Don’t Fall for This Private Equity “Masquerade”

It always amazes me how long it takes dying businesses to finally give up the ghost. And how long it takes shareholders to admit that they are going to lose every last dollar if they don’t bail out before the stock loses all of its value. We are seeing that in the retail space today as one dying brand after another bites the dust, and we are going to see it in the consumer space as well. Nostalgia is bittersweet, but investing in nostalgia is just bitter.

A sure sign that a company is in serious trouble is when it announces a restructuring plan. (See my article on TGT a few weeks ago.) An even more ominous sign is when it puffs up its chest and claims that its restructuring plan is actually something more grand rather than merely another tired attempt to fix a broken business model.

The company I’m writing about today chose the latter route by calling its desperate attempt to save itself a “Transformation Plan.” But in this stock’s case, it did more than restructure itself – it sold off its North American business (keeping a minority 19.9% position) and decided to tie its fate to the emerging markets, which have been giving it all kinds of currency and tax fits for years, and to one of the most tough-minded hedge funds in the world.

This company is no longer the master of its own fate. It now works for Cerberus Capital Management, LLC (Cerberus) and is effectively a private equity portfolio company masquerading as a public company.

As you’re about to see, that’s a huge red disaster flag (and a good short opportunity)


These Three Sectors Are Getting Slammed As Washington Flounders

Markets spent last week watching the Republican Party eat its own and reject seven years of promises to repeal the broken Obamacare bill while the Democrat Party that destroyed the American healthcare system celebrated.  For the moment, investors chalked this cynical display of political paralysis as typical Washington dysfunction and left markets relatively unscathed.  The Dow Jones Industrial Average shaved off only 1.5% or 317.90 points on the week to close at 20,596.72 while the S&P 500 dropped by 1.4% to 2343.98.  The Nasdaq Composite Index lost 1.2 to finish the week at 5828.74 in the wake of a flurry of Elon Musk tweets designed to distract Tesla investors from that company’s massive losses and broken promises. 

Who says that the narrative of nonsense that dominates our public discourse is limited to Washington, D.C.?  But investors will soon run smack into the reality that Obamacare imposed crippling costs on consumers and businesses that contributed to the worst recovery in modern history. With no prospect that the yoke of this ruinous legislation will be lifted off the backs of the American people for the foreseeable future, markets are likely to turn from irrational exuberance to rational sobriety very quickly.

And we’re already seeing casualties (and of course, some attractive shorts) in these three sectors