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Podcast: Q&A with Keith and Clients

 

Keith answers questions on professional top-callers, the importance of valuation and more.



Dollar Matters

Client Talking Points

Dollar Flexes Its Muscle

The US Dollar broke out to year-to-date highs yesterday, in a rally that Keith says is  “really starting to matter” from both correlation risk (lower commodities) and economic growth (strong consumption) perspectives. The US dollar is overbought immediate term, but the US Dollar index could push $90 in the intermediate term.

Gold Losing Luster

Gold, though, doesn’t like a strong dollar that confirms that growth is indeed accelerating. Gold is currently oversold at $1409, but Keith says gold is beginning to look like it did in the early 1980s. That’s anything but good for gold bugs.

Asset Allocation

CASH 39% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  

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. 

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road

TWEET OF THE DAY

“FX: Hell0 102, Burning Yen.” -- @KeithMcCullough

 

QUOTE OF THE DAY

“He who conquers, endures.” -- Perseus

STAT OF THE DAY

3.3%, the amount the S&P 500 is up so far in May


Distant Peoples

This note was originally published at 8am on May 01, 2013 for Hedgeye subscribers.

“the unnatural task of holding in submission distant peoples...”

-Edward Gibbon

 

Edward Gibbon was an 18th century British historian who became famous for his 6 volume work, The History of the Decline and Fall of the Roman Empire (published between 1776-1788). Contextualizing Roman history is critical in order to attempt to scrutinize the rise and fall of any post 18th century economic empires (Britain, USA, or Japan). Governments plundering their people doesn’t end well.

 

Alongside Clausewitz (Prussian military theorist), Gibbon was also a favorite of America’s 1st grand strategist in the US State Department, George F. Kennan, whose biography I am waist deep in right now (it starts off slow, but the meat and potatoes of this book start in the post WWII period; I’m studying it now so that I can contextualize Russian policy – a country ETF (RSX) that we re-shorted yesterday).

 

The reason why I’m highlighting Gibbon’s quote this morning is that it’s FOMC d-day. Via debauching the world’s reserve currency, Ben Bernanke’s Fed has held distant peoples (including those in the US who don’t live in D.C.) in an unnatural submission to a Policy To Inflate food and energy prices. End it man – let #StrongDollar manifest. The People need a consumption #TaxCut.

 

Back to the Global Macro Grind

 

For those who were paid to see no inflation at the all-time highs in Oil (2008), Gold (2011), and/or Food Prices (2012), all I can say is shame on you. The People know the truth. And now they are ready to receive the communion of #CommodityDeflation.

 

I never grew up thinking about which “class” I was in. Class warfare is stated plainly in the opening sentence to Marx’s Communist Manifesto. I’m more of a freedom and meritocracy type of a guy myself. The last word of the last sentence of Darwin’s On The Origin of Species is “evolved.” People who think they can centrally plan other people into submission should evolve too.

 

To be clear, these are two different ideologies that you see in both political and economic thought. One camp thinks the market and economic system is one that can be “smoothed” and controlled with certainty (policy action). The other believes the global economic system is open, interconnected, and non-linear. You know which camp I’m in.

 

If you study the last 42 years and back out the Bernanke years (Down Dollar, Up Commodity Inflation to all-time highs), most US market historians understand the power of a #StrongDollar (“tighter” money than you have today, combined with fiscal conservatism). Unless left wing Marxists are levered up on their credit cards at home, I think even they get the #StrongDollar thing too.

 

So when will Bernanke acknowledge economic gravity and get out of our way?

 

US economic growth has accelerated from +0.38% in Q4 of 2012 to +2.5% in Q1 of 2013. The US Dollar strengthened the entire way through this #GrowthAccelerating period as #CommodityDeflation took hold.

 

Look at both the US Consumption side of the US economy (very strong in Q113) and the consumption sectors of the US stock market (here are the inflations and deflations for 2013 YTD):

  1. US Healthcare Stocks (XLV) = +18.68% YTD
  2. US Consumer Staples Stocks (XLP) = +17.31% YTD
  3. US Consumer Discretionary Stocks = +15.12% YTD 

Vs.

  1. CRB Commodities Index (19 commodities) = -2.3% YTD
  2. Brent Crude Oil = -5.9% YTD
  3. Cattle = -6.7% YTD
  4. Corn = -7.6% YTD
  5. Wheat = -7.9% YTD
  6. Coffee = -9.7% YTD
  7. Sugar -10.8% YTD
  8. Gold = -12.1% YTD
  9. Copper = -13.2% YTD
  10. Silver = -20% YTD

Do you hear me now, Ben? Do more of this. Do more of nothing.

 

On a 3 month duration, the US stock market gets this inasmuch as it did in 1983-89 and 1993-99 (#StrongDollar periods). Our intermediate-term TREND correlation between the USD and US Stocks (SPY) = +0.72. USD vs Commodities (CRB Index) on a 3 month duration is -0.71. It’ll keep working, unless Bernanke says he’ll devalue the Dollar again. Distant Peoples, Unite!

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1367-1492, $98.07-104.83, $81.58-82.63, $1.29-1.31, 97.11-100.93, 1.66-1.76%, 11.67-14.29, and 1575-1610, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Distant Peoples - Chart of the Day

 

Distant Peoples - Virtual Portfolio


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 15, 2013   

As we look at today's setup for the S&P 500, the range is 28 points or 1.47% downside to 1626 and 0.22% upside to 1654.

                                                                                               

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.73 from 1.72
  • VIX  closed at 12.77 1 day percent change of 1.75%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, May 10 (prior 7.0%)
  • 8:30am: Empire Manufacturing, May, est. 4.00 (prior 3.05)
  • 8:30am: PPI M/m, April, est. -0.6% (prior -0.6%)
  • 8:30am: PPI Ex Food & Energy M/m, April, est. 0.1%
  • 9am: Total Net TIC Flows, March (prior $53.6b)
  • 9am: Net Long-term TIC Flows, March (prior -$17.8b)
  • 9:15am: Industrial Prod, April, est. -0.2% (prior 0.4%)
  • 9:15am: Capacity Util, April, est. 78.3% (prior 78.5%)
  • 9:15am: Manuf (SIC) Prod, April, est. 0.0% (prior -0.1%)
  • 10am: NAHB Housing Market Index, May, est. 43 (prior 42)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $750m-$1b notes in 2023-2031 sector

GOVERNMENT:

    • 10am: Senate Appropriations panel holds hearing on budget requests for Air Force, Army
    • 10am: Senate Environment Cmte holds hearing on EPA budget
    • 10am: House Ways and Means Cmte discusses draft of small business, pass-through entity tax plan
    • 10am: House Financial Svcs panel holds hearing on Dodd-Frank Act, taxpayer-funded bailouts
    • 1pm: Attorney General Eric Holder testifies on DOJ oversight
    • 1pm: House Foreign Affairs Cmte holds hearing on preventing a nuclear Iran
    • 1pm: House Cmte on Small Business holds hearing on patent reform implementation
    • 2:30pm: Senate Appropriations panel hears from acting Energy Sec. Daniel Poneman on DOE proposed budget
    • 2:30pm: Senate Banking panel hearing on “Improving Cross Border Resolution to Better Protect Taxpayers and the Economy”

WHAT TO WATCH

  • U.S. says Apple, publisher colluded to fix e-book prices
  • Wal-Mart to inspect Bangladesh plants, won’t sign safety pact
  • German economy barely expands, France enters recession
  • Google said to plan introducing music service rivaling Spotify
  • Merlin Entertainments reconsiders GBP3b IPO: Times of London
  • Itau to pay Citigroup $1.37b to reclaim Credicard
  • J.C. Flowers buys Partners Group’s stake in Cabot Credit
  • HSBC signals 14,000 jobs cuts With $3b cost savings plan
  • ThyssenKrupp to cut 3,000 jobs as loss widens, confirms outlook
  • KPN, partly owned by America Movil, raises $3.78b in share sale
  • Chinese premier signals reluctance on stimulus to boost growth
  • Citigroup, BofA, others report monthly charge-offs
  • Pershing, Greenlight, SAC report end-of-qtr holdings
  • MSCI index changes to be announced ~5pm

EARNINGS:

    • Deere (DE) 7am, $2.72 - Preview
    • First Majestic Silver (FR CN) 7am, $0.18
    • Macy’s (M) 8am, $0.53 - Preview
    • Computer Sciences (CSC) 8am, $1.00
    • Pinnacle Foods (PF) Bef-mkt, $0.27
    • Power of Canada (POW CN) 2:07pm, C$0.52
    • Jack in the Box (JACK) 4:01pm, $0.31
    • Acxiom (ACXM) 4:05pm, $0.16
    • Sapient (SAPE) 4:05pm, $0.12
    • Boardwalk REIT (BEI-U CN) 4:10pm, C$0.71
    • Cisco Systems (CSCO) 4:30pm, $0.49 - Preview
    • Skechers U.S.A. (SKX) 4pm, $0.16
    • Freehold Royalties (FRU CN) 5pm, C$0.97
    • NetEase (NTES) 6pm, $1.23

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Iron Ore Tumbles Into Bear Market on China Growth Concerns
  • Latest Corn Crop in Decades May Raise Costs for ADM: Commodities
  • Gold Drops to 3-Week Low in Worst Run Since February on Dollar
  • WTI Falls a Fifth Day in Longest Run of Declines Since October
  • Gold Premiums in India Jump as Central Bank Curbs May Cut Supply
  • Shell Targeted With BP in EU Price Fixing Probe for Oil: Energy
  • U.K. Within-Day Natural Gas Declines as Demand Forecast to Fall
  • Death Cross on Lumber Chart Signals Decline: Technical Analysis
  • Goldman Sachs Lowers Sugar Price Forecasts on Brazil Weather
  • Copper Reaches One-Week Low as Economies Weaken and Stocks Swell
  • Iron Ore Seen Strong Into 2014 on China Steel Demand, Supply
  • Lead Demand Exceeded Output in March, Study Group Reports
  • Rail Revival Is Lifeline to Biggest Africa Copper Mines: Freight
  • Corn Drops as Dry Midwest Weather May Accelerate U.S. Planting

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 


THE M3: SJM COTAI; SUEN; CHINA BAD LOANS; PACKAGE DATA

The Macau Metro Monitor, May 15, 2013

 

 

SJM COTAI GETS OFFICIAL APPROVAL Macau Business

According to the official gazette, SJM Cotai has gotten the green light.  The company will pay the government a total premium of MOP2.15 billion (US$269 million) for the land.  It has already paid MOP800 million for the land premium.  SJM first filed its request in 2006.

 

The project was announced in October last year and includes a five-star hotel, a gaming venue and car park. CEO Ambrose So said earlier that he expected that SJM’s Cotai project could break ground this year and be completed by “between 2016 and 2017”.

 

SANDS ORDERED TO PAY $70 MILLION IN MACAU DISPUTE WSJ

A Nevada jury on Tuesday ordered LVS to pay a Hong Kong businessman $70 million for helping the casino giant enter Macau.  The verdict was the latest development in a long-running legal dispute between Sands and Richard Suen over the role Mr. Suen played in helping the company obtain a casino license in Macau.

 

Sands spokesman Ron Reese said the company would "aggressively" appeal Tuesday's verdict. The latest judgment followed a retrial of Mr. Suen's lawsuit, first filed nine years ago, against the company after Sands appealed an earlier verdict awarding him $58.6 million.

 

Suen alleged in his lawsuit that Sands owed him $328 million for introducing company executives to key Chinese officials. Sands officials denied Mr. Suen's claim that his efforts led to the company's securing a license.

 

CHINA BANKS Q1 BAD LOANS UP, CAPITAL ADEQUACY DOWN-CBRC Reuters

The average non-performing loan ratio in China's banking system edged up to 0.96% at the end of March from 0.95% at the end of 2012, the China Banking Regulatory Commission (CBRC) said.

 

The weighted average capital adequacy ratio (CAR) of Chinese banks was 12.3% at the end of March, which is not comparable to previous data as tougher bank capital rules were introduced in January this year, the CBRC said.  "According to calculations based on the new rules, the overall capital adequacy ratio has decreased," the CBRC added.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR MARCH 2013 DSEC

Macau visitor arrivals in package tours decreased by 2.0% YoY to 739,091 in March 2013.  Package tour visitors mainly came from Mainland China (533,170), with 199,991 coming from Guangdong Province, followed by those from Taiwan (45,703); Hong Kong (41,859) and the Republic of Korea (40,738).  

 

In March 2013, the hotels and guesthouses received 915,766 guests, up by 20.4% YoY. The average length of stay of guests held stable from a year earlier at 1.4 nights.



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