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M: Idea Alert. Shorting.

Takeaway: We’re taking the other side of today’s intraday bounce.

We added Macy’s to the short-side of our Real-Time Positions with the stock hitting lower highs today. There are a number of a reasons we don’t like M’s setup headed into 2013:

  1. Estimates Are Too High. We’re modeling flattish earnings in 2013, the consensus is looking for growth of about 13%.
  2. Can't Comp Forever. The Street is banking on another 2-3% comp for Macy’s next year. Seriously? Go back into the pages of retail history and find a time when Macy’s comped up 4-years in a row. Have fun with that research. It’ll take a while.
  3. JCP Matters Now. Is anyone considering that precisely 1-year ago JC Penney started hemorrhaging revenue, and essentially handed over $3bn in sales to anyone who wanted it? We’ll give Macy’s (and GPS) all the credit in the world…they saw the opportunity, and they took it. But JC Penney is coming on strong. What people don’t get is that even if JCP fails miserably in putting the wrong higher-end brands in front of an audience who could care less, the inventory still needs to be sold…somewhere, somehow. To think that this will not come back to haunt M is being intellectually dishonest.
  4. How big of a deal is JCP? We’re talking roughly $2.8bn over four quarters if our estimates are right. To put that into context, that equates to about 10% of Macy’s sales right there. We’re not saying that Macy’s got it all – or even half (Heck, KSS comped down during this period so we know it wasn’t them). But 2-3% comp points worth? We think so. Macy’s management won’t agree with that assessment, but the reality is that there is no way for them to know why people walk into their stores, or walk right by. One fact that is impossible to argue with is that we are just beginning to start off on a period where Macy’s needs to comp against these share gains -- whatever they are. Let’s say that they are prepared…I can promise you that all of their competitors are not. Desperate competitors equals an unhealthy environment.
  5. They'll Get It The Painful Way. In the end, we think that if Macy’s wants the comp, they’ll get the comp. But they’ll need to buy it. And we quote CFO Karen Hoguet…“We’ve consciously tried to bring more goods into the stores to help us transition to the Spring and have more newness as Christmas approaches and for a post-Christmas strategy. So this is a conscious change from what we’ve done in the past.” Much like we see with JCP, the merchandise will need to be sold.


The way we look at it, the best bull case is that even with EBIT down 5% next year (which we think will happen) we still get to earnings being about flat. Due to the debt tender and share repo activity, the financial engineering here rivals what we saw at GPS for much of the past decade. Tack on the potential success of My Macy’s and the Millennial Stores, and we’re looking at yet another year where M comps consistently higher, and add on 100bp leverage in gross margin as a result without commensurate SG&A spend. Add on some financial engineering… and you get to about $4.75 in 2013 earnings – suggesting that the stock is actually trading at 8.2x earnings and ~5x EBITDA today.

Do you REALLY want to pay 8.2x/5x for a department store under the assumption that everything goes absolutely perfect?


This a business that has no square footage growth, no ‘birthright to comp’ in its core, struggles to consistently earn its cost of capital (what happens when lease accounting rules change and M has to account for its property?), and has zero competitive advantage in the core area that will be driving incremental consumer purchases for generations to come – dot.com. Try as they will with ‘The Millennial store’ and My Macy's, but the reality is that as they grow, our kids are unlikely to go en masse to Macy’s to buy their apparel at a rate greater than what we’re doing today. If they do, it will be the result of some considerable capital investment that we have yet to see (or model).

In the end, if our numbers are right, there’s no reason why this stock deserves a double digit multiple on an earnings number that people realize is shrinking. Zero growth retailers have traded at 6x forwarded earnings – several times – and there’s no reason why M can’t test that again. A 10x multiple on $4.75 suggests $8 in upside from here - that's good. But when considering a 6x-7x multiple on $3.00 in earnings, we don’t like the risk/reward here as we look out over the next 12-months.


M: Idea Alert. Shorting. - M TTT


Stocks Around The World

Now that 2012 is coming to a close, let’s take a look at how equity indices around the globe performed. Germany’s DAX took the prize for the largest percentage gain while the Shanghai Composite in China churned out a small gain to close the year positive.


  • S&P 500: +12%
  • DAX: +29%
  • Shanghai Composite: +3%
  • Nikkei 225: +23%
  • Eurostoxx 50: +11%


Stocks Around The World - image001

Housing: Simply The Best

Housing is one sector that is enjoying a meaningful recovery after a long downturn. It seems that nearly every other day there is a new data point that supports the recovery in housing; things just keep getting better every day. The latest data we have is Pending Home Sales; November’s data was surprisingly strong with an increase of 1.7% month-over-month following October’s 5.0%. We expect future data in pending home sales to remain strong.


Housing: Simply The Best - image001


Housing: Simply The Best - image002

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This whole cliff mess is quite funny when you look at what has occurred over time. The US government has changed how it calculates inflation nine times since 1996. This way, it looks like there’s never any real inflation to report, no matter what Bernanke does. But we’re not fools and you aren’t either. We know inflation when we see it and as well as deflation. The commodity bubble that Bernanke helped create is now deflating as growth stabilizes. If we want further recovery, we need to strengthen the US dollar in addition to deflating commodity prices. It worked for Reagan and Clinton. Why not give it a shot after our failed Keynesian efforts?

Judgment Day

Today is the last day of the 2012. It’s also the last day until we “officially” hit the debt ceiling although some economists would argue that. Can the President and Congressional Democrats and Republicans put aside their differences and actually serve the people of this great country for once? We’re about to find out. 

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Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.


Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“Looks like a full trading day” -@Marketshot


“An ignorant person is one who doesn't know what you have just found out.” -Will Rogers


Shanghai Composite Index closes up +15.8% from its December low (+1.6% for the year) as global growth stabilizes. 


According to our proprietary model, despite one extra Friday relative to last November, we're projecting November 2012 revenue for the Strip to come in between -6% to -10%, assuming normal slot and table hold.  This would break a streak of two consecutive months of gains.  One reason is the abnormally high slot hold in November 2011 (8.4%); as a result, we believe slot win YoY change would tumble double digits; even if we assume unchanged slot hold YoY, gaming revenue (ex baccarat) would still be lower.  Another reason is the disappointing transportation metrics:  McCarran Airport traffic slipped 0.3% in November while taxi trips fell 2.7% YoY.  The important slot handle metric is also likely to shrink again.


Here are our projections:




The Macau Metro Monitor, December 31, 2012



S'PORE ECONOMY GROWS 1.2%: PM LEE Channel News Asia

According to Prime Minister Lee, Singapore's economy grew 1.2% in 2012, missing estimates of 1.5%.  This implies a contraction in 4Q, which would result in a technical recession since Q3 also fell QoQ.  2013 GDP projection is 1-3%.  Official 2012 GDP will be released on Wednesday.



The partial ban on smoking inside casinos will kick in at midnight tonight. Government health inspectors will patrol the gaming areas to make sure the ban is being enforced.  If someone is found smoking in a non-smoking area inside a casino, they could face a maximum on-the-spot fine of MOP400 (US$50).



Twenty-seven people were injured on Saturday when a Hong Kong-bound jetfoil hit a signal buoy near Macau’s Outer Harbor. The 183 passengers and crew members all escaped without serious injuries. 


Ferry operator TurbotJet said jetfoils do deviate from course occasionally, and would follow up claims by individual passengers that some seat belts were out of order.  The company said the head of the ferry suffered slight damage and that one of its underwater wings had fallen into the sea.  The authorities are examining the records of the ferry’s course and operation to determine the real cause of the collision.  The waterway near Outer Harbor was closed for approximately one hour for rescue on Saturday, and another short interval on Sunday to retrieve the ship’s sunken wing, and to replace the buoy damaged in the collision.



Changi Airport has crossed the 50 million passenger milestone this year, just two years after hitting the 40 million mark, as low-cost carriers and intra-Asia travel continue to boost passenger numbers.


From January to November, Changi Airport handled 46.3 million passengers, on par with the 46.5 million passengers for the whole of 2011, thanks partly to strong double-digit growth in travel to and from Northeast Asia and South Asia.


Indonesia is Changi's top market.  Its 6.2 million passengers between January and November, up 8.6% YoY, accounted for 13.4% of total traffic handled at the airport.  Changi is expanding to cater to the rising number of travelers walking through its gates, with the Budget Terminal being revamped to reopen as Terminal 4 in 2017, raising Changi's passenger-handling capacity to 85 million passengers per year. 

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