“I’m going to lie on the sand and watch the world go to hell.”
-William Bullitt Jr.
That’s not a very nice thing to say now is it? Young Yale men can get pretty emotional when they go out into the real world and get told they are wrong. In 1913, William Bullitt was voted the “most brilliant” man at Yale. I am not sure what that means, but trying to do a deal with Lenin probably changed his classmates’ minds on that, eventually.
Brilliant is as brilliant does. Yesterday may have been one of the best days to sell everything and go to the beach for the rest of the summer. I doubt it, but we’ll see. Every morning we reserve the right to change our mind. That’s the upside to not working for the government. Poor Bullitt (he was a rich kid from Philadelphia actually) didn’t share our self-deterministic luxury.
In 1919, “Bullitt and Steffens spent a wonderful week in Moscow: accommodation in a confiscated palace, piles of caviar, nights at the opera…” etc. Life was indeed #brilliant, until he came back to Paris and Wilson bagged his idea to appease the Bolsheviks. Lenin later recalled that the young American diplomats were “useful idiots” (pages 78-81, Paris 1919 by Margaret Macmillan).
Back to the Global Macro Grind…
I don’t do beach. At least not now. I have work to do, a family to feed, and a firm to build. It’s mid-June and its really only the 2nd day in the last 6 months where I woke up thinking, wow – the world might actually start going to hell again.
When I say I “think”, I mean the Global Macro market’s interconnected signals are making me think. When I was Bullitt’s age (28 years old at the Paris Peace Conference) I wasn’t yet married and I thought in very different ways!
I was a lot more bullish on US Consumption oriented Equities < 1601 in the SP500 last week than I was 50 handles higher yesterday. At 11:02 AM EST I wrote a note titled “Sell Some: SP500 Levels, Refreshed.” The research view didn’t change; my risk signals did.
To review the what on that (which is usually more important than the why):
Get the Dollar right, and you’ll get other things right. You don’t have to be brilliant to embrace the uncertainties associated with that. When I make big moves in either Real-Time Alerts or the Hedgeye Asset Allocation Model, it almost always starts with a USD signal.
Since we’ve already beached our asset allocations to both Fixed Income and Commodities (0% on both), our only risk management exercise this summer is deciding how big we get (and when) on this US Consumption LONG versus Commodities SHORT position.
For now, the intermediate-term TREND ranges for US Equities and volatility are as follows:
Again, you’ll note that what’s new in that 2 factor model is:
A) Lower-highs for US stocks
B) Higher-lows for US equity volatility
Plenty will quibble with how my models work, and that’s perfectly fine with me. I don’t have time to do anything other than what we are already doing here at the firm. So my own risk is going to be doing more of that.
The beauty of operating from the opposite perspective as brilliant central planners who promise you certainty (Obama just called his freshly minted Keynesian, 42 year old Harvard boy, Jason Furman, “one of the most brilliant minds of his generation”) is Embracing Uncertainty. We have no idea what tomorrow is going to tell our model.
Here’s all I am certain about as of this morning (this could change by tomorrow, but probably not):
And it goes on and on and on …
Multi-factor, multi-duration. That’s how we roll. And as you’ll quickly note, there are plenty of places to be bearish in this world. The problem with consensus US stock market bears in 2013 is that they weren’t bearish enough on many of these things – primarily because they weren’t bullish enough on US #GrowthAccelerating.
Gold and Sovereign Credits (Japan and USA) loathe growth. And while the Japanese won’t get real (inflation adjusted) economic growth in the end anyway, at least their Keynesian duo of Abe/Aso will get plenty of beach time. We can only pray that they lose their jobs fast. Never mind the beach, dealing with their and Furman’s “brilliance” every morning might just drive me to the bottle.
Our immediate-term Risk Ranges Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Nikkei, and the SP500 are now $1, $100.21-105.04, $81.21-82.42, 96.05-99.55, 2.14-2.26%, 14.07-17.69, 129, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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THE MACAU METRO MONITOR, JUNE 11, 2013
HO TRAM CASINO TO OPEN ON JULY 26 Macau Business
Ho Tram Project Co announced that its first resort, "The Grand Ho Tram Strip" in Ho Tram, Vietnam, will open on July 26. The casino will be operated by Ho Tram Project Co itself.
The first phase of The Grand Ho Tram Strip includes 541 five-star rooms, gaming facilities, meeting and convention space, ten bars and restaurants, a spa, three swimming pools and luxury retail shops.
Ho Tram Project Co announced last October that it had broken ground on the second phase of the project, which will include a second tower of 559 rooms and additional leisure facilities.
GOVT MUST DISCLOSE WHICH CASINOS JUNKETS PARTNER WITH Macau Business
The Court of Second Instance has sided with lawyer Vong Chong Kio in his request that the Gaming Inspection and Coordination Bureau disclose which casinos two junket operators are doing business with. He had requested the Gaming Inspection and Coordination Bureau to disclose the information but the bureau denied the request, saying Vong had no cause to have access to the information, which was restricted.
Vong first appealed to the Administrative Court, which sided with the regulator. Now, the Court of Second Instance has ruled in his favor. The court says “there is nothing restricted, confidential, intimate or secret” about which casinos junket operators work with.
TODAY’S S&P 500 SET-UP – June 11, 2013
As we look at today's setup for the S&P 500, the range is 38 points or 1.14% downside to 1624 and 1.17% upside to 1662.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: LULU needed to shore up confidence after 1Q product issues. They blew it. There's margin risk. Maybe not a short. But definitely not a long.
Conclusion: LULU had to do one thing and one thing only this qtr -- instill confidence in the investment community that the recent product issue was a one-off, and it that management is on offense. Unfortunately, LULU blew it. Its quarter was hardly squeaky clean, the outlook is cloudy, and the CEO tendered the most surprising resignations we've seen in retail in a while. This remains a great global growth story in retail -- one of the best, actually. But there's margin risk to the downside. That matters at 33x earnings. It might be a lousy short. But we'd avoid it long.
In the wake of the Luon pant fiasco throughout the first quarter, there was one thing and one thing alone that LULU needed to do with this print -- and that's instill confidence with the investment community that the right team is steering this ship, and that the issues that caused the stumble are temporary and not a sign of more systemic issues at the company. Unfortunately, the company dropped that ball with the announcement that Christine Day is resigning her post of CEO after 5 1/2 years on the job.
Quite frankly, we were stunned by the announcement. For investors, this is the corporate equivalent of being bitten by your Golden Retriever. There was no warning. Usually when something happens so suddenly, it is the Board's decision, but this one sounds like it was all Christine. Could it be that the Luon pant debacle took its toll on her? Perhaps. But she already canned LULU's Chief Product Officer in April, and the company is in the process of broadening its executive team. We'd be surprised if her departure was due to this issue alone.
Our sense is that Ms. Day -- who is held in extremely high regard by the investment community -- simply sees that the next leg of growth will be tougher to come by. To her credit, she saw the company through the period in '09 when it was a $3 stock and drove it up to $80. That's $11.2bn in value creation -- or a 27-bagger for those keeping score.
While LULU had several wins this quarter, like golf, tennis, men's and e-commerce, in the end, this quarter was hardly squeaky clean. Aside from the Luon issue, the company noted certain misses from a styling perspective, higher expected landed costs in 2H due to factory/production issues, SG&A deleverage through 2H14 as LULU ramps up its East Coast distribution center, and difficulty in finding store locations to facilitate Hong Kong expansion.
We still think that LULU is one of the few iron-clad brands in retail that can put up 20%+ organic top-line growth on a consistent basis for the next 3-5 years (the others are RH, FNP, UA and KORS). But unlike these other brands, we think that LULU has risk to the downside in its mid-20s margin as the company spends more to facilitate its growth. If we compare it to UnderArmour (or FNP or RH), for example, we see that UA has only an 11% margin, and even it is stepping up spending on the margin to maintain top line growth. We think that LULU will maintain a significant premium to UA, NKE, RH and FNP. But in doing so we still think that the risk is to the 20% range as margins (and even high teens) look to find a final resting place.
This still nets us a respectable 20%-ish EPS growth rate by any stretch (25% top line growth less 500bp due to margin erosion). But with the stock trading at 33x earnings (per the after-hours sell-off) we find it really tough to get excited about on the long side.
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