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Mining: The Cycle Turns

Takeaway: Names like $RIO and $MCP are under pressure as the mining cycle turns.

The last decade has undergone an extraordinary mining boom that has been a positive for companies that have some kind of involvement in it. Everyone from Caterpillar (CAT) to BHP Billiton (BHP) to Rio Tinto (RIO) have reaped the benefits of the rush for resources and owe China a “Thank You” card or two for boosting the mining rush. But all good things must come to an end and it appears the cycle is turning in the mining industry.


As China’s economic growth begins to slow and people realize they don’t need 500 high rise condo buildings in a one square mile radius, demand for materials and resources has tapered off. Seeing as how mining is a cyclical industry, the price of certain commodities like copper are beginning to fall regardless of Bernanke’s quantitative easing methods. Companies that manufacture mining equipment are also due to see a slowdown in sales and revenue as demand weakens. 



Mining: The Cycle Turns  - Mining

Up On a Rope: SP500 Levels, Refreshed

Takeaway: Everything is fine until it isn’t.

POSITIONS: Long Consumer Staples (XLP), Short SPY


The SPY is up on a rope as the US Dollar is getting burned at the stake. Correlation Risk, all the while, is moving right back to where it has multiple times in the last 5 years (0.9). Correlation Risk between Gold/USD is even higher than that.


But, bullish is as bullish does, until the music stops – and the musician himself has quite the set of expectations to deliver on tomorrow, so I’ll stay with the defensive position (Long Staples, Short SPY) into that.


Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1445 (+0.55% upside)
  2. Immediate-term TRADE support = 1433 (-0.27% downside)
  3. Intermediate-term TREND support = 1419


In other words, everything is fine until it isn’t, so it’s worth waiting on Bernanke’s Weimar river card. I can handle a few 100bps of pain if it means we get a blow off top. It’s the price you pay for insurance against buying tops pre the next 10% draw-down.


If he prints to infinity, Oil probably rips to $125-130 again (like it did in February post his 0% rate push to 2014 on January 25th). Then #GrowthSlowing picks up its pace on the downside again too.





Keith R. McCullough
Chief Executive Officer


Up On a Rope: SP500 Levels, Refreshed - SPX

GPS: Waxing and Man-scaping?

Takeaway: We think $GPS hiring Michael Francis, recently fired CMO at JCP, as a strategic advisor is yet another building block to a developing short.


We think that GPS hiring Michael Francis, recently fired CMO and confidant of Ron Johnson at JC Penney, as a strategic advisor is extremely telling. Think about it like this…

Make no mistake, this has been a financial engineering story over the past 8-years. Basically, buying back stock. $11bn in repo has taken down the share count by 47%. As recently as 3-years ago, GPS was sitting on a net cash position of $2.3bn. Now it is down to $400mm. In other words, this did not need to be an operational improvement story to grow earnings. Now the share repo angle is largely over. GPS absolutely NEEDS to show consistent comp and/or margin improvement.


GPS: Waxing and Man-scaping? - 9 12 2012 11 44 42 AM


At the precise time that they needed to perform, two things happened.

1)    The company ‘hit a fashion trend’ with its colors. I’m still not sure what that means. Hitting a fashion trend is pretty much useless. Having a process to sustain driving fashion trends (Ralph Lauren, Nike) is a completely different issue. GPS hit fashion because it was lucky, not because it was good.  

2)      JC Penney imploded at that exact same moment. When one of the largest apparel retailers in the country comps down by 20%+ and hands off $3bn in sales to the lowest bidder, it is absolutely positive for GPS. Some people think that Gap’s biggest competitors are specialty apparel retailers – even the teen and adolescent retailers. Not true. GPS is basically a department store. The company competes head to head with JCP. In fact, when JCP started comping down, its top competitor, Kohl’s, ALSO comped down. Virtually all of the share was picked up by Macy’s, GPS, TJX, and ROST.


Though we think that JCP is terminally ill, the reality is that its business will ebb and flow along the way. The second that it stops ebbing, then these companies -- particularly GPS and M will stop gaining share on the margin – which is all that this P&L needs to start choking on itself.


So this takes us back to the Michael Francis hire. What does this tell us? Well, on one hand, it tells us that GPS is being proactive in getting as smart as possible as to how JCP will be going to market with its new strategies. That way, GPS can pre-empt, or even just cope appropriately when certain initiatives come to fruition.


But on the flip side, it shows just how vulnerable it is and how much it is downplaying the JCP threat. Check the last conference call transcript. Search for the name ‘JC Penney’. You’re not going to come up with much. They’re completely playing down to the street how much this has been helping them.


Are they flat-out lying? Probably not. We’re not crying conspiracy theory here. But the reality is that they simply don’t know. Do retailers know why people buy their goods? Why they walk past the door and go to the next retailer? They really don’t. The only one that likely can is Wal Mart. Amazon is a close second. Costco and Target round out the top. It falls precipitously from there. GPS simply does not know (and JCP does not know either). That’s why this industry has always been plagued by companies having to compete away what is near-universal previously-held optimism around sales and margins.


Ron Johnson announced this week that the company had logged in 1.6mm free haircuts at JC Penney stores this Back-to-School. Now that the former head of marketing is advising GPS, maybe we’ll see free waxing at Athleta, and Man-scaping at Banana. They’re gonna need it…no joke.


The consensus has GPS earning $2.40 next year. Then $2.72 the year after. We’re about 10% below next year, and 20% below the year after. We’d argue that barring a disproportionately large capital investment (which would drive returns lower) GPS will never see $2.50 again – ever. And as we say at Hedgeye, ‘ever’ is a long time.


That did not matter with the stock trading at $15 a year ago. But it certainly matters today at $35.  Let’s say we’re dead wrong, and the Street is spot-on. Then you’re paying 12.9x earnings for a number that GPS will earn in FY 2014. That’s right up there with AAPL, NKE and RL. Which would you rather own?


Takeaway: There are other ways for LVS to skin the table cap cat

Helping casinos cope with the Macau table cap



There has been a lot of chatter recently on how Macau casinos will overcome the table cap of 5,500, which is in effect until the end of March 2013.  First off, it's not a law, it's government stipulation that can be changed at any time.  One way casinos are helping to overcome this stipulation is through the placement of "super tables' each of which seats 12 people with two dealers, compared to 6-8 positions on a traditional Macau table with one dealer.


Here is our count of Macau super tables:







At the end of Q2, there were 5,498 tables reported by the Macau government.  The cap has been a concern for LVS investors in particular with the opening of Phase 2 on September 20th.  Sands China is already the most aggressive with the new product to free up room for the additional 200 tables expected at Sands Cotai Central in late 2012/early 2013. 


SCC isn’t likely to get their new table allocations until December or January 2013.  In the meantime, they can increase the table count above the cap during Golden Week.  The good news is that the number of tables that SCC originally opened with was too high so they moved a lot of those tables back to Venetian where they are more productive.  When Ph2 opens next week they will move some of those back and take some from Sands.  What that means is that on weekends and peak times, Sands’ properties will be running at overcapacity, however, most of the time, the table shortage will not impact them as there are plenty of under-utilized tables.




SUPER SIZE ME - IMG 20120912 00857


Takeaway: Casual dining traffic continued to decelerate through August $DRI $DIN $BLMN $EAT $CAKE $BWLD $TXRH

The estimated Knapp Track numbers for August suggest a slight sequential improvement in casual dining trends from July. Traffic, however, continues to decelerate.


Knapp Results


Estimated Knapp Track casual dining comparable restaurant sales grew 0.8% in August versus an estimated 0.6% in July.  The sequential change, in terms of the two-year average trend, was -45 basis points. 


Estimated Knapp Track casual dining guest counts declined -1.7% in August versus an estimated -1.8% in July.  The sequential change from July to August, in terms of the two-year average trend, was -70 basis points.



Black Box Intelligence


Black Box Intelligence released its casual dining index comparable restaurant sales growth for August earlier this month.  Comparable sales grew 1% last month while traffic declined -1.1% and price grew 2.2%.  The Knapp-Black Box spread was at -0.2% in August, which could imply that Darden underperformed since Darden is included in Knapp but not in the Black Box data.  To be clear, there are several differences between the Knapp Track and Blackbox data sets so the spread is not a sure-fire indicator of a slowdown in Darden comps but, given the size of the Darden system, we believe that the spread between Knapp Track and Blackbox is likely relevant for Darden’s top line trends.  The spread was +0.8% in February, which was a strong month for Darden (Red Lobster, in particular).  Since then, however, the spread has been negative through August.



Pricing Power Pressure


The restaurant industry’s pricing power is under pressure, currently, as Food at Home CPI is now well below Food Away from Home CPI on a year-over-year basis.   


AUGUST CASUAL DINING SALES TRENDS - food at home vs food away from home cpi



Howard Penney

Managing Director


Rory Green




Takeaway: Expert Call on $NAV's emissions situation @11AM. It is not as simple as it looks and it doesn't look simple at all.

Participant Dialing Instructions

Toll Free Number:

Direct Dial Number:

Conference Code: 952591#


Conference Call Today at 11am EST

Focus on NAV emissions strategy. PCAR,CAT



  • Navistar's Emissions Situation
  • Drivers and Direction of EPA Policy
  • Potential Election Impact
  • Heavy & Light Vehicle Emissions Standards
  • Policy for Off-Road Vehicles
  • Impact of Power Plant Emissions Rulings
  • Other questions from the audience


In addition to his substantial emissions-related Bio, we chose to do a call with him because he represented Volvo in its suit against the EPA regarding Navistars non-conformance penalties.



Navistar has 18pct of the Class 8 market and a losing product strategy, in our view.  Additional lawsuits against the EPA's new non-conformance penalty regime would undermine Navistar's claim that the issues are now settled.  That notion - that the EPA issues are now settled - is what they are saying in the market place to sell trucks. If it turns out not to be true (even in relatively minor ways), it could further jeopardize the already shaky confidence customers have in the brand.  That is a win for PCAR, Volvo and Daimer, and NAV has a lot of share that it could lose. New new (ie higher) non-conformance penalties may also directly undermine NAV's products. There is even risk that the NCP concept itself could be over-turned.



Dick will also discuss class 8 emissions in general, as well as the likely direction of regulation post 2018.



We will touch on Tier IV regulations, a possible driver of prebuy activity at CAT and other off-road engine manufacturers.



Dick actively worked on the new light-duty regulations. We will discuss the broader supply chain effects and the potential election impact.



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