Tears in Tokyo

Client Talking Points

JAPAN

That was quick. Japanese Prime Minister Shinzo Abe went from flying like Superman on the cover of The Economist to the Weimar Nikkei crashing to earth (-20.4% since May 22!). Evidently, people are realizing that the whole Bernanke strategy doesn’t actually work where it is promised to work – in the Japanese economy. YEN breakout > 95.95 TREND line (vs USD) #critical 

CHINA

It's just a certified train wreck in the A-shares (down -2.7%) and the Hang Seng (down -3.4%). Developing. We held our China Risk conference call yesterday which was very well attended. If you want the slide deck, ping us.

USD

I've been pounding the table on this: Get the US Dollar right and you get a lot of other things right. When we covered the USD/YEN short on Monday and sold ½ our longs in US Equities, this was the interconnected risk I was worried about. Down Dollar is bad for SPY. Period. The TREND correlation between USD/SPY = +0.84. So we’ll be looking for a USD oversold signal to start buying US stocks again.

Asset Allocation

CASH 54% US EQUITIES 17%
INTL EQUITIES 17% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NSM

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

ASIA: complete collapse of another Keynesian experiment in Japan; Weimar Nikkei -6.4% and rest of Asia gets smoked

@KeithMcCullough

QUOTE OF THE DAY

“To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears” (Hedgeye Early Look, May 30, 2012)

STAT OF THE DAY

38% ... The percentage of Japan's population that is 55 years old or older.


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