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Diving Into Energy

If we analyze the energy sector to see what investors are piling into, we find that the top performing stock factors in energy over the last three months are: low margin, low short interest and large cap. The safety trade remains popular.

 

Diving Into Energy - facro normal


Double Trouble

Client Talking Points

What's Left For Us?

The political class of America loves to take, take take. Between widespread commodity inflation, a devalued currency and unsustainable debt limits, we really have it made here, don’t we? The Republicans and the Democrats are fighting each other over every little detail of a resolution to the fiscal cliff, so the odds of a deal actually happening are very slim. Think about it: how many politicians do you really trust? Do you think they’re looking out for you in the long run or themselves? 

Mining Away

Mining stocks took a hit yesterday with Freeport-Macmoran (FCX) getting a baseball bat to the head like no other. And this morning, gold is down significantly in addition to gold mining stocks. Our intermediate-term TREND line of $1711 is broken for gold. Hedge funds are shedding their holdings related to gold miners and the commodity. Ignore brash comments from people saying that the “super cycle isn’t ending” in commodities. It has already ended and we can go a lot lower here on out.

Asset Allocation

CASH 52% US EQUITIES 12%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
YUM

New unit openings in China and strength in YRI and US should offset China weakness in 1H13. China SRS growth is sensitive to the economy but new unit growth and ROIIC are likely to be supported by continuing growth of the consuming class in China. Looking at operating income by geography for YUM/MCD/SBUX, we can see that YUM is the most geographically diverse. This is manifest in YUM’s more stable EPS growth and price performance over the last 10 years.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

ASCA

We believe ASCA is greatly undervalued due to its potential to follow a OPCO/PROPCO model like PENN in two years or so. A high FCF yield and a healthy balance sheet make this gamer an attractive investment.

Three for the Road

TWEET OF THE DAY

“Diamondback liquidation confirmed. Investors pull $520MM. Fund to close down” -@Zerohedge

QUOTE OF THE DAY

“It is a waste of energy to be angry with a man who behaves badly, just as it is to be angry with a car that won't go.” -Bertrand Russell

STAT OF THE DAY

Standard Chartered to pay $330 million in fines to US regulators for dealings with Iran.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 6, 2012


As we look at today's setup for the S&P 500, the range is 15 points or 0.37% downside to 1404 and 0.69% upside to 1419.       

                                                                                                                                                        

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.34 from 1.35
  • VIX closed at 16.46, 1 day percent change of -3.86%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England interest rates announcement
  • 7:45am: ECB interest rate announcement
  • 7:30am: Challenger Job Cuts Y/y, Nov. (prior 11.6%)
  • 8am: RBC Consumer Outlook Index, Dec. (prior 48.9)
  • 8:30am: Initial Jobless Claims, Dec. 1 est 380k (prior 393k)
  • 8:30am: ECB’s Draghi holds news conference
  • 9:45am: Bloomberg Consumer Comfort, Dec. 2 (prior -33)
  • 11am: U.S. Treasury to announce plan for auctions of 1Y bills, 3Y notes, 10Y notes, 30Y bonds
  • 11am: Fed to purchase $1.5b-$2.25b notes due 2/15/36 11/15/42
  • 12pm: Household Change in Net Worth, 3Q (prior -$322b)
  • 2:00pm: Fed to purchase $4.25b-$5.25b notes due 12/31/18 11/15/20

GOVERNMENT:

    • Obama, first family attend National Christmas Tree lighting
    • Obama, Romney presidential campaigns file last spending reports
    • Senate Judiciary to vote on collection of location data from companies such as Apple, Google
    • FedEx CEO Frederick Smith speaks at Economic Club of Washington
    • Recreational marijuana legalized in Washington state

WHAT TO WATCH

  • Euro area pushed into recession as trade slows, spending drops
  • France sells bonds at record-low yields
  • HTC to make quarterly royalty payments to Apple based on vol.
  • Zynga files with Nevada to operate online games w/ real money
  • UPS said to offer remedies in 13 countries to save TNT deal
  • FTC says Motorola Mobility shouldn’t get injunction in patent suit against Apple
  • Carl Icahn reports lowered stake in Oshkosh
  • Garmin to replace R.R. Donnelley on S&P 500
  • Boeing says 787 Dreamliner didn’t lose power during generator failure
  • Intel CEO says favors internal candidate to take over top spot
  • Apple may try to get ban on future Samsung smartphone products; patent infringement case to be heard by judge today
  • China Mobile says Apple must discuss benefit sharing on IPhone
  • SAC’s Steinberg said to be unindicted co-conspirator at trial

EARNINGS:

    • Canadian Imperial Bank of Commerce (CM CN) 5:35am, C$1.99
    • Smithfield Foods (SFD) 6:00am, $0.43
    • Toronto-Dominion Bank (TD CN) 6:30am, C$1.81
    • H&R Block Inc (HRB) 7:00am, $(0.41)
    • Lululemon Athletica (LULU) 7:15am, $0.37
    • Dollarama Inc (DOL CN) 7:30am, C$0.70
    • National Bank of Canada (NA CN) 7:30am, C$1.93
    • Uti Worldwide (UTIW) 8:00am, $0.24
    • Esterline Technologies Corp (ESL) 4:00pm, $1.59
    • Cooper Cos (COO) 4:01pm, $1.55
    • Forest City Enterprises (FCE/A) 4:02pm, $0.01
    • Palo Alto Networks (PANW) 4:05pm, $0.03
    • Harry Winston Diamond (HW CN) 5:00pm, $0.12

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

OIL – both Brent and WTIC continue to make lower-highs on low volume rallies – and both remain in Bearish Formations in my model. We expanded our Commodities Bubble short positioning yesterday to US Energy stocks (XLE) and Russia (RSX); the sell side’s top rated Sector is still Energy “because it’s cheap”, using the wrong commodity prices of course.

 

GOLD – not good. My intermediate-term TREND line of $1711 is now broken and being confirmed on the downside. Gold Miners getting hammered as they remain over-owned by funds seeing redemptions.

  • World Food Prices Fell a Second Month in November on Oils, Grain
  • Russian Wheat Facing Coldest Winter in Two Decades: Commodities
  • Copper Declines on Concerns About Global Economic Growth
  • Oil Trades Near One-Week Low as U.S. Distillate Supplies Surge
  • Freeport’s Oil-Gas Bet Prompts Biggest Slump in 4 Years: Energy
  • Morgan Stanley Backs Gold, Corn, Soybeans as Best Picks in 2013
  • Sugar Falls on Mounting Speculation of Oversupply; Coffee Climbs
  • Gold Declines for Third Day Toward One-Month Low as Dollar Gains
  • Palm Oil Reserves in Malaysia Seen Holding Near Highest Ever
  • Mississippi Water Level Buoys Odds of Keeping River Open Longer
  • Japan Buys Most Milling Wheat in Four Months From U.S., Canada
  • OPEC’s Biggest Cut Since 2009 Looms Next Year: Energy Markets
  • Gold Set to Return to Run of Records Next Year: Chart of the Day
  • Soybeans Gain as USDA May Report Lower South American Outlook

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS


GERMANY – who cares what the Dow is “up YTD” when you could be up +28% YTD owning the German DAX, powering past the September closing highs? With the SP500 -4.4% from the Bernanke SEP Top, this +1.1% move this morning in Germany is definitely the macro move of the morning.


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


History Matters

“Few soldiers knew the history, and most didn’t give a damn.”

-Michael Sallah

 

Sound familiar? History matters. And that doesn’t just hold for the Geneva Conventions (1949). It holds for the Constitutional and economic history of the United States of America too. We shouldn’t give a hall pass to the willfully blind.

 

The aforementioned quote comes from a chilling book that I am reading right now about Vietnam: Tiger Force - A True Story Of Men and War, by Michael Sallah and Mitch Weiss. It won the Pulitzer Prize in 2004 and is a glaring example of how groupthink can dominate decision making by men abusing authority.

 

When it comes to the big rules in life, most of us follow them. Some don’t. But when we catch them, they pay the price. What is the free-market price we are willing to pay the #PoliticalClass in this country? Giving up our children’s liberties violates the US Constitution. It may not matter in the moment. But I am guessing that if we keep this up, it eventually will.

 

Back to the Global Macro Grind

 

After the market close yesterday Timmy Geithner proclaimed his mystery of faith that “we’ll fall off the cliff if taxes don’t rise.” Really? Is that a threat? Or is he abusing his political power to do more of what many men and women before him have? Fear monger.

 

Geithner is one of the more unique authorities of the US #PoliticalClass because he has spent 54% of his born life working for the US government. That’s a long time – and boy has he raised a lot of debt and government spending along the way.

 

As a reminder, this generational (and Constitutional) debate in America isn’t just about raising the #PoliticalClass’ “revenues”:

  1. It’s about DEBT (raising the Debt Ceiling requires Congressional approval – yes, that’s a rule)
  2. It’s about SPENDING (real US government spending just ripped at an annualized rate of +9.5% in the last 3 months)
  3. And, of course, it’s about TAXES (Geithner calls them revenues because that’s how he gets paid)

Marxists wanted this – so now they have it. This is class war. The #PoliticalClass vs. The Rest of Us.

 

And if Geithner wants to try to scare the hell out of us threatening to “go off the cliff”, he can go ahead and try – but I for one am not scared of this man. If he was “deeply” worried about this, why in God’s good name was he ramping Government Spending (for the 1st time in 5 quarters) in the last 3 months? Why did he and Obama cheer Bernanke on, printing money and monetizing more US Debt?

 

Sadly, we all know the answers to these questions.

 

In other central planning news, Citigroup (C) pulled the ole bait and switch on Geithner and Co. and decided to fire 11,000 people yesterday. If you didn’t know how crony socialism works, here’s the deal: Geithner bails out his boys with your tax dollars, they grease each-other politically saying that they “saved” jobs, then fire everyone so that they can keep getting paid.

 

The Financials (XLF) liked that yesterday. Meanwhile Apple (AAPL) was collapsing (you only need to be up +30% from here to get back to September’s price to break-even). Now that growth and earnings have slowed, maybe that’s the new bull case – firing people.

 

What’s a better bull case?

 

From a US Economic Growth perspective, the only bull case that I can see as sustainable remains Strong Dollar, Down Commodities. Bernanke’s Bubbles (Commodities) are popping, and that’s potentially a very good thing for both US and Global Consumers if Obama just tells Bernanke to get out of the way.

 

What are the odds of that happening? Low.

 

Morgan Stanley (MS) is out with a version of the call Goldman (GS) made yesterday (Bloomberg: “Morgan Stanley Backs Gold, Corn, and Beans as Best Picks for 2013”). I smiled when I read that. Our call remains the exact opposite – has been since March 2012.

 

Despite Goldman pleading that the commodities “super cycle isn’t ending”, it’s pretty clear to us that it has already ended. Whether it’s Freeport McMoran (FCX) or the Gold Miners (GDX) getting blasted yesterday, it’s all one and the same thing to us – over-owned.

 

The other side of commodities (and their related equity “plays”) melting down since The Bernanke Top (SEP 2012) is of course buying consumption oriented exposures.

 

That’s why we bought US Housing (ITB) on red yesterday, and reiterate our favorite big cap Consumer long ideas: Starbucks (SBUX), Nike (NKE), and Yum Brands (YUM) this morning.

 

Our Financials and Housing Sector Head, Josh Steiner, will be hosting a housing call tomorrow at 11AM EST titled: "Could Housing's Recovery Go Parabolic in 2013?" If you’d like access to the call, please ping .

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $108.61-110.05, $3.54-3.68, $79.61-80.19, $1.29-1.31, 1.58-1.66%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

History Matters - Chart of the Day

 

History Matters - Virtual Portfolio


DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES?

Takeaway: Even though we like them fundamentally, Brazilian equities remain inconclusive from a quantitative perspective.

SUMMARY BULLETS:

 

  • Brazilian equities – particularly the consumer oriented names and industrials names – continue to look interesting to us on the long side with respect to the intermediate-term TREND, aswe continue to anticipate the positive effects of the cumulative stimulus efforts to continue to roll through on a lag(s), setting Brazil up to economically outperform peer economies, at the margins, over the intermediate term.
  • Additionally, we did receive some positive news on the POLICY front in the week-to-date – specifically in that investors should now anticipate some degree of FX stability and reduced capital controls, on the margin.
  • That said, however, we fully understand the lack of investor enthusiasm for this contrarian play (accelerated Big Government Intervention and Bubble #3 popping) and are not surprised to see the Bovespa continue to trade below its TREND line.
  • Is the Bovespa’s recent TRADE breakout a leading indicator of better things to come in Brazilian financial markets or is it merely a beta-driven head fake to be ultimately faded? While we don’t know the answer to that question at the current juncture, we do know what we plan to do if: A) the Bovespa follows through with a confirmed TREND breakout (buy Brazilian equities, unhedged from a FX perspective) or B) the index fails at its TREND line (more of the same = nothing).

 

Brazil has been a country we’ve been hot and cold on in the YTD from an equity market and FX perspective. When we last touched base here in our OCT 24 note titled: “IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS?”, we posited:

 

The Bovespa’s TREND-line breakdown diminishes our formerly positive bias and affirms our negative cyclical concerns regarding ‘risk assets’.

 

In the ~3 weeks following that note, the Bovespa traded down -3.1% to its NOV 16 closing low 55,402 and has since rebounded to +91bps higher than the original 10/24 closing price of 57,161. the S&P 500 (as a proxy for “risk assets”) dropped -3.9% to its NOV 15 closing low of 1,353 and has since recovered to the original 10/24 closing price of 1,409.

 

What to do from here depends largely on the quantitative setup, which we will continue to receive from Keith in real time. A confirmed breakout above the Bovespa’s TREND line of 58,498 would be a signal to us to increase our exposure to Brazil on the long side. We especially like consumer oriented names as Bubble #3 continues to pop amid a confluence of noteworthy domestic tax and tariff reductions.

  

DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES? - 1

 

We would also expect to see some strength in industrials names (particularly within the construction industry) as both FIFA and the IOC have recently come out and flagged Brazil as being “way behind schedule” in both World Cup (2014) and Olympic Games (2016) preparations.

 

We expect President Rousseff & Co. to address the situation with some Chinese-style command economy policies in the coming quarters as she seeks to protect the reputations of both herself and a her country from the scorn of the international community. Finance Minister Guido Mantega appears ready to follow suit at moment’s notice, suggesting his crew is working to increase investments in the country’s “inefficient infrastructure” per his own recent statement.

 

From a top-down perspective, Brazil’s GIP outlook remains robust and is supportive of further equity market and currency gains w/ respect to the intermediate-term TREND. We also like that consensus 2013 GDP estimates have come down to a more realistic +3.9% from a peak of +4.5% as recently as five months ago; +3.9% is in line with the latest projections out of the Brazilian Finance Ministry (+4%) – inclusive of last week’s demonstrable miss on the 3Q12 real GDP print (+0.9% YoY vs. Bloomberg Consensus at +1.9%).

 

DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES? - BRAZIL

 

While we remain somewhat skeptical of those projections – especially given that aggressive monetary easing (525bps worth of cuts), record low interest rates (7.25% nominal; 1.8% real), subsidized credit (YTD State bank credit up +25.5% YoY vs. only +11.7% for private banks), tax breaks for consumer products and financial services and new tax incentives for various industries have all failed to demonstrably accelerate GROWTH in the YTD – we cannot deny that the Brazilian economy is finally headed in the right direction; everything that matters in the relative world of Global Macro occurs on the margin.

 

Moreover, we continue to anticipate the positive effects of the cumulative stimulus efforts to continue to roll through on a lag(s), setting Brazil up to economically outperform peer economies, at the margins, over the intermediate term.

 

DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES? - 3

 

As we have stressed all along in our recent work on the Brazilian economy, POLICY uncertainty – particularly the flurried nature of the announcements and notable anti-international investor and anti-private sector bias – has been the key driver of Brazil’s underperformance in the YTD, with the Bovespa ranking 83rd out of the 106 country-level and international sector-specific indices we track across the Global Macro universe.

 

Additionally, fiscal slippage may have also contributed some to weakness, as Finance Minister Guido Mantega recently confirmed that Brazil won’t hit its fiscal year budget targets and will opt to use an accounting ploy to discount public investments to make them less accretive to the deficit. Moving the goal posts mid-game remains a tried and true way to discourage the cross border capital deployment – especially for Latin American economies, which have received a black eye over the LTM as a result of President Fernandez’s (Argentina) aggressive spate of Big Government Intervention and expropriation.

 

We did, however, receive some positive news on the POLICY front in the week-to-date:

 

  • Just days after the central bank intervened in the forex market by selling 21,800 currency swap contracts worth $1.1 billion (designed to strengthen the BRL vs. the USD), the central bank reduced the maturity of international debt capital subject to the +6% IOF tax to one year from two years. This follows yesterday’s move to exempt approved exporters from the tax on qualified borrowings.
  • Both efforts reverse the tide of capital controls in Brazil and are designed to promote capital inflows and cement a base in the BRL exchange rate. We think the unofficial targeted range is ~2-2.10 per USD, w/ the top end of the range ~5% higher from here.
  • In addition, Mantega was out essentially pledging to back away from further measures designed to control/manipulate the price of the BRL, suggesting that the currency is at a level where the market can set prices (finally!).

 

We’ve said it before and we’ll keep pounding the table on this critical point: removing currency translation risk from the perspective of Brazilian companies (whose balance sheets are levered with foreign currency denominated debt) and from the perspective of international investors improves the outlook for both earnings growth and foreign currency denominated returns within the Brazilian equity market.

 

DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES? - 4

 

All told, Brazilian equities – particularly the consumer oriented names and industrials names – continue to look interesting to us on the long side with respect to the intermediate-term TREND. That said, however, we fully understand the lack of investor enthusiasm for this contrarian play (accelerated Big Government Intervention and Bubble #3 popping) and are not surprised to see the Bovespa continue to trade below its TREND line.

 

Is the Bovespa’s recent TRADE breakout a leading indicator of better things to come in Brazilian financial markets or is it merely a beta-driven head fake to be ultimately faded? While we don’t know the answer to that question at the current juncture, we do know what we plan to do if: A) the Bovespa follows through with a confirmed TREND breakout (buy Brazilian equities, unhedged from a FX perspective) or B) the index fails at its TREND line (more of the same = nothing).

 

Darius Dale

Senior Analyst


Early Look

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