Blog Archives

A Commitment to Recapitalize European Banks is Bullish for US Financials

October 10, 2011
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A Commitment to Recapitalize European Banks is Bullish for US Financials

The Euro rallied 2% today against the USD causing a sharp reversal of crisis-fearing “risk off” trades which have been working against all financial markets around the world. The Euro rallied based on indications that France and Germany are going to work seriously towards recapitalization of the European banking sector. This has been one of the two necessary conditions for the confidence to return to Europe: 1) Sovereign debt crisis needs to be contained by capping interest rates for countries like Italy, Belgium, and Spain. This was the easy part because for now the ECB has the authority to buy the debt to cap rates. Eventually the EFSF will be expanded and debt will be purchased through this vehicle. 2) The financial system in Europe needs to be able...

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Occupy Wall Street – Part Protest, Part Woodstock, Part Circus

October 9, 2011
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Occupy Wall Street – Part Protest, Part Woodstock, Part Circus

Occupy Wall Street is part protest, part Woodstock, and part circus act, but none of it has anything to do with Wall Street. I live in Manhattan and figured I would check out the scene this weekend not quite sure of what to really expect. There has been plenty of financial press calling the protest full of imbeciles and there have also been coverage of arrests and hard core protesting. After seeing the spectacle in full splendor most of the media coverage has been sensationalized. Upon arriving to Zuccotti Park early on Saturday morning I was immediately struck by the sanitation aspect of things. The downtown Manhattan park was something one would expect after a humanitarian crisis like Katrina or a camp for displaced refugees fleeing an oppressive dictator...

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Crying Wolf – False Recession Calls Brutally Hurt Returns

October 7, 2011
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Crying Wolf – False Recession Calls Brutally Hurt Returns

The ECRI has come out and caused a stir from continually touting their “unavoidable recession” forecast. In addition, ECRI co-founder, Lakshman Achuthan has been continually highlighting their 3/3 track record without forecasting a false positive. While this track record is impressive, Crackerjack Finance would like to highlight a term from our disclaimer; “past performance is no guarantee of future results”. At economic inflection points, the investment stakes are doubly heightened. I thought it worthwhile to review and quantify S&P 500 investment returns when investing in an environment of recession fears that does not materialize into a recession. Reviewing the numbers clearly demonstrates that if you are not invested during the time of a false recession fear you miss out on out-sized excess returns over the next 12 months. Of...

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US Economy Demonstrates Resiliency – Retailer Comp Sales Strengthen in September

October 6, 2011
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US Economy Demonstrates Resiliency – Retailer Comp Sales Strengthen in September

Despite massive uncertainty stemming from the manner in which Europe is handling its financial crisis, a gut wrenching stock market sell-off (the S&P 500 was down 7.2% last month), negative headlines almost every day, and predictions towards the end of the month that the US economy is now “in a recession”, the US consumer continues to spend at a healthy rate. Perhaps the savings rate is now high enough at 5% which is leading to more stability in retail sales than many predict. Stability with the growth rate of retail sales is one of the most important inputs towards GDP growth. With personal consumption expenditures as a % of GDP still above 70%, a 4% growth rate in PCE makes it all but impossible to be in a recession....

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Yum! Brands – Results Indicate Strong China Consumption Growth Continues

October 5, 2011
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Yum! Brands – Results Indicate Strong China Consumption Growth Continues

Yum! Brands (YUM) released results after the close of market yesterday. Yum is the world’s second largest quick service (fast food) restaurant after McDonald’s and operates the KFC, Taco Bell, Pizza Hut, Long John Silver, and A&W Restaurant franchises. Yum is an important company I follow because of the exceptionally strong gearing to China. This year, over 45% of the company operating profits will come from China. The positioning that Yum has in China is the result of decades of investment, brand building, and restaurant openings. There are 4,187 company-owned restaurant units in China amounting to over half of the company owned store base. Yum chooses to own the restaurants units, as opposed to franchise, because the restaurant profitability is so high. Yum makes more money on KFC and...

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Excesses Cause Recession – A Comparison of 2008 and 2011

October 4, 2011
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Excesses Cause Recession – A Comparison of 2008 and 2011

Recessions are typically caused by some sort of an excess. Real economic activity stretches too far and the subsequent unwind causes a retrenchment via a sudden and abrupt change in business and household behavior. There have been a number of excesses that have built up in the global economy over the past couple of decades. Japan had a speculative bubble in terms of corporate borrowing and real estate investment at stratospheric prices in the late 1980s. The US and world saw a technology driven CAPEX boom in 1999-2000 which was unsustainable, and created the lead-in to the 2001 recession. 2008 saw the culmination of two decades of loose credit expansion which fed into the US housing market bubble. Ex-post the cause of the retrenchment is often clear. Today, most...

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Financial Conditions are Driving all the Market Fears

October 3, 2011
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Financial Conditions are Driving all the Market Fears

Positive data and developments on the real economy front are being ignored while increases in financial stress are being focused on. The pervasive gloom in the financial markets is a result of growing fears of another financial crisis. If this were to unfold, the financial crisis would surely cause a global recession but I’m remaining in the camp that a global recession can be averted if financial conditions stabilize. Financial conditions fully reflect the jitters of market participants or investors. Numerous sets of survey data reflect low levels of investor confidence which are being reflected in yield spreads, short-term funding markets, and stock markets around the world. While the stress is nowhere close to the degree it hit during the Lehman event, it is worrisome nonetheless. The source of...

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China PMI – No Evidence of a Hard Landing

October 2, 2011
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China PMI – No Evidence of a Hard Landing

China’s official PMI was released over the weekend (after financial markets closed on Friday) and the September data point came in slightly higher than last month and slightly higher than expected. The total manufacturing PMI index came in a 51.2 which is the strongest month of the past 4-months. As important as the slight uptick, the gains were broad with improvements in the key categories. Total PMI rose to 51.2 (50.9 in Aug) Output rose to 52.7 (52.3 in Aug) New Orders rose to 51.3 (51.1 in Aug) Export Orders rose to 50.9 (48.3 in Aug) Backlogs rose to 48.9 (47.6 in Aug) Employment rose to 51.0 (50.4 in Aug) In short there was some modest yet broad improvement. While a PMI reading of 51.2 is weak for China,...

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China Hard Landing Fears – The Reality and The Preposterous

September 30, 2011
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China Hard Landing Fears – The Reality and The Preposterous

Slowdown fears in the market have shifted to China. The past two days has seen the start of a shift in sentiment with China exposures viewed more as risk than as opportunity. There is clearly some slowing in China, and there should be, because the government has been trying to slow the economy to help contain inflation for the past year. China starting to slow is a positive because it helps inflation remain under control which is a key element towards China achieving its multi-year economic plans. Over the latter half of this week, the fear has shifted that the slowdown is no longer orderly and that it is accelerating towards a hard landing in China. If this were to be true, it would dramatically increase the chances of...

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Strong Labor Market Data Point – Unemployment Claims Solid Despite Department of Labor Explanation

September 29, 2011
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Strong Labor Market Data Point – Unemployment Claims Solid Despite Department of Labor Explanation

In a curious press release, the Department of Labor came out this morning and highlighted some atypical calendar alignments for the unemployment claims data which make it more difficult for the government to adjust the not seasonally adjusted claims data for seasonal changes. As a result, the seasonally adjusted claims data fell by 37k to 391,000 claims which would be the best data since the first week of April. The Labor Department mentioned that the seasonal adjustment in claims heading into the last week of a quarter typically look for a drop in the raw data. This year’s data were expected to rise slightly, so the pre-released seasonal adjustment factor was set to revise the claims data lower. In actuality, raw claims came in without any abnormal increase and...

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Refinancing Activity Hits New Highs – Conditions now in Place for the Housing Market to Turn

September 28, 2011
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Refinancing Activity Hits New Highs – Conditions now in Place for the Housing Market to Turn

Reports have recently been popping up that 30-year fixed mortgage rates in the US have approached 4%. This is a new low for the cycle. Much of the analysis I have read regarding mortgage rates is that they do not matter. The rational goes something like this: since mortgage rates have come down from the time of the financial crisis, and since housing activity and home prices haven’t picked up, mortgage rates don’t matter. The arguments go on to state that not enough people can refinance because of the broken and bogged down mortgage financing system in the US, and the issues with banks. I think this argument is wrong and that the housing market would be much worse than it is now with higher rates, therefore lower rates...

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Greece Will Stay On Board – Merkel and Papandreou Plan a Dinner Date in Berlin

September 27, 2011
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Greece Will Stay On Board – Merkel and Papandreou Plan a Dinner Date in Berlin

Greece will ultimately stay on board. There I’ve said it – and it is really what I think will happen. There were a number of “unity” headlines hitting over night which have led to a continuation of the rally in global risk assets. Emerging Markets which looked sufficiently panic sold to call out yesterday are up 3-6% across the board. Major stock markets in Europe are up 3-4%. At risk of sounding Pollyannaish about the whole episode it appears to me that Greece and the rest of the Eurozone are coming to terms and seeking out a middle ground which avoids the suicide option. My thesis for the past month has been that this looming crisis is avoidable across the Eurozone because it has morphed into a crisis of...

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