"The evil of the world is made possible by nothing but the sanction you give it. "
Ayn Rand, Atlas Shrugged, 1957
Isn't that quote the truth! Maybe all of these BIG Government people should remind themselves of what they sanctioned...
Ayn Rand's 'Atlas Shrugged' paperback edition is currently in 1st place in the "Classics" section on Amazon.com's best-seller list for book sales in the USA. How can this be? This was a novel published in 1957. It is over 1,000 pages long - who in this crackberry culture has the time to read that? Be forewarned, this is my longest note yet!
Apparently anyone who is sick and tired of being told that Big Keynesian Government socializer's of AIG and Goldman losses do! The book is based on the philosophy of Objectivity - show me one American with a moral compass who doesn't objectively understand that Big Government isn't the answer any more.
The protagonist in Atlas Shrugged is a man by the name of John Galt - he's a hardcore free market capitalist who leads a general strike by leading businessmen against the world, refusing to contribute anything (inventions, leadership, art, science, ideas, etc...) to anyone, anymore. If you don't have time to read the first 300 pages, let me give you the Cliff Notes version - Galt is the modern day antithesis of yes-man Timmy Geithner.
You see, Geithner, like his new best buds supporter Jimmy Cramer is a Goldman guy (see my Early Look note on 2/11 "Jimmy and Timmy"). No, Timmy didn't work for Goldman... but he worked for the Goldman brain-trust of levering up long with cheap Greenspan moneys.
Robert Rubin was also Goldman guy (joined Goldman in 1966 in risk arb of all places; nice job managing that Citigroup risk man). Larry Summers is Rubin's guy (Deputy Treasury Secretary under Greenspan and Rubin)... and Geithner is Summer's guy. So who's this guy John Galt?
Rand starts Atlas Shrugged with that very question - "who is John Galt?" Rather than me go on and on about this, I'll let you do the required reading that apparently plenty of Americans are in the midst of doing right now. It's called American Capitalism - as in the non-socialization of corporate losses kind - as in the old fashioned economic freedom to win or lose kind...
The Russians, The Chinese, The Australians, The Brazilians (and even The Canadians!) are moving forward as Americans let the manic media anchor on what Hank Paulson sanctioned with AIG (whose business was highly profitable to Goldman Sachs) while Barons is running cover stories of Goldman "being back!" We need to seriously get a grip here on The New Reality or the 21st century will not remember America well.
Bailing out billionaire compensation structures that implode at the sniff of an economic cycle is not the answer. There is a big difference between a compensation structure and a repeatable American business model.
Even American Idol's Simon Cowell has issued a bailout! He calls it a "save", whereby he and his intimidated crew can effectively stop someone from losing via America's vote. Folks, wake up and smell the Starbucks here - this is embarrassing power mongering... and Americans are tired of it. America has voted!
Let's look at the world's 2009 global equity market scorecard:
1. China up again last night (sorry Alan Abelson), taking the Shanghai Composite to +25.3% YTD (we are long China)
2. Russia is up again this morning (re-flating alongside commodities). Russia is +35% in the last month and +12% for the YTD (we are long Russia)
3. Brazil was up another +0.78% yesterday despite the US being down, taking YTD gains to +8% (we're long Brazil)
4. Australia was down small overnight, but has paired her YTD losses back to -7% (their proximity to the Client (China) matters) - (we're long Australia)
5. Canada was up again yesterday, like Brazil and Russia, outperforming the USA, and has paired her YTD losses to -3%
6. India is -7% YTD; Japan is down -10% YTD; USA -13% YTD; and the UK is down -14% YTD
What are the takeaways? A) Auto-correlation in global stock market returns is dead B) heavy handed government intervention countries are getting creamed and C) investment capital in the halls of what used to be capitalism (London, New York, Tokyo) is leaving those countries en masse to service the client - China.
Client? Yes, most of you out there are managing other people's money, remember? The client with the most cash and growth is no longer the USA, its China. Buy what China NEEDS, not what Wall Street wants them to need is what is working. This is how a globally interconnected market of capital that flows freely works.
Let's look at how a few things that China needs (no, not US Financial Services) are doing:
1. The confidence associated with a strong domestic stock market = +25% YTD
2. Copper (which closed limit up in Shanghai overnight) = +25% YTD
That correlated YTD return must be some kind of irony right? Yeah, capitalists call it math.
How about Russia? They have some of that energy stuff The Client needs... think about this:
1. After tacking on another +11% week to date to its re-flation, oil is up +35% in the last month (we are long oil)
2. Russia's stock market is +36% in the last month...
More irony in the math? Or does Russia understand that shaking hands with The Client rather than Nancy Pelosi is how you move forward in this world. On February 12th, 2009 the Russians signed $25B in pacts (Transeft and Rosneft) with the Chinese. What was BIG American Government doing on 2/12/09? Making excuses and pointing fingers?
The point here is that America is not unlike Britain was as the United States entered the 20th century - vulnerable. There is no reason why the 21st century of global economics can't belong as much to China as it did to the USA in the 20th or Britain in the 19th.
No matter what your politics, my advice is that the American mindset needs to continuously evolve. Learn, un-learn, and re-learn. We need to challenge the received wisdom of our Government, particularly when it comes to economics. I'm probably not old enough to be given the benefit of the doubt on this, so my suggestion would be to pick up Atlas Shrugged and read the chapter "This is John Galt Speaking"... next to the Holy Bible, this is the most influential book in American history and it has a track record that dates back to 1957.
It's Galt, not Geithner...
This has been a solid week of performance. Enjoy some time away from your screens this weekend with your families.
Best of luck out there today,
RSX - Market Vectors Russia-The Russian macro fundamentals line up with our quantitative view on a TREND duration. Oil has benefited from the breakdown of the USD, which has buoyed the commodity levered economy. We're seeing the Ruble stabilize and are bullish Russia's decision to mark prices to market, which has allowed it to purge its ills earlier in the financial crisis cycle. Russia recognizes the important of THE client, China, and its oil agreement in February with China in return for a loan of $25 Billion will help recapitalize two of the country's important energy producers and suppliers.
DJP - iPath Dow Jones-AIG Commodity -With the USD breaking down we want to be long commodity re-flation. DJP broadens our asset class allocation beyond oil and gold.
XLK - SPDR Technology-Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last several weeks. Semiconductor stocks, which are early cycle, have provided numerous positive data points on the back of destocking in the channel and overall end demand appears to be stabilizing. Software earnings from ADBE and ORCL were less than toxic this week and point to a "less bad" environment. As the world stabilizes, M&A should pick up given cash rich balance sheets in this sector and an IBM/JAVA transaction may well prove the catalyst to get things going.
EWZ - iShares Brazil- The Bovespa is up 7.7% YTD. President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil cut its benchmark interest rate 150bps to 11.25% on 3/11 and will likely cut again next month to spur growth. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme: as the USD breaks down global equities and commodity prices will inflate.
EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months. With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.
USO - Oil Fund- We bought oil on Friday (3/6) with the US dollar breaking down and the S&P500 rallying to the upside. With declining contango in the futures curve and evidence that OPEC cuts are beginning to work, we believe the oil trade may have fundamental legs from this level.
CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +25.2% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.
GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish TREND.
DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.
EWJ - iShares Japan - Into the strength associated with the recent market squeeze, we re-shorted the Japanese equity market rally via EWJ. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction-it dropped 3.2% in Q4 '08 on a quarterly basis, and we see no catalyst for growth to return this year. We believe the BOJ's recent program to provide $10 Billion in loans to repair banks' capital ratios and a plan to combat rising yields by buying treasuries are at best a "band aid".
EWU - iShares UK -The UK economy is in its deepest recession since WWII. We're bearish on the country because of a number of macro factors. From a monetary standpoint we believe the Central Bank has done "too little too late" to manage the interest rate and now it is running out of room to cut. The benchmark currently stands at 0.50% after a 50bps reduction on 3/5. While the Central Bank is printing money and buying government Treasuries to help capitalize its increasingly nationalized banks, the country has a considerable ways to go in the face of severe deflation. Unemployment is on the rise, housing prices continue to fall, and the trade deficit continues to steepen month-over-month, which will hurt the export-dependent economy.
DIA -Diamonds Trust-We re-shorted the DJIA on Friday (3/13) on an up move as we believe on a TRADE basis, the risk / reward for the market favors the downside.
EWW - iShares Mexico- We're short Mexico due in part to the country's dependence on export revenues from one monopolistic oil company, PEMEX. Mexican oil exports contribute significantly to the country's total export revenue and PEMEX pays a sizable percentage of taxes and royalties to the federal government's budget. This relationship is unstable due to the volatility of oil prices, the inability of PEMEX to pay down its debt, and the fact that PEMEX's crude oil production has been in decline since 2004 and is down 10% YTD. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.
IFN -The India Fund- We have had a consistently negative bias on Indian equities since we launched the firm early last year. We believe the growth story of "Chindia" is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we've followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit. Trade data for February paints a grim picture with exports declining by 15.87% Y/Y and imports sliding by 18.22%.
XLP -SPDR Consumer Staples- It performed in line with the market yesterday. 20.71 is a critical line. Should it break-watch out below.
SHY -iShares 1-3 Year Treasury Bonds- On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.
"The evil of the world is made possible by nothing but the sanction you give it. "
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I’ve been sitting here patiently waiting for new (lower) consensus numbers post the biggest sequential slowdown in orders (on a 2-year trendline basis) in nearly 10-years. The verdict is in, and unfortunately, consensus numbers are too high. Fourth quarter looks OK, but Nike will have a down year in FY10. I can model a positive ’11, but that barely gets back above last year’s high water mark.
To say that I believe in what this company is doing strategically to manage earnings and take share is an understatement. So few companies are managing so proactively. But these positive actions come at a cost, and that cost is that for the next 18 months, Nike will not be considered a growth company. That puts valuation back in the ‘tweener’ category. Not cheap enough for a value investor, not growth enough for a less valuation-sensitive growth PM, and certainly not appealing to a momentum investor given my view that it will be missing numbers more often than not – until they are reset 10% lower.
There’s a critical theme here. Nike is a company that grows in ‘bursts’ and after each one it resets for a couple years until it races forward again. Keep in mind that each time it ‘reset’ the world thought that the growth story was dead, and it was proved wrong. Check out the stock chart below. I identified 4 ‘bursts’ over 20 years. 1) ramp in US footwear. 2) US apparel. 3) Int’l growth. 4) Subsidiaries (Converse, Golf, etc…). Each of these bursts required a completely different organization. The next opportunity is globally integrated categories, regions, and products. This is massively complex – moreso than anything Nike has ever done. The good news is that it has been investing in it for 2 years. It has flexibility to shift around assets, and pare back excess to maintain margin and protect growth. But it won’t be pretty.
My prediction… My estimate of flat earnings will be proved wrong because Nike’s gonna buy something. Potentially something sizeable. The cash burning a hole in its pocket is generating $0.04 per share less in income now than a year-ago, and this company does NOT like to be perceived as anything but a growth company. Even though the recent Umbro deal – where Nike wrote off over 60% of the value just 1.5 years after buying it – might go down as its most value-destroying deal since Cole Haan, I don’t think that this will spook this management team from deploying capital to deals. If anything, I think it will reiterate what has always been the case with the Nikester – it does not do well when it buys broken or bruised assets. It needs strong brands, over which it can leverage its infrastructure to make stronger (like it did with Converse. My top picks? Lululemon (after it implements its ERP platform – Nike won’t get in front of that, Remember i2?) and Timberland. I also think Zappos would be a slam-dunk from an infrastructure standpoint, but I’m not holding my breath on that one.
So what’s my bottom line? The stock looks cheap. But it is only 2-quarters into a ‘resetting’ phase which could conceivably last 2 years. This name might be cheap for a while.
“I remember down in Houston we were puttin’ on a show when a cowboy in back stood up and yelled, Cotton-eyed Joe.”
At Research Edge, we don’t come to work Cotton-eyed (except for maybe the morning after the firm holiday party), but we do, in fact, have our Eyes on cotton.
Brian McGough, who is the Director of Research and Footwear and Apparel Analyst, recently sent a note to his clients highlighting the year-over-year declines in cotton pricing. His point, as it related to his coverage universe, was as follows:
“All in, let’s not forget that cotton accounts for about $5 in costs for a $100 garment at retail. We can debate up and down where in the supply chain any cost saves would show up – but quite frankly, I really don’t care at this point. We’ve had a 1.5 year cost headwind that is starting to ease on the margin. This will help everyone to some degree. It pains me to say this, because I have zero confidence in management or company strategy, but Gildan would be a disproportionate beneficiary to the reduction in cotton costs given that cotton is 35% of its COGS. If you want to play in that sandbox, then knock yourself out. I’m sticking with the winners like RL, HBI, UA (though it has zero cotton exposure – it competes with those that do), and LULU.”
The USDA announced last week that US cotton exports were up 23% for the week ending March 4th, which implies demand may be picking up. That said, the news from China continues to be bearish for cotton as noted by the U.S. Department of Agriculture: “China’s imports of cotton in the year through Aug. 31st may halve to 6.5 million bales from a year ago.” The most recent data point from China, released by the National Development and Reform Commission, was that China imported 93,000 tons in February, which was down 41% y-o-y. Since China is the world’s largest cotton importer, this data is very bearish as it relates to global cotton supply and demand, and future cotton prices. As outlined above though, low cotton prices are bullish for the margins of certain apparel manufacturers.
While the price of cotton appears to be troughing, we will need to see some sustainable fundamental evidence that supports either increasing demand, or decreasing supply, that will support a sustained price increase. As such, cotton may be a commodity to play on the short side against other commodities that will be more direct beneficiaries of the re-flation theme. This potential negative divergence in cotton is notable today with natural gas up 10.4%, West Texas Intermediate up 6.3%, gold up 7.7%, copper up 5.1%, silver up 13.9%, and cotton only up 2.95%.
We are currently long Oil via the etf USO and long the etn DJP, which mirrors the iPath Dow Jones-AIG Commodity Index.
Daryl G. Jones
Today, in the shadow of the Fed’s 1 trillion DOLLAR bond purchase program, the BOJ’s 1.8 Trillion YEN a month program looks even more anemic. With the prospect of a weak dollar comes a return to the pain for Japanese exporters and the Nikkei retreated by 30 basis points.
For Japan’s leaders the pressure to find ways to stimulate the economy in the face of decimated demand from US and European markets is daunting. With an export industry that is dependent on big ticket consumer discretionary products, retooling for the current Chinese market is not a viable option and, although Chinese consumer spending is still growing (including a recent boost in car sales spurred by stimulus measures), buyers there are still years away from making up for the slack in high end US automotive and consumer tech sales. On the domestic front it seems increasingly unlikely that consumers will be convinced to start draining the savings they built up over decades of stagnation coupled with zero interest rates based on the historic low spending expectations included in the latest consumer confidence survey data. In the near term, all of these factors leave business leaders in Tokyo hostage to currency fluctuations.
As long as the dollar continues to weaken against the Yen, we expect key sectors of the Japanese equity market to remain under pressure and we will maintain our tactical short bias.
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