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Friday, March 29, 2024

What Now Wednesday – Markets Struggle to Stay Above Last Week’s Lows

Well yesterday was ugly.  

A lot of it was caused by an almost 1% gain in the Dollar but that was caused by AWFUL Consumer Confidence numbers (98.7) while, at the same time, Fed Pres Williams said he expects rates to be 3.5-4% next year and thinks 0.75% would be appropriate at the next meeting.  So stagnant Economy + Inflation = Stagflation – and that’s not a good thing.

Goldman Sachs FINALLY realized earnings expectations for 2023 were likely overdone – especially in light of higher interest rates.   Fortunately, at PSW, we’ve been taking higher rates into account all year in determining which companies to invest in so our selections should do very well as GS sends their High Net-Worth Clients running for the safety of low-debt stocks.  

When the market is reacting to news that isn’t news to us – we see it as a buying opportunity but FIRST we increased our hedges (SQQQ in particular) – as we did not like the display of overall weakness we saw in the indexes yesterday.  We’re going to give them a hall pass due to the pop in the Dollar but not a lot of slack.  We had planned to hedge more into the holidays anyway, this just hastened our plan. 

One saving grace to the sell-off is it came against low volumes – so what is done can easily be undone but we’re going to need some good news and all we have this morning is some depressing Q1 GDP data (-1.5%) and BBBY just announced they are getting rid of their CEO (as if that will help) as sales were down 27% – because who would have thought that cutting back on coupons while the customers were suffering from inlfaion would not work out well???    Mark Triton has been with BBBY since 2019 and, before that, he was the CEO of TGT – so you’d think he’d have a clue but inflation makes fools of us all, apparently.  

You can now buy BBBY, which also includes BuyBuyBaby (but who’s having those these days?) for Just $500M at $6.50 per share and they do have $7Bn in sales but that’s dfown from $12Bn in 2019, when Triton took over.  Even worse, in early 2020, BBBY had over $1.3Bn in cash and $200M in net debt and now, after revamping, they have just $100M in cash and $800M in debt.  

With 953 large stores, BBBY may be interesting to AMZN as fulfilment centers.  AMZN drops 4% to the bottom line and that would be $280M/yr on BBBY’s $7Bn – which is half their market cap so something like that is likely to be their fate at this point.   Pre-market they are looking like $5..50 and that almost makes them interesting at $400M, where you would be paying just $500,000 per (money-losing) store.  

This is a good valuation exercise for those of you who have some retail experience – go to your local BBBY and think about whether or not you would buy that store and everything in it for $500,000.  If so, then consider you also get their back-office infrastructure and inventory as well as whatever shreds of value remain in the brand.  Of course, you also get $1M per store in debt – keep that in mind as well.  Since each store currently loses about $500,000 per year – it will take quite a while to catch up on that.  

That’s why the pool of potential buyers is limited to people with very deep pockets, who can drop $2Bn into the transaction to clean up the debt and re-do the stores into something that makes money (clearly it’s not selling home goods).  The real problem with BBBY is they lost the high-end market to RH and WSM and that was where the profit was.  Then they tried to get those customers back and screwed the low-market customers who had been loyal to them – now sales are down 40% and profits are gone – along with the CEO.  

Most likely this morning, you can sell the BBBY 2024 $5 puts for $3, which would net you into the stock for $2 – 1/3 of yesterday’s price.  Will we do that?  No thanks – but it’s an interesting play.

8:30 Update:  GDP came in a little worse than expected at -1.6% for the first quarter but keep in mind that Biden’s $2Tn Build Back Better plan went into play in March of 2021 and that gave us a 10% boost to our GDP in 2021 – so of course the comps are going to be tough moving forward.  

If you come out of the hospital and your blood-oxygen level is 98.4% but in the hospital it was 100% because you were hooked up to a machine – it doesn’t mean you are going to die – it’s just that you had an unrealistic measurement when you had stimulus in the hospital.  That’s what we’re seeing now as the economy goes back to “normal“.  

Also, the GDP “Deflator”, which adjusts for Inflation, is usually not such a majjor factor but, at 8.1%, it’s a huge factor and we already know the Government’s Inflation measures are way, way off from reality so I’m not going to take this GDP report too seriously – other than to note a trend, which is lower with no stimulus – DUH!  

The GDP should give us a nice low and then we’ll see what happens but the news cycle is not good at the moment:

 

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