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Bearish TREND: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Consumer Staples (XLP)

 

Today’s failure at our intermediate-term TREND line of resistance is very consequential.

 

Across durations here are my refreshed levels that matter most: 

  1. TAIL = 1266
  2. TREND = 1231
  3. TRADE = 1189 

I don’t think failing at 1231 means we crash right here and now. What I have been saying about crashing stock and commodity prices (20% declines from YTD peaks) is that the probability of crashes occurring goes up as market prices do (on low volume and negative skew).

 

If 1189 (TRADE support) holds, that will be a healthy signal in the immediate-term. If it doesn’t, it will be another bearish one. This is why earnings season hasn’t been this important in years.

 

In the very short-term, earnings should help take some of the headline burden off of European sovereign risks. The problem with that is that earnings like JPM and WFC have been negative catalysts too.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bearish TREND: SP500 Levels, Refreshed - SPX


H&M: Lower Highs, Lower Lows

Not a good nugget related to the strength of the global consumer.

 

September comps -7% showing a sequential slowdown on both a 1 and 2-year basis. With few exceptions, the trendline since August 2010 has been heading lower. The key here is that H&M is ‘comping the comp’ with relatively lousy numbers. So for all those people who think that after 1-year things must start to get better, they might want to tack on another 10 months to their ‘process’.

 

In typical UK fashion, disclosure is horrible, so until the mid-November report,  all we know is the comp, and don’t know what countries or products are driving the business (or not, for that matter). The interesting thing we always keep in mind with H&M is that its geographic dispersion is simply massive, and sells everything from fast fashion apparel, to high-end Champagne, to cosmetics, and more. In other words, a fairly good barometer of the global consumer.

 

H&M: Lower Highs, Lower Lows - H M monthly sales 10 17 11

 

Here is H&M's sales distribution by country as well as the trends in the top 5 sales volume countries as of the September nine month report.

 

H&M: Lower Highs, Lower Lows - H M country dist. 10 17 11

 

H&M: Lower Highs, Lower Lows - HM top 5 countries 


THE HBM: KKD, ARCO, YUM, SBUX, BWLD

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Commodities

 

Cattle futures rallied to a record high as reduced herd sizes and strong demand for U.S. beef continues to support price.

 

 

SUBSECTOR PERFORMANCE

 

Food processor stocks improved as the rebound in corn prices faded.

 

THE HBM: KKD, ARCO, YUM, SBUX, BWLD - subsector fbr

 

 

QUICK SERVICE

 

KKD: Krispy Kreme is to open 35 additional locations in the UK over the next six years.

 

ARCO: Arcos Dorados announced preliminary 3Q revenue of $970m to $990m and net income of $69 to $75 million.  The company expects its systemwide comparable sales growth for the third quarter of 2011 to be within a range of 14.8% to 16.2%.  With respect to EPS, the company expects an impact from an increase in compensation expense, certain one-time charges associated with the partial redemption of the Company’s 2019 Notes and the depreciation of certain local currencies versus the US dollar.

 

YUM:  Taco Bell has named Brian Niccol has its Chief Marketing and Innovation Officer.  Niccol has previously served as general manager at Pizza Hut and had been the brand’s CMO prior to that position.

 

SBUX: Starbucks features in a NY Post story this morning speculating that the company may be entering the pressed-juice bar business.  The article states that CEO Howard Schultz has been “scoping out” top New York juice bars and has hired Liquiteria manager Yohana Bencosme, an 11-year veteran of the juice-bar business from Washington Heights.

 

 

CASUAL DINING

 

BWLD:  Buffalo Wild Wings was the only stock to trade on accelerating volume Friday as it underperformed peer casual dining stocks.

 

THE HBM: KKD, ARCO, YUM, SBUX, BWLD - stocks 1017

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS

CDS tightened for American and European banks last week but widened slightly for most European sovereigns. The TED spread hit another new YTD high mid-week. 

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 6 of 11 improved / 1 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 7 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 7 of 11 worsened / 3 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - Summary

 

1. US Financials CDS Monitor – Swaps tightened across all 28 major domestic financials last week.

Tightened the most vs last week: PMI, MTG, RDN

Tightened the least vs last week:  GS, AXP, COF

Tightened the most vs last month: PMI, CB, MMC

Widened the most vs last month: GS, MS, AIG

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - CDS  US

 

2. European Financials CDS Monitor – Bank swaps mostly tightened in Europe last week.  Swaps tightened for 37 of the 40 reference entities. The average tightening was 7.2%, or 36 basis points, and the median tightening was 5.0%.  Spanish banks saw the least tightening of the group. 

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - CDS  Europe

 

3. European Sovereign CDS – European sovereign swaps were mixed last week. Irish, Spanish, Italian, and French spreads were slightly wider, while Portuguese and German CDS spreads tightened week over week. Most notably, German sovereign CDS spreads tightened by 8.9%.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - Sovereign CDS  1

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - Sovereign CDS  2

 

4. High Yield (YTM) Monitor – High Yield rates fell 28 bps last week.  Rates ended the week at 8.49 versus 8.77 the prior week.

 MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - High Yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 33 points last week, ending at 1548. 

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - LLI LT

 

6. TED Spread Monitor – Last week the TED spread hit a new YTD high of 39.8 on Tuesday before backing off slightly to end the week at 39.5 bps.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index continued its decline, falling 1.4 points to end the week at -20.0.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - JOC LT

 

8. Greek Yield Monitor – Last week the 10-year yield on Greek debt rose 40 bps to end the week at 2393 bps versus 2353 bps the prior week.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - Greek Bond Yields

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  After bottoming in April, the index has been moving higher.  Last week, spreads fell 3 bps and closed at 173 bps.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - MCDX

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index rose 173 points, ending the week at 2173 versus 1899 the prior week.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - Baltic Dry

 

11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 10-year yield rose to 2.25, pushing the 2-10 spread to 198 bps, 19 bps wider than a week ago.   

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - 2 10 Spread

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 2.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - XLF Macro Quant

 

Margin Debt Falls in August

We publish NYSE Margin Debt every month when it’s released. 

 

 NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year.

 

 The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which has retraced back to +0.64 standard deviations as of August, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. We’ve dropped 230 S&P handles in getting from +1.5 standard deviations to +0.64 standard deviations. There’s plenty of room for short/intermediate term reversals within this broader secular move, but overall this setup represents a material headwind for the market.  

 

One limitation of this series is that it is reported on a lag.  The chart shows data through August.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN WHILE SOVEREIGN CDS WIDENS - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: MACAU 3Q TABLES/SLOTS; S'PORE SEPT HOME SALES

The Macau Metro Monitor, October 17, 2011

 

 

3Q GAMING STATISTICS DSEC

The number of tables in Macau increased by 142 QoQ to 5,379.  Slot machines increased by 802 to 15,900.  VIP baccarat accounted for 74% of total GGR.

 

NEW PRIVATE HOME SALES SURGE 21% IN SEPTEMBER Strait Times

Singapore new private home sales surged 21% MoM to 1,631 homes.

 

 


LIZ: NewCo is Just Getting Started

 

To say that interest in LIZ has picked up since the company announced it sold another $328mm worth of assets last week is an understatement. We expect more of the same in the coming weeks. We think the stock’s 50% move this week is not the culmination of the company’s 3-month transformation, but rather that it’s just the beginning of a more sustainable and less volatile move higher from here over the intermediate-term TREND and longer-term TAIL duration.

 

So let’s put some figures into perspective given the company’s shift from a leveraged/consolidating/profit losing stock to a growth stock with what we expect to be a growth multiple virtually overnight:

  1. For starters, $471mm in asset sales over the last 3-months will drastically reduce LIZ’s debt position by more than 60% from $769mm at the end of Q2 by the time these sales are completed by year-end. Moreover, the company will have enough cash to settle its Eurobond in full, but more importantly eliminate related Fx hedges that have created considerable volatility on the P&L.
  2. With Mexx and a basket of tertiary brands no longer holding back the company’s Domestic Direct Brands (Juicy, Lucky, and Kate), we expect ‘the company formerly known as LIZ’ to post low-to-mid teen top-line growth.
    • More specifically, we assume the wholesale jewelry (what’s left of Partnered Brands) is roughly a $75-$80mm business growing at a LSD-MSD rate.
    • Coupled with ~14% top-line growth in the remaining Direct Brands, we expect the company to post 13% revenue growth in 2011 as pro-forma financials become available over the next two quarters followed by 12% and 15% growth in 2012 and 2013 respectively.
  3. Gross margins will also see a significant boost from historic levels. LIZ has posted margins of 46.7% and 49.9% in each of the last two years. The margin profile looked something like this – Mexx at 51%-52% and Partnered Brands at 35-38% compared to Direct Brands at 55%.
  4. SG&A is the biggest variable in “NewCo’s” P&L. While we know the SG&A associated with the Direct Brands – which has been fully allocated –the addition of a corporate expense line due to some residual overhead expenses was suggested on the most recent call. While we are building in nearly $25mm in Partnered Brand related SG&A, this is one of the key questions heading into earnings on November 9th as management looks to reduce costs. Ideally, all costs associated with the sold off assets would be eliminated along with them, but it sounds like we might see at least a few quarters of further ‘streamlining’ as NewCo takes shape.
  5. With net debt down to $270-$290mm by year end (i.e. total debt ~$300mm), we’re modeling interest expense of $27mm and $23.5mm in ’12 and ’13 reflecting a blended rate of 9.2% (comprised of senior secured at 10.5% and convert at 6%).
  6. Tax Rate is likely to shake out at ~35% particularly with the sale of Mexx. However, near-term the company doesn’t expect to be a cash tax payer given its NOLs. This is another item that we expect to have greater clarity on once the Mexx deal is complete – we expect before Nov. 9th.
  7. Lastly, we have to consider the potential impact of the $90mm convert (due 2014), which can be settled in either stock, cash, or some combination therein. The maximum conversion if settled in all stock would be 25.1mm shares. We expect the company to pay some portion (if not most) in cash, which would reduce the dilutive impact if shares were called.

All in, we’re shaking out at $0.47 and $0.84 in 2012 and 2013 EPS respectively, which could translate to $0.40 and $0.69 assuming the maximum possible dilution from the convert. On an EBITDA basis, we’re at $165-$170mm in 2012 compared to updated guidance of $130-$150mm. With roughly $75mm in D&A and ~$10mm in EBIT generated from what’s left of Partnered Brands (wholesales jewelry business and QVC royalty), the company’s updated guidance implies Direct Brands EBIT of $45-65mm. That appears too low, if not – dare we say – down right conservative. We expect Kate to generate $58mm in EBIT alone. With Lucky at breakeven and Juicy EBIT margins of 4%, we’re coming out at ~$85mm in Direct Brands EBIT.

 

Based on the company’s 2012 outlook the stock is trading at 6.5x-7.5x EBITDA and ~6x our numbers – for 2013, you’re looking at ~4x. That’s 9x earnings, and a Free Cash Flow Yield of about 15%.  Not bad at all – especially when the largest profit center (Kate) is growing sustainably at 35%+. While management’s credibility in meeting – let alone beating – expectations is virtually nil, it appears that McComb is finally setting the bar low enough to beat. This one is just getting started.

 

See our September 13th Black Book on LIZ (Get In While You Can) for our full investment thesis.

 

LIZ: NewCo is Just Getting Started - LIZ NewCo Estimates 10 11

 

Casey Flavin

Director


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