This chart was extracted from Josh Steiner's "HOUSING SUMMIT OFFERS EARLY GLIMPSE OF WHAT MAY COME - STARTS & PERMITS SHOW CONTINUED WEAKNESS" post, yesterday.
Conclusion: China’s decision to open up its bond market to foreign investors is likely a major catalyst for widespread internationalization of the yuan. Furthermore, we believe this decision has major implications across asset classes globally over the next 10-20 years.
Yesterday, we published a note on the intermediate-to-long term outlook for the Chinese consumer, and within that note, we briefly touched on China’s policy announcement to open up its interbank bond market to qualified foreign institutional investors. The key takeaways were: a) to accelerate capital flows from abroad by opening up its domestic securities market and b) to make its currency more attractive to foreign central banks by broadening its use globally. Traditionally, trade has been the main way for foreign holders of yuan to return money to China. By opening up its $2.1 trillion interbank bond market, China is now creating new avenues for foreign investors to invest in China.
We believe this decision has major implications across asset classes globally, particularly as it relates to the dollar, commodities, and U.S. corporate and government debt over the next 10-20 years. But before we get into key takeaways at it relates to investment opportunities, allow me to briefly summarize the reforms China is putting in place:
Combined, these reforms are significant, as it expands yuan transactions beyond just trade settlements. By granting foreign institutional investors greater access to investment opportunities, China is likely to spur global demand for yuan-denominated assets, ranging from securities to savings deposits. Furthermore, we believe that with this increased demand outlook, the yuan will receive incremental upward pressure over time, as popularity and investor comfort grows.
From an international FX reserves perspective, we believe this news is also bullish for the yuan from both an appreciation standpoint and from a diversification standpoint. As investor confidence grows, so should the confidence of foreign central bankers as it relates to holding yuan-denominated assets. In July, China agreed to a three-year currency swap with Singapore worth 150 billion yuan in addition to the 650 billion yuan of outstanding swap agreements with Indonesia, Malaysia, South Korea, Hong Kong, Argentina, and Belarus.
So what does this all mean as it relates to investing? First, we believe this is likely to be a catalyst that accelerates a likely secular up-trend in the yuan’s FX rate. We believe in the yuan as a percentage of international FX reserves will grow substantially over the next decade or two as foreign central banks diversify their FX exposure away from U.S. dollars. The latest data from the IMF supports our view that the U.S. dollar as a percentage of international FX reserves is mired in a secular down-trend that is not likely to end anytime soon. After falling from 71.5% in 1999 to 62.2% in 2009, the dollar continued its decline in 1Q10, dropping to 61.5% of global FX reserves. China has been leading the charge away from the U.S. dollar: in June it reduced its holdings of U.S. Treasuries by the most ever on a monthly basis, favoring Japanese government and Korean treasury bonds of late (+$20.1 billion and +$2.45 billion, respectively Jan-June). China’s KTB holdings grew 111% Y/Y in Jan-June period and the country is on pace to buy roughly 4 trillion won of KTB’s by year-end.
We are at the start of what looks to be a secular shift among global investors away from a low-growth, low-interest rate environment in the U.S. and towards high growth, high(er) interest rate environments in parts of Asia – particularly in the Indonesia, Singapore, Thailand, Malaysia and, of course, China. Malaysia today posted a +8.9% 2Q10 Y/Y GDP growth figure and raised guidance for the full year – citing a pickup in domestic growth in spite of slowing growth in advanced economies. Contrast that with TGT’s top line miss and soft guidance from this morning, and you can see clear as day that the world is changing and that capital will continue to chase yield either through growth or high interest rates.
Lastly, we feel that the Chinese economy will benefit from increased access to foreign capital. As growth slows in the Western economies, any investment within China catered towards producing goods for a Western consumer will slow. The broadening of China’s capital markets may ultimately serve to direct investment towards China’s domestic industries where development is needed in order to accommodate its growing consumer base. On the margin, this is a bullish catalyst for the Chinese consumer and, as a side-effect, bullish for the goods they will need (agricultural commodities, automobiles, electronics, etc.). Obviously, these structural changes won’t be fully developed in the near term, so we’ll continue to manage risk throughout the lengthy, long term ascent of the Chinese consumer.
POSITION: Long Brazilian Equities (EWZ)
After outperforming US equities for the better part of the last week and trading up for the last 4 days, consecutively, the Bovespa in Brazil is taking a bit of a breather today. We’re going to stay long Brazil via the EWZ etf.
Moshe Silver did his usual translation of the Portuguese press this morning and had the following insights on what Latin America is starting to cautiously refer to as a boom:
“Fundacao Getulio Vargas, Brazil’s leading social and economic policy research university, working with Germany’s IFO institute, says the Latin American Economic Climate Index rose from 5.6 to 6.0 points between April – June of this year. According to FGV, the combination of positive current readings, together with current projections, suggests that Latin America has entered a boom for the first time since July 2007, though the decline in projections leads FGV to characterize this as “a cautious boom.”
The current measures component of the index rose from 4.7 to 5.8, while the expectations component declined from 6.4 points to 6.2. The FGV report said “the historical series of the economic climate index, going back to January 1990, shows that an economic climate index reading of 6 should be read as very favorable.”
For Brazil, the current measures component rose from 8.1 to 8.4, while expectations declined from 6.4 to 6.1, resulting in an unchanged reading of 7.3 points. Argentina, Chile, Paraguay and especially Mexico showed higher readings.
The FGV report said “the situation in Latin America – as in the rest of the world – suggests caution. In the Latin American countries studied, expectations started to decline from October 2009 through January 2010. Nonetheless, analysis of current measures showed a reverse pattern. The experts expected the worst, which did not come to pass. Then they got better results out of current measures. Still, they are not sure of how solid the recovery is.”
The intermediate term TREND line of support for the Bovespa is now 64,290.
Keith R. McCullough
Chief Executive Officer
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Here are some of our thoughts on both Dick’s and Hibbett’s headed into the Thursday and Friday’s prints respectively.
Our view is that the company will deliver on sandbagged guidance again after the close. The setup remains positive with the easiest top-line compare of the year and favorable GM compares. We expect comps to come in ahead of the guided range for the sixth straight quarter though we see the spread starting to compress (see chart below). A strong footwear cycle and benign promotional environment was a positive tailwind in the quarter. Also each qtr that passes leaves more opportunity for cycling investments in .com and planning systems.
For the year, we're at $1.58 vs. Street at $1.46 and guidance of $1.41-$1.44. Next year is $1.75.
Sell-side sentiment is a 70/30 split between bulls/bears compared to 55/45 3-months ago.
Insider activity has been relatively quiet. Short interest remains below 10%.
We don't love the story long term due to its latent rent hurdles due to aggressive growth posturing. But near term, the R&D cycle out of the brands is helping, and that should last at least through CY11. We're not averse to owning this.
The bottom-line is that the company should print something starting with a 2, vs. the Street at $0.16 cents. The setup for the quarter is about as solid as it gets – against the worst comp in company history along with extremely favorable GM and SG&A compares. Consensus estimates equate to a ~14% comp based on our math – we’re at 16%. Like DKS, a strong footwear cycle and benign promotional environment continues to bode well for HIBB.
"in terms of our guidance, we hope to increase it again in August and then again in Q3, but depends on the macro." – Mickey Newsome
For the year, we're at $1.60 vs. Street at $1.52 and guidance of $1.35-$1.50. Next year is $1.80.
Sell-side sentiment is about 60/40 split between bulls/bears.
Insider activity has been relatively quiet following sales in March. Short interest has come down from 32%, but still stands at a toppy 24% - high for such a good model.
Net/Net, numbers are likely to come in better than expected this quarter for both DKS and HIBB and there are going to be many reasons as it relates to the industry cycle why trends should continue for both players.
Casey Flavin, Director
This note was originally published at 8am this morning. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK in real-time, published by 8am every trading day.
"To play well you must feel tranquil and at peace. I have never been troubled by nerves in golf because I felt I had nothing to lose and everything to gain.” -Harry Vardon
Having tired of reading about the collapse of societies, currencies, and politicians, I have shifted gears in my mid-August reading schedule to something I am much more proud of pursuing in this good life than the fate of the Fiat Fools – winning.
What’s most interesting about the aforementioned quote isn’t that it comes from one of the world’s all-time great golfers, it’s that it comes from a man who had a nerve in his right hand that had been impaired by tuberculosis.
Despite the obvious disadvantage Harry Vardon had in a critical component of his game (putting), the man didn’t whine or complain. He didn’t point fingers either. He focused his mind and energy on what he could control.
In “The Grand Slam – Bobby Jones, America, and the Story of Golf”, Mark Frost wrote, “opponents felt as if Harry wasn’t even aware of their presence, and they weren’t wrong; experience had taught him that his opponent was the golf course, not the other guy.”
Vardon graced this good world between May 9th, 1870 and March 20th, 1937, winning the British Open Championship a record 6 times along the way. He was never the longest off the tee. He was never the flashiest player either. Harry Vardon was a Risk Manager.
On avoiding losses, Vardon once said that “more matches are lost through carelessness at the beginning than any other cause.” When it comes to modern day US monetary and fiscal policy doesn’t that ring in your ears?
Unfortunately it’s a lot easier to read that lesson than to execute on it. President Obama definitely has his work cut out for him on this score. After coming back from some much deserved peace and tranquil with his family on vacation, the President of the United States stepped right up into the tee-box of US mid-term election qualifiers delivering the following shot:
“We have a choice between the policies that got us into this mess and the policies that are getting us out of this mess.”
OK. Shot made. Predictably, all replays of this opening shot have been recorded by partisan pundits on both sides of the gallery. But can’t Americans do better than this?
I’m certain that we can. Both Bush and Obama signed off on empowering a losing economic ideology that’s taken this country and its balance sheet to its knees. It has been all about fear-mongering and now it’s playing on America’s nerves. Confidence is abysmal and spending is slowing. America’s winners are deeply troubled about a colossal “mess” in American politics – not about “the other guy.”
With all due respect Mr. President, it’s your ball now and you need to play it as it lies. Planning to have our central government’s economic planners come up with more plans to change the rules won’t work.
The solution here is to find a message that doesn’t focus on insulating America’s losers. We have to find a way to get back to winning. That starts with confident messaging. Confidence breeds success. Success builds confidence.
My immediate term supports and resistance lines for the SP500 are now 1062 and 1099 respectively. For now, we remain most confident in our short positions. We shorted the SP500 (SPY) at 1098 yesterday and we remain short the US Dollar (UUP).
Best of luck out there today,
R3: REQUIRED RETAIL READING
August 18, 2010
WMT needs bank charter. Officially stick a fork in high end denim. HD's inventory miracle. NKE, UA, FL, APP, and more...
LEVINE’S LOW DOWN
- In an interesting collaboration, Target and Gilt.com are teaming up to launch the discounters latest designer collaborations. Items from the John Derian, Tucker, and Mulberry collabs will go on sale before they appear in stores. Looks like Gilt is evolving beyond closeouts.
- Wal-Mart noted that sales of its financial service products (check cashing, prepaid debit cards, etc…) increased by double digits in the quarter. Given that groceries were slightly positive and other discretionary categories including home, apparel, and hardlines were negative it appears that this may have been one of the best performing areas in the store. Now if only WMT got its bank charter…
- Saks noted that denim remains one of the weakest categories in the store. It finally looks like premium denim may have run its course. Not good for True Religion or VFC’s Seven For All Mankind.
- Home Depot showed its third quarter in a row of inventory turn improvement, which comes as a result of recent systems and logistics investments. Prior to this recent improvement, HD had not reported an improvement in inventory turns in a decade!
Vietnam Overseas Footwear Orders Increases by 16% - Vietnam’s overseas footwear orders in the year to date has increased by 15-16% year-on-year at the expense of the labor shortage problems in China, according to Vietnam Leather & Footwear Association (Lefaso). Several local footwear producers claimed that they received a good volume of orders and big contracts. China has been facing worker shortage in labor-intensive industries, including the shoe-making sector, causing some of its partners to switch to Vietnam for footwear products. Footwear exports reached US$2.75bn in the first seven months of this year, up 13.8%. <fashionnetasia.com>
Hedgeye Retail’s Take: Despite strong export numbers to the U.S. yesterday, news of this shift is not new news – expect the trend to continue. Also expect higher prices out of Vietnam.
American Apparel's Future Is Dim - Without a concession from its lender, the company will likely trip a financial covenant next month, causing a potential cascade of debt repayments. CEO Dov Charney expressed confidence American Apparel would live on claiming: “The capital structure issues will work themselves out.” That will take between 6 and 15 months, predicted Charney, who owns 45% of the company’s stock, inclusive of warrants. Much of the current problems can be linked back to difficulties at the firm’s Los Angeles factory, which hired 1,600 new workers in the second quarter due to the equivalent amount of illegal workers that were dismissed. The company’s debt load ballooned by $28.9 million to $120.3 million over the course of the second quarter ended June 30. And it expects operating losses of $5 million to $7 million during the quarter. First-half losses were described by the firm as “substantial.” American Apparel said it was “probable” that it would not meet the requirements of its minimum consolidated EBITDA covenant by Sept. 30. In June, Lion amended its credit agreement with the firm for a third time, adjusting the covenant and extracting an even higher interest payment in the process. <wwd.com/business-news>
Hedgeye Retail’s Take: This is one concept that wouldn’t be sorely missed if it ceased to exist tomorrow. Newsflash Charney, capital structure issues don’t “work themselves out,” management does.
Wal-Mart Pressured by Home Electronics Manufacturer For Labor Rights Issues - A Hong Kong labor-rights group is calling for U.S. retail giant Wal-Mart Stores Inc. to investigate Elec-Tech International Co., a home electronics supplier in China, following a rash of lost limbs and other severe workplace injuries that workers say were caused by unsafe equipment and no training. In a report slated for release this week, the labor-rights group Students and Scholars Against Corporate Misbehavior investigated a string of severed limbs and digits at the Zhuhai-based production center of Elec-Tech, a company that makes electronics, including small home appliances like toasters, coffee makers and electric skillets. <wwd.com/business-news>
Hedgeye Retail’s Take: As if child labor concerns weren’t enough, heightened severed limb occurrences certainly falls into the “we have an issue” bucket. This one could become a serious black-eye in the media if not addressed yesterday.
World Basketball Festival Benefits Nike, Foot Locker - Athletic companies were looking for a boost in sales as a result of Nike’s World Basketball Festival, which took place in New York last week. The four-day basketball celebration, that included events at Foot Locker, House of Hoops and Champs banners throughout the city, were a positive for the New York-based athletic retailer which saw a lot of traffic in the New York stores. According to Nike Brand President Charlie Denson, retail partnerships were a key factor in planning this brand-building event. <wwd.com/footwear-news>
Hedgeye Retail’s Take: In light of recent concerns surrounding basketball sales despite our trend data suggesting otherwise, this is just one of several initiatives underway within Foot Locker’s merchandise mix. We expect this event to accelerate the positive sequential trend we’re seeing in basketball of late and expect to hear more about it on Thursday’s call when the company reports. By the way, we expect FL to come in well ahead of consensus.
Mizuno Looking to Gain US Market Share on Road Trip - Mizuno Corp., the Japanese maker of baseball gloves and bats for major league stars Ichiro Suzuki and Hideki Matsui, is on a summer road trip to win a better position on U.S. baseball and softball diamonds. The company has deployed a caravan of royal blue-and-white vans bringing gear and glovemakers to stadiums, amateur fields and sporting-goods stores in California, Ohio, Indiana and Kentucky as it tries to boost its sales in the $1.8 bn diamond-sports retail market by 33% within five years. Mizuno is fighting Nike Inc., Rawlings Sporting Goods Co. and Spalding for shelf space after the Osaka-based company’s baseball sales in the U.S. peaked at $75 mm in 2008. The company aims for sales of $100 mm by 2015, and it pulled out of Europe and Latin America to funnel resources into that effort. Mizuno ranked No. 6 in the U.S. baseball and softball retail market last year with an 8.2% share. Easton-Bell Sports Inc. led with 22%, followed by Rawlings, Wilson Sporting Goods Co. and Nike. <bloomberg.com>
Hedgeye Retail’s Take: This sounds like a good idea. Nike is deploying capital around a category focus – and baseball is not one of them. Under Armour is diversifying out of cleats. Mizuno is striking while it can, and we'll be watching.
Wholesale Apparel Prices Made in US Increases Y/Y but Decline Sequentially - Wholesale prices for U.S.-made apparel declined 0.3% in July compared with June, but rose 0.1% from a year earlier, the Labor Department reported Tuesday in its Producer Price Index. Women’s apparel prices fell 0.5% for the month and 0.8% year-over-year. Men’s apparel prices declined 0.3% month-to-month, but rose 0.9% in 12-month comparisons. <wwd.com/business-news>
Hedgeye Retail’s Take: With cotton prices turning sharply higher coupled with wage inflation we expect these trends to turn higher not only on a yy basis, but also sequentially before long.
Firearm Parent Company Reports Sales Declines - Freedom Group, Inc., the parent company of firearms and ammunition brands such as Remington, Bushmaster and DPMS/Panther Arms, reported consolidated sales for the quarter ended June 30th fell 23.8%. The company also disclosed that it will pay $6 mm for its 75% stake in the outdoor apparel company Mountain Khakis, not including $1.6 million of debt the company assumed in the deal. <sportsonesource.com>
Hedgeye Retail’s Take: The ammunitions stockpile play is officially played out.
Perry Ellis Preannounces Positive Q2 - Perry Ellis International, Inc. said that based on preliminary estimates for Q2 it expects revenue of approximately $162 mm, compared to $159 mm during the comparable period last year. Revenues grew approximately 9%, excluding the planned exit of $11 million in unprofitable businesses from last year. Perry Ellis branded wholesale business as well as its owned retail stores were significant contributors to the company's revenue growth and earnings during second quarter fiscal 2011. <sportsonesource.com>
Hedgeye Retail’s Take: Hardly a surprise, but not a positive one with consensus above PERY’s preannouncement results.
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