“If you have to forecast, forecast often.”
You probably don’t know who Fiedler was. Like many Keynesian “economists” of the Nixon/Carter and Bush/Obama eras, his growth and inflation forecasts were useless.
But I like his quote.
And I really like the opportunity the market gave us yesterday to add to things we’ve liked from lower prices all year. That list of big macro stuff includes Commodities (Gold, Food, etc.), Foreign Currencies (vs. the USD), and Bonds (long-term Treasuries in particular).
Back to the Global Macro Grind…
But, but, she said that the economy wasn’t slowing and that rates could rise, eventually…
“I do want to emphasize this is a forecast”
-Janet Yellen (March 19, 2014)
I hear you on what the market did in reaction to her forecast (Dollar up, Rates up, Gold down). Nice day-trade. But do you hear Mr. Macro Market’s trending forecast? He updates his forecast often.
So, now there are 2 big conflicting forecasts to concern yourself with:
- Janet Yellen’s forecast (which is based on what happened in the US in Q3/Q4 of 2013 – inflation fell, growth accelerated)
- Mr. Macro Market’s updated forecast of #InflationAccelerating and real #GrowthSlowing in kind
And, since you have to pick one of the two, which one will it be?
- A Fed forecast that is wrong at least 2/3rds of the time and is based on lagging economic data
- A market based forecast that is right more than 2/3rds of the time based on real-time market data
To recap the Fed’s forecast:
- Most of the Q114 slow-down was due to the weather
- As growth recovers in the 2nd and 3rd quarter, you should expect the Fed to continue to taper
- There is no inflation (its below the “committee’s objective”), so don’t worry about it
And to update you on what Mr. Macro Market has to say about that this morning:
- US DOLLAR is showing no follow-through to yesterday’s bid and remains bearish TREND @Hedgeye
- US 10YR TREASURY yield is showing no follow-through to yesterday’s ramp and remains bearish TREND @Hedgeye
- GOLD sold off to immediate-term TRADE support of $1321, and remains a bullish intermediate-term TREND too
So, on the “what Janet meant to say” part, you might need Hilsenrath to spell it out for you circa 3PM on a market Friday. I get that. You should too. Most people don’t have a macro process, and they have to take the Fed’s word for it, literally.
From a risk management perspective, if the following three things happen:
- US Dollar Index breaks out > $81.14 TREND resistance
- US 10yr Yield breaks out > 2.81% TREND resistance
- Gold snaps $1278 TREND support
Well, then I forecast that I will change my forecast. In the meantime, I say you fade the Fed’s forecast because I forecast that Janet Yellen will get less bullish on US Growth after growth slows.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.61-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
TICKERS: HLT, RCL, PNK, BYD, ISLE, PENN
EVENTS TO WATCH: UPCOMING EARNINGS/CONFERENCES
Thursday, March 20
Friday, March 21
Monday, March 24
Tuesday, March 25
- CCL to report earnings pre-market, conf call at 10 a.m. EDT
PNK - The former Westinghouse site, located on Page Boulevard in Springfield Massachusetts which was almost an Ameristar Casino, could now be the North American hub for Changchun Railway Vehicles Company. The Westinghouse site is now owned by Pinnacle Entertainment following PNK’s acquisition of Ameristar. Ameristar purchased the 41 acre site for $16 million in January 2012.
TAKEAWAY: Unlocking hidden value in the balance sheet of approx $0.25/share assuming Ameristar's $16 million basis.
Universal Entertainment - Investigation efforts are focusing on a $25 million payment Universal Entertainment made to Rodolf Soriano, a casino consultant, who was linked to a former Philippines gaming regulator. Subic Leisure, “the receptacle for $35 million of the $40 million in payments,” was controlled by Soriano. Subic Leisure is registered in the British Virgin Islands where there is no requirement to disclose the names of its shareholders or director
TAKEAWAY: Based on this information, it appears WYNN was justified in cutting ties with Okada and Universal Entertainment.
HLT - announced the signing of a new management agreement with PT Putragaya Wahana to introduce the Waldorf Astoria Hotel & Resorts property in Jakarta, Indonesia. Scheduled to open in 2018, the 181-room Waldorf Astoria Jakarta will be the second property of the legendary luxury brand's portfolio in Indonesia.
TAKEAWAY: Hilton continues to expand it's footprint globally via capital light.
RCL - will not attend the London Cruise Show this weekend but announced it will instead make a special offer available to all UK trade partners to encourage new to cruise bookings. Cruise holidaymakers no longer have to go to Olympia to get the best deal, instead RCL is offering a special offer of $400 onboard credit for all potential guests to enjoy, not just restricted to those who attend the show. The $400 onboard credit applies when a guest books a stateroom on selected sailings of seven nights or more departing between April 1 and December 31, 2014. The offer excludes sailings on Quantum of the Seas and is applicable for bookings made between March 20 and 24.
TAKEAWAY: Despite Wave Season coming to a close, widespread discounting and promotions continues across the industry.
RCL- Norwegian Cruise Line announced that Guy Harvey, widely recognized as the world's finest marine wildlife artist and champion of ocean conservation, has been named to design the signature hull artwork of the line's largest ship to date, Norwegian Escape, scheduled to debut in October 2015. Norwegian's newest ship is Harvey's largest canvas to date, at 1065 feet in length, with his artwork spanning from the hull to the aft featuring two undersea scenes that blend seamlessly
TAKEAWAY: While interesting, we are unclear how such art projects increase shareholder value versus increasing onboard maintenance capex to maintain the hull painting.
China’s Invisible Hand on Macau – China’s Central Commission for Discipline Inspection, the central government’s anti-corruption arm, announced it will keep watch on the central government’s liaison offices in Macau and Hong Kong. Political analysts say the announcement may indicate that Beijing is serious about cracking down on corruption, but that it may also be just a gesture, meant to deter mainland officials from gambling in Macau.
TAKEAWAY: This is yet another example of increased scrutiny over Macau and the gaming business.
On Line Poker - California lawmakers introduced two separate bills to legalize online poker in the state.
TAKEAWAY: California would be a key U.S. state in the legalization process. If the California legislature moves ahead with plans, then numerous other states might follow their lead.
Louisiana Gaming Revenues - the Gaming Control Board reported statewide revenues increased 1.5% to $209.7m for February. Same-store revenue (excluding Margaritaville) gaming revenues decreased 3.3%. On an operator basis, BYD, decreased 5.4% to $45.4m, ISLE increased 12.4% to $12m, PENN decreased 11.8% to $6.7m, and PNK decreased 3.5% to 53.9m,
TAKEAWAY: Not surprisingly, LA led the way in the regional markets given the cold, wintry weather elsewhere. February would have been one of the better months for regional gaming in general if not for the weather. We expect March to disappoint even with good weather.
Clark County Slot Parlors – Clark County imposed a moratorium on applications for “tavern” slot machine licenses. Under the 2011 regulations, taverns with the proper gaming license could have up to 15 slot machines, so long as the revenue from gambling was incidental to the primary business of serving food and alcohol. However, “incidental” was never defined, meaning some taverns could generate up to 80 percent of their revenues through gaming.
TAKEAWAY: Any reduction in slot parlor business would likely benefit Stations Casinos and Boyd Gaming's locals business. We will examine this issue during our upcoming Las Vegas trip.
Atlantic City - United will begin serving Atlantic City International Airport on April 1 with daily flights from its Chicago and Houston hubs. Service will start modestly, with only one flight per day from each city using 50-passenger regional jets. The Atlantic City Alliance has a $1 million annual subsidy program to entice conventions and meetings to town. Overall, the convention subsidy, the United flights and a promotions campaign for Atlantic City’s special events will be a catalyst for more business.
TAKEAWAY: This is a good first step and we look forward to additional airlines introducing additional service to Atlantic City.
Las Vegas Culinary Workers Union 226 - The union delayed its strike authorization vote to March 27 as negotiations continue with the 11 downtown Las Vegas casinos that are operating without labor agreements. Casinos that still haven’t reached agreements with the union include Golden Gate, Golden Nugget, Binion’s, Main Street Station, Four Queens, the D Las Vegas and Margaritaville
TAKEAWAY: It appears the Culinary Union is having success negotiating new contracts with the larger casino operators. We would not be surprised to see the remaining casino operators fall in line.
Atlantic City - The Tropicana Casino and Resort plans to carry out a $35 million renovation to its Atlantic City buildings, including the addition of a choreographed LED light show on its exterior. The project also would re-do the 434 hotel rooms in the Tropicana's north tower. The resort's parent company, Tropicana Entertainment Inc. is owned by billionaire Carl Icahn.
TAKEAWAY: Is such capital reinvestment and redevelopment too little too late?
Foxwoods Casino - laying off 65 people, according to a recent filing with the state Department of Labor. Foxwoods revenues dropped from $1.2 billion in 2011, to $1.14 billion in 2012, to $1.04 billion in fiscal 2013, which ended Sept. 30. Foxwoods and Mohegan Sun are competing with new and expanded gaming facilities in New York, Rhode Island and elsewhere in the Northeast.
TAKEAWAY: Falling revenues unfortunately leads to operating margin pressures in this fixed cost business as operators attempt to maintain profitability.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.
TAKEAWAY: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
TODAY’S S&P 500 SET-UP – March 20, 2014
As we look at today's setup for the S&P 500, the range is 29 points or 0.63% downside to 1849 and 0.93% upside to 1878.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.35 from 2.35
- VIX closed at 15.12 1 day percent change of 4.13%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Initial Jobless Claims, March 15, est. 322k (prior 315k)
- Continuing Claims, March 8, est. 2.880m (prior 2.855m)
- 9:45am: Bloomberg Economic Expectations, March (prior -3)
- Bloomberg Consumer Comfort, March 16 (prior -27.6)
- 10am: Philadelphia Fed Business Outlook, March., est. 3.2 (prior -6.3)
- 10am: Freddie Mac mortgage rates
- 10am: Existing Home Sales, Feb., est. 4.60m (prior 4.62m)
- Existing Home Sales m/m, Feb., est. -0.4% (prior -5.1%)
- 10am: Leading Indicators, Feb., est. 0.2% (prior 0.3%)
- 10:30am: EIA natural-gas storage change
- 2:40pm: President Obama at Valencia College in Orlando, Fla. for economy event
- 4pm: Fed releases Dodd-Frank stress test results
- 8:25am: Marriott CEO Arne Sorenson, Hilton CEO Christopher Nassetta attend Economic Club of Washington, D.C
- 9:45am: House Democratic Leader Nancy Pelosi holds press conf.
- 10am: Federal Energy Regulatory Commission holds open meeting
- U.S. Election Wrap: Obama in Florida, FEC deadline for filings
- Obama in Fla. to deliver speech on U.S. economy 2:40pm
WHAT TO WATCH:
- Fed releases CCAR/Dodd-Frank stress test results 4pm
- Ukraine’s interim PM warns of Russian escalation in east
- U.S. cos. with Russia ops urged to update evacuation plans
- Search for Malaysia jet advances as objects spotted in ocean
- GM sued in California over ignition switch defect
- Starbucks to expand evening alcohol sales to 1,000s of stores
- Boeing oversight of 787 contractors faulted by FAA
- JAL, JetBlue to increase number of codeshare flights
- IMF says Greek banks may need more capital than ests. show
- Europe’s CHMP concludes monthly mtg
- AAR (AIR) 4:05pm, $0.48
- Cato (CATO) 7am, $0.13
- ConAgra Foods (CAG) 7am, $0.60
- dELiA*s (DLIA) 4:05pm, NA
- IHS (IHS) 6am, $1.25
- Lennar (LEN) 6am, $0.28 - Preview
- New Residential Investment (NRZ) 6am, $0.17
- NIKE (NKE) 4:15pm, $0.72 - Preview
- Silver Wheaton (SLW CN) 5:06pm, $0.24
- Wet Seal (WTSL) 4:05pm, ($0.24)
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Trades Near $100 After Cushing Stockpiles Drop; Brent Steady
- El Nino Probable by July for MDA as Temperatures Warm in Pacific
- Gold Trades Near 3-Week Low as Fed Outlook Weighed With Ukraine
- Copper as Economy Sage Fails as Growth Defies Slump: Commodities
- Coffee Falls as Brazil Rains Prompt Fund Sales; Sugar Declines
- Copper Falls First Time in Five Days on Fed Rate Outlook, China
- Wheat Retreats as Advance to 10-Month High Seen Curbing Demand
- JPMorgan Ranked No. 1 in Commodities in 2013 With Goldman No. 2
- Rubber Posts Biggest Weekly Drop Since January on China Slowing
- Wildcatters Rush Spindletop in Return to East Texas Oil: Energy
- Margarita Fans Miffed as Mexican Lime Growers Squeeze Supply
- Wrong Fuel Seen Extending Worst Europe Refinery Rout Since 1980s
- Domestic Chinese Iron Ore Reaches Multi-Year Low, SGX Holds on
- Russian Asia Oil Exports to Grow at Europe Expense, Rosneft Says
The Hedgeye Macro Team
Takeaway: NKE at $70 had everything going right. Near $80 it’s all about top line. No room for error. Good Q, but we just don’t like the risk profile.
We don’t have a strong opinion on NKE headed into its print on Thursday, which is a rarity for us. As background we turned somewhat cautious on Nike coming out of last quarter for a couple of reasons.
- First is that we’re still not sold on the management transition at the company. We don’t like the circumstances that led up to the changes, and we’re not convinced that the right people are in the right places. That’s a bold statement in that Nike is all about people. And it’s success over the years has been driven by consistently putting the right people in the right roles. Some recent moves are a slam dunk (like putting Eric Sprunk in charge of operations), but others are not. We fully acknowledge an important point – that our opinion on who is doing what inside Nike is not very relevant. The opinion that matters is that of the employees who have acclimated to their new bosses. And our concern is that THEY are not sold on the new management team anywhere near to the extent that they were a year ago. Another thing we acknowledge is that management transitions in a company as big and complex as Nike take years to play out – either good or bad. None of our concerns will manifest in any way as soon as this quarter. But we remain concerned about solidarity throughout the organization.
- The second, and more pressing (near term) reason is that the Nike story six months ago had three massive pillars of support; 1) Severe Brand heat – with futures and revenue both accelerating, 2) Improving Gross Margins, and 3) Slowing inventory growth. That’s a trifecta that makes Nike pretty much bullet proof. But today, we have a) Gross Margins turning from a tailwind to a headwind, and b) Inventories growing above the rate of sales. In effect, it lost two of its three pillars of support. The positive is that the Brand is still on fire – both here and in Europe. That’s the most important pillar, thankfully. But there’s no question that the margin of error for Nike is dramatically tighter now than it was heading into last Fall.
So we’re looking at one longer-term concern – that won’t play out now – and a near-term concern that will likely be masked by the fact that revenue momentum remains so strong. And let’s face it, there’s not a long list of companies that are clobbering the competition like Nike is today – so on a relative basis, which is where many investors live, this one ain’t too shabby. So in the end, this will likely be a decent-enough print. But in the fall when NKE was a $70 stock it had everything going its way. Now it’s nearly an $80 stock, only one thing is going its way, and not much else can go wrong. We just don’t like the risk profile.
Here are some questions we have into the quarter:
1) North America vs The World: Without question, the North American region has been carrying the company for the past two years. Europe kicked in to high gear last quarter and began to shoulder some of the Global Futures growth. That was great to see. That trend needs to sustain itself for Nike to maintain a 10%ish growth rate on the top line. We’d really like to see better consistency out of Emerging Markets (though we guess that once they’re consistent, they will no longer be ‘emerging’) and a meaningful step-up in China.
2) Gross Margins: We know that the company is facing input cost pressures, but the way we see it cost pressures were easing (mostly over the past year) and at the same time the company had a great two-year run in taking up price in footwear. Can it take up price further to offset the higher raw materials, or will they have to ‘eat it’ for another three quarters while raw materials go against them? Inflation is definitely not going down.
3)SG&A Spending: Very rarely have we EVERY questioned Nike on SG&A spend. The reality is that – despite splurges when it was in its younger days – Nike has grown up to be an extremely reliable and proficient steward of capital. But we question the recent signing of Jonny Manziel, who is taking home a reported $20mm annually. After blowups that Nike had with athletes like Lance, Kobe, and even the (once) squeaky clean Tiger Woods, we’re surprised that it is rolling the dice on someone that is not particularly likable and poses significant ‘blow-up risk’. Nike prides itself in paying up for what it calls ‘crossover athletes’ meaning that they could be on the cover of Sports Illustrated and Vogue/GQ in the same month. Not quite sure that Manziel is that kind of guy. While that might be nitpicking on one small asset in the context of a company that has $3.6bn in minimum obligations against endorsement deals in the coming 5-years, we should also note the recent deal with Manchester United. The company recently re-upped its 10-year ManU deal at a premium that stunned us. The company had been spending £23mm annually – an amount that now goes up to £60mm. We could understand if the team became meaningfully stronger in recent years, but unfortunately the reverse has happened. Nike is paying nearly 3x for a lesser team. Hopefully there are parts of this deal that we are not privy to that justifies the expense. We certainly hope that Nike will elaborate on both on the call.
4) FlyKnit – Changing the Conversation: As cool as the FlyKnit kicks are, we want to start hearing more about a few things a) unit cost savings per pair (which they won’t provide because then they’ll tell retailers what their real cost is), b) how much Nike saves in inventory costs (raw materials) for a pair of FlyKnits vs traditionally-manufactured footwear, and c) when the production technology will be ready to roll out at retail, so consumers could order FlyKnit NikeID product in a store, then go get a burrito at the foodcourt, and come back an hour later and the product is created, fully customized, and ready to take home. Once they nail down that capability (something they’ve quietly been working on for four years) we’ll drop every concern we have about this name and pound the table faster than you can say ‘Prefontaine’.
5) Jordan Running: Nike is launching its first running shoe for the Jordan line on May 1. It’s about time…you can buy a Jordan basketball shoe, baseball cleat, football cleat, and golf shoe. Yet not for the largest shoe category of all – running? This is one of the biggest lay-up (no pun intended) opportunities for the Jordan brand we’ve seen in a decade. We’re interested in management’s plans here.
6)Dot.Com: For one of the most powerful brands in the world, Nike has one of the lowest dot.com ratios at about 4%. Granted, part of the reason Nike’s Direct business is half the size of UnderArmour’s (as a percent of total) is that its wholesale model is so incredibly powerful. But Nike needs to do a better job articulating its dot.com strategy.
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