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WMT: Buying Again

Yesterday, we added Walmart (WMT) back into our Real Time Alerts after the selloff. The decline can be blamed on the perception that earnings were weak combined with the slew of Foreign Corrupt Practices Act violations the company is facing globally. We think concerns will blow over and the stock is close to its TAIL line of support at $66.12 a share. There’s plenty of room for upside for WMT and we’re buyers. The FCPA violations will amount to tens of millions or maybe even a hundred million bucks. For a company like Walmart, this means nothing.

 

WMT: Buying Again  - image003

 

WMT: Buying Again  - image004


Moving Past The Noise

Client Talking Points

The Slowdown Continues

Corporate earnings continue to slow in addition to global growth. Moving into Q4, when companies report, expect a lot of misses. Any company that didn’t guide lower into the next quarter has to really prove they can beat the Street by a longshot. The market certainly has lost confidence in the ability of corporations to put up solid numbers, so testing 1300 on the S&P 500 soon isn’t some kind of crazy pipe dream. We can go a lot lower here so anyone screaming that stocks are “cheap” should realize that cheap can get a whole lot cheaper.

Political Dysfunction

President Obama meets with Congressional leaders today to kick off negotiations on the Fiscal Cliff. Obama won’t give wealthy Americans a break on taxes where as Republicans in the House want everyone to enjoy the benefits of a tax cut. Neither side is likely to budge, so you can imagine how well this will work out.

Asset Allocation

CASH 61% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
TCB

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.

IGT

There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.

HCA

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.

Three for the Road

TWEET OF THE DAY

“Romancing The Fiscal Cliff” -@JohnBiggs

QUOTE OF THE DAY

“If I had only known, I would have been a locksmith.” -Albert Einstein

STAT OF THE DAY

Hostress Brands, maker of the infamous Twinkie, will close its doors and lay off 18,500 employees. The end of an era.


FL: Early Read

Takeaway: Solid Q confirming concerns over slowing sales were overstated. With $3 in EPS now squarely in view next yr we expect FL to work through YE.

Solid quarter out of FL coming in at $0.63 (adj) vs. $0.54E and our $0.59 expectation. Comps came in at +10.2% slightly higher than our +9.5% estimate and well above consensus (+7%). As always, we’ll get further detail on the call (at 9amEST), but we suspect domestic comps came in up low-to-mid double-digits offset by slower international growth of flat to slightly down. As noted in our 10/20 note ‘FL/FINL: Stealth Strength in Athletic Specialty,’ concerns over slowing sales were overstated due to a widening spread between the athletic channel and industry.


In addition, we’ll get the customary month-to-date comp update which we expect to be one of the least encouraging in recent quarters due to the impact of Sandy – this is not new news to investors. We suspect sales are likely running negative with weekly industry trends reporting sales down -6% November-to-date (see table below). While this sample consistently understates performance in athletic, we wouldn’t be surprised to learn that sales are down to start the quarter.

 

Gross margins came in essentially in-line with more modest SG&A spend accounting for the EPS upside. SG&A spend was flat yy leveraging 202bps. Taking into account $7mm in vacation pay accrual adjustments last year, SG&A was up +2%. With an estimated $2mm benefit from Fx and further growth in marketing investments, the spread between core SG&A and revenue growth continues to drive meaningful margin expansion.


Inventories marked the twelfth consecutive quarter of a positive sales/inventory spread though down 4pts to +6% which likely reflects some initial inventory build related to the storm at quarter end. This continues to put FL in a very good position to manage merchandise margin pressure near-term and gross margins through year end against easing compares.

 

FL is clearly continuing its momentum following a significantly more challenging 1H printing EPS 17% above expectations. Basketball continues to be a favorable tailwind given last year’s disruptions though we suspect that the company’s women’s initiatives are starting to play a more significant role in driving top-line in recent months as well. We expect plenty of air-time on the call to be allocated to the recently announced SIX:02 women’s only concept that will be tested this holiday season. This makes a ton of sense as the company looks to increase its women, kids, and apparel mix as well as growing the international store footprint (more productive that domestic base), and expanding digital platform to drive business over the next several years.

 

With a favorable setup through year-end, we expect more opportunity for further upside in performance. With $3 in EPS now squarely in view next year, we expect this one to rebound and work higher over the intermediate-term.

 

 

FL: Early Read - FL S

 

FL: Early Read - FW sales

 

FL: Early Read - FL FW sales chart

 

 

 

 


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 80.30%
  • SHORT SIGNALS 78.51%

THE M3: S'PORE ANNUAL LEVY; S'PORE GDP; GRAND PRIX

The Macau Metro Monitor, November 16, 2012

 

 

NOT MANY SINGAPOREANS BUY ANNUAL LEVY PASSES INTO THE CASINOS Channel News Asia

Contrary to widespread perception, Singaporeans are not taking advantage of annual levy passes into the casino to enjoy multiple entries at the fixed price of $2000.  Minister Iswaran said that of the total number of entry levies bought by locals last year, less than 1% of them were annual entry levies. The rest were daily entry levies.  He was responding to several Parliament members' suggestions during the ongoing debate on casino regulations, that the Government scrap the annual entry levies.  

 

SINGAPORE'S ECONOMY EXPECTED TO GROW 1.5% IN 2012 Channel News Asia, AFP

According to the Trade and Industry Ministry, Singapore's economy is expected to grow by around 1.5% in 2012 (low end of 1.5-2.5% previous forecast range) and 1-3% in 2013.  Early estimates show that in 3Q, GDP grew 0.3% YoY and fell 5.9% QoQ.  Permanent Secretary at the Trade and Industry Ministry Ow Foong Pheng said: "Growth may come in slightly lower than forecast if the weakness in the externally- oriented sectors persists into the final quarter of 2012."

 

HEAVY TRAFFIC ACROSS PENINSULA AS GRAND PRIX BEGINS Macau Daily Times

Roads across the Peninsula recorded heavy traffic and congestion as well as numerous accidents as the Grand Prix race got underway yesterday.   According to police and transport departments, congestion started as early as 7am in the Areia Preta zone after many roads were completely or partially closed to facilitate the annual event.  Road conditions were even more overloaded in peak traffic hours with long queues of vehicles seen in Avenida de Horta e Costa, the NAPE area and other districts near the racing track. 

 



Fish Stories

“Many men go fishing all of their lives without knowing that it is not fish they are after.”

-Henry David Thoreau

 

The thing with fishing trips is they end more often with stories of massive fish that were on the hook, rather than actual proof of the whopper.  The best evidence of catching a trophy fish is of course taking a picture of it.  My colleague Keith McCullough and I went fishing off of Long Island more than a decade ago with some buds, back when we were hedge fund pups, and caught a whopper.  Being the accountable market operators we are, we actually took a picture of it and it is featured in today’s Chart of the Day.

 

Managing money is a little like fishing.  You can tell tall tales of your performance, but at the end of the day you need to be able to show the results.  In that sense, I’m pretty certain 2012 it is going to be a year of great tales but few whoppers reeled into the boat.  Simply, this has not been a year in which navigating the global macro waters has been easy.

 

All year we’ve been spinning the tale of both slowing growth and declining corporate earnings, but for much of the year the market shrugged off these concerns.  Now, of course, these concerns are front and center again.  As always, the most dangerous markets of all are those that go up in the face of declining fundamentals because ultimately those markets will have further to fall. 

 

In the global macro waters this morning, there are a number of key points to consider:

 

1.   Chinese leadership – After much speculation, the final names of the seven gentlemen (down from nine) that will run China was announced.  The conclusion is that they are more “conservative”.  The key takeaways are that we are likely to see fewer human rights reforms and likely a more tepid pursuit of economic growth.   Under the outgoing leaders, China experienced a decade of 10% growth and passed both Japan and Germany to become the second largest economy in the world.  At the very least, that growth rate will decelerate.

 

2.   Japanese easing – The Japanese equity markets are up almost 2% this morning, but don’t confuse that move with economic growth.   The LDP is widely expected to win in the December 16th election and LDP President Abe put his cards on the table and is calling for “unlimited easing” to achieve a 2 – 3% inflation target.  Ironically, or not, one of our top ideas yesterday was shorting the Yen.  Email if you’d like to get our Senior Asia Analyst Darius Dale on the phone to discuss this thesis.

 

3.   American political dysfunction – Today, President Obama is set to meet with key Congressional leaders as formal negotiations on the fiscal cliff begins.  Obama unofficially began the negotiations on Wednesday when he said in a press conference that he expects tax increases for wealthy Americans to be part of any deal.  This is a much more aggressive stance than the House Republicans were willing to accept in the prior negotiations, so it is unlikely to be accepted this time either. 

 

Of the three macro points highlighted above, the most pressing concern from a current and future growth perspective is clearly the fiscal cliff, or as we call it The Keynesian Cliff. Unfortunately, the election did not solve much in the way of giving either party a mandate to solve this issue.  At the table today, we have exactly the same cast of characters: President Obama, Senator Harry Reid, Senator Mitch McConnell, Congresswoman Nancy Pelosi, and Congressman John Boehner.  As Yogi Berra would say:

 

“It’s déjà vu all over again.”

 

To the extent that the participants get away from a grand plan, it may actually be a positive for the markets.  Simply, there is an immediate term catalyst.  In six weeks, dramatic spending cuts and tax increases go into effect, to the tune of some $500 billion annualized.  If this short term catalyst can be taken off the table it is likely to at least calm equity markets.  This would of course imply rational action from Washington, D.C. 

 

Since it is unlikely, based on recent history, that the elected officials in Washington act rationally, perhaps they will act in a more bi-partisan spirit.  Senator McConnell’s opening statement seems to suggest that, too, is unlikely.  As the Senator stated:

 

“I was glad to hear the President’s focus on jobs and growth and his call for consensus. But there is no consensus on raising tax rates, which would undermine the jobs and growth we all believe are important to our economy. While I appreciate and share the President’s desire to put the election behind us, the fact is we still have yet to hear an actual plan from the President for addressing the great economic challenges we face. What’s needed now is a realistic and specific proposal from the President that can actually pass the Congress.”

 

It’s pretty clear, so far, that tax hikes on the rich won’t pass Congress, so President Obama’s opening gambit may ultimately be a sign that we are in for a very volatile next six weeks.

 

Our immediate-term risk ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $108.19-111.10, $3.41-3.47, $80.58-81.33, $1.26-1.28, 1.53-1.68%, and 1, respectively.

 

Enjoy the weekends with your families and all the best to Yale Football up in Cambridge!

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Fish Stories - Chart of the Day

 

Fish Stories - Virtual Portfolio


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