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It All Adds Up

Client Talking Points

It All Adds Up

You can put together clues like a detective to come up with a thesis on where things are headed and how markets interact with each other. Get the EUR/USD right and guess what? You’re going to get some other things right, too. In this case, we think it’s a good time to short the Euro with the EUR/USD at $1.286 - up against our TRADE line of resistance. The time is also right to short high-beta stocks and commodities while buying up bonds and the US dollar. 

Lowering Expectations

The days of decent (read: >3% a year) GDP growth are now behind us. We’re on track for a growth number akin to 1.4% a year and adjusted growth of 0.9%. That can be hard to swallow but sometimes the truth isn’t what you want to hear. Our macro theme of #GrowthSlowing continues to press on and coalesce into the #EarningsSlowing game. Despite all the negative data points we continue to see, housing is actually offering a glimmer of hope as mortgage applications pick up and the glut of supply begins to shrink. Despite the good news, however, we have a long way to go before we’re back to the way things used to be before the financial crisis; it won’t be an easy journey.

Asset Allocation

CASH 52% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 18%

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

“Locked eyes with the security guard at Brookstone. He knew that I would take his life before surrendering this vintage gumball machine.” -@ReformedBroker

 

QUOTE OF THE DAY

“Traditions are group efforts to keep the unexpected from happening.” -Barbara Tober

STAT OF THE DAY

Hurricane Sandy may ultimately deliver $240 billion in reconstruction and rebuilding costs helping to drive US economic growth.


Parabolic Recoveries

This note was originally published November 23, 2012 at 08:29 in Early Look

“The last of human freedoms - the ability to chose one's attitude in a given set of circumstances."

-Viktor Frankl

 

Typically over Thanksgiving, I head over to Keith’s house and join his family for a masterfully prepared feast by his wife.  This year they’ve headed out of town, so I joined some friends on an impromptu basis in Williamsburg, Brooklyn.  No, I didn’t don skinny jeans for the adventure, but I did experience a gluten-free Thanksgiving for the first time.

 

As a Canadian in the United States, I have always been thankful for the great American holiday of Thanksgiving.  It is the ideal opportunity to reconnect with old friends and establish new friendships.  And if you are a fan of the correct NFL team, it is also a chance to cheer your team to victory.  Unfortunately, for those fans of the New York Jets, the last point doesn’t exactly hold.

 

Given the elongated nature of the holiday this year, I’ve also been doing some reading for pleasure and have picked up Viktor Frankl’s best-selling book, “Man’s Search for Meaning.”  For those that haven’t read this great book, it is basically the story of Frankl’s time in the Nazi German concentration camps.  The gist of the book is that humans can, and should, find meaning in even the most sordid of situations.

 

It goes without saying that we have had a relatively negative outlook on global growth this year.  Even as a resolution of the Fiscal Cliff becomes possible, we aren’t likely to be persuaded that global growth is set to accelerate.  As it relates to equities, the key issue of tepid economic growth is that the pace of earnings growth will ultimately slow, as it has and is in the United States (one of our key Q3 themes).

 

Even as bearish as we are and have been on economic activity, we are certainly not as pessimistic as Jeremy Grantham, who wrote the following in his most recent quarterly letter:

 

“The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.

 

Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.”

 

Certainly, Grantham has an impressive long run track record, but there is always danger in predicting out for long time frames.  In this case, Grantham is actually saying that the United State’s historic growth rate of 3% is gone forever.   As much respect as we have for Grantham, we wouldn’t bet against the American people and their ability to innovate and create economic growth in the long run.

 

In the short term, akin to Frankl’s ideas of finding a positive in the most sordid of situations, housing is starting to become a real positive factor in the U.S. economy.  Our Financials Team led by Josh Steiner has done much of our housing work and on the way down was correct in his analysis that housing would take longer to bottom than consensus expected.  Conversely, on the way up, Steiner is starting to develop the thesis that housing may recover quicker than expected.

 

The most recent data point on housing was mortgage applications from last week that rose 3.0% week-over-week, which is on the back of a 11.0% increase in the prior week.  In the Chart of the Day, we show mortgage application data going back to 2009.  The key takeaway is that mortgage applications are starting to accelerate on a year-over-year basis.

 

The conundrum of the housing market for many has been the fact that mortgage applications, and thus purchases, have remained at anemic levels despite all-time lows in interest rates.  In part, of course, this is due to tighter lending standards from banks, but the other key component is psychological.  In effect, housing is a virtuous cycle in which rising prices and falling inventory actually stoke demand.  So when potential home buyers see that prices are starting to accelerate, or there is less inventory, they get more excited to buy.  A shocking concept we know – people chase price!

 

To be clear, a stabilization in the housing market is basically a consensus call at this point.  There is an alternative scenario from the simple linear recovery though, which is that the housing recovery could become parabolic.  As my colleague Josh Steiner wrote last week:

 

“Fundamentally, the data suggests that over the long run total housing starts have grown at a rate slightly above the growth rate in household formation. From 1959-2012 housing starts have averaged 1.468 million per year while over that same time period new household formation has averaged 1.287 million per year. Recently, household formation rates have picked up sharply.

 

From 3Q11 through 2Q12, household formation growth has risen at an annualized rate of 1.739 million, yet housing starts have been running at an annualized rate of 0.673 million during that same time period. Our parabolic extrapolation from above projects that housing starts would rise to an annualized level of 1.318 million and 1.886 million by year-end 2013 and 2014, respectively, whereas a linear extrapolation gets to 1.012 million and 1.180 million by year-end 2013 and 2014.

 

While the parabolic extrapolation may seem high, it exceeds recent household formation rates by just 147k units. This compares with the 53 year trend (1959-2012) of starts exceeding HH formation by an average of 181k.”

 

Simply put, the combination of rising prices, tight inventories, and increasing household formation may lead to an accelerating recovering in housing.  This would certainly be beacon of positivity in sordid economic recovery.

 

Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Natural Gas, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1714-1738, $109.21-111.48, $3.73-3.94, $80.53-81.36, $1.26-1.28, 1.54-1.68%, and 1364-1399, respectively.

 

Happy Thanksgiving to you and your families.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Parabolic Recoveries - Chart of the Day

 

Parabolic Recoveries - Virtual Portfolio


THE M3: SLOT PARLOURS; STUDIO CITY; VISITOR ARRIVALS; S'PORE CPI

The Macau Metro Monitor, November 23, 2012

 

 

HALF OF THE SLOT PARLOURS AFFECTED BY NEW POLICY: GOVT Macau Business 

“Nearly half of the 11 slot parlours” operating in Macau will have to either close or relocate under a new bylaw regulating the location of those gaming venues" said Secretary Tam.  Tam stressed the new bylaw “further tightens the parlour regulation, it does not relax it, unlike some opinions have reckoned.”  On Wednesday, the Executive Council, the government’s top advisory body, issued a press release saying that a new set of rules on the location of slot machine parlours was finally ready.  The new bylaw stipulates that slot parlours cannot operate in residential areas.  The government must adopt  “adequate measures” to solve the issue of slot parlours located in residential areas, within one year after the bylaw takes effect, said the press release.

 

The new rules state that slot parlours are to be located only inside five-star hotels, in non-residential buildings located within a 500-metre range of a casino or within a resort “not integrated in a densely populated area”.

 

PAUL Y. ENGINEERING GETS STUDIO CITY CONTRACT Macau Business

A joint venture between the Macau-based subsidiaries of Paul Y. Engineering Group Ltd and Yau Lee Holdings Ltd has been awarded the construction contract for the Studio City casino resort, a project majority owned by MPEL.  The contract sum for the project is approximately HK$10 billion (US$1.29 billion).  The completion date is expected to be in the middle of 2015.


Earlier this week, Paul Y. Engineering Group announced it was planning to raise HK$3.2 billion for the construction of a boutique casino hotel in Cotai, just next to the One Oasis residential project.  In the stock filing, it was not disclosed under which casino operator’s gaming licence the casino would operate, but a 2009 prospectus unveiled by Macau Daily Times names MPEL as the project’s partner.

 

MACAU VISITOR ARRIVALS DSEC

Visitor arrivals totalled 2,347,646 in October 2012, down by 1.2% YoY.  In October 2012, the average length of stay of visitors stood at 1.0 day, up by 0.1 YoY.  Visitors from Mainland China decreased by 1.4% YoY to 1,445,420, with those travelling to Macao under the Individual Visit Scheme rising by
6.0% to 612,073.

 

THE M3: SLOT PARLOURS; STUDIO CITY; VISITOR ARRIVALS; S'PORE CPI - MV

 

SINGAPORE'S INFLATION RATE EASES TO 4.0% IN OCT Channel News Asia

Singapore's inflation rate eased to 4% in October from 4.7% in September.  The core inflation rate, which excludes transport and accommodation costs, fell to 2.2% in October from 2.4% in September.  The Monetary Authority of Singapore (MAS) said, "The persistent tightness in the labor market will support slightly stronger wage increases in 2013, which will continue to be passed through to consumer prices."


On the whole, MAS anticipates core inflation to be "broadly stable" and averaging around 2.5% this year, and 2% to 3% in 2013.  For the full year, CPI-all items inflation will remain "elevated" in Q4 2012 and Q1 2013, reflecting significant contributions from housing and accommodation costs.  CPI-All items inflation is likely to come in slightly above 4.5% in 2012 and ease to 3.5% to 4.5% in 2013.


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Parabolic Recoveries

“The last of human freedoms - the ability to chose one's attitude in a given set of circumstances."

-Viktor Frankl

 

Typically over Thanksgiving, I head over to Keith’s house and join his family for a masterfully prepared feast by his wife.  This year they’ve headed out of town, so I joined some friends on an impromptu basis in Williamsburg, Brooklyn.  No, I didn’t don skinny jeans for the adventure, but I did experience a gluten-free Thanksgiving for the first time.

 

As a Canadian in the United States, I have always been thankful for the great American holiday of Thanksgiving.  It is the ideal opportunity to reconnect with old friends and establish new friendships.  And if you are a fan of the correct NFL team, it is also a chance to cheer your team to victory.  Unfortunately, for those fans of the New York Jets, the last point doesn’t exactly hold.

 

Given the elongated nature of the holiday this year, I’ve also been doing some reading for pleasure and have picked up Viktor Frankl’s best-selling book, “Man’s Search for Meaning.”  For those that haven’t read this great book, it is basically the story of Frankl’s time in the Nazi German concentration camps.  The gist of the book is that humans can, and should, find meaning in even the most sordid of situations.

 

It goes without saying that we have had a relatively negative outlook on global growth this year.  Even as a resolution of the Fiscal Cliff becomes possible, we aren’t likely to be persuaded that global growth is set to accelerate.  As it relates to equities, the key issue of tepid economic growth is that the pace of earnings growth will ultimately slow, as it has and is in the United States (one of our key Q3 themes).

 

Even as bearish as we are and have been on economic activity, we are certainly not as pessimistic as Jeremy Grantham, who wrote the following in his most recent quarterly letter:

 

“The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.

 

Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.”

 

Certainly, Grantham has an impressive long run track record, but there is always danger in predicting out for long time frames.  In this case, Grantham is actually saying that the United State’s historic growth rate of 3% is gone forever.   As much respect as we have for Grantham, we wouldn’t bet against the American people and their ability to innovate and create economic growth in the long run.

 

In the short term, akin to Frankl’s ideas of finding a positive in the most sordid of situations, housing is starting to become a real positive factor in the U.S. economy.  Our Financials Team led by Josh Steiner has done much of our housing work and on the way down was correct in his analysis that housing would take longer to bottom than consensus expected.  Conversely, on the way up, Steiner is starting to develop the thesis that housing may recover quicker than expected.

 

The most recent data point on housing was mortgage applications from last week that rose 3.0% week-over-week, which is on the back of a 11.0% increase in the prior week.  In the Chart of the Day, we show mortgage application data going back to 2009.  The key takeaway is that mortgage applications are starting to accelerate on a year-over-year basis.

 

The conundrum of the housing market for many has been the fact that mortgage applications, and thus purchases, have remained at anemic levels despite all-time lows in interest rates.  In part, of course, this is due to tighter lending standards from banks, but the other key component is psychological.  In effect, housing is a virtuous cycle in which rising prices and falling inventory actually stoke demand.  So when potential home buyers see that prices are starting to accelerate, or there is less inventory, they get more excited to buy.  A shocking concept we know – people chase price!

 

To be clear, a stabilization in the housing market is basically a consensus call at this point.  There is an alternative scenario from the simple linear recovery though, which is that the housing recovery could become parabolic.  As my colleague Josh Steiner wrote last week:

 

“Fundamentally, the data suggests that over the long run total housing starts have grown at a rate slightly above the growth rate in household formation. From 1 housing starts have averaged 1.468 million per year while over that same time period new household formation has averaged 1.287 million per year. Recently, household formation rates have picked up sharply.

 

From 3Q11 through 2Q12, household formation growth has risen at an annualized rate of 1.739 million, yet housing starts have been running at an annualized rate of 0.673 million during that same time period. Our parabolic extrapolation from above projects that housing starts would rise to an annualized level of 1.318 million and 1.886 million by year-end 2013 and 2014, respectively, whereas a linear extrapolation gets to 1.012 million and 1.180 million by year-end 2013 and 2014.

 

While the parabolic extrapolation may seem high, it exceeds recent household formation rates by just 147k units. This compares with the 53 year trend (1) of starts exceeding HH formation by an average of 181k.”

 

Simply put, the combination of rising prices, tight inventories, and increasing household formation may lead to an accelerating recovering in housing.  This would certainly be beacon of positivity in sordid economic recovery.

 

Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Natural Gas, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.21-111.48, $3.73-3.94, $80.53-81.36, $1.26-1.28, 1.54-1.68%, and 1, respectively.

 

Happy Thanksgiving to you and your families.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Parabolic Recoveries - Chart of the Day

 

Parabolic Recoveries - Virtual Portfolio


IDEA ALERT: SHORTING DRI

Takeaway: DRI is one of our least favorite names in casual dining as industry- and company-specific factors dampen our view of the stock

Keith shorted DRI this year as his quantitative analysis lined up with one of the most important calls we made in 2012.

 

Fundamental View

 

Darden remains one of our top ideas on the short side.  Company- and industry-specific issues that we highlighted in our July black book, “DRI: THE UNTHINKABLE SHORT CASE”, are coming to the fore. 

  • Industry trends are slowing (see Knapp Track chart, below)
  • Darden likely needs a recovery in industry trends to achieve its targets of 1-2% SRS growth at Olive Garden, Red Lobster and LongHorn (again, see Knapp Track chart, below)
  • Darden’s two most important chains, Olive Garden and Red Lobstser, continue to underperform versus the industry
  • With jobless claims and difficult comparisons versus a year ago (weather) over the next few months, we are not expecting much good news on Darden’s top-line
  • The company’s CMO leaving is a negative, particularly seen as the management team did not announce a replacement.  Marketing is a key factor in driving traffic in casual dining and this news only adds to our bearish view of Darden’s sales outlook
  • While earnings expectations continue to decline, we believe the Street’s expectations remain too bullish on this name
  • The company's growth, dividend payments, and share repurchases are becoming more and more difficult to sustain under the company's current path.

IDEA ALERT: SHORTING DRI - olive garden knapp track ttm

 

 

Quantitative Setup


IDEA ALERT: SHORTING DRI - DRI levels

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Early Look

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