Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen.

Keith McCullough – CEO

New home sales hit five-year high, prices soar (via Reuters)

Criminal Indictment Is Expected for SAC Capital Advisors (via DealB%K)

What does it take to be wealthy? $5 million (via CNNMoney)

Clashes in Mexico's Michoacan state leave 22 dead (via BBC)


Morning Reads on Our Radar Screen - bullbear


Jay Van Sciver – Industrials

CATastrophe: Why Caterpillar, Inc. is a Strong Sell (via thelongshorttrader)

Caterpillar cuts outlook on lower sales, plans more cost cuts (via Reuters)


Daryl Jones – Macro

Jim Cramer's TheStreet Facing Hostile Takeover by Spear Point (via Benzinga)


Tom Tobin – Healthcare

Fewer Hospitals May Lead to Higher Prices (via Time)


Josh Steiner – Financials

Nasdaq Profits Fall, Missing Estimates; Declares Dividend (NDAQ) (via


Howard Penney – Restaurants

Panera cuts 2013 view after restaurant sales miss target (via Reuters)


Brian McGough – Retail

Iconix 2Q profit up, lifts 2013 profit outlook (via AP)

PCAR: 2H Buying Opportunity Coming?



Given the risks inherent in the Hours-of-Service (HOS) regulations, the Euro 6 pre-buy and higher a share price relative to our fair value range, we do not expect PCAR to continue to outperform in 2H 2013.  PCAR is one of the best large U.S. industrial franchises and we would like to re-enter lower.  The HOS regulations and Euro 6 emissions standards may yet let us do so.


Key Items


Euro 6 Pre-buy:  To us, PCAR’s quarter looked fairly dependent on the Euro 6 pre-buy.  The effect of Euro 6 is hard to estimate - even though it was downplayed on the call.  Sales in Europe would probably not have been up (while those in the US and Canada were down) without it.  That pre-buy will probably reverse in 2014, with orders leading by year-end.


Industry Not Great Into HOS:  As we have written before, the industry backlog to build ratio (and other metrics) are not all that strong into the new HOS regulations.  These regulations will almost certainly exacerbate the driver shortage and negatively impact truck sales.


PCAR Strategy:  We would look to exit PCAR around here (it’s at the high end of our base case valuation range less special dividend, for example).  We suspect that Europe orders will look weak into 2014 with Euro 6 pending.   We also suspect that 2H 2013 US orders will look weak post hours-of-service.  We do not think that investors are compensated valuation-wise for taking those risks at current levels.  If PCAR gets clobbered on HOS, Euro 6 and other worries, we would very much like to re-enter.  There are a number of positive drivers for PCAR, as we outlined in our Truck OEM black book last August, including a very old North American fleet, parts sales on the MX engines and some returns on investments in Brazil.  But the shares have outperformed significantly since that presentation, leaving the risk/reward trade-off less attractive.  We are looking to buy a big dip, if we get it.  If not, there are other fish.



PCAR: 2H Buying Opportunity Coming? - nb


Short the Fear

Client Talking Points


Fact: Fear is not getting paid. S&P 500 still ripping higher up +18.7% year-to-date. Russell 2000 absolutely en fuego up basically +24% year-to-date. Key point is S&P 500 has been down only two of the last fourteen days. Yesterday's tiny -0.2% "Mini-Me" correction came on the lowest volume day in the last fourteen. Overall volume trending very weak in July; but the two down days had lower volume than all of the up days. Incidentally, today is the 10th consecutive day where all 9 sectors in our Hedgeye S&P model are bullish on both our TRADE and TREND durations. Don't short any sectors. Immediate-term risk range on S&P 500 is 1684-1702.


Both the Bubonic Plague (Gold) and Oil are backing off this morning as the US Dollar stops going down. For the record, we bought back our long USD position yesterday; we still like that versus short Yen. Not to rain on the Gold Bug Parade, but the precious metal is down 20% year-to-date. Our immediate-term risk range (in our Daily Trading Range product) for Gold is $1249-1349. The immediate-term risk range on Oil (Brent) is $107.21-109.14. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


Hedgeye only gets paid for being right - no banking, broker dealering, or insider trading - just research



Huh? Caterpillar CEO Olberhelman on CNBC this morning: "3 to 5 to 10 years down the road mining activity will come back."


China's manufacturing weakened by more than estimated in July, according to a preliminary survey of purchasing managers that casts further doubt on the government’s ability to meet its annual economic growth target. The reading of 47.7 for an index released today by HSBC Holdings Plc and Markit Economics, if confirmed in the final report Aug. 1, would be the lowest in 11 months. Readings below 50 indicate contraction. (Bloomberg)

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Similar trend to Q1 



Upper upscale (UUP) & Luxury Transaction Trends for Q2 2013

  • Q2 2013 worldwide hotel transactions (UUP & Luxury brands) was $2.0 billion, similar to Q1 2013's $2.0 billion but lower than Q2 2012's $2.7 billion. 
  • The number of US luxury/UUP hotel transactions (where price was disclosed) was 12 in Q2 2013 compared with 7 in Q1 2013 and 6 in Q1 2012. 
  • The number of non-US luxury/UUP hotel transactions (where price was disclosed) was 8 in Q2 2013 compared with 7 in Q1 2013 and 10 in Q2 2012.
  • As usual, REITs were very active. 
  • HST bought Hyatt Place Waikiki for $325k APPK (average price per key) and HOT sold W New Orleans for $158k APPK
  • Several multi-asset deals with one large M&A deal in the Upscale segment:  Apple REIT Six merged with BRE Select Hotels (an affiliate of Blackstone); 
  • Relative to a two-year trailing average, US average price per key (APPK) in the UUP segment slipped 11% at $237k.  Non-US APPK in the UUP segment rose 39% to $465k 

Delinquency rate

  • According to Fitch, the hotel delinquency rate in June was 8.4%, higher than that seen in March 2013.  However, the delinquency rate remains well below the relative high of 14% seen in Q3 2011.








July 24, 2013

July 24, 2013 - 724dtr

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