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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 2, 2012


As we look at today’s set up for the S&P 500, the range is 12 points or -0.81% downside to 1363 and 0.07% upside to 1375. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

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EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1033 (-1982) 
  • VOLUME: NYSE 814.48 (-26.71%)
  • VIX:  17.26 -6.35% YTD PERFORMANCE: -26.24%
  • SPX PUT/CALL RATIO: 2.29 from 2.48 (-7.66%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 40.85
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 2.01 from 2.03
  • YIELD CURVE: 1.73 from 1.74 

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: ISM New York
  • 1pm: Baker Hughes rig count
  • 8pm: Fed’s Bullard speaks on U.S. economy in Vancouver 

     GOVERNMENT:

    • President Barack Obama visits wounded service members at Walter Reed hospital in Bethesda, Md.
    • House not in session, Senate in session
      • Senate meets to resume consideration of surface transportation bill, 10am 

WHAT TO WATCH:

  • Yelp priced 7.15m shares at $15 each in IPO after offering them at $12-$14 apiece
  • European leaders agreed to provide capital faster for planned permanent bailout fund
  • Settlement talks continue over blame for Deepwater Horizon sinking, oil spill; trial will otherwise begin March 5
  • Sands China profit beat estimates on jump in Macau casino sales; watch LVS
  • President Obama said to have told Wall Street donors that Democrats can’t unilaterally stop accepting money from big- dollar PACs
  • U.S. ITC may announce whether it will review judge’s finding that Motorola Mobility infringed one Microsoft patent and not six others, 5pm
  • Washington state Republican presidential caucuses take place tomorrow 

 EARNINGS:

    • Big Lots (BIG) 6 a.m., $1.74
    • Exelis (XLS) 7am, $0.56
    • Genesco (GCO) 7:35am, $1.67
    • TransAlta (TA CN) 8:54am, C$0.24 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


OIL – down 1% this morning but the lines that matter most continue to hold as the US Dollar’s bid remains fleeting. If Iran doesn’t send a missile somewhere soon, we’re going to need another line of storytelling out of Washington, fast. Immediate-term supports for Brent and WTI = $123.29 and 106.12, respectively. 

  • Copper Bull Streak Extends to Longest Since October: Commodities
  • Oil Heads for Weekly Decline After Saudi Arabia Denies Sabotage
  • Cocoa Falls as Rains May Boost Crops in West Africa; Sugar Rises
  • Soybeans Set for Third Weekly Gain on U.S. Sales, Drought Woes
  • Gold May Fall in London on Speculation Fed Will Refrain From QE3
  • Copper May Decline as Shanghai Stockpiles Increase to a Record
  • Bangladesh Plans to Import 100,000 Tons of Sugar From Brazil
  • Palm Oil Posts First Weekly Decline in Four as Exports Weaken
  • Economic Surprises Signal Rising Metals Demand: Chart of the Day
  • Coal to Japan Seen Near Record in Xstrata Talks: Energy Markets
  • Aluminium Bahrain Seeks to Keep Bribery Suit Against Alcoa Alive
  • Palm Oil Imports by Pakistan to Slump as Strike Shuts Factories
  • Oil Prices May Rise Next Week as Gasoline Gains, Survey Shows
  • Oil Falls as Saudi Arabia Denies Sabotage
  • Rubber Gains to 5-Month High as U.S. Data Boosts Demand Outlook
  • Saudis Suffered No Sabotage to Oil Facilities, Ministry Says
  • Russia Plans $8 Billion Siberia Investment to Boost Coal Exports 

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CURRENCIES


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EUROPEAN MARKETS


RUSSIA – the most popular man with Putin right now has to be The Bernank. Putin gets paid in Petro-Dollars, and with the Petro straight up, Dollar straight down, what more could our comrade want heading into this weekend’s election? Russia +25.2% YTD. That’s probably a depression or deflation signal, or something.

 

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ASIAN MARKETS


YEN – this is easily the most recognizable downward dog pattern that consensus still isn’t talking about. Straight down again (-0.46%) vs the USD this morning, the Japanese are about to engage in selling more sovereign debt than even the Americans and Europeans could. We have a 100 slide deck and conference call on Japan at 11AM EST today if you want to get up to speed on it.

 

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MIDDLE EAST


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The Hedgeye Macro Team

 


THE M3: GAMING DRAFT BILL; INCOME SUBSIDY

The Macau Metro Monitor, March 2, 2012

 

 

CALLS FOR GAMING BAN ON CASINO STAFF Macau Daily Times

Some lawmakers have called on the government to extend the gaming ban on public servants to casino staff, as part of a draft bill on restrictions for access, stay and gaming in casinos.  The draft law, which applies to slot parlours,  raises the minimum age to enter and work inside a casino from 18 to 21. 

 

The law proposal was discussed at the Legislative Assembly’s first standing committee yesterday but the suggestion gathered no consensus.  Lawmakers are now waiting for the Administration to put forward the final version of the bill before signing their report. The proposal could be ready for voting in April.

 

NO INCOME SUBSIDY RAISE DESPITE INFLATION Macau Daily Times

The Macau Executive Council kept the income subsidy scheme of helping low-salary permanent residents flat YoY at MOP 4,400 despite inflation reaching almost 6% in the last 12 months.  “There are other measures launched by the government to alleviate low-income earners’ living pressure,” Executive Council spokesperson Leong Heng Teng said.




Shorting EWI: Italy Trade Update

Positions in Europe: Short Italy (EWI)

 

Keith shorted EWI in the Hedgeye Virtual Portfolio today with the etf overbought on its immediate term TRADE duration. Our thesis on Italy remains intact: the country’s public debt overhang will continue to compromise growth and compress tax receipts as PM Monti continues to press the austerity button that should crimp confidence and spending and heighten unemployment.  And recent fundamentals are reflecting this weakness: Retail Sales were down -3.7% in DEC Y/Y vs -1.8% in NOV; Business Confidence fell to 91.5 in FEB vs 92.1 in JAN; the Unemployment Rate rose to 9.2% in JAN vs 8.9% DEC; and CPI remains elevated at 3.4% in JAN Y/Y vs 2.6% for the Eurozone aggregate.

 

We’re forecasting a long TAIL to Europe’s sovereign debt ‘crisis’, especially under a scenario in which the current Eurozone fabric is maintained (that is to say Greece and Portugal don’t “default” and stay in the Union), which we think is probable given Eurocrat resolve. As the goalposts continue to change (think ISDA ruling on Greek debt) and uncertainty abounds (think structure around the ESM and EFSF or terms and outcome of a “fiscal compact”) we expect volatility ahead across European markets and we’ll tactically take advantage of these price swings.

 

Matthew Hedrick

Senior Analyst

 

Shorting EWI: Italy Trade Update - 1. MIB


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 80.28%
  • SHORT SIGNALS 78.51%

Retail: Spotlight on the Mid-Tier

February comps came in largely ahead of expectations shining the spotlight on mid-tier weakness ever brighter.

 

February sales reflect a solid start to the year for retailers…most of retail that is. The beat-to-miss ratio was favorably skewed with 14 companies coming in ahead of expectations compared to only 4 misses. The most notable callout from the morning is the fact that on the same month that JCP and DDS join the ranks of the SSS alumni, KSS was one of the few retailers to come in below expectations shining the spotlight on mid-tier weakness ever brighter. This is consistent with our view that the increasingly competitive pricing dynamic playing out in the mid-tier is heating up.

 

Here are some additional callouts:

 

  • The High/Low-end department store performance spread remains intact. JWN comps came in 4+ pts above consensus at +10.2%, SKS +6.6% & M +4.6% while KSS came in (-0.8%) as one of the key misses on the morning. JWN highlighted a shoe clearance event that typically takes place in March as a driver of 200-250 bps of comp during the month with a negative 150-200bps impact on March however excluding the event’s contribution, comps would have still come in ahead of estimates by 2 pts.  
  • Off-price retailers ROST and TJX continue to outperform with both reporting +9% in February ahead of expectations. Notably the spread between the blended off-price comp and total monthly comp increased from +3.9% to +4.1% in February. Both retailers highlighted favorable weather as drivers of spring apparel sales during the month. Exiting 2012, guidance from both TJX and ROST suggested upside to consensus 2012 EPS expectations. As pricing continues to heat up at the mid tier (see KSS), we expect the off-price channel to continue to outperform.  
  • KSS: was the clear underperformer (-0.8%) vs. (-0.1%E) and is now the last mid-tier retailer standing with both JCP and DDS no longer reporting monthly comps. KSS highlighted children’s, women’s, footwear and home as slightly positive to negative; all categories that were positive callouts among other companies reporting this morning.
  • GPS: was one of the biggest upside surprises of the day +4% vs. (-1.6%E) with positive comp growth across all of the domestic businesses. The first round of merchandise designed at the new Global Creative Center in NYC hit stores on February 10th. CEO Glenn Murphy did not comment specifically on the Feb MTD performance of the new spring product on last week’s call but not surprisingly was optimistic regarding the creativity at the new global hub.
  • TGT: beat expectations in both January & February by 2 pts up +7% this month. February performance was notable given an increase in comp transactions, average transaction size, better than expected traffic and comp increases in every region. Further, TGT comped positively across all of its major categories for the first time in over a year (see table below).
  • LTD: came in +8% vs. +7%E after increasing guidance for the month from LSD to MSD. Consistent with guidance given on the Q4 call, the company again highlighted merchandise margins down in all segments.
  • ROST, TJX, TGT were all positive regarding their inventory position at month end while WTSLA highlighted low inventory levels resulting in weaker top line results.
  • At a category level, Handbags, Footwear and Accessories continue to perform well at the high-end (JWN, SKS) with men’s and women’s apparel highlighted by TGT, M, BKE, SKS, ROST.

 

Longs: LIZ, NKE, RL

Shorts: HBI, JCP, HIBB, JNY

 

Matthew Darula

Analyst

 

Retail: Spotlight on the Mid-Tier - high low comp

 

Retail: Spotlight on the Mid-Tier - Total SSS

 

Retail: Spotlight on the Mid-Tier - TGT SSS grid


INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH

Initial Claims Flat for the Third Week

The headline initial claims number came in flat, falling 2k after the upward revision to the prior week's data. Rolling claims fell 5.5k to 354k. On a non-seasonally adjusted basis, claims fell 15k to 332k.

 

In our note last week, we walked through a quantification of the distortion in seasonal adjustment factors arising from the Lehman shock in 2008.  Because the Labor Department uses a five-year lookback to create its seaosnal adjustment, the 2008 shock is still percolating through the data.  

 

The seasonal distortion plays out as follows.  Claims are understated in the last weeks of February by the largest amount.  From now through May, the understatement disappears.  Absent an underlying trend in the series, this effect would drive claims higher by about 20k over the course of the next three months.  By July, the distortion reappears, this time as an overstatement, pushing claims slightly higher still. From July through year-end, the distortion disappears, and the underlying trend will be reflected in the weekly data. 

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - Rolling2

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - Raw2

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - NSA

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - s p

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - Fed and Claims

 

2-10 Spread

The 2-10 spread tightened 3 bps versus last week to 167 bps as of yesterday.  The ten-year bond yield decreased 3 bps to 197 bps.

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - 2 10

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS HOLD STEADY - SEASONAL TAILWIND STARTS TO FADE IN MARCH - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 


LIZ: Noise = Buying Opportunity

There was a lot of noise embedded in LIZ’s Q4 results as expected, but the take away from the quarter is unequivocally net positive. We see weakness in the stock following these Q4 results as a buying opportunity for those who remained on the sidelines looking to get into the stock below $10. Here’s your chance.

 

Here are our thoughts on the quarter and LIZ story:

  • For starters, headline Q4 revenues came in down -3%, but on an adjusted bases accounting for businesses sold or exited, revenues came in up +12%. Kate and Lucky came in in-line to above our expectations while the Partnered Brand business (now Adelington Design) and Juicy accounted for the $25mm difference equally.
  • As expected, the additional brand disclosure provided improved clarity revealing among other things how profitable and meaningful Kate Spade is to the LIZ story. We expect the profitability of Kate to continue to ramp up to 16-17% operating margins over the next two years. Also revealed was that Lucky did indeed breakeven for the year. We expect margins to expand meaningfully to MSD this year as top-line strength continues.
  • Additionally, we see the comp outlook by each brand to be conservative. The outlook for Juicy is in-line with our own. As we noted in Monday’s “LIZ Q4 Preview” note, we expect this turn at Juicy to be a gradual one, which is reflected in MSD comp growth for 2012. Lucky, on the other hand is starting off the year better than we expected as the women’s business continues to drive growth. We are taking our numbers up to a +11% comp from our prior +8% estimate.
  • As for Kate, we think management is flat out sandbagging expectations – that’s fine actually. It does no good to set unrealistic expectations for the brand. Compared to management’s outlook for mid-teen comps and 30%+ revenues, we are modeling +20% comps and 40% revenue growth, which could in fact prove conservative.
  • One of the few callouts from the call that differed from our expectations was the announcement that 35-40 stores will be added at Kate and Jack Spade alone ahead of the 20 stores we were modeling. This will adding an incremental $25mm to F13 revenues driving sustainable 35%-40% revenue growth over the next 3-years.

 

With gross margins expanding largely from brand mix and SG&A cost reductions coming in as planned we are shaking out $0.26 in EPS for F12 and $0.65 in F13 reflecting $145mm and $205mm in F12 and F13 EBITDA respectively. As we move through 2012, we think investors will start looking out to $1 in earnings power in three years (F14). That is NOT reflected in the stock at $10. Below is our updated sum-of-the-parts by brand. LIZ remains our top long and we think it doubles again this year.

 

LIZ: Noise = Buying Opportunity - LIZ SOP


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