THE MACAU METRO MONITOR, FEBRUARY 19, 2014
INTERVIEW: MACAU GAMBLING LICENSE RENEWAL TERM OF 10 YEARS OR LESS HKEJ
The 6 gambling license holders may not be granted a renewal period of 10 years or more. According to authoritative sources, because 3 of those 6 licensed are US-owned, the central government will be more focused on Sino-US relations. This could be a deciding factor in giving licenses with a shorter period (e.g. 5 years). One source said each of the 6 concessionaries will have their licenses renewed in 2020 and in 2022, and no new licenses will be issued.
This note was originally published at 8am on February 05, 2014 for Hedgeye subscribers.
“What we need is not the will to believe, but the wish to find out.”
I know. I’m going all #behavioral on you this year. When combined with #history and #math, it gives me an edge. And god knows, I’m not the smartest player in this league – so I need one!
The aforementioned quote comes from the introduction in the latest #behavioral book we’ve been discussing in the office, Counterclockwise, by Harvard Applied Psych professor, Ellen Langer.
Langer’s research is unique in that she was really one of the first women (1st woman to ever get tenure in Psychology @Harvard) to break the ice on a lot of topics that make us think about how we think. Her most popular book was Mindfulness in 1989. She wrote Counterclockwise in 2009 and it’s relevant to how you think about your risk management day.
Back to the Global Macro Grind…
Do you wish to find out why almost every major macro position that was working for you last year sucks for 2014 YTD? If I needed to believe that the Japanese-burning-currency thing was going to work, I could – but I’d be losing a lot of money on that.
Last night’s pathetic bounce in Japanese Equities (Nikkei +1.2% to -12.9% YTD) tells you all you need to know about Japanese consensus – all the locals (brokerage clients getting margin calls) were short Yen and long Mothers (as in the index Japanese dudes lever up on).
Most of Wall Street was in the same trade too. It was only 1 month ago today that the CFTC (futures and options) net short position in Japanese Yen hit all-time highs (-135,000 net short position in terms of contracts). This morning that net short position is -89,420 contracts.
Next to short Yen, what have been the other major consensus long/short positions in Global Macro options?
And how’s that going YTD?
Why? Do you want the answer that consensus needed to believe on December 31, 2013, or do you wish to believe what Mr. Macro Market is telling you about growth (hint: on the margin, with #InflationAccelerating, US growth is slowing)?
And it’s not just a USA thing. As you can see in our Chart of The Day (where we show “Hard Growth Comps” for countries versus “Easy Comps”), Japan and the United States were setting up to slow from their 2013 momentum peaks irrespective of this US weather.
Oh, and by the way, the weather on the Merritt in Connecticut this morning isn’t what the dude in Tokyo is dealing with via his margin calls. Japan actually just reported a 16 year low in wages. When his government has a Policy To Inflate the dude’s cost of living, that is not good!
How does the Burning Your Currency thing work again?
Then pop a “consumption tax” on your people (Japan’s is pending) and what people who need to believe about “Abenomics” (that it’s good because the stock market was going up) isn’t aligned with what politicians “wish to find out” about economic reality.
Back to the wage inflation (or deflation) thing, I’ll show you what’s going on in the USA on our US Economics Flash Call this morning at 11AM EST. After seeing big time pressure on wages throughout the 2008 crisis, aggregate private sector wages are actually tracking up +5% on a 2-yr comp basis. . If you need dial in details for the call, email firstname.lastname@example.org.
I know your run of the mill academic doesn’t model the US economy how we do (we model it on a 1, 2, and 3 yr comparative basis so that we don’t get run-over by changes on the margin in trends), but that’s cool. It seems to work.
What seems to be a developing bearish to bullish reversal in a @Hedgeye TREND may not turn out to be a long-term reality. But can you afford to miss 3, 6, and 12 month accelerations and decelerations in big macro stuff like growth and inflation?
We can’t. And that’s all I have to say about that.
Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TRENDs, bullish or bearish, in brackets):
SPX 1735-1782 (bearish)
Nikkei 14036-15004 (bearish)
VIX 15.49-21.63 (bullish)
USD 80.78-81.43 (neutral)
Gold 1239-1274 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: We remain the bear on EHTH's 2014 prospects. If 2014 guidance isn't light on the initial release, we believe it will have to cut in 1Q14.
SHORT THESIS SUMMARY
IF GUIDANCE BEATS, EXPECT A CUT LATER
We continue to expect 2014 guidance will disappoint on the release. There are too many headwinds facing the company, and consensus has gotten ahead of themselves in terms of 2014 growth expectations. We can send you our prior notes and our blackbook if you would like more detail.
At a meeting with another sell-side firm in January, EHTH management suggested that guidance will include caveats, which we suspect means it will be issued in a wide range, with the top end potentially beating consensus estimates. If that is the case, it could perpetuate the ACA growth narrative, and push the stock higher in the near term. However, if management chooses to guide high on the 4Q13 release, we believe it will have to cut on the 1Q14 release.
EHTH MISSES THE NEXT WAVE?
Management suggested that it is expecting another wave of applications before the March 31st Open Enrollment deadline, which is why we suspect EHTH could guide higher than it should. While possible, we have yet to see any surge in demand three weeks into February. Health Insurance search traffic has steadily waned ever since Open Enrollment began on 10/1/13, and is now at its lowest point since Open Enrollment began
Even if demand picks up into the final Open Enrollment deadline, it doesn't mean EHTH will see a proportionate share of applications. EHTH is gradually losing whatever competitive edge it had over the public exchanges. Three things to consider
In summary, if guidance surprises to the upside, we suspect it would be more wishful thinking than anything else. We believe management would be setting themselves up for disappointment later. We remain short into the 4Q13 earnings release this Thursday (2/20/13).
Hesham Shaaban, CFA
Takeaway: Not a good 4Q, but we already knew that. People are freaking over guidance. They should. It’s bad. But it’s a big sandbag.
Conclusion: We’re one of the few bulls on WWW, and we heard absolutely nothing that shakes our confidence in this story. We continue to believe (regardless of guidance) that WWW will print outsized revenue growth at an incremental margin nearly 2x the company average as it scales its newer brands over its superior Int’l infrastructure and de-levers along the way. We’re modeling $1.78 and $2.28 in 2014 and ’15, respectively, with ultimate earnings power of $4.18 out in 2018, which is roughly 50% above the consensus. This stock used to be expensive, with earnings catalysts. Now it’s cheap with the same catalysts. Our full thesis and model highlights are outlined below.
WWW’s fourth quarter print was a lot more tame than the stock price would otherwise suggest. The company beat estimates by $0.02, though admittedly it was on a weak-ish growth algorithm (revenue and EBIT both flat organically, with taxes helping). Listening to the company’s prepared remarks, it was clear to us that these guys have such a firm grasp on their portfolio. They get it. That’s such a rarity in the US retail space. Unfortunately, their guidance is perennially conservative, and few people choose to see through it. As painful as this event is, we think it sets up a series of earnings beats throughout the remainder of the year.
We think that there are a few points that are critical in contextualizing WWW’s performance this quarter, and in modeling the upcoming year.
1) Guidance: We so rarely spend so much time on guidance, but with this company, it matters. It gave better definition to FY guidance -- 3-6% top line and 10-14% EPS. Acceptable in the context of where they already came out at ICR, but below where the Street is published. That in itself was probably not enough to hit the stock. But just before the Q&A when CFO Grimes discussed that the first quarter would have down revenue and EPS, the stock lost its bid almost immediately. Are there issues around this quarter? Weather, the economy, weather -- of course there are. But this seems a bit severe to us. Either a) something has changed fundamentally, b) weather is beating the heck out of this company, or c) WWW is being overly conservative with its forecast.
As hard as we try – at least with the information we have -- we can’t find anything that leads us to think that this story has changed over the past 8-weeks. Weather is probably a bit of a factor – especially since 25% of its sales come from a summer brand like Sperry. But let’s consider guidance for a minute. Over the past 5 years, WWW has, without fail, taken a substantial whack out of guidance at the beginning of each year. And EVERY year, the company has come back and earned something higher than where guidance was in the first place. That’s evidenced in the chart below. We think this is what we’re looking at today.
2) Seasonality: Furthermore, seasonality is counting against this story in a very big way. In every single year over the past five, you did not want to own the name at the start of the year. This one is obviously no exception. Is it because of weather, or retail trading patterns? We think NO and NO. The reality is that this is the time of year when the company gives earnings guidance. And as noted above, guidance is ALWAYS weak. As the year progresses, the Street miraculously realizes that both top line and EPS growth is far better than they initially expected (because they initially did nothing other than plug the company’s guidance into their models). The chart is a bit ugly (Bloomberg) but the patterns are very clear.
3) Sentiment. Plain and simple…sentiment stinks. When we’re faced with conservative initial guidance at the start of the year, only 1 out of 14 analysts being positive on the name, and short interest near historical highs, it’s usually not very good news over the near-term. Seriously, one of the only names that has lower sentiment scores out of the 135 retail names we track is JC Penney.
4) Why do we have higher confidence in 2014? Let’s take a step back and look at the PLG acquisition.
2012 was the year of the deal. It was big, and painful initially – no EBIT and interest from $1.2bn in debt.
2013 was the year of integration. In 1H they moved people around, repositioned the brands, and realigned management. Then in 2H the chessboard was largely set, but they had to seal the deal with an SAP implementation, which went without a hitch.
2014, in our view, is the year of revenue growth. They have four new major tools in their toolbox, and the global salesforce (the most efficient footwear operation on the planet) finally gets to sell them. They’ve been getting international distribution arrangements in place over the past year. And while they strike new ones every day, each of them is cumulative (i.e. signing three per month means that by now there are over 40). Aside from each of those arrangements getting more productive, there’s still another 150 that could be added by our estimates.
5) Double standard? OK, here’s a nitpick. But how come in the summer when Sperry is crushing it and Merrell is sucking wind, all everyone talks about is that ‘Merrell is over’. But now that Merrell has come roaring back – even without the full contribution yet from Gene McCarthy, all anyone talks about is how Sperry (a warm weather brand) is down (in what might be the worst winter on record). Yes, Sperry is important – and we think it has another $300-$400mm worth of growth ahead of it. But it’s not WWW’s biggest brand. Yes, that distinction belongs to Merrell, and even as Sperry succeeds, it will probably always be number 2.
OUR LONG TERM THESIS
This is the most global footwear company in the world (legacy WWW). It sells about 65% of its units outside the US, and has seamless and sophisticated systems (SAP) such that all distributors speak the same language. The PLG brands, which we think are better quality overall, sell only 5% overseas, and that's simply because its former owner (Collective Brands) spent capital first on Sperry, then on US Payless stores, and did not have anything left in the kitty for international distribution of PLG brands. So now WWW can scale this superior content over its existing lean/mean infrastructure. We think it will drive an incremental $2bn in revenue over 5-years and an extra 400bp of margin. In the end, we get to earnings power of about $4.30, which is 50% ahead of what management guided at its recent analyst meeting. We're the first to admit that WWW probably won't make you rich here, as it will likely take a good 4-5 years to double. We'd admittedly rather get more aggressive on a pullback. But we know people who have been waiting for a pullback for the last 50%. In the meantime you're paying a high-teens multiple for mid-20s EPS growth -- and this company has one of the best track records of anything in consumer.
Takeaway: Our intermediate-term view calls for investors to be OVERWEIGHT/LONG UK, Germany, Eurozone and China vs. UNDERWEIGHT/SHORT US and Japan.
This note was originally published February 14, 2014 at 12:34 in Macro
All week we’ve been pounding the table on our #InflationAccelerating Q1 Macro Theme, which continues to broadly manifest itself in buy-side PnLs (in one direction or the other). Today, we wanted to briefly update you on our #GrowthDivergences Q1 Macro Theme, which called for investors to be OVERWEIGHT/LONG UK, Germany, Eurozone and China vs. UNDERWEIGHT/SHORT US and Japan.
Like our #InflationAccelerating theme – which continues to be VERY non-consensus based on a number of dialogues we’ve had with our always-sharp subscriber base – this theme has, on balance, worked like a charm:
These deltas are generally supported by each of the respective GIP (i.e. Growth/Inflation/Policy) outlooks. Below, we offer up some quick-and-easy one-liners summing up our intermediate-term view on each economy. Lastly, we outline what we are seeing in the model that makes us sound so directionally negative on the macroeconomic setup in the US (vs. leading the bull charge in 2013).
UK: Probably the best looking economy of the bunch; the threat of +6% nominal GDP growth in 2014E plus deteriorating BoP dynamics underscore Carney’s increasingly hawkish bias – which only insulates our #StrongPound = #StrongUKConsumer view.
Germany: Our model has German GDP growth continuing to materially accelerate in 1H14, helping the country achieve 3Y highs in economic growth for 2014E. The acceleration in inflation should lend marginal support to the EUR by allowing Draghi to back off of his easing bias to some degree.
Eurozone: Very similar [bullish] setup to Germany, though we see less upside in both GDP growth and CPI on a full-year basis as structural headwinds persist throughout the periphery.
China: Our lowest-conviction bullish bias. If Chinese GDP growth doesn’t show strength against ridiculously easy compares in 1H14, the back half of the year could be a disaster from a growth perspective. Still, our analysis shows that the PBoC has adopted a marginal easing bias in the YTD, which should be supportive of our base case scenario.
US: Inching towards a deep trip to Quad #3 (i.e. growth slowing as inflation accelerates). Refer to the analysis below for more details.
Japan: Careening towards a deep trip to Quad #3. The only call to make here is whether or not the BoJ accelerates its timeline for incremental easing, which, on the margin, would be bearish for the JPY and the Japanese consumer, but bullish for manufacturing, exports, employment and wage growth. We’ll learn more post the BoJ’s policy meeting next week, but our base case scenario is that they’ll be dangerously slow to react as a result of their previous guidance and out-year inflation targets.
MODELING THE US ECONOMY
Growth: As compares get tougher at the margins, think real GDP growth comes in at the low end of our current forecast range for 2014E. This is a markedly different setup from 2013E, where we thought GDP would come in at the high end of our target range and accelerate throughout the year on a sequential basis.
Now we are below both the Street – which continues to take up their numbers in recent weeks – and the Fed. If we’re right on growth, the FOMC will be forced to react to a fair amount of negative economic surprises as the year progresses, likely forcing them to shift back to an easing bias.
It’s important that we make the following statistical point regarding our predictive tracking algorithm: when compares for any rate-of-change series get tougher at the margins, you need a commensurate increase in sequential momentum to prevent a deceleration in the first derivative.
In light of that, it’s important to note that recent trends in the broad balance of economic data do not support expectations for an increase in said momentum over the intermediate term. Consumption growth continues to accelerate on a trend-line basis, but industrial production growth and PMI data is clearly slowing, while confidence readings are more-or-less flat (on a trend-line basis).
Inflation: The confluence of easy compares, annualized currency weakness, a commodity base effect and the recent acceleration in commodity reflation continues to support our directionally hawkish view of the domestic inflation outlook. Moreover, we are now well ahead of both the Street and the Fed with respect to our full-year expectations for CPI. If that view proves correct, consumption growth (i.e. ~70% of GDP) will slow domestically.
In summary, hopefully this note was helpful to further elucidate our views and is additive to your individual thought process around where to allocate risk capital. As always, feel free to ping us with any questions, comments, concerns, etc.
Happy Valentine’s Day,
Associate: Macro Team
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