Flow of Funds Household Net Worth – US Making Progress

September 19, 2011
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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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The Johnny Cash Project – Google Now A Global Marketing Titan

September 18, 2011
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The Johnny Cash Project – Google Now A Global Marketing Titan

Google recently ramped up spending to pursue initiatives described by the company as the next billion dollar opportunities. During the first quarter of this year, Google had plenty of detractors as the growth rate in expenses far outpaced the growth rate in sales. In Q2, there was a slightly different tune as Google achieved a much better balance between expense growth and sales growth – which accelerated north of 30%. The Johnny Cash project is representative of an inflection point in the corporate history of Google. This creative campaign represents some of the most innovative marketing (of any kind) in years where Google is able to juxtapose music, art, pop-culture, emotional connection, and corporate branding. The last company to establish such a strong connection with a consumer base was...

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Target – Missoni is a Home Run!

September 16, 2011
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Target – Missoni is a Home Run!

A number of news reports have been out regarding the new exclusive apparel and home line designed by Missoni for Target (TGT). The Italian designer is very well regarded in the fashion world and Target getting an exclusive launch of this magnitude speaks to the credibility of the merchandising team and the power of the Target brand. Target experienced a website crash while the product line launched due to high demand (perhaps the site was intentionally crashed?). This has created enormous buzz and an air of exclusivity. There have been reports of lines at the door before stores open across the country. When you invest in Target you get one of retail’s best merchandising and branding teams in the nation. The success of the Missoni line has the potential...

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Europe Starts to Come Back Together – Bullish Sign for Depressed Markets

September 15, 2011
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Europe Starts to Come Back Together – Bullish Sign for Depressed Markets

Yesterday, German Chancellor Merkel and French President Sarkozy proclaimed they are convinced that Greece will remain in the Eurozone. While the announcement was short on details, the spirit of it was enough to lift markets. Why news such as this can have an impact is because the markets have started to invest with “crisis” as a baseline result. This is why I’ve been holding the view that at certain price levels it is quite sensible to be constructive with investing despite how bad the news is – the news gets in the price. Recently the market has been reflective of this dynamic so news which is really just a signal of continuing to work together can actually be quite bullish. The present debate around Greece, the role of the...

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Why the Market Will Bottom Higher than 2009 – An Analysis of S&P 500 Free Cash Flows

September 13, 2011
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Why the Market Will Bottom Higher than 2009 – An Analysis of S&P 500 Free Cash Flows

The market is in the midst of a crisis. The US sovereign credit rating has been downgraded. Developed market economies are demonstrating an inability to create jobs. Greece is about to default on its sovereign debt which will lead to contagion through the financial system in Europe. French and other European financials will be downgraded this week and markets are in a period of exceptional volatility and uncertainty. How does one invest in the crisis that everyone sees coming? I continue to hold a constructive view with respect to investing and taking risk. In order to be rationally bullish, one must have some view with regard to the amount that will be lost if a crisis gets out of control. Knowing what you can lose ahead of time, while an...

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Chitaly Starts to Mambo Italiano – China in Talks To Buy Italian Sovereign Debt?

September 12, 2011
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Chitaly Starts to Mambo Italiano – China in Talks To Buy Italian Sovereign Debt?

I mentioned this possibility over a month ago on August 5th, in the story “Chitaly – China to Purchase Italian Sovereign Debt?” Headlines just hit that Italy is in talks with China to directly buy Italian bonds according to the FT. This headline caused an immediate lift to depressed markets which is quickly getting faded. I believe this may actually transpire because it accomplishes two aims. Most clearly, it helps Italy fund its sovereign debt, which they had some trouble doing today as evidenced by the 1-YR note auction going for 4.15% this month vs 2.96% last month. Secondarily, China is desperate to maintain the euro, because this is the only other major currency which has the potential to be investible for large quantities of FX reserves. To the extent that China runs a...

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French Banking Crisis – Steps Needed to Stabilize the System

September 12, 2011
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French Banking Crisis – Steps Needed to Stabilize the System

George Soros recently made an excellent point in an interview with Spiegel that the origin of the euro crisis was when Angela Merkel stated bailout support would be granted from each EU member state individually, and not by the European Union. He goes on to highlight that this approach shattered a vision of an EU that could jointly protect the euro. That interview was one month ago, and now the situation has gotten worse. What should be apparent to politicians and central bankers in Europe is that the European financial crisis should not be handled piecemeal. Since the flawed European Banking Association stress tests in July there has been a hesitance to address the problem from a structural standpoint. On July 15th, the EBA announced that 8 out of 90...

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Google Acquires Zagat & Early Signs of a Strong Q3

September 9, 2011
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Google Acquires Zagat & Early Signs of a Strong Q3

Google announced on its Google Blog, that they have finalized a deal to acquire restaurant reviewing company Zagat. The company was founded in 1979, and grew over time as more cities and restaurants have been added to the network. Zagat has also been adding venues such as hotels, bars, shopping centers and others in recent years. Zagat was purchased by private equity buyers for $31M in 2000. A few years ago, Zagat hired Goldman Sachs to put the company up for sale, reportedly for over $200M. Assuming that Zagat has continued to grow I would estimate this was between a $400-$600M deal for Google. While the terms of the acquisition were undisclosed, I look favorably on Google’s expansion into the local arena. Integrating Zagat will fit nicely with Google...

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Obama’s American Jobs Act Speech – Implications for Markets

September 8, 2011
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Obama’s American Jobs Act Speech – Implications for Markets

The S&P 500 futures were about unchanged heading into his speech and at last glance they were down 3 points – but this may be due to the 9/11 anniversary terror threat announcement more so than anything said in the speech. I come away moderately encouraged by Obama’s speech tonight. He stated at the outset that our economic recovery won’t be led by the government but by businesses – which is refreshing. I felt the tone was still somewhat abrasive but the fact that the size of the Jobs Act is larger than expected ($447B) may be a slight positive. I think the gist of the plan makes sense. While you are trying to emerge from recession you spend in order to stimulate. So long as the spending is...

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Charles Evans Dual Mandate Responsibilities Speech – Goes Too Far

September 8, 2011
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Charles Evans Dual Mandate Responsibilities Speech – Goes Too Far

Yesterday, Charles Evans who is the ninth president of the Federal Reserve Bank of Chicago and a voting member on the FOMC, gave a speech at the European Economics and Financial Center in London. This speech goes too far with starting to push the Fed towards more stimulus as the returns from additional stimulus diminish. The debate revolving around additional Federal Reserve accommodation also made its way to the WSJ this morning. I believe that the economy is actually much stronger than is being presented by the media. Yes the unemployment rate is 9%+ and it has been tough to work it down, but the Fed can do little at this point to actually create jobs. The incremental returns from additional monetary stimulus aren’t needed and become risky with...

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Investing In Europe – Now the Risk/Reward Is Attractive

September 7, 2011
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Investing In Europe – Now the Risk/Reward Is Attractive

Yesterday, I reviewed the reasons why the Eurozone as a monetary union is a flawed construct and why the implications for a breakup are disastrous. I believe this is so much the case, that the odds of a Eurozone unwind are actually quite low. The breakup option is really the self-immolation option as all parties involved would come out dramatically worse off. Investing in the whole mess that is Europe, makes sense now, particularly for any investors who seek to be contrarians. A number of subtle, yet bullish items have come about and most importantly the markets are 30% cheaper relative to the spring. I’ve read a lot that Europe is “to be avoided” from an investment perspective and that the region is “un-ownable”. These types of comments generally...

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Eurozone Breakup – Implications for Financial Markets are Disastrous

September 6, 2011
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Eurozone Breakup – Implications for Financial Markets are Disastrous

Over Labor Day weekend we saw an unfortunate breakdown in Europe’s approach, strategy, and near-term ability to avoid a financial crisis. In the Mecklenburg Western Pomerian state (along the coast of the Baltic Sea), Germans voted against the Christian Democratic Union which is a repudiation of Angela Merkel’s support and commitment to the Eurozone. I’ll start out by saying that an all-out breakup of the Euro would be disastrous for the global economy and for financial markets. At a minimum, the world would go back into recession with a dire scenario being a redux of the financial crisis. If this were to happen there would be a rush to get to the sidelines quickly and heavy selling in all types of risk assets. As a result of the very...

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Chanel, Gaspard Ulliel, Scorsese, and The Rolling Stones: The Awesome Power of Global Brands

September 5, 2011
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Chanel, Gaspard Ulliel, Scorsese, and The Rolling Stones: The Awesome Power of Global Brands

One theme I have been highlighting is the value that exists in the developed European corporate sector which of course gets ignored as fears of a crisis escalate. Chanel having the ability to get Martin Scorsese to direct an advertisement with French actor, Gaspard Ulliel, with vintage Rolling Stones (“She Said Yeah – December’s Children (And Everybody’s) – 1965”) points to the insurmountable competitive advantages that many European brands and companies have. Chanel is a private company but there are many other listed companies through Europe with similar brand heritage, charisma, and intellectual capital. These companies are some of the best positioned in the world to participate in the growth of emerging markets – despite being listed on indicies that sport single-digit multiples such as the; CAC 40, FTSE,...

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Why Can’t We Create Jobs?

September 2, 2011
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Why Can’t We Create Jobs?

I’ve been holding a constructive view on the economy and markets for a number of reasons. The economy isn’t as soft as has been presented and market valuations are extremely low for a non-recessionary environment (if that is indeed the environment we are in). Today’s Employment Report was downright ugly. Being constructive, I could search for some of the glimmers within the guts of the report such as the household survey’s 331k new jobs or that the employment-population ratio ticked up slightly. This is a stretch though, and the report was clearly a disappointment because in normal cycles of economic recovery we “re-create” jobs which are lost during recessions. I believe the primary reasons the job market has been in a funk, where it is stable, but not creating...

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Retail Chain Sales Very Strong – No Recession

September 1, 2011
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Retail Chain Sales Very Strong – No Recession

It was particularly impressive that sales in August were not only strong for retailers that sell lots of food and consumer products (which benefited from the buying panic pre-Irene) but that they were broadly strong. While the food and broadline retailers should have benefited from some buying “pull-forward” before the storm, other retailers such as department stores and specialty apparel retailers were clearly hurt. You don’t need to rush out and buy apparel before a storm, and these retailers had up to hundreds of stores closed over a key back-to-school shopping weekend. It bodes very well that results were stronger than expected, and strong in an absolute sense, despite missed selling days on a key weekend. September will benefit as sales of apparel and discretionary items gets pushed out...

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It’s Time to Buy in Hong Kong

August 31, 2011
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It’s Time to Buy in Hong Kong

After a brutal correction in both prices and valuations it is time to get long(er) China geared Hong Kong listed equities. I believe the timing is right because the single largest risk factor, inflationary pressure, is in the process of peaking, and is likely to abate moving forward. China growth persists at a 9% clip and I believe this growth rate is likely to slow gradually. Through a combination of currency appreciation, higher real interest rates, and credit constraints (the growth rate of credit) China will start the gradual process of focusing on domestic demand. Valuation is on the side of real investors as the H-Shares (HSCEI index) are at ex-crisis lows and sub 10x forward earnings. This is a 30%-40% valuation discount to what is “average” over the...

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Redbook Chain Store Sales Remain Strong – Don’t Indicate Slowdown

August 30, 2011
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Redbook Chain Store Sales Remain Strong – Don’t Indicate Slowdown

There has been considerable airplay relating to the “near recessionary” levels of many economic indicators in August. Readings for consumer confidence, economic optimism, and Fed Surveys from Philadelphia, New York, and Richmond have all contracted. These items have led many economists and forecasters to predict a sharp downturn in ISM (released Thursday), and have led to reductions in GDP estimates for the full year. I don’t believe it is being Pollyannaish to want to see some of the severe weakness in actual measured data (as opposed to weakness in survey data). The two series I am keying on to see signals of a “roll-over” in the economy are initial unemployment claims and higher frequency retail sales (from Redbook and ICSC –yes which are surveys – and from companies which...

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