Tag / Wall Street

by Frank Maduri

Pushing The Easy Button: Staples Sold To Sycamore

The sale of office supply retail giant, Staples to a private equity firm, Sycamore Partners, is the most recent in a string of merger activity in the retail sector. It is no secret that Staples has had difficulties recently competing with online retailing behemoth, Amazon, who has taken quite a significant chunk of the market share away from Staples.

This transaction represents yet another major American retail brand taking the first of many options along the “decision tree” to retail survival. The key to this sale is that Staples will transition from a publicly traded company on the stock exchange into a privately held enterprise.

This is a huge distinction because, quite often, companies make decisions on any number of matters based upon how it will potentially impact the valuation of their stock, or how it will “play” with the analysts on Wall Street, or their shareholders perception of the decision.

Conversely, a privately held company has none of those same considerations. These types of enterprises can make decisions based upon what is good for the overall health of their business. In this case, with Staples, the company that once touted the “easy button” for solutions to home office or small business needs; the company pressed the button to solve their overall issues.

Staples initially attempted the “get bigger” strategy by attempting to purchase one of their largest competitors, Office Depot, but the proposed acquisition was rejected by regulatory anti-trust officials.

Staples remains the largest brick and mortar retailer of office supplies in the United States, and this is after shutting down hundreds of underperforming locations to free up more cash flow. That is the advantage they have over Amazon and other retail competition, is the in-store option. They have to play that to their advantage and refocus their brand on what they do very well particularly in the service area of copy and print.

The investment from the perspective of Sycamore is a reasonable one at face value because they obtain a recognizable brand with a huge network of retail stores that could own that space if they recalibrate themselves correctly.

Staples could weather the storm here by going into private hands, it is certainly going to make the transition to fighting Amazon easier without having to answer to “The Street”. It remains to be seen whether they make the correct course adjustments to their business to stay relevant in an extremely price sensitive marketplace with much more savvy and well informed consumers.

by Frank Maduri

The Complexities of a Global Economy Reliant on China

(This post originally was submitted to a subscription-only financial investment site. I have included it here on my blog in order to reach a wider audience.)

 

The first two weeks of 2016 have proven that the global economy being so reliant on China can wreak havoc on the stock markets of all the major indexes in the world. The uncertainty which is pervading Wall Street regarding the future of the Chinese economy and their currency is the underpinning for the rapidly declining performance of the US financial markets.

 

The second issue with the global economy is the precipitous drop off in the price of oil. The price for a barrel of crude oil is now down to below $30.00 and this huge price decrease on a commodity as vital as oil is great for consumers paying less at the pump to fill their cars, but it is detrimental to the overall economic outlook.

 

The rationale behind the drop in oil prices is tied to two main factors. First, it is a matter of basic supply and demand: the world has too much oil and far less demand for this resource. The United States alone has contributed to this situation with the abundance of laws clearing the way for the rise in hydraulic fracturing, or fracking, in huge swaths of land called shales or shale plays. The result of fracking created conditions in the market where oil was entering the system from several new entry points in different states that previously did not contribute to the oil supply. This added to the increasing supply quantities.

 

The second component to the drop in oil prices is the decreasing demand from emerging economies in other parts of the world including, and most importantly, the Chinese economy. The slowing growth of manufacturing and other factors in China have a chain reaction effect where the world’s largest emerging market needs less oil.

 

In addition, a factor that is certainly contributing this issue and will continue to be in the coming months is the freedom of Iran from economic sanctions and their subsequent reentry into the oil market. The broader issue is that Iran has not made any money from their oil supply due to the international sanctions levied because of their nuclear program; so any revenue it makes from the sale of oil is gravy to them. This will translate into a commodity pricing battle between Iran, Saudi Arabia, Libya, Iraq, and other Middle Eastern countries who are in dire need of liquid cash so they have turned on the oil faucet, so to speak.

 

The evidence of the impact of these new Middle Eastern players (Libya, Iran, and Iraq) is demonstrated by the dip in oil prices below the $30.00 threshold. Many economists will attribute this to an overabundance of supply of oil because a couple of reputable studies show that American demand has not diminished and that Americans are driving more now on average than in the past several years.

 

Fuzzy Math

 

The root cause of the issue revolving around a global economy that is reliant on China is that the accounting practices in that Asian powerhouse have been consistently under scrutiny for being unreliable in the best case scenario. This inherent unreliability coupled with inconsistent practices in quality control as well as variability in their supply chain all equals what Wall Street cannot handle: unpredictability.

 

That unpredictability coupled with the turbulent valuations surrounding the Chinese currency, the yuan, and the result is the wild swings in the trading activity across all the major stock indices from the start of 2016. The data coming out of China, financial or otherwise, is so completely unreliable and lacks so much credibility that the integrity of the entire financial marketplace is vulnerable to the deficits we have witnessed in the first two weeks of this year.

 

Some economists and financial market analysts will tell you that China is a growing economy with an emerging middle class which was bound to hit some “bumps in the road” and that this was expected. My take is slightly different in that I do not think our entire global economic future should be underpinned by the performance (or lack thereof) in China. I know it may seem naïve but I feel like it must change, it is a fundamental flaw in the global system.

 

Other economists and experts predict that it is precisely because of this widespread reliance on China and products manufactured and exported from there all over the world, that the global system will collapse worse than it did in 2008. In that case, if the first two weeks of this New Year are any indication, we might be in for that situation playing out exactly in that manner.

 

Elbow Room

 

The other notion that is prevalent in some circles of the financial realm at this point is the thought process that the Chinese yuan might be trying to elbow its way into the top currency spot in the world.

 

I find even the mention of this so fraught with concerns because of all the issues with the currency valuation in China at this point. The recent decline in the overall growth of the Chinese economy will have a reverse effect in that I believe it will drive investors back to the American economy and to invest in the US dollar. The US dollar is, and will remain, the top currency in the world based on the stability of our democracy and our economy, even in the event of a recession or a downturn.

 

It is time for us as investors and for the world economies involved to look at China with caution and to prepare your portfolio strategy accordingly for both the short term and the long term investment objectives. In the end, this year is showing us what most of us already knew, we cannot trust the information coming out of China and we need to embrace different practices when evaluating their economy in the future.