Sears Holdings (SHLD) – Flawed Strategic Experiment Results in Retailing Train Wreck – AutoZone and Sears Comparison

December 28, 2011
By
Sears Holdings (SHLD) – Flawed Strategic Experiment Results in Retailing Train Wreck – AutoZone and Sears Comparison

Sears Holdings pre-reported Q4 results which showed a rapid deterioration yesterday. The most alarming item in the press release was the rapid deterioration in sales trends at both Sears and Kmart. Sears comparable store sales trends ran -3.3% in the YTD period (which is a month away from the full year) while the trends through the first two months of the 4th quarter came in at -6.0%. Kmart sales slowed from -1.8% to -4.4% in the YTD to QTD period. Retailing is tough and you can’t run a retailer without regard for the shopping experience. Eddie Lampert attempted to replicate the magic formula he applied to AutoZone (AZO) with Sears Holdings. The experiment has failed in spectacular fashion. In order to understand what went wrong with Sears it is...

Read more »

Santa Hits the Beach as Warm Weather Continues in December

December 22, 2011
By
Santa Hits the Beach as Warm Weather Continues in December

The warmth and subtle humidity in the air stirs emotions as one envisions heading to the ball park for opening day, preparing for the start of a new fishing season, or produces visuals (perhaps with dread) of how that new swimsuit or bikini will fit. Oh wait, it’s December 22nd! The northeast part of the United States feels like spring, it has been this way all through the month of December. While quite enjoyable and enabling a number of extra runs, outdoor tennis, and pleasurable strolls through the park, the weather is unseasonable enough to impact typical economic seasonal patterns. It’s been somewhat of a running joke in New York City: “Don’t worry it will eventually get really cold, it always does!” Adages be damned, as Mother Nature has surprised us...

Read more »

Lack of Confidence – A Key Driver of Investment Returns in 2011 – An Opportunity and Risk for 2012

December 20, 2011
By
Lack of Confidence – A Key Driver of Investment Returns in 2011 – An Opportunity and Risk for 2012

2011 has been a difficult year for most investors. Market sentiment oscillated throughout the year and generating returns has been exceedingly difficult to come by, let alone maintain. The world experienced at least three distinct crisis; Japanese nuclear disaster, Arab Spring, and Sovereign Debt contagion through Europe. All three of these events were enough to knock the market down for a spell but the global economy was resilient enough to keep growing. Growing global GDP created an environment where corporate earnings rose, achieving new highs on the year. S&P 500 earnings will come in at close to $97 in 2011, up from about $86.50 in 2010. Earnings will register double digit growth of around 12% while the S&P is down 4% ytd. It isn’t difficult to see that the...

Read more »

China Moves Towards Opening Domestic A-Share Equity Market and Hints of Policy Easing Continue

December 16, 2011
By
China Moves Towards Opening Domestic A-Share Equity Market and Hints of Policy Easing Continue

China had an interesting announcement after the close of trading last night which entails opening up the mainland securities markets to Hong Kong investors. According to regulators, China National Radio reports the government is going to trial quota issuance to Hong Kong securities firms for mainland investment. Securities brokerages and fund management firms will be able to use Yuan proceeds raised in Hong Kong to invest in domestic securities markets. China is approving 20 billion Yuan for the initial trial of quota which will be investible up to 80% in fixed income markets and 20% in equity markets. There isn’t much information out at this stage, but opening the domestic market up to a wider array of investors is the first step towards opening the market in general. The...

Read more »

Investing Ahead of a European Recession

December 14, 2011
By
Investing Ahead of a European Recession

Investing ahead of a recession is like a trip to the dentist for a filling when the Novocain isn’t quite right. You know you are in for some pain, but it’s unclear just how much, and how long it will last. Europe is accepting the German path forward, which will at a minimum, lead to plenty of pain for many countries. Spain, Portugal, Greece, Belgium, Italy, and France are all experiencing, or likely to experience, a recession. Forward looking indicators are declining, confidence is dashed, austerity being implemented, European financial assets down sharply, and interest rates higher. The ECB is taking a minimalist approach to fighting the recession and the 17 countries in the Eurozone have different agendas, interests, and policy aims. In the background of the economic recession, there...

Read more »

The Rest of Europe Can’t be German

December 12, 2011
By
The Rest of Europe Can’t be German

The EU Summit and ECB meeting which transpired last week are likely to be the final supporting actions by Eurozone officials this year. The tack forward for Europe has been clarified; move ahead with the long and arduous process of fiscal unification, supported by a reactive ECB. The path ensures two outcomes; that there will be flare ups along the way which will negatively impact sovereign debt/currency markets, and that Europe’s economies will continue to slow as the mending process is drawn out. The way forward will be the German way forward, and the rest of Europe will need to accept it in the near term. Germany has the strongest and most robust economy in the Eurozone. German unemployment is low and the euro has already depreciated to levels...

Read more »

ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

December 8, 2011
By
ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

The ECB issued a terse press release detailing an interest rate cut for the main refinancing operations of the Eurosystem (from 1.25% to 1.0%) commencing on December 14th. In addition, the ECB cut rates on the marginal lending facility and deposit facility by 25 basis points. This move was widely expected and had a limited impact on the euro or equity markets. The press conference and Q&A (45 minutes later) with financial reporters was where the real action took place. The only market friendly outcome was the announcement to extend lending to European banks from a one-year to a three-year term. The collateral requirements for these loans are also being loosened. The press conference was predominantly hawkish. When asked about hints earlier in the week that the ECB could...

Read more »

Standard & Poors Places Europe on Negative Credit Watch – World Set for Downgrade!?

December 6, 2011
By
Standard & Poors Places Europe on Negative Credit Watch – World Set for Downgrade!?

I find it rather ironic that Standard & Poors placed the EU-17 on negative credit watch on the same day the market provided the strongest one-day positive assessment to peripheral Europe’s sovereign credit outlook since August (borrowing costs were down sharply on Monday). I have no issue with actually conducting a downgrade of the entire EU-17, but question how this is of any meaning or particular use to investors? Standard & Poors changed its methodology, and incorporated its own political forecasts into the ratings process, which renders the conclusions difficult to interpret. Not that the ratings were of much predictive use in determining credit quality before this change (see 2008). The question now arises; how does one utilize information from a mostly backward looking set of ratio based credit...

Read more »

Mario Monti Announces Serious Austerity Plan for Italy – 2013 Balanced Budget Target Leads to Sovereign Debt Rally

December 5, 2011
By
Mario Monti Announces Serious Austerity Plan for Italy – 2013 Balanced Budget Target Leads to Sovereign Debt Rally

Italian Prime Minister, Mario Monti, announced sweeping austerity measures and reforms, bolstering confidence in Italian sovereign debt markets. Monti’s plan includes tax increases, government spending cuts, pension savings and raising the retirement age. Italy needs to enact these reforms over the next couple of years, and there are some political risks to implementation, but the immediate market response is positive for this round of announcements as opposed to the cynical reactions in the summer and fall. Italian 10-year borrowing costs dropped from 6.68% to 6.10%. While it is dangerous to extrapolate any daily changes in sovereign debt yields due to the vagaries of European markets, this change is driven by a major announcement which would impact actual fundamentals (again if implemented) and the change in yields is simply a...

Read more »

CJF Read of the Week – Acting Man: “The ECB and Balance Sheet Recessions”

December 4, 2011
By
CJF Read of the Week – Acting Man: “The ECB and Balance Sheet Recessions”

Pater Tenebrarum, writer for Acting Man, did a great job of putting together a timely and comprehensive update on Mario Draghi’s speech to European Parliament. He highlights the hints that Mario Draghi and the ECB are moving closer towards monetary pump priming. Some great charts, relevant excerpts, and good humor. Click for the full piece at Acting Man    

Read more »

ISM New Orders – A Strong Indicator of GDP Growth Improved Sharply in November

December 2, 2011
By
ISM New Orders – A Strong Indicator of GDP Growth Improved Sharply in November

The financial crisis in Europe detracts from a normal focus on the underlying strength of the US and global economy. Despite the US economy being relatively solid, an escalating Eurozone crisis has the potential to derail economic growth because of the enormity of the impact from a financial seizure. While the solution to the Eurozone liquidity and structure crisis is being debated, there continues to be very resilient economic data from the rest of the world. US GDP data is set to recover towards the 2.5%-3.0% range based on the strength coming from retail sales, manufacturing, and the labor market. It is relatively rare for the market to have a flat year of returns when earnings grow sharply in a non-recessionary environment. Clearly, valuation multiples for the S&P 500 have...

Read more »

China Starts Monetary Policy Easing Cycle & Rest of World Provides Additional Liquidity

November 30, 2011
By
China Starts Monetary Policy Easing Cycle & Rest of World Provides Additional Liquidity

Overnight, financial market sentiment turned around pretty dramatically. The China A-Share market sold-off by 3.3% and approached the vicinity of recent lows. Fears started to mount that Chinese central bankers were going to be slow to ease monetary policy based on continued inflation concerns. After Asian markets closed, the People’s Bank of China announced that reserve ratios were being cut by 50 basis points, from 21.5% to 21.0%. The move was somewhat of a surprise and has started a turnaround in sentiment in the financial world. The reserve ratio cut is significant because it is the first time reserve ratios have been cut since 2008. China’s central bank has been allowing reserve ratios to generally trend higher since 2006 when the ratio used to be in the high single...

Read more »

Facebook Considers a Spring 2012 IPO at a $100 Billion Valuation

November 29, 2011
By
Facebook Considers a Spring 2012 IPO at a $100 Billion Valuation

We all knew it was coming, a spectacular IPO at a high valuation, for one of the world’s most innovative and intriguing companies. After many years of capturing young people’s internet time around the world, Facebook is moving closer to an IPO, reportedly valued at a $100 billion. The company may potentially file before year-end and go public between April and June according to Bloomberg. Facebook would likely raise $10B, effectively listing 10% of the company. Facebook is a company and brand that investors are intimately familiar with. Many investors have uploaded wide expanses of personal data to the company’s servers and have also been regular members for a number of years. We even have feelings about the corporate history through the venture capital phase due to the success...

Read more »

Black Friday Retail Sales Strong – Demonstrate the US Economy is Nowhere Near a Recession

November 28, 2011
By
Black Friday Retail Sales Strong – Demonstrate the US Economy is Nowhere Near a Recession

A number of Black Friday retail sales surveys were released over the weekend. All measures pointed to a robust start to the holiday shopping season. Strong data were received from the National Retail Federation, ShopperTrak, and Comscore. None of the individual sales measures are completely reliable, but the collective strength is likely indicative of a higher growth rate in holiday retail sales relative to a year ago. This result, if it holds through the entire holiday season, would be impressive given how US Consumers have continually (and wrongly) been expected to roll over. The National Retail Federation (NRF) estimated that Black Friday weekend sales were up strongly, achieving new highs in sales volume. The NRF puts a survey together in conjunction with BIG Research. The strong sales estimates from...

Read more »

Germany’s First Failed Bond Auction – The European Crisis Continues to Spread

November 23, 2011
By
Germany’s First Failed Bond Auction – The European Crisis Continues to Spread

Germany failed to get bids for 35% of the 10-year bonds auctioned today. Yields are up about 10 basis points this morning. The increase in borrowing cost is insignificant for Germany. Yields are still well below 2%, and Germany continues to benefit from the combination of very low borrowing costs, and a declining euro which helps support export competitiveness. The first sign of German bond market stress does highlight the risk the EU-17 is flirting with; the breakdown in confidence across the entire region. What started as a crisis in Greece has spread one-by-one to the rest of the European sovereigns. The reason the crisis has spread is not based upon profligate actions by the rest of the Eurozone. On the contrary, progress has already been made across Europe...

Read more »

Emerging Market Currencies Signaling More Risk Aversion

November 22, 2011
By
Emerging Market Currencies Signaling More Risk Aversion

For almost a decade, emerging markets have been in a bull market with high growth rates, declining interest rates, and capital inflows. During the financial crisis, emerging markets were hit like financial assets around the world, and capital flowed out of the asset class. Over the course of 2010, and most of 2011, emerging market currencies strengthened once again. Recently, the European financial crisis cast doubts on the risk appetite for emerging market investment. EM currencies experienced a sharp, across the board, selloff in September 2011. Currencies such as; the Brazilian Real, Mexican Peso, and Indonesian Rupiah quickly declined by 20%. Part of the decline was based on the start of EM central bank rate cuts but the majority of the move was simply risk aversion. Many of the...

Read more »

“Super” Committee – Lack of Progress Heightens Risks to Economy and Financial Markets

November 21, 2011
By
“Super” Committee – Lack of Progress Heightens Risks to Economy and Financial Markets

The US “Super Committee” failed to make any progress on the sole task it was created for: deficit reduction. It now appears probable that there will be an announcement today stating the committee has “failed to reach its mandated goal of reducing deficits over the next 10-years by $1.2 trillion dollars”. An announcement of this sort would be particularly discouraging because the committee looks unable to achieve even partial success. At a time when the global economy and financial markets are experiencing a crisis of confidence in the future, this result is a major letdown. The US economy has been incredibly resilient despite the confidence-sapping political ineptitude, and the political/financial breakdown in Europe. The main issue with a potential “lack of result” announcement from the Super Committee is not...

Read more »