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Q1 Macro Themes Conference Call January 15th

Q1 Macro Themes Conference Call January 15th  - Themes.dialin

 

Each quarter, Hedgeye's Macro Team, led by CEO Keith McCullough and DOR Daryl Jones, hosts a Quarterly Macro Themes conference call with a presentation and a live Q&A session for participants. The call will highlight three themes representing significant developing sectors or macro trends for the quarter, analyzing potential impacts across various scenarios and identifying investment opportunities. The Q1 2013 Macro Themes Call will be held Tuesday, January 15th at 1:00pm EST.              

 

 

Q1 THEMES INCLUDE:

 

1) #GrowthStabilizing: 

Both our research and risk management indicators are signaling a shift away from #GrowthSlowing and have a bullish read-through for equities as fund flows move out of bonds. The risk of the U.S. Debt Ceiling remains a factor; however, we expect a rebound from the consumer as Bernanke's Commodity Bubble continues to deflate. 

 

2) #HousingsHammer: 

Housing market fundamentals continue to strengthen and are expected to maintain and possibly accelerate their momentum through 2013. We see changes in key housing metrics driving further upside that includes inventory levels, pricing and household formation.       

 

3) #QuadrillYen:

With the recent election of prime minster Shinzo Abe and his appointment of Taro Aso as finance minster, Japan looks to dominate the macroeconomic news flow out of Asia in Q1 as it pursues a variety of unconventional monetary and fiscal policies. Still our favorite short in all of Global Macro, we believe the yen will continue its descent vis-a-vis the U.S. dollar and the euro, imposing a variety of spillover risks for Japanese and international financial markets. 

 


Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. A link to the presentation will be distributed before the call, if you have any further questions email .

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 292394#

 


EARNINGS: A Look Ahead

#EarningsSlowing is one of the themes we closed 2012 out with, coinciding with #GrowthSlowing. With growth now stabilizing and several facets of the economy recovering, we’re taking a look at how 2013 is shaping up from an earnings perspective.  Right now, the consensus is that the next four quarters should show modest top-line comp acceleration on a year-over-year basis through 2013; there is headroom for revenue beats should economic activity & real growth accelerate. EPS comps should mirror that of top-line comps with the exception that on a two-year basis, consensus expects flat growth thru 3Q13.

 

 

EARNINGS: A Look Ahead  - SPX Comps   Estimates normal

 

 

One should consider that management using the fiscal cliff and Hurricane Sandy as an excuse if results disappoint for 4Q12. With the February debt ceiling negotiations adding an air of uncertainty to the earnings season, management will also be able to low-ball estimates and offer conservative guidance. The first quarter of 2013 faces a particularly tough comp stemming from favorable weather in 1Q12 and in terms of working days due to Leap Year & the Easter shift.  For those companies levered to weekday traffic/volume, working days shift to a small tailwind in 2Q/3Q13.

 

EARNINGS: A Look Ahead  - SPX EPS Comps   Estimates normal


COH: It's Looking Ugly

We added Coach (COH) to our Real-Time Alerts this week on the short side. The intermediate-term outlook remains bearish for us and for several reasons. Revenue is decelerating and the cost of growth is rising at Coach. Growth is dependent on the new ‘Legacy’ launch, its new men’s line and China. With the sell-side becoming increasingly bearish on the stock over the last five months, it’s hard to find positives in a room full of negatives with COH. 

 

Our 9-point duration screen posted below shows what we think of Coach from a revenue, margin and cash flow perspective over our three durations: TRADE, TREND and TAIL. While COH looks cheap relative to history at current levels – the reality is that valuation is not a catalyst.

 

COH: It's Looking Ugly - coach1


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GLOBAL GROWTH STABILIZES SOME MORE

Takeaway: Both our fundamental RESEARCH and quantitative RISK MANAGEMENT signals support our #GrowthStabilizing theme.

SUMMARY BULLETS:

 

  • Both our fundamental RESEARCH and quantitative RISK MANAGEMENT signals support being increasingly allocated to equities in lieu of Gold and Treasuries.
  • Turning to some key economic indicators, we’re seeing this potential GROWTH pickup confirmed across a large swath of PMI readings (we track 31 in total across both the Services and Manufacturing sectors) and a global uptick in manufacturing activity in the month of DEC.
  • Financial market indicators are singling #GrowthStabilizing as well. In recent Early Looks, Keith has been vocal about the multitude of bullish quantitative RISK MANAGEMENT signals he’s been receiving from various asset classes – particularly Bullish Formations across a variety of global equity indices and bearish breakdowns in assets like Gold and US Treasury bonds.
  • Additional financial market indicators, like sovereign 10YR-2YR spreads – which we view as key leading indicators for GROWTH across most developed markets – confirm the fundamental signals as well. US, German, Chinese and Japanese nominal yield curves are all widening relative to their late-NOV/early-DEC lows.
  • All that being said, we continue to hold the view that global GROWTH is indeed on the mend, but not necessarily returning to prior peak rates of economic activity that we’ve seen on a trailing three-to-five year basis – at least not in the near term. This signal is being confirmed by similar moves and relative levels across other financial market indicators from around the world, such as China’s rebar and iron ore markets.
  • Moreover, measures of implied volatility are indeed at dangerous levels from a forward-looking perspective as it relates to various macro markets and global economic data is likely to have an increasingly difficult time surprising to the upside as it has in recent weeks.
  • So what does one do with all of this? Quite simply, we find it prudent for investors to continue to fight the urge to sell and/or get short for contrarian’s sake at the current juncture. As we mentioned before, the data isn’t great, but data that’s better-than-bad should continue to provide a floor under market prices of various “risk assets” – for now.

 

As part of our rigorous fundamental RESEARCH process, we track literally hundreds of economic and financial market indicators across four key economic blocs globally: US/Canada, Europe, Asia Pacific and Latin America. Moreover, we model the GROWTH and INFLATION statistics from dozens of countries with a predictive tracking algorithm that backtests in the 82-89% range, depending on the data set.

 

The vast majority of the time, nothing really jumps off the pages of our notebooks, nor is it actionable or critical enough to write a research note about. Over time however, we are able to form a unique perspective of broader trends – particularly as it relates to global GROWTH, INFLATION and POLICY, which we find the confluence of the three to be the key driver of asset class rotations. Right now, that process continues to confirm our overarching conclusion of #GrowthStabilizing.

 

Turning to some key economic indicators, we’re seeing this GROWTH pickup confirmed across a large swath of PMI readings (we track 31 in total across both the Services and Manufacturing sectors). For the month of DEC, the median PMI reading came in at 50.7; while down from the 51.4 reading we saw in NOV, this amalgamated metric still falls above the 50 level designed to diffuse sequential expansions from contractions.

 

GLOBAL GROWTH STABILIZES SOME MORE - 1

 

Broadly speaking, the service sector continues to outperform manufacturing, as it has done since mid-2011. We hold the view that this is largely a function of the decline in commodity prices over that period (commodity-related CapEx declines layered on top of a consumption tailwind). Still we are encouraged to see the global Manufacturing PMI resurface above 50 for the first time since MAY ’12.

 

GLOBAL GROWTH STABILIZES SOME MORE - 2

 

Recall that our 12/7 note titled, “AMID RECESSION FEARS, COULD GLOBAL GROWTH SURPRISE TO THE UPSIDE OVER THE INTERMEDIATE TERM?” introduced a lot of these same fundamental RESEARCH signals. Flagging critical deltas – large or small – in real-time is something we always strive to do as part of our process.

 

Moving along, financial market indicators are singling #GrowthStabilizing as well. In recent Early Looks, Keith has been vocal about the multitude of bullish quantitative RISK MANAGEMENT signals he’s been receiving from various asset classes – particularly Bullish Formations across a variety of global equity indices and bearish breakdowns in assets like Gold and US Treasury bonds.

 

Additional financial market indicators, like sovereign 10YR-2YR spreads – which we view as key leading indicators for GROWTH across most developed markets – confirm the fundamental signals as well. US, German, Chinese and Japanese nominal yield curves are all widening relative to their late-NOV/early-DEC lows.

 

GLOBAL GROWTH STABILIZES SOME MORE - 3

 

Note that each spread is well shy of prior peaks – a clear signal in our model that global GROWTH is indeed on the mend, but not necessarily returning to prior peak rates of economic activity that we’ve seen on a trailing three-to-five year basis – at least not in the near term. This signal is being confirmed by similar moves and relative levels across other financial market indicators from around the world, such as China’s rebar and iron ore markets.

 

GLOBAL GROWTH STABILIZES SOME MORE - 4

 

Moreover, measures of implied volatility are indeed signaling broad-based investor complacency, suggesting that spot prices of downside protection are at dangerous levels from a forward-looking perspective as it relates to various macro markets. Recall that the last time we were getting loud about this was back on MAR 29th (“DEFINING ASYMMETRY: INVESTOR COMPLACENCY AT MULTI-YEAR LOWS”); the S&P 500 Index (as a rough proxy for “risk assets” – whatever that implies) corrected almost -10% from its APR 2nd cycle peak to its JUN 1st cycle lows shortly after the publication of our note.

 

GLOBAL GROWTH STABILIZES SOME MORE - 5

 

Additionally, global economic data is likely to have an increasingly difficult time surprising to the upside as it has in recent weeks.

 

GLOBAL GROWTH STABILIZES SOME MORE - 6

 

So what does one do with all of this? Quite simply, we find it prudent for investors to continue to fight the urge to sell and/or get short for contrarian’s sake at the current juncture. As we mentioned before, the data isn’t great, but data that’s better-than-bad should continue to provide a floor under market prices of various “risk assets” – for now.

 

At a different TIME and PRICE from today, however, that will certainly change – most likely ahead of the late-FEB debt ceiling showdown. There’s a lot SPACE between now and then for investors to underperform, however. The last thing you’d want to do here is ignore the fundamental RESEARCH and quantitative RISK MANAGEMENT signals by shorting this market – which could conceivably force people to cover higher, potentially just shy of all-time highs (US equities).

 

Alas, timing remains a critical input is this game we play – especially when all of the signals aren’t necessarily singing the same song at the same time.

 

Darius Dale

Senior Analyst


Looking at ADM through Cargill

This morning, privately held Cargill reported fiscal 2013 second quarter results – net earnings of $409 million versus $100 million a year ago.  The earnings gains appeared to be broad-based across the company’s operating segments.  Cargill’s business is broadly comparable to ADM’s in a number of segments and can provide some directional guidance with respect to business trends.

 

For example, the company called out North American farm services where Cargill was helped by large grain shipments in Canada but continued to feel the lingering effects of the drought and reduced crops in the Midwest (known issue for ADM).    Cargill also did call out excess capacity in the North American ethanol market (again, known for ADM) but did mention the “return of profits in some product lines to more normalized levels” in the company’s food ingredient business.  Finally, the company mentioned that an “improved margin environment in oilseed processing in several regions boosted earnings well above the year-ago level.”

 

While it is difficult to make specific comparisons given the lack of visibility in Cargill’s business, the magnitude of the earnings increase reported today is, at least, marginally comforting with respect to ADM’s upcoming earnings report  (February 5th).

 

The issues highlighted by Cargill are well documented with respect to ADM.  Both segments for ADM 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.

 

Given the valuation relative to historical norms, the risk/reward makes sense to us as we look out over the prospects for the 2013 crop year and likely planting decisions by farmers.

 

-Rob

 

Looking at ADM through Cargill - ADM price to book

 

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

 

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CONTEXT AROUND RECENT POLICY DEVELOPMENTS IN JAPAN

Takeaway: Japanese policymakers continue to attack the yen, both rhetorically and with incremental POLICY maneuvers.

SUMMARY CONCLUSIONS:

 

  • In the week-to-date, Japan has certainly made a lot of noteworthy headlines – particularly on the POLICY front. In the note below, we highlight these recent developments with the intent of providing both historic context and future implications for Japanese and global financial markets.
  • Specifically, it is reasonable to anticipate that the pace of yen declines is likely to slow post the JAN 21-22 BOJ meeting, only to resume accelerated losses ahead of the changing of the guard atop the BOJ board in mid-to-late MAR (out with deputy governors Hirohide Yamaguchi and Kiyohiko Nishimura)/early-APR (out with Governor Shirakawa).
  • While we continue to view incremental monetary Policies To Inflate and expansionary fiscal POLICY as reflationary for Japanese equities and supportive of regional sentiment in the near term (Japan is the 2nd largest economy in Asia, where roughly two-thirds of all trade is intra-regional), over the long term we continue to see material risk of a Japanese currency and sovereign debt crisis borne out of those same policies.

 

NEW STIMULUS MEASURES

On Monday, it was reported that the Diet is preparing a ¥12 trillion supplementary budget for fiscal stimulus measures, with ¥5-6 trillion of that directed to public works projects. Additionally, the Finance Ministry will offer ¥100 billion of loans to help spur domestic R&D and an additional ¥70 billion fund to help Japanese companies finance overseas acquisitions.

 

Context & Implications:

 

  • As we outlined in our 12/26 note titled: “JAPAN TO LOOSEN FISCAL POLICY AS WELL”, Japan’s fiscal POLICY outlook is deteriorating rapidly as PM Shinzo Abe seeks to reflate the Japanese economy to capture more political goodwill for his LDP party ahead of the late-JUL Upper House elections.
  • This ¥12 trillion supplementary budget figure is in line with our estimates of > ¥10 trillion and will likely require ¥8-10 trillion in deficit-financing bond issuance, according to market chatter. That’s ok, though: Finance Minister Taro Aso reiterated his pledge to blow right through the ¥44 trillion debt issuance ceiling in the upcoming fiscal year. Piling debt upon debt upon debt will only accelerate Japan’s jumping of the ¥1 QUADRILLION debt outstanding shark.
  • That being said, however, we continue to anticipate Policies To Inflate to continue to drive the yen lower and Japanese equities higher over the intermediate term – at least until the bond market starts to price in a sustained phase change with regards to Japan’s INFLATION dynamics.
  • For more details on how we think Japan’s Keynesian experiment could end in a globally-destabilizing Japanese sovereign debt crisis, please refer to the following two notes:

 

BUYING ESM DEBT

On Tuesday, it was reported that Japan is planning to use its FX reserves to buy European Stability Mechanism debt to “help weaken the yen”, according the Finance Minister Taro Aso.

 

Context & Implications:

 

  • Japan, which has $1.2 trillion in FX reserves, has already purchased $9.2 billion of EFSF debt (6.7% of total issuance), so this pledge does little to move Japan in the direction of a bonnafide foreign asset purchase program.
  • Not to mention, because they are using FX reserves to make the purchases, it’s unlikely that this initiative alone will result in material weakness in the yen over the intermediate term. In fact, the only way ramping up allocations to ESM debt would systematically and sustainably weaken the yen is if Japanese policymakers instead used JPY-denominated domestic capital to make the purchases.
  • In light of this somewhat disappointing news, we are not surprised to the see the yen bounce ever-so-slightly from oversold levels in the week-to-date.
  • That said, however, we continue to anticipate that the BOJ will ultimately be forced to print yen to buy foreign currency-denominated assets; that’s what the market wants and is sniffing out.
  • From a timing perspective, that catalyst is likely several months away – likely after Shirakawa and his two deputy governors are replaced at the BOJ in mid-to-late APR.

 

REVIVING THE COUNCIL ON ECONOMIC AND FISCAL POLICY

Today, it was reported that the Council on Economic and Fiscal Policy will meet for the first time in four years. Previously abolished by the outgoing DPJ government – which tends to favor increased central bank independence and fiscal sobriety (i.e. they shun direct financing of public expenditures by the BOJ), on the margin – the Council on Economic and Fiscal Policy meetings will once again pool together Cabinet members (including Prime Minster Shinzo Abe), academics, business leaders and BOJ board members in a broad-based discussion of Japan’s POLICY objectives.  

 

Context & Implications:

 

  • Who needs to revise the 1998 BOJ Act – which created the BOJ’s independent POLICY-setting board – when one could just meet regularly to ensure the central bank’s POLICY objectives are aligned with those of the Diet leadership?
  • As such, we see limited risk for any legislative threat to BOJ independence with respect to the immediate-to-intermediate term. It should be much easier for Abe & Aso to exert political pressure upon the BOJ board in face-to-face meetings than it would be through political grandstanding, as they have been doing in recent months.
  • That being said, if the BOJ doesn’t revise its inflation target up to +2% at the JAN 21-22 meeting and introduce further easing measures (its current Asset Purchase Program and Lending Program total ¥101 trillion), we could see Abe throw down the gauntlet from a rhetorical perspective.
  • To the extent BOJ Governor Masaaki Shirakawa still believes a joint BOJ-Diet INFLATION target (de facto or de jure; the net result is the same) is not a good thing, he could be met halfway by adopting the aforementioned +2% INFLATION target while simultaneously instituting an indefinite timeframe with regards to achieving the goal.
  • Focusing on the markets, assuming some confluence of what we outlined above materializes in the coming weeks, it will be tough to see declines in the yen accelerate (i.e. break through the mid-to-low 90’s vs. the USD; break through the mid-to-low 120’s vs. the EUR) in the late-JAN through mid-MAR period on the strength of just fiscal POLICY and jawboning alone.
  • While we don’t necessarily view the following risk as probable at the current juncture, you could see the JPY pull back towards our TAIL line of ¥83.94 per USD before resuming further declines to lower-lows – particularly if we get any US Debt Ceiling-induced bout of global risk aversion.
  • What should really get Japan’s currency revved up again to the downside is the pending discussion of who’s going to replace Shirakawa and his two deputy governors atop the BOJ board. Judging by the last two appointees (Takahide Kiuchi and Takehiro Sato joined the board in mid-2012), the candidates will likely be of the view that the central bank needs to play a larger role in overcoming persistent deflation.
  • By contrast, Shirakawa has long held the view that the BOJ cannot achieve its inflation target on its own. At a business conference in JAN ‘10, he remarked: “A lack of demand was the root cause of deflation and there was no magic wand [to overcome it].”
  • If former BOJ deputy governor Kazumasa Iwata is indeed a legitimate candidate to succeed Shirakawa, he would be especially in favor of a foreign asset purchase program; he suggested in a JAN ‘12 interview that the finance minister should let the central bank create a ¥50 trillion (then $643 billion) bond-buying fund to combat the yen’s gains.
  • Toshiro Muto and Heizo Takenaka are also being rumored as candidates for the BOJ governorship in the early goings and both are also in favor of structurally more aggressive action out of the BOJ – which is exactly what we have been calling for since we outlined our bearish TREND and TAIL bias on the yen back on SEP 27 (“IDEA ALERT: SHORTING THE YEN AS SINO-JAPANESE TENSIONS ESCALATE”).

 

CONTEXT AROUND RECENT POLICY DEVELOPMENTS IN JAPAN - 1

 

Darius Dale

Senior Analyst


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