Sand Spring Advisors LLC
October 17, 2002
by, Barclay T. Leib
Subscribers to Sandspring.com may remember our negative commentary about some of the large-cap retailers in our August 27th article "The Era of New Government, Debt Deflation, & Weakening Consumerism." We particularly mentioned Sears in the following vein:
We...think Sears’ recent acquisition of catalog clothier Land’s End at near 25x earnings will be deemed a silly and costly strategic move with time (in similar fashion as the AOL-Time Warner merger now is viewed). Sears itself trades at a far more modest 10x P/E, but if the consumer is slowly forced to put away the credit cards, Sears could also be ripe for a fall. Why buy a catalog clothier at this time? Sears' Fibonacci rhythm suggests $14.50 could be seen with time.
That commentary appeared along with the following chart, now updated by the second chart below.
Sears did of course announce Thursday that it has a credit card accounting problem suddenly rearing its ugly head. Presumably credit card receivables, previously booked to the profit column of the P&L ledger and carried as an asset on the balance sheet, had insufficient delinquency reserves and now represent the nasty culprit. Subsequent to our article, we had actually heard additional rumors that this credit card accounting problem was lingering at Sears. Many smart folks with solid forensic accounting abilities actually saw this coming. Congratulations are truly due them.
By matter of update, we do spy a bit of Fibonacci rhythm support near Thursday's closing $23.15 level. We would not be surprised to see a bounce back toward $32-$32.92 in the short-term, but from there, $12.50-$14.50 still beckons with time. Yes, we have even lowered our target a bit longer-term due to the more recent Fib rhythms shown by Sears.
Another venerable American company is thus uncovered cooking its books, or perhaps just being dumb enough not to notice a growing problem. Surprise, surprise. As discussed in our August subscriber-only article, could P&G be next American icon to start serving up earnings disappointments and restatements?
Subscribers are advised to book out some short-term profits on Sears, but please, do not even consider trying the long-side of this stock. Instead, from a now flat position, simply keep an eye out to re-establish shorts on a reaction bounce toward $32 in the coming few weeks. Also keep a close eye on P&G as the next potential big-cap short-selling opportunity. Perhaps Walmart as well.
Non-subscribers are invited to access this August article, together with our more recent October 4th subscriber-only missive ("The Ancient History of Math, Current Pi Cyclical Rhythms, and The Macro Picture in Europe and Asia in Relation to the U.S") by signing up for a quarterly Sandspring.com subscription below.
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