Dimmer Outlook from Macy Sends Retail, Apparel Stocks Tumbling


Dimmer Outlook from Macy Sends Retail, Apparel Stocks Tumbling
Here is the opening of this topical article from Bloomberg:

A glum outlook from Macy’s Inc. renewed concerns about the broader retail industry, contributing to a stock rout for consumer companies such as Wal-Mart Stores Inc., Michael Kors Holdings Ltd. and Ross Stores Inc. on Wednesday.
Macy’s cut its profit forecast for this year and posted first-quarter revenue that missed analysts’ estimates -- a sign that slow foot traffic at shopping malls continues to take a toll on the largest U.S. department-store company.
Shares of Macy’s plunged as much as 14 percent to $31.91 in New York, their worst intraday decline in six months. And it wasn’t alone. Wal-Mart, the largest U.S. retailer, slid as much as 4.6 percent to $65.61. Target Corp. fell as much as 5 percent to $76.01, its biggest intraday drop since November.
Macy’s is spooking investors with the message that consumers just aren’t spending, said Ken Perkins, president of Retail Metrics. And the chain doesn’t see that changing soon.
“It’s beginning to feel like a new world,” Perkins said.
Companies that stock retailers with goods also got hit. Nike Inc. tumbled as much as 4 percent. VF Corp., owner of the North Face, Lee and Wrangler clothing brands, dropped as much as 5.7 percent. Michael Kors, meanwhile, plummeted as much as 13 percent.
Gap Inc., the largest specialty chain focused on apparel, also reported weak results this week. It posted a 7 percent decline in Gap’s same-store sales last quarter. Analysts had predicted a gain of 1.1 percent, according to Retail Metrics.
Gap’s evaporating sales may force the retailer to rely more heavily on real estate deals and other cost-cutting moves to maintain profit, said Fitch Ratings, which cut its long-term issuer default rating to junk status on Wednesday.
The retreat for U.S. retailers takes some of the shine off of what had been a strong year for the stocks. Even with Wednesday’s drop, the group has surged 19 percent from mid-February, when the Standard & Poor’s 500 Index fell to a 22-month low. It’s the sixth-best performer of 24 industry groups in the three months, though much of the rally can be attributed to a 41 percent jump in Amazon.com Inc., which makes up more than a quarter of the retailing index.

David Fuller's view
I am surprised the hammer did not fall sooner because the biggest disruptor in Western retail – Amazon – makes up more than a quarter of the retailing index, according to the article above.
Amazon is not going away so retailers face a tough period ahead.  Nevertheless, successful retailers are very good at reinventing themselves so they will come up with attractive policies which attract the missing buyers.
Meanwhile, value investors will be increasingly attracted by the retail sector’s current underperformance.  Macy’s currently sells at an estimated p/e of 8.69 and yields 4.77%, according to Bloomberg.
This item continues in the Subscriber’s Area and includes an obvious but too often overlooked behavioural technique for evaluating these shares. 

Devastating MORI Poll Shows European People Share British Rage Over EU
Here is the opening of this informative article by Ambrose Evans-Pritchard of The Telegraph:
When David Cameron first announced the UK’s referendum on Europe in 2013, the reaction from EU capitals was disdain. Brexit would be a disastrous error for Britain – perhaps suicidal – but Europe would brush off the effects.
As I reported at the time, Spain's foreign minister José Manuel Garcia-Margallo told us that Brexit would lead to "terrible devastation" of our industries, leaving nothing left but "a few petty bankers" in xenophobic isolation.
"David Cameron must understand he cannot slow the speed of the EU cruiser," came the finger-waving admonition from Madrid.
The penny has since begun to drop that Brexit fall-out might be very serious for them as well.
Yet even as recently as this February the prevailing view was still that the referendum saga was largely a British affair, to do with the idiosyncrasies of an island people, or some such peculiarly British pathology, or to do with the post-imperial hang-ups of the English – an irritating canard that inverts the truth, since those Britons with an imperial reflex often rediscover their natural home in the EU power structures.
This was still the view of the policy elites even after the Schengen fire had been raging for months. There was a strange reluctance to accept what has been obvious for a long time, that comparable feelings of irritation with Brussels have been welling in France, Italy, Holland, Scandinavia, and Germany itself.
They still could not see that the EU had over-reached disastrously, or that it had breached the historical contract with Europe’s nation states, or that broader contagion was a mounting threat to their own interests.

David Fuller's view
I think Europe is more divided today than at any time since the 1970s, not despite the EU’s influence but because of it.  However, I also agree with an earlier comment by Ambrose Evans-Pritchard which I quoted on 28th April:
“You can quarrel with Europe, or you can quarrel with the US, but it is courting fate to quarrel with the whole democratic world at the same time.”
For that reason I am marginally more likely to vote ‘Remain’ in the UK’s referendum on 23rd June, even though I think the EU is in a downward spiral of its own creation.  Meanwhile, the UK can hopefully continue to provide an element of stability and sensible advice, while also fending off any further intrusions on our sovereignty.
(See also: Nation states have been the making of Europe, by Alan Sked for The Telegraph on 9th May 2016.  He is Emeritus Professor of International History at the LSE, and his perspective is interesting.)

What Vegetarian Lions Say About Erdogan Plans for Turkey
Here is the opening of this unsettling report from Bloomberg:

“No one has the right to turn Turkey into a country of lions condemned to a vegetarian diet.”
Confused? In President Recep Tayyip Erdogan’s usage, a lion subsisting on salad is like a country running old software even though it's got strong hardware.

Vegetarian lions and out-of-date software are the same as a shirt that’s too tight, to use another of Erdogan’s recent phrases. These colorful metaphors all boil down to one thing – that thing being the president’s determination to move Turkey away from the parliamentary system that he says has outlived its usefulness.
Since at least his election to the post in August 2014, Erdogan has been seeking to shift Turkey’s center of power to the presidency instead of parliament, expanding the scope of his powers in what had previously been more of a ceremonial role.
That’s why Capital Economics’ Emerging Market Economist William Jackson places the president’s latest turns of phrase on a continuum with other expressions of his might, like the act ofedging out his prime minister that sent markets tumbling last week. The lion quip is an attempt to seize the momentum after Prime Minister Ahmet Davutoglu’s ouster and put constitutional reform back on the agenda.

In an interview with Bloomberg, former presidential adviser Burhan Kuzu revealed that behind the scenes plans for political reform are in full swing. Turkey's ruling party may push for a "mini constitutional change package" that allows Erdogan to assume leadership of the ruling AKP in a transitional step on the way to an enhanced presidential system, he said yesterday.

David Fuller's view
A confident Erdogan is dismantling Turkey’s previous advantage – a healthy democracy since the days of Mustafa Kemal Atatürk, in an often troubled region of the globe.  For ‘Sultan’ Erdogan, democracy represents a tedious restraint on his superior leadership.  His confidence is bolstered by a fawning EU’s dependence on Turkey to take some of the Middle Eastern and North African refugees off their hands, albeit for a considerable price.   

The Markets Now
Please put this date in your diary – Monday 11th July, at London’s East India Club.

David Fuller's view
Iain Little and I will be joined by David Brown who will be introducing a new subject in his presentation.
A new brochure will be available next week.

Brazil Impeachment Vote May Spell Rousseff's Last Day on Job
This article by Raymond Colitt and Anna Edgerton for Bloomberg may be of interest to subscribers. Here is a section:
The scandal and crisis have taken on a quality of endlessness and many here are growing numb to each development.

A decision from Fitch Ratings to downgrade Brazil’s sovereign credit rating yet again was relegated to page 27 of O Globo newspaper. The detention of former Finance Minister Guido Mantega for questioning this week wasn’t even the top story for most papers.

By law, Temer would be in charge for 180 days or until the Senate permanently ousts Rousseff. She is charged with having illegally tapped state banks and taken loans to cover up budget deficits. Most analysts agree it will be very difficult for Rousseff to recover support in the Senate and avert a final ouster, not least because she will no longer have control over discretionary spending for legislators’ public works projects.

Rousseff is expected to remain in the official residence, but the Senate will determine whether she will lose other executive privileges, such as the right to use the presidential plane, or take a cut of her salary.

Temer aides say that as soon as Rousseff is notified of the Senate vote, he will take office and quickly nominate a new cabinet. Former central bank chief Henrique Meirelles is the front-runner to become his finance minister, they said.

While financial markets have rallied this year on the prospect of a more business-friendly Temer taking over, there are also concerns that an ongoing corruption scandal and wide- spread disillusionment with the political establishment could come back to haunt the 75 year-old constitutional lawyer.

A Datafolha poll published last month showed 61 percent of respondents support Rousseff’s removal from office, while Temer fared only slightly better with 58 percent calling for his ouster.

Eoin Treacy's view
In addition to the corruption charges levelled against her Rousseff was also unlucky that her premiership occurred during a lengthy decline in commodity prices. With her ouster the potential for reform is still cloudy considering how much of the political establishment are embroiled in the corruption scandals. As a result the makeup of a new cabinet will have a significant bearing on how well the new administration is received by investors. The fact commodities prices have in all likelihood bottomed should act as a tailwind for the economy and leave some room for manoeuvre as the budget deficit is tackled. 

Email of the day on Chinese commodity trading
Do you have any insights to share regarding reported chaotic futures trading in China. You said markets were likely be volatile going forward but I never imagined this wild ride. As for my personal investments I have consciously sold into recent market rally's while significantly increasing my weighting to cash. I need to maintain a disciplined response to markets otherwise I get stressed.

Eoin Treacy's view
Thank you for a topical question. There is a lot of hot money chasing short-term profits in China. It’s a symptom of a wider problem where there are limited options to invest for yield, a wide spread between the lending and deposit rates and lax to non-existent regulation. The result is that manias tend to occur with uncomfortable regularity. The stock market last year and the commodity markets this year are two examples.

Crop Prices Rally as Report Points to Easing of Glut
This article by Jesse Newman for the Wall Street Journal may be of interest to subscribers. Here is a section:
The Agriculture Department report offered the first official forecast for the new season’s production and consumption around the world.

It said poor weather in South America would contribute to a surge in soybean exports from the U.S. as production in places like Argentina falls off.

“The demand that USDA set forward is incredible,” said Mr. Reilly of the forecast for soybean exports.

The USDA expects U.S. soybean reserves to dwindle to 305 million bushels by August 2017 from an estimated 400 million a year earlier as exports pick up.

Even at their current level, however, soybean prices are about 40% lower than their peak in 2012, and the level of stocks still are comfortable.

Corn futures jumped even though the USDA forecast farmers would harvest a record 14.43 billion bushels this year. The agency’s supply estimates, however, fell short of analysts’ expectations. The USDA projected stockpiles will climb to 2.153 billion bushels by August 2017 from 1.803 billion a year earlier, the largest since the mid-1980s.

The USDA said global corn reserves at the end of the 2016-17 season would total 207 million tons, down from an estimated 207.9 million tons for the current season.

Eoin Treacy's view
A link to the full article is posted in the Subscriber's Area.

The full effects of the El Nino weather phenomenon are now becoming evident in soft commodity pricing despite the fact it has already peaked. Soybeans  completed a six-month base in March and continues to extend the breakout. An increasingly overbought condition is developing but a clear downward dynamic would be required to check momentum.

The Chart Seminar 2016

Eoin Treacy's view
Thank you to everyone who has expressed interest in The Chart Seminar this year. Our plans are to hold a webinar sometime in June and I will share details of this as we firm up how best to conduct it. The timing of the seminar will be catered to where the majority of delegates sign up from but we’ll try to pick a time when the most possible people can tune in live.

We also plan to hold two seminars in physical locations this year. From some subscriber feedback I was thinking of holding one in Los Angeles during the summer and another in London during the fourth quarter. If you would like to express interest in any of our events please message Sarah Barnes at [email protected]

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