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Removing TIP, Adding TLT to Investing Ideas

Takeaway: We are removing TIP from our Investing Ideas list, and we are adding TLT to it.

REMOVING TIP

On June 2 we added the iShares TIPS Bond Fund (TIP) to our Investing Ideas list. Since then this ETF has outpaced the -1.3% decline for the S&P 500 ETF Trust (SPY) and the -4.4% decline for the iShares Russell 2000 ETF (IWM).

 

In conjunction with our #InflationAccelerating and #StructuralInflation themes, we’ve seen measures of domestic consumer price inflation creep up over the past several months. Indeed, CPI has nearly doubled from its February 2014 YTD trough of +1.1% YoY to +2.1% in the month of June. We’ve seen a similar trend of accelerating inflation in the GDP deflator as well, with the figure accelerating to +2% QoQ SAAR in 2Q14 from +1.3% QoQ SAAR in 1Q14.

 

Is the trend of accelerating inflation in the rearview mirror? With the recent downdraft in commodity prices, we are increasingly inclined to think so. Both Crude Oil and the benchmark CRB Commodity Index are now breaking down quantitatively on our intermediate-term TREND duration, which is typically a leading indicator for a phase transition in both market prices and reported fundamental data.

 

To the extent the US Dollar Index confirms its commensurate quantitative breakout, we could be looking at a situation where the rate of change in reported inflation and inflation expectations levels off. To that tune, it’s worth noting that the 5Y Breakevens have receded -13bps from their late-JUN YTD highs in the 2.11% range.

 

On the margin, this developing fundamental setup is negative for TIP, so we are looking to book the gain here.

ROTATING INTO TLT

As they have been throughout the YTD, fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side.

 

In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next 2-3M:

 

  • iShares 20+ Year Treasury Bond Fund (TLT): +12.4% YTD
  • S&P 500 ETF Trust (SPY): +4.5% YTD
  • iShares Russell 2000 ETF (IWM): -4% YTD
  • PowerShares DB Commodity Index Tracking Fund (DBC): -1.4% YTD

 

This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Be it Bloomberg consensus estimates that call for a 3.11% US Treasury 10Y Yield at EOY ’14 amid perpetual ~3% real GDP growth forecasts or speculative net length in the futures and options markets for 10Y Treasury Notes at -19.2k contracts on a rolling 4-week basis, consensus is far from being in the area code of bullish on bonds.

 

Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

 

 


VIDEO: McCullough and Berger Talk Semi Stocks ($BRCM $INTC $NVDA $QCOM)

Hedgeye CEO Keith McCullough and Tech Sector Head Craig Berger discuss the outlook for the semiconductor sector, and dive deep into a number of individual stocks.


Cartoon of the Day: Sad State of the Consumer

Here’s a big reason we see #Q3Slowing.

Cartoon of the Day: Sad State of the Consumer - Econ Indicator 08.04.2014

 

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MGM 2Q EARNINGS PREP

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.

 

 

Q2 2014 CONSENSUS ESTIMATES

  • Total revenues:  $2.578 billion
  • Adjusted EBITDA:  $592 million
  • EPS:  $0.10/share

 

QUESTIONS FOR MANAGEMENT

  1. Strip casino demographics:  frequency of visits, spend per visit
  2. Q2 gaming trends look encouraging on the Strip. Can it be sustained heading into 2H 2014? Or will gaming spend under perform non-gaming?
  3. Convention rooms booking pace for 2015?
  4. What % of your chinese VIP player database do you cross market (e.g. Macau/Vegas)? Has VIP Chinese play picked up in Q2 - in either Las Vegas or Macau? Is there a correlation between Macau VIP and LVS?
  5. MGM Macau table revenue fell in 2 out of the 3 months in Q2, significantly underperforming the market due to VIP exposure.  How do you feel about the VIP customer in 2H 2014?  How is the performance of the new table initiatives?
  6. What factors attribute to the recent pick up in mass share at MGM Macau?
  7. How do you feel about your chances regarding the Massachusetts repeal referendum in November?
  8. Is the construction on MGM Cotai on track? Any labor issues?  What delays are you facing? Any permitting issues?
  9. Discuss early thoughts on how to address debt maturities in 2015 and 2016?

 

RECENT MANAGEMENT COMMENTARY

 

LAS VEGAS:

Overall

  • Market share is improving in a growing market
  • Control about half of the convention market

2Q REVPAR

  • Based on current trends, MGM expects second quarter RevPAR to grow by approximately 5%.

CityCenter

  • 1Q:  On the hotel side, ARIA was able to grow RevPAR by some 14% YoY, driven by both improvements in occupancy and ADR.  Vdara had a record quarter, with hotel occupancy of 89.5%, an increase of over 400bps, and ADR increased 16% to $185, driving RevPAR up 21% to $165 in the quarter. Crystals continues to gain more traction and it, too, recorded results with EBITDA increasing some 30% year-on-year compared to the prior quarter.
  • Expect a record year out of Crystals in 2014 and probably better yet in 2015

Gaming metrics

  • International gaming business remained strong, and domestic rate of play continues to improve.  MGM saw increases in volumes across each of our casino segments – baccarat, non-baccarat table games, and slot handle YoY.  Slot handle and non-baccarat market share continues to grow.

Convention mix 

  • Expect to be near our prior peak for the entire year at around 16% of our total room nights coming from convention.  And to continue to grow this mix beyond that peak, MGM ultimately need more space
    • Mandalay Bay is the place to do that. It has 1.7 million square feet of convention space today and MGM is expanding that to 2 million square feet and that will not only retain and grow MGM's existing groups but also to attract a wide array of new trade shows and corporate groups.  This will solidify MGM's trade-show business while allowing them to increase their high-margin corporate business. They expect great ROI from this in 2016.
  • Seasonality:  strongest in the first quarter, good in the second quarter, weakest in the third and then flat or up in the fourth.

Corporate mix

  • In terms of corporate mix last year, it was about 55% and that's picking up this year to closer to 60% in terms of bookings and that's higher margin particularly in the F&B side.

 

Interest Expense

  • Interest expense decreased by some $16 million YoY 1Q as a result of continued efforts to lower borrowing costs and reduce debt; MGM expects this trend to continue.

Monte Carlo

  • Strip frontage at Monte Carlo is near completion.  MGM has already opened up three restaurants and are already experiencing significant traffic increases on that side of the Strip.

New York New York

  • Opening up Hershey's next month, which will be a killer and drive a lot of traffic over to the NYNY facade and continue that traffic increase when MGM opens up Tom's Urban and Shake Shack in December 2014.

LV Arena

  • In between NYNY and Monte Carlo that be about 80,000 square feet of very high energy entertainment and food and beverage. 
  • All of that opens in early 2016, accruing to the benefit of those properties and the west side of the Strip and across the street at MGM.

Mandalay Bay - THEhotel Delano remodel

  • Expect to be done in September...expect a significant increase in RevPAR 

MGM National Harbor

  • On track for Summer 2016 opening

myVegas

  • Vastly exceeded expectations with over 850,000 average daily users on social gaming sites

Flowthrough

  • 1Q 2014 flowthrough was 55%, in-line with expected range of 50% to 60% despite a lower hold comparison in the quarter.

 

MGM MACAU

  • Looking at cross segment table yield improvement opportunities between the VIP and the mass as well as product upgrades to refine the MGM experience 
  • Sustained market share
  • Mass market is now getting to that point where it's anchoring most of the operator's EBITDA performance (70% of 1Q EBITDA). And MGM sees that as being strong growth.

    Retail Callouts (8/4): KORS, TGT, JCP, ARO, H&M, BOSS

    Takeaway: KORS can’t rely on multiple expansion anymore. Don’t ignore cash conversion cycle (bad). Cornell picked TGT v JCP. Ullman looking to leave?

    HEDGEYE RETAIL IDEAS LIST

     

    Retail Callouts (8/4): KORS, TGT, JCP, ARO, H&M, BOSS - Chart1 8 4 2014

     

    EVENTS TO WATCH

     

    Tuesday (8/5)

    • COH - Earnings Call: 8:30am
    • CVS - Earnings Call: 8:30am
    • NILE - Earnings Call: 8:30am

     

    Wednesday (8/6)

    • RL - Earnings Call: 8:30am

     

    Thursday (8/7)

    • TUMI - Earnings Call: 8:30am
    • HSNI - Earnings Call: 9:00am

     

    COMPANY NEWS

     

    KORS - 1Q15 Earnings

     

    Takeaway: At risk of sounding punitive, this 12% EPS beat was just the 2nd lowest EPS beat in company history. But when you play the 'smoke and guide conservatively' game like KORS does, this stuff matters. The top line still looks solid, and growth outside of the US remains bullet-proof.  But the rate of gross margin improvement is decelerating, SG&A spending remains robust (+60%), and the cash conversion cycle looked horrible thanks to a 19 day increase in inventories. This might be a great brand, and a really good company. But something tells us that this print is a watershed event for the stock in that multiple expansion from here could be limited. That's not to say that the stock can't go higher -- but it will need to be driven by revenue and earnings growth.  Oh and by the way…if you're a CEO of a company and some of your metrics start to show weakness, do yourself a favor and don't verbally spank your shareholders on the conference call. Not a good idea.

     

    Retail Callouts (8/4): KORS, TGT, JCP, ARO, H&M, BOSS - chart2 8 4

     

    TGT - Target opens three new Canadian stores; plans three more

    (http://www.chainstoreage.com/article/target-opens-three-new-canadian-stores-plans-three-more)

     

    • "Target opens three new stores in Canada Aug. 1 and plans three more new Canadian stores later in the fall. The stores are located at Erin Mills Town Centre in Mississauga, Ontario; Park Place in Barrie, Ontario and Carrefour Candiac in Candiac, Quebec."
    • "The opening of the three new stores brings the total number Target stores open in Canada to 130."

     

    Takeaway: The reality is that within the next 12 months, Target Canada will look very different than it does today. It will either a) close shop entirely, or b) invest the capital needed to ultimately be a viable and profitable player in the market. This is all on Cornell.

     

    JCP - In the CEO Hunt, Target’s Gain is J.C. Penney’s Loss

    (http://blogs.wsj.com/corporate-intelligence/2014/08/01/in-the-ceo-hunt-targets-gain-is-j-c-penneys-loss/)

     

    • "Target beat out J.C. Penney in landing Brian Cornell as its next chief executive, people familiar with the matter said."
    • "The battered department store chain pursued Mr. Cornell about succeeding CEO Mike Ullman. Penney, which has been seeking Mr. Ullman’s successor for a year, contacted Mr. Cornell earlier this year."
    • "Despite Penney’s approach, Mr. Cornell 'never expressed any interest' in taking command there, one of the people said Friday."

     

    Takeaway: Truth be told, Cornell could have potentially had a much bigger payday at JCP than at TGT. But on a risk-adjusted basis, it's tough to question his decision.

     

    OTHER NEWS

     

     

    BOSS - Hugo Boss Shares Decline After Report Permia Seeks Exit

    (http://www.bloomberg.com/news/2014-08-04/hugo-boss-shares-decline-after-report-permia-seeks-exit.html)

     

    • "Hugo Boss AG shares dropped as much as 3.7 percent after people familiar with the matter said that Permira Advisers LLP is discussing a potential sale of its remaining stake in the German fashion house."
    • "Permira, based in London, is in talks with advisers to find a buyer for its 56 percent holding in the German fashion label, valued at about 4.1 billion euros ($5.5 billion)..."

     

    Bangladesh Workers Protest Over Wages

    (http://www.wwd.com/business-news/government-trade/bangladesh-workers-stage-hunger-strike-7821750?module=Men%27s-Retail/Business-second)

     

    • "A 24-hour deadline to make back payments to 1,500 workers of apparel manufacturer Tuba Group in Dhaka, Bangladesh, created a deadlock on Sunday in talks to end a workers’ hunger strike."

     

    H&M tops list of largest certified organic cotton users

    (http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=166513)

     

    • "H&M is again topping the list of the world’s biggest users of certified organic cotton, according to Textile Exchange’s latest Organic Cotton Market Report 2013. With a 29% increase in the last year, H&M manifests its leading position."
    • "This is part of the company’s strategic target to use only more sustainable cotton by 2020."

     

    ARO - P.S. From Aeropostale launches brand in Mexico, 100 stores on tap

    (http://www.chainstoreage.com/article/ps-aeropostale-launches-brand-mexico-100-stores-tap)

     

    • "Aeropostale, Inc. will roll out its P.S. from Aeropostale brand in Mexico through a licensing partnership with Distribuidora Liverpool, S.A. de C.V."


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