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BEST IDEAS UPDATE (LONG CHINA; SHORT YEN)

Takeaway: The latest econ data releases are very much in support of our theses. No change to either fundamental view for now.

SUMMARY BULLETS:

 

  • As anticipated, the first batch of MAR Chinese growth data accelerated sequentially, headlined by the NFLP Manufacturing PMI (11-month high) which accelerated to 50.9 from 50.1 vs. 51.2 est., and the HSBC gauge, which accelerated to 51.6 from 50.4 vs. 51.6 est. Underneath the hood, all is very well, as the New Orders and New Export Orders components of the official PMI both accelerated fairly meaningfully (+2.1 ppts MoM and +3.6 ppts MoM, respectively), while the Input Prices component ticked down to 50.6 from 55.5 (2nd consecutive month of deceleration on Strong Dollar = Strong CNY).
  • That the Shanghai Composite Index closed down -0.1% on today’s positive growth figures speaks volumes to the growing concerns surrounding Chinese banking risks as regulatory overhang continues to weigh on the Chinese equity market (latest data point: 17 cities have recently implemented the latest round of property curbs). This fundamental tug-of-war between an improving cyclical outlook and an increasingly-convoluted structural outlook keeps us in a position where we’re inclined to let the market tell us what to do next.
  • Turning to Japan, with the USD/JPY cross immediate-term TRADE oversold, we think the balance of risks warrants re-shorting the yen here ahead of the APR 3-4 BOJ meeting. Japan’s bleak cyclical trends (particularly the FEB CPI print, which was incrementally deflationary) warrant further easing – irrespective of the broader Abenomics agenda, which, on its own, has inflation expectations in Japan flat-out ripping.
  • As highlighted by the confluence of recent survey data, expectations for Japanese economic growth continue to lag far behind Japanese inflation expectations, which, as we highlighted in our #Quadrill¥en slide deck, remains the biggest risk to the Japanese sovereign balance sheet, as well as to the P&L’s of Japanese equity beta-chasers – who remain safe for now, given our TREND and TAIL duration views on the Japanese yen from here. Recent trends in the JGB market (pancaked yield curve on speculation that the BOJ will extend the duration of its asset purchases) are in confirmation of our view.

 

CHINESE EQUITIES: IN “DO NOTHING” MODE FOR NOW

As anticipated, the first batch of MAR Chinese growth data accelerated sequentially, headlined by the NFLP Manufacturing PMI (11-month high) which accelerated to 50.9 from 50.1 vs. 51.2 est., and the HSBC gauge, which accelerated to 51.6 from 50.4 vs. 51.6 est. Underneath the hood, all is very well, as the New Orders and New Export Orders components of the official PMI both accelerated fairly meaningfully (+2.1 ppts MoM and +3.6 ppts MoM, respectively), while the Input Prices component ticked down to 50.6 from 55.5 (2nd consecutive month of deceleration on Strong Dollar = Strong CNY).

 

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That the Shanghai Composite Index closed down -0.1% on these positive growth figures speaks volumes to the growing concerns surrounding Chinese banking risks as regulatory overhang continues to weigh on the Chinese equity market (latest data point: 17 cities have recently implemented the latest round of property curbs). This fundamental tug-of-war between an improving cyclical outlook and an increasingly-convoluted structural outlook keeps us in a position where we’re inclined to let the market tell us what to do next.

 

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For more details on the latter of the aforementioned outlooks, as well as our latest risk management decision-tree, please refer to our 3/28 deep dive titled: “IS CHINA CAREENING TOWARDS FINANCIAL CRISIS?”. For reference, the Shanghai Composite Index is up +7.2% since we outlined the thesis back on 12/10 (vs. a regional median gain of +7.4%), but down -3.4% since we reiterated the view in our Best Ideas Call back on 2/27 (vs. a regional median gain of +1.7%). If it sounds at all like our patience is running thin on the long side here, it’s because that is precisely the case.

 

BEST IDEAS UPDATE (LONG CHINA; SHORT YEN) - China SHCOMP

 

JAPANESE YEN: ALL EYES ON KURODA’S FIRST CUT

The USD has appreciated +20.3% vs. the JPY since we got bearish on the yen back on 9/27; it is rumored that George Soros has netted about $1 billion on shorting the yen since NOV – right around the time we reiterated our bear case on our 11/15 Best Ideas Call. Six months into currency combustion, the Japanese economy remains largely on the outside looking in from an economic growth perspective.

 

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While sequentially improved, this morning’s highly disappointing 1Q Tankan Survey results only amplify the previous claim that Japanese officials simply aren’t getting it done in the growth department:

 

  • Large Manufacturer Confidence: -8 from -12 vs. a Bloomberg consensus estimate of -7;
  • Large Non-Manufacturer Confidence: 6 from 4 vs. a Bloomberg consensus estimate of 8;
  • Large Manufacturer Outlook: -1 from -10 vs. a Bloomberg consensus estimate of 1; and
  • Large Non-Manufacturer Outlook: 9 from 3 vs. a Bloomberg consensus estimate of 11.

 

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In addition to these disappointing headline figures, large Japanese corporations from all industries plan to decrease capital spending by -2%  in the fiscal year through MAR ‘14, compared with a revised +5.2% increase in the fiscal year ended MAR 31.

 

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Ahead of the BOJ’s APR 3-4 meeting (Kuroda’s first as BOJ governor), sentiment in the forex market is still not bearish enough on the yen, as many believe expectations are so stretched in favor of monetary easing that Kuroda & Co. can only disappoint from here – an event that would be bullish for the yen in the short-term.

 

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For example, Japan’s large manufacturers forecast on average that the yen will trade at 85.22 per dollar in the fiscal year through MAR ‘14, according to today’s Tankan Survey results. Bloomberg consensus forecasts call for the currency to be at 96.5 per dollar by the end of the same period.

 

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All that being said, however, with the USD/JPY cross immediate-term TRADE oversold, we think the balance of risks warrants re-shorting the yen here ahead of the APR 3-4 BOJ meeting. Japan’s bleak cyclical trends (particularly the FEB CPI print, which was incrementally deflationary) warrant further easing – irrespective of the broader Abenomics agenda, which, on its own, has inflation expectations in Japan flat-out ripping.

 

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To that last point, a recent BOJ survey showed that nearly three-quarters of Japanese households expect consumer prices to rise a year from now (74.2% in 1Q13 from 53% in 4Q12), the highest ratio in ~4.5 years!

 

As highlighted by the confluence of recent survey data, expectations for Japanese economic growth continue to lag far behind Japanese inflation expectations, which, as we highlighted in our #Quadrill¥en slide deck, remains the biggest risk to the Japanese sovereign balance sheet, as well as to the P&L’s of Japanese equity beta-chasers – who remain safe for now, given our TREND and TAIL duration views on the Japanese yen from here. Recent trends in the JGB market (pancaked yield curve on speculation that the BOJ will extend the duration of its asset purchases) are in confirmation of our view.

 

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Our updated quantitative risk management levels for the USD/JPY cross are included in the chart below. Happy hunting out there, this week!

 

Darius Dale

Senior Analyst

 

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UA vs NKE Endorsements: Financial Deep Dive

Takeaway: Here's a financial snapshot of UA's endorsement profile vs NKE. While NKE has the edge, there's oppty for UA if it plays its cards right.

Conclusion: The financial composition of athlete endorsement structure is more different in comparing Nike vs. UnderArmour than one might think. UnderArmour has wiggle room to be less conservative and take on more implied leverage with longer-dated sponsorship agreements as Nike’s long-dated deals outpace UA’s by over 200x.  This could offer UA margin leverage on a TREND and TAIL duration, which it sorely needs. But NKE’s size, scale and balanced portfolio of deals is tough for anyone to compete with.  This is not enough for us to get constructive on UA today, but it's something we'll watch develop.

 

FULL DETAILS 

Much like off-balance-sheet leases, companies are also required to disclose any contractual obligations as it relates to endorsements and/or sponsorships. In the case of Nike and UnderArmour, this is Athlete Endorsements – and the numbers are quite significant. These are minimum payments that are required regardless of whether or not the athlete performs or even plays. We’re given good disclosure here, even though they are rarely analyzed or discussed by most of Wall Street.

 

UA vs NKE Endorsements: Financial Deep Dive - endorsement1

 

Here are some notable differences in the financial composition of Nike’s athlete endorsement portfolio versus what we see at UnderArmour.

  1. Size Matters: The obvious difference between the two is the raw size, with Nike logging in $3.8bn in sponsorships on its books. UnderArmour is $158mm. While you could argue that this is to be expected given the size gap between the two companies, NKE’s obligations net out to be 16% of current year sales, while UA is only 9%. Nike is 13x the size of UA, but it’s athlete endorsement pool is 25x the size of UA.

    UA vs NKE Endorsements: Financial Deep Dive - endorsement2
  2. Nike is More Balanced, But Opportunity for UA: It’s important to look at the duration of the obligated payments. As a percent of total, nearly 90% of UA’s payments are scheduled in less than 3-years. That compares to Nike at 61%. Conversely, 22% of Nike’s payments take place in years 4-5, and 16% are after year 5 (UA is 2%). We’re mixed on the implications here.
    On one hand, Nike’s portfolio is balanced between short-term deals, longer-dated agreements that are soon coming to an end, and long-term agreements (ie the $628mm for NKE covers NFL, LeBron and the Tigers of the world). We like that.
     
    On the flip side, NKE’s $628mm compares to UA’s long-term dollar tally of only $3mm. NKE’s long-term agreements are 209x UA’s.  While this shows the opportunity for UA to sign more deals that are longer-dated (and presumably requiring lesser up-front investment), it shows how much powder Nike has even relative to a powerful competitor like UA. Deep pockets breed deeper pockets.  

    UA vs NKE Endorsements: Financial Deep Dive - endorsement3
  3. Percent of Demand Creation/Marketing: Last year, 32% of Nike’s Demand Creation budget was ‘locked’ under these contractual agreements, and it’s noteworthy that in any given year over the past seven, the lowest Nike ever got was 27%. That’s incredibly stable. UnderArmour was remarkably close to NKE at 28% last year,  but that number is up from 15% in 2006. Simply put, as UA matures, a greater proportion of its Marketing budget is being allocated to Athlete Endorsements as opposed to flat-out brand marketing. We’re ok with this, as it is a sign of a company maturing in this industry. But we’d rather not see it much higher (same goes for NKE).

    UA vs NKE Endorsements: Financial Deep Dive - endorsement4
  4. Note: The only way these minimum payments can cease to exist is if there is a breach of contract on the part of the athlete/team in question. That could be failure to participate in advertising/marketing campaigns, but that’s rare. More often, the factor comes down to an athlete breaking Morality clauses that are built into nearly all such agreements. When certain events are triggered, the Brand can look the other way (rare), sever the agreement (more frequent), or often in the case of Nike (Tiger, for example), the minimum obligation is materially lowered and the performance-based piece goes up materially. 

CAG Q3 - Steady as She Goes

ConAgra is scheduled to report Q3 2013 EPS this Wednesday, April 3rd before the market opens.  Consensus for the quarter is $0.56 per share, and for the full year $2.15 (one quarter remaining after Wednesday’s report).  The quarter closed the week following CAG’s presentation at CAGNY (February 19th) where the company raised full-year guidance to “approximately $2.15”, so we expect few surprises.  We are at $0.57 for the quarter.



While we don’t expect this week’s earnings release to be a positive catalyst for the name, we do think that we can hear some commentary that may support the investment thesis, specifically, early commentary regarding merger integration and any commentary on the input cost environment.

 

Finally, to the extent that value exists anywhere in consumer staples these days, CAG at 14.8x ’13 EPS (calendar) makes sense to us given the opportunity we see for outsized EPS growth over the next 2-3 years due to the combination of merger synergies, deleveraging and a more benign commodity cost environment that could stand to substantially benefit both the branded business at CAG as well as the legacy and recently acquired private label business.

 

CAG is one of our preferred names in the staples universe and we are going to stick with it.

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matt Hedrick

Senior Analyst


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All Eyes On China

March's Chinese PMI (Purchasers Manufacturing Index) reading came in at 51.6; missing expectations despite hitting an 11-month high and having accelerated sequentially versus February's print of 50.4. On the margin, however, this is a positive improvement for China after last week's banking and credit regulation debacle. We don't have a position in China currently, but will keep a close eye on the TREND line of 2207 on the Shanghai Composite Index. If it holds, we may be inclined to hop back into the market.

 

All Eyes On China - China pmi


Russian Stocks Crash And Burn

Russia's stock market continues to be one of the worst performing in the world with the RTS Index down another -0.93% to start off the month of April. The RTS Index is down -11.6% since hitting its year-to-date high in January. Comparatively, the S&P 500 is up +9.5% year-to-date and closed at a new all-time high yesterday.

 

Russian Stocks Crash And Burn - Russia equities


Food Prices Plummet

The US dollar is up for the 7th week in the last 8 posting a gain of +0.74% on the US Dollar Index. As the dollar continues to strengthen, commodity prices will continue to fall lower, which is a positive for consumption and in turn, is a positive for global growth. Food prices got pulverized last week with wheat, corn and soy dropping -5.8%, -4.3% and -2.5%, respectively, on a week-over-week basis. When you go grocery shopping next month, you're bound to see a material change in the price of food you shop for. That's the power of a strong dollar at work.

 

Food Prices Plummet  - food prices


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