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The Trouble With China And Japan

Takeaway: War is unlikely, but election outcomes and economic growth are certainly at risk in both countries.

Over the last few weeks, there have been daily protests in China against Japan over territory in the South China Sea. Over 500 protests have occurred daily with the Chinese government rarely interfering, which is odd in the sense that the government is usually keen to keep demonstrations of this sort on lock down. The questions that outsides looking in have been asking are: what’s going to happen? Will the two countries undergo a trade war or a military conflict?

 

Military action is an unlikely scenario; both sides have too much to lose and are too interdependent on one another. That said, however, our Macro team believes that as the territorial dispute drags on, economic growth is potentially at risk as trade protectionism kicks in and sentiment becomes depressed. With the militaristic undertones of current policymakers on both sides in full swing, the conflict is unlikely to be resolved soon.

 

Hedgeye Senior Analyst Darius Dale brings to light what could happen as we head into 2013:

 

Both China and Japan have leadership transitions/parliamentary elections on the docket in 2013, so it would seem that maintaining a strong geopolitical face is in the interest of policymakers in both countries. Leaders who engage in defending the sovereignty of their nation tend to resonate well with their respective populace.”


What's In A Dollar?

WHAT’s IN A DOLLAR?

 

 

CLIENT TALKING POINTS

 

WHAT’S IN A DOLLAR?

Jerry Seinfeld would probably say something along the lines of “what’s the deal with the US dollar these days?” Well, Jerry, the US dollar broke its 6 week spell of falling lower and lower and is now up for the week. You know what that means? A Dollar Holler smashes commodity prices in the face of Ben Bernanke and his policy of inflating prices and easing the markets. The CRB Commodity Index is down -4.4% week-to-date. You have to remember that when trading these markets, there is correlation risk to be had. Get the US dollar right and you’re going to get a lot of other things right, including oil, gold and even the stock market.

 

 

TREASURY TROVE

The 10-year Treasury is an instrument which many consider to be among the safest in the world. When people flock to Treasuries, driving yields lower, they’re looking for a safe haven play; a way to allocate capital while still earning some kind of return, even if it’s only 100 basis points or so. Well now that Ben Bernanke has extended QE3 and encouraging rampant stock market orgies of epic proportions, we’re seeing the 10-year yield climb higher. 10-year breakevens are testing new all-time highs and the current 1.76% yield will probably go higher by the end of the day as long as there’s no drastic news about the issues in Europe.

 

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  UP

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: DOWN  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

WENDY’S COMPANY (WEN)

Our conversations with Wendy’s franchisees indicate that sales have been trending sequentially higher in 3Q versus 2Q. We believe the company is about to announce the end of the company’s Sisyphean breakfast initiative after a prolonged “testing” phase. Given the capital demands on the company over the next few years as it invests to upgrade its asset base, shifting capital from the distraction that has been breakfast is a positive. The tail is less certain as it will take years for the system to rejuvenate the asset base and push out the older franchisees that don’t want to make the necessary investments to bring the asset base in line with contemporary industry standards..

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

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • 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

“If you waited in line earlier then 7am for an iPhone 5 today, you need to get a job. $AAPL” -@MarketShot

 

 

QUOTE OF THE DAY

“I didn't really say everything I said.” –Yogi Berra

                       

 

STAT OF THE DAY

CRB Commodity Index fell -4.4% week-to-date.

 

 

 


Idea Alert: UA


Keith added UA back on the long side of the Real-Time Positions yesterday. Pressure in retail/apparel presented an opportunity to buy back one of our favorite TAIL ideas. There’s no chance to the research call. While this is one of our favorite TAIL ideas, look for us to keep a TRADE a TRADE on this one.


On a TAIL duration (3-Years or Less):

  • UA should put up $3bn in revenue by ‘14 – impressive given a $1.5bn print in 2011.
  • It’s tough to find any name out there growing EBIT in the 25-30% range. This translates to over $2 per share in earnings at UA’s current margin structure (which we think is sustainable). Simply put, UA was built to be expensive.
  • There’s no fundamental reason why footwear should not attain share at least in line with lesser brands like New Balance, Reebok, Brooks, Saucony…Admittedly it has not happened yet, but will – the big risk is that it costs them more to do it.
  • International is also next on the docket with the hire of Charlie Maurath.
  • All in, it’s true that it faces a stiff competitor in Nike, but barriers to entry here are immense, and UA has already invested to jump that hurdle. Few others have.
  • In addition, UA has ~2x the Direct-to-Consumer exposure as Nike – that’s one of the benefits of building a business without a legacy wholesale model that’s dependant on dinosaur retailers to conform to its marketing plan.

Near-term TRADE duration (3-Weeks or Less) factors:

  • Our estimate is 7% ahead of the Street in the upcoming quarter reflecting strong sales trends and share gains in both apparel and footwear.
  • Apparel sales have continued to outpace the broader industry posting greater than 2pts of share gain quarter-to-date.
  • Meanwhile, footwear sales have reaccelerated since early June reflecting the early success of the new Spine platform and launch of UA’s new basketball line.
  • On the flip side, UA just lost its SVP/Sourcing, which is not good. Also, DKS writing off its investment in UK’s JJB is not great for UA’s int’l growth given the relationship between the two. We’re more concerned with perception than reality, but the facts can’t be ignored. When concerns are high, we’re buyers.

Idea Alert: UA - UA TTT







 


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At The Front

This note was originally published at 8am on September 07, 2012 for Hedgeye subscribers.

“No man can properly command an army from the rear; he must be at its front.”

-General William Tecumseh Sherman

 

I don’t force myself to write every morning. I have a passion to find the truth. I want to be on the front lines of that daily search.

 

On the Research Front, that doesn’t mean I’ll always find the truth; it just means I expect to. On the Risk Management Front, that doesn’t mean I am certain of anything markets will do; I am constantly humbled by their uncertainty.

 

That’s my life At the Front. Research (Growth Slowing) and Risk Management (market moves) are 2 very different things. Long-term, I think you are best prepared to have a process that embraces both. Winning and losing battles happens in every position, everyday. The war, however, is far from over.

 

Back to the Global Macro Grind

 

Hats off to them. I have no problem giving credit to my competition where it is due. The last 48 hours of global equity market trading has provided for one of the more impressive Keynesian Central Planning performances in at least the last 40 years.

 

Just think, it was only January of 2008 when you could have bought the SP500 at this very same price. You’d have had to have taken a very “long-term investor” view from that price… and mostly everything the buy-high bulls told you to buy on would have changed at least once every 3 months during the next 5 years… but now, after a little volatility, you are back to break-even, right?

 

Back to reality…

 

At The Front of real-time risk management this morning, yesterday is over. Now, what we really need to ask ourselves is what I have been borrowing from Ray Dalio’s Principles as of late, “What Is True?”

 

This usually happens when I am short-term wrong – I have more questions than answers:

  1. Is the US bond or stock market right on growth?
  2. What is the US stock market? the SP500 (higher-highs yesterday) or Russell2000 (lower-highs yesterday)?
  3. Is the European bond or stock market right on growth?
  4. Are German stocks (higher highs vs March this morning!) or the Eurostoxx600 (lower-highs) right?
  5. Is the Asian bond or stock market right on growth?
  6. Was the 1-day +3.7% rip off the YTD low in Chinese stocks the bottom or another lower-high?

If you have all the answers to these questions nailed down, across immediate to long-term durations, give me a buzz. On growth, the answer isn’t what the SP500 is “up year-to-date.” That’s just a short-term proxy for how less and less people get paid.

 

If that was the answer in Weimar Germany in 1923 or, say today in Venezuela’s IBVC Index (+155% YTD post currency debauchery), that would have been good and fine until revised as a very wrong answer. I guess they needed “more time.”

 

To review: stock and commodity market inflation is not economic growth.

 

The former is helpful to some, the latter is hurtful to many. I didn’t hear that coming out of either the RNC or DNC in the last few weeks. Why? Because both parties are Keynesian in their economic policy. Sadly, Obama and Romney look a lot more like Carter and Nixon, than they do Reagan or Clinton to me.

 

At this point, maybe I can appeal to both the far left and right of each party. Political strategists, you will love this storyline: when I came to this country (mid-1990s), I was an immigrant… son of a teacher and firefighter

 

I had no money… I was the beneficiary of two US Administrations (Reagan and Clinton) who had the three things that someone like me could believe in – Strong Dollar, Low Oil Prices, and Free-Market Capitalism. I worked 3 jobs; I took risks; got married, had 2 beautiful American children, and hired 50 people – a Made In America exporter of ideas…

 

Enough of the storytelling drama already. I didn’t earn any of this kissing anyone’s rear at the 2007 September-October stock market highs. I didn’t beg for bailout money at the 2008-2009 lows either. I sucked it up; I took my losses; and I carried on.

 

So don’t expect me to fade and not face the front lines this morning. From the top, to the bottom, and back again - it’s been a long 5 years writing to you – and there is still a war to be won.

 

My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1674-1712, $112.21-114.92, $80.98-81.61, $1.24-1.26, 1.56-1.72%, and 1419-1435, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

At The Front - Chart of the Day

 

At The Front - Virtual Portfolio


THE M3: ST REGIS HOTEL; CPI

The Macau Metro Monitor, September 21, 2012

 

 

ST. REGIS HOTEL TO BE READY IN 18 MONTHS: ADELSON Macau Business

Sheldon Adelson announced that Sands China has already received the government’s licence to go ahead with the construction of a fourth hotel tower at Sands Cotai Central.  According to Adelson, the US$450 million (MOP3.6 billion) tower will host a St. Regis hotel, with 460 rooms and serviced apartments.

It is to be ready within 18 months, he said.

 

Also, according to Sands China executives, US$1 billion of the financing for Lot 3 will come from the company’s equity base with the remainder coming from international banks.

 

Adelson confirmed yesterday that the new Pacifica casino at Sands Cotai Central, inaugurated yesterday, opened with no new live gaming tables; instead, the units available there came from Sands China’s existing four casinos.  But Sands China executives said they were confident the government would grant the casino operator 200 new tables next year, once the current 5,500 live table cap expires.

 

CONSUMER PRICE INDEX FOR AUGUST 2012 DSEC

Macau CPI for August 2012 increased by 6.33% YoY and 0.23% MoM.




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