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The JCP Economy

4/15/2014

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In my second ever blog entry for JYE Financial (Now Firing : The New American Way), I discussed two failing companies, one of which was J.C. Penney. I mercilessly attacked the "bottom line" thinking of its management team as such tactics are woefully misaligned with the inherent nature of a business the size of JCP and is therefore subject to a potential boomerang effect where the long-term consequences of cost-cutting quickly overwhelm its short-term benefits.

Then in late February, JCP shares shot up 25% in a single day, the best performance on record since 1967. Did that deter my bearish sentiment towards the retail giant? Not even for a second! On that day, I entered a blog entry entitled, "Reversal of Fortune?" in which I argued that the technical mechanisms that permitted such an explosive move, namely an overly levered short float, belied a coherent marketing strategy that threatened its revenue base. In other words, financing a company through equity dilution did nothing to address the fact that for the most part, JCP does not have a dependable market share by which it can extract top line sales.

Almost as an afterthought, I mentioned the debt overhang that the lack of revenue will impose upon the retailer. Without a consistent stream of consumer dollars that are equally met with a passionate marketing message, JCP ran the risk of withering against a double-fronted war. On one hand, the mediocre improvements in revenue were not enough to offset basic business costs and other expenses. Yet the back door of legacy liabilities, the enormous long-term debt, grew larger and larger as evidenced by the descending cash flow statements.

Each and every time JCP fails to achieve a substantive target by whatever margin, a base level of investment dollars will quickly vacate the sector in search of more profitable (and stable) opportunities. Beyond conjecture, investors are only human : they want to make money and they prefer to do so in an expedient fashion. When either valuation risk or time risk comes into play, the likelihood of volatility increases. With JCP, they suffer from both and there's very little reason to commit capital in such a tenuous environment.

The same can be said for U.S. equities. I understand that the mainstream media will trumpet "improving economic data" and a "buying on the dips" mentality, but the elemental truth is that much of the investment money that was profited in the domestic stock market has already been rendered : there's not much room, if at all, for the regular folks.

That's more of a technical/psychological reason why I'm not a big fan of the large-cap equities at this moment. The fundamental reason is found in the JCP dilemma : where do we go from here? The stock market is where the engine of America's economic activity goes to dilute themselves in exchange for liquidity. With the S&P 500 regularly crossing above 1,850 points, it's safe to say that whatever liquidity was sought was most certainly found. Now unless the country has an actual plan to substantively restore the economy and not just regurgitate fairy tales, volatility will only become an inevitability.


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