© Thunder Road Report - 1 August 2009
the boat and the mist is even thicker. So much so, that “Chief” wants to stop because he can’t see wherehe’s going. Willard pulls rank and on they go.In the last Thunder Road, I argued that the heavy-handed intervention of politicians and central bankerswas pushing us into a “distorted Kondratieff Winter”. What I meant was that in the normal course of
events, we would experience a deationary depression for 10-15 years while debt and excess capacity werepurged. However, the intervention, i.e. offsetting inationary policies, are so extreme that the evolution of
events will be far more complex this time, with more twists and turns along the way. Making money is very
difcult at the moment and even the “Trader Wizard”, Bill Cara, is nding the going so tough he is heavily
in cash and watching from the sidelines:
“the risks are just too great. When you see a cash ow stable Microsoft drop -10% in a day or a McDonald’s-5%, how can anybody commit 100% of their capital to such a market environment. I know I cannot.”
I have to invest more aggressively and I’ve put some of the cash I had on the sidelines back into the marketboth a bit before and after the Dow Theory. buy signal which was triggered on 23 July 2009 when boththe Dow Jones and Dow Jones Transportation Index broke through their previous peaks (on the 12 and 11June 2009, respectively) in the current rally. That’s not because I trust this rally, rather I can’t afford to be
left out of a rising market to any signicant degree. As well as adding to my heavily overweight positionsin gold/silver and technology stocks, I bought shares in luxury goods group, LVMH (albeit with a 6% stoploss), after it announced its rst half 2009 results last week.
Why a trade in luxury goods? It struck me that a combination of the recent return of the “bonus culture”
to parts of the nancial sector, the possibility of a bubble developing in China (discussed further below)
and the likely response of the ultra-rich to the recent stock market rally all bode well for this sector in the
current quarter. At the same time, Japan, which is the biggest market for luxury goods (> 20% of the worldmarket), should benet from recovery in China, its largest export market. Japanese department store sales
have seen double-digit declines in every month bar one since last December and surely some improvementis due?LVMH.is the world’s largest luxury goods play with major brands such as Louis Vuitton, Moet & Chandon,Hennessy (cognac), Christian Dior, Marc Jacobs, Fendi, Donna Karan, Givenchy, Tag Hauer, etc.The H109results were marginally worse than expected due to margin weakness in Wines & Spirits and Watches & Jewelry – it looked to me like analysts underestimated the operational gearing in these divisions.
Despite the worst recession since the Great Depression, organic sales only declined by 7% as the group
saw market share gains across most of its brands, especially Louis Vuitton. Fashion & Leather Goods, which
accounted for 64% of group operating prot, reported organic sales growth in local currencies of 1% overallwith 18% growth in Asia – a remarkable performance in my opinion.
By the way, according to Vogue UK’s August 2009 issue: “The fashion gods have spoken: this autumn, it’s all about the shoulder.” I read it. “black dominates, along with urban gray. However, indigo tones – from smoky teal to luscious purple – arethe shades that mesmerise.” In the second half of 2009, LVMH’s management is expecting more market share gains due to “numerousproduct launches” and further expansion in emerging markets. LVMH has one of the largest exposures
to emerging markets in the luxury goods sector – 32% of sales are outside the US, Europe and Japan,including 24% in “Asia ex-Japan”. Hennessy is the biggest selling cognac in China. At the same time, LVMHis aggressively cutting costs – down Euro163m in H109, equivalent to 10.6% of H108 operating prot fromrecurring operations. It would be even better if they could do more on inventory management. In PE terms,on c. 17x 2009E and 15x 2010E, the stock is only trading in line with the sector average, excluding the very
highly rated Hermes.