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CHART DU JOUR: IT WASN’T JUST THE CALENDAR

Takeaway: July regional revenues disappoint

  • Riverboat same-store revenues fell 7% YoY in July, the worst SSS performance since January 2010
  • The seasonally adjusted trend was predicting -4%, and already accounted for the unfavorable calendar (one fewer Friday and Saturday relative to July 2011)
  • Louisiana led the decline, tumbling 12% YoY—the worst monthly drop since January 2010

CHART DU JOUR: IT WASN’T JUST THE CALENDAR - asdf


BOEING: Hard Cancellations

Takeaway: Qantas has cancelled an order for several aircraft from Boeing. $BA

One of the worst things that can affect an airplane manufacturer like EADS' Airbus (EAD) or Boeing (BA) are cancellations from a major airline. In this case, Australian airline operator Qantas cancelled a recent order from Boeing for 35 787 Dreamliner aircraft. Qantas is a rather small airline when compared with the US; the Australian market for commercial aircraft is about 1/10th the size of the US’s, which is only ~15% itself. Still, cancellations are not something manufacturers want experience, especially when rolling out new aircraft (in Boeing's case, the 787).

 

Boeing is currently 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. In the highly consolidated airspace industry, cancellations are a major  problem and in a global macro environment that’s experiencing growth slowing, this sort of thing does not bode well for the BAs and EADs of the world.

 

Looking at the chart below, one can see that orders and deliveries are trending upward after a decline that occurred during the financial crisis. This Qantas cancellation may be a one off situation rather than an indication of moves other airlines may make going forward.

 

BOEING: Hard Cancellations  - BA cancellations


Major Catalysts

MAJOR CATALYSTS

 

 

CLIENT TALKING POINTS

 

MAJOR CATALYSTS

We’ve got a plethora of issues to begin taking care of in this country. Dealing with everything from the fiscal cliff to the debt ceiling to the mess in Europe to slowdown in China, it’s like no matter where you go, you’re going to run into trouble. News flow regarding most of the aforementioned catalysts has been slow. Quiet isn’t necessarily a good thing, but on a Friday, I be some people are glad that the Eurocrats are on vacation and such.

 

 

THE MACAU INDUSTRY

Gaming in Macau has been on the decline for some months now, with a recent pickup in the numbers thanks to a multitude of factors. The latest numbers just came out of Macau, and average earnings per employee are up. At the end of the first half of 2012, the gaming sector had 52,800 workers, up by 11.6%.  The figure doesn’t include junket promoters and junket associates.  Overall, there were over 1,800 job vacancies in the gaming industry.          

  

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  UP

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  DOWN

 

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

“"My mom used to tell us, Carl, put on your shoes. Oscar [Pistorius], put on your legs, so I grew up thinking I had different shoes." Fav #Olympic quote.-@LewisPugh

 

 

QUOTE OF THE DAY

“Thought is only a flash between two long nights, but this flash is everything.”–Henri Poincare

                   

 

STAT OF THE DAY

0.5%. The amount the UK economy shrank between April and June.

 

 

 


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Staying Flexible

"I know a lot of people have very strong and definite plans that they've worked out on all kinds of things, but we're subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible."

- Henry Singleton

 

I have to admit, I didn’t know who Henry Singleton was when I first read the quote above – I just really liked the quote.  Then I read a little bit about Mr. Singleton and I really liked him too.  He was what I would call a great American.

 

Singleton graduated from the Naval Academy in 1940 and went to work as an electrical engineer.  As the United States upped its involvement in World War II, Singleton was eventually sent to Europe as a member of the Office of Strategic Services, which was the forerunner to the CIA.

 

After serving his country, Singleton returned to the U.S. to get a graduate degree in electrical engineering from MIT.  He would then make his way out to California where he and a former Naval Academy roommate, with the backing of legendary venture capital investor Arthur Rock, would start  Teledyne, a company that had decades of success before being acquired by Allegheny Steel.  None other than Warren Buffett once said:

 

“Henry Singleton of Teledyne has the best operating and capital deployment record in American business.”

 

Lofty praise, indeed.

 

One of Singleton’s keys to success was his willingness to be flexible.  Nothing could be more accurate for those of us that actively invest in the stock market.  The ability to change your mind and change your exposures on new information is a critical to succeeding as a money manager.

 

Yesterday, I did a brief interview on National Public Radio.  The key question they wanted answered was why August was so quiet and whether that meant things were getting better. Now perhaps I’m being a little inflexible, but my response was that they shouldn’t confuse absence of news with good news.  In fact, as we look forward there are a number of major events that we need to manage risk around, such as:

  1. The U.S. Election – As we’ve noted, this race is basically a dead heat with Romney likely doing a bit better than many polls indicate based on higher voter engagement for Republicans.  We are confident in saying, especially with the addition of Paul Ryan to the ticket, that the economic policy outcomes will be very different under a President Obama or President Romney.
  2. The U.S. Debt Ceiling – Do you remember this little critter last summer that led to a dramatic sell off in risk assets and a literal shutdown in Washington D.C.? Well, it’s going to become an issue again very soon.  According to analysis from our healthcare team, the U.S. Treasury will issue $592 billion in debt through year end, which will put them in breach of the debt ceiling of $16.4 billion sometime before 2013.
  3. Fiscal Cliff – It’s funny how we are hearing less and less about the fiscal cliff these days, since the issue hasn’t gone away.  In 2013, we have the toxic short term growth combination of higher taxes and lower government spending coming our way (less government spending will be good in the long run, of course).  Reasonably this could be a 2% plus headwind to economic growth next year.  The non-partisan CBO actually has 2013 growth pegged at an anemic +0.5% in 2013.
  4. Japanese Debt Ceiling Debate – Just because Japan is in a different time zone, doesn’t mean it doesn’t exist.  Currently,   legislation to enable the Japanese government to sell debt to finance 40% of the federal budget is stuck in the upper house as the opposition party is attempting to force Prime Minister Nodo to fix an election date.  Japan’s government could run out of money by October if this legislation is not passed. 
  5. Chinese Growth – I highlighted the Chinese flash PMIs yesterday that showed inventories building and sales declining heading.  In the Chart of the Day, we show Chinese steel prices that illustrate much the same story economically.  Rebar, in particular, is required for large scale construction and to the extent prices are declining it bodes poorly for economic activity and suggests the upcoming quarters will be replete with negative economic data.
  6. European Debt – The Eurocrats are on vacation so the news flow has been minimal and, on the margin, that’s been positive.  That said, nothing has been solved and we will likely see more “solutions” and “summits” in the coming months.  In fact, news out this morning has the German finance minister stating they will be preparing for a scenario in which Greece leaves the Eurozone.

It’s Friday, so I do want to leave you on a more cheery note heading into the weekend, so I decided to leave out my 7th potential catalyst, which would have been the potential for an Israeli strike on Iran this fall.  Certainly, oil is signaling something along these lines lately.

 

On a much more cheery note, my colleague Jay Van Sciver, our Industrials Sector Head, will be joining our client call this morning to discuss his sectors and one of his favorite names, PACCAR.  Van Sciver has a differentiated view on the upcoming trucking cycle, which is likely to lead to fewer truck sales and more parts sales.  Get this, truck OEMs, such as PACCAR, actually make more money selling parts.  If you can’t join us for the call this morning, ping and get on a call with Van Sciver.  His long call on PACCAR is almost as compelling as is short case on United Airlines.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are 1, 113.96-116.21, 81.28-82.13, 1.23-1.25, 1.62-1.75% and 1.

 

Enjoy the weekend!

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Staying Flexible - Chart of the Day

 

Staying Flexible - Virtual Portfolio


Timing Shorts

This note was originally published at 8am on August 10, 2012 for Hedgeye subscribers.

“Observe due measure, for right timing is in all things the most important factor.”

-Hesiod

 

Efficient market folks say they can’t time markets. Take their word for it. It’s our job, not theirs.

 

Whether you practice the art of short selling in gnomic, hymnic, or genealogical form, at some point in the decision making process we all have to do the same thing – timestamp our position.

 

We waited, watched, and finally re-shorted the SP500 yesterday at 10:21AM EST (1405). Given all the perma-bullish narratives I’ve had to listen to for the last few weeks, I must say I enjoyed the experience quite thoroughly.

 

Back to the Global Macro Grind

 

To timestamp or not to timestamp, remains the question. All of you who do this with real money understand the concept obviously. Timing stares at you from your P&L every day. For the Old Wall’s finest strategists, the whole accountability exercise still appears to be quite foreign.

 

If you’re one of the many non-timestamping strategists who had a 3% US GDP growth forecast and 1500-1600 target for the SP500 back in March, you had the entire 2012 fundamental thesis wrong. In order to remain bullish, the best move from here is to beg for bailouts and just change your thesis entirely because the “market is up year-to-date.”

 

Since the March 26th YTD high for the Russell2000 (+5.5% higher at 846) and the April 2nd YTD high for the SP500 (+1.2% higher at 1419) if nothing else, we’ve been consistent with both our research call (#GrowthSlowing) and our risk management process (#timestamps).

 

Looking back at the tapes, since February 15th this will be the 9th time we have made a risk management call on the SP500 itself without violating Rule #1 (don’t lose money). We’ve shorted it 8 times and bought it once (bought SPY on May 17th when plenty a March Perma-Bull was in the fetal position).

 

I’m not trying to evangelize or puff out my chest here. We haven’t killed it with all these calls. They haven’t been the worst timed calls to land in your inbox either. They aren’t meant to be anything other than immediate-term risk signals (which go both ways).

 

I’m just reminding you that there are some firms in this industry that have at least attempted to evolve the research and risk management process while many haven’t changed a darn thing.

 

Maybe this time we’ll be wrong. Maybe we’ll be right. The only thing I can tell you is that there will be no maybe when the position is closed.

 

Timing Matters. In some parts of this country, so does winning and losing – and being held accountable to both.

 

My immediate-term risk ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1603-1624, $108.96-114.11, $81.95-83.01, $1.20-1.23, and 1388-1405, respectively.

 

Best of luck out there today and have a great weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Timing Shorts - Chart of the Day

 

Timing Shorts - Virtual Portfolio


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