MAXIN GLOBAL FUND - USD is a Long / Short Directional hedge Fund incorporated in Luxembourg. It started trading on February,22 2022 and replaces MAXIN ADVISORS' MODEL PORTFOLIO which has been trading since January 1st 2014.
LUXURY BREAK DOWN
On January 17th 2023, we were publishing an Article titled THE BIG SHORT where we highlighted the major headwinds facing the European Luxury Groups and their unsustainable valuations.
Equity investors and analysts being what they are, the good results published by the main luxury groups in January and February gave a new lease of life to the mania in Luxury stocks, taking them to even higher extremes. Bernard Arnault became the richest man on the planet and LVMH became the first European company to exceed a USD 500 Billion market capitalisation.
Our fundamental case was that luxury is a late-cycle industrial sector where excess money splashes into un-necessary goods until recession hits, a time where consumers cut sharply into those luxurious but un-necessary purchases.
As our macro economic research concludes to the unfolding of a significant recession in the US and in Europe in the coming quarters, under the combined weight of high inflation, higher interest rates, lower real estate prices and the credit crunch accelerated by the banking crisis, our expectations was that the revenues of these companies coming from the US and Europe – the bulk of their extraordinary performance of the past couple of years – would start declining soon, and that the economic recovery in China which represents roughly 40 % of their sales would not be sufficient to sustain their revenue and profit growth in the years ahead.
Any analyst taking the time to perform a historical analysis of their business and stock price behaviour over the most recent previous recessions – 2000 and 2008 – could have easily conclude, as we did, that a storm was brewing ahead, probably compounded by the unprecedented extremes in valuations reached in their stock prices due to FOMO and herd instinct.
In the past few weeks, Europe’s luxury stocks have become the European equivalent of the US mega cap technology stocks, a very limited number of stocks keeping the general indexes up while breadth deteriorated significantly, as they became the darlings of retail investors and long only managers looking at the world in the rear mirror.
When LVMH reported its first quarter results on April 12th 2023, a forensic analysis of their figures already revealed two important trends, confirming our thesis, Their sales growth in the US has already stalled, with a sharp deceleration in March after two strong months in January and February, while their March figures were boosted by a non-recurring catch-up in China as consumers emerged from an extended period of lock downs.
Another important indication came from ESTEE LAUDER’s numbers in Asia showing that their Hong Kong sales were dismal despite all the hopes for a sharp recovery in China, confirming our assessment that “being Rich is no longer glorious in China”, contrary to what was the case in the 2010s. People there are no longer enticed or willing to show their wealth and are keen to keep a low profile as per XI Jing Ping’s desire for a “Common Prosperity” instead of the “iconisation” of Billionaires, entertainers and social media influencers of te Westrn culture. Driving Ferraris and Bentleys is no longer “IN” in China …
But the straw that broke the back of the luxury stocks rally was the publication of BURBERRY’s results on May 18th, reporting on their activity for the three months from February to April 2023, which showed a significant decline of their sales in the US ( -10 % ) their second largest market, confirming our conclusions that business conditions were deteriorating fast in the US, and soon to come in Europe.
Today, the spectacular rally in Luxury stocks that started in the summer of 2022 ended brutally.
HERMES lost -6.54 % in one single day, Christian Dior and LVMH – 5 %, BURBERRY is now down -15 % since its May peak, and RICHEMONT has lost -10 % since its failed break out to a new high at 160 on the day of its earnings reports.
Investors are finally realising that the 100 % advance of HERMES stock price since October 2022, taking it to an unsustainable 60x earnings valuation, fuelled by trend-followers analysts who raise their ratings and targets as stock rise, the best of which is probably the prestigious firm ODDO who managed to raise its rating on HERMES the very day it broke down, was probably inconsistent with the macro headwinds and the cyclical nature of the luxury business.
The following chart shows how the consensus of analysts tend to raise their target prices ( white line ) when stocks rise and decrease them when stocks fall…
Investors should be extremely careful here and resist the temptation to dip-buying.
To us, and as stated in our January article, these companies stand to lose between 40 and 50 % of their value in the coming 12 months, as they did when the 2008 and 2000 recessions unfolded. There is no secret and these companies are first and foremost industrial companies that build plants, maintain and expand large networks of brick and mortar showrooms and outlets, maintain high levels of personnel and see their margins suffer considerably from the combined effect of declining sales and rising production and personal costs.
They are amongst the biggest shorts in the investable universe at the moment.
The following charts shows how LVMH, already a great company then, saw its stock price decline by – 57 % in the 12 months between November 2007 and November 2008, during the last recession and by -71 % in the 13 months between August 2000 and September 2001 at the time of the bursting of the Dotcom bubble.
Some readers and investors may argue that they see no signs of recession for now, but recessions are exactly that : either you have the ability to predict them using advanced indicators or you wait until you see them, and it is usually too late.
Our analyses lead us, and have led us to conclude for months now, that a sharp recession would unfold in the US and in Europe, and that considering the extreme levels of accumulated debt in an environment of sharply rising interest rates, the deflationary forces ahead are humongous, making this recession far more dangerous than the previous ones.
If investors needed another leading indicator of the looming recession, suffice to show the worst two months contraction in commercial and industrial loans in the US, contractions that only happen when the economy is entering recession.
The following chart, courtesy of Charles Henry Monchau and Oxford Economics shows how drastic the increase of debt relative to GDP has been in the past 15 years of zero interest rates policies in the European and American economies and the colossal challenge facing Governments to avoid a devastating debt spiral in the coming years.
In technical analysis terms, the price action of today marks the peak and major reversal of the substantial uptrend of the past 8 months and heralds a new bear market for this sector.
We are short those companies, have taken profits on our short in Burberry to increase our shorts in LVMH, CDI, and HERMES at the beginning of the session, and will remain short for the duration of the down cycle.
We have also argued that the hyped luxury auto makers such as Ferrari or Porsche may face the same fate ahead as investors have been piling into these stocks focusing on their long lead production time and substantial order book, without maybe realising that in recession times, the first thing would-be buyers do is precisely to cancel their orders, wave their deposits and leave those manufacturing companies with unsold inventories and idle manufacturing plants.
On a more global level, today’s sharp reversal of the SP 500 Index, failure to sustain its breakout above 4195 and break down below 4150 also heralds a a change of regime in US stocks and AAPL, NVDA, MSFT, AMD, GOOGLE and the like may be also marking final tops after their significant advance since October 2022.
An advanced signal may be the sharp fall that took place in the iconic and defensive consumer staples stocks such as KO, PG, WMT and else, a very unusual development and another sign that a sharp recession is at hand.
As our readers know, we expect US equities to be much lower by October 2023 with significant damage in the extremely overvalued US technology sector.
MAXIN GLOBAL FUND – USD
Transaction List 23 May 2023
Today, we added to positions in the Chinese clean energy sectors as the Government is directing power generation companies to increase capacity to ensure a margin of safety over peak consumption.
We added to our XINYI SOLAR positions and added two new positions in the leading wind turbine manufacturers XINJINAG GOLDWIND and China LONGYUAN POWER.
We also aded to our position in retailer PopMar that operates a large network of convenient stores across China.
In Europe, we added to our short positions in HERMES, CHRISTIAN DIOR and LVMH and in the US we increased our short position in AMD and started a new short position in MONDELEZ the world leader in snacks owner of prime brands such as Oreo, LU, Ritz or vine Cadbury, Milk and Toblerone.
When defensive businesses with low growth start rolling over, the economy is not doing well.
New Asset Allocation
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