Fattening of the Population Isn’t Just in the US

Investors, especially those in the US, tend to have an in-country perspective, but the reality is our investment themes play out on the global stage even Fattening of the Population. As more countries recognize obesity as a disease, this will likely change the way it is treated, which could expand the universe of contenders for investment.

Experts at two recent endocrinology meetings are calling for more countries to formally recognize obesity as a disease in order to strengthen the fight against this epidemic of the 21st century.Speakers at the European Congress of Endocrinology (ECE) 2017 and the recent European Congress on Obesity (ECO) 2017 both stressed the fact that recognition of obesity as a disease in Europe remains a much–needed step forward.

Source: Call for More Countries to Recognize Obesity as Disease

Aspirational Products Drive Affordable Luxury Brands to Blow the Doors Off Mainstream Retail

Aspirational Products Drive Affordable Luxury Brands to Blow the Doors Off Mainstream Retail

 

Don’t let all the bad news from domestic brick & mortar retailers cloud your view of the overall retail landscape as it would mislead you into thinking that it was doom and gloom for all retail. Looking at the performance from Affordable Luxury retailers like Kering, LVMH, Burberry and Hermes, that’s certainly not the case.

The BI Europe Luxury Goods Top Peers index has jumped 8 percent this year, amid signs that appetite for expensive handbags, silk scarves and timepieces is rebounding. While the industry had grappled with ebbing demand in China and a slowdown in tourism in Europe after terrorist attacks, a rebounding China and the Chinese New Year are likely to stoke demand for our companies that fit our Affordable Luxury investing theme.

Gucci’s $2,000 Sylvie leather shoulder bags and $1,190 studded leather pumps are flying off the shelves, propelling parent company Kering SA to its fastest sales growth in four years and further lifting spirits in the hard-hit luxury-goods industry.

The Italian fashion brand’s revenue advanced 21 percent in the fourth quarter, almost twice as fast as analysts expected, Kering said Friday. Full-year sales at the business, Kering’s largest, exceeded 4 billion euros ($4.3 billion) for the first time as creative director Alessandro Michele reignited interest in the label.

Source: Gucci’s Record Sales Propel French Luxury House Kering – Bloomberg

Foreign Leaders Nervous About Trump

On March 8th I spoke with Neil Cavuto about how many foreign leaders, particularly those in Europe, are getting nervous about Donald Trump’s statements. Living a good portion of my time in Italy I am able to have a richer perspective on how the rest of the world views what is happening in the U.S., and while I agree that the U.S. ought not chose its policies based on the preferences of other nations, it is always a good idea to at least listen to our friends and neighbors, just as we do in our personal lives.

The United States has the largest economy in the world and the most powerful military, so naturally the rest of the world has a vested interest in what happens here. Our entertainment industry is also the most impactful in the world, so that American cultural shifts are often rippled throughout the globe. What happens here, doesn’t stay here.

For most Americans alive today, World War II is something we read about in the history books. We don’t sense that it impacted our culture in any meaningful way, at least nothing like the way 9/11 has. In Europe there is a very different memory, one filled with great trepidation over those leaders that seek to use the military in ways that are outside of the law. Donald Trump’s repeated comments concerning how he is confident that the members of the military would defy their oath to uphold the law in order to obey his demands strike an alarming cord in Europe, where leaders in the past who used the military that way brought devastation to a continent.

Perhaps Trump is simply using the type of hyperbole that he found worked so well to garner attention for his reality TV show, but hyperbole of that nature on the global political stage, from a man who could be the commander-in-chief of the largest military in the world, in understandably cause for concern.

Shove It! A Greek Tragedy?

Shove It! A Greek Tragedy?

The headlines are once again dominated by the living Greek economic tragedy, vacillating between dire predictions of a Greek collapse and ensuing global financial calamity to ebullient, (and frankly rather ludicrous) stock market jumps of joy on hopes of a pseudo happily-ever-after. Conventional wisdom has been to lambast the Greeks with the usual damning triumvirate of a nation whose citizens are either lazy, stupid or evil… or all three. The nation is currently in a technical default, having failed to make payments already due on loans to the International Monetary Fund (IMF), but has claimed that it will make a single lump sum payment later in the month for all monies due in June. The size of the Greek debt relative to GDP is second only to Japan, which given its ability to control its own currency is a very different animal.

Debt2GDP

 

To put the level of Greek debt in context, at a total of $352.7 billion, it is about half of the $700 billion that was approved by Congress for the Troubled Asset Relief Program in 2008.   So in the context of global debt, it isn’t that big of a deal, what is a big deal however is the precedent the situation will set for the Eurozone, the second largest economy in the world. I can’t imagine just how much coffee and antacids have been consumed this week in Luxembourg, as all sides find themselves stuck between a rock and a hard place, with no clear common ground.

As for that excruciating austerity we keep hearing about, meaning the cuts governments were wailing about having been forced to endure. Errrr, hmmmmm, not so sure where that is coming from when we look at data from the IMF on the next chart….

EuroDebtByYear

Spending cuts? Where? All three countries have increased their debt to GDP ratios since the crisis began. So here’s the real scoop.

 

Greece has a massive government full of rules and regulations on darn near everything that makes it very difficult to start or run a business and a tax code that makes War and Peace look like a summer beach read. Now all these rules, regulations and taxes were put in place for ostensibly good reasons, like most bureaucratic shenanigans, “We need to protect hotel employees, cab drivers, restaurants, nurses, fishing boats, gardeners etc. etc. etc.” The problem is that when you add up all this “protection” for existing businesses, employees, consumers, tradespeople… it becomes increasingly tough to run a business.

 

To make up for just how tough it is, the government has made it a practice to promise people lots of safety in the form of pension systems, welfare aid, etc. The math here isn’t too tough to figure out. If on the one hand you make it really hard on people to get things done and on the other hand you provide ample support for a decent living for those who aren’t working for whatever reason, well you’ll have less people working their tails off, which means less money available to tax and spread around to those who aren’t working. But that’s ok, because hey, we are part of the Eurozone and can get debt cheap, so we’ll just borrow whatever we can’t get through taxation and spend that. No worries.

 

That worked for a while… until the market started looking at the math a bit more in depth and realized that Greece had reached the point where it really cannot sustain its debt any longer.

Greece is like the family with a single income earner holding down two jobs that pay slightly over minimum wage who needs to support a spouse, some kids, manage a $525,000 adjustable rate mortgage whose rate keeps rising, has two cars in the driveway in desperate need of rather costly repairs, a cousin who just moved in and has some serious health problems and found out today that the roof has a major leak. Now the bank keeps calling and telling you that you need to work harder and cut back on the spouse’s spending habit as your mortgage rate continues to rise and you are already late on a few months’ worth of payments and your credit cards are maxed out. Your boss is telling you that your skills are seriously lacking and your cousin says she can’t possibly live in that room you gave her unless she gets to redecorate it on your dime. At some point, you throw your hands up in the air and tell everyone to shove it!

 

Earlier this week, according to a report by the Financial Times, Greek prime minister Alexis Tsipras argued that,

 

“The pensions of the elderly are often the last refuge for entire families that have only one or no member working in a country with 25 per cent unemployment in the general population, and 50 per cent among young people.” That’s Greek for shove it.

 

How does a politician manage this type of pressure from back home? Ms. Merkel and Mario Draghi just aren’t that scary or persuasive!

 

So that’s where we are. The majority of Greeks have decided to go the “shove it” route and sent Yanis Varoufakis to deliver the message, in a rather debonair manner we might add, (that’s Yanis on the left in the picture below.) This has left Germany’s Angela Merkel, the European Central Bank’s Mario Draghi and France’s François Hollande in a tizzy as they try to figure out how to work with a Greek envoy that appears to be quite confident their game theory skills will eventually get them whatever they want. Italy’s Renzi, by the way, is mostly back home dealing with his nation’s struggling economy and the seemingly eternal roll of sitting between the U.S. and Russia – poor man has enough on his plate!

Greeks

 

So here we stand with Greece still wanting to be part of the Eurozone club, having never, even upon admission to the club, been able to satisfy the requirements for membership. To be fair, many nations who were let into the Eurozone club never have been able to meet them either.

 

Bottom Line: What does a Grexit mean for the rest of the world? First, it likely means a stronger dollar relative to the euro, at least in the near-term, as there will be a flurry of uncertainty given that (1) the Maastricht Treaty didn’t provide any way for a nation to exit the Eurozone and (2) there will be fears that other member nations may try to find wiggle room around their heavy sovereign debt loads, which will give some cause for concern about the future of the Eurozone. Eventually, all that flurry will likely pass as frankly a Eurozone without Greece is stronger than one with it. Holders of Greek debt will be hit hard, which means a lot of European banks, (primary holders of all that debt) are getting even more complicated. However, the Eurozone economy is still struggling, thus the ECB will continue on with its euro-style quantitative easing, which means that over the longer run, the U.S. dollar is likely to continue it bull run.

Just what data is the Fed seeing?

Just what data is the Fed seeing?

Funny-Images-33On Monday March 3rd, the NASDAQ closed above 5,000 for the first time since 2000, while the S&P 500 and the Dow Jones Industrial Average also reached new record highs, which would lead one to think that things are going pretty darn well. According to Chris Verrone of Strategas Research Partners, 70% of US stocks are currently in an uptrend. In comparison, at the NASDAQ’s previous March 2000 peak only 25% of stocks were in an uptrend.

Unfortunately outside of the US, central bankers don’t look like they are feeling quite as rosy as American equity investors. So far in 2015 at least 21 central banks have lowered their key interest rates in an attempt to strengthen their economies. China surprised the markets with a rate cut last weekend, after having early in February made a system-wide cut to bank reserves. India cut its main interest rates just last week for the second time in less than two months followed by Poland, which cut rates March 4th. So much for a growing global economy, and our view is if the guys in the center of it all think the punch bowl needs to be spiked, perhaps we need to look deeper.

Just what data is the Fed seeing?

Last week Janet-I’m-not-tellin-Yellen reported the domestic economy is looking better, not great, but better. We’re wondering just what data she was looking at because so far this week alone we’ve seen the following:

  • Monday we learned that Personal Income rose less than expected, (0.3% vs. expectations of 0.4%) while Personal Spending came in below expectations, (-0.2% vs. expectations of -0.1%) in January. That’s two in a row for spending whiffing it.
  • Markit Manufacturing PMI beat expectations, up from 53.9 to 55.1 vs. expectations of 54.3.
  • ISM manufacturing index fell in February to 52.9 from 53.5, for the fourth consecutive monthly decline
  • ISM non-manufacturing index beat expectations at 56.9 in February vs. 56.5 estimates.
  • Construction spending unexpectedly fell1% in January.
  • Six of the top seven auto manufacturers on Tuesday reported year-over-year sales increases in February, but all fell short of expectations.
  • This morning we learned private-sector job creation for February was below expectations with companies adding 212,000 positions versus expectations of 220,000 while also dropping from the 250,000 in January.
  • U.S. crude oil supplies rose to yet another record high last week, with crude-oil stocks at their highest level since 1982 on a weekly basis. Stockpiles rose by 46,000 barrels during the week versus expectations of a 1.8 million drop; keep in mind we’ve already seen operational oil rigs drop by about 1/3.

Well what about prior reports? From the economic data released during the month of February, forty-two were below expectations, (the aforementioned personal spending, construction spending, factory orders, retail sales, business inventories, housing starts, building permits, industrial production, and capacity utilization) while only six beat expectations, (including nonfarm payrolls, Case-Shiller Home prices and Markit Manufacturing PMI). Kinda makes one wonder exactly what Yellen was looking at let alone feeling good about.

Oh wait, there’s the love! Turns out there is no lack of (at least) self-love in the markets as companies last month announced a record $104.3 billion in planned repurchases, which is the most since TrimTabs Investment Research began tracking the data in 1995 and nearly twice the $55 billion from last year. To put that number in context, buybacks will amount to about $5 billion in purchases every day, which is about 2% of the value of all shares traded on U.S. exchanges, according to Bloomberg, which also estimates that earnings from S&P500 members will decline by at least 3.2% this quarter and next, with full year growth at 2.3% versus 5% in 2014.   With executive pay often linked to share price, it shouldn’t come as a surprise that companies in the S&P 500 spent about 95% of their earnings on repurchases and dividends in 2014… oh did we just say that out loud?

In the bond market, negative bond yields currently account for about $2 trillion of debt issued across Europe. Just this week Germany sold five-year bonds at a negative rate for the first time ever. Why would anyone buy bonds with negative yields? The ECB is set to begin rather large purchases of sovereign bonds in the coming months, which will likely push yields even lower. That could allow a negative yielding bond to actually experience a capital gain as bond prices are pushed lower. The ECBs move is also likely to push the euro even lower against the dollar, and as we discussed at the opening of this piece, central banks around the world are lowering their rates, which devalue their currencies… at least relative to currencies that aren’t lowering rates, which right now is basically the dollar. All this is a surreptitiousness form of monetary tightening, of which we are sure the Fed is well aware.

But what about last Friday’s (March 7th release) February Employment report.  The headline for the jobs report boasted 295,000 jobs being created during February, a big beat relative to the 240,000 jobs economist forecasted. The second headline pointed to a drop in the Unemployment Rate to 5.5%. That got everyone in an excited tizzy that the economy is finally really going strong and oh goody-goody-goody we can’t wait to see the next retail sales report!

As always, it pays to dig a bit deeper.  When we do, we find a lot of people continued to drop out of the labor force in February and that was the real driver behind the drop in the unemployment rate. Tough to argue that the jobs situation is all champagne and roses when lots of people decide it just isn’t worth it.  The chart below says it all – unemployment rate falling right along with those who simply leave the workforce.

umeployment and participation

Additionally, wage growth was once again modest in February with a pittance 0.1% increase. Hours worked during February declined, which could be thanks to the snowy weather and port disruptions – we continue to hear from companies like Macy’s (M), Gap (GPS) and others that both will weigh on growth in the current quarter.  The number of construction jobs created in February fell 40% month-over-month.

Most importantly the quality of jobs created remains problematic as leisure & hospitality was the big winner in February, continuing the trend we’ve been watching for some time as a good portion of the post-crisis job creation has been of lower quality than the jobs that were lost. For example, mining/logging lost 8,000 jobs, (which tend to be higher paying) while retailers (which tend to be lower paying) contributed 32,000 jobs. Makes you think about just how many “Do you have this in a small” jobs it takes to replace one highly skilled mining job. On that note, if the job situation is so rosy, why has personal spending declined for two months in a row?