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Keith's Macro Notebook 10/1: Volume | Russell 2000 | UST 10YR


Retail Callouts (10/1): AdiBok, NKE, UA, Mobile Sales

Takeaway: Adidas is in denial. UA joins recent athlete endorsement incidents with Phelps arrest. AMZN and AAPL lead mobile.

COMPANY HIGHLIGHTS

 

ADIDAS IS IN DENIAL ABOUT WHY IT'S LOSING SHARE

AdiBok, NKE, UA - Adidas fights to draw top talent to headquarters in sleepy Bavarian town

(http://uk.reuters.com/article/2014/09/29/uk-adidas-germany-insight-idUKKCN0HN0B720140929)

 

  • "Adidas needs world-class designers, brand experts and technical whizz kids to improve its image against U.S. rival Nike, but persuading them to move to its headquarters in rural Germany is difficult. Adidas acknowledges it is hard to recruit at its headquarters near the Bavarian town of Herzogenaurach, particularly for design, marketing and digital roles, and admits it missed trends in the U.S. market, where Under Armour has just overtaken it as No. 2 behind Nike. Nike's better than expected earnings on Sept. 25 underscored its ascendancy."

 

Takeaway: Let's be clear about something, Adidas is not losing share because its headquarters is in a sleepy town. If anything we'd argue that its town is sleepy because the company is failing to drive the culture of the company. Nike is crushing it, and it's based in Beaverton, OR -- not exactly a cultural mecca. Yes, it's 20 min from Portland and a short drive to Seattle. But Adidas is a short drive from several major towns (as Adi CEO points out in this article), and it also has an office in Portland with 1,000 employees -- a good deal of them poached from Nike.   Our point here is that Adidas' problem goes far beyond where people hang their hat.  First it should look really close at its processes and ideals. Then it can worry about where the people that execute on them are physically located.

 

UA - Michael Phelps Arrested for DUI

(http://bleacherreport.com/tb/df3RQ?utm_source=newsletter&utm_medium=newsletter&utm_campaign=daily-radar)

 

  • "Michael Phelps was arrested for driving under the influence in Baltimore, Maryland"

 

Takeaway: We hate to call out something like this, but the fact of the matter is that with the string of bad behavior in professional sports over the past month, this event will garner special attention. Nike dropped both Adrian Peterson and Ray Rice after their 'incidents', though we'd be surprised to see UnderArmour take much action against Michael Phelps. He'll make a public apology, and say he'll never do it again -- just like when he caught his first DUI at 19 in 2004, and when he was caught smoking pot in 2009. He'll get a fourth chance.

 

Mobile Commerce Callouts

 

This ranking of the top mobile commerce players is interesting to us on many levels.  1) Amazon and Apple combined equal the next eight companies on the list in total sales volume. 2) Apple and Google Play make sense as having a high conversion rate (high traffic and low ticket), but Amazon's 7% is extremely impressive -- especially for a company with an $82 average ticket.  Average for the other retailers on the list is about 2%. 3) Sears is actually on the list of top 10, with an impressive 100% growth over last year. 4) Chinese mobile retailers have far superior ASPs than we have the US.

 

Retail Callouts (10/1): AdiBok, NKE, UA, Mobile Sales - 10 1 chart1

 Source: Internet Retailer

 

OTHER NEWS

 

AdiBok- ADIDAS AG TO INITIATE A MULTI-YEAR SHAREHOLDER RETURN PROGRAMME

(http://www.adidas-group.com/en/media/news-archive/press-releases/2014/adidas-ag-initiate-multi-year-shareholder-return-programme/)

 

  • "With approval of the Supervisory Board, the Executive Board of adidas AG resolved today to return up to € 1.5 billion in total to adidas AG shareholders over the next three years, primarily in the form of share buybacks. In addition, adidas AG confirms its stated commitment to pay an annual dividend to shareholders in the range of 20% to 40% of net income attributable to shareholders."

 

HIBB - Jared Briskin Promoted to Chief Merchant at Hibbett

(http://www.wwd.com/business-news/human-resources/jared-briskin-promoted-to-chief-merchant-at-hibbett-7961334?module=Retail-latest)

 

  • "Jared Briskin has been promoted to senior vice president and chief merchant of Hibbett Sports Inc., the Birmingham, Ala.-based sporting goods retailer."
  • "Briskin was most recently vice president and divisional merchandise manager of footwear and equipment and has been with the company for 16 years."

 

DLIA - Teen Retailer Delia's Seeks Buyer

(http://www.wwd.com/business-news/mergers-acquisitions/delias-inc-is-exploring-a-possible-sale-of-the-company-7960006?module=hp-topstories)

 

  • "With a stalled turnaround effort and moves to recapitalize the company failing to reverse its fortunes, Delia’s Inc. is looking for a buyer."

 

Boot Barn Files for IPO

(http://www.wwd.com/footwear-news/business/boot-barn-files-for-ipo-7961228?module=Footwear%20News-Business-main)

 

  • "The Irvine, Calif.-based retailer has filed with the Securities and Exchange Commission for an initial public offering."
  • "While no terms were given for the offering, the move could potentially raise up to $86.25 million. The company plans to list on the New York Stock Exchange under the symbol BOOT."

 

SHOO - Madden Acquires Mexico Business

(http://www.wwd.com/footwear-news/business/madden-acquires-mexico-business-7961047?module=Footwear%20News-Business-second)

 

  • "Steve Madden is buying up its Mexico-based licensee."
  • "Executives expect that the $15 million acquisition of SM Mexico, which distributes and markets Steve Madden product in wholesale and retail stores, will boost efforts to grow the brand's presence throughout the Mexican market."

 

SPLS - Staples launches nationwide tour to boost employee productivity

(http://www.retailingtoday.com/article/staples-launches-nationwide-tour-boost-employee-productivity)

 

  • "Staples has kicked off a nationwide tour called "Refresh. Recharge. Refuel." The tour aims to encourage office workers across the country to take a break from the daily grind by visiting a large-scale, popup break room stocked with free snacks, coffee and other beverages."

 

SPLS - Staples closes 15 stores in Canada

(http://www.theglobeandmail.com/report-on-business/staples-closes-15-stores-in-canada/article20867209/)

 

  • "Staples Canada has closed 15 of its 331 stores in this country as the office supplies retailer feels the brunt of more business shifting online."
  • "The closings are part of a broader move by U.S. parent Staples Inc. to shut as much as 12 per cent of roughly 1,800 North American stores and downsize others as it struggles to improve its bottom line in a fast-changing market."

LEISURE LETTER (10/01/2014)

Tickers: MPEL, PEB, RHP, CCL

EVENTS

  • Oct 1 - Oct 2: G2E Las Vegas
  • Wednesday: Oct 1
    • National Day of the People's Republic of China
    • DB Leveraged Finance: PENN, BYD, SGMS, MTN
    • TAG Fall Consumer Conf: LVS, WYN
  • Oct 8: HT Investor Day

COMPANY NEWS

MPEL – Casino resort City of Dreams, in Macau, announced on Tuesday a partnership with XCOR Space Expeditions that will see three customers sent to space. “The Space Legend” campaign will kick off in November. City of Dreams will draw one winner every month for three consecutive months. “Participating guests will become one of the first 12 XCOR astronauts in Asia and also one of the first 100 XCOR astronauts in the world,” XCOR Asia chief executive Alex Tang said in a statement.

Takeaway: Boldly going to the next frontier.

 

PEB – amended and supplemented its Trust Certificate, classifying and designating an additional 1,200,000 of the Company’s authorized preferred shares of beneficial interest, $0.01 par value per share, as 6.50% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest as the Company entered into an underwriting agreement with Wells Fargo Securities, LLC relating to the issuance and sale of 1,000,000 Series C Preferred Shares at a price of $24.50 per share. The closing of the offering occurred on September 30, 2014. Upon completion of the offering, there were 5,000,000 Series C Preferred Shares outstanding. The 1,000,000 Series C Preferred Shares issued and sold pursuant to the Underwriting Agreement have been registered on the Company’s shelf registration statement on Form S-3 which became effective upon filing with the Securities and Exchange Commission on March 4, 2014.

Takeaway: PEB rounding out its capital stack with modestly priced preferred securities.

 

RHP – expect a press release from RHP today addressing the maturity of the convertible notes.

Takeaway: We expect positive earnings revisions as analysts adjust downward their fully diluted share count.

 

CCL (Travel Weekly) Holland America Line said it was forced to cancel a seven-day Canada/New England cruise on the Veendam to make emergency repairs on a propeller. The cruise had been scheduled to depart Quebec on Sept. 28. Booked guests will receive a full refund of their cruise fare and all shore excursions booked through Holland America Line, plus a credit toward a future cruise equal to 100% of the fare paid.

 

CCL (Courier Mail) In the latest debacle for Princess Cruises Sea Prince, close to 2,000 passengers in Sydney were told their New Zealand cruise had been cancelled due to technical issues. Over the past two months, The Sea Princess was plagued with several norovirus outbreaks as well as mechanical issues which resulted in passengers “go-slow” transit, meaning the ship could only travel at half-speed, resulting in several missed ports during a cruise to the north of Australia. 

Takeaway: Lots of small cancelled sailing in aggregate may undermine the recent positive financial and earnings results. Hedgeye remains concerned with European pricing risk.

INDUSTRY NEWS

Macau Smoking Ban Pronouncement – We understand the DICJ called an urgent meeting with the six concessionaires with representatives from the Health Bureau.  The DICJ issued a clarification that tables that are currently designated as “mass” tables can not be amended to be included as VIP/Premium/High Limit and shall maintain this designation and remain as non-smoking once the regulations are in force. Effectively all mass gaming areas as of Oct 6th will be non-smoking areas. This includes all tables within currently designated Premium and High Limit areas. Tables designated as VIP (Junket) tables within designated VIP (Junket) areas remain unaffected and smoking will be allowed.  The definition of a “mass” table as opposed to a “VIP” table is via the classification from the DICJ whereby the annual operating premium payable to the Govt. associated with a “mass" table is HKD $150K with a “VIP” table attracting an annual premium of HKD $300K. All the current partition works and barriers regardless of height are now, based on the revised interpretation, obsolete.  The only areas that smoking will be allowed on the mass floors is within the dedicated smoking rooms.

Takeaway:  More restrictive than previously thought and a negative for the Macau stocks.

 

Macau Smoking Ban Part 2 – Only 12 of Macau’s casinos and slot-machine parlors have already completed the construction of smoking lounges on their mass floors, Health Bureau director Lei Chin Ion said on Wednesday. The Health Bureau on Tuesday said that by then only 28 gaming venues had submitted final requests to establish smoking lounges.  Macau has 35 casinos in operation and five slot-machine parlors, according to data from the city’s Gaming Inspection and Coordination Bureau. Casinos will have to go 100 percent smoke-free in their mass floors after October 6 if their smoking lounges have not been inspected and approved by then. The full ban would remain until the smoking lounges are approved and operational.

Takeaway: Failure to comply with the smoking ban rules may create incremental disruptions in gaming play and downside to financial results.

 

Japan Gaming Legislation (Bloomberg) A Japanese lawmaker backing the legislation to enable the legalization of casinos said he expects it to win lower-house approval next month and that the gambling resorts would be in major cities and charge locals an entry fee. “We want to finish up in the lower house in the first half of October and send it on to the upper house,” Koichi Hagiuda, secretary-general of a lawmaker’s group promoting the casino bill and an aide to Prime Minister Shinzo Abe, said in an interview.  The parliament’s autumn session runs from September 29 to November 30.  Should the bill to legalize casinos pass, further legislation setting rules for operating gambling resorts would have to be approved before building would start. This could be presented in the next session of parliament, starting in January, Hagiuda said.

Takeaway: Like all things Japan, its the process...so let's pass the enabling legislation. 

 

Macau Ferry Fares to Increase (Macau Daily Times) The Marine and Water Bureau (DSAMA) announced that it has approved requests from two local ferry service providers to increase their ferry fares for Macau–Hong Kong economy class journeys by 2.6 to 3.4% which equals MOP5. The economy class fare of the Hong Kong International Airport–Macau service will also rise between 3.3 and 6% which equals MOP8. The new fares will come into force on October 8. TurboJet and Cotai Water Jet asked to increase their fares between 7.5% and 8.3% in March this year.

 

Outbound Macau Visitation (Macau Business Daily) Macau residents are traveling more and often. Since January, around one million locals vacationed abroad, a 7% increase year-over-year. South Korea is the hot new destination for locals, with Macau tourists growth of 10.2% year-over-year. By comparison and in sharp contrast to a 54.6% drop in outbound travel to Thailand and a 29.2% drop in travel to Malaysia during the same period, official figures released yesterday by the Statistics and Census Service. Mainland China remained the most popular destination, accounting for 72% of the total residents traveling outbound

Takeaway: Despite protests about unfair wages, we suspect casino workers are traveling and spending more.

 

Revel Update – The bankruptcy auction enters a third day today but with a contingency.  According to local media reports which quoted Glenn Straub's attorney Stuart Moskovitz, rival bidder Brookfield Asset Management, which owns the Hard Rock casino in Las Vegas and Atlantis Paradise Island in the Bahamas, had increased its offer from $98 million to more than $110 million, but Brookfield made its bid contingent on it being accepted by 6 a.m. today.

Takeaway: Brookfield Asset Management, a late entry to the bidding process but already licensed in Nevada.


Singapore Housing –- The flash estimate of the 3rd quarter 2014 Resale Price Index (RPI) for public housing is 192.5, falling 1.6% over the prior quarter, the Housing and Development Board while the flash estimate of the private housing price index fell 1.3 points to 208, resulting in a 0.6% decline over the previous quarter, the Urban Redevelopment Authority

Takeaway: A headwind for the Singapore mass gaming segments at Genting Singapore's Resorts World Singapore and Las Vegas Sands' Marina Bay Sands.

MACRO

China Macro – September manufacturing PMI 51.1 vs 51.0 consensus and 51.1 in August.

 

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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MACAU: NOT MUCH WIGGLE ROOM WITH SMOKING BAN

Takeaway: Remain negative on Macau - reaction to end of specific anti-corruption drive overdone and smoking ban guidelines look restrictive

DICJ held a meeting with the concessionaires yesterday to clarify expectations for the smoking ban

CALL TO ACTION

The implementation of the October 6, 2014 Macau smoking ban became less hazy and very clear – with no room for operator interpretation of where punters can smoke on the gaming floor.  The DICJ and Department of Health called an emergency meeting of the six Macau gaming concessionaires to discuss and clarify the smoking ban rules.  We reiterate our negative outlook for the Macau gaming operators and believe the clarification will put added pressure on the concessionaires

DETAILS

At the same time some analysts are recommending investors attempt to catch the falling Macau knife, our outlook remains decidedly negative.  Yesterday’s announcement by the Chinese government of the end of a specific anti-corruption program was interpreted as the pivot for a turn in the VIP business.  However, we believe the broader anti-corruption effort continues and see no basing of Macau’s VIP business yet.  Moreover, yesterday’s surprise convening of the concessionaires by the DICJ yielded much more specific guidelines for October 6th implementation of the smoking ban.

 

We understand the DICJ along with representatives from the Department of Health called a meeting with the six gaming concessionaires to discuss and clarify the smoking ban Tuesday afternoon.  Apparently, the DICJ reiterated the only area where smoking will be permitted on mass gaming floor is within the dedicated smoking rooms. Aside from the dedicated smoking rooms with special ventilation systems, all mass gaming areas will be non-smoking areas, including premium mass areas.

 

The DICJ further noted the clear, legal definition and difference between a mass vs. VIP table -- the definition of a mass table as opposed to a VIP table is via the classification from the DICJ whereby the annual operating premium payable to the Macau government associated with a “mass" table is HKD $150K with a “VIP” table attracting an annual premium of HKD $300K.

 

The DICJ then pronounced -- tables currently designated as “mass” tables cannot be amended to be included as VIP/Premium/High Limit and shall maintain the mass designation and remain as non-smoking once the regulations are in force beginning October 6, 2014.  Tables designated as VIP or junket sponsored tables within designated VIP areas or dedicated junket rooms remain unaffected and smoking will be allowed.

CONCLUSION

In our opinion, the clarification by the DICJ makes the smoking ban very black and white per the legal definition of what constitutes a mass vs VIP table.  As a result, the gaming concessionaires cannot interpret where smoking is allowed or not allowed.  We believe today’s ruling/clarification serves to further “dislocate” player time at the tables (some premium mass included), a vital component to driving play, and potentially cause further disruption as enclosed smoking areas specifically constructed for premium mass smoking may have to be dismantled.

 

We reiterate our negative view of the Macau gaming operators and would take advantage of yesterday’s pop to reduce positions.  For longer-term investors desiring long exposure to Macau, we favor Galaxy Entertainment Group due to its early 2015 Phase 2 opening and unique Chinese VIP strategy which is taking market share from competitors. We will be in Macau on October 8th and 9th and will update our observations real time.


Volume, Russell 2000 and Bond Yields

Client Talking Points

VOLUME

Volume was up huge (in rate of change terms) on yesterday’s U.S. stock market down day (that’s when we get the real volume, accelerating on down days. Total U.S. Equity Market Volume (including dark pool) +26% vs. its 3 month average – the liquidity trap in the small cap #bubble remains obvious.

RUSSELL 2000

The Russell 2000 closed the month at lower-lows than the ones it made in AUG, and is now -8.9% from its all-time #bubble peak established on July 7th. I have been calling it a #bubble A) because it is one and B) no one else will.

UST 10YR

UST 10YR Yield falling again to 2.47% this morning and we don’t think it will take much (another bad jobs report?) to smack this sucker right back to its year-to-date lows; bond yields rise/fall with the rate of change in U.S. growth – oh, and now there’s a rumor that Draghi’s “shock and awe” might include buying Treasuries? #wonderful.

Asset Allocation

CASH 58% US EQUITIES 2%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 26% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

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 two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  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.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

Yesterday's Total US Equity Volume was +26.1% vs its 3mth avg - volume comes on the down moves

@KeithMcCullough

QUOTE OF THE DAY

The secret of getting ahead is getting started.

-Mark Twain

STAT OF THE DAY

In 2013, real median household income was 8.0% lower than in 2007, the year before the most recent resession.


CHART OF THE DAY: The Hong Kong Government Has Already Lost

 

CHART OF THE DAY: The Hong Kong Government Has Already Lost - CHINA High Frequency GIP Data Monitor


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