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TRADE OF THE DAY: BA

Today we bought Boeing (BA) at $73.37 a share at 3:02 PM EDT in our Real-Time Alerts. Both our risk management signal (immediate-term TRADE oversold) and Hedgeye Industrials Sector Head Jay Van Sciver's research view (maintenance issues will be corrected - there are no real alternatives), say buy Boeing here, so we will. Nice dividend yield from this price.

 

TRADE OF THE DAY: BA - TOTD


PATIENCE SHOULD PAY DIVIDENDS IN INDIA

Takeaway: We are warming up to India on the long side, but plan to wait ~2-3 months for what we think could be a much better entry point.

SUMMARY CONCLUSIONS:

 

  • Given our short-cycle outlook for the Indian economy (i.e. Quad #3 in 1Q = Growth Slowing as Inflation Accelerates), we don’t think the RBI, led by Governor Duvvuri Subbarao, will be inclined to ease as soon as many are hoping (~MAR) and we believe this pushing out of monetary easing expectations by at least one quarter is one of the core reasons the SENSEX and the rupee have underperformed over the past month.
  • However, we don’t think the aforementioned timing catalyst is strong enough to run out and short the SENSEX or the INR with. If anything, it should just keep India’s benchmark equity index from making a new all-time high (north of 21k on the SENSEX) in the coming 1-2 months.
  • Moreover, a probable ~six-month stay in Quad #1 (Growth Accelerating as Inflation Decelerates) of our G/I/P chart starting in 2Q should provide the RBI with the macroeconomic cover to acquiesce to market demands for aggressive monetary POLICY easing – especially if Singh & Co. make additional headway in the fiscal reform department.
  • Regarding fiscal reform, the key India-specific catalyst that looks to dominate domestic headline risk between now and then is undoubtedly the unveiling of the FY14 budget. For the sake of India’s investment-grade credit rating, Finance Minister Palaniappan Chidambaram and his team must get serious about fiscal sobriety. Ultimately, that means cutting spending, overhauling the tax code and just saying “no” to subsidies – a very difficult task indeed, given the political pressure to “buy” votes ahead of the MAY ’14 parliamentary elections.
  • All told, we will patiently look to use any US Debt Ceiling-induced weakness to increase our allocation to India on a pullback(s) heading into 2Q – provided our quantitative signals support that move at the time.

 

Since the start of DEC, India’s 10YR sovereign debt yield has plunged -27bps to a ~two-year low of 7.91% on the strength of widespread expectations for monetary POLICY easing in the next 1-3 months. The aforementioned move on the long end has pancaked India’s 10YR-1YR* (no actively traded 2YR note) yield curve to a nine-month low of -3bps wide – a move that is likely foreshadowing a trip to Quad #3 (i.e. Growth Slowing as Inflation Accelerates) on our G/I/P chart.

 

PATIENCE SHOULD PAY DIVIDENDS IN INDIA - 1

 

PATIENCE SHOULD PAY DIVIDENDS IN INDIA - INDIA

 

GROWTH should slow from somewhat impressive rates within this current cycle (DEC Manufacturing PMI: 54.7 from 53.7 prior; DEC Services PMI: 55.6 from 52.1 prior) and INFLATION should be buoyed on the margin by the late-year diesel price hike and a weak currency, which has fallen -6.5% vs. the USD since its cycle peak on OCT 4; that compares to a regional median gain of +0.5% and is good for the second-sharpest decline in Asia over that duration (the JPY fell -10%).

 

PATIENCE SHOULD PAY DIVIDENDS IN INDIA - 3

 

By the end of the second quarter, Bloomberg consensus has the RBI cutting its benchmark repo and reverse repo rates by a cumulative -50bps each. Directionally similar, the buy-side is a bit reserved in magnitude, pricing in -42bps relative to the benchmark on the 1YR OIS tenor and -6bps relative to the benchmark on the 1YR sovereign debt note.

 

PATIENCE SHOULD PAY DIVIDENDS IN INDIA - 4

 

Given our short-cycle outlook for the Indian economy (i.e. Quad #3 in 1Q = Growth Slowing as Inflation Accelerates), however, we don’t think the RBI, led by Governor Duvvuri Subbarao, will be inclined to ease as soon as many are hoping (~MAR). Moreover, India’s deteriorating current account dynamics and a still-underwhelming fiscal POLICY outlook are likely to continue keeping RBI board members awake at night just enough to remain data dependent on monetary POLICY. Despite the RBI’s recently adopted focus on GROWTH, we view rate cuts in India as more of a 2Q-3Q event as opposed to a 1Q catalyst.

 

PATIENCE SHOULD PAY DIVIDENDS IN INDIA - 5

 

Jumping back to Indian fiscal POLICY, Finance Minister Palaniappan Chidambaram has pledged to narrow the budget shortfall to 5.3% of GDP this fiscal year, from 5.8% in FY12. With a decade-low fiscal year GROWTH target of +5.7%, we don’t think Chidambaram’s deficit-to-GDP target is sober enough to warrant Subbarao abandoning his long-held view that India requires meaningful fiscal retrenchment to create ample space for the RBI to meaningfully ease monetary POLICY.

 

We believe this pushing out of monetary easing expectations by at least one quarter is one of the core reasons the SENSEX and the rupee have underperformed over the past month. Since our 12/6 note backing off of the short side of Indian equities and the rupee (“SINGH WINS THIS ROUND IN INDIA”), the SENSEX has appreciated just +1.3%, which compares to a regional median gain of +4.4%. The INR has fallen -1.3% vs. the USD over that same duration, which compares to a regional median gain of +0.1%.

 

If just on the strength of our quantitative factoring alone, however, we don’t think the aforementioned timing catalyst is strong enough to run out and short the SENSEX or the INR with. If anything, it should just keep India’s benchmark equity index from making a new all-time high (north of 21k on the SENSEX) in the coming 1-2 months.

 

PATIENCE SHOULD PAY DIVIDENDS IN INDIA - 6

 

Moreover, a probable ~six-month stay in Quad #1 (Growth Accelerating as Inflation Decelerates) of our G/I/P chart starting in 2Q should provide the RBI with the macroeconomic cover to acquiesce to market demands for aggressive monetary POLICY easing – especially if Singh & Co. make additional headway in the fiscal reform department. That would be supportive of continued inflows of foreign capital into both India’s debt market (which foreign investors have been increasingly allowed to participate in; up +26% in 2012) and Indian stocks. Importantly, such inflows would be supportive of the INR, which Bloomberg consensus sees strengthening +4.7% by year-end from near all-time lows vs. the USD.

 

PATIENCE SHOULD PAY DIVIDENDS IN INDIA - 7

 

PATIENCE SHOULD PAY DIVIDENDS IN INDIA - 8

 

All told, we will patiently look to use any Debt Ceiling-induced weakness to increase our allocation to India on a pullback(s) heading into 2Q – provided our quantitative signals support that move at the time.

 

The key India specific-catalyst that looks to dominate domestic headline risk between now and then is undoubtedly the unveiling of the FY14 budget. For the sake of India’s investment-grade credit rating, Finance Minister Palaniappan Chidambaram and his team must get serious about fiscal sobriety. Like yesterday. Ultimately, that means cutting spending, overhauling the tax code and just saying “no” to subsidies – a very difficult task indeed, given the political pressure to “buy” votes ahead of the MAY ’14 parliamentary elections.

 

Darius Dale

Senior Analyst


COH: Idea Alert. Shorting.

Takeaway: The intermediate-term outlook remains bearish on the front-end of what is an investment year for COH.

We’re adding COH to the short-side of our Real-Time Positions again. While Signet’s holiday sales report is positive on the margin for luxury names today, the intermediate-term outlook remains bearish on the front-end of what is an investment year for COH.


Fundamentally, revenue is decelerating and the cost of that growth is rising. We expect this to be reflected in COH’s results for the next couple quarters at a minimum. Growth is dependent on the Legacy launch, as well as Men and to a lesser degree, China. At the same time, SG&A costs are rising to support the launch (which may or may not work) and Asia acquisitions, and Gross Margins are at risk as the financial triangulation of Sales Inventories and Margins rests in a tenuous point of our SIGMA analysis.


We know that this is all well-telegraphed, but with a decelerating EBIT growth rate until the July print – not to mention a very difficult 1Q – we need to pay particular attention to TRADE factors. Unfortunately, we can’t point to a positive near-term catalyst with our estimates 7% below consensus over the next two quarters.

 

Quantitatively, the stock is immediate-term overbought and would need to break $58.11 and hold that level to support the bull case from a near-term perspective. With the stock approaching $58 we’re admittedly close to that level. But we think there’s a greater chance it retests its support of $55.36 given earnings pressure.


The argument that sentiment is already bad holds some truth with the sell-side becoming increasingly bearish over the last 5-months with 66% of ratings a Buy down from 81% in August. However, short interest still stands at only 5% of the float – well below historical peaks.


While COH looks cheap relative to history at current levels – the reality is that valuation is not a catalyst.

 

COH: Idea Alert. Shorting. - COH TTT Table

 

COH Risk Management Levels:

 

COH: Idea Alert. Shorting. - COH TTT

 

 

COH SIGMA eroding (inventories outpacing sales growth with margins contracting):

 

COH: Idea Alert. Shorting. - COH S

 




Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Trends Good On the Mgn For COLM, VFC and DECK

Takeaway: Another good week for footwear, as athletic remains strong and boots played catch up. On the margin, this is good for COLM, VFC, and DECK.

Athletic footwear clocked in another very impressive week, with low teens growth over last year for the week ending Sunday per NPD. Mind you, this comes on the heels of an impressive +35% holiday week, and also comes just as people are increasingly questioning the sustainability and longevity of the so-called ‘sneaker cycle’. Remember that sales turned down for three weeks in a row at the same time we saw Finish Line implode due to company-specific issues. That hardly helped the space.

 

One thing we’re encouraged to see is that it is not just performance shoes carrying the day. The gap between performance and non-performance closed almost entirely last week due to a step-up in boot sales. While the performance side of the business is a better barometer for the Nike’s and Foot Locker’s of the world, we like the idea of more even-keeled sales across categories, and this week is the first time we’ve seen that since February 2011. On the margin, this is good for COLM, VFC, and DECK.   

 

Trends Good On the Mgn For COLM, VFC and DECK - FW App Table1

 

Trends Good On the Mgn For COLM, VFC and DECK - FW perf v non perf2

 

Trends Good On the Mgn For COLM, VFC and DECK - FW Brand Sales3

 

Trends Good On the Mgn For COLM, VFC and DECK - FW Mkt Sh4

 

Trends Good On the Mgn For COLM, VFC and DECK - FW Category

 

 


FNP: Big Value

The recent Tory Burch deal, in which Chris Burch (Tory’s ex-husband) sold the majority of his 25% stake in the company for ~$813 million, acts as a reminder that Fifth & Pacific (FNP) is undervalued at current levels. It’s worth noting that Tory Burch is one of FNP’s closest comps. Estimates on Burch's top-line suggest a multiple north of 4x and ~3x 2012 and 2013 sales respectively. This lands right between FNP’s two publicly traded peers: KORS at 5.5x and COH at 3.5x 2012 sales and at the low-end of 2013 multiples.

 

FNP: Big Value - image001

 

FNP on the other hand trades at less than 2x 2013 Kate Spade sales alone (not including Lucky or Juicy Couture, which FNP owns in addition to Kate Spade) – a 45% discount to the peer average. Hedgeye Retail Sector Head Brian McGough outlines the growth potential in FNP:

 

“We’re modeling Kate Spade sales approaching $800 million in sales for 2013 and over $1 billion in 2014; we expect profitability to continue to move upward toward the 20% level over the next 2-3 years. Assuming a 3x multiple of next year’s sales for Kate Spade alone that would imply a valuation close to a $2.5Bn for the brand – over 50% higher than the entire value of FNP today.”


LV STRIP: AN UGLY PRINT COMING

We don't think November's GGR release will be a pretty one for the Strip

 

 

November Nevada gaming figures will be released this Thursday, the 10th.  As we wrote in "LV STRIP: BACK IN RED FOR NOVEMBER" (12/31/2012), we're projecting November Strip gaming revenue to fall between -6% and -10%, assuming normal slot and table hold.  We're starting to think we may even be too conservative with that estimate.  Difficult slot hold comps (8.4% vs normal of 7.5%) and sluggish slot volumes will certainly pressure slot revenue.  Moreover, November 2012 has one less Friday relative to November 2011.  Finally, the Pacquiao vs Marquez 3 fight occurred in November 2011 while Pacquiao vs Marquez 4 took place in December 2012.  The 2011 fight contributed to a 7% increase in table drop last year in November.


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 80.33%
  • SHORT SIGNALS 78.51%
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