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Idea Alert: BA - Decline On Cancellation

Takeaway: $BA - The Australian market for commercial aircraft is small and Qantas' cancellation has more to do with its own operating challenges.

Boeing: Hard Sell-off on Cancellation

 

Levels:

Long-term TAIL support of 69.91 holds; immediate-term TRADE upside to 73.11 

 

Boeing sold off today following a cancellation by Qantas.  We note that Qantas has its own operational issues, in addition to needing a “u”.  The Australian market for commercial aircraft is about 1/10th the size of the US’s, which is only ~15% itself.  Today’s decline highlights the risk of being in consensus long names.  While it may not mean we will be wrong longer-term, it may increase downside volatility.

 

Rationale

  • Cycle:  Boeing is in the midst of a long up cycle in commercial Aerospace, with 7 years trailing revenue in backlog.  The company also has a major product cycle in the 787.
  • Industry Structure:  Boeing has a largely unassailable competitive position in a highly consolidated industry.
  • Valuation: The valuation of Boeing is attractive at these levels on a sector relative basis, in our view, both in a DCF and on screening metrics like relative EV/S (0.5 standard deviations below the trailing 8-year mean).
  • Sector Relative: With growth slowing and estimates in the industrial sector under pressure, we believe BA remains an attractive destination for investors.
  • Sentiment:  Unfortunately, consensus seems to agree with us.  We note that consensus can be right.

Idea Alert: BA - Decline On Cancellation - 5

 

  • Global aircraft fleet aging has set-up robust backlogs for commercial aircraft makers
  • Strong deliveries in the late 1980s/early 1990s were partly driven by deregulation (US, UK, Japan in the 70s and 80s and, in the early 90s, Europe), which drove demand growth
  • Late 1980s/early 1990s deliveries are now retired or approaching retirement (20 to 25 year sum)
  • Boeing and Airbus have very high backlogs as deliveries have trailed orders for much of the last decade 

Fleet aging is particularly noticeable in the US.  Though only about 15% of commercial aircraft orders, the US aircraft fleet will need to be replenished over time. 

 

Idea Alert: BA - Decline On Cancellation - 6

 


IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD

Takeaway: Our outlook for US monetary policy over the TRADE and TREND durations remains counter to consensus expectations.

CONCLUSION: We shorted $GLD and bought $UUP in our Virtual Portfolio yesterday afternoon based largely on our view that Chairman Bernanke will not announce further easing at Jackson Hole.

 

As Shakespeare once wrote, expectations are the root of all heartache.  Next week, expectations heading into Jackson Hole by equity investors are heightened to say the least.  As incremental economic growth data continues to slow, there is really little reason left to justify the recent ramp in U.S. equity markets other than the perceived panacea of a potential monetary easing announcement in Jackson Hole.

 

To be fair, the FOMC minutes from yesterday certainly did leave the door open:

 

“A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

 

Nonetheless, we still believe that the next two monetary policy catalysts that are on the horizon that investors are hyper focused on (i.e. the AUG 31-1 annual central banker bonanza in Jackson Hole, WY and the SEP 13 FOMC Announcement) are likely to disappoint. While the manic media is likely to do its best to perpetuate expectations of additional “accommodation” among investors, we expect little to no change in US monetary policy out of both events. Needless to say, our outlook for US monetary policy over the TRADE and TREND durations remains counter to consensus expectations.

 

Looking back to Jackson Hole 2010 when the Fed overtly signaled QE2, we can safely conclude that the conditions are not in place for the Fed to pull the trigger at either of these upcoming events. Moreover, the OCT 24 FOMC meeting is far too close the election for the Fed to act, in our opinion. The caveat here is that the FOMC, a presumed-to-be-independent board of unelected bureaucrats, can do whatever they please.

 

That said, however, we anticipate that rising political scrutiny about the stagflationary impact of their recent policies will force them to become more, not less, prudent with regards to their decision making. As we demonstrated yesterday in our note titled, “FIRE IN THE [JACKSON] HOLE: BATTLE LINES ARE BEING DRAWN IN THE US MONETARY POLICY ARENA”, quantitative easing amounts to a highly regressive tax on the poor, begging the key political question: why is Obama such an avid Bernanke supporter?

 

Regarding the aforementioned conditions, we parse the Fed’s mandate into its three pillars to show just how aggressive and politically compromised the Fed would look in the event it introduces yet another LSAP over the immediate-term. For reference, Obama’s reelection odds correlate tightly with the SPX per our proprietary Hedgeye Election Indicator, as well as those provided by sources such as Intrade.

 

MANDATE #1: Inflate the Stock Market

The S&P 500 had completely broken down to the mid-to-low 1,000s ahead of Jackson Hole ’10. At ~1,400 on the SPX, the argument that the stock market requires additional stimulus loses a great deal of credibility.

 

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - SPX

 

MANDATE #2: Full Employment

Heading into Jackson Hole, we had seen two consecutive months of negative MoM Nonfarm Payroll growth and a total of four consecutive declines by SEP ’10. No such negative trend exists currently.

 

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - PAYROLLS

 

MANDATE #3: Price Stability

Core CPI was threatening the economy with the specter of deflation, slowing all the way to +0.9% YoY in JUL ’10 and then down to +0.6% YoY by OCT ’10. We’re at +2.1% YoY per the latest data point (JUL) – in line with the Fed’s +2% target. Additionally, the Fed’s own 5yr forward breakeven inflation rate is at 2.57% currently – well above the low of 2.17% we saw on AUG 24th, 2010.

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - CPI

 

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - BREAKEVEN

 

Our quantitative levels on Gold are included in the chart below. Specifically regarding the etf GLD, we see heightening risk of forced sales over the intermediate term as John Paulson & Co., the etf’s largest owner at 5.14% of shares outstanding, may be forced to get incrementally liquid following the news that Citi Private Bank will redeem $500 million from Paulson’s flagship Advantage funds.

 

Daryl G. Jones

Director of Research

 

Darius Dale

Senior Analyst

 

IDEA ALERT: BUYING THE DOLLAR AND SHORTING GOLD - GOLD


Idea Alert: PCAR - Top Industrials Idea

Takeaway: We think $PCAR offers the best exposure to reduced pre-buy activity in the US Class 8 market. $PCAR may also benefit from NAV's troubles.

Idea Alert: Paccar - Our Top Industrials Idea

 

Levels:

TRADE support = 39.82

TREND support = 38.55

 

Class 8 Truck Cycle:  For decades, Class 8 truck demand has been driven by the imposition of expensive safety and emissions regulations.  However, the current round of regulations should actually decrease the total cost of ownership for commercial vehicles, aligning the interests of truck operators and regulators.  This may eliminate the costly pre-buy cycles that have historically distorted underlying demand.  More stable demand should result in higher OEM capacity utilization, an older fleet and more stable used truck prices.  Those factors should contribute to higher margins and valuations.

 

Industry Structure:  The Class 8 truck OEM industry is consolidated and has a history of profitability.  Recent execution missteps at Navistar may allow Paccar to add market share.

 

Valuation:  We see Paccar as the most attractively valued OEM offering exposure to the improved US truck pre-buy dynamics. 

 

Trade & Trend:  We expect the EPA to promulgate revised non-conformance penalties for Navistar within the next two to twelve weeks.  If significantly more punitive, Navistar’s competitors could benefit significantly.  Into 2013, we expect Navistar to struggle with its ICT+/SCR combined 13L engine in the market place.  Further, we think that the incorporation of the Cummins 15L engine may take longer than expected.  This may also benefit Paccar.

 

Tail:  As industry capacity adjusts to a market without pre-buy activity, the OEMs may generate more stable profits.  That should result in higher valuations.

 

Please see our August 16th Black Book and conference call for additional details.


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WHO’S GOT SPACE FOR STIMULUS IN ASIA AND LATIN AMERICA?

Takeaway: Some countries have more room to stimulate than others.

CONCLUSION: While certainly not a credible bull case in and of itself, we do think it’s important to contextualize which countries have the appropriate space to stimulate economic growth over the intermediate term – especially in light of the concerns we continue to have with respect to the outlook for global economic growth.

 

If you are also using this latest no-volume melt-up to sell/short into, then you’re likely on the same side of the coin as us with respect to global growth – specifically that it is likely to continue slowing over the intermediate term in the face of potential negative catalysts such as the Fiscal Cliff/Debt Ceiling Drama in the US, a resurgence of European sovereign debt risks and/or an incremental round of tightening in the Chinese property market.

 

If we are indeed in a 2007-esque perch atop lower-highs across many equity markets globally, then perhaps consensus is right: the bull case is, in fact, bailouts. Much like valuation for single stocks, we do not anchor on stimulus as the deciding factor for any thesis on a country’s equity market. Rather, we try to identify opportunities where expansionary POLICY can lead improvements in a particular economy’s GROWTH outlook without materially compromising the INFLATION outlook. Reflexivity remains core to our fundamental research process.

 

In that light of this process and our negative intermediate-term fundamental outlook for global economic growth, we decided to score countries based on a few key metrics to determine which  of them had the most/least space to stimulate going forward. It’s important to note that this score does not replace our policy expectations for each county in the sample, as those individualized conclusions continue to be driven by our forward-looking G/I/P framework and real-time market signals. Nor is it an attempt to predict who’s going to announce incremental stimulus efforts over the intermediate term. Rather, this is our best first attempt at determining which countries have room to stimulate the most/least  without imposing incremental risk upon their currency and bond markets.

 

METHODOLOGY

For the 17 countries in Asia and Latin America we were able to find comparable data sets for, we gathered 10yrs of sovereign budget balance and debt metrics (as percentages of GDP; annual) as well as TTM YoY CPI readings. Secondly, we statistically analyzed each data set to determine where the latest data point was relative to its mean from a standard deviation perspective. Lastly, we tallied each of the three metrics together for each country, inverting the debt/GDP and CPI readings (i.e. higher values here should be interpreted negatively).

 

RESULTS

As the table and chart below show, there’s a sizeable discrepancy between those countries with the most space and the least space in our sample. The median score of 0.58 points pales in comparison to the 6.89-point delta between the country with the most room to stimulate (Peru) and the country with the least space (Mexico). While certainly not to be used as a one-factor investment thesis, we are pleased to see two countries we’ve been most positive on in recent quarters (Philippines, Thailand) on the right side of the latter chart and outperforming in the YTD, while two countries we’ve been most negative on recently (Australia, Japan) on the left side of that same chart and underperforming on that same duration.

 

WHO’S GOT SPACE FOR STIMULUS IN ASIA AND LATIN AMERICA? - 1

 

WHO’S GOT SPACE FOR STIMULUS IN ASIA AND LATIN AMERICA? - 2

 

Moreover, the country-level micro data points support our findings as well: Filipino policymakers are planning an incremental $16 billion worth of investments on roads, schools and airports and ruling Thai policymakers are looking to continue spending upwards of 11% of their federal budget on their 1yr-old rice price-fixing scheme, designed to inflate the incomes of the country’s farmers. Conversely, Australian policymakers are currently implementing the largest fiscal tightening since at least 1953, while Japanese policymakers have recently passed a contentious VAT hike bill – the first of its kind since 1997.

 

All told, while certainly not a credible bull case in and of itself, we do think it’s important to contextualize which countries have the appropriate space to stimulate economic growth over the intermediate term – especially in light of the concerns we continue to have with respect to the outlook for global economic growth.

 

Darius Dale

Senior Analyst


JOBLESS CLAIMS: HOW MANY JOBS CAN THE FED CREATE?

Takeaway: QE3 implications: Fed asset purchases are highly correlated with jobless claims, and jobless claims are highly correlated with the market.

How Does the Fed Measure Up as a Job Creator?

According to the Federal Reserve's website, one of its statutory objectives established by Congress is "maximum employment". The other two are stable prices and moderate long-term interest rates.  

 

The chart below suggests a strong relationship exists between Federal Reserve securities holdings (QE) and employment. On the x-axis we're plotting Fed holdings of treasury, agency and agency MBS securities while on the y-axis we're showing rolling initial jobless claims. This is weekly data going back 42 months, which corresponds to the beginning of QE1. The R-squared is relatively high at 0.928, suggesting that if there's a causal relationship, then changes in the level of Fed holdings of government and quasi-government debt explain about 93% of the change in the level of jobless claims.

 

This means that it's possible to ask the question, assuming a causal relationship, how much does it cost the Fed to create a job? An important note here is that we're treating an averted layoff (i.e. a reduction of jobless claims by one) as the equivalent of a new job. 

 

The equation reads y = -0.1397x + 751,424. This means that for every $1 million dollars (x-axis is denominated in millions), the Fed can apparently reduce weekly jobless claims by 0.1397 people. The inverse of this ($1mn / 0.1397) is $7.16mn. In other words, it costs the Fed $7.16 million dollars to reduce jobless claims by one person a week. Now, let's factor in that there are 52 weeks in a year, and that suggests that it costs the Fed $137,692 to avert one annual layoff (create one new job). That sounds like a lot of money considering that median per capita annual income for employed people was $41,663 in 2011. It costs the Fed 3.3x the average private sector annual income to prevent one private sector job loss.

 

It's widely held that the Federal government is inefficient, but just how inefficient is it? The Federal government spent an average of $64,781 per person in payroll on civilian employees in 2010, according to the US Census Bureau. In other words, it costs the Federal Government about 1.5x as much to employ someone as the private sector, and it costs the Fed about 2.1x as much to avert a private sector layoff as it does for the Federal government to hire someone. 

 

QE3 expectations are running high, and the below chart should provide a framework for thinking about its potential impact on jobless claims, when and if the size of the program is unveiled. For reference, a $500 billion program could be expected to reduce weekly initial claims by 69,832. That would take claims down to around 300k from their current 370k. This would be good news for lenders on the credit front; though, curiously, we showed last week that in the last two years the correlation between the price level of the XLF and jobless claims has been effectively zero.

 

In the second chart below, we show the relationship between the S&P 500 and jobless claims - another tight fit. We showed last week that weekly initial claims and the S&P 500 have an R-squared of 0.8866 from 2007 through present. The equation there is y = -0.0021x + 2128.2. Assuming an initial claims level of 300k, the equation of the line would suggest an S&P 500 level of 1,498.2. Obviously, many things could cause these relationships to breakdown or decouple. 

 

JOBLESS CLAIMS: HOW MANY JOBS CAN THE FED CREATE? - claims vs fed scatter 3

 

JOBLESS CLAIMS: HOW MANY JOBS CAN THE FED CREATE? - s p claims

 

The Details on This Week's Print 

Initial claims rose 6k to 372k last week from 366k, but only 4k after incorporating the 2k upward revision to the prior week's data. Meanwhile, rolling claims rose by 3.75k to 368k. 

 

A bright spot in this past week's print is that for the second week in a row rolling NSA claims widened their YoY improvement, this week moving to -8.3%, vs -7.8% the week prior. This is a healthy sign.

 

JOBLESS CLAIMS: HOW MANY JOBS CAN THE FED CREATE? - claims sa

 

JOBLESS CLAIMS: HOW MANY JOBS CAN THE FED CREATE? - claims sa rolling

 

JOBLESS CLAIMS: HOW MANY JOBS CAN THE FED CREATE? - nsa 1

 

JOBLESS CLAIMS: HOW MANY JOBS CAN THE FED CREATE? - nsa rolling

 

Joshua Steiner, CFA

 

Robert Belsky

 

 


Ahead Of The Fed

AHEAD OF THE FED

 

 

CLIENT TALKING POINTS

 

FIXING GREECE

Everyone wants to chat with Angela Merkel these days. Today, it is French President Francois Hollande, who is discussing potential outcomes for Greece and the possibility for a default as the country prepares to release a report next month detailing its finances. Greek Prime Minister Antonis Samaras will be meeting with Merkel on Friday. While no earth shattering headlines have come out of Europe in the past week, the fact of the matter is that the situation with the Eurozone continues to worsen as Germany’s ability to prop up the rest of the region dwindles. The only way out of this mess is to formulate a plan that will get countries like Greece and Spain back on a long-term, sustainable path to growth and fiscal sustainability.

 

 

AHEAD OF THE FED

Ahead of the Federal Reserve’s infamous Jackson Hole meeting next week, we went short gold and long the US dollar in the Hedgeye Virtual Portfolio yesterday. We believe that any action that the Fed may or may not take is already priced into the market for the most part and thus, the timing is right for us to initiate positions ahead of the meeting. While we’re of the opinion that the Fed will not introduce another round of QE, there’s not much to do at this point but watch and wait for the Fed to make its next move.

 

 

FAUSTIAN INVESTING

Goethe would be pleased with this term we’ve coined this morning. Like the book, Dr. Faust makes a deal with the devil and in exchange for his soul, experiences the pleasures of the world and unlimited knowledge. We think that buying equities with the VIX at 15 combined with no volume rallies is similar to making a deal with the devil or in this case, central bankers.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  UP

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  DOWN

 

Int'l Currencies: UP   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE INC (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“"My mom used to tell us, Carl, put on your shoes. Oscar [Pistorius], put on your legs, so I grew up thinking I had different shoes." Fav #Olympic quote.-@LewisPugh

 

 

QUOTE OF THE DAY

“It is easier to forgive an enemy than to forgive a friend.”–William Blake

                   

 

STAT OF THE DAY

$1665/ounce. The price of gold, which is hitting 16 week highs amid hopes that the Federal Reserve will provide additional stimulus.

 

 


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