Welcome back to our Monday edition of Wide Moat Daily. Here, I’ll share the stories I’m watching and the ones that should be on your radar as well.

And I guess we have to talk about the drones…

That was probably the biggest news story last week, and one that’s still developing as we start another. Nobody really knows what’s going on here, only that there are an unknown (or at least unreported) number of unmanned aircraft flying over New Jersey and nearby cities such as New York and Philadelphia, too.

A few were spotted back a month ago, it seems. But thousands more Midcoast residents have now seen the things hovering over places like Staten Island, the Picatinny Arsenal Military Base, the Joint Base McGuire-Dix-Lakehurst, and the Naval Weapons Station Earle.

Yet government officials from Biden on down don’t seem that concerned. Or at least most are saying there’s nothing to be done about it.

And so these mysterious objects keep flying where they’re flying and doing whatever they’re doing.

It’s insane that a country that spends more than $800 billion per year on defense:

1. Doesn’t know who these foreign objects are from, and

2. Doesn’t know how to deal with them.

Seems like one more very good reason to get the Department of Government Efficiency up and running as soon as possible… not to mention a new administration in general that takes appropriate action when action is almost certainly necessary.

TikTok’s Time Ticks Down

Could the drones be Chinese like that spy balloon was earlier this year?

Maybe. Maybe not. But there is a known Chinese creation Uncle Sam is tackling: TikTok.

A U.S. Court of Appeals decided on Friday to reject the company’s emergency bid to keep its business as-is. That means parent company ByteDance has until January 19 to either divest the social media platform…

Or be banned from the U.S.

Last Monday, the embattled company filed for extra time in order to bring its case before the Supreme Court. It says the order is unconstitutional. But it seems it’s tough luck for everyone involved on that side of the legal equation, including TikTok’s 170 million domestic monthly users.

ByteDance will just have to work within the original timeframe given.

Whether the ban is going to have ultimate positive or negative effects on the U.S. is arguable – with both sides offering points worth considering. But it is worth noting that the ban would take effect on Biden’s final day in office.

Interesting…

The Longshoremen Fight Picks Up Again

Speaking of political disputes, President-elect Trump said he’s backing the International Longshoremen’s Association, or ILA.

Remember them? Their story came up back in October, with dockworkers threatening to strike unless they got proper protection against automation. As usual, it’s a battle between management’s desire to cut costs through technological advancements… and their employees who know where those costs will be cut.

Both parties agreed to temporary terms until after the election. But it’s now officially after the election – with nothing resolved. And so the battle begins again.

A dockworkers strike from New England down the coast and around to Texas could cost the U.S. $4.5 billion per day. And that’s to say nothing about supply chain disruption. So it should come as no surprise that many lawmakers on both sides of the aisle are mostly concerned about the economic hit.

So is Trump, just from a different angle. On Thursday, he posted this on X after meeting with the ILA:

The amount of money saved is nowhere near the distress, hurt, and harm it causes for American Workers… Foreign companies have made a fortune in the U.S. by giving them access to our markets. They shouldn’t be looking for every last penny knowing how many families are hurt. They’ve got record profits, and I’d rather these foreign companies spend it on the great men and women on our docks, than machinery, which is expensive, and which will constantly have to be replaced. In the end, there’s no gain for them, and I hope that they will understand how important an issue this is for me. For the great privilege of accessing our markets, these foreign companies should hire our incredible American Workers, instead of laying them off, and sending those profits back to foreign countries. It is time to put AMERICA FIRST!

And so the automation fight continues…

GameStop Catches a Break

GameStop (GME) reported a 20% drop in sales year-over-year. Yet it made $17.4 million in net income after losing $3.1 million during the same period in 2023. This appears mostly due to drastic cost-cutting (closing stores).

Now, that’s a shocker.

As I’ve said in the past, GameStop is a company with a business that appears to be in secular decline. The stock’s year-to-date performance (about 60%) has nothing to do with selling video games and accessories. It has everything to do with the meme-stock trend.

Case in point…

Keith Gill, Reddit’s “RoaringKitty,” apparently placed yet another round of bets on the retailer. He must have been pretty pleased to see the stock shoot up 9% on Wednesday morning.

The Reddit army is still having fun with this one, but I’m pretty sure the company’s heyday is done. It’s the Blockbuster of gaming – a company that missed its cue to evolve years ago.

And the company appears to understand that. From the earnings release:

During the quarter, the Company completed its previously disclosed “at-the-market” equity offering program pursuant to the prospectus supplement filed with the SEC on September 6, 2024 by selling 20.0 million shares of its common stock for aggregate gross proceeds of approximately $400.0 million (before commissions and offering expenses).

GameStop is not in the business of selling video games. Not really. GameStop is in the business… of selling shares of GameStop. New shares mean dilution. Dilution – all else equal – means each share is worth less. That doesn’t strike me as a sustainable model.

I believe in SWAN (sleep well at night) investing. And this ain’t it.

Macy’s Might Not Be Worth Much As-Is

Another store that’s struggling is Macy’s (M). And, like GameStop, one of its solutions is to shutter stores.

Back in February, the retailer announced it would close 50 stores by the end of its fiscal year. Now, it’s upped that number to 65. And by 2026, it will be down 150 of its current 720 locations.

This latest announcement might give more credence to activist investment firm Barington Capital and private equity firm Thor Equities’ analysis. The way they see it, Macy’s real estate is worth more than its actual business.

They recently released a joint report where they argued that the once iconic retailer is behind the times. “The rise in e-commerce and growth in off-price competition have led to significant loss of retail market share for the department store sector,” they assert. Moreover, Macy’s “initiatives have not yielded much improvement in comp sales” for the brand. Only its luxury chains, Bloomingdales and Bluemercury, “have proved more resilient.”

In the end, Barington and Thor believe Macy’s “should form a separate internal real estate subsidiary that would be responsible for optimizing the value potential of its owned real estate” since “the market is implying that Macy’s retail operations are essentially worthless.”

That might seem harsh, but Macy’s does own some intensely attractive properties – including its flagship store at Herald Square in NYC. So, while corporate seems to have rejected the proposal for now, it might have to give in at least somewhat going forward if sales continue to struggle the way they have been.

Looking Ahead…

The year’s final Fed meeting happens this week. That means we’ll find out once and for all whether I was right about my prediction for three rate cuts before 2024 is through.

Most investors expect a 25-basis-point drop. And I’m right there with them on this… even if I don’t necessarily agree it’s the best move. Not when:

1. The economy just keeps expanding,

2. The labor market isn’t slowing down significantly or consistently, and

3. Inflation is proving to be stickier as well.

But, as we learned in 2021, when Fed Chair Jerome Powell commits to an opinion (“transitory” inflation, anyone?), he really commits. So whether it makes sense or not, he’s going to do what he’s going to do.

Before he and his make their decision on Wednesday, we’ll get the scoop on one more fairly big economic report – the November retail sales numbers. Estimates are that they’ll have risen 0.5% over October, marking a strong start to holiday shopping.

Who knows? Maybe Macy’s and GameStop will even end up having a Merry Christmas this year.

Before I sign off on this Monday piece, I want to mention something I definitely do know: that I have some absolutely talented kids!

My oldest daughter, Lauren, just got named The Wall Street Journal‘s lead deals reporter – which is a very big deal I hope you don’t mind me bragging about for a moment. Talking Biz News (accurately) writes:

She consistently breaks market-moving news about the biggest deals across all industries. Some of her scoops have included Exxon Mobil’s $60 billion deal for Pioneer Natural Resources, Capital One’s $35 billion deal for Discover Financial, Mars’ $30 billion deal for foodmaker Kellanova, and Johnson & Johnson’s $13 billion acquisition of Shockwave Medical. She also frequently scoops the biggest proxy fights in corporate America, including recent battles at Starbucks, Disney, and Southwest.

Suffice it to say that I couldn’t be more proud of her. And I can’t wait to see what she can still accomplish from here!

Regards,

Brad Thomas
Editor, Wide Moat Daily