prev

Magnificent Investing

This note was originally published at 8am on August 08, 2012 for Hedgeye subscribers.

“Another thing that freaks me out is time.  Time is like a book.  You have a beginning, a middle and an end. It’s just a cycle.”

-Mike Tyson

 

This week I enjoyed a few days off in the Banff and Lake Louise region of Alberta in the heart of the Canadian Rockies.  As part of my tour, I hiked up to view the Takakkaw Falls in Yoho National Park.  The falls are the second highest natural falls in Canada at 245 metres.  In Cree, the word Takkakaw is loosely translated to mean “it is magnificent” and is an apt description of this natural wonder.

 

Interestingly, while much of North American is being adversely impacted by record hot temperatures, Western Canada seems to be thriving.  Specifically, the crops appear to be in excellent condition.  In fact, the Canadian Wheat Board issued its first crop outlook for the 2012 – 2013 season and in it said the following:

 

“Wheat fundamentals are favorable to prices. World wheat production is forecast to fall by over 40 million tonnes to 646 million tonnes.  A weather-related shortfall in Russia, Ukraine, and Kazakhstan is the main driver behind the global production decline. The U.S. corn belt has been hit by a severe drought, resulting in dramatic declines in corn and soybean production potential.”

 

We Canadians are known for our subtleness and this report from the Canadian Wheat Board is no exception.  To translate: it is going to be a record year for Canadian farmers because of shortage of supply of both wheat and corn globally.  This shortage of supply is primarily being supported by drought like conditions in both the U.S. and key growing areas in Europe. As a result, many agricultural commodity prices have been in a mini bull market.  As an example, the corn ETF, aptly named CORN, is up more than 50% in the last two months. Being on the right side of a trade like this is what I would call: Magnificent Investing.

 

Personally, I haven’t studied global warming enough to either be a proponent or opponent, although this year certainly gives some credence to the concept. That said, Keith and I have at times discussed our longer term investment view of Canada and even presented this view to various municipal governments across Canada.  A key component of this view is obviously the vast resources of Canada as typified by the agricultural production capabilities and the Saudi Arabia like oil resources in Alberta.  But another important potential tailwind for Canada is weather patterns.

 

UCLA Geography Professor Laurence C. Smith has done much of the work that underscores our long term investment view of Canada.  In his book, “The World in 2050: Four Forces Shaping Civilization’s Northern Future”, Smith highlights some of the key forces driving economic share gains of the Northern Rim Countries, or as he calls them NORCs.  A key point in his thesis related to NORCs is that their share of crop production will increase dramatically if and when the world becomes warmer because they will be less directly impacted by an increase in temperature.  His prediction is for this trend to really have an impact by 2050, even though it sounds a little like 2012 . . .

 

No doubt climate cycles can be challenging to invest around, though industrial cycles can be much more predictable and create longer term (in our models TAIL duration) investable fundamentals.  Our recently hired Industrials Sector Head Jay Van Sciver has spent more than a decade on the buy-side and a key component of his investing framework is that if you get the industrial cycle right, you’ll get a lot of other things right.  An example he uses in his presentation is being on the right side of U.S. electrical transmission infrastructure investment cycle.  A couple of points to consider:

  • In the down cycle from Q1 1992 to Q1 2000, the SP500 returned 243%.  In that same period, the primary players in this industry, Copper Industries, Hubbell, and Thomas & Betts, returned on average 25%.
  • In the up cycle from Q1 2001 to Q1 2012, when investment in transmission infrastructure was accelerating, the SP500 was up 51%.  Meanwhile, the key players noted above were all up more than 300%.

I’ll say it again, if you get the cycle right, you’ll get a lot of other things right.

 

Van Sciver’s launch presentation on June 27th was a bearish call on the airline cycle.  Call him lucky or good, but as we highlight in the Chart of the Day, airline stocks have basically been in free fall since he launched.  In fact, speaking of Magnificent Investing, one of his least favorite names, UAL, is down almost -20% in that period.  His next deep dive will be on the global truck OEM market and he will be hosting a conference call on August 16th to discuss. Ping us at macro@hedgeye.com or contact your sales person if you are an eligible institution and would like to join this call and review Van Sciver’s work.

 

In our global macro research, a key theme we’ve been hammering on for the last few years has been the global debt super cycle.  An important point of this cycle is that as government debt accelerates past 90% debt-to-GDP, economic growth slows.  This morning’s data from Europe does little to change our debt cycle thesis. Spanish 10-year yields are back pushing that 7% line at 6.98% and so there’s no surprise that the IBEX 35 is down -1.9%.  Further, German June exports were down -1.3% year-over-year and German industrial production was down -0.3%.  Clearly, even a relatively well situated country like Germany cannot escape the growth slowing debt cycle.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1603-1624, $107.34-111.83, $81.89-82.69, $1.23-1.24, and 1381-1407, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Magnificent Investing - Chart of the Day

 

Magnificent Investing - Virtual Portfolio


THE M3: CRA FINES; JULY VISITATION; CHANGI JULY TRAFFIC

The Macau Metro Monitor, August 22, 2012

 

 

MBS AND RWS FINED FOR BREACHING SOCIAL SAFEGUARDS TodayOnline

Casino Regulatory Authority of Singapore (CRA) has fined MBS and RWS S$357,500 and S$140,000 respectively for breaking social safeguard requirements, such as letting Singaporeans and Permanent Residents enter without paying the S$100 entry levies.  The breaches took place between May and October 2011. In addition, RWS has been censured for three cases of similar breaches during the period and MBS censured for failing to display appropriate message on its progressive jackpot system on Oct 18, 2011.

 

VISITOR ARRIVALS FOR JULY 2012 DSEC

Visitor arrivals decreased by 4.2% YoY to 2,444,264 in July 2012.  The average length of stay of visitors stood at 1.0 day, down by 0.1 day YoY.  Visitors from Mainland China decreased slightly by 0.3% YoY to 1,456,351, coming mostly from Guangdong Province (683,285), Fujian Province (70,439) and Zhejiang Province (56,937); Mainland visitors traveling under the Individual Visit Scheme rose by 4.1% to 643,147.  Visitors from the Republic of Korea (36,030) and Japan (35,132) increased by 2.0% and 20.1% YoY respectively, while those from Hong Kong (639,580) and Taiwan (112,263) both registered a decrease of 11.1%.

 

THE M3:  CRA FINES;  JULY VISITATION; CHANGI JULY TRAFFIC - MACAU1

 

CHANGI AIRPORT PASSENGER TRAFFIC UP 4.5% IN JULY Strait Times

Passenger traffic at Changi Airport grew by 4.5% in July to hit 4.36 million.  Changi Airport Group said that traffic to and from the Middle East, Southwest Pacific and the Americas remained strong and witnessed double-digit growth.  However, the growth in Southeast Asia and Northeast Asia traffic was weaker and in the low single digits. These two regions account for about 70% of total passenger traffic at Changi.

 

THE M3:  CRA FINES;  JULY VISITATION; CHANGI JULY TRAFFIC - changi

 



THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 22, 2012


As we look at today’s set up for the S&P 500, the range is 10 points or -0.30% downside to 1409 and 0.41% upside to 1419. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT: 

  • ADVANCE/DECLINE LINE: on 08/21 NYSE -344
    • Decrease versus the prior day’s trading of -343
  • VOLUME: on 08/21 NYSE 640.96
    • Increase versus prior day’s trading of 16.39%
  • VIX:  as of 08/21 was at 15.02
    • Increase versus most recent day’s trading of 7.13%
    • Year-to-date decrease of -35.81%
  • SPX PUT/CALL RATIO: as of 08/21 closed at 1.10
    • Down from the day prior at 2.44

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.78%
    • Decrease from prior day’s trading of 1.80%
  • YIELD CURVE: as of this morning 1.50
    • Down from prior day’s trading of 1.51

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: MBA Mortgage Applications, Aug. 17 (prior -4.5%)
  • 10am: Existing Home Sales, July, est. 4.51m (prior 4.37m)
  • 10am: Existing Home Sales, July, est. 3.2% M/m (prior -5.4%)
  • 10:30am: DoE Inventories
  • 2pm: FOMC Meeting Minutes

GOVERNMENT:

    • House, Senate not in session
    • SEC holds meeting on disclosure rules regarding conflict minerals, payments to governments made by resource extraction issuers, 10am
    • Federal Reserve Bank of Chicago President Charles Evans holds press briefing at U.S. embassy in Beijing, 11:30pm
    • U.S. Census Bureau holds webinar on foreign trade rules, with ombudsman Omari Wooden, 1pm
    • Commerce Dept.’s National Telecommunications and Information Administration meets on consumer data privacy codes of conduct concerning mobile application transparency, 9:30am
    • NRC, FEMA hold conference call to discuss emergency preparedness plans at U.S. nuclear power plants, 2pm

WHAT TO WATCH: 

  • Verizon Wireless said to be planning to sell Nokia with Microsoft’s Windows 8 software this year
  • UPS extends offer period for TNT to Nov. 9 from Aug. 31
  • Dell says PC business deteriorated more than expected
  • RBS said to be probed by U.S. over Iranian sanctions
  • Carl Icahn withdraws offer to take CVR Energy private
  • Jury in Apple, Samsung patent trial begin deliberations
  • ATP wins prelim. approval for bankruptcy financing
  • Sales of existing U.S. homes probably climbed 3.2% in July
  • Exxon, BHP, other energy, mining firms may need to report what they pay each country they tap resources from under rule SEC has votes to adopt
  • BHP delays $68b of project approvals, profit plunges
  • Sirius directors sued by investors for failing to defend co. from potential takeover by Liberty Media
  • IAC/InterActiveCorp said to have offered more than $300m to buy About.com, topping bid from Answers Corp.
  • Allianz trims asset-mgmt unit targets on Europe debt crisis
  • Microsoft, Samsung may face greater scrutiny of labor practices as Apple’s biggest supplier improves conditions at its Chinese plants
  • Japan swings to trade deficit as Europe drags down exports
  • Wet Seal hired financial advisers, adopted poison pill
  • SEC should approve Nasdaq’s proposal to pay firms $62m for losses suffered in Facebook’s IPO, Citadel said
  • Electronic Arts’s PopCap Games fired ~10% of staff

EARNINGS:

    • Express (EXPR) 7am, $0.17
    • Chico’s FAS (CHS) 7:15am, $0.30
    • American Eagle Outfitters (AEO) 8am, $0.21
    • Eaton Vance (EV) 8:40am, $0.47
    • International Rectifier (IRF) 4pm, $(0.15)
    • Kayak Software (KYAK) 4pm, $0.24
    • Hain Celestial (HAIN) 4pm, $0.45
    • Synopsys (SNPS) 4:05pm, $0.50
    • Prospect Capital (PSEC) 4:05pm, $0.40
    • Guess? (GES) 4:05pm, $0.51
    • Hewlett-Packard (HPQ) 4:05pm, $0.98
    • Semtech (SMTC) 4:30pm, $0.41
    • Heico (HEI) 4:40pm, $0.41

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


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 80.28%
  • SHORT SIGNALS 78.51%

CHART DU JOUR: IGT BUYBACK

A pictorial view

 

  • IGT bought back 110 million shares over the past 8 years, or almost 30% of the outstanding shares
  • The buyback has been very accretive to EPS but hasn’t done much for the stock.  The stock is at the low end of its 8 year range and 76% off its high in early 2008
  • Nevertheless, we are currently projecting almost 25% EPS growth in FY2013 which, if achieved, would likely result in significant share appreciation – the one advantage of low expectations

 

CHART DU JOUR: IGT BUYBACK - IGT


The Reversal: SP500 Levels, Refreshed

Takeaway: With global growth slowing, this isn’t the place to chase low volume equity rallies.

POSITIONS: Long Healthcare (XLV), US Dollar (UUP), Flattner (FLAT), Longer Term Treasury Bond (TLT), Short Euro (FXE), France (EWQ) and SPY

 

Midmorning today, it looked like the bulls were once again fully in charge of the SP500.  The index traded through 1,425 and appeared to be on pace to close at a new yearly high . . . and then we reversed.  From the highs of the day, the SP500 is now off 0.85%.

 

In our models, this type of a move is significant.  It is called an “outside day” and occurs when the market tests the prior closing high, fails, and then closes below the prior closing high.  In this case, that prior closing high is 1,419.

 

In the chart below, we’ve highlighted our current risk management levels.  The sell TRADE line is at 1,419, the buy TRADE lines is 1,410, and the buy TREND line is down at 1,384.  In essence, if 1,410 doesn’t hold . . . look out below.

 

We’ve been clear on our view that with global growth slowing, this isn’t the place to chase low volume equity rallies.  In particular, chasing equities at a time when the VIX is sub 15 has been exactly the wrong call over the last three years.  Currently, the VIX is up 7.4% on the day to 15.07.

 

For those looking to add some short exposure to your portfolios, we are currently short these individual stock names in the Virtual Portfolio:

 

  • Freeport-McMoran Copper and Gold (FCX);
  • Caterpillar (CAT);
  • United Airlines (UAL);
  • Dominoes Pizza (DPZ);
  • American Express (AXP);
  • MGM Resorts (MGM); and
  • Morgan Stanley (MS).

Ping if you want to talk to one of our Sector Heads on these names. 

 

Daryl G. Jones

Director of Research

 

The Reversal: SP500 Levels, Refreshed - SPX


Saving Europe

SAVING EUROPE

 

 

CLIENT TALKING POINTS

 

SAVING EUROPE

Tons of rumors coming out of Europe this morning. But that’s really all you need is one good, juicy rumor to save the day. In this case, it’s that Germany will go out buying unlimited peripheral debt in order to stabilize the Eurozone. Der Spiegel also reported that Germany was looking for way to cap yields on Spanish and Italian debt. This is all pretty ridiculous. Let’s sit back and see what happens. Without a doubt, US equities will respond positively to the news.

 

 

BUBBLING CRUDE

WTI crude futures are up on the NYMEX – more than 1.6% as of writing sending oil to $97.60 a barrel. The race to drive oil prices back up is upon us apparently. We never understood the hysteria surrounding why traders and investors want higher food and fuel prices. But one thing is certain: if you get the dollar right, you get a lot of other things right. And with the dollar down this morning, this move in oil makes sense and will continue higher should the dollar drop further.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  Flat   

 

U.S. Equities:   Flat   

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: UP   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE INC (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • 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

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“We're about due for a $GS super-spike oil note up here.. $255 Brent here we come” -@HedgeyeENERGY

 

 

QUOTE OF THE DAY

“It's all right letting yourself go as long as you can let yourself back.” – Mick Jagger

                   

 

STAT OF THE DAY

$17. The record price of soy beans per bushel as commodity prices shoot higher.

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next