Patrick Garot

Wall Street's New Math

"Most who have invested long enough will realize that their gut is usually wrong."

I know the above is just an aside in a well-written article, but I'd like to offer a counterperspective. Your gut just needs to be supported by fundamental analysis, a back-to-the-basics approach.

I rarely have found my gut wrong. I think a lot of us go wrong when we lose discipline and follow (not our gut but) our head, which gets caught spinning around trend, momentum, other's counsel, etc. Particularly pernicious is our head's being informed by greed, as in watching a stock that has gone up 300%, and you can't believe you missed those "easy profits", so you finally board the train.

Other than that, thanks for the article.

Santelli's Chicago Tea Party: The Quest for Our Nation's Soul

Hi, Titoman. Not sure I agree with you in full.

"Right Wing" far-extremism tends to take the form of authoritarian rule by the landed gentry, moneyed merchants, corrupted capitalists or whatever the incarnation of Aristotle's "aristocracy" -- per the Attic Greek translation -- is. Visit early Russian Czars for instances.

Contrary, Hitler and Mussolini were men of the people. Fascism and National Socialism (the Nazi Party) were populist movements, wherein the individual, collectively, voluntary succumbed to the State. Hitler and Mussolini began as leftist, populist uprisings in hyper-inflationary environments. This populism was directed against the perceived control of industrialists, large merchants, and (especially but not exclusively in the German case) enterprises thought "Jewish".

(Incidentally, the treatment of Jewish merchants in Britain from the 1500s to 1940s is a fabulous case study to see how even a heroic Magna Carta may be supplanted by both left- and right-wing extremism.)

I agree with you that extremism tends negative for a nation... but I think that's whether it's from the left or the right.

Hitler and Mussolini I put on the "left" (due to populist origins), and Mao I put initially on the left, then moving to just paranoiac crazy. I would put Stalin on the right -- although he was first "elected", he subsequently consolidated rule by disenfranchising all opponents to the point where he became a true Czar, using the authoritarian mechanisms available him at the time.

As a student of history, I suppose my point is, you automatically cannot look left or right for fascism, authoritarianism, or whatever you wish to call it.

Rick Santelli's "rant" is a healthy part of the dialogue that must happen should we wish to remain the United States of America that we grew up in -- without succumbing to a neuvo-McCarthyism that may come from either "right", or the "left".

Thank you to all who posted for your comments,
and Best regards --
Patrick Garot


On Feb 24 10:16 AM Titoman wrote:

> FYI, Hitler and Mussolini were RIGHT-WING fascists. Mao, Stalin
> were left wing communists. Either way, when you are extreme on either
> side, you had terrible leaders that slaughter millions of people.
> Read your history you Santelli sucker.

Santelli's Chicago Tea Party: The Quest for Our Nation's Soul

Hi, raytayzmd --

Thanks for your comments. Let me share what prompted me to write the original Nov 2008 Paper Is Dead post.

In August 2008, I picked up work for a small estate for one client's in-laws. The estate had $200K paper-value in GM Senior Secured bonds as its largest asset; the bonds' market value was 60, or $120K.

Clearly GM was losing liquidity in August. I started inquiring if GM had made outreach to Senior Secured bondholders; could not find any. By November, GM was speaking to the Gov... and still had not engaged bondholders in dialogue.

Fast forward to now, the Gov has passed laws on loans it's made to GM. Gov has put its (and taxpayer) interests ahead of bondholders. So-so for taxpayers. NOT good for bondholders... who were promised the procedural "calls" on GM's assets that you cite (senior secured, sub-o, etc.)

With the loans to GM that the Gov made, a new sheriff is in town, the Gov -- with its infinite resources and nothing but time. Government has changed the rules, so distorting any "orderly liquidation process".

Paper Is Dead because the Govt is changing the rules -- literally the LAW -- to suit its perception of developing situations. Absent consistent application of civil law and procedural order, the contracted agreements on that paper are not civil nor orderly.

They are only promises. If we are setting up a world where investors cannot trust that our courts will uphold these promises, investors will not invest in them.

I earnest believe that we need to turn this ship around, and make Paper mean something.

Best regards -- Patrick Garot

ps: Thanks to all for your comments.


On Feb 23 12:28 PM raytayzmd wrote:

> ...paper is NOT dead...paper is a simple contractual agreement...failure
> to live up to the contract has civil consequences...if you hold senior
> debt then you get first call on the assets, next comes subordinated
> debt, etc, etc...if there is a problem then it is one of clarity
> -- if GM says it has a billion in assets, it's important to the bondholders
> that those assets are in fact really worth a billion...unfortunatel...
> on any given day, S&P and Fitch and the other ratings agencies
> can't seem to make up their minds what those assets are worth...and
> that makes it pretty darn hard to value the bonds.

Kraft Foods: Time to Put This Cash Cow Out to Pasture?

Good analysis in retrospect. You hit all the key issues that would later come out on Kraft's Q4/2008 earnings release. Good work -

Abercrombie Q4: EPS Smoke and Mirrors

Hi, Hbball - Actually, my capex for 2009-2010 is off $90-100 mm from management's. Per the release and conf call: "the Company expects total capital expenditures to be in the range of $165 to $175 million," whereas I saw $265mm. Good for management, but not bad for my article. These are the levers management should pull next year, thought I said. (My capex estimate for 2008-2009 is rather right on; it's confusing to follow, I know, since the formatting didn't come out.)

Also, my changes in cash is right on for year 2008- 2009... couldn't be more accurate unless I were ANF mgmt. Re EPS, note my ests were closer ($0.63 ps GAAP vs $0.79 actual, and $1.04 "Headline" vs. $1.10 actual) than the Street's $1.00 ps. GAAP.

Look, a full year where cash+investmts rises $103mm, but debt rises $100mm, (ie, net-net up only $3mm) w/ only $80mm in share repurch is a bad year. ANF used to have its net-net up $200mm+ after making $200mm+ in buybacks. Next year will be tough, too. It's good they're cutting capex to preserve cash, but it's like a lot of things -- easy growth and huge cash flow generation is gone, so adjust perspectives.

As to why I didn't write this after earnings were released, ??? Not sure why wait; further, probably shouldn't since my numbers are more accurate than the Street's, both in "EPS" and "Headline EPS".

I think it's a good short at $22, so I bought some puts yesterday when stock went above $23 (x=$22.50, Feb 09) for pennies. We'll see what we see this week.

Thanks for your input -- pg


On Feb 13 12:12 PM Hbball wrote:

> Cash is only down $8 million or so and the marketable securities
> you keep mentioning are listed at plus $110 million or so.
>
> As for your comments on "continuing weakness in same store sales",
> your own chart shows that SSS have declined by less each month from
> November to January.
>
> Your capex prediction is off by, what, $240 million?
>
> These numbers are only based on my quick scan on their earnings release
> and your article, but I'm not writing actual articles for an investor
> web site. Why don't you write these reports after earnings are released
> instead of immediately before?

Earnings Preview: Abercrombie & Fitch

See other SA article here...

seekingalpha.com/artic...

don't know why the formatting didn't work out... it will be great to see whether my calls on EPS are close to management's.

Regards, Patrick Garot

Kraft Earnings: The Hurt Is Organic

foglights - sounds like we know some of the same people, and if you were senior vp anywhere worldwide, 1994-95, you may recall some of my "Peer Analysis" reports on GIS, K, NESZN, CAG, etc. from those days.
Nestle has always been a favorite of mine on how they redeploy capital into growth. They "seem to overpay" for acquisitions, but 3 years post-acq, you see payoff in their results. That said, I haven't gone into their balance sheet for years; should I for a future SA article, I will let you know what I find.
Agree with you on KFT's mature-to-declining categories. It's hard to move the needle without dramatic redeployments like Nestle, and KFT's balance sheet doesn't allow much of that.
But KFT still can grow its existing categories. So target +5% annual gains in category consumption, for instance, and maintain or grow Share. Act like the leader, and bruise a few knuckles telling consumers that cheese is better for you than a bag of Doritos.


On Feb 09 07:44 PM foglights wrote:

> Patrick,
>
> I read your commentary with interest because I, too was a Kraft employee,
> having held senior management and strategy positions, albeit north
> of the border. If indeed, you were the architect of organic growth,
> I commend you. It was and is a key metric. You rightly observe
> that the growth numbers in Q4 were tough to say the least. Part
> of the issue in my view is that Kraft has not been successful in
> identifying and participating in categories and trends with staying
> power. Witness Nestle, who has the benefit and strength of having
> driven strategic investments in vibrant, consumer aligned categories.
> It's pretty hard to pull out consistently strong organic growth from
> mature to declining businesses...no matter how brilliant the merchandising
> in drive time periods. I wish I could be more bullish about the
> prognosis for the company and brands. I don't believe they'll be
> able to continue to line-extend and achieve superior sustained growth.
> There needs to be more fundamental change and this is certainly a
> tough environment in which to attempt such a feat.

Kraft Earnings: The Hurt Is Organic

thanks for your comments. it's a balanced piece b/c Kraft is a balanced company. in times of strong economic growth, KFT marketers tend to rule. if economic difficulties persist, it is logical and desirable that the Sales function gain prominence.

svosavvy, great question. lower input costs are generally great for KFT. the big brands are managed for Share, Gross Margin % and $, Contribution Margin $ (gross margin less marketing/sales), and cash flows. (Sales dollars are an after-thought versus these; sales dollars often go down if input costs go down, unless volumes led by share recapture were so strong they countered a, say, 20% drop in costs and a 10% reduction in sales list prices.)

so holding percentage margins the same, and lowering input costs, means that Kraft can reduce prices. on-shelf, the consumer notices less "price gap" between private label and Kraft products (say, price gap down from 75 cents to 45 cents).

further, the consumer may feel richer in his other grocery purchases in a world of lowering costs, so "trading back up" to a Kraft/Nabisco brand for cookies, mayo or cheese is one of the first luxuries he pursues.

there can be negatives in lowering sales prices due to lower input costs (share moves back up gradually; in the meantime, lower $ in Gross Margin means less marketing A&P $ to spend if you're going to hold "Contribution Margin $").

but since Share is the big banana, and the greatest risk today, if input costs lower, it's time to reignite Field Sales, make smarter but lesser investment in advertising, and regain Share over the next 2 quarters. blame so-so profit results on "aggressive share recapture" and position the brands for Q3-Q4 events.

weird stock at a weird time, $25-27 range is fair value. in a bull run, $30 attainable. in a bear, $22 floor (unless a bad first-half that management doesn't guide appropriately; problem: it didn't guide well for this past Q4).

On Feb 07 09:50 PM svosavvy wrote:

> Thanks author for the article, very informative
>
> In your opinion, How do you feel a potential drop in soft commodities
> would affect kft? In other words cheap corn, soy , milk, etc...
> If the softs were to bottom out say this growing season. Would this
> help like in the instance of low oil helps the crack spread of refiners.
> Would low input costs and possibly a slowing to lower prices on kft's
> part help margins and revs? Crazy question ,but, I wonder if deflation
> and the potential for overproduction of soft commodities won't linger
> a bit in light of massive (inflationary) spending. Thanks

A Most Bearish View on Bear Stearns in a Bear Market

Wow. Standing here at Feb 2009 as I write this, let's see how far we've come. As I reach back across the 13 months, gotta say great post, Reggie. To everyone else: data is reality and science, all else is sentiment.

Another Big Bank Failure: More Likely Than Not to Occur

It is great to read these older posts by Reggie. I've gone back over a year on SA, and -- if one can put himself back in the mindset of Dec 2007, March 2008, June 2008 -- Reggie must have seemed to more than a few that he was a Cassandra. He was proved right.

That said, I'd love to hear some BULL predictions from Reggie. Any?

Tax Breaks for New Cars, But Not Doctor Bills?

The hoops to jump to deduct medical costs have been ludicrous forever. This area of tax code is over-engineered, and inconsistent with the individual good. Instead, it favors large employers, the employees who work at them, and large insurers, by supporting that we all buy gold-gilded health insurance policies (deductible by our large employers) so individuals don't have to come out-of-pocket.

Examples:

1) The "self-employed health insurance" deduction doesn't help if you work at, say, an auto repair shop where the owners won't pay your insurance... unless you become "self-employed" and make that shop your "client". Then, in most states, your "self-employed" self forfeits unemployment benefits should the shop lay you off.

2) The code that "if you have self-employment income, you can take a deduction for health insurance expenses" also doesn't help if you haven't worked for awhile (laid off, sabbatical, etc.) and don't have any self-employed income in that 12 month tax year.

3) The limits of 7.5% of AGI ensures that for most of us, if your employer moves to a lower-cost, higher-deductible plan (say, from $10 per office visit to $30 per visit) you are out-of-pocket not only that $20 difference, but since you have paid income and employment taxes to earn that $20 extra, even more.

Introduction to Best Portfolio for 2009

Good discipline. I look forward to reading about and tracking your portfolio.

Tech vs. Credit Bubble Bursts

Thanks for the article, although if financials are still 10.7% of the S&P, this is because some of the big baddies can't go below $0/share.

Buffett Saddles Up His HOG: Stay Away

TSPORT, I hear all y'all. Makes me embarrassed to admit my first bike was a Yamaha dirt 175 cc. In your honor, I will be picking up 20 shares a piece for my 2 kids, and damn the price.

Thanks for the comments and the readership.

Questioning the Relevance of Abercrombie

Thank you all for your comments. I love the brand outside the US, but the US is the driver of 90% of sales and cash, and where the rubber will meet the road. Very high-priced leases in particular.

EU and other international will be great, but there's a 2-year payback at best on the cash used to create the stores.

My bigger point is that you can't really use ANF's "cash hoard" as a support to its stock valuation, because the money is already spent.

I will follow this up with an article prior ANF release of Q4, which will draw on the "cash is spent" theory. I expect the numbers to tell the story.

Thank you again for your comments. Keep posting.