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THINKING OUT LOUD RE: GLOBAL GROWTH

CONCLUSION: New data points, including negative revisions to the official growth forecasts out of Singapore and Hong Kong, affirm our bearish conviction on the slope of global growth with respect the intermediate-term TREND duration. Applying a longer-term lens, would argue that the incessant policy responses out of the global central planning cartel over the last ~5yrs have set us up for broadly weak economic fundamentals for the foreseeable future.

 

This week, Singapore and Hong Kong each cut the upper limit of their respective 2012 GDP forecasts by -50bps and -100bps, respectively. Singaporean officials now see Real GDP growth coming at +1.5-2.5% for 2012 and officials in Hong Kong anticipate domestic economic growth in the +1-2% range for the full year. We continue to trumpet the heightened sensitivity of Hong Kong and Singapore to the global economic cycle and view these countries as the best barometers for global growth out there: 

  • At 211% and 223% of GDP, respectively, Singapore and Hong Kong are far and away the most export-oriented countries in Asia – far more levered to global demand than other noteworthy exporters (China: 29.6%; South Korea: 52.4%; Japan: 15.2%; Thailand: 71.3%; and Taiwan: 58.9%);
  • The ratio of Singapore and Hong Kong’s share of world exports to their individual shares of world GDP are 7.1x and 7.5x, respectively – besting the next closest economy in Asia (Malaysia) on this metric by at least 3.7 turns; and
  • Singapore and Hong Kong are home to the world’s second and third-busiest container ports, handling 28,431,100 and 23,669,242 TEUs, respectively, per the latest yearly data from the American Association of Port Authorities. 

THINKING OUT LOUD RE: GLOBAL GROWTH - 1

 

The fact that both countries independently revised down the upper band of their 2012 GDP forecast this week (even as the SPX raced to another long-term lower-high) is telling. Data points like these continue to affirm our bearish conviction on the slope of global growth with respect the intermediate-term TREND duration. China’s JUL Export/Import numbers (released overnight) also lend credence to this view.   

  • JUL Exports: +1% YoY from +11.3%
    • JUL Exports to US: +0.6% YoY from +10.6%; lowest since NOV ‘09
    • JUL Exports to EU: -16.2% YoY from -1.1%; lowest since SEP ‘09
    • JUL Imports: +4.7% YoY from +6.3%
    • Key Takeaways: China’s bombed-out Export growth numbers – particularly those to the US and Europe – portend negatively for the slope of end-consumer demand growth across those regions over the next few months. Furthermore, China’s slowing Import growth continues to remind people that China, itself, remains a drag on the slope of global economic growth and demand for raw materials. 

Applying a longer-term lens, we continue to side with 219 years of data afforded by the renowned analysis of Reinhart and Rogoff to conclude that we should expect slower rates of world economic growth going forward. We would argue that the incessant policy responses out of the global central planning cartel over the last ~5yrs have set us up for broadly weak economic fundamentals for the foreseeable future. Across the globe, various markets and economies have, unfortunately, not been allowed to clear, leading to a broad-based misallocation of capital and resources. Much akin to a company with bad CapEx management, the “management teams” of the world economy (i.e. our central planners) have broadly set the stage for subpar performance on the top line by encumbering us with sovereign debt loads well beyond critical thresholds and perpetual monetary Policies To Inflate.

 

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As always, we encourage disagreement and debate – having such an intelligent collection of clients has certainly made us jocks much smarter over the years. Feel free to ping us if you’d like to discuss any of our existing theses.

 

Have a great weekend,

 

Darius Dale

Senior Analyst


Trucks: What’s Next For The Global Truck OEM Industry?

Next Thursday, August 16th at 11am EST, the Hedgeye Industrials Team, led by Jay Van Sciver will be hosting a conference call discussing opportunities in shares of Truck OEMs.  The presentation will review Truck markets globally, with a look at Brazil, Europe and the U.S.  The dial-in information and materials will be circulated prior to the call. 

 

OEMs: PCAR, NAV, VOLVB SS, DCX GR, MAN GY, FI IM, SCVB SS

 

Suppliers/Related: CMI, ACW, CVGI, RUSHA  

 

 

Topics Will Include

  • The Cycle: A long-term look at Truck equipment cycles - what is changing and what is not.  Regulation, fleet age, OEM product trends and aftermarket growth will position the industry differently over the next several years.  It is not just about fleet age driving truck sales.  
  • Industry Structure: The trucking industry has a supportive industry structure, leaving the industry better able to weather variations in demand.  We look at several key ways that this already strong industry structure is improving. 
  • Valuation, Sentiment & Company Specific: The U.S. based truck OEMs are out of favor at the moment, with valuations at highly attractive levels.  We present our ideas on the best way to play this attractive industry and some key areas we would avoid.

 

About Jay Van Sciver

Jay has covered the Industrials sector for over a decade, providing buy-side research for long-only, long/short hedge fund, and proprietary trading strategies. He was a Co-Founder and Partner at Bishop & Carroll Capital Management, where he focused on Industrials, Materials and Consumer Durables. Previously he was a Managing Director at LaBranche, which seeded Bishop & Carroll, and an Industrials and Materials Sector Analyst at Brown Brothers Harriman. Jay graduated from Yale with a B.S. in Chemistry.  

  

 

About HEDGEYE

Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.

 

 

 

Please contact if you have any questions.


THE WEEK AHEAD

The Economic Data calendar for the week of the 13th of August through the 17th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - weekahead


Early Look

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JCP: Not Ready For Primetime

NOTE: This article was originally published on August 1. After reporting second quarter results, it has become clear that the company's turnaround plan is not working despite a pop in shares in today's trading. Same store sales (SSS) fell 21.7% in Q2 when analysts expected a 17.4% drop. Total revenues fell 22.6% to $3.02 billion. CEO Ron Johnson has promised to "stay the course." 

 

 

JCP: Not Ready For Primetime - JCP concept5 large

 

Despite the hype surrounding the new JCPenney (JCP) stores due to rollout this year into 2013, we remain bearish on the stock, a call that we’ve stuck with for about a year now. Ron Johnson and executive management continue to fail to execute on their turnaround plan which has helped the stock fall from $40 a share to $20 a share in under a year.

 

JCP proudly announced the unveiling of its new store concepts yesterday in a release, showcasing the mini-stores for the Levi’s and Arizona brands. While the video they produced was entertaining, showing off their concept of a “denim bar,” the Hedgeye Retail team begs to differ noting that there are noticeable hiccups in the rollout.

 

The team checked out a JCP store yesterday and instead of a hip, modern concept, found a half-completed store that resembled a warehouse more than anything. The Arizona stores were not ready due to a late shipment of wallpaper and the entire store had construction going on for other mini-stores that gave the store an unsightly appearance.

 

Here are the takeaways from our team, along with some choice photos below:

 

• The women’s Levi shop is already open although there we no i-pads in sight. This could simply be a store that did not receive the full blown Levi “store” however notable given the “denim bar” innovation.

 

• The Arizona shops (both men’s and women’s) will not be opening on time despite having been scheduled to open with the Levi shop due to wallpaper arriving late. The images below show a view into the women’s shop which has no décor as well as the men’s shop which is just to the right of the store’s entrance; neither is complete.

 

• The overall atmosphere of the store has a warehouse feel despite the areas under construction being concealed. Interestingly, with 2-4% of the location’s selling square footage remaining under construction over the next 2 years, there were concealed areas with no work complete inside. Our sense is this area is sectioned off for the September shops but we found this interesting nonetheless given the amount of the store already under construction.


IGT: BUYBACK NOW LOOKS BETTER

More disclosure surrounding Accelerated Buyback yields higher than expected accretion.

 

 

In the back of IGT’s 10Q filed on August 8th, we found additional details surrounding their “Capped Accelerated Stock Buyback Agreement, dated as of June 13, 2012” with Goldman.  The mechanics of the agreement allowed IGT to reduce their share count by a minimum 21MM by the end of F3Q, but leave the ultimate number of shares delivered to the company to vary based on IGT’s arithmetic VWAP (volume-weighted average price per share) over the course of the following 3-6 months.  In layman’s terms, since the price dropped like a rock post its earnings release on July 10th, we’re pretty sure the ultimate share reduction will be a lot greater than the initial 21MM at the same $400MM price tag.

 

We calculate the buyback could be 5 cents MORE accretive annually than our original estimate.  

 

On June 13th, IGT entered into accelerated buyback agreement with Goldman Sachs under which they would repurchase $400MM of the $1BN share repurchase program authorized by their Board.  The mechanics of the agreement are actually fairly standard so we’re not sure why IGT didn’t explain it better on their earnings call.  Below is our understanding of how the accelerated buyback works:

  • On June 19th IGT paid GS $400MM and delivered 21MM shares over the course of several days. This allowed IGT to start F4Q with approximately 274MM shares.  $320MM of the $400MM paid to GS was classified as treasury stock purchase and the balance was recorded in APIC.
  • In July, an additional 1.8MM were delivered and thus far, 4MM share have been delivered in through August 6th.  On August 6th, IGT had 267MM shares outstanding.
  • The ultimate number of shares that get repurchased will be determined by what IGT’s arithmetic VWAP is through at least September 19th but no later than December 19th.  Goldman has the discretion over the exact date to settle the trade within that window.  Based the VWAP of where IGT’s traded over the last 37 days and assuming that the stock stays between $11.25 and $12.50, the number of shares delivered should be between 31-33MM.
  • Assuming our math is close to accurate, IGT’s share count at September 30th should be around 264MM with a weighted average diluted count of 268MM.
  • The agreement has a cap of $19.  Normally, companies need to pay for a cap (somewhere in the neighborhood of 3% for a stock with IGT's volatility). However, perhaps due to the deep out of the money nature of the cap, IGT did not have to pay any additional money for this option.
  • The accelerated buyback agreement only covers the initial $400MM
  • IGT is not restricted on additional buyback activity during the period of the Accelerated Buyback as long as the aggregate purchases stay below 25% of 4 week average trailing volume

As to the question of timing, IGT likely had to sign a MPI agreement prior to the execution of this agreement; which means that the deal had to be done several weeks prior to the quarter or after IGT reported.  While this clearly improves EPS, this doesn't translate into higher management bonus incentives, as we previously thought, given that performance-based compensation is solely tied to revenue and operating income.  Even if IGT knew or suspected that a miss was in the works, they had to weigh the option of a lower average share count in 4Q vs the ability to buy back a few million more shares.  The other issue was that if they announced the buyback after the call, it would have likely buffered the stock decline – so on a net-net basis they may not have gotten a much better price.  If their stock trades in the $11.25-$12.00 range for the next 57 days, the effective buyback price will likely be in the $12.13-12.57 range.


SPY: The Time And Price

SPY: THE TIME AND PRICE

 

 

CLIENT TALKING POINTS

 

SHORTING THE S&P 500

This week we’ve discussed shorting the S&P 500 via SPY. What we were waiting for, particularly after hitting 1400, was time and price. At 10:21AM yesterday we shorted SPY at $140.78; it is timestamped in the Hedgeye Virtual Portfolio for your viewing pleasure. We think the market will continue to trend lower today but will manage the risk and the range and will cover if need be.

 

Keep in mind that it is Friday. The odds of Jon Hilsenrath from the Wall Street Journal running his mouth near the close (especially if the market is in the red) are high. Hopefully most people have gained some common sense by now to take those words at face value.

 

 

A MESS OF CORN

Corn continues to trend higher with the futures ripping higher this morning ahead of the 8:30AM crop report. Considering that the Midwest has been ravaged by hot heat, strong winds and a prolonged drought, it’s not going to be good. Throw in the falling US dollar, courtesy of your central planners, and commodity prices are going to keep going up. There’s nothing positive to come out of this. Corn is so interconnected to everything (fuel, feed for animals, etc.) that making a trip to the grocery store will likely make you wince.

 

 

THE TIMESTAMP

It’s important to timestamp your trades. The reason is obvious: hold yourself accountable. When you timestamp your entry and exit points, you have nothing to hide. Your P&L says it all. If you’re up, you’re up and if you’re down, well, you’re down. It’s how this game works. We pride ourselves on holding a darn good batting average while providing totally transparent trades and will continue to do so. It’d be nice to say we were short JCP in the Virtual Portfolio going into today’s open but that’s OK. Going back to the first note in today’s Playbook, it’s all about time and price. When the markets and moons align for a trade, we’

 

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ASSET ALLOCATION

 

Cash:                  UP

 

U.S. Equities:   DOWN

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat   

 

 

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TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

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THREE FOR THE ROAD

 

TWEET OF THE DAY

“$JCP discussing ‘gross margin ex markdowns’ is worse than a .com start-up I saw in ‘99 who touted ‘profit before costs’. That co is gone now” -@HedgeyeRetail

 

 

QUOTE OF THE DAY

“Never express yourself more clearly than you are able to think.” – Niels Bohr

 

 

STAT OF THE DAY

Tough day for Bill Ackman. JCPenney same-store sales fell 21.7 percent during the second quarter, steeper than the 17.4 percent drop analysts were expecting, according to Thomson Reuters. Revenue tumbled 22.6 percent to $3.02 billion, also below Wall Street's low expectations.

 


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 80.64%
  • SHORT SIGNALS 78.57%
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