Friday, October 9, 2015


And it won't matter now
Whatever happens will be
Though the air speaks of all we'll ever be
It won't trouble me
--Toad the Wet Sprocket

Little interests me on the long side currently beyond the metals. However, one old friend that's popping up on my radar is Gap (GPS). I have owned this name several times over the years when 1) I'm bullish on general economic direction, 2) the balance sheet is cash rich, 3) valuation is attractive. When those conditions are in place I find GPS one of the most attractive operators in the retail space. Excellent brands, nice market segmentation in fashion retail, solid free cash flow generation.

Unfortunately, the three conditions noted above are not solidly in place--particularly the first one. However, I must admit that in an overvalued world, the relative value of GPS appears interesting. Alongside other fashion retailers, shares have been sold hard as investors worry about product mix, same store sales, and other usual suspects. Negative sentiment is an attractive feature as it typically creates value. Indeed, from a valuation standpoint, current enterprise value of about $11 billion seems inline with annual FCF generation of $1 billion or so over the past few years.

Although the company has been adding debt to its balance sheet like all other operators in a ZIRP world, it still holds about the same amount of cash as it does debt. In the past, management has shown proclivity for paying down debt. It has the cash to do so once again.

Technically, the stock appears oversold on both short and long term time frames. Recent selling has the stock currently perched on a 50% retracement of the 5 year price range. Monthly stochastics are crossing low.

Am not a buyer currently. But if this issue gets more washed out--particularly down to the 62% retracement level at $22ish where it has some support, my position might change.

no positions

Controlling Others

Let me be your ruler
You can call me queen bee
And baby I'll rule, I'll rule, I'll rule, I'll rule
Let me live that fantasy

The extent to which some people seek to control the lives of others never ceases to amaze. Some feel obligated. They view others as incapable of making 'correct' decisions for themselves and therefore in need governance. These are the nannies.

Others get satisfaction in manipulating the behavior of others. These are the puppeteers.

Others obtain pleasure from positions of power. They believe that there is a natural role in society for some to govern others and that this position is rightly theirs. These are the rulers.

One tendency nannies, puppeteers, and rulers share is a willingness to use the strong arm of government to realize their control objectives and associated psychic income.

Thursday, October 8, 2015

Desperate Revisionism

She musters a smile
For his nostalgic tale
Never coming near what he wanted to say
Only to realize
It never really was
--Doobie Brothers

Former Fed Chair Ben Bernanke has been floating op eds recently defending FOMC actions during his tenure. No different from Greenspan's desperate attempts at revisionism, really. Of course, it will take more than some well placed editorials to revise history.

One of his claims is that the most meaningful contribution of the Fed's quantitative easing programs has been to the labor markets.

Perhaps, Ben, but almost surely not in the way you'd like people to believe.

Wednesday, October 7, 2015

Free Trade Treaties

In violent times
You shouldn't have to sell your soul
In black and white
They really, really ought to know
--Tears for Fears

Salient point made here. Free trade does not require a treaty. Genuine free trade involves voluntary exchange between individuals. By definition, they need no permission to do so.

Treaties impose limitations on trade--limits on who, what, where, or how things can be exchanged. And how these limitations will be enforced.

Free trade is grounded in peace. Treaties are grounded in violence.

Tuesday, October 6, 2015

Charlatans and Sheep

I'll be your savior, steadfast and true
I'll come to your emotional rescue
--Rolling Stones

Thomas Sowell observes that social justice, equality of outcome charlatans would have no influence were it not for sheep-like followers who refuse to reason for themselves. Heavy reliance on emotionally driven, System 1 thinking by large groups of people is what keeps charlatans in business.

Monday, October 5, 2015

Risk and Reward

Hear the echoes and
Feel yourself starting to turn
Don't know why you should feel
That there's something to learn
It's just a game that you play
--Al Stewart

'Common wisdom' in mainstream financial advice is that stocks, while being riskier than other asset classes such as bonds, handily outperform over time. Thus, investors should buy and hold equities for the long term because the longer one holds stocks, the more likely they are to outperform bonds.

Anyone who understands the relationship between risk and reward should see problems with this thought process. Axiomatically, riskier asset classes present prospects of higher reward. After all, who in their right mind would invest in a high risk, low reward proposition? But risky investments also carry higher potential for loss. If they did not, then by definition these asset classes would be low risk and high reward and everyone would pile into them, driving prices higher and reducing reward (which would bring the risk:reward relationship back in line).

Of course, proposing stocks as low risk and high reward in the long run is likely to draw doubts from even gullible clients.

A more truthful statement is that risky asset classes like stocks have potential for high returns over time but also potential for high losses over that same time horizon. In other words, investors heavily into stocks should prepare themselves for the prospect that their portfolios could just as easily be down big after 30 years as they might be up big.

If that were not the case, then the risk:reward axiom would be wrong.   

Sunday, October 4, 2015

Monetary Disorder

There's a place where the lights won't find you
Holding hands while the wall come tumbling down
When they do, I'll be right behind you
--Tears for Fears

The always thoughtful Jim Grant offers several insights relative to the current state of financial and economic affairs.

Portfolio balance channel. This is a fancy phrase for central bank sponsoring of higher asset prices in hopes that it will spur consumer spending. Another name for this is the 'wealth effect' which enjoys marginal empirical support at best. Central bank administration of asset prices, as demonstrated by the ham-handed interventions of the Chinese, has reached epic levels.

Aggregate supply. Central bankers have implemented policies aimed at boosting aggregate demand. They forget or ignore the effects of their polices on aggregate supply. Cheap credit motivates expansion which could easily put downward pressure on prices despite the monetary inflation. A nice example of this can be witnessed currently in US shale oil production. Lower capacity utilization helps explain why 'headline' CPI numbers have not gone thru the roof. Monetary inflation has resulted in excess supply versus demand which, as ECON 101 suggests, weakens prices.

Helicopter money. Traditional monetary policies have not brought about hoped for economic strength. This leads central bankers toward increasingly radical ideas. If the existing monetary system grounded in credit money creation isn't working, then aren't ideas of bypassing the banking system altogether and simply mailing checks to citizens a 'logical' next step. Grant suspects so. These pages have thought so for some time.

Saturday, October 3, 2015

ZIRP Dependence

You can't eat
You can't sleep
There's no doubt
You're in deep
--Robert Palmer

When yesterday's dismal job numbers were first released yesterday morning, futures immediately tumbled more than one percent. That surprised me because it seemed obvious that poor job numbers would once again imply that the Fed would be inclined to keep their zero interest rate policy (ZIRP).

Didn't take long for traders to figure that out, as the initial dip was bought and markets ground higher all day, closing with gains of 1%+.

Another demonstration of market dependence on ZIRP.

position in SPX

Friday, October 2, 2015


"I always say, the way a man treats his car is how he treats himself."
--Inspector Tarconi (The Transporter)

Don't think I've ever owned an automotive stock--at least w.r.t. the car makers. From where I sit the most attractive operator is BMW. In the US, BMW trades as BAMXY on the pink sheets.

Some analysts are out recommending the stock, as it is off its highs and has fallen in sympathy with the Volkswagen debacle.

Despite the recent price decline, the security still seems significantly overvalued. About $50 billion market cap expands to at least $80 billion in enterprise value once cash vs debt taken into account. The company has generated negative free cash flow for the past three operating years. Maybe $2-3 billion in annual FCF prior to that. If capitalized as a perpetuity, then this amount of FCF is well below current enterprise value.

Stated differently, from a valuation standpoint, either FCF needs to go up or price needs to come down.

Technically, the multi-year uptrend has been broken. Stock currently trades near a 38% Fibo retracement of its 2009-2015 price range, with monthly stochastics ready to hook at the bottom, which may make it ripe for a trade.

As an investment, seems more interesting near the 62% retracement area ($20 share price) as it coincides with other lines of support and a price more commensurate with fundamental value.

no positions

Thursday, October 1, 2015

Novelty and Truth

Step right up and don't be shy
Because you will not believe your eyes
--The Tubes

As Judge Nap alludes at the end of this screed, truth is immutable. It does not change with the winds of progress. Truth is durable and final. It can not be disconfirmed by reason.

Novelty, on the other hand, is what is interesting today. It is popular because it is different. It often makes people feel modern or 'leading edge.' Once the newness wears off, however, people shed today's outdated novelty for new fashion.

In time, novelty bows to truth.