Volatility Breeds Contempt

Client Talking Points

JAPAN

The implied volatility in both Japanese stocks and bonds is ripping now. Volatility breeds contempt. The Weimar Nikkei was hit hard overnight, down over -3% on what was supposed to be a burning currency speech by Prime Minister Shinzo Abe. Instead, the Yen (vs USD) holds it’s immediate-term TRADE overbought gains, despite 10yr JGBs holding above our TAIL risk line of 0.81% (0.85% last).

UK

1.     Don’t blame me for highlighting more surprisingly bullish #GrowthAccelerating in another country’s economic data. The last week of data out of the British has been bullish. Following up on a solid Construction PMI print of 50.4 yesterday, UK Services PMI accelerated to 54.9 in May (vs 52.9 APR). On the other hand, France’s Services economy still stinks (44.3 in May vs the UK’s 54.9). Policy has consequences.

GOLD

No, gold doesn’t like US Housing and Employment #GrowthAccelerating. We re-shorted the precious metal yesterday ahead of Friday's employment report where, not surprisingly, expectations remain relatively bearish. Gold is broken on all 3 of our core risk management durations after failing at immediate-term TRADE resistance of $1424/oz.

 

Asset Allocation

CASH 24% US EQUITIES 30%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 28%

Top Long Ideas

Company Ticker Sector Duration
IGT

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.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.

FDX

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.

Three for the Road

TWEET OF THE DAY

@KeithMcCullough been with you on real time alerts just now getting into twitter, you have made more money this year than any broker I had

@cvevan1

QUOTE OF THE DAY

"Wherever you see a successful business, someone once made a courageous decision." - Peter Drucker

STAT OF THE DAY

A 12-piece bucket of KFC chicken bought for $11.50 in Egypt and smuggled into Gaza City costs $27.


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