Top Hedge Funds Predict How It All Will End

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In early 2009, roughly at the time when this blog was launched which coincided with the start of the greatest monetary experiment of all time, we warned that there are two ways it will end: either in hyperinflation, or a deflationary supernova, the failure of currency and, eventually, barter. Now, almost 8 years later, some of the world's top hedge funds are in agreement, and they are worried.

As the WSJ reports, these prominent hedge fund managers join an increasingly bigger and louder chorus which says central bank bond buying programs that are pumping trillions of dollars into global markets will end badly.

In yesterday's main event, the ECB said it would extend its asset purchase program to the end of next year, buying bonds at a reduced rate. As the following chart from BBG projects, at the ECB's revised rate of bond purchases, its balance sheet will soon surpass that of the Fed.

 

So what happens next? Prominent managers have told The Wall Street Journal in recent interviews of their doubts about the endgame for quantitative easing around the world. 

“There’s no non-messy way out of this,” said Luke Ellis, chief executive of Man Group, one of the world’s biggest hedge-fund firms with $80.7 billion in assets. “There’s two versions” of how this ends, he added. Either central banks could move to so-called ‘helicopter money,’ where they buy debt from the government, which then spends the proceeds or gives it to the population to spend. This “for a few years looks golden then leads to hyperinflation,” he said. Or the speed at which money circulates within the economy could grind to a halt. “Then you effectively have a barter economy,” he said.

In a series of exclusive interviews with the Journal, hedge-fund executives overseeing around $280 billion in total highlighted a range of problems created by quantitative easing. The problems they highlight are precisely those that QE was designed to solve, and are exactly the same problems we warned about since the 2009, for which we have been repeatedly branded some variation of "fake news." Now the skepticism has become mainstream.

This is what, according to the hedge fund managers interviewed by the WSJ, will happen:

Damage to economic growth

Rather than kick-starting growth, quantitative easing may do the reverse. Some managers fear it distorts financial markets and undermines capitalism. That system relies on profit-hungry investors to differentiate between strong and weak companies—funding the strong while letting the weak die. QE, say some managers, doesn’t differentiate.

For instance, the Bank of England is buying the debt of firms it deems make “a material contribution” to the U.K. economy. That has led some investment banks and companies to create new debt especially for it to buy. The ECB has bought €48.2 billion ($51.2 billion) of corporate debt since June, but the hoped-for private-sector investment hasn’t materialized.

“What does a market do? It’s a voting mechanism,” said Michael Hintze, billionaire founder of hedge fund CQS, which runs around $12 billion in assets. “Instead you’ve got this 800-pound gorilla out there who’s hoovering up assets. “There’s a misallocation of capital and an opportunity cost to the real economy,” added Mr. Hintze, whose portfolio is up 30% this year, ranking it one of the world’s top-performing hedge funds. “It means GDP is not growing as much as it might.”

Some put it even more strongly. “It’s definitely destructive of economic growth,” said Crispin Odey, founder of Odey Asset Management, which runs $8.2 billion in assets.

“Capitalism dies a death,” said Mr. Odey, who sees government policy as the main factor influencing markets. His fund, a top performer after the credit crisis, is down sharply this year because of being too bearish. “It’s all policy. It’s the Kremlin. And I’m in the gulags.”

* * *

Damage to society

In her speech to the governing Conservative Party conference in October, U.K. Prime Minister Theresa May spoke of “some bad side effects” from quantitative easing as people with assets got richer while those without them suffered. U.S. President-elect Donald Trump has said low rates have robbed savers. Those side effects include “envy and distress” within society, “as people think ‘I can’t get out of where I am,’” said Andrew McCaffery, group head of solutions at Aberdeen Asset Management, who looks after $170 billion in assets.

Ultralow interest rates mean the large part of the population with few financial assets begins to despair of how to generate income to fund retirement, he said.

“People see a developing black hole,” he said. This “increases the sense of there being little to lose for many” people.

Andrew Law, chief executive of New York-based Caxton Associates LP, which runs around $7.8 billion, said quantitative easing averted economic depression after the financial crisis.

But he added: “The losers of QE are society, and democracy is also a loser, because central banks are not publicly elected officials.”

* * *

Deflation

Quantitative easing was also introduced as a way of increasing private-sector spending and raising inflation. Some investors even worried it would spark hyperinflation and rushed to buy gold. Instead, say some managers, it has led to deflation.

“It took me a long time to work it out,” said CQS’s Mr. Hintze. “It’s a very complex issue.” He said that massive amounts of liquidity mean that “liquidity’s not worth much anymore,” which leads to negative interest rates. “I do think it [QE] is a massive deflationary force. The reason is because money is worth less but the price of real assets goes up.”   

Mr. Odey said quantitative easing leads to deflation because weaker competitors are kept alive by cheap debt as “zombie” companies.

* * *

Hard stop

Finally, hedge-fund managers see difficulty in ending quantitative easing.

“Central banks are sadly helping to create the ‘black hole,’ and the sucking noise and pull is getting bigger,” said Aberdeen’s Mr. McCaffery, “but you just have to keep going as your alternative options as a central banker are just too unpalatable to consider.

Using an analogy we first came up with in 2009, McCaffrey slammed the use of a drug placebo to keep the system intact: “More methadone is not going to help, a form of cold turkey [is] needed, but no central bank is going to do that,” he added. He warns governments’ debt-to-GDP levels have risen.

The punchline:

“In the long term, it implies rates can never go up, as the damage will be extraordinary in nature,” he said, as they struggle with their debt loads. For now, however, the market which moments ago hit new all time highs, is blissfully ignoring all of the above.



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Official Warning: Stocks Are Going to Crash

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Stocks are going to Crash.

This wasn’t the case a mere six weeks ago. But the Bank of Japan has committed one of the most egregious manipulations in history.

The Yen/ $USD pair has imploded by over 14% in the last six weeks. The last time the pair fell this much the BoJ expanded an already monstrous QE program by $260 BILLION.

This time around it is nothing more than abject monetary devaluation. The Bank of Japan has accomplished in SIX WEEKS what previous took $260 BILLION and SIX MONTHS.

This is absolute madness. And it is going to ANNIHILATE US corporate earnings.

Over 47% of US corporate sales come from abroad. With the $USD spiking, courtesy of the Yen devaluation, US corporations are going to be imploding in the 1H17.

The $USD ramp job of 2014 has already imploded corporate profits to 2012 levels. This next ramp to new highs is going to kick them even lower.

You can ignore this, just as the S&P 500 has done for the last six weeks. But soon this will matter in a big way.

At the very least you can expect a collapse to 2100. But 2000 and even 1864 are not out of the question.

THIS WILL HIT BEFORE JUNE OF NEXT YEAR.

Another Crisis is brewing… the time to prepare is now.

If you've yet to take action to prepare for this, we offer a FREE investment report called the Prepare and Profit From the Next Financial Crisis that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

We made 1,000 copies available for FREE the general public.

As we write this, there are fewer than 49 left.

To pick up yours, swing by….

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

 

 



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Obama orders review into Russian hacking of 2016 election

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"The President has directed the Intelligence Community to conduct a full review of what happened during the 2016 election process. It is to capture lessons learned from that and to report to a range of stakeholders," she said at a Christian Science Monitor breakfast. "This is consistent with the work that we did over the summer to engage Congress on the threats that we were seeing."

Monaco said the administration would be mindful of the consequences of revealing the results of their review publicly.

The review is intended to be done before Donald Trump's inauguration on January 20.

Developing story - more to come



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Fast Food Damnation

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Matthew Yglesias has an interesting post about the fast-food tycoon who has been nominated as Labor Secretary. Even aside from the fact that “when did you stop beating your wife?” would, in fact, be a valid question in this guy’s confirmation hearings, you might think that this nomination would be seen as a total betrayal of the working-class voters who went overwhelmingly Trump a month ago. He’s anti-worker, anti-higher wages, pro-immigration. Won’t there be a huge backlash?

What Yglesias suggests, however, is that his connection with fast food is itself a protection — because the white working class likes fast food, liberals don’t, and the former feels that this shows the latter’s contempt for regular people.

I suspect that there’s something to this, and that it’s part of a broader story. And I don’t know what to do with it.

What I see a lot, both in general political discourse and in my own inbox, is a tremendous sense of resentment against people like Hillary Clinton or, well, me, that isn’t about policy. It boils down, instead, to something along the lines of “You people think you’re better than us.” And it has a lot to do with the way people live.

If populism were simply about income inequality, someone like Trump should be deeply resented by the working class. He has gold toilets! But he gets a pass, partly — I think — because his tastes seem in line with those of non-college-educated whites. That is, he lives the way they imagine they would if they had a lot of money.

Compare that with affluent liberals — say, my neighbors on the Upper West Side. They aren’t nearly as rich as the plutocrats that will stuff the Trump cabinet. What’s more, they vote for things that will raise their taxes and cost of living, while improving the lives of the very people who disdain them. Objectively, they’re on white workers’ side.

But they don’t eat much fast food, because they believe it’s unhealthy and they’re watching their weight. They don’t watch much reality TV, and do listen to a lot of books on tape — or even read books the old-fashioned way. if they’re rich enough to have a second home, it’s a shabby-chic country place, not Mar-a-Lago.

So there is a sense in which there’s a bigger cultural gulf between affluent liberals and the white working class than there is between Trumpkins and the WWC. Do the liberals sneer at the Joe Sixpacks? Actually, I’ve never heard it — the people I hang out with do understand that living the way they do takes a lot more money and time than hard-pressed Americans have, and aren’t especially judgmental about lifestyles. But it’s easy to see how the sense that liberals look down on regular folks might arise, and be fanned by right-wing media.

The question is, what do you do? Again, objectively those liberals are very much on workers’ side, while the characters who play on this perceived disdain are set to betray the white working class on a massive scale. Is there no way to get this across other than eating lots of burgers with fries?



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Dissecting a Case of Imposter Syndrome

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It’s been a while since I have had a full-blown, this is really truly nutso, case of Imposter Syndrome. I’m having one now, so I want to pull it apart and see what makes it tick.

When I arrived at Facebook in January 2011, I felt completely over my head. I learned enough technical details to get along, but everybody seemed much better than me. It got to where I would have an idea and say to myself, “Someone must have already had that idea. If I mention it people will think I’m stupid. There’s probably an obvious reason it won’t work.”

After about six months of this, I had a long talk with myself. I didn’t get here by being an idiot. Most of my ideas won’t work out, but that’s because most ideas don’t work out. Give each one a little time and energy and see what pays off.

Six years later, when my manager asks for an unexpected meeting my first thought is still, “That’s it. I’m fired.” The difference is that now I quickly move on to other explanations, like oh for example there’s something he wants to talk about.

Music

When I started jamming with people at Andela in Lagos, though, Mr. Imposter Syndrome set up a shiny new shop in my brain.

I arrived in Lagos on Saturday night. Sunday I went to church, rode on the back of a motorcycle (it was okay, I’d been to church), and out to dinner. When we got back to the shared staff apartment, we broke out the instruments and started playing.

The first few songs were a little tentative. My new brother Kes taught me chord progressions. The singers were great (like

Broadway-bound

great). Guitars and keyboards rocked steady. People were drumming on all available surfaces and dancing around the room. Each song would start with the actual lyrics and music, spiral out for ten or fifteen minutes of improvisation, and gradually fade out, only to be replaced by the next.

In a lull after a song I heard a fast jam in my head, so I started playing. After a few seconds the other musicians took it up. I started twisting the rhythm in ways I never would dare in a group of American folk musicians. No problem, everyone stayed right in the groove. And further out. And further.

I went There, that place where you hear music and it comes out your fingers and your brain just sits back on a park bench and watches the show. I started playing guitar with my whole body. I was dancing and playing and listening. Sounds good, right?

As I was going to bed late late late that night, Mr. IS kicked in. “You know, they were probably laughing at your antics. You looked ridiculous.” Shut up, asshole. That was glorious.

Thursday we jammed again. Same thing happened. New jam, same connection to the music, same insane internal conversation afterwards.

Friday night was the Christmas party. We got up. Did our first song. I started the jam. The singers went to town over the top of it. Keyboards and bass. The drummer lashed in (drummer? there wasn’t a drummer here a second ago–I love playing in Africa). The whole party hit their feet. Five minutes later we finally wound down, drenched in sweat and smiling like fools.

And me? Mr. IS. “They’re just humoring you. Any minute now they’re going to say, ‘Ha ha, just kidding.’ There’s nothing special about what you do. Especially not here, you old, bald, white eejit.”

Dissection

So that’s what my Imposter Syndrome looks like. I have absolutely no evidence that anybody is saying any of those things except me. I have plentiful evidence that people like what I play. Doesn’t change the voice, though.

What’s going on?

  • Cognitive dissonance? If I love music and people enjoy the music I play and I have chosen not to play much for decades, well, that doesn’t make sense. If people secretly hate my music, then not playing makes perfect sense.
  • Daddy issues? The only screaming fight my father and I ever had was over whether I would study music in college. His dad had to pawn his sax to feed the family during the Depression. I was going to by god get a real job. Maybe I’m still fighting that fight.
  • Scary options? Maybe I don’t want to consider the possibility that music will be a much bigger part of my life in future. If people secretly hate my music, then that’s not an option, and I can go on doing what I’m doing now without worrying that I’m missing out on a beautiful part of life.

I don’t have any conclusions, just questions. And a crazy voice in my head. And memories of transcendent jam sessions. And new friends. Peace.



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Leftist Students Shouted 'F*ck You B*itch' at the Gay Director of a Pro-Trans Movie, Boys Don’t Cry

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ReedThere was a time not so long ago when the people shouting "fuck you bitch" at a gender-fluid gay filmmaker would have been bigoted right-wing conservatives. But because we currently live in the year 2016, the people who heckled Kimberly Peirce—director of Boys Don't Cry, a groundbreaking film about a transgender man—during her recent appearance at Reed College were far-left students.

The students hurled a litany of insults at Peirce, putting up posters that read "fuck your transphobia" and "you don't fucking get it" among other things. Worse, when Peirce ascended to her podium, students had placed a sign there. It read "fuck this cis white bitch." That Peirce is actually gender-fluid is quite beside the point.

The students' unbelievable rudeness crossed the line into a kind of censorship when Peirce tried to speak: the students simply shouted over her. Eventually they let her talk, but some students continued to yell things like "fuck your respectability politics" and "fuck you scared bitch."

You're probably wondering why the social justice left hates Peirce so much. Bear with me. She had come to campus to do a Q and A following the screening of her 1999 film, Boys Don't Cry. The film is an adaptation of the true story of Brandon Teena, who was born a woman but chose to identify and present as a man, and was murdered because of it. It's a heartbreaking love story that undoubtedly introduced countless Americans to the reality of anti-trans violence.

You're probably still wondering why the social justice left hates Peirce so much. Well, the film was ahead of its time in 1999, but in 2016 it's problematic. That's because the main character, Brandon, was played by Hilary Swank, a non-trans person. Students were also incensed at the idea of Peirce having profited from violence against trans people, which isn't a remotely accurate way to characterize things, but there it is.

Jack Halberstam, a University of Southern California professor who writes about queer issues and is friendly with Peirce, blogged about the uproar for Bully Bloggers, publishing pictures of the posters. Halberstam also made note of the students' criticisms of the film, but suggested that at the time Boys Don't Cry was released, trans people were often portrayed as "monsters, killers, sociopaths, or isolated misfits." It was revolutionary for audiences to see a trans person who was otherwise a typical twenty-something. Halberstam also pointed out that it would have been much harder to cast a trans person to play Brandon in 1999 than it is today.

But whether the criticisms of Peirce are legitimate is a separate matter. Her movie is important, and was worth screening on campus.

A spokesperson for Reed College confirmed the posters and the heckling, which he attributed to a handful of students.

"It has sparked a lot of debate on campus," the spokesperson told Reason.

Dean of Students Nigel Nicholson, to his credit, penned a strongly-worded statement in the campus paper:

The actions that I saw were not animated by the spirit of inquiry or the desire to learn that usually animates Reed audiences. The students had already decided what they thought, and came to the Question-and-Answer session to make their judgments known, not to listen and engage. Some brought posters bearing judgments and accusations. Others asked questions, that, while grammatically questions (that is, they ended with question marks), were not animated by a genuine desire to explore a question, but rather sought to indict the speaker. It felt like a courtroom, not a college.

Some students sought to dominate the space, and to take control of the space away from the speaker.

I was deeply embarrassed and ashamed of our conduct, and I hope that as a community we can reflect on what happened and make a determination not to repeat it.

Would anyone deny that the students' actions amounted to harassment, at least under the current Title IX understanding of the term? Was this not, at the very least, a bias incident? For a group of students who were ostensibly concerned about hatred directed at trans people, their own language was remarkably hateful.

Reed College, by the way charges, $50,000 a year for tuition. The opportunity to scream insults at a queer film director whose perspective is mildly different from today's leftist students is certainly an expensive privilege.



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West Marine: Category Killer With Stable Core Demand And Significant Asset Coverage At Discounted Valuation

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Thesis: West Marine (NASDAQ:WMAR) (or the Company) is a category killer with a clean balance sheet, stable core demand from maintenance and repair product revenue and significant asset coverage. Furthermore, the Company has been fairly successful thus far in diversifying revenue and should have the ability to positively impact margins via selective store consolidation. The Company weathered the recession with 3 years of single-digit sales decline but has experienced stable sales growth since, even while consolidating store numbers. The Company's market cap over cash plus inventory is 0.74x and the Company has had no material debt outstanding in the periods reviewed, and the Company holds ~$3.77 per share in cash (share price of ~$9.26) which could be returned to shareholders at some point. EV/EBITDA as of 12/6/2016 of 4.65x represents an attractive valuation given the aforementioned strengths, additional opportunities to increase margins/cash flow, comp valuations and collateral value.

Why is WMAR mispriced? The Company's price partially reflects general retailers which have been out of favor recently; however, in reality, the Company falls into the two retail categories that have been viewed favorably through this time, niche retailers and (to a lesser extent) luxury retailers (Cabela's (NYSE:CAB), Big 5 (NASDAQ:BGFV) and Hibbett Sports (NASDAQ:HIBB) trading at 19.2x, 9.9x and 7.25x, respectively, versus West Marine at 4.6x). Additionally, the Company is sitting on a material cash balance ($93M), and while management has not indicated plans to return this cash to shareholders, it is tough to think of an accretive target to use it on and a return to shareholders in the form of a buyback or dividend would represent value upside (currently holding ~$3.77 per share in cash at a share price of $9.26). Furthermore and to a lesser degree, the Company does not disclose store level information and on the outside seems slightly resistant to forfeit revenue growth for margin (number of stores has decline but newer stores are larger, total square footage has declined much less materially than total store count). Depending upon the results of a store level analysis, there could be additional value to unlock via further consolidation.

Brief Company Overview and Current Landscape:

West Marine is a specialty retailer of boating, recreational and other aquatic/marine supplies, parts, products, apparel and merchandise. The Company sells to the professional boating community, recreational boating community and, with increased focus in recent years, the recreational "waterlife" community (aquatic apparel, kayaks, etc.). As of 3Q 2016, the Company generated sales through 256 stores (89.8% revenue) and an e-commerce platform (10.2% revenue). The e-commerce platform is comprised of westmarine.com and portsupply.com, with the Port Supply brand being targeted more towards the professional boating/marina community. The websites also include extensive, proprietary how-to videos for installing parts. Though the Company has stores throughout the US (and a handful of international locations), a large majority of stores are clustered around ocean coasts and major bodies of water (i.e.. Great Lakes), please see the appendix for a store map.

The Company's business plan since ~2014 has included the following strategic initiatives: (i) increase revenue to "Waterlife" customers (non-boater, aquatic customer), (ii) increase e-commerce as a percent of sales (which includes order to store revenue?), and (iii) consolidate into fewer total but more "flagship" stores. A portion of this plan has been titled the "15/50" plan by management, with the target of generating 15% of total sales via e-commerce and 50% of total sales via waterlife stores. The Company has addressed the aforementioned initiatives as follows:

The Company has increased "Waterlife" stores from 24 FYE 2011 to 70 9/30/2016. The Waterlife stores are revitalized stores with an increased focus on recreational-boater or non-boater customers through selling apparel, marine leisure products, and other aquatic activity products. The Company reports sales of "Core Boating Products" versus "Merchandise Expansion Products" (of which nearly all are Waterlife only) with expansion products growing from 13.8% FYE 2011 revenue to 20.8% FYE 2015 revenue.

The e-commerce growth was initiated with the launch of a revamped website in early 2014. Additionally, the Company offers ship-to-store and ship-from-store options to leverage their existing footprint. The Company's e-commerce sales as a percent of total revenue grew from 7.6% FYE 2013 to 10.2% YTD 3Q 16.

Consolidation into fewer, but more comprehensive stores is evidenced in the decline in total stores. While total stores peaked at 404 in 2005 (revenue of $692M, therefore average ~$1.7M revenue per store), that number has fallen since, to 319 in YE 2011 and 256 9/30/2016. Additionally, average revenue per store has risen since that time, to $2.02M FYE 2011 and $2.75M LTM 3Q 2016.

Risks

Competition: West Marine's closest competitor historically, Boater's World, closed all stores in 2009 as a result of the bankruptcy and liquidation of its parent Company, Ritz Camera. Some commenters speculate (example here) Boaters World was the only successful business of Ritz Camera, and was collateral damage in the parent's bankruptcy proceedings; however, this cannot be verified. Today, primary competition for West Marine likely falls into three categories: online retailers, large sporting goods retailers and "mom-and-pop" stores. Among other factors, the Company's brand recognition and national footprint provide an edge, please see below for an overview of competitive positioning by competition category:

- Online Retailer: The Company could face competition from a number of online retailers (including Amazon (NASDAQ:AMZN), which presents competition for essentially all retailers), which offer boating, fishing, and other marine activity products; however, there are multiple factors which provide some comfort against online retailing competition: (i) the Company generates a portion of sales from large and/or heavy items which would require additional time and money to ship (ex. stand-up paddle board, kayak, anchor, SCUBA gear, small vessels), which one could be less likely to order online; (ii) the Company is focusing on the growth of West Marine's online platform which has grown from 7.6% ($50M) of total sales FYE 2013 to 10.2% ($72M) LTM 3Q 2016; (iii) the store's existing footprint in high-aquatic activity areas allows multiple advantages, including ease of access to customers, reduced shipping costs on ship-to-store orders, and expedited delivery on ship-from-store orders; (iv) time sensitive nature of certain products - as many core boating parts can be operationally critical it is important to have these products available quickly, for example if a boater is looking to go fishing and realizes the need for a replacement engine part to start his boat, the boater could quickly swing by the West Marine to salvage his journey. Additionally, the Company's leading brand name among serious and recreational boaters alike represent a competitive advantage.

- Large Sporting Goods Retailers: Large specialty retailers, such as Bass Pro Shops and Dick's (NYSE:DKS), carry a range of marine activity products (fishing gear, bathing suits, etc.) which would compete with West Marine; however, these retailers do not typically carry as comprehensive a range of niche boating products as West Marine. As these large retailers carry a wide range of sporting goods and apparel, they are less likely to focus as in depth on a range a niche boating parts. Additionally, West Marine's store footprint represents a competitive advantage. In the appendix at the end of this memo, there is a West Marine store map and a Bass Pro Shop store map, which show West Marine has a far greater number of stores (~256 West Marine Vs. ~91 Bass Pro Shop), which should enable West Marine to benefit from being the only player in certain locations. As shown in the Appendix as well, Cabela's footprint does not have as significant an overlap with West Marine and also has a materially lower store count.

- "Mom and Pop" Stores: The Company's scale allows it to keep a large inventory in stock while Mom and Pop stores may face working capital restrictions on inventory scale. Additionally, the Company's online platform, which West Marine has invested in considerably, allows various consumer friendly sales channels that a resource-constrained Mom and Pop store may not offer, such as ship-to-store and ship-from-store options. Furthermore, the Company's reputable brand could give consumers comfort in shopping with West Marine.

Macroeconomic Cycle and Secular Decline Risk: As a majority of revenue is generate through discretionary products, the Company is likely to be negatively impacted by a macroeconomic decline as shown below. However, as the below shows, the Company only exhibited three years of single-digit revenue decline from 2007 to 2009, while over this period the number of stores declined from 376 to 335, meaning average revenue per store declined from $1.8M to 1.76M or a CAGR of -1.4%, while a number of similar companies experienced materially worse declines from a total revenue standpoint (Note: Dick's and Foot Locker (NYSE:FL) experienced growth; however, part of this could be attributed to acquisitions). Furthermore, the Company experienced relatively stable EBITDA margins in all periods aside from 2008; however, it is important to note the Company had a ~$23M pretax charge associated with allowances against deferred tax assets that year. Furthermore, avid boaters tend to prioritize proper care-taking of their boats and commonly have above average discretionary income allowing for some insulation against general macro trends. As West Marine is a category killer, they should benefit as one of the only major outlets for critical parts. Furthermore, the Company could close down or not renew leases at unprofitable locations to improve overall profitability and cash flow during a down cycle. Presumably, a portion of these locations would be the weakest during steady state conditions and the effect of this could be positive from a profitability stand point once economic growth were to return. Please note the Company does not disclose financials on a store by store basis, reporting of this would enable further analysis on a number of topics, including profitability potential.

Number of new boat registrations have declined in recent years (Source: US Coast Guard, further discussed below); however, as the Company sells a large portion of maintenance and repair or aftermarket items (80.2% of revenue is from core boating products), demand from the large existing boat fleet (which saw record registrations in the early 2000's) should contribute to a stable core business. Additionally, the Company's diversification into the broader "waterlife" market should provide further mitigation to potential negative trends in new boat purchases. Furthermore, the Company's clean balance sheet and high working capital should allow for relative painlessness in navigating short-term secular disruptions.

Historical Comp Perofrmance Click to enlarge

Source: Info from CapIQ and Company Filings, Chart Self Made

Recent Capex and Effect on FCF: In recent years, capex has increased from 2.6% of revenue in 2011 and 2012, to 4.3%, 3.6%, 3.2% and 3.1% in 2013, 2014, 2015 and LTM 3Q 16, respectively. This increase in capex as a percent of revenue has been due, in large part, to the build out and remodeling of waterlife stores as well investments in the build out of the online platform. This increase in capex has represented a material use of cash, however at the same time the Company has demonstrated the ability to grow cash balances and inventory. Furthermore, if the Company ran into any near-term liquidity problems as a result of these investments, the Company also has access to an undrawn $145M credit facility. As shown below, the significant increase in capex led to negative Free Cash Flow (as measured by EBITDA less capex Less Interest Less Taxes) in FYE 2013, while increased capex and compressed margins led to additional negative FCF in 2014. FYE 2014 margins experienced a decline from historical margins due to costs associated with the web platform build out, increased benefit costs, increased training costs and increased health claim costs. Though this cash burn is a negative investment consideration, a material portion of this capex is expected to be one time from the build out of the online platform and certain Waterlife stores. Furthermore, in a period of demand softness, the Company should be able to reduce capex related to the further build out of Waterlife stores, and the Company should have to ability to reduce capex via the closure/non-renewal of poorly performing locations. Additionally, the below FCF analysis excludes any working capital analysis, and as West Marine has significant inventory levels, the Company could likely generate cash through reducing inventory levels. The Company's assets (namely cash and inventory) provide material coverage, Cash plus Inventory Plus AR less A/P and Accrued expenses results in $230M and the business has no debt outstanding.

Click to enlarge

Source: Info from Company Filings, Chart Self Made

Strengths

Clean balance sheet and asset coverage: As of 3Q 2016, the Company had $93.9M Cash and $231.7M Inventory, with no outstanding debt and accounts payable of $55.3M. The Company's Inventory to Enterprise Value of 2x and working capital of $247M are the highest in the reviewed periods. The Company's cash balance, and lack of obvious acquisition targets, could represent an opportunity for a substantial return to shareholders. Accounts payable have increased in recent periods; however, per management, this is due to improving terms with the vendor community (which could suggest negotiating power over suppliers). Please note waterlife stores are greater than 10k Sq. Ft. and Traditional stores are less than 10k Sq. Ft.

Click to enlarge

Note: Store Breakout not available 2012 and prior

Source: Info from Company Filings, Chart Self Made

Store Count Consolidation: The Company has been consolidating number stores since peaking at 404 in 2005, with average revenue per store of $1.71M, to 256 at 9/30/2016, with average revenue per store of $2.75M. In the period from FYE 2011 to LTM 9/30/2016, the number of stores declined from 319 to 256 while average revenue per store increased $0.73M, although EBITDA margins fell from 5.72% to 4.32%, due in part to cost associated with building out waterlife stores and growing the online platform (please note average revenue per store includes online sales, which grew from 6% of total revenue to ~10% of total revenue during this period). The Company does not report store by store performance therefore one cannot determine the potential value in closing lower profitability stores; however, given the store density in certain areas, further consolidation combined with increased e-commerce sales as well as a reduction in expenses associated with building out waterlife and e-commerce platforms could lead to margin upside. (Please see chart below next strength for per store trends)

Category Killer of Niche/High-End market, with material MRO and critical part demand and an established footprint: West Marine is the largest boat supplies and marine lifestyle retailer in the US, with a dense footprint in the most active marine communities in the US. As the Company does not sell vessels (aside from smaller dinghies, etc.), a majority of its boating revenue is derived from aftermarket and repair/maintenance demand, from life jackets and boat fenders to engine parts and electronics. The Company generated 80.2% of LTM revenue from "Core Boating Products". As such, the Company's demand is insulated from trends in new boat purchases. As the chart below (source: US Coast Guard) shows, the number of registered vessels has fallen in recent years from ~2004 peak; however, the large volume of in-use boats provides stable demand for West Marine boating products. Furthermore, in recent years the Company has leveraged its position as a go-to boating supply store to diversify into other marine activities (which makes sense given both brand reputation and geographic footprint) and has increased the total % revenue from "Merchandise Expansion Products" from $89.4M FYE 2011 to $151.1M 3Q 2016, as Core Boating Product sales have remained relatively constant. The Company has an established footprint and brand name in high-activity boating communities (see store map in appendix), which it services out of two distribution centers: a 472,000 square foot facility in Rock Hill, SC, and a 240,000 square foot facility in Hollister, California.

Rec Boat Reg Click to enlarge

Source: US Coast Guard

Valuation and Valuation Trends: As shown below, the Company's EV/EBITDA, as of 11/28/16, has declined by 1.1x from FYE 2011 and 6.1x from FYE 2014. As EV/EBITDA has fallen over 50% from 2014, both revenue and EBITDA per store have increased, revenue increased from $2.42M average per store FYE 2014 to $2.75M 3Q 2016, while EBITDA has grown from $0.08M to $0.12M in the same period. Furthermore, during this same period, the number of stores has decline by 23 and both cash and inventory have risen materially, with cash more than doubling from $45.7M to $93.9M.

Click to enlarge

Source: Info from CapIQ and Company Filings, Chart Self Made

Supplier and Customer Diversification: West Marine purchases merchandise from over 800 vendors, with the largest vendor accounting for ~9% of total vendor purchases and the top 20 accounting for 41%. As noted above, Accounts Payable increased in recent periods (however, per management, expected to remain stable around current levels) as a result of revised terms with vendors, showing the Company's ability to manage vendor relationships on favorable terms. Given the Company's position as the largest boating supply retailer and a growing retailer in marine lifestyle products, it is possible the Company is able to exercise pricing power over suppliers who rely on West Marine as a key distribution channel. Furthermore, the Company has a material number of stores across a broad geographic footprint leading to customer base diversification. The Company's recent push into waterlife has increased the diversification of its customer base as well.

Value Accretion Opportunities and Related Thoughts:

Activism or Acquisition: Due to the clean balance sheet (including significant cash), EV discount to asset values, category killer status, and maintenance/repair/replacement (including critical parts) revenue from the boating industry, West Marine could be a good target for either shareholder activism or a potential take-private offer. The ability to close low profitability stores or consolidate stores in close proximity to one another could represent the opportunity to improve margins while temporarily reducing inventory purchases, positively affecting cash generation. Though there has been a consolidation in number of stores over the past decade, and notably in recent years, the recent expansion of larger "Water-life" stores has led to a slower decline in total square footage and while revenue per store and per square foot has improved, EBITDA per store and square foot has been relatively flat to down on a margin basis. Perhaps management is unwilling to sacrifice sales to improve profitability, and this could be part of the why they do not report any financials at the store level (which would be a key piece of diligence). However, given the current valuation, the downside protection from stable core boat product demand and asset values, as well as potential for margin and cash flow enhancement, West Marine could present an opportunity for material upside for an active shareholder or a private buyer.

Analysis of Capex: The Company has increased capex spend in recent periods primarily to build out waterlife stores and improve the online platform. Capex increased from 2.67% of FYE 2011 revenue to 3.21% of FYE 2015 revenue. As the Company does not report financials on a store level basis, one cannot determine the exact use of this capex and the returns generating from these investments.

Compensation, Board and Ownership: CEO Matt Hyde has made greater than $1M (total compensation) each year since joining in 2012, with 2012-2015 total comp of $1.6M, $1.0M, $1.1M and $1.5M, while 2015 represents the highest year of cash compensation at $1.1M. The next three highest paid employees on a total compensation basis for 2015 were EVP of Stores and Wholesale, CFO and EVP of Merchandising, Replenishment and Logistics, who made $0.66M, $0.64M and $0.57M, respectively. FYE 2015 total compensation for each board member was $100k or above, with cash compensation for each board member of $50k or more.

The largest individual shareholder is Randolph Repass (founder and affiliated director) who owns 24.5% of outstanding shares. The rest of management and the board combined own less than 2% of outstanding stock. The largest institutional shareholders are Franklin Resources (15%), Dimensional Funds (8.4%), Royce (7.1%) and BlackRock (5.7%). An opportunity could arise if Mr. Repass seeks partial or full liquidation as he ages or the institutional shareholders seek liquidity (ownership figures per CapIQ). Furthermore, some investors may be justified in thinking that given the high compensation of management, perhaps more of their worth could be tied up in West Marine.

Trading Comps:

The below represents the comparable universe for publicly traded companies of similar size or in similar industries.

Comps Click to enlarge

Source: CapIQ and Company Filings

Conclusion: WMAR provides upside for both value and growth via stable cash flows, potential margin enhancement opportunities and valuation increasing towards comp norms while significant asset value and no debt provide downside protection. Shareholders could further benefit from a return of cash via a buyback or dividend. While the present consolidation plan seems relatively positive, additional upside could be unlocked if a store level analysis proves certain stores to consistently lag on a margin and return on capital basis. The Company's core boating products revenue and clean balance sheet should provide stability in a period of macro headwinds. The existing valuation of ~4.75x EV/EBITDA represents a discount based on historical levels, comps and expected cash generation.

Upside Catalysts:

- Return of significant cash balance to shareholders

- Ability to expand margins via consolidation of poorly performing square footage

Downside Catalysts:

- Increased competitive pressures from big sporting goods retailers and online competitors

- Significant top-line headwinds due to competition or macro softness

Appendix:

North America WMAR Store Map

WMAR store map Click to enlarge

Source: Google Maps

Bass Pro Map Click to enlarge

Source: Basspro.com

Cabela Map Click to enlarge

Source: cabelas.com

Sources:

Capital IQ

WMAR Filings and Presentations

Disclosure: I am/we are long WMAR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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Don’t let your doctor make these 9 blood pressure measurement mistakes

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Heart and Disease

“Blood pressure is measured incorrectly about half the time,” says physician William B. White, editor of the medical journal Blood Pressure Monitoring.

Here are some common mistakes that can cause your systolic blood pressure reading to be off by 2 to 20 points, according to the American Heart Association and other experts. If you have hypertension, the error is more likely to be at the higher end.

  • Don’t have your blood pressure measured after consuming caffeine. Caffeine temporarily raises your pressure.blood pressure
  • Don’t have your blood pressure measured within half an hour of smoking. This can increase blood pressure.
  • Don’t get measured if your bladder is full. That can raise your pressure.
  • Don’t get measured within 30 minutes of aerobic exercise like brisk walking or jogging. That can lower your pressure temporarily.
  • Don’t sit on an exam table or chair with no back support.  That can raise your diastolic pressure. (That’s the lower number.)
  • Don’t sit with your legs dangling or crossed. That may raise your pressure. Your feet should be flat on the floor.
  • Don’t rest your arm above or below your heart level. That can raise or lower your blood pressure. And your upper arm should be supported at heart level by the person taking your blood pressure, not by you.
  • Don’t chat with the person doing the measuring. Even a casual conversation can raise your pressure.
  • Don’t have the cuff wrapped around clothing. That can lead to a higher reading. So can a cuff that’s too tight (too small for your arm or wrapped too tightly). And a cuff that’s too loose or too large can lead to lower readings.

Before a diagnosis of hypertension (high blood pressure) or prehypertension is made, your blood pressure should be measured at least twice on at least two separate occasions

If you check your pressure at home

The American Heart Association recommends an automatic, cuff-style, bicep (upper-arm) monitor. You should be able to find one for $50 to $100. Wrist and finger monitors give less reliable readings, says the Association.

“You want to make sure that the device you use was independently assessed and validated,” adds Blood Pressure Monitoring editor William B. White.

For a list of validated monitors, see http://ift.tt/2gjKfot. However, this is not a consumer-friendly list. As an alternative, Consumer Reports rated blood pressure monitors in May 2015.

Tip: To verify your monitor’s accuracy and that you’re using it properly, take it with you to your next doctor’s appointment.

Find this article about blood pressure interesting and useful? Nutrition Action Healthletter subscribers regularly get sound, timely information about how nutrients can affect their health. They also receive science-based advice about diet and diabetes, heart disease, cancer, osteoarthritis, and other chronic diseases; delicious recipes; and detailed analyses of the healthy and unhealthy foods in supermarkets and restaurants. If you’re not already subscribing to the world’s most popular nutrition newsletter, click here to join hundreds of thousands of fellow health-minded consumers.

The post Don’t let your doctor make these 9 blood pressure measurement mistakes appeared first on Nutrition Action.



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Magic Leap’s technology may be years away from completion

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Magic Leap’s allegedly revolutionary augmented reality technology may in fact be years away from completion and, as it stands now, is noticeably inferior to Microsoft’s HoloLens headset, according to a report from The Information. The report, which incorporates an interview with Magic Leap CEO Rony Abovitz, reveals that the company posted a misleading product demo last year showcasing its technology. The company has also had trouble miniaturizing its AR technology from a bulky helmet-sized device into a pair of everyday glasses, as Abovitz has repeatedly claimed the finished product will accomplish.

Magic Leap lied about a video demonstration of its tech

The revelations undermine one of the most secretive startups in the technology industry, casting Magic Leap as a fast-growing startup that has overhyped its product with wild marketing stunts and unrealized ambition. The company has raked in $1.4 billion funding at a valuation of $4.5 billion. Investors include Google, Chinese e-commerce giant Alibaba, and Silicon Valley juggernaut Andreessen Horowitz. It has done so by convincing prominent tech and entertainment figures that it has a cutting-edge, never-before-seen technology that can realistically create virtual objects and blend them with the real world. Magic Leap was not immediately available for comment.

The company has repeatedly used YouTube videos to demonstrate its AR technology, showing tiny elephants in the palms of people’s hands and a life-sized whale jumping out of a virtual ocean on a gymnasium floor. But at least one of these videos — showing an alien invader game that let the wearer of the supposed headset or glasses make use of real-world objects — was created by visual effects studio Weta Workshop. Prior to today, it was believed Weta had simply created the visual assets for the game. However, The Information reveals the entire video was created by the studio. Magic Leap nonetheless used it to recruit employees to work at its South Florida headquarters. “This is a game we’re playing around the office right now,” reads the video’s description — an assertion that could not have been true.

The Information received a rare product demonstration at Magic Leap, describing the device as a bulky helmet that connects to a desktop computer using multiple cables. The demo is described as having elements similar to the HoloLens, but with images that are in some cases blurrier and more jittery than Microsoft’s prototype. The HoloLens is now available in a developer kit form for $3,000, and it can be worn completely untethered from a computer.

Is Magic Leap the Theranos of AR?

The crux of the problem appears to be Magic Leap’s gamble on a so-called fiber scanning display, which shines a laser through a fiber optic cable that moves rapidly back and forth to draw images out of light. The company thought the fiber scanning display could be Magic Leap’s breakthrough tech, allowing it to shrink down the extremely expensive hardware used on a previous prototype — a refrigerator-sized device known internally as the “Beast.”

According to The Information, Magic Leap still has not been able to get the fiber scanning display to work. It has since demoted it to a long-term research project. “You ultimately in engineering have to make tradeoffs,” Abovitz said in the interview. Still, the company’s latest prototype appears to be the size of a standard pair of glasses. It’s known internally as the PEQ, for product equivalent, and yet Magic Leap declined to demonstrate it for The Information. Abovitz claims it works only slightly worse than the earlier, tethered prototypes, but denied that it now uses technology similar to the HoloLens.



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