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Q1 2014 Macro Themes Conference Call

Q1 2014 Macro Themes Conference Call  - 1Q14Themes dial

 

We will be hosting our Quarterly Macro Themes conference call on Thursday, January 9th at 11:00am EST. The accompanying presentation will detail the three most important macro trends that our team has identified for the quarter, as well as the associated investment opportunities.

Q1 2014 THEMES OVERVIEW

#InflationAccelerating: Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. Moreover, the reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.

 

#GrowthDivergences: Looking to the U.S., Europe, China and Japan, we see the heavyweights of the world economy diverging from an economic growth perspective as some countries and/or regions are much further along in the economic cycle than others. We highlight those divergences and identify which countries and/or regions you want to be allocating assets to at the start of the year.

 

#FlowShows: in Q1 we expect a continuation of fund flows out of fixed income and into equities: the “Queen Mary” has indeed turned, aided by the Fed’s decision to begin tapering.   

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 897866#
  • Materials: CLICK HERE

CONTACT

Please email to for more information. 


CHINA STRATEGY UPDATE: MORE OF THE SAME

Takeaway: Stay with the “New China” vs. “Old China” trade as economic growth looks to stabilize then accelerate in 1Q14.

CONCLUSIONS:

 

  1. We continue to think Chinese growth is slowing and we think it is likely continue to slow for the next 1-2M.
  2. From there, Chinese growth should stabilize and then accelerate throughout the balance of 1H14. It’s tough to have a strong view beyond that given the continued lack of clarity on the economic reform implementation front.
  3. That said, however, all signs continue point to a dramatically reduced threat of the banking sector’s structural liquidity constraints spilling over into the real economy in a meaningful way – for now at least.
  4. Recent reforms centered on curbing explosive growth in shadow banking activity will act as a marginal headwind to growth over the intermediate-to-long term, but will introduce-much needed disclosure and regulation to an otherwise opaque segment of the Chinese financial system.
  5. We continue to think the best way to play China is via a “New China” vs. “Old China” pair trade. In effect, this amounts to being overweight Chinese Information Technology and Consumer Staples names, while being underweight or short Industrials and Financials names.

 

1) Chinese growth is currently slowing and may continue to slow into FEB. In fact, all four of China’s main PMI indicators (NBS and HSBC) slowed in DEC, the first such occurrence since APR ’13.

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 1


CHINA STRATEGY UPDATE: MORE OF THE SAME - 2

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - China PMI Table

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 4

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 5

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 6

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 7

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 8

 

2) Extremely easy growth comps, easing money market conditions and seasonality are all supportive of an acceleration in Chinese GDP growth in 1H14.

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 9

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - China Money Market   Rates Monitor

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 11

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - CHINA

 

3) For now at least, it would appear that the PBoC has been successful in convincing the market that there is adequate liquidity in the marketplace assuming financial institutions are broadly compliant with regulatory quotas for credit growth, etc. Additionally, their persistence in marking the CNY higher is supportive of capital flows into China at the expense of other emerging markets.

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 13

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 14

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 15

 

4) Shadow banking activity has been a key source of credit for the most marginal borrowers according to existing regulations (i.e. LGFVs and property developers) and standard industry practices of only extending credit to the largest, safest SOE borrowers (i.e. SMEs). That said, shadow banking does not represent an overly material source of credit for the broader Chinese economy, nor is it being curbed excessively at the current juncture.

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 16

 

5) We continue to think that investors should overweight Chinese Information Technology and Consumer Staples names, while underweighting/shorting Industrials and Financials names as economic rebalancing continues, at the margins. It’s worth noting that this trade has returned a cumulative +1,576bps (assuming equal weighted allocations) since we first outlined it back on 12/4. Given China’s structural GIP fundamentals, we think there is plenty of room for this strategy to continue working from here.

 

CHINA STRATEGY UPDATE: MORE OF THE SAME - 17

 

Darius Dale

Associate: Macro Team


SBUX: WHY WE ARE CAUTIOUS

Following the 4Q13 earnings call we wrote that SBUX was firing on all cylinders and, in fact, they were.  However, as we published in a note on 12/18, we believe SBUX is beginning to lose some momentum and could struggle in the first half of fiscal 2014.  But before we get into that, we will briefly highlight why we continue to like the long-term prospects of the company.

 

LONG-TERM BULL CASE

The bull case for Starbucks is clear: a strong commodity tailwind, high-single digit same-store sales, expanding margins, an international white space growth opportunity, a recovery in the EMEA segment, and expansion into new segments of the global food and beverage industry are all long-term bullish factors moving forward.

 

For the most part, these levers are still in place and the secular opportunity for the company remains attractive.  Having learned from past experience, we believe management is well prepared to take advantage of this.  To this point, management has made some significant investments in order to capture these opportunities.  The chart below illustrates this point and shows that Starbucks’ return on incremental invested capital has recovered from the lows of 2012.  For these reasons, we remain bullish on a long-term basis.

 

SBUX: WHY WE ARE CAUTIOUS - sbux roiic

 

 

SHORT-TERM BEAR CASE

As we’ve written before, one of the only negatives we found in an otherwise all-star 4Q13 was management’s clear attempt to reign in expectations for FY14 (especially expectations for same-store sales in the Americas).  While we initially viewed this as management’s attempt to simply bring estimates back down to earth, it appears they may have done so for a reason. 

 

Our recent store visits in the Northeast suggest that the holiday season has not been as robust as anticipated.  If this is the case, we believe the trickle-down effect on slowing same-store sales are not yet fully reflected in the current share price.  With revenue growth decelerating, valuation close to a 3-year high and the likelihood that earnings will be revised down over the coming months, we see some short-term downside in the stock. 

 

Below, we visually run through the short-term bear case from a fundamental and sentiment perspective in a series of annotated charts. 

 

 

FUNDAMENTALS

 

SBUX: WHY WE ARE CAUTIOUS - sbux americas sss

 

SBUX: WHY WE ARE CAUTIOUS - sbux emea sss

 

SBUX: WHY WE ARE CAUTIOUS - sbuxx capp

 

SBUX: WHY WE ARE CAUTIOUS - sbux traffic

 

SBUX: WHY WE ARE CAUTIOUS - sbux cost of sales

 

SBUX: WHY WE ARE CAUTIOUS - coffee

 

SBUX: WHY WE ARE CAUTIOUS - sbux operating expenses

 

SBUX: WHY WE ARE CAUTIOUS - sbux other expenses

 

SBUX: WHY WE ARE CAUTIOUS - sbux g A

 

SBUX: WHY WE ARE CAUTIOUS - sbux operating margin

 

SBUX: WHY WE ARE CAUTIOUS - sbux americas operating margin

 

SBUX: WHY WE ARE CAUTIOUS - sbux emea operating margin

 

SBUX: WHY WE ARE CAUTIOUS - sbux cap operating margin

 

SBUX: WHY WE ARE CAUTIOUS - omg

 

SBUX: WHY WE ARE CAUTIOUS - right

 

SBUX: WHY WE ARE CAUTIOUS - sbux price performance

 

 

SENTIMENT

 

SBUX: WHY WE ARE CAUTIOUS - sbux ev ebitda

 

SBUX: WHY WE ARE CAUTIOUS - sbux pe

 

SBUX: WHY WE ARE CAUTIOUS - sbux analyst ratings

 

 

 

Feel free to call with questions.

 

 

 

Howard Penney

Managing Director

 


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A Mind/Body Market Connection?

Takeaway: If stock market declines can put you in the hospital, maybe feeling bad (low confidence) really makes you feel bad!

In what must have been a time consuming exercise in data management (even by our standards), a study titled Worrying about the stock market: Evidence from hospital admissions by Joseph Engelberg and Christopher A. Parsons combed through 30 years daily hospital admissions and stock market data.  The authors make a remarkable conclusion on page 27:

 

"Over roughly three decades, we provide evidence that daily fluctuations in stock prices has an almost immediate impact on the physical health of investors."


A Mind/Body Market Connection? - mktfear 

If stock market declines can put you in the hospital, maybe feeling bad (low confidence) really makes you feel bad!

 

Charts and data can sometimes show you something that just doesn't "feel" quite right.  In this case, we are talking about the inverse relationship between medical spending and Consumer Confidence.  It's not new to us, but it's been easy to ignore, despite consistently showing up in multiple analysis across multiple durations and multiple company and economic factors.  

 

So, does a happy consumer go to the mall, while an unhappy one goes to the doctor?  It may be more true than we previously thought.  

 

Check out the chart below.

 

It reveals just how tight the relationship is. Specifically, that changes in Consumer Confidence lead Medical Utilization by 2 to 3 quarters.  The trajectory forecasts accelerating medical utilization for 2014.

 

A Mind/Body Market Connection? - tobin

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European Banking Monitor: Still More Good Than Bad

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Most of Europe's banks saw their swaps tighten last week but Greek banks were notably wider with Alpha Bank and National Bank of Greece tacking on 24 and 38 bps, respectively. Italian banks continue to show the greatest improvement on a month-over-month basis. 

 

European Banking Monitor: Still More Good Than Bad - z  banks

 

Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese, Italian and Spanish swaps tightened the most, falling 29, 21 and 19 bps, respectively. 

 

European Banking Monitor: Still More Good Than Bad - z. sov1

 

European Banking Monitor: Still More Good Than Bad - z. sov2

 

European Banking Monitor: Still More Good Than Bad - z. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Still More Good Than Bad - z. euribor

 

Matthew Hedrick

Associate

 

 



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