Friday, September 11, 2009

Betting on – or against – Obama hatred

I run an investment business – and my blog is about investing.  Sometimes (quite often) investing requires that you have a dispassionate look at politics, political trends and political decisions – even if those trends and decisions are anathema to you.

This is one of those times.

In March the US economy was in dire risk.  Everyone who sold discretionary consumer products – especially high value discretionary consumer products – was watching their business implode about them.  Well not everyone – but almost everyone.

One sector was having a rollicking boom – an off-the-scale big boom.  It was recreational handguns.

A large number of Americans allowed themselves to be convinced that Obama was going to take their guns away.  Or maybe they were convinced that socialists were taking over the country and that you needed to protect yourself.  They may have even been convinced that Nazis were taking over the company (evidenced by eugenics policies under the Trojan horse of nationalised health care).  Whatever… they bought guns.  Lots of them.  Here is a presentation from the Ruger AGM…

image

(Some corrections – the sales are probably on first quarter 2009 running at about 1.5 billion at the moment… this boom is MUCH bigger than show in in this graph). 

I do not need to tell you a billion dollars (the current projected 2009 sales) represents a lot of handguns.  Its up 250 percent [see correction – but about 400 percent] since 2003.  Very few consumer products (that are not made by Apple) can claim that.

The Obama-hatred inspired boom in handguns was so large that manufacturers simply could not keep up and handguns had to be obtained on order.  The companies had exploding forward order books.  As Smith Wesson said in a press release dated 22 June

Our firearms backlog continued to increase dramatically during the quarter, and reached its peak at $268 million dollars by the end of April. That level is $218 million dollars higher than the same quarter one year ago.

More generally, Smith & Wesson deserves special mention.  They have taken as their marketing guide the success of Harley Davidson – a company producing marginally inferior (but iconic) products and turned it into a mass-market product for wanting to rebel (and recapture youth) middle-aged baby boomers.  What is more they have done so with some success – as evidenced by their shoot-the-lights-out record sales this quarter. 

Dispassionately if you thought Obama hatred of the most extreme ilk was going to continue to grow like topsy you would buy Smith and Wesson and its ilk – and become a gun seller.   As a committed Liberal I might not like the second amendment and I might like the second amendment supporters even less – but – we owe a duty to our clients to make money – and we might even do it owning the shares of a gun manufacturer.

Fortunately though that is not the decision we have taken.  I am not sure I would be comfortable being a gun seller – and some of my clients might also have strong views.  We prefer to short this…

The proof of Obama is there to see.  Obama is (despite the protestations of Rush Limbaugh and his ilk) turning out to be a middle-of-the-road centrist.  [Strong Liberals wanted change they could believe in…  Smith & Wesson just wanted to sell guns.] 

And they have.  Smith and Wesson sales were good but their forward order book took a dive.  To quote Wednesday’s press release

Our firearms backlog was $177.5 million at the end of the first quarter. Cancellations reduced backlog by approximately 10% during the quarter. It is important to note that our backlog always represents product that has been ordered but not yet shipped. As a result, it is possible that portions of the backlog could be cancelled if demand should suddenly drop.

The warning about the backlog not being binding is new – and it is clear from the new disclosure that they are having massive problems during this quarter with order cancellation. 

The backlog dropped from $268 million to $178 million – a drop of 90 million.  Ten percent of that (say $27 million) was order cancellation – but a net $63 million of sales came from the backlog.  Total sales were 102 million – and less than 100 million in firearms.  The rate at which Americans are placing orders for new Smith and Wesson handguns is collapsing. 

The company did not tell us the current forward order book.  At that rate of collapse what they are facing is a disaster.

Whether that says anything about the size and intensity of belief of the Rush Limbaugh right – well I will leave that for my readers to discern.  We just want to make money for our clients – so we are short Smith & Wesson. 

32 comments:

Andy said...

Do you have idea how much of this gun sales bubble was due to cross border sales of guns to the Mexican drug cartels?

enthusiasm said...

No doubt you'll enjoy this analogous posting from a smart investor (who's politics is on the far right) about the market for ammunition: Ammo shortages and the Beer Game.

Commited Liberal said...

Your analysis overlooks two things.

First, Obama is continuing and actually expanding Bush's torture policy, particularly with respect to extraordinary rendition. More guns will be necessary to pistol-whip detainees.

Second, Obama is stepping up the wars in Iraq and Afganistan. Those conflicts require guns, guns, guns . . . and that's exactly what Smith and Wesson makes!

Michael Fowke said...

I live in England and we have more commies than we know what to do with. Unfortunately, we are not allowed to own guns.

Ian said...

Another great indicator of gun demand is the FBI background check data. http://www.fbi.gov/hq/cjisd/nics/nics_checks_total.htm

The surge from last fall and this spring definitely appears to have died down, although there was a slight uptick in August (could just be seasonality).

Anonymous said...

Dear Andy,

The drug smuggling channels that Mexican gangs use to send drugs out run in reverse to bring illegal guns in. By illegal I mean illegal for an American to own which rules out any American source for these weapons. This includes rocket grenades, machine guns, and other military grade weapons.

The sources for these weapons are the usual bad actors of the world. Venezuela, rogue arms dealers, China, and deserters from the Mexican Army who take their weapons with them.

So, when you see a display of military weapons in the news and a plea to shutdown smuggling from America, it just means someone wants to shutdown gun ownership in America and they are willing to lie to get their way.

babar ganesh said...

john i think you get some of the peculiar american sociology wrong. the market collapse played into the hands not of the anti-obama crowd but into the frontier/survivalist strain in america. the crisis brought on a reactive need for self-protection.

people were not buying guns to protect themselves against the govt. people were buying guns because society was collapsing and they were going to need to protect their family and private stashes of food and medicine from gangs of roving hungry bandits.

i'd bet though that most of the people buying guns forgot to stockpile food and medicine. if they had, those purchases would have added enough aggregate demand to the economy to get us halfway out of this mess.

mptk said...

the reason why ...making domestic armanent resisting organizations against likely the invasion of aliens ( spacemen )

Anonymous said...

Wait, so a product experiencing extraordinary sales, the starting to return to the average is in danger of collapse? This is the most ridiculous claim I have seen in a while.

The idiots with guns will just keep on going at a normal pace as represented in the graph you presented. They may accidentally shoot .01% of us in return for them keeping the government scared of the masses. I don't think it is a good trade but they do.

Anonymous said...

Great post. Can you please give us a hint in your next blog about the NYSE listed E&P company you referenced a while back which you thought was a scam, and whether the SEC is following up?

John Hempton said...

"Wait, so a product experiencing extraordinary sales, the starting to return to the average is in danger of collapse? This is the most ridiculous claim I have seen in a while."

No - almost 70 percent of the sales came from the forward order book. You still need to buy on order...

The great Obama gun rush bought forward a couple of years of sales... this is going WAY below trend... and the company has done capex to build the capacity and the stock price has been great on the trend.

The claim is not idiotic at all.

John

Eddie Bravo said...

The billion dollars in forecast sales you mention, this is based on the graph in the post? The last year in the graph says 2008 est., not 2009 est. Where is the 2009 data derived from?

John Hempton said...

Sorry about the graph - its over that this year - Ryger... is the source.

John Hempton said...

Actually - checked - it is on RYGER's financial year... so it includes the beginning of the March spike...

The March Spike was completely wild...

John Hempton said...

Some corrections have been made to deal with this graph problem - its a bigger boom than I indicated in the picture... the story is just more extreme...

John

Eddie Bravo said...

Thanks for clarifying this!

Frank said...

I hate to brake it to you. It was and is not hatred of obama. It is fear of what the democrats and obama will do to the second amendment. By the way I just sold my stock in Smith & Wesson. I made a fortune because I bout it the day after obama won the election. Nov. 5.

lewy14 said...

John, a great demonstration of how to nail a trade and blow the sociology.

Surely you must be aware that to a great many Americans, your post reads like stereotypal rubbish.

But then Amanda Drury just finished a stint Stateside and ended her time on CNBC Squawk Box here fielding questions about the Outback and kangaroo meat - so I suppose we have it coming. ;)

John Hempton said...

I know I am blowing the sociology - but - hey - the market is funny.

One of the worst performing stocks in America last night was Cabellas (CAB). The real people who know the gun industry KNOW that Guns are YESTERDAY.

Guns are more yesterday than Monica Lewinsky.

John

Richie Rich said...

1) You forgot to take into account the seasonality factor dude.

2) Obama is governing as a centrist???? Are you for real? He is the most radical Leftist in U.S. history. Takeover of autos, financials, health care - that's 40% of our economy right there. Get real - I do appreciate the fact that you admit to your being a Liberal though; that is helpful (seriously).

Anon1 said...

The collapse in sales is likely tied to the millions who have lost their jobs and suddenly have to worry about FOOD before they can worry about their gun collection.

Only another 550k more formerly interested potential gun buyers have been laid off this last month, to say nothing for the millions in ongoing joblessness. Are they supposed to keep their gun purchase in the pike when they are losing their homes, healthcare coverage, lives, etc?

Northeast Elizabeth said...

Hope your firm hasn't put in its short orders yet . . . I expect Smith & Wesson to be raising its guidance even further shortly to the $110-115 range.

I can understand why in the short term you might like to scare investors away from the stock by throwing out terms like "collapsing" etc. etc., but ultimately you're going to have to deal with the effect of massive upgrades by responsible analysts who can actually read an earnings report. It's going to be quite painful for you to cover. Especially when this country gets even angrier when Obama further digs himself into the healthcare mess and tries to divert attention by insulting or harassing the "God and guns" crowd.

RBH said...

There's no need to wait for S&W's quarterly data -- I followed the same phenomenon for 18 months (the runup to the election and post-election months) on a daily basis by watching the auction prices at Gunbroker.

Anonymous said...

Great post, John. I imagine you're getting as much amusement out of the comments as I am.

what? said...

so lemme get this straight. Half of you on here are calling obama a communist. The fact that you are posting comments means you are probably reading the GSE series ) - don't you realize the seizure of FNM, FRE,WM and NCC represents the biggest seizure of private property by the government in US history - and that this was all done by Dubya?

Anonymous said...

i've been running a long short guns / butter strategy now for years. almost blew up last october when people were hoarding both of them.

Anonymous said...

I would think more of your analysis now if you had made the corresponding recommendation to buy these stocks a year ago when they were clearly booming, no pun intended. (Well, maybe a little.)

Ther's rationality and then there's rationalizing.

Anonymous said...

If their sales are collapsing, why did they up their guidance for the year?

John Hempton said...

Their sales are not collapsing - their forward order book is collapsing.

When the forward order book is exhausted THEN the sales will collapse.

My guess - sales RISE this quarter - and the guidance is met - but they then need to smash the forward guidance.

J

Anonymous said...

A lot of gun folks won't buy S&W guns due to their support of gun control in the 90's.

Kevin said...

One sector was having a rollicking boom – an off-the-scale big boom. It was recreational handguns.

While handguns can certainly be used for recreation, most are designed and bought for defense of self, family and home.

Your understanding of the product and its market seems lacking.

Anonymous said...

Prescient call. From today "Gun maker Smith & Wesson Holding Corp. on Thursday posted a fiscal second-quarter profit, reversing a year-ago loss, as sales rose 49 percent, reflecting a jump in sales of handguns and tactical rifles and the acquisition of a security company.

But a weak sales outlook for the upcoming quarter sent shares tumbling after-hours."

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