An Eye on China & Germany

Client Talking Points

CHINA

A major call-out this morning is the Shanghai Composite which is down almost -2%.  This weakness is being driven by the property sector which is under pressure based on local news reports that longer term regulations could be in place soon for controlling property in China. Being the price and market driven analysts we are, the move in Chinese equities this morning is certainly a red flag in our notebooks, but isn’t changing our more positive view on China.  

GERMANY

More good news out of Europe today with European car sales ripping to a 2-year high. Add into the bullish economic mix a fantastic German confidence reading of 52.8 in October versus 49.6 last month This clearly bodes well for German #GrowthAccelerating and dovetails nicely with our Q4 Macro Theme #EuroBulls. Yes - we are long the German DAX.

Asset Allocation

CASH 42% US EQUITIES 18%
INTL EQUITIES 22% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
DAX

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up. 

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

$DRI Breakup ‘Not the Answer’ Oppenheimer Says - HWP: Do we want more of the same? Give management more time? Seriously? Unbelievable! @HedgeyeHWP

QUOTE OF THE DAY

The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money. -Alexis de Tocqueville 

STAT OF THE DAY

The period from March 2009 to March 2012 was one of the strongest three-year market rallies in history -- stronger, in fact, than the 1996-1999 bull market. 


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