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Chinese Cowboy

This note was originally published at 8am on June 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We ride and never worry about the fall – I guess that’s just the cowboy in us all.”

-Tim McGraw

 

My Thunder Bay Bear boys and I are big country music fans. Tim McGraw’s “The Cowboy In Me” is one of our favorite songs. I’ll be heading up to the homeland for some time with the family tomorrow. I’m looking forward to slaying the great Canadian Walleye with my buddies Luch, Gunner, and RM.

 

The Cowboy In Me” hit #1 on the Billboard Hot Country Singles charts immediately after McGraw’s duet with Jo Dee Messina “Bring On The Rain” did in 2001. Sometimes a bear needs a lot of rain before he gets hungry to buy.

 

I bought Chinese stocks (CAF) on June 16th … and I must say, not many people agreed with that. I actually don’t think I agreed with it either. But I bought them anyway.

 

“The things I’ve done for foolish pride

The me that’s never satisfied”

 

That’s a small part of the why. Most people who know me well know that I love to compete. Sometimes that’s hurt me in this business. Most of the time it’s been my greatest asset. During the sometimes that it isn’t – it’s usually because I am letting my pride get in the way of my process.

 

“Sometimes I’m my own worst enemy

I guess that’s just the cowboy in me”

 

Back to the Global Macro Grind

 

This morning’s bullish immediate-term TRADE action in Asia was led by the biggest rally Chinese stocks have seen in 4 months. The Shanghai Composite Index was up a big +2.2% (up for the 4th consecutive day).

 

Why?

 

The actual data was bad (the HSBC PMI print came in at 50.1, an 11 month low). But bad data in China isn’t new. The leadership call to action of Chinese Premier Wen last night was. Away from the #1 Bloomberg headline this morning being some version of European socialist hope for Greece, one of the   “Most Read” stories was about the Premier’s comments about Chinese inflation:

 

“I am confident prices will be firmly under control this year.”

 

Now I typically don’t believe a Chinese politician inasmuch as I don’t trust an American one, but the actual inflation data we’ve been modeling into our Chinese Consumer Price Inflation (CPI) forecast for the back half of 2011 is in line with Premier Wen’s forecast.

 

On the 2 things that really matter to Chinese stocks – Growth and Inflation – here’s Hedgeye’s call for the 2nd half of 2011:

  1. Growth Slows At A Slower Rate (+7-9% GDP growth instead of 10-12%)
  2. Inflation Starts To Deflate (4-5% CPI instead of 5.5-6.5%)

If we are right on Growth and Inflation, the only big thing left to solve for is Monetary Policy. Premier Wen’s comments also have a huge implication for Chinese interest rates – Deflating The Inflation (Hedgeye Q2 Macro Theme) means he can STOP raising rates!

 

On Chinese Monetary Policy, here are the facts:

  1. China has raised interest rates 4x during La Bernank’s policy to inflate cycle
  2. China has not raised interest rates in 11 weeks
  3. China’s swap spreads are already discounting an arrest of interest rate hikes

So what does The Cowboy In Me do with that?

  1. I BUY Chinese stocks (CAF)
  2. I SELL Chinese currency (CYB)

If my Macro Team continues to be right that:

  1. The US Dollar is done going down (for now)
  2. The CRB Commodities Index and Oil are going to keep going down (for now)

Then Premier Wen and I are probably going to be right. Deflating the Inflation in the CRB Commodities Index and WTI Crude Oil has been -10.8% and -19.5%, respectively since May.

 

Deflating The Inflation will be good for US Consumers inasmuch as it will be for Chinese consumers. Between now and then, Chinese stocks have much more upward potential to this trade than US stocks do. The SP500 is still lathered with The Inflation Trade (Financials, Energy, Basic Materials), and The Correlation Risk to US Dollar UP is much more severe to the SP500 than it is to the Shanghai Composite.

 

Does my craw constantly consider the time and price relationship between being long China (CAF) and short US Equities (SPY)? Of course. Managing risk in the most globally interconnected marketplace that investors have ever faced is the game that we are in.

 

But I won’t wake-up every morning worried about the guys who are playing this game with hope and fear as their governor. I have enough on my plate in not letting my pride get in the way of my own process.

 

“The face that’s in the mirror when I don’t like what I see

I guess that’s just the cowboy in me”

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1511-1532, $90.44-95.11, and 1259-1297, respectively.

 

Enjoy your weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Chinese Cowboy - Chart of the Day

 

Chinese Cowboy - Virtual Portfolio


RESTAURANTS - A SAFE HAVEN?

There is not a restaurant company that would is not worried about the current reading of consumer confidence.  

 

The Conference Board index of Consumer Confidence fell by 3.2 points in June to 58.5 on top of the 4.3 point decline in May.  Over all the consumer fundamentals remain soft and, at least judging by the market’s reaction, confidence missing the consensus number of 61.0 is consensus.  The two-day rally in the S&P 500 and, more pertinently, Restaurant stocks, of 1.80% and 2.82%, respectively, is indicative of that. 

 

Restaurant stocks continue to perform well in both and up and down tapes.  Over the past month, the QSR and FSR sectors have outperformed the S&P 500 by 5.5% and 4.1%, respectively.  The average EV/EBITDA multiple for the QSR and FSR sectors now “not cheap” at 10x and 7.4X, respectively.  Relative to other sectors that are slightly more cyclical or are driven by the wild swings in commodities, the restaurant industry as a whole is serving as somewhat of a safe haven.  The industry is not overly levered and the cash flow generation and dividend yields of some of the more mature companies are very attractive.    

 

Industry demand is improving, but not all concepts are created equal.  Malcolm Knapp recently reported that estimated comparable restaurant sales growth in May was 2.2%.  Final accounting period April comparable restaurant sales growth was +1.5% (versus the prior estimate of +1.6% based on weekly data).  The sequential acceleration from April to May, in terms of the two-year average trend, was +50 basis points.  Comparable guest counts for the casual dining industry, according to Knapp Track, grew +0.4% in May on a year-over-year basis.  The final April guest counts growth number was -0.1% (versus the prior estimate of +0.2%).  The sequential acceleration from April to May, in terms of the two-year trend, was +15 basis points. 

 

As we head into earnings season, it will be important to keep a close eye on movement in top line trends.  There appears to be a cultural shift to the fast casual segment, as younger consumer prefers the “overall” environment of the fast casual store design.  I will be exploring this theme in the coming days.    

 

All the good news aside, an erosion of consumer confidence is concerning and expected amidst concerns over declining asset values, inflation, rising energy costs, geopolitical flashpoints, the availability and cost of credit, and rising unemployment.  The Conference Board Consumer Confidence Index is at its lowest level since November 2010, when Knapp Track was reporting a 1.6% decline in traffic for the casual dining industry.  Even more concerning is that the expectations component once again led the decline in the overall index, falling to 72.4 from 76.7 (previously 75.2); the present situation component dipped to 37.6 from 39.3.

 

Declining house prices continues to be another burden for the consumer to bear (despite today’s seasonal uptick which looks to be temporary and scant consolation for homeowners).  Today, the Case-Shiller 20-City Home Price Index increased 66 bps in April to 138.84 on a non-seasonally-adjusted basis.  On a YoY basis, however, prices fell -4.0% YoY in April versus -3.8% YoY in March.  As our Financials team noted today “there is a strong seasonal aspect to home prices, with the greatest increase in prices occurring in April, May, and June … Thus, expect to see two more months of improvement (May and June) before the downtrend resumes.  As a reminder, we use the NSA YoY data instead of the seasonally adjusted series because S&P noted last year that their seasonal adjustment factor had become unreliable.”  Housing is slowly capturing more attention in the media, particularly as other bearish data points emerge and resonate with what has been playing out in housing – in line with Hedgeye Financials’ call – for some time.

 

Without the corporate sector adding any significant contribution to payrolls, wage income is growing at an all-too-anemic pace.  Disposable income is holding up, but only due to the temporarily reduced payroll tax withholdings, offset by the “gas tax” Gasoline prices remain a constraint, although recent trends are making life a little easier.  Over the last week, gas prices have dropped by 2.4% and 11% from the high set back in early May.  Year-over-year gas prices are now up 29%.  The consumer’s response to increasing gas prices, declining equity markets, and the disappointing trend in home prices reduced real spending in both April and May.

 

In today’s environment no one is immune from some sort of economic malaise:

  1. High energy prices particularly hurt “lower-income” households as they spend a disproportionate share of their income on energy needs.
  2. The decline is housing seems to hurts everyone but the “middle-income” are likely effected the most.
  3. The recent stock market weakness hurts “high-income” households

 

In the world of Restaurants, the Hedgeye virtual portfolio we are currently LONG COSI and SBUX and SHORT CBRL.  I’m nervous about the DRI quarter to be reported on 7/1 - it’s a consensus long and its core consumer for both Red Lobster and 

Olive Garden fall in the sweet spot of those hurting the most in the current economic environment.  Although, Long Horn is killing it! 

 

I am negative on CAKE and PFCB, also.

 

 

RESTAURANTS - A SAFE HAVEN? - hrm vs spx

 

Howard Penney

Managing Director


CONSUMER UPDATE - WHEN MISSING CONSENSUS IS CONSENSUS

It comes as no surprise that the Conference Board index of Consumer Confidence fell by 3.2 points in June to 58.5 on top of the 4.3 point decline in May.  The consumer fundamentals remain soft and, at least judging by the market’s reaction, confidence missing the consensus number of 61.0 is consensus.  The two-day rally in the S&P 500 and, more pertinently, Consumer Discretionary, of 1.80% and 2.5%, respectively, is indicative of that. 

 

An erosion of consumer confidence is expected amidst concerns over declining asset values, inflation, rising energy costs, geopolitical flashpoints, the availability and cost of credit, and rising unemployment.  The Conference Board Consumer Confidence Index is at its lowest level since November 2010.  The expectations component once again led the decline, falling to 72.4 from 76.7 (previously 75.2); the present situation component dipped to 37.6 from 39.3.

 

Declining house prices continues to be another burden for the consumer to bear (despite today’s seasonal uptick which looks to be temporary and scant consolation for homeowners).  Today, the Case-Shiller 20-City Home Price Index increased 66 bps in April to 138.84 on a non-seasonally-adjusted basis.  On a YoY basis, however, prices fell -4.0% YoY in April versus -3.8% YoY in March.  As our Financials team noted today “there is a strong seasonal aspect to home prices, with the greatest increase in prices occurring in April, May, and June ... Thus, expect to see two more months of improvement (May and June) before the downtrend resumes.  As a reminder, we use the NSA YoY data instead of the seasonally adjusted series because S&P noted last year that their seasonal adjustment factor had become unreliable.” 

 

Housing is slowly capturing more attention in the media, particularly as other bearish data points emerge and resonate with what has been playing out in housing – in line with Hedgeye Financials’ call – for some time.

 

Without the corporate sector adding any significant contribution to payrolls, wage income is growing at an all-too-anemic pace.  Disposable income is holding up, but only due to the temporarily reduced payroll tax withholdings, offset by the “gas tax” Gasoline prices remain a constraint, although recent trends are making life a little easier.  Over the last week, gas prices have dropped by 2.4% and 11% from the high set back in early May.  Year-over-year gas prices are now up 29%.  The consumer’s response to increasing gas prices, declining equity markets, and the disappointing trend in home prices, caused a reduction in real spending in both April and May.

 

In today’s environment no one is immune from some sort of economic malaise:

  1. High energy prices particularly hurt “lower-income” households as they spend a disproportionate share of their income on energy needs.
  2. The decline is housing seems to hurts everyone but the “middle-income” are likely effected the most.
  3. The recent stock market weakness hurts “high-income” households

Not all consumer companies are created equal.  While Nike is helping the Leading the XLY higher today, the stock that are leading the charge over the past 5 days are car retailer CarMax and AutoNation.  The powerhouse retails brands Chipotle, Starbucks and Bed Bath & Beyond round out the top five.  Not surprisingly, the big ugly retail names like Sears, Target and JC Penney are some of the worst performing names in the past five days.

 

In the Hedgeye virtual portfolio we are currently LONG COSI, SBUX, PNK and Healthcare (XLV).  On the SHORT side, we have UA, CBRL, HSIC, RL and DKS in the portfolio.

 

Howard Penney

Managing Director

 

 

CONSUMER UPDATE - WHEN MISSING CONSENSUS IS CONSENSUS - conf board confidence

 

CONSUMER UPDATE - WHEN MISSING CONSENSUS IS CONSENSUS - conf board expectations

 

CONSUMER UPDATE - WHEN MISSING CONSENSUS IS CONSENSUS - conf board pres situation


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R3: NKE, M, Kors, LIZ

 

R3: REQUIRED RETAIL READING

June 28, 2011

 

 

 

RESEARCH ANECDOTES

  • Among the many new product previews likely to accompany Nike’s analyst day presentations, today could include a sneak peak at the company’s latest “Make Yourself” campaign. The 2011 iteration slated to air this fall was shot by Annie Leibovitz highlighting seven professional women athletes. Interesting to note the stark contrast between these images and Lululemon’s current campaign (leisurely, bright, airy). Chiseled physiques like these don’t just happen. Accompanying a campaign like this with new innovative product, will make for a highly competitive women's athletic apparel market over the next 12-24 months.

R3: NKE, M, Kors, LIZ  - R3 6 28 11

 

OUR TAKE ON OVERNIGHT NEWS

 

Tommy Hilfiger Eyes Stake in Michael Kors - Tommy Hilfiger’s original investment team may soon be back together again. Tommy Hilfiger and Joel Horowitz are said to be among the private investors due to invest in Michael Kors, joining their previous partners, Silas Chou and Lawrence Stroll, who bought Michael Kors in 2003 for a reported $100 million, according to sources. Kors is seeking to raise as much as $500 million to fund its global expansion plans and has hired Morgan Stanley to sell an equity stake of about 25 percent. The round of financing is closed and is expected to be finalized in July, according to a financial source.  Hilfiger, who was traveling in Europe, declined to comment on whether he will invest in Kors, but told WWD: “Anybody would be crazy not to invest in it. Michael Kors is the next major global player in my eyes.” <WWD>  

Hedgeye Retail’s Take: Kors has been one of the fastest growing brands in recent years and his recent efforts to expand the brand internationally illustrates its strength. Back in March, Kors opened his first full collection international store with a flagship in Paris to accompany the five he has stateside. With Kors looking to sell only a 25% stake, we can’t imagine demand was an issue here. Given Tommy’s international experience and ties to the brand’s current owners, it would be more surprising if he wasn’t involved in some form.

 

Old Gringo Sues Lucky Brands - Western boot maker Old Gringo has sued Lucky Brands, a division of Liz Claiborne, for unfair competition. Old Gringo alleges Lucky has made a “cheap knock-off” of its popular Marsha boot, and sold an “unauthorized” copy of the style, which involves a distinctive embroidered boot with a side zipper. The style has been a best seller for Old Gringo, and the Chula Vista, Calif.-based firm is seeking injunctive relief for unfair competition and false advertising. It first filed its complaint on March 23, 2011, in the U.S. District Court for the Southern District of California. In the lawsuit, Old Gringo claims it first designed, manufactured and sold the Marsha boot to specialty boutiques in the western U.S. in July 2008. Calling the boot “a work of art,” the firm added that the Marsha became the firm’s best-selling style by 2009. <WWD>

Hedgeye Retail’s Take:  This one falls into the any news is good news camp. Lucky is starting to finally turn under Dave DeMattei and this ‘slip up’ may not be the worst thing for the brand since it suggests a fashion awareness that the brand had been lacking. Anecdotes like this suggest the brand could be starting to get the women’s business right.

  

R3: NKE, M, Kors, LIZ  - R3 2 6 28 11

 

Macy’s Goes GlobalMacy’s Inc. today kicked off international sales to online shoppers in 91 countries. Consumers can place orders at the retail chain’s Macys.com and Bloomingdales.com e-commerce sites. U.S.-based shoppers also can ship gifts bought through Macys.com or Bloomingdales.com to customers in those 91 countries (see the list below). “International shipping will enable Macy’s to build upon its existing customer base beyond the United States by exposing our product offerings abroad,” says Kent Anderson, president of Macys.com. The company says international shoppers accounted for 36 million web site visits to Macys.com last year. Macy’s Inc. is No. 17 in Internet Retailer’s Top 500 Guide. <internetretailer>

Hedgeye Retail’s Take:  Macy’s is among the early adopters to take their business global. Within the past month, Williams-Sonoma, Barneys New York, and Jos. A Bank all launched international e-commerce programs. While not as aggressive as WSM’s free shipping launch, this move provides Macy’s with a substantial opportunity to further expand its online business, which the company has been successful in growing and which accounts for over 20% of sales.

 

Brooks Bros. to Carry College Licensed Apparel - Brooks Brothers has reached an agreement with IMG Worldwide Inc., the owner of The Collegiate Licensing Company (CLC), to sell college-licensed apparel for the first time in its almost 200-year history. The agreement allows for the sale of merchandise, beginning Aug. 15, from 15 schools, including Alabama, Auburn, Boston College, Cornell University , Georgetown, Georgia, Harvard, the U.S. Naval Academy, New York University, Notre Dame, Ohio State, Princeton , Stanford, Vanderbilt and Virginia, according to a report by Bloomberg. Items were be available depending on the proximity of each school's campus to Brooks' stores. The lines, for men only, will comprise sweaters, dress and polo shirts and ties. Eventually a children's and women's line is expected to be added as well.  <SportsOneSource>

Hedgeye Retail’s Take:  Really? Brand dilution is the first thing that came to mind after reading this. There are a lot of ways to capture a younger demographic, but this one is a stretch. There’s something about logoed shirts that just doesn’t resonate with preppy.

 

Blue Nile Moves Away from Engagement Rings - Online jeweler Blue Nile Inc., which posted record sales of $80.2 million during the first quarter, plans to grow its business by offering more moderately priced engagement rings and expanding its product assortment. Blue Nile’s core business is engagement rings, which represent about 68% of its annual revenue, Vijay Talwar, interim chief financial officer and general manager of international, told analysts last week at the Goldman Sachs Second Annual Dot Commerce Day. Non-engagement business, such as necklaces or bracelets, accounts for the remainder of revenue. “That’s essentially what our model is based on and how we’ve been able to grow and get to this point,” Talwar says. For Blue Nile, No. 60 in the Internet Retailer Top 500 Guide, the average ticket for engagement rings is about $6,100, he says. That compares with the U.S. average of about $3,200.

Hedgeye Retail’s Take: Now this makes sense. Evolve as your customer’s needs do is a time honored retail tradition. Ideally, Blue Nile would have evolved its offering a few years ago, but as they say, better late than never.

 

Dwyane Wade Designs for Hublot - Dwyane Wade might have sat front and center during the men’s fashion weeks in Milan and Paris, but on Monday the basketballer unveiled a luxury design venture of his own: a limited edition timepiece created in partnership with Hublot.  Hublot’s King Power “D-Wade” watch, which will bow in late fall, is comprised of a black, micro-blasted ceramic casing offset with red detailing. Retailing for $20,000 with production limited to 500 pieces, the 48mm timepiece is Wade all the way — from the stitching on the black leather strap that’s made to look like a basketball net, to the subtle “basketball effect” of the watch face. There is also a “3” on the face (Wade’s Miami Heat number), and the player’s new logo appears on the back. <WWD>

Hedgeye Retail’s Take:  Yet another sign that the premium luxury watch market is in the stratosphere.

 

 


HOUSING HEADWINDS UPDATE

The following is a republished note from our Financials vertical, led by Josh Steiner - the architect behind our long-term Housing Headwinds thesis. Josh has been and continues to remain both the axe and bear on the Street as it relates to the US housing market. If you'd like to see more of his extensive work on this subject, please email sales@hedgeye.com. 

 

Case-Shiller YoY Decline Worsens

The Case-Shiller 20-City Home Price Index increased 66 bps in April to 138.84 on a non-seasonally-adjusted basis.  On a YoY basis, however, prices fell -4.0% YoY in April versus -3.8% YoY in March.  There is a strong seasonal aspect to home prices, with the greatest increase in prices occurring in April, May, and June, as we show in the chart below. Thus, expect to see two more months of improvement (May and June) before the downtrend resumes.  As a reminder, we use the NSA YoY data instead of the seasonally adjusted series because S&P noted last year that their seasonal adjustment factor had become unreliable.  Let us know if you'd like to see a copy of the S&P report.

 

Looking at the breadth of the index,16 of the 20 cities measured accelerated their YoY declines in April while 4 slowed or improved.  Month over month, all 20 cities were sequentially better on an NSA basis (declined less or increased more MoM in April than they did in March).

 

Mortgage Interest Deduction Under Renewed Fire

The head of the Minneapolis Federal Reserve made a speech yesterday proposing that the mortgage interest deduction be scrapped in favor of a tax credit to assist homebuyers with their down payment.  While Kocherlakota was attempting to disincentivize leverage, rather than increase total government tax revenue, the mortgage interest deduction has come under fire from a number of different angles recently.  For reference, with a median home price of $170,000, a 20% down payment, and a 5% mortgage rate, the median borrower's monthly payment is $730.  Annual interest expense on this payment is $6,430 at year 4 (roughly midway through the life of a typical mortgage).  With a $50,000 median household income and an average 22% federal tax rate, the interest deduction is good for a $1,415 tax offset.  Eliminating this would represent a 2.8% tax increase on $50,000 in income, the national household median.  Needless to say, this would be a headwind for the housing market and another push from homeownership into the rental market.  

 

HOUSING HEADWINDS UPDATE - 1

 

HOUSING HEADWINDS UPDATE - 2

 

HOUSING HEADWINDS UPDATE - 3

 

HOUSING HEADWINDS UPDATE - 4

 

HOUSING HEADWINDS UPDATE - 5

 

As we've noted previously, the greatest appreciation/smallest downside each month occurs in those cities with the highest home prices.  The charts below demonstrate. Not surprisingly, Washington DC continues to be the best performing market in the country (followed by New York) based on the unprecedented growth of the Federal Government.

 

HOUSING HEADWINDS UPDATE - 6

 

HOUSING HEADWINDS UPDATE - 7

 

Joshua Steiner, CFA

 

Allison Kaptur


MACAU TIDBITS

The following are some nuggets we picked up recently.  We’re here in Macau and will try to get confirmation on a lot of this stuff. 

 

 

GALAXY

  • Galaxy Macau - drop in share may be due to weakness in VIP business
  • Galaxy Macau advertising in HK has not gotten the bang for the buck spent.  Behind target.
  • Management quietly disappointed that the property has not performed to expectations

MPEL

  • Mostly good news for the most underappreciated stock in Macau in our opinion
  • Strong volumes the last couple of weeks
  • Galaxy Macau impact on CoD has been less than expected – Street consensus was that CoD was going to get crushed
  • Macau Studio City:
    • Probably needs gazetting to start construction
    • Shouldn’t be a problem if developer sticks to original 2008 plan; otherwise, any changes to the plan will require new govt approvals
    • Earliest ramp-up in construction will be end of 2011; same time for Wynn Cotai
    • Neptune likely to open at CoD in the next couple of weeks
    • Another junket operator Lao Kung also finalizing deal to open at CoD

MGM

  • Rumor that Neptune thinking about moving home base VIP room from MGM to Galaxy Macau
  • Would be a blow to MGM since Neptune was a big part of MGM’s market share surge
  • Plausible given Galaxy’s struggles – Galaxy may be willing to offer attractive package

LVS

  • Will announce name for sites 5 & 6 soon; probably Sands Cotai
  • Hotel operator for site 5 will probably be Holiday Inn or Hilton
  • Site 5 completion date: 1Q 2012 is doable but certainly by 2Q 2012.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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