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Shipbuilding Update: Walking Down a Long Plank

Takeaway: Order and Backlog data, along with signs of Chinese competitive entry in offshore, continue support the short side in SK shipbuilders.

Shipbuilding Update: Walking Down a Long Plank


  • Backlogs Sinking Fast:  Consistent with long down-cycle in commercial shipbuilding, there has been no meaningful rebound in orders.  That has left shipbuilders to drain backlogs, reporting revenues that relate to years-old demand.  Backlogs have been on a steady downtrend, inflating revenues relative current demand.  Chinese backlogs fell from 169.3 mil tons at the end of 2011 to 116.4 mil tons at the end of September.

Shipbuilding Update: Walking Down a Long Plank - d1


  • Short Fuse:  Samsung Heavy has only about two years of work left in backlog, while Hyundai Heavy has only about 1.5 years.  When backlogs with high margin orders are gone, revenues and profits should reflect the more averse current market. Using multiples of income statement items produced by draining backlogs is not a reasonable valuation approach, in our view.
  • Pricing Highly Competitive:  Global shipyards are desperate for new orders to keep their docks full (article).  As backlogs continue to fall, pricing is likely to become irrational, in our view.  Chinese competitors may be particularly aggressive.  This will happen for a long time, if previous cycles are any guide.

 Shipbuilding Update: Walking Down a Long Plank - d2


  • About Offshore:  It has been our contention that Chinese shipyards will become increasingly proficient in offshore energy production vessels, undermining the bullish thesis on South Korean shipbuilders.  Since this cycle will take upwards of a decade, the Chinese have plenty of time to enter every relevant offshore market, in our view.  Chinese entry has continued to be aggressive, as discussed in the WSJ yesterday here.
  • Performance & Opportunity:  Since we first posted a note on the short opportunity in the Korean shipbuilders here, Samsung Heavy has only underperformed the KOSPI by ~ 8%.  We think there is a good deal more that this short has to run as favorably priced orders in backlog are not replaced and margins contract toward historical (read: low) norms. We value Samsung Heavy at around krw 10000-14000 in our base-case DCF vs. a current market price of krw 37800 and we expect that gap to close over the next few years.
  • Additional Information:  We have additional background on the Shipbuilding industry, so feel free to follow-up if this industry is of interest.


Jay Van Sciver, CFA

Managing Director

111 Whitney Avenue

New Haven, CT 06510




Today we bought Illumina (ILMN) at $50.74 a share at 3:23 PM EDT in our Real-Time Alerts. Hedgeye Healthcare Sector Head Tom Tobin is getting increasingly bullish on Illumina's growth re-accelerating. Buying the pullback on our immediate-term oversold signal.



Idea Alert: Shorting Macy's

Takeaway: We're capitalizing on our department store short theme by adding Macy's into our #Real Time Alerts. Valuation is not a catalyst.

We’re adding Macy’s to our #Real Time Alerts on the short side. The theme is similar to the call on KSS that we made yesterday, but with more operational and financial leverage. We’re also bearish in GPS for some similar reasons. We’d characterize expectations around both inventories and comps heading into 2013 as being way too complacent.   


For 2013, we’ll be going against a year where JCP will have ceded nearly $4bn in share, and it starts to comp against that in a few short weeks. Will JCP comp positive? Not likely. But even if it comps down 5 or 10% that creates a meaningfully negative delta to the companies that benefitted from the displacement.


Furthermore, inventories industry-wide were extremely tight in 2012 despite JCP’s issues, thanks to the off-price channel keeping the channel clean. That buffer will be unlikely to carry the trajectory forward in 2013.


Out of every name in the space, the most emotion rests with Macy’s. We consistently get the argument stating ‘you can’t short it bc it’s cheap’. But when you look historically, valuation has almost never been a catalyst to buy department store names. We don’t think now is a time to start.


Idea Alert: Shorting Macy's - kss


Idea Alert: Shorting Macy's - 1 16 2013 3 47 08 PM

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 80.46%
  • SHORT SIGNALS 78.35%


Takeaway: Just managing immediate-term risk within the construct of our intermediate-to-long-term theme.



  • Our proprietary quant signals are telling us now is a good time to re-short the Japanese yen, which we’ve done through the etf FXY. We’ve got levels for that security, the USD/JPY exchange rate and the Nikkei in the charts below.
  • Regarding Japanese equities specifically, shorting the yen here probably means some reflation across Japanese stocks – almost by default to some degree. Enjoy this trade while it lasts; like the many others before it, this latest Keynesian experiment won’t end well for the Japanese economy.
  • In addition to this update on Japanese risk, we take a step back and walk through our broader process in greater detail for those of you who may be interested. As always, we're around to dialogue further.


Earlier this morning, we got our quantitative signal to re-short the Japanese yen, our Macro team’s best idea on the short side with respect to the TREND and TAIL durations.


Since peaking intraday at ¥88.62 per USD on early Monday morning and €120.05 per EUR on Sunday night, Japan’s burning currency has corrected to another lower-high on the strength of concerned commentary out of Japanese officials and some degree of profit taking ahead of next week’s BOJ board meeting.


@Hedgeye, we always find it helpful to remind existing clients and educate new clients on our process, which is two-fold in nature:


  1. Fundamental RESEARCH themes – longer term in nature (intermediate-term TREND and long-term TAIL)
  2. Quantitative RISK MANAGEMENT overlay – shorter term in nature (immediate-term TRADE)


Adhering to this comprehensive approach helps us to:


  1. Extract alpha by trading risk ranges within the construct of a security or market’s directional trend;
  2. Avoid “swinging” at outside pitches (i.e. head fakes) on the research front; and
  3. Hone in on market timing around the key events and catalysts embedded in our best ideas.


With respect to the Japanese yen, we became the bears on Japan’s currency back on September 27, and, as we pointed out on yesterday’s 1Q Macro Themes presentation, there are a number of reasons why we think the yen will continue to trend  lower vs. peer currencies over the intermediate term. To quickly recap those POLICY catalysts:


  • MONETARY: A +100bps revision to the BOJ’s current +1% INFLATION target (likely at the JAN 21-22 BOJ board meeting);
  • FISCAL: A meaningful expansion of public expenditures and sovereign debt issuance in the FY13 budget on top of the recent “large scale” stimulus package (additional details in the coming weeks);
  • MONETARY: An erosion of BOJ independence, with the BOJ governorship and two deputy governorships eventually assumed by politicized puppets (late-MAR/early-APR);
  • MONETARY: Experimental monetary POLICY – particularly a foreign asset purchase program (likely several weeks after the previous catalyst materializes);
  • FISCAL: 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; and
  • FISCAL: A VAT hike delay (discussions to flare up in late 2013).


As it relates to the aforementioned commentary, both Economy Minister Akira Amari and Chief Cabinet Secretary Yoshihide Suga made public statements this week highlighting the expected adverse impact of “excessive” exchange rate depreciation upon the Japanese economy.


Personally, I think they were simply jawboning to reduce international criticism of their beggar-thy-neighbor monetary policies, as highlighted by recent comments out of Korean, Eurozone and Russian officials in the week-to-date. All this means to us is that the yen won’t go to ¥100 per USD next week…


As we pointed out on slide #52 in the aforementioned presentation, it truly is Japan’s turn to take center stage in the global Currency War.




As such, we see no need to alter to our structural bias on the yen in light of these explicitly hawkish comments. Prime Minster Abe and Finance Minster Aso are likely going to need to see a much lower exchange rate(s) if they are even going to even sniff their +3% nominal GROWTH and +2% INFLATION targets on a sustainable basis.


Regarding the upcoming BOJ board meeting, to some degree, their likely adoption of a +2% INFLATION target and incremental monetary easing was somewhat priced in Sunday night/Monday morning, prompting some investors to reduce positions. Moreover, the fact that Amari himself plans to attend the meeting may be quashing some hopes of anything truly meaningful on the easing front.


While this may be true to some degree, we continue to look well past next week’s meeting and to mid-FEB when Japanese policymakers plan to commence discussions on who will replace the upcoming three vacant seats atop the BOJ board.




All told, our proprietary quant signals are telling us now is a good time to re-short the Japanese yen, which we’ve done through the etf FXY. We’ve got levels for that security, the USD/JPY exchange rate and the Nikkei in the charts below. Regarding Japanese equities specifically, shorting the yen here probably means some reflation across Japanese stocks – almost by default to some degree.


Enjoy this trade while it lasts; like the many others before it, this latest Keynesian experiment won’t end well for the Japanese economy.


Darius Dale

Senior Analyst







HOUSING: Explosive Growth

Two more positive datapoints for the housing market have recently come out: household formation and mortgage demand. Household formations accelerated to a new high in December, +1.95% on a year-over-year basis versus November’s year-over-year growth rate of 1.73%. Households are being formed at the fastest rate since the start of the financial crisis several years ago and it’s quite striking to see how quickly housing is recovering as a whole. 



HOUSING: Explosive Growth - census hh formation dec 12



Meanwhile, mortgage applications surged, rising 12.9% week-over-week versus last week’s 10% rise. That brings the index level for purchase applications to 205, the highest level we've seen since the downturn bottomed. Total mortgage volume for the first two weeks of the year are running 6% below the full-year 2012 average.



HOUSING: Explosive Growth - mba short term


HOUSING: Explosive Growth - mba purch shark yoy


Keith added EAT to the long side of our Real Time Alerts this morning at $32.42.  Brinker is our favorite casual dining name and, despite the many headwinds facing the group, we believe that Chili’s will continue to take share versus its competitors.


We expect Chili’s to produce 2QFY13 same-restaurant sales in the region of 2%.  Kitchen enhancements and remodels at Chili’s continue to aid top-line momentum and lead, in our view, to an upside surprise versus the consensus estimate of 1.5% SRS.  It will be important for results to continue to demonstrate continuing progress on the restaurant operating margin line as the benefits of the remodel program continue to flow through. 


At 7.5x EV/EBITDA, the stock is being valued below the average casual dining stock at 7.7x.  As well as the attractive multiple, we believe that there is modest upside to the Street’s EPS estimate, which is currently at $2.32, to $2.38-2.40.


Brinker’s shares represent the best way to play casual dining on the long side, in our view, particularly if macroeconomic growth continues to stabilize.  However, competitive dynamics, including the impact of Darden’s explicit desire to sacrifice margin to gain traffic should not be ignored.  It's difficult to know how great an impact Darden's "price war" will have on Chili's - particularly Chili's newly remodeled stores - but given the recent declaration from Orlando, we would advise close monitoring of long positions in any casual dining shares.





Quantitative View


Our Macro Team’s quantitative view of the stock is that near-term TRADE resistance and support lie at $33.95 and $32.23, respectively.  Intermediate-term TREND support is at $31.56.


IDEA ALERT: BUYING EAT - brinker levels



Howard Penney

Managing Director


Rory Green

Senior Analyst



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