Friday, January 27, 2023

The return of animal spirits; Bed Bath & Beyond Says Banks Have Cut Off Its Credit Lines; Seven inflation charts; Inflation Is Cooling, Leaving America Asking: What Comes Next?; My inflation prediction

By Whitney Tilson

1) After the bloodbath that reckless speculators suffered last year, you might think that they'd learned at least a few lessons, but nooooo...

It seems like every stock that crashed 60% to 80% last year is up 20% to 50% this year. Just look at my preferred proxy for these types of stocks, Bubble Queen Cathie Wood's Ark Innovation Fund (ARKK), which is up 23% after falling 60% last year.

It would be hard to find a better example of how quickly "animal spirits" (that's my polite way of saying "reckless idiocy") has returned to the markets than the fact that the stock of dying retailer Bed Bath & Beyond (BBBY) only fell 22% yesterday on this news: Bed Bath & Beyond Says Banks Have Cut Off Its Credit Lines. Excerpt:

Bed Bath & Beyond said it doesn't have the funds to repay its banks after they determined the retailer has defaulted on its credit lines.

The home-goods chain said it received a notice of default from JPMorgan Chase on Wednesday. The banks are calling for an immediate repayment of all outstanding loans under the credit agreement.

Bed Bath & Beyond shares tumbled 22% Thursday to $2.52 following the disclosure in a securities filing. The company warned earlier this month that it was running low on cash and exploring a potential bankruptcy filing.

The default notice from the banks is unusual even for a company facing a potential bankruptcy and sets in motion a clock for Bed Bath & Beyond to remedy the issues.

Typically companies reach agreements with their lenders over their plans for filing for bankruptcy protection, putting a pause on the requirement to repay their debt.

The company has $550 million in loans outstanding from the banks led by JPMorgan, as well as $375 million from a facility provided by Sixth Street Partners, according to a securities filing. It had $154 million in unrestricted cash and equivalents in late November. It also had $1 billion in senior notes outstanding.

Bed Bath & Beyond is now all but certain to file for bankruptcy in the very near future and, regardless of whether it's a Chapter 11 (restructuring) or, more likely, Chapter 7 (liquidation), there will be no recovery for the stock... yet it closed yesterday at $2.52 per share, giving the company a nearly $300 million market cap.

In a rational world, BBBY shares would be trading for a dime...

2) Genevieve Roch-Decter posted a Twitter thread with seven charts showing inflation is heading downward. These three are my favorites:

3) The New York Times has a related story: Inflation Is Cooling, Leaving America Asking: What Comes Next? Excerpt:

America may have reached an inflection point on inflation at last. The question now centers on what will happen next.

Some economists expect inflation to remain stubbornly faster than before the pandemic, while others anticipate a steep deceleration. Some anticipate something in between. Which prospect plays out matters enormously: The speed and scope of the inflation cool-down will inform how high Federal Reserve policymakers raise rates, how long they leave them elevated and how much pain they inflict on the economy.

For now, the staggering uncertainty has prompted Fed officials to come out in favor of further slowing – but not stopping – their interest rate increases at their Jan. 31-Feb. 1 meeting. Officials pulled back from their previous three-quarter-point increases to a half-point move in December, and many support raising rates this time by just a quarter-point. Moving more gradually would give policymakers more of a chance to see how the economy was developing, lessening the risk that they drive the economy off a cliff.

"If you're on a road trip and you encounter foggy weather or a dangerous highway, it's a good idea to slow down," Lorie Logan, the president of the Federal Reserve Bank of Dallas, said during a speech last week. The same considerations that prompted central bankers to decelerate in December "suggest slowing the pace further at the upcoming meeting."

4) My expectation is that inflation will continue to fall and reach roughly 4% by mid-year, which will lead the Fed to slow its rate increases and the stock market to surge.

However, I do not expect inflation to continue falling to the Fed's stated target of 2% over the remainder of the year, primarily because the labor market is so tight that I think wages will keep rising – at least at a moderate pace.

If I'm right, then the Fed, while it might stop tightening, likely won't start easing – which could disappoint investors and lead to the market giving back some of its gains.

I'll be keeping an eye on this and let you know how my thinking develops...

I'll also remind my readers that if I find a good company with an undervalued stock, I'll buy it without hesitation, irrespective of macro factors like what I think inflation will be and what the Fed might do.

5) Continuing my ongoing series of the highlights from our Antarctica trip...

We were able to sign up for three small-group adventures: kayaking, camping overnight on shore, and mountaineering. In my January 19 e-mail, I shared pictures of kayaking. Here I'll share three pictures from our camping expedition (for more pictures, a video, and a description of what we did, see my Facebook post here):

Best regards,


P.S. I welcome your feedback at [email protected].