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Un-Vailing the Other Side


Is it possible we are underestimating the U.S. consumer?

Lovin' you has go to be (take me to the other side),
Like the devil and the deep blue sea (take me to the other side),
Forget about your foolish pride (take me to the other side),
Oh take me to the other side (take me to the other side).

The Other Side

I had two unusually perfect opportunities to review the Have's and the Have Not's of Toddo's keynote in the past two weeks. I went straight from Vail to a decidedly Un-Vail, a dusty Texas town called Bastrop for a decidedly Have-not-a-thing in common with Vail vacation with my family. Along the way I wanted to attack my own convictions and positions which I have built around the Have's and Have Not's which I believe is recognized by many but is accelerating faster than generally perceived. I could not agree more with our bearded prophet. But…I want to know the other side of my trade and I want to challenge my firm's ideas, especially those that have made us the most money like this one. Most money managers are very good at this, but most of them are not crazy enough to do it out loud! But that's the unrivaled spirit of the 'Ville that Todd and Kevin have built. Reading professor's reflections and hearing their thoughts from Minyans in the Mountains 3, I can assure you was worth more than a year's worth of Wall Street research from any firm. That's not even counting the fleece.

So, I'll foolishly consider out loud the other side of the trade that many of us professors agreed on in Vail. Too many perhaps, with too much money to work too well? Is it possible we are underestimating the U.S. consumer? I know I have, and have consistently. I'm like Costanza when he volunteered to help the elderly, "Don't you ever think about dying? My god, if I were your age I'd think about it all the time." But the old man who should have been worried just smiled and played his records. I have some of my own questions like…

Why Doesn't Pooh Wear Pants?

From what I can gather, after a dozen or so viewings of his finest films this past week, the friendly bear has only one thing on his mind. All of Pooh's troubles are caused by looking for only one thing, honey, at the exclusion of all else. Pants are an afterthought. In between block orders for more Pooh, less Nemo, option chains of various snack possibilities and unhedged volatility (no naps) I saw many surprising things as we rambled down the backroads of Texas on my family vacation and I tried to think about what have I been overlooking, like Pooh?

I think bears in my business run into some of the same trouble. Looking at only certain things, it is easy to be a bear right now. Most of my own trades all year long have been from the darkside and my partners have never seen this much cash in their portfolio and they have never witnessed such a long period without a new long (several months until yesterday). Our research systems, half quantitative / half qualitative, led us to each of these positions and they have served us well. A bear, however, I am not. I am simply hunting for what is over-owned and under-owned and especially what is overlooked.

Crippling Energy Prices?

I was stuck in traffic around Austin for an hour, not unusual except that it was 10 o'clock at night! The combination of construction crews, and simply a lot of people going a lot of places amazed me. Traveling I-10 through Texas always makes me wonder the same thing – if the economy is so bad, where are all the trucks going? Bumper to bumper late at night, boy I wished somebody had stayed home because of higher gas prices like they were supposed to.

When Will Consumers Go Belly-Up?

Every morning it turns out, and I had no idea with so much enthusiasm. The main attraction for the kids was the "Lazy River" where everyone grabs a tube and jumps in, belly-up. Each day we get more data confirming the average tuber's financial demise. Each afternoon along the banks of this river they roast S'mores without those graphs, utilizing napkins instead. For everything we thought we had to buy for the kids for this vacation there was absolutely NOTHING that sold like those S'mores. They went nuts for them and loved the entire process. Maybe the average tuber has a few things figured out better than me. For about 360 days a year I range from politely worrying about many of these people to ferociously shorting their decisions in the markets. For these five days I realize they probably worry about me and disagree with my decisions as well!

Structural Imbalances?

According to most charts, we are drowning in debt, and the U.S. is certainly suffering from some competitive imbalances. But I left those charts at the office so I could settle into the highlight of the vacation for me - fifth row tickets directly behind the catcher at a minor league baseball game in Round Rock, Texas. Remember the bad-body catcher I wrote about from Moneyball? He broke up a perfect game in the seventh with a homer. Must have been a shout-out from Jeremy after reading MV! Since everything can be analogized to baseball with zero margin of error (we can at least agree on some things, right?), I sat back and thought about all the people in this country in such dire situations and I thought about a lot of similar problems in baseball.

We all knew the debt, in the form of player salaries our teams were swallowing, was not sustainable. For years we have heard, "This is nuts, this can't continue, the structural imbalance has never been greater between the have's and have-not's, costs are soaring, yet the governing bodies keep spending." That's baseball, but it rhymes with many of the vibes from money managers on our economy as well. Average salaries topping $3 million per player are ridiculous and surely could not be supported by consumers who could not afford higher ticket prices and concessions along with sponsors who would contract their own spending in a slowing economy.

Would guys still go to work for $1.5 million if prices crashed by 50%? My hunch is they would, and as was pointed out in a panel observation in Vail – Tony Dwyer noted that if the housing market followed suit, he's still looking at a windfall! He is not alone. Of course baseball is a ridiculous example so again let's look at the average consumer, not ballplayer. I think one of several line items of the consumer's business that is non-negotiable was sitting all around me at that ballpark. People will pay for smiles. Some will do that no matter what it costs on the high end, while others will continue, no matter what, on the low end - and we underestimate that fact consistently.

The last ticket to a big league game cost me more than our entire family's evening of: four tickets behind the catcher, including Texadelphia cheesesteaks (better than anything at our big league park), Blue Bell ice cream, a hat and t-shirt for the kids and a picture with Spike the mascot (free, and the biggest treat of them all!). I sat back and thought about the "worst case" scenarios agreed upon right now, and not being able to afford a lot of stuff that we assume is what the middle class wants. I looked around and overheard conversations from the regulars behind the plate that night and realized those "worsts" might be even better than the bests for many consumers. They were poking as many holes in Have's situations as we too often poke in the Have Not's. Making fun of Ensberg on a recent rehab tour because he missed the air conditioned stadium in Houston was the topic that night.

How bad has it gotten for those that cannot afford anything but a minor league game? When a grand slam was cracked that night, the fans around me started to pass around a hat and I could not understand what was going on. Turns out they all threw in cash for the player who hit it which is delivered to him in the clubhouse. Then it hit me. I have been loudly critical of American consumer's assumptions that are flawed and will result in some painful adjustments. I will stand by them, but looking around that night I am just not so sure some of the adjustments will not be even more pleasant, more real, more authentic than what we assume is so much better. Could some of our own assumptions be flawed?

My Eyes Disagreed With Me Everywhere They Went.

Of course I have not changed my mind about the severe headwinds I have noted. Those decisions and positions were the result of careful and rigorous analysis. Our job is not to be optimistic, but it also isn't to be negative. We must be one thing, open-minded. We must be just as willing to change our position as we are to open or close them. Our job is to find opportunities, not point out the obvious problems. This article was the result of nothing more than an exercise as a money manager in looking at the other side of my own trades, but more importantly it was one heck of a fun trip as a dad.

I am prepared for violent disagreements (I know I have a few of my own) to the notion that the consumer is underestimated. But the "Other Side" of roundly agreed upon trades intrigues me here and always. What was on display in Vail was the highest end of the human spirit. We would do well to not underestimate that same quality in the people that make up those bearish numbers presented. Those folks have the same unconquerable desire for one asset above all others, more smiles, and that is a consumer discretionary item that is non-negotiable. If you disagree with me now, I can't wait to see what you think about my belief that there is also an "Other Side" to the real estate bubble assumption. I talked for two straight hours on my plane ride back from Vail with someone you will want to hear from….to be continued.
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