined with firmer demand than anticipated will lead to a good holiday season for retailers.

I am skeptical on the latter point. Consumer confidence data has been trending down, which is not part of the bullish script.  Housing and employment are nagging problems.  Consumers are dubious on the sustainability of the recovery.  One tool I use for consumer research is Google Insights — you can track trends in search volume by topic, like, for instance, Neiman Marcus or Kmart or Sports Authority.

In each of those instances and in many others I ran, searches in October and early November in 2009 were less frequent than in 2008.  This is healthy happy bullish 2009 versus Lehman is melting, TARP is coming the world may end 2008.  Will search volumes predict a weaker than expected Black Friday and holiday selling season? I don't know, but if they do, retail stocks should see some air come out.  Should does not mean will in the environment.  But one catalyst for a leg down is weaker than expected sales in mainstream retailers.

Xrt

The Softer Side of Retail (by Fayssoux)

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On the one hand:  shares
are hard to borrow, puts are very expensive, famous and aggressive hedge funds are heavily invested,
this stock has squeezed many shorts.  On the
other hand:  target consumers are under
stress, competitive position has been deteriorating for a generation, valuation is
tied in part to commercial real estate in an overstored America,  frequent management turnover, empty stores, questions about cash position, does not report same store sales regularly;
big earnings announcement on November 19. 
What do you do?

Shld

Short What You Know

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Peter Lynch made famous the idea of using local information about changes in buying habits and behavior to "invest in what you know" to get ahead of professional investors.  The idea is that trends can be spotted "on the ground"  before earnings and stock prices have adjusted to the change in fundamental prospects for a hot product or company. A mirror of this concept in a bear market is to short what you know — find companies that are losing competitive stature and bet against them before the institutional investment community realizes circumstances have changed for the worse.  I had success with an example of these last year — betting against ANF based on insight I felt I had about how Abercrombie was losing "it" status with teens.  

Here are some things I "know" from my local environment:

  • Our household is filled with tweens and teens, and the various stand-alone gaming systems we own — PS2, WII — go basically unused.  The endless drumbeat of requests for new $50 titles to feed these systems has also tapered off.  No new Madden, no new Lego Star Wars, no new Sims.  We have a plastic bag of portable gaming devices — Gameboy Advance, Nintendo DS 2 — that are also dormant.
  • My kids spend more and more time online.  They don't play the Sims on the PS2 or after loading a CD Rom into a PC (we have both formats).  They play Farmville on Facebook, obsessively.  They play addicting games.  They watch Youtube videos.  The bottleneck in our household is access to the iMac and PC machines, not dedicated gaming consoles.  To the extent they play games on portables, it is apps on ipods (they crave iphones but know I'm not getting them).  I know I am not unique in this respect — I see this with other families as well.
  • We used to go to Gamestop quite frequently.  We have not been there in months.  I have been to the Apple store to buy a macbook.  We picked up a new a new Nano at Costco for a family vacation.  Apple, Facebook and Google are gaining share of mind, time and wallet in our household.

What's the big picture?  Video killed the radio star, and broadband is killing a host of high margin, consumer businesses based on expensive-to-build and expensive-to-deliver proprietary hardware and software.  Yesterday video game software sales for September were announced, and the results were lower than expectations.  Notwithstanding Tom's love of the product, Guitar Band Beatles or whatever it is called is a sales disappointment.  Who do you know who has bought Madden 10?  It is not that people have stopped playing games or seeking interactive entertainment, it is that they are getting access online and often for free.  Online access from a universal device is cheaper, better and faster than stand-alone, single function systems.

Gamestop, Electronic Arts, Activision and THQ all vulnerable.  They are also all overvalued. Activision was on Tim's list yesterday, no doubt because of his chart reading and chart reading alone.  It is on my list for fundamental reasons.  Do your own homework, read your own charts.  But this is a sector with tens of billions in market cap that is slowly losing relevance, and that market cap can go evaporate quickly once professional investors catch up to what is happening in households as we speak.  For now, portfolio managers think we are returning to an era where gaming companies are hot growth plays that deserve lofty multiples.  Economic downturn or no downturn, the tide is going out on these companies.- - 

Fayssoux