MoneyFitt

20 February 2023

Happy Monday!

US large-cap S&P 500 closed 1.38% DOWN 🔻 Tech-heavy Nasdaq Composite closed 0.58% DOWN 🔻 (US markets will be shut on Monday for Presidents’ Day)
Pan European STOXX Europe 600 closed 0.2% DOWN 🔻
HK’s Hang Seng Index closed 1.28% DOWN 🔻
Japan’s Nikkei 225 closed 0.66% DOWN 🔻

📝 Focus

Birkins Bucking the trend… Hermès rides the luxury pony

📊 In the Markets

Higher for Longer? No! (Yes!!)
What would you pay for Man United?Crypto Clampdown ContinuesUK Cost of Living Crisis continues

📖 MoneyFitt Explains

🎓 The Fed Funds Rate

📝 Focus

Birkins Bucking the trend… Hermès rides the luxury pony

Hermès’ long-standing strategy of high and ever-increasing prices plus strictly controlled product supply (and the resulting rich premium in the after-market) led to a sales increase of an astonishing 23% in the fourth quarter of 2022. Much was driven by huge demand from China and the US, boosted by its massive new Madison Avenue flagship.

It is all the more remarkable given much weaker figures among its luxury peers LVMH, Burberry, Cartier-owner Richemont and especially Gucci-owner Kering, all of which were hit by rising COVID infections in China in the fourth quarter. (Chanel, though privately owned, has chosen to publish annual results since 2018, but has not yet done so. In 2021, Chanel’s revenues were three-quarters HIGHER than Hermès’.)

Full-year profit for 2022 rose 38% to €3.4bn, with the company clocking in industry-high margins (the profits made by the company relative to each dollar of sales.) 

With strong and, importantly, consistent results over the years, the stock has a “premium valuation” relative to its competitors. One common valuation measure (of many) is the “P/E ratio”, or the stock market price per share divided by the earnings per share. Using the last year of earnings, the Hermès historic PER is currently 63x compared to LVMH, Kering (both Paris-listed), Burberry (London) and Prada (HK) at 29x, 20x, 24x and 42x. All these are higher than the broad STOXX Europe 600 index at just 14x.

(Gucci owner Kering had earlier said that its sales were hit by weaker Gucci performance in China on top of the controversy in Western markets over Balenciaga’s advertising campaign featuring children with plush toys in bondage gear. Sales across the luxury group have picked up since the beginning of the year, though. Industry giant LVMH, Europe’s largest company and led by the richest man in the world, raised its annual dividend by 20 per cent after delivering another year of record sales and profits despite a slightly worse fourth quarter thanks to Covid-related struggles in China.)

📊 In the Markets

US stocks continued to trade down right from the Friday open, before bottoming out after lunch and rallying into the close, possibly from traders closing short positions (bets that the market would go down) ahead of the long weekend. (Markets are closed on Monday for Presidents’ Day, the third Monday every February.) 

Still, that made it two down weeks in a row as traders digested economic data showing that the US economy was stronger than expected, and hence interest rate cuts during the year were less likely. In other words, Wall Street is falling in line with the “higher for longer” scenario that the Fed has been saying quite consistently for several months now… but which Wall Street’s Masters of the Universe thought was wrong.

While the blue-chip S&P500 and tech and growth stock-heavy NASDAQ indexes are still down 15% and 25% from the end of 2021, Europe’s broad market STOXX 600 is off only 5% with several indexes hitting all-time highs, such as the UK’s FTSE-100 and France’s CAC-40 just last week. The CAC-40’s performance has been largely driven by luxury titans LVMH, Kering and Hermès, and since overtaking London last year, Paris is the largest stock market in Europe.

Higher for Longer? No! (Yes!!)

US stock and bond markets have been falling… and also falling inline with what the US central bank’s been saying. Since last year, the Federal Reserve has fairly consistently said that interest rates would be “higher for longer” than markets were expecting and that any cut would be unlikely this year.

To illustrate the sharp move over just the last three weeks in expectations for interest rates, we use the CME FedWatch Tool. This shows the probabilities of interest rates as implied by the futures prices on the Federal Funds Rate 🎓, not forecasts by Wall Street economists. (Nerd link here.)

The blue boxes simply chart the highest probabilities in each row (each representing a rate-setting meeting of the Federal Open Markets Committee.) The red-circled rate is the Fed’s target rate at the time of the reading. We lined up the rates to show the shift to the right (higher) and the path projected for the rest of the year. (It was a rather manual process!) 

As we mention from time to time, the Fed itself is far from infallible and actually has access to little data that’s not also available to better-paid private sector economists, but… they do pull the trigger. The old Wall Street adage, though recently ignored, is “Don’t Fight The Fed.” A separate note is that futures traders and equity investors —even in the same bank— seldom interact directly with one another, eyeing the other side with some derision, while suspecting the other knows something they don’t. 

(​​The next meeting of the FOMC, the Fed’s rate-setting committee, takes place on March 22nd. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures price index, or PCE, comes out on Feb. 24. The next CPI report is due on March 14.)

What would you pay for Man United?

The chairman of one of Qatar’s biggest banks and (surely by coincidence) son of a former Qatari PM, has thrown his hat into the ring with a bid for Manchester United. On Friday’s soft deadline, Sheikh Jassim bin Hamad bin Jaber Al Thani announced his intention to acquire “100 per cent of the club” for cash (no debt) with no involvement of either Qatar Sports Investments (QSI, which owns Ligue 1’s Paris St.Germain), or the Qatar Investment Authority (QIA, formerly headed by his dad.)

Meanwhile, local fan man-and-boy and petrochemical billionaire Sir Jim Ratcliffe (owner of Ligue 1’s Nice) confirmed his bid for 69% of the company (exactly what the selling Glazers have) and US hedge fund Elliott Management (former owners of AC Milan) indicated interest in a $MANU financing deal (not a takeover) which may include an equity stake. Despite recent reports, there was no Saudi-backed move for the club, given the conflict of interest with the Saudi ownership of fellow Premier League club Newcastle United.

For what it’s worth, the vocal Manchester United Supporters Trust (MUST) released a statement reiterating “demands” they had previously set out for new owners, but also added thinly-veiled “sporting integrity” (regarding Nice and PSG) to concerns over debt levels (departing Glazers, perhaps Elliott) and the LGBTQ+ rights records of any potential new owners.

Read more about how the current owners, the Glazers, bought the club and loaded it with billions in debt in a “leveraged buyout” eighteen years ago in this MFM from last November.

Crypto Clampdown Continues

The SEC has settled with former Celtics star and NBA Hall of Famer Paul Pierce for US$1.4 million for touting and making misleading statements about a cryptocurrency token in a series of tweets in 2021, not because it has cratered (which it absolutely did), but because he did so without disclosing that he was paid more than $244,000 worth of Emax for doing so. He was also accused of making false and misleading statements about the digital asset. 

The case hinges on the definition of the token as a security, which, in the eyes of the SEC, it is, and follows the October charges against Kim Kardashian for similar violations (she settled for $1.26mn.) There are far stricter disclosure rules for securities than for other items that are advertised, but it is a valid question whether the celebs and their advisors back in 2021 were aware that this was applicable.

Anyway, the peak price of the Emax token on the EthereumMax platform in 2021 was 517 billionths of a $, which was last spotted at about 1 billionth of a $, a 99.8% decline.

UK Cost of Living Crisis continues

UK retail sales unexpectedly bounced up in January after two consecutive months of decline. The City’s Finest was expecting a 0.3% drop in sales compared to December but it came in at 0.5% up. 

Compared to January 2022, the volume of sales was down 5%, while the amount of money actually spent went up 4%, in other words, higher prices over the year meant consumers bought less with more money. (Echoes of the US, where January sales grew a faster than expected at 3%, following a drop the prior two months from front-loaded holiday shopping, such as with Amazon’s 48h Prime Early Access.) 

Meanwhile, inflation in the UK stayed double-digit at 10.1% in January, though down for a third consecutive month and lower than the 10.3% forecast.

📖 MoneyFitt Explains

🎓 Federal Funds Rate (US dollar policy rate)

The federal funds rate is actually a target interest rate range rather than a single number set in stone.

It is set by the US central bank’s FOMC (the Federal Open Markets Committee, which meets 8x a year) for the rate at which commercial banks borrow and lend their extra reserves to one other overnight.

As a result, the Fed Funds rate influences short-term rates on consumer loans and credit cards. Other central banks around the world do the exact same thing (like the UK’s Monetary Policy Committee and Japan’s Policy Board) but when it is the USA and the US Dollar we’re talking about, everyone pays attention!

Note that such target rates can be negative as well as positive, depending on the mandate(s) of the central bank in question, its level of political independence and the current economic picture.