Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail

Takeaway: Energy: Fuel shortage won't last long. Industrials: Near great Express & Courier entry point. Retail: Discounted goods and lower earnings.


Hedgeye Internal Dialogue



ENERGY: Refined Product Shortage Will Not Last Long


Takeaway: The refining, distribution, and marketing of refined product in the greater NYC metro area is clearly the segment of the energy industry most impacted by Sandy. We suspect that this “shortage” will not last much longer.


The area was ill-prepared for such a disaster. Gasoline and distillate inventories in the Atlantic Districts and New England were at the lowest level in five years heading into the storm.  There are a few key reasons for this:

  1. Refined product demand remains weak across the entire U.S.  When demand is weak, there is less chance of a “demand shock,” therefore less need to hold product in inventory.
  2. Futures curves are backwardated (higher prices today than in the future), dis-incentivizing storage.
  3. Refined product production is low in the Northeast because of poor refining margins (high Brent price, weak demand for products, excess capacity).  Indeed, several Northeast refineries have closed or are running at reduced rates due to profitability issues over the last two years.

The pre-Sandy inventory figures were 48MM bbls of gasoline and 39MM bbls of diesel in the Northeast.  Compare this to 3.1 MM bbls/d of demand for gasoline (15.5 days of supply) and 1.2 MM bbls/d of demand for diesel (32.5 days of supply).


The waive of the Jones Act (only U.S. flagged ships can move refined product from U.S. port to U.S. port) allows ships to take product inventory from the U.S. Gulf Coast and move it up to the New York area.  At least two companies are in the process of doing that. 


There is little risk of a gasoline shortage, in our view.  With 15 days of inventory, refineries already coming back online and increased shipments from the Gulf via pipeline and tanker, there will be enough gasoline to support demand in the Northeast market. 


The issue is that so many gas stations were without power last week (more than 50%), that the ones that had power were jammed and ran out of fuel.  Now, nearly 100% of stations have power, and the ones that never lost power are waiting on the new supplies.  That should come quickly.  We suspect that this “shortage” will not last much longer.


Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail - 1


INDUSTRIALS: Airfreight/Express & Courier Services Entry Point


Takeaway: We believe we are looking at a really good entry point for airfreight/express & courier services – particularly FDX.


There have been 4 huge headwinds:

  1. Inventories have been building
  2. Global trade has fallen over the past couple of quarters
  3. Capacity in airfreight has just started to tighten after years of slack
  4. Containership prices have increased relative to airfreight since 1Q after years of lost pricing.

Those have depressed margins and understated profitability and may be turning. A port disruption would be icing on that last point’s cake on relative pricing.


An estimate shows that each day of transit costs 0.6% - 2.3% of the cargo’s value in what is essentially a transport tax (lost selling days, spoilage, lost design time etc).  This is an interesting data point, even if it’s only a few days of lost cargo activity, it still matters.  Therefore, weeks of disruption could matter significantly.  Since air cargo is basically always only at +/-50% capacity utilization, there could be some switching of more critical cargo into that transport channel.  It certainly has the capacity and reliability.


People claim that improved service levels have driven air cargo to boats, we think it’s mostly that the price differential blew out.  The opposite was true around 2004, when everyone figured air cargo was a huge growth business.  That was relative pricing, too and largely unrelated to service.  The price swings are huge over time.  See the chart below from our pending Express & Courier Services Black Book (for access to this call email ).


Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail - 2


RETAIL: Sandy Destruction; Longer Term Impact


Takeaway: Reality is going to be more discounted goods, lower earnings and less cash flow. We particularly don't like the department stores in this context (M, KSS, JCP, and we'd throw GPS in there as well).


If anyone out there thinks that Sandy will not have a meaningful impact beyond a couple of weeks worth of disruption in consumer purchasing behavior, then think again. The chart below shows the absolute containerized imports into the US for apparel and footwear products over the past two years.


Number of Twenty-Foot Equivalent Units (TEUs) Imported Into The U.S.

Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail - 3A


The data is through November 2, and the drop is startling. 


The reality is that we cannot simply expect the ships to dock, unload their wares, and then the retailers are off to the races.

  • The Longshoremen (already near the full capacity their strict work rules allow) will have to unload the excess containers, and then the (largely unionized) drayage drivers will need to take to either the railyard or to the hub and spoke system for an LTL trucking company (also likely unionized)
  • Then the goods get unpacked, repackaged, and shipped off around the country
  • It wouldn't be a problem if we were operating previously at less than 50% productivity, because then all we'd need to do is get people to work harder
  • But productivity is closer to 80%, which leaves little room catching up on lost work

A simple one or two week delay in shipment could snowball into a 3-4 week delay in when product hits the shelves. This is an extremely critical period logistically for the holiday shopping season. Sandy had very bad timing.


This is when 'just in time' inventory management comes back to bite U.S. businesses. Retailers will do a great job of playing the blame game on the storm. But the reality is going to be more discounted goods, lower earnings and less cash flow. We particularly don't like the department stores in this context (M, KSS, JCP, and we'd throw GPS in there as well).




NKE: Fundamentals Turning Now

Takeaway: We think that the most significant factor that has been impacting $NKE's valuation and sentiment will turn on the margin this quarter.

Nike’s stock price is all about growth in Futures, right? We’d argue that the answer is ‘Not Necessarily’, and in this instance, we think Gross Margin matters much more.

Clearly, futures matter. We’d be foolish to suggest otherwise. Chart 1 shows the stock against the change in Global Futures. Not bad. Until recently, that is.

NKE: Fundamentals Turning Now - nk1


Chart 2. Once Nike’s Gross margin started to break down, the importance of futures was taken down a notch. It was ‘all about inventories and margins.’

NKE: Fundamentals Turning Now - nke22


Chart 3. Inventories, however, have turned a corner, and are again converging with Gross Margins. The company has nudged that perhaps they are up towards the back half. But we think they could be positive in the coming quarter.

NKE: Fundamentals Turning Now - nke3


For a stock that is so universally hated right now (note worst sell-side Buy Ratio in a decade), we’ve gotta think that it can only be a positive for the stock if we’re right that this factor is turning. (Chart 4)

NKE: Fundamentals Turning Now - nke4

Energy and Elections

WTI crude oil had a nice run from late 2008 until mid-2011. Since then, the price of oil has been all over the place. Really, it comes down to tonight's election results and whether Mitt Romney wins. If he does, that's bullish for the US dollar and bearish for oil. The opposite rings true if Obama is reelected.


Energy and Elections - oil


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The Golden Election

During the 2008 presidential election, gold was still around $700/oz. Since then, the Federal Reserve and Ben Bernanke have deployed multiple rounds of quantitative easing, driving the price of commodities and gold up while devaluing the US dollar. As you can see, the price of gold has increased by nearly $1000 since the last election and is likely to continue to rise if Obama is reelected. On the other hand, a Mitt Romney win is expected to bring strength to the dollar which would drive gold's price lower.


The Golden Election - gold

Can Romney Swing A Win?

Takeaway: Early voting shows consistent gains for Romney versus 2008 (which isn’t surprising), but the gains are big enough to matter in Iowa.

Early voting based on the most recent data shows Romney with a slight edge thus far. Let's examine some of the swing states in this election:


-Colorado -- Votes: 1.7 million ... Democrats: 35 percent ... Republicans: 37 percent ->  In 2008, was 38% for Dems and 36% for Republicans so 4% net gain for Republicans In 2008, Obama won by +9.0

--Florida -- Votes: 4.5 million ... Democrats: 43 percent ... Republicans: 39 percent -> In 2008, was 46% Dems and 37% Republicans so 5% net gain for Dems In 2008, Obama won by +2.8

--Iowa -- Votes: 640,000 ... Democrats: 42 percent ... Republicans: 32 percent – In 2008 was 47% Dems and 29% Republicans, so 8% net gain for Republicans In 2008, Obama won by +8.0

--Nevada -- Votes: 702,000 ... Democrats: 44 percent ... Republicans: 37 percent – Same as 2008


--North Carolina -- Votes: 2.8 million ... Democrats: 48 percent ... Republicans: 31 percent -> In 2008, Dems were 51.4% and Repubs were 30.2% -> 4% net gain for Repubs In 2008, Obama won by +0.3

--Ohio -- Votes: 1.7 million: Democrats: 29 percent ... Republicans: 23 percent _> A little unclear, but it appears that Romney has improved here as well.  While the date is much less clear, one county that people are pointing to is Cuyahoga County which went 68.5% for Obama in, early voting was down about 15%.  Further, Cuyahoga County has 208,207 fewer total registered voters in 2012 compared to 2008 Further, in 2008 33% of absentee ballots went to Democrats and 19% to Republicans, so a 8% net gain is fair here for Republicans. Obama won by +4.6% in 2008


In preparation for MPEL's F3Q 2012 earnings release Wednesday, we’ve put together the recent pertinent forward looking company commentary.



Melco Crown Entertainment Announces Signing of Commitment Letter for Its Senior Secured Credit Facilities for the Development of Studio City (10/19)

  • US$1.4 billion senior secured credit facilities (with both Hong Kong dollar and U.S. dollar tranches) which is expected to consist of: (i) a US$1.3 billion equivalent delayed draw term loan facility and (ii) a US$100 million equivalent revolving credit facility, both of which will mature 5 years from the signing of definitive legal documentation.
  • MSC remains on track to open mid-2015





  • "Our rolling chip segment continues to be impacted by our table optimization strategy. This strategy has resulted in further tables being shifted from Altira to City of Dreams, as well as the movement of some tables from VIP to mass during the second quarter of 2012. While somewhat disruptive as it is happening, this initiative should set us up favorably going forward."
  • "The market-wide mass market table game segment continues to demonstrate strong year-over-year growth, expanding over 33% during the second quarter of 2012. This once again reinforces our mass market focus strategy, particularly at the higher end of the market, which we believe will provide a more stable, loyal, and profitable customer base for the foreseeable future."
  • "Total depreciation and amortization expense is expected to be approximately US$90 million to US$95 million, corporate expense is expected to come in at US$18 million to US$20 million, and net interest expense is expected to be approximately US$23 million to US$25 million."
  • [Studio City] "So again, we're very confident to have gaming as part of this exciting, integrated resort. And I would like reemphasize that after the land grant stage, whether it's us or any of our competitors, we are going down the same route in terms of applying for gaming or gaming tables."
  • [Mass hold rate] "We said 25% to 30%, and we're quite confident in COD will be very, very high end of that range going forward because of our enhancement of the efficiency on the floor during the last few quarters."
  • [5th tower at CoD] "We are short of rooms at City of Dreams, and tower five has always been in the plan. And given our strength in mass and also the fact that we do need more rooms going forward; we're at 90% plus occupancy every single day of the year not just on weekends. We have completed all of our conceptual designs for that tower. And I can assure you, when it's built, it's going to be the ultimate art piece in Macau....again, it's subject to the government processes because this started as a apartment hotel in the early days, so we do need to have the land re-gazetted. But as soon as that is done, we would like to begin construction of that as early as next year."
  • [International opportunities] "We have continued to do a lot of research and field work and lobbying work in both Taiwan and Japan. We are very encouraged by the passing of the referendum in Matsu. So we're studying. We're waiting for the next move from the central Taiwanese government, and at the same time, we are looking at those places with keen interest."
  • "I think on the new supply in the second quarter in Cotai, we do experience some of our lower-end customers moving across the Cotai area. But the good news is, starting from third quarter July, we see a lot of these customers coming back, and we have a fantastic July rebound in that sense."
  • "We see some more promotional activities in Macau. And I think the mid to lower end of the market is more sensitive to the promotional activities, i.e., we see some of the changes when the other properties are doing these promotional activities. So I think we are still maintaining our premium position in COD, and we are very positive on the long-term development of that particular segment."
  • "We've really spent our time and effort into improving the product of our VIP, knowing that there's been disruption. Inevitably when you renovate a VIP room, you will disrupt the business there. We have to close off sections of it. And I think that's why, on top of the general market trends, you are seeing some slowdown in terms of some of our VIP business."
  • "On the cost side, I think we maintain a very, very lean operation teams in Altira there for the last, almost last two to three years' time. So I guess it's more about the productivity of the tables that we are working on Altira. Recently, I think the productivity level at the moment is actually improved to almost the highest time in the last."
  • [Altira] "So with the current run rate, I think we will see some continuous improvement in the EBITDA generated by this property going forward."
  • "More aggressive approach to comping rooms, in other words, expanding our casino block within our hotels. And that's what's resulting in a higher promotional allowance."

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