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VFC: Revisions Looking Exhausted

Takeaway: We’ve liked the name, but earnings revisions are starting to look tired. We’d start to lighten up here.

The negative reaction to an otherwise decent quarter for VFC shows how punitive the market is when quality of earnings is even mildly suspect in a group that is overextended like retail. Yes, VFC beat on the EPS line by $0.03, but it missed the top-line due largely to weakness in Europe a slowdown in The North Face, and continued weakness in US Jeanswear (due to JCP). The company’s SIGMA looks good, but notable is that EPS revisions are trending negatively for VFC.  

After a 5-year streak of upwards revisions of an average of 5-6% for FY2 on the print, VFC guided roughly in-line for the second quarter in a row. EPS have been the main factor where bears have gotten this stock wrong.  With increased spending to support growth, and continued challenges in key businesses, it’s tough to bank on real EPS upside aside from better FX rates. That’s not exactly a multiple enhancer.

The punchline is that we’re a little surprised to see this event take down the stock by 5%, but have a tough time justifying that a name like VFC – even with its track record – should trade at a 15x multiple when the earnings trajectory is getting increasingly cloudy. We’ve liked the name, but would start to lighten up here.


VFC: Revisions Looking Exhausted - VFC EPS revis





CAT: Back-end Loader Digs Through Backlog

Takeaway: New Order activity only ~2/3s of sales, suggesting $CAT does need a massive order recovery to hit 2013 sale guidance. Bear thesis intact.



CAT: Back-end Loader Digs Through Backlog



CAT provided back-end loaded 2013 sales guidance and reported a significant draw down in backlogs.  New orders in 3Q were very weak, running over 30% below sales.  CAT dealers are adjusting inventories down for a reason, and it is not a bullish end-market order rebound outlook.  We think that the bubble in resources investment will take a long time to be fully priced into CAT’s share price.  Importantly, CAT’s orders and backlogs have collapsed without an obvious global recession.

  • $5.1 billion Backlog Draw: If an investor’s long thesis is that CAT can ride its large backlog through a downturn, that thesis is now being tested.  Backlogs fell $5.1 billion in 3Q 2012, so CAT chewed through 18% of the backlog in just one quarter
  • Orders Far Below Sales: The new order rate was only about 2/3 of sales.  Without the draw on backlog, CAT was at an $11.3 billion order run rate vs. a reported $16.4 billion 3Q topline.   To us, that seems a very wide gap in a single quarter to blame on dealer inventory reductions.
  • CAT IS Expecting A Recovery, In Our ViewOrders must rebound for CAT to come anywhere near its 2013 sales guidance, in our view. The company noted that dealer orders are below deliveries, but deliveries are the product of end-market demand some time ago.  Deliveries lag, orders lead.  Dealer orders and inventories respond to end-market orders, not end-market deliveries.  Put another way, orders would need to rise nearly 50% for the company to hit its new sales guidance!
  • Capacity and Inventories High:  CAT’s own inventories continue to look bloated to us and the company will likely have to curtail production capacity, which it has started to discuss in this release, if orders do not rebound sharply.  That would likely lower margins from their current, multi-decade peak.
  • Long Cycle:  Trying to guess when to re-enter CAT is like trying to figure out when to buy CSCO in the early part of the last decade, in our view.  The mining and resources capital investment bubble appear quite large and may take years to run off.  We see CAT’s fair value in the $40-$70 range and we would wait until we were at the bottom of or below that range to enter the shares.  Cyclically adjusted valuation is key, in our view.
  • Bear Thesis Intact:  We continue to expect CAT to struggle with collapsing resource capital spending, excess inventories and excess capacity.  At the margin, we are a bit surprised at the weakness in CAT’s order activity.  We expect order deferrals to change to cancellations as contract delay options expire.  The company is letting us down easy, but it may feel like death by 1000 cuts.

Please see our September 14th CAT Black Book for additional details on our CAT thesis.


Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012



European Banking Monitor: European Financial Swaps Decline on the Summit’s Disappointment

Takeaway: Nothing tangible came from last week’s EU Summit, however European bank swaps priced less risk on the week.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


* European bank CDS tightened across the board last week with only 1 out of the 37 reference entities we track widening. This is a bit surprising considering that the EU Summit failed to produce any tangible solutions once again. But Sovereign swaps around the globe too moved sharply lower, mirroring the move in bank swaps. 


On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated to date.



If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor – Europe was not as good, only 36 of 37 reference entities improved. Spanish banks showed some of the sharpest improvement.


European Banking Monitor: European Financial Swaps Decline on the Summit’s Disappointment - aa. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 1 bp to 11 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: European Financial Swaps Decline on the Summit’s Disappointment - aa. euribor


ECB Liquidity Recourse to the Deposit Facility – The amounts drawn under this facility have been steadily declining since July 2012. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: European Financial Swaps Decline on the Summit’s Disappointment - aa. facility

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%

The Decline Line






A lot of people weren’t expecting the market to take a tumble like it did on Friday - it’s been awhile since something like that happened, right? June 25th was the last time the S&P 500 fell more than -1.5% in one day. Now with the VIX hovering around 15 and volumes remaining depressed, people are wondering how the market could decline like it did last week. The fact of the matter is that our #EarningsSlowing theme continues to strengthen. It’s going to get worse before it gets better. You’re seeing a lot of corporations with peak earnings offering lower guidance for 2013, including the big boys like Caterpillar (CAT) and FedEx (FDX).  


For the bulls out there: caveat emptor




We are in the midst of a commodity boom that’s been raging on for the past decade courtesy of Ben Bernanke’s policies to inflate at the Federal Reserve. You know how it works by now: print money, drive up commodity prices. But there’s a light at the end of the tunnel and Bernanke is running out of ammunition. Commodities will soon come down in price and 2013 is looking like a ripe time for this to happen. Companies who rely heavily on inflated commodity prices to drive revenue and earnings will suffer greatly, so keep that in mind when you see them reporting guidance going forward.






Cash:                DOWN


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  UP


Int'l Currencies: Flat  








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.

  • TAIL:      LONG            



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.

  • TAIL:      LONG



While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TAIL:      LONG







“ $CAT basically admitting that they are f'd in China w/o more stimulus..#nice” -@HedgeyeENERGY




“The nice part about being a pessimist is that you are constantly being either proven right or pleasantly surprised.” -George F. Will




The December to March "Risk On" base in Spanish bond yields was 5.15%; they’re now over 5.40%.

David and Goliath

“Success is to be measured not so much by the position that one has reached in life as by the obstacles which he has overcome.”

-Booker T. Washington


This weekend one of my colleagues circulated an article written by Malcolm Gladwell in The New Yorker titled, “How David Beats Goliath”.  The gist of the article is that there are actually advantages to being the “David”, or the underdog, in an industry, game, or confrontation.  On a basic level, this often occurs because the underdog does not subscribe to the same norms as his or her opponent.  In fact, to succeed “David” has to be quicker, more tireless, and, most importantly, more innovative.


In the article, Gladwell uses basketball as a case study to highlight his point.  He cites example after example of basketball teams that have beaten more talented teams by aggressively utilizing the full court press.  In effect, instead of letting more talented opponents bring the ball down the court and set up their plays, the teams Gladwell highlights aggressively went after their opponents in their own end.


In top level basketball such as the NCAA or NBA, the full-court press is rarely used despite the evidence that it enables those teams with lower talent levels to be much more competitive.  One of the more successful basketball coaches to use the full court press is Rick Pitino.  Despite struggling as a coach in the NBA, Pitino has had a steller NCAA record of 616 wins and 227 losses, in part due to his use of the full-court press. 


So, why don’t more coaches adopt Pitino’s strategy? Well, many actually do reach out to Pitino to come watch his practices and learn from him, but as Gladwell writes:


“The coaches who came to Louisville sat in the stands and watched that ceaseless activity and despaired. The prospect of playing by David’s rules was too daunting. They would rather lose.”


Being an underdog is not easy work.


On Friday the SP500 closed down -1.7% and no doubt many stock market operators felt like underdogs.  The last time we had a sell-off in that area code was June 25th when the SP500 was down -1.6%.  At a VIX of 15-ish, which is where Friday started, no one was expecting an almost two percent declining in equities, especially when the market is so “cheap”.


One of the key negative catalysts on Friday was #EarningsSlowing – one of our key Q4 investment themes.  As is usual when complacency sets in, negative events occur when they are least expected to happen.  On Thursday this occurred with Google’s (GOOG) earnings being released earlier than expected and being worse than expected.  Although, to be fair, revenue was still up 45% year-over-year, but in the investment business expectations, as always, are the root of all heartache.


Earnings from Google on Thursday were then compounded on Friday with news from Asia that some of Apple’s (AAPL) supply chain was looking to take some margin back from the Cupertino giant.  As reported in the Korea Times this morning, Samsung Display has now said that they will terminate its contract with Apple as Samsung is unable to supply its flat-screens at “high discounts”.


On the earnings front this morning one of our Industrials team’s favorite short ideas, Caterpillar (CAT), has come out with disappointing numbers and guidance.  According to CAT:


“Cat dealers have lowered order rates to well below end-user demand … Production across much of the company has been lowered, resulting in temporary shutdowns and layoffs.”


The simple thesis for CAT is that next year’s earnings will be lower than this year’s earnings.  While many companies may continue to grow earnings in 2013, even if CAT isn’t one of them, a bigger issue goes back to the point of expectations.  In the Chart of the Day we highlight the view of margin expansion that is baked into consensus expectations headed into 2013.  Needless to say, we do not see an acceleration in margin expansion in an environment where revenue is barely growing at 2% year-over-year in aggregate for the SP500.


Interestingly, CAT also plays into our second key quarterly theme, which we have called Bubble #3. A key tenet of this thesis is that the decade long boom we have seen in commodities driven by loose monetary policy is getting close to the last inning. This is most directly supported by slowing economic growth in China, which just printed one of its worse GDP numbers since the Great Recession.


Coincident with this commodity boom has been mining companies investing well beyond depreciation and amortization for more than a decade.  This, too, will mean revert as we are seeing with CAT’s guidance this morning. We are expecting to see more follow through on this theme as more of the mining complex reports in the coming weeks.


Stepping away from earnings, the most significant global macro catalyst in the short term is clearly the November 6th election in the United States.  Currently, the race has no underdog.  The two candidates are virtually tied in national polls, they are virtually tied in the elector college, and in terms of favorability ratings they are, as well, virtually tied.  Intrade still has Obama with a slight edge, but that too may well be fleeting. 


In terms of insight into the election outcome, we will be joined this Wednesday at 1pm for a call with Professor Ken Bickers from the University of Colorado.   He has crafted an interesting analysis based on state-by-state election economic situations that, according to his analysis, suggest that Romney may win in a run-away.  Clearly, this is a non-consensus view.  We hope you can join us for the call and will circulate the dial-in to institutional subscribers later this week.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $108.67-112.61, $79.15-80.24, $1.29-1.30, 1.73-1.82%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


David and Goliath - Chart of the Day


David and Goliath - Virtual Portfolio

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