Takeaway: Bernanke, Draghi & Co. are the real threat.
I’m sick and tired of half-baked econ PhDs trying to centrally plan our lives.
The European Central Bank cutting rates and devaluing The People’s currency as European growth is accelerating (not a typo) took my level of disgust up another notch yesterday. I didn’t think that was possible. I guess I thought wrong.
Like the Fed, the European central planners thought that cutting rates was going to “stimulate growth”, or something like that. Meanwhile, the market’s reaction to yesterday’s European rate cut “news” was global #GrowthSlowing.
Yes. Much like the “growth” style factor being for sale in US Equities ever since the Fed’s unaccountable decision not to taper (Financials down, Staples/Telcos straight up), that’s precisely how Mr. Market voted, worldwide, after the ECB rate cut:
- US Growth Stocks got killed yesterday (Nasdaq -1.9%); Russell2000 now -3.7% from its YTD high
- European Growth Stocks stopped going up (yes, we sold everything on the ECB “news”)
- Asian Stocks continued lower overnight – China and Japan down another -1.1% and -1.0%, respectively
Actually, since the Fed’s slow-growth-no-taper decision and ECB rate cut, from their recent highs:
- China’s Shanghai Composite Index is -6.7%
- Japan’s Nikkei is -4.7%
- US Growth Stocks like Facebook (FB) and Tesla (TSLA) are -12% and -27%, respectively
These academic wonks of the Keynesian empire fundamentally believe that Deflating The Inflation (from the world record inflation they perpetuated via currency devaluation in 2011-2012) is now the world’s greatest threat.
No. To be clear, their most recent policy moves are the new threat.
Are these un-elected people at the Federal Reserve and ECB frauds? Or are they just completely bought and paid for by the Bond Bull Lobby and currency debauchery camps?
I don’t know. But I do know that ECB chief Mario Draghi worked at Goldman Sachs. And I also noticed that Goldman just had the worst FICC (Fixed Income, Currency, Commodity) quarter in the Federal League…
Was Goldman’s prop and/or FICC team choking on too much illiquid bond and currency bubble paper that they finally had to start taking some marks?
Why is Goldman’s Hatzius such a raging dove? Why is he trying to scare the hell out of the Fed on #RatesRising when his own desk is saying the opposite? Why is he all of a sudden lobbying for the Fed to change the goal posts on a lower “unemployment” target?
Who can really get out of any of these bubbles (MBS, REITS, etc.) that Bernanke backstopped? How will it end? Or are they trying to convince you, like they did in late 2007, that nothing could possibly go wrong?
(Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.)
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THE HEDGEYE EDGE
Our bullish call on the British Pound was borne out of Hedgeye’s Q4 2013 Macro themes call. We continue to believe that the health of a nation’s economy is reflected in its currency. The Pound has benefitted from the UK’s fiscal discipline to embrace austerity before its regional peers during the global recession – a policy decision that is paying off in spades through accelerating growth above its European peers. Additionally, we expect a stronger currency to increase consumer spending power by deflating imported inflation.
Incidentally, our bullish call on the British Pound versus the US Dollar was further strengthened today with the European Central Bank unexpectedly cutting its main interest rate by 25 basis points to a record low of 0.25%. From our perch, it’s now anyone’s guess how the central bank currency wars between the USD and EUR will play out. However, anchored on our Q4 2013 Macro theme of #EuroBulls (presented on 10/11/13), we continue to like the British Sterling.
Finally, data out this week showed the UK Services PMI for October hit a 16-year high at 62.5 (above 50 = expansion), an outperformance over its peers. Our call for #GrowthAccelerating in the UK is now showing up in economic forecasts: the European Commission in its autumn report this week raised UK GDP expectations, to +1.3% in 2013 from +0.6% and to +2.2% in 2014 versus a previous estimate of +1.7%.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
Additional bullish signals include the slope of UK economic growth, just clocking a 3-year high, and the British stock market (FTSE) is breaking out to new highs. The fundamental data, from business and consumer confidence to retail sales and manufacturing, continue to confirm the improving growth environment we’re forecasting.
Taken together, we expect a continuation of this positive data to propel the Pound higher.
ONE-YEAR TRAILING CHART
“Around the world, we are focused on providing the menu quality and choice, customer service and affordability that are the hallmarks of the McDonald’s experience.”
- McDonald’s October Press Release
Despite management’s aforementioned focus, there is something that is not resonating with McDonald’s customers. While MCD is a fundamentally strong company, we find it difficult to believe that it will be able to drive “initiatives that will deliver the greatest benefit” for McDonald’s customers, as promised.
The charts below show sales trends across MCD’s four main regions – and they are not pretty. October’s results prove that same-store sales continue to steadily decelerate on a two-year basis. That said, we are comfortable in reiterating our view that McDonald’s has legitimate, inherent issues that management must address.
Next week, McDonald’s will host its analyst day to address the initiatives management has lined up for 2014 in order to stem the decline in global sales. Our research tells us that the company will make an aggressive push to sell more coffee in attempt to capture incremental market share in the coffee category next year. We expect this to be a main topic at the analyst day on November 14, 2013.
Our goal is to understand the potential consequences, both good and bad, of this strategy. Delving more into this topic, we have conducted a proprietary Retail Coffee Consumer Survey, which features some of the top coffee retailers, including MCD, SBUX, DNKN, KKD, and Peet’s.
We will be holding a conference call on Tuesday, November 12th at 11: 00am EST in order to present our findings and analysis.
Takeaway: LULU selling 2nd Chance Pants, PUM and ADDY must hate NKE, JNY loses another suitor, JCP puts up fantastic .com comp number
JCP - J. C. PENNEY COMPANY, INC. PROVIDES UPDATE ON CONTINUED PROGRESS OF TURNAROUND
JCP Q3 Update:
- Same store sales increased 0.9 % in October, marking a 490 basis point increase over September
- Sales on jcp.com increased 37.6 % versus last year, a continuation and acceleration of the positive trend in the Company's online business
- Conversion continues to improve in October compared to last year, reflecting favorable customer response to promotional events and improved inventory levels
- "The Company attributes its improved sales trends to the restoration of inventory levels in key private brands, including St. John's Bay®, Stafford®, and jcp Home(TM), and significant sales increases in Levi's®, Nike®, Carter's®, Dockers®, Alfred Dunner®, Vanity Fair® and IZOD®, some of the Company's largest national brands."
- "The Company also continues to make strides in the remerchandising and reconfiguration of its Home department both in stores and online to better reflect how customers shop while highlighting its most compelling brands and price points. These changes are beginning to resonate, as Home saw the largest percentage sales increase among the Company's divisions in October."
- "The Company noted, however, that gross margin showed sequential improvement within the quarter, with October representing the highest margin levels of the quarter."
Takeaway: This is old hat to the market by now, but it's still worth highlighting. True, a 0.9% comp is hardly worth declaring victory over -- especially when you're going against a -26% comp last year. But the +38% dot.com growth number was absolutely fantastic. That's a respectable growth number for a REAL company, never mind JCP. We still think that this beast is fixable, and remain in the bull camp..
LULU - LULU is repurposing its see-through Luon pants. Maybe these ones will fit everybody or should we say every body?
Takeaway: The company can't be quoted in the press as suggesting that the product did not fit the consumer because the women are too fat. Seriously…that's the most ridiculous thing we've heard from a Chairman of a company. You don't blame the consumer for not fitting into your product, you blame yourself for not making product that fits the customer.
MW, JOSB - Activist Takes Stake in Men's Wearhouse
- "The Men's Wearhouse Inc. has a new large shareholder in the form of Eminence Capital…"
- "The New York-based hedge fund in a regulatory filing Thursday said it is now the single largest shareholder in MW, holding nearly 4.7 million shares, or a 9.8 percent stake."
- "Eminence’s chief executive officer Ricky C. Sandler said in a letter to MW’s board: 'We are writing to you to express our disappointment in the board’s response to the recent proposal put forth by Jos. A. Bank [to] acquire MW….In our view, the board’s actions to date with respect to this matter fail to fulfill that obligation.'"
- “'We agree with the board that the proposed $48 share price undervalues MW both for its stand-alone prospects and for its fair share of the merger synergies.'"
Takeaway: We remain of the view that MW should remain independent, unless JOSB gives it complete assurance that it move forward with its business plan on its own. The $48 price is still too low.
GIII, JNY - G-III Drops Out of Jones Pursuit
- "G-III Apparel Group Ltd., which had been looking to acquire Jones’ apparel business, has dropped out of the process, according to two sources."
- That leaves private equity firm Sycamore Partners, which has been pursuing the footwear side of Jones, in an uncertain position. It is unclear whether Sycamore is able to, or even wants to, make a play for all of Jones, or if there’s another investor who would step into G-III’s place and buy the other portion of the company."
- "One source said the Jones camp has recently reached out anew to other investors to see if they want to buy the whole firm."
Takeaway: Not a surprise. JNY's brands are not desirable to the general public (if 80% of the brands went away the consumer wouldn't care), the stock is not valuable to the public equity market, and it's no surprise that private capital is getting skittish as well.
PUM - PUMA SE amends full-year 2013 guidance
- "PUMA’s Management anticipates one-off charges, the majority of which will be non-cash effective, of approximately € 130 million to be booked in the fourth quarter of 2013. The majority of these special items will consist of impairments charges related to non-current assets. New initiatives include the closure of the product development centre in Vietnam and the intended transfer of our international product teams from London to Herzogenaurach."
- "Reflecting these new elements mentioned above, Management now expects 2013 full year net earnings to be positive, but significantly below those of 2012 (previously: increase in net earnings compared to 2012)."
Takeaway: First Adidas takes down numbers…now Puma. Not a good month for German sports apparel brands. At the same time, Nike is crushing it. Germany hates Nike.
BEBE, TUMI - BEBE & TUMI report quarterly results
Takeaway: Two polar opposite SIGMA results here. BEBE (surprisingly) takes a sharp about-face from the Danger Zone to positive sales/inventory territory. On the flip side, TUMI went from the Sweet Spot (sales up, inventories down and margins up) to the dungeon -- pretty much polar opposite to where it had been.
HBI - HanesBrands to prepay 8% senior notes due 2016
- "The company will prepay the remaining $250 million of 8 Percent Senior Notes on Dec. 16, 2013, completing its successful multiyear campaign to use cash flow to retire all of the company’s bond debt except for its $1 billion of 6.375 percent notes."
- "The company expects to incur costs of approximately $15 million in the fourth quarter of 2013 for bond prepayment expenses and acceleration of noncash unamortized debt costs. The expectation for these costs has been previously communicated and is incorporated in the company’s 2013 financial guidance."
Takeaway: More of the same from HBI. Financial engineering is creating value. Not our preferred way to drive the stock, but hey…it works. The accretion from the MFB acquisition is a bigger deal. The company continues to sandbag. Estimates are going higher.
Chinese Luxury Market Poised for Uptick
- "The luxury market in China is expected to regain momentum in 2014 as Mainland consumer tastes and spending habits continue to become more sophisticated, according to a new luxury forecast released by communications agency Ruder Finn in partnership with Ipsos Group, a market research firm."
- "Chinese consumers increasingly care less about brand names and more about the uniqueness of products, the study said. It also found that Mainland shoppers care more about customer service, with 92 percent of those surveyed expressing dissatisfaction with service offered by luxury brands within China, which is fueling more purchases overseas."
- "Nearly 40 percent of Chinese surveyed said they are turning to the Internet for luxury shopping, representing a 22 percent increase compared with 2012."
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