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Switching It Up

Client Talking Points

Ebb And Flow

The markets can move any which way they please, regardless of what participants think it should do. Right now, we’ve been enjoying (so to speak) a move from #GrowthSlowing to #GrowthStabilizing. Commodities continue to deflate, equities are on the rise and housing is recovering. There is a caveat: crude oil. It’s been going up in price since December and if we go back to $120 a barrel oil, that can take us right back to #GrowthSlowing. Oil is an important indicator of growth in our model, so we'll be watching it closely to see which direction it heads over the next week.

Bad Bonds, Bad Bonds

COPS-theme song aside, bonds have had one hell of a bad start this year. Treasuries in particular haven’t had a start this bad since 2009. The 10-year risk range for today is 1.84-1.96% and is currently trading at 1.885% as of writing. A 200bps yield is a stone’s throw away. Investors are worried that the Fed will stop buying debt this year but it remains to be seen if that’s merely gossip or hard fact.  As Congress works with the Treasury to raise the debt ceiling, the yield on the 10-year looks to keep climbing.

Asset Allocation

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

Top Long Ideas

Company Ticker Sector Duration
NKE

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.

ADM

ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“Easier for the #PoliticalClass to talk political economy instead of real-time business - easier to just make stuff up” -@KeithMcCullough

QUOTE OF THE DAY

“If absolute power corrupts absolutely, does absolute powerlessness make you pure?” -Harry Shearer

STAT OF THE DAY

ICSC/GS weekly chain store sales w/e Jan 6th w/w: -4.2%; y/y: +4.0%


YUM SHARES APPETIZING FOR 2013

News flow for YUM in China may be negative for much of 1H13 but investors looking to buy a global retail stock for the long-term TAIL have an attractive opportunity today in Yum! Brands.

 

Guidance Revised

 

The headlines this morning are decidedly negative for YUM’s stock as the company released an 8-K yesterday after the close describing the impact of a probe into a former chicken supplier for the company as “significant”.  Last night’s 8-K also revised 4Q China SSS guidance to -6% from -4%.  Previously, on December 21st, the company had described the impact of the government probe on demand as “moderate”.

 

YUM SHARES APPETIZING FOR 2013 - china pod 1

 

 

There will likely be pressure on YUM’s shares over the near-term TRADE as this news is absorbed but there are a couple of things worth bearing in mind:

  • The suppliers implicated in the government probe represent an “extremely small percentage of product to KFC”, according to YUM.  Given the size of this company and the importance of China to its overall profitability, we are confident that management will go to appropriate lengths to address any trust issues consumers have. 
  • In 2011, Taco Bell in the US was subject of a lawsuit, which was ultimately dropped, that had a significant impact on the US business. The company’s response was vigorous and it is clear that consumer perception has been improved.  We expect management to act with even more urgency in this instance, given the importance of China to overall profitability.

YUM SHARES APPETIZING FOR 2013 - yum op inc geography

 

 

What Matters


China is a huge part of Yum! Brands and it is no surprise that the stock price reaction to the guidance revision has been so strong.  However, YUM remains our best pick for 2013.  The enterprise value will continue to accrete value at 10-13% per year with added gains possibly coming from a 2% dividend yield and share repurchases in 2013. 

 

The argument for near-term multiple contraction is purely a forecast on sentiment.  The growth potential of YUM, in our view, is unrivalled in the restaurant industry when the capability of management to execute is considered.  Even if there is a one-multiple contraction in EV/EBITDA, we see downside reaching $63-64, which is where the stock rallied from in December. 

 

The macro setup in China has been improving and, despite narratives that will attempt to attribute all of the recent softness in China to a probe into a chicken supplier of a small percentage of KFC’s product in the country, slowing growth was clearly a factor in recent decelerations in same-store sales growth.  The retail sales environment in China is sequentially improving as of November 2012 and, if this continues into 2013, we believe it will benefit YUM as the negative headlines abate.

 

For 2013, we still believe that there is upside in the shares to $85-90 per share. 

 

YUM SHARES APPETIZING FOR 2013 - china retail sales growth

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 8, 2013


As we look at today's setup for the S&P 500, the range is 45 points or 1.63% downside to 1438 and 1.44% upside to 1483.      

                                                                                                                         

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: 1.63 from 1.63
  • VIX closed at 13.79 1 day percent change of -0.29%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB small bus. optim., Dec., est. 87.6 (prior 87.5)
  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 10am: IBD/TIPP economic optim., Jan., est. 46.5 (prior 45.1)
  • 11am: Fed to buy $3b-$3.75b in 2018-2019 sector
  • 11:30am: U.S. to sell 4W, $25b 52W bills
  • 12pm: DoE short-term outlook for Jan.
  • 1pm: U.S. to sell $32b 3Y notes
  • 3pm: Consumer credit, Nov., est. $13b (prior $14.16b)
  • 3pm: Lacker speaks on economic outlook in Columbia, S.C.
  • 4:30pm: API weekly inventories

GOVERNMENT:

    • House, Senate not in session
    • Obama said close to picking Jack Lew for Treasury Secretary
    • API’s Jack Gerard speaks on state of oil industry, 12:30pm
    • Supreme Court to hear arguments in case brought by two Gabelli Funds LLC officials seeking to block SEC claims they improperly let client engage in market timing, 10am

WHAT TO WATCH

  • Alcoa profit seen recovering after output cuts as aluminum gains
  • Japan to buy ESM bonds using forex reserves to help weaken yen
  • Barrick ends talks with China National to sell African unit
  • German exports fall more than forecast as Euro crisis cuts European demand
  • Consumer Electronics Show continues: GOOG, IBM, DIS on tap
  • CES roundup: Nvidia Shield, 3D Systems CubeX; QCOM
  • Qualcomm upgrades mobile chip lineup fending off Intel
  • JPMorgan Healthcare Conference continues: ILMN, WLP
  • Samsung profit beats estimates as Galaxy fends off iPhone 5
  • International Game targeted with proxy fight by ex-CEO
  • GM beats Ford in U.S. government sales in first since bailout
  • HSBC client admits to using offshore accounts to dodge taxes
  • Chesapeake Energy CEO McClendon loses 2012 bonus amid reforms
  • BAE butts into Lockheed $3b overseas market for F-16 work
  • Vodafone gains after Verizon CEO signals U.S. mobile buyout is feasible

EARNINGS:

    • IHS (IHS) 6am, $1.11
    • Lindsay (LNN) 7am, $0.75
    • RPM International (RPM) 7:30am, $0.42
    • Monsanto (MON) 8am, $0.36 - Preview
    • Schnitzer Steel (SCHN) 8:30am, $0.06
    • Acuity Brands (AYI) 8:35am, $0.83
    • WD-40 (WDFC) 4pm, $0.56
    • Alcoa (AA) 4pm, $0.06
    • Global Payments (GPN) 4:01pm, $0.87
    • Mistras Group (MG) 4:01pm, $0.32
    • Apollo Group (APOL) 4:05pm, $0.90

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


OIL – looking less and less like gold by the day; this becomes a global economic headwind in our model (to real-inflation adjusted growth), so keep tabs on it; Brent’s TAIL risk line = $111.48, so Oil is back above that and signaling $113 next as probable.

  • Oil Trades Near Four-Month High on Demand, Euro-Area Confidence
  • Record Car Sales Extending Shortages in Palladium: Commodities
  • Soybeans Slip as Rain Forecast to Improve Brazil Crop Conditions
  • Palm Oil Extends Decline as China Builds Record Port Inventories
  • Gold Halts Three-Day Decline as Weaker Dollar Increases Demand
  • Copper Rises as Index Weighting Change Fuels Buying Speculation
  • Liquefied Natural Gas Creates a New, Global Commodity Market
  • Mongolian Group Says Draft Law Hurts Foreign Mining Investment
  • Iron-Ore Swaps Rise to 14-Month High as China Growth Accelerates
  • Alcoa Profit Seen Recovering After Output Cuts as Aluminum Gains
  • African Oil Flows Seen Shifting to Asia as U.S. Imports Drop
  • Investors Should Bet on Dry-Bulk Shipping Gains: Deutsche Bank
  • New U.S. LNG Terminals to Muscle in on Global Domestic Gas Trade
  • BullionVault’s Gauge of Client Buying Climbs to 12-Month High

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS


ITALY – unemployment doesn’t improve (11.1% y/y in NOV), but the stock market pushes for a higher-high – that’s Europe, in a nutshell; where economic data is stabilizing, stocks rip (Denmark, Germany, etc); where its soft, they’re making higher-highs now too. Shorts are capitulating. Russia opens the yr +3.1%.


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


JAPAN – Taro Aso is now saying he’s going to buy ESM (European debt) to “stabilize Europe” and weaken the Yen; we think this guy is crazy – and history is littered with crazy political people who have wreaked havoc on their citizenry, so stay tuned; Japanese Equity vol is picking up as people try to front run this guy; they’ll blow through the 44 Trillion Yen debt issuance ceiling.

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 


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THE M3: BIGGER S'PORE FINES; CHINA LOTTERY RECORD

The Macau Metro Monitor, January 8, 2013

 

 

SINGAPORE UPS ANTE FOR CASINO FIRMS WITH NEW RULES, BIGGER FINES Reuters

Amendments to the Casino Control Act cleared parliament late last year and now await formal passage into law, giving the operators of Marina Bay Sands and Resorts World Sentosa little choice but to adapt to the new rules - including fines of up to 10% of gaming revenue - and the costs of compliance.

 

The operators, which have been fined for admitting minors and failing to collect the levy for the government, will face a maximum penalty of 10% of annual gross gaming revenue.  The current cap on fines is S$1 million but, if fully enforced, the new ceiling could be closer to S$200 million.  A panel will also be set up by the trade ministry to help the Casino Regulatory Authority determine how attractive the resorts are as tourist destinations - an assessment that will apply to the renewal of their casino licenses from January 2015.

 

MAINLAND'S LOTTERY MARKET SETS NEW RECORD Macau Business 

The mainland’s lottery industry hit a new annual revenue record last year, of RMB262 billion (MOP336 billion).  That is above Macau’s casino gross gaming revenue for the same period.  Full-year revenue from the mainland’s Welfare Lottery and Sports Lottery went up by 12% YoY in 2012, with the growth rate slowing down from the 18% recorded in 2011, government agencies said.



Soft Earnings

“Never have I seen a country so utterly unprepared for war and so soft.”

-Field Marshall John Dill

 

In one of the more poorly timed British central command comments during WWII, that’s what the Chief of the Imperial General Staff, Sir John Greer Dill, had to say about America just before December 1941 (The Last Lion, page 421).

 

Japan, of course, attacked the US at Pearl Harbor on December 7th, 1941. And, after President Roosevelt told Winston Churchill that “we are all in the same boat now”, America all of a sudden didn’t seem so “soft” anymore.

 

In his memoirs Churchill explained that he was quite happy about the whole turn of events. On the night of the Japanese attack he “slept the sleep of the saved and thankful” (page 423).

 

Back to the Global Macro Grind

 

After watching Notre Dame’s defense last night, I am still pretty sure that soft is as soft does. That’s also one of the Top 3 Global Macro Risks to being really long US Equities here: Soft Earnings.

 

Given our view of Global #GrowthStabilizing, that might confuse come people – but it shouldn’t. Veteran Risk Managers know that earnings are a lagging indicator, while growth is a leading one.

 

That doesn’t mean that #EarningsSlowing won’t matter. We introduced that Global Macro Theme in October of 2012, right before the worst US corporate earnings season since 2006. It too, didn’t matter, until it did.

 

One of the core takeaways from that theme was that this isn’t a ‘one-off’ where we’ll have 1 quarter of down earnings then straight back up again. That’s because US corporate margins are coming off all-time peaks. All-time is a long time.

 

I think #EarningsSlowing will matter, but so will the timing it:

  1. Alcoa (AA) and Monsanto (MON) kick off Earning Season tonight, but they aren’t driving the boat; Financials (XLF) are
  2. Financials Earnings Season starts on Friday, and we expect both Housing and Yield Spread to make that Sector bullish
  3. The biggest sector with #EarningsSlowing risk remains Tech (XLK); we don’t get those reports for a few more weeks

Yes, there’s a big difference between buying US stocks with the SP500 at 1400 and levering up long at a 5-yr closing high (1466). So be mindful of that. Be sector selective and stock specific.

 

Back to the Top 3 Global Macro Risks to being long overbought beta (Equities) here:

  1. #EarningsSlowing
  2. Japanese Policy To Inflate
  3. Rising Oil Prices

The 3rd risk in my Top 3 is the most trivial. Oil’s price, volume, and volatility is measurable within our TRADE/TREND/TAIL process, so as time/price changes, my fundamental research view of how that factor impacts our growth model does.

 

A far less obvious risk remains what could happen to Japan if they pull an Argentina in 2013. I think this old (but new) bureaucrat they have brought back as Japan’s Finance Minister is crazy. That’s not a typo – plenty of politicians are crazy. Especially Keynesian ones.

 

Last night Taro Aso (great name for the history books if he rips his country a new one) said Japan is going to print money and buy ESM debt (as in European Bonds) in order to devalue the Japanese Yen further. We’ll walk through what that means as Japan blows through their 44 TRILLION Yen debt issuance ceiling on our Q1 Macro Themes Call (January 15th). Key word score: Quadrill-Yen.

 

Away from all of that, there’s nothing to worry about out there…

 

“During the first week of December (1941), Churchill regularly telephoned Bletchley to ask about the disposition of the Japanese Combined Fleet (Kido Butai)… Each time Churchill asked, the Bletchley reply remained the same: No intelligence was forthcoming. The Japanese navy had vanished.” (The Last Lion, page 416)

 

I am sure some dude in Spain, Taro Aso, and Obama’s latest son-of-Summers US Treasury bureaucrat (Jack Lew) have all central economic command under control. Full debt printing and deficit spending ahead.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now, $1, $110.19-113.06, $3.63-3.75, $79.99-80.49, 1.30-1.31, 1.84-1.96%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Soft Earnings - Chart of the Day

 

Soft Earnings - Virtual Portfolio


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