Fallback Thursday – Retail, Buffett and BABA, Oh My!


lions-and-tigers-and-bears-oh-my-300x225 - Last Key Realty BlogLots of things going wrong this morning.

Although the market ignored it yesterday, Retail Sales were down 0.1% in October and last October was UP 1.4% and then last November was down 0.7% and this entire year has been kind of lackluster on the Retail (XRT) front but now Walmart (WMT) lowered guidance and, suddenly, everyone is worried.

We also have a report that Berkshire Hathaway (BRK.B) has dumped out of General Motors (GM), Mondelez (MDLZ), Johnson & Johnson (JNJ), Proctor & Gamble (PG) and UPS (UPS) and Cisco (CSCO) just had some very disappointing numbers and, over in China – even the mighty Alibaba (BABA) is slowing down, with that stock now 33% below it’s 52-week high but that’s nothing compared to the 73% they have lost since 2020.

Cisco’s disappointing numbers are a cause for concern. As a key player in the tech and communications sector, their performance can be a bellwether for broader industry trends. With the tech sector already facing headwinds from various fronts, including supply chain disruptions and changing consumer spending habits, Cisco’s results could be a precursor to more widespread challenges in the industry and the issue they seem to be grappling with is all those empty offices causing companies to pull back on the IT infrastructure CSCO supplies.  

BABA’s troubles are indicative of the challenges facing all Chinese tech companies. Regulatory pressures, economic slowdown, and geopolitical tensions are all playing a role – this is why we’ve been avoiding Chinese companies in general this year. At this point, however, both BABA and CSCO are compelling buys and the recent Xi/Biden meeting makes me think it may be time to give BABA a shot – we’ll decide on them later in our Live Member Chat room.

I think I’ve done my job warning you about Retail this summer and we have no WMT or TGT or even COST in our Member Portfolios but we do have Macy’s (M) and they hit it out of the park today. As I said in yesterday’s Live Trading Webinar, we may not like the index but that doesn’t mean we can’t find component stocks that are FUNDAMENTAL BARGAINS to invest in.  

Still, the retail sector is clearly showing signs of strain and it’s a red flag for the economy. This isn’t just a one-off blip; it’s part of a broader trend of underwhelming performance in the Retail Sector. XRT is a bellwether for retail stocks, could be an indicator of broader Consumer Sentiment and spending patterns. With inflation and supply chain issues still in play, investors should be wary of assuming a quick rebound in retail.

Berkshire’s divestment speaks volumes. Buffett’s investment strategy has always been about long-term value and stability. This shift could signal a lack of confidence in these sectors or a strategic reallocation towards more promising opportunities but consider where the stocks are:

  • GM is at a long-term low – clearly Buffett is giving up on them but you also have to consider the fact that the simple act of Berkshire selling 40M shares of GM ($2.1Bn) in Q3 may be the very reason they traded down so relentlessly as that’s 5% of the company’s total value in outflows.  

  • JNJ is another Buffett seems to have given up on and look at those volume spikes that started the sell-off when they topped out at $175. That very well may have been Buffett dumping 327,100 shares but it’s still a drop in the bucket out of 2.4Bn shares outstanding. Still, this is how panics start – one investor gets spooked and suddenly they are stampeding for the exits (or one boy points and we all realize the Emperor has no clothes!).  

  • MDLZ sold off hard and bounced back but it’s not likely to have much to do with Berkshire as Buffett only held 578,000 (0.04%) shares out of 1.36Bn outstanding.

  • PG seems to have taken Berkshire’s $46.8M dump in stride. It’s not even a blip in the company’s $356Bn valuation – hardly worth mentioning.  

  • UPS is even less worth mentioning as Buffet only had $11.8M worth of the $125Bn shipping giant – less than they spend on gas every day… I like UPS down here and we have no transports so, for our Long-Term Portfolio (LTP), let’s sell 5 UPS 2026 $150 puts for $21 ($10,500) and let’s buy 15 2026 $130 calls for $30 ($45,000) and let’s sell 10 2026 $150 calls for $20 ($20,000) and that’s net $14,500 on the $30,000+ spread that’s almost 100% in the money to start, so we have $15,500 worth of upside potential but we’ll also draw an income selling 5-10 short calls per quarter – but not when it’s this low in the channel. 

That’s why we love to pick through stocks like this – you never know when you’ll uncover a hidden gem! 

Overall, the market landscape is fraught with cautionary tales, from the retail sector’s struggles to strategic shifts by investment giants like Berkshire along with the ongoing challenges in the tech sector, both Domestically and Internationally. Investors need to be more discerning than ever. It’s not just about identifying growth opportunities; it’s also about understanding the underlying factors driving these market movements and adjusting our strategies accordingly.

And you know you cannot leave her
For you touched the distant sands
With tales of brave Ulysses
How his naked ears were tortured
By the sirens sweetly singing” – Cream

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