Blog Archives

Midsummer Issues Persist; Divergent Global Central Bank Actions Create Challenges

November 10, 2015
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Midsummer Issues Persist; Divergent Global Central Bank Actions Create Challenges

The market moves fast. Thankfully, in the rest of the world, trends of all kinds, generally move at a measured pace. The market overreacts to events and day-to-day happenings based on crowd think and behavioral issues. A change in trend will often start with a subtle data point or indicator, which in hindsight, ignites a big, and sustained move in the market. Now is not one of those times. Late summer fears of China slowdown and EM collapse look to have been overblown, and the severity of the selloff too harsh. But the rally of the past two months also contains elements of overreaction; the underlying drivers and risks from the summer aren’t resolved. The world is fundamentally caught in a new dynamic. Credit expansion reached limits in every...

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The Chickens Come Home to Roost; More Fraudulent Business Practices Exposed at Iconix Brand Group

November 6, 2015
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The Chickens Come Home to Roost; More Fraudulent Business Practices Exposed at Iconix Brand Group

Usually, the juicy, salacious stuff comes to the fore during recession or crisis, when past misconduct can no longer be concealed. Recently, between Valeant Pharmaceuticals, and Volkswagen, there are plenty of good fraud stories to go around. Yesterday, sigh, Iconix Brand Group (ICON) revealed that its accounting statements, since 2013, were presented with smoke and mirrors. The revelation comes after the former CEO, and founder, Neil Cole (Kenneth Cole’s brother) left abruptly in August to “pursue other interests”. Perhaps there is a good backlog of dodgy accounting, and insider shenanigans to expose after the 6-year recovery since the financial crisis. The story of Iconix is a fascinating one, and rhymes with other high profile deceptions over the years, such as, Valeant, Enron, and WorldCom; beware of acquisitive growth that...

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On Sentiment; How the Market Mini-Crashed and Exploded Right Back

November 4, 2015
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On Sentiment; How the Market Mini-Crashed and Exploded Right Back

The stock market is on fire. As negative, dour, downbeat, and gloomy was August, the market this fall (early fall), is contrastingly, positive, nonchalant, optimistic, and even euphoric. So it goes; a fast 11% sell off over 6 trading days, on little more than poor sentiment, and a 3% Chinese currency devaluation, followed by an incredible global recovery on dramatic global central bank stimulus and, well, things not being quite so bad in China (for now). In retrospect, it’s always easy. The economic machine works as a process (using Ray Dalio’s terms), and short of a deep freeze of liquidity, economic activity doesn’t shut down over night. The global economy isn’t ready to slow dramatically; the US is still too strong, and global central banks still too eager to...

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The World Wants More Coffee and Starbucks Owns the Category

October 31, 2015
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The World Wants More Coffee and Starbucks Owns the Category

During a controversial 3Q earnings period, patterns continue to emerge, with beloved companies accelerating business trends in the midst of a tough global economy. Winners are thriving with differentiated brands, business models, and strategy; the stock market is awarding the victors to an almost unprecedented degree with rich valuations and surging stock prices. On the other hand, companies with secular challenges are in a severe de-rating process and bear market. Starbucks (SBUX) falls into the former category and the stock is now valued at unprecedented levels post-financial crisis.     SBUX stock is up 6x over the past 6-years, pre dividend:                             The path to superior investment returns is often obfuscated with a complex strategy, tactical...

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Tim Cook & Apple Confirm China Strength

October 28, 2015
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Tim Cook & Apple Confirm China Strength

Apple posted an excellent Q3 result; 48 million iPhone shipments exceeded expectations, gross margin approached 40% (32 bps above last year), and EPS grew 43%, an impressive growth rate for the largest company in the world by market capitalization. Mac computer units grew 3% despite a 11% contraction in the overall global PC market. Iterations of new products are coming with updated Apple watches and the Apple TV in time for the holidays, and the Apple brand remains hot. Tim Cook emphasized strength within China, more so than past conference calls, in order to remove one particular bear case which transpired this summer; a sharp slowdown in China and inventory glut. With Nike posting its fastest growth rate in China in several years, and Apple sales doubling, two data...

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Amazon and Wal-Mart; Atypical Market Rally Driven by Disintermediation and Secular Trends

October 24, 2015
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Amazon and Wal-Mart; Atypical Market Rally Driven by Disintermediation and Secular Trends

Wal-Mart recently hosted an Analyst Day to update Wall Street on current operating trends and strategy. The amount of investment needed to modernize the store base, and improve the overall customer offering is staggering. Wal-Mart will experience a second consecutive year of earnings decline in 2016. The stock took the update poorly, falling over 12% from last week’s price of $67 to $58 on Friday. The decline slashed $27b in market capitalization. Along with Wal-Mart, the retail sector got pounded, despite a rampaging market and stunning moves within large-cap tech. While the market isn’t at new highs (yet), the August sell-off is now undone, and the market trades solidly within the range of the previous 7-months (2,050-2,130). What’s going on? The current rally is atypical because it’s driven by...

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5 Investment Patterns That Don’t Make Sense

October 14, 2015
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5 Investment Patterns That Don’t Make Sense

2015 is shaping up to be a challenging year for investments. The market swoon in mid-August caught most off-guard, and the subsequent violent recovery arrived right after several prominent investors turned bearish, or at least hedged. Markets don’t need to make any sense, and at times, understanding “why” the market is getting crushed, or exploding, is a futile exercise; it may lead to a grounded feeling, but ultimately, is not too helpful in predicting the next move. Nonetheless, since mid-August, several relationships/patterns emerged that are particularly nonsensical. A short list: 1) A-share returns matter for global stock markets The stock market in China, the world’s second largest economy, is a big mess of a structure. Top Chinese companies are listed in three separate exchanges/geographies, each open to a different...

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Dovish Fed Minutes Ramp Market; Valuing the Yellen Put

October 10, 2015
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Dovish Fed Minutes Ramp Market; Valuing the Yellen Put

The September 16-17th FOMC minutes were released Thursday afternoon, continuing the market’s Beast Mode reaction to Fed dovishness. The S&P 500 completed the best week of the year, barely down-ticking from 1,893 to 2,015. The market rallied 7% from the lows after the September Employment report to the highs yesterday. The 122 handle rally takes the market multiple up one turn (from 15x to 16x multiple). Despite the euphoria of a quick fix, there are a number of reasons for caution after scrutiny of the Fed’s minutes. Yes, the Fed minutes were dovish. Full stop. The Fed awaits more data on improving labor markets despite a 5.1% unemployment rate, and inflation is expected to remain below 2% for some time. All the voting members, other than Lacker, voted against a hike....

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Utilities Utilities Utilities; sound investment for a slower growth, low rate world

October 6, 2015
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Utilities Utilities Utilities; sound investment for a slower growth, low rate world

What a rally! In two sessions, the S&P 500 rallied 5%, almost 100 handles from the Friday low. The ex-post “cause” of the rally seems to be the punk September Employment Report, which boxes the Fed into a corner. Yellen’s inertia, and dovishness, during the September press conference, coupled with the subsequent soft employment data, led to an immediate feeling of: “oh my, now they can’t hike“. The surprisingly low payroll data initially got sold, but upon further reflection, the soft report created certainty, that the Fed is out of the equation, and zero interest rates will remain in place for as far as the eye can see. Markets prefer certainty, and thus the 5% explosion higher. It’s really that simple a 5% move. Using 2016 earnings estimates of $125, the...

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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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