Is That Bell a-Tolling?

From: Derek Hillen
Sent: Thursday, December 15, 2011 10:38 AM

To: Derek Hillen
Subject: Is That Bell a-Tolling?

“Economics is a very difficult subject.”  - Ben Bernanke

Even the thickest journalists are realizing that the “deal” hashed out at Europe’s “Save the Euro Summit” is a farce. Merkel is waving around a 20 year roadmap but the car is out of gas. And it’s starting to rain, heavily. More fantasy stories being spun out of thin air are easily identified with headlines like, “Emerging Markets – Growth Engines for the Global Economy.” Ahem, no. The evidence is conclusive; China and India and Brazil are dependent on global demand. They can’t go it alone. Or as John Donne, probably thinking about something else, put it:

   No man is an island entire of itself…

  If a clod be washed away by the sea, Europe is the less…

The “clods” here refer not to the politicians as you may think but are Greece and all her bad neighbors, of course.

    Any man’s death diminishes me,

    Because I am involved in mankind

So, when the southern Europeans are kicked out the door into the rainstorm, we’ll get wet too.

    And therefore never send to know for whom the bell tolls;

     It tolls for thee

Decoupling – this ain’t it.


This means, of course, global consumers will more and more focus on “needs” rather than “wants,” perhaps causing the recent global sell-off in high end luxury stocks. The shine has come off market leader Tiffany (TIF US); down 20% since early November. LVMH (MC FP) is off 16% and Hengdeli (3389 HK) has unwound 35% over the same period. So why pay up for a company like Chow Tai Fook (1929 HK) today? A deal that barely got done and which was priced at the low end of the range, CTF is still expensive at 14.9X PE. Mirae is one of the few houses not involved in the deal and we came out against it in a note dated 29 November (attached). The analyst, Selina Sia, maintains CTF’s vertically integrated model has weighed down working capital compared to Luk Fook and Chow Sang Sang (116 HK) and despite having 1500 outlets in HK and China, economies of scale don’t seem to have been reached. The man behind the deal, Dr. Cheng Yu-tung is a wily trader: look no further than his latest deal where he acquired 3.44% of Ping An Insurance (2318 HK) for US$2.5 bn in March to offset an equally large short position in the stock. The 4th richest man in Hong Kong with a net worth of US$9 bn and Honorary Consul for the Kingdom of Bhutan (true!), Dr. Cheng is a very canny operator and if he’s selling, I’m not buying. He may have overlooked one thing however, especially in a city fascinated with numerology, the listing code for Chow Tai Fook is supposed to have been chosen because it was the year the company was founded. To me, however, the number “1929” has a completely different connotation…. Stay away.


The WSJ reported that Ben Bernanke just refinanced his house, and for the second time. He apparently owes $672,000 on an $850,000 home in the Washington, DC area. That gives him only 21% equity. The Bernanke just turned 58 years old this week (December 13th – same birthday as hard rocker and right wing nut case Ted Nugent), and if Ben refi-ed a 30 year fixed mortgage to get those Fed-induced low, low rates, he isn’t planning to pay off his home until he’s 88 years old. This tells me our Fed Chairman isn’t afraid of debt…


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA



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