Carving Turkey

Conclusion: We do not see a buying opportunity of Turkey’s equity market given looming energy uncertainty.


Positions: Short Emerging Markets via the etf EEM and Brazil (EWZ)


Turkey’s main equity index, the ISE 100 got crushed yesterday, falling -4.2%, while the etf TUR fell -5.5%.  Today the ISE is trading flat, however we caution that one main factor that may significantly influence Turkey’s overall equity performance is its dependence on foreign energy.


To meet its consumption needs, the country imports ~ 93% of its oil and ~ 97% of natural gas, according to the EIA. While Turkey receives economic benefit as an important energy transit state (with supplies originating in Russia, the Caspian Sea region, and the Middle East for delivery primarily in Europe), the fact remains that given the present uncertainty in the oil producing nations of the Middle East and North Africa (MENA) and Turkey’s extreme foreign energy dependence, Turkish stocks should continue to underperform so long as global supply and production remain uncertain.


A look under the hood (and as the charts below present), recent Turkish fundamentals show:


1.)   Growth Slowing - GDP has slowed sequentially over the last 3 quarters, with difficult year-over-year comps from here on out.  Turkey is clearly one country that has been the recipient of the pullback in the emerging market trade over the 6 last months. We’re explicitly short the emerging market via the etf EEM and Brazil (EWZ) in the Hedgeye Virtual Portfolio


2.)   Inflation Slowing – bucking the trend of most global economies, inflation (as reported by the CPI) has slowed in Turkey over the last 4 months on a year-over-year basis. As the chart below shows, comps will remain difficult for much of 2011, so CPI may decline over the next months. However, our focus is on the country’s primary tax, energy, especially given the prospect for further unrest from its suppliers, and therefore higher prices. We’re less concerned about possible declines in the headline CPI number, for now.


3.)   Trade Deficit Widening – The country ran a trade deficit of -$7.3 Billion in January. While the country has consistently run a trade deficit over the last 10 years, the trend is widening, and is certainly one macro factor that will eat into overall growth.  50% of its exports are destine for Europe (in particular Germany, France, Italy), arguably a relatively stable market. However almost 30% are destine for MENA, and obviously the demand from this region is a huge unknown.  [For reference, manufacturing is the country’s largest component at 91.7% of total exports].


In reference to today’s Early Look penned by my colleague Daryl Jones, Turkey also has a relatively young population, with median age of 28.5 years (World median = 28.4 years), according to the CIA Factbook.  Currently, total unemployment in Turkey is 11% and local purchasing power is down with the Turkish Lira down -16% vs the USD or -15% vs the EUR since a high on 11/4/10.  Surely it could be argued that Turkey has a more stable government than many in MENA and therefore is less likely to see uprisings. That withstanding, from a market perspective we think Turkey has more downside risk than upside potential so long as the fate of rulers and governments throughout MENA remain uncertain.


Therefore, we do not see yesterday’s pullback in the ISE as a buying opportunity, and think the index, which is down -18% from its top on 11/9/10, could fall further. We’re also taking risk management cues from rising CDS spreads (Turkish CDS is on a steady rise since Oct. 2010 and currently at 175bps) and rising yields (Turkey’s 10YR government bond yield has blown out since the beginning of the year, currently at 9.5%) . In the last chart below we show our resistance levels on the ISE. 


Matthew Hedrick



Carving Turkey  - Tur1


Carving Turkey  - Tur2


Carving Turkey  - Tur3


Carving Turkey  - Tur4


Analysts focusing just on a potential FCPA fine are missing the bigger risks.



Let’s face it.  Macau is a can of worms.  Money laundering, side betting, junket relationships with nefarious triads are just some of the activity that may be going on in Macau.  To date, the Nevada Gaming Commission has apparently looked the other way.  Will political pressure force them to turn its head eastward?  To us, that is one of the biggest risks emerging out of this Department of Justice and SEC investigations announcement.  The other is what does this do to LVS's prospects in new markets?


So we had to shake our heads watching two groupthink analysts agreeing with each other that LVS will just face a fine for violating the Foreign Corrupt Practices Act.  One analyst estimated a fine between $50 and $200 million.  That results in a per share hit of $0.05 to $0.25.  Case closed, right?  Well, case closed if one wants to stop with a very superficial analysis.  The stock market is a little smarter than that which is why we saw almost $3 lopped off the stock price (over 6%).  Granted, it was in a down market day but on the flip side, there was a bulge bracket upgrade and the announcement of huge February gaming revenues would’ve normally pushed the stock higher.


We don't pretend to know all the details and veracity of what went down with Jacobs, alleged payments from LVS, alleged “dirt digging” on government officials, etc.  And we won't pretend to know how this will all turn out but we can outline the risks.  While low probability, a real risk is that the Nevada Gaming Commission decides it cannot stomach its companies operating in Macau.  Of course, that would affect WYNN and MGM as well but it has to start with LVS given the alleged behavior.  We don’t think this risk can just be summarily dismissed. 


In addition to the fine, the 3rd issue for LVS would be a loss of credibility and reputation when it comes to participating in new Asian markets.  Japan, Taiwan, India, and Thailand are just some of the markets that may pursue legalized, large scale casinos and LVS and WYNN were probably the top developers for an Asian development.  Will politicians want to risks their reputations getting in bed with LVS if these investigations go against LVS?  Surely, the LVS multiple has contained a premium for new market growth.


So how do we handicap the risk?  Obviously, this is a very imprecise and difficult task.  In the following table, we’ve quantified a low and high case for lost value in each of the three areas of risk:  FCPA fine, a forced exit from NV and PA, and multiple contraction from lower probability of securing new markets. 




Our conclusion is that the Street did a pretty good job of discounting the new risks.  Best case for LVS is obviously that DOJ/SEC finds nothing.  The bulls (most of the sell side) think that the worst case is a big fine amounting to less than a $1 per share.  We think the worst case is LVS is forced to exit the US gaming markets at fire sale prices - 4 multiple points below the implied value in the stock.  Also under this scenario, the FCPA fine is actually 5x the largest rumored bribe we’ve heard of $250m.  Finally, LVS loses a multiple point of valuation to the lost new market opportunity.  Under our worst case scenario, $8 of share price value would be lost. 


Of course, there are a range of possibilities in the middle.  Nevada could do nothing or it could force a complete separation of the companies which may not result in as much value destruction as a forced sale.  It's also unclear what would happen to the brand and management fees paid by Sands China to LVS.  For simplicity sake, we've ignored them.  We just don't know what will happen.  It's all about risk management at this point.


The collective wisdom of the stock market was somewhere in the middle which we think was appropriate.  The questions now are the overhang effect, the duration of the investigation, and how do the big long-only funds feel about the huge tail risk.  Our guess is that most analysts will come out today with the “overdone” and “risks were well known” commentary.  Maybe that helps the stock temporarily but it’s not like the stock is dirt cheap, even after yesterday.  And as we pointed out going into the Q4 announcement, estimates are finally reasonable, and not conservative.  There is a valuation precedent for a cheaper LVS.

R3: JCG, AZO, PVH, and GPS


March 2, 2011


  •  Target’s expansion within NY’s five boroughs is likely to continue with the company picking up a 7.9 acres parcel of land in the Bronx.  The site is slated to include a 300,000 square foot mall along with a Target.  Given the size of the land it’s unlikely that this location will be part of the company’s smaller store test of CityTarget’s.
  •  According to the NRF/BigResearch 2011 Tax Returns Intentions and Actions Survey, 41.9% of respondents will pay down debt, 42.1% will increase savings, and 29.7% will put the cash towards everyday purchases.  The amount of consumers putting money into savings rose by 4% year over year while those planning to pay down debt slipped by 4.5%.  Approximately 63.9% of Americans have already filed their returns.
  •  Add AutoZone to the list of retailers noting that tax refunds (aka Refund Anticipation Loans) did not materialize at the same level as they have in prior years.  This had a negative impact on January results (along with weather) although management believes this will likely end up being a timing issue rather than a permanent reduction in cash flow for the company’s lower-income consumer.




Shareholders Approve J. Crew Buyout - Shareholders approved J. Crew Group Inc.’s $3 billion buyout by TPG Capital and Leonard Green & Partners by a better than three-to-one margin at a special meeting Tuesday. The acquisition faced opposition heading into the meeting. Some investors saw the price of $43.50 a share as inadequate and groused over the way chairman and chief executive officer Millard “Mickey” Drexler talked to the private equity firms about a deal before informing his board. Investor advisory firm Institutional Shareholder Services Inc. recommended stockholders vote against the deal. <WWD>

Hedgeye Retail’s Take:  Despite rumors that TPG/Leonard Green were contemplating a higher bid (competing against themselves) the soap-opera style saga surrounding this deal is now over.  It will be 3-5 years before the Street needs to brush off its earnings models on this specialty retailer for its next IPO.


Gap's Asian Expansion Moves Forward - Gap Inc. is continuing its international expansion drive, eyeing potential acquisitions, launching a Japanese e-commerce site and bringing the Old Navy chain here, according to John Ermatinger, Gap’s Asia Pacific president. Although the executive said the company’s main priority is developing its existing portfolio of brands, Gap is “always looking” at possible acquisitions. He said the company has already examined some companies in Asia, but the potential targets have either overlapped with Gap’s existing brands or turned out to not be for sale. <WWD>

Hedgeye Retail’s Take:  Interesting comments on acquisitions which would surely jumpstart the company’s Asian expansion efforts.  If anything were to transpire, we suspect a deal would be rather small in nature relative to the overall size of the corporation.  A content related purchase would also be high on the list.


PVH Gives Izod Watch License to Ritmo Mundo - Phillips-Van Heusen Corp. has licensed Ritmo Mundo to market and distribute a line of men’s and women’s watches under the Izod label in North America. The deal is for five years, with a three-year renewal option at PVH’s discretion.The sport-inspired Izod watches will debut at BaselWorld in Switzerland later this month. They will be distributed at major department stores and specialty stores throughout the U.S., Canada and Mexico. “We are very excited to partner with Ritmo Mundo — a highly respected luxury watchmaker,” said Allen Sirkin, president and chief operating officer of Phillips-Van Heusen. <WWD>

Hedgeye Retail’s Take:  While FOSL tends to garner a fair amount of the business in the licensed watch business, we’re reminded that there are still plenty of partners for which brands can develop partnerships with.  Don’t expect the IZOD watch biz to be a meaningful driver of sales or earnings.


New Balance Launches "Excellent" Campaign - New Balance debuted a new brand campaign designed to motivate and inspire active consumers to reach a new level of personal performance -  a new level of "Excellent."   The fully-integrated campaign launches a new tagline, "Let's Make Excellent Happen," and plans to aggressively leverage the voice of Team New Balance athletes to bring the brand's message to life. "This campaign is grounded in our running heritage yet reflects the innovation and passion of our brand, our products and our world-class athletes as we compete in today's marketplace," says Rob DeMartini, President and CEO at New Balance. The campaign's creative work includes TV, print, digital advertising, engagement in NB's on-line community, viral video content, in-store and event exposure. The cornerstone of the campaign is the "Pier 54" television spot. <SportsOneSource>

Hedgeye Retail’s Take:   Increased advertising=good for retailers like FL, FINL, and DKS.  Expect the new campaign to reinvigorate New Balance which has taken a bit of a backseat to both toning and more innovative running platforms from NIKE, Adi, and UA over the past several months.


Jeans Maker RGR to Close - A surge in cotton prices has forced the closure of Groupe RGR, a 38-year-old maker of denim sportswear for U.S. clients such as Gap Inc. and Tommy Hilfiger, and Lois jeans in Canada. The company will close five plants in July, affecting about 400 full-time female workers who will lose their jobs. “It’s the toughest decision I ever had to make in my life,” said Rolland Veilleux, co-founder and chief executive officer of RGR, based in St. Georges de Beauce, near Quebec City. “At the top in 2000, we employed 1,800 and operated 11 specialized plants working for top North American clients,” he said. “But we’ve had to fight mounting low-cost Asian competition for several years. Business has been declining steadily and we no longer have the volume.” <WWD>

Hedgeye Retail’s Take:   This may be one of the more extreme examples of what rising costs can do for textile manufacturers that are still operating with high cost infrastructures. 


Cotton Committee Forecasts Production Increase The International Cotton Advisory Committee on Tuesday projected that worldwide cotton production will increase 9 percent to 127 million bales in the 2011-2012 season, as farmers plant more in response to spiraling raw cotton prices and increased demand that has gripped the industry. On the Cotlook A index, cotton prices, which have created havoc in the apparel and textile industries’ pricing structures all the way through to retail, are expected to hover around $1.61 a pound in this new season, after hitting a record high of $2.33 a pound on Feb. 18, the committee said.  <WWD>

Hedgeye Retail’s Take: Not surprisingly demand leads supply which in turn leads to lower prices as supply increases.  The key issue here being that an entire growing cycle needs to transpire before we see prices come in materially.


Retailers Can Win over Negative Consumers   - Retailers can’t give up on consumers who post negative reviews or comments on social networks such as Facebook, Twitter or Yelp. Rather, by listening and responding to those complaints merchants can turn disgruntled shoppers into brand advocates, according to a new Harris Interactive report commissioned by RightNow Technologies Inc., which provides customer data and contact center technology. The report, which is based on a survey of 2,516 shoppers in January, found that many retailers are attempting to do just that. 68% of the consumers who posted a complaint or negative review said that they were contacted by the retailer. <InternetRetailer>

Hedgeye Retail’s Take:  Imagine a retailer actually caring what you think?  Simple customer service goes much further than simply low prices.  Expect to see the feedback loop continue to increase as social networks allow consumers to share their views/thoughts/complaints in real time.


Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Getting Old

“Demographics is destiny.”

-Arthur Kemp


Undoubtedly, there is a lot I disagree with Arthur Kemp on.  He is the Foreign Affairs Spokesperson for the British National Party, and is a self-avowed white separatist and critic of miscegenation.  Yup, definitely not that kind of cat I would spend much time socializing with or supporting.  Despite this, his quote above regarding demographics rang very true with me.


We employ demographics across many of our research verticals, and in fact use it from a macro perspective when analyzing countries and demand patterns.  The inevitability of demographic trends is difficult to deny.  In some instances, it may merely be getting old, which is what my mother likes to tell me I’m doing as a 37-year old bachelor.  In other situations, demographics, and the related outcomes, relate more to youth and birthrates.


In an intraday note yesterday titled, “Could the Kingdom Fall?”, I highlighted the importance of age to social unrest in the Middle East and North Africa.  Simply put, MENA has a young population that is severely under-employed.  If there is an elixir for social unrest, this is it - young people with too much time on their hands, and not enough money in their pockets. 


As a frame of reference, the median age in the United States is 36.9 years. Globally, the median age is 28.4 years.  So, the population of the United States is meaningfully older than the rest of the world.  The global median age is driven down by the Middle East and North Africa.  In the Chart of the Day, we’ve highlighted this global discrepancy broadly, but the median age in Iran is 26.8, in Iraq 20.9, in Egypt 24.3, in Libya 24.5, and in Pakistan 21.6.  The lower average and median ages in MENA have been driven by vastly improving health care over the last decade, which have driven up birthrates.


In Japan, the key demographic trend is the exact opposite.  In contrast to many MENA countries, and really the world, Japan is old.  Not getting old, but already there.  In fact, the median age in Japan is 44.8 years.  According to the CIA World Fact Book, this makes Japan the second oldest nation based on median age after Germany, whose median age is 44.9.  Not surprisingly then, demographics is one the key tenets in our bearish thesis on Japan’s equity and currency; or as we like to call it: Japan’s Jugular.


While Japan’s median age is slightly lower than Germany’s, it has by far the world’s most elderly population.  Currently, as of 2009, 22.7% of Japan’s population is above 65 years of age.  The Japanese government has modeled this ratio to grow to 29.2% by 2020 and to 39.6% thirty years after that.  The implications are that in ten years the ratio of retirees to working age will be ~48% in Japan. 


The aging Japanese population has dire implications related to the future fiscal and monetary health of the country.  The Japanese Government Pension Investment Fund, the world’s largest pension fund with ~$1.4 trillion in assets, has consistently been one of the largest buyers of Japanese government debt.  This fiscal year, ending March 2011, the fund will be for the first time a net seller of Japanese government bonds.  According to Takahiro Mitani, the President of GPIF, “We certainly have to come up with an adequate amount” to pay pensions.  With these bond sales, the impact of demographic headwinds has likely reached an inflection point in the Japanese economy. These sales will only accelerate in the coming decades and with them the associated risks to the Japanese economy (higher interests rates as one) will also accelerate.


In the United States, there is some clear destiny embedded in demographic trends as well, specifically related to healthcare and healthcare investors.  The Baby Boomer wave, which Healthcare investors commonly, and mistakenly, place as the core driver of a long-term Healthcare growth thesis, remains the most consequential domestic demographic trend. 


Boomer Employment (45-64 yr olds) reached its crescendo in the 1 timeframe with peak earnings and peak disposable income occurring alongside historic lows in unemployment.  Now, with this segment of the working population in deceleration mode, the U.S. workforce nearing a peak in average age, and the echo boomers (30-39 yr. olds) years away from peak consumption growth, the healthcare and broader economy face significant longer-term demographic headwinds.


This last point is also embedded in long-term projections for healthcare and social security entitlements in the United States.  In the Congressional Budget Office’s long-term baseline scenario, due to these aging demographic trends, social security spending accelerates from 4.8% of GDP in 2010 to 6.2% in 2035 and healthcare spending accelerates from 5.5% of GDP to 9.7% over the same time period, which will lead to a huge ramp in mandatory government spending over the coming decades with no reform.


While there is inevitability embedded in many of the demographic trends outlined above, from a risk manager’s perspective we just have to manage the tail and headwinds accordingly.   And as Chuck Jones, the inventor of Wile E. Coyote, said about inevitability:


“There is absolutely no inevitability as long as there is a willingness to think.”




Keep your head up and stick on the ice,


Daryl G. Jones


Getting Old - daryl1


Getting Old - daryl2


The Macau Metro Monitor, March 2, 2011


Secretary Francis Tam said the government  "is poised to control the level of expansion of the sector."  He added, "We shall only see the industry increasing by a few percentage points” every year.


Tickets for adults to Universal Studios Singapore now cost $66 on weekdays, and $72 on weekends and peak periods. Travel agents expect prices to rise by between $2 and $8 as a result of price hikes by RWS.  RWS will charge travel agents between $1 and $3 more for tickets which they re-sell to tourists from April 30.



Las Vegas Sands has denied the allegations and will cooperate with the probe. Separately,  Sands China has announced David Fleming as an alternate director to Michael Leven starting March 1.  Fleming is the joint company secretary and the general counsel of LVS.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.