Keith answers questions on professional top-callers, the importance of valuation and more.
Keith answers questions on professional top-callers, the importance of valuation and more.
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, 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.
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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 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.
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.
“FX: Hell0 102, Burning Yen.” -- @KeithMcCullough
“He who conquers, endures.” -- Perseus
3.3%, the amount the S&P 500 is up so far in May
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 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):
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,
Keith R. McCullough
Chief Executive Officer
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.
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.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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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