We are seeing a rush to market with share offerings, both IPOs and secondaries and it seems to indicate to U.S. that companies might truly be worried about the situation in Washington and looking to get cash before any potential government shutdowns or other moves can rile markets. It makes sense to us, but at the same time it also worries U.S. a bit as there are now more wild cards in Washington that at any other time we can remember. Worse still is the fact that very few of the politicians are prepared to stick their neck out and vote for a compromise, so the next few days should be quite interesting in that regards. One side is going to have to give, and our guess is that the president will be forced to negotiate on something because a stance of refusing to negotiate will accomplish nothing.
Markets are a bit weak right now, so it will be crucial to see whether a rally can take place or whether investors will look to shed risk heading into the weekend. Personally we are taking our portfolios into the weekend and maintaining our current posture in the market.
Chart of the Day:
The transports have helped lead this latest rally and the fact that they are back in the leadership seat gives U.S. some confidence that this rally is for real. So long as they are leading and not lagging we want to be long this market ... even if Washington is playing a potentially deadly game of chicken.
Source: Yahoo Finance
We have economic news today and it is as follows:
- Personal Income (8:30 a.m. ET): Est: 0.3% Actual: 0.4%
- Personal Spending (8:30 a.m. ET): Est: 0.2% Actual: 0.3%
- PCE Prices - Core (8:30 a.m. ET): Est: 0.1% Actual: 0.2%
- Michigan Sent. - Final (9:55 a.m. ET): EST: 77.3
Asian markets finished higher today:
- All Ordinaries -- up 0.27%
- Shanghai Composite -- up 0.20%
- Nikkei 225 -- up 0.26%
- NZSE 50 -- up 0.36%
- Seoul Composite -- up 0.22%
In Europe, markets are lower this morning:
- CAC 40 -- down 0.25%
- DAX -- down 0.30%
- FTSE 100 -- down 0.85%
- OSE -- up 0.11%
The move that JC Penney (JCP) pulled yesterday should be illegal. No matter what you say about having to keep certain aspects of a business private until it is ready to be released to the market, the fact that the rumors this week about a nearly $1 billion equity offering taking place was vehemently denied by the company's management is just wrong. It is one thing when there is a span of a couple of weeks or months between the rumor and actual event taking place where one could simply explain that the situation changed, but one could not plan an offering in the few hours between the company's denial of a need for any financing and the actual announcement of financing.
Penney's has lost all credibility with the market now and the shares are down nearly 10% in pre-market trading as investors let out a little stress. Making matters worse for management is that the shares continue to trade lower than the secondary offering price, which could force the company to lower the secondary price if the gap widens. Many wonder why ordinary investors do not trust Wall Street or anything they say, and the reason is best explained by situations such as these where the market is straight lied to.
Everyone made fun of Ackman for taking a nearly 50% loss on JCP shares, however maybe we should all look at the trade as being brilliant because when he no longer had faith in the company he took the loss and walked away from greater losses. That is textbook investing for how to deal with losing investments, simply cutting them loose.
Source: Yahoo Finance
The problems at JC Penney are not just with old stores, bad management and a company needing further cash, but a company with inventory that not a lot of people quite understand. The turnover in offerings has been dramatic in the past few years with very few items from previous years remaining on the company's shelves. If the problem here is going to be fixed Penney's is going to have to revamp their inventory and take a page from Gap's (GPS) book. The company needs to reconnect with their core consumer and introduce inventory that really speaks to the consumer. The key with Penney's is that they not only have to stock up on the product lines that they compete with other stores on price with but also their private labels and exclusive offerings. Gap used this strategy to bring back their customer that had left years ago and it has worked to reinvigorate their flagship brand which many were worried had run its course. It is not an easy undertaking, but if Penney's is to survive then it will have to be successful.
One of our favorite names in technology continues to impress. Yahoo (YHOO) has been hitting new 52-week high after new 52-week high. The Alibaba IPO is certainly helping with this run, along with the fact that the IPO could not take place on one of the American based stock exchanges and make a tax-free portion of the transaction on Yahoo's part much easier. Mrs. Mayer is laying the groundwork for a solid foundation to rebuild Yahoo on and in our opinion it is working out quite well. Some of the redesigns we do not agree with on an aesthetics level, but most of these changes are generation skipping where the company made a big upgrade in technology to present a better product.
Now some have been critical of the job Mrs. Mayer has done since arriving and say she has not done anything except to monetize an asset the company already possessed. That should not be minimized as it is a task many before her were unable to accomplish. Her plan now will provide the company with liquidity on the balance sheet and cash to do more of the next generation platform building she has been doing with your recent transactions, such as Tumblr, which bring in more traffic and open up new demographics to the company which they can integrate into their content web. Long story short, we continue to like this name and think that it can head higher from the current $32.75/share, especially if it gets to trade alongside an Alibaba IPO here in the United States. That is the kind of event which could really get the animal juices flowing.
This has been a great stock over the past two years and we have been lucky enough to be extremely bullish of it at times. Further gains look achievable, especially if the deleveraging story continues to play out.
Source: Yahoo Finance
SiriusXM (SIRI) continues to surprise U.S. with its upward movement, yesterday rising $0.10 (2.61%) to close at $3.93/share. The company is facing increasing competition to get equipment into the vehicle from the reports we are reading but still are having success in converting customers and retaining them. This march higher has been persistent and unrelenting, taking a few stops along the way to build a base for the next move higher. The story here is one of our favorite types, a company that has created a ton of free cash flow and is now using that to pay off the company's debt early. This is a deleveraging story and so long as the growth can continue and the company holds its own versus the new competition that has crept up with the invention of the smartphone we envision a situation where the company will be able to return cash to shareholders via a future dividend or buybacks, especially if their new market initiatives pay off which we think will ultimately happen.
Caesar's Entertainment (CZR) announced that they would be offering 10 million shares via a secondary offering yesterday with the expectation that they would grant the underwriter a 1.5 million share overallotment. The shares finished the session down over 5% to close at $19.84/share and this deal looks to U.S. like it will put a momentary halt on the company's share price gains. The entire sector has been on fire recently, so the timing of the secondary is perfect but it does now differentiate further the gap between Caesar's and its peers who already have better assets going for them. Caesar's has had a nice run, but with this offering we think that the proverbial bucket of cold water has been thrown on investors and so despite our bullish comments a few days ago on the entire sector, we want to shift that bullishness more so to names like Las Vegas Sands and MGM Resorts and away from Caesar's for the time being.