Superb results from Nike (NKE). Revenue grew by 6.7% including fx headwind and lapping World Cup surge in revenue last year. No fx excuses. NKE is delivering on all fronts. Direct-to-customer, DTC, revenue up 27% constant currency. North America up 14%, no port slow down excuses. Oh and fx hedges are going to add $50mm in other income per quarter for the next 4 quarters! NKE management is performing well. Margins up across the board, and guidance is for 50 bps improvement in gross margin in FY 2016. The only negative is the stock valuation which is elevated, but I still NKE. Management delivers with no excuses.
Financials lead today's rally on the back of a selloff in fixed income related to indications the Greek government may give concessions in debt negotiations. European banks led in the financial sector. Managed care stocks are up on improved & rejected ANTM bid for CI and rumored AET bid for HUM. The S&P pushed up through its HOD after the strong existing home sales report, and treasuries sold-off to their LOD. The USD is mixed, and oil traded down helping airlines stocks to rally. The energy sector is up on the rejected $48B ETE bid for WMB. Semiconductor stocks traded down, possibly on a report AAPL will internally develop touch and display driver integration (TDDI) chips going forward.
May existing home sales beat, +5.1% to 5.35m consensus 5.25m. U.S. inventory of unsold homes at 5.1 months supply. U.S. May median existing home price +7.9% year-over-year at $228.7k. The report noted strength from first time home buyers.
6/18/2015 0 Comments
USD down at 1-month low on Fed dovishness and weaker than expected inflation data. Biotechs leading today's equity rally on analyst upgrades and more M&A speculation. Tech lags on ORCL earnings miss, but semiconductors are performing. Treasury yield curve steepening.
Lots of positive economic data out today. The Philly Fed Survey indicates a pickup in manufacturing activity boosting belief in Q2 GDP growth bounce. Jobless claims & current account deficit both better than expected. The only piece of weak data was the greater than anticipated build in natural gas inventories. Good data and dovish Fed; only Greece could ruin today's rally!
Stopped out on remaining small front end short yesterday. Was wrong on Fed dovishness, seems obvious after the fact. Adding to some health care names. ORCL weighing on tech sector, but may add on semis. Buying large caps with exposure to non-USD sales because of weaker USD today. Believe the strong USD will re-establish itself, but this may take a little time. In the meantime, large caps may report a better Q2 with USD down from Q1.
The Euro started off the day down on Merkel comments about a strong Euro harming reform efforts. WTI down on stronger USD and oversupply concerns. Next week's big scheduled event is the FOMC meeting on Wednesday, June 17. It's a 2-day meeting, so the FOMC will update their growth, inflation and rate forecasts. PPI came out in-line at the core level but slightly above on the top line. Front eurodollars traded down to their LOD after the release, although today's low is a couple bps above yesterday's low following the strong retail sales report. Covered the 10-year note future short yesterday after the 30-year auction. Still short Mar 2016 eurodollars, added yesterday and may add again today if the front end stays weak. Yield curve bull flattened again today. Consumer spending may remain weak; a result of a higher savings rate. Consumer is under-saved for a longer retirement. The House is set to vote on the Trans-Pacific Partnership today which is the biggest trade pact since NAFTA.
Greece headlines hit just before the European close again. Greece is submitting a counter-proposal and meeting creditors Saturday. To think this tiny country moves the currency, bond and stock markets globally is a joke! Greece is better off out of the Euro in my opinion, and its just a matter of time before they get there. All the debt is owned by the IMF and ECB, so there will be no credit contagion problem... just a media circus! Plus this leak sounds like it came from the Greek side, which has no credibility in my mind.
Today is a good day to clean up and hedge some long positions after nice gains over past few days. The S&P remains in this tight trading range. I thought it was going to break to the down side before Wednesday's strong rally. Still like select tech and health care names, but prefer to hold them hedged until the S&P can muscle up some renewed strength. This might not occur until the next earnings season begins after the Independence Day Holiday. With a month-long gap before earnings news flow, covered calls might be an attractive way to hedge longs. Any pre-announcements are likely to occur in the next few weeks before the earnings quiet period, and this may give the shorts the upper-hand near-term.
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The OECD downgrades their 2015 growth outlook for the G20 to 2.8% from 3%. This is largely yesterday's news since the Q1 slowdown has been well advertised. The big question now is the strength of the Q2 pickup in growth. Today's strong retail sales, +1.2%, reaffirms the a strong Q2 pickup scenario. Treasuries rallied after the report. I view this rally mainly as a relief rally with the risk of a large positive retail sales number taken off the table. The retail sales report is consistent with a September Fed hike. The USD strengthened and the treasury yield curve flattened. Utilities led the rally on lower 10-year treasury yields and their domestic focus and limited exposure to a strengthening USD. I don't like utilities because as treasury yields increase, they loose their yield support and at lofty valuations, there is no valuation support. WTI down today on the stronger USD and continued high OPEC supply (31mbpd); although the IEA cited increasing demand.
The Athens Stock Exchange FTSE Bank Index rallied 16+% today. Someone is bullish on the Greek bailout! The broader Greek stock market up 8.2%. The leaders of Germany, France and Greece agreed to continue talks with "high intensity". This doesn't sound like much progress to me. The Greexit is inconsequential to the market in my opinion anyway. It makes sense for the Greek stock market to react, but the S&P?... I don't think so. Although I don't think the market should react to Greek headlines, I know there will be some reaction until the market's attention snaps to the next headline and Greece is forgotten again. One hour before the European market close (Greek market closed already), our daily Greek headline came out: "IMF leaves talks due to lack of progress." SURPRISE... surprise. Stocks dipped, the 10-year treasury rallied 1 bps and little reaction to the front of the curve where a credit contagion would first manifest itself. yawn...
Good article today about Athanasios Orphanides about Fed policy. Makes you a bit uncomfortable about the current state of monetary policy. Curve flattener today supports the view of early but less Fed hikes.
House set to vote on President Obama's trade bill. These trade negotiations are so important to the global economy, but much of the details of these bills are hammered out behind closed doors and it is difficult to know whether the bill is good or bad and for whom until after the bill is passed and the details are released. Politico has a couple articles on the trade bill: one on Boehner's involvement and one on Pelosi's.
Another interesting article on the basis between swaps in Chicago versus London. Raises some liquidity concerns.
Continued weakness in the USD today was triggered by comments by BoJ Govornor Kuroda to the Japan parliament that the yen is unlikely to weaken further. Then just before the close of the European markets, a bloomberg story broke on encouraging signs in the Greek / German negotiations. Today's equity rally was widespread, and the tech and financial sectors led. Lower than expected crude oil inventories goosed WTI to a $61 handle and it's YTD high. U.S. Treasuries hit their YTD high yield.
Tomorrow's retail sales number will be an important barometer on the assumed Q2 growth pickup.
Stocks might benefit from 2016 election when several policy issues may break the political log jam: immigration, trade, infrastructure and tax reform. (This might be wishful thinking)
Inflation may surprise to the upside. This is an out-of-consensus view. Monetary policy works with significant lags, and the extraordinarily easy monetary policy of the past 5 years will eventually bump up inflation. Right now the consensus view is inflation will remain subdued from quite some time. Much of the recent global bond selloff was a result of higher inflation numbers and slightly increased inflation expectations.
I believe the neutral Fed Funds rate is currently around 2 - 2.5%, far below the "old" neutral rate of 5% and even far below the Fed's own current view of a 3.5% neutral rate. The Fed is likely to hike at the September meeting because inflation has bottomed, and the longer the Fed waits to lift-off, the more likely the Fed might be forced to tighten more quickly and throw the economy into recession.
The USD should benefit from the Fed's tighter monetary policy, particularly because the ECB and BOJ are still in easing mode. This is the consensus view, and today is a good example of why consensus trades sometimes don't work. The pace of the USD rally should decrease to around 5% per annum from double digits the past 2 years. Currency movements tend to occur in decade long cycles, so I would expect the USD to restrengthen as long as the U.S. economy stays strong.
Not clear how to add up today's market action. My take is the market thinks the pickup in growth is a head fake. The weak dollar and treasury rally indicate the market is not convinced the economy is strong enough for Fed tightening. The weak stock market selloff and the rotation out of cyclical sectors into telecom and staples indicates the market is not bulled up on economic growth.
In my opinion, the pickup in growth is robust, and the economy is strong and ready for Fed hikes. Thursday retail sales number will settle this debate on the pickup in growth. If retail sales have a strong rebound from April's disappointment, then the growth pickup is intact. If retail sales disappoints again, then the stock market may be in a real pickle. Today's market action is quite a disappointment after Friday's strong NFP.
6/5/2015 0 Comments
Today's strong NFP number should reassure investors that the Q2 pickup in growth is well underway. The firm job market should allow the Fed to hike rates in September and the USD to remain well supported. I like Chipotle (CMG) after this strong jobs number on a stronger consumer, limited exposure to a strengthening USD, and WTI likely to remain below $60.
After reporting Q1, Chipotle moved down from the high $600's to the low $600's. I like Chipotle's non-GMO and 68 healthy ingredient strategy and believe this differentiation allows Chipotle to maintain above average same store sales growth, margins and pricing. Chipotle only uses 68 ingredients and no artificial ingredients and has a new ad campaign coming out to emphasis this advantage. Chipotle opened 600 new restaurants in the past 3 years, 49 in Q1. Chipotle plans to open 190 - 205 new restaurants in 2015 and currently operates 1,831 restaurants. Chipotle reported comparable restaurant sales growth of 10.4% in Q1. Chipotle mentioned sales could have been 100 - 200 bps higher with better weather and a stable supply of carnitas. Chipotle expects carnitas to return to all restaurants in Q3, and estimates a 200 bps increase in sales. Restaurant levels margins increased 160 bps in Q1. Chipotle raised prices by 6.1% last year, and this benefit to comparable restaurant sales will roll off in the coming quarters. One of the main reasons the stock was hit after reporting Q1 was the guidance of low single digit comp growth in Q2. Unfortunately, this quality operator does not come cheap. CMG is currently trading at 33x forward free cash flow and 30x forward earnings. Although the stock is richly valued, 21% long-term growth in earnings makes the stock much more attractive. Given a strengthening consumer and limited exposure to a stronger USD, Chipotle is positioned to have a strong Q2. Chipotle is attractive after guiding down and reducing expectations. The lower bar and a price increase by Q3 should propel the stock higher.
Michael Grove, CFA