We (Still) Don't Like China

Takeaway: Our view on China remains simple: We don't like it.

We still don’t like China. We’ve been clear on that. What’s going on there isn’t good.


Despite US equities rallying last week and into the close on Friday, Chinese equities were down another 2.4% overnight and are down 12% for the year. The Hang Seng also failed to bounce, down another 1.3% after failing at its immediate term TRADE line resistance. Indonesia was down 3.2%; Thailand down 2.4%. The only market above its TREND line in all of Asia is Japan. There are some big bad moves going on over in Asia.


So, is Asian growth slowing? Yes, that’s already happening.


Looking more closely at China, the Politburo (via President Xi), the PBoC (via Governor Zhou) and the State Council all came out at varying times last week and talked down market expectations for GDP growth and credit expansion going forward. With Manufacturing PMI hitting a 4-month low and Services PMI hitting a 9-month low in June, this does not bode well for China’s TREND duration growth outlook.


We (Still) Don't Like China - China GDP


Meanwhile, Bloomberg reports that President Xi Jinping said officials shouldn't be judged solely on their record in boosting GDP, the latest signal that policymakers are prepared to tolerate slower growth.


More to be revealed.


June casino revenues are being released by the states and the verdict is…



Longing for the good ol’ days of same store revenue declines of only 2%?  You may be after the final tally for June.  Illinois released dreadful figures this am with SSS down 10%.  We’re pretty sure Missouri will show a decline of around 11%.  Yes, there were some weather issues on June 1st and the calendar is down a Friday, but these numbers are even worse than what we were predicting.  Our estimate for June regional SSS was down 5% but given IL and MO, downside exists.  Remember that May was only down 2%.


We’ve got 3 charts included in this post.  The first is total regional same store revenue.  Note the significant sequential drop from May to June.  July should look better than June but that is due to a very easy comparison.  Please also note how historically accurate our predictions have been.  The second and third charts detail the specific markets of Illiniois and Missouri, respectively.  The other states will release their June figures over the coming 2 weeks.


We remain negative (and generally wrong lately) on the regional gaming stocks:  PNK, BYD, ISLE, and PENN.  The pie of slot customers is shrinking over the long-term but the impact is being felt now.







Beware of Brent

Takeaway: Brent Oil is the biggest threat to our Q2 #GrowthAccelerating macro investment theme.

As many of you already know, our three Q2 Macro Themes here at Hedgeye were:

  • #StrongDollar
  • #EmergingOutflows
  • #GrowthAccelerating

All three of these themes have played out well.


That being said, we are keeping a close eye on what's going on in the Middle East right now. In particular, the violence in Egypt following the military-led ouster of Islamist president Mohamed Mursi.


The biggest threat to our #GrowthAccelerating investment theme is the price of Brent Oil which has caught a bid following the Egyption chaos. If Brent closes, and ultimately holds above the long-term TAIL risk line of $108.36, watch out.


We are keeping a close eye on this one.


Beware of Brent - Brent Oil 2



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JNY: Don't Chase The 'Strategic Alternatives' Announcement

Takeaway: Not FNP Part II. Lots of skeletons in this closet. While there could be some upside with a deal, it's not enough on a risk-adjusted basis.

We wouldn't chase JNY on the 'exploring strategic options' announcement.

This story does not have the guts to become FNP Part II.  There are a lot of skeletons in this closet. While there could be some upside with a deal, it's not enough for us on a risk-adjusted basis.


  1. In part, a transaction is already priced in. We started to field 'activist-related' questions when the stock was about $12 in Feb and March. The financial press reported on Barrington Capital's activist intentions on April 12th of this year, by which point the stock hit $14.  Over the past three months, the stock is up by 33%, or about $300mm in market value. That's not to say that it can't go higher, but simply that the M&A mill has already created some value.
  2. Valuing JNY is no easy task, but the way we look at the world, the current price is already reasonable for what you get. Some might argue that the margins are artificially low at 5%, but the reality is that they're really not. This company has perennially bled its good content of growth capital to acquire future top line growth.  In fact, when you go through the arduous exercise of separating the acquired growth from the declining core, you see that the company's sales base is the same place today as it was a decade ago.  If we're right in that the company is not underearning, then 8x EBITDA sounds about right. As a check, that comes out to about 0.5-0.6x sales…a $250mm price tag on Juicy Coture (the rumored price tag, which we think sounds about right) equates to 0.5x sales.

    JNY: Don't Chase The 'Strategic Alternatives' Announcement - 7 8 2013 3 22 18 PM
  3. For those who say that  the loss of the Lauren and Polo Jeans business back to RL in 2005 and 2007 -- which accounted for about $775mm in revenue -- masks the organic growth in the the underlying business -- we'd simply ask the question "why did RL take back the businesses in the first place?" It's because JNY was grossly underperforming in its contractual obligation to drive that business forward. That's all water under the bridge, and was during a different JNY CEO's tenure. But, it shows our point that JNY does not have the culture of reinvesting in brands. That's why the RL situation was one of the only incidents of a license breach in recent memory, and that's also why the portfolio of brands JNY has today is simply 'Average' and not easily fixable.
  4. Where could we be wrong? We could be missing the boat if it turns out that the two crown jewels -- Jones New York and  Nine West, fetch a far better price than we're modeling. Each of the brands is in the vicinity of $1bn -- accounting for  a little more than 25% of JNY's revenue.  While we still think that both brands have margin problems that will require capital to fix (ie margins need to go down before they can go up) the reality is that with the right management they are definitely worth something. We could justify ultimate earnings power of $200-$250mm in EBIT from the combo if all goes right, which at $16 suggests that you get the other brands for free.   While that sounds like the kind of story we'd ordinarily be drawn towards, the reality is that we think there's a lot of skeletons in this closet. We need to be eyeing massive upside (ie at least a double) to get really excited. We're not there. In addition, if no transaction happens, you're left holding the bag with a really bad investment at $16.

Be Afraid (Of Fear)

Takeaway: A pervasively strong US Dollar has far reaching global macro implications. You get the USD right, you get a lot of other things right.

Bill Gross may not like it, US stock market bears may not like it, but #StrongDollar + #RisingRates are still tattooing Treasuries, Gold and Emerging Markets.


Meanwhile, US stocks are still ripping higher with the Russell 2000 notching another new all-time high today up almost 20% YTD. Yes - we’ve been calling for this all year long.


Be Afraid (Of Fear) - Chart of the Day


We don’t fear growth here at Hedgeye. We know a lot of other folks do. But to paraphrase FDR, what people should really be afraid of is … fear itself. It has been on sale all year.


Just look at Gold (and its levered brethren gold miners) cratering, along with Volatility and Treasuries. The fact is being short fear has been and remains the best place to be positioned.


It’s all about the TRIFECTA (Employment, Housing and Consumption Growth in the U.S.) The trifecta has been our pointedly non-consensus, time stamped call all year. When you get it, the US Dollar responds. Strongly. You want to be long growth in Financials and Consumer Discretionary.


I’ve said it before and I’ll say it again: You should be avoiding commodities like the Bubonic plague. I don’t know how else to put it. Gold, Copper, Silver—they all look like hell. I don’t know why anyone would buy them.


That said, we’re keeping a close eye on Brent Oil. It’s the biggest risk to U.S. Consumption growth. Oil has been diverging due to Middle East unrest. If it shoots up to $112, that would be terrible for U.S. consumption growth.


Look, consumption growth happens to a point. But everything that really matters happens on the margin. So if Brent goes above our long term TAIL line that would be bad news. It makes the game a little bit tougher in here.


Getting Global Macro right has been relatively easy this year. It has had many simple, but moving, parts. In the end it’s all correlated and it’s all about having a proven process. Bottom line is a pervasively strong US Dollar has far reaching global macro implications. You get the USD right, you get a lot of other things right. 


(This is a brief excerpt of Hedgeye Risk Management CEO Keith McCullough's morning conference call. If you would like additional information on our products and services please click here.)

European Banking Monitor: Negative Divergences in Italy and Greece

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - Bank swaps were narrowly tighter across Europe last week with negative divergences in Italy and Greece. 


European Banking Monitor: Negative Divergences in Italy and Greece - vv. banks


Sovereign CDS – Sovereign swaps were mostly uneventful last week with two exceptions. Portugal widened by 73 bps to 474 bps, while Japan tightened by 5 bps to 73 bps. All other major markets were unchanged.


European Banking Monitor: Negative Divergences in Italy and Greece - vv.sov1


European Banking Monitor: Negative Divergences in Italy and Greece - vv.sov2


European Banking Monitor: Negative Divergences in Italy and Greece - vv.sov3


Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Negative Divergences in Italy and Greece - vv.euribor ois


ECB Liquidity Recourse to the Deposit Facility – Deposits rose by 11.5 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: Negative Divergences in Italy and Greece - vv.facility

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