Bubble Shards from Bed Bath & Beyond

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Hello. I haven’t written much on individual stocks here, but what happened to a small US retailer yesterday really surprised me. As always, I hope I’m just delusional. Please send me the email: [email protected]

Bloodbath and beyond

The bath in bed and beyond is strange Five-Stock chart for the year:

What’s odd is not the constant shift to the left that began in 2015. Amazon will impact retailers in brick-and-mortar stores that aren’t particularly competitive with e-commerce competition. What’s odd is the incredibly powerful recovery that begins shortly thereafter. Pandemic did it. Still foreigners, it is a common model. This is the same graph, but this time it includes the Solactive-Pro Shares Index for US physical store retailers.

The big fiscal stimulus in the United States, spikes in home improvement spending, support for value stocks, and risk acquisition in general have been very positive for once-beaten old-school retailers (). By the time rumors of a crazy take-over bid on this year’s bedbath gained momentum).

However, on Thursday, Bed Bath shares fell 22% after releasing quarterly results ending in August (see red circle in first chart). Analysts were forecasting sales of $ 2.06 billion. They were less than $ 2 billion. Margins slumped, with adjusted earnings per share of 4 cents, 48 ​​cents lower than expected. Company CEO Mark Tritton said: Explanation check:

“In August… Sales were not as expected due to a significant slowdown in traffic. Covid-19 is difficult because it fears it will reappear in the current Delta variant. »Experienced the environment. This was especially noticeable in large states like Florida, Texas, and California, which account for a significant portion of sales. In addition, unprecedented supply chain challenges are having a pervasive impact on the industry. It exerts a sharp increase in cost inflation on a monthly basis, especially in the second half of the quarter, beyond the significant increase already expected. “

In short, Tritton says the quarterly show was temporary (to use Federal Reserve Chairman Jay Powell’s preferred term). Market reaction tells investors “sorry Mark, we don’t believe in you.” We don’t reduce inventory to a fifth because of the problem of not being a quarter or two.

There may be a reason why the market reaction to this particular situation has been so violent. Some can be technical – you probably have a lot of hot retail cash in stock. And Bed Bath is a vulnerable company, going through a delicate restructuring with heavy debt.

However, other retailers were also affected by the Bed Bath earnings report. Williams Sonoma, the seller of expensive kitchen dudad, who was an absolutely formidable stock, fell 7%.

Investors in (expensive) US stocks seem reluctant to see small consequences in the past due to Delta variants or supply bottlenecks. A good earning season starts in a few weeks. It may be wild.

Two visions of the strong dollar

The market is faltering. The bullish trend in equities over the past year and a half has collapsed, bond yields have shot up again, and market volatility has increased slightly. It is difficult to interpret what the market is saying. However, one price that sends a clear and consistent signal is the dollar. It has increased throughout the summer and recently hit its highest level since September of last year. This is a 5-year DXY dollar index (in the context of the Fed Funds rate and 10-year Treasury yield).

What does the recent rally tell us (see red arrow)? Calvin Tse of Citigroup said this is a classic risky dollar hike and global concerns are boosting demand for the dollar. He counts the six risk factors behind it:

  1. A hawkish federal government that the market does not expect.

  2. The hawks of the world’s central banks (represented by the central banks of the United Kingdom, New Zealand, Norway, Brazil and Russia).

  3. China is worried (both for Evergrande / real estate and more general growth);

  4. US political situation / debt ceiling battle;

  5. Significant increases in European natural gas prices (which worsen the region’s balance of payments and weaken the euro and the pound sterling).

  6. Rebalancing the portfolio at the end of the month (US assets underperformed in September, so global portfolio rebalancing requires dollars to buy US assets).

Monetary analysts often speak of the “dollar smile”. This means that the greenbacks will rise when the US leads global growth (attracting foreign capital to US risk assets) or when the US is struggling (which is bad news for the world. whole). It’s a concept. Foreign capital flows to government bond havens). It is only in the midst of synchronized global growth, of the “smile”, that the dollar will fall.

For Tse, we are on the “American leadership” side of the smile. The promotion of national immunization started early and the financial response has been enormous. Yes, some of the risks he points out (points 1, 4, 6) have roots in the United States. But in the marketplace, what happens in the United States often has a greater impact abroad than at home.

Tse thinks American leadership might not last long. [may] Sliding in the middle [of the smile] As other parts of the world begin their own path to recovery. This suggests a situation like 2017, when the dollar fell despite the Fed tightening.

Aberdeen Standard James Assy disagrees. I think he’s there to keep the dollar going up. “The probability distribution will be dominated by two very different outcomes over the next few years,” he says. Each represents a corner of the dollar’s smile.

Outcome 1: The Covid bottleneck is resolved, US growth is picking up again, the Fed continues to tighten, and the short end of the US yield curve is rising. China and the Eurozone could also raise interest rates, but export-oriented economies can’t stand the currency’s excessive appreciation, so there isn’t much room for them. The resulting interest rate differential will support the rising dollar along with bond yields and federal funds rates, as in 2018.

Outcome 2: Covid problems continue, US slows down, Fed takes a break. As US demand weakens, economies around the world are exported and a global flight of risky assets into Treasuries pushes the dollar up.

What about the middle – synchronous growth in 2017? It can happen, but only for a short time, says Athey. “It’s an unstable balance. The reason lies in the mercantilist prejudices of large economies other than the United States, mainly China and the euro zone. They cannot tolerate hard currencies due to economic imbalances. China’s investment-driven economy is supported by exports. European monetary union means that stronger currencies will be strangled, giving a boost to accommodate German consumption, for example Italy. These same imbalances are the brakes to strong growth over the next few years. By default, the US economy should be the engine of the global economy.

A good read

My colleague Martin Sambu very good What Evergrande revealed about China’s growth prospects and political challenges. Look at his real estate chart as a percentage of gross domestic product in different countries. With the exception of pre-crisis Spain, China’s levels are unprecedented. Do you remember how it was done in Spain?

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