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Japanese Exports - The Storm Before the Flood?

Conclusion: Japanese Exports slowed again in August, highlighting additional concern that the island’s recovery is faltering. Moreover, the confluence of the strong yen and slow growth from the U.S. and Western Europe will continue to be a headwind for Japanese exports over the next 3-6 months.

 

Position: Short Japanese equities (EWJ); Short the Japanese yen (FXY)

 

If you didn’t know, now you know: Japanese exports rose 15.8% YoY in August – the slowest growth since last Deceber. August marks the sixth consecutive month of sequential deceleration of export growth on a YoY basis. On a seasonally adjusted basis exports fell (-2.3%) MoM. This marks the fourth consecutive decline on a monthly basis and the largest MoM decline since January 2009.

 

Japanese Exports - The Storm Before the Flood? - dd1

 

On a more granular level, Japanese exports to the U.S. – its second largest export destination at 16.4% to total – fell substantially on a sequential basis: +8.8% YoY in Aug. vs. +25.9% YoY in July. August also marked the first YoY decline in shipments of autos to the U.S. since October of 2009. This highlights two headwinds that will continue to restrict Japanese growth going forward – waning U.S. consumer demand and the painful appreciation of the yen.

 

Regarding the yen, Japanese exporters believe they can remain profitable if the yen trades at 92.90 per U.S. dollar or weaker, according to a Japanese Cabinet Ministry report. Since the start of the Japanese fiscal year on April 1st, however, the yen has traded an average of 89.02 – 3.88 less than their forecast. The spread, which we track using our proprietary Japanese Exporters Margin Kitty has been trending down throughout the entire period and closed at (-8.67) on Friday.

 

Japanese Exports - The Storm Before the Flood? - dd2

 

While we continue to have conviction that the yen will continue to weaken over the next 3-6 months due to (if nothing else) Japanese government intervention, we do not think intervention alone will be able to reverse the damage brought on by the yen’s recent strength. Speaking of, the strong yen is driving Japanese investment abroad, as exporters attempt to shield their profits from currency risk. Nissan is one of many Japanese exporters considering additional plants in Indonesia, Thailand, and other parts of SE Asia to counter this trend of currency strength. While it may provide reprieve for Japanese corporate profits, it will do so at the cost of exporting Japanese jobs to other countries further compounding the economies struggle to revive domestic demand.

 

In effect, both Japan’s exports and currency are likely to struggle going forward on a TREND duration. With trade accounting for more than half of Japan’s meager 1.5% expansion in 2Q10 (according to the Japanese Cabinet Office), we expect Japanese GDP growth to slow meaningfully from here.

 

To address the potential for a severe slowdown in the Japanese economy, Japanese politicians are likely to do what they’ve always done for the past two decades (to no avail, of course) – fire up the ‘ol stimulus. This morning, they are said to be considering an additional package worth 4.6 TRILLION yen ($54.6B). Prime Minister Naoto Kan’s administration is particularly excited about this round of stimulus, as it is unlikely to warrant any additional issuance in government debt:

  • 2 TRILLION yen from greater-than-forecast tax receipts
  • 1 TRILLION yen from savings on debt servicing
  • 1.6 TRILLION yen from the previous fiscal budget

While we certainly applaud their relative fiscal restraint, we don’t think piling another 4.6 TRILLION yen of stimulus on top of the most recent 915 billion yen of stimulus will achieve the desired effects of avoiding slow(er) growth.

 

All said, Japan’s fiscal situation is in an “emergency state”, according to Japan’s Vice Finance Minister Fumihiko Igarashi. At Hedgeye, we have added the Japanese economy to the growing list (politicians, bureaucracy, demographics, pension funding ,etc.) of things in an “emergency state” within Japan. It should, then, come as no surprise to see the Nikkei 225 down 9.3% YTD, trailed only by the PIIGS, China, and Slovakia.

 

Darius Dale

Analyst

 



UK Housing in the Woods

Conclusion: While U.K. housing data points are rolling over, they are still more positive than in the United States.  This fact combined with an increased likelihood that interest rates in the U.K. increase sooner than in the U.S., supports our long Pound, short U.S. Dollar position.

 

Position: Long Pound (FXB)

 

Below are a few charts we keep front and center to track moves in the UK housing market: the UK’s Hometrack Survey and British Bankers Association Mortgage data.  In both we’ve seen a marked turn in housing since early 2010, a downward move we’d expect to continue over the intermediate term TREND due to significant oversupply issues (2004-7 period) and continued weak demand, reflected in buyer/consumer economic hesitance alongside new waves of austerity measures (higher VAT, government job and wage cuts) that should pinch the consumer and lead to tame economic growth out on the curve (see charts below).

 

UK Housing in the Woods - mh1

 

UK Housing in the Woods - mh2

 

UK Housing in the Woods - mh3

 

In context, we believe that the weakness in the US’s housing market could be a far greater driver in capital and currency market moves over the next 3 months (both locally and globally). To be clear, our bullish call on the Pound via the etf FXB in the Hedgeye Portfolio is a relative one based on our conviction for weakness in the USD over the intermediate term TREND. As a point to note, we’re still seeing inflation signals in the UK, which may also be fueling the move in the GBP-USD, which is up +2.75% in the last month and +6.04% in the last three months.  CPI in the UK has held above the 3% level (year-over-year) each month in 2010, while US CPI has trended lower this year, currently at 1.1% in August Y/Y.

 

Increased inflation in the United Kingdom is likely to lead to rates moving higher sooner than in the United States where the primary concern from Federal Reserve officials remains deflation. Further, an increase in interest rates in the United Kingdom will continue to support an appreciation in the Pound versus the U.S. dollar.

 

Our TREND level of support for the FTSE is 5,260. Our TRADE and TREND levels of support for the GBP-USD are $1.55 and $1.52, respectively (see chart below).

 

Matthew Hedrick

Analyst

 

UK Housing in the Woods - mh4


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Q3 GDP WATCH - THE CONTRACTION CONTINUES

Consensus expectations are for an accelerated pace of GDP growth in 3Q10 to 1.9% from the 1.6% posted in 2Q10.  As an aside, on September 30th, the Department of Commerce will report the second revision to 2Q10 GDP and the expectation is for the growth to hold steady with annualized quarterly growth of 1.6%, according to Bloomberg.

 

While the durable goods data on Friday sparked a 2% rally in the S&P 500 on Friday, the MACRO data from last week continues to point to a sequential slowdown in 3Q10 GDP growth. 

 

On the housing front; existing home sales, new home sales, housing starts and building permits are now declining year-over-year and quarter-to-quarter.  The biggest quarter-to-quarter decline is coming from existing home sales followed by new home sales, down 28.5% and 14.3% respectively.  Building permits, and indication of future demand, is down 4.1% quarter-to-quarter.

 

Q3 GDP WATCH - THE CONTRACTION CONTINUES - home data 927

 

New orders for durable goods is also seeing a sequential slow down quarter-to-quarter of 0.3%, while still growing year-over year.  While the durable goods number missed overall expectations, when transportation and aircraft were stripped away it beat.

 

Q3 GDP WATCH - THE CONTRACTION CONTINUES - durable good 927

 

Moving to this week and today’s news, the Dallas Fed Manufacturing Index came at -17.7, on expectations of -6.0 and compared to -13.5 previously.  In addition, U.S. economic activity, according to the Federal Reserve Bank of Chicago fell in August to -0.53 versus -0.11 in July. 

 

The MACRO forces sending the S&P 500 (+9.43%) in September, don’t correlate with Gold (+4.8%) and the dollar getting hammered (-4.28%).  Bond yields also suggest that the state of the economy may not be as strong as many investors believe (or hope).  With the US economy continuing to weaken, the only option for the Federal Reserve to ensure stocks do not slump is to aggressively add liquidity to the system.    

 

Howard Penney

Managing Director


MACAU TABLE REVS THRU SEPT 26TH

Taking into account the number of weekend days versus weekdays and adding in estimated slot revenues, we project September will come in around HK$14.9 billion or +40% YoY growth.

 

 

Macau generated HK$12.5 billion in table gaming revenues through September 26th, implying +40% YoY growth for the full month of September, per our projections.  Market share trends remained consistent with last week:  MPEL and MGM above recent history and Wynn well below.  We are hearing that rolling chip hold percentage remains low at Wynn and MGM and high at MPEL.  The junket market continues to get more aggressive, mostly in the form of commission advances.  MGM and MPEL, on the margin, are most aggressive while LVS also appears to be extending terms for commission advances.  We will be writing more about this shortly.

 

Below are the September month to date table gaming revenues in Macau through the 26th.

 

MACAU TABLE REVS THRU SEPT 26TH - macau333


A Point is not a Point is the Point

Conclusion:  Finish Line comps were light, but not all points of comp are created equal.  With questions surrounding market-share gains and losses within the mall-based athletic footwear space, we remind investors that a point of same-store sales at Foot Locker represents 3.2 times the revenue dollars as a point of growth at Finish Line.  Same store sales beats and misses simply don’t tell the true market share story, nor are they worth over-analyzing when a product tailwind is building.

 

With the reporting of Finish Line and Nike results lat last week there’s been a large amount of data shed on the athletic wholesale and retail landscape.  On one hand we got confirmation from Nike that the domestic outlook appears to be accelerating over the back half of the year with the reporting of a 14% increase in domestic futures.  On the other hand we got a glimpse of monthly volatility in the mall at retail and the inherent risk of running inventories too low when demand appears to be picking up.  That was Finish Line. 

 

As a result of the data flood, we were also faced with a whole bunch of speculation surrounding the momentum and trends at Foot Locker, athletic retail’s 800-lb gorilla.  As most of you know, we’ve been bullish on the opportunity for FL and its shares going back to February of this year.  Along the way there have been zigs and zags with the quarterly results, but the overall trajectory of earnings, sales, and stock performance has been positive and in line with the thesis we originally laid out.  With each data point, we check our thesis against reality as any analyst would do.  This time is no different, as we’re challenged to rectify the sales miss at Finish Line with a decade-high futures number from Nike.

 

One of the main issues or topics coming out of this week’s results surrounds market share amongst the mall based athletic chains.  We’re often baffled by the Street’s obsession with same-store sales and this time is no exception.  For the first time since we laid out our bullish thesis on FL, we’re now getting questions about possible share gains at the expense of FINL.  For the past year, the question was centered on Foot Locker’s share loss. 

 

However, the reality is, this is not about comps.  All comp points are not created equal.  Given that both FL and FINL are no longer growing their store base, it’s a fairly simple exercise to figure out what a comp point really means for revenue at each company.  It turns out that if you exclude international from FL’s total and look at the domestic business, a point of same store sales is worth about $35 million to the topline ($50 million on a global basis).  At FINL, a comp point yields about $11 million in incremental revenue for the chain.  So in other words, a point of domestic comp at Foot Locker is worth 3.2x the revenue dollars at Finish Line.  Again, not surprising given that Foot Locker is running 2,732 domestic stores to Finish Line’s 667 (productivity accounts for the discrepancy between sales and stores). 

 

The bottom line here is it is entirely possible that Foot Locker may out “comp” Finish Line in their 3Q.  For those “comp junkies” this is good news. We are hearing that apparel is taking hold, and in fact is running up double-digits at the Lady Foot Locker sub-brand.  This is all part of the plan to turn the business around and it is largely on track.  However, the Street is overly focused on one chain winning, the other losing, and using same store sales as the barometer.  In aggregate, the market it robust, the product pipeline continues to improve, ASP’s remain strong, and the comparisons are fairly easy.  We expect both FINL and FL to perform well against this backdrop. 

 

With that said, FINL needs to produce a same store sales result 3.2x as good as Foot Locker’s to maintain market share neutrality.  This is something to watch, especially as FL’s merchandising efforts begin to take hold and the inevitable market share debate rolls on. 

 

Eric Levine

Director


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