Toro's Running of the Bulls Market Blog

Holiday Sales Not a Disaster

From Reuters, via 24/7 Wall Street.

The holiday shopping season got off to a slow start as consumers, squeezed by the economic crisis, bought carefully and said they would wait for better deals closer to Christmas.

Early results from the Black Friday weekend, which kicks off holiday sales one day after U.S. Thanksgiving, bolstered forecasts by some analysts that total holiday sales could contract for the first time since that data started being collected in the early 1990s.

ShopperTrak, which measures customer traffic, said on Saturday that Black Friday sales rose 3 percent to $10.6 billion. That was slower than an 8.3 percent rise in 2007.

"The initial response by many people may be positive," said Telsey Advisory Group analyst Joseph Feldman of the increase.

But, Feldman said, excluding inflation the sales figures are roughly flat year over year. His firm still expects overall holiday sales will be flat to slightly down.

Flat sales?  Considering the prognostications for disaster, I'll take it.

This Bid's For You

As I enjoy a bottle of my new favourite summer beer, Stella Artois, I am reading this article about August Anheuser Busch IV, the current CEO of Anheuser Busch.

The article convinces me even more that BUD should be sold to InBev.  Not only do I find it hard to believe that the best person to run the largest beer company in America just happens to be the great-great-great grandson of the founder whose family controls 4% of the stock - which has flat-lined this decade - it creeps me out knowing that a women died with this guy and he tried to run over a cop with his car.

InBev's offer is $65, higher than the stock has ever been.  I suggest shareholders support the sale of Anheuser Busch.

Budweiser, the King of Beers of ... Belgium?

InBev, the Belgian brewer, is mulling over a bid for Anheuser-Busch.

Anheuser-Busch, the maker of Budweiser beer, jumped to a record in New York trading on a report that it may receive a bid valued at $46 billion from larger brewer InBev. ...

InBev, the maker of Stella Artois beer, is working on a bid valued at $65 a share for Anheuser-Busch, the Financial Times' Alphaville blog said today, citing executives and bankers it didn't identify. The combination would create a company that distributes one-fourth of the world's beer and allow InBev to expand in the U.S., where Anheuser-Busch controls almost half the market.

No doubt the strong euro is contributing to a possible bid.  Smart move by InBev.  They will benefit mightily when the dollar eventually strengthens against the euro.  Good for them.

Speaking of which, I just discovered Stella Artois. 

I am an unabashed beer snob.  I love finely crafted microbrews but avoid the mass-produced beers such as Budweiser, Miller, Coors, Labatts, Molsons, etc.  "Cooking beers" I call them.

I assumed that Stella Artois was just another cooking beer, mass produced to the lowest common denominator to push product out the door.  Boy, was I wrong.

My change of opinion began when I was up in Vancouver last week having a beer with my friend Kevin.  Kevin ordered a Stella Artois, which is on tap at Joey's on Burrard.  I noticed how tight the bubbles were on the head of foam, and how the foam stuck to the side of the glass after it was consumed.  Both are signs of a quality beer.

So when I returned back home, I bought a six pack and was pleasantly surprised at how good the beer was.  It is a mass-produced beer but it is a quality product nonetheless. 

I tend to buy heavier, darker ales, and generally avoid the lighter lagers, but I thoroughly enjoyed Stella Artois and will continue buying it, especially during the hot summers.

I have never tasted beer as good as I had when I was in Belgium in March.  It was outstanding.  The Belgians are so good at it, they can even produce a quality, mass-produced product.

Do they speak Flemish in St. Louis?

What Gas Costs in America

The USA National Gas Temperature Map, via The Big Picture.

A Newspaper? What's That?

The Audit Bureau of Circulations released the semi-annual circulation numbers.  According to the bureau, circulation declined 2.8% annualized over the past six months at the 770 daily newspapers tracked by the bureau. The losses were greater at the metropolitan-sized newspapers. The drop in readership is compounding a decline in advertising sales. At Tribune, average paid circulation at the Los Angeles Times fell 8% over six months, while circulation declined 1.7% at the Chicago Tribune. Last year, circulation declined 2.6%.

The newspapers are in secular decline.  I wouldn't be surprised if there were no publicly traded newspapers in five years.  Public shareholders don't like falling revenues.  Throwing off copious amounts of steady free cash flow, the newspapers are good candidates to be taken private. The question is if the owners of the papers are willing to sell for less than what they believe the papers are worth.

Wal-Mart Lifting Millions Out of Poverty

Fabulous article on Wal-Mart's role in lifting people in China out of poverty.

Between 1990 and 2002 more than 174 million people escaped poverty in China, about 1.2 million per month. With an estimated $23 billion in Chinese exports in 2005 (out of a total of $713 billion in manufacturing exports), Wal-Mart might well be single-handedly responsible for bringing about 38,000 people out of poverty in China each month, about 460,000 per year.

There are estimates that 70 percent of Wal-Mart's products are made in China. One writer vividly suggests that "One way to think of Wal-Mart is as a vast pipeline that gives non-U.S. companies direct access to the American market." Even without considering the $263 billion in consumer savings that Wal-Mart provides for low-income Americans, or the millions lifted out of poverty by Wal-Mart in other developing nations, it is unlikely that there is any single organization on the planet that alleviates poverty so effectively for so many people. Moreover, insofar as China's rapid manufacturing growth has been associated with a decline in its status as a global arms dealer, Wal-Mart has also done more than its share in contributing to global peace.

Further

D. Gale Johnson, an economist who studied regional inequality within China, described the enormous disparity between urban and rural workers as "the great injustice."  Urban workers earn about 2.5 times as much as rural workers. Even after counting the higher cost of living in urban areas, urban workers make about twice as much. Not surprisingly, massive numbers of people are moving to the city to work in factories. In 1990, 71 percent of China's labor force was in agriculture, whereas by 2000 that percentage had dropped to 63 percent: this great migration represents roughly 100 million people leaving rural areas to earn, on average, twice as much as they had on the farm.

The author goes on and makes an excellent point about workers in Asian sweatshops of a few decades ago.

Moreover, most of the sweatshops workers in Japan in the 1950s and 60s, as well as the most of the sweatshop workers in Taiwan and South Korea in the 1970s and 80s, are now middle class retirees in developed nations. Likewise most of the "underpaid" Chinese workers of today will retire in a state of comfort and luxury unimaginable to them in their rural youth, as average Chinese wages will gradually rise just as they have risen in every other nation that has experienced long-term economic growth. At present rates of economic growth, China will reach a U.S. standard of living in 2031.

The last sentence may be a little optimistic, but the rapid increase of wealth in China is staggering.

Wal-Mart and Drug Prices - The Political Angle

I'm sure you've heard about Wal-Mart offering over 300 generic drugs at $4 a pop in Florida.  This, obviously, isn't good for the drug retailers such as Walgreen, CVS, Rite Aid, et. al.  Even though much of the Wall Street analyst community has rushed to the defense of the drug stores, increasing competition is a bad investment thesis no matter what the industry.

The drug retailers are saying this will not significantly effect their bottom line. Most of the drugs discounted by Wal-Mart, they argue, are already at the bottom of the pricing list. Also, the drugs offered are a fraction of the thousands of drugs retailed in the United States, which are more expensive than the drugs being discounted. Wal-Mart would be operating at a significant loss if they expand this program, and thus Wal-Mart is unlikely to do so.

I'm not so sure.  One aspect not being picked up by Wall Street and the press is the political angle.  Wal-Mart has been on the receiving end of a lot of bad publiclity over the past several years for allegedly offering low wages and benefits, driving local retailers out of business, and being a catalyst for outsourcing of American jobs overseas.  It has been nothing but bad, bad, bad for Wal-Mart.

How does a savvy corporation shift perception?  Do something for the people you are accused of exploiting, of course!  And what better way to do this than addressing an emotional issue that has hit Americans in the pocketbook - rising healthcare costs. So big, bad Wal-Mart offers cut rate prices on pharmaceuticals. Wal-Mart, like all retailers, offers loss-leaders to get shoppers in the door. Why not make some pharmaceuticals loss leaders? 

This is great PR. Lower drug prices has garnered a whole host of good press for Wal-Mart, and it buys currency in the halls of Washington and legislatures across the country.  That's why I don't think this policy is quite as benign as the drug retailers are spinning.  Surely Wal-Mart will will expand this pricing scheme nationwide, and perhaps they will offer more pharmaceutical products at lower prices.

That spells trouble for drug retailers.

Harrah's - Someone Knew!

Harrah's is a wanted company.  To the tune of $15 billion to be exact.  And by private buyers nonetheless.

Action in the derivatives markets suggests that someone knew Harrah's would become a target of the private stewards of the world's excess liquidity.  There was heavy call buying and credit default swap premiums rose the week prior to the bid.

For the uninitiated, credit default swap premiums rise when a company is being taken private because CDSs insure against a credit event, i.e. "bankruptcy".  And because private buyouts rely on debt to finance the purchase, with more debt on the balance sheet, the risk of bankruptcy rises. Thus CDS premiums rise.  So one way to play a private takeout is to buy CDSs. 

Lowe's Pre-announces

Lowe's guided down yesterday. 

I could go through it but First Boston summed it nicely in a note this morning

[C]onsumers have been using cash-out refis to meet monthly living expenses more than previously expected, particularly in overheated housing markets. When the home no longer is an ATM machine as prices stabilize or fall, that game is ending for many consumers, squeezing spending further and also further pressuring housing prices and turnover. To the extent this effect is much deeper than suggested in past studies by the Fed and others, it could impact the housing market and consumer spending more than expected. Niblock also identified the following factors that differed from expectations:

• Weaker than expected housing turnover (running down 13% now vs. down 5-18% expectation at beginning of year)

• Higher than expected gasoline prices

• Lighter than expected hurricane season

• Lower than expected consumer confidence

• Slightly elevated promotional activity

• Higher than expected interest rates and a greater impact on variable rate ARMs and HELs

The company guided down to the lower end of its previous $2.00-$2.07 range.  The Street was already at $2.01 so it doesn't come as any surprise.  There had been several estimate cuts over the past few weeks.