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Crude Correlations

Our adage of "get the US dollar right and you'll get a lot of other things right" reigns true across multiple asset classes. With the US dollar appreciating in value since September of this year, Brent crude oil has gone the opposite way, dropping in value as the dollar rises. We believe there's room for further downside in crude oil but the US dollar will need to continue to strengthen.

 

Crude Correlations - 1yearoil


ISLE 2Q CONFERENCE CALL NOTES

In-line with us but below the Street

 

 

"The second quarter was a period of achievements and challenges. Similar to other regional gaming operators, we experienced softening net revenues during September and October. Cost containment efforts led to increased adjusted EBITDA and margins at several of our properties; however we could not overcome the softness in our Mississippi business."

 

Virginia McDowell- CEO of ISLE

 

CALL NOTES

  • Miss in Mississippi; other regions performed well
  • Natchez entrance ramps have been repaired but still limited access to the property
  • Cape Girardeau - ramping up to ISLE's expectations
  • FQ2:  $2.5 million cost - sub-note offering in July
  • $75.5MM in cash; $1.18BN debt ($38MM outstanding in revolver, $300MM 7.75% senior notes, $350MM new subnotes, $4MM other debt)
  • FQ2:  debt increased by $30MM; Capex: $46MM.  
  • Leverage cap: increased a couple of tenths to 5.9x, should start to trickle down as Cape Girardeau ramps up
  • Borrowing capacity: $200MM; $1.3MM cap interest

 

Q&A

  • Cap interest and pre-opening will go away when Nemacolin ramps
  • No Cape Girardeau in FQ2 results
  • $1 million in increased legal costs--will not continue going forward
  • Nemacolin budget went up since previous estimate occurred when construction was on hold waiting for regulatory decision
  • REIT conversion in the future? 
    • PENN may be an one-off situation
    • ISLE doesn't have the size or leverage to do something similar
  • Nemacolin feeder markets:  Morgantown, WV and Nemacolin
  • Credit amendments:  function of timing;  before amendment, there was an expectation that Nemacolin would be open by now.  Because of the delay in Nemacolin, ISLE needed more room in their credit agreements.
  • Capex guidance:  $80-90MM (for balance of fiscal year 2013)- $20-30MM will be for Nemacolin;
  • Vicksburg essentially done; renovation of Lake Charles will be done by end of FY 2013. 
  • Cash from Biloxi: ~$50MM
  • Target leverage:  around 5x

SSS Hat Trick, JWN Out

Takeaway: With retailers behind the revenue eight ball coming out of November, margin risk is elevated headed into an already promotional holiday.

Despite talk of strong Thanksgiving sales, November disappointed as this morning’s Retail Sales confirms with 11 companies missing expectations compared to 5 beats. Simply put, Sandy significantly impacted sales (perhaps the most valid weather related scapegoats in years) putting retailers behind the eight ball headed into December – that’s just reality. While still early in the quarter, if retailers have a shot at hitting 4Q comp outlooks it’s most likely going to come by way of increased promotional activity in what was already expected to be a highly promotional holiday. Enter margin risk.


The other callout is the SSS hat trick with JWN becoming the third retailer in as many months to pull out of the sample along with TGT and KSS. This represents ~36% of the SSS sample withdrawing at year end. The days of this exercise are numbered.

 

The most notable company specific (negative) callout is KSS. Follow through on strong October sales was critical re the company’s optimistic holiday outlook, but November sales didn’t comply. With in-store inventories up +12% on revenues down -5%, it appears the company is trying to keep margins high. With the rest of retail looking to reaccelerate sales in December after a slow start to the quarter, this puts one of the more aggressive retailers on inventory in precarious shape heading into what is likely to be an even more promotional holiday season.

 

SSS Hat Trick, JWN Out - SSS Sample


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FL: Solid Update for Top Long

Takeaway: One of our top longs, FL’s sales are tracking ahead of plan and the setup is increasingly favorable into year-end

This note was originally published November 27, 2012 at 13:42 in Retail

As a follow up to FL’s recent 3Q results, we think a reacceleration in athletic footwear industry sales after a slow start to November and a favorable near-term setup suggest a strong finish into year-end. We are also positive on FINL and NKE, which is another top long idea.


Consider the following on a TRADE basis (3-weeks or Less):

  • Athletic footwear sales have come in up +5.3% over the last two weeks after coming in down -6% in the first two weeks of November accelerating sequentially each of the last 3-weeks.
  • As seen in the chart below, continued underperformance in the other channels cause weekly sales to significantly understate performance in the Athletic Specialty channel (i.e. FL, FINL, DKS, etc.).
  • Basketball continues to be a significant driver with trailing 3-week domestic sales accelerating sharply higher +27% from +15% over each of the prior four weeks.
  • With FL reporting comps up +MSD through the first half of November despite the industry down -6% and sales over the last two weeks running +5%, we believe FL comps are tracking well ahead of the “upper end of mid-single digit” comp plan.
  • With a favorable setup through year-end and shift towards basketball in Europe, we expect more opportunity for further upside in performance.
  • Retailer sales gains over the holiday weekend were heavily reliant on deep promotional activity. We think athletic footwear retailers (FL/FINL) were substantially less impacted and benefitted from more full-priced sell through with several new launches hitting over the holiday week. Moreover, while several apparel and home furnishing retailers offered free shipping on certain items for the first time, there was no incremental hit to footwear retailer margins as free shipping has become standard.

 

The longer-term TREND (3-Months or More) & TAIL (3-Year or Less) call:

  • Still in the early stages of its turnaround, FL is not solely reliant on the ‘footwear cycle’ for growth.
  • A return to new store growth for the first time in over 6-years will augment comps benefitting from higher growth and higher margin businesses (i.e. Women’s, Apparel, and Kids).
  • After a decade of inventories outpacing sales growth and contracting margins under Matt Serra, FL has posted positive sales/inventory growth and margins expansion over the last three years under Ken Hicks.
  • We’re see more opportunity for upside performance over the intermediate-term and are looking at $3 in earnings power next year approaching $3.50 in F14.


FL: Solid Update for Top Long - FW App Table

Source: NPD Weekly POS Data

 

FL: Solid Update for Top Long - FW 1YR

 

FL: Solid Update for Top Long - FW Cat

 

FL: Solid Update for Top Long - FW Channl

 






 


INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT

Takeaway: New Jersey remains in a shambles, while New York and Pennsylvania are renormalizing. Overall, the labor market appears to remain on track.

Getting Back to Normal

Hurricane Sandy's effects continued to fade in this latest jobs report, mirroring trends we saw after Hurricane Katrina. At this point, initial claims have retraced 64% of their increase from the storm. New Jersey initial jobless claims remain extremely high. For reference, in the latest round of state level data, NJ accounted for some 45,631 new jobless claims, which represented 11.3% of total claims (vs. NJ being 2.8% of the U.S. population). This was actually up from the previous week, in which NJ represented 9.6% of total claims. New York saw claims fall sharply, but still represented 8.1% of all claims vs. being 6.2% of the population. Similarly, Pennsylvania accounted for 6.0% of claims while being 4.0% of the population. If we tally those differences, we find that these three states represent an overstatement of claims on the order 12.4%. If we adjust the numbers for this, we find that the "normalized" claims level is closer to 370k, which is slightly above where claims were just prior to the storm (361k). 

 

The Numbers

Initial jobless claims fell 17k last week to 393k, but after incorporating the 6k upward revision to last week's data, claims were lower by 23k. Rolling claims, meanwhile, were higher by 7.5k to 405k. On a non-seasonally adjusted basis, claims fell 47k. 

 

Bottom Line

We think 370k is a reasonable approximation of where Sandy-adjusted claims are currently, but this estimation could be off by +/- 10k. The rolling claims number going into the storm was actually 371k (higher than the 361k single-week print cited in the chart below), suggesting that over the next few weeks we should expect claims to return to their pre-storm trendline. Obviously, there remains great uncertainty around the resolution of the Fiscal Cliff, which is the greatest near-term threat to the labor market, but, at least so far, it doesn't appear to be altering the trajectory. 

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Sandy v Katrina

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - weekly claims state level  2

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Seasonality

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - NSA Rolling YoY by year

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Raw

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - rolling

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - NSA

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - rolling NSA

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - S P

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Fed

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - NSA YoY

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - recession

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - claims linear

 

Yield Spreads

The 2-10 spread fell 5 bps WoW to 136 bps. 4QTD, the 2-10 spread is averaging 1.42%, which is up 5 bps relative to 3Q12.   

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - 2 10 QoQ

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - 2 10 spread

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over multiple durations.

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Scoreboard

 

INITIAL CLAIMS: UNDERLYING TRENDS APPEAR RESILIENT - Companies

 

Joshua Steiner, CFA

 

Robert Belsky


European Problems

Client Talking Points

Greek Tragedy

Greece just can't get its act together. It really is one big tragedy full of bailouts, misconceptions, deception, and cheating investors. Every time Greece needs a bailout, it gets one. What if we just yanked the money away this time around and let them deal with their debt problems head on. I'm sure taxpayers in Europe wouldn't have any issues keeping their money.

Asset Allocation

CASH 55% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 6%
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

“New Jersey had one of the weakest U.S. housing markets--high foreclosures, soft prices--and that was before Sandy hit http://on.wsj.com/RjNGJy" -@NickTimiraos

QUOTE OF THE DAY

“There are two ways to pass a hurdle: leaping over or plowing through... There needs to be a monster truck option.” -Jeph Jacques

STAT OF THE DAY

Q3 GDP Growth Revised To 2.7%


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 80.64%
  • SHORT SIGNALS 78.57%
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