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

October 6, 2015
By
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...

Read more »

Global Growth Scare + High Valuations = Bear Market Dynamics

September 29, 2015
By
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...

Read more »

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

September 25, 2015
By
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...

Read more »

Primark is Coming; US Specialty Apparel Sector Disrupted

September 22, 2015
By
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...

Read more »

Super Dovish Fed Persists

September 18, 2015
By
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...

Read more »

Brazil’s Economic Miracle; Seeing the Monster

September 15, 2015
By
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...

Read more »

Employment Report & Markets; Forcing a Fed Rate Hike

September 9, 2015
By
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...

Read more »

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

September 5, 2015
By
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...

Read more »

China in Recession; Yuan Depreciation Imminent

September 3, 2015
By
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...

Read more »

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

September 1, 2015
By
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...

Read more »

Stanley Fischer’s Jackson Hole Speech: Fed Determined to Lift-Off

August 29, 2015
By
Stanley Fischer’s Jackson Hole Speech: Fed Determined to Lift-Off

Stanley Fischer delivered a critical speech this weekend at the Jackson Hole, Economic Symposium, outlining the Fed’s forward looking view on inflation and the potential for a lessening of factors that dampen inflation. This speech signals the Fed is staying the course and determined for rate hike lift-off on the advertised time-table. CJF interprets this speech hakwishly, relative to market expectations for a push-out to the December lift off timeframe. It is likely that December is the latest possible preference for lift-off with September (or October) still very much on the table. Will be interesting to see how volatile markets react to some of the forceful language in the speech. The speech, in full, is a worthwhile read. Excerpts with CJF commentary: The past year’s energy price declines ought...

Read more »

Emerging Market Doldrums

August 26, 2015
By
Emerging Market Doldrums

Not out of the woods yet – no way. The world has changed in the past week, and unmistakably, extreme volatility (mostly of the down kind) is back within financial markets. The potential of Fed rate hike cycle, in the not too distant future, is wreaking havoc. An unintended consequences of the extended period of ZIRP (2011-now) is the degree to which the rest of world, particularly EM, depend on it. Market lurches with random gaps higher and sudden sell-offs occur daily since China’s FX policy shift and highlight the fragility of financial markets. The overarching issue for EM can be reduced to capital flows and structural reforms. The 2015 circus act out of Greece/EU, in hindsight, deflected attention from the coming EM storm/crisis. With Greece now “fixed” EM...

Read more »

Market Treads Water

August 17, 2015
By
Market Treads Water

After a one year hiatus (CJF writing hiatus), the US equity market remains resilient, hovering around 2,100, in a historically tight range for the past 9-months. The 20-day, 50-day, 100-day, and now 200-day, moving averages are converging, because again, the market is flat. A few observations to re-engage investment dialogue on this blog… At risk of a truism, sideways markets always resolve in one of two ways: a breakout to the upside or downside. CJF points this out because investors should not be lulled by extreme sideways action, nor should investors underestimate the possibility of a significant move in either direction. The current sideways market is manic, with a rotating focus on different exogenous factors, some of which have an inflated perception of ultimate impact. Market negatives and positives...

Read more »

S&P2K; a new highs odyssey

August 28, 2014
By
S&P2K; a new highs odyssey

Please excuse the summer lull – anticipating more regular posts after a well needed period of summer travel! Two posts ago (in late May) focused on the market ascent to 1,900. In relatively short order, another centennial milestone is surpassed with the market melt-up to 2,000 over the past 15 trading days. Recapping the market action this summer (while CJF was on hiatus):         market hit new highs in July multiple on the S&P 500 approached 16.5x (notably representing new cycle highs) several geopolitical fears hit (Iraq, Syria, Israel, Russia/Ukraine) none of the geopolitical fears came close to corralling the bull (only a 4% pullback ensued) still no correction of 10% (for those keeping track it’s been over 1,000 days since one) since Aug 7th, there...

Read more »

A tale of two growth rates; GDP and US corporate profits

June 3, 2014
By
A tale of two growth rates; GDP and US corporate profits

Last week’s “second” 1Q14 GDP print revised to a -1.0% annualized growth rate relative to the prior print of +0.1%. The second 1Q14 GDP print was shrugged off, with equity markets rallying to new highs, in impressive fashion, given the seasonally low volumes around Memorial Day. While the 1Q14 print is still not “final” (there will be third print, and an ultimate benchmark revision) there is little fear for two consecutive down GDP quarters; the typical definition of a recession. Nonetheless, the real economy is still punk. The performance between the real economy, and the environment for corporate profits, is often confused, and wrongly, treated as one and the same thing. CJF holds the view that what’s ok for the economy is a nirvana for corporate profits. If the...

Read more »

1,900; now what?

May 27, 2014
By
1,900; now what?

The US stock market, the best market in the world for a multitude of reasons, hit new highs on Friday, ascending to the 1,900 level, on a closing basis. The market is confounding because of the lack of normal draw-down (no meaningful pull-backs in a long enough time to be scary) and because many high profile stocks or stock indexes are way off recent highs. Yet the market is at a new high. This is based on capitalization weightings. An example can be found in the Russell 2000; comprised of the smallest 2,000 stocks within the Russell 3,000 (top 3,000 stocks in the US). The Russell 2000’s market capitalization is only about 8% of that of the Russell 3000. Select internet, growth, biotech, and small-cap stocks are under significant...

Read more »

Big Orange; Home Depot 1Q results soft on weather – outlook a positive signal for housing

May 20, 2014
By
Big Orange; Home Depot 1Q results soft on weather – outlook a positive signal for housing

Home Depot (HD) 1Q14 results reflect a benefit to earnings, net of tax, of $61m from a sale of a portion of the company’s equity ownership in Home Depot Supply Holdings (HDS). Exclusive of this gain, HD reported EPS of $0.96 relative to consensus estimates of $0.99. A miss in a difficult to predict quarter with spring arriving late. Nonetheless, the stock is bid based on commentary for “robust” May sales, a period less impacted by weather, and likely reflecting some pent-up demand from the spring. The colder than seasonal weather in 1Q also weighed on gross margin indicating that margin trends remain on plan. HD doesn’t see evidence of a slowing housing market; commented on heavily in financial markets. HD’s big ticket items are outperforming small ticket and...

Read more »