A Little Reality Beats a Lot of 'Thesis'

 | Feb 27, 2013 | 11:08 AM EST
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We called it "thesis investing," and I hated it. That's right, when I ran my hedge fund, I always heard these big think-people on air and in print and at meetings talking about top-down economics and then shoe-horning stocks into their views from the top down.

Frankly, it rarely worked, and more importantly, when it went awry, it produced spectacular losses for anyone who attempted it.

Right now, you are seeing the residue of thesis-investing playing out on your screens. The thesis in play had been the hobbling of the U.S. consumer. The litany of woes the consumer is facing -- higher payroll taxes, higher gasoline payments, relentless dysfunctional behavior in Washington sure to lead to a job-cutting sequester, even delayed tax refunds from the IRS said to total more than $30 billion -- all add up to what should have been tremendously disappointing earnings for the retailers.

When you think about it, the thesis makes so much sense and was so easily applied because the earnings season for retail came right after we were certain that every consumer should have been blown by what are endlessly referred to as headwinds. How could the retailers duck these profoundly damaging concerns to their pocketbooks?

So these thesis investors put on short after short to profit from the certain decline. They shorted the ETFs. They shorted the department stores. They shorted the discounters and the dollar stores. And they shorted the big housing derivative retailers.

The result? A squeeze up of pretty remarkable proportions, as the facts didn't fit their story, and the shorts were forced to cover.

Think about it. Wal-Mart (WMT) started things off with a much better than expected quarterly report, and while some tried to seize on the outlook, which was muted -- the "some" most likely influenced by the shorts spreading the bad word -- the stock went higher and then has refused to come in.

Then we got Home Depot (HD) and Macy's (M), two disparate but powerful nationwide retailers that both reported amazing earnings and signaled not only that was there no spending weakness but that spending might be accelerating. That was certainly the takeaway from Home Depot.

Today it's the dollar stores. When we last left them in the previous reporting period, it was a total debacle, sloppy sales and terrible outlooks with lots of chatter about declining gross margins, the kiss of death.

Whoops, Dollar Tree (DLTR) reported a beautiful number, and while guidance wasn't blown away, it did report a dramatic increase in gross margins. Talk about not fitting the thesis, this was an extraordinary reversal and the exact opposite of what the bears thought they would hear, and believe me, they were lying in wait for these firms.

To make matters worse, the restaurants wouldn't comply with the thesis either, as DineEquity (DIN), also known as IHOP and Applebee's, Cracker Barrel (CBRL), Jack in the Box (JACK) and Darden Restaurants (DRI) all either reported a terrific story or said things are getting better.

Now, of course, not every company is executing well enough to take advantage of what I can only call consumer strength. Target (TGT) and Lowe's (LOW) got beaten by the other guys, and if there were headwinds, they were headwinds coming from the front doors of their stores.

But even they managed to recover, because, again, the shorts had no game here.

Yep, the facts just refused to comply. The consumer refused to read the headlines or listen to the news or realize how poor she had become. She simply accelerated her spending at the exact time she was supposed to be curtailing it. As we would say on the desk: a good short spoiled.

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