Monthly Archives: September 2015

Global Growth Scare + High Valuations = Bear Market Dynamics

September 29, 2015
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Global Growth Scare + High Valuations = Bear Market Dynamics

It’s been a difficult market since the dog days of summer. After 10-months of exceptionally low volatility, a fierce downdraft set in during mid-August. Lower stock prices, and volatility, will persist, simply because the conditions to go right back to the old dynamic aren’t in place. There isn’t enough global growth to support stock prices at high valuations. Full stop. Investors got complacent, extrapolating higher trends in stocks price as growth around the world slowed; a bad combination. For perspective, the market (S&P 500) got close to 18x forward (1-year ahead) earnings at the high of 2,131. An 18x multiple represents an incredible move from the 12x multiple the market achieved during most of 2011. QE set in motion exceptionally low interest rates and a stock-market re-rating. The ability...

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Nike Bone Crusher; China’s Economy isn’t Collapsing

September 25, 2015
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Nike Bone Crusher; China’s Economy isn’t Collapsing

Maybe the economy in China isn’t collapsing. Nike reported a bone crusher of a quarterly report last night; a stark wake-up call for China bears. Nike management credibility is higher than that of the Chinese government, and this earnings report, at this juncture, is stunningly good. Nike segment reports its future orders by geography, adjusted for currency movement, and the results out of China are the strongest since 2012. Nike is surging in China again. Impressive because China isn’t a new market; Nike is entrenched, and has invested, and developed the brand in China for a solid 15 years. The 27% china orders growth accelerated relative to last quarter’s 22% growth. The acceleration took place despite the China A-shares collapse, the renminbi devaluation, and lots of negative press on...

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Primark is Coming; US Specialty Apparel Sector Disrupted

September 22, 2015
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Primark is Coming; US Specialty Apparel Sector Disrupted

Business models that don’t evolve are always threatened by disruption. The US specialty apparel sector is a fascinating case study in businesses, and brands, entrenched for long periods of time (decades), seemingly safe, but now facing imminent destruction. The concept of the shopping mall is dated; millennials have different habits than teens in the 80s & 90s. It’s no longer a valid plan to simply have a store in the mall, pay high rent, and expect shoppers to arrive, happy to pay high prices. Consumers (especially young ones) are more “global culture aware” and use technology/apps to find the very best price points. The retail graveyard is full of stores that failed to invest in technology, kept prices too high, and never modernized distribution to incorporate faster turnover of...

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Super Dovish Fed Persists

September 18, 2015
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Super Dovish Fed Persists

The Fed’s lack of policy response, and subsequent press conference, evokes memories of a scene in Bronx Tale… What’s going on here?  Now you can’t leave.  I will never forget the look on their faces.  All eight of them.Their faces dropped.  All their courage and strength was drained from their bodies.  They had a reputation for breaking up bars.  But they knew that instant they made a fatal mistake.  This time, they walked into the wrong bar. An opportunity for the Yellen Fed to exit ZIRP came and passed yesterday. Possibly, it will be more convenient to start a rate hike cycle in October/December or possibly, in 2016. But if China enters a recession, and financial markets remain stressed, it is also possible that the Fed will be unable to raise rates during the...

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Brazil’s Economic Miracle; Seeing the Monster

September 15, 2015
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Brazil’s Economic Miracle; Seeing the Monster

The depth of corruption and scandal at Petroleo Brasileiro (Petrobras) isn’t your typical run of the mill emerging market scam. A conflux of events around the world, built up over decades, fostered the conditions for a defrauding of this magnitude. Post financial crisis, global central bank stimulus, created an environment devoid of scrutiny, resulting in robust emerging market capital inflows, largely untied to the merits of structural reform. Investors were encouraged to take risks, and the BRICS were beneficiaries of exceptionally loose, if not misguided, capital flows. Today, we behold the end result of the grand EM experiment, and unfortunately, the results are appalling. The extent of economic mismanagement has been spectacular, with all BRIC governments, to varying degrees, failing the opportunity to modernize. Economic malaise got masked by...

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Employment Report & Markets; Forcing a Fed Rate Hike

September 9, 2015
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Employment Report & Markets; Forcing a Fed Rate Hike

While the odds on a Fed rate hike are still vacillating, the strong jobs report, and recent market action are now forcing the Fed’s hand. The Fed needs extreme market conditions to justify not hiking. The point has arrived where stock and bond markets are strong enough, even with the prospects of a hike, that diminished Fed credibility should outweigh any benefits of pausing. Stanley Fischer clearly outlined the need to hike ahead of not only inflation, but inflationary expectations. The August Employment Report was a key data set before the Fed meeting. The headline jobs number was soft at +173k jobs but all other aspects of the report were notably strong: July payrolls were revised +30k higher (to 245k) June payrolls were revised ++14k higher (to 245k) The unemployment rate fell to...

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China Central Bank Governor, Zhou Xiaochuan; China Bubble has Burst

September 5, 2015
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China Central Bank Governor, Zhou Xiaochuan; China Bubble has Burst

News out of China is opaque; often altered, editorialized, or outright censored. It is rare to receive a straightforward assessment, based in fact, irrespective of the congruence with the China governmental aims. Zhou Xiaochuan (ZX) is a maverick Central Bank governor, versed in global economics, and financial markets. ZX is a reformer, pushing to open China’s financial markets and currency regime in order to achieve longer-term economic goals. Over the past couple of years, news that ZX would be replaced caused China stock market rallies, as more accommodative, short-term oriented governors were rumored to take his place. For years, China deferred near-term pain, always attempting to maximize short-term growth. The push-out game is now over. The FT recently ran a story crediting ZX with selling the need to devalue the renminbi...

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China in Recession; Yuan Depreciation Imminent

September 3, 2015
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China in Recession; Yuan Depreciation Imminent

China is at the end-game of its great economic transformation. Multiple iterations of 5-year plans, and flawed central economic planning, created a massive build-up in debt that can no longer be continued. China’s debt fueled growth is understood, but the impact of the deleveraging phase is becoming evident in real time. Various estimates of China debt exist, but given the proliferation of shadow banking, and state involvement in the corporate sector, China’s total debt is a nebulous subject. Using estimates, China debt rose from $1 trillion in 2001 to $30 trillion today. China GDP is approximately 10x larger during a period in which debt rose 30x. McKinsey Global Institute estimates China debt-GDP at 282% in 2014. China’s economic problem is straightforward. Party rulers believed steadfast in the ability to...

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Crude Rally Boxes Fed Into A Corner & China PMI Weakest Since 2012

September 1, 2015
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Crude Rally Boxes Fed Into A Corner & China PMI Weakest Since 2012

This weekend’s Jackson Hole speeches, and subsequent commentary, outlined the guideposts for a Fed rate hike, potentially in September. The explosion in crude, if it holds for two more weeks, will pressure the Fed to hike. The Fed clearly highlighted the USD, employment, and oil, as drivers of inflation. The fast 10-point in rally in oil, from sub-$40, to near-$50, unwinds 2-months worth of decline. With the Fed keying off energy price declines as “temporary”, the failure to hike, in the face of the above mentioned factors swinging more inflationary, risks a credibility issue. With stronger crude (again if it holds), the August Employment Report looms very large, and will likely be the final determinant of a September rate-hike, aside from a potential market crash. On the topic of market crashes… funny...

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