TKO's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/335503/comments http://seekingalpha.com/article/179205/comments?source=feed#comment-816854 816854 I was with you until about the 4th sentence. But "If the United States can't afford $90 barrel oil what makes anyone think China or India can? ... After all commodities are just that, materials with no value added."??

There are so many things wrong with these two sentences.

Because of the growth forecasts of China, India, and other emerging heavy weights like Brazil, Oil and other Commodities of finite supply are in heavy demand. Unless you know more than the Chinese state-run companies' who rapidly acquired foreign commodities and commodity producers over the past year, I would refrain from making such remarks. With human rights issues aside, you and I both know the Chinese government is quite the master in economic planning and the ball is very much in their court for the next few decades (thanks to the US fumble over the past few years).

You want to tell the Chinese that materials have no value added? How about owning all the resources China will need -- domestically, and not by foreign countries who can strangle them with resource requirements? (Does the US come to mind here?)

On Dec 21 11:48 PM sethmcs wrote:

> Past performance does not necessarily indicate future results. The
> dollar is getting stronger and China and India are growing fast.
> Maybe too fast. A crisis of some sort may set them back a few pegs.
> If the United States can't afford $90 barrel oil what makes anyone
> think China or India can? Commodities may not lead the pack in 2010.
> After all commodities are just that, materials with no value added.]]> Tue, 22 Dec 2009 08:21:05 -0500 I was with you until about the 4th sentence. But "If the United States can't afford $90 barrel oil what makes anyone think China or India can? ... After all commodities are just that, materials with no value added."??

There are so many things wrong with these two sentences.

Because of the growth forecasts of China, India, and other emerging heavy weights like Brazil, Oil and other Commodities of finite supply are in heavy demand. Unless you know more than the Chinese state-run companies' who rapidly acquired foreign commodities and commodity producers over the past year, I would refrain from making such remarks. With human rights issues aside, you and I both know the Chinese government is quite the master in economic planning and the ball is very much in their court for the next few decades (thanks to the US fumble over the past few years).

You want to tell the Chinese that materials have no value added? How about owning all the resources China will need -- domestically, and not by foreign countries who can strangle them with resource requirements? (Does the US come to mind here?)

On Dec 21 11:48 PM sethmcs wrote:

> Past performance does not necessarily indicate future results. The
> dollar is getting stronger and China and India are growing fast.
> Maybe too fast. A crisis of some sort may set them back a few pegs.
> If the United States can't afford $90 barrel oil what makes anyone
> think China or India can? Commodities may not lead the pack in 2010.
> After all commodities are just that, materials with no value added.]]> http://seekingalpha.com/article/176639/comments?source=feed#comment-790932 790932
The non-seasonally adjusted payroll numbers have actually been on an uptrend for the last few months.

If the Feds really wanted to sway the market with manipulation, they would be pushing the non-adjusted numbers. This leads to speculation that the Feds, at this point, might be more concerned with inflationary pressures and asset bubbles than economic recovery. I, for one, believe the Feds are actually being cautious with the job numbers in fear of what I described.

On Dec 04 05:25 PM ebworthen wrote:

> I don't believe it is a coincidence that Obama's "job summit" and
> these rosy numbers coincided with each other.
>
> Not to mention that seasonal temp. employment was boosted pre-holiday
> to make up for all the full time workers fired to increase quarterly
> profits.
>
> You don't have to pay part-time temps. overtime or benefits and you
> can fire them unceremoniously come the second week of January - after
> the Christmas gift returns slacken.
>
> I'll believe statistics like this when they continue through Spring.
> Otherwise, it appears to be some data fudging for political candy
> - and ignoring the usual temp. worker spike leading up to the holidays
> and the end of the quarter.]]> Fri, 04 Dec 2009 17:32:31 -0500
The non-seasonally adjusted payroll numbers have actually been on an uptrend for the last few months.

If the Feds really wanted to sway the market with manipulation, they would be pushing the non-adjusted numbers. This leads to speculation that the Feds, at this point, might be more concerned with inflationary pressures and asset bubbles than economic recovery. I, for one, believe the Feds are actually being cautious with the job numbers in fear of what I described.

On Dec 04 05:25 PM ebworthen wrote:

> I don't believe it is a coincidence that Obama's "job summit" and
> these rosy numbers coincided with each other.
>
> Not to mention that seasonal temp. employment was boosted pre-holiday
> to make up for all the full time workers fired to increase quarterly
> profits.
>
> You don't have to pay part-time temps. overtime or benefits and you
> can fire them unceremoniously come the second week of January - after
> the Christmas gift returns slacken.
>
> I'll believe statistics like this when they continue through Spring.
> Otherwise, it appears to be some data fudging for political candy
> - and ignoring the usual temp. worker spike leading up to the holidays
> and the end of the quarter.]]> http://seekingalpha.com/news/market_currents/post/35610?source=feed#comment-740669 740669 either that, or profit taking -- though it seems rather excessive over the past few days.]]> Mon, 02 Nov 2009 13:09:31 -0500 either that, or profit taking -- though it seems rather excessive over the past few days.]]> http://seekingalpha.com/news/market_currents/post/35553?source=feed#comment-739883 739883
Your comment, sir, is a very good example.

Goldman Sachs, whether you hate them or love them, are extremely talented at managing money. Anyone who deals with the major banks, investment firms, and capital markets know that their client service, valuations and risk management is top notch compared to the rest -- Barclays is right up there as well. There's a good reason why they are highly regarded.

Being "well connected" may not be the reason for their profitability but the effect of their abilities.

On Nov 01 11:45 PM Rolo wrote:

> You know Vladimir, I call it FRAUD not "unethical hedging" lol.]]> Mon, 02 Nov 2009 01:43:57 -0500
Your comment, sir, is a very good example.

Goldman Sachs, whether you hate them or love them, are extremely talented at managing money. Anyone who deals with the major banks, investment firms, and capital markets know that their client service, valuations and risk management is top notch compared to the rest -- Barclays is right up there as well. There's a good reason why they are highly regarded.

Being "well connected" may not be the reason for their profitability but the effect of their abilities.

On Nov 01 11:45 PM Rolo wrote:

> You know Vladimir, I call it FRAUD not "unethical hedging" lol.]]> http://seekingalpha.com/news/market_currents/post/35501?source=feed#comment-737114 737114 Fri, 30 Oct 2009 11:58:15 -0400 http://seekingalpha.com/article/169877/comments?source=feed#comment-736589 736589
In Recessions, "Temporary Factors" are often required to prevent the economy from dipping farther. Without them, the economy would indeed be in a much worse position. The government acted as the spender of last resort.

The idea of a government stimulus is not to prop up the economy indefinitely. It is often used to temporarily stabilize demand for capital goods, prevent enormous capacity destruction and, most importantly, do just enough to introduce a turnaround in expectations.

The economies around the world are extremely fragile. Expectations are the greatest contributor to outlooks, and thus, spending patterns. Naturally, the first step towards any recovery is a change in expectations. That is the point of this stimulus.]]> Fri, 30 Oct 2009 01:02:39 -0400
In Recessions, "Temporary Factors" are often required to prevent the economy from dipping farther. Without them, the economy would indeed be in a much worse position. The government acted as the spender of last resort.

The idea of a government stimulus is not to prop up the economy indefinitely. It is often used to temporarily stabilize demand for capital goods, prevent enormous capacity destruction and, most importantly, do just enough to introduce a turnaround in expectations.

The economies around the world are extremely fragile. Expectations are the greatest contributor to outlooks, and thus, spending patterns. Naturally, the first step towards any recovery is a change in expectations. That is the point of this stimulus.]]> http://seekingalpha.com/news/market_currents/post/24825?source=feed#comment-515817 515817
But here's the trick, CPI is a basket. Individual components could inflate more so than other components. Housing is in a deflationary cycle that probably won't be picking up anytime soon, but Energy and Agricultural Products (Fertilizer) are actually on an uptrend. If Housing actually does stabilize, Energy and Agricultural Products would be in much greater demand (And higher prices).

Not to mention, commodity-linked equity is forward looking -- so it accounts for future increases in prices; inflation and TIPS does not.

So if you are going for a full-blown inflation play, it would be much wiser to invest in an Energy or Agricultural Products (i.e. Potash) ETF because of the "forward looking" component.]]> Sat, 23 May 2009 23:36:55 -0400
But here's the trick, CPI is a basket. Individual components could inflate more so than other components. Housing is in a deflationary cycle that probably won't be picking up anytime soon, but Energy and Agricultural Products (Fertilizer) are actually on an uptrend. If Housing actually does stabilize, Energy and Agricultural Products would be in much greater demand (And higher prices).

Not to mention, commodity-linked equity is forward looking -- so it accounts for future increases in prices; inflation and TIPS does not.

So if you are going for a full-blown inflation play, it would be much wiser to invest in an Energy or Agricultural Products (i.e. Potash) ETF because of the "forward looking" component.]]> http://seekingalpha.com/news/market_currents/post/24795?source=feed#comment-515150 515150
So let me ask you this. What's the difference between a centrally planned economy and a free market economy with regulations, taxes, and subsidies? Sooner or later, the government effects from regulations, taxes, and subsidies will overpower the 'free market' and dictate the movement of the economy -- which is analogous to a centrally planned economy.

Of course, the intention of the 3 items is not to 'plan' but thwart or limit the potential damage to consumers alike -- which is fine. But if the rules keep adding up, the end-product would look much the same as a centrally planned economy.

I am not arguing for or against this. But in a matter of time, the "free market" will be bogged down by so much law and regulation that it may actually negatively affect long-term growth infinitely - the cost of being compliant through the various channels will just become so enormous that the benefits of regulation may be less than the cost (i.e. have you seen how much audit and law firms charge?)

For example:
- Free Market where anything goes
- Free Market with 1 billion page book of rules attached; By the time anyone figures out what you can and cannot do, the equivalent non-regulated Free Market most likely already went through the exploitation, crisis, aftermath, recovery stage and on to growth.

The worst part of it all is that, by the time anyone else theorizes this, it'd be extremely hard to prove -- how do you exactly test out such a theory if the government dictates the entire economy's movement.]]> Fri, 22 May 2009 23:12:46 -0400
So let me ask you this. What's the difference between a centrally planned economy and a free market economy with regulations, taxes, and subsidies? Sooner or later, the government effects from regulations, taxes, and subsidies will overpower the 'free market' and dictate the movement of the economy -- which is analogous to a centrally planned economy.

Of course, the intention of the 3 items is not to 'plan' but thwart or limit the potential damage to consumers alike -- which is fine. But if the rules keep adding up, the end-product would look much the same as a centrally planned economy.

I am not arguing for or against this. But in a matter of time, the "free market" will be bogged down by so much law and regulation that it may actually negatively affect long-term growth infinitely - the cost of being compliant through the various channels will just become so enormous that the benefits of regulation may be less than the cost (i.e. have you seen how much audit and law firms charge?)

For example:
- Free Market where anything goes
- Free Market with 1 billion page book of rules attached; By the time anyone figures out what you can and cannot do, the equivalent non-regulated Free Market most likely already went through the exploitation, crisis, aftermath, recovery stage and on to growth.

The worst part of it all is that, by the time anyone else theorizes this, it'd be extremely hard to prove -- how do you exactly test out such a theory if the government dictates the entire economy's movement.]]> http://seekingalpha.com/news/market_currents/post/20808?source=feed#comment-444533 444533
It's inflation adjusted. A home purchased in 1979 at 2.5% inflation over the past 20 years would be worth 110% higher in nominal value today. Although your real home value has not increased since then, because you are paying a mortgage on the price of the home 20 years ago, your mortgage rate most likely has not increased substantially since then either. The only thing you've lost here is opportunity cost because the nominal value of your home is still 110% higher.

Saying that people who purchased a home in 1979 is underwater is severely misleading because of this.]]> Sun, 29 Mar 2009 19:55:32 -0400
It's inflation adjusted. A home purchased in 1979 at 2.5% inflation over the past 20 years would be worth 110% higher in nominal value today. Although your real home value has not increased since then, because you are paying a mortgage on the price of the home 20 years ago, your mortgage rate most likely has not increased substantially since then either. The only thing you've lost here is opportunity cost because the nominal value of your home is still 110% higher.

Saying that people who purchased a home in 1979 is underwater is severely misleading because of this.]]> http://seekingalpha.com/article/124794/comments?source=feed#comment-418691 418691
What we might be seeing is a deep U-shaped curve in the stock markets. With all of the pessimism surrounding the markets, a trigger to alleviate all of that could send the markets flying. Until then, we might be heading down for quite some time -- and in force. I would not be ruling this out. Perhaps an unintended bubble may be created a few months out - and another slight burst before we go marching on our way.]]> Sun, 08 Mar 2009 23:53:56 -0400
What we might be seeing is a deep U-shaped curve in the stock markets. With all of the pessimism surrounding the markets, a trigger to alleviate all of that could send the markets flying. Until then, we might be heading down for quite some time -- and in force. I would not be ruling this out. Perhaps an unintended bubble may be created a few months out - and another slight burst before we go marching on our way.]]> http://seekingalpha.com/news/market_currents/post/19393?source=feed#comment-417642 417642 Sun, 08 Mar 2009 00:35:48 -0500 http://seekingalpha.com/article/121844/comments?source=feed#comment-398030 398030
However, the indirect effect could be:
1) An increase in shareholder wealth for these banks. The net effect would, at the very least, be a 0 sum game with few people (shareholders) being made better off with many people (tax payers) being made worse off.
2) An increase in investor confidence. The $7 trillion or so in cash sitting out of the equity markets may be reinvested back in, either in the forms of equity or other investments, as there would be a decreased level of uncertainty.
3) As private capital starts to move back in, leading indicators may start to pick up steam towards the positive renewing hope for economic recovery. Manufacturers forecasting a prolonged recession may revise their forecasts and put on hold potential layoffs in light of this.
4) And so on.

The doom and gloom surrounding this world today began with the subprime debacle. Banks started to tighten up, preventing much needed loans for continued economic growth. Manufacturers saw less opportunity for growth, lowered their expectations, and it snowballed into large scale layoffs.

Folks, you can blame this on overextension of credit, but what stopped the economic growth wasn't the overextension of credit -- it was quite the opposite -- it was the lack of credit. It is when the expectations began to turn sour, and because of leverage, it simply magnified the snowball that occurred.

What drives this world is nothing more than consumer and investor psychology. What this world needs is confidence.]]> Sat, 21 Feb 2009 17:18:56 -0500
However, the indirect effect could be:
1) An increase in shareholder wealth for these banks. The net effect would, at the very least, be a 0 sum game with few people (shareholders) being made better off with many people (tax payers) being made worse off.
2) An increase in investor confidence. The $7 trillion or so in cash sitting out of the equity markets may be reinvested back in, either in the forms of equity or other investments, as there would be a decreased level of uncertainty.
3) As private capital starts to move back in, leading indicators may start to pick up steam towards the positive renewing hope for economic recovery. Manufacturers forecasting a prolonged recession may revise their forecasts and put on hold potential layoffs in light of this.
4) And so on.

The doom and gloom surrounding this world today began with the subprime debacle. Banks started to tighten up, preventing much needed loans for continued economic growth. Manufacturers saw less opportunity for growth, lowered their expectations, and it snowballed into large scale layoffs.

Folks, you can blame this on overextension of credit, but what stopped the economic growth wasn't the overextension of credit -- it was quite the opposite -- it was the lack of credit. It is when the expectations began to turn sour, and because of leverage, it simply magnified the snowball that occurred.

What drives this world is nothing more than consumer and investor psychology. What this world needs is confidence.]]> http://seekingalpha.com/article/121818/comments?source=feed#comment-397860 397860
The view that homes are investment vehicles are totally wrong. They should be viewed more as an alternative to rent, which is an expense.

As for a better graph of the real estate picture: static.seekingalpha.co...
I give credit to Tim Iacano for his article: seekingalpha.com/artic...

If we take a totally different angle and compare median home prices to median household income, and factor in a historically low interest rate at this current time, real estate almost seems undervalued.

The truth lies somewhere between your interpretation and Tim's interpretation.]]> Sat, 21 Feb 2009 13:42:41 -0500
The view that homes are investment vehicles are totally wrong. They should be viewed more as an alternative to rent, which is an expense.

As for a better graph of the real estate picture: static.seekingalpha.co...
I give credit to Tim Iacano for his article: seekingalpha.com/artic...

If we take a totally different angle and compare median home prices to median household income, and factor in a historically low interest rate at this current time, real estate almost seems undervalued.

The truth lies somewhere between your interpretation and Tim's interpretation.]]> http://seekingalpha.com/article/120801/comments?source=feed#comment-391124 391124
For example, if I were to sell 100, 100 strike april expiry, put option contracts on IBM at a cost of $9/option... I now have a $1,000,000 obligation in few months time if IBM stays below $100 by expiry. All for a $90,000 premium.

So now what, my asset is $90,000 and my liability is $1,000,000? No.

The $1,000,000 is the nominal value but the asset (options) based on time of trade is worth $90,000.

If i close this trade out by buying back the put options before expiry/exercise, I can immediately close out the $1,000,000 nominal amount and book a gain or loss based on the dollar amount that changes hand on the close.

The example above is only of one type - equity options. The nominal/notional value is small in comparison to swaps where the notional is often greater than $100,000,000 per deal.

You can't simply look at the notional value to determine risk. Risk is far more complex than that - in fact, it is a very gray area that brought us into this mess in the first place. We use quantitative theories to arrive at some formula to calculate a number that can be interpreted in some way to determine how risky something is. If everything breaks down as it did in the sub-prime mess, we begin to question the number, the calculation, the formula, and the theories. This uncertain area is what we should be scared about -- NOT the notional values.

On Feb 16 03:25 PM phdinsuntanning wrote:

> buying Venezuelan sovereign bonds
> probably have more hypothesis to end
> the subprime mess. 200 billions are peanuts,
> look at how much is at risk
>
>
> Top of the list remains JP Morgan Chase Bank. It held $91.7 trillion,
> yes, trillion in derivatives in the third quarter of 2007. One year
> later, it held only….$87.7 trillion! A shrinkage of $4 trillion.
> Now, JP Morgan’s assets are only $1.7 trillion in 2008, better than
> the $1.2 trillion they had in 2007. At least one financial institution
> is getting some benefit from the crisis and US government bailouts,
> but with a huge risk.
>
> Bank of America was third in derivative contracts in 2007, now is
> the second. In 2007 its Derivatives were at $32 trillion and in
> 2008 are $38.6 trillion! its assets were $1.2 trillion in 2007 and
> $1.3 trillion in 2008, so they increased their assets in only 100
> billion dollars ( close to the size of the refined copper market),
> but its Derivatives rose by $5.4 trillion. Pretty risky.
>
> Citibank is the third now US bank with more derivative contracts
> and holds $35 trillion in Derivatives, one trillion more that the
> $34 trillion in Derivatives of 2007. With total assets more or less
> unchanged of $1.3 trillion it looks in a pretty risky position to
> me.
>
> thanks Elaine for the data]]> Mon, 16 Feb 2009 18:12:15 -0500
For example, if I were to sell 100, 100 strike april expiry, put option contracts on IBM at a cost of $9/option... I now have a $1,000,000 obligation in few months time if IBM stays below $100 by expiry. All for a $90,000 premium.

So now what, my asset is $90,000 and my liability is $1,000,000? No.

The $1,000,000 is the nominal value but the asset (options) based on time of trade is worth $90,000.

If i close this trade out by buying back the put options before expiry/exercise, I can immediately close out the $1,000,000 nominal amount and book a gain or loss based on the dollar amount that changes hand on the close.

The example above is only of one type - equity options. The nominal/notional value is small in comparison to swaps where the notional is often greater than $100,000,000 per deal.

You can't simply look at the notional value to determine risk. Risk is far more complex than that - in fact, it is a very gray area that brought us into this mess in the first place. We use quantitative theories to arrive at some formula to calculate a number that can be interpreted in some way to determine how risky something is. If everything breaks down as it did in the sub-prime mess, we begin to question the number, the calculation, the formula, and the theories. This uncertain area is what we should be scared about -- NOT the notional values.

On Feb 16 03:25 PM phdinsuntanning wrote:

> buying Venezuelan sovereign bonds
> probably have more hypothesis to end
> the subprime mess. 200 billions are peanuts,
> look at how much is at risk
>
>
> Top of the list remains JP Morgan Chase Bank. It held $91.7 trillion,
> yes, trillion in derivatives in the third quarter of 2007. One year
> later, it held only….$87.7 trillion! A shrinkage of $4 trillion.
> Now, JP Morgan’s assets are only $1.7 trillion in 2008, better than
> the $1.2 trillion they had in 2007. At least one financial institution
> is getting some benefit from the crisis and US government bailouts,
> but with a huge risk.
>
> Bank of America was third in derivative contracts in 2007, now is
> the second. In 2007 its Derivatives were at $32 trillion and in
> 2008 are $38.6 trillion! its assets were $1.2 trillion in 2007 and
> $1.3 trillion in 2008, so they increased their assets in only 100
> billion dollars ( close to the size of the refined copper market),
> but its Derivatives rose by $5.4 trillion. Pretty risky.
>
> Citibank is the third now US bank with more derivative contracts
> and holds $35 trillion in Derivatives, one trillion more that the
> $34 trillion in Derivatives of 2007. With total assets more or less
> unchanged of $1.3 trillion it looks in a pretty risky position to
> me.
>
> thanks Elaine for the data]]> http://seekingalpha.com/article/119920/comments?source=feed#comment-390689 390689 - Lowered current demand due to Global Recession

Reasons why you should buy:
- China's commitment to urbanization -- less farmers, more manufacturing/service based (Pressure on farmers that remain to be more efficient)
- The requirement of subsidies around the world to provide farmers an incentive to produce (Current food prices are too low)
- Fertilizer prices are holding their own versus many other cyclical commodities like oil, metal prices, gas, etc.

Conclusion:
If you are shorting a fertilizer company now, you are shorting all of these expectations that are already built into the share price. If the world tips over from here, stock piling food will be next. If it moves up from here, you eliminate the most important reason to short while all of the long reasons remain.

Disclosure: I am long AGU at $29 on TSX.]]> Mon, 16 Feb 2009 13:13:02 -0500 - Lowered current demand due to Global Recession

Reasons why you should buy:
- China's commitment to urbanization -- less farmers, more manufacturing/service based (Pressure on farmers that remain to be more efficient)
- The requirement of subsidies around the world to provide farmers an incentive to produce (Current food prices are too low)
- Fertilizer prices are holding their own versus many other cyclical commodities like oil, metal prices, gas, etc.

Conclusion:
If you are shorting a fertilizer company now, you are shorting all of these expectations that are already built into the share price. If the world tips over from here, stock piling food will be next. If it moves up from here, you eliminate the most important reason to short while all of the long reasons remain.

Disclosure: I am long AGU at $29 on TSX.]]> http://seekingalpha.com/article/120699/comments?source=feed#comment-389792 389792
It's all very complex, but in the end, you're really looking comparing expected value vs. stock price. How is this any different from choosing a growth stock? I'm sure there are details which are looked more heavily by one set of investors over the other, but it really comes down to the expected value vs. stock price comparison.

Labeling yourself a growth, income or value investor is just a difference in labels. You're all doing the same thing. We're all really value investors.]]> Sun, 15 Feb 2009 18:41:55 -0500
It's all very complex, but in the end, you're really looking comparing expected value vs. stock price. How is this any different from choosing a growth stock? I'm sure there are details which are looked more heavily by one set of investors over the other, but it really comes down to the expected value vs. stock price comparison.

Labeling yourself a growth, income or value investor is just a difference in labels. You're all doing the same thing. We're all really value investors.]]> http://seekingalpha.com/news/market_currents/post/17802?source=feed#comment-388948 388948
While we bicker and complain about who's to blame and explain why we aren't willing to help because it's "not my problem", the economies around the world will continue down in a tailspin. Those underwater will cut their spending, which will affect various companies who will need to layoff workers due to decreasing demand, who will then begin to cut spending due to layoffs, who will then become a statistic to be forecasted into macro-economic models, which will then provide trends for various companies to layoff workers due to forecasted decreasing demand, and so on.

What's important here is not the finger pointing -- this can be done later when we AREN'T in a full-blown crisis. What's important here is to stop this tailspin with one big push, turn all of the forecasts around (because they are all really interpolations of data anyway), and curtail this tailspin from going down further.

I am not talking about optimism or pessmism here. I'm speaking realistically. Expectations and forecasts drive our spending/consumption patterns, not the current situation. The current situation is poor as we all know it, but if the future looks less bleak or 'better', it can be enough to send the trends back the other way. This is what the governments around the world are trying to do, and with the amount of force and quickness they are doing so, it will only be a matter of time before one of these economies start turning the other way. The problem is, however, if the largest of the economies do not turn within a similar time-frame, the downward trends will overpower the push. A global push is necessary with a global problem.]]> Sun, 15 Feb 2009 03:10:43 -0500
While we bicker and complain about who's to blame and explain why we aren't willing to help because it's "not my problem", the economies around the world will continue down in a tailspin. Those underwater will cut their spending, which will affect various companies who will need to layoff workers due to decreasing demand, who will then begin to cut spending due to layoffs, who will then become a statistic to be forecasted into macro-economic models, which will then provide trends for various companies to layoff workers due to forecasted decreasing demand, and so on.

What's important here is not the finger pointing -- this can be done later when we AREN'T in a full-blown crisis. What's important here is to stop this tailspin with one big push, turn all of the forecasts around (because they are all really interpolations of data anyway), and curtail this tailspin from going down further.

I am not talking about optimism or pessmism here. I'm speaking realistically. Expectations and forecasts drive our spending/consumption patterns, not the current situation. The current situation is poor as we all know it, but if the future looks less bleak or 'better', it can be enough to send the trends back the other way. This is what the governments around the world are trying to do, and with the amount of force and quickness they are doing so, it will only be a matter of time before one of these economies start turning the other way. The problem is, however, if the largest of the economies do not turn within a similar time-frame, the downward trends will overpower the push. A global push is necessary with a global problem.]]> http://seekingalpha.com/article/114227/comments?source=feed#comment-352947 352947
For example;
Consumer staples, which make up most of the retail sales, may have shown a 0.5% decline (for example). Assuming 30% of retail sales are made up of discretionaries, that means consumer staples saw a 0.5% x 70% drop in sales for a weighted drop in sales of 0.35%. Let me put this in perspective - Of the total 1.7% drop, only 0.35% of it is attributable to consumer staples... which make up the bulk of retail sales. So this means the other 30% makes up the other weighted drop of 1.35%. 1.35% = consumer discretionary retail drop x 30% --> Consumer discretionary retail drop = 4.5%.

If your gross profit margins are normally 40% and your net profit margins are 6.5% (Taken from AEO's industry average on Reuters)... doing some reverse engineering, 100M in revenue means 40M in operating profit and 6.5M net profit - or simply, deduct roughly 33.5M from operating profit to arrive at net profit as most of these expenses are fixed (and not tied to cost of goods sold). a 4.5% drop in sales means revenue drops to 95.5M and your gross profit is now 40% x 95.5M = 38.2M. Deduct 33.5M and you now have a net profit of 4.7M instead of 6.5M. A healthy consumer discretionary company suffering a 28% drop in net income is quite harsh. Imagine what company's like ANF are going through with a 24% drop in december year-over-year sales.

The good thing is, however, most of these prominent mid-range to slightly higher-mid range clothing companies such as AEO and ANF are not very highly leveraged -- companies like AEO are actually sitting on a wad of cash. With bankruptcy a very small probability, general economic trends priced in, and an overall very bleak picture that is hard to get any worse, any better than expected results can place significant movement on these stock prices -- There is far more upside than downside.

This is not to say, the news can certainly get worse. But with most of that priced in, it'd be difficult to see significant drops or movements beyond the levels we saw in november. With a technical bottom from panic selling established in the near-term and the worst news priced in fundamentally into consumer discretionaries, both things signal some optimism.

On Jan 11 03:23 PM PastTense wrote:

> "December retail sales dropped 1.7 percent year-over-year, making
> for the worst decline ever recorded''
>
> 1.7% just doesn't seem that catastrophic to me. If business can't
> handle declines that small, they need new management.]]> Mon, 12 Jan 2009 01:26:26 -0500
For example;
Consumer staples, which make up most of the retail sales, may have shown a 0.5% decline (for example). Assuming 30% of retail sales are made up of discretionaries, that means consumer staples saw a 0.5% x 70% drop in sales for a weighted drop in sales of 0.35%. Let me put this in perspective - Of the total 1.7% drop, only 0.35% of it is attributable to consumer staples... which make up the bulk of retail sales. So this means the other 30% makes up the other weighted drop of 1.35%. 1.35% = consumer discretionary retail drop x 30% --> Consumer discretionary retail drop = 4.5%.

If your gross profit margins are normally 40% and your net profit margins are 6.5% (Taken from AEO's industry average on Reuters)... doing some reverse engineering, 100M in revenue means 40M in operating profit and 6.5M net profit - or simply, deduct roughly 33.5M from operating profit to arrive at net profit as most of these expenses are fixed (and not tied to cost of goods sold). a 4.5% drop in sales means revenue drops to 95.5M and your gross profit is now 40% x 95.5M = 38.2M. Deduct 33.5M and you now have a net profit of 4.7M instead of 6.5M. A healthy consumer discretionary company suffering a 28% drop in net income is quite harsh. Imagine what company's like ANF are going through with a 24% drop in december year-over-year sales.

The good thing is, however, most of these prominent mid-range to slightly higher-mid range clothing companies such as AEO and ANF are not very highly leveraged -- companies like AEO are actually sitting on a wad of cash. With bankruptcy a very small probability, general economic trends priced in, and an overall very bleak picture that is hard to get any worse, any better than expected results can place significant movement on these stock prices -- There is far more upside than downside.

This is not to say, the news can certainly get worse. But with most of that priced in, it'd be difficult to see significant drops or movements beyond the levels we saw in november. With a technical bottom from panic selling established in the near-term and the worst news priced in fundamentally into consumer discretionaries, both things signal some optimism.

On Jan 11 03:23 PM PastTense wrote:

> "December retail sales dropped 1.7 percent year-over-year, making
> for the worst decline ever recorded''
>
> 1.7% just doesn't seem that catastrophic to me. If business can't
> handle declines that small, they need new management.]]>