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Idea Alert: BA Consensus Isn’t Always Wrong

BA Long:  Consensus Isn’t Always Wrong

 

Keith added Boeing to the Virtual Portfolio today and a summary of why we are positive on BA is below.

 

 

Rationale

  • Cycle:  Boeing is in the midst of a long up cycle in commercial Aerospace, with 7 years trailing revenue in backlog.  The company also has a major product cycle in the 787.
  • Industry Structure:  Boeing has a largely unassailable competitive position in a highly consolidated industry.
  • Valuation: The valuation of Boeing is attractive at these levels on a sector relative basis, in our view, both in a DCF and on screening metrics like relative EV/S  (0.5 standard deviations below the trailing 8-year mean).
  • Sector Relative: With growth slowing and estimates in the industrial sector under pressure, we believe BA remains an attractive destination for investors.
  • Sentiment:  Unfortunately, consensus seems to agree with us.  We note that consensus can be right.

Idea Alert: BA Consensus Isn’t Always Wrong - aircraft deliveries

  • Global aircraft fleet aging has set-up robust backlogs for commercial aircraft makers
  • Strong deliveries in the late 1980s/early 1990s were partly driven by deregulation (US, UK, Japan in the 70s and 80s and, in the early 90s, Europe), which drove demand growth
  • Late 1980s/early 1990s deliveries are now retired or approaching retirement (20 to 25 year sum)
  • Boeing and Airbus have very high backlogs as deliveries have trailed orders for much of the last decade 

Fleet aging is particularly noticeable in the US.  Though only about 15% of commercial aircraft orders, the US aircraft fleet will need to be replenished over time. 

 

Idea Alert: BA Consensus Isn’t Always Wrong - fleet age 2


CHART DU JOUR: WYNN/LVS STRIP SHARE

Masked by low hold, both WYNN and LVS likely gained volume share in Q2

 

  • Following May’s 18% GGR decline, we’re already projecting a down June for the Strip but MGM and/or CZR may have lost volume share too
  • On a YoY basis, both WYNN and LVS likely improved volume share in both slots and table
  • Estimated GGR share in 2011 was MGM – 28%, CZR – 25%, WYNN – 13%, LVS – 8% for a total of 75% of the market

 

CHART DU JOUR: WYNN/LVS STRIP SHARE - MGM


IS BRAZIL IN A BOX?

CONCLUSION: We think Brazil is officially in a box from a fiscal and monetary policy front and any further dovish policy on either front would be in direct conflict with increasing fear of policymakers losing control over guiding domestic inflation towards official targets. As a result of this “box” we think Brazilian equities, currency and bonds could all be headed lower over the intermediate term as confusion about the outlook for policy breeds increasing contempt across Brazil’s financial markets.

 

This morning, Brazil’s JUL IGP-M inflation index (60% wholesale, 30% consumer prices and 10% construction costs) came in rather hot at +6.7% YoY from +5.1% in JUN; +6.7% is the highest YoY reading since OCT ‘11. Further, the MoM acceleration of +1.3% from +0.7% in JUN is the fastest sequential gain since NOV ’10 – the month QE2 was officially commenced. This acceleration of inflation in Brazil is very  much in-line with our written work on the subject (from our MAY 3 note titled, “WHAT THE HECK IS GOING ON IN BRAZIL?”):

 

“Additionally, recent weakness in the BRL/USD cross is eroding the currency’s marginal strength relative to global food and energy prices – which serves to threaten reported inflation statistics to the upside in the coming months. Notably, the IGP-M inflation index, which has been known to lead the benchmark IPCA CPI index by 2-6 months, bottomed in MAR. While we don’t see material upside in Brazil’s headline inflation rate over the intermediate term, this data point is in support of our model’s view that Brazilian CPI bottoms here in 2Q and accelerates in the back half of the year – likely preventing the central bank from reaching the midpoint of its inflation target of +4.5% (+/- 200bps), which it has repeatedly promised to accomplish by year’s end.”

 

IS BRAZIL IN A BOX? - 1

 

We maintain the aforementioned conclusion, which, coincidentally, is a view that is becoming more consensus on both the sell-side (via central bank survey data) and the buy-side (via an inflection in expectations for incremental monetary easing in the OIS market). We’d be remiss to not mention the fact that over 100,000 civil servants in Brazil – including employees of the central bank itself – are currently striking for wage increases that keep pace with the country’s consistently elevated rates of inflation.

 

IS BRAZIL IN A BOX? - 2

 

IS BRAZIL IN A BOX? - 3

 

As a result of this proactively-predictable pickup in inflation, Brazil’s central bank is officially in the box we had been calling in MAY – which we identified then as a supportive factor for the BRL exchange rate(s) and, subsequently, Brazilian equities. Now, however, because they over-stimulated in recent months (-450bps of cuts since last AUG) and failed to adequately protect the currency from rising international price pressures, speculation that they’ll have to actually tighten monetary policy over the intermediate term should continue to grow.

 

Speculation around monetary tightening – or rather, the consensus realization that Brazil’s central bank has greatly exhausted its bullets on the stimulus front – will likely introduce incremental economic growth concerns that we’d view as negative for Brazilian equities on the margin. Additionally, the both the central bank and central government of Brazil have signaled that they are likely to continue implementing dovish policy over the intermediate term (Tombini indicated such in his latest statement; the Finance Ministry is actually planning to introduce further fiscal stimulus measures in AUG); that should drive future expectations for Brazilian real interest rates lower as inflation expectations pick up. That would be an incremental negative for the BRL over the intermediate term, which, in turn, would be an incremental negative for Brazilian equities for the following two reasons: 

  1. An increasingly subdued outlook for currency appreciation/an outlook for outright depreciation limits the appeal of Brazilian assets to international investors. Brazil, with a current account deficit of 2.1% of GDP, needs steady flows of international capital in order to sustain economic growth.
  2. A weaker currency – particularly vs. the USD – drives up the cost of servicing international debt as well as expenditures on FX and interest rate hedges for Brazilian corporations. Additionally, it drives up the cost of imports – from raw materials to capital goods – and erodes the gross margins of Brazilian corporations. All of this acts as a headwind to earnings growth. 

While not necessarily a factor in our TREND-duration outlook for the BRL, we do see the central bank’s planned failure to roll over the $4.5B of maturing currency swaps coming due tomorrow as a TRADE-duration negative for the currency (though a fair amount might be getting priced in today, as it BRL is down nearly -80bps vs. the USD intraday).

 

The quantitative setup in Brazil’s benchmark Bovespa equity index is akin to the outlook for Brazilian monetary and fiscal policy – stuck between a rock and a hard place. A sustained breakout above the TREND line (58,131) would signal to us that we’re wrong on our intermediate-term bearish thesis. A breakdown below the TRADE line (54,843) would be a signal to short Brazilian equities on any/all rallies to lower highs.

 

IS BRAZIL IN A BOX? - 4

 

All told, we think Brazil is officially in a box from a fiscal and monetary policy front and any further dovish policy on either front would be in direct conflict with increasing fear of policymakers losing control over guiding domestic inflation towards official targets. As a result of this “box” we think Brazilian equities, currency and bonds could all be headed lower over the intermediate term as confusion about the outlook for policy breeds increasing contempt across Brazil’s financial markets.

 

Darius Dale

Senior Analyst


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Ideas Alert: BUNL, EWI, FXE; ahead of ECB and BOE Decisions

On Friday (7/27) Keith made a number of trades in our Hedgeye Virtual Portfolio related to Europe. He shorted the EUR/USD via the etf FXE, shorted Italy via EWI (note that on Friday the short selling ban on stocks trading on the FTSE MIB was extended to September 14th), and went long German Bunds (BUNL). 

 

Keith’s trading calls are tactically taking advantage of the current price dislocation and not major changes in our broader theses across Europe. We saw these “dislocations” into and out of ECB President Mario Draghi’s comment on Thursday that “the ECB is ready to do whatever it takes to preserve the euro.”

 

In short we believe Draghi’s “whatever” comment could boost broader European capital markets, including the EUR/USD, going into Thursday’s ECB meeting because Draghi has put himself in a box in which he has to deliver to the market something on the monetary and/or fiscal fronts.

 

However, we expect any announcement from Draghi to under-deliver based on market expectations for a bazooka. Specifically, we think Draghi should reengage the SMP, a positions the Germans are still against. We see a very low probability of another long-term LTRO being issued (due to the lack of success the last two had) and we see a split probability on a 25bp cut to the main interest rate. Yet even if the rate was cut, we’d expect it to have very little lasting impact on the markets.

 

Keith covered FXE today in the Virtual Portfolio to take a gain on the short side. Our immediate term TRADE levels for the EUR/USD are $1.20-1.23. As we mention above, we expect Draghi’s “whatever” comment to put support in the cross until Thursday morning’s ECB press conference at 8:30am EST.

 

As it relates to the BOE’s interest rate decision on Thursday, we expect no change in the main rates, and no additional asset purchases following a £50 Billion increase on 7/5 when the Bank last met (to take total purchases to £375 Billion), despite continued challenged economic fundamentals.

 

Below we show our levels with Keith’s commentary on all three securities recently traded:

 

EWI - I've seen some ridiculous 1-2 day moves in the last 5yrs. This one might take the cake. Italy right back to immediate-term TRADE overbought.

 

Ideas Alert: BUNL, EWI, FXE; ahead of ECB and BOE Decisions - ccc. italy

 

BUNL - German Bunds are immediate-term TRADE oversold within their bullish intermediate-term TREND.

 

Ideas Alert: BUNL, EWI, FXE; ahead of ECB and BOE Decisions - ccc. germany bunl

 

FXE - Whatever it takes right back at you Mr. Draghi. Re-shorting the Euro at the top end of our immediate-term TRADE range (of $1.23).

 

Ideas Alert: BUNL, EWI, FXE; ahead of ECB and BOE Decisions - ccc. eur

 

Matthew Hedrick

Senior Analyst


OLYMPICS: Retail In The Mix

The2012 Olympics have been nothing but trouble for everyone involved. From the city of London’s transit issues to Michael Phelps’ inability to perform to NBC’s broadcasting problems, it’s been a disaster from the get go. The same goes for retail sales in London with respect to Olympics gear and apparel.

 

Manufacturers are doing well –names like Nike (NKE), Ralph Lauren (RL), Adidas (ADS) and Under Armour (UA). Other brands like COH, GES, and ANF are likely not faring as well. Below is a visual we did back in June analyzing NKE stock action relative to the broader market headed into and out of the Olympics.

 

OLYMPICS: Retail In The Mix - NKE olympicspread


CHART OF THE DAY: NASTY REAL-TIME GLOBAL GROWTH SIGNAL

CONCLUSION: We continue to flag the risk that Growth Slowing’s Slope is accelerating to the downside as prices of raw materials race higher alongside asset prices broadly amid heightening speculation on Fed/ECB Policies to Inflate.

 

In kicking off what will be a very busy week for global GROWTH/INFLATION/POLICY data, the Bank of [South] Korea’s AUG Business Conditions Survey left much to be desired on the growth front. The survey results, which are a 1MO-forward look at expectations for operating conditions, literally tanked: 

  • Manufacturing: 70 from 81; lowest reading since MAY ’09; steepest MoM decline since DEC ’08
  • Non-Manufacturing: 69 from 76; lowest reading since APR ’09; steepest MoM decline since NOV ‘08 

CHART OF THE DAY: NASTY REAL-TIME GLOBAL GROWTH SIGNAL - 1

 

While the absolute level of the indices are worrisome indeed (lowest readings since the thralls of the Great Recession), the sharp acceleration to the downside in the slopes of the lines is quite frightening indeed. And since the work of renowned behavioral psychologists such as Dr. Richard Peterson and Dr. Daniel Kahneman has taught us that short-term forecasts are typically not much more than an extrapolation of recent trends, these forward-looking AUG numbers may be a leading indicator for a messy week of Asian/Latin American JUL/2Q GROWTH data. We list the most noteworthy releases below (email us for the full list):

 

MON (tonight):

  • South Korea: JUL Industrial Production
  • Japan: JUL Manufacturing PMI; JUL Employment Report
  • Taiwan: 2Q GDP
  • Singapore: 2Q Unemployment Rate

TUES:

  • South Korea: JUL Trade Data
  • China: JUL Manufacturing PMI; JUL HSBC Manufacturing PMI
  • Indonesia: JUL Manufacturing PMI; JUL Consumer Confidence
  • Australia: JUL Manufacturing PMI
  • Taiwan: JUL Manufacturing PMI
  • Vietnam: JUL Manufacturing PMI

WED:

  • India: JUL Manufacturing PMI
  • Singapore: JUL Manufacturing PMI
  • Australia: 2Q Retail Sales
  • Brazil: JUL Manufacturing PMI; JUL Trade Data
  • Mexico: JUL Manufacturing PMI; JUL Services PMI

THURS:

  • China: JUL Services PMI; JUL HSBC Services PMI
  • Hong Kong: JUL Manufacturing PMI
  • Australia: JUL Services PMI
  • Thailand: JUL Consumer Confidence

FRI:

  • India: JUL Services PMI
  • Brazil: JUL Services PMI
  • Mexico: JUL Consumer Confidence

 

All told, we continue to flag the risk that Growth Slowing’s Slope is accelerating to the downside as prices of raw materials race higher alongside asset prices broadly amid heightening speculation on Fed/ECB Policies to Inflate. On the strength of said asset price inflation, South Korea’s benchmark KOSPI equity index, like many other equity indices globally, is bumping up against critical resistance levels as indicated in the chart below. Absent confirmation of a true quantitative breakout, we view this month-end hope rally as exactly that – hope.

 

CHART OF THE DAY: NASTY REAL-TIME GLOBAL GROWTH SIGNAL - 2

 

Best of luck out there this week.

 

Darius Dale

Senior Analyst


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