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PREMIUM INSIGHT

ICYMI: Clock Is Ticking On China’s $24 Trillion Debt Time Bomb

ICYMI: Clock Is Ticking On China’s $24 Trillion Debt Time Bomb - ICYMI 1 10 2017 CHINA

If you’re looking for a catalyst that could send China’s flagging economy into a tailspin, here’s one: The People’s Bank of China is pulling money out of the system in an effort to defend the yuan. But that could have ramifications for the country’s overheating debt markets too.


How Trump’s (Devastating) Trade Policies Would Impact The Retail Industry

The policies of Donald Trump could change the retail industry forever

#Trump #China #Protectionism #Trade

 

On the campaign trail, the President-elect threatened to “impose tariffs of up to 45%” on Chinese goods because under him the U.S. is “not playing games anymore.” Trump’s protectionist trade policies would, in fact, radically alter how the retail sector conducts business, by importing cheap goods from China to keep costs down.

 

If Trump gets his way and imposes aggressive tariffs (i.e. taxes on imports) or quotas (that limit on the number of imports of a particular good that can legally come into the States) it could have a devastating effect on retailers who have long benefited from importing cheap Chinese goods.

a bit of history: 1990's quotas phased out = Great for Retailers

#WarrenBuffet #Retail 

 

Before 1994, there were import quotas that limited the quantity of apparel the U.S. could import from non-World Trade Organization countries (China didn’t become a member until 2001). These measures were basically lobbied for by legendary investor Warren Buffet and others who, after acquiring North Carolina-based apparel manufacturing plants, which were threatened by cheap Chinese labor.

 

Those quotas began to be phased out in 1994. Seizing an opportunity, Chinese apparel manufacturers cut deals with U.S. manufacturers to pour Chinese made goods into the states.

 

That’s precisely what happened, says Hedgeye Retail analyst Brian McGough in the video above. “China’s share of total U.S. apparel imports, troughed at 8% [in 2001] and went up to 39% over a decade,” he says, pulling up a chart. At the same time, import costs plunged. During the 1990s, we saw the cost of apparel come down by 5-10% per year – every year for two decades.

Winners & Losers

$XRT $KSS $JCP

 

This has been a boon for the weakest brands in the space, like Kohl’s (KSS) and JCPenney (JCP), McGough says, which probably wouldn’t exist today were it not for cheap Chinese imports.

 

As we’ve pointed out before, there’s reason to worry about Trump's potential trade policy changes. In a foreboding sign of the protectionism to come, President-elect Trump named Peter Navarro as Director of Trade and Industrial Policy. This guy literally wrote the book Death by China, describing the threat that China’s form of capitalism and militarism poses to the future of the U.S.

 

In short, the probability that Trump’s protectionist policies get passed isn’t zero. There is historical precedence that suggests this retail risk is serious and worth monitoring (and not the ramblings of some deranged liberal).


PREMIUM INSIGHT

REPLAY | Special Free Edition of The Macro Show with Hedgeye CEO Keith McCullough

REPLAY | Special Free Edition of The Macro Show with Hedgeye CEO Keith McCullough - km3.1.16

Did you miss this special (free) edition of The Macro Show? No Worries ... watch the replay here!


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PREMIUM INSIGHT

Why Exact Sciences Has More Upside (Even Though It’s Up 20% Today)

Why Exact Sciences Has More Upside (Even Though It’s Up 20% Today) - thumbnail Healthcare Exact Sciences 1 9 16 TT NO TEXT

“We think the marketing opportunity here and execution opportunity here could be big, given that [Cologuard] tests are pretty good and we’ve got a lot of good feedback from physicians,” Tobin says.


ICYMI: Brexit Fears Overdone, Buy British Pound

 

"We're leaving. We're coming out. We're not going to be a member of the EU any longer."

–U.K. Prime Minister Theresa May

 

Prime Minister May made the comment above in an interview on Sunday, dismissing entirely the possibility that the UK might "keep bits of membership" to the European Union. The British Pound was down more than -1% on that news this morning. Investors feared  the repercussions of a long, drawn-out “hard Brexit” from the European Union.

 

We believe those fears are overdone.

WHAT TO BUY

We think this is an opportunity to get long the British Pound (FXB). We suggest investors buy the pound on pullbacks, like today, and sell on days when the pound rises in value. The immediate-term risk range (our proprietary ranges that change daily) today is $1.21 – 1.24. Essentially, when the pound hits the low-end you buy and at the top-end you sell. Simple.

 

Another reason to buy the pound? Wall Street consensus is still short.

 

As you can see in the video above, institutional investors are net short pounds by -60,109 contracts (futures and options), according to data from the CFTC. Just three months ago, consensus was short pounds by -90,000 contracts before getting squeezed out of those positions. The pound rose 5% from mid-October to the December highs of $1.27. Wall Street was forced to cover shorts.

 

As we pointed out recently, the British economy grew +2.2% year-over-year growth in the third quarter. That was even better than the USA’s +1.7% year-over-year growth rate. Despite Brexit fear-mongering, we think the U.K. economy will continue to grow and Wall Street capitulates (once again) on these short positions. 


This Radical Change is Reshaping the Restaurant Industry… Here’s What It Means for Domino’s | $DPZ

 

Change is coming to the restaurant industry that will reshape how diners order food. In the coming years, food delivery will be “the most disruptive change in the restaurant industry in this generation,” says Hedgeye Restaurants analyst Howard Penney.

 

The winners and losers of this trend are becoming more apparent with each day. So far, early adopters like pizza chain Domino’s Pizza (DPZ) have been the prime beneficiaries. In the past year, shares of Dominoes are up 46%, with the company’s innovative food delivery technology bolstering the bottom line. Delivery accounts for 29% of the company’s business and annual digital sales total about $4.7 billion.

 

However, Domino’s competitive edge is fading fast.

 

There has been a spread of third party delivery services like DoorDash and Postmates which have received considerable venture funding, and partnered with many independents and large national chains. Historically, GrubHub has merely been an aggregator of orders. But now it’s diving into the delivery space.

 

Even more traditional restaurant chains like Panera Bread are getting in on the action, Penney explains in the video above. The bakery-café fast casual restaurant has been investing immense amounts of capital to push out their “Panera 2.0 initiative,” which is nearly completed in company-owned stores next frontier is delivery. The company anticipates it will be in 15% of units by the end of 2016, and ramping to 35% - 40% of the system by the end of 2017.

 

“We have no particular call on Domino’s right now,” explains Penney, “but the more money that’s invested in this business, and as long as companies like Panera continue to go on TV and start talking about delivery in their advertising, it’s going to change the story around the Domino’s business longer-term.”

 

It will be tough to unseat Domino’s as top-dog in delivery over the short-term. Over the long-term, the company will feel the pressure of competition. This should benefit new entrants, like Panera (PNRA), while squeezing companies with lofty delivery goals, like GrubHub (GRUB).

 

We are keeping  a close eye on this trend.


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