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URBN: Dressed For Success

Takeaway: You'd be a fool to short URBN, even at its current levels which are deemed expensive. The stock is performing well and has room to go higher

The Street has been pretty bullish on Urban Outfitters (URBN) and rightfully so with the stock up +50% since May. Keith added URBN to our Real-Time Positions this week as a long and our Retail team supports URBN, albeit with reservations.

 

 

URBN: Dressed For Success - URBN RevEbit

 

 

Revenues and comps are trending upward and have been since Q1 of fiscal year 2013. The company revised comp guidance (to a positive tune) earlier this month, pleasing sell-side analysts yet again. What URBN seems to “get” is that it needs to execute and run its business in a tight, efficient matter. Three notes that Retail Sector Head Brian McGough pointed out in a note back in May say it all:

 

The message is simple:

 

-Hire all the right talent.

-Empower each of them to come up with a concise plan, to which they will be held accountable.

-Give them the financial and human resources to achieve the plan.

 

And that’s what you have with URBN. The stock is now more expensive than it was back in May, but we still like it and believe betting against URBN is simply the wrong choice at this point in time.


IDEA ALERT: SHORTING THE YEN AS SINO-JAPANESE TENSIONS ESCALATE

Takeaway: We're shorting the Japanese yen here as risk heightens across the Japanese economy and Japanese capital markets.

SUMMARY BULLETS:

 

  • We are now short the Japanese yen (via the CurrencyShares Japanese Yen Trust etf “FXY”) in our Real-Time Positions product as a way to communicate our bearish TRADE and TREND thesis on the JPY relative to the USD.
  • The key catalyst in support of our bearish bias is a likely acceleration of the BOJ’s balance sheet expansion, which may include a potential implementation of a foreign asset purchase program as Japan’s economic outlook deteriorates on the margin due to slowing commerce with China and recent yen strength.
  • From a TAIL duration perspective, any sustained weakness in the yen risks Japanese banks and asset managers clearing out of the JGB market en masse in search of higher yields abroad (which they couldn’t do previously due to structural yen appreciation), as well as imposing the threat of structurally higher rates of inflation – a risk the JGB market hasn’t had to price in for over a decade.

 

Overnight, recent BOJ board appointee Takehiro Sato (former Morgan Stanley economist) attempted his best Chuck Evans impersonation by publically stating that the Japanese central bank is ready to ease monetary policy further – just one week after the BOJ increased its Asset Purchase Program by ¥10 trillion to ¥55 trillion (¥5 trillion for purchases of JGBs; another ¥5 trillion for purchases of Japanese Treasury discount bills) and removed its price ceiling/yield floor for JGB purchases! More importantly, he reiterated his call for the board to consider new measures, such as taking on additional balance sheet risk via purchases of riskier securities and/or outright purchases of foreign currency assets.

 

Sato, a known dove from his days on the sell side, has been a big supporter of altering the BOJ’s mandate to include the purchasing of foreign currency assets, with the explicit goal of devaluing the JPY vs. competitor currencies to promote Japanese exports. It’s worth noting that its +7.1% gain vs. the USD makes the JPY the world’s strongest currency over the last six months. We’ve written extensively on how this is the ultimate fool’s game with respect to the JGB market, as any sustained weakness in the yen risks Japanese banks and asset managers clearing out of the JGB market en masse in search of higher yields abroad (which they couldn’t do previously due to structural yen appreciation), as well as imposing the threat of structurally higher rates of inflation – a risk the JGB market hasn’t had to price in for over a decade. For our detailed thoughts on this topic, refer to the following notes: ARE JAPANESE GOVERNMENT BONDS POSED TO MAKE SOME NOISE? (7/27) and THE RAMIFICATIONS OF JAPAN’S LOOMING GOVERNMENT SHUTDOWN (8/28).

 

A new catalyst that looks poised to accelerate yen deprecation over the intermediate term are Shinzo Abe’s recent election to head up the Liberal Democratic Party in Japan, the ruling DPJ’s main opposition group. He’s long been in favor of the BOJ accelerating their balance sheet expansion as they seek to achieve a +3% inflation target, which Abe prefers over the BOJ’s current +1% target. A broader parliamentary election must be called by AUG ’13 at the latest and a Yomiuri newspaper poll published SEP 18 showed 31% of respondents planned to vote for the LDP in the proportional representation section of the next election vs. 14% for the DPJ and 16% for a new party formed by Osaka Mayor Toru Hashimoto – meaning Abe and the LDP could once again reestablish themselves atop the Japanese political hierarchy. As a result, we could see even more pressure placed upon the BOJ to acquiesce to political demands for monetary easing, though to some extent, that is already very much a non-partisan agenda among Japanese bureaucrats.

 

Another way Abe’s victory contributes to our intermediate-term bear case on the JPY is via the current Sino-Japanese tensions over the Diaoyu-Senkaku islands. Abe has been outspoken in recent years about revising Japan’s pacifist constitution to loosen military restrictions and he also supports building on the islands, which would be a “gross violation of China's territorial integrity and sovereignty" per China’s foreign minister Yang Jiechi. “We want to show our intention to firmly protect the islands and our territorial waters,” Abe said at a post-election press conference. At a bare minimum, Abe’s hawkish stance and rhetoric on the matter is likely to push current Japanese prime minister Yoshiko Noda in that direction as he seeks to strike a chord with the Japanese populace (75% of Japanese voters approve of the government’s intentions to seize and develop the islands). In that vein, Noda stated today that “Japan will never budge” on its ownership over the Senkaku islands.

 

As we detailed in a research note last week titled, “ARE CHINA AND JAPAN HEADED FOR WAR?”, the economic consequences of escalating tensions between the two countries are both great in magnitude and poised to continue accelerating over the intermediate term. To recap recent events occurring in just the week-to-date:

 

  • Bloomberg news reported that reservations for more than 40,000 seats on All Nippon Airways flights were canceled from SEP to NOV as of yesterday, and Japan Airlines Co. had 15,500 cancellations as of Sept. 24.
  • Kyodo news says over 60 Japanese companies were told to leave a China trade show earlier this week.
  • Nikkei news reported that Nissan, Honda and Toyota are scaling back China production as anti-Japanese consumer sentiment is expected to impact sales.

 

It’s no surprise that corporate CDS in Japan are approaching 52-week wides, as indicated in the following chart:

 

IDEA ALERT: SHORTING THE YEN AS SINO-JAPANESE TENSIONS ESCALATE - 1

 

The key risk here as it relates to our bearish thesis on the yen is that incremental economic weakness may force the BOJ to accelerate balance sheet expansion over the immediate-to-intermediate term via conventional or potentially non-conventional measures. The BOJ monetary policy meeting calendar is listed below; to the extent Sino-Japan tensions remain status quo or even deteriorate over this duration, we expect the JPY to weaken vs. the USD into and through these catalysts. The global Currency War remains in full force and Japan looks to take the baton over the next few months as the Fed is likely to be on a temporary hold with regards to pursing incremental “stimulus”.

 

  • OCT 4-5 (NOTE: A bleak Tankan Survey, which is due out 9/30, may actually set the stage for the BOJ to ease in back-to-back meetings here)
  • OCT 30
  • NOV 19-20
  • DEC 19-20

 

Our quantitative risk management levels on the yen are included in the chart below.

 

Darius Dale

Senior Analyst

 

IDEA ALERT: SHORTING THE YEN AS SINO-JAPANESE TENSIONS ESCALATE - 2


A Eurozone Crisis Of Confidence

Takeaway: With confidence heading lower for the sixth consecutive month, not even Draghi's "unlimited" buying power is enough to boost EU morale.

As fall kicks into high gear, tensions in the Eurozone have grown thick as both economic sentiment and consumer confidence continue to slide lower for the sixth consecutive month of declines.

 

Everything seems to continue to go wrong in the EU with eurocrats fighting over lending and bailout terms with manufacturing and services confidence wearing thin as well. It backs up our case for shorting the Euro which we’ve done via the FXE ETF in our Real-Time Positions. 

 

 

A Eurozone Crisis Of Confidence  - aa. 1

 

 

A Eurozone Crisis Of Confidence  - aa. 3

 

 

The uncertainty revolving around a monetary, fiscal and banking union as Germany pushes back over terms of said unions. It appears Draghi’s “unlimited” buying comments from earlier in the month are doing little to restore order to things.

 

Senior Analyst Matthew Hedrick breaks down the long-term implications for the Eurozone crisis:

 

"Here we’ll note that the data from the Eurozone continues to paint a challenged fundamental picture over the intermediate to longer term. These confidence figures are but one piece of the puzzle demonstrating the intersection between expectations for slowing growth and the uncertainty on the direction of the Eurozone.  Eurocrats continue to suspend reality and Draghi’s “unlimited” put will continue to fuel a disconnect between the health of the economy and performance of capital markets."


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Eurozone Confidence Continues to Roll

Takeaway: Confidence falls on the intersection between growth slowing and Eurocrat policy uncertainty. Waiting on the OMTs.

Positions in Europe: Short EUR/USD (FXE); Long German Bonds (BUNL)

 

The charts below show very definitively that confidence figures across the Eurozone continue to roll. Business, Consumer, Economic, Industrial and Services confidence figures all fell in the September reading, marking 6 to 7 months of consecutive decline. 

 

Eurozone Confidence Continues to Roll - aa. 1

 

Eurozone Confidence Continues to Roll - aa. 2

 

Eurozone Confidence Continues to Roll - aa. 3

 

Here we’ll note that the data from the Eurozone continues to paint a challenged fundamental picture over the intermediate to longer term. These confidence figures are but one piece of the puzzle demonstrating the intersection between expectations for slowing growth and the uncertainty on the direction of the Eurozone.  Eurocrats continue to suspend reality and Draghi’s “unlimited” put will continue to fuel a disconnect between the health of the economy and performance of capital markets.

 

As we see it, there is a long and uncertain road for the Eurozone moving from a monetary union to a monetary union with a fiscal union, including a banking union. We’ve already seen much push back from Germany on terms of a banking union, and expect push back if and when countries are required to give up their fiscal sovereignty to Brussels.

 

In the wake of Draghi’s unlimited announcement (9/6), this week has shown an increase in Eurozone sovereign yields (and CDS spreads). We expect that the markets and the EUR/USD cross could get a lift (but likely just a short-term one) from the inevitable announcement of the ECB to engage the OMTs program to buy sovereign bonds from such countries as Spain and Italy. However, market movement will largely depend on the severity of the conditions demanded in return for the buying.  Yet our hunch is that the ECB will have loose and/or forgiving terms in any case, which would likely set us up to fade any Eurozone equity market and EUR/USD strength.

 

Matthew Hedrick

Senior Analyst


NKE: A Rare Glimpse...

Takeaway: Here’s a very rare look under the hood of Nike's footwear product by platform. By platform we mean Jordan, Shox, Free, Lunar, Air, etc.…

Here’s a very rare look under the hood of Nike's footwear product by platform. By platform we mean Jordan, Shox, Free, Lunar, Air, etc.… The results here look rather simple but it's the result of very detailed and exhaustive analysis of point-of-sale data that we procure from third-party vendors. Aside from the sheer diversity of the product, the most notable callout is that unlike other brands Nike doesn't simply come out with a new platform that simply fizzles out after initial launch. A new Nike platform, in effect, equates to a new business within the company which usually grows over time. Here are a few other takeaways.

 

  • Free and Dual Fusion are the fastest growing platforms – both of which are running.
  • It’s worth noting that these two platforms accounted for nearly half of NKE’s growth domestically over the past year. Particularly given that the NKE Free platform only started selling through Europe less than 6-months ago (March/April), which we expect to continue to help offset macro headwinds.
  • The ‘other’ platform compiled of all orphan lines and new launches was next followed closely by Jordan. It’s worth noting that both of these platforms have had the most significant rate of incremental growth contribution.
  • The ramp in ‘other’ reflects increasing success with new launches suggesting that NKE innovation is as healthy as ever.

 

Note: special thanks to our All-Star intern Ben Ryan (and Forward for the Nashville Predators organization) for his contribution to this  product.

 

NKE: A Rare Glimpse... - NKE PlatRevs

 

NKE: A Rare Glimpse... - NKE IncrRev Plat


This Is What A Recession Looks Like

A chart is worth 1000 words and these Durable Goods numbers say all that needs to be said.

 

This Is What A Recession Looks Like - durable2

 

This Is What A Recession Looks Like - durable1


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