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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 10, 2011

 

As we look at today’s set up for the S&P 500, the range is 31 points or -0.66% downside to 1221 and 1.86% upside to 1252. 

 

SECTOR AND GLOBAL PERFORMANCE

 

If you were long King Dollar, Long-term Treasuries, and Growth Slowing yesterday, you enjoyed your day – always a bull market somewhere!

 

THE HEDGEYE DAILY OUTLOOK - levels 1110

 

THE HEDGEYE DAILY OUTLOOK - daily sector performance

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -2517 (+1459) 
  • VOLUME: NYSE 1112.51 (+26.47%)
  • VIX:  +36.16 +8.48 YTD PERFORMANCE: +103.72%
  • SPX PUT/CALL RATIO: 2.18 from 1.98 (10.1%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 44.41
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.04 from 1.96    
  • YIELD CURVE: 1.81 from 1.73

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Import Price Index; M/m est. 0.0% (prior 0.3%)
  • 8:30am: Trade balance; est. -$46.0b (prior -$45.6b)
  • 8:30am: Jobless claims; est. 400k, prior 397k
  • 9am: Fed’s Lockhart speaks in Washington
  • 9:45am: Bloomberg consumer comfort; est. -51.0, prior -53.2
  • 10:30am: EIA natural gas storage
  • 10:40am: Fed’s Evans welcome remarks at Chicago banking conference
  • Noon: Fed’s Bernanke speaks to soldiers in El Paso, Texas
  • 1pm: ECB’s Praet Speaks in Chicago
  • 1pm: U.S. to sell $16b in 30-yr bonds
  • 2pm: Monthly budget statement, est. -102.5b, est. $140.4

 

WHAT TO WATCH: 

  • Svenska Cellulosa agrees to buy Georgia-Pacific’s European tissue ops for $1.8b.
  • U.S. trade deficit probably little changed at $46b, economists est.
  • Greek President Papoulias calls meeting with political party leaders for today:
  • U.S. foreclosure filings rose 7% in October to a seven-month high
  • Cisco rating boosted by Deutsche after 1Q EPS, rev. beat est.
  • Deutsche Telekom 3Q Ebitda beat est.
  • Credit Agricole profit trails est. after EU905m Greek writedown
  • The European Commission slashed its euro-region growth forecast for next year by more than half
  • WhaleShark, which distributes online discounts, said to gain funding that values it at as much as $1b
  • PC shipments may fall as much as 3.4% in 4Q following floding in Thailand, IDC says
  • Mitsubishi agreed to pay $5.39b for Anglo American’s Chilean copper unit
  • U.S. Bancorp sued by an Oklahoma police pension fund over mortgage bonds allegations.
  • Italy sells 1-yr bill as 6.087%, most since Sept. 1997

 

COMMODITY/GROWTH EXPECTATION

  • Copper Drops to Two-Week Low as EU Cuts Euro Growth Forecast
  • Gold Falls for Second Day in New York After Gain in Dollar Value
  • Oil Rises Near Three-Month High on Europe Sentiment, U.S. Supply
  • Solar Glut Worsens as Supply Surge Cuts Prices 93%: Commodities
  • Most Refinery Cuts Since ’80s Can’t Help Profits: Energy Markets
  • Noble Falls Most Since 1998, Bond Risk Doubles as CEO Quits
  • IEA Cuts Oil Demand Forecast a Third Month on Weaker U.S., Japan
  • Gold ETF Calls Surging Most Since U.S. Stripped of AAA: Options
  • Palm Oil Jumps to 3-Month High as Stockpiles Decline in Malaysia
  • Transocean Risks Junk Grade as Cash Flow Ebbs: Corporate Finance
  • Soybeans, Grains Decline on Concern Euro Crisis May Slow Demand
  • Gold Exchange-Traded Products Attracted $2 Billion in October
  • Indonesian Tin Shipments Gain for First Time in Four Months
  • Copper Declines to Two Week-Low on Europe
  • Brent Oil to Drop After Failing at $116 Peak: Technical Analysis
  • Asia Naphtha Crack Drops; Hin Leong Buys Fuel Oil: Oil Products

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

CURRENCIES

 

EURO – when our only line of remaining support (TRADE line support of $1.37) snapped yesterday, oh did they snap! Not only is this risk cleanly defined by The Correlation Risk, but a flailing currency perpetuates economic stagflation. European Stagflation is not consensus, yet – but it will be as long as Growth goes negative y/y and these inflation readings continue to accel sequentially.

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

ASIA – Growth Slowing continues to be the #1 factor that US centric investors (and European gawkers) have missed all year and will continue to miss if they don’t start modeling the day-to-day risk in both the Asian high-frequency economic data and what it’s embedding itself into Asian stocks/bonds/FX prices. Hang Seng down -5.3% last night and down -21.9% since April (crashing)

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

The Hedgeye Macro Team

Howard Penney

Managing Director

 

 

 


KSS: Quick Take

What’s not to like? But they’re raising the bar, and probably won’t get paid for it.

 

We have a very mixed read on this KSS quarter. On one hand, it was the mother of all in-line performances – something we’ve grown to know and love (and expect) out of this company. Sales were already a known entity and margins came in virtually in-line. The inventory spread improved year/year and sequentially, making KSS one of the few retailers to post this trend. In effect, it was the opposite of what we saw from Macy’s. That’s notable given that KSS represents roughly 8% of the softlines industry in aggregate – the more sane the industry is on inventories – especially in the mid-tier -- the better. KSS showed yet again, why it sets so many benchmarks for the rest of the industry.

 

But we’re a bit perplexed on guidance. This is a complete and total nit-pick, but why take up 4Q at a time when yy compares are getting tough? With so much uncertainty coming down the pike, why not keep the year even instead of stepping up the Street’s expectations by 5% when we’re already looking at  18 Buys, 6 Holds, and only 1 Sell? Buy-side sentiment is slightly less positive, with 6% of the float short – on the higher side for KSS. But blended together in our Sentiment Indicator, people are still bulled-up on this name. (see chart below).

 

We have no reason to doubt that the KSS will hit numbers in 4Q. There are a lot of factors at play, and it’s way too early to tell. But the ante chip just went up a notch and now KSS HAS TO hit estimates.

 

More after the call.

 

 

KSS: Quick Take - KSS Sentiment 11 10 11

 

KSS: Quick Take - KSS SIGMA 11 10 11


Loving Life

This note was originally published at 8am on November 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Choose a job you love, and you will never have to work a day in your life.”

-Confucius

 

On this day in 2007, my first son Jack was born. Less than a week prior to that, on November 2nd, 2007, I was fired. Having recently achieved my highest ranking “title” in the vaunted hedge fund universe, this was a rather abrupt end to what was only a 10 month old affair at Carlyle’s new hedge fund.

 

All that ends abruptly creates opportunities for new beginnings. I’d never been cut from a team or fired by a firm before (unless I fire myself, hopefully that doesn’t happen again!). However, I firmly believe that men and women have to be able to “fail” in order to ultimately succeed. It’s the only way to learn how to rethink and rework what it is that we are here to do. Evolve.

 

Thank you to Laura, my family, and firm for giving me such a tremendous opportunity to help create Hedgeye. I am Loving Life.

 

Back to the Global Macro Grind

 

With all of the October 2011 fanfare associated with the only good month stocks and commodities have had since April, last week was a reminder of what intermediate to long-term equity investors should recognize as bearish. Welcome to November.

 

If you’ve taken the lessons of the October 2007 US stock market top and embraced it as an opportunity to change your process to one that’s more diversified and Global Macro in scope, last week was a very good one for you. Both the US Dollar and US Treasuries outperformed, big time.

 

On the week, with the US Dollar Index realizing an impressive +2.5% week-over-week return, here’s how everything that’s inversely correlated to the USD moved:

  1. US Stocks (SP500) = down -2.5%
  2. Asian Stocks (MSCI Index) = down -3.6%
  3. Latin American Stocks (MSCI Index) = down -3.3%
  4. Euro/USD = down -2.1%
  5. Canadian Dollar (CAD/USD) = down -2.0%
  6. CRB Commodities Index = down -0.9%
  7. WTIC Oil = up +0.9%
  8. Gold = up +0.5%
  9. Copper = down -3.8%
  10. 10-yr US Treasury Yields = down -12.5%

Interestingly, with both Oil and Gold maintaining 0.7-0.9 inverse correlations to the US Dollar, they diverged versus just about everything else in our Global Macro Correlation model. The intermediate-term TREND between Oil and the US Dollar since May remains intact, however, with the USD Index up +5.4% and Oil down -8.7%, since.

 

Positively correlated with the US Dollar Index (this is the good news, if you’ve been long them since May) are:

  1. Long-term Treasury Bonds (TLT)
  2. US Treasury Flattener (FLAT)
  3. Corporate Bonds (LQD)

Oh, and Volatility (VIX)…

 

Volatility was up +23% last week alone and is up +101% since The Bernank offered us his first global press conference on what he calls “full employment and price stability” (end of April 2011).

 

Not.

 

With the so called “catalyst” of the G20 meetings gone, and another terrible 2011 US employment report behind us, “the gales of November came early.”

 

That line, as many locals from Thunder Bay, Ontario would recognize, comes from one of our local risk management ballads called The Wreck of the Edmund Fitzgerald:

 

“The legend lives on from the Chipewa on down

Of the big lake they called ‘Gitche Gumee’

The lake it is said, never gives up her dead

When the skies of November turn gloomy”

 

And since today is just another day for Risk Managers who have proactively prepared for the Growth Slowing storm of 2011, I’ll just end this morning’s missive here. Given the number of rants you’ve all put up with in the last 4 years of my writing these notes, I owe you all some brevity.

 

My immediate-term support and resistance ranges for Gold (bullish TRADE, TREND, and TAIL), Oil (bearish TAIL, bullish TRADE), German DAX (bearish TRADE, TREND, and TAIL), and the SP500 (bullish TREND; bearish TAIL) are now $1732-1778, $92.97-93.88, 5711-6068, and 1210-1267, respectively.

 

Happy Birthday Jack and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Loving Life - Chart of the Day

 

Loving Life - Virtual Portfolio


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

LIZ: It's All About Execution

 

It wouldn’t be a LIZ call without plenty of puts and takes, but the bottom-line is that our thesis remains unchanged on the name. At this point, it’s all about execution. That will ultimately determine whether this is a $10, or closer to $20 stock 12-18 months from now. Either way, we think LIZ is headed higher.

 

Generally speaking we got the added color we were looking for on the conference call regarding several items that we called out earlier – we’ll hit on that in a minute. Our overall take on the quarter is that sales and segment margins are coming in better with more wood to chop on corporate overhead than expected. Coupled with uncertainty regarding the timing of debt reduction, we expect this process to be choppy near-term, but think the visibility of F12 and F13 EBITDA remains greatly improved and highly attractive on an annual basis.

 

We’re taking up our top line growth forecast by 2% to 14.5%, though we’re also taking up costs needed to secure the growth. Netting those two out, our numbers are down modestly (to EPS of $0.36 and $0.73 and $155mm and $215mm in EBITDA for this year and next year, respectively). We NEVER like a downward revision – but in a market like this where investors are paying up for stories that have rapid underlying growth with strong visibility, we’re going to give LIZ a bit of a pass. That’s especially when our estimates remain 2x consensus in the outer years.

 

Here are the key highlights from the quarter:

  1. Direct Brands: Kate and Lucky continue to press forward with both Q3 and October sales coming in strong. In fact, management got incrementally more bullish on both increasing the long-term outlook for Kate margins to high-teens to low-twenties (from 15%-20%) and margins at Lucky noting they expect to turn profitable for the year in Q4. In addition, the company is accelerating store growth at Kate by another 10%-20% to 20-25 in 2012. Given that Kate accounts for over 50% of EBIT this is exactly where you want to see incremental investment. Juicy came in a little lighter than expected in October. Since we aren’t expecting any real turn in sales until the 1H of next year when new product hits shelves – we’re not overly concerned.
  2. Partnered Brands: With assets sold rolling off and the DKNY license expiring at year-end, this segment is quickly consolidating to a base of ~$20mm in revs per quarter. It will be closer to $60mm in Q4 for the aforementioned factors, but the margin profile is coming in better than expected. Instead of the 10-12% margins we were modeling, on a go forward basis this business is going to have a margin profile in the mid-teens.
  3. Corporate Expenses: This was an incremental negative in the quarter. As it turns out, the corporate expense line is currently $70-$75mm, which the company intends to work down to $40-$50mm over time – more than we expected. By the end of F12, the company expects to have corporate overhead down to $55-$60mm with ~$15mm earmarked for next year. Roughly $10mm is associated with Mexx, which we expect to be cut on the front end resulting in corporate expenses of ~$60mm for F12.
  4. CapEx: Given the consolidation in sales, we expected CapEx to come in around $50-$60mm in F12 following ~$60-$65mm of CapEx in F11. Instead, the company is taking CapEx up to $70-$75mm next year to drive store growth as well as e-commerce and IT systems. At ~4.5%-5% of sales, this would represent the highest level of capital spending in company history. While a slight negative for F12 FCF, this has positive implications for revenue growth 2-3 years out.
  5. Debt Reduction: There is still uncertainty regarding the exact timing of when the company is going to settle either the Eurobond or convert. As such, we expect continued earnings volatility near-term until the Eurobond is settled, which is still the company’s first priority.
  6. Net Operating Losses: The updated loss carry forwards the company will have on its books by year-end is $200-$250mm, which LIZ can use as a tax shield for next few years.

All in, we’re adjusting our numbers to reflect higher sales growth of 15% in each of the next two years while also accounting for higher corporate expense. As a result, we’re reducing our EPS estimates by ~$0.10 to $0.36 and $0.73 in F12 and F13 respectively and EBITDA by ~$15mm to $155mm in F12 and $10mm to $215mm in F13. Using a blended 8x multiple, we’re still looking at a mid-teens stock. At this point, it’s all about execution. That will ultimately determine whether this is a $10, or closer to $20 stock 12-18 months from now. This remains at the top of our long list.

 

 

Casey Flavin

Director

 

 


GENTING 3Q11 CONF CALL NOTES

Large bad debt provision hurt results. Cautious tone on credit and Macau.

 

 

CONF CALL

  • Adjusted GGR grew 10% sequentially helped by a high 3.17% win rate while volumes remained stable
  • Slightly lower visitation was offset by increasing spend per visit
  • With close to peak occupancy, the pending opening of their new hotel will help complement their VIP business
  • They are entering the busiest period of the year now
    • Nov 3rd opening of December
    • West Zone openings
  • The tightening of lending in China is going to have a negative impact on VIP play.  They have already seen an impact of the tightening policies in China. As a result, they are provisioning more against their receivables.

 

Q&A

  • RC market share volume: 44%
    • Have 200 luxury rooms coming online by the end of the year and then 20 more villas in the beginning of next year which should help their market share
  • Gaming will always be their core business.  They are very optimistic about some opportunities in Asia.  They are pretty optimistic that Japan will legalize gaming within the next 1-2 years.  The bill will be tabled in this current parliamentary session and voted on in the Spring Diet session.  Looks like there will be one or 2 licenses in Japan.
  • Nothing will happen in Korea for at least 7 months until after the presidential elections
  • Mass market share was 48%
    • Volumes in Mass were flat sequentially
  • No changes with commissions – stable
  • More optimistic that junkets will happen in the next few months
  • Doesn’t think that Macau can keep growing at the rate that it is growing given that China tightening is impacting the real estate business and that property prices have already started to come down.  That must have at least some trickling affect on to the players.
  • A higher provision rate than prior years? This year is already at a higher rate than last year.  Don’t think that they will see a continued rate of provision creep.
  • They were a little slow in ramping up to the max slot/ETG machines.  Will max out to 2500 by year end. They are also replacing some poor performing tables.  Their competitor has already maxed out their machines.
  • They are still looking at their receivables each month. They are taking a more conservative view on collections but they haven’t changed their methodology.
  • Their margins should be between 45-50% going forward for the next 4 quarters. Between now and 3Q12 they will have lots of pre-opening expenses and they are hiring a lot of people but there is no revenue.  So they won’t have stabilized margins until 4Q12/1Q13.
  • 570 tables right now - 1/3 VIP table
  • 1,315 slots, 544 ETG's. By YE, they will have the same # of tables and 1,744 slots and 726 ETGs
  • Not interested in partnering up in Miami; Genting Malaysia looks after NA so they would have no involvement there.
  • Yes, they are very active in North Asia.  They are interested in Korea.
  • They cannot pay dividends until the end of 2013 or 2014 under their bank covenant agreement
  • 48% market share was for Mass + slot; which was roughly the same for each segment
  • No meaningful adjustment needed for luck this quarter because of the bad luck provision
  • Maintenance will stay at $200MM
  • Extra hotel rooms should drive $2MM per day per hotel room of contribution - $713MM * 16-20% = $100MM of extra gaming revenue per year.
  • The villas can drive the Middle East and West Asian markets which they haven’t even tapped yet.  Think that they can also drive North Asian business along with the attractions opening at Marine Life Park
  • Mass market hold has been doing quite well and has been on an increasing trend
  • Split of VIP vs. Mass revenue: 53% of Rolling is gross and on a net basis VIP is 42% net
  • If they are tapped out on rooms why is it that their occupancy isn’t higher vs. what MBS is seeing – same question for ADR.
    • Anything above 90% occupancy you end of giving away your rooms for free on a same day policy many times.
    • They only have half the rooms that MBS has so they need to be more prudent in yielding their rooms than MBS
  • Equarius rooms pretty similar to Ritz Carlton Singapore rooms and the Villas will be 4x the size of their current 4 villas
  • ETG count at the end of 2Q:  543 tables, 1,290 slots, 496 ETGs
  • Change in the profile of their VIP players this past quarter? No
  • What kind of criteria do they look at when they decide how much receivables to write down?  They have a credit committee meeting every month and then decide if they need to write anything down.
  • 80-90% of their VIP customers come from overseas
  • Why is their Mass volume flat QoQ?
    • Even for Mass market, rooms also play a big part – since still a large % of their players are overseas
  • Sense is that the theme park is subject to seasonal trends around the school holidays but since they are just lapping the first year they are just learning about how to manage through seasonal patterns.  Once they open the Marine Life Park they will be able to bundle packages to get people to stay longer.
  • Total gross gaming revenue split – was 48% for them
  • 48% share: Mass drop
  • VIP turnover was flat QoQ
  • Since the average yield per machine hasn’t been increasing, why are they adding more machines?
    • Utilization of machines is different during different days and times of days.  During peak times, they are tapped out- so even if there are only 10-20 days a year where they are peaked out it makes sense to add more machines

 

HIGHLIGHTS FROM THE RELEASE

  • Group revs: S$801.8MM, +10% YoY, attributed to higher VIP hold
  • Daily visitation to Universal Studio Singapore: 9,400
    • Average spending: S$84
    • Hotel occupancy: 89%; ADR: S$315
  • Adjusted EBITDA: S$375.6MM, higher VIP hold offset by higher bad debt by S$37.8MM
  • Development/construction at west zone of RWS
    • Equarius Hotel will open at end of 2011, with Beach Villas soon thereafter
    • The last phase will be complete by mid-2012
  • The economic uncertainties in Europe and the U.S. have presented challenges to the Asian economies. Amidst such volatile financial environment, we have exercised caution in our dealings and prudence in our approach.

Big Sports Apparel Trends

Sports apparel numbers continue to defy gravity. Let's see if the trend holds in the coming weeks when comps get tough. Regardless, the numbers look solid. Good for FL FINL DKS HIBB.

 

Big Sports Apparel Trends - FW aPP chart 1

 

Big Sports Apparel Trends - apparel 11 9 11

 

Big Sports Apparel Trends - FW chart

 

Big Sports Apparel Trends - FW chart 2

 

Big Sports Apparel Trends - FW chart 3

 

Big Sports Apparel Trends - FW chart 4


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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