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US Economy Demonstrates Resiliency – Retailer Comp Sales Strengthen in September

October 6, 2011

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....

Yum! Brands – Results Indicate Strong China Consumption Growth Continues

October 5, 2011

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...

Excesses Cause Recession – A Comparison of 2008 and 2011

October 4, 2011

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...

Financial Conditions are Driving all the Market Fears

October 3, 2011

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...

China PMI – No Evidence of a Hard Landing

October 2, 2011

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,...

China Hard Landing Fears – The Reality and The Preposterous

September 30, 2011

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...

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

September 29, 2011

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...

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

September 28, 2011

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...

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

September 27, 2011

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...

Gold – The Spot On Take From The Fundamental View

September 26, 2011

Gold – The Spot On Take From The Fundamental View

The Fundamental View has done a great job profiting from the bull market in gold and has also called the correction over the past month spot on. Worth reading for all gold investors. Click here to read The Fundamental View’s recent analysis of the gold market. The above link will take you right to The Fundamental View site.

EM Stock Markets – Destabilized by Currency Sell-offs and Capital Outflows

September 26, 2011

EM Stock Markets – Destabilized by Currency Sell-offs and Capital Outflows

Developed market equities are attempting to stabilize based on additional talks from Eurozone leaders who are meeting with the IMF and reported to be discussing items such as expanding the size of the EFSF, creating a TARP-EU, and recapitalizing more of the European financials. Developed market investors are attempting to look ahead during scary times. This contrasts to the overnight session in Asia, which saw another spiral into panic selling towards the Asian close. Most markets were down 3-6% again, and for a short period last night the S&P futures were down 15 points (2.5% lower than 8:00am NY time). There are a number of signs that this round of selling is liquidation with little regard to fundamentals in the region. The selling is indiscriminant when you look across...

Tom Brady, Mos Def and Deckers launch Ugg for Men

September 25, 2011

Tom Brady, Mos Def and Deckers launch Ugg for Men

Decker (DECK) has been one of the biggest success stories in the consumer space this decade. Since the depths of the financial crisis the stock has more than quintupled from sub-$20 to $100. The brand expansion and sustainability of growth have been questioned all through the bull market in the stock. Ugg has been the key brand driving growth. The products have always been very high quality and comfortable but the fashionista set has continually cringed thinking that styles would morph and Ugg would hit a wall in terms of growth. In short, the company continues to thrive. In the consumer space, success often begets additional success. In a savvy move, Deckers launched an advertising campaign with Tom Brady as they attempt to expand market share in the men’s...

Nike’s Strong Results Indicative of Solid Global Consumption

September 23, 2011

Nike’s Strong Results Indicative of Solid Global Consumption

Nike (NKE) reported an excellent set of results after the close last night. Headline earnings were $1.36 vs a street consensus of $1.21 (12.4% beat). I listened to the Nike earnings conference call and was really impressed with the strong business trends relative to the obvious dislocations we are seeing in the market and talk of global recession. Nike is one of the world’s strongest global brands and has a diversified business across both developed and emerging markets, across product categories such as footwear, apparel, and equipment, and across income demographics. If there was a global slowdown taking place right now it would be something that should impact Nike’s business. Basketball and running sneakers are mature categories in most countries. Nike’s earnings were driven by strong sales trends around...

Europe’s Minimalist Approach Is the Wrong Course

September 22, 2011

Europe’s Minimalist Approach Is the Wrong Course

What an 18 hours, as a conflux of negatives weigh on the market. In wrenching fashion, the US markets are down 6% since yesterday at 2:00pm. Most international markets around the world are down significantly more. Many emerging markets are off over 10% over two days. The Fed implemented Operation Twist yesterday, and the size and scope was actually greater than expected. The US Fed is not the crux of the current set of global financial problems, nor is it reasonable to expect that the Fed can fix things. I have highlighted previously that Europe has the capacity to avoid a full blown financial crisis by taking decisive actions. Unfortunately, Europe’s hard stance with respect to minimizing backstops, bailouts, the EFSF, coupled with a cavalier approach towards the French...

Operation Twist – What the Fed May Announce Today and the Implications

September 21, 2011

Operation Twist – What the Fed May Announce Today and the Implications

The Federal Reserve is likely to announce additional easing measures at the conclusion of the two-day Fed meeting today. Additional easing is anticipated by the market but there are a number of uncertainties related to the scope of what the Fed will implement. The most focused on initiative is called “Operation Twist” which is jargon for selling shorter-term Treasury note holdings (which are yielding a number of basis points which can be counted on one hand) and reinvesting the proceeds out the maturity curve. The action has the effect of increasing the duration of the Fed’s treasury holdings and effectively taking duration out of the market. The System Open Market Account (SOMA) is the account where Fed purchased securities reside. It has been estimated by Brian Sack’s New York...

Why A European Sovereign Debt Crisis Can Be Avoided

September 20, 2011

Why A European Sovereign Debt Crisis Can Be Avoided

The European sovereign debt crisis has dominated financial news and been the primary driver of markets for the past month. I would argue that we are in an actual crisis in Europe and this is no longer about fears of a crisis. When banks can’t finance independently through the market and when large countries can’t issue debt at reasonable interest rates you are in the throes of a crisis. The outlook regarding how this unfolds is really the dominant driver behind any and all short and medium term investment decisions right now. If one believes that this crisis can’t be contained and it will be a 2008-2009 redux, then it would make no sense to be invested and a lot of sense to be short. If one believes this...

Flow of Funds Household Net Worth – US Making Progress

September 19, 2011

Flow of Funds Household Net Worth – US Making Progress

On Friday, the Federal Reserve Board released the quarterly Flow of Funds data which measure the US household sector’s assets, liabilities, and net worth. The data are released with a lag as we just received Q2 measurements, two and a half months after the calendar quarter came to a close. While the level of net worth declined very slightly from Q1 to Q2 (25 basis points) the y/y growth rate in net worth (wealth) actually accelerated from up 5.9% in Q1 to up 8.1% in Q2. 8.1% growth rates are not sustainable nor do they need to be. The strong growth rate in the second quarter is a function of depressed markets in last year’s second quarter coupled with a market rally in June 2011. The market is already...

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