Yes, A Bankruptcy Cycle Exists

Whitehall Jewelers filed Chapter 11 today in yet another reminder to the investment community that a bankruptcy cycle does, in fact, exist. I'm amazed at how short the Street's memories are. People seem to be looking back to the past three years when it was safe to own over-levered, junky consumer names, and think/know that there would ultimately be a strategic or financial bid at some price.

Maybe that was a safe bet in 2005 and 2006 - and even the first half of 2007. But this was a rather unique period. Let's put on our historical hats on for a moment. Looking back all the way to 1934 (when FDIC data first became available) there was at least one (and usually multiple) financial institution bankruptcy filing in every single year, except - you guessed it - 2005 and 2006.

Now that's ticking up again, and yes, these are the same institutions that lend to businesses and consumers alike. As such, retailers like Linens'n'Things, Sharper Image, Goody's, and now Whitehall are paying the price. I cannot possibly imagine that the buck stops here.

Hang on folks, there's more to come...

If You Do Macro You Won't Do These Stocks

We as a firm are concerned. We have the strongest macro call on the Street, in my opinion, but it's not positive. If you know anything about lodging you know that RevPAR is a function of supply and demand and demand is driven by Macro.
  • I'm not just worried about GDP. This time around the lodging beta could be significantly higher than the typical 1.0. Airline capacity is declining and airfares are going up. About time if you are an airline but clearly not good for the hotel industry. It might be time to invest in video conferencing finally, but probably not the time for lodging stocks. There is no RevPAR story, not here, not globally. As far as I can see the only growth story is global brand penetration driving new units. While certainly an investable story, it is a long term thesis. The near and intermediate story may be margins. We can argue about where the economy is heading but history shows us that margins have a long way to fall should we hit a downturn. As the chart displays, margins fell by a whopping 850 bps during the last downturn (2000 to 2002). Applying that margin degradation to the most recent revenues posted by the big four lodging companies results in an average EBITDA hit of 45%.
  • We don't want to be all gloom and doom. The demand for international branded hotel product appears insatiable. We see Marriott and Hilton as the primary beneficiaries although Starwood should capitalize as well. The supply situation is favorable domestically and more fee based business models could soften the economic blow. However, estimates look like they need to come down, potentially in a big way. In other words, as we like to say at Research Edge: Investors are not bearish enough.

SKX: Irony Can Be So Ironic

Here is a lawsuit that is up there with the guy that sued Starbucks because his beverage was too hot. Skechers, the king of knocking off other brands' IP, has filed a lawsuit against a company called Aetrex for - you guessed it - patent infringement. I can try to describe the irony here, but words cannot do a better job than the picture below.

While this development has little near term investment significance, it is very noteworthy for Skechers. Given how frequently SKX is sued for patent infringement, I wonder how much more juice its plaintiffs will have now that SKX has acknowledged the economic harm caused by such behavior.

I still think that this company is overearning by a good 3 points (see my 6/4 post).

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LEH: Revisiting it's prior lows...

We have some good friends at Lehman and, for their sake, we do not like to see the marked to market effects of senior management's lack of judgement, but we would compromise our process if we didn't continue to call this one like it is.

Lehman was down another -5.8% today to $22.80, getting closer to my target, which i am going to move to $21.85...


(chart courtesy of

GM down another -6.4% on the day

From a quantitative perspective, GM has now lost almost 1/3 of its value since we shorted the Barron's "buy GM" call, and the stock is finally oversold. Cover for a "Trade" and re-short the bounce.

Levered companies are still allowed to go bankrupt.

(chart courtesy of

Yellow Roadway (YRCW) Paving The Quants With Some Red

Last week, there was plenty of fanfare from the "Fast Money" crew about how well the truckers must be doing, given that YRCW didn't miss the quarter. Unfortunately for those momentum investors chasing green, today the red lights were flashing, taking this trucking stock down -6.4% on the day.

Interestingly, two big "Quant" shops are long this name, and given that the short interest is a whopping 41% of the float, that liquidity factor could very well be part of the reason why.

AQR Capital and LSV Asset Management are the 2 reputable quant firms on the top 10 holders list.

Quantitative Strategies do pose serious stock specific and market related risks when they correlate. The % moves in YRCW in the past few weeks highlights an example of as much.

(chart courtesy of

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