Tailored Brands – not looking too good

The next clothing retailer that stands a good chance of going to Chapter 11 (to restructure what are fairly onerous amounts of outstanding store leases) is Tailored Brands (NYSE: TLRD).

They filed Form 8-K today and the salient highlights are this:

Cash and cash equivalents at the end of the first quarter of 2020 (this would be May 2, 2020) were $244.2 million;

…

As of June 5, 2020, cash and cash equivalents were $201.3 million, excluding $93.5 million of restricted cash.

That’s a burn rate of about $43 million per month, which should be disturbing to most investors, especially since they have a minimum cash maintenance requirement with their lender.

In order to reduce the cash burn, they need to sell inventory and get their stores up and sell product. However, initial data does not look good:

The Company noted that it is too early to determine steady-state comparable store sales for the second quarter but wanted to provide an update on recent performance. For the week ended June 5th, for stores open at least one week, the average comparable sales performance was:

o Men’s Wearhouse down about 65%,
o Jos. A. Bank down about 78%, and
o K&G down about 40%.

Clearly buying suits hasn’t been a priority of the consumer public post-Covid-19.

Ignoring the common stock, which has been exceptionally volatile over the past week (it spiked up to US$2.40 two days ago, and is now closed at $1.24), the corporate debt tells the real story:

This is the July 1, 2022 unsecured debt, with US$173.4 million outstanding. It is structurally behind the majority of the company’s asset-backed loan facility which does not bode well for recovery for the unsecured debt. If you have any inkling that the company will make some sort of financial recovery, however, these bonds are trading at roughly a 100% YTM at present.

A sure sign of Chapter 11 will be if the company decides to withhold interest payments on this debt (we will find out by the end of June), or they could be pulling the plug earlier than that. Who knows, with how Hertz (NYSE: HTZ) has traded after its Chapter 11 filing, it might result in an improvement in the stock price!

A side note – famed “big short” investor Michael Burry took his lumps on the stock last month. At one point he had a 4 million share position (8.3% of the company), with his last shares purchased in March 24, 2020.

I have no positions in TLRD or its debt, and not intending on taking one – they need to chop off half their debt, shed half their leases and this can only come in the form of a restructure within Chapter 11. I made my trade for a few cheap suits after they cut their dividend to zero, and closed it out late last year for a mild gain.

Market observations

The S&P 500 is up another 100 points today, purportedly on a jobs report that the US hired people in the month of May (everybody was expecting layoffs). For example, the unemployment rate expected was 19.8%, while the actual rate was 13.3%. Suffice to say this was a shock.

So everything’s going crazy. Cruise liners are up about 20% (they’ll be able to raise another round of financing and sail through it). Energy stocks are going through the roof. There are all sorts of indications of a market recovery, and indeed, the “V” scenario happened:

Recall my daily rule of “only sell in up markets, buy in down markets”. There will be days things will go down, that’s the time to buy. On a day like today, the only real option is to lighten up and raise some cash. You’re too late if you do the opposite. Today, and especially for those in the past month, those that have cash on the sidelines are hurting. The only worse feeling in the stock market than losing money is to watch everybody else make money while you’ve got a pile of zero-yielding cash. The news headlines are going to gravitate away from Covid-19, protests and now gravitate towards recovery and give people a feeling of comfort. Again, this will be false, since it will be built up on a pile of debt taller than Olympus Mons, but this is a medium term consideration and not short-term, which will be euphoria.

You are also seeing the start of the capitulation of the gold market, which is down about $40 per ounce. Although the downside here is not going to be extreme (10-20% from the US$1,780 peak?), holders in gold will be wondering alongside those holding cash whether they should dip back into the markets at ever increasing prices. There will be a significant contingent of people holding on to hedge themselves against the excesses of monetary policy, but there are also a lot of “loose” holders that have held paper gold which will want to catch the equity train. In fact, for those contemplating dipping back into gold, consider that the Canadian dollar is likely to rise in the future due to the resurgence in commodities, so valued in Canadian dollars you will probably be able to pick up gold for relatively less.

In these sharp rallies, there are going to be two-three day periods where you will see volatility spikes and the main indexes will dip down, usually caused by some transient headline. These are really the only opportunities to deploy cash. The only factor is when they will happen – it is difficult to predict these sentiment spikes. These spikes down are designed to wash out very short-term holders (this tend to be retail investors very new to investing that are skittish to volatility and because they tend to act in swarms, it amplifies price changes), but the overall trend is going to continue to be up as long as Central Bank rocket fuel propels the market.

Speaking of which, by the end of this year, the Federal Reserve is going to step off throwing gasoline onto the fire, and depending on how ridiculous things get, may even signal an increase in interest rates next year (the buzz-word will be “re-normalization”, very ironic since nothing is normal now). Any rate increase will be nothing extreme – just a quarter point – but even they will start to recognize when the S&P 500 hits 3500 that they should be applying some brakes otherwise they are getting ready to engineer the market crash of the 21st century that will make the 2008-2009 economic crisis look like a correction. Central Bank interest rates cannot rise too much because there is just too much debt.

My last note is a very easy prediction. Zoom stock (Nasdaq: ZM) in three years will be lower than US$208/share. The borrow is extremely cheap right now, but once the Federal Reserve rocket ship stops, this is probably the easiest short candidate I have seen in ages. I wouldn’t short it now because all of the index-based buying can make it even more ridiculously expensive. But I did note that Zoom sent me a spam to my inbox offering me 30% off a yearly subscription (I was month-to-month) and this is more than their usual “buy 12 months for the price of 10” offer, which means that their management is smart enough to know their gravy train is ending, and ending soon (get the years’ worth of deferred revenues while you can!). Microsoft, Google, and even open source options are all competing for this market and Zoom has little in the way of competitive advantage other than incumbency protection.

Have a good weekend everybody.

Taking my foot off the market accelerator

When reading the news, keep in mind that it is trying to program your brain what to think about. Frequently it tries to program your mind how to think. Social media is a filter and amplifier of both of these effects.

In all of these instances, they do not give you any cues about what is not being discussed. As a result, the potential for availability bias is extreme if one does not have reasonably decent critical thinking skills.

I’ve written before about what it takes to outperform in the markets, and one variable is knowing where your thinking is standing in relation to the competition. Since a good amount of the competition is programmed by media what to think, there is a value in paying attention to the programming, but with keeping your full mental shields on.

Right now, apparently Covid-19 is no longer the scourge of the earth. Businesses are re-opening, a good chunk of the public is in silent defiance of social distancing, and life appears to be slowly getting back to normal, short of the annoying lineups you see to get into Costco.

A safe time to invest back in the markets again? Seemingly yes, but the process of transitioning from a very risky (Covid-19 is going to kill us all) to risky (riots in the name of racism is going to kill us all) to not so risky (normalization of the pre-Covid life) has more or less been priced into the market – the S&P 500 is sitting at about 8% less than the pre-Covid peak.

Short of these headlines (riots, normalization), what is not being discussed? I’ll leave this as an exercise to the reader. Being able to assemble ideas to answer the “not” question is valuable in that it allows you to take a good guess at what might be in future headlines (presumably after you’ve gone long on whatever it is that you’ve thought of).

After things re-open, there is a certain ‘novelty’ factor which will result in an initial boost, but reality will be setting in pretty soon – the Canada Emergency Response Benefit payments will end (the US parallel is the $600/week unemployment benefit enhancement), and then decisions will become tough. This will come with increased risk, which portends to choppy waters ahead.

I’m not saying we’re going to crash back down again, but I am saying that the ‘easy’ gains (at least if you recognized that March 23rd was indeed the bottom) have been made here and things going forward will be much more difficult than the past month. The past month you could throw you money into nearly anything and make profits, while going forward, the market is going to be much more discriminating. In particular, I’d be especially hesitant to be long on stocks that Robinhood investors are bullish on. With record amounts of retail account openings, it gives me caution (although the wisdom of the masses may be correct in that they want to be converting their cash into assets that aren’t going to depreciate rapidly like all world currencies are doing).

Bombardier

Aerospace-related entities today received a bit of a boost up on credit, especially Air Canada (TSX: AC) (they were able to get off a reasonable offering consisting of equity and 4%, 5-year convertible debt, both of which are now significantly doing better).

However, my focus is on Bombardier – their debt has been in the trash heap since Covid-19 and it is finally beginning to normalize – their 2022 issue spiked up 12 cents on the dollar today and the rest of their yield curve is flattening. While they are hardly out of the woods (they have a huge disposition of their Transportation division to finalize), it is looking seemingly apparent this is coming to fruition, which leaves their private jet division.

I believe the remaining private aviation industry will do better post-Covid-19 than most people anticipate.

They will also receive large business subsidies from the Canadian and Quebec governments. Bombardier is oddly reliable in this respect. I mean, just five years ago, I was doing the same thing.

The Alstom acquisition of Bombardier Transportation is the key trigger to the company’s solvency and all indications appear (unlike Cineplex and Air Transat!) that it will continue.

May 2020 – wild times

Today wraps up another month in the markets.

This quarterly report is going to shape up to be one of the most interesting since the 2008-2009 economic crisis. May was a very active trading month. Indeed, something very rare is that my usually very concentrated portfolio has been flattened like the COVID-19 curve – today I count 18 separate issuers that I own either equity or debt positions in (some more concentrated than others). There is an additional three separate positions in various futures contracts. There are more balls being juggled up in the air than ever in the history of my portfolio.

I was caught very badly with the onset of Covid-19, but just because you lose a bunch of money on the way down doesn’t mean you have to earn it back in the same manner. Things are going to be a bit more tricky in the next month – predicting correctly the nature of the post-Covid normalization is where the bulk of the money will be made.

An investor wins in the Covid-19 era by avoiding where there is less likely to be demand. Although I’m sure a few of my picks are going to be duds, the nature of what happened (culminating March 23, 2020) will result in winners that will, by the virtue of mathematics, become more concentrated, while the laggards will naturally reduce in proportion to the overall portfolio.

But overall, there is still an obvious tailwind for the market. This is taking the market sailboat that we are all on in a forward and upward direction. The wind is going to slow its gusting (i.e. central banks will soon start to normalize monetary policy), but just because the wind slows down doesn’t mean the ship stops sailing forward. There’s momentum and plenty of participants that want to convert their zero-yielding cash into assets at ever increasing prices. The winners and losers of Covid-19 are well known by this point, and institutions have their sales data to place their near-insider bets on various retail agencies. Headlines now are concerned about racism and police brutality, geopolitical and electoral politics, another sign of normalization.

Finally, here is an un-testable prediction – on Saturday at 12:22pm Pacific Time, you can watch Elon Musk’s SpaceX launch a couple astronauts into space. While this might not seem like anything special, if this launch is successful, the S&P will rise faster than the rocket that took them up into space. I’ve always thought that SpaceX and not Tesla, SolarCity, Boring or Paypal is the gem of Elon Musk, which would explain why it’s not publicly traded.