Gap chief spins a yarn investors find hard to swallow

The similarity between the fortunes of clothing retailer The Gap and the broader U.S. economy were highlighted in speeches spanning the past 24 hours. Mr. Bernanke's depiction of the weakness in the household sector left the impression that the economy is hanging on by a thread. The same story is apparent for Gap Inc. where investors sold shares left hanging on a thread following a recent earnings miss at the company. Harsh words from its CEO met with a broker downgrade and the picture got uglier.

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Investment Grade -

The Gap Inc. (GPS) – Asking for a discount on a big order often works, but according to Gap CEO Glenn Murphy, it isn’t easy when the price of cotton is rising in response to a global shortage. Mr. Murphy spoke Wednesday saying the company didn’t get enough breaks considering its size and said as a result he’s turning his nose up at some vendors in order to perhaps get a better deal in the future. He also ‘fessed up to mistakes at the clothing retailer adding the cure for ailing sales is a flagship revamp in North America. Investors agreed with Mr. Murphy that the company has made mistakes and that the impact on the bottom line resulting from surging input costs is glaringly evident. They consequently gave the share price a resounding thump sending it back down to $17.53 for a 2% loss on the day. Owners of its bonds were equally responsive to shortfalls in his wisdom, forcing a $2.12 loss per $1,000 investment in Gaps’ 10-year paper. At one point the yield on the secondary paper was higher by nine basis points on the day at 6.38% and with volume of almost $60mm, Gap was the single most-actively traded issue on the day. Investor disdain for the bonds was rather evident in the 15 basis point widening between its paper and government securities as 10-year treasury notes advanced.

Wells Fargo & Co. (WFC) – Financial shares are weaker once again midweek as investors mull the slow patch for the economy with the direct question posed by JPMorgan Chief Jamie Dimon to Fed Chief Bernanke when he asked whether regulation had perhaps gone too far. Wells Fargo’s share price CFO speaking at a Deutsche Bank conference added that new financial regulations were adding fuel to the fire in a challenging business environment. Investors sold shares in Wells Fargo to the lowest price in seven months as its CFO pushed back against regulations designed to prevent a re-run of the 2008 crisis. “It feels like we’re going a bit too far,” said Timothy Sloan, CFO at Wells Fargo, hinting also that his bank’s financial strength and liquidity shouldn’t leave it subject to the strictest capital requirements. Investors continued to walk away from its A1-rated paper selling some $38mm of its April 2021 maturity hoisting the yield by five basis points while government paper shed as much forcing the spread 10 basis points wider.

Non-Investment Grade –

Beazer Homes USA Inc. (BZH) – It was August of last year that shares in homebuilder Beazer traded as low as they reached Wednesday at $3.47. Since that point and as the economy recovered its fortunes to trade 80% higher and as high as $6.23. Almost one year on and the housing market recovery remains as elusive as ever. Fed Chairman Bernanke remarked in his speech yesterday that household spending remained elusive with stubbornly high unemployment, the legacy of lower wealth courtesy of a slide in home values and still tight credit conditions. A weekly MBA index of mortgage applications through last weekend depicted indifference among would be home buyers. Even a seven-month low for 30-year mortgage loan rates failed to stimulate buyers with the purchase index falling by 1.4%, although some home owners took advantage by refinancing at lower rates. The MBA refi-index rose by 4.4% according to the data. Investors shunned BZH today sending its shares 1.6% lower while bond sellers walked away from its Caa2-rated seven-year paper. At one point the yield on its June 2018 issue carrying a 9.125% coupon rose to 11.7% as eager sellers drove its price down for a loss of $3.13 per $1,000 face value. The yield has settled somewhat and at its mid-quote yields 11.28%.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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