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AXP: SPENDTREND - DOLALR VOLUME GROWTH DROPS SHARPLY IN DECEMBER

Takeaway: December credit volume growth slowed sharply vs. November, but 4Q12 growth is still likely to be up from 3Q12. January will be interesting.

Slowest Growth in Three Years

First Data released its December SpendTrend data this morning, which tracks aggregate same-store sales activity in the United States. December showed further deceleration in credit card volume growth to +4.3% YoY vs. +6.8% YoY growth in November and +8.9% YoY growth in October. 

 

On an overall basis, including credit, debit and check, consumer spending volume growth in December slowed to 4.0% YoY, which was down from 5.8% in November and 6.7% YoY growth in October. December's 4.0% YoY growth was, in fact, the slowest rate of growth in the last three years.

 

A portion of the weakness in December was attributed to fiscal cliff apprehension on the part of consumers coupled with the time-shift of excessive holiday retail discounting in November. 

 

We like to use SpendTrend data as a proxy for American Express' intra-quarter momentum. The good news is that the underlying growth rate in credit-based spend volume has been more resilient in 4Q12 than the longer-term trend would have suggested. 4Q12 growth, based on First Data's numbers, accelerated to +6.7% from +5.0% in the third quarter. There's also likely to be a notable FX tailwind for the company in 4Q12, as we show in the last chart.

 

Our primary concern on Amex, however, remains the double impact of higher income tax rates on its top tier clients coupled with higher payroll taxes on all its clients. The company typically provides an intra-month update when it reports earnings. This quarterly update will be more interesting than usual, as it will shed light on both the impact of the new tax regime as well as whether there was time-shifting going on ahead of the fiscal cliff outcome.

 

 

AXP: SPENDTREND - DOLALR VOLUME GROWTH DROPS SHARPLY IN DECEMBER - first data monthly

 

AXP: SPENDTREND - DOLALR VOLUME GROWTH DROPS SHARPLY IN DECEMBER - first data quarterly

 

AXP: SPENDTREND - DOLALR VOLUME GROWTH DROPS SHARPLY IN DECEMBER - qtrly axp vs fdc

 

AXP: SPENDTREND - DOLALR VOLUME GROWTH DROPS SHARPLY IN DECEMBER - us dollar qtrly

 

Joshua Steiner, CFA

 

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 10, 2013

 

As we look at today's setup for the S&P 500, the range is 45 points or 1.03% downside to 1446 and 2.05% upside to 1491.                                                                                                                               

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.64 from 1.62
  • VIX closed at 13.81 1 day percent change of 1.40%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init jobless claims, Jan. 5, est. 365k (prior 372k)
  • 8:45am: Bloomberg Jan. U.S. economic survey
  • 9:45am: Bloomberg consumer comfort, Jan. 6 (prior -31.8)
  • 10am: Freddie Mac 30-yr mortgage rates
  • 10am: Wholesale inventories, Nov., est. 0.3% (prior 0.6%)
  • 10am: JOLTs job openings, Nov., est. 3.683m (prior 3.675m)
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to buy $2.75b-$3.50b in 02/15/2020–11/15/2022 sector
  • 1pm: U.S. to sell $13b 30Y bonds reopening
  • 1:10 pm: Fed’s George speaks in Kansas City
  • 2pm: Fed’s Bullard speaks in Madison, Wisconsin
  • 8pm: Fed’s Kocherlakota speaks in Minneapolis

GOVERNMENT:

    • House, Senate not in session
    • CFPB field hearing in Baltimore on mortgage policy, 10am
    • Organic farmers to ask appeals court to reinstate suit filed against Monsanto over gene-modified seeds, 10am
    • Dow, other companies discuss natural gas exports, 12pm

WHAT TO WATCH

  • Blackrock to buy $17.6b ETF business from Credit Suisse
  • Herbalife to defend itself against Ackman in analyst mtg
  • China exports rise more than estimated as credit expands
  • Bats says system errors caused pricing problems over 4yrs
  • Spain sells EU5.8b of bonds vs maximum target of EU5b
  • BOE seen refraining from further stimulus as officials access credit plan
  • Chrysler says UAW retiree trust demands step to possible IPO
  • Volkswagen offers to buy out MAN owners to push truck intergration
  • Buffett guarantees banks pose no U.S. threat after cutting excessive risk
  • Deutsche Bank denies Libor manipulation after report of $654m gain
  • Liberty Media awarded EU765m in case against Vivendi
  • Verizon said to face backup power requirement on emergency calls
  • Tiffany, Aeropostale, American Eagle release holiday sales

EARNINGS:

    • Jean Coutu Group (PJC/A CN) 7am, $0.26
    • MSC Industrial (MSM) 7:30am, $1.01
    • Astral Media (ACM/A CN) 7:55am, $1.03
    • Supervalu (SVU) 8am, $0.07
    • Synnex (SNX) 4pm, $1.04

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Brent Oil Rises to Three-Month High on Chinese Growth, Saudi Cut
  • Corn Supply Dropping Most Since 1995 Signals Rally: Commodities
  • Saudi Arabia Said to Cut December Oil Output to 19-Month Low
  • European Copper Premium Seen Steady by Traders Amid Weak Demand
  • Palm Oil Reserves in Malaysia Gain to Record as Exports Drop
  • Goldman Names Quek Asia-Pacific Commodities Trading Head
  • Copper Rises on Chinese Exports as Aluminum Gains for Fourth Day
  • Wheat Advances as Slump to Six-Month Low May Attract Importers
  • Sugar, Cocoa, Coffee Gain as Commodities Advance on China’s Data
  • Hall Sets Up Commodities Hedge Fund Five Months After Duet Split
  • Bakken Oil on Trains to East Boosts Independence: Energy Markets
  • Molycorp Misses Rare-Earth Output Target, Reduces Sales Forecast
  • China Steam Coal Prices Fall 26% From Peak in December: BI Chart
  • Shanghai to More Than Double Bonded Warehouses as LME Eyes Port

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 



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Early Look: Japan’s Battle of Diu

"He who ate the chick must also eat the rooster, or pay for it."

-Francisco de Almeida, first viceroy of the Portuguese State of India, circa 1508

 

Dom Francisco de Almeida (1) was a distinguished Portuguese solider and explorer. Also of noble background as a counselor to King John II of Portugal, he is widely credited with establishing Portuguese hegemony in the India Ocean – paving the way for nearly a century of Portuguese dominance in the Indian Ocean trade.

 

Before Almeida’s arrival as commander of Portugal’s fourth seaborne voyage to India, the Portuguese Empire had been struggling mightily to establish a stronghold in this globally omnipotent trading hub, failing to cultivate key trading relationships in addition to being denied a meaningful presence at key ports.

 

The first voyage was commanded by Vasco da Gama (1), who is credited with captaining the first ships to ever sail directly from Europe to India (1498), rounding the Cape of Good Hope into what was previously believed to be a landlocked Indian Ocean.

 

Beyond his discovery – which is arguably the most important geographic discovery in the history of globalization – his first voyage was a broad failure, losing roughly half his men and two of his four ships.

 

The second voyage of eight ships was commanded by Alvarez Cabral, which set sail for India’s port cities in 1500. After an inadvertent detour to the coast of Brazil, Cabral and his depleted crew finally docked in Calicut six months later.

 

Cabral’s brief stay in the region was highlighted by two violent skirmishes with established parties within the region, which perpetuated more largely unsuccessful trading exploits. He hastily retreated to Lisbon with just five men and one ship.

 

The third voyage was once again commanded by Vasco da Gama. Setting sail in 1502 with a 15-vessel fleet, da Gama’s primary objective was to uproot the Egyptian power preventing Portugal’s establishment of trading dominance in the region.

 

To some degree, da Gama found a fair amount of “success” – particularly in combat. His fleet is credited with burning alive 250 men, women and children on a ship, as well as slaughtering 800 fishermen in Calicut. Shortly after his ruthless exploits, he traveled to neighboring Cochin where he defied local wishes and set up a well-forfeited trading factory.

 

A costly tactical error would have cost the Portuguese all of their progress in India when Cochin was overran by Calicut forces, had it not been for the timely arrival of our “hero” Francisco de Almeida.

 

Under several years of the viceroy’s leadership, Portugal was able to make solid headway into Indian Ocean trade. His eventual victory over a joint fleet of Gujarat, Egyptian, Calicut, Ottoman, Venetian, and Ragusa forces in the Battle of Diu (1509) cemented Portugal’s dominance within the region and ultimately allowed the empire’s trading and transport strategies to flourish.

 

It is believed that had Almeida’s son Lourenco de Almeida not been murdered by a joint Gujarat-Egyptian fleet in the First Battle of Chaul, the decisive Portuguese victory mere months later at the Battle of Diu would have eluded the history books. The battle itself was pursued as a personal outlet for Almeida to avenge the death of his son, which is the origin of the highlighted quote above.

 

Motivated by the pain of a lost child, Almeida’s hasty foray into battle helped the Portuguese Empire finally overcome the headwinds to Portuguese dominance of the world’s most important trading route at the time.

 

If this colorful story of persistent failures preceding ultimate triumph reminds us of anything, it’s modern-day Japan. Plagued by persistent deflation (10YR average annual CPI = -0.2%) and nonexistent growth (10YR average annual nominal GDP growth = -0.7%), the Japanese economy has long been failing to establish itself as anything remotely resembling vibrant, dynamic or just plain healthy.

 

If Japan is the modern-day version of the Portuguese Empire – oft seeking, but not finding – then Japanese policymakers have undoubtedly been reincarnated versions of Vasco da Gama and Alvarez Cabral, multiplied many times over.

 

For over ten years now, Japanese policymakers have implemented a variety of “counter-structural” strategies (i.e. there’s absolutely nothing cyclical about Japan’s economic malaise) designed to overcome deflation and perpetuate nominal GDP growth: perpetual ZIRP, quantitative easing, comprehensive monetary easing, bloated sovereign deficits, etc.

 

All have failed to deliver the Japanese economy the inflation and nominal growth it has so desperately sought.

 

Enter recently-elected prime minster Shinzo Abe, who we think has a chance to be Japan’s modern-day version of Francisco de Almeida. Abe, head of the ruling Liberal Democratic Party (LDP), can indeed be said to be motivated by the “blood of a son”.

 

The LDP has long been the dominant political party in Japan. With the exception of a brief 11-month period between 1993 and 1994, the LDP was in power from 1995 through 2009, when it was flat-out dominated by rival Democratic Party of Japan (DPJ) in the AUG ’09 general election (308 to 119 seats).

 

On the strength of party leader Shinzo Abe’s pledge to proactively pursue a nominal growth target of +3% and an inflation target of +2%, the LDP was able to take back control of the Lower House to the tune of 294 seats vs. only  57 for the DPJ in the DEC ’12 general election.

 

Focused intently on the previous failures of Japanese policymakers (particularly the central bank) to deliver the goods, Abe has adopted a very open and aggressive anti-deflation stance in the media. His appointment of Taro Aso as Finance Minster is yet another signal that he is prepared to do what it takes to win Japan’s version of the Battle of Diu.

 

As outlined in our 12/26 note titled: “JAPAN TO LOOSEN FISCAL POLICY AS WELL”, the following is a list of the strategies we think Abe will purse to emulate Almeida’s success in the 1509 version of the battle – which the latter won by leading off with a massive naval bombardment that was followed up by the larger Portuguese ships pelting enemy vessels from afar with technically-advanced weaponry that was far superior to that of their opponents:

  • A +2-3% joint Diet-BOJ INFLATION target (likely at the JAN 21-22 BOJ board meeting);
  • A meaningful expansion of public expenditures and “large scale” stimulus package (additional details in the coming weeks);
  • A VAT hike delay (discussions to begin in late 2013);
  • The LDP wins a majority in the Upper House pending elections late-JUL/early-AUG, paving the way for a full-fledged assault on Japan’s public finances;
  • An erosion of BOJ independence, with the BOJ governorship and two deputy governorships eventually assumed by politicized puppets (late-MAR/early-APR); and
  • Experimental monetary POLICY – particularly a foreign asset purchase program (likely several weeks after the previous catalyst materializes).

All told, we are of the view that a true phase change in the Japanese economy is definitely underway. While some may still be viewing Abe through the same lens as previous Japanese policymakers, we think it will continue to pay to be short the Japanese yen with respect to the intermediate-term TREND and long-term TAIL.

 

And while we continue to view incremental monetary Policies To Inflate and expansionary fiscal POLICY as reflationary for Japanese equities and supportive of regional sentiment in the near term, we continue to flag material risk of Japanese currency and sovereign debt crises borne out of those same policies with respect to the long-term TAIL.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, VIX, and the SP500 are now $1, $110.28-112.82, $80.26-80.81, $1.29-1.31, 1.84-1.96%, 13.34-16.03, and 1, respectively.

 

Darius Dale

Senior Analyst

 

Early Look: Japan’s Battle of Diu - Chart of the Day

 

Early Look: Japan’s Battle of Diu - Virtual Portfolio

 


THE M3: FRANCIS TAM ON TABLES; SANDS SMOKING BAN; MGM COTAI; SJM WAGES; TAIWAN LAUNDERING

The Macau Metro Monitor, January 10, 2013

 

 

FRANCIS TAM EXPECTS LIMITED INCREASE OF GAMING TABLES BY 2015 Macau Daily Times, Macau Business

Secretary Tam said that although new resorts have been approved by the government in recent months, it would take some time before they are constructed, and he expects the growth of new gaming tables to be very limited up to 2015.  The government has set an annual growth ceiling at 3% for the coming 10 years.  Tam said the new tables being granted by the government will mainly be allocated to the newly opened larger casino-resorts that are complying with the authority’s strategy for diversification towards more non-gaming business such as Sands Cotai Central and Galaxy.  In reference to the 3% growth of new tables for this year, Tam said the authority would grant them to the five casino-resorts on Cotai in proportion to their non-gaming business. 

 

Yesterday, Sands China's COO David Sisk said he expects to get 200 new gaming tables allotted to Sands Cotai Central casino resort within the first quarter of 2013.

 

SANDS EXECUTIVE SAYS SMOKING AREA ALLOCATION "APPROPRIATE" Macau Daily Times

Sands COO David Sisk said, “We follow what the government asked us to do, in terms of allocating between 50% of our smoking space and 50% of our non-smoking casino space, so we followed what the government told us to do.  The government came in and evaluated and approved; both the DICJ and the health department were involved in the measures.  We felt we’ve done the appropriate thing. We’re comfortable with how we’ve allocated our tables and slots, and we believe we did it in the best business interests of our company, as well as the interests of our employees… I can’t speak for what the other [casinos] did, but I think they probably did appropriately as well,” Sisk said.  “We took the appropriate actions for our employees and for our business. Whether that meant that there may be more tables in one area or another, I don’t think that is the real issue for us,” he continued. 

 

MGM CHINA PROFITS TO DOUBLE WITH COTAI CASINO: JIM MURREN Macau Business

MGM CEO Jim Murren says that the profits of MGM China are set to more than double once the gaming operator opens a casino resort in Cotai.  He also said that he forecasts Macau’s casino gross gaming revenue to rise by mid-to-high double digits in 2013.

MGM China CEO Grant Bowie said the company hopes to make an announcement on the construction timetable “within the next six to eight weeks”.  Bowie said the company was currently liaising with the Lands, Public Works and Transport Bureau to organize the necessary permissions to start construction.  “Once we get our building approvals, the next phase will be to make a full announcement on the whole development and the branding of the project,” he said.

 

SJM HOLDINGS TO RAISE WAGES: ANGELA LEONG Macau Business
Angela Leong On Kei, executive director of SJM said the company would raise its employees’ wages as soon as it is approved by SJM's shareholders.  Last year, SJM increased its staff wages between 5-10% – the percentage of the increase was based on salaries, with employees with lower salaries getting higher raises.

 

TAIWAN PROBES ILLEGAL MONEY TRANSFER FOR MACAU CASINOS SCMP

Taiwanese prosecutors said they were investigating a locally-based Hong Kong firm for allegedly carrying out huge money transfers for use in Macau casinos, circumventing strict forex rules.  The company, which opened in Taiwan in 2009, allegedly accepted deposits by Taiwanese gamblers allowing them to withdraw the money once they were in Macau, said the Taipei district prosecutors’ office.  Prosecutors, who declined to identify the firm, said they suspected it was behind a total of US$179 million in illegal transactions.

 

The head of the company was questioned on Wednesday on suspicion of violating Taiwanese law, which stipulates only banks are allowed to handle domestic and international money transfers, it said in a statement.


SBUX TAILWINDS IN FY13

Starbucks has two, potentially major, tailwinds in FY13 that could push the stock higher.  Sentiment is a cause for concern but at this price we are positive on the stock.

 

 

Key Levels

 

From a trading perspective, our macro team’s quant model is indicating that SBUX is in a bullish formation, with immediate-term TRADE and intermediate-term TREND support at $53.39 and $51.37, respectively.

 

SBUX TAILWINDS IN FY13 - sbux levels

 

 

Fundamental View

 

We believe that Starbucks is set to post another strong year in FY13 with its revenue drivers firing on all cylinders, coffee prices down ~40% year-over-year, and a macro outlook that suggests that the company’s high degree of leverage to the US economy could prove to be a benefit. 

 

Revenues are expected to grow 12.7% in FY13, versus FY12, by the Street.  We believe that this is possibly conservative given continuing momentum in CPG, including single serve, and the core retail business. 

 

We believe that the flow of positive news regarding Starbucks, to which we have become accustomed, will continue in 2013:

  • CPG could surprise to the upside as the availability of Evolution Fresh is expanded and the company continues to take share in single serve. 
  • International growth, particularly in China, was a key focus of the investor conference at the beginning of December and we expect management to continue to underline this potential throughout FY13
  • Coffee costs constitute a significant tailwind and we expect incremental positive commentary on input costs to continue in FY13.  Coffee needs are locked through 1HFY14 but, given the price decline since the company's most recent guidance, more positive news seems likely

 

Leverage in the P&L

 

Starbucks is part of a small group within the restaurant space that it is likely to see significant leverage in its P&L over the next 12 months. We believe, especially in casual dining, that consensus is overly optimistic about companies’ ability to grow earnings significantly faster than sales over the next year.

 

With strong momentum, effective sales initiatives, a fully-loaded CPG division, and impressive unit growth both domestically and internationally, we believe that top- and bottom-line estimates for Starbucks are likely to rise over the next three months.

 

SBUX TAILWINDS IN FY13 - sbux eps vs sales growth

 

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


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