Global FX Update

Conclusion: The U.S. Dollar remains the dominant factor in our 27-factor Global Macro model and it continues to signal to us to be outright short or have extremely low levels of exposure to commodities and emerging market currencies over the intermediate term.


Positions: Long the U.S. Dollar (UUP).


Given recent developments across the global foreign exchange market, we thought we’d take the time to briefly provide you with our updated thoughts as it relates to managing the FX risk on your screens. Having a call on this asset class (particularly vs. the USD) is crucial to determining the associated costs of entering, exiting, and hedging one’s exposure to assets denominated in foreign currencies – including the FX impact on cross-border investment returns.


As it stands now, we are currently bullish on the U.S. Dollar and long it via the ETF “UUP” in our Virtual Portfolio (having been accurate on 22 of the past 23 positions). This is a meaningful stance we have taken and is also underscored by our recent decision to reduce our exposure to commodities within our Dynamic Asset Allocation to ZERO percent.


For context, we’ve only been this bullish on the U.S. Dollar twice since our firm’s inception just over three years ago: 2Q08 and 1Q10. Though no two periods of economic history are alike, the chart below provides useful reference points for what happened to the commodity complex after prior episodes of Hedgeye USD-bullishness:


Global FX Update - 1


As a corollary to the USD-breakout, commodities as an asset class (as measured by the CRB Index) remain broken across our TREND and TAIL durations. We’ve been calling for this Deflating the Inflation and that outlook was the primary reason we were on time in getting out of the long side of things like crude oil and energy stocks back in 2Q11. Regarding crude oil specifically, earlier today we initiated a short position in Brent (ETF: “BNO”) in our Virtual Portfolio.


Global FX Update - 2


Bernanke’s Box and our call for Europe to ease monetary policy in the latter part of the year remain the two primary reasons we have called for and seen recent U.S. Dollar strength:


“Slowing growth in the Eurozone will have the FX market pricing in less and less hawkishness out of the ECB relative to the Fed on a go-forward basis (don’t forget that the socialist Mario Draghi takes over in November and the Europeans have a full 125bps of potential interest rates to cut). EUR bearishness is USD bullish (57.6% of DXY basket).”

- “Emerging vs. Developed Markets: Aggressively Framing Up the Debate”, June 24


“In aggregate, CPI readings should continue to keep the Federal Reserve in a box as it relates to implementing incremental easing.”

- “Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation”, August 18


“Our view of incremental easing remains that the Federal Reserve will be in a proverbial box in terms of incremental easing until at least the end of 2011, if not well into 2012. The primary reason for this is simply that the data will not support further easing… inflation was running at much lower levels, largely below 1%, when the first two rounds of quantitative easing were implemented. Currently, this measure of inflation is north of 3% and set to remain at that level through the next couple of quarters based our models.”

- “The Fed Remains in a Box”, August 26


Above all, the U.S. Dollar’s quantitative setup is quite bullish and price remains the dominant factor in our Global Macro framework:


Global FX Update - 3


Of course, Christine Lagarde and the IMF’s soon-to-be-announced La Bazooka (see: today’s Early Look) could work to strengthen the Euro for a TRADE, but the prevailing quantitative setup (bearish TAIL) remains the trend. We covered our Euro short (ETF: “FXE”) yesterday in anticipation of such immediate-term price action, especially given how crowded this trade is. In fact, as of the most recent reporting period, the EUR/USD garnered the highest number of bearish wagers by hedge funds and other large speculators since July ‘10 (54,459 net-short contracts on Sept 13 vs. 2,539 net-long contracts on Aug 23).


Global FX Update - 4


Of course, being bullish on the dollar implicitly implies that we’re bearish on most emerging market currencies and that is a key risk to monitor as it relates to the performance of your foreign currency-denominated assets. In this space, a general shift towards dovish monetary policy, massive external debt issuance in recent years, and a general repatriation of US dollars are all combining to put downward pressure on the exchange rates of these economies:


Global FX Update - 5


For the sake of brevity, we won’t go into further detail on this topic now; we have, however, put together a long list of detailed notes and data points we’ve been sending to clients on a one-off basis as it relates to the rising external debt burdens and the recent “flows” out of emerging market (and European) assets and [perhaps] into liquid, large-cap U.S. equities – which have been largely outperforming much of world on a quarter-to-date basis. Email us if you’d like us to follow up with you directly.


The U.S. Dollar remains the dominant factor in our 27-factor Global Macro model and it continues to signal to us to be outright short or have extremely low levels of exposure to commodities and emerging market currencies over the intermediate term.


Darius Dale


Solid Athletic Trends

Good numbers for the week for footwear and apparel on the eve of several weeks where comps should start getting very easy. Good news all around.



Apparel sales for the week (per Sportscan) accelerated meaningfully, taking the 3-week average to about 12%. Footwear (per NPD) is a less impressive low single digit rate, but in looking at the really underlying trend we see it accelerating from a trough of -4% last month.  The most notable point here is that we’re currently comping against some of the most difficult numbers in all of Fall 2010. Starting next week, both categories begin to comp against much easier yy numbers. Nike remains the most balanced grower, while a notable callout is Adidas US, which continues to track about +150bp of share gain – meaningful on top of a paltry 4.6% share base. UnderArmour is still putting up mid-teens growth in the channels captured. While footwear has started to accelerate in just the last few weeks, inventories ended last quarter +74%. We realize that this is not a fair 1 to 1 comparison, but it’s directionally bad.


Solid Athletic Trends - fw   app


Solid Athletic Trends - footwear sales growth


Solid Athletic Trends - fw share


Solid Athletic Trends - apparel table


Solid Athletic Trends - fw chart 1


Solid Athletic Trends - FW 2 year 9 21


Comments from Mike Leven and Ken Kay




  • LVS is one of 16 companies with a market cap > $10BN with a projected Revenue CAGR > 20% from 2011-2013E and one of 6 companies with a 2013E FCF > 8%
  • Have a very seasoned management team in case anything happens to Sheldon
  • The management team's job is to execute on Sheldon's vision
  • 2Q11 EBITDA: 45% Singapore, 43% Macau, 10% Las Vegas, 2% PA (88% from Asia)
  • Opening of Sands Cotai Central at the end of 1Q12; it will be the only new opening for at least 4 years
  • Looking at development opportunities in jurisdictions considering gaming expansion: Japan, Korea, Vietnam, Taiwan, and Europe
  • Consensus for 2012 EBITDA: $4,073MM ($1.9BN for Macau, $1.7BN at MBS, $385MM for Vegas, and $96MM for PA)
  • Organic growth opportunities in all their operating jurisdictions
    • Macau: improving VIP competitiveness and expansion of regional transportation infrastructure
    • Singapore: Broadening and deepening VIP expansion; MTR train opening in 1Q12 right by their property and the opening of the deep water cruise terminal in 2012
    • Vegas: refurbishment and renovations
    • PA: retail mall outlet opening


  • Expect further economies of scale on the cost side when Sands Cotai Central opens
  • CAPEX: 2011E: $1,545; 2012E: 1,462MM; 2013E: $893MM (40% maintenance - $350-400MM per year or 3% of revenues)
  • In 3Q11/4Q11, they will refinance VML/VOL credit facilities which are complete but waiting for Macau government approval; in November 2011, they plan to redeem $712MM of preferred stock; and in 2012, they will refinance the Singapore Credit facility.
  • By 2013, assuming no new developments, they will have no net debt (or $729MM of net leverage of .2x)
  • FCF yield should be 9% by 2013 or $3.1BN
  • Cash Balance projected to be $5.6BN in 2012 and $8.14BN by 2013;  +$1BN of R/C capacity - so they will be in a very unique position to pursue a number of development opportunities
  • They will use this cash in new developments and return cash to shareholders through dividends and stock buyback as well as debt reduction
  • Future development projects will be developed with 25-35% equity
  • Working on the tax efficient repatriation of cash flow,  They have $450MM of NOL's; $1BN may be repatriated from MBS and nearly $6BN of foreign tax credits generated from the Macau gaming taxes paid that can offset tax liabilities.


  • Have been in the process of retooling their development department led by Mike Lentz
  • Steps: Strategy/ Opportunity Definition; Feasibility assessment; Concept development; Negotiations; Design Development; Execution


Early Look

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Over the last week, continuing dollar strength put pressure on commodity prices.  Brent crude oil went higher, despite the greenback strength, suggesting that the slow-but-steady decline in gas prices could be plateau-ing. 




Commodity prices declined across the board, with only chicken wings gaining on the week.  Wheat, coffee, cheese and corn fell -7.1%, -3.8%, -3.6%, and -2.8% respectively.  On our commodity performance table, below, the most interesting thing is that there are now several commodities trading below their year-ago prices.  Cheese, in particular, is surprising given where it was trading just a few weeks ago.  Caution is warranted on dairy prices, however, given that the fourth quarter compare becomes more difficult as time goes on. 







Coffee prices declining over the last week is a function of the stronger dollar, which erodes the appeal of commodities as an asset as it gains.  From a supply and demand perspective, coffee exports from Colombia, Mexico, and seven other Latin American countries fell 13% in August from a year earlier.  Total shipments dropped to 1.545 million bags from 1.766 million bags, Guatemala’s National Coffee Association, or Anacafe, said in a report released yesterday.





Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.


PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”


“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”


HEDGEYE:  Peet’s is a company with a very competent management team that manages coffee costs extremely well.  Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.



SBUX (7/28/11):  “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”


“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.”


HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.



GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”


HEDGEYE:  GMCR hedges out 6-9 months in advance.  Strength in the dollar has helped bring coffee prices lower but whether or not dollar strength will continue or not will be a significant factor in future price action in coffee.  Growing demand, globally, is bullish for coffee prices over the long term.





Grain prices slumped over the last week, again, as a result of the stronger dollar.  Continuing concerns surrounding crop sizes in the U.S., Ukraine, Argentina and Australia are providing some price support while rising inventories and the strong dollar provide downside pressure.  Despite concerns around the crop size, we would expect a continuation of slow growth and a stronger dollar to prevent significant upswings in price.  Wheat prices also fell on dollar’s rally cutting export demand.






Below is a selection of comments from management teams pertaining to grain prices from recent earnings calls.



PNRA (7/27/11): “Just to note on the cost of wheat, in 2011 overall, the per-bushel cost will be about the same as 2010 due to our laddering purchasing strategy.”


“We are going to take price in the fourth quarter. This price will offset dollar for dollar the per-bushel inflation of wheat of approximately $3 a quarter that we're going to see in the fourth quarter of this year and then across next year”


“We do continue to expect significant inflationary pressures in 2012, 4% to 5% food inflation, $10 million of unfavorability on wheat costs, which means that we don't expect operating margin much better than flat to full-year 2011 in 2012.”


HEDGEYE:  Wheat costs have come down but it remains unclear whether or not the current easing of grain prices will continue.  Weak global demand and a stronger dollar are currently trumping the adverse impact on supply due to weather and fires in the U.S.  Slowing demand may also mean lower sales for PNRA, so it remains to be seen if margins improve from this effect, even if high wheat costs come down.



DPZ (7/26/11): “We're fairly locked in on our chicken, locked in on our wheat into – partway into next year.”


PZZA (8/4/11): “We're actually covered through Q1 from a contract standpoint. So from a supply chain disruption or even significant price impact we don't anticipate anything between now and the end of the year.”





Cheese prices have dropped dramatically since early August and are now trading below the year-ago price.  This is the first time cheese prices have been down year-over-year since January.  It is important to note that the bullish supply and demand set up for beef prices could indicate some support for cheese prices as compares become more difficult in the fourth quarter. 




Below is a selection of comments from management teams pertaining to cheese prices from recent earnings calls.


DPZ (7.26.11): “Given higher than originally anticipated cheese prices, we currently expect our overall market basket for 2011 will increase by 4.5% to 6% over 2010 levels. This was up from our previously communicated range of 3% to 5%.”


HEDGEYE: We recently highlighted the fact that DPZ’s last earnings call took place during a trough in cheese prices and we expected a change in tone from the commentary in early May.  CAKE's EPS guidance may seem more reasonable now but we would caution against making that assumption if it is based on diary inflation being benign.  Beef prices and dairy prices, naturally, track rather closely and dairy prices have whipped around to the upside and downside this year.  Tougher compares as we move through 4Q only adds to the uncertainty.



TXHR (5.2.11): “We've also got a lot of flow in the dairy markets, in cheese, so there's other things beyond produce that do move around throughout the year.”


HEDGEYE: In 1Q09, TXRH called out favorable beef and cheese prices as being primary drivers of cost of sales being down 126 bps in the quarter.  Cheese was a contributor to a cost of sales increase in 2Q11, as we predicted.  For the remainder of the year, barring another (possible) spike in prices, TXRH could see some margin relief from lower dairy costs.



CMG (4.20.11): “As we move into 2011, we're expanding our use of cheese and sour cream made with milk from cows that are raised on open pastures rather than spending much of their time in confinement, as most dairy cattle do.”


HEDGEYE:  For CMG, the lower levels of dairy costs, if they persist, will offer some food costs relief on the company’s P&L.





Chicken wing prices gained 7.2% over the last week as the price action continues to point higher.  Unless there is a significant upswing into year-end, we expect favorable year-over-year compares to continue until 1Q12.





Howard Penney

Managing Director


Rory Green





Some remarks by Sheldon Adelson


  • There is a general consensus that the company should consider making dividend payments.  They are considering it.
  • Won't pursue any developments where they can't get a 20% ROI. Assume any new project would have 30% equity contribution and 70% leverage.
  • Asia expansion is their first priority, however, they will pursue any gaming opportunities that make sense
  • Other jurisdictions all look to MBS to see what they have done there when considering opportunities
  • Spain: Madrid or Barcelona is their location site of choice. Think that a resort in Spain would draw 1BN people that live within a 5 hour flight.  Before they make any investments in Europe, they will thoroughly research the opportunity and feasibility of an integrated resort. They like Spain given the good weather and the high unemployment rate there should garner support from the government - both regionally and nationally.
  • FCPA allegations made by a 'former very disgruntled employee'.  They are fully cooperating with the investigation. 100% certain that he or any other senior executive employee at LVS has never asked their employees to do anything improper. When the lawsuit concludes, he's sure that all of Jacobs allegations will be found to be baseless. In fact, Sheldon asserts that there is no actual allegation of wrongdoing by Sheldon so he can't be found guilty of anything.
  • Predictability and reliability of their revenue and FCF has been greatly improved as they have expanded. Their properties are mostly mature and their success has made them a front-runner for future opportunities.

NKE: Black Book Available


Our NKE Black Book is now available...


We think that investors are underestimating both the depth and duration that Nike’s recent infrastructure investments will have on financial results. It is one of the few companies that fits within our three different durations – TRADE (3 weeks or less), TREND (3 months or more) and TAIL (3 years or less). We like it at current levels, and think that there is upside to earnings in the coming quarter, the remainder of the May 12 year, and throughout the next three years. If Nike puts a lid on guidance on Thursday, as its biorhythm so often leads it to do with 1Q earnings, then we think it will be a great shot to get involved.


True, with a current EBITDA multiple of 10x our F12 estimates, Nike might not look like the cheapest name out there. But we think that earnings and cash flow expectations are too low across all durations, and that Nike has such a commanding lead right now in a global duopoly backed by the tools to sustain it. Combine that with a bullet proof balance sheet and what we think is a permanent structural advantage in sourcing product in a strengthening Yuan climate and this story has some serious legs to stand on.



If you have not received a copy of our report, contact , or at to request access.



NKE: Black Book Available - NIKE HE estimates vs. Street 9 11


NKE: Black Book Available - NKE BB Post Cover 9 11






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