Retail Therapy

Retail stocks have recently taken a pounding. Nordstrom (JWN) fell 15% on Friday following weak earnings. Macy’s (M) fell 14% a couple of days earlier following their earnings. All of a sudden retail is a tough business. Consumers aren’t buying quite as readily as they were. We’re not invested in the retail sector, so as I watched these stocks collapse I must confess to experiencing the kind of grim satisfaction that one feels when others experience a discomfort with which we’re already uncomfortably familiar. A friend reminded me it’s Schadenfreude. It’s not just energy infrastructure names that can cause sharp, sudden financial pain to their investors. Yeah!! Finally, it’s somebody else’s turn for a price shock! Readers who are invested in retail stocks will hopefully forgive this temporary insensitivity to their plight.

Although the S&P500 is flat for the year, there’s evidence to show that individual, retail investors have had a substantially worse time of it. Master Limited Partnerships (MLPs) are predominantly held by individuals whereas U.S. public equities are largely held by institutions. The 29% drop in the Alerian Index this year is substantially worse than the S&P500 and has been disproportionately endured by individuals.

Closed end funds is another area where individual investors dominate, because there’s insufficient liquidity to attract many institutions. The sector appeals because of the yields but also because of the opportunity to invest in funds at a discount to their net asset value. Many large funds are trading at double-digit percent discounts, reflecting the diminished appetite of new money to invest and close the gap. CEF Connect lists Pimco Dynamic Credit Income (PCI), DoubleLine Income Solutions (DSL) and Cohen and Steers Infrastructure (UTF), all fairly sizeable funds with a market cap of $1.6-2.6BN, with discounts of 13-17%. MLP funds in this sector usually trade at a premium, since investors value the 1099 for tax reporting (since direct holdings of MLPs generate K-1s) but even these funds are at a discount to NAV. Kayne Anderson (KYN), one of the largest such MLP funds at $2.2BN in market cap, is down 43% this year. Because they use leverage, like many of their peers, they will have undergone forced selling of positions in order to remain within their borrowing limits, causing a permanent loss of capital and illustrating some of the non-economic selling in the sector. KYN has a 10 year annual return of 5.25%, versus 9.4% for the Alerian Index. Leveraged exposure isn’t that smart.

Activist hedge fund managers are some of the smartest guys around. It’s interesting to watch their moves and copying them can be compelling. They’re often on TV and the stocks they own garner outsized media attention. You don’t have to try that hard either. For those unwilling to hunt through SEC filings there is a convenient mutual fund called the 13D Activist (DDDIX) which invests in stocks targeted by activists. It’s down 9.1 for the year. It owns Valeant (VRX), which has ruined the year for a few Masters of the Universe as well as retail investors.

So it seems as if individual investors are having a pretty tough year that is not reflected simply by looking at the S&P500. Asset classes that are most favored by individuals have had a tough year, and as we head towards the Holidays it’s a time for dumping what’s not working. Tax-loss selling or simply cutting loose investments that have not worked is depressing certain security prices by a surprising amount. It’s likely causing some of the liquidation we’re seeing  that often appears to be borne out of resignation rather than an assessment of new information.

My retired bond trader friend was well known for making money from bearish bets on bonds by selling first and buying later, although he always maintained that he was comfortable making money in either direction. He did this more regularly than most and enjoyed substantial professional success. However, while enduring a particularly tough period of shorting the market only to be forced to cover at a loss, he was lamenting to his wife how difficult it was to make money. Her breezy advice was to do what she did when she was fed up; go out and buy something. Of course, buy first and then sell was the answer.

Retail therapy is what’s needed by today’s retail investors, and the retail industry could certainly use it.


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