prev

HedgeyeRetail COTD: Pricing Decelerates

Consumer prices for apparel took a notable reversal relative to costs in the recent month. It’s not a full-out Bear move. But it is a definite item that anyone that keeps models on companies in this space needs to watch.

 

After accelerating for 3 months in a row, the year over year growth in apparel CPI slowed sequentially in May +4.45% vs. +5.12% in April. This is an important call-out, because as of last month, import cost trends continued to decline, while consumer price changes set 30-year highs. Now we have consumer prices moving in the same direction as unit costs. Of course, it does not get truly bearish until the CPI falls below the import cost change. No one in their right mind is planning for this – it’s not the kind of thing you plan for given that it is usually a function of irrational competitive behavior or a sequentially weakening consumer (or both). But given where margin expectations are for some companies, we think that the change in these two Macro metrics is more important now than at any point since the recession.

 

HedgeyeRetail COTD: Pricing Decelerates - CPI COTD


JUST DO IT: Investing in NKE for the long haul

Nike has been the darling of both the retail and institutional crowd for some time now but with Wednesday’s sell off, we expect this stock to be bearish over the next two months or so. Too much volatility and the sell off hasn’t completed in full just yet.

 

JUST DO IT: Investing in NKE for the long haul - 2NKE EPS chart

 

But over the long term, specifically our three-year TAIL duration, there is much to get excited about. Hedgeye Retail Sector Head Brian McGogh thinks there’s a mismatch as to why the consensus owns Nike, versus why it should own Nike. Here are three important catalysts to keep in mind that will affect earnings to the upside:

 

  • European Football: While America isn’t too keen on “soccer,” Europe and the rest of the world go nuts over Euro 2012. It’s seriously the biggest sporting event in the world going on this year, save for the Olympics which are an unjustifiable catalyst.
  • FlyKnit Technology: People get excited over new technologies in apparel. This is an excellent new product and platform for Nike and they’ve got the manufacturing process down solid. It hits stores next month and people are ready to buy. But the hype shouldn’t be factored into a near-term position. This is an investment that will matter over the next two to three years. 
  • The NFL Deal: Though the news is a bit old by now, it’s still a very important win for Nike. They reap the benefits at an accelerating rate and come football season, you’ll be seeing a lot more swoosh.

QUANTIFYING THE INFLATION TRADE ACROSS ASIA AND LATIN AMERICA

CONCLUSION: Our analysis shows that the post-QE/OpTwist returns of USD-based investors in Asian and Latin American equity markets were neither a function of that index’s/economy’s exposure to rising commodity and/or asset prices; nor were those returns a function of performance in past iterations of Fed easing. Thus, we would argue that outperformance in the next iteration of Fed easing (if any) will come down to identifying and taking advantage of idiosyncratic factors across the individual economies.

 

Dollar down; stocks, commodities and EM FX up. That’s the consensus reflation trade that has suddenly become the predominant bull case throughout the global investment community. As we have been saying since 1Q11, the reflation trade becomes the Inflation Trade as rapid commodity price gains perpetuate faster rates of reported inflation and slower growth across the global economy.

 

As completely detrimental as that is to any “long term” investment strategy, the reality of the situation is that most institutional investors have to chase short-term performance in one form or another. As such, if the Fed uses the recent string of anemic domestic employment growth and slowing [headline] inflation to signal or implement QE3-4 (it’s hard to keep track) next week, we would not be surprised to see another short-lived “risk” rally to another lower long-term high across global equity and commodity markets.

 

Turning to Asia and Latin America, we’ve taken the liberty to quantify the effects of the last three iterations of the Federal Reserve’s Policies to Inflate on their financial markets for any investors who may be looking to hit up the ol’ well once more. Our hypothesis was that those countries whose benchmark equity index was most exposed to the Inflation Trade would experience outsized returns relative to the group in both their stock market (faster earnings and economic growth) and local currency vs. the USD (capital flows; policy tightening speculation) on a S/T TREND duration (3MO). Moreover, we expected performance during these periods of reflation to be both positively and tightly correlated to the aforementioned exposure.

 

Using a simple linear regression analysis, we were able to dispel both components of our hypothesis, as outperformance of a given country’s stock market and local currency was not necessarily a function of its index’s (an admittedly loose surrogate for “economy”) exposure to the Inflation Trade; nor were returns always positively correlated across iterations.

 

QUANTIFYING THE INFLATION TRADE ACROSS ASIA AND LATIN AMERICA - 1

 

QUANTIFYING THE INFLATION TRADE ACROSS ASIA AND LATIN AMERICA - 2

 

QUANTIFYING THE INFLATION TRADE ACROSS ASIA AND LATIN AMERICA - 3

 

The key takeaway here is that there is hardly any relationship to be derived, suggesting that either A) country-specific fundamentals (i.e. GROWTH/INFLATION/POLICY) were the key determinants of performance or B) returns were more a function of performance in past iterations (i.e. “going back to the ol’ well”). To test the latter theory, we regressed returns of QE2 against those of QE1 and the returns of Operation Twist with those of QE2. In short, our findings here would suggest that this wasn’t the case.

 

QUANTIFYING THE INFLATION TRADE ACROSS ASIA AND LATIN AMERICA - 4

 

QUANTIFYING THE INFLATION TRADE ACROSS ASIA AND LATIN AMERICA - 5

 

All told, our analysis shows that the post-QE/OpTwist returns of USD-based investors in Asian and Latin American equity markets were neither a function of that index’s/economy’s exposure to rising commodity and/or asset prices; nor were those returns a function of performance in past iterations of Fed easing. Thus, we would argue that outperformance in the next iteration of Fed easing (if any) will come down to identifying and taking advantage of idiosyncratic factors across the individual economies.

 

Below is a full performance table of the countries included in our sample.

 

Darius Dale

Senior Analyst

 

QUANTIFYING THE INFLATION TRADE ACROSS ASIA AND LATIN AMERICA - 6


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

CHART DU JOUR: BYD DOUBLE DIPS ON LOWER OIL

The positive impact of lower gas prices on regional gaming revenues is well-known but BYD benefits from low jet fuel costs too.

  • BYD’s Hawaiian travel business (rolled up in the Downtown LV region) benefits from lower jet fuel costs – downtown EBITDA margins and jet fuel at -0.55 correlation
  • Q2 to-date jet fuel is down 8% sequentially and YoY
  • We calculate $0.01 per share positive impact each quarter for the next 4 quarters if jet fuel prices stay at current levels, beginning with Q2

 

CHART DU JOUR: BYD DOUBLE DIPS ON LOWER OIL - BYD


IDEA ALERT: LONG SAFM

Sanderson Farms is a company with long term top line tailwinds, easing input costs, and a best-in-class balance sheet operating in an industry that is consolidating.  Keith just bought the stock in the Hedgeye Virtual Portfolio. Please refer to our note “IDEA ALERT: LONG SAFM” from 6/7/12 for the thesis.  The levels are below; Keith sees it as a good spot to buy it here on red.

 

IDEA ALERT: LONG SAFM - SAFM levels

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


SPAIN: Burning down the house

Perhaps the Talking Heads originally predicted the fate of global housing markets once upon a time, but we’ll leave that up to you. Spain has BIG problems on its hands, including the cost of borrowing (10-Year bond yield just hit 7%), stagnant growth and a high unemployment rate that’s fast approaching 25%.

 

SPAIN: Burning down the house - spanish housing prices

 

But perhaps one of the more overlooked concerns about Spain is – wait for it – its housing market. Yes, similar to the United States in 2007-2008, Spain has a rapidly deteriorating housing market. Another leg down in Spanish home prices sees very likely. Hedgeye Director of Research Daryl Jones lays out why Spain is following the lead of the US:

 

Spain actually had two bubble periods with the first beginning in 1985.  From 1985 – 1991 home prices basically tripled, from 1992 – 1996 they basically remained flat, and from 1996 – 2008 prices more than doubled.   So far, from the peak, Spanish home prices are in aggregate only off about 20%.” 

 

As recently as February 2012, Spanish housing transactions were down 30% year over year. If you think that isn’t slowing growth, then we don’t know what else to say. The pressure on Spain is already here and it’s about to get a lot worse as we move into the summer.

 

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next