Monday, July 20, 2009

You Know Something Does Not Add Up When...

Ruby Tuesday (NYSE: RT) is a casual dining chain that was hit hard over the last few months. I wrote about them in May when I thought that their stratospheric rise made no sense.

Today our friends there, with help from Merrill and Wachovia, announced that they are offering 10 mm shares (this is 20% dilution on ~50 mm shares outstanding). Market reaction...shares are up 1.5% as of right now. Buy more, fools, bwahahaha. This way they can even sell the 1.5 mm overallotment. Can't lose on this one. I mean, people gotta eat, and what-not.

I also highly recommend reviewing Karl Denninger's article about today's earnings "beats". In summary, you cannot fire your way to prosperity. 30% revenue drops seem to be the norm. Sure, you beat the "number" but what happens to aggregate demand if employers fire 30% of the workforce? Even B2B is derivative of end-user demand.

Then, keeping up with the Orwellian theme, our friends over at Amazon recently reached into people's Kindles and deleted...1984 and Animal Farm. You can't make this stuff up even if you tried. What's next, going after Bradbury? Come to think about it, with the likely new Supreme Court appointee (is she an alcoholic, btw? sure looks like one), we might get closer to a Brave New World to ensure equality of outcomes, regardless of personal efforts.

Tuesday, July 7, 2009

A Great Pointer on P/E Ratios and Random Bleak Thoughts on the Future

Over on Zero Hedge, they have posted a nice interview with David Rosenberg, the guy who got kicked out of Merrill for ruining their game (and then went on to some shop in Canada which ran these unfortunate full page ads). Anyway, he says in the interview that the S&P P/E should be the inverse of the Baa corporate yield (hence S&P under 700 based on $75 in earnings). Thanks to the SL Fed, we have the graph above.

I personally think that 2-3 years from now, the Baa rates will be much higher, hence there will be a substantial multiple contraction on the S&P. But with increasing inflation expectations, the value of the S&P will not go down as much simply because there will be a rush for assets, any assets. You already see this in the deals that China is doing all over the globe: natty res grabs in Australia, Canada, Latin America, as well as massive farmland grabs by them and the oil-rich mid-east countries in places like Zimbabwe, Kenya, Sudan and others. This is a massive dollar flight that is done step-by-step: if those countries thought that their dollar assets would be worth more in the future, they would not be exchanging them for hard assets, right? This is not a short-term play but a larger, more strategic view.

Next in line will be the inability of the US to borrow in dollars, effectively delegating it to a banana republic status. Following that, the US will have to pawn off assets as a backing for any financing. It has already allegedly started with the US giving the B-2 bomber blueprints to China in exchange for some debt relief. Then you will have some base deemed "non-strategic" "leased" to a creditor country (think Guam or the abandoned airfields on multiple Pacific islands). Then you might see a wholesale turnover of the "keys" to the empire: handing off the bases in Djibouti, Panama and the Straits of Hormuz. Next will be the drilling rights in currently off-limits US coastal zones: California, the Atlantic Seaboard. Next will be the mineral rights in portions of Alaska closed for drilling. Simply put, there is NO free lunch. You cannot consumer more than you produce for a prolonged period of time. Unfortunately, our government simply does not get it, and what might be coming will make Peter Schiff sound like a lovable optimist. I hope the Kennedy descendants on Cape Cod enjoy the view of CNOOC drilling rigs guarded by Chinese navy boats.

Good luck trying to pull off a Margaretta then.

"I have not become the King's First Minister in order to preside over the liquidation of the British Empire." 1942

Who said that? Once you have the answer, read the link below. Any parallels are coincidental. For sure.

Decolonization and Decline 1945-1997

Sunday, July 5, 2009

What would the tipping point day look like?

Honoring the Fourth, I have been wondering what a tipping point day might look like in the credit/FX markets. One thing we have seen is that things can sink very quickly in a day or two.
I think we might see a combo credit/FX crisis. Something like the 10-year yield up 100% in two days, USD down 40%, S&P crashing 15%, gold and oil up 20-50%.
This will be the day the music dies.
It will also affect every single aspect of everyday life: the banks will shut down, people will start to hoard food, gasoline and medicine which will lead to shortages very quickly in our over-optimized JIT inventory world. Ambulances and police cars not running. Looting, riots, etc.: all the things you now see on TV happening in the third world will happen here. The US will not be a fun place to be then.

Wednesday, July 1, 2009

More Trouble at American Apparel (AMEX: APP)

My friends over at American Apparel got a "small" inspection by the INS, finding out that 1,600 employees are illegal and 200 are questionable.

My read:

10-K, filed March 16
-- cutting: 100 employees
-- dyeing: 900 employees
-- sewing: 3,900 employees
Total:4,900 mfg employees

8-K filed last night:
"5,600 employees that the company employs in its mfg operations"

They added 14% of their workforce in 6 mo? What a great American success story! Get Obama on the line!

Can't check the Q because: "The Company was unable, without unreasonable effort and expense, to timely file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (“Form 10-Q”) because the Company needs additional time to complete certain reviews and analyses with respect to the financial statements and related disclosures to be included in its Form 10-Q."

No biggie, everyone does it once in a while.

In the raid 8-k, they state: "
the Company does not presently believe that the loss of employees would have a materially adverse impact on its financial results. The Company believes that its current surplus levels of inventory and manufacturing capacity would mitigate the adverse impact of any disruption to its manufacturing activities that may potentially result from the loss of these employees. As the ultimate impact is difficult to predict at this time, no assurances can be given as to how, if at all, the loss of a significant number of manufacturing employees will affect its business and operations. "

This might mean:
(1) Piss-pour working capital management so they have excessive inventory to cover the loss of a substantial number of employees
(2) They knowingly hired illegals and are all stocked up as a precaution for a raid-induced disruption
(3) They are simply disingenuous about their inventory levels
(4) Inventory levels are OK given how much their sales have been dropping (on a SSS basis): May 09 -10%; Apr 09 -7%; March -11%; Feb 09 -9%; Jan +2%; Dec + 3%; Nov +6%; Oct +22%; Sept +35%. You think there is a trend?

Also new CFO and Gen Counsel in the last few months. I hope the new CFO is less of a "complete loser", per the CEO's description of the fired CFO.

Good luck to the new hires and best wishes to Lion Capital, who made a large investment in APP back in March, here from the world headquarters of Barbarian Capital.