Toyota (TM): How Do We Trade It From Here?

For those of you who have been following my strategy work since November's blog launch of MCM Macro, you're probably tired of my flashing the TM short call. We can get tired of things like this, as long as they keep working!

The thesis hasn't changed. The facts continue to play more and more into my hand and out of Toyota's. In their home market, Japanese economic trends have materially deteriorated in the past month - they look as bad as this TM chart. Domestically, I can argue forever and a day with the media and the sell side about why I don't care if and when TM overtakes GM as America's leading car salesman - why do I "have to own" a new car or either of these stocks anyway? Reality is that TM and GM are overspending to capture US consumer dollars that are being spent less and less on cars. In May GM was at 19% share and TM was at 18%. I don't buy shares of anything that's shrinking.

Europeans have one car basically per family. The Chinese have 1 child per family. The Japanese population of families is shrinking. What does all of this mean? I'll tell you what it doesn't mean - that Americans owning 2.2 vehicles per shrinking household of income isn't going to inspire a new car sales boom anytime soon, no matter how cool Toyota's used to be. Auto sales in the US are approximately 20% of the total retail sales number. The bulls eye on this line item in US Household spending budgets doesn’t say “yeah, but Toyota’s are different.”

If you're still with us on the TM short side, I'd cover some at $84.34, and re-short any strength back up to the $89-91 range. This one is macro, cyclical, and secular, all at once. I like 3's. Especially one's like these that come together like Toyota's short thesis.
(chart courtesy of

Eye On Leadership: Remembering John Templeton

This past month of volatile global stock market performance takes me back to my book shelf. In this business, I’ve always found that looking back helps me ground myself in a stronger fundamental stance. Then I can look forward with clarity again.

Looking back at 2008 YTD performance, “Global Macro”, as the Street likes to call it, is back! Some investors out there with a rational global fact finding process like Peter Thiel at Clarium capital, are taking advantage of the confusion that seems to be breeding contempt all of a sudden in the momentum oriented levered long community.

Looking back, this is not a new investing “style” of course. On Wall Street, global macro has come and gone out of favor for a generation. One of the pioneers of the global macro trade, John Templeton, passed away this past month, at the age of 95.

The”Fast Money” folks who “buy high, and sell higher” wouldn’t have got along very well with Sir John. One of his classic principles of investing was “to buy when others are despondently selling, and to sell when others are greedily buying.”

John Marks Templeton was born in 1912 in rural Tennessee. He was not only the 1st Yalie from his home town; he was the first to attend college. After finishing 1st in his Yale Class here in our offices’ stomping grounds in New Haven, Templeton went on to become a Rhodes Scholar. Then he obtained his Law degree from Oxford. At the age of 27, he famously bought 100 shares of 100 stocks on the NYSE that were trading under a buck. In 1954 he founded the Templeton Growth Fund, and the rest is history.

Templeton was a man who professed fortitude and “open mindedness”. He didn’t follow the Wall Street crowd. He wasn’t into social climbing or “owning stuff” either. He lived in the Bahamas, drove his own car, and until is later years was often sighted power walking in the ocean against the tide. An Investor’s Business Daily article from 1998 quoted him as saying that he hadn’t watched more than 84 hours of TV in his life.

According to the obituary ‘The Economist” wrote about him on July 19th, 2008, “late in life he favored market neutral hedge funds… he disliked speculation, and any instrument over-geared to make money.”

Templeton liked the idea of hedge funds actually being hedged, and didn’t like leverage – fancy the complexity of that.

God Bless John Templeton’s soul. Wall Street needs to be rebuilt with men and women of principle like him.
Picture: (

China: It’s Time For Strategic Action

If probably flew under most radars that Li Ning (3rd largest footwear brand in China) struck an agreement with Lotto (#1 in Italy) to distribute the Lotto brand to Chinese consumers. While not a huge standalone event, it is yet another reminder of the number of brands that are flocking to China for a leg up in growth. This brings to my mind a couple of random China-related issues…
  • 1) Brands are flocking to China. Unfortunately, many of these brands have no reason to exist in the first place. Brown Shoe (BWS) attacking the Chinese middle-tier footwear opportunity? C’mon…first get the opportunity right in the US. ANY preexisting brand that cannot work in a developed market certainly can’t hack it in China.
  • 2) I like the Lotto deal. It is a premium Italian brand that clearly has a place on the feet of Chinese consumers. Without knowing financial terms, I’ll say at least that the strategic move was a sound one for Li Ning.
  • 3) There is definitely too much product being shipped in for the Olympics. Period. And it will take a lot to convince me otherwise. Think about it. Are the big brands growing aggressively in China to sell product around a 2-week sporting event? No. They want to be front and center in the eyes of consumers attending the event. Unfortunately, this means building a massive number of stores filled with a whole lot of product. China is a black hole where even the best brands have no clue how much product is in the market. There will be excess inventory in the wake of August.
  • 4) On a less doomsday-ish note, any inventory glut will pass. This is not like Atlanta, which took years to recover from the overbuilding around the 1996 Summer Games. I can’t imagine that any PM owning this stock would look at ‘post-Olympic market stress’ and subsequently deem the market broken. But still, an important growth driver will be frozen for a few quarters.
  • 5) I think we’re going to see a content transition in China. Yes this is purely my opinion, and I cannot quantify it. But Chinese consumers want US brands such as Nike, and European brands like Adidas to show the world that they’ve arrived – even if it means spending a week’s worth of income on a pair of kicks. But we’re seeing local brands gain some steam, like Warrior and Feiyue – not to mention Li Ning. Not only will these brands accelerate in China, but my bet is that they’ll become more prominent in Western markets.
  • 6) If Nike and Adidas are smart, they’re looking at deploying cash to add Chinese brands to their portfolios before they are playing defense and spending more marketing dollars to combat them. If I’m a Chinese brand with any history of relevance whatsoever, I’m scrounging every last Yuan I can find to build my brand image. I’ll get it back many times over when I’m acquired.
50-year old Warrior brand that is making a comeback in China. Orlando Bloom sporting Feiyues.

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‘The Economist’ wrote a controversial article with the aforementioned title on July 19th, 2008. At the time, prospects for Turkey’s ruling AKP party were under fire, and Prime Minister Erdogan had plenty of back pedaling to do. Anti-secularism would have spelled the death of his bid for European Union acceptance.

This week the Constitutional Court rejected the proposed ban of Erdogan and his political party. Instead, they fined him for “anti-secular” behavior, and the stocks in Istanbul celebrated big time.

On Friday, the Turkish stock market flashed a very positive divergence versus weakness across equities, globally. Turkey’s ISE National 100 Index closed up +1.9% on the day, taking its ramp up 10,000 feet from the thralls of potential political disaster on July 1st where the market was trading at 33,208,-29% lower!

I’ve attached the roller coaster 3 year chart of Turkey as it tells many stories within the “it’s global this time” stock market narrative. On October 15, 2007, at the peak of global equity euphoria the ISE Index closed at a nosebleed height of 58,231.The levered long community saw no tail risk to Ataturk’s long standing secular Republic coming under geo-political fire – why would they? Did they even know what it meant?

Obviously, there were winners and losers coming out of those October 2007 highs. Turkish stocks ended up losing -43% of their value from that peak to the July 2008 trough. Ouch.

I model all country level stock index performance daily (globally) as it often issues me clues as to where tail risk lies. I am in the camp that the global economy is an increasingly interconnected and complex system of factors that need to be respected before they are fully understood.

Understanding Turkey’s domestic arm wrestle between their dominant Islamic faith and secular aspirations to be accepted into the European Union is a fascinating one as it pertains to global geo-political tail risk. It may not be a widely known statistic on Wall Street that there are approximately 1 billion Muslims in a world of 6 billion people. But that certainly doesn’t mean that the reality of these numbers cease to exist.

It is global this time, indeed. America’s grip on “leading” the world is loosening, and we need to pay attention to all of the critical factors underlying where the world is headed next. Turkish politics have the Europeans on their toes – the “Caliph” of Istanbul’s return would wake American’s up in a hurry too.

  • The ISE National 110 Index
(Chart courtesy of


Boyd Gaming announced this morning that it has postponed construction of Echelon, suspended its dividend, and approved a $100m buyback plan. This is the first time in awhile we’ve seen a smart redeployment of capital by a gaming company. MGM with CityCenter is in a seemingly similar situation except for a few important and complicating differences.

1. CityCenter is further along in terms of construction

2. Dubai World is a 50% partner and probably doesn’t want its billions in capital sitting in a dormant project

3. CityCenter has contracts for what it expects to be $2.7bn in residential sales within CityCenter. Millions of dollars of deposits have been received and would have to be refunded. Echelon does not contain a residential component.

This is a smart move by BYD and helps the supply situation a bit. However, let’s not get too excited about MGM following a similar path.

LIZ: Pluses and Minuses To End the Week

On the plus side, Liz Claiborne is covertly leaking details of its redesigned logo/image under the direction of Isaac Mizrahi. This is coming just in time. The latest internet promotional campaign is for 80% of its summer assortment (leftovers). And I thought the 50% at this time last year was a lot.
  • Does this change my mind on the 1-2 year call? No. In fact, with the sales in department stores having stabilized relative to this time last year (See my 7/30 post), my sense is that LIZ is using on-line clearance channels to a greater extent than funding markdowns on the product to retailers.
  • Nonetheless, anything that is 80% off in retail is nothing short of pathetic. Mizrahi has his job cut out for him. The good news is that the brand has sunken so low that if he hits a fashion trend – even if by accident – then it’s a big potential margin event.
New Liz Logo by Isaac Mizrahi

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