There was a very interesting tidbit in the 13-D filed by Sears Holdings
(SHLD) regarding its bid for Restoration Hardware
(RSTO) with the SEC today.
Here it the filing:
"In June 2007, on behalf of Sears Holdings, the Chairman of Sears Holdings and another member of the Board of Directors of Sears Holdings approached a non-management director of the Issuer to inquire as to his views concerning a possible business combination or other strategic transaction involving the Issuer and Sears Holdings. This director advised Sears Holdings to contact the Chief Executive Officer of the Issuer. Following this conversation, the Chairman of Sears Holdings spoke with the Chief Executive Officer of the Issuer and discussed the potential benefits of a business or strategic combination between Sears Holdings and the Issuer. After that conversation, the Chairman of Sears Holdings spoke to the non-management director of the Issuer with whom he had previously spoken and this director suggested that the Chairman of Sears Holdings continue speaking with the Chief Executive Officer of the Issuer. Shortly thereafter, the Chairman of Sears Holdings requested an opportunity to meet in person with the Chief Executive Officer of the Issuer to discuss the benefits of a transaction involving the Issuer and Sears Holdings. Due to scheduling conflicts, the Chairman of Sears Holdings and the Chief Executive Officer of the Issuer did not meet during the summer.
In early October, the Chairman of Sears Holdings, the President of Sears Holdings’ Lands’ End business and a non-management member of Sears Holdings’ Board of Directors had a meeting with the Chief Executive Officer of the Issuer. Sears Holdings did not enter into a confidentiality agreement or receive non-public information about the Issuer or its business in connection with these discussions, and no price or terms of any transaction were solicited by the Issuer nor proposed by Sears Holdings. In late October, in a conversation with the Chairman of Sears Holdings, the Chief Executive Officer of the Issuer informed Sears Holdings for the first time that the Issuer was considering a potential management buyout transaction and that a Special Committee of the Board had been established. After being informed of this development, Sears Holdings sent a letter to Raymond C. Hemmig, chairman of the Special Committee of the Board of Directors of the Issuer, proposing a transaction at $4.00 per Share (a 39% premium to the Shares’ closing price of $2.87 on the last trading day prior to Sears Holdings making its proposal) and informing him of Sears Holdings’ potential to increase the offer as a result of information gained from a due diligence process. Mr. Hemmig later responded by e-mail that the Special Committee was not prepared to have Sears Holdings engage with the Issuer’s management team and advisers in due diligence on the proposed terms and indicated that in order to have the opportunity to engage in due diligence Sears Holdings should revise its proposal to offer a substantially higher price.
On November 8, 2007, the Company announced it had entered into an Agreement and Plan of Merger (the “Home Merger Agreement”) with Home Holdings, LLC, a Delaware limited liability company, and Home Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Home Holdings, LLC.
On November 23, 2007, Sears Holdings sent a letter to the Special Committee of the Board of Directors of the Issuer (the “November 23 Letter”) providing the Special Committee, at its request, with a proposal to offer holders of Shares of the Issuer $6.75 per Share in cash via a tender offer, subject to the terms set forth in the November 23 Letter. The November 23 Letter also stated that Sears Holdings would contemplate entering into a merger agreement on terms substantially similar to the Home Merger Agreement, modified as necessary to accommodate a tender offer structure and with a lower, more reasonable break-up fee than contained in the Home Merger Agreement. A copy of the November 23 Letter is attached hereto as Exhibit 1 and incorporated by reference into this Item 4.
Subsequent to sending the November 23 Letter, representatives of Sears Holdings and the financial advisor for the Issuer and counsel to Sears Holdings and counsel to the Issuer and counsel to the Special Committee engaged in discussions about a confidentiality agreement and Sears Holdings’ proposal. On December 7, 2007, after extensive negotiations, Sears Holdings and the Issuer entered into a confidentiality agreement on terms permitted by the Home Merger Agreement (the “Confidentiality Agreement”). A copy of the Confidentiality Agreement is attached hereto as Exhibit 2 and incorporated by reference into this Item 4.
Subject to the terms of the Confidentiality Agreement, Sears Holdings intends to evaluate the Issuer and the desirability of confirming the proposal set forth in the November 23 Letter (or a proposal on substantially similar terms). Subject to the terms of the Confidentiality Agreement, Sears Holdings also intends to review its holdings of Shares on a continuing basis and in that connection expects to consider various factors including, without limitation, the current and anticipated future trading price levels of the Shares, the status of the transactions contemplated by the Home Merger Agreement, the financial condition, results of operations and prospects of the Issuer, tax considerations, any non-public information which it receives from the Issuer, conditions in the home furnishings industry and securities markets, general economic and industry conditions, other investment and business opportunities available to Sears Holdings, and other factors that Sears Holdings may deem relevant, and will in the future take such actions with respect to Sears Holdings investment in the Issuer as it deems appropriate. Such actions that Sears Holdings may take include, subject to the terms of the Confidentiality Agreement but otherwise without limitation: (a) announcing its intention or plan to undertake or otherwise undertaking an extraordinary corporate transaction such as a tender offer or exchange offer for some or all of the Shares or a merger, consolidation, other business combination or reorganization involving the Issuer; (b) increasing or decreasing its position in the Issuer through, among other things, the purchase or sale of Shares in open market or private transactions for cash or for other consideration; (c) seeking to acquire or influence control of the Issuer, including seeking representation on the board of the Issuer; (d) entering into derivative transactions, engaging in short selling of or any hedging or similar transactions with respect to the Shares; or (e) taking any other action similar to those listed above. Subject to the terms of the Confidentiality Agreement, any open market or privately negotiated purchases, sales, distributions or other transactions may be made at any time without further prior notice".
The part that got me the most? "In early October, the Chairman of Sears Holdings, the President of Sears Holdings’ Lands’ End business"
Just yesterday I posted that my thesis for Lampert wanting Restoration was its mail order business. The success of that part of Restoration despite the current retail environment in the last quarter underscored its strength and the possibilities for it. I further stated that I thought a Lands End and Restoration combination was the likely reason for his interest.
Now we find out that in October Lampert had Lands End's President accompany him to see Restoration's CEO. It would appear as though Lampert was thinking along the same lines, a Restoration / Lands End combination.
The filing also states that Sears may at any time take any action it deems appropriate regarding the acquisition or disposition of shares in Restoration. Simply put, Lampert got the confidential information he wanted without giving up his ability to seek other channels to acquire more control of the company.
Perhaps this little nugget is the reason for Sears Holdings
(SHLD) interest in Restoration
(RSTO).
Let's ignore the store traffic and start with the mail order division (think Lands End)..
Third quarter net revenues increased $16.6 million compared to the year ago period, primarily driven by growth in the Company's Direct-to-Customer segment. Direct-to-Customer revenues were $97.2 million and accounted for 56% of total revenues, up from 36% of total revenues in the third quarter of last year. The increase reflects growth in catalog and page circulation, and a continuing shift in revenues from the Stores segment to the Direct-to-Customer segment resulting from management's multi-channel merchandising and marketing strategies and operational changes implemented in the second quarter of 2007. Revenues in the Stores segment were $76.5 million in the third quarter of 2007.
So, Lampert is offering about $262 million for a company with more than $150 million in owned inventory, $1.7 million in cash, $8.5 million in receivables and a mail order division with profits of about $32 million a year that grew 71% over last year. If we take those numbers alone, Lampert will receive $192 million back for his purchase price almost immediately.
By merging Restorations back end operations with Land's End, profitability at the segment will jump. One also has to consider the added benefits to both catalogues by cross selling merchandise in them. Perhaps a combined Land's End / Restoration issue?
Of Monday's results, Gary Friedman, President and Chief Executive Officer, stated, "Weakening consumer spending and traffic levels continued to affect our business in the third quarter, particularly higher ticket durable categories. Revenue did not achieve our expectations, driving substantially all of our larger than anticipated operating loss in the quarter. While we are encouraged by some of the early holiday trends in our business, we remain cautious due to the macro economic environment, which has proven highly challenging for the home furnishings sector this year."
The same song has been sung by all housing related retailers this fall like home Depot (HD), Lowes (LOW) and Sears itself.
Lampert will end up getting Restoration for essentially nothing. Sound familiar? Is restoration a huge deal that will make a huge difference in the $53 billion in annual sales Sears generates? No. But Lampert is picking up a quality brand name at a song that will generate positive results and will add to the current brand base Lampert has .
True, Restoration's results sucked and well, that is why Lampert can get it so cheap. It is called "value" investing for a reason.
PRNewswire-FirstCall/ -- "In response to media and other inquiries concerning the Schedule 13D amendment filed by Sears Holdings Corporation on Monday, November 26, 2007, the Independent Committee of Restoration Hardware's Board of Directors stated if Sears will agree to execute the customary confidentiality and standstill agreement on substantially the same terms that other parties have signed, it would be pleased to provide Sears with the confidential information it requested.
"While Sears has announced its willingness to sign a confidentiality agreement, there is no agreement on terms and, to date, instead of agreeing to the standstill agreement to which other interested parties have agreed, Sears has proposed to reserve the right to launch a tender offer outside the process," the Independent Committee said in a statement today.
The Committee stated that it is encouraged by Sears' current proposal at $6.75 per share based upon publicly available information, which is a vast improvement over its prior proposal at $4.00 per share. At the same time, the Committee stated that it believes that stockholder value will be maximized if Sears participates inside the process with other interested parties.
"Sears is an American icon," said Ray Hemmig, Chairman of the Independent Committee. "We are flattered that it is interested in learning more about our company. We welcome its participation in the process along with the other interested parties. However, the Committee is firmly committed to a fair process that will yield the best results for all stockholders and believes that process is best served through all parties agreeing to the proposed standstill terms without preferential treatment of one party over another."
On November 8, 2007, Restoration Hardware announced a merger agreement with Catterton Partners. In that announcement, the Company said that under the terms of the agreement, the Independent Committee of the Company's Board of Directors, consistent with its fiduciary duties, would be soliciting competing proposals from third parties during a 35 day period ending December 13, 2007. On November 19, 2007, Sears filed a Schedule 13D with the SEC indicating that it had accumulated shares equaling just under a 14% ownership position in the Company."
The whole release is a bit self-serving at best. Why? The other "bidders" in this situation is management itself! What unfair advantage could Sears possibly get over the people currently running the company? Answer? None. Restoration is trying to save face.
Restoration got bitch slapped by Lampert & Co. the other day when they reminded them that as the "largest shareholder" they actually owned more of the company than the current bidders and the Board or Directors themselves and that as such, deserved consideration in the process in getting the information they wanted. It is no coincidence that this information was forthcoming immediately.
There is nothing to stop Lampert from acquiring more shares on the open market during this process, he just cannot launch an official tender offer for shares. Semantics.
Where do we go from here? Lampert gets what he wants (information) and either two things happen. He ends up buying the company OR management raises it offer above that of what Sears would be willing to pay and Lampert cashes out at a profit. Either way Sears shareholders win.
Word On The Street The stock market plunged Monday as investors continue to sell equities after new housing data disappointed. The Dow closed down 218 points and the Nasdaq fell 43 points. Karen Finerman says storm clouds are everywhere and the Goldman downgrade of Citigroup Inc. (C) really hurt the markets. Guy Adami thinks we might be near a bottom for the markets. Jeff Macke thinks that Wall Street decided on Monday that there’s a recession coming. Pete Najarian had a fun day trading. He thinks the financial sector is in big trouble and he is extremely worried about General Motors Corporation (GM) which fell below $27. Hewlett-Packard Company (HPQ) reported a 28% jump in profits off of strong notebook PC sales. Adami thinks Hewlett is a great growth story and dips should be bought before the stock trades to the mid-$50’s. Najarian likes that only 10% of Hewlett’s profits come from the financial sector. Nordstrom Inc. (JWN) reported a 22% rise in third-quarter profits helped by an extra week of sales. Macke thinks Nordstrom is a really cheap stock. Finerman was surprised that Nordstrom guided higher and she is now interested in the name. Medtronic Inc. (MDT) reported a 2% decline in profits, but the stock trades 3% higher after hours. Najarian was positive on the name, but he wants to get more color on how well some of the firm’s acquisitions are performing Lowe’s Companies Inc. (LOW) falls 7% after reporting a 10% decline in profits due to the weak housing market. Adami thinks a tradable bottom is getting close for Lowe’s. Finerman finds it interesting that both The Home Depot Inc. (HD) and Lowe’s thinks they’re taking market share from the other. Gold continues to slide losing 1.1% to $776.80. Adami thinks the next $50 to $60 in gold will be lower. Dennis Gartman will join the “Fast Money” crew Wednesday to discuss his take on gold. Celgene Corporation (CELG) buys Pharmion Corporation (PHRM) for $2.9 billion. Najarian thinks Celgene paid a huge premium in this deal, but it might be worth it for Pharmion’s strong pipeline. Adami thinks the only thing that can save Pfizer Inc. (PFE) is to make acquisitions like Celgene is doing. EchoStar Communications Corporation (DISH) shares explode higher Monday after Citigroup says there is a 65% chance that AT&T Inc. (T) will buy DISH. Macke says sell DISH in the upper $40’s and buy it back near $40. Najarian says you have to sell into this speculation. Sears Holdings Corporation (SHLD) disclosed it has taken a 13.7% stake in Restoration Hardware Inc. (RSTO) and the possibility of proposing an acquisition.Macke thinks this is great for Restoration Hardware shareholders. Finerman thinks this is interesting and a takeover seems possible. WORD ON THE STREET VIDEO Target Trade Target Corporation (TGT) is set to report earnings Tuesday before the opening bell. What is the trade? Najarian noted that he is seeing a high volume of call buying versus put buying in the options pits for Target. He saw 55,000 calls versus 10,000 puts traded by noon Monday and this could be forecasting a positive stock reaction. Macke thinks Target for a trade could work and he feels that traders in the options pits are betting they’ll report not bad numbers. Finerman thinks Target might take the sale of their credit card business off the table here. TARGET VIDEO Technical Take With Louise YamadaLouise Yamada, a highly ranked technician on Wall Street, joined the “Fast Money” crew to discuss her take on the technicals of the market. Yamada is currently worried that the S&P 500 could break 1406, which would signal to her an end of the longer-term uptrend. She also mentioned that if the market can muster up a Santa Claus rally it will be a weak one. Yamada is still bullish on Cisco Systems Inc. (CSCO) and she would look to buy pullbacks on the name. She wasn’t so thrilled about the chart on Broadcom Corporation (BRCM) calling it a sell because it hasn’t followed through after a false break-out. The chart on The Coca-Cola Company (KO) is initiating an uptrend according to Yamada. She would be a buyer of KO. The last chart she examined was Bed Bath & Beyond Inc. (BBBY). Yamada thinks the chart is suggesting that BBBY should be sold. YAMADA VIDEO Ultimate Fighting TradeUltimate Fighting is now the fasting growing spectator sport in the United States cashing in on America’s appetite for violence. Jeff Macke attended the “UFC 78: Validation” this weekend to look for investing ideas. Macke would look for growth in cable companies and satellite companies like Viacom Inc. (VIA.B) and EchoStar. He also thinks makers of energy drinks like Coca-Cola will benefit. One company he would avoid is the World Wrestling Entertainment Inc. (WWE) because the UFC is taking share. Lastly, Macke speculated that Anheuser-Busch Companies Inc. (BUD) could be near a beverage deal with the UFC. UFC VIDEO Happy 52-Week HighAltria Group Inc. (MO) POPS&DROPS POPS-Xerox Corporation (XRX) traded up 2%. Adami says Hewlett-Packard is eating their lunch. IntercontinentalExchange Inc. (ICE) traded up 3% off a positive Barron’s article. Finerman says the story isn’t over for the exchange stocks. VeriSign Inc. (VRSN) traded up 2%. Najarian likes that VRSN is going to focus on internet security. DROPS-E*TRADE Financial Corporation (ETFC) fell 13% even with speculation of a takeover by TD AMERITRADE Holding Corporation (AMTD) making the rounds. Finerman wouldn’t touch it. Wynn Resorts Limited (WYNN) fell 7% off a negative Barron’s article. Najarian thinks that emerging markets are hurting WYNN.Genesco Inc. (GCO) plunged 24%. The CEO denied allegations by UBS that the company defrauded UBS after agreeing to a $1.5 billion takeover. Finerman says if you want to play GCO only do it with options. The Walt Disney Company (DIS) fell 4%. Macke thinks DIS will snap back. General Motors Corporation (GM) fell 8% after the automaker announced plans for year-end discounts to clear out inventory. Adami says if the short interest on GM gets into the low teens buy it. Dillard’s Inc. fell 5%. Macke wouldn’t touch this stock. Tween Brands Inc. (TWB) fell 13% after the teen retailer cut its profit outlook. Macke says go away. POPS&DROPS VIDEO Final Trade Macke likes Dicks’ Sporting Goods Inc. (DKS) and Target Corporation (TGT) on any selloff Tuesday. Najarian says buy EchoStar Communications (DISH) on a pullback under $44. Finerman is sticking with long Goldman Sachs Group Inc. (GS) and short Lehman Brothers Holdings Inc. (LEH). Adami recommendsVodafone Group Plc (VOD) for a play on China. FINAL VIDEO
UP
Restoration Hardware, Inc.
(RSTO) Nordstrom, Inc.
(JWN) Rambus Inc.
(RMBS) Lattice Semiconductor
(LSCC) Nice Systems Ltd.
(NICE)
DOWN
Giant Interactive Group Inc
(GA) Freddie Mac
(FRE) Focus Media Holding Limited
(FMCN) KongZhong Corporation
(KONG) InterNAP Network Services
(INAP)
It is a small deal but one that has the potential to change the image of Sears Holdings
(SHLD) in home furnishings.
In a filing with the SEC (below), Sears said it acquired 5.31 million shares for about $30.2 million in cash of Restoration Hardware (RSTO).
Restoration Hardware, is a specialty retailer of hardware, bathware, furniture, lighting, textiles, accessories and gifts. The Company operated 103 stores and eight outlet stores in 30 states, the District of Columbia and Canada as of February 3, 2007. In addition to its retail stores, Restoration Hardware, Inc. operates a direct-to-customer (direct) sales channel, which includes both catalog and Internet, and a wholly owned furniture manufacturer. The Company is a multi-channel business and its catalog distribution drives sales across Restoration Hardware's retail, catalog and Internet businesses. The Company uses its catalog as the primary marketing vehicle, marketing to new customers and return customers, both in and outside the retail trade area.
From the SEC Filing: "In June 2007, on behalf of Sears Holdings, the Chairman of Sears Holdings and another member of the Board of Directors of Sears Holdings approached a non-management director of the Issuer to inquire as to his views concerning a possible business combination or other strategic transaction involving the Issuer and Sears Holdings. This director advised Sears Holdings to contact the Chief Executive Officer of the Issuer. Following this conversation, the Chairman of Sears Holdings spoke with the Chief Executive Officer of the Issuer and discussed the potential benefits of a business or strategic combination between Sears Holdings and the Issuer. After that conversation, the Chairman of Sears Holdings spoke to the non-management director of the Issuer with whom he had previously spoken and this director suggested that the Chairman of Sears Holdings continue speaking with the Chief Executive Officer of the Issuer.
Shortly thereafter, the Chairman of Sears Holdings requested an opportunity to meet in person with the Chief Executive Officer of the Issuer to discuss the benefits of a transaction involving the Issuer and Sears Holdings. Due to scheduling conflicts, the Chairman of Sears Holdings and the Chief Executive Officer of the Issuer did not meet during the summer. In early October, the Chairman of Sears Holdings, the President of Sears Holdings’ Lands’ End business and a non-management member of Sears Holdings’ Board of Directors had a meeting with the Chief Executive Officer of the Issuer. Sears Holdings did not enter into a confidentiality agreement or receive non-public information about the Issuer or its business in connection with these discussions, and no price or terms of any transaction were solicited by the Issuer nor proposed by Sears Holdings.
In late October, in a conversation with the Chairman of Sears Holdings, the Chief Executive Officer of the Issuer informed Sears Holdings for the first time that the Issuer was considering a potential management buyout transaction and that a Special Committee of the Board had been established. After being informed of this development, Sears Holdings sent a letter to Raymond C. Hemmig, chairman of the Special Committee of the Board of Directors of the Issuer, proposing a transaction at $4.00 per Share (a 39% premium to the Shares’ closing price of $2.87 on the last trading day prior to Sears Holdings making its proposal) and informing him of Sears Holdings’ potential to increase the offer as a result of information gained from a due diligence process. Mr. Hemmig later responded by e-mail that the Special Committee was not prepared to have Sears Holdings engage with the Issuer’s management team and advisers in due diligence on the proposed terms and indicated that in order to have the opportunity to engage in due diligence Sears Holdings should revise its proposal to offer a substantially higher price.
On November 8, 2007, the Company announced it had entered into an Agreement and Plan of Merger (the “Home Merger Agreement”) with Home Holdings, LLC, a Delaware limited liability company, and Home Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Home Holdings, LLC.
Sears Holdings is seeking to obtain from the Issuer certain non-public information concerning the Issuer, as permitted by the Home Merger Agreement, and has indicated that it would enter into a confidentiality agreement in order to do so. Sears Holdings and the Issuer have discussed the terms of such a confidentiality agreement. There can be no assurance that Sears Holdings will enter into a confidentiality agreement or will receive any such information from the Issuer.
Sears Holdings intends to evaluate the Issuer and the desirability of proposing an acquisition of the Issuer and it also intends to review its holdings of Shares on a continuing basis and in that connection expects to consider various factors including, without limitation, the current and anticipated future trading price levels of the Shares, the status of the transactions contemplated by the Home Merger Agreement, the financial condition, results of operations and prospects of the Issuer, tax considerations, any non-public information which it may receive from the Issuer, conditions in the home furnishings industry and securities markets, general economic and industry conditions, other investment and business opportunities available to Sears Holdings, and other factors that Sears Holdings may deem relevant, and will in the future take such actions with respect to Sears Holdings investment in Issuer as it deems appropriate.
Such actions that Sears Holdings may take include, without limitation: (a) undertaking an extraordinary corporate transaction such as a tender offer or exchange offer for some or all of the Shares or a merger, consolidation, other business combination or reorganization involving Issuer; (b) increasing or decreasing its position in the Issuer through, among other things, the purchase or sale of Shares in open market or private transactions for cash or for other consideration; (c) seeking to acquire or influence control of the Issuer, including seeking representation on the board of the Issuer; (d) entering into derivative transactions, engaging in short selling of or any hedging or similar transactions with respect to the Shares; or (e) taking any other action similar to those listed above. Any open market or privately negotiated purchases, sales, distributions or other transactions may be made at any time without further prior notice."
Why will this acquisition matter? RSTO is a very successful high end catalog retailer like, ummmm.... Land's End!! We know Land's End is the future of Sears Holdings retail and Sears will be able to market RSTO's merchandise both in the Land's End catalog AND in the new Land's End stores (200+ to date). Restoration saw sales increase 40% in FY 2007 vs FY 2006 and the ability of Sears to seamlessly merge its merchandise into their existing operation will cause the segments sales to explode AND give more people a reason to look at Sears for products.
With the pain of the real estate plunge, Restoration Hardware (NASDAQ: RSTO) has had a hard time (the company is a specialty retailer of bath ware, furniture and so on). But is it really a good time to sell out?
Well, the company's management thinks so. Late last week, Restoration Hardware announced a going-private transaction for $267 million or $6.70 per share. The buyer is Catterton Partners, which has quite a bit of experience with retail deals.
The premium comes to about 150%, which is nothing to sneer at. Yet, keep in mind that a variety of institutional investors are keeping their shares (yes, they are betting there could be a nice turnaround).
In fact, Restoration Hardware has already been making some restructuring moves (such as cutting jobs). But, as a private company, I suspect the actions will be even more substantial.
More importantly, this may be a sign that other specialty retailers may seek an exit, such as Pier 1 Imports Inc. (NYSE: PIR). And if so, I think managements will point to the super premium on Restoration Hardware's deal.
The last week of August and the week that includes Labor Day are favorites for Wall Street types to take some vacation time. That likelihood only increased for a great deal of institutional players who needed to postpone their vacation plans of the two weeks just passed. I could just hear them explaining to their dearests, "You don't get it sweetheart, if I don't go to the office, there may not be a vacation next year." Still, we don't care how powerful you are, you can only hold the wife off for so long. We anticipate a barren scene (excuse the pun) on Wall Street over the next two weeks, depending on the number and degree of finance fires that need to be put out. However, today's virtual world caters to the investment banker, and if need be, he can always just hop on a helicopter or seaplane and return from the Hamptons early.
Still, the fun in the sun did not stop the retail crowd from withdrawing $6.8 billion from mutual funds last week, excluding ETF activity. In fact, it probably offered most some free time to do so. We expect more of the same in the near-term, as retail dough typically lags the smart money, which, according to Barron's, was bargain hunting.
Your favorite Greek fondly recalls the summer commute in New York. If I wasn't on a beach in Greece, I was enjoying a significantly shorter cab share line on the Upper East Side and half empty Mario Van Shuttles or subway car rides home in the evenings. It almost made the soupy humidity bearable. The point here is that trading should be significantly lighter this week, and maybe next week as well, depending on when school starts and if papa is going to grant junior a reprieve so his old man can finally get some rest. Now, lighter volume does not imply less volatility. It just means you can't read too much into market and security movements, and you should not let the downticks panic you. That said, the week ahead is information heavy, setting up a quite ominous scenario in such precarious times.
Monday kicks off the week with an opportunity for the housing market to provide verification or refutation of last week's stronger than expected new home sales for the month of July. You see, the existing home sales market is much more important (read bigger) than that for new abodes, and July's used market results are due out at 10:00 a.m. on Monday morning. According to Bloomberg's consensus of economists, we should look for an annual sales pace of 5.7 million. That's down from June's 5.75 million.
In other news, we should note that markets in the U.K. will be closed for the day. In the U.S., Monday's earnings report schedule is light and includes Harmony Gold Mining (NYSE: HMY), Sinopec Shanghai Petrochemical Company (NYSE: SHI), Streamline Health Solutions (NASDAQ: STRM), Winn-Dixie (NASDAQ: WINN) and a few others.
Tuesday ushers in the possibility of a bloodred close, due to some important news from the Federal Reserve. At 2:00 p.m., the Fed will release the minutes from its August Federal Open Market Committee meeting, and Barron's speculates it may also release the minutes from its August 16 conference call that preceded the group's decision to cut the discount rate by 50 basis points. Wall Street Greek certainly hopes that if the August meeting notes carry a hawkish tone, the Fed will consider the consequences of such a message, and also issue the notes from its emergency conference call. If it does so, our concerns will be doubly pacified by the fact that William Poole was busy at a prior arrangement that day and was reportedly not present for the call or the vote to cut the discount rate. Therefore, we will likely be spared any of his discussion of calamitous consequence.
The first bit of news out on Tuesday will be the regular weekly ICSC-UBS same-store sales data, providing some further insight into the state of the retail environment. Last week's report showed a week-to-week increase of 0.2% and year-over-year rise of 2.7%. While still growing, retail expansion is running at a much more moderate pace of late. Wall Street Greek continues to advise of our expectation that retail sales will weaken on consumer softness, in light of the many often discussed pressures on the center column of our economy.
At 10:00, the Conference Board is scheduled to report consumer confidence. Bloomberg's consensus of experts sees confidence slipping in August, to 105, from 112.6 in July. We will not insult your intelligence here by explaining why... The S&P/Case Shiller home price index for June is also due for release on Tuesday, and we expect it to post another decline. If not, we are fairly certain that July's results will show a dramatic decline in prices, as implied by the pickup in new home sales during the relative month.
Tuesday marks the end of the extension for Accredited Home Lenders (NASDAQ: LEND) and it's savior to consummate their agreement. We believe LEND's earlier threat of lawsuit led to the extension and was meant to nudge the deal's closing. However, we also believe last week's announcement that LEND's CFO would resign at the end of the month could imply another result. LEND also laid off some 1,600 employees last week and stopped taking U.S. mortgage applications. We do not believe you stop doing business if you expect to close a deal that is suppose to keep you in business. Thus, we view the potential for a bankruptcy filing in the near-term more likely than LEND's deal closure.
Tuesday's earnings reports include Anaren Incorporated (NASDAQ: ANEN), Applied Signal Technology (NASDAQ: APSG), Aruba Networks (NASDAQ: ARUN), Bank of Montreal (NYSE: BMO), Bank of Nova Scotia (NYSE: BNS), Borders Group (NYSE: BGP), China Medical Technologies (NASDAQ: CMED), Converium Holding AG (NYSE: CHR), Corinthian Colleges (NASDAQ: COCO), CPI Corporation (NYSE: CPY), CRH plc (NYSE: CRH), Culp Inc. (NYSE: CFI), Dycom Industries (NYSE: DY), Micros Systems (NASDAQ: MCRS), Pacific Internet (NASDAQ: PCNTF), Perceptron (NASDAQ: PRCP), Pike Electric (NYSE: PEC), RG Barry Corp. (AMEX: DFZ), Sanderson Farms (NASDAQ: SAFM), Semtech (NASDAQ: SMTC), Shanda Interactive Entertainment (NASDAQ: SNDA), SourceForge (NASDAQ: LNUX), Tuesday Morning Corp. (NASDAQ: TUES), Versant (NASDAQ: VSNT) and several other international firms.
Wednesday brings the weekly Purchase Applications Index report from the Mortgage Bankers' Association, and because it's much more current than the housing news from last week and Monday, it's more important in our view. Wednesday also sheds more light on the state of the oil market, as the Energy Information Administration issues its weekly Petroleum Status Report.
In other news, Latin America and the world are anticipating a possible general strike in Chile. We are sure Venezuela's Chavez, who recently offered a large chunk of aid to Latin America, will have some more to say on the subject Wednesday. Chavez looks to build up regional support and fuel his own fire against the United States. Situations like the one developing in Chile offer him opportunity to do so. We seek to bring attention to the risk that Mr. Chavez may move from a comical opportunity for the Saturday Night Live cast, to a serious threat to the United States if he is successful in drumming up broader support for his movement.
Wednesday's earnings schedule includes Big Lots (NYSE: BIG), Brown Shoe Co. (NYSE: BWS), Chico's FAS (NYSE: CHS), Citi Trends (NASDAQ: CTRN), Coldwater Creek (NASDAQ: CWTR), Concho Resources (NYSE: CXO), Cyberonics (NASDAQ: CYBX), DaimlerChrysler (NYSE: DAI), Dollar Tree Stores (NASDAQ: DLTR), Double Hull Tankers (NYSE: DHT), Energy Conversion Devices (NASDAQ: ENER), Finlay Enterprises (NASDAQ: FNLY), Fred's (NASDAQ: FRED), Greif Inc. (NYSE: GEF), HEICO Corp. (NYSE: HEI), Jo-Ann Stores (NYSE: JAS), Joy Global (NASDAQ: JOYG), Layne Christensen (NASDAQ: LAYN), Learning Tree (NASDAQ: LTRE), Net 1 Ueps Technologies (NASDAQ: UEPS), Novell (NASDAQ: NOVL), Collective Brands (NYSE: PSS), PowerShares Dynamic Software (AMEX: PSJ), Quanex (NYSE: NX), Sigma Designs (NASDAQ: SIGM), SWS Group (NYSE: SWS), Synovis Life Technologies (NASDAQ: SYNO), The9 Limited (NASDAQ: NCTY), TiVo, Inc. (NASDAQ: TIVO), United American Healthcare Corp. (NASDAQ: UAHC), Williams-Sonoma (NYSE: WSM) and more.
The first revision to Q2 GDP growth is set for release on Thursday, and Bloomberg's consensus sees Real GDP adjusted higher to 4.0%, from 3.4% initially reported. Folks, we advise not getting caught up in the old news number, despite Hank Paulson's cheerleading that is likely to follow it's release. The here and now seems to clearly indictate a slowing of economic growth or outright recession in coming months. We have been anticipating recession since we started this project almost a year ago. We continue to argue that if a softening consumer does not do it, a messy and complicated war with Iran and its allies (read both nations and terrorist organizations) will.
Weekly Initial Jobless Claims will be reported at 8:30 a.m., and it's about time this data starts to show signs of a weakening employment environment. We expect the later September report of the Employment Situation will show new hiring sharply lower, excluding seasonal affects. The Help Wanted Index, reported Thursday as well, might have proven valuable, but it focuses on print ads for jobs. As you know, there is strong migration to the online medium, and the Monster.com data is becoming more important. Still, the Help Wanted numbers remain worth checking in on.
The EIA reports natural gas inventory on Thursday, as usual. As long as the Atlantic is devoid of hurricane, or war with Iran is not imminent, we expect natural gas should continue its trend lower. You see, the most important driver of oil and nat gas is economic health. Some will argue that global demand is what matters, but remember, the natural gas market remains a somewhat localized market. While we believe natural gas is increasingly becoming a more important substitute for oil in many instances, and remains sensitive to changes in the price of oil, we also expect a softer U.S. economy to impact the economies of manufacturing nations and other trading partners. In other words, U.S. weakness should bleed into the global economy enough to impact industrial commodity prices and petrochemicals, not to mention high flying equity markets overseas.
Thursday's earnings schedule includes some specific reports worth breaking out. H&R Block (NYSE: HRB) has some mortgage market exposure that might come to light and hurt the shares on Thursday. Also, the National Bank of Greece (NYSE: NBG), a beneficiary of expansion into improving Turkish and Eastern European markets, reports earnings. So, there's one long and one short idea for you speculators.
The rest of Thursday's earnings reports include Dell Inc. (NASDAQ: DELL), Benihana (NASDAQ: BNHNA), Blyth (NYSE: BTH), Canadian Imperial Bank of Commerce (NYSE: CM), Catalyst Semiconductor (NASDAQ: CATS), Chunghwa Telecom (NYSE: CHT), Conn's Inc. (NASDAQ: CONN), Cost Plus (NASDAQ: CPWM), Credence Systems (NASDAQ: CMOS), Del Monte Foods (NYSE: DLM), dELiA*s Inc. (NASDAQ: DLIA), Edap TMS (NASDAQ: EDAP), Esterline Technologies (NYSE: ESL), FuelCell Energy (NASDAQ: FCEL), Genesco (NYSE: GCO), Gottschalks (NYSE: GOT), Hellenic Telcommunications (NYSE: OTE), Jamba Juice (NASDAQ: JMBA), Kirkland's (NASDAQ: KIRK), LTX Corporation (NASDAQ: LTXX), Omnivision Technologies (NASDAQ: OVTI), Open Text (NASDAQ: OTEX), Peerless Systems (NASDAQ: PRLS), Restoration Hardware (NASDAQ: RSTO), SeaChange International (NASDAQ: SEAC), Silicon Graphics (NASDAQ: SGIC), Standex International (NYSE: SXI), Suez (NYSE: SZE), Telvent (NASDAQ: TLVT), Veolia Environnement SA (NYSE: VE), Vimpel Communications (NYSE: VIP), Wind River Systems (NASDAQ: WIND), Zale Corporation (NYSE: ZLC), and a few more.
Just when you thought it was safe to leave work early for the three day holiday weekend, we get a busy day for economic news Friday. At 8:30 a.m., the Fed's favorite inflation gauge will be reported, the PCE deflator. If ever it was important for the figure to show inflation moderation, it is now. Personal Income is expected to show a July increase of 0.3%, while Consumption is seen increasing 0.4%. We remind you that these are rearview mirror type numbers, but July was not too far back. Wall Street Greek expects both personal income and spending to trend softer in months to come.
As far as the inflation gauge goes, we do not think the PCE figure matters as much as the Fed does. This is because of our differing view regarding food prices. We know from recent reports and conference calls of major food providers that pricing pressure is not easing for grain, feed and proteins. We know severe disease plagues China's pork market, and are well aware of China's growing need for imported food, due partly to its population growth and partly to its industrial revolution. Food prices are a secular problem, not seasonal, and the Fed must recognize this. Food prices pressure the consumer, and they will not go away any time soon, in our view.
The PCE metric focuses on the prices of consumer goods and services, and the Fed is concerned with prices excluding food and energy. If prices look elevated, the Fed may continue with its avoidance of significant rate reduction. This error, in our view, could discredit the Fed and help lead our economy into deeper recession. If confidence is lost in the Fed's ability to aid securities markets, we expect a great degree of capital could be lost to investors.
The National Association of Purchasing Management - Chicago is seen reporting its index at roughly 53 for August, versus 53.4 in July. More importantly, the University of Michigan's Consumer Sentiment reading is expected to drop to 82.5 for August, versus 90.4 in July. We agree, sentiment is on the downswing. It's generally been that way all year outside of a few monthly blips higher.
Factory orders are seen rising 3.2% for July, according to Bloomberg's count. On numerous occasions, we have outlined our view that manufacturing will not show weakness until after consumer and employment softness develop in the U.S. This is due to international demand for cheap U.S. product on dollar weakness.
Last but certainly not least important, Fed Chairman Ben Bernanke will be in Jackson Hole attempting to avoid falling into a hole of his own, as he addresses housing, housing finance and monetary policy. We think a few people might be interested in what he has to say...
Friday's earnings reporters include Aktieselskabet Dampskibsselskabet Torm (NASDAQ: TRMD), ChemGenex Pharmaceuticals (NASDAQ: CXSP), Vivendi (Paris: VIV.PA) and many other international firms. The bond market closes at 2 p.m. Enjoy the symbolic final week of summer!
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MOST NOTEWORTHY: Nvidia (NVDA), Briggs & Stratton (BGG), Sun Microsystems (SUNW), Healthways (HWAY) and MGIC Investment (MTG) were today's noteworthy downgrades:
Stifel cut shares of Nvidia (NASDAQ: NVDA) to Sell from Hold on valuation.
Briggs & Stratton (NYSE: BGG) was cut to Underperform from Neutral at Baird following the disappointing Q4 report and guidance.
Goldman downgraded Sun Microsystems (NASDAQ: SUNW) to Neutral from Buy.
Goldman also cut Healthways (NASDAQ: HWAY) to Sell from Neutral on valuation, following the recent rally that lacked material news of fundamental changes at the company.
JP Morgan cut MGIC Investment (NASDAQ: MGIC) to Underweight from Overweight following recent strength which they believe is not warranted by fundamentals. They believe the overhang of the proposed RDN merger along with weak near-term fundamentals will likely drive underperformance in shares until the merger issues are fixed...
OTHER DOWNGRADES:
Robinson Humphrey downgraded Goodrich Petroleum (NYSE: GDP) to Reduce from Neutral.
RBC Capital downgraded Symmetricom (NASDAQ: SYMM) to sector Perform from Outperform.
Restoration Hardware (NASDAQ: RSTO) was downgraded to Hold from Buy at BB&T.
Henry Schein (NASDAQ: HSIC) and Aflac (NYSE: AFL) were cut to Equal Weight from Overweight at Morgan Stanley.
S&P hits a record high, regional banks keep setting yearly lows
ILA Aquila Inc IHR Interstate Hotels HDL Handleman Company RSTO Restoration Hardware REDE Redenvelope Inc OPOF Old Point Finl Corp FMAR First Mariner Bancorp FFSX First Fed Bankshares FFNM First Fed Northern Michigan FBNC First Bancorp North Carolina CCBD Community Central Bank CBIN Community Bank Shares CBHI Centennial Bank Holdings BFBC Benjamin Franklin Bank
Homebuilders and banks hit the skids again, sounds like a Melloncamp song
NCC National City Corporation MYL Mylan Laboratories Inc KBH Kb Home PHA Pulte Homes Inc HMB Homebanc Corp Ga HDL Handleman Company RSTO Restoration Hardware RIGL Rigel Pharmaceuticals Inc REVU Princeton Review Inc REDE Redenvelope Inc TRMP Trump Entmt Resorts Inc IBCP Independent Bank Corp HTLF Heartland Finl Usa Inc GFLS Greater Community Bancorp GCBC Greene County Bancorp Inc FSNM First State Bancorporation FMBI First Midwest Bancorp Inc FFNM First Fed Northn Michigan FCTR First Charter Corp FCCO First Cmnty Corp S C FBTX Franklin Bank Corporation
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