Bad is Good

Client Talking Points

JAPAN

Japanese Industrial Production for June came in at -4.8% y/y vs expectations for -2.6%. Given the complete Japanese co-opting of western style Keynesian policy, the accelerating slowdown is viewed as a market positive as it ensures continued easing and ongoing Yen debasement – exporters benefit and things priced in (less valuable) Yens go up.   The Yen, despite recent strength, failed at our 97.61 resistance line which, of course, is positive for the dollar, on the margin.   The $USD remains Bullish in our quantitative risk management model with immediate downside/upside at $81.46/82.39. 

10 YR

With the SPX off a whopping 37bps yesterday on vapid volume, the 10YR barely took notice – advancing 4bps to 2.60% and is holding that level this morning.  With a record over-allocation to fixed income funds and near historic lows in investible cash, we continue to think money flows from bonds to equities as investors and asset allocators adjust portfolio’s to reflect the realities of #RatesRising.        

Asset Allocation

CASH 37% US EQUITIES 24%
INTL EQUITIES 14% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
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.

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. 

HCA

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

TWEET OF THE DAY

#Water is the next great asset class, the next great uncorrelated investment - @JamesGRickards

QUOTE OF THE DAY

"..We can ease policy further if needed.  The recent decline in the exchange rate seems to make sense from a macroeconomic perspective. It would not be a major surprise if a further decline occurred over time.” Glenn Stevens, RBA Governor

STAT OF THE DAY

Japan Industrial Production -4.8% YoY vs -2.6% estimate.  Nikkei Up on more Japan QE.   


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