This blog doesn't follow the retail sector, nor for that matter does it follow pharmaceuticals. The rational for this is because of the deafening noise that extraneous factors bring to the process. In retail I spent many years trying to come to grips with a moribund retail environment while trading Japanese equities. During those years there always seemed to be a reason for failure to deliver. Perhaps the most frustrating reason was weather.Leaving that aside I do occasionally get an interest in the space when things get to extremes. Let's take J C Penny for example.
I remember walking into a J C Penny store in Chicago in 1993 and coming away with the feeling that they had what I wanted, but I just couldn't find it. It never occurred to me to ask anyone for help as staff seemed fairly conspicuous by their absence. Anyhow flash forward to yesterday when Penny's released their results. Now the only thing I knew about them was the Hedge Fund Pershing Square owned about 18% of the shares and had spent the last few years agitating for a turnaround of some king. Bill Ackman, the boss at Pershing Square has been on the board of JCP since 2011. The results yesterday must have brought a smile to his face after a seemingly fruitless campaign. In the new world of stock analysis it must have been somewhat galling to those betting on a total collapse of this retailing stalwart that the company actually produced a profit for 4Q13 by increasing margins and a decline in sales. This is the crux of things. JCP had become an undisciplined giant giving away margin for the sake of sales, always trying to out-discount competitors. The realisation that this game is a fruitless race to the bottom seemed to allude many, especially today when internet companies spend most of their time on conference calls talking only about the top line and avoiding questions about how they'll actually make money. This blog only 2 weeks ago pointed out the problems with this business plan in respect of Amazon (Margins 0.6%). JCP has provided an example today why in order to stabilise a business you have to shrink to grow returns. They are not out of the woods yet, but investors interested in the end game for companies trumpeting top line growth would do well to follow this one and its' board over the next 4 quarters.
Of course if the JCP board is showing retailers a new face you might expect that here in Australia someone at Qantas might be watching what can be done when you realise your limitations. QAN yesterday produced another big loss (AUD 250m) and decided they needed to sack 5,000 staff. The problem is that the way the airlines current management set things up very few observers believe that they can deliver. This blog also is in that camp. The current CEO Alan Joyce drew a line in the sand and was determined to defend a 60% market share of the domestic market in the face of a better financed, newer operation (Virgin Australia). This effectively meant that every time Virgin added a 100 seats to a route QAN added 200. And because QAN has a higher cost base due to old union agreements they either had to swallow the margin or introduce a new low cost entity Jetstar to a route. This of course also had the knock-on effect of educating the public away from premium price levels and played into the hands of Virgin. I mean the travelling public once it had been weened off QAN saw no reason not to at least try Virgin or move to Jetstar. In other words the confusion became similar to what I'd experienced at that JCP store in Chicago and just like me people walked away and looked for something more simply presented and therefore easier to deal with. The end game with QAN will be a severe shrinkage and this blog is of the view that QAN will end up as a domestic player with 50% of the market. Investors should heed Warren Buffetts words from an interview in London's Daily Telegraph in 2002:
“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.”
Its not so different being on a bicycle. After all the growth rate in cycling is starting to imply very different metrics when it comes to valuations of bicycling related stocks. The trouble of course comes when growth starts too plateau. Look at Shimano . . . it's very similar to something like Apple because theres a cap at which the market can expand. At that level you start to see valuation dew back and RoE pick-up. Clearly there's only so many times you can release a new group set. The next high earnings will be when disk brakes are legalised by the UCI . . . . until then you better hope for natural growth through population up-take . . .
I switched back to tubulars this week on the Cannondale because I'm sensing a problem with my Mavic Cosmic Carbones SLRs. I felt a shuddering through the front fork of my bike late last week which at first seemed likely to be a loose headset. When I checked I found no discernible movement in the headset so tried switching front wheels. Immediately the sound was gone. I checked the skewer and cleaned and greased it which helped a bit, but I checked with Mavic and they suggested it was probably that the bearings were starting to go. Interesting? I'm not sure, but will take the wheels down to Cheeky Monkey next week as they are a Mavic authorised dealer. Im off to Orange; north west of Sydney (3 - 4hrs) and need clinchers to ride on. The team I'm going wit are from Tattersalls Club in Sydney and there's no way I want to hold up fellow 40+ year old men on a weekend away from wives and loved ones. Patching and pasting with super glue and tubulars is boring. Imagine if you will taking a pre-glued tubular and carrying it on a ride. Then a puncture . . . stripping off the old one, adding rim tape and stretching the new one on , , , if you're a 50 year old man you're not going to want to wait around . . . you get the idea . . . .
Ciao!
Friday, 28 February 2014
Thursday, 20 February 2014
Composites . . .
Composite materials are taking over the world. In 2007 while working as a hedge fund manager in Singapore I spent hours listening to stockbrokers describing the magic that was within reach of Japanese carbon fibre wonder company Toray Industries.
What I liked about Zai skis was their purported desire to damn the costs and just try to produce the best skis they can. As these cost from CHF 6 - 10k I haven't raced out and bought a pair, so maybe they're not very good? I don't know whether the company will achieve what they set out to do, but if they stick to their business plan they'll probably be OK. My point is that investors need to think outside of the consensus to achieve returns greater than normal.
There is a war going on between currency and other markets at the moment. If you're long equities you want to believe the Fed is not going to continue "add" to the taper anytime soon. That is a problem because minutes of the January policy meeting released yesterday showed several members f the board were in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor” of continuing to trim asset purchases by $10 billion at each meeting. If that happens yield plays will have to devaluated. The currency market believes it with the Bloomberg Dollar Spot Index reaching its' highest level since Feb. 13 yesterday.
Equity world is clinging on to 'bad' data from the Phili Fed, Empire State manufacturing and Chinese PMI (amongst others). Broad market equity bulls think all this data will see the Fed pause. This blog thinks that the bad US weather has distorted the US data (NY has got 40+ inches more snow this year than average).
The bond market has other problems. Emerging market anxiety is centred on China. The HSBC and Markit Economics Index of Chinese manufacturing fell to 48.3 from January’s final figure of 49.5. GDP growth is forecast to fall to a 24-year low of 7.4% in 2014. The worry for investors in bonds is that we start to get a surge in credit rating downgrades of China-centric companies. This blog has seen what happened in 1997-8 in Asia when growth hit a debt wall. That was a time when Samsung Electronics was within a month of not being able to pay there workforce and Malaysia shut its' currency market down. Given this investors should re-evaluate their current exposure to emerging market bonds a and instead look for euro-centric issuers to express their preference for any carry advantage they might wish to take.
It's Friday in Sydney as I write this and the weather has turned for the better. Being unemployed has it's advantages as I'll be getting on my bike to stretch out again. I've managed to get nearly 150km's under my belt so far this week. I'm riding on the north side of Sydeny on Sunday morning with a big group of middle aged men and the odd lady. My cold / lung problems have nearly disappeared and I'm noting that I have a bit more zip in my pedal stroke. Yesterday I hit the park after 2 hours in the dentist chair and happily racked up the km's. Amazingly cycling seems to be growing daily in Sydney. It's very encouraging that even in the face of poor infrastructure, driver ignorance and a hilly geography that people are increasingly putting in time on their bikes. I'm not sure what the end game is for this city, but I tend to think that numbers alone, like in London, will dictate more cycling infrastructure. Good days are ahead . . .
Ciao!
Toray at the time was one of the prime contractors to Boeing for the soon to be king of air travel the 787 Dreamliner. For a long time it outperformed the N225 and was a good bet for those of us happy to be long technology and short the rusting carcass of Japan's hopelessly moribund industries caught in a race to zero margin nirvana. Problems arose when engineers at Boeing couldn't master the bonding of the wing frame box to the aircraft's main fuselage. If you were part of this clogged supply chain you were toast and Toray Industries shares quickly returned to a marginal out performer. As with a lot of Japanese companies investors will almost always be frustrated by the conglomerate nature of these companies. Often you'll want to buy into a company because of some amazing new technology, but what you'll probably get is a management likely to be timid in exploiting the new segment and almost always end up giving you 20% of what you want. Of course if you were in another country you probably would have floated of the carbon fibre business to allow it to achieve it's full potential both in entrepreneurial terms and in terms of company valuation.
Technology companies need to be single minded in their passions to an almost pig-headed degree. I want to see companies with either unique technologies (such as Toray's high end fibre business) or be in position to use technology in a new way that plays against the consensus (think Apple under Jobs or todays big news WhatsApp). If you can get both then you're really in an investor friendly zone.
While skiing recently I was struck by just how ridiculously heavy the gear you have to carry around is. As I said to a banker in Zurich, how come my entire bike weighs about 6kgs, while my skis weigh at least 7kgs and boots must be close to 10kgs. Think about it . . . imagine strapping an extra 15kgs on your bike and trying to ride up a hill. In fact imagine the same scenario downhill and what that means to your breaking. Why then haven't we seen more composites in skiing? Well there are companies out there experimenting with this type of thing. Dodge Boots in the US or the team on this report from Bloomberg:
While skiing recently I was struck by just how ridiculously heavy the gear you have to carry around is. As I said to a banker in Zurich, how come my entire bike weighs about 6kgs, while my skis weigh at least 7kgs and boots must be close to 10kgs. Think about it . . . imagine strapping an extra 15kgs on your bike and trying to ride up a hill. In fact imagine the same scenario downhill and what that means to your breaking. Why then haven't we seen more composites in skiing? Well there are companies out there experimenting with this type of thing. Dodge Boots in the US or the team on this report from Bloomberg:
What I liked about Zai skis was their purported desire to damn the costs and just try to produce the best skis they can. As these cost from CHF 6 - 10k I haven't raced out and bought a pair, so maybe they're not very good? I don't know whether the company will achieve what they set out to do, but if they stick to their business plan they'll probably be OK. My point is that investors need to think outside of the consensus to achieve returns greater than normal.
There is a war going on between currency and other markets at the moment. If you're long equities you want to believe the Fed is not going to continue "add" to the taper anytime soon. That is a problem because minutes of the January policy meeting released yesterday showed several members f the board were in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor” of continuing to trim asset purchases by $10 billion at each meeting. If that happens yield plays will have to devaluated. The currency market believes it with the Bloomberg Dollar Spot Index reaching its' highest level since Feb. 13 yesterday.
Equity world is clinging on to 'bad' data from the Phili Fed, Empire State manufacturing and Chinese PMI (amongst others). Broad market equity bulls think all this data will see the Fed pause. This blog thinks that the bad US weather has distorted the US data (NY has got 40+ inches more snow this year than average).
The bond market has other problems. Emerging market anxiety is centred on China. The HSBC and Markit Economics Index of Chinese manufacturing fell to 48.3 from January’s final figure of 49.5. GDP growth is forecast to fall to a 24-year low of 7.4% in 2014. The worry for investors in bonds is that we start to get a surge in credit rating downgrades of China-centric companies. This blog has seen what happened in 1997-8 in Asia when growth hit a debt wall. That was a time when Samsung Electronics was within a month of not being able to pay there workforce and Malaysia shut its' currency market down. Given this investors should re-evaluate their current exposure to emerging market bonds a and instead look for euro-centric issuers to express their preference for any carry advantage they might wish to take.
It's Friday in Sydney as I write this and the weather has turned for the better. Being unemployed has it's advantages as I'll be getting on my bike to stretch out again. I've managed to get nearly 150km's under my belt so far this week. I'm riding on the north side of Sydeny on Sunday morning with a big group of middle aged men and the odd lady. My cold / lung problems have nearly disappeared and I'm noting that I have a bit more zip in my pedal stroke. Yesterday I hit the park after 2 hours in the dentist chair and happily racked up the km's. Amazingly cycling seems to be growing daily in Sydney. It's very encouraging that even in the face of poor infrastructure, driver ignorance and a hilly geography that people are increasingly putting in time on their bikes. I'm not sure what the end game is for this city, but I tend to think that numbers alone, like in London, will dictate more cycling infrastructure. Good days are ahead . . .
Ciao!
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