☀️☕️ Bricks, Mortar and Macy’s

📝 Focus

• Bricks, Mortar and Macy’s

📊 In the Markets

• “¡Viva la libertad, carajo!”

• The Santa Claus Rally

📖 MoneyFitt Explains

• 🎓️ Private Equity

💸 Personal Finance Corner

• 5 Best Tips and Tricks When Asking for a Pay Raise

📚 What We’re Reading

📝 Focus

Bricks, Mortar and Macy’s

Iconic bricks and mortar retailer Macy's shares surged almost 20% on Monday on reports that shareholders Arkhouse and Brigade would take the 165-year-old chain private at a 32% premium over Friday's closing stock price. The $5.8bn bid would, though, still represent a 75% decline from its 2015 peak.

Like all department stores, Macy's, with 722 store locations, has struggled against online retailers like Amazon and diversified “big box” competitors such as Walmart and Target, though it has strengths in its millions of cardholders, a (surprisingly) successful ecommerce business with over $7bn in online sales, a foothold in the luxury space through the upscale Bloomingdale’s chain and Bluemercury beauty product stores. But Macy's also has $2.8bn in net debt and, even if currently profitable, a very patchy earnings track record.

With Arkhouse a real estate investor, and Macy's real estate assets valued at somewhere over $6 billion, the implication is that the deal will focus on unlocking the value tied up in the property portfolio as a private company. What then happens to Macy's core but challenged retail business is anyone’s guess.

..... ▷ Famously the sponsor of the Thanksgiving Day Parade in New York, Macy’s was one of the pioneers in getting Americans to associate Christmas with shopping for gifts, and the 1947 holiday classic “Miracle on 34th Street”, a film about Santa Claus bringing back the spirit of Christmas to shopping, cements the Macy’s Herald Square flagship store in popular cultural history.

..... ▷ In recent decades, investor groups like private equity and hedge funds have targeted struggling retailers, aiming to take them private, enhance operations, restore them to their past glory and sell them off at a profit. 

But the end result has often been struggle, decline and closure rather than revival. 

Sears, another iconic department store chain, was bought by hedge fund manager Eddie Lampert (and merged with another chain, Kmart) but filed for bankruptcy shortly after its acquisition. While it remains in business, it is now down to just a handful of stores where each brand once had hundreds.  

Lord & Taylor, Toys ‘R’ Us, Payless ShoeSource, Sports Authority, RadioShack, The Limited, Wet Seal, Claire’s and Aeropostale all filed for bankruptcy and shut down their US stores after being taken off the market by private equity firms.

Private equity managers making dumb trades, fueled by a blend of easy financing arranged by greedy investment bankers and inflated egos?

..... ▷ A simplified playbook for private equity investors is to buy out these famous retail chains by loading the company up with massive amounts of debt. 

This can happen because rather than borrowing to buy things as one would on a credit card, private equity firms create a new firm which borrows the money by issuing bonds and then merges it with the target. 

That newly merged company will then owe the debt that was used to buy it from other shareholders and then has to pay the interest and principal back on what could be an unaffordable amount of debt taken on at a high interest rate. (That’s what Elon Musk did with his acquisition of Twitter, now X.)

..... ▷ The play is then to separate the new company’s real estate holdings off from its retail operations. 

With real estate and retail operations now belonging to two separate legal entities, the “legacy” retail company is forced to pay not only interest to the bondholders but often jacked-up rent to the split-off real estate company which owns the buildings the stores are in.

Even if that puts the legacy retailer on shaky ground as a business, the real estate portfolio’s new owner can extract maximum returns in the resulting set-up. 

And even if it all results in bankruptcy, mass layoffs and sunset for familiar retail names, the private equity investors themselves and (usually) their bondholders do just fine, thank you.

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

Monday trading in Asia-Pacific markets was mixed, with China trading up and HK down, both on news about China’s ongoing battle with deflation (See: “Deflating China.”). Japan closed firmer on a bad-news-is-good-news trade where traders bet that weak economic numbers would mean interest rates are unlikely to rise any time soon.

But European and US markets closed higher on Monday with key US benchmarks managing to close at new highs for the year despite every single one of the “Magnificent Seven” stocks (Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla) closing in the red.

Investors are looking ahead to this week’s Federal Reserve policy meeting on Wednesday and US inflation data on Tuesday (CPI) and Wednesday (PPI). The interest rate setting committees of both the European Central Bank and the Bank of England meet on Thursday.

¡Viva la libertad, carajo!

Down south, Argentina’s benchmark local stock market  index, the S&P Merval, popped up 3.7% on the first trading day under its new president, right-wing libertarian economist Javier Gerardo Milei, whose campaign slogan translates to “Long live freedom, dammit!” 

The Merval is now up 380% this year… in Peso terms. The Official Peso rate has halved against the USD over the same period.

Aiming to revamp an economy plagued by 200% inflation (12% in November alone), recession and 40% poverty, he arrived at his inauguration ceremony on Sunday in a simple blue Volkswagen, rather than in a cavalcade of limousines, 40 years to the day since Argentina’s return to democracy.

Milei campaigned on drastic economic changes like shutting the central bank entirely, ditching the collapsing Argentine peso and slashing spending. His first step was to sign a presidential emergency decree that very afternoon mandating the reorganisation of Argentina’s government down from 18 to just 9 ministries.

(Also see: “Don’t Cry For Me, Argentina.”)

The Santa Claus Rally

With the market showing positive momentum heading into the final weeks of December 2023, traders are speculating that we’re in the midst of another Santa Claus Rally.

But technically, it’s referring to the historical phenomenon in which prices tend to rise during the final five trading days of December and the first two of January. It was first identified by Yale Hirsch in 1972, and has held true for a majority of years since then, with the S&P 500 experiencing an average gain of 1.35% during this period.

..... ▷ While market commenters often credit increased optimism and a boost in investor confidence to holiday season jolliness in general, there are a couple of other factors that may drive this seasonal move in the markets:

Year-end “window dressing”: Fund managers may manipulate their holdings to boost their fund’s performance before the year-end portfolio snapshot and to show better names going into the new year, often by selling underperforming stocks and buying high-performing ones.

Tax-loss harvesting: US investors often sell off losing stocks to offset capital gains, leading to temporary dips earlier in the month that could be followed by rebounds.