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THE DECLINE LINE

CLIENT TALKING POINTS

THE DECLINE LINE

A lot of people weren’t expecting the market to take a tumble like it did on Friday - it’s been awhile since something like that happened, right? June 25th was the last time the S&P 500 fell more than -1.5% in one day. Now with the VIX hovering around 15 and volumes remaining depressed, people are wondering how the market could decline like it did last week. The fact of the matter is that our #EarningsSlowing theme continues to strengthen. It’s going to get worse before it gets better. You’re seeing a lot of corporations with peak earnings offering lower guidance for 2013, including the big boys like Caterpillar (CAT) and FedEx (FDX).  

For the bulls out there: caveat emptor

HERE COMES THE BOOM

We are in the midst of a commodity boom that’s been raging on for the past decade courtesy of Ben Bernanke’s policies to inflate at the Federal Reserve. You know how it works by now: print money, drive up commodity prices. But there’s a light at the end of the tunnel and Bernanke is running out of ammunition. Commodities will soon come down in price and 2013 is looking like a ripe time for this to happen. Companies who rely heavily on inflated commodity prices to drive revenue and earnings will suffer greatly, so keep that in mind when you see them reporting guidance going forward.

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ASSET ALLOCATION

Cash:                DOWN

U.S. Equities:   Flat

Int'l Equities:   Flat   

Commodities: Flat

Fixed Income:  UP

Int'l Currencies: Flat  

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TOP LONG IDEAS

BRINKER INTL (EAT)

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

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

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

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

HCA HOLDINGS (HCA)

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

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

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THREE FOR THE ROAD

TWEET OF THE DAY

“ $CAT basically admitting that they are f'd in China w/o more stimulus..#nice” -@HedgeyeENERGY

QUOTE OF THE DAY

“The nice part about being a pessimist is that you are constantly being either proven right or pleasantly surprised.” -George F. Will

STAT OF THE DAY

The December to March "Risk On" base in Spanish bond yields was 5.15%; they’re now over 5.40%.