Buyer’s Remorse Tuesday – WMT, TWTR, (Hopefully Not) SPX


Chief Strategist at Interactive Brokers

I woke up today to find equity index futures trading higher, and that enthusiasm is continuing in early trading.  As I write this, we’re only about 40 minutes into the regular trading session, but major indices like the S&P 500 (SPX) and NASDAQ 100 (NDX) are holding steady with 1% gains.  It is far too soon to know if this morning’s enthusiasm will hold – remember that bear market rallies are short, sharp and ferocious – but oversold conditions in a monthly expiration week can lead to a tradeable bounce.

Instead I’d like to focus on two more lasting forms of buyer’s remorse.  The more recent was revealed when Wal-Mart (WMT) released its first quarter earnings today.  WMT reported $1.30, which missed the consensus $1.48 by a wide margin.  There were two major culprits.  One was the stronger US dollar, which depressed the level of WMT’s international sales when converted back into its home currency.  This is not something unique to WMT, and this is likely to affect a wide range of US companies with significant levels of international sales.  A stronger dollar has many benefits, but it usually poses a problem for US-based multinational companies.   The market doesn’t need any more headwinds.  While it is not exactly a secret that the USD is performing strongly against most of the world’s currencies, continuing dollar strength will increasingly weigh on earnings estimates. 

Their buyer’s remorse comes from an unexpected increase in inventory.  The company describes it this way:

Net cash used in operating activities was $3.8 billion for the three months ended April 30, 2022, which represents a decline of $6.6 billion when compared to the same period in the prior year. The decline is primarily due to an increase in inventory costs and purchases to support strong sales, lower operating income and the timing of certain payments.

They go on to note that free cash flow was -$7.3 billion, or $7.9bn less than a year ago, with a $1.3bn increase in capital expenditures accounting for some of the decline.  That means that WMT has spent billions on inventory that it hasn’t yet sold – not a good thing for a retailer that relies on keeping its inventory moving.

We don’t yet know whether this reflects the company being too aggressive about mitigating supply chain issues, a decline in customer buying habits, or simply a timing mismatch that might resolve itself over the coming quarter.  But either way, traders have a phrase that describes the current inventory situation at WMT – “long and wrong.”

The other more prominent case of buyer’s remorse is being displayed by Elon Musk in regards to Twitter (TWTR).  It is quite clear that he no longer wants to pay $54.20 for the company and is doing his best to either renegotiate the price or walk away completely.  I explained it like this yesterday:

Suppose there is a house that you really like, and you think it is in your price range.  So, you impulsively make an offer to buy that house and pick a value that has some significance to you, say $542,000.  In your enthusiasm to buy the property, you signed a contract that was not contingent upon the house passing inspection (aka due diligence) – despite rumors that there were issues with mold.  You then realized that no one else was even willing to pay even $440,000 for the house and the mortgage was going to be more costly than you expected, so you try to get the seller to cut the price because you now think the mold problem that you intended to fix is indeed quite bad.  The mold (aka bot accounts) may indeed be worse than the seller claimed, but you forfeited your contractual right to make that a reason to lower the price.  How do you expect that to work out for you?

How Elon Musk expects it to work out is of course vastly different than you or I might.  This is not a battle over a suburban home or condo, this is a multi-billion dollar game of chicken.  The contracts may seem very unfavorable to Musk, but if he walks away it would be a lose-lose round of expensive litigation amidst a lower TWTR price.  It is obvious that he knew about the issue of bots at TWTR – he stated that he wanted to fix that problem – so it is disingenuous to now claim that the problem might be worse than he thought after forgoing the opportunity to research the matter fully before his impulsive bid. 

Buyer’s remorse is a nasty feeling, whether it results from a bad meal, too much inventory, or a misguided company purchase.  And don’t forget that it can result from misguided market enthusiasm too.

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