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THE M3: RUSSIA; TAM COMMENTS ON CURRENCY MONITORING; SJM COTAI NON-GAMING

THE MACAU METRO MONITOR, JULY 11, 2013

 

 

MACAU MOGUL LAWRENCE HO COMMITS TO CASINO IN RUSSIA WSJ

Lawrence Ho's Summit Ascent Holdings Ltd. said Wednesday it agreed to buy a 46% stake in an initial US$130 million phase of the casino project on the outskirts of Vladivostok.  Melco International Development Ltd, which also is run by Ho would take a 5% stake.  It is unclear if MPEL is not involved. 

 

Ho and his Russian associates also signed a memorandum of understanding to be equal partners in a second phase of the project, estimated to cost US$500 million.  Ho's companies cited Russia's low tax rate, proximity to northeast China, "cordial diplomatic relationship" with Beijing and Vladivostok's tourism potential as reasons for the investment.

 

The first phase of the planned casino resort in Primorye—a vast eastern region bordering China and Korea—is scheduled to open in September of next year. The developers plan to build around 120 hotel rooms and install 65 gambling tables and 800 slot machines. The second phase could include 170 gambling tables, 500 slot machines, 500 hotel rooms and entertainment and conference facilities.

 

GOVT SAYS TOURISTS' CASH DECLARATION WON'T UNDERMINE MACAU'S FREE PORT STATUS Macau News

Secretary for Economy and Finance Tam Pak Yuen said that cash flow across the border would not be restricted “as long as it is not related to money laundering”, insisting that the city’s status as a free economy and free port would hardly be affected by the possible implementation of the cash declaration system.  The purpose of the system was to enable “higher transparency and monitoring of the flow of cash", he added.

 
When asked if the “threshold” was currently being studied, Tam said that “the relevant entity is studying the amount suitable for Macau’s situation”, reiterating that the first priority was to study “if Macau needs to implement this system”.
 
Tam also said that the cash declaration system “is not targeting the gaming industry,” stressing that the possible measure was not “a limitation on the movement of cash at all.”

 

SJM HOLDINGS SIGNS NON-GAMING ENTERTAINMENT FOR COTAI Macau Business

Olympics 2008 supplier Beijing Gehua Cultural Development Group will create an entertainment precinct and cultural attractions for SJM Holdings Ltd’s Cotai development.  The RMB2-billion (MOP 2.6 billion) deal will lead to the creation of the Wonderland of Art and Literature, including performances, exhibitions and amusement park rides based on Chinese cultural themes.

 




THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 11, 2013


As we look at today's setup for the S&P 500, the range is 42 points or 1.55% downside to 1627 and 0.99% upside to 1669.                     

                                                                                                          

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.22 from 2.27
  • VIX closed at 14.21 1 day percent change of -0.98%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Import Price Index, M/m, June, est. 0.0% (pr. -0.6%)
  • 8:30am: Init Jobless Claims, week of July 6, est. 340k
  • 9:45am: Bloomberg Cons Comfort, week of July 7 (pr. -27.5)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed’s Tarullo testifies on regulation to Senate
  • 11am: Fed to buy $1b-$1.5b TIPS in 7/15/2017-2/15/2043 sector
  • 1pm: U.S. to sell $13b 30Y bonds in reopening
  • 2pm: Monthly Budget Statement, June, est. $100b

GOVERNMENT:

    • 9am: U.S.-China Economic and Security Review Commission holds roundtable on deterring cyber theft
    • 11am: Senate Banking, Housing and Urban Affairs Cmte hearing on “Mitigating Systemic Risk Through Wall Street Reforms,” w/ Fed Governor Daniel Tarullo, FDIC Chairman Martin Gruenberg, Comptroller of the Currency Tom Curry
    • 3:30pm: ACLU, Assn for Molecular Pathology briefing on Supreme Court decision to strike down patents on human genes

WHAT TO WATCH

  • June U.S. retail sales likely helped by heat, pent-up demand
  • Euronext will be spun off in IPO mid-2014, Cerutti says
  • Microsoft reorganization to be announced today: AllThings D
  • BOJ keeps monetary policy on hold as recovery signs seen
  • U.S., Europe said poised to announce agreement on swap rules
  • PC shipments fall for 5th quarter even as U.S. decline slows
  • Bank Indonesia raises benchmark rate more than forecast to 6.5%
  • Luxembourg PM to resign amid security service spying probe
  • Heineken sells Hartwall unit to Royal Unibrew for $614m
  • Sprint drops Nextel from co. name as SoftBank takes control

EARNINGS:

    • Commerce Bancshares (CBSH) 7am, $0.71
    • Corus Entertainment (CJR/B CN) 7am, C$0.51
    • Progressive (PGR) 8:12am, $0.41
    • Bank of the Ozarks (OZRK) 6pm, $0.57

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • IEA Sees 20-Year Supply Peak Outpacing Demand Recovery in 2014
  • Corn Bets Turn Bearish as Rain Revives U.S. Crops: Commodities
  • Thai Sugar Harvest Seen at Record Adding to Global Surplus
  • WTI Trades Near 15-Month High as U.S. Crude Inventories Plunge
  • Copper Reaches Three-Week High on Outlook for Further Stimulus
  • Gold Nears $1,300 After Fed’s Bernanke Backs Sustained Stimulus
  • Commodity Traders Face New Squeeze as Storage Congestion Spreads
  • Crude-by-Rail Profits Fall as WTI-Brent Narrows: Energy Markets
  • Raw Sugar Rebounds in New York After Brazil Raises Interest Rate
  • Japan Purchases Alternatives to Oregon Wheat in Tender
  • Zinc May Advance to $1,974 on Retracement: Technical Analysis
  • South Africa Mine Wage Talks Open With Highest Demands on Record
  • Iron Ore Bests Metals as Prices Have Gone Nowhere Since 1913
  • Corn Gains as Investors Weigh Stress Risk to Record U.S. Crop

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 


BRENT: BEWARE THE BREAKOUT

Takeaway: Brent Oil is a potential fly in the #GrowthAccelerating ointment.

Brent Oil is dancing around our long-term tail-risk line of $108.36/barrel today. It broke out above it earlier in the session. 

 

BRENT: BEWARE THE BREAKOUT - Brent Breakout

 

Our global macro model says $108.36 (or higher) is key. That is where we choke global consumption demand. Since U.S. consumption growth effectively doubled in the last six months to 2.4% vs. 1-1.2% prior, that’s a headwind, on the margin.

 

An expedited back-up in oil costs and the follow-on impact to fuel prices will be a headwind to other discretionary consumption growth. Gas prices aren’t yet a headwind (they are still lower on both a YoY and QoQ basis) but any existent tailwind is diminishing.

 

BRENT: BEWARE THE BREAKOUT - National Average Gas Price

 

A large and sustained back-up in energy costs (at the same time as the furloughing of federal workers), while not a direct drag to disposable income growth, does serve as an incremental drag to consumption.

 

Bottom line: Rising Oil Prices is not a dynamic supportive of continued #GrowthAccelerating.  

 

BRENT: BEWARE THE BREAKOUT - US Fuel Consumption


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#RatesRising

Takeaway: Consumer Discretionary and Financials are where you want to be positioned.

This note was originally published July 09, 2013 at 15:07 in Macro

We’ll introduce our detailed view on #RatesRising and the cross-asset class implications of the reversal in the 30Y bull cycle in bonds on our 3Q13 Macro Themes call next Tuesday July 15th. 

 

#RatesRising - benj

 

As a visual preview and for some historical context, the sector study below shows the average, relative Q/Q sector performance during periods in which the factor combination of:  Rising 10Y Yields, Expanding Yield Spread, and $USD appreciation all prevailed.  At n=7, the sample population isn’t overly large but we’d still view the output as instructive. 

 

General underperformance in defensives and outperformance in cyclicals isn’t particularly surprising.  Additionally, we’d note that given the policy catalyzed, positive relative performance in yield chase assets, the downside for sectors such as Utilities and Staples is likely larger than historical precedent would suggest.  

 

Further, in the context of our #StrongDollar and Bearish China/Emerging Markets view, the relative performance risk for Materials and select Energy & Industrials is likely to the downside vs the historical mean.  

 

In short, alongside continued TREND improvement in domestic Labor Market, Housing, Confidence and Credit metrics, we’re viewing the back-up in Treasury rates and expansion in the yield spread as a pro-growth signals.  

 

In terms of positioning, the 1H13 playbook remains largely in-tact with Consumer Discretionary and Financials the best way to find positive $USD and domestic consumption leverage at the sector level.  While equities are immediate-term overbought here (see today’s note: Overbought: SP500 Levels, Refreshed) we continue to like the absolute and relative growth setup for the U.S. and pro-growth oriented asset exposures.

 

#RatesRising - ccc

 

#RatesRising - 2013 MACRO FLOW

 

 

Christian B. Drake

Senior Analyst 

 


CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS?

Takeaway: Chinese policymakers remain inclined to resist consensus demands for any meaningful monetary and/or fiscal easing.

SUMMARY BULLETS:

 

  • We maintain conviction in our view that Chinese policymakers have no intention to meaningfully stimulate economic activity over the intermediate term – absent a “decrease [in economic growth] to the ‘lower limits’ set earlier” (according to Premier Li’s most recent commentary). The Party’s own economic rebalancing agenda, its preference for economic and social stability, accelerating property price inflation and a recent upside inflection in CPI all remain a headwind to monetary or fiscal easing.
  • Given that Chinese officials remain content to pursue slower, more sustainable rates of economic growth for the foreseeable future, we can’t help but anticipate a continuation of recent negative trends for Chinese equities, which continued to be pressured from a top-down (#EmergingOutflows) and bottom-up (structural banking sector headwinds) perspective.
  • With that in mind, don’t mistake the manic media’s interpretation and attempted explanation of today’s dead-cat bounces across Chinese equities and industrial metals as anything more than that. In fact, the Shanghai Composite Index can rally another +9% from here to its TREND line of resistance and our interpretation of the fundamental outlook for Chinese equities won’t have changed a bit.
  • In the immediate term, macro markets mean revert and we recommend having a tried and tested quantitative risk management process to properly interpret the price action. Over the intermediate-to-long term, however, macro markets tend to trend in the absence of a fundamental inflection(s) in economic gravity. With respect to Chinese stocks – specifically bank and property developer shares – we think that trend remains south.

 

To borrow and manipulate a quote from the late Rick James, “[monetary easing] is one helluva drug”. Indeed, it’s interesting to see yet another salty batch of Chinese growth data inflate consensus expectations of monetary and/or fiscal easing out of Chinese policymakers. Such has been the case for much of the past 18 months, despite Chinese equities and Chinese economic growth making-lower highs in the process.

 

CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS? - 7

 

CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS? - 8

 

Needless to say, we remain inclined to take the other side of such speculation.

 

Specifically, we maintain conviction in our view that Chinese policymakers have no intention to meaningfully stimulate economic activity over the intermediate term – absent a “decrease [in economic growth] to the ‘lower limits’ set earlier” (according to Premier Li’s most recent commentary). The Party’s own economic rebalancing agenda, its preference for economic and social stability, accelerating property price inflation and a recent upside inflection in CPI all remain a headwind to monetary or fiscal easing.

 

CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS? - China Real Estate Climate

 

CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS? - 2

 

Explicitly in the 12th Five-year Plan and implicitly through their [in]action during the recent credit crunch Chinese officials remain content to pursue slower, more sustainable rates of economic growth for the foreseeable future. Heck, the Ministry of Finance actually just issued a country-wide directive for central government agencies to cut spending by an incremental 5% for 2013.

 

It should be noted that the Politburo, the PBoC and the State Council all came out at varying instances last week and talked down market expectations for GDP growth, credit expansion and/or monetary/fiscal easing going forward. Why some market participants appear content to ignore the data is beyond us:

 

  • President Xi Jinping said officials shouldn't be judged solely on their record in boosting GDP. He added, “the Communist Party should instead place more importance on achievements in improving people's livelihood, social development and environmental quality when evaluating the performance of officials”.
  • Premier Li Keqiang said the conditions for the Chinese economy to achieve its growth targets are [already] in place. Specifically, he noted that “conditions exist for China to realize its economic targets for this year and for sustainable, healthy development”.
  • PBoC Governor Zhou Xiaochuan affirmed our belief that the recent cash crunch was primarily caused by excessively rapid YTD credit expansion at some banks and was a timely reminder that many Chinese financial institutions need to adjust their businesses models. Specifically, he stated, “the PBoC refused to inject liquidity because it wanted the banks to adjust their practices, and the message has been correctly understood by the market”.
  • The State Council on Friday reiterated that it will maintain a prudent monetary policy to support economic restructuring. While it pushed back against requests from commercial lenders to loosen policy, it did note that credit growth will be kept at a reasonable level.

 

Just because we were largely on holiday last week doesn’t mean the Chinese economy took a vaca as well…

 

To play devil’s advocate and indulge the Pavlovian consensus hysteria, even if Chinese policymakers wanted to put the easing pedal to the metal, the law of large numbers rests as a meaningful roadblock for a material inflection in Chinese GDP growth (from our JUN ’12 note titled: “CHINA’S RATE CUT IS LIKELY A BAD SIGN OF WHAT LIES AHEAD”):

 

“… the 2008 stimulus package was CNY4 trillion or 12.7% of GDP at the time – that’s a fairly large hurdle to climb for an economy that is roughly ~50% larger in size (on a nominal basis) from its year-end 2008 level.”

 

In case “Pavlov” (i.e. consensus) is actually right for once and the PBoC does cut rates in the intermediate term – a highly improbable scenario based on Chinese OIS spreads – please note the title of the aforementioned research note and the fact that Chinese economic growth and Chinese equities continued trending down from the time of its publication until their respective inflections in late 2012.

 

CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS? - 3

 

With Manufacturing PMI hitting a 4M low and Services PMI hitting a 9M low in JUN, a lack of meaningful easing measures (i.e. PBoC reverse repos won’t cut it) does not bode well for China’s TREND duration growth outlook.

 

CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS? - 4

 

Given that Chinese officials remain content to pursue slower, more sustainable rates of economic growth for the foreseeable future, we can’t help but anticipate a continuation of recent negative trends for Chinese equities, which continued to be pressured from a top-down (#EmergingOutflows) and bottom-up (structural banking sector headwinds) perspective.

 

CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS? - China SHCOMP

 

CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS? - HSI

 

With that in mind, don’t mistake the manic media’s interpretation and attempted explanation of today’s dead-cat bounces across Chinese equities and industrial metals as anything more than that. In fact, the Shanghai Composite Index can rally another +9% from here to its TREND line of resistance and our interpretation of the fundamental outlook for Chinese equities won’t have changed a bit.

 

In the immediate term, macro markets mean revert and we recommend having a tried and tested quantitative risk management process to properly interpret the price action. Over the intermediate-to-long term, however, macro markets tend to trend in the absence of a fundamental inflection(s) in economic gravity. With respect to Chinese stocks – specifically bank and property developer shares – we think that trend remains south.

 

Darius Dale

Senior Analyst


WWW: Another Milestone to $100

Takeaway: 2Q spot-on with our call that this is a $100 stock over 2-yrs. But we need some serious context around some overblown near-term factors.

This note was originally published July 09, 2013 at 13:30 in Retail

WWW's 2Q print was spot-on with what we needed to see to remain confident in our call that this is a $100 stock over 2-years.  We think that the revenue hammer is cocked to add $1bn in sales over three years. This is accentuated by the margin story that reared its head meaningfully in 2Q and will get return on capital moving in the right direction after a 2-year decline.

 

WWW: Another Milestone to $100 - sp99

 

One thing that became abundantly clear to us in listening to the conference call is how bifurcated the perception is on this name. We all know that Wall Street is naturally short-sighted, but easily 80% of the time on this marathon 80-minute call was allocated to near-term puts and takes that have no real bearing on what we think is relevant to the appropriate money-making thesis.

 

There were two factors in particular that were a big focus (and shouldn’t be). 1) The lack of guidance, and 2) Commentary around accretion of the PLG brands.

    1. WWW bowed out of the quarterly earnings game, and simply reaffirmed an annual revenue range while upping annual EPS guidance by a dime after a $0.13 EPS beat Q2. Combined with unidentified/unauditable expenses that were supposedly pushed out, and unquantified revenue that was pulled forward, WWW succeeded in spooking the Street into keeping back half estimates low.  We're at $2.86 vs. a consensus range for the year between $2.60-$2.75.
       
    2. PLG Accretion. Here's one where we've got to call a spade a spade. Either the company's forecast accuracy as it relates to acquisition accretion is simply horrendous, or they've artfully sandbagged the Street's expectations on a consistent basis. Consider the progression of expected accretion/dilution vs. actual results. Going into the year, WWW guided to Modest Accretion in 1Q, Slight Dilution in 2Q, and $0.35-$0.50 per share in accretion for the year. It ended up earning $0.34ps and $0.24ps in 1Q and 2Q, respectively, from PLG, or $0.58 combined. Now, even though at the beginning of the year it called for accretion in both 3Q and 4Q, it is taking down expectations for zero back half accretion.  Perhaps we'll fall victim to thinking there's a sandbag when one does not exist, but given the momentum of Sperry and Keds, we find it very difficult to get to a loss in 2H.

       

The near-term factor that mattered most, in our opinion, was the fact that the Performance division went from +8% in 1Q to -4.8% in 2Q. Simply put, Merrell, WWW's largest division, tanked.  We can talk all day about how a product like M-Connect is up double digits, but the reality is that Merrell has a huge division called Outdoor Lifestyle that sells the non-performance product in the portfolio.  We think that it was ignored immediately following the PLG acquisition, which is less than optimal given that it accounts for about 40% of the Merrell portfolio.  The good news is that the company made organizational changes over the past 3-6 months, and the order backlog for the brand in aggregate turned up to the point where management noted that it can grow low single digits for the year. We have no reason to believe that they're lying about order levels, and the channel is lean enough that we don't forsee outsized cancellation levels. In other words, we're going to give them the benefit of the doubt on this one.

 

Even better is that the full benefit of the Merrell reorganization will be seen at the beginning of 2014, which is also when we start to see a greater impact from the company scaling Sperry and Keds over the existing International infrastructure.  From a timing perspective, this is when we think people will really start to realize that WWW is much growthier than they otherwise think.

 

 

 

OUR THESIS

The Street is grossly underestimating the revenue growth opportunity as the legacy WWW scales its recently acquired brands over its global infrastructure.  We think WWW can and will add $1bn in sales to its $2.7bn base over 3-years. Under its former owner, Sperry, Keds, Saucony and Stride-Rite only generated 5% of its sales outside of the US, and most of that was in Mexico and Canada. Legacy WWW, on the other hand, is the most global footwear company in the world (yes, even more so than NKE and AdiBok), with 65% of units sold outside the US through an elaborate network of seamlessly-integrated third-party distributors. Given that the infrastructure is already in place, the incremental sales should be brought on close to a 20% incremental margin, versus 8% margin today. Similarly, minimal capital is needed on the balance sheet to grow these brands, making the growth trajectory over the next 3-5 years very ROIC accretive. The stock might look expensive at 20x earnings and 12x cash flow, but the street’s numbers are low by an incremental 10% per year. We're at $5.75 to the Street's $4.25 three years out.  We’d buy aggressively on a pullback, but are not so sure that will happen. We think WWW is a double over 2-3 years.

 

 

WWW: Another Milestone to $100 - mcg1

 

WWW PROFITABILLITY  ROADMAP (Components of RNOA)

WWW: Another Milestone to $100 - 2

 

 

 

 

 


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