Bursting Bubbles

Client Talking Points

Das DAX

Germany’s DAX is the new killing it. The index is hitting highs not seen since 2008; that includes holding above September closing highs (7451). That level has now become support instead of resistance. While the mainstream media is focused on the Dow, the DAX is where the real action is. Keep in mind that the DAX’s performance does not mean that the German economy is A-OK. Sure, it’s in better shape than our economy right now, but Germany has plenty of issues to deal with. The Eurozone crisis is still a crisis and is far from over.

Holler At The Dollar

Since 2007, we’ve had the pleasure of watching Hank Paulson, Tim Geithner and Ben Bernanke destroy the value of the US dollar. All this printing of money was supposed to fix all the bad stuff that happened to us but instead, we still have $3.50 a gallon gas, expensive food at the grocery store and bubbles all over the commodity space. Since the Bernanke Top (Sept. 14, 2012), we’ve seen the CRB Commodities Index drop -8.7% while the S&P 500 is only down -3.8% during the same time period. Our global macro theme of commodity bubbles deflating is coming true and strength is finally coming back to the US dollar, which has been up for 8 of the last 11 weeks.

Asset Allocation

CASH 55% US EQUITIES 12%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
YUM

New unit openings in China and strength in YRI and US should offset China weakness in 1H13. China SRS growth is sensitive to the economy but new unit growth and ROIIC are likely to be supported by continuing growth of the consuming class in China. Looking at operating income by geography for YUM/MCD/SBUX, we can see that YUM is the most geographically diverse. This is manifest in YUM’s more stable EPS growth and price performance over the last 10 years.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“If you were lucky enough to buy $AIG shares from the gov't at $32.50 last night in the follow-on, you're very happy right now.” -@GTWNJACK

QUOTE OF THE DAY

“There is danger from all men. The only maxim of a free government ought to be to trust no man living with power to endanger the public liberty.” -John Adams

STAT OF THE DAY

Baltic Dry Index falls by 3.9% to 900, the biggest drop since January.


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