“All I really need is love, but a little chocolate now and then doesn't hurt!”
-Charles M. Schulz, Peanuts.
As I set about to find an appropriate theme for the Early Look this morning, I was reminded that it is Valentine’s Day. Now just how I was reminded of Valentine’s Day is interesting in and of itself; watching the news get interrupted by yet another commercial for Kay Jewelers pitching their seemingly endless collection of heart-shaped charms and sparkling pendants. Of course TV isn’t the only place I have been inundated with a Valentine’s Day message to exercise consumerism. All I had to do was to walk into my local pharmacy or discount store where I had to snake my way around displays of candy boxes in every shape, size, and assortment. Honestly, without these less-than-subtle reminders, Valentine’s Day might sneak up on me unnoticed and Hallmark might miss the sale of one additional card.
A lot of chocolates and gifts are bought for Valentine’s Day. According to the National Retail Federation, the average male will spend $175.61 this Valentine’s Day on gifts, jewelry, roses, chocolates, dates and more. Women will spend just less than $89. It is estimated that more than 58 million pounds of chocolate will be sold in the days leading up to Valentine’s Day. All totaled, it is estimated that $13.19 Billion will be spent.
Those same commercials that last night reminded me of Valentine’s Day were also omnipresent both before and after Tuesday evening’s State of the Union message. Thinking about the marketing effectiveness surrounding Valentine’s Day, I wonder if a similarly unavoidable marketing reminder of the rising United States debt, the current Federal deficit, and pending sequestration cuts would drive more timely decision making by the male and female constituents of congress. I bet they made their respective Valentine’s decisions before today!
From candy and gifts to the State of the Union.
Tuesday evening’s address seemed to me a rambling list of the wonderful things this administration is hoping to set in place during the balance of Obama’s term in office. And whenever I hear “hope”, I am now conditioned to question the means behind the anticipated “hoped-for” event. The President spoke of expansive government involvement ranging from building roads and bridges to pre-kindergarten education for four year olds, and from Social Security and Medicare to energy independence. Very little discourse was aimed at the funding of these proposals. Like walking into displays of chocolates around Valentine’s Day, does it not make sense to discover which ones are favored by your sweetheart first? Certainly, buying every option in the store so as not to neglect that one special favorite is less than efficient, if not financially impossible.
Not knowing what chocolates are favored, would you elect to push off Valentine’s Day a couple months if you could? Would you kick the can down the road and address the decision later? What if Valentine’s Day could not be delayed or postponed? What then of your chocolate choices?
At Hedgeye, we tend to simplify our thinking wherever possible and bring complicated matters down to sporting metaphors where appropriate. In this case, I think of the Federal budget as the foundation of any game plan for our government. Pending decisions for our congressional leaders seem too easily kicked down the road. Congress has failed to pass a Federal budget since 2009! How should we expect our leaders to make decisions that potentially influence our enemies and allies alike, positively and negatively, without a game plan? I played for some Hall of Fame coaches in Herb Brooks and Bob Johnson. Like Keith and Daryl, I also played for the legendary Tim Taylor at Yale. Whether it was hockey, football, volleyball, softball, tennis, golf, or any other sport, there was always a game plan!
The Federal Debt level is fast approaching $16.5 Trillion. It is estimated that 2013 will add another $900 Billion-$1 Trillion. Rienhart and Rogoff will argue that “Countries with debt to GDP ratios above a certain level (90%) tend to experience slower economic growth.” It certainly appears that the U.S. has reached the point where our debt levels significantly dampen growth.
Of particular interest to me during the State of the Union speech were the President’s plans projecting out a decade and longer. At Hedgeye we talk about duration and believe projections longer than three years out are highly subject to forecasting error. Already the US economy is showing anemic growth. The most recent figures showed a decline of -0.1% in US GDP during the fourth quarter. The CBO office is projecting 1.4% growth for fiscal 2013. And projecting 2.6%, 4.1%, and 4.4% in ’14, ’15, and ’16 respectively. Unfortunately, much of the US expenditure projections are not as flexible or easily manipulated as the revenue and economic growth assumptions.
Just for reference, the average US GDP growth rate over the past ten years was 1.7%. What is the real plan and how does Congress make it flexible enough to adjust for the game changing and to embrace the unknowns?
And what about the sequester and Congress? Referring to Congress after the State of the Union speech by President Obama, House Speaker John Boehner stated, “None of them have ever lived under a sequester. For that matter, neither have I…This is going to be a little bleak around here when this actually happens and people actually have to make decisions.” A sobering thought during times when decisions have to be made that will affect the lives and finances of so many.
My Valentine’s wish is for Congress to develop a game plan; one with real metrics, transparent to voters, and offering accountability.
As for chocolate choices, I know yours will be easier than the decisions that face our Congressional leaders. My Valentine’s Day game plan is simple. My wife will wake to a card on the counter under a package of Reese’s Cups. And I am likely to read my card from her as I down a handful of plain M&M’s with my morning coffee.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $116.98-118.91, $79.71-80.31, 92.78-94.46, 1.96-2.01%, and 1, respectively.
Happy Valentine’s Day!
The Macau Metro Monitor, February 14, 2013
VISITATION GROWTH RATE SLOWS ON FOURTH DAY OF LUNAR NEW YEAR Macau Business
The Year of the Snake continues to bring thousands of tourists to Macau, although the growth rate has slowed down. Yesterday, Macau welcomed close to 162,000 visitors, an increase of 16.4% YoY. That marked a growth slowdown in comparison with the day before, when Macau welcomed almost 167,000 visitors, up by 28.4% YoY. Note that the figures provided by the Tourist Office also include non-resident workers and students, some of whom exit and re-enter Macau during the holiday period.
Of the total tourist arrivals recorded yesterday, close to 114,000 were from the mainland, up by 24.6% YoY. The soaring number of tourists is putting heavy pressure on Macau’s borders, in particular on the Border Gate checkpoint, which is the busiest. Media reports said that people had to wait for several hours either to enter or leave Macau. Some chaotic scenes and scuffles were recorded, though there have been no reports of people being injured.
In the first four days of the Year of the Snake, Macau welcomed close to 566,000 tourists, up by 21.5% YoY.
MBS FINED $475,000 BY REGULATOR FOR SURVEILLANCE BREACHES Strait Times
Marina Bay Sands was fined $475,000 by the Casino Regulatory Authority of Singapore (CRA) on Wednesday for surveillance breaches. The integrated resort had failed on three counts and were fined under Regulation 3(2) of the Casino Control (Surveillance) Regulations. The first breach, which led to a $150,000 fine, was for failing to retain casino surveillance footage during the period of Sep 14, 2011 to April 12, 2012. Casinos have to retain footage for a specified time period. The time period was not disclosed. The second fine of $100,000, was for failing to ensure continuous recording of casino surveillance footage from Dec 17, 2011 to June 14, 2012. The third fine of $225,000, was for the lack of notification system to alert the casino of failures to their surveillance system.
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This note was originally published at 8am on January 31, 2013 for Hedgeye subscribers.
“Only practitioners (or people who do things) tend to spontaneously get the point.”
On a flight to Denver last night I had round 2 with Taleb’s new book, Antifragility. It wasn’t painful, but I definitely feel like the guy has something brewing inside of him. Transitioning from a market practitioner to a philosopher can’t be easy.
“I am re-connected to my practical self, my soul of a practitioner, as this is a merger of my entire history as practitioner and volatility specialist combined with my intellectual and philosophical interests in randomness and uncertainty…” (page 13)
People can go a little squirelly when they over-think the complex.
Back to the Global Macro Grind…
Buy or sell? Or, as my 2-year old daughter Callie has figured out (when asking me for something when she senses I am pre-occupied), “yes or no?”. If you are playing this Game of Risk in real-time, you don’t have time to philosophize. Save that for the weekends.
On Monday and Tuesday, we bought the US Equity market open (on red). Yesterday, we sold it (on green). It doesn’t always work out that way - but when it does, at least you know that you did it for a reason.
In yesterday’s rant, I outlined the reasons to make some risk adjusted sales (SP500 and US Treasury 10yr Yields immediate-term TRADE overbought) pre-game. And that’s really why I do what I do. I need a repeatable process so that I can have a plan.
Oh, and the plan is that the plans are always changing …
Some people don’t like that. It doesn’t sound sophisticated, I guess. But on that point, I agree with Taleb: “Simplicity has been difficult to implement in modern life because it is against the spirit of a certain brand of people who seek sophistications…”
“Less is more and usually more effective.” –Nassim Taleb
So, let’s slap on the Practitioner Pants and go down that path this morning (just bullet points from my notebook).
- Russell2000 reversed from its all-time high yesterday, closing down -1.2% at 896
- SP500 was down for the 2nd day in 3, finally making a lower high vs the YTD closing high of 1507
- US Equity Volatility (VIX) continues to signal a Risk Range with lower-highs and lower lows (11.94-14.62)
- US Equity market Volume is finally starting to show some flickers of light (+8% versus the TREND avg)
- All 9 S&P Sectors in our model are bullish on both our TRADE and TREND durations (19 of the last 20 days)
- US Dollar Index signaled immediate-term TRADE oversold at $79.24 yesterday
- US Treasury Yields (10yr) signaled immediate-term TRADE overbought at 2.04%; next support 1.93%
- Apple (AAPL) failed at immediate-term resistance yesterday; Risk Range = $420-461
- Eurostoxx50 and Eurostoxx600 both signaled immediate-term TRADE overbought yesterday
- DAX immediate-term TRADE support line of 7771 needs to hold for price momentum to continue
- Spain’s IBEX is snapping its immediate-term TRADE support of 8494 this morning (-1.6%)
- Italy’s MIB Index is breaking its immediate-term TRADE support of 17189 this morning (-1.1%)
- Greece’s squeezage finally stopped for a day (Athex index -1.5%)
- Euro (vs USD) = immediate-term TRADE overbought at $1.35 (support = $1.33)
- China’s stock market (Shanghai Comp) is signaling immediate-term TRADE overbought at 2384
- Japan’s Nikkei (up +28.6% as the Yen gets Taro Aso’d) has immediate-term TRADE resistance at 11159
- South Korea’s KOSPI remains bearish TRADE (1976 resistance) and bullish TREND (1959 support)
- India’s BSE Sensex is down (net) since being the first major country to cut rates in 2013
- Thailand and Vietnam (momentum markets in Asian Equities) corrected -1.1% and -1.6% overnight
- Brazil’s BOVESPA Index snapped immediate-term TRADE support of 60889, -1.8% yesterday
What’s new? We have 4 major countries (Brazil, South Korea, Spain, and Italy) showing initial chinks in the Global Equity market armor. It’s only an immediate-term TRADE signal (all remain bullish intermediate-term TRENDs), so do with it what you decide to do. I did.
Catalysts? It’s month-end today. Tomorrow you probably get another confirmation on why stocks are crushing US Treasuries and Gold for 2013 YTD (employment #GrowthStabilizing). But, at the same time, Oil prices up here are a new headwind to global consumption.
Buy or sell? Yes or no? These are simple questions requiring simple answers. No one has a Ph.d in playing a game that’s always changing. Stick with the practitioners. We can win this game together.
Our newly minted Senior Sector Head of Consumer Staples, Rob Campagnino, will be hosting an expert call on pyramid schemes ("An Expert's Opinion on Multi-Level Marketing, Pyramid Schemes and Herbalife” featuring multi-level marketing expert Dr. Jon M. Taylor) at 1030AM EST today. Ping Sales@Hedgeye.com if you are interested.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1649-1678, $113.02-115.22, $79.24-79.81, $1.33-1.35, 89.98-91.68, 1.93-2.04%, and 1495-1511, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: The leverage in this model is nothing short of extreme. We want JNY to be the next LIZ/FNP. But until management agrees with us, it won't.
Given how 'out of favor' JNY perennially is we’re tempted to want to go the other way – and today’s beat certainly supports that point. During the quarter, both Domestic Wholesale Jeanswear and Domestic Wholesale Footwear & Accessories confirmed not only the turn we saw last quarter, but a reacceleration in both sales and profitability in these key segments (accounting for 65% of total EBIT). At the same time, despite further revenue deceleration, incremental losses slowed in Domestic Wholesale Sportswear arresting the contracting profit trend reported in each of last four quarters. Not bad at all.
The leverage in this model – both operational and financial – is nothing short of extreme. If only a few things go right, this company can print $2 in earnings power – which makes a $12 stock look like a seriously mispriced asset. But there are two ways to get to the earnings power in question. A) improve the entire portfolio of 30+ brands under the JNY banner, or B) take a draconian stab at this portfolio and do to it something akin to what LIZ/FNP did over the past two years.
Despite the glaring evidence that things are getting better, the reality is that the risk/reward is still not good enough for us to get involved here. Why? Simply put, management is gunning for option ‘A’. For a portfolio that is simply ‘average’, we can’t bank on broad-based improvement in the macro environment to unleash the earnings, and we don’t have the confidence yet that JNY possesses the tools to keep the recent momentum going. We want option ‘B’.
We think that JNY needs to go the way of FNP. It needs to focus its portfolio into the brands the matter most, and dispose of/sell the rest. JNY has over 30 brands, and our sense is that the average investor can’t name the brands representing over a third of JNY’s revenue base.
Realistically, the best way to monetize this content will be for department stores to strike exclusive deals with the company for 100% wholesale distribution, or the brands should be sold to the retailer (like FNP did with JCP and the Liz Claiborne Brand).
When all is said and done, we think that this will prove to be a more valuable strategy for shareholders than to try to continue to run this company as a multi-brand portfolio.
The problem is that management seems to have zero desire to go down this path. They seem to be comfortable running the ship much like it has been run for the past 20 years. Are there call options in footwear and International? Yes. And they’re making great strides today in US Wholesale. Both of these things are great. But they require too many leaps of faith for us at this point, and we don’t like investing based on faith.
Takeaway: We remain bearish on Burger King (BKW) as the company was never properly "fixed" when it went private.
Howard Penney – Restaurants: SHORT Burger King (BKW)
BKW was taken private in 2010, then IPO’d again in 2012 after only 18 months, in what Penney calls “one of the best charades put over on restaurant investors in 2012.” Penney says there are issues in BKW’s North American operation that have persisted since before the company went private in 2010 and have still not been addressed, and the private owners appear to have starved BKW of cash, deferring much needed capital expenditures.
Sentiment on BKW is very high in the investing community, with analysts championing it as a successful turnaround and a play on global consumer growth. But Penney says the building blocks of a successful business are just not in place. BKW made a big deal over cost cutting – one executive said the management team in Miami were “sitting on pickle buckets” rather than spend corporate cash on office furniture – but a company doesn’t cut its way to sustainable profitability and, says Penney, the revenue side is simply not there. There has been significant deterioration in same store sales (SSS) across the US and Canada. Penney thinks SSS declined 4%, versus the consensus of analysts covering the company of only around a 2% decline, and he expects sales growth for the last quarter to be only 2%, short of the 3.4% average expectation.
Calling BKW “the turnaround that failed to turn around,” Penney says the company could significantly disappoint when it reports earnings this Friday. He acknowledges that the stock has drifted lower in recent weeks, but he expects disappointing numbers that could rattle largely positive sentiment in the near term as folks realize BKW is not the global growth vehicle its boosters say it is. If negative surprises lead to downgrades, Penney thinks the stock could drop by as much as $4-$5 in the near term.