October 25, 2013

October 25, 2013 - Slide1



October 25, 2013 - Slide2

October 25, 2013 - Slide3

October 25, 2013 - Slide4



October 25, 2013 - Slide5

October 25, 2013 - Slide6

October 25, 2013 - Slide7

October 25, 2013 - Slide8

October 25, 2013 - Slide9

October 25, 2013 - Slide10

October 25, 2013 - Slide11



TODAY’S S&P 500 SET-UP – October 25, 2013

As we look at today's setup for the S&P 500, the range is 21 points or 1.09% downside to 1733 and 0.11% upside to 1754.                               










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.21 from 2.22
  • VIX closed at 13.2 1 day percent change of -1.64%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Durable Goods Orders, Sept., est. 2.2% (prior 0.1%)
  • 9:55am: U Mich Consumer Sentiment, Oct. final, est. 75.0 (prior 75.2)
  • 10am: Wholesale Inventories, Aug., est. 0.3% (prior 0.1%)
  • 1pm: Baker Hughes rig count


    • President Obama speaks in N.Y. on importance of education, entrepreneurship, middle class competitiveness
    • Senate, House out of session
    • U.S. Customs and Border Protection holds final day of East Coast Trade Symposium on “Increasing Economic Competitiveness through Global Partnerships and Innovation”


  • Twitter seeks $1.4b in biggest Web IPO since Facebook
  • Twitter insiders hold on to shrs in IPO amid growth prospects
  • JPMorgan said to see possible U.S. accord on Madoff scheme role
  • Microsoft 1Q sales, profit top analyst ests.
  • Amazon reports jump in 3Q rev. ahead of holiday shopping season
  • DuPont says it will spin off performance chemicals subsidiary
  • Fed said to issue warning about lax loan underwriting practices
  • U.K. eco. grew in 3Q at strongest pace since 2010 on services
  • German business confidence unexpectedly decreased in Oct.
  • Samsung’s record earnings fueled by demand for handsets to chips
  • Toyota loses $3m verdict in Oklahoma fatal crash lawsuit
  • Ares Capital Management planning IPO, hires JPM: N.Y. Post
  • Boeing gets China commitment for $20.7b of 737s: Reuters
  • Europe clocks go back 1 hour as daylight savings time ends
  • Fed Meeting, BOJ, Iran Talks, Apple: Week Ahead Oct. 26-Nov. 2


    • AbbVie (ABBV) 7:51am, $0.78 - Preview
    • Aon (AON) 6:30am, $1.04
    • Avery Dennison (AVY) 8:30am, $0.64
    • Brookfield Office Properties (BPO CN) 7:20am, $0.25
    • DTE Energy (DTE) 7:10am, $1.22
    • Eaton (ETN) 6:30am, $1.12
    • ImmunoGen (IMGN) 6:30am, $(0.22)
    • Lear (LEA) 7am, $1.33
    • Legg Mason (LM) 6:59am, $0.62
    • Moody’s (MCO) 7am, $0.81
    • National Oilwell Varco (NOV) 7am, $1.32 - Preview
    • Newell Rubbermaid (NWL) 6:30am, $0.49 - Preview
    • Procter & Gamble (PG) 6:58am, $1.05 - Preview
    • Rockwell Collins (COL) 7:25am, $1.31
    • Sherwin-Williams (SHW) 8am, $2.64
    • Simon Property (SPG) 7am, $2.16 - Preview
    • TCF Financial (TCB) 8am, $0.23
    • United Parcel Service (UPS) 7:45am, $1.15 - Preview
    • Ventas (VTR) 7:03am, $1.02
    • WisdomTree Investments (WETF) 7am, $0.09


  • Abe’s Farmers Fight Fat as Trade Talks Mean Tariff Cuts in Japan
  • Gold Bulls Persist on Dollar Drop as Stimulus Kept: Commodities
  • Gold Trades Below Three-Week High as Demand May Slow After Rally
  • Copper Heads for Weekly Drop on Concern China May Tighten Credit
  • Wheat Gains as Australia Dry Weather Adds to Crop Damage Concern
  • WTI Oil Fluctuates on the Way to Biggest Weekly Loss Since June
  • Cocoa Butter Falls as Chocolate Makers End Christmas Buying
  • Crude May Decline Next Week as Weak Demand Boosts U.S. Supplies
  • Palm Oil Declines Most in Four Weeks as Malaysian Exports Slow
  • Rubber in Tokyo Has First Weekly Loss in Three as Yen Climbs
  • Aluminum Shipments by Japan Expand as Auto Demand Improves
  • Anglo American CEO Cools on Minas-Rio Stake Sale as Prices Climb
  • European Coal Rallying From Record Low on Growth: Energy Markets
  • Copper Set for Weekly Drop on China Credit Concern: LME Preview


























The Hedgeye Macro Team















I’d like to have some of what Steve Wynn was eating during the conference call last night.



WYNN served up a tasty quarter and whet our appetites with hints of an impactful upcoming Board meeting.  A smorgasbord of issues will likely be discussed at the meeting including a special dividend, whether to pull out of the MA and PA bidding, and potentially moving corporate headquarters to Asia (just our guess).  


WYNN’s long-term prospects in Asia are delicious:  Potential new menus in Japan, Taiwan, and South Korea, and the Cotai project that could open before Chinese New Year in 2016.  Moreover, WYNN also announced a Phase II in Cotai.  Over the near-term, Wynn Macau is finally hungry for potential market share gains in the Mass market.  While the overall continued strength of Macau was discussed, management’s recent aggressive push into the Mass business was not.


We think Wynn Macau will be more aggressive promoting its Mass business, something it really hasn’t done.  Macau management was enhanced recently with some Mass focused personnel.  Consistent market share losses have been a key tenant of the WYNN bear thesis.  Any reversal will likely be rewarded by investors.  As can be seen in the following chart, September produced a Mass revival for Wynn Macau.  Our sources indicate that the property should show further gains in October and likely for the rest of the year.



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.68%


Strong quarter and outlook 




  • On their way to having their best year
  • Wynn Palace on schedule for CNY 2016 but by 1H 2016 at the latest
  • Planning for phase 2 for Wynn Palace - will introduce a revolutionary product
  • $1 BN cash at parent company; after tender at Wynn LV, they'll have $250MM
  • Macau: >$1.8BN cash and $1.55BN  revolver - plenty of capital
  • Las Vegas:  positive trends in 4Q as well as 2014; continuing with same momentum as they've had in previous Q
    • Conventions trending very well
  • WYNN board meeting: Nov 4/5- will discuss special dividend possibility
  • Encouraged about MA but very challenging, complex situation there; timelines change frequently
  • Like idea of hotels with casinos
  • Adding 2 major junket areas at Wynn Macau (southwest corner); they will be done by CNY 2014
  • Wynn Diamond will include the Wynn  Diamond coliseum of 15,000 seats, it will include an  all suite Wynn Diamond hotel that will be directly related 1,300-square foot feet at the premium mass  market and above.
  • Will consider social/virtual gaming opportunity
  • High hold (direct business) impacted Macau by $10-15MM
  • Vegas:  F&B revenues may have been hurt by new competition from Hakkasan but Wynn emphasized the need to protect the bottom line, not top line
  • No comment on Japan
  • Macau: usual rooms out of service in 3Q; remodel will be done in few weeks-remodel is more about retaining existing customers than attracting new customers

CRI: DON'T Build A Position Here

Takeaway: There's a lot of warning signs right now with CRI. The company has been executing, but PLEASE, don't build a position here.

We didn't like this CRI quarter one bit. In fact, with the exception of good growth in e-commerce, there wasn't a single thing we liked.   To be clear, we were negative on this name last year,  and though we were mostly right on the model, we couldn’t have been more wrong on the stock.  Though we continued to have a serious bias against the sustainability of the business model, we kept our discipline and (painfully) threw in the towel on our short. Congratulations to all of you that rode this horse from $50 to $75 over the past year.  Lesson learned for HedgeyeRetail.


All of that said, there's no shortage of reasons for selling your position today. Consider the following…


1. Here's the elephant in the room: CRI  borrowed an extra $400mm in debt to repo $454mm stock (thus far). We ordinarily would give a company credit for such a buyback, but to execute on such a big program when Margins are at peak, your stores are comping down, inventory is building, and your stock is at an all-time high???   We're sure it went through an exhaustive corporate governance process, but quite frankly, we're surprised that any board let it get past the goalie.


2. At face value, the growth algorithm looks good -- until you get to SG&A. On a GAAP basis, earnings were down for the second quarter in a row. We know no one cares about GAAP anymore, but hey, it's the REAL earnings of the company.  Even excluding all special charges, earnings only grewby 9.5% -- well below the rate of revenue.


3.  Wholesale Carters was the star. Kinda.


4.  Carter's Retail put up slammin' revenue numbers as well -- up 16% in aggregate, but 8.9% when we exclude e-commerce.  The comp was up only 0.5%. But get this…they're on track to open 66 new stores for the year. Can someone explain to me why a company is growing 14.5% square footage while its stores are not comping. This is a little reminiscent of Coach (but not as pathetic).


5.  As good as a 15% retail top line number is, it's hard to get excited about it when EBIT grows 500bp slower.


6.  Dot com looked really good for CRI, but keep in mind that its still only 7% of brand sales. Other premium brands are 2x that rate. The good news for CRI is that the new DC in Atlanta will help keep this growth rate in gear.


7.  In wholesale Carters, the Brand printed 6.4% EBIT growth on a whopping 15.6% top line performance.  Clearly it did not play the promotional game wisely this quarter. The company noted an ad shift into the quarter, as well as some air freight expense. If we assume that all of this  a) actually happened, and b) was about $7mm, then margins were about flat versus last year.


8.  Osh Kosh Wholesale: Down double digits for the fourth quarter in a row, with operating profit clocking in at a whopping $2mm. In fact, if you add up all the EBIT generated by Osh Kosh Wholesale over the past five ears, you come up with an embarrassingly low number -- $15mm. It's not getting better.


9.  Retail Osh Kosh put a better foot forward by NOT shrinking its revenue base for the first time in 8 quarters.  That said, it was entirely due to e-commerce, as the base stores comped down by 4.3%.


10.  Here's a comment we don't get...

Management: "We continue to see strong demand for our brands in international markets. Our growth in the quarter was largely driven by our business in Canada. The decline in earnings reflects the start-up costs in Japan."

Hedgeye: Why don't we get it!  Comps were -3.6% in Canada, -6.4% for Bonnie Togs, and -1.3% in the co-branded stores (the latter is billed as CRI's saving grace in Canada).



CRI: DON'T Build A Position Here - CRI FIN

 CRI: DON'T Build A Position Here - CRI Sigma


CL Organic Growth Continues to Impress

We remain positive on CL as it remains one of the few companies in HPPC delivering robust organic sales growth, globally. FX headwinds are impacting results and sentiment but, over the longer-term, we expect the stock to outperform.



3Q13 Thoughts


Colgate reported another slight top-line miss, the second in a row, but managed earnings to $0.73, which was in line with consensus estimates.


In our view, the most substantial positive, which bodes well for the longer-term potential of the company, was the ongoing top-line resilience in emerging markets. The negatives included a stronger-than-expected FX headwind and sequential volume deceleration in the United States.


Even with expectations pinned at the high end of the company’s (reiterated) EPS guidance range of 4.5-5.5%, we believe long-term upside in earnings potential will attract investors over the next three years. The company offered initial EPS guidance for 2014 of positive double digit growth, which should continue to justify its premium multiple.


Over the long term, we continue to see CL as one of the best stocks in personal care on the long side. On a relative basis, versus its peers, we believe the stock is less vulnerable to a rising rates environment, given its growth profile and future prospects. Additionally, there is plenty of room for sentiment to improve, particularly on the sell-side (3rd least-liked stock in HPPC on the sell-side).


CL Organic Growth Continues to Impress - hppc sentiment



What we liked from the CL 3Q13 release

  • EPS met consensus expectations
  • Organic growth came in at 6%, a solid number despite being slightly below the Street
  • Continuing strong performance in EM’s – taking share across categories
  • Commodity outlook remains benign
  • Gross margin expansion despite a sequentially tougher comp (chart below)
  • US EBIT margin improvement accelerated in 3Q to +370 bps, resulting in 31.5% margin
  • Hill’s organic sales of 6% surprised to the upside


CL Organic Growth Continues to Impress - CL Gross Margin



What we didn’t like from the CL 3Q13 release

  • EBIT year-over-year growth of 1.2% versus 1.5% sales growth
  • FX continues to be a substantial drag on earnings
  • LatAm EBIT margins declined once again


Rory Green

Senior Analyst


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.