May 27th 2014
Conference Call Supplement
Economic Overview
Economic Overview
• Liquidity responsible for the majority of the
market rally & most economies around globe are
still accommodative
• Slowdown in Asia, and now Europe. Although
Europe is still better than US. China is slowing.
• Leading US indicators are neutral
• Housing improvement is tepid, underemployment,
student debt, stagnant wages and lower job quality
will affect consumption
• Indicators indicative of benign growth
• We believe we are in a reverse stagflationary
environment
Fundamental Review
• Corporate fundamentals are not robust
• Revenue growth & margins ex-buybacks are flat or
falling in many sectors
• Watch for share buybacks impact on the market
with record insider selling
• Certain sectors look better than others – defensive,
energy – those with pricing power
• Pricing power in taxes, insurance, necessities,
energy, utilities, health care, food
Financial/Risk Review
• CDS are not elevated
• Spreads still look narrow
• Government debt is too high globally,
mostly developed countries
• Large concern is bad debt in EE’s? We do
not think this will be an issue
• Evidence that risk is back on in the
derivative space
Technical Review
• The markets are showing some chinks in
the armor. Remember, this moves 6
months in advance of real economic
issues
• Small cap, mid cap are underperforming
• The amount of new highs versus new
lows is declining
Positioning
• Large Cap, European Stocks, Necessities
• Generally stocks that do well toward the
latter part of a business cycle
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Economic Overview
Long Term Views
Credit Cycle is Changing
• Days of cheap money is over
• Ripple effect throughout economy, most profoundly for small businesses
• Believe it is a slow turn in rates to the upside
US Middle Class Standard of Living is Declining
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Intentional wealth transfer, example portion of healthcare
Structural employment issues
Impact of globalization on job quality and wages
Inflation for necessities will rise
Tax increases
Aging demographics
Huge burden of debt on college grads
Emerging Economies are the Lead Long-Term Leaders
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Highest growth markets, they make up 50% of global GDP today, up from 22% in 2000
Dictate Commodity Prices
Demographics
Better debt/deficit situation vs. developed markets
Long-term dollar concerns
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Long-term impact of QE
Currency wars
Reserve currency status in question
Real asset exposure (farmland, commodities) is prudent
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Two Areas of Focus Today
• The consumer (70%
of our economy)
– Wages & employment
– Home equity
– Inflation of necessities,
healthcare, food, fuel
– Demographics
– Retail sales = concern
• The $ as a Reserve
Currency
– New Bilateral
agreements for swaps
– Geopolitical issues
– Chart technical
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Employment, not what it seems
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Prices of Necessities
The consumer price index (CPI) for U.S. meat is up almost 10 percent so far in
2014. Prices, even after adjusting for inflation, are at record highs.
The USDA estimated the overall U.S. food price inflation for 2014, including food
bought at grocery stores and food bought at restaurants, would rise by 2.5 percent
to 3.5 percent in 2014.
THEY ARE WRONG
"The food-at-home CPI has already increased more in the first four months
of 2014 then it did in all of 2013," USDA noted. At-home spending accounts for
about 60 percent of the U.S. food CPI.
OUR CONCERN:
We believe the price of necessities are going higher. We are in stagflation.
AND:
The quality of the food, pink slime (for example) is on the rise and therefore they
will claim prices have come down.
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WTI Crude Oil
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Reverse Stagflation?
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Housing (ZeroHedge)
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Wealth Affect
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PEAK CONSUMER
From; ZeroHEDGE
Retail store results for the 1st quarter of 2014 have been rolling in over the last week. It seems the hideous government
reported retail sales results over the last six months are being confirmed by the dying bricks and mortar mega-chains. In
case you missed the corporate mainstream media not reporting the facts and doing their usual positive spin, here are the
absolutely dreadful headlines:
• Wal-Mart Profit Plunges By $220 Million as US Store Traffic Declines by 1.4%
• Target Profit Plunges by $80 Million, 16% Lower Than 2013, as Store Traffic Declines by 2.3%
• Sears Loses $358 Million in First Quarter as Comparable Store Sales at Sears Plunge by 7.8% and Sales at Kmart
Plunge by 5.1%
• JC Penney Thrilled With Loss of Only $358 Million For the Quarter
• Kohl’s Operating Income Plunges by 17% as Comparable Sales Decline by 3.4%
• Costco Profit Declines by $84 Million as Comp Store Sales Only Increase by 2%
• Staples Profit Plunges by 44% as Sales Collapse and Closing Hundreds of Stores
• Gap Income Drops 22% as Same Store Sales Fall
• American Eagle Profits Tumble 86%, Will Close 150 Stores
• Aeropostale Losses $77 Million as Sales Collapse by 12%
• Best Buy Sales Decline by $300 Million as Margins Decline and Comparable Store Sales Decline by 1.3%
• Macy’s Profit Flat as Comparable Store Sales decline by 1.4%
• Dollar General Profit Plummets by 40% as Comp Store Sales Decline by 3.8%
• Urban Outfitters Earnings Collapse by 20% as Sales Stagnate
• McDonalds Earnings Fall by $66 Million as US Comp Sales Fall by 1.7%
• Darden Profit Collapses by 30% as Same Restaurant Sales Plunge by 5.6% and Company Selling Red Lobster
• TJX Misses Earnings Expectations as Sales & Earnings Flat
• Dick’s Misses Earnings Expectations as Golf Store Sales Plummet
• Home Depot Misses Earnings Expectations as Customer Traffic Only Rises by 2.2%
• Lowes Misses Earnings Expectations as Customer Traffic was Flat
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The Real Earnings Story
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Debt is still an issue.
this and money printing = reverse stagflation
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