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Bounce, Fail: Rebar Prices Falling Again - CAT

Takeaway: Sustained weakness in Chinese construction-related commodity prices are flashing a warning to $CAT investors. Coal & Energy are also a risk.

Bounce, Fail: Real Chinese Steel Rebar Prices Falling Again



  • Real Rebar Prices:  The Hedgeye Industrials team often finds local commodity price data easier to use than Chinese economic figures.  Significant global industrial resources are devoted to supplying China’s fixed asset investment (FAI) boom.  Tracking construction-related commodity prices, like domestic rebar prices adjusted for inflation, may provide us with timely information on Chinese activity.   


Bounce, Fail: Rebar Prices Falling Again - CAT - 1



  • Negative Indicator for Chinese FAI:  Real rebar prices are ~4% below 2009 lows, which is not a good signal for mining capital investment or Chinese construction activity, in our view.
  • Currency Relationship:  China pegs its currency to the USD and commodity prices are often responsive to currency moves.  Chinese rebar prices show a modest negative correlation to the USD Index.  


Bounce, Fail: Rebar Prices Falling Again - CAT - 2


  • Residual Suggests Sustained Weakness:  Looking at moves in excess of those driven by currency (the residual of the regression to the USD Index), we see cause for concern in the Chinese construction related steel markets.  The residual has been below its currency implied value for several months and is rising again.


Bounce, Fail: Rebar Prices Falling Again - CAT - 3


  • CAT Exposed:  We believe Caterpillar is exposed to the potential popping of the mining capital investment bubble, which was in large part inflated by Chinese FAI.  CAT has acquired mining related businesses and invested in production capacity for mining equipment at what we believe is (roughly) a cycle peak.
  • Coal & Energy Capex Additional CAT Concerns:  Global adoption of innovative gas extraction techniques may result in long-term weakness in coal mining capital investment.  As we wrote on Monday in Overweight Capital Goods?  Wrong Question, But Probably Not, growth in energy related capital investment is already elevated (chart courtesy Kevin Kaiser, Hedgeye Energy).
  • CAT Risky, In Our View:  We continue to think that the downside risks in CAT are not reflected in the current share price.


Bounce, Fail: Rebar Prices Falling Again - CAT - 4






Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012








Athletic FW & Apparel Update Post Sandy

Takeaway: We remain positive on the space and the R&D driven cycle benefitting key players – NKE, FL, and FINL (long); UA (short near-term).

Athletic Footwear and Apparel sales continue to improve following Sandy related disruptions in early November. In addition, the setup for both footwear and apparel gets increasingly more favorable through year-end.

Pricing remains healthy up MSD-HSD, reflecting the increasing mix shift towards basketball footwear in light of last year’s NBA strike as well as efforts to offset apparel costs.

The key brands of note continue to be Nike, Brand Jordan, Adidas, Under Armour, as well as VFC’s The North Face. We remain positive on the space and the R&D driven cycle benefitting key players – NKE, FL, and FINL (long); UA (short near-term).


Athletic FW & Apparel Update Post Sandy - FW App table


Athletic FW & Apparel Update Post Sandy - App FW 1yr


Athletic FW & Apparel Update Post Sandy - App FW 2yr


Athletic FW & Apparel Update Post Sandy - FW sales


Athletic FW & Apparel Update Post Sandy - FW mk sh


Athletic FW & Apparel Update Post Sandy - App Sales


Athletic FW & Apparel Update Post Sandy - App Mktsh

Lower-Highs: SP500 Levels, Refreshed

POSITIONS: Long Bonds (FLAT), Long US Dollar (USD); Short Industrials (XLI) and Utilities (XLU)


At the beginning for the year, the bull case was growth “is back” – then, as growth slowed, it was earnings (“stocks are cheap”, using the wrong numbers). And earnings slowed. Now the bull case is government.




Across our core risk management durations, here are the lines that matter to me most:

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE resistance = 1406
  3. Long-term TAIL support = 1364

In other words, the Risk Range across durations is widening as the expectation for more government catalysts are heightening.


Waiting on Obama to speak,



Keith R. McCullough
Chief Executive Officer


Lower-Highs: SP500 Levels, Refreshed - SPX

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 80.51%
  • SHORT SIGNALS 78.32%

Bulls, Bears and BRICs

We're pleased to present the question and answer session from this morning's investment call held for subscribers. Hedgeye CEO Keith McCullough discusses the slowdown occurring in BRIC countries (Brazil, Russia, India, China), noting that China's equity market has declined double digits over the last three years. Russia is without a doubt the worst market right now with high beta and a rough investing climate. Also discussed is bullish and bearish sentiment in the market and the Shanghai and Hang Send Indices. You can listen to the full audio from our Q&A session below.



In preparation for ISLE's F2Q 2013 earnings release Thursday, we’ve put together the recent pertinent forward looking company commentary.



Isle of Capri Casinos, Inc. Opens Isle Casino Cape Girardeau (10/31)




  • "While we've been able to mitigate the economic issues at most of the properties in the portfolio through our continuing cost containment measures, our results in Pompano and Kansas City were impacted by an increasing competitive environment."
  • "We also continue to experience construction disruption in Vicksburg and Lake Charles as we focus on asset renewal, and by road construction in Black Hawk."
  • "We received good news from the Supreme Court in Pennsylvania last week and are finally looking forward to starting construction of our Lady Luck property at the Nemacolin Woodlands Resort in Western Pennsylvania. At the point that we're able to do so, it will be 9 to 12 months before our flagship Lady Luck welcomes our first guests."
  • "Shortly after the end of the quarter, we completed the refinancing of the 7% subordinated notes which were due in 2014 with a new subordinated debt issue due 2020. Our nearest maturity is now 2016. Related to this refinancing, we will incur charges of approximately $3 million in the second quarter on the underwriting discounts and various fees related to the financing."
  • "Interest expense for the balance of the year is now expected to be approximately $66 million."
  • [Midwest] "I can't specifically say we're seeing it related to the drought; we have seen a pullback just like the rest of the group has, probably since the end of the first calendar quarter. So I can't pinpoint anything specifically to the drought or farming."
    • "You don't know how many people sold forward. And then the other thing is, to the extent that there is yield in the fields, the corn is at pretty live prices right now. So how all that balances out, I think it's really going to be into the fall before we know the full impact."
  • [Florida] "There is promotional war right now they started out when they opened with two to three promotional mail offers a month, now they're up to 10 to 12. So they are up over 300% just with their mailing to their customers and that's what we're facing."
  • [Depreciation guidance of $76-78MM for FY 2013] "We're still on target for what we expected for the 12 months."
  • [Annual corporate cost run rate] "$40 million (includes $6 million of stock comp)."
  • [$50 million maintenance capex guidance]  "We've been running in the $40 million to $50 million range in any given year. I think that that's probably a pretty good number."
    • "We're comfortable with where the slot floor is now. We're up to speed at all of our properties or most of our properties where the slot floor needs to be."
  • [Lake Charles] "But we do expect the margins to increase. We started the fan club in the quarter, we have some additional expenses there with some comp reserves that we left because they are such heavy table play in that market that we made a decision to leave some comp residual in their accounts. So we're tweaking all of that along with our marketing spend and our labor to find to your point where we really need to be post-Crown and where that labor and marketing needs to settle in."
  • "I think the issue in Mississippi right now is really being driven by Lula. We are continuing to modify the way we act at the property. The way we market the property down there and operate to kind of find the right mix on this volume, but you know, we really just have seen what I believe now
    appears to be kind of a permanent diminution in that market."
  • "In Vicksburg, we're under some pretty heavy construction disruption right now with – redoing our casino floor and some of the couple of the restaurant products there.  The re-branding there that's getting done and the renovations have had a pretty good impact on the property in the quarter. And that should start to subside as this stuff finishes up later this year."
  • [New Black Hawk competitor] "We've had a great communication with them in terms of just moving forward as our neighbor. We installed a new sign. We got their permission to put up a big truck in middle of the road to kind of impact what they did for a week. Everything we've done with them has been positive, but we haven't seen any promotional challenges or anything that would cause us any concern."
  • [Black Hawk improving margins] "I think we're seeing good results from the hotel rooms that we've been able to refurbish. And so I think we've been up against some pressure with the rest of the market. Instead of being the first stop with the highway construction, we became the last stop as traffic got rerouted. And I think our marketing promotions have been developed in such a way that they take into account people that show up rather than a sunk cost for promotion. So, I think we've tailored a lot of what we did this quarter in a more efficient way, better yielding in the hotel, better food product, able to raise some prices in our buffet and things like that. So, I think we've been able to overcome that along with a tax increase July 1."

Return Of Rebar

The price of spot Chinese steel rebar has undergone a sharp drop in price since August of 2011 and continues to head lower month-after-month. While the price bounced back in August of this year, it was a dead cat bounce and quickly sold off. The price of rebar once correlated tightly with Brent crude oil until the Federal Reserve began quantitative easing which inflated the price of oil but not Chinese steel. Chinese steel is not a financialized market like oil markets have become, so investors can’t pile into Chinese steel as an “inflation hedge.” For the correlation to return, Brent crude would have to come down significantly and rebar would have to increase in price to some degree.


Return Of Rebar - REBAR

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