Decoding Disappointing Holiday Shopping Results
December 27, 2007 | 10:15AM
Each year retailers focus a lot of time and energy into bringing holiday shoppers to their stores. This year was no exception, and many analysts anticipated retail sales growth of 3.5%-4.5% over the same time last year. So, when the holiday shopping blitz tallied a modest 2.4% increase over last year, it is no surprise that some are disappointed. The most likely causes of the disappointing numbers are declining home values, high energy prices, and uncertainty about the economy. However, there are compelling reasons not to give in to pessimism, and chief among them is the evolution of holiday shopping in the twenty first century.
First of all, as retailers will readily admit, the holiday season has grown longer that the traditional Thanksgiving to Christmas shopping season. Stores begin gearing up of the holiday shopping bonanza after Halloween, and with the ever increasing impact of gift cards the season can easily last into February or beyond. Gift cards were one of the real winners this season with over 61% of shoppers claiming to have given at least one, which is up from 48% a year ago. Because gift card sales are counted on redemption, this will have the effect of stretching the season and distorting traditional numbers further. For a truly stunning article concerning a new gift card law in Maine follow the link (http://www.msnbc.msn.com/id/22348233/).
Furthermore, instead of fighting the crowds and dealing with the other hassles that accompany holiday shopping, online sales spiked 22% over last year. Major online retailers such as amazon.com enjoyed a great season, and offered discounts and free shipping to make it ever easier to just point and click from the comfort of a home computer.
Consumers may be the biggest winner in the post holiday news from retailers. As results from this shopping season were below most estimates, retailers are going to offer deep discounts in order to make a strong push in after Christmas sales. This may raise concerns over shrinking profits, but again shoppers will be delighted. So, while the initial reports are below expectations, we understand that there is much that is yet to be determined in this season and the evolution of shopping makes the traditionally calculated numbers only a portion of the retail story.
New York Is Optimistic
December 18, 2007 | 6:24PM
After a week long trip to New York to meet with hedge fund clients, software companies, algorithmic trading shops, and sell side brokerages, one thought continues to come to mind: things really aren't that bad.
The general attitude at all of our meetings was one of both confidence and a belief that innovation is growing at such a rapid pace, particularly in financial services, that the market's volatility is a welcomed year-end activity. Hedge funds are naturally huge fans of volatility, but when all the other meetings we had with more conservative shops, and the trading and software vendors who service everyone are just as positive, that bodes quite well for the near term.
Looking at our ratings model for the week, we saw the percentage of Buy rated securities at Ockham rise slightly to just under 40%. While this was a positive move, it was really only created by downward price action and not because of any real change in the underlying fundamentals. A noted exception to this might be Best Buy (BBY), as our Company Research page willl show. But even BBY is still only rated as a Hold.
And what a day of trading activity and volatilitiy again today. The market may have ended up 65 points, but it sure was a beating to get there. The question of a recession continues to loom large on the horizon, and we certainly are cautious in our own perspective when it comes to earnings and historical levels leading into a recession. However, as my colleagues and I look back at our meetings, we were very surprised at just how positive each company and management firm really was. Now the contrarian may read into that (as we do quite often at Ockham), but generally, you can sense whether people are avoiding a topic, and that wasn't happening either.
Overall, the market is continuing to wait for the other shoe to drop, and they may be right, but the general sense seems to be that productivity and innovation are continuing to press forward, particularly those that are helping to cut costs. We are excited by some of this perspective, for if it holds true, then there may be a decline in the market's Price/Earnings ratios which are still just unfortunately too high. If earnings can rise while the market catches its breadth, that would definitely help our historical P/E view. We will just have to see if cooler heads do prevail, as the greatest danger continues to be the Wall Street practice of forward earnings calculations.
The Fed is Ready to Cut Yet Again
December 11, 2007 | 10:20AM
Today the Fed Open Market Committee will meet and discuss the appropriate rate cut. For weeks, most commentary has anticipated a 50 basis point cut. However, more and more analysts are now looking for a quarter point drop after the market rallied last week. We will be curious to see what is decided, but not because this Fed action will free up massive amounts of liquidity. The Fed can do relatively little to significantly ease liquidity. Rather, it will be interesting to see the short-term psychological influence the Fed will actually be able to effect. Will investors be disappointed by just a quarter point? Will the market go extremely bullish after a half point rate cut?
We remain neutral on the rate cut for the long term health of the market. The Fed certainly plays a role, as the market will generally swing one way or the other after a Fed announcement, but a rational investor who studies the data cannot honestly think that the Fed actually "injects liquidity" into the market. Stock prices are inflated right now and a Fed rate cut could exacerbate the problem by pushing stocks ever higher. Recession is not unavoidable, as some would have you think, but when sanity and rationality do prevail expect stocks to come down to a more reasonable price level.
In other news, the market was up last week and continued that hot streak to begin this week. Probably the biggest news story of the early part of this week is the announcement of another massive write-down by wealth management titan, UBS. For more commentary on this and other individual stocks in the news, please read our Company Research blog.
THE COMING MORTGAGE FREEZE...
December 5, 2007 | 9:10PM
The coming winter months and the freezes which accompany them, are nothing compared to the cold freeze that may come out of the White House and its meetings with major lenders in the next few days. Taking a monumental step between the free market and its destiny, the federal government appears to have the "fix" for our mortgage crisis. The headlines make it quite clear that while lenders are being encouraged to work with distressed homeowners, the reality is that the political pressure to mandate a solution is now fierce. One Money Manager accurately pointed out how such meddling actually prolonged the Great Depression. And we don't believe anything is really quite that depressing yet. Lest our esteemed Washington elite forget, lenders are incentivized through the free market to work with distressed homeowners when it makes good business sense to do so. To act out of sheer political panic and pre-election propoganda, is just poor pollicy.
We aren't saying that there isn't a problem But we are advocating less governmental involvement and more attention to real concerns that continue to plague this economy. Specifically on our list of serious market concerns are the accounting standards that have little to do with reality and the flexibility to make earnings whatever companies and analysts wish them to be. Just ask bankers in London how they feel about our accounting standards and our regulatory reporting requirements. They love them! And our capital formation process continues to suffer domestically because of these continued disparities in standards between the international community and our own.
The market reclaimed all of its losses over the last two trading sessions today, amidst strong economic reports primarily led by non-farm business productivity swelling to a 4-year high. Between this data, and the all-but-CNBC-guaranteed 50 basis point rate cut on the horizon, investors feel we have past more than just the "hump" in our work week.
We were quite pleased by the recent surge in shares of AIG, as it continues to be a very strong recommendation from Ockham. Naturally, we have great concerns about how management will manage through the current crisis. However, it is our belief, that management will do just that... manage.
Continuing Caution With Optimism
December 3, 2007
Amazing what a few days can do for the market, isn't it? With a 4.5% increase in the S&P 500 at its heels, the market was poised this morning to open a little lower. The pundits are all now yelling either "Dead Cat" or "rally". We would say we don't feel quite that optimistic, but we are more positive than many others yelling recession at this point.
Looking at the overall market, the subprime mess is still at the forefront of discussions. However, as we told our clients, you are beginning to hear the rumors that some of this debt is not as odious as was believed. This is hopefully the case, and may be signaling a more rational look at what is truly lurking inside these debt portfolios. From our perspective, last week's rally was well timed for our "Buy" rated securities setting a new 12 month high. However, as we warned last week, we expect to see our percentage of "Buy" ratings rise to a much higher level (yes, even higher than last week's 55% of total ratings portfolio) before we really see the optimal buying opportunity.
So our direction is still cautious optimism. This week our percentage of "buy" ratings dropped to about 37%, which takes into account the run up in some of the names we had just recommended the week prior. For many of those stocks, they are now back to a "hold" rating in our Ockham Reports. To be clear, we aren't at all market timers nor do we advocate such short holding periods. Generally, Ockham Research attempts to identify undervalued securities which have a high likelihood of successful appreciation. The problem is, in such a volatile market, that appreciation and correction can happen in the blink of an eye.