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ICI Mutual Fund Flows – “A Waterfall”

August 17, 2011

ICI Mutual Fund Flows – “A Waterfall”

ICI MUTUAL FUND FLOW HISTORY ICI mutual fund flows <click on the PDF link in red> for the equity asset class (Aug) were released today with an outflow of $23.5B which rivals the exit from the equities back in the depths of the financial crisis (late 2008). This is stunning, that investors would run for the exits so abruptly. While the analogies to 2008-09 abound we think there are “dramatic” differences. Our banking system is much better capitalized, households have de-leveraged, and the economy has shown no signal of imminent collapse. The good news – the data is reflective of what already happened, not what will happen! There is no predictive statistical significance between mutual fund flows and go-forward stock market returns. The relationship is spurious and as much...

The US Economy – not as bad as the headlines (7 reasons why)

August 17, 2011

The US Economy – not as bad as the headlines (7 reasons why)

While many pundits are talking about recessionary type conditions – we would like to point out that the actual environment is much better than this, and in many regards running at about the same pace now that we did in Q1. We acknowledge that GDP growth has disappointed this year, and has come in much lower than bullish forecasts from Wall Street banks like Goldman Sachs. Much of the delta in GDP has come from a push-out in the housing recovery as well as a slowdown in government spending. On the consumption and private sector side, things are hanging in. Some rays of light: 1) Retail Sales are strong – the weekly sales surveys from Redbook and ICSC are running at the high growth rates of the year (exhibiting...

German Economy – The End of Detachment

August 16, 2011

German Economy – The End of Detachment

The German economy has been detached from other developed markets over the past year. Real GDP growth in Germany grew at 3.6% in 2010, and accelerated to 5.5% growth in the first quarter of this year. This morning, we learn that the initial estimate of Q2 GDP growth has fallen sharply to 0.5%. This is the weakest rate of growth since Q1 2009. While much slower GDP growth in the world’s 4th largest economy creates challenges, the abruptness of the decline may serve as a wake-up call to some of the aloof German politicians who seem to think that all of the problems around the rest of the developed world were unique to other places and that German was exempt because of superior fiscal policy choices over the past...

Google (GOOG) to acquire Motorola – Investment Analysis

August 15, 2011

Google (GOOG) to acquire Motorola – Investment Analysis

Google has announced an agreement to acquire Motorola Solutions (MMI) as they continue their push into mobile internet and mobile hardware. The deal was announced for $12.5B and shareholders of Motorola Solutions will receive $40 per share in cash. This is a cool 63.5% for shareholders of MMI relative to Friday’s closing prices. Larry Page and Patrick Pichette (Google’s CFO) did a quick conference call explaining the deal this morning. You can listen to the call over at Google’s investor relations site. The call didn’t say too much other than point out that the deal will be accretive (ex amortization of intangibles) immediately from the time it closes. This is because Google is funding the transaction with excess cash that is sitting on the balance sheet earning very low...

Buy Dillard’s (DDS) – stock selloff overdone

August 12, 2011

Buy Dillard’s (DDS) – stock selloff overdone

There is an opportunity right now to purchase Dillard’s (DDS) to earn outsized short-term returns. This post is different from a “focus investment” which is a much more in-depth analysis and suitable for longer-term investment. See the post on Guess (GES) with the attached PDF for a “focus investment” selection (we still like Guess btw). This trade idea is an observation on a market dislocation that we feel doesn’t make sense. Today we suggest buying shares of Dillard’s (DDS) which is down 17.5% on not beating expectations. The results at Dillard’s were not fundamentally bad. EPS were up from $0.10 last year to $0.32 this year (adjusted EPS). Same Store Sales trends remain healthy at Dillard’s (+6% for Q2) and the margins are expanding. The key quarter for full...

“Risk On” – DOW surges 423!

August 11, 2011

“Risk On” – DOW surges 423!

European banks, which were the cause of yesterday’s collapse all rallied today. CDS spreads in Europe all narrowed across the board, French and Italian sovereign debt rallied, Gold sold off 41 dollars (down 2.3%), earnings continue to be holding in relative to reduced expectations (Kohl’s, Cisco), the Bovespa rallied sharply, and the VIX went down all day. After an exhausting first 4-days of the week we have: 2-2 (in terms of terrifying market collapses vs euphoric booms). Again, this is just this week. If you need some water to mix with your alcohol IV, you aren’t alone. Rubber match on Friday.

China Rate Hike Cycle Over?

August 11, 2011

China Rate Hike Cycle Over?

The markets have been on edge like high-schoolers lining up prom dates. This type of volatility isn’t fun – the ups and downs. It weighs on professional investors, it interjects more emotion into the investment process, while elevating stress, and causing people to lose sleep. The above is natural as money is made or lost at an outsized pace in hourly timeframes. This phenomena is measured in the VIX index which has surged to over 40 this week (was 15-25 the majority of the past couple of years). I point out the above, because when you are stressed, tired, and emotional, you don’t think or research as clearly. Things get missed. There was some subtle news in the past week about August 10th being a key date for...

France to be downgraded – it should be – it doesn’t matter

August 10, 2011

France to be downgraded – it should be – it doesn’t matter

Rumors are swirling that France is about to be downgraded by Standard & Poor’s. We will state in advance that not only do we think that France should be downgraded, we think every nation that is rated “AAA” should now be rated “AA” on Standard & Poor’s definition of “AA”. There simply is no country which should have a higher sovereign credit rating than the US. No other nation has the world’s reserve currency or largest military – there for they are riskier. If the market sells off on any news related to France, we will take that opportunity to buy. French Government bonds are 3.10%. German Government bonds are 2.11% Italian Government bond are 5.10% (down sharply from last week) Spanish Government bonds are 5.01% (down sharply from...

Is yesterday’s 5% rally sustainable?

August 10, 2011

Is yesterday’s 5% rally sustainable?

Why was the market up 5% yesterday after the Fed meeting? At first the market became scared of a crash and sold off down 2%. Subsequently the market came back to unchanged and rallied another 5%. Whoa. Our “green light” to buy worked out, if just for a day. Of course what everyone cares about is what to do going forward. We remain skeptical of a market crash to be induced by something as mundane as a Fed statement on the economy or a Standard & Poor’s statement on the credit worthiness of the US. These are absurd reasons for a market crash though we remain vigilant of real reasons for a market crash. 1) Credit availability and liquidity really drying up across the global economy 2) An actual...

Green Light for a Rally!

August 9, 2011

Green Light for a Rally!

The markets are completely destabilized and due for a bounce from dramatically oversold conditions. For those investors who are bullish and wish to take the view that the US and global economy will not be in a recession in the next 6-9 months, we advocate buying while the buying is good and other investors are too scared to buy because they are worried about an utter meltdown. Based on the lead-in to today, acknowledging the destabilized market environment, we would see a 2/3 chance of a very strong bounce that gains some momentum when the investing heard gets over the shock of an up-market. Of course there is a solid 1/3 chance that confidence remains completely dashed and we again have another heavy selloff. Why we are leaning towards...

China Inflation – Non-News News

August 8, 2011

China Inflation – Non-News News

The Chinese CPI is not an apples-to-apples measure relative to the CPI (consumer price index) that is reported here in the US. Some are attributing the overnight leg-down in the S&P futures (down another 24 or 2.25% at 11:00pm) to the fact that Chinese inflation came in at 6.5% when the consensus was 6.4%. Crackerjack says: “bullocks”. This is just some more good old fashion market panic in our opinion. Chinese food inflation came in at +14.8%. Certainly high, but food inflation is much more volatile and both weather, crop, and commodity price dependent (notice how all commodities except for gold have been collapsing the past few days). Chinese inflation ex-food is running up 2.9%. Not too much different than inflation in the US, nor should it be with...

“Recession Trade” – Clear by Investor Actions Today

August 8, 2011

“Recession Trade” – Clear by Investor Actions Today

The immediate observation for those watching this macabre sell-off is that stocks are pretty much being sold off based upon how they would be expected to hold-up in a recession, that will presumably be starting within the next 6-months or so. Any stocks that have a very high valuation, are particularly leveraged, are pro-cyclical or are discretionary look out! Stocks in these categories are down indiscriminately, regardless of near-term or current business trends. The market is being forward looking and pricing in a much higher probability of a recession on the horizon. There is no way to prove or dis-prove the recession prediction until more time goes by. Some stocks of note at 3:00PM: Goldman Sachs (GS) – (down 9%) Coach (COH) – (down 11%) Sears (SHLD) –...

Market Fears of a Recession in 2012

August 8, 2011

Market Fears of a Recession in 2012

Well, the market clearly isn’t looking for the light at the end of the tunnel. Italian 10-YR bonds have surged, rallying 80 basis points (from a 6.09% yield on Friday to 5.29% yield today). Spanish 10-YR bonds have also surged, rallying 88 basis points (from a 6.03% yield on Friday to a 5.14% yield today). While we think this was the more important event over the weekend into Monday morning. The market is clearly on edge regarding the unintended consequence of the Standard & Poor’s sovereign debt downgrade. Standard & Poor’s also downgraded both Fannie Mae and Freddie Mac based on their reliance on the US Government. A number of insurance companies and municipal bond issues will also be downgraded. We hold the view that if the US sovereign...

US Sovereign Debt Downgrade

August 7, 2011

US Sovereign Debt Downgrade

The actual downgrade of the US Sovereign credit rating is sure to cause continued jitters in the financial markets on Monday morning. In actuality, there may be net-positive developments this weekend as it now appears clear that the ECB will engage in buying the debt of Italy and Spain. Drawing a “line-in-the-sand” for Italy and Spain is one of the key elements of halting a financial crisis redux in its tracks. The Standard & Poor’s downgrade of the US Sovereign credit rating looks to be timed to create maximum stir and hints at some political motivations. The actuality is that this downgrade was firmly signaled on July 14th when the US was put on credit watch. Standard & Poor’s was looking for $4T in spending cuts to be announced...

Chitaly – China to purchase Italian Sovereign Debt?

August 5, 2011

Chitaly – China to purchase Italian Sovereign Debt?

Crackerjack continues to hold the view, that what has transpired in the markets is a crisis of confidence relative to an actual crisis. There is a very big and important difference. During the real-deal 2008-2009 economic crisis you had actual insolvent institutions as the value of mortgage securities declined when the US housing market imploded. The sovereign debt crisis in Europe is also a real crisis as it relates to Greece, Portugal, and Ireland (these countries can never pay back what they borrowed) but we have been stressing that these economies aren’t big enough to tip the world into a global recession. While Spain and Italy have numerous longer-term structural issues which need to be addressed, it appears to Crackerjack, that both Spain and Italy as nations have ample...

Pressure on ECB to be decisive Friday morning

August 4, 2011

Pressure on ECB to be decisive Friday morning

It goes without saying, that the DOW dropping 500 points, and the S&P 500 losing close to 5% will put in enormous pressure on Europe tomorrow morning. We will be watching Spanish and Italian bond yields and European stock markets very closely in the wee hours of the morning. The Non-farm payrolls report is a side-show with the real issue near-term being “how to avoid a crisis”

Fears of a Crisis Grow

August 4, 2011

Fears of a Crisis Grow

Fears of a Crisis Grow Interesting market reactions this morning. While many market participants are clearly being terrorized by fears of a crisis of confidence (and this is always a risk) there look to be some genuinely better pieces of information that are not being focused on during the scare. Crackerjack’s take on why the markets are selling off – is that it appears that rhetoric from the ECB will be challenged. As we discussed yesterday – the ECB needs to talk big to instill confidence that bond markets in Spain and Italy are not on the cusp of spiraling out of control. Jean-Claude Trichet, the ECB President, mentioned the ability to buy bonds (even today). At first this caused a rally, but the rally in Italian 10-YR yields...

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