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Off the Radar: Yet Another Example of the Hyper-Inflated Market Bubble

Takeaway: It's all fun and games and pink fluffy unicorns until the music stops.

In the latest sign of our hyper-valued, bubbly marketplace, we give you EBates...

Off the Radar: Yet Another Example of the Hyper-Inflated Market Bubble - fr3

 

Rakuten to Buy Ebates in Japan’s Biggest E-Commerce Deal

 

  • "Rakuten Inc. agreed to buy U.S. rebates website Ebates Inc. in Japan’s largest e-commerce deal as the operator of the country’s biggest online mall seeks overseas growth through acquisitions."
  • "Rakuten will pay $1 billion in cash for all of Ebates, it said in a filing to the Tokyo Stock Exchange today. San Francisco-based Ebates offers cash rebates to customers who buy products ranging from laptops to lipsticks from the website’s retail partners."
  • "Rakuten’s billionaire chairman Hiroshi Mikitani is betting the purchase will help the Tokyo-based company push its global e-commerce strategy. Rakuten has also been plowing cash into technologies such as mobile applications and online video as it seeks to add to its online marketplace business."

Takeaway

There are no direct public company implications here. But the simple fact that a Japanese company is buying an early cycle, non-asset-based US e-tail startup for $1bn in cash is pretty much huge any way we slice it.

 

In order of magnitude, this is like when Amazon bought Zappos for $928mm six years ago -- near the top of the last cycle.  Except for the fact that Zappos actually had a brand... And a loyal customer base... And warehouses... And suppliers... And revenue...  


Why Vladimir Putin Is More ‘Judo Master’ Than Chess Player

“Vladimir Putin firmly believes that martial arts teach such knowledge, abilities and skills that every politician needs. Putin believes that judo trains both your body and your mind. It develops strength, reaction, endurance, teaches self-control, the ability to feel the moment, to see the opponent’s strengths and weaknesses, to strive for the best results and constantly work on improving oneself.”

- From the Kremlin’s website on Putin’s “Interests”

 

It’s no secret to any student of Russian President Vladimir Putin. The man loves Judo.

 

Putin started practicing Judo when he was 11 years old and Nikita Khrushchev was still at the top of the Soviet totem pole. He holds a black belt in the sport, is an honorary president of the European Judo Union and has even written a book on the subject, “Judo: History, Theory, Practice.” Last year he was ceremoniously awarded a ninth “Dan” (out of 10) in Taekwondo (for comparison’s sake, that’s higher than Chuck Norris’ eight Dan achievement), and recently attended the World Judo Championship in the southern Urals to view the Russian men’s team take second place to Japan.

Why Vladimir Putin Is More ‘Judo Master’ Than Chess Player - 1. putin

 

Oftentimes, when commentators try to size up state actors and their influence on geopolitics, the discussion quickly turns to the metaphor of a “chess game” – and the current Russia vs. Ukraine (and the West) conflict appears no different (witness this week’s cover of The Economist with Putin standing on a giant chessboard).

 

We think the metaphor of a chess match misses the mark in Putin’s case.  We think the metaphor of a Judo fighter is more apt in capturing the essence and approach of Putin since he joined the KGB in 1975.

 

Moreover, like any great Judo competitor, we fully expect Putin to continue to play to his strength by exploiting Europe’s reliance on Russian oil and gas and leveraging his popular support and Cult of Personality he’s built at home. 

 

As news headlines fly back and forth on talks of cease fires and additional sanctions between Russia, Ukraine, and the West, we fully expect Putin’s focus to remain squarely on Ukraine, THE key region where he derives strategic influence over the West. We further expect his meddling to continue roiling global markets throughout the year (Note: on a year-to-date basis the Russian equity market RTSI is far and away the worst performing major global equity market, down nearly -14%).

 

Gaming Influence

 

If there ever were a “grand” strategy vis-à-vis Ukraine, it has greatly morphed over recent months: Russia lost its Ukrainian puppet leader in Victor Yanukovych and Western sentiment towards Russia dramatically shifted after it annexed Crimea and participated (directly or indirectly depending on who you talk to) in the downing of the private airliner MH17 over Ukrainian territory.

 

Like a Judo fighter, Putin has the ability to pick his spots of attack. Advantageously, he has the luxury to take a defensive posture (let the opponent strike first) given his strong hand (energy assets).  Meanwhile, despite being compared to Hitler by British Prime Minister David Cameron, or claims that he’s is under the influence of Satan by an Orthodox Church official in Kiev this week, as Adam Gopnik writes in a New Yorker article titled Crimea and the Hysteria of History (March 7, 2014), Putin may in fact be behaving quite rationally as far as Russian history is concerned:  

 

“Russia, as ugly, provocative, and deserving of condemnation as its acts may be, seems to be behaving as Russia has always behaved, even long before the Bolsheviks arrived. Indeed, Russia is behaving as every regional power in the history of human regions has always behaved, maximizing its influence over its neighbors—in this case, a neighbor with a large chunk of its ethnic countrymen.”

 

Deriving Advantage

 

Since his early days in office, Putin has proactively cultivated a macho Cult of Personality, flexing his strength at home and abroad.   Look no further than the widely-circulated press photos of him shirtless on a horse in the wilderness some years back (see photo below) to more recent videos of Putin “scoring goals” amongst former and current professional hockey players. Putin has created a bravado and brawn which serves to throw off and intimidate opponents while also increasing his appeal at home. 

Why Vladimir Putin Is More ‘Judo Master’ Than Chess Player - 2. putin

 

Fresh off the pride of hosting the Olympic games in Sochi and the “success” of annexing Crimea, Putin’s popular support is now riding at all time highs. According to a Pew Poll, it stands at 83%! 

Why Vladimir Putin Is More ‘Judo Master’ Than Chess Player - 3. putin

 

Digging in deeper, Putin has been able to maintain high popular appeal throughout his time in office – and this despite popular uprisings that have toppled and challenged authoritarian regimes throughout North Africa and the Middle East over recent years.  

 

What’s been Putin’s edge to command such support and prevent uprisings at home?  As The New Yorker’s David Remnick, a long student of all things Russia, explains in a Letter From Moscow: Watching The Eclipse in The New Yorker (August 8 & 11, 2014):

 

“…Putin was able to do what Yeltsin had not: he won enormous popular support by paying salaries and pensions, eliminating budget deficits, and creating a growing urban middle class. It was hardly a secret that Putin also created his own oligarchy, with old Leningrad pals and colleagues from the security forces now running, and robbing, the state’s vast energy enterprises. This almost unimaginably corrupt set of arrangements, which came to be known as Kremlin, Inc., outraged nearly everyone, but the relative atmosphere of stability, in which tens of millions of Russians enjoyed a sense of economic well-being and private liberty, provided Putin with a kind of authoritarian legitimacy.”

 

Indeed, yet the risk appears in the ability to disguise a “sense of economic well-being and private liberty.”

 

Resource Legitimacy

 

Critically, Putin’s authoritarian legitimacy could not be solidified without the country’s resource legitimacy.  In what’s known as “Dutch Disease,” the country has relied squarely on its natural resources for economic growth at the expense of developing and diversifying the economy. Will this come home to roost?  Like any cycle, Russia may be able to disguise its decline over the medium term, but over the longer term—especially should oil prices abate—things get much more troublesome.   

 

Russia’s energy leverage over Europe clearly remains significant. The share of Russian gas as a percentage of EU imports has grown from 22% in 2010 to over 30% today. The Economist estimates that 50% of all gas that flows to the EU passes through Ukraine. For a refresher on demand at the country level, the NYTimes offers an illustrative graphic (see below):

Why Vladimir Putin Is More ‘Judo Master’ Than Chess Player - 4. putin

 

While the EU has made developments since periodic suspensions to Ukrainian gas delivery in 2006 and 2009 (for failure to pay incurred debts), they’ve not been significant enough to offset a Russian shutdown. As the chart shows, not only does the eastern bloc (highest = Estonia, Latvia, and Lithuania) have the majority of its consumption tied to Russia, but Netherlands has a 34% exposure, Germany 30%, and Italy 28%. No small potatoes.

 

Estimates suggest that if Russia were to shut-off supply lines through Ukraine (still a seemingly unlikely scenario though a greater leverage point as we move deeper into the colder months), the EU could survive for an estimated three months with current reserves. We call that significant leverage!

 

In addition, and as my commodity-focused colleague Ben Ryan points out:  Europe’s ability to source oil and gas is both limited and much more expensive than Russian-sourced energy. For example, LNG that Germany purchases in the international market is about double what it costs when sourced from Russia. Tack on that there is virtually no capacity from the U.S. shale oil boom to help Europe in the immediate, or even intermediate term, and the U.S. has no LNG export facilities.

 

Finally, Putin has an additional competitive advantage in the recent completion of the Nord Stream pipeline that transfers LNG from Vyborg (near St. Petersburg) up through Finland, and across the Baltic Sea to Germany. In essence, Russia could cut off all supply to Ukraine and not completely isolate the largest European countries.

 

Playing To Strengths

 

Despite all the trade sanctions that both Russia and the West may throw at each other, could analyzing the geopolitical posturing be as simple as this? – Russia, while playing with a weak economic hand, can hold on to its energy rich leverage, and simply, like a Judo competitor, wait for the West to move before countering? 

 

We think it’s that simple.

 

For us, the promise of Russia intimately mingling with Ukraine for the foreseeable future is high – especially as we move into colder months when heating oil becomes a human necessity.   Jigoro Kano, the founder of modern Judo in 1882, outlined the central principles of the sport:  seiryoku zen’yō or maximum efficiency, minimum effort.  Is this not Putin’s game plan? 

 

Last week we got a taste of Putin’s tactics:  as the West cautiously hailed Ukraine’s announcement that they agreed to a truce (cease fire) with Russia, Putin allowed the story to gather steam for a bit. Then he commented:  well, Russia is not a party to the conflict, so actually Russia can’t be part of a Truce… , or something to that effect.   In other words, the West gets tripped on itself, while Putin exerts minimum effort to receive considerable results.

 

That’s Judo.

 

Matthew Hedrick

Associate

 

 

 

 

 


Cartoon of the Day: Bubble Bath

Takeaway: Yes, it's a bubble.

Cartoon of the Day: Bubble Bath - bubble cartoon 09.09.2014

 

 



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Retail Callouts (9/9): PLCE, KATE, HD, TGT, FRAN, JCP, COH, LULU, WMT

Takeaway: Another big reading from ICSC, PLCE adds Vill from KATE, HD breach could be biggest yet, Rakuten coughs up $1bil for Ebates

EVENTS TO WATCH

 

Wenesday (9/10)

  • VRA - Earnings Call: 9:30am
  • FIVE - Earnings Call: 4:30pm
  • WTSL - Earnings Call: 4:30pm
  • RH - Earnings Call: 5:00pm

 

Thursday (9/11)

  • LULU - Earnings Call: 9:00am
  • KR - Earnings Call: 10:00am
  • ULTA - Earnings Call: 5:00pm

 

ECOMONIC DATA

 

Takeaway: Another big reading from the ICSC up 4% YY - with a slight deceleration on the 1yr and 2yr trend line. Looking at the change in growth rate by calendar quarter: 1Q down 85bps, 2Q up 48bps, and 3Q to date up 163bps. We'll reiterate what we said last week. "US retailers should be killing it in this kind of environment. Most are. But for companies that but up questionable quality numbers (like KSS) but get rewarded anyway, we'd simply ask what they'll look like when this strength ends?"

 

Retail Callouts (9/9): PLCE, KATE, HD, TGT, FRAN, JCP, COH, LULU, WMT - 9 9 chart1

Retail Callouts (9/9): PLCE, KATE, HD, TGT, FRAN, JCP, COH, LULU, WMT - 9 9 chart2

 

COMPANY HIGHLIGHTS


PLCE, KATE - The Children's Place taps former Kate Spade exec as group VP, finance

(http://www.retailingtoday.com/article/childrens-place-taps-former-kate-spade-exec-group-vp-finance)

 

  • "The Children's Place has appointed Robert Vill as group VP of finance. He will report to Michael Scarpa, chief operating officer and CFO."

 

Takeaway: This is a big win for PLCE. Some people know Vill as the Investor Relations contact at LIZ/FNP/KATE. But the reality is that he played the CFO role in large part since Mike Scarpa left what was then Liz Claiborne in 2008.  It's natural for the two to connect again for many reasons. But this is not the role we expected to see Vill take. He has always been extremely tight with Scarpa, but was also invaluable to Bill McComb throughout the period he transformed LIZ into KATE. It is only a matter of time before McComb lands another CEO role, and we fully expected Vill to be his CFO. Guess not.

 

HD, TGT - Home Depot Data Breach Could Be the Largest Yet

(http://bits.blogs.nytimes.com/2014/09/08/home-depot-confirms-that-it-was-hacked/?_php=true&_type=blogs&ref=business&_r=0)

 

  • "Home Depot confirmed on Monday that hackers had broken into its in-store payments systems, in what could be the largest known breach of a retail company’s computer network."
  • "The retailer said the exact number of customers affected was still not clear. But a person briefed on the investigation said the total number of credit card numbers stolen at Home Depot could top 60 million. By comparison, the breach last year at Target, the largest known attack to date, affected 40 million cardholders."

 

Takeaway: We still think that the key takeaway is that this breach is so big, but so few people seem to care relative to past breaches. Sadly enough, the consumer is getting used to data security lapses. They may be more forgiving for past offenders as well, including Target.

 

Rakuten to Buy Ebates in Japan’s Biggest E-Commerce Deal

(http://www.bloomberg.com/news/2014-09-09/rakuten-to-buy-u-s-website-ebates-for-about-1-billion.html)

 

  • "Rakuten Inc. agreed to buy U.S. rebates website Ebates Inc. in Japan’s largest e-commerce deal as the operator of the country’s biggest online mall seeks overseas growth through acquisitions."
  • "Rakuten will pay $1 billion in cash for all of Ebates, it said in a filing to the Tokyo Stock Exchange today. San Francisco-based Ebates offers cash rebates to customers who buy products ranging from laptops to lipsticks from the website’s retail partners."
  • "Rakuten’s billionaire chairman Hiroshi Mikitani is betting the purchase will help the Tokyo-based company push its global e-commerce strategy. Rakuten has also been plowing cash into technologies such as mobile applications and online video as it seeks to add to its online marketplace business."

 

Takeaway: No direct public company implications here, but the simple fact that a Japanese company is buying an early cycle non-asset-based US e-tail startup for $1bn in cash is pretty much huge any way we slice it. In order of magnitude, this is like when Amazon bought Zappos for $928mm six years ago -- near the top of the last cycle.  At least Zappos had a brand. And a loyal customer base. And warehouses. And suppliers. And revenue. 

 

OTHER NEWS

 

FRAN - 2Q14 Earnings

 

Retail Callouts (9/9): PLCE, KATE, HD, TGT, FRAN, JCP, COH, LULU, WMT - 9 9 chart3

 

JCP - J. C. Penney Commences Tender Offers for 6.875% Medium-Term Notes due 2015, 7.65% Debentures due 2016 and 7.95% Debentures due 2017

(http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-newsCompanyArticle&ID=1965091&highlight=)

 

  • "J. C. Penney Company, Inc. announced today the commencement of cash tender offers  by J. C. Penney to purchase up to $300 million aggregate principal amount of the three outstanding series of securities issued by JCP, and for which the Company is co-obligor, described in the table below, except that with respect to the 7.95% Debentures due 2017, J. C. Penney is only offering to purchase up to $100 million principal amount."

 

COH - COACH APPOINTS GEBHARD RAINER AS PRESIDENT AND CHIEF OPERATING OFFICER

(http://phx.corporate-ir.net/phoenix.zhtml?c=122587&p=irol-newsArticle&ID=1965060&highlight=)

 

  • "Coach, Inc. ... today announced the appointment of Gebhard Rainer, as President and Chief Operating Officer, effective September 29, 2014."
  • "Mr. Rainer joins Coach from Hyatt Hotels Corporation, where he most recently held the position of Executive Vice President and Chief Financial Officer. Previously, Mr. Rainer served as Managing Director for Hyatt International Europe, Africa and Middle East (EAME) LLC from January 2007 to August 2012 overseeing all aspects of the company’s business in the region. Mr. Rainer has more than 30 years of experience in progressively more senior operating and finance roles, and has extensive international experience, having lived in the Caribbean, the Middle East, Eastern Europe, Western Europe, and the United States."

 

LULU - New Lululemon Flagship Signals Identity Crisis for Embattled Retailer

(http://www.retail-insider.com/retail-insider/2014/9/lululemon-flagship)

 

  • "The recent unveiling of the Lululemon flagship store in downtown Vancouver offers a glimpse into what the future may hold for the embattled retailer. Lululemon has been under intense scrutiny since a series of blunders have hamstrung the brand’s image and damaged its share price. But it's what's missing from the flagship store that may worry investors: the essence of the Lululemon brand."

 

WMT, TGT - Wal-Mart to Kill 'Express' Store Brand: Report

(http://www.cspnet.com/industry-news-analysis/corporate-news/articles/wal-mart-kill-express-store-brand-report)

 

  • "Wal-mart U.S. will rebrand all its Express stores to Neighborhood Markets in an effort to streamline its retail offer, according to a report in the Arkansas Democrat-Gazette."
  • "Citing an internal company memo from Wal-mart U.S.’ chief development officer, the newspaper reported that the Express moniker will be eliminated, with all new small stores in the future called Neighborhood Markets. The 21 existing Express stores will be converted to the Neighborhood Market banner in coming months"

 

Twitter's 'Buy' Button Debuts With Burberry

(http://www.wwd.com/business-news/technology/twitter-unveils-buy-button-for-ecommerce-7882875?module=Business-latest)

 

  • "The social network, which boasts 271 million average monthly users, on Monday unveiled a 'buy' button that allows users to buy directly from a tweet. The move is an attempt by the social network to generate another revenue stream and satisfy the ever-hungry Wall Street for ongoing growth."

 

WAG - Walgreens Appoints Barry Rosenstein of JANA Partners LLC to Board of Directors As Company Progresses Toward Alliance Boots Merger

(http://news.walgreens.com/article_display.cfm?article_id=5895)

 

  • "Walgreens announced the appointment of Barry Rosenstein and a second new director to be named to its board of directors as the company continues moving forward to complete its merger with Alliance Boots GmbH."

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