‘Cash Is Oxygen’

You know it’s a slow news day when Peloton and Michael Burry compete for space above the digital fold.

Summer vacations are upon us, and stocks are higher, which together means there’s little incentive to trouble oneself with markets — or stories about markets.

Filling the languid void Friday was news that Peloton is slashing almost 800 jobs and raising prices. With sincere apologies to the newly jobless, I’d gently suggest nobody cares anymore. Peloton was a “story stock,” and notwithstanding the company’s turnaround efforts, the stock price long ago gave away the ending (figure below).

In a memo to employees, CEO Barry McCarthy outlined next steps in the company’s “ongoing transformation,” which include hiking the price of “Bike+” by “+” $500 to $2,495. The price of a “Tread” will be $3,495, up 30%.

McCarthy described those prices as “an attractive entry point for new Members.” If you’re inclined to emit a wry chuckle, nobody will blame you, but McCarthy is walking a tightrope: He has to preserve the brand’s premium mystique without pricing out potential new customers at a time when consumers are dialing back on all discretionary purchases, to say nothing of luxury stationary bikes.

Prices for two of the company’s other models were unchanged, but at a time when moms around the country are trying to pass off a tiny dollop of jelly folded up in a piece of store brand white bread as a genuine Pop-Tart to skeptical six-year-olds, thousand-dollar exercise equipment probably isn’t on the menu. (Maybe Peloton doesn’t want those moms anyway.)

The company is also outsourcing more delivery and setup to third party logistics companies, a move McCarthy said will reduce product delivery costs by 50%. He acknowledged the risks to customer satisfaction, but presented the situation in stark terms. “We have no choice but to make it work,” he wrote. Peloton is cutting some customer support roles too.

McCarthy explained why these decisions were so difficult. “We are impacting people’s lives,” he wrote, presumably referring to the newly jobless, not Peloton customers whose experience with the product may be negatively impacted. “Cash is oxygen. Oxygen is life,” he went on to say. “We have to make our revenues stop shrinking.”

I applaud McCarthy for his candor — I guess. His memo was one of the more blunt assessments of a struggling business I’ve read in a long time emanating from an executive. He also set a November 14th deadline for employees to return to the office at least three days per week. He indicated the company expects at least some workers to quit over the in-person mandate, but I imagine that probably wouldn’t hurt management’s feelings at a time when Peloton is desperate for “oxygen,” as McCarthy put it.

There was something tragically ironic about a company which thrived on product demand driven by stay-at-home culture unveiling a return-to-office mandate as part of a turnaround plan aimed at reversing a bike wreck brought on in part by the end of the stay-at-home era.

Peloton exemplifies the pandemic “story stock” Icarus dynamic, but it’s not alone. And, I should note, it’s not the most offensive example. At least Peloton has a decent product and a business which is still at least marginally viable. You can’t say the same for all pandemic story stocks.

Speaking of pandemic beneficiaries now experiencing a hangover, Best Buy is poised to cut hundreds of store jobs in an effort to cut costs as consumer preferences shift. The job cuts, which included workers tasked with “helping people purchase or plan home-entertainment layouts,” were originally reported by the Wall Street Journal.

Retail earnings are the next hurdle for a US equity market which rode a spate of (relatively) good news on inflation to a fourth consecutive weekly gain (simple figure below).

Walmart, Target, Home Depot, Lowe’s and a host of other big names report in the days ahead. Generally speaking, the outlook for retail is tenuous as consumers retrench in the face of generationally high inflation.

But, to the extent Americans are retrenching, it’s not fast enough for Michael Burry, who, in my opinion, would do well to acknowledge the possibility that his 15 minutes of fame may have expired years ago. On Friday, he issued what a news-parched media was happy to tout as a dire warning to spendthrift Americans.

“Net consumer credit balances are rising at record rates as consumers choose violence rather than cut back on spending in the face of inflation,” Burry said.

He may have been referring to household debt, credit card balances, or both. As documented here in “Fed Risks ‘Disaster’ As Americans’ Credit Card Balances Soar,” the 12-month change in Americans’ card debt during the second quarter was the largest on record (figure below).

Monthly data from the Fed showed revolving credit jumped almost $15 billion last month, well below huge increases in March and April, but still very large and the 15th consecutive monthly increase.

In a separate social media message, Burry tacitly alluded to an imminent drawdown in recently buoyant equities. “Congratulations, we now have the average bear market rally,” he said, of the Nasdaq’s 23% rebound from the June lows. “Across 26 bear market rallies from 1929-1932 and 2000-2002, the average is 23%,” Burry added, before reminding his followers (who are many) that after 2000, there were multiple large bear market rallies prior to the market bottom.

Commenting further on the American consumer, Burry said: “Remember the savings glut problem? No more. COVID helicopter cash taught people to spend again, and it’s addictive. Winter coming.”

It wasn’t immediately clear what Burry meant, but it’s fair to suggest he was attempting to convey something ominous. So, hang onto your cash, I suppose. Winter’s coming. And, as Peloton’s McCarthy will attest, cash is oxygen.

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12 thoughts on “‘Cash Is Oxygen’

  1. Yeah, I’m one of Burry’s many follows on Twitter. Of all the racist MAGA turds in that hellscape, he’s definitely the most interesting.

  2. Mr. H offers good reading during all four seasons. I’ve been following him for a while.

    Perhaps Blurry was making a reference to self-destructive behavior related to increased credit card balances? I can only guess.

    Different strokes for different folks. No Pelotons for me. I prefer an educated trainer who is schooled in multiple martial arts, Pilates, and yoga. And I ride a nice Bianchi on the local bicycle trails.

    1. I moved on to a Class I mountain ebike. I can now do the same uphill and cross rides that I used to do a decade (or more) ago without an electric motor.
      So fun!

    2. Do you drive a Dodge Stratus?

      Of course you don’t, I’m just busting chops. But you used to right? Hell, I used to drive a Dodge Intrepid, so no stones being thrown here.

  3. LOL, certainly emitted a wry chuckle even before the attractive entry point line

    CEO Barry McCarthy outlined next steps in the company’s “ongoing transformation,” which include hiking the price of “Bike+” by “+” $500 to $2,495. The price of a “Tread” will be $3,495, up 30%

  4. I tried to follow Burry on Twitter for a while, but he doesn’t say anything different from dozens or hundreds of other bearishly-inclined FinTwit people say, and he provides no data or analysis. In general I’m only interested in following people whose tweets or posts provide value other than their declarative statement.

  5. My feeling, nothing more, is that investors generally expect poor reports and negative guides from retail. There will be single stock volatility, where the few names thought to be immune turn out to not be or names thought to be dark toast show only moderate toasting, but I wonder how the retailers’ reports will affect the macro picture.

    To the extent that they deliver unexpectedly bad news, that seems set to feed into the peak inflation and pressure to pivot narratives.

    For the group, it’s usually one of the first to fall apart so it’s also usually one of the first to buy. I bought a few retailer names after 1Q reports, still have only 1/3 rd positions.

  6. Inventories will be a thing on the calls. Intuitively, one would think the companies selling necessities (think food and gas) would hold up better. That being said, it did not help Target and Walmart so far. Costco has held up better (where the gas lines look like something from the 1970s).

  7. “There was something tragically ironic about a company which thrived on product demand driven by stay-at-home culture unveiling a return-to-office mandate as part of a turnaround plan aimed at reversing a bike wreck brought on in part by the end of the stay-at-home era.”

    With this quote, H perhaps has uncovered the salvation for Peloton’s woes — exercise equipment which is neither traditional, nor stationary, but which moves in tight, vertiginous circles that increase nausea levels, but not fitness.

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