PROTECT THIS HOUSE: Putting UA to work

Similar to our view of Nike, we like Under Armour more on a longer-term duration rather than the immediate-term TRADE duration. We added and removed UA from the virtual portfolio due to macro risks but Hedgeye Retail Sector Head Brian McGough remains bullish on the company for a variety of reasons.




First, UA is a great brand with solid recognition.  It basically rolled into the market a decade ago and “punched Nike in the jaw” with its line of compression apparel. The company also has a habit of reinvesting capital back into the business rather than pumping up operating margins.


For the TRADE duration, UA is looking a little too expensive for some. But as far as the TREND and TAIL durations go, we like UA for the long run. Look for a stronger dollar to boost UA’s margins due to the company’s lack of international operations. We also estimate that UA will be pushing out $3 billion in revenue by 2014 compared with $1.5 billion in 2011. 

HedgeyeRetail Visual: BBBY Comp Upside?

Our Home Furnishings index suggests BBBY’s 1Q12 comps should come in +6.5% vs. guidance of +2-4% and consensus expectations of +4.1% when the company reports after the close on Wednesday.


Over the past 12 quarters, BBBY comps have only missed consensus once (in 3Q11, by 40bps) despite coming in slightly above the high end of guidance (+4.1% vs. +2-4%). BBBY did not miss its own comp guidance once over that same time period and bucked the street by an average of 250bps over those 12 quarters. Mind you, however, that this coincided with the period during which it contributed to, and benefitted from the Bankruptcy of Linens ‘N Things.


Now, comp expectations are above the high end of BBBY’s standard +2-4% guidance at +4.1%, and as noted, our model suggests that we’ll see it.  But given our poor outlook for the company longer-term, we’d view any near-term strength as an opportunity to get out.


We see concern over the runway for omni-channel growth given BBBY’s e-commerce penetration has declined over the past 4 years with its exposure to the older spending group increasing. Of the nearly 100 companies we analyzed, BBBY was ranked 9th in terms of exposure to the 55 and up spending demographic which actually increased in 2011 relative to 2010. Finally, with a 93% direct product overlap with, there is additional risk in transitioning current BBBY shoppers from in store to online without remaining vulnerable to attrition from AMZN- BBBY’s competitive advantage is its in store shopping experience, quite the opposite for AMZN.


HedgeyeRetail Visual: BBBY Comp Upside? - Home furnishings index


HedgeyeRetail Visual: BBBY Comp Upside? - BBBY comp guidance history



Whispers: SP500 Levels, Refreshed

POSITIONS: Long Consumer Staples (XLP); Short Industrials (XLI)


I’ve only heard 4 whispers about different flavors of interventions in the last hour. That’s just got to be good for someone, because it sure can’t be for confidence.


No trust; no volume. That’s the market you have to risk manage right now. Equity outflows remain a paramount factor when we get to the top end of either my immediate or intermediate-term range.


Across risk management durations, here are the lines that matter most: 

  1. Intermediate-term TREND resistance = 1365
  2. Immediate-term TRADE resistance = 1347
  3. Immediate-term TRADE support = 1319 

In other words, keep managing the risk of the range. It’s somewhat predictable. So are the whispers.



Just make sure to have a large cash position for that day when the whispering stops,



Keith R. McCullough
Chief Executive Officer


Whispers: SP500 Levels, Refreshed  - SPX

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European Banking Monitor: Chaos Delayed

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


* The Greek election. New Democracy, the pro-bailout/pro-austerity party, received the plurality of the vote on Sunday with 29.7%, eclipsing Syriza by roughly 2.5%. PASOK, the center-left party, took 12.3% of the total vote, which means New Democracy and PASOK together should be able to clear the 151-seat hurdle necessary to hold a majority of the legislature. Recall that in the May 6 election they fell short of the 151-vote threshold by 2 votes. As such, a Greek exit of the Eurozone has been delayed, and some measure of relief rally should be expected.


That said, Spanish and Italian CDS widened, rising 5.3% (+31 bps) and 3.0% (+16 bps), respectively. So, while Greece's election was viewed as a potential downside catalyst, it hasn't changed the negative reality facing either Spain or Italy's economy, or Greece's for that matter. While expectations are now high for austerity terms on Greece to be eased, the current rate of contraction in the Greek economy will make it all but impossible to comply with even reduced terms in the intermediate to long-term. 


If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst




European Financials CDS Monitor – 26 of the 39 reference entities we track showed spreads widening across Europe last week. To be clear, these results are from last Friday, a few days before the Greek Election.  


European Banking Monitor: Chaos Delayed  - aaa. banks


Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 41 bps.


European Banking Monitor: Chaos Delayed  - aaa. euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  The latest overnight reading is €741.2B.


European Banking Monitor: Chaos Delayed  - aaa. facility


Security Market Program – For the fourteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 6/15, to take the total program to €210.5 Billion.


European Banking Monitor: Chaos Delayed  - aaa. SMP


June GGR forecast of 17-22% YoY growth



Macau had another strong week, generating average daily table revenues of HK$756 million.  Our full month June forecast is now for GGR of HK$23.5-24.5 billion or 17-22%.  We believe YoY growth at this level should inspire investors following the single digit growth of May.




As we expected, LVS continues to gain market share.  While 19.8% might not be sustainable over the near-term, it is representative of the longer term share we expect out of the company and certainly better than the 17% generated in the months prior and after the opening of Sands Cotai Central.  




CONCLUSION: As the chart of Japanese sovereign CDS continues to indicate, intermediate-term event risk in the JGB market continues to dissipate. While Japan’s poor sovereign fiscal metrics and heavy debt burden continue to signal heightened TAIL risk, we think it’s safe to conclude that a JGB crisis is less probable from TRADE and TREND perspective than it was just 3-4 months ago. Thus, it is likely to prove prudent to resist saturated consensus storytelling by avoiding the “widow-maker trade” for now.


On slide 59 of our MAR 2 presentation titled: “JAPAN’S DEBT, DEFICIT AND DEMOGRAPHIC RECKONING”, we outlined four catalysts that we felt would expose the JGB market to heightened event risk over the intermediate term: 

  1. The threat of future ratings agency downgrades beyond critical levels (triggering a capital call across the Japanese banking system);
  2. A deterioration of the country’s current account dynamics eroding the country’s net creditor status;
  3. A failure to pass meaningful austerity measures that would slow the growth of Japanese sovereign debt below the growth of domestic assets; and
  4. A structural increase in long-term inflation expectations. 

As things stand today, it is our official view that the risks embedded in each of these four catalysts have receded enough to substantially erode our assessment of TREND-duration risks in the JGB market. Moreover, this view is consistent with our work since early APR, which, among other things, has mainly focused on tempering expectations of an intermediate-term Japanese sovereign debt crisis.


As it relates to catalyst #1, on MAY 22, Fitch became the first of the “Big 3” ratings agencies to downgrade Japan’s L/T L/C issuer rating to single-A status (A+ w/ a negative outlook). Moody’s currently has a Japan at Aaa with a stable outlook; Standard and Poor’s has Japan at AA- with a negative outlook. We suspect both agencies will be on hold indefinitely given the resolution of catalyst #3, which is new as of this morning and a major delta from the previous status quo, which centered on LDP demands for a dissolution of the Diet (in hopes to regain the ruling mandate though a popular vote) prior to participating in negotiations on the proposed legislation.


To that point, the DPJ, led by prime minster Yoshihiko Noda, reached an agreement late yesterday night with senior delegates of the two largest opposition groups (LDP and New Komeito Party) on a deal to double the nation’s 5% VAT in a two-step process ending in OCT 2015. Reaching the deal took a fair amount of political compromise on Noda’s behalf, including the recent reshuffling of his cabinet to remove two controversial members from key posts and shelving a DPJ-backed plan to introduce a minimum guaranteed pension. Moreover, hiking the VAT has become increasingly unpopular as Japan’s TREND-duration economic outlook becomes more cloudy (56% of voters opposed the bill in JUN vs. 51% last month per Asahi News). All involved parties hope to have the deal officially ratified by the end of the current Diet session, which concludes on JUN 21.


As we demonstrated in our APR 3 research note titled: “DIGGING DEEPER INTO JAPANESE SOVEREIGN DEBT RISK”, hiking the VAT tax leaves much to be desired in the way of fiscal consolidation and outright debt burden reduction for the Japanese sovereign – using the Cabinet Office’s own official projections! Incorporating more grounded numbers into our scenario analyses, we concluded that Japanese policymakers needed to adopt a far more dramatic fiscal consolidation plan to make a material dent in the growth of Japan’s sovereign debt burden.


That all being said, however, we would be remiss to ignore the positive headline risk associated with agreeing upon and ultimately passing the VAT hike bill in the immediate term, as it is highly likely to buy the Japanese sovereign a meaningful amount of time as it relates to the timing of future ratings downgrades and/or shifts in the supply/demand dynamics of the JGB market itself.


Turing to point #2, we also received resolution on this front as well, with Prime Minister Noda agreeing on JUN 16 to restart the first two of the country’s 50 idled nuclear reactors. Per the statement, two reactors at Kansai Electric Power Co.’s Ohi nuclear plant can now be operated safely. The key takeaway here is that Japanese policymakers have now signaled that A) political hurdles to restart reactors are being cleared, which will increasingly reduce Japan’s need to import fossil fuels (supportive of Japan’s current account surplus, which had posted its two lowest monthly readings ever in the YTD), and B) there exists a new willingness to go against popular sentiment on this front; as recently as last month the government was busy issuing official projections for mandated rolling blackouts, which amount to cuts in consumer and corporate energy consumption.




This change of heart strikes us as being highly politically motivated and reminds us who really runs the show in Japan (i.e. big corporations). The Kansai region of western Japan (accounting for ~20% of Japanese GDP) is home to the industrial cities of Osaka, Kobe and Kyoto, as well as the headquarters of Panasonic Corp., Sharp Corp. and Nintendo Co. As previously mentioned, the decision is quite unpopular among Japanese voters; 71% of respondents in a Mainichi poll opposed an expedited restart to the Ohi reactors; 70% of respondents in a Pew Research Center poll said the country should reduce its reliance on nuclear energy and 52% of respondents of that same poll said they felt that they or members of their family had been exposed to radiation.


Lastly, in accessing the development of point #4, we look no further than the slope of Japan’s 5yr breakeven inflation rate, which we identified earlier in the year as the key indicator to watch as it relates to a structural increase in long-term inflation expectations within the JGB market. That slope, which had been straight up and to the right for nearly 10 months, has now inflected; this inflection coincides quite nicely with the Bank of Japan’s recent unwillingness to succumb to elevated political and market pressure to incrementally ease monetary policy in pursuit its +1% inflation target (adopted in FEB; latest rejection of consensus pleading on JUN 15).




We still see risk, here, but as we have been pointing out in recent notes, the BOJ’s reluctance to acquiesce to consistent demands that it aggressively expand its balance sheet has taken a fair amount of immediate-to-intermediate-term reflation risk off of the table in Japan. That, in conjunction with a proactively-predictable compression in global interest rate differentials, has led us to anticipate the latest bout of JPY strength in spite of our bearish TAIL-duration view.


Pertaining to that duration, it is still our view that personnel changes among the BOJ’s monetary policy board – particularly current governor Shirakawa’s term expiration in APR ’13 – will bring about a new era of meaningful BOJ balance sheet expansion, which is an outcome that has multi-partisan political support out of the Diet. The latest developments on this front are the nominations of Takahide Kiuchi of Nomura Securities Co. and Takehiro Sato of Morgan Stanley MUFG Securities Co. Both are sell-side economists and, most importantly, both are open to the idea of the BOJ being more aggressive in its efforts to help Japan overcome persistent deflation.


We will continue to keep an eye on S/T-L/T JGB nominal yield spreads as indications of A) whether the BOJ will extend the maturities of JGBs targeted as part of its Asset Purchase Program (at 1-3yrs currently) and B) whether the BOJ convinces the JGB market to start pricing in the threat of inflation – something market participants haven’t had to do in decades.




All told, as the chart of Japanese sovereign CDS continues to indicate, intermediate-term event risk in the JGB market continues to dissipate. This is supported by what we feel are either meaningful positive developments within or resolutions of each of the key negative catalysts we outlined back in MAR. While Japan’s poor sovereign fiscal metrics and heavy debt burden continue to signal heightened TAIL risk, we think it’s safe to conclude that a JGB crisis is less probable from TRADE and TREND perspective than it was just 3-4 months ago. Thus, it is likely to prove prudent to resist saturated consensus storytelling by avoiding the “widow-maker trade” for now. 


Darius Dale

Senior Analyst



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