prev

Loss of Confidence

This note was originally published at 8am on April 26, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The failure of the Knickerbocker Trust was just the beginning of a more general loss of confidence.”

-Jim Rickards

 

Anyone who has been in this business for more than the last 5 years knows what the biggest problem is for the US stock market – confidence. The People do not trust the financial system and all of its central planning puppetry. Therefore, The People are not giving the asset management community the number one thing they want – fund flows.

 

No Confidence. No Flows. No Volume.

 

That’s not new this morning. Neither is the world’s reaction to the US Federal Reserve’s un-elected Central Planner in Chief’s Policy to debauch the US Dollar in a repeated, but fleeting, attempt to inflate stock and commodity prices.

 

Sure, the price of Oil and Gold are up on the Dollar Down move. But they are up less than they were on Bernanke’s moves to Qe1, Qe2, and Qe3 (Bernanke’s latest war on the American Consumer (and Saver), pushing 0% interest rates on fixed income savings accounts to 2014 was a hybrid Qe3). We don’t think he has an iQe4 upgrade in his bailout bag during the General Election debate.

 

The reason why I used another one of Jim Rickards’ quotes (page 49 of Currency Wars) this morning is that it’s a critical one to consider in terms of why the US Federal Reserve Act of 1913 was established in the first place.

 

I’ll let you read Rickards book to form your own opinion on this, but the upshot of the problem was that NYC bankers, traders, etc. have always had the same problem – at a point, they take on too much risk with other people’s money, and they blow up.

 

In any other business, you’d be accountable for those losses and your business would go away. Post the 1907 Crisis, when banks like Knickerbocker literally blew up, banking and capital markets related companies have worked very hard at making sure that they have an un-elected man at the Fed that they can both appoint and politicize for their own compensation purposes.

 

The Fed was created to bailout banks, not American consumers.

 

Back to the Global Macro Grind

 

While it’s both shocking and sad (but expected), Ben Bernanke was able to get through an entire press conference yesterday without mentioning the words “US DOLLAR.”  What might be an even more glaring national embarrassment was that not 1 American journalist asked him about it either.

 

For those of us who aren’t paid to be willfully blind, here’s how real-time market expectations work:

  1. The Fed’s Monetary Policy drives the direction of the US Dollar
  2. The US Dollar, since it’s the world’s reserve currency, drives real Dollar adjusted expectations in liquid asset prices
  3. The inflation or deflation of asset prices (commodities in particular) drives the slope of Global Consumption Growth

I have my B.A. in Keynesian Economics from Yale. I don’t need a Ph.d in that dogma to explain to me how obvious the relationship is between the US Dollar and its purchasing power. Try it with your own money at home – you’ll get the point.

 

Despite Spain crashing again (Spanish stocks down -22% since February), even the Euro is strong versus the US Dollar this morning. The #1 Most Read Headline on Bloomberg: “Bernanke Prepared To Do More.” And the US Dollar Index is down for the 6th out of the last 7 weeks.

 

Our models show that Global Consumption Growth has never NOT slowed with oil above $96/barrel. Pick your vintage, Brent or WTIC, last I checked nothing happened in Iran overnight either. Prices of $104 and $119 per barrel, respectively, don’t lie; politicians do.

 

Does money printing matter? Does the amount of Dollars (World Reserve Currency) matter relative to World Oil Reserves? Of course they do. In 1990 the ratio of US Money Supply (M3)/Proved Oil Reserves = 4.1x. Today, that ratio = 10.7x. Reversing this factor alone would get you $75-80 oil, and the 99% would love that.

 

Got 1990s? Look at our Chart of The Day, then pull up a long-term chart of Oil – and you’ll see what I mean by Loss of Confidence:

  1. US Consumer Confidence tracked between 80 and 140 during the 1990s (this week it hit 69.2 for April)
  2. US Dollar Index Averaged $92.93 during the 1993-1999 expansion (avg GDP was 3.84%, so demand did what to oil?)
  3. Average price per barrel of WTIC Oil during 1993-1999 expansion = $18.63/barrel (not a typo)

It’s the US Dollar Stupid. That’s what real people use when they buy gas at the pump. So, if you’re part of a Keynesian crack house in Washington that’s addicted to devaluing the credibility and currency of the American people, shame on you.

 

If you want to try the “counter factual”, get your conflicted and compromised Fed friends to raise interest rates on Sunday night and tell me how many call options on oil you want to buy in front of that.

 

If you want to tell me Oil is up because of Iran, show me something going on in Iran. If you want to tell me Oil is up because global demand is up, show me where growth isn’t slowing.

 

Show me something. But don’t show me another complete embarrassment like yesterday’s Fed Press Conference. The concept of “price stability” (Fed mandate) does include the currency in which prices are paid. The Loss of Confidence in this country is rightly placed.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1633-1655, $118.64-120.77, $78.97-79.44, and 1377-1394, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Loss of Confidence - Chart of the Day

 

Loss of Confidence - Virtual Portfolio



American Pilots

“American and British pilots were forced to learn about this lethal athlete the hard way.”

-Ian Toll

 

Don’t blame the pilots. Blame the politicians. They were willfully blind to obvious risks and put our bravest in the sky anyway. That’s one of the key risk management and leadership lessons I learned from Ian Toll’s excellent new book about WWII, Pacific Crucible.

 

“The Mitsubishi A6M Zero was a dog-fighting champion, and aerial acrobat that out-turned, out-climbed, and out-maneuvered any fighter plane the Allies could send against it… The Zero had been placed in service in the summer of 1940, almost 18 months before Pearl Harbor… it was yet another example of the fatal hubris of the West in the face of plentiful evidence..” (pages 52-53)

 

I read about war because it educates me on winning and losing. Every decision counts. Decision processes matter. There has been “plentiful evidence” that the US Dollar has been driving The Correlation Risk in Global Macro markets since 2007-2008. There has also been an outright obfuscation of facts by Western Academics who have chosen to ignore it. It’s un-objective and un-American.

 

Back to the Global Macro Grind

 

The US Dollar is up for the 7thconsecutive day and US Stock Futures are indicated down for the 7thconsecutive day. There is absolutely zero irony in this causal relationship. Policy expectations drive currency prices.

 

In the absence of immediate-term expectations for an iQe4 upgrade of Gold and Oil price inflation from Ben Bernanke, the US Dollar has arrested its decline – and stocks and commodities have arrested their ascent.

 

Here’s a real-time update on the surreal Correlation Risk (inverse correlations between the USD and asset prices) developing:

  1. SP500 = -0.90
  2. Euro Stoxx = -0.92
  3. CRB Commodities Index = -0.94
  4. WTIC Oil = -0.89
  5. Gold = -0.89
  6. US Equity Volatility (VIX) = +0.93

Yes, you’ll notice that in the Romper Room that has become Keynesian Economic Policy outcomes, one of these things is not like the other – one of these things just doesn’t belong. It’s called volatility.

 

The US Federal Reserve has a 2-stroke mandate:

  1. Price “stability”
  2. Full Employment

We have neither. We have price volatility like the world has never seen. And we have forced American Pilots of other people’s hard earned moneys to chase their own tails of performance going after short-term and short-sighted Policies To Inflate.

 

As US Dollar Debauchery has only proven to Slow Global Economic Growth via accelerating short-term food and energy price inflations, now world markets have to deal with the other short-term side of the trade:

  1. Growth Slowing (until it slows at a slower rate)
  2. Deflating The Inflation (Bernanke’s Bubbles in Oil, Gold, etc. are popping)

When these 2 things are happening at the same time, you just cannot ignore the capital losses. They happen real fast.

 

That said, what’s been fascinating about this -4.6% draw-down in the SP500 from its April 2nd, 2012 top (capital loss from the Russell2000 March 26th, 2012 top = -6.9%) isn’t the absolute performance impact, but the Storytelling.

 

The Most Read (Bloomberg) headline this morning epitomizes the storytelling of the Old Wall: “Dow Falls For 6th Day In Longest Losing Streak Since August On Greece.

 

On Greece? C’mon. Americans in this profession are better than that.

 

You can look at real-time market signals (leading indicators) in 2-ways at this stage of the Fed Fight:

  1. What’s happened on the margin (draw-downs) from the YTD tops in February-April
  2. What’s happened YTD

The YTD thing is all about the Storytelling. Just don’t do it with my money. Last I checked, the SP500 is still down -13.5% from its willfully blind 2007 high and needs to be up almost +16% (from here) just to get The People and their 301ks back to break-even.

 

Everything that happens on the margin in markets matters most to the American and Global Macro Pilots who are trying to manage your money’s real-time risks. What happens on the margin is what drives fear and greed. It’s also what builds or destroys confidence.

 

If you don’t have planes or markets that the pilots can trust, you’re one step closer to losing whatever is left of the money they are willing to flow back to the politicized decision making process that’s driving markets.

 

Bottoms are processes, not points. We humbly suggest you fly these risky skies of Federal Reserve sponsored Price Volatility with the credible analytical sources out there who have actually landed the planes for the last 5 years.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $110.23-113.89, $79.42-80.28, $1.29-1.31, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

American Pilots - Chart of the Day

 

American Pilots - Virtual Portfolio


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

GENTING SINGAPORE 1Q12 CONF CALL NOTES

A slight beat from our estimate and we were above the Street

 


CONF CALL

  • In March, first junket licenses were issued. They believe that it will help them in the intermediate term. They are confident that there will be more licenses issued over the next 12-18 months. First IMA's started operating in May. 
  • Raised funds that will enable them to pursue new projects; their location remains disadvantaged

  • Issued largest bond offering in S'pore in March
  • EBITDA margin: 48%
  • Gained market share in mass - due to better promotional spending
  • 1Q VIP hold rate: 3.4%
  • Remain committed to growing the company with new projects

Q&A

  • No comment on location of their new project other that they will likely announce something in the next 12-18 months.  Not interested in Europe.  JV/direct investment are both possible.  If they went into Japan, they would go in with a partner. 

  • Balance of 2012 capex for West Zone: S$500MM; Not all the capex in the quarter is related to West Zone - there is a timing differential in paying contractors for past work already completed.  They will likely not pay all the 500 in 2012 though. 
  • Total S'pore capex so far (ex. WC, land): S$5.5BN
  • Cannot allocate tables to the IMAs   
  • They are only at the beginning of hiring IMAs. There will be very minimal revenue impact from the IMAs over the next few months. The very tight regulatory process allows them to go through with the government of what is allowed and what is not allowed.  It's a very structured learning.  So if and when the IRA allows other junkets to come in, they will know how to best utilize them- especially if the rules get modified.

  • RC volume share: 49%; mass drop: 47%
  • Rolling win mix on a net revenue basis was 36%
  • Mass hold %: 22.8% 
  • Net revenue share: not comparable since they deduct more costs 
  • No change on the VIP commissions; they continue to be very cautious on giving credit.  Do not want to overextend themselves.  They give a higher rebate to customers to get an early payment.
  • RC volume growth QoQ was +29%
  • Mass floor revenue QoQ: +8%; slot growth was higher relative to tables
  • 2,440 slots in end of 1Q; 702 ETGs
  • No changes on government regulations on advertising.  What the government did is simply clarify what was ok or now.

  • Still a few pending IMAs that have not been rejected
  • Hotel occupancies are not constant since they have to reserve rooms for the VIP; not concerned about the decline in occu and margins QoQ. Added 200 more rooms in 1Q. Hotel margins: 60%
  • Margins on USS and everything else is where there is upside
  • Rentals should be finished (West Zone) in 4Q 2012; costs will ramp up in the next few quarters but margins for 2013 will be better
  • Next few quarters will be focused on USS; once break-even point passed (6,000-7000 visitors), there is $0.80 per $ flowthrough to bottom line
  • 1Q Table count: 562 tables (MASS/VIP%: 1/3, 2/3); in terms of capacity, "they are almost there."
  • 1Q: 8,400 average visitors in USS; attendance went up 14% YoY
  • 1Q pre-opening: $2MM 
  • The significance of the IMA contribution depends on which ones get approved.  At most, IMA can contribute 30-40%. 
  • VIP hold rate may stabilize around 3.0-3.1% but that's just a guess
  • IMA don't collect debt at this point but they guarantee it

  • Continue to be cautious on extension of credit for rest of year

 

HIGHLIGHTS FROM THE RELEASE

  • Group revenue of S$787MM and S$EBITDA $376.4MM 
  • Non-gaming revenue up 16% YoY
  • USS grew its daily average visitations by 14% to 8,400 visitors at an average spending of about S$88. Hotel business improved as occupancy rate increased from 79% to 86% with an average room rate of S$338. However, overall revenue for first quarter of 2012 was affected by lower win percentage and business volume in the premium player business when compared to first quarter of 2011. 
  • On quarter to quarter basis, overall casino gross revenue grew by 9% as a result of higher business volume in all gaming business segments.
  • Consequently, the Group’s net profit for the first quarter of 2012 was S$211.5 million as affected by the revenue mentioned above and higher depreciation with the opening of new attractions in USS, the Maritime Experiential Museum, Equarius Hotel and Beach Villas compared to first quarter of 2011. This was mitigated by lower finance costs in first quarter of 2012 as a result of lower effective interest rates and lower loan principals.
  • On 12 March 2012, the Company issued S$1,800 million 5.125% perpetual capital securities at an issue price of 100 per cent. The perpetual capital securities were issued for the Company’s general corporate purposes as well as to finance capital expenditure and expansion of its business.
  • The Group spent a total of S$262.4 million for construction work-in-progress and other property, plant and equipment during the financial period.


CRI: Short It

 

Nearly all the factors that kept this stock grinding higher while estimates came down last year are either slowing, or flat-out reversing, on the margin. We really like the 3/1 odds on the short side.


We think Carter’s is shaping up as a short again. After nearly a year of perceived positive factors at its back, we think that opacity related to organic earnings power will be gone, and competitive challenges will emerge at a time when it is shifting away from harvesting its prior investments, and will need to put capital in to its model that will put a ceiling on margin improvement at a minimum, and likely create meaningful downside if our industry call for increased competition and margin pressure comes to fruition. With that, sales deceleration is a near certainty barring another acquisition, and valuation is sitting near the seven-year peak.


We say ‘shaping up as a short again’ with full awareness that it did not do what we thought it should have done in 2011. In fact, we went into 2011 with estimates for the year at $1.75 and the consensus at $2.40. By year’s end, the Street came down, and down and down by 21%, and CRI earned an adjusted $1.94 (before $0.15 Bonnie Togs accretion). Yet the stock literally defied gravity and went the exact opposite direction – gaining 35% for the year (vs. virtually flat performance for S&P, RTH and the MVRX).

 

If there’s one rule of retail investing that we’ve learned over time, it’s that earnings revision is the key factor in determining the direction of a stock. Pull up the <EEG> function on your bloomberg. With 9 stocks out of 10, you’re going to see that the stock price tracks (or leads) earnings in a very tight band.  Take a look at NKE, AAPL, GIL earnings revisions vs. the stock (all courtesy of Bloomberg).

 

NKE...Check

 

CRI: Short It - nke

 

AAPL…Check

 

CRI: Short It - aapl


GIL...Check

 

CRI: Short It - gil

 

Now look at CRI. HUH?

 

CRI: Short It - cri 

 

Whenever we talked to people about this name, we were given the same bull factors ad nauseam:

1)  The company had the toughest COGS comps in 2H11, in advance of which it took up prices by 10%. In doing the math, a 10% increase on a $10 product at retail almost entirely outweighs a 25% increase in a $3-4 product cost.

2)  At the same time, CRI was boosting its off-price sales from 1% of total in 2010 to 4% in 2011, and while this would ordinarily be dilutive to margins, it was enough to help leverage SG&A.

3)  While both of these two factors played out, CRI benefitted from the addition of the Bonnie Togs acquisition, which boosted sales by an average of 6% per quarter – again, a factor that (with some minor cuts to acquired SG&A) helped leverage SG&A at the greatest rate in nearly a decade.

4)  And how could we forget the ultimate response?  “The market is flat, I’m clawing to hang on to my return/loss for the year, and you expect me to short the stock of a company that Berkshire Partners is not-so-slowly taking private?

 

Now what have we got?

1)  The good news is that CRI starts to anniversary its higher product costs (that’s the bull case), but unfortunately, it starts to anniversary its pricing initiatives as well. It’s all too often that people adjust one without the other. There are, after all, two components to gross margin. Costs are forecastable. But prices to consumers – especially for a company where 40% of sales come from vertically-owned-retail – are DEFINITELY not.

2)  Off price sales should come down from 4% of sales last year, to about 2% this year. Yes, that’s good for gross margin. But on top of other factors impacting top line, it will make any form of SG&A leverage very difficult.

3)  Bonnie Togs is still there. But it is officially anniversaried. Now it and Carter’s each need to grow on their own without the benefit of basic acquisition accounting helping the situation.

4)  Expectations are lofty – at or above company guidance for sales and EPS.

    • Revenue: Consensus at $2,370mm – ABOVE guidance of $2,300mm – $2,342mm.  
    • EPS: 2012 Consensus at $2.61 – ABOVE guidance of $2.51-$2.61                                        
      • Consensus EPS of $3.28 for 2013, and $3.63 for 2014. We’re at $2.70 and $3.00, respectively.                                                 
      • With all these other factors no longer in CRI’s favor, we have a tough time stomaching the premise that the <EEG> chart on bloomberg maintains its scant correlation under these circumstances with a 20% earnings reduction.                                                           
      • If our estimates prove right, there’s no reason this stock can’t see the low-mid $30s. But under the most bullish consensus expectations, we still have a tough time getting this name in the upper $50s. We like the 3/1 odds of a short here.

 5)  And lastly…the “Berkshire is Buying” argument is pretty much dead in the water. Yes, they’re selling on the margin.

 

 

Historical context is important here...

 

We were asked a couple of weeks ago by a top client as to why CRI traded at such a high EV/Sales ratio (2.1x) circa 2005. Our answer sounded something like this:

 

This was when CRI achieved cult stock status. There were several factors, all related to post IPO action.

 

The pitch on the IPO was…

a)  Shift away from basics into playwear

b)  Shift from traditional dept store biz to serving 1) mass channels, and 2) company-owned retail.

c)  CRI had new arrangements with Li&Fung – through which it cut its sourcing costs by nearly 1/3 and passed right through to consumers in the form of lower prices to gain share.

d)  Remember that this period (ending April 2007 when LIZ went Ka-Boom) was easy for apparel retail. You could be an average brand and run at peak margins without much effort. The environment allowed CRI to sell into three completely distinct channels with like product without stepping on each other’s toes – and the Street was not only oblivious, but it also gave CRI’s multiple credit for this as a big positive.

e)  Then in 2005 CRI bought Osh Kosh. In the ensuing 2-years, they cut employee count from 400 to less than 100. Margins went up temporarily, before growth slowed and the story became outwardly and visibly broken.

f)  Pretty soon thereafter, people realized that this name was not infallible – that it can’t sell the same stuff through Target, Kohl’s, Macy’s and its own stores -- and that it can’t cut costs to keep margins high in the face of slowing growth.
g)  Fred Rowan (CEO) got fired in 2008, and since then, the Mike Casey era has taken hold. Definitely a better regime. But there was just as much financial engineering as anything else (he was former CFO). CRI had to button up policies due to a markdown irregularity accounting issue w KSS, as well as an exec being charged with fraud and insider trading by SEC in 2010. Nonetheless, it’s got a long way to go before it’s worthy of ‘cult stock’ status again. Our point is that today it is sitting at 1.25x EV/Sales. That’s well below the prior peak of 2.1x, but the old peak is just that…the OLD peak. It need not apply any more.


Playwear has nearly doubled as a percent of CRI’s total over the past ten years. ‘Baby’ is a very defendable business – the Carter’s brand goes a long way with a new Mom swaddling her newborn. But in the Playwear category, it competes with everything from Children’s place, to Old Navy, to JC Penney and Wal-Mart private label. Not a place to hang your hat on.

 

CRI: Short It - CRI Categories

 

 


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next