Stocks were mixed yesterday amid a dearth of significant news. Bonds mostly traded sideways. As noted, Monday, with most of the big earnings reports now out of the way, we face several weeks with little corporate information to feed on. There will be plentiful economic information that could be market moving. When we get into these mid-quarter quiet periods, small changes in economic data often have an outsized impact on markets. The sharp gains since the start of November leave little room for error. I don’t tend to rely on technical analysis a lot but any chart reader will see that many stocks are overextended, meaning they may have gone up too far too fast. Some sort of correction would be cathartic and set the stage for another move higher should such a move be supported by fundamentals.
The biggest outlier, at least short term, would be further signs that inflation is higher than hoped for despite rising interest rates over the past two months. Tomorrow’s PCE reading will garner a lot of attention.
But long-term investors can’t digest every piece of economic data and switch gears every time the numbers deviate a tiny bit from consensus. Clearly, the economy remains strong. That doesn’t mean the risk of recession has disappeared. But it is certainly less than it was a few months ago.
Today, I am going to deviate and talk about two items that hit the newswires yesterday. Macy’s reported a loss for its fiscal fourth quarter ended in January. Most of the damage came from the Macy’s chain itself. Same store sales were down 5%. GDP in the fourth quarter on a nominal basis was up over 6%. Macy’s management can try to spin those numbers any way it wants. They stunk. Why? Simple. Over the years, Macy’s has lost its way. Its legacy was a great product assortment at attractive prices, coupled with great service. Today, the principal attraction of Macy’s is price. Service? Good luck finding someone experienced to help you. Online? It’s a mess compared to Amazon and Wal-Mart. Once again, the Macy’s solution is to close stores. Cut the damage. Except shrinking the business is rarely a path to success. Macy’s will close 150 more of its flagship stores while opening 15 Bloomingdales and some additional Blue Mercury stores. Guess what? Bloomingdales also had a decline in sales of 1.5% in the fourth quarter. The reality is that Macy’s is on the same glide path of slow decline that other old retail names followed until they disappeared altogether. Yes, there are even a few Sears stores left. Maybe my comments are too harsh. But they won’t prove to be unless Macy’s can find the formula to bring customers back to its stores. To be sure both Macy’s and Bloomingdales have long time fans who won’t leave so quickly. But they are getting older, and younger shoppers are looking elsewhere. Amazon. Wal-Mart. Costco. Lululemon. Unless Macy’s can find a way other than simply cutting prices to show customers that it offers the better mix of price and value, then it will ultimately disappear. For big retailers, that takes a long time. But directionally, it seems to be on the way.
Perhaps more startling than the store closings announced by Macy’s was the comment from Wendy’s that it will increase prices during peak hours when stores are crowded. SO, let me understand this. When the lines are long and I have to wait for an extended time to get my food, Wendy’s wants to charge me more. Huh? OK, we understand surge pricing. Uber uses it when demand for car rides exceeds supply. I get that. I’ll pay more to get a ride at rush hour in the rain. But trying to equate surge pricing for a ride in bad weather to getting the same stinking hamburger while waiting in line longer is a leap of faith that makes absolutely no sense. I hope this is a colossal failure that other chains will avoid. Newspapers, most on their way to oblivion, are charging more for smaller papers. They are on a death spiral where only those with strong online presence can survive. Technology has changed how we live. But it hasn’t changed the concept of a value equation. Giving less for more never has made much sense. I suspect it won’t be endearing for Wendy’s customers. Rather than pay more for a Wendy’s burger, I think the next time I will go across the street and wait in the drive-thru line at McDonald’s.
There’s a bigger message here for investors. Managements will put the best spin they can on every piece of news, good or bad. No one wants to say, “we messed up”. Errors can be commission or omission. Listen to what management says, but if you want to succeed, you have to unravel the spin.
Today, on top of all this, we are experiencing a rise in speculative fever. That’s what four months of a straight up market will do. We aren’t quite back to the euphoria of 2021 but we are headed in that direction. Readers will note that I often point to bitcoin as a gauge of speculation. It’s back near its all-time high. I still can’t do anything with it, but it’s almost three times the price it was a little over a year ago. Since you still can’t do much with a bitcoin, the only clear reason to hold it is a bet that you will be able to sell it at a higher price. And maybe you will. For now, new ETFs are feeding the speculative fire and Ethereum ETFs are just around the corner. Pundits on CNBC predict further spectacular gains ahead. Maybe. Again, think for yourself. While SPACs haven’t come back, retail speculation is returning in new forms. Penny stocks are the new rage with individual names trading tens of millions of shares a day. Robin Hood stock is back in favor and Reddit is about to come public. The old saw was when your cab driver (today, your Uber driver) starts talking stocks, it’s time to get out. Caveat emptor. There’s nothing wrong with the economy. There was nothing wrong in 1999 either before the Internet bubble burst. Forget Nvidia. There is nothing normal about a good quality industrial company selling for 25 times earnings when the Fed Funds rate is over 5%.
Think for yourself. Pay attention to valuations. Rather than chase, identify what you want to own and be patient. As consumers, you look for the sale to buy. Do the same with your investments.
Today, Jason Aldean is 47. Bernadette Peters is 76. Mario Andretti turns 84. Architect Frank Gehry, who recently helped to remodel the Philadelphia Museum of Art, turns 95. Finally, today is my brother Chris’s birthday. I will leave the age blank.
James M. Meyer, CFA 610-260-2220