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Brexit: What You Need to Know


Well, they did it. British voters decided to “declare their independence” from the European Union. But before we start talking in grand terms about self determination, there are some points to keep in mind. This is not Britain’s “July 4, 1776 moment.” This was a non-binding referendum that will require multiple years of negotiations between The UK and Brussels. But before those negotiations even start, there will likely be months of internal discussions in Whitehall to figure out what comes next. Here is how I see it playing out:

  • At some point in the next three months, Britain will formally invoke Article 50, which will begin the exit negotiations. Once invoked, this process should take two years.
  • At this point, Britain’s access to the European market becomes ambiguous. Nothing will officially change until the exit is complete. If Britain were to negotiate a trade deal similar to what the Swiss enjoy, that is — at least in theory — an entirely separate set of negotiations that cannot even formally start until after the exit arrangements have been made. Of course, this is Europe, where all treaties seem to be flexible and open to interpretation.
  • The EU will probably stop short of brutally punishing the UK for leaving as doing so would hurt the EU just as badly. No one wants to see the European nationals working in London’s banks to get booted out, and no one wants to see British expatriates in Europe sent packing.

Bottom line, no one really knows what this will look like, and there promises to be a lot of muddle and a lot of making up the rules as we go.

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Dish Network Just Launched the Next Phase of the Streaming Revolution

Dish Network (DISH) just launched the next phase of the streaming revolution. From the New York Times:

Dish Network Unveils Web TV Service to Rival Cable (and It Has ESPN)

Dish Network, the satellite provider, is trying to lure younger viewers back to paying for television with the start of a web-based offering that includes [Disney’s (DIS)] ESPN and a number of other popular networks for $20 a month, about a fifth the cost of the average household bill for cable and satellite service.

Announced at the Consumer Electronics Show in Las Vegas on Monday, the new service is called Sling TV, and provides live and on-demand television delivered via an Internet connection to television sets, computers and mobile devices…

Dish executives said the new service would not cannibalize the company’s current business because its current offerings do not appeal to Sling TV’s target audience of 18- to 35-year-olds…

The service also requires no long-term contract, no equipment, no credit check and no scheduled installation.

I’ve complained for a long time that cost–while a factor–was not my biggest reason for cutting the cord. It was the clunkiness of the cable box. It is absurd that Roku can deliver content via a box the size of a hockey puck–and do so elegantly–why most cable and satellite boxes are the size of a large hardback novel and require a maddeningly complicated remote control, not to mention a time-consuming installation appointment. And if anything goes wrong, you grow old and die waiting for someone to answer to phone.

The one thing I missed was sports programming. And now even this is available, for $20 per month, whenever I want it.

Kudos to Dish. Netflix (NFLX) started the streaming revolution, and the major broadcast networks furthered it with Hulu. Now Dish is taking the revolution to the next stage.

¡Viva la revolucion!

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.


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What’s Holding Back the Retail Sector?

Behind the Numbers had some interesting comments on the retail sector in this week’s Thursday Thoughts:

Tuesday’s front page article in the WSJ did a nice job explaining how rising costs and shifting spending habits are stifling the consumer’s discretionary shopping. While such a premise may seem suspect in an environment of low inflation and ultra-low interest rates, consumers are funneling much more money to a few specific, often fixed cost items, than they were just a few years ago. These higher fixed expenses appear to be limiting Americans’ ability to purchase discretionary goods. [Emphasis mine]

Although the employment situation has improved markedly from the financial crisis, progress has been slow and wage growth has been particularly disappointing. Meanwhile, the WSJ found that health care spending by middle income Americans grew by 24% between 2007 and 2013. Another area sapping consumer finances is internet service. The middle 60% of consumers (by income) has ramped the amount they spend to access the web by 80% over the last half-decade. Spending on cable and satellite TV is up 24% for this group. While smart phones may have made life more convenient for Americans, the middle 60% has seen their cell phone spending jump by 50%.

Charles here. I expect the increased on cable and satellite spending to go into reverse soon. Consumers are increasingly pushing back against rising cable bills, and HBO just fired a major warning shot to the industry with its announcement that it would be selling directly to consumers via its streaming service starting next year. That entire business model is on the verge of unravelling, but that is a longer conversation for another day.

Getting back to discretionary spending, lower electric utility and gas bills from falling energy prices also free up a modest amount of cash, though we’re talking about $100-$200 per family per month at most. Meanwhile, the overall picture looks terrible. As Behind the Numbers continues,

The figures are based on surveys of 14,000 households who kept spending diaries. The study was designed to examine the spending habits of the middle 60% of the population based on income. Total spending by the group rose by 2.3% over the period while incomes rose less than 0.5%. Inflation rose 12% point to point. From these figures alone one would surmise consumers are increasingly forced into setting priorities and losing the ability to make discretionary purchases.

As an example of this lack of discretion, the higher fixed costs resulted in the households examined spending 26.5% less on “household textiles” which includes bed and bath linens. Even spending on care for the children and elderly fell 25% as Americans figured out a way to work from home or make other arrangements.

This sort of behavior sounds like a major headwind for retailers, not only those selling discretionary goods, but also those, like Walmart (WMT), that cater to the financially strapped. Walmart’s struggles are well known as it reported negative same store sales in its last fiscal year and recently posted its first positive comparison in seven quarters.

Are online sales the answer? Doubtful. Amazon (AMZN), though a fast revenue grower, has never really generated much in the way of profits. And online sales are arguably a profit killer for traditional retailers. As Behind the Numbers continues,

While the struggles to maintain traffic no doubt reflect increasing online sales, simply moving sales from a physical store to a warehouse is no guarantee of margin improvement. Some experts even argue that shipping, handling and returns can actually make web business less profitable than brick and mortar retailing. Kohl’s, for example, says its online business is half as profitable as its store business. Further, as fewer customers visit a company’s stores, per unit fixed costs rise on that portion of sales. This looks like an industry where it will be increasingly tough to pick long term winners.

I’ve been investing fairly heavily in the retail sector, particularly in serial dividend growers like Walmart, Target (TGT) and Home Depot (HD). As a group, the sector was cheap and, until recently, out of favor with investors, making it a solid contrarian value play. The bargains are getting harder to find, however, and I agree with Behind the Numbers when they say that picking winners will be tough.

In a tough overall retail environment–and one in which U.S. stocks are broadly overvalued by all traditional metrics–my advice is to forget trying to pick the next trendy retail stock. Instead, stick with shareholder friendly serial dividend raisers and share repurchasers. Slow and steady wins the race.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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Black Friday 2014: What Are Retailers Expecting?

The holiday shopping season seems to start a little earlier every year. Given that several national chains–among them heavyweights like Walmart (WMT) and Target (TGT)–are opening their doors while the sun is still up on Thanksgiving Day, I’m beginning to wonder if Black Friday sales will be much of a meaningful indicator in the years ahead.

At any rate, while the holiday shopping season is coming a little earlier for shoppers this year, the retailers have been planning for months. According to research firm Panjiva, most shipments for toys and merchandise to be sold during the holiday season arrive in U.S. ports during the months of August to October. So, in taking a look at that data, we can get a pretty good idea of what the major retailers are expecting this year.

According to Panjiva, total shipments of goods coming into U.S. ports from August through October are up five percent from last year. Shipments of toys are up three percent. Those are not blockbuster numbers by any stretch, but they do show that retailers are expecting improvement over last year. Given Wall Street’s recent enthusiasm for consumer discretionary and retail stocks, investors seem to agree.

So, the data in aggregate looks decent. Let’s drill down and see what exactly it is that retailers expect their shoppers to buy this year.

Puppies and Dolls Rule This Year’s List of “It” Toys

From Panjiva’s November 24, 2014 press release:

Panjiva analyzed shipment trends of various buzzed-about toys in 2014 and found that, based on their buying behaviors, retailers are expecting consumers will spend sizably on puppies and dogs this holiday shopping season. With 681 shipments from August through October, merchandise from Paw Patrol, a preschool-aged TV series starring a pack of puppies, is among the top new toys on this year’s list. The robotic, interactive dog Zoomer is also a toy retailers are betting big on, with 417 shipments—a nearly 300 percent increase over the toy’s 2013 holiday season shipments.

Retailers may be hedging their bets on the aforementioned and other newer toys by also stocking shelves with perennial favorites—especially dolls. Shipments of [Mattel’s (MAT)] Barbie continue to be among the top overall toys every year. America’s favorite fashion doll experienced 3,000 shipments this year, marking a 32 percent increase over last year… Doc McStuffins, Monster High and Sofia the First are among the other dolls retailers appear to be stocking on shelves, with 901, 765 and 663 shipments, respectively.

All of these items—along with others such as DohVinci, Little Live Pets, Elmo, and Nerf toys—approached or surpassed the 300 shipment mark, which has historically indicated strong performance and wide availability on store shelves.


Panjiva didn’t report specifically on toys from Disney’s (DIS) Frozen in their press release, though a representative indicated that data for expected Frozen toy sales was expansive enough to warrant its own report to be released next week. Other market studies have Frozen toys and merchandise ranked very high. A trip to the Disney store would certainly confirm this!

Want a little bit of data to help keep your kids behaving this December? Panjiva reports that shipments of coal into the U.S. from August through October are up two percent over 2013, suggesting America’s children might have been a little naughtier this year.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Ignore the Jobs Report; The Fed Won’t Be Tightening Any Time Soon

The jobs report came in better than expected today, leading the usual barrage of speculation that the Fed will be tightening sooner rather than later.

Guess what?  Not gonna happen.

I try to avoid Fed bashing.  There is really nothing worse than a Monday-morning quarterback, and in any event, complaining about the Fed’s policies is counterproductive.   It’s a distracting waste of time.

That doesn’t mean that I support Yellen & Company, mind you. I just try to keep my emotions out of the mix when handicapping the Fed’s next move.

The general consensus seems to be that the Fed will aggressively start to raise rates starting late in the first quarter of next year, and the Fed itself seems to be forecasting an aggressive timeline for hikes. By the end of 2017, the Fed’s policy-setting committee expects the fed funds rate to be 3.75%.

That seems awfully aggressive to me.  Assuming quarter-point rate hikes, the Fed would have to raise rates at 15 consecutive meetings.  If they start in March of 2015, they could theoretically hit that number by the first quarter of 2017.  But the bond market seems to be telling a different story if you look at the spread between traditional Treasury yields and inflation-protected Treasury (or TIPS) yields. The market is pricing in annual inflation of just 1.9% over the next ten years.

I don’t see the ten-year Treasury yielding more than 3.75% by 2017, particularly with rates as low as they are across Europe and Japan.  That means that the Fed would be inverting the yield curve (raising short-term rates above long-term rates), which is generally a leading indicator of a recession.

We probably will have a recession sometime in the next two years (see October Portfolio Outlook) as part of the normal ebb and flow of the economy.  But I don’t think the Fed is reckless enough to force one unless inflation gets out of control…and again, the bond market is telling us that that isn’t happening any time soon.

But here’s the real trump card and a major reason why I believe the Fed will remain dovish for a lot longer than most Fed watchers expect: The hawks are retiring.


(Thomson Reuters created the graphic; click here to visit the original.)

Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser—two of the three most hawkish governors—will be stepping down in 2015 and will most likely be replaced by more dovish appointees by President Obama.  That will leave Jeffrey Lacker as the last of the reliable hawks.

Bottom line: The Fed will not be tilting in a more hawkish direction any time soon.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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