Several members of this blog’s audience asked me about revisiting the topic of last year’s blog on the weekend after Thanksgiving Day. (Note that I am referring to “members” rather than “readers,” as there are now enough regular visitors to this site to cause me to believe that we now have something of a viral community.) Similar to last year, my intention was to visit both the nearby glitzy high-end mall and the local downtown on Friday following our favorite holiday. There were two interventions however, which prevented me from completing my mission on Friday.
The first intervention began late Wednesday, when I was happily notified that there was going to be an earlier-than-anticipated, sizeable contribution to the money we manage for a long-term client. One’s initial reaction to cash flow into an account, after expressing gratitude, is to apply the new money in the exact proportion in the existing allocations. However, my rule is that any addition or subtraction to an account is an opportunity to reexamine the entire structure of the account to optimize the potential net reward. (The term net reward includes risk reduction as well as looking to the upside.) In this particular case, a number of the mutual funds which this account holds are “hard closed” to new money. A few other funds are in limbo or have portfolio managers whose actions are a bit disturbing, thus I am not comfortable adding new money. In one case the inflow was large enough that it could fund a number of new positions without causing too great diversification. Much time was devoted on Friday to examine whether the new fund candidates had sufficiently different portfolios from one another that we weren’t double counting our exposure. Further, we reviewed all the funds’ total expense ratios to watch that we were not inadvertently raising the costs to the client’s beneficiaries. (This work will continue next week.)
The second intervention, which may be much more important to investors around the globe, was the announcement on Thanksgiving Day that Dubai World was asking the holders of its $ 60 billion debt to extend maturities by six months. In view of the near-term memory of the credit crisis that became a liquidity crisis coming out of sub prime mortgage defaults, the markets reacted violently. Dubai World’s real estate subsidiary, Nakheel, has a bond issue that is due for repayment on December 14th. Prior to the announcement, I am told that the bond was trading at 109 and on Friday was quoted in the 40's. In response, European and Asian banks led their markets down. In the US, significant, initial lenders to Dubai were weak. (The reason I stress initial lenders is that we have learned from the residential mortgage decline, that often the initial lenders sell out all or almost all of their positions.) Both Goldman Sachs and NASDAQ OMX fell in sympathy with their Dubai customers’ problems. As with the residential mortgage problems around the world, there were signs of trouble prior to the headlines. I know one respected investment manager, who upon returning from Dubai, stated that Dubai was out of cash to complete its various projects or to start new ones. As this brewing crisis had too great a potential to be really disruptive to our existing investments (let alone any new investments), I was glued to my computer and television screens on Friday. Thus, I did not go out except briefly for a late lunch after the NYSE early close for the day. (I expect some calming news will come out before the Tokyo market opens Sunday evening.)
Having delivered my excuses for working on Black Friday, I will now briefly describe my positive and negative reflections to my abbreviated visits to both the mall and our suburban downtown, along with a number of insightful conversations. Perhaps, the single biggest clue to how the shopping season was going is that both the mall and downtown had ample parking spaces available. In fact, I found better parking than on a normal Saturday. Walking around, we did not encounter crowds. In a number of stores the slimmed down sales staff outnumbered the purported customers. Some stores did have customers, but were not overflowing. My wife Ruth, who had a Black Belt in shopping when we married 23 years ago, noted that there were no customers at numerous cash register positions and one store had only four shoppers waiting to pay for their selected merchandise. Casual conversations with various sales clerks revealed no interest in contacting supervisors to get a more favorable price on a high-priced item. A major department store was advertising a short fur jacket rather than their normal full length fur, in their way lowering price points.
Focusing on prices was revealing. Several stores had significantly lower-than-normal priced merchandise in their display windows. Not lower prices on their normal products, but lower value, lower priced goods. Perhaps, the most revealing input we got was how the mall’s management reacted. Prior to the season there were a number of empty store-fronts. Most of these are now filled with “pop-up” stores that can quickly open with easily moveable fixtures, signage, and support equipment. These “pop-ups” are usually for seasonal items or marketing tests. Often these stores do not occupy the full store bay of the prior tenant, adding short space stores to the category of short-sale real estate transactions. The mall management is vigorously protecting its base. According to local real estate gossip, the mall gave significant rent concessions to a brand name merchant to prevent them from moving out of the mall and into the town, (reversing the normal pattern). I suspect there must have been a major concession, as the downtown now has 19 vacant stores. (We saw a similar pattern when we visited Birmingham, Michigan recently; another wealthy suburban community that has had a vigorous downtown retail district.)
An additional cause of concern to me is that it now appears appropriate to call this the “Shopping Season.” In our politically correct world there is little mention of Christmas or Chanukah. Religion and religious events seem not to be discussed in polite society. This approach has supposedly been taken so as not to offend anyone. As a Marine, I find this a defensive, or worse, a passive stance. We should stand for care and concern for others, which can even include our families and friends, but most importantly to those who are less fortunate. The muzzling of religious and spiritual thoughts is an attack on another pillar of our society. Institutions are important to our way of life, and incidentally important to how and in what we invest. Without strong, viable institutions in which we believe, we will be lost in a morass of meaningless politeness.
The job of a good analyst is to see things that others don’t. In the aforementioned “glitzy” mall, there are a number of higher-end jewelry stores. In these times one would expect to find at least one of these stores to be in the bankruptcy process. I found it encouraging that, in an auction of one store’s assets, the winning bid was by a respected professional liquidator. To my mind, the existing competitors were more logical buyers, as they already have sales outlets to sell the acquired merchandise, and wouldn’t have to employ the failed store’s people. That a professional would put up cash to buy merchandise from a failed firm in order to sell it out of existing locations, is a very positive sign. I hope they make a lot of money on this bet. Their past history would indicate that the odds are good.
One of the reasons that the US has been traditionally successful is that we adapt to calamities well. We rise to the occasion. Taking a leaf out of the liquidator’s book, adding the “pop-up’ stores, lowering price points but maintaining price discipline, are all signs of adapting to the current economic problems. Unlike a number of other recessions which impacted lower wage people primarily, the current one is a trickle-down recession with the problems hitting the wealthy either before, or at the same time, as the general population. Thus the adaptability at the high end is a good sign that unless materially higher taxes don’t prevent it, the high end will lead us out of the recession.
Therefore I expect we are coming out of our recession if we haven’t already done so. While we may take a little bit of time in making new equity fund commitments with new money, we think we will look back from the future and see that today’s prices will look as opportunities.
Please share your thoughts and reactions.