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The Best and Worst of Times

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

-Charles Dickens


First of all, sorry for the long quote this morning.  I’m sure after reading some of my more eclectic quotes and missives this week, you are all awaiting Keith’s return with bated breath.  But as I was contemplating the stock market this week and the earnings results that were released, somehow Dickens’ quote from “A Tale of Two Cities” seemed appropriate.


The SP500 opened Monday up near 1,380 and closed yesterday at near 1,378.  So despite the sizeable swings mid-week, the broad equity market has done nothing all week.  It seems Mr. Market, just like the Dickens’ quote, can’t decide:  Is growth slowing? Or is growth accelerating? Is Europe out of the woods? Or is sovereign risk accelerating in Europe?  Is China going to ease more? Or is inflation more of risk than growth in China?


We’ve been somewhat definitive on our views that we believe global growth is slowing sequentially, but the market hasn’t totally come around to accept the Hedgeye views just as of yet.  (I guess we will have to get Keith on CNBC more next week to preach the gospel.)  On the growth front, an interesting data point we recently picked up was that traffic through the Suez Canal was only up 1.2% for the month of February year-over-year basis and has been in steady decline for really the last year.  In the Chart of the Day, we show this trend and have combined it with a couple pictures of Hedgeye friend and former NHLer Jeff Hamilton.  As the pictures show, life as a pro hockey player is sometimes good and sometimes bad as well.


Obviously this is but one data point, but this is literally the worst month of traffic through the Suez Canal since the end of the most recent global recession.  As well, the Suez is far from an insignificant indicator.  It is estimated that in total almost 8% of the world’s sea trade is transported through the Suez Canal.  So, this is a data point worth writing in the notebook.


Just as with the continued angst over the direction of global growth, there remains debate over the direction of Europe from a debt perspective.  Some, like Bank of America, are ready to call a bottom in Europeans debt woes as indicated by B of A’s positive call on European Banks this morning.   The actual sovereign market itself, as manipulated as it is, begs to differ though, as Spanish yields on 10-year government bonds are back above 6.0% this morning.


My brothers up in Canada are even getting into the European mix this morning.  Canadian Finance Minister Jim Flaherty came out publically yesterday to propose that non-European nations should have a collective veto when European nations come to the IMF to ask for aid.  Obviously, Flaherty sees what we see, which is that the likelihood of a Socialist getting elected in France means that “the ask” from Europe could soon get a lot bigger.


As well, you can’t really blame Canada (pun intended) for pushing back on continued carte blanche aid to Europe.  In 1993, Canada’s fiscal house was in terrible order and Standard & Poor’s rightfully downgraded Canada debt.  The Canadians then righted the fiscal ship the hard way by implementing a consumption tax and making tough budget cuts, by some estimates almost 20% across the board.  As Canadian Finance Minister Paul Martin said at the time, “Let there be no doubt about that. We will balance the books.”  There are some other nations that could use some of that Canadian fiscal resolve.  (Incidentally, we like the Loonie on the long side over the long term in part due to this.)


As usual during earnings season, we are going to have a note up on our website later today that discusses our view of the broad energy sector this earnings season.  One quote from the note is worth sharing this morning, which is as follows:


“The macro backdrop for the quarter is muddled – Brent crude averaged $118.70/bbl in the quarter, +13% YoY and +9% QoQ; NYMEX natural gas averaged $2.50/Mcf, -40% YoY and -28% QoQ; rig count growth slowed in North America to +12% YoY (vs. +19% YoY in 4Q11); and worldwide rig count growth slowed to +9% YoY (vs. +15% YoY in 4Q11).  Our proprietary US oil and gas inflation index shows that costs for producers were +8.1% YoY in 1Q12, the lowest level of inflation since 4Q10.”


To say that the energy pictures is currently muddled is definitely the Hedgeye understatement of the week, but the key fact I would point out is that natural gas is down 40% y-o-y and oil is up 13% y-o-y.  Thematically, those companies that use natural gas as an input, like certain industrial and chemical companies, are receiving the input cost boon of a life time. 

Meanwhile, any company that competes with the price of gasoline for the consumer’s wallet is certainly feeling the pinch.


The immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Euro/USD, and the SP500 are now $1, $116.71-119.34, $79.25-79.65, $81.12-82.67, $1.30-1.32, and 1, respectively.


Enjoy the weekend with your families,


Daryl G. Jones

Director of Research


The Best and Worst of Times - Chart of the Day


The Best and Worst of Times - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 20, 2012

As we look at today’s set up for the S&P 500, the range is 39 points or -1.52% downside to 1356 and 1.31% upside to 1395. 












    • Up from the prior day’s trading of -1015
  • VOLUME: on 4/19 NYSE 822.92
    • Increase versus prior day’s trading of 14.14%
  • VIX:  as of 4/19 was at 18.36
    • Decrease versus most recent day’s trading of -1.50%
    • Year-to-date decrease of -21.54%
  • SPX PUT/CALL RATIO: as of 04/19 closed at 1.62
    • Down from the day prior at 2.74 


  • TED SPREAD: as of this morning 40
  • 3-MONTH T-BILL YIELD: as of this morning 0.07%
  • 10-Year: as of this morning 1.98
    • Up from prior day’s trading of 1.97
  • YIELD CURVE: as of this morning 1.72
    • Increase from prior day’s trading at 1.70 

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: G-20 central bankers, finance ministers meet in Washington
  • IMF, World Bank host spring meetings
  • 1pm: Baker Hughes rig count
  • 2pm: Treasury Secretary Tim Geithner hosts Deauville Partnership Ministerial on Arab Countries in Transition 


    • Quinnipiac University releases poll of American voters on economy, bailout of auto industry, health care law, 6am
    • Mitt Romney speaks to RNC State Chairman’s National Meeting in Scottsdale, Ariz, Noon
    • Filing deadline for campaign finance reports
    • Senate, House not in session
    • CFTC holds closed hearing on enforcement matters, 10am   


  • Consumer Financial Protection Bureau said to be scrutinizing nine banks including JPMorgan, Wells Fargo and BofA on overdraft protection programs
  • German business confidence unexpectedly increased to nine- month high in April; U.K. retail sales beat est.
  • Former Chinese President Jiang Zemin said to have met Starbucks CEO Howard Schultz on April 17 in Beijing
  • TPG Capital won’t improve its $816m bid for GlobeOp Financial Services, clearing way for SS&C Technologies to buy the hedge fund administrator
  • JPMorgan, fighting Lehman Brothers over $8.6b the defunct firm wants back, won dismissal yesterday of some claims
  • Samsung Electronics sued Apple again in the U.S. over patent infringements, one day after cos. ordered by federal court to discuss settling year-long IP dispute
  • Rio Tinto has withdrawn from talks with Queensland state govt. for $9.3b expansion of Abbot Point coal export harbor due to shift in global economic markets, higher costs
  • Lubrizol CEO James Hambrick plans to increase rev. by ~60% as he sets goals under new ownership of Berkshire Hathaway
  • General Electric seeking $6b in contracts out of Australia by end of decade as it taps country’s growing role as supplier of LNG, iron ore and wind power
  • Interactive Brokers Chairman Thomas Peterffy tells WSJ he plans to cede responsibilities over next several years, has no immediate plans to step down
  • Disney, Viacom’s Paramount Pictures among Hollywood’s biggest movie studios that lost piracy lawsuit in Australia
  • Bernanke, Apple Earnings, French Vote: Week Ahead April 21-28 


    • Schlumberger (SLB) 6 a.m., $0.97
    • General Electric (GE) 6:30 a.m., $0.33
    • American Electric Power (AEP) 6:57 a.m., $0.78
    • AO Smith (AOS) 7 a.m., $0.61
    • Honeywell International (HON) 7 a.m., $0.99
    • National Penn Bancshares (NPBC) 7 a.m., $0.14
    • Under Armour (UA) 7 a.m., $0.24
    • IDXX Laboratories (IDXX) 7 a.m., $0.71
    • Johnson Controls (JCI) 7 a.m., $0.53
    • Ingersoll Rand (IR) 7 a.m., $0.25
    • Manpower (MAN) 7:30 a.m., $0.35
    • Kimberly-Clark (KMB) 7:30 a.m., $1.17
    • Canadian Pacific Railway Ltd (CP CN) 7:30 a.m., $0.79
    • Sensient Technologies (SXT) 7:57 a.m., $0.57
    • McDonald’s (MCD) 7:58 a.m., $1.23
    • Royal Caribbean Cruises (RCL) 8:30 a.m., $0.15 


  • Copper Traders Turn Bullish as Growth Accelerates: Commodities
  • Oil Rises First Time in Three Days as German Confidence Improves
  • Corn Gains as China Signals Rising Demand; Soybeans Advance
  • Guar Crop in India to Climb, Lifting Supply for Halliburton
  • Cocoa Falls After North American Grindings Drop; Coffee Rises
  • Gold May Advance for a Second Day as Weaker Dollar Spurs Demand
  • Copper May Rise on Shrinking Stocks, Demand From Auto Makers
  • Plantation Stocks to Rally as Palm Oil Surges: Chart of the Day
  • Oil-Dollar Link Tightens as Iran Tension Eases: Energy Markets
  • Indonesian Miners Exempted From Ban Need Permits, Saleh Says
  • Grape-Crop Freeze Damages Fruit Used in U.S. Juice, Welch’s Says
  • Nuclear Exit Cuts Steelmakers’ Bond Cost to Record: Japan Credit
  • Oil May Fall as Slower Economy Reduces Demand, Survey Shows
  • Copper Traders Turn Bullish as Growth Gains
  • Guar at Record May Fail to Boost U.S. Output, Help Halliburton
  • China Hog-Farmers Profits Drop to 19-Month Low: Chart of the Day
  • Mistry Sticks With 4,000 Ringgit Palm-Oil Call, Likes Wilmar 






















The Hedgeye Macro Team


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After predicting a consensus beating Q1, our projection is now even higher following the release of the March Louisiana numbers.



Louisiana released March gaming revenues yesterday and BYD performed much better than expected.  We had already predicted a strong quarter in our 04/13/12 note “THE REGIONALS: Q1 THOUGHTS”, but we’re upping that projection.  Our Q1 EPS and EBITDA estimates are now $0.12 and $133 million versus consensus of $0.08 and $126 million, respectively.  On their Q4 conference call, BYD provided Q1 guidance ranges of $0.06-0.09 for EPS and $120-127 million for EBITDA.


BYD will report earnings next Tuesday morning.  As always, Q1 earnings will not be the only story.  BYD should provide Q2 guidance on the conference call.  We’re above the Street for Q2 as well - $0.12 vs. $0.11 – but we expect management will once again be conservative with their guidance.  Accurate guidance should be in the $0.11-0.14 range but something lower like $0.09-$0.12 is more likely.


As measured by sell side ratings, BYD remains an underappreciated stock.  Our long-term thesis for domestic gaming is not positive but with BYD’s operational and financial leverage, better demand trends in the LV locals market and some of the regional markets should drive potentially significant EPS upside over the remainder of 2012.


The Macau Metro Monitor, April 20, 2012




According to a survey by the University of Macau, around 53% of visitors to Macau don’t gamble while visiting the city a new survey shows.  The survey involved 7,300 visitors, 61% of whom were from the mainland.

HBI: Golf Clap on a Triple Bogie

Let’s give ‘em a golf clap on forecast accuracy this quarter. Despite losing a nickel less than the guide-down, we think the stock was looking for something better. All in, we still think that the company is in denial as to the risks to its revenue and/or margins in 2H12. We’re 30-40% below the consensus for the next 3 years.


This was a horrendous quarter for HBI. But relative to expectations, it was right in line. In fact, we’ve got to hand it to management; with such massive moves in its Gross Margin line and the pricing pressure in its screenprinting business, we’d think that its forecast accuracy would be sub-par at best. But they came in right in line with nearly every line on the P&L. In addition, relatively all aspects of guidance that the company said 9 weeks ago remain completely unchanged. When all is said and done, the company lost -$0.27, and while better than the Street at -$0.33, we don’t think that this is anywhere near what the stock needs to rally.


Why? Keep in mind that the company reported its 4Q a few weeks late (2/15), and reported this quarter a week early. In the end, there was only 8-9 weeks between reports, and we’d venture as far as to say that the company did more conferences and roadshows intra-quarter than it ever has. The tone of its meetings has been extremely bullish, about both the state of the current business and the prospect of hitting a $4 earnings number in the future. Recent conversations we’ve had with the investment community lead us to think that the real concern for anyone who is short HBI is that the company would come out and print a profit this quarter. But clearly, it did not. We’ll give ‘em a golf clap for its forecast accuracy. But not much more. In addition, in alluding to 2013, management again referenced a low $3 EPS assumption. On the Q4 call, Rich suggested “one could reasonably model 2013 EPS potential in the low $3 range.” There was slightly more conviction in the low $3 reference this evening- “10% to 11% operating profit run rate is still a good assumption resulting in 2013 EPS potentially in the low $3 range”… still not exactly a raging endorsement.


While comments on the business remained largely unchanged, there was a slight softening as to management’s tone on its ability to pass through pricing. Also, we continue to be puzzled about HBI’s bullishness on cost inflation. The company believes that the industry acted very rationally this quarter, supporting its own strategy as well. It thinks that there is a paradigm shift going on at retail where higher costs = higher consumer prices, and higher margins for the supply chain. That’s where we simply disagree. It’s the consumer that decides whether or not there is inflation, not the fluctuation in input costs. The retailers might seem fine now, but all we need is for one major party to break rank, and the ballgame changes very quickly. The consumer will have no problem blowing up a paradigm shift.


The biggest positive that I’m being hit with by the bulls is that the company is committed to repaying debt, and having debt down from $1.8bn to $1.0bn by 2014. That’s great, and we’ll be the first to admit it. But that also assumes that the cash is there to achieve the goal. If HBI’s business turns down or if margins compress, then net income comes down, working capital goes up, and there won’t be anywhere near enough free cash flow to achieve those debt levels. Remember, it was in 4Q11 where the company said it would generate free cash flow of at least $192mm to meet the low end of the full year guidance of $100-$200mm. As a result of the business underperforming in Q4, they only reported $174mm for the quarter and $82mm for the full year, falling $18mm short of the low end of the $100-$200mm guidance. That’s certainly a hit to credibility. And we’re going to give them the benefit of two years? This is not necessarily an HBI thing, as they definitely helped their credibility somewhat this quarter. But it’s tough to guage that level of confidence for any company with limited visibility, a consolidated customer base, and high operational and financial leverage.


HBI remains political about changes at JCP – that it’s excited about the change. They might lose a little hosiery business there, but that’s all that’s in their plan. That’s a binary outcome, in our opinion. JCP is about a 5%-6% customer for HBI. Family dept stores = 15%. Mass channel = 50%+. Ron Johnson at JCP is going to competitively bid out each section in the stores to see which brand wants it more. JCP might get the revenue, but it will be at a lower margin. PLUS, any special product workup is going to upset Kohl’s, Target, WalMart, Sears, Macy’s, Dollar Stores, etc… This will be a domino effect with or without HBI. Also, be sure to remember that price competition at retail in higher end categories is often funded by discounts in more commodity categories (ie discounts on Polo at Macy’s will be paid for by Jones Apparel Group, PVH’s Dress Shirt biz, and underwear vendors like HBI). If HBI is savvy enough to please all of its customers, the cost of the growth is likely to go up.


All in, we took our numbers up by $0.10-$0.15 for each of the next three years, which is ENTIRELY due to a lower tax rate (down 500bps each year). Management mentioned a $3+ EPS number in 2013.  We don’t have that in the cards until 2015 at the earliest. We think this stock is just flat out expensive.



HBI Management Credibility Check.

Here’s a quick check as to what the company said it would do when it reported 4Q results versus both 1Q actual and 2012 guidance.


Wholesale Orders:

-Wholesale order slowed substantially in Dec, expect sell rate and orders to normalize


Margin Pressures:

-Both sales and profits should grow for the full year but sales and margin pressures expected to cause a loss for Q1 $0.27 loss in Q1

-Beyond Q1, Q2 operating margins should return to MSD-HSD Unchanged-  2H Gross margins expected to be low 30s with OM LDD

-Q3 operating margins should be DD


Free Cash Flow:

-Guided to $400-$500mm for 2012 Unchanged- Half of the reduction from improved working capital primarily through better inventories

-“FCF should be strong for the next number of years”

-Debt reduction a priority- goal for debt to be at $1.5bn in December 12 Unchanged



-2012 innerwear pricing solidified Unchanged- 95% of US volume locked

-Price gaps have been closing to more appropriate long term levels Unchanged- Reaching more normalized levels

-As pricing comes back, HBI will tactically give back value to the consumer (5 pack for 12.46 today will be a 6 pack for 13.46 tomorrow)

-Have removed volume offers to create every day prices despite the industry offering volume initiatives as sales drivers



- Gaining shelf space at retail primarily through Hanes Comfort Brand and socks as well as intimate apparel (trends encouraging) and hosiery Unchanged- Additional shelf gains in innerwear should help revs in 2Q and 3Q 

- Gear for Sports Operating profit expected to be $40mm in 2012 Unchanged 

- JCP: Have planned for an impact on intimates business which is included in guidance but not so much on the underwear business which is still set for expansion Unchanged- JCP’s goal for fewer more impactful brands said to fit right into HBI’s wheelhouse and plans for imagewear to be more quality focused vs. commodity


Guidance headed into the Call:


1Q12 Guidance: 

Sales: Estimating 1Q around $1bn BEAT

Excluding impact from outerwear, expect sales flat YoY through first 5-6 months Unchanged- sales ex imagewear and JMS expected to be flat through May with growth resuming with the help of shelf gains thereafter


Gross Margin: 900 bps of pressure primarily from screen print business Came in down 898bps


Expect flat SG&A in Q1 Came in down 1.7%


2012 Guidance:

Full year sales growth 2-4% Unchanged


Expect EPS $2.50-$2.60 Unchanged

Includes a $0.30 loss in imagewear (should occur half in Q1 and half in Q2) Unchanged- $0.18 impact in Q1 with the balance to take place in Q2


Interest expense should be down $15mm in 2012 Unchanged


FCF guidance: working capital headwinds should reverse and become tailwinds in 2012 Unchanged


Longer term prospects of the business:

Inherent long term guidance includes average operating margin of 10-11% in 2013 resulting in Low $3.00 EPS range Unchanged




Brian P. McGough
Managing Director

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 80.48%
  • SHORT SIGNALS 78.35%