Takeaway: FL - Lorna Jane may help fix womens/apparel issues at FL, but we're not overly excited
FL, LULU - Australia's Lorna Jane Attracts Some Big-Name Suitors
- "Lorna Jane, an Australian maker and seller of women's workout clothing that is up for sale, has attracted buyer interest from Foot Locker Inc. and private-equity firms, according to people familiar with the matter."
- "Manhattan-based Foot Locker and private-equity firms Advent International and Bain Capital are among potential buyers submitting first-round bids for Lorna Jane, some of the people said. Lorna Jane hired investment bankers Credit Suisse to sell itself, the people said."
Takeaway: FL has a lot of cash to play with and Lorna Jane could help reinvigorate two of FL's biggest issues womens and apparel. If a deal were to go through, it's likely that Lorna Jane would function as a stand alone banner - we can't justify $90 yoga pants on Foot Locker shelves. Adding the brand's 169 stores into the fold would account for 5% unit growth to a base that has been shrinking organically for the last 8 years, and 3 percentage points of growth to the top line. But, it's hard for us to get overly excited about a brand that did under $1mil per store in 2013 (150 Stores, $138mm in sales) when LULU is pumping out $5mil plus through its box. Yes, the brand has limited awareness in the US and the Yoga market shows no signs of slowing so there is some runway for growth, but not enough for us to get overly excited about this potential deal.
EBAY, AMZN - ChannelAdvisor Reports June Comp Sales
GPS - Gap Inc. Reports June Sales
- "Gap Inc.’s comparable sales for June 2014 were down 2 percent versus a 7 percent increase last year. Comparable sales by global brand for June 2014 were as follows:
- Gap Global: negative 7 percent versus positive 5 percent last year
- Banana Republic Global: negative 7 percent versus negative 1 percent last year
- Old Navy Global: positive 7 percent versus positive 13 percent last year"
Tickers: PNK, ISLE, PENN, GLPI, LVS
- July 14: AC June revenues
- July 15-17: Pre-RCL earnings Hedgeye Cruise pricing survey
- July 16: LVS 2Q call (430pm)
- July 23: TRIP 2Q call (430pm)
- July 24:
- WYN 2Q call (830am)
- PNK 2Q call (9am)
- LHO 2Q call (930am)
- PENN 2Q call (10am)
- HOT 2Q call (1030am)
- July 25:
- PEB 2Q call (9am)
PNK – expects its 2Q Consolidated Adjusted EBITDA and Income (loss) from Continuing Operations to include unusual expense items that aggregate to a range of $8-10 million. The unusual expense items relate to the rollout out of the Company's my choice player loyalty program at its Ameristar branded properties, Colorado lobbying expenses, and severance expense.
Takeaway: PNK had mentioned on its Q1 conf call that it expects a $5m charge only related to the loyalty program integration at its ASCA properties. At some point, analysts will have to start including these regularly occurring "non-recurring" expenses in EBITDA. No wonder margins continue look better.
ISLE – after the close, the Company announced a strategic realignment including the departure of Dale Black, who served as CFO since 2007, replaced by Eric Hausler, who currently serves as Chief Strategic Officer, a role that will be eliminated going forward. Executive Chairman Jim Perry will step down and Robert Goldstein, currently the Vice Chairman of the board, has been named (non-executive) Chairman of the board. ISLE expects these actions to reduce annual corporate expense by approximately $2.5m exclusive of severance costs.
Takeaway: If the company were about to be acquired, one would think C-Level management would stick around for the vesting and higher take-out value on their equity interests. This also signals the need for ISLE to reduce expenses further.
PENN & GLPI – District Judge Eliza Ovrom on Thursday extended her stay of an Iowa Racing and Gaming Commission order to close the casino until she rules on Argosy's appeal. Previously, Judge Ovrom granted the casino a 10-day stay, which allowed it to stay open past the July 1 deadline until Thursday. At the conclusion of a hearing Thursday morning, Ovrom said she hoped to issue a ruling early next week.
Takeaway: Positive for PENN as this is not included in guidance
LVS – CEO Sheldon Adelson has continued his anti-online gambling crusade by hiring former GOP congressman Connie Mack of Mack Strategies to lobby against Internet gambling legislation. Mack will go to bat for Adelson and his Coalition to Stop Internet Gambling and will be tasked with lobbying in support of the Restoration of America’s Wire Act, the federal bill introduced by Sen. Lindsey Graham (R-S.C.) and Rep. Jason Chaffetz (R-Utah) over three months ago. Mack joins a lobbying lineup that includes Steptoe & Johnson, Capitol Counsel, The Keelen Group and the Lincoln Policy Group.
Takeaway: Mr. Adelson's battle against online gaming continues.
BYI (SHFL) – Macau’s Court of Second Instance dismissed an appeal from SHFL Entertainment (Asia) Ltd, which sought an injunction against Paradise Entertainment Ltd and its subsidiaries’ assertions of monopolistic rights over “multi-gaming” in the Macau market. The injunction sought to prevent Paradise Entertainment and its subsidiaries from claiming monopoly rights over multi-game electronic table game products in Macau and to restrain them from any unfair competition.
WYNN & 1128:HK – (GGRAsia)The head of Macau's Commission Against Corruption confirmed the agency is "analyzing some details" about land granted to Wynn Macau for its Cotai project after U.S.-based International Union of Operating Engineers called on the Macau authorities to investigate how Tien Chiao Entertainment and Investment Co Ltd secured rights to Cotai land before it was granted to Wynn Macau. While WYNN says it hasn't been contacted by authorities, and it doesn't anticipate any delay to the Cotai project, which is scheduled to open in H1/16.
Takeaway: More scrutiny behind a complicated Cotai deal but Wynn is apparently not a part of the investigation.
Chinese Money Laundering – (Xinhua) China's central bank is looking into allegations by a state broadcaster that Bank of China, the country's fourth largest lender, has been laundering money offshore for clients.
Takeaway: Could money laundering by Chinese big banks be the next area of Chinese Central Government crackdown?
Margaritaville Tulsa – (Tulsa World) Construction on the Muscogee’s $355 million Margaritaville casino is running behind schedule, and is now on track to open sometime in 2016 rather than mid-2015.
Takeaway: Even fewer new slots for 2015
Gaming in California's Wine County – A group of Native Americans, the Mishewal Wappo Tribe of Alexander Valley, filed a federal lawsuit in 2009 asking for recognition of their tribal status. The group's 350 members, most of whom live in Sonoma County today, say they are descendants of the Wappo people, who once inhabited parts of Sonoma, Lake County and much of Napa Valley, and that they were unfairly stripped of tribal status. Tribal leaders insist they simply want recognition. But winemakers worry such status would allow the tribe to petition for lands and eventually build a casino in Napa County. If the tribe wins, it would become a sovereign nation, and any lands they were granted by the federal government or that they purchased would be exempt from local land-use and zoning restrictions. Motions to dismiss the Wappo's claim have been denied. Last July a federal judge affirmed a ruling that Napa and Sonoma counties had no standing to fight recognition of the tribe, escalating widespread apprehension that a casino could find a home in Napa’s agricultural region
Takeaway: Nearly 3 million people visited Napa Valley in 2012 and visitors spent an average of $714 per day, including $260 on lodging, $148 on restaurants and $107 on wine purchased at wineries. Lodging guests typically stayed in the valley for 2.9 days on average.
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.
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We will be hosting our highly-anticipated Quarterly Macro Themes conference call today at 11:00am EDT. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and related investment opportunities.
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 171487#
- Materials: CLICK HERE (Slides will be available approximately one hour prior to the start of the call)
Q3 2014 MACRO THEMES OVERVIEW:
- #Q3Slowing: Against a backdrop of harder growth and easier inflation compares in 3Q14, the conflation of rising inflation, static nominal wage growth, and an ongoing deceleration in housing should drive a sequential deceleration in domestic economic growth. Growth sentiment, meanwhile, has been improving with 3Q GDP estimates rising as consensus again back-end shifts misguided 1H estimates. We expect that optimism to be marked to [a more dour] reality as we progress through 3Q.
- #DollarDevaluation: Given that the Fed's 2H14 and full-year growth forecasts are still too optimistic, the outlook for an easier Fed and future dollar devaluation looks probable. The negative correlations between the dollar and commodity prices should tighten further as the Fed surprises consensus by getting more dovish.
- #VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.
Client Talking Points
Risk happens slowly, then all at once - front month VIX went from its long-term asymmetry point (buy it at 10!) to immediate-term TRADE overbought yesterday after crashing (to the upside) on a +24% four-day move. Risk range for VIX is now 10.32-12.67, so use that as a beta backboard.
Russell 2000 is both below our TREND resistance line of 1173 and DOWN for 2014 YTD (bull market). Its risk range is now 1155-1173; above 1173 bullish; below it bearish – with a lot of emotion in between.
We learn a lot more from the bounce than the breakdowns – and this morning’s European Equity bounce is rather pathetic; DAX and FTSE only +0.2-0.3% and are now both trading below TRADE and TREND lines; Portugal is +2% but would need to be up another 1,000 points on the PSI 20 to recapture TREND support.
|FIXED INCOME||26%||INTL CURRENCIES||20%|
Top Long Ideas
Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration. The first survey tool measures 3-D Mammography placements every month. Recently we have detected acceleration in month over month placements. When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner. With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.
Three for the Road
TWEET OF THE DAY
GOLD: not giving it back to the bears this morning - and I like that = +11.1% YTD
QUOTE OF THE DAY
“A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.”
- John F. Kennedy
STAT OF THE DAY
The Japanese Nikkei has been down every day this week and is down -6.1% year-to-date.
This note was originally published at 8am on June 27, 2014 for Hedgeye subscribers.
“Keep it simple. Tell the truth. People can smell the truth.”
-Steve Wynn, Chairman & CEO of Wynn Resorts
I ran over a skunk on the way to work this morning. Accidentally, of course. But regardless it still did not smell very good. That’s the thing with skunks; they sort of surprise you with their malodorous nature.
For those of you that don’t know him, Pepé Le Pew is a French cartoon character that was first introduced in 1945. Pepé is a French skunk who strolls around Paris looking for love. Unfortunately, he has two big things going against him. First of all, he’s a skunk, so he smells. Second, he’s a tad bit aggressive and reluctant to take no for an answer.
Now if that sounds a little bit like the U.S. equity market right now, it probably should. As we’ve been flagging here at Hedgeye (somewhat “aggressively” at times) volatility in the U.S. is at a level that is signaling that all is well in the world. Between you and me, that kind of stinks.
I read an interesting article in the Wall Street Journal (Media 1.0) yesterday discussing the volatility and the VIX. It quoted Robert E. Whaley, a professor at Vanderbilt University’s business school, who is credited with developing the VIX for the Chicago Board Options Exchange in 1993. Here’s what he had to say about the VIX being literally at an all-time low:
“I wouldn’t be worried about it.”
Indeed. And if an aggressive skunk happens to be pestering you in Paris, no need to worry about that either.
Back to the Global Macro Grind…
While Professor Whaley, aka the “Father of the VIX,” isn’t worried, that’s not necessarily a reason for us not to be worried, despite the fact that this morning, the global equity markets are decidedly not worried. China is down -0.11%, Europe is up small, and the U.S. equity futures are down small. Frankly, the only excitement overnight is that the Nikkei in Japan is down just over a -1%.
So, what gives in Japan? Are you sitting down? Inflation! Yup, Japan, the home of generational deflation, is actually experiencing inflation. In fact, CPI in Japan accelerated +3.4% year-over-year. This was the highest pace in 32-years for Japanese inflation. The Japanese bureaucrats wanted inflation. Now they've got it.
The fact of the matter is that the Japanese will tell you that once you factor out the sales tax impact, there was actually a slight drop in CPI. That said, even the Japanese labor market is showing inflationary signs as the jobs-to-applicants hit a 22-year high at 1.09. In theory, a tight labor market should lead to increased wages and eventually more purchasing power for the consumer. Translation? Organic inflation.
Ultimately, the challenge with either inflation driven by a tight economy or, conversely, driven by overly dovish monetary policy is that inflation slows growth. In the U.S., the counter argument to our view that inflation will slow grow is that even though the CRB Commodities index is up double digits on the year, commodities are a relatively small portion of the consumer’s annual spend. In part this is true, although much less so in emerging economies.
In fact, the WSJ this morning referenced the “fragile five” economies of Turkey, India, Indonesia, South Africa, and Brazil as economies that are particularly subject to the negative impact of commodity inflation. The challenge with trying to fight inflation for the central banks in these countries is that growth is not at abnormal levels, so any rate hikes would slow it even more. Yes, indeed, monetary inflation stinks!
Speaking of inflation, the Fed’s balance sheet continues inflating at an almost staggering rate:
- Holdings of US Treasury securities were $2.4T on 25-Jun, +$5.5B w/w and +$469B y/y;
- Holdings of mortgage-backed securities were $1.7T on 25-Jun, ($4.5B) w/w and +$456B y/y; and
- Holdings of federal agency debt securities were $43.7B on 25-Jun, unch. w/w and ($27B) y/y.
In total, the Fed’s balance sheet is at an astounding $4.4 trillion. Certainly, tapering is slowing the growth of these assets on the Fed’s balance sheet, but what, exactly, happens when the Fed starts to sell these assets? At over 25% of GDP, it is worth sniffing around this question.
As it relates to GDP, my colleague Darius Dale wrote a very thoughtful note earlier this week that again emphasized that the Fed is “always wrong on growth.” Specifically, since 2012 the Fed has been wrong on growth by an average of 113 basis points. No small potatoes. The takeaway from the Fed (and virtually all of Wall Street) being wrong on growth is that Fed may actually surprise us with its dovish policy. As Darius writes:
“As it relates to actual macroeconomic analysis, the doves are definitely starting to cry at the Fed. In a fantastic article today, Reuters journalist Howard Schneider walks though the current debate being held amongst members of the Federal Reserve and its regional banks. Specifically, the Yellen-led institution is openly debating pushing out their forecasts for labor market tightness, citing both new and old analyses in the process.
The key takeaway is that the FOMC is setting up to surprise both buy-side and sell-side consensus to the downside with respect to tightening monetary policy. A less-tight labor market in the interim means the Fed can remain “accommodative” for longer – which is exactly what is being priced into the interest rate markets. Expectations for a 2015 Fed Funds Rate hike are down -27% on average, across the curve, from when we correctly introduced this bold prediction back in JAN.”
Slowing U.S. growth… accelerating inflation… low volatility… Yup, it might make sense to your nose right now.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.46-2.60% (bearish)
SPX 1934-1971 (bullish)
VIX 10.61-12.94 (neutral)
USD 80.01-80.45 (bearish)
Brent Oil 112.38-115.49 (bullish)
Gold 1289-1345 (bullish)
Keep Your Head Up,
Daryl G. Jones
Director of Research
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