Takeaway: Hedgeye Retail Ideas List. US cotton yield forecasts look healthy-good news for HBI & GIL. AAPL builds smartwatch team as LG & Samsung debut
HEDGEYE RETAIL IDEAS LIST
EVENTS TO WATCH
- TCS - Earnings Call: 4:30pm
- FDO - Earnings Call: 10:00am
- PSMT - Earnings Call: 12:00pm
HBI, GIL - Cotton Boom Goes Bust as Rain-Soaked Texas Crop Sets Glut
- "Two months ago, a drought threatened output in the U.S., the world’s largest exporter, and stockpiles were heading for a two-decade low. Then came the rains in Texas, the top grower, sparking a planting surge that the government said will send inventories to a six-year high before the 2015 harvest."
- "The 'stunning' weather reversal may boost U.S. output by 32 percent, Plexus Cotton Ltd. said in a report. Prices that in March were the highest in 25 months are now down more than any commodity this year."
Takeaway: Cotton is down almost 20% from its YTD highs. Increased yield forecasts from the US coupled with China's decision to release some its cotton reserves, which accounts for nearly 60% of global stocks, means that the supply side of the pricing equation looks relatively healthy. Material cost deflation should help offset the labor cost headwinds facing names like HBI and GIL.
AAPL - Apple poaches another luxury executive as iWatch nears
- "Apple has poached a senior executive from Swiss luxury watch brand Tag Heuer, which could be to help it with the launch of its iWatch expected this autumn."
- "Tag Heuer, part of luxury goods group LVMH, said on Friday its vice president for sales, Patrick Pruniaux, who had been with the brand for seven years, was leaving on Monday to join Apple. It did not say what his new job would be."
Takeaway: Interesting that Samsung and LG are both releasing smart watches today. And AAPL hired someone from Tag. I'll probably buy one. But it's so surprising to me that everyone is giving the smart watch a free pass at being a success. The biggest hurdle these companies face is that people under 18 simply do not wear watches.
PETM - PetSmart Issues Statement Regarding JANA Partners Schedule 13D Filing
- "PetSmart welcomes open communications with its shareholders and values constructive input toward the goal of enhancing shareholder value. Our Board and management team are committed to creating value for all PetSmart shareholders, and we will continue to take actions to accomplish this goal and position the Company for growth and success."
APP - American Apparel in Talks to Raise New Financing
- "American Apparel Inc. is in talks to raise new financing from hedge fund Standard General that would allow the company to pay off a loan that came due after it ousted founder Dov Charney, people familiar with the matter said."
- "As part of the talks, the two sides also have reached an agreement in principle to replace all of the company's board—except for its two co-chairmen—with directors who have more industry experience, though no formal agreement has been signed, people familiar with the situation said."
- "Still unclear is what role Mr. Charney will play at the company going forward. His fate depends on the outcome of a continuing investigation into his conduct, people familiar with the situation said."
WMT - Asda restructuring to cut 1,360 jobs
- "Asda has announced a shake-up of its management structure, which is likely to result in 1,360 redundancies."
- "The retailer, which has 578 stores across the country, says 1,360 people are expected to take redundancy, as staff choose to leave or do not meet the overall selection criteria for the new roles."
- "Asda currently employs over 170,000 people across the UK."
Bonobos - Online retailer Bonobos raises $55 million in funding to open more stores
- "Online menswear brand Bonobos has raised a total of $55 million in venture capital funding, bringing the brand's total funding to $128 million. The company plans to use a large part of the latest investment to quadruple its physical store count, growing from 10 locations to 40 nationwide by 2016"
Takeaway: The shortened holiday week was punctuated by big moves in AGO, MBIA and Espirito Santo.
Current Best Ideas:
* U.S. Financial CDS - Swaps at Assured (AGO) and MBIA (MBI) were sharply wider on the week, adding 87 and 137 bps, respectively. The moves come in response to Puerto Rican municpal debt exposure. Outside of those two entities, however, most of the rest of the complex was modestly tighter week over week.
* European Financial CDS - After widening steadily, swaps were predominantly tighter in Europe this past week. Part of the relief came from Portugal where initial reports of a Luxembourg investigation into Espirito Santo turned out to be wrong. Meanwhile, a temporary short-selling ban in the stock and management change all led to a relief rally. Espirito Santo swaps were 24 bps tighter on the week, closing at 294 bps, but remain +124 bps on the month.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 6 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged
1. U.S. Financial CDS - Swaps at Assured (AGO) and MBIA (MBI) were sharply wider on the week, adding 87 and 137 bps, respectively. The moves come in response to Puerto Rican municpal debt exposure. Outside of those two entities, however, most of the rest of the complex was modestly tighter week over week.
Tightened the most WoW: C, MMC, MTG
Widened the most WoW: MBI, AGO, AIG
Tightened the most WoW: TRV, ACE, ALL
Widened the most MoM: MBI, AGO, WFC
2. European Financial CDS - After widening steadily, swaps were predominantly tighter in Europe this past week. Part of the relief came from Portugal where initial reports of a Luxembourg investigation into Espirito Santo turned out to be wrong. Meanwhile, a temporary short-selling ban in the stock and management change all led to a relief rally. Espirito Santo swaps were 24 bps tighter on the week, closing at 294 bps, but remain +124 bps on the month.
3. Asian Financial CDS - Swaps in Asian Financials were mostly tighter on the week, falling by an average of 3 bps. Chinese banks tightened slightly more than peers in India and Japan.
4. Sovereign CDS – Sovereign swaps were little changed on the week outside of Portugal. Portguese swaps tightened 22 bps to 132 bps on the news that its largest bank, Espirito Santo, was not under investigation by Luxembourg.
5. High Yield (YTM) Monitor – High Yield rates rose 1.1 bps last week, ending the week at 5.34% versus 5.32% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1885.
7. TED Spread Monitor – The TED spread rose 1.3 basis points last week, ending the week at 22.5 bps this week versus last week’s print of 21.16 bps.
8. CRB Commodity Price Index – The CRB index fell -1.9%, ending the week at 307 versus 313 the prior week. As compared with the prior month, commodity prices have increased 0.8% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 15 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 8 basis points last week, ending the week at 2.96% versus last week’s print of 2.89%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China were unchanged last week at 3,125 yuan/ton, but are down 90 yuan/ton in the past month (-2.8% m/m). We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread widened to 213 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 3.9% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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.
One week of data is hardly reliable but it does appear the soft results from June have continued into July.
THE CALL TO ACTION
The long trade we made two weeks ago looks off as we recommend caution into more difficult Mass comps and a soft July.
Table revenues averaged only HK$725 million per day through the first 6 days of the month, down 21% from the difficult comparable week last year. We believe some of the operators held low but VIP volumes also appear soft. Mass continues to be strong but we would caution that comparisons get tougher the rest of the year on the Mass side. July is the first month to lap last year’s sharp rise in Mass table minimum bets. See our June 13th note “MACAU – HANDICAPPING MASS DECELERATION”.
We expect sequential improvement throughout the rest of July. As shown in the following chart, the comps ease the next few weeks. Be careful with the 3rd and 4th week comps - they are impacted by the recurring "placeholder" revenue figure and must be viewed in the aggregate. For the full month of July 2014, we expect full month GGR growth to be flat to slightly down YoY.
Market shares are irrelevant this early in the month but for those interested, here they are:
Tickers: ALL.AX, LVS, ISLE, MAR, RCL, CCL
- July 15-17 Pre-RCL earnings Hedgeye Cruise pricing survey
ALL: AX Aristocrat Leisure – announced two acquisitions.
- Acquired U.S.-based Paltronics Inc, including intellectual property relating to products. Paltronics is a leading supplier of jackpot managers and display systems for casino games - including applications for in-game media windows and bonusing applications for electronic gaming machines, video poker machines and table games. Paltronics jackpot controllers have been deployed in Aristocrat’s linked progressive products, including its Hyperlink and Xtreme Mystery.
- Acquired Video Gaming Technologies, Inc. for total consideration of US$1,283m in cash, subject to certain adjustments and regulatory approvals. Privately owned VGT is a provider of gaming machines for the leased tribal gaming market in North America. VGT had an installed base of approximately 20,200 leased machines at the end of last year. After the acquisition, Aristocrat will have an estimated market share of 31% in the North American tribal leased machine market versus the current 5% well ahead of second-placed IGT, which has a market share of 22%, according to a presentation from Aristocrat.
Takeaway: Solid acquisitiona as Aristocrat continues to make ground in the North American market. Aristocrat is unlikely to be a suitor for IGT.
27:HK Galaxy Entertainment Group – Francis Lui sees revenue growing by 10% or more Macau Business
Galaxy's vice-chairman, Francis Lui Yiu Tung, says he expects annual growth of at least 10% in his company’s gross gaming revenue in Macau this year. Lui also told reporters that he expected the company’s annual revenue from VIP gaming to increase by less than 10% this year.
Takeaway: Galaxy has been outstanding, particularly on the VIP side. YTD, GGR at Galaxy is up 24% YoY.
LVS & 1928:HK – announced a “special award” to over 27,000 full time employees who are manager grade and below. The award, equal to one month’s salary, will be paid July 31. In addition, this benefit will also be paid each year together with the July payroll until 2017.
Takeaway: Adelson's response to Wynn Macau's Employee Ownership Scheme.
ISLE – City of Bettendorf approves ISLE's new land-based casino. The new casino on-land will be around 70,000 square feet. This is about the same size as the current boat.
Takeaway: Construction is expected to begin within 30 days
MAR – Atlantis Paradise Island in Nassau, Bahamas, will join the Autograph Collection, Marriott International's portfolio of more than 60 independent hotels.
The 3,400-room Atlantis will be Autograph's first resort in the Bahamas and will be the largest hotel in the collection. Atlantis will have access to Marriott International's global sales and reservation system as well as the Marriott Rewards program. Atlantis, owned by Brookfield Asset Management and independently managed, will join the Autograph Collection this autumn.
Takeaway: An interesting addition to the Autograph collection. Atlantis has experienced operating challenges giving up ADR to drive higher occupancy since the global financial crisis and recession of 2008.
RCL– Celebrity Cruise Ship Departure Delayed due to Mechanical Issue; Skips Port Stop Cruise Critic
A spokesperson from Celebrity said: "Celebrity Reflection's stay in Civitavecchia, Italy was extended in order to resolve a technical issue. The repairs have been completed and the ship departed Civitavecchia at approximately 3:00 p.m. local time. The ship is currently sailing to Athens (Pireaus), Greece, and is expected to arrive on Monday, July 7, as originally scheduled." Passengers received an unspecified amount of onboard credit as a gesture of good will from the cruise line
Takeaway: Another Celebrity incident
Celebrity offers agents the chance to earn a cruise TTG Digital
The “Sell and Sail” promotion will enable any agent who makes five Celebrity Eclipse bookings to earn a future cruise certificate for the line worth £1,000.
Agents who make 10 bookings will enjoy £2,000 worth Celebrity Cruises holidays, with £5,000 up for grabs for those who make a 25 bookings. The incentive applies to all Celebrity Eclipse 2014 sailings between August 16 and November 8, which is the end of the ship’s Southampton-based season.
CCL - Forces Cruise Ship Itinerary Change Cruise Critic
Hurricane Arthur has forced Carnival Splendor to call in at Bermuda rather than St. John.
RCL - canceled stops at CocoCay Cruise Critic
Royal Caribbean canceled stops at its private island of CocoCay, affecting Majesty of the Seas, Enchantment of the Seas, and Grandeur of the Seas.
Takeaway: Doesn't look like Arthur made much impact
Macau VIP Gaming & Smoking Ban – (Macau Business Daily) The DICJ has defined the characteristics that a VIP gaming room should have if a casino operator wishes to allow smoking in a VIP gaming room including: 1) “separate areas” or isolate them with “physical or architectural barriers” from the main casino; 2) gamblers using VIP rooms where smoking is allowed must have special passes issued by the casino, and 3) the chips used in such rooms must be different from the chips used elsewhere in the casino.
Takeaway: New regulator pronouncements aimed at "clearing the air".
Egypt Fiscal Reforms, Negative for Cruise Industry – Egypt raised taxes on many consumer products over the weekend, including cigarettes, alcohol, natural gas and gasoline as part of a series of measures to curb the budget deficit and reform the economy as Egypt is trying to reduce its deficit to 10% of gross domestic product in the next fiscal year, from an expected shortfall of 12% in 2013/14. A Ministry of Tourism official predicts a 100% price rise for cruise services due to the diesel price hike, raised Friday night from EGP 1.10 to EGP 1.8 per liter. The tourism industry consumes 22% of total diesel output in Egypt, amounting to 12.4m tonnes per year, according to a study by the Federation of Egyptian Industries.
Takeaway: Higher prices for the wrong reason.
Russia Gaming Expansion – Russia’s State Duma passed a new law on Friday, July 4, allowing the establishment of gambling zones in Crimea and Sochi, Russian. Russian legislators inserted a clause into the bill during its second reading that allows for the creation of gambling facilities in Sochi. The bill stipulates gambling venues can only be established in Olympic facilities that were financed by private investors while the bill gives Crimean authorities full jurisdiction over defining the location and boundaries of gambling areas. Russia currently has one gambling zone in operation – on the border between Krasnodar Territory and Rostov region – and three more are being built in Kaliningrad, Altai and Primorsky regions.
Takeaway: Potentially more competition for European gamblers.
Japan Gaming Expansion – (Kyoto News) The operator of Universal Studios Japan in Osaka is considering bidding for a license to operate a casino complex in the western Japanese city once gambling regulations are relaxed. USJ Co., which operates the theme park featuring popular Hollywood movies, is likely to team up with other parties interested in the new business and lead a consortium. An amusement complex with a casino and a theme park may be placed on an artificial island known as Yumeshima, some 3 kilometers away from USJ, according to a blueprint set by local authorities.
Takeaway: A new and previously unannounced competitor with a strong understanding of local market demographics.
Atlantic City's Gaming Promotions – (Chicago Daily Herald) Promotions such as free stays and meals aren't translating into the spending boom that Atlantic City needs, 20 months from the five-year deadline that Governor Chris Christie set for a turnaround. Freebies totaled 26% of gross revenue for casino owners last year as compared to other North American gambling operators averaged 6%.
Takeaway: Operators are attempting to "buy" the business but even the high rate of promotions is not sufficient life support for GGR.
New Jersey Gaming – New Jersey Senate President Steve Sweeney wants a November 2015 referendum asking New Jersey voters to expand gaming beyond Atlantic City. Recently, Sen. Paul Sarno introduced a bill to allow a casino at the Meadowlands near New York City with a tax on Meadowlands GGR to support the Casino Reinvestment Development Authority.
Takeaway: Finally some rationality from New Jersey and the realization that the expansion of gaming across the northeast is a permanent headwind to Atlantic City and New Jersey GGR.
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.
Takeaway: A glaring US equity sell signal at VIX 10.32.
Editor's note: This is an excerpt from CEO Keith McCullough's morning research.
A glaring US equity sell signal at VIX 10.32. It has never sustainably held below 10. Never. That is a long time.
The first SELL signal I issued in SPY since Feb 10, 2014 came on Thursday in conjunction with that front-month vol oversold reading.
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