Monday, February 09, 2009

How to lose 90% in a year and keep your job

Bill Ackman has been a very successful hedge fund manager in past years. His active use of options and pushing management for aggressive changes have proved profitable for investors over the years (I think you can argue that his activism doesn't necessary improve the companies he targets, but rather just generates short-term gains).

However, his latest bet on Target has been painful to watch. Since establishing the fund a little over a year ago, this fund is down 89.5%. Ouch. Options can be great when you're on the right side of the trade, but they can wipe you out when you're on the wrong side.

Barry Riholtz at the Big Picture has an interesting view of the new US economy as we move forward. I added some of my observations:

* Asset Deflation: Equity portfolios are on average down about 40%; Dividends are being slashed, stock repurchases canceled. Nationally, home prices are down 20-25%;

Asset deflation is real and reflating asset prices with another bubble of some sort is not the answer.

• Consumer Spending: Down significantly, after the US had its worst Xmas in 40 years. Savings rate has turned positive; Conspicuous Consumption replaced with Conspicuous Conservation.

I don't necessarily agree. US consumers view spending as a recreational sport. Any little upward blip will lead consumers back to the feed trough.

• Retail Stores: Have been hard hit; Many chains are filing bankruptcy (Circuit City, Linens ‘n Things Sharper Image, Steve & Barry’s Tweeter, Mervyn’s); The survivors (Starbucks, Macy’s, Sears, Office Depot) are closing stores — some, as many as 10-20% or more of exiting stores. Retail shopping will emerge from the recession with a much smaller footprint than before;

Despite my belief that consumers will keep trying to spend their way out any downturn, I do agree that we have far too many retailers. I remain stunned when I drive down Arsenal Street in Watertown and realize that some of the new commercial space that's been finished for months remains empty. Consider the number of anchor retailers that could go bankrupt or close stores this year (Bon-Ton, Rite Aid, Target, Home Depot, Old Navy, etc) and Watertown could be awash in available commercial real estate soon.

• Employment: 3.6 million jobs lost already, with anywhere from 1 to 4 million more to go; Real Unemployment hit a record this past month;

• Autos: US auto sales have plunged; Annual Sales are down 37%, from a 15 million annual run rate to barely over 10 million.Its not just Detroit, either. Toyota, Honda, BMW, Lexus are all suffering;

If you build your business expecting X and then the industry shrinks to 60% of X, you need to shrink your business quickly or fail.

• University Endowments: The intellectual engine of America’s brain trust has just taken an enormous hit to the frontal lobe: Harvard, Yale, Stanford, others are down -25% plus over the past 6 months alone. The big endowments fund Professorships, grants, student scholarships, pure research. The loss will be deeply felt over ensuing decades.

This is particularly troubling to me. Universities need be an engine of growth for the US to remain a global leader for years to come. However, I sense that universities are doing just the opposite, cutting staff and investment allocations in an effort to conserve their current balances. They are operating to save their jobs rather than improve the prospects for their universities.

I think many of the changes you see in the US 2020 are do to the dramatic demographic shifts that we are experiencing. The boomers are aging, the boomers parents are still hanging on, Gen X is only having enough kids to keep our population static and Gen Y can't get off Facebook long enough to look for job:)



Anonymous said...

I enjoy your blog and find it educational. It's also depressing. My husband said I listen to the news too much. I worry about our children and grandchildren. What a mess we are in!

The Artful Blogger said...

I try to be balanced in my presentation of the current situation, but I think a fair amount of concern is appropriate.

I'll seek out some good news tonight :)

Thanks for the comment.