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TRADE OF THE DAY: Apple Picking

Takeaway: Keith’s multi-factor, multi-duration model produced another winning trade in Apple stock.

We don’t believe there is a single authority on Apple (AAPL) or its stock price, but we do believe that you can risk manage a trade in Apple. That’s exactly what Hedgeye CEO Keith McCullough did today in our Real-Time Alerts, and it’s our Trade of the Day.

 

Here’s what happened: Keith’s models flashed an immediate-term oversold signal, and he bought AAPL at 10:27am today at $502.50, just above the low of the day when the stock briefly traded below $500 for the first time in ten months. The stock fell in part because of another downgrade by a sell-side analyst.  However, AAPL rallied to close the day at $518.83, thanks in part to word that the company’s IPhone 5 sales in China  topped two million handsets.

 

Keith’s trading record in AAPL is stellar due to his multi-factor, multi-duration model that manages risk in real-time. Keith sold AAPL on September 28 at $677.74, just ten days after the stock broached the $700 level.


Eyeing Utilities

We shorted the Utilities Select SPDR ETF (XLU) at $35.70 a share at 2:28 PM EDT in our Real-Time Alerts. Utilities are immediate-term TRADE overbought again within a bearish intermediate-term TREND. As always - short on green, buy on red. That's how we play the game. 

 

Eyeing Utilities - image001


KEY CALLOUTS FROM CHINA’S CENTRAL ECONOMIC WORKS CONFERENCE: EXPECT MORE OF THE SAME

Takeaway: The objectives introduced in China’s Central Economic Work Conference are in line with previous POLICY objectives and our outlook for China.

SUMMARY BULLETS:

 

  • The confluence of the POLICY objectives per the latest Central Economic Work Conference are in full support of our long-held core thesis on the Chinese economy – specifically that Chinese real GDP growth is no longer going to outperform CCP targets by 200-400bps; rather, Chinese GROWTH will come in sustainably slower at +7-8% per annum (the CCP target for 2013 is +7.5%).
  • We’ve been in print confirming that Chinese GROWTH is no longer decelerating, but that any economic improvement over the intermediate-to-long term will be rather marginal and certainly nowhere near the area code of China’s trailing 5-10 year peak GROWTH rates.
  • In light of this positive, but decidedly subdued outlook for the Chinese economy, we continue to hold bearish TAIL-duration biases on worldwide mining-related capex and international raw materials prices. Plainly stated, the slope of Chinese demand for raw materials is likely to remain flat-to-negative for the foreseeable future as China accelerates its economic rebalancing by siphoning marginal GDP dollars towards consumption in lieu of fixed capital formation.
  • Sure, Chinese policymakers do indeed have a unique opportunity to accelerate urbanization and promote capital markets reform in order to sustain GROWTH, but sustaining GROWTH < demonstrably accelerating GROWTH. Don’t get ahead of your ski tips on this one!

 

Over the weekend, Chinese policymakers held their annual Central Economic Work Conference, which is used to finalize the country’s strategic macroeconomic objectives for the upcoming year. Below, we list what we thought were the key highlights of the largely uneventful event (per the State-owned Xinhua New Agency’s translation of the resulting statement):

 

  • The key points from the conference include transforming the growth pattern through expanding domestic demand, eliminating imbalances in development through structural adjustments and achieving sustainable and stable social progress through reforms in key sectors. Leaders vowed to target “sustained and healthy development” as they maintain a “prudent” monetary policy and “proactive” fiscal stance.
  • There was no mention of seeking “relatively fast” growth, a policy in place since 2006. It marks the first time that quality and efficiency, rather than speed, are center-staged in China's economic growth.
  • New growth points should be created in domestic consumption, which will serve as both a strong pulling power and foundation for the sustained and healthy development of the country's economy.
  • China will actively and steadily push forward urbanization next year, with a focus on improving quality of the efforts.
  • China has reiterated its firm stance regarding property market controls and vowed to keep tightening measures in place, including bans on third-home purchases and property tax trials that have been introduced since 2010.
  • China vowed to continue to protect foreign investors' rights and interests and their intellectual property rights.
  • While encouraging and providing better guidance to private investors, the government will increase public investment on infrastructure projects that will not cause repetitive construction but set foundations for long-term development and benefit people's well-being.

 

All told, the confluence of the aforementioned POLICY objectives are in full support of our long-held core thesis on the Chinese economy – specifically that Chinese real GDP growth is no longer going to outperform CCP targets by 200-400bps; rather, Chinese GROWTH will come in sustainably slower at +7-8% per annum (the CCP target for 2013 is +7.5%).

 

Most importantly, the government’s resolve to maintain property market curbs amid a continuation of “prudent monetary policy” and “proactive fiscal policy” confirms our view that Chinese policymakers have no interest in reflating their credit-based economic bubble – which has been identified by them as the key contributor to heightened levels of social unrest. To that tune, it’s important to note that China’s Gini coefficient (a common measure of income inequality) ripped to 0.61 in the most recent year the data was available (2010); per China’s Survey and Research Center for China Household Finance, that level is 50% higher than a risk levels for social unrest. Mass incidents, including strikes, riots and other disturbances, doubled to at least 180,000 in 2010 from 2006 levels per Tsinghua University.

 

As repeatedly stressed in outgoing CCP General Secretary Hu Jintao’s transition speech, those atop the CCP brass are keenly aware of the political risks the Party faces from social discontent, so it’s prudent for investors to maintain muted expectations with regards to Chinese POLICY going forward. We’ve been in print confirming that Chinese GROWTH is no longer decelerating, but that any economic improvement over the intermediate-to-long term will be rather marginal and certainly nowhere near the area code of China’s trailing 5-10 year peak GROWTH rates.

 

In light of this positive, but decidedly subdued outlook for the Chinese economy, we continue to hold bearish TAIL-duration biases on worldwide mining-related capex and international raw materials prices. Plainly stated, the slope of Chinese demand for raw materials is likely to remain flat-to-negative for the foreseeable future as China accelerates its economic rebalancing by siphoning marginal GDP dollars towards consumption in lieu of fixed capital formation. For more of our thoughts here, please refer to the following notes:

 

CHINESE GROWTH: STICKING TO THE [CENTRAL] PLAN (7/13);

PONDERING CHINESE GROWTH PART II (7/17);

EARLY LOOK: River Baptisms (10/4);

HOPE VS. REALITY IN THE CHINESE PROPERTY MARKET (10/4); and

HU SPEAKS; IS ANYONE LISTENING?: NOTES FROM CHINA’S 18TH PARTY CONGRESS (11/8).

 

Sure, Chinese policymakers do indeed have a unique opportunity to accelerate urbanization and promote capital markets reform in order to sustain GROWTH, but sustaining GROWTH < demonstrably accelerating GROWTH. Don’t get ahead of your ski tips on this one because China will not be lining up to bail out the global economy (see: 2009-10’s CNY4 TRILLION stimulus package and CNY17.5 TRILLION credit expansion) this time around!

 

Darius Dale

Senior Analyst


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Looking at ADM below 1.0x book value

Takeaway: Since the beginning of 2009, ADM has traded at an average of 1.21x book value - the current number is 0.99x.

Within the context of our Consumer Staples Sector launch this afternoon, we highlighted ADM as one of our preferred names within the firm's broader macro call of falling commodity prices.

 

ADM has significantly lagged the overall market in 2012 (-2.9% YTD) over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist.  Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry.  Merchandising and handling results were at the mercy of a smaller U.S. corn harvest.

 

Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground.  With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.

 

Given the valuation relative to historical norms, the risk/reward makes sense to us as we look out over the prospects for the 2013 crop year and likely planting decisions by farmers.

 

Looking at ADM below 1.0x book value - ADM price to book


CHART DU JOUR: WYNN MACAU UNDER PRESSURE

Market share in a tailspin and stagnant growth


  • In 2012, Wynn Macau will likely have generated flat net revenues and EBITDA on a normalized hold basis vs 2011
  • Our projections, as seen below, indicate similarly flat to slightly down revenue growth but EBITDA is projected to fall 4% vs the Street consensus of +3% growth.
  • Unless Wynn changes its junket commission and/or credit strategy, EBITDA growth is likely to remain flat at best until Wynn Cotai opens in 2016
  • With no positive catalysts, WYNN stock could be under pressure with slowing market growth next year (smoking restrictions, Beijing corruption crackdown, and moderating Mass hold percentage)

 

CHART DU JOUR: WYNN MACAU UNDER PRESSURE - wynn


Replay: Consumer Staples Launch

I am very excited to be a part of the Hedgeye team and adding to the process with my launch on consumer staples this afternoon.

 

If you missed the call, or would like to review it, you will find links to the call and presentation below.

 

Call Replay: CLICK HERE

Presentation: CLICK HERE

 

I look forward to rolling up my sleeves across the space in the weeks and months ahead. More importantly, I'm excited to open up a dialogue with you all.  

 

Wishing a happy and restful Holidays!

 

-Rob

 

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

 

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