JC Penney and retail in general

I note with fascination a particular hedge fund investor’s large stake in JC Penney (NYSE: JCP) and them talking up their book massively in their past quarterly report.

First of all, talking up your book is a sign that you don’t want to accumulate any more position – why tell the whole world your investing thesis before you can capitalize fully on it? I follow a similar policy on this site – there are quite a few names I haven’t mentioned until after the point where I simply won’t accumulate any more of a position.

I took a look at JCP for interest sake, simply because I generally do not like investing in S&P 500 components and also I do not like retail companies – it should be perfectly evident to anybody that unless if the retailer is about branding opposed to product (examples: Abercrombie and Fitch, Coach, Limited Brands/Victoria’s Secret, etc.), they will continue to be exterminated by the likes of Walmart, Target and Amazon. JC Penney is in the “extermination” category. This is doubly so with their new “every-day pricing” strategy, which a high school student can figure out will put it at odds against Walmart and Target.

I also note that they brought in some high-profile management formerly from Apple last year to try to turn the operation around, but in my unprofessional estimation, there isn’t a heck of a lot they can do with the hand of cards they were dealt.

My own simplistic view of the retail world also doesn’t explain how companies like Pier 1 Imports (NYSE: PIR) actually manages to exist, but I’ll let smarter people out there explain that one. My sour grapes with Pier 1 was that I was doing some on-the-ground research on the company about 5 years ago and told myself after walking in one of their stores “Who buys this over-priced crap?”. I note that if you put in a big order to buy shares of them during the February-March 2009 economic crisis (which reached a low of $0.10 per share) that you would be a very, very rich person today. So answering my question, apparently plenty of people do buy their over-priced crap.

This leads to my final point when it comes to retail investing: Never assume your own consumer preferences are those of others.

Greek election prediction

While making election predictions is not the focus of this website, making political calls is something that I would consider to be in my core competency, and my guess is that the people of Greece will be giving a plurality of votes to the anti-austerity party, SYRIZA. My prediction is that they will receive 22-25% of the vote and with the 1/6th seat bonus that the top party gets in the legislature, this will put them at 39-42% of the seats in the Greek parliament.

This will require them to make a coalition with one of the other parties in order to have any hope of forming government. In this respect, 39% is a lot different than a 42% result – 39% will require them to form government with the socialist PASOK, but 42% will give them more freedom to likely work with one the other minor parties and strike up the best deal with them from a position of negotiating strength. If they cannot form government, the other parties are sure to not form government and there will be yet another election.

What this means in the macroeconomic scope is that there will be yet further uncertainty in Greece and this will translate into continued focus on Greek domestic impact on the entire EU.

Risk on, risk off

Today was clearly a “risk off” day. After the EU had all the “good news” by extending another $100 billion to Spain which enabled them to kick the can down the road for another few months.

I will use spot WTIC crude as an example, but really, this could have been a chart for any of the major indicies and bond yields:

I always play this imaginary game with myself: looking at just one intraday chart and then extrapolating how the rest of the market fared in the day. Financial wizards call this “correlation”. Basically you can see how the entire commodity market (minus Gold and Silver) did by just looking at the Canadian to US dollar ratio. If the Canadian dollar strengthens, its a pretty good sign that commodity markets are up.

Today, with crude down, clearly the Canadian dollar will be losing purchasing power. The fun, however, is looking at individual issues and picking out the semi-liquid ones that have gotten taken down with margin calls. I still don’t see signs of too much distress in the non-AAA/AA/A Canadian corporate debt markets at the moment, unless if you’re an investor in Yellow Media.

I’m waiting to pounce for the day that I can deploy this cash, but it is still not here.

Chesapeake Energy – How long to clean up the mess?

I will not be taking any positions in Chesapeake Energy (NYSE: CHK), but the story behind it is fascinating. The latest revelations from Reuters not surprisingly shows that the corporation has significant structure built around the CEO’s lifestyle.

It makes you wonder how this will all go down when they finally get rid of the board of directors and the CEO is forced to depart. It will be a long and messy restructuring process, and most importantly for shareholders, costly. You can be sure that the lawyers that are working there are structuring the breakup of the CEO from the company to be as long and strung out as possible, baked with non-arms length relationships. This will all likely culminate in some sort of lawsuit whether such agreements were legal.

In other words, the company is going to be in a very messy state of affairs for a very long time. This is reflected in their relatively depressed share price, but the question for any prospective purchasers would be – is all of this bad news baked in, or is there still more bad news out there that needs to be reflected in the share price? One almost forgets that the company’s main business is the production and sale of natural gas.