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Housing is improving but still not good enough


  • We’ve shown that housing prices have historically been the most statistically significant macro variable in explaining gaming revenue growth
  • While better, home prices were still down YoY in Q2.  The good news is that price change might be on the positive side in Q3.
  • The mortgage delinquency rate continues to slope downward which is a decent economic barometer.  However, that could also mean that more people are paying their mortgage or have moved out and are now paying rent.  Either way, it likely means less monthly discretionary spending which could be impacting gaming spend.  This phenomenon could continue to suppress locals gaming revenue.



Takeaway: Latin America is reminding US policymakers of the unpleasant direction in which they're steering the US economy.



  • From excessive froth in Mexican capital markets to a serial CPI under-reporter (Argentina) calling out the US for being guilty of the same to Latin America’s resident socialist (Hugo Chavez) giving Obama a hyper-supportive thumbs up, recent occurrences and quotes from Latin American companies and policymakers have shed an unflattering light on the direction of US monetary and fiscal policy.
  • As it relates to specific investment ideas and themes across Latin America, we maintain our TAIL-duration bearish thesis on Argentinean peso-denominated assets as the continued popping of Bernanke’s Bubbles perpetuates both currency devaluation and sovereign default risk. Refer to the following two notes for more details: “ARGENTINA, IMPLODING” (APR 18) and “POPPING BERNANKE’S BUBBLES: READING THE WRITINGS ON THE WALL” (SEP 4).
  • Additionally, we maintain our bullish intermediate-term bias on Brazilian equities – though certainly on a short leash amid the backdrop of potential global economic contraction. Our view on Brazil is supported by our quant levels on the Bovespa, our country-specific economic models and our analysis of historic cycles (OCT ’08 bottom in the Bovespa Index). For more details here, refer to our SEP 25 note titled, “IDEA ALERT: BUYING BRAZILIAN EQUITIES (EWZ)”.



Mexican auto parts maker Sanluis Rassini SA in planning to market $250 million of B-rated 10yr bonds to international investors – just two years after the holding company in charge of the unit defaulted and 10yrs since its parent company stopped servicing its debt! While we are certainly not surprised to see the issuance pipeline filled with complete junk at/near all-time highs across a bevy of liquid asset markets globally, we would be surprised if this did not ultimately turn out to be yet another signal of the Topping Process underway across international capital markets.


Pause for a second and read the following sentence slowly: A company that has defaulted twice in the last 10yrs is marketing a quarter-billion dollars of 10yr, B-rated debt to yield-starved international investors – at/near the top of the global economic cycle.


We maintain that the academically-partisan Policies To Inflate out of the Fed, ECB and BOJ continue to fuel a broad-based mispricing of credit risk across international capital markets – a phenomenon that is directly born out of the Dare To Chase Yield and perpetuated via gross capital misallocation and malinvestments. From our purview, this is precisely why global economic growth and the domestic labor market continues to remain sluggish, as both continue to reel from allowing bad actors and bad investments to remain liquid.


Moreover, we believe that recessions and cyclical growth slowdowns are healthy insomuch that they promote an effective transition away from outdated growth strategies that no longer work. It’s highly unlikely that the global economy will ever be able to achieve any semblance of sufficient and sustainable economic growth if policymakers continue to incessantly manage their own career risk by attempting to reflate asset price bubbles, rather than promoting new organic growth opportunities. Refer to our AUG 10 note titled, “THINKING OUT LOUD RE: GLOBAL GROWTH” for more of our thoughts on this topic. But don’t just take our word for it; the Dallas Fed agrees wholeheartedly: http://dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf.



In a response to IMF managing director Christine Lagarde’s plan to censure the Argentine economy (i.e. blacklisted from the bailout bonus pool) for not allowing the Washington D.C.-based organization to conduct its Article IV consultation of the country’s official economic statistics, Argentine President Cristina Fernandez recently said she would not accept any threats from the institution and followed up by saying:


What were the statistics of Portugal, of England, of this country? Do you really believe them? Do you really believe the cost of living in the United States is rising just 2 percent?”

–Cristina Fernandez at Georgetown University in Washington D.C.


For a bit of background here, this is the embodiment of the pot calling the kettle black, as Argentina has been serially underreporting CPI since her late husband Nestor cleaned house at the country’s national statistics agency INDEC back in 2007. Last year, the government fined more than a dozen researchers as much as 500,000 pesos ($106,000) each for reporting inflation rates that were in the range of 10-15 percentage points higher than official rates – which are already elevated to begin with (+10% YoY in AUG). By artificially suppressing the reporting of inflation, the Fernandez’s have been able to A) record higher rates of real GDP growth than otherwise possible and B) limit interest payments on inflation-protected debt securities, which, at $37.6 billion outstanding, account for ~21% of Argentine sovereign debt. It’s worth noting that the securities are down -13.7% in the YTD.




In calling out the US, which continues to pursue a brand of ultra-easy monetary policy not seen domestically since the 1970s, Fernandez shed light on what policymakers like former presidential hopeful Ron Paul have alluded to in recent years: US CPI is also being systematically underreported, likely to help the powers that be achieve the aforementioned goals Argentina is pursuing, as well as to hold down the pace cost-of-living (COLA) adjustments to government benefits. But don’t just take our word for it; shadowstats.com, an increasingly respected research provider and scrutinizer of faulty US government statistics, agrees wholeheartedly:




But maybe we’re just a bunch of grumpy conspiracy-theorists-turned-macro-analysts. Perhaps there’s a chance that Obama isn’t having Bernanke debauch the USD in pursuit of his politicized goal to promote US manufacturing and exports (GM bailout?), all the while having the BLS report that there’s little-to-no inflation to speak of. Perhaps the bond market has it completely wrong by pricing the 10yr breakeven at 2.46%, which is a mere 20-25bps shy of all-time highs. Markets do tend to get things wrong from time-to-time; the S&P 500 peaked in OCT ’07 – just months ahead of the largest financial crisis and economic recession since the Great Depression!



Just in time for the Venezuelan presidential election (OCT 7) and the US presidential election (NOV 6), current Venezuelan president and presidential hopeful Hugo Chavez just dropped what may be the defining quote of the Obama presidency:


“If I was American, I would vote for Obama. And I think if Obama had been born in a Caracas slum, he would be voting for Chavez. I’m sure of it.”

–Hugo Chavez


It’s only fitting that North America’s most-socialist head of state is getting the official back-slap from South America’s resident socialist – especially given that both the Bush and Obama administrations have incessantly sought to make the US more like Venezuela over the last 12 years (i.e. perpetuating stock market inflation via currency devaluation and big government spending initiatives).




All told, the present-day Venezuelan economy – with its persistent 20-plus percent annual CPI readings and university graduates working as mere street vendors – may be a startling glimpse into the US’s future if we continue down the path of Big Government Intervention in the US economy and global financial markets.




Enough said; enjoy the rest of your respective afternoons.


Darius Dale

Senior Analyst

The Golden Age

Takeaway: Gold ($GLD) will likely continue its meteoric rise as central planners devalue the dollar and perpetuate quantitative easing.

Hedge funds and mom and pop retail investors are big fans of gold and particularly the SPDR Gold Trust ETF (GLD). Since the beginning of September, the US dollar has been devalued by Ben Bernanke and the Federal Reserve's policy of easing and market intervention. As a result, gold has enjoyed an extensive climb over the same time period and has really taken off since August. The question remains: when will Americans demand a stronger US dollar?


The Golden Age - GLDversusDOLLAR

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Japan: The Hot Drop

Keynesian economics just don't work these days. If America's rabid stock market wasn't enough to convince you, then perhaps Japan's Nikkei 225 Index will show you the way. The Nikkei is down -14.3% since March highs and continues to trend lower with every passing month. Growth is still slowing on global scale and the proof is in the market.


Japan: The Hot Drop - nikkei

FDO: Bearish Setup

Takeaway: We like $FDO on the short-side headed into Q4 earnings Wednesday.

We remain bearish on the dollar store space and like FDO on the short-side headed into Q4 earnings Wednesday. We don’t need Operating Margins to contract in order to build a short case but simply for the prior drivers of expansion to fade.

The following table encapsulates our call here for investors across multiple durations. Headed into tomorrow’s print, FDO is sitting at the top end of its Immediate-term risk range of $62.98-$66.09.


FDO: Bearish Setup - FDO TTT Table


This SIGMA setup is about as bearish as it gets for gross margins.


FDO: Bearish Setup - FDO S


Sentiment is neither here nor there, but management has been selling and we haven’t seen any meaningful purchases since last year.


FDO: Bearish Setup - FDO Sent


Food stamp participation growth is on track to turn negative by year-end for the first time in 5-years eliminating what has been a nice tailwind for the dollar stores.


FDO: Bearish Setup - FDO SNAP



FNP: Take 2

Takeaway: We think we’ll be making a call within six months that they’re finally getting rid of Juicy. You’re getting another shot at FNP today.

For those who think they’ve missed FNP, you’re getting another shot today. Sound familiar? It should. It’s the second time FNP has revised its F12 EBITDA outlook this year. The problem from our perspective is that they’ve shown us #2 when we thought it was improbable. We can argue until we’re blue in the face that the stock is cheap, but that would be pretty ridiculous when it comes down to one of the real questions to be researched – can #3 rear its’ ugly mug? We think it’s not likely, as this was probably a greater take-down than they needed. But then again McGough, you didn’t expect a press release after the close last night, so why should I believe you now? Excellent question.

Let’s step back, re-evaluate the thesis, and see what’s changed.


Thesis: FNP is an misunderstood, underloved, and grossly undervalued company made up of one power brand, and two call options on value creation. The company will aggressively grow Kate Spade globally while milking Lucky Brand for cash, and fix Juicy Couture or else boot it. This is all on a greatly reduced operating asset base after the Mexx and Liz Claiborne brand sale. In the end, there’s a much higher top line growth rate and a less volatile msd/hsd blended operating margin – and when laid over a reduced asset base the implications for ROIC are not even being considered by 99% of the investing population.

Changes to thesis: There’s no way we’d even attempt to argue that it did not change. But let’s review…

Kate: comps looked great and business is on plan. Check.

Lucky: Check

Juicy: While continued business ‘bumpiness’ has been feared and rumored for 3-6 months, the conformation is definitely a bad thing.


Management: We’re mixed on this one. We had a meeting with them two months back and learned that CEO and CFO were BOTH spending about 90% of their time on Juicy. Retail is a fickle business that changes daily, we get that. But it bugs us that so much of their effort is going to a division that just missed. To be fair, we said at the time that we did not know if that time ratio was a good or bad thing. Perhaps the same still applies. Maybe it’d have otherwise missed a lot more. Regardless, management is back on the spot with the ‘fix or sell’ decision. The good news is that we have enough confidence in McComb (and we don’t have confidence in most CEOs) that he’ll make the right call.

McGough’s prediction: The good news is that I think that Juicy will be outta here. The recent improvements to the back end of the combined company make it easy to do so. The bad news is that it might take another disappointment before they jettison the division. In addition, the miss is likely to hamper dollar value, as well as any discussions for international JV’s that management hinted will be announced near-term.

The stock had already broken critical TRADE support of 13.21 before the event even transpired, (which is why Keith wasn’t long it in the Hedgeye Virtual Portfolio); TREND support is 11.48; he’d probably buy it if recaptures that level and holds it.

Based on our model and assumptions, we think the impact of the announcement is roughly $26mm in lower FY12 sales as well as a $22mm reduction in Juicy EBIT and additional ~$3mm of DC related costs. In addition, we expect the impact on FY13 sales and EBIT to be $28mm and $10mm respectively. This shakes out at a $0.13 and $0.08 hit to FY12 and FY13 EPS respectively. All in, we’re at $0.54 and $1.03 next year and the year out (FY14). Assuming a high teens multiple for a significantly faster earnings grower, this $0.08 revision equates to roughly $1.50 in value. The market has it about right from a near term trading perspective with a $1.55 draw down.

From a longer-term vantage point, we think we’ll be making a call within six months that they’re finally getting rid of Juicy, with the difference being that it could generate a $500mm sale. You may have to live with the volatility of owning the business for 2 quarters before then. Over a TAIL duration, its well worth it. Else, get ready to buy it, bc the days where it will dip below $10 will not last long – if they ever even come to fruition.

What Happened:

The key delta impacting EBITDA by ~$25mm is impaired profitability at Juicy, which accounts for ~12% of FNP’s equity value. Importantly, results at both Kate and Lucky remain and on track to ahead of expectations.

So what have we learned:

  • Juicy has too much high priced product. The only plus here is that they moved up-scale too quickly, which is better than shifting down-scale too fast. However, it also begs the question re the direction that Leann Nealz has taken the brand since coming on 2-years ago, but more importantly, the process put in place to sustain consistent profitable growth. Is the brand more or less uniquely Juicy than it was 2-years ago such that they core customer is willing to pay more for it? It’s difficult to suggest the answer to that question is yes given today’s update. Perhaps there is simply too much product in the ‘Best’ tier of the product pyramid. Either way, we aren’t likely to have clarity here before Spring.
  • Also embedded in adjusted EBITDA is $2-$4mm of delay-related DC transition costs as the company looks to outsource its distribution.
  • They gave us better disclosure regarding the componentry of FY12 adjusted EBITDA guidance by brand. What jumped out at us was how much Juicy accounted for prior guidance at $45-$48mm (with corporate expense allocated) accounting for 32%-38% of $125-$140mm FY12 adjusted EBITDA. With this hindsight, we had been lower on Juicy and higher on Kate. The new outlook adjusted expectations for Kate higher nearly in-line with our model while Juicy was adjusted sharply lower accounting for the net negative $25mm delta.



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