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Putting On Risk

PUTTING ON RISK

 

 

CLIENT TALKING POINTS

 

PUTTING ON RISK

There’s always risk somewhere. Be it in the stock market or voting in an election. Risk is a part of our daily lives. So the IMF coming out this morning and stating that it sees an “alarmingly high risk of a deeper global slump,” is a realization of the risk that has been inherent in global markets for some time now. What does that mean for you? To us, it means more of the same that hasn’t worked. We’re still in a recession and multiple rounds of QE haven’t worked. What’s left to try out at this point? When you run out of bullets, you're at risk of being taken down, just like the market.

 

 

EUROPE’S BAILOUT

Europe continues to watch itself turn into an absolute mess. Italian stocks and Spanish stocks continue to fall lower and people still think that these countries aren’t all that bad. What will it take for them to realize the mess they’ve gotten themselves into? The ECB can buy bonds until it’s blue in the face, but is that going to fix the underlying problem? The U.S. and Greece enjoyed kicking the can down the road; does that mean it’s OK to kick the can to others? These are questions that will soon be answered. And in the mean time, we'll watch stocks fall and bond yields climb.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                Flat

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Down  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

BRINKER INTL (EAT)

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

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

 

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

 

UNDER ARMOUR (UA)

This company’s on track to post $3Bn in revenues by ’14 – impressive given a $1.5Bn print in 2011. Perhaps more impressive is the breadth of growth drivers that will get it there – women’s, accessories, new underwear platform etc. in addition to footwear. UA is gaining share in both apparel and footwear quarter-to-date. While some may be concerned over the loss of UA’s SVP/Sourcing we’re 8% ahead of the Street in the upcoming quarter and buyers on weakness.

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

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“#Iran Live: Gold prices soar 25% in a week as officials try to "black out" the figures bit.ly/UOLcim | #p2 #tcot#IranElection” -@EANewsFeed

 

 

QUOTE OF THE DAY

“Forgive your enemies, but never forget their names.” -John F. Kennedy

                       

 

STAT OF THE DAY

Iron ore, Shanghai steel near 2-month peak as demand revives

 

 

 


UA: Getting Bearish on UA

Takeaway: Top line growth -- the sole multiple driver -- is at risk based on our math.

This company needs to beat on the top line to keep its momentum going, but we think that wind is being sucked from its sail. The sole multiple supporter is at risk based on our math.

 

We’re getting bearish on UnderArmour. To be clear, this is a TREND/TRADE call given concerns about the top line, and to a lesser extent, SG&A costs needed to compete in the footwear arena. We think that the long-term TAIL opportunity is largely in-tact, and if our near-term call does not play out, we’ll likely reverse course. But the underlying research is compelling enough for us to get bearish on top line trajectory.

 

Simply put, we think that wholesale sell-in has been growing faster than retail sell-through for too long.

  • By our math, which isolates like-for-like apparel sales by stripping out footwear, International, UA Retail, and e-commerce, UA sell-in to retail has been 20%, 14%, 20% and 28% over the past four quarters, respectively.
  • Those are great numbers. But unfortunately retail sell through was 3%, -1%, 17% and 22% over those same periods per third party POS data services.
  • The latter two data points might seem like a nice rebound, but it’s not enough.  They have not made up for the (-17%) and (-16%) shortfall witnessed at during 4Q11 and 1Q12, respectively. In fact, they added to the shortfall in sell-through.

 UA: Getting Bearish on UA - ua1

  • Our concern about last year lies in the amount of packaway merchandise that still needs to be sold through. During those two time periods, UA’s Gross Margins and Inventories both improved on the margin. With the sell-in/sell-through gap eroding. That’s simply not good. It suggests that excess product was pushed out to retail. 

UA: Getting Bearish on UA - ua2

  • In looking at results from specialty retailers like Dick’s as well as Department stores, it’s pretty clear that they are already heavy cold-weather gear before the selling season really begins due to packaway from last year. Simply put, in the absence of excess vendor support they did not clear out goods last year at bargain-basement prices. They stuck it in boxes in the stock room. Ross Stores and TJ Maxx concur with those thoughts on inventory levels.
  • Two of our industry sources – including one mid-sized private brand – suggest that these trends are not specific to UA, but are pervasive throughout several players in the industry.
  • Basically, this threatens either/or the initial shipment into retail or the first replenishment order – the latter of which happens in the back half of October through the first half of November.
  • We’re not suggesting that revenue will be down. But simply that the Street’s 23% top line growth rate for 3Q, or its 29% rate for 4Q (which would be guidance in the release) are at risk.

 

Another point we’re slightly more concerned about is the success factor associated with footwear. It’s no secret that the footwear initiative at UA is slow to catch. But we think about this a bit different than most. In the end, we think that UA will realize the 6-8% share that most ‘non-Nike competitors’ steadily enjoy. The problem is that the cost of this share will be dramatically higher than the company is currently set-up for. So will UA realize up to $1bn in footwear revenue? It could definitely get there. But it could take the aggregate EBIT margin down by 200-300 basis points along the way. We think that any radical shift in expense structure will take time. But unfortunately, so will a big wad of footwear dollars.

 

Over the past 2 years, UA has had issues impacting margin, and those start getting easier. But all along the way, the market has looked right through ‘em due to the strength in top line growth. Perhaps it puts up good earnings numbers, but our sense is that the risk of a top line miss is not fairly represented in a stock trading at 37x next year’s EPS and 20+x EBITDA. This company NEEDS a top line beat to head higher, and perhaps even to stand still. Short interest might seem lofty at 13% of the float, but UA’s short interest has historically peaked at 3x that level.  It doesn’t give us much confidence either that management has been net sellers of the stock.

 

Management at the Goldman Retail Conference

“So as far as the back half of the year goes, obviously, in addition to our guidance, I think a couple of things that are important to note, is what are some of those things out there in the back half of the year that could change a guidance for us. Two of – the two biggest things we saw was obviously weather, weather plays an important part especially in the fourth quarter and coming out of a warm winter last year not only does that impact how people book their business for this winter, how they plan for this winter, but there is also some leftover stock from last year too, so how that impacts the start of this fall winter season.

 

So, if there is upside in the back half of the year relative to weather being colder than last year that would pretty much be in the fourth quarter for us. The other piece of that as we talked a lot about at our last earnings call, is our E-commerce business, and we talked about some challenges we were having in the front half of this year relative to our conversion rate since we launch the new site last November, and that conversion rate was below last year's conversion rate and the gap was widening during the front half of the year.

 

So, clear the path for E-commerce team, put some quick fixes in place, basics around speed and around easier shop-ability on the site and in the last five weeks or so, we've seen that gap narrowing now for the first time this year versus widening as far as the year-over-year conversion rate. So, that's a good sign for the back half of the year too, but again, E-commerce heavily weighted towards the fourth quarter. So, when you look at the – our guidance in the rest of this year upside, and weather upside for E-commerce business continues to improve, those would be good things for us in the back half, and that it all be weighted towards the fourth quarter.”

 

Read this how you want, but to us it sounds like an incrementally cautious read on 3Q with a ‘keeping our fingers crossed for a few things to go right in 4Q’ position.

 

Simply put, we don’t like UA at $56.60. We putting this one in the bucket of our shorts – along with M, KSS, GPS, SPLS, COH and CRI. As always, we identify the fundamentals. Keith will manage risk around the specific price. 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 9, 2012


As we look at today’s set up for the S&P 500, the range is 16 points or -0.54% downside to 1448 and 0.56% upside to 1464. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 10/08 NYSE -601
    • Decrease versus the prior day’s trading of 408
  • VOLUME: on 10/08 NYSE 464.24
    • Decrease versus prior day’s trading of -23.48%
  • VIX:  as of 10/08 was at 15.11
    • Increase versus most recent day’s trading of 5.44%
    • Year-to-date decrease of -35.43%
  • SPX PUT/CALL RATIO: as of 10/08 closed at 1.87
    • Down from the day prior at 1.93

CREDIT/ECONOMIC MARKET LOOK:


BONDS – Treasuries start their wk moving back up into the right as 10yr yields drop -5bps to 1.69%; bonds have had #GrowthSlowing right since March. Chasing equity yield/performance is not economic growth.

  • TED SPREAD: as of this morning 25.40
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.71%
    • Decrease from prior day’s trading of 1.74%
  • YIELD CURVE: as of this morning 1.46
    • Down from prior day’s trading at 1.49

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:30am: NFIB Small Business Optimism, Sept. est. 93.5
  • 7.45am: ICSC weekly sales
  • 8:00am: IBD/TIPP Economic Optimism, Oct. est. 50.0
  • 8:55am: Johnson/Redbook weekly sales
  • 11am: Fed to buy $1.75b-$2.25b notes
  • 11:30am: U.S. to sell $32b 3-mo bills, $28b 6-mo bills
  • 1pm: U.S. to sell $32b 3-yr notes
  • 4pm: USDA crop-condition reports
  • 8:30pm: Fed’s Yellen at IMF panel in Tokyo

GOVERNMENT:

    • Jury trial begins in SEC lawsuit against Reserve Primary Fund, Chairman Bruce R. Bent, Vice Chairman Bruce R. Bent II, 9am
    • IRS holds hearing on proposed regulations relating to basis of indebtedness of S corporations to their shareholders, 10am
    • FDIC board meets to consider final rules implementing bank stress tests required under Dodd-Frank Act and on large-bank pricing system for assessments, 10am
    • HHS advisory panel meets on informed consent issues in randomized human trials, 8:30am
    • FAA holds meeting of Commercial Space Transportation Advisory Committee to discuss export controls, 8am

WHAT TO WATCH:

  • IMF sees alarmingly high risk of deeper global slump
  • IMF: Most advanced nations progressing at deficit cuts
  • Europe salutes Greek budget-cutting, raising aid chances
  • Apollo seeks to avoid housing-market misfire with Realogy IPO
  • Stress Tests for U.S. Banks Face Vote by First of Three Agencies
  • AT&T shares network with IBM to lure more customers to the Cloud
  • Barclays buys ING’s U.K. unit, adding 1.5m clients
  • U.K. August manufacturing output declines more than forecast
  • Climate change threatens central American corn crop, study says
  • Reserve fund faces trial on SEC suit over Lehman Brothers losses
  • Athens preparing for anti-austerity protests aimed at Merkel
  • Alcoa results in PM mark traditional start to earnings season

 EARNINGS:

    • Alcoa (AA) 4:03pm, $0.00
    • Yum Brands (YUM) After-mkt, $0.97

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Oil Halts Two-Day Drop as Optimism on Greece Offsets Oversupply
  • Milk-Cow Drought Culling Accelerates as Prices Jump: Commodities
  • Copper Consumption in China to Drop for First Time Since ‘08
  • Wheat Climbs on Speculation U.S. to Cut Global Supply Estimates
  • Sugar Rises on Speculation Brazil Supply to Tighten; Cocoa Gains
  • Copper Seen Falling for Third Day as IMF Cuts Growth Forecasts
  • Gold Seen Falling in London as Stronger Dollar Curbs Demand
  • Iron-Ore Swaps Seen Rising Highest Since July on Australia Cargo
  • Climate Change Threatens Central American Corn Crop, Study Says
  • Swiss Target Commodities Secrets Risking $21 Billion Hegemony
  • Iran Oil Sanctions Boosting Returns for Nordic American: Freight
  • Platinum Holdings Signal Further Gain in Price: Chart of the Day
  • Africa, Middle East Most Exposed to Rising Food Prices, IMF Says
  • Oil Halts Two-Day Drop on Greece Optimism
  • Iron Ore Seen Dropping Back to $100 on Worldwide Slowdows

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


ITALY – even if you believe their GDP numbers, they are still horrendous – Italy reports another sequential slowdown in GDP to -2.6% y/y (with +3% inflation, that’s centrally planned stagflation to me); MIB Index broke its TRADE line of support 3 wks ago; now down -6.5% since the Bernanke SEP top

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

JAPAN – down hard again overnight closing down -1.1% (Nikkei down -14.4% since #GrowthSlowing started globally in March); we shorted the Yen again on green yesterday as we expect the Japanese to go full Krugman as the economy slows for the umpteenth time on ZIRP policies that don’t work.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

The Hedgeye Macro Team

 

 

 

 

 


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.

President Obama's Reelection Chances

President Obama's chances of being reelected climbed 1.6 percentage points week-over-week to 64%, only 0.5% under his all time high made on September 24. Romney may have won the first debate, but he'll have to keep crushing it going forward to take the White House in November.

 

Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.

 

Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.

 

President Obama’s reelection chances reached a peak of 64.5% on September 24, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.

 

President Obama's Reelection Chances - HEI

 


Holding Our Position

This note was originally published at 8am on September 25, 2012 for Hedgeye subscribers.

“We are holding our position.”

-General George S. Patton

 

That’s what one of America’s greatest said on the eve of July 31, 1944 when Patton “outlined the basic procedure for his men until war’s end.” In specifically addressing his intentions toward the enemy, he also added that “we’re going to go through him like crap through a goose.” (The Soul of Battle, page 289)

 

In terms of how I think about our proverbial enemy in Global Economics (The Keynesian Army of Academia), that sounds about right. As I watched a good man win $30,000 after hitting a Hole-In-One yesterday at the Homes For The Brave fundraiser in CT, I said to myself ‘divine intervention!’ Somewhere, something out there is telling me Americans are smarter than our failed policy makers.

 

After their 2-day Viagra rally, Bernanke’s Bailout Beggars are back on their heels. Our Q2 2012 Global Macro Theme of “The Last War: Fed Fighting” isn’t easy. But it ain’t over till it’s over either. We’re Holding Our Position that Policies To Inflate (Qe3) will only perpetuate the global growth slowdown. We believe that Strong Dollar is the only way to long-term American prosperity.

 

Back to the Global Macro Grind

 

Don’t look now, but US stocks are down for 5 of the last 6 days and have done nothing but go down versus the YTD highs established on the day after Bernanke became completely politicized (September 13th, 2012).

 

From that goose poop intraday high on September 14th of 1474 in the SP500:

  1. US stocks are down -1.2% and -1.9% respectively (SP500 and Russell 2000)
  2. CRB Commodities Index is down hard, from 320 to 305 (-4.8%)
  3. US Treasury Bond Yields are down even harder, from 1.89% to 1.69% (-11%)

Ok, maybe calling it goose poop is a bit much. But if you bought stocks/commodities up there and shorted bonds, and put your nose real close to your P&L since, it’s closer to the truth than a rumor.

 

On a more serious note, this is getting serious. The Chairman of the Federal Reserve continues to make promises to markets that he cannot keep. Reality here is sad and simple, at the same time:

  1. Money Managers are forced to front-run Bernanke, chasing asset prices higher into central planning events
  2. Then they all need to sell, at the same time, before economic gravity takes hold, and prices correct

This is the anti-thesis of part I of Bernanke’s Congressional mandate (“price stability”). It’s also the #1 reason why A) people won’t hire and B) people won’t invest in this market at a 4.5 year top. Real people with real money don’t trust this market as far as they can throw an NFL replacement ref.

 

Now, to be fair, the equity bulls who got smoked from March-June have absolutely “nailed it” from July-September – maybe for all of the wrong reasons (#GrowthSlowing) – but nailing it is nailing it when it comes to the score.

 

But where do they go from here? In March perma-bulls said “3-4% growth is back, earnings are great, and stocks are cheap.” Today, we have both Growth and Earnings Slowing, but something like 216,000 global “easings” which are, allegedly, going to trump earnings season.

 

In addition to what Fedex (FDX), Intel (INTC), Staples (SPLS), Norfolk Southern (NSC), Bed Bath & Beyond (BBBY), and Oracle (ORCL) have previewed in the last 2 weeks, here’s the Growth and #EarningsSlowing Update from Caterpillar (CAT) last night:

  1. CAT cut 2012 and 2015 guidance without a lot of specifics
  2. Management hinted that 2012 Revenues would “come off” by about $2 Billion Dollars
  3. Management insisted cutting 2015 guidance from $15-20 in EPS to $12-18 in EPS was “not a guidance cut”

So, in our Research Meeting today I’ll ask our new long-cycle master Industrials Managing Director, Jay Van Sciver, if it’s “not a guidance cut”, what specifically does that goosy stuff smell like to you?

 

To review: when people say “stocks are cheap”, this CAT puke example really speaks to the heart of what that might mean. Cheap is cheap if the company can actually deliver on revenue and earnings expectations. “Cheap” gets cheaper when companies guide down:

  1. If you bought CAT in February 2012 at $116, assuming $20 in 2015 EPS, you paid what you thought was 6x EPS on 2015
  2. If you shorted CAT in February at $116, assuming $12 in 2015 EPS, you shorted it at 10x hopeful 2015 EPS

Ok, so 6-10x is cheap, I guess, if you use 2015! I’d need at least 6 Bud Lights and a 50% chance at Powerball to put my name on a 2015 forecast right now, by the way.

 

In the meantime, what about 2013? What if the company can’t drive earnings above $9 for the next 3yrs? What does Chinese “construction off 40%” (per CAT management) mean to Q3 and Q4 of 2012 revenues and earnings assumptions?

 

If you are long CAT, we’re guessing you don’t know the answer to those questions this morning. That’s ok, neither does CAT’s management. Therefore, goose or no goose, we are Holding Our Position: Short CAT as growth and earnings slow.

 

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1742-1785, $106.73-111.44, $1742-1785, $78.85-80.63, $1.28-1.30, 1.63-1.79%, and 1442-1458, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Holding Our Position - Chart of the Day

 

Holding Our Position - Virtual Portfolio


THE M3: VIP; GOLDEN WEEK VISITATION; AUSTRALIA

The Macau Metro Monitor, October 9, 2012

 

 

VIP BUSINESS PICKED UP DURING GOLDEN WEEK HOLIDAY Jornal Va Kio

Despite the increasing number of tourists during the golden week holiday, the catering and retail sectors said business was not as good as expected.  However, VIP gaming business was in-line with expectations during the period.  Investors are still optimistic on fourth quarter revenues for the VIP business.

 

VISITORS WELL BELOW EXPECTATIONS Macau Daily Times

According to the Public Security Police Force (PSP), a total of 1.6 million visitors entered Macau during the Golden Week holiday.  The number of visitors registered between September 29 and October 7 was well below some expectations.  Some reports mention that about 2 million people were expected to enter the city through the Border Gate, while others were arriving thorough the ferry terminals and airport. 

 

GENTING SCIONS GAIN FOOTHOLD IN AUSTRALIA, EYE ASIA GAMING DEALS Reuters

Joey Lim Keong Yew and Ben Lim Keong Hoe, grandsons of Genting founder, the late Lim Goh Tong, and nephews of current CEO and chairman KT Lim, have acquired 95% of Two Way, an Australian wagering group. Donaco Singapore, the company controlled by Joey Lim and Ben Lim, will be renamed Donaco International Ltd.   Two Way will initially focus on the expansion of the Lao Cai International casino and hotel complex in Vietnam, which represents all of Donaco's assets, but is also planning two similar projects and a casino cruise ship.

 

The expansion of Lao Cai to a 428-room hotel with a casino housing 26 gaming tables and 150 slot machines, due for completion next year, is expected to provide a significant boost to revenue.  Mak Siew Wei, an executive director of Donaco who will join the Two Way board, said two similar casino-hotel projects in two other Asian countries were "far along" the planning stages, but declined to give more details due to the sensitivity of licensing negotiations.


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