the Toys R Us Chapter 11 filing

Toys R Us (TRU) is no longer a publicly traded company.  After a very rocky period of being buffeted by Wal-Mart, Target, and with Amazon beginning to pile on, TRU was taken private in 2005.

Its fortunes haven’t improved while in private equity hands.  In addition, as private equity projects usually do, TRU acquired a huge amount of debt, as well.  In a situation like this, suppliers are typically very antsy about the possibility of a bankruptcy filing.  That’s because trade creditors have little standing in bankruptcy court; they usually can’t get either their merchandise back or payment on any receivables due.

When a reent press report appeared that TRU was considering Chapter 11, suppliers apparently refused to send any more merchandise to TRU on credit, demanding payment in full upfront instead.  The company didn’t have the cash available to pay for enough merchandise to fill its stores in advance of the all-important holiday season.   So it filed for Chapter 11 bankruptcy.

None of this is particularly strange.  Years ago, one of my interns did a study that showed that even in the early 1990s TRU was losing market share to WMT and TGT, and was making due mostly by taking share from mom and pop toy stores.  Then the last mom and pops closed their doors and TRU’s real trouble began.

What dd surprise me was the report in today’s Financial Times that the company’s notes due in 2018 were trading at close to par a couple of weeks ago–vs. $.28 on the dollar now.

How could this be?  Holders were apparently betting that TRU would limp through the holidays and then refinance its 2018 debt obligations–allowing these “investors” to collect a coupon and exit if they so chose.

The fact that professional investors would commit money to this threadbare investment thesis shows how desperate for yield they are in fixed income land at present.  As/when rates begin to rise, things could easily get ugly, fast.

economics in the US vs. identity

The Financial Times has recently added an interesting new Opinions columnist, Rana Foroohar.  In her column yesterday, she writes that while the Democrats believe that they lost the presidential election because of misogyny and racism, the more likely cause is wage stagnation and job insecurity.  In other words, long-time Democrats voted Republican in the last election in spite of the victors’ abhorrent social views, not because of them.  Further, she implies that by continuing to seek favor from large corporates as well as by taking up the former Republican mantle of mindless legislative obstruction, the Democratic party risks further establishing itself as part of the economic problem, not the solution.

Clearly, the Democratic leadership doesn’t believe this, although personally I think Ms. Foroohar is correct.  Moreover, as Ms. Foroohor notes, the issue of job insecurity and wage stagnation is a dynamic one, not static.  As recent research from the University of Cambridge suggests, and the emergence of self-driving cars illustrates, the range of human tasks subject to replacement by machines is continuing to expand, putting more blue-collar jobs as well as some white-collar occupations as risk.

So this central issue is not going to go away.  It’s going to get bigger.


Social issues aside, a stock market investor must, I think, address two questions:

–how to participate through stock selection in the substitution of hardware/software capital for labor, and

–how closely continuing political dysfunction in the US resembles the situation in Japan thirty years or so ago, in which a foolish political defense of the status quo in the face of structural change has resulted in a decades-long impairment of GDP growth there.



oil inventories: rising or falling?

The most commonly used industry statistics say “rising.”

However, an article in last Thursday’s Financial Times says the opposite.

The difference?

The FT’s assertion is that official statistics emphasize what’s happening in the US, because data there are plentiful.  And in the US, thanks to the resurgence of shale oil production, inventories are indeed rising.  On the other hand, the FT reports that it has data from a startup that tracks by satellite oil tanker movements around the world, which seem to demonstrate that the international flow of oil by tanker is down by at least 16% year on year during 1Q17.

Tankers move about 40% of the 90+million barrels of crude brought to the surface globally each day.  So the startup’s data implies that worldwide shipments are down by about 6 million daily barrels.  In other words, supply is now running about 4 million daily barrels below demand–but we can’t see that because the shortfall is mostly occurring in Asia, where publicly available data are poor.

If the startup information is correct, I see two investment implications (neither of which I’m ready to bet the farm on, though developments will be interesting to watch):

–the global crude oil supply/demand situation is slowly tightening, contrary to consensus beliefs, and

–in a world where few, if any, experienced oil industry securities analysts are working for brokers, and where instead algorithms parsing public data are becoming the norm, it may take a long time for the market to realize that tightening is going on.

It will be potentially important to monitor:  (1) whether what the FT is reporting proves to be correct; (2) if so, how long a lag there will be from FT publication last week to market awareness; and (3) whether the market reaction will be ho-hum or a powerful upward movement in oil stocks.  If this is indeed a non-consensus view, and I think it is< then the latter is more likely, I think, than the former.

This situation may shed some light not only on the oil market but also on how the discounting mechanism may be changing on Wall Street.