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The Slope of Hope: US Industrial Production

POSITIONS: short the US Dollar (UUP) and short the SP500 (SPY)

 

You’d think, with all of the academic-dogma-nites out there parroting how “good” a Debauched Dollar is “for US Exports”, that QE would have these kinds of charts spiking up into the right. Not so much…

 

While this morning’s US Industrial Production report for September may very well have stoked further hope that we’ll have QE3, it won’t change the prospects that matter to 99% of non-Wall Street types in this country who see the writing on the wall - Industrial Production in America is slowing.

 

Notwithstanding that September’s IP report missed the sell-side’s hopeful expectations, what matters most to our macro model here at Hedgeye is the slope of this line. Since the peak of this cyclical recovery in US IP (June’s reading of +8.3% y/y) to September’s report of +5.4%, there is a fairly obvious gravitational force (math) that is going to draw this line towards flat year-over-year growth in the next 3-6 months.

 

January is when the “comps” (comparisons) for Industrial Production growth get very difficult. By summer-time of next year, the Keynesians might be begging Bernanke for QE6.

 

QE is only perpetuating US style Jobless Stagflation via a Debauched Dollar and hope is not an investment process.

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Slope of Hope: US Industrial Production - 1


MACAU SLOWS DRAMATICALLY POST GOLDEN WEEK

Table revs thru the 17th were HK$10.8bn. Normalizing the rest of the month would produce 47% YoY growth (HK $18bn) for October, below expectations of $HK20bn.

 

 

The Golden Week honeymoon is over and business levels in Macau in the past week have slowed substantially.  Table revenue per day in the first 10 days was HK$868m but only HK$320m in the last 7 days.  Assuming only HK$320m per day for the rest of the month (taking into account weekend vs weekdays) and adding in slot revenue produces full month October revenue of only HK$16.2 billion, up 32% YoY.  However, we believe the last week was unusually slow due to the end of the Golden Week honeymoon and business will “normalize” for the rest of the month.  If we normalize the last two weeks of October at the average daily revenue for the year, then full month would come in at HK$18.0b, up 47%.  We think this is more realistic.  Either way, the numbers are a disappointment from consensus expectations of HK$20b following the strong Golden Week.

 

In terms of market share, both Wynn and MPEL lost share since we reported on the numbers through the 10th.  Galaxy’s share has started to normalize and MGM continued to hold an above trend share, which we expect to continue.  Here are the numbers through 10/17:

 

MACAU SLOWS DRAMATICALLY POST GOLDEN WEEK - macau1


R3: VFC, GIII, URBN, and the NFL

R3: REQUIRED RETAIL READING

October 18, 2010

 

With the majority of the NFL licenses locked up again for several years, we believe we’ll see renewed interest and marketing surrounding the next generation of on and off-field merchandise.  In the interim, choose your jerseys wisely as team uniforms, colors, and logos, are likely to see some tweaks in 2012.

 

 

RESEARCH ANECDOTES

 

- With hard earned cash hard to come by, retailers are thinking creatively about bartering and trade-ins.  Toys R Us is currently offering up to $100 for used iPods this week in exchange for a cash/gift card to be used towards a new device.  Recall that Radioshack and Costco also offer electronics trade in programs.

 

- Ralph Lauren’s latest boutique on 109  Prince St. in Soho is leading some to speculate what exactly may be coming to this former Replay Jeans location.  The window stencils read “Ralph Lauren Quality Goods Proprietor”- a new tagline.  We suspect this may be an accessories focused boutique, especially given its proximity to two other locations within a several block radius.

 

- According to the Pew Research Center, 85% of Americans own a cell phone while only 59% own a desk top computer.  Laptops are owned by 52% Americans, 47% own an MP3 player, and 42% own a game console.

 

- Add wedding packages to the list of creative initiatives to drive traffic and ‘other revenue’ streams at McDonald’s. Cakes made of burgers, or apple pies is just one of the custom touches available for interested couples, which average about 10/week at Hong Kong locations – the first to offer this option. While these packages are not yet offered in the U.S., it’s just a matter of time and also begs the question when lavishly decorated retailers might also consider opening their doors for nuptials.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

Anthropologie Introduces Accessories Only Concept - Anthropologie is opening an accessories-only store Oct. 29 in Chevy Chase, Md., the first of several new retail concepts it will roll out. The 1,400-square-foot accessories-only store at 5402 Wisconsin Ave. will have the largest selection of shoes, handbags, scarves, belts, costume jewelry, fine jewelry and, for the first time, estate and antique jewelry, including one-of-a-kind brooches and engagement rings. There will also be handcrafted one-off pieces and reworked vintage styles. The store’s initial assortment will include shoes by designers Rachel Comey, Chie Mihara and Bourne, among others. Accessories were designed by Marion Vidal, Eugenia Kim, Ikou Tschuss and Leslie Oschmann.  <wwd.com/retail-news>

Hedgeye Retail’s Take:  Given URBN’s methodical approach to testing and incubating, we’re not going to get overly excited (yet) about this concept.  However, if there is any fashion retailer  that can create the look and feel of a specialty boutique (while still backed by a multi-billion dollar corporation) it’s URBN.  More to come here for sure. 

 

VF Licensed Sports Group to Extend NFL Partnership - VF Licensed Sports Group and the National Football League (NFL) have reached an agreement to extend apparel rights. The new contract, which starts in 2012, marks the 25th anniversary of the VF-NFL partnership, which began in 1987.  <sportsonesource.com>

Hedgeye Retail’s Take:  With NKE taking the lead with the on-field license, there may be some positive “rub off” for other licensees given the marketing efforts that are likely to ensue with the transition to the Swoosh. 

 

G-III Apparel Group, Ltd. Signs Expanded License With NFL - G-III Apparel Group, Ltd. has entered into a new, extended and expanded license agreement with National Football League Properties, Inc. to manufacture and market men's and women's outerwear, sportswear, and swimwear products in the United States under a variety of NFL trademarks, according to a release by the company. <sportsonesource.com>

Hedgeye Retail’s Take:   See above.  In addition, we’d keep an eye on the women’s opportunity which should be the largest growth opportunity under the NFL license umbrella. 

 

Luxury Goods Update - Sales of luxury goods may climb this year to the highest level since 2007, led by demand in China and a rebound in the U.S., according to Bain & Co. Sales of high-end apparel, accessories, watches and jewelry and other products may rise to as much as $236 bn, helped by currency moves including the appreciation of the dollar. Sales of leather goods will lead the increase, gaining 20%. Sales in stores directly operated by makers of luxury goods may grow 20% in 2010, while wholesale revenue may rise 6% as U.S. department stores restock inventories. <bloomberg.com>

Hedgeye Retail’s Take: Sustainability of this demand remains the key question as stock shortages have begun to impact retailers heading into the holiday season. The offset with potential staying power continues to be the devaluation of the dollar relative to far east economies – as such, domestic luxury brands will be at a considerable competitive disadvantage to counterparts with global scale.

 

Apparel and Textile Imports Continue to Rise - Apparel and textile imports in August rose to their highest one-month volume in two decades, despite flagging consumer confidence and a dim outlook for the holiday season. Combined shipments of textiles and apparel to the U.S. increased 28.6%. Apparel shipments increased 23.1% and textile imports rose 33.9%. <wwd.com/business-news>

Hedgeye Retail’s Take: Driven primarily by concerns over rising shipping rates, retailers have been building inventory in an effort to stem one of the many components of cost inflation in the 2H. Inevitably, some retailers will get overaggressive setting up the likelihood of increased promotional activity at selective concepts and an opportunity for better managed and quality retailers to notably outperform.

 

Apparel Weakening, Prices Falling - Two government reports released Friday point to a weakening in demand for apparel, as retail sales fell and prices declined. In yearly comparisons, specialty store sales were up 3.2%, department store sales were off 0.8%, and general merchandise stores saw a 2.6%increase. Meanwhile, economic pressures drove retail apparel prices down a seasonally adjusted 0.6% in September, and decreased 1.2% compared with a year earlier. Women’s apparel prices fell 0.8% while men's dropped 0.2%. <wwd.com/business-news>

Hedgeye Retail’s Take: With department store performance lagging broader retail, expect the channel to lead promotional cadence heading into the holiday season.

 

USA Bid Committee To Focus on 2022 FIFA World Cup - The USA Bid Committee has withdrawn from the 2018 FIFA World Cup bid and will exclusively focus on the 2022 campaign. <sportsonesource.com>

Hedgeye Retail’s Take: The 2010 World Cup in South Africa proved yet again that geographic location matters little when it comes to the financial impact of these games for athletic brands. That said, the biggest beneficiaries of a domestic Cup would undoubtedly be the smaller players given the natural halo effect.

 

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS

*** We are including our Earnings Scorecard at the end of this note ***

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 5 of 10 improved / 3 of 10 unchanged / 2 of 10 worsened
  • Intermediate-term (MoM): Positive / 6 of 10 improved / 1 of 10 worsened / 3 of 10 unchanged
  • Long-term (150 DMA): Negative / 7 of 10 worsened / 2 of 10 improved / 0 of 10 unchanged / 1 of 10 n/a

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - summary

 

1. US Financials CDS Monitor – Swaps were mixed last week but leaned negative.  Swaps tightened for 11 of the 29 reference entities and widened for 18.

 

Tightened the most vs last week: RDN, MBI, AGO

Widened the most vs last week: JPM, BAC, WFC

Tightened the most vs last month: PMI, MBI, AGO

Widened the most vs last month: BAC, WFC, PGR

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - us fins cds

 

2. European Financials CDS Monitor – In Europe, swaps indicated lessening risk. Swaps tightened for 29 of the 39 reference entities tightened and widened for 9.  

 

Tightened the most vs last week: Alpha Bank, National Bank of Greece, Sberbank

Widened the most vs last week: Deutsche Bank, Assicurazioni Generali, Investor AB

Tightened the most vs last month: Sberbank, Royal Bank of Scotland, Svenska Handelsbanken

Widened the most vs last month: Bank of Ireland, HSBC, EFG Eurobank

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - euro fins cds

 

3. Sovereign CDS  – Sovereign CDS fell 29 bps on average last week, led by Ireland, Portugal, and Greece once again. 

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, closing at 7.94 on Friday.  

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - high yield

 

5. Leveraged Loan Index Monitor – The leveraged loan index rose 7.3 points last week, closing at a new YTD high. 

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - lev loan

 

6. TED Spread Monitor – Last week the TED spread fell, closing at 15.4 bps.

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index rose 3.96 points, closing at the highest level since early June.

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - joc

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields continued to plummet, falling another 88 bps.

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - greek bond yield

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads rose slightly last week, closing at 201 versus 199 the prior week.   

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index rose, closing at 276 versus 270 the prior week.  

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - baltic

 

Earnings Scorecard

This morning we are introducing our rolling earnings scorecard which includes all financials that have reported thus far in the earnings season along with subsector averages and our proprietary Hedgeye Earnings Score. The score evaluates company performance across ten measures, looking for either sequential improvement or decline and performance relative to expectations. A "perfect" score would be 10 while the worst possible score is negative 10. Over the course of an earnings cycle, it can get confusing trying to gauge how both individual companies and whole subsectors are faring relative to the group. It is our intention to simplify that process with this product, which we will be publishing each morning over the course of the earnings season as an embedded table in our regular morning posts.

 

WEEKLY FINANCIALS RISK MONITOR - STILL POSITIVE ON A SHORT AND INTEREMEDIATE TERM BASIS - EARNINGS SCORECARD

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: SANDS CHINA FOREIGN WORKERS; BELLE; EMPLOYMENT; IMPORTED WORKERS; PAGCOR; CHINA PROPERTY

The Macau Metro Monitor, October 18th 2010

 

SANDS TO GET APPROVAL TO HIRE FOR MACAU PROJECT WSJ

According to a source, the Macau government has told company officials that construction companies employed by Sands China should receive approval to hire the 5,000 foreign workers they need to immediately restart work this month.  This may imply a mid-2012 opening date as construction companies, once they are given the green light, need one month to recruit workers and Sands said that it would take approximately 16 months to complete the first phase of the project once it had "sufficient labor to ramp up construction activity to requisite levels."  The company in August said it hopes to open the Cotai project in Q4 2011.

 

Many Macau residents believe that labor restrictions have had unintended consequences such as delaying construction projects unrelated to casinos and placing foreign labor quotas on businesses.  It remains unclear if allowing Sands China to hire foreign construction workers would prompt a territory-wide relaxation of labor regulations.

 

BELLE IN TALKS WITH 3 OVER CASINO BUSINESS  Manila Standard Today, Manila Times

Belle Corp hopes to reach an agreement with a casino operator for its $350 million hotel/casino project with 250 tables and 1,500 slot machines in the Philippines by November.  Belle's operating partner, Leisure and Resorts World Corp (LRWC), said it was in talks with three interested operators, two of whom have already established a presence in the Asian gaming market, particularly in Macau and Singapore.  The front-runner had been Harrah's, but negotiations faltered.  Belle's CFO Manuel Gana said “Our original schedule of start of commercial operation is by the first quarter of 2012. But if we can open by the third quarter of next year, we will do so."  Gana added that Belle had started constructing the infrastructure required by the project pending the selection of a foreign casino operator.


Q3: TOTAL NUMBER REGISTERED FOR SEEKING EMPLOYMENT FELL BY 27% Macau Daily News

According to DSAL, total number of people registered for seeking employment in Q3 fell 27% QoQ to 3,681. 

 

IMPORTED WORKER NUMBERS CONTINUES GROWTH TREND Macau Daily Times

For August, non-resident workers increased by 2% MoM to 73,719.  Mainland China continued to be the main source of imported labor, registering 41,126 people, followed by the Philippines (11,096), Vietnam (7,439), Indonesia (4,137) and Hong Kong (4,102).  The entertainment and gaming sector hired the most foreign workers in the reporting period (plus 967 in August).  The construction sector added 67 foreign workers, with a total of 3,800.


PART PRIVATIZATION FOR PAGCOR? Asian Gaming Intelligence

AGI said there is a new proposal to partially privatize the Philippine Amusement and Gaming Corporation (PAGCOR) by floating up to 49% of PAGCOR stock on the Manila stock exchange.  The proposal from a vice-chairman of San Miguel Corp to sell PAGCOR to the private sector is no longer considered.


CHINESE PROPERTY PRICES REBOUND WSJ

China's property price index, which covers 70 large and medium-sized cities, rose 0.5% in September from August, and 9.1% YoY, said the National Bureau of Statistics.  This registers as the first MoM increase since May.


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - October 18, 2010

As we look at today’s set up for the S&P 500, the range is 14 points or -0.78% downside to 1167 and 0.41% upside to 1181. Equity futures are trading below fair value as investors continue to digest Friday's speech by Fed Chairman Bernanke which appeared to have disappointed investors who were looking for specifics on any further QE. Overnight moves in Asia and Europe have been muted with the dollar bouncing off lows and sending commodity prices lower. Looking ahead to today, earnings from Citi before the open and Apple after the close will be in focus, while the September Industrial Production numbers are the main MACRO data points.

  • Allergan (AGN) said the U.S. FDA approved Botox for the preventive treatment of chronic migraines in adults
  • Daimler (DDAIF) shares may touch $75 or higher as more Chinese buy Mercedes cars and demand gains for its medium- and heavy-duty trucks, Barron’s reported, citing analysts and investors.
  • Lulu Athletica (LULU US) may fall as much as 30% as sales growth slows, Barron’s reported, citing analysts
  • Pioneer Natural Resources (PXD) expects to record $127.6m in 3Q derivative gains
  • Supertex (SUPX) said 2Q sales will be no more than $22.5m, lower than the average analyst estimate of $25.1m
  • WD-40 (WDFC) posted 4Q EPS 41c vs est. 38c
  • Wilmington Trust (WL) may be a takeover target, Barron’s reported, citing analysts

 PERFORMANCE

  • One day: Dow (0.29%), S&P +0.20%, Nasdaq +1.37%, Russell (0.22%)
  • Month/Quarter-to-date: Dow +2.55%, S&P +3.07%, Nasdaq +4.23%, Russell +4%
  • Year-to-date: Dow +6.09%, S&P +5.48%, Nasdaq +8.8%, Russell +12.44%
  • Sector Performance: Technology +1.69%, Consumer Discretionary +0.73%, Healthcare +0.42%, Utilities +0.30%, Materials +0.29%, Energy +0.27%, Consumer Staples +0.25%, Industrials (0.62%), and Financials (1.71%).

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -629 (-9.97%)
  • VOLUME: NYSE - 1416.33 (-27.52%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Google +11.19%, Western Digital +8.14% and Amazon +5.86%/Gannett -8.80%, First Horizon -7.90% and Capital One -7.62%.
  • VIX:  19.03 -4.28% - YTD PERFORMANCE: (-12.22%)
  • SPX PUT/CALL RATIO: 2.85 from 1.49 +91.58%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 15.32 -0.101 (-0.658%)
  • 3-MONTH T-BILL YIELD: 0.14%  
  • YIELD CURVE: 2.22 from 2.14

COMMODITY/GROWTH EXPECTATION:

  • CRB: 296.06 +1.29%%
  • Oil: 81.25 -1.74% - BULLISH
  • COPPER: 383.35 +0.62% - OVERBOUGHT
  • GOLD: 1,370.97 -0.28% - BULLISH

CURRENCIES:

  • EURO: 1.3977 -0.55% - BULLISH
  • DOLLAR: 77.041 +0.51%  - BEARISH

OVERSEAS MARKETS:

 

European markets:

  • FTSE 100: (0.11%); DAX (0.03%); CAC 40 (0.13%)
  • Major indices are weaker in tandem with the softer tone set by Asian markets with mining, auto, retail and construction sectors underperforming.
  • Strikes across France shuts oil terminals
  • Philips reported Q3 EBIT of €517M vs €453M expected, with a €154M gain on the sale of the remaining stake in NXP boosting net income to €524M. Shares fell 5% on a cautious revenue outlook statement
  • Rio Tinto (RIO.LN) BHP Biliton (BLT.LN) abandon production jv

Asian markets:

  • Nikkei (0.02%); Hang Seng (1.21%); Shanghai Composite (0.54%)
  • Markets fell across the region in muted reaction to Fed Chairman Bernanke's comments on Friday which fuelled speculation of the likelihood of further QE measures being implemented.
  • Japan ended flat, supported by short covering and defensive plays. 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



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