Tale of Two Cities

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The market had a decent bounce yesterday and it looks like we are building a consolidation for a broader support in here. We could be in for some chop in here as we build consolidation before we get a solid rebound back to the previous high or break-down to new lows. The longer we can build some volume at consolidated prices, without any economic disruption, the better the chance we get a good push back up to the highs.


Tale of Two Cities

In the Charles Dickens novel, Tale of Two Cities reflects the demoralization of the French and English lower class vs. the wealthy in the years preceding the French Revolution. The famous opening sentence has stuck with me since high school, “It was the best of times, it was the worst of times…” The book resents today in both the economic data as well as the class warfare perpetrated by the administration. What added fuel to the fire was President Obama’s interview with the Economist, in which he blasted the CEOs, companies, and wealthy. They should stop complaining and he doesn’t care about them. However, there complaints remain legitimate, the higher taxes, more regulations, and burdensome healthcare programs has hindered company growth and contracted margins.


Courtesy of wikipedia

We can’t forget that jobs are a byproduct of a successful business. Listening to Obama, one would think that a business’s sole purpose is job creation. This is a distinct difference in ideology, whereas the view of Obama is one of collectivism. Perhaps he is just playing to the populist in this modern day story of the tale of two cities as we head into the mid-terms. However that type of talk only divides a nation, rather than uniting.

For all the talk about a huge rebound in the second quarter and supposedly demonstrated by the rebound in the GDP, the top-line revenue /sales domestically and earnings are not supporting that hypothesis. It’s important to remember the biggest injection into the GDP, 1.66% points, came from inventory loading. This is important because we can’t automatically assume that strong inventory loading equates to strong sales. Yet, there is good news out there. The emerging markets continue to see strong growth and continue to be the fastest and largest growth in the S&P 500 top-line revenue and sales. Additionally, luxury good makers continue to show strong sales. So if we were to extrapolate from earnings the economic picture, we see two things. First, strong growth continues to be generated in the fast growing emerging markets and companies continue to move inventory, manufacturing, and focus to there. Domestically the strong growth continues to come from the higher income and wealth class. Second, earnings, revenue, and top-line sales from low-middle class retailer’s remains stagnant and in some cases contracting. It is clearly a tale of two cities.


Luxury Brands


Courtesy of wikipedia

Coach (COH) reported interesting earnings. While the net sales fell 7%, mainly from the West (US/Europe), sales and revenue continued to grow strongly in the emerging markets, namely China. The story of luxury goods continues to expand where we see the fastest growing incomes and growth. China is one of the fastest growing place for millionaires and billionaires.


Courtesy of wikipedia

Michael Kors (KORS) reported topline sales and revenue that grew both in Europe and Asia, but in the U.S. sales growth contracted for significantly for the second straight quarter. Their guidance and concern for contracting growth in North America did bring concerns and pushed the stock lower.

The theme among the luxury goods makers remains the same across the board, while they are still seeing growth in the West; it is not nearly as robust as the emerging market growth in both sales and revenue. However, it is one of the few sectors that continue to see growth in the West, as the low-end and bulk retailers struggle. Perhaps a confirmation of the West living with two economies, the broad economy of weakness and stagnation from the lower-middle class and increase in poverty vs. the upper middle class and higher income.



Courtesy of wikipedia

Target (TGT) cut its second quarter earnings estimates. While they did sight the data breach as being one cause, the other cause was both a combination punch of higher costs (inflation) coupled with the need to drive bigger discounts to boost sales competing with the low-cost “dollar” stores and bulk stores. Same store sales were flat and in some areas contracted. For a company reliant on the middle class and lower end consumer, it continues to suffer. Competition to drive sales to the lower income means heavy discounts in an inflationary environment is squeezing the margins. The company needs to drive higher sales to make-up for a contraction in margins, flat sales is not helping.

Target’s warning is just more anecdotal evidence that the nation faces a divide, which only continues to widen. Business success, small and large, exists in only in a healthy economic environment. Rules, regulations, taxes, and incentives create an environment in which businesses are created, expand, and grow. The opposite view, similar to President Obama’s, is one of punitive actions that include fines, taxes, more regulations, and general blame.

We have seen companies seek healthier and more welcoming environments; one only has to look at off-shoring, tax-inversions, mergers, and new manufacturing. The results of this is seen in the top-line revenue and sales growth in the S&P 500 which continues to come from abroad, while domestic stagnation has become the norm.


Race for Africa

I applaud President Obama’s African Summit as I have mentioned Africa is the China of the 1970s in which we will see the fastest growth of low cost manufacturing and commodities. However, what has already been a key discussion point is U.S. governance as part of any deals. It’s not just about trade, but about spreading OUR view of democracy. The BRICs already have huge growth in Africa, they exclude governance issues as their agreements and investments are about trade and manufacturing, not about changing their government and bending them to THEIR view.

While I am a champion of liberty, the Constitution, and the basis of law of our nation, I am also opposed to imposing it on others and using it as a negotiating standpoint in trade deals. One significant problem in imposing our ideology on other nations is that we are fundamentally a Christian nation. Certainly we have a separation of Church and State, but many of our beliefs and values are a basis of our laws. Regardless if we (as individuals) are Christain or not, the world sees us as a Christian nation. We have seen how intervention in the Middle East, a predominately Islamic region has done for U.S. relations and perception around the world, not including the lives lost and the economic expense. Ironically, a nation that has only trading agreements with the Middle East and avoids mixing trade with governance ideology, which includes intervention, has taken them off the Jihad Radar.

How will Africa fair with U.S. trade agreements if they are married with governance, ideology, and intervention. It’s not solely about religion and faith, a big part of it is also cultural. No one liked English and before that Spanish Imperialism, they were viewed as “occupiers” and “oppressors”, I can’t help but think the peoples of the Middle East thing think the same of US today. We know how the Spanish and English Imperialism ended, are we following in their footsteps? Policing the world and trying to bend the world to your ideology and belief is a costly task in both lives and economics. Let’s hope this African Summit is not marred in US government ideology and intervention. Unfortunately in an interview this morning with Obama’s Commerce Secretary, a key discussion point was “governance”.


Support & Resistance

INDU 16,500 – 16,600
I would look at this range as the consolidation zone in which we can have some initial volatility and then it compresses before we see a break and trend created. We could see dips to 16,400 during this consolidation, but they should be just intraday.

NDX 3900
There is some volatility around this level, but I suspect we will see some consolidation in here if we avoid any economic shocks.

SPX 1925 – 1940 Much like the Dow Jones this is a consolidation area. We have seen the VIX break down into the 15 range. If we continue to consolidate in here we should see the VIX to fall into the low 14 and perhaps even 13 range.

RUT 1110 – 1125 Watch the Russell more closely this index needs to see some support and rally up to the 1140 range to confirm flow back into equities. A solid close above 1140 would bring confirmation that we could see a stronger bounce in the narrower indices back up to previous highs.


Summer Doldrums

The big data is behind us, the GDP, Labor Report, and last FOMC meeting until September. That means the market will train its focus back on outside geopolitical and economic volatility. Fundamentals are domestically showing weak growth, but emerging markets continue to help boost top-line revenue and sales.

Any surprises to the market will come from outside at this point. Domestically for economic data we are in a Summer End quiet period until September. I suspect we bounce because bonds remain unattractive; we remain in a Fed Fueled equity market. Until that changes or until an outside economic event, I don’t expect any massive corrections.

Sure fundamentals domestically and geopolitical events should inject volatility, but so far the market has proven resilient and has ignored much of it. Expect daily jolts of volatility, but nothing definitive.

Yet, remain vigilant and hedge positions to lock in gains. While I think we might not see any significant increase in sustainable volatility until later in the year, that doesn’t mean it can’t happen.

One Response to “Tale of Two Cities”

  1. [...] Market Previews we have focused on fundamental domestic economic issues. On August 5th, the Preview Tale of Two Cities focused on the difference domestically between the Luxury and general Retail. August 8th, was [...]