Big Trouble In China

China is a big economic bubble ready to pop and this morning, it's looking like it may be ready to burst. Economic activity dried up with the Chinese Purchasing Managers Index (PMI) slowing sequentially to 50.5 versus 51.6 last month. In turn, Chinese stocks, which were moving to the upside constantly back in January, are taking a turn for the worse, with the Shanghai Composite Index closing down -2.2% this morning. As you can see in the chart below, Chinese stocks have been falling since Valentine's Day. No love for China? Apparently not.


Big Trouble In China - shcomp

RAI Q1 – Less Volume, More Profit

RAI is on the tape with Q1 results - $0.03 better than consensus and maintaining full-year guidance.   We think the key theme across the release is lower volumes but better profitability, a state of nature that we think persists for the balance of 2013.

What we liked:

  • EPS of $0.72 versus consensus of $0.69
  • Maintained full-year guidance of $3.15 - $3.30
  • A substantial increase in cigarette profitability per unit year over year from $33.20 per thousand to $39.42 per thousand despite Q1 2012 being the most difficult comparison on this metric
  • Continued share momentum in Grizzly (+110 bps) despite a difficult Q1 comparison
  • A 4.6% increase in revenue per can at American Snuff (however, against a ridiculously easy comparison)
  • A 252 bps improvement in operating margins at American Snuff (comparisons get significantly more difficult as the year progresses)

What we didn’t like:

  • Total cigarette industry declined 6.1% against the easiest comparison of the year (Q1 2012 declined -4.0%)
  • RAI’s volume decline outpaced the industry (-8.7%)
  • Pall Mall declined against the easiest comparison of the year
  • Disappointing American Snuff volumes (+1.1%) as well as smokeless industry total volume (-1.4%)

At this point, we aren’t seeing a lot to do with the domestic tobacco manufacturers – the likely combination of weaker volumes and better profitability preserves guidance and consensus estimates, and the yields in the names are still chunky.  Our bias would be to be buyers on material weakness in RAI, LO and MO for trades, using the yields as a backstop.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


In preparation for WYN's F1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • As we grow internationally, specifically in countries such as China, there will be a dilutive impact on global RevPAR.
  • [Wyndham Exchange and Rentals] Excluding FX movements and acquisitions, adjusted EBITDA would be up slightly for the  year reflecting the weak economic conditions in Europe and the continued challenges in the broader timeshare industry
  • WVO will have difficult year-over-year comparisons in the first quarter based on an exceptionally strong quarter one in 2012 and the timing of some expenses on the sales side.
  • In the Rental business, the four tuck-in acquisitions we completed since August 2012 will add to our growth and represent new markets for the organic growth of this business. We see some macro challenges in Europe during 2013 in the Rental business, but we believe we have  budgeted and planned for these challenges appropriately in our guidance.
  • The deal pipeline is about the same as it was last year. It was pretty strong last year. We got a couple of deals done. We're not looking at anything that is much different from what we've done in the past.  But when we talk about tuck-ins, tuck-ins can be larger than $80 million or $30 million or $20 million
  • We haven't changed our capital allocation policy… We will keep our leverage ratio around 3.2 the way that the agencies calculate it, or 3.3, and that will allow us to add on more debt as we increase our EBITDA, which we said we would do because we don't look to improve that rating, but we want to stay where we are right now in investment grade

2013 guidance

  • Revenues of $4.925 - $5.100 billion
  • EBITDA of $1.140 - $1.165 billion
  • EPS of $3.57 - $3.70
  • Weighted average diluted shares of 140 million

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.

Two Formations

Client Talking Points

Bullish Formation

There's a lot to get bullish on these days. The US dollar is certainly worth getting behind as commodities get destroyed across the board. You've saw what can happen to gold and copper is getting a beatdown that's even more severe. US equities are another market in bullish formation, and we like the S&P 500, Consumer Discretionary (XLY), US Consumer Staples (XLP), US Healthcare (XLV) and individual stocks by the way of Nike (NKE) and Starbucks (SBUX).

Bearish Formation

Now, it may seem obvious at this point but commodities are in bearish formation. We've been bearish on commodities for some time now as one of our big global macro themes. Particularly, we like shorting gold (GLD) and gold miners (GDX). We're also bearish on individual names like Freeport (FCX). And then we have Japan, where the Yen (FXY) has been in bearish formation for sometime thanks to the Bank of Japan's planning. Russia and Brazil are also in bearish formation due to their correlation with the commodity markets.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company. 


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view. 


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


"We do not want you to buy $CAT" -@KeithMcCullough


"Defining and analyzing humor is a pastime of humorless people." -Robert Benchly


Netflix shares rally 25% after earnings beat expectations.

Commodity Deflation

This note was originally published at 8am on April 09, 2013 for Hedgeye subscribers.

“We can’t afford to risk a downturn, no matter how much inflation.”

-Richard Nixon


Nixon’s legacy is Watergate. Trivial Pursuit presidential history doesn’t yet appreciate how horrendous he was for the US economy. On matters of economic policy, this guy was easily the most conflicted, conniving, and compromised president in the post WWII period.


If you’d like to re-educate yourself on the what, when and why (Nixon’s economic policies), chapter 4 “Gamble” of Volcker: The Triumph of Persistence is a beauty. The aforementioned quote came from Nixon during his 1972 re-election campaign.


Prior to that (1971), Nixon had already abandoned the Gold Standard and explicitly devalued the US Dollar. On the fiscal policy side, he hired a Democrat from Texas who polled well (John Connolly) to be Treasury Secretary. Connolly wrote later, “I was not an economist; I had really never studied monetary affairs. My experience with fiscal issues was limited largely to a familiarity with Congress…” (Volcker, pg 74)


Back to the Global Macro Grind


Why do we care about the context of politicized currency devaluations (and the local inflations they drive) this morning? Well, because the only opportunity the US economy has to grow (on a real inflation adjusted basis) is through pervasive Commodity Deflation. It’s a Tax Cut.


To be balanced, cracker jack economists who have never traded a market in their life (i.e. don’t understand price expectations) want you to believe that currency devaluation will give you the elixir of an exported life. Now that the Japanese Yen is crashing (-24% from where we made the short call in 2012), they’ll have to let us know how that is going for the Japanese consumer who isn’t levered long Nikkeis.


The biggest Global Macro calls for 2013 YTD have been centered squarely on understanding the causal impact central planners have on their domestic currency:

  1. Get the central plan right, you get the currency right
  2. Get the currency right, you get the correlation right
  3. Get the correlation right, you get the money

“Show me the money!” –Tom Cruise


To review, the US Dollar has been strengthening ever since Bernanke tried to promise to print to infinity and beyond (SEP2012):

  1. MONETARY POLICY: Since, on the margin, market expectations for an iQe5 upgrade have been crushed (see Gold chart)
  2. FISCAL POLICY: after plenty of political spending wants, the US actually implemented marginally hawkish spending cuts

Again, if you get policy (monetary and fiscal) right, you’re going to likely get the local currency move right. On the margin is what matters most in macro, and when you combine marginally hawkish domestic policy with relatively dovish competing policy (Japan), ta-dah!


Japan’s currency devaluation is very easy to understand (primarily because Japan’s #PoliticalClass is doing precisely what America’s did):

  1. MONETARY POLICY: hit CTRL+P (print) and step that Japanese debt monetization up to 50 TRILLION more Yens (a year)
  2. FISCAL POLICY: get the LDP to take the Upper House in this summer’s election and implement “spend your brains out 2.0”

In other words, even if we are dead wrong on the USA’s marginal policy shifts in 2013, we could be right on our #StrongDollar via the rate of change in Japanese policy. Layer on some European Marxism onto the Euro, and I have myself quite a Keynesian treat.


Hedgeye Playbook: how do you make money on this?

  1. Long US Dollars vs Short Yens
  2. Short Commodities (they have hyper high inverse correlations to #StrongDollar)
  3. Long Asian and US Consumption Equities

Some of our competitors can pop this in their next report. “Last night the Chinese reported more of the same on this front. #StrongDollar = Down Food Prices (globally) = Down Inflation (for countries that have a US Dollar peg).” Chinese CPI fell from 3.2% in FEB to 2.1% in MAR – and yes, that is better than a bad thing for people who don’t take government car service to work and have to eat.


I shorted Wheat (WEAT) on the bounce yesterday (unlike trying to call tops in the SP500, it’s always easier to short things that have already started going down – Wheat prices are down -8.4% YTD). Corn and soybean prices are down -9.3% and -2.9% YTD, respectively.


Brent Oil is down -5.7% YTD – but seriously? Who cares about these YTD Commodity Deflations when you can look at how epic they’ve been since Wall Street front-running Bernanke on Commodity prices ended (in food prices especially) at their all-time highs of September 2012? On a 6 month basis, Corn and Wheat are down -14.6% and -17.2%, respectively.


Nixon had it wrong – so did Charles de Gaulle, Jimmy Carter and George W. Bush. President Obama, like Clinton, has a choice on monetary and fiscal policy in his second term. Will he risk the Big Auto lobby for a weak currency? Folks, we need a #StrongDollar and Commodity Deflation. Oh yessir – Yes We Can.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1544-1585, $103.19-108.02, $82.42-83.39, 95.23-99.31, 1.71-1.83%, 12.21-14.43, and 1551-1573, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Commodity Deflation - Chart of the Day


Commodity Deflation - Virtual Portfolio