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$AAPL, LEVELS REFRESHED

Takeaway: The world’s largest tech company is set to report earnings today. Here are Hedgeye CEO Keith McCullough's trading levels in advance.

$AAPL, LEVELS REFRESHED - AAPL

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

Anything longer than 3 years is unpredictable

 

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Under Armour: EXPENSIVE

Takeaway: UA may face a tough margin stretch ahead. Great company, but we can find other stocks with better growth at a lower price.

This note was originally published October 24, 2013 at 12:03 in Retail

Under Armour: EXPENSIVE - ua1

Under Armour (UA) might have a couple tough margin quarters ahead of it.  The good news is that its finally making progress outside the United States.

 

UA is a great company that is coming into its own, but it may face a couple of tough margin quarters ahead. UA is one of the most expensive names in consumer, and we can find other stocks with higher quality growth at a lower price.

 

Given how hated UA's stock is (see our sentiment monitor in Exhibit 1) we suspected that material revenue beat followed by a better print on the EPS line would be enough to give this stock a shot in the arm.

 

Under Armour: EXPENSIVE - brian1

 

But then we flipped over to the balance sheet and a 59% boost in inventories (despite only a 25.7% boost in sales), and juxtaposed that against the -33bp erosion in Gross Margins in the quarter. Any way we slice the onion, bloated inventories and weakening gross margins hardly inspires confidence in any financial model.  In fact it is almost always a precursor to additional gross margin weakness.

 

WHEN A BRANDS LINE SWINGS DOWN AND FLIRTS WITH THE LOWER RIGHT QUADRANT, IT'S NEVER GOOD

Under Armour: EXPENSIVE - UAsigma

Also, footwear sales were up 28% in the quarter. Don't get us wrong -- that's a great number for most brands. This isn't most brands -- it's UnderArmour. A few years ago when the footwear product used to -- well…stink -- we'd expect sub par growth. But the brand has finally figured out its identity and has put out product that consumers actually want to wear -- -both men and women. But does this add up to 28% growth? We'd think something greater -- perhaps even 2x (at least if it wants to maintain a 48x forward multiple.)

 

Under Armour: EXPENSIVE - UAPE

Let's put that multiple into perspective for a minute… UA is expensive -- period. But some of the best stocks in the market are expensive (and some of the worst stocks are cheap). We're not a fan of PE/Growth multiples. But when looked at alongside other high growth peers it certainly puts things into perspective we can get a good sense as to relative value.  SO let's do that…lets compare UA against a who's who of high-flying consumer growth names. We're talking everything from TSLA, CMG, AMZN, UA, NFLX, KORS, NKE, WWW, RL, FNP, FNP and RH.  Unfortunately for UA, it tips the scale along with TSLA, AMZN and NFLIX at 2.0x PEG.  As an aside, our favorite name is RH -- the cheapest name on the page.

 

 

There were definitely some things we liked this quarter, and those focused on the areas where UA has been damaged goods in the past -- The biggest of those is International where It just opened up a huge Brands experience store in Shanghai, which is a great idea no matter how you slice it.  For the first time in…well, ever…it looks like UA can get 10% of its sales outside of these United States. That would be a big valuation kicker for US, because there's a fair sized contingent that thinks UA is forever rooted in the US. We disagree, by the way. Secondly, womens continues to outpace the company's overall growth rate, and now accounts for about 30% of total revenues. To put that into perspective, Nike announced last week that it's targeting its women's business to account for 24% of revenues by 2018. UA, already has a well established women's product, and if womens were to account for nearly half of the business in the years to come as company management indicated that could be a serious growth opportunity.


European Banking Monitor: Further Improvement

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 .

 

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European Financial CDS - Swaps widened modestly in Europe last week, rising by an average 4 bps (median: +2 bps).  

 

European Banking Monitor: Further Improvement - z. banks

 

Sovereign CDS – Sovereign swaps showed further improvement across Europe with the exception of Germany, which widened by 3 bps, though still trades well inside of the US. Interestingly, the US widened again last week, adding 3 bps and rising to 37 bps. 

 

European Banking Monitor: Further Improvement - z. sov 1

 

European Banking Monitor: Further Improvement - z. sov2

 

European Banking Monitor: Further Improvement - z. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 11 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: Further Improvement - z. euribor


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

MACAU HEADED FOR 30%+ GROWTH

While slower than recent weeks due to seasonality, Macau put up another strong week, up 23% YoY.  Our October GGR growth forecast remains at +30-32%.  We continue to hear positive anecdotal evidence of a strong Mass month with consistently high casino traffic.

 

In terms of market share, the Asian companies continue to dominate this month.  SJM and Galaxy are posting share well above their recent trend.  LVS’s share has improved but remains below trend.  We’re pretty sure the LVS properties held low in the first half of the month.  While Wynn’s share looks low – also likely hold-related – we think that property is becoming more aggressive on the Mass side and should see Mass share gains going forward (possibly at the expense of MGM).

 

MACAU HEADED FOR 30%+ GROWTH - macau1

 

MACAU HEADED FOR 30%+ GROWTH - macau2


MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA

Takeaway: China's interbank lending rate rose 109 bps W/W to 409 bps. Sovereign and institutional swaps widened, reversing their recent trend.

Risk Monitor / Key Takeaways:

A few of the notable callouts on the risk front this morning include China's interbank lending rate, Shifon, rising 109 bps W/W to 409 bps and a broad-based reversal in CDS at both the institutional and sovereign level.

 

* Chinese interbank rates rose 109 basis points last week, ending the week at 4.09% versus last week’s print of 3.00%. 

 

* Sovereign swaps showed further improvement across Europe with the exception of Germany, which widened by 3 bps, though still trades well inside of the US. Interestingly, the US widened again last week, adding 3 bps and rising to 37 bps. 

 

* High Yield rates fell 7.4 bps last week, ending the week at 5.92% versus 5.99% the prior week.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 4 of 13 improved / 4 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 8 of 13 improved / 2 out of 13 worsened / 3 of 13 unchanged

 • Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 15

 

1. U.S. Financial CDS -  In the US, swaps widened for 16 out of 27 financial institutions. The average and median increase were both 3 bps. On a M/M basis, however, swaps remain tighter by 7-8 bps. The large cap banks all worsened on the week with JPM, BAC and C all widening by 6 bps. WFC, GS and MS, however, all tightened by 1 bp.

 

Tightened the most WoW: AXP, COF, PRU

Widened the most WoW: C, UNM, ALL

Tightened the most WoW: AXP, COF, CB

Widened the most/ tightened the least MoM: MBI, GNW, GNW

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 1

 

2. European Financial CDS - Swaps widened modestly in Europe last week, rising by an average 4 bps (median: +2 bps).  

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 2

 

3. Asian Financial CDS - Chinese banks widened last week following the blow-out in the interbank lending rate. Indian banks, meanwhile, went the other way, tightening by 13-22 bps. Japanese Financials were largely unchanged on the week.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 17

 

4. Sovereign CDS – Sovereign swaps showed further improvement across Europe with the exception of Germany, which widened by 3 bps, though still trades well inside of the US. Interestingly, the US widened again last week, adding 3 bps and rising to 37 bps. 

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 18

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 3

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 7.4 bps last week, ending the week at 5.92% versus 5.99% the prior week.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7.0 points last week, ending at 1818.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 6

 

7. TED Spread Monitor – The TED spread fell 1.2 basis points last week, ending the week at 20.4 bps this week versus last week’s print of 21.56 bps.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.8%, ending the week at 283 versus 288 the prior week. As compared with the prior month, commodity prices have decreased -1.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 11 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. 

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 109 basis points last week, ending the week at 4.09% versus last week’s print of 3.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 4 bps, ending the week at 85 bps versus 89 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 11

 

12. Chinese Steel – Steel prices in China fell 0.5% last week, or 19 yuan/ton, to 3480 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 221 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 2.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: KEEPING AN EYE ON CHINA - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


#GrowthSlowing Signals

Client Talking Points

VIX

This happens infrequently, so pay attention. With the Financials (XLF) down -0.2% and Russell 2000 lagging at +0.3% last week (versus the slower growth Dow +1.1% and Utilities +2.0%), the VIX was actually UP +0.4% on the week, making a higher low. Not good.

GOLD

The long-term love affair with Ben Bernanke has been epic. Since the no-taper decision, it's been Dollar Down, Gold Up. Gold was up +2.7% last week. It officially moves out of crash mode for the year-to-date at -19.8%. I'm still waiting for my levels to confirm before buying it. Stay tuned.

UST 10YR

If you ask the bond market, Ben Bernanke is going to pander to the Bond Bull Lobby (check out 2.52% on the 10-Year this morning, below @Hedgeye TREND resistance of 2.60%, not a good US growth signal). Slow-growth styles loved this development last week. Utilities, MLPs and REITS all were up around 2% across their subsector ETFs. Isn’t this great?

Asset Allocation

CASH 62% US EQUITIES 6%
INTL EQUITIES 16% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
DAX

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

I'd need to see 10yr Yield close (and hold above) 2.61% to get back on the bear Treasuries train @KeithMcCullough

QUOTE OF THE DAY

"Better to go to bed supperless then wake up in debt." -Ben Franklin

STAT OF THE DAY

American Purchasing Power (U.S. Dollar) down -3.4% in the last three months to now negative -0.7% year-to-date. Euro +0.8% last week versus USD, now +4.0% year-to-date.


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 80.32%
  • SHORT SIGNALS 78.48%
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