Rye and Coke

This note was originally published at 8am on December 28, 2012 for Hedgeye subscribers.

“An intelligent man is sometimes forced to be drunk to spend time with his fools.”

-Ernest Hemingway

 

In my homeland of the vast plains of Alberta, the drink of choice for many is Rye Whiskey and Coke.  Now normally, I wouldn’t start the Early Look discussing beverages of choices, but given what has been going on in Washington, D.C. over the last few months, what choice do any of us really have but to have a few cocktails to make ourselves feel better? Or, to Hemingway’s point, to enable us to at least suffer this political foolishness.

 

Now on one hand, I do give President Obama some credit for leaving the golf links early and coming back to work.  In reality, though, does anyone really believe that a last minute meeting tonight with Congressional leaders is going to solve either the fiscal cliff or the coming debt ceiling violation?  Personally, I hate to be consensus on this, but I sure don’t.  Currently InTrade has the probability of the debt ceiling being raised before December 31st, 2012 at 17%.

 

The issue currently in Washington is that Democrats and Republicans don’t agree with each other.  Ok, that’s not really a new issue, but heading into the deadline of December 31st neither side is acting like they want to work together and get a deal done.  This excerpt from a news article quoting House Minority Whip Steny Hoyer about sums up how divisive things are in the nation’s capital:

 

“In a sign of just how charged and hyperbolic this year-end debate has become, House Minority Whip Steny H. Hoyer, D-Md., used an unfortunately timed comparison that likened Republicans trying to use the debt limit for leverage on spending cuts to people threatening to shoot their own children.

 

It is somewhat like taking your child hostage and saying to somebody else, ‘I’m going to shoot my child unless you do what I want done.’ You don’t want to shoot your child,” Hoyer said at a press conference following a brief 10-minute pro forma session for the House.”

 

Obviously the timing of this quip was bad on many levels, but the reality is that this is obviously no way to set the table for some sort of grand bargain in today’s meeting with President Obama and the Congressional leadership.

 

So unfortunately heading into 2013, I hate to report but it is likely that politicians and policy continue to inform much of our investment decision making.  That is not to say that everything is negative of course.  In fact, in the Chart of the Day today I’ve borrowed a chart from our Financials Sector Head on the recently released Case-Schiller Housing Price Index. As the chart shows, the last five months (ending with October 2012) have seen consistent year-over-year national home price increases.  In the last couple of Early Looks I’ve been beating this like a dead horse, but this is a real positive for the U.S. economy and consumer.

 

Unfortunately, a home price recovery will only get us so far as yesterday’s consumer confidence number tells us.   This reading for December came in at 65.1 versus the 70.0 that was expected and the 71.5 reading in November.  So it seems that the uncertainty relating to the fiscal outlook in the United States has likely had an impact, as expected, on consumer confidence.

 

Given that, the looming Longshoreman strike that looks likely to occur could not be happening at a more inopportune time.  This looming strike will impact 14 major East Coast and Gulf Coast ports. In aggregate, these ports move more than 100 million tones of goods every year, which is about 40% of the nation’s containerized cargo.  So even a shut down of a few days is likely to have a meaningful effect on the economy.

 

In cheerier news, it is starting to look like the bottoming process in China is taking place.  In terms of commodities, both rebar and iron ore have had very strong quarters of price appreciation.  On the back of this, the Shanghai composite was up more than 1% over night to close at its highest level since the summer.  Once again, this plays into our theme of global growth stabilizing.

 

In lieu of regularly scheduled macro call this morning, we are going to have our Financials, Industrials and Consumer Staples Sector Heads join the morning call and discuss their top ideas and themes heading into 2013 (if you are not subscribing to receive the morning call service, email sales@hedgeye.com for details on how to gain access).  Since I’m the Director of Research at Hedgeye, I’ll take some liberty and highlight what I think are each sector’s top idea long ideas. In my view, they are as follows:

 

1.   Financials – TCF Financial (ticker: TCB) is a play on housing which is improving, is growing both loans and deposits at a healthy clip, and has a CEO who is older than average which may make it ripe for a takeout.  On a reasonable multiple of price-to-tangible-book, we think the stock has 25% upside over the next twelve months.

 

2.   Industrials – Paccar (ticker: PCAR) has been one of our key names since launching Industrials coverage earlier this year.  A key tenet of the thesis is struggles at key competitor Navistar, which were reaffirmed to us this week (over the last year Navistar’s class 8 market share has been cut in half).

 

3.   Consumer Staples – Archer Daniels Midland (ticker: ADM) is a name that we highlighted in our Consumers Staples launch a few weeks back.  High corn price negatively impacted ADM in 2012, but an increase in corn plantings in 2013 should be a beneficial tailwind to ADM.  At just around 1.0x price-to-tangible-book, ADM is trading at a serious discount to its 1.2 average on this metric.

 

On a closing note, please enjoy the New Year with your friends and loved ones.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1636-1671, $109.42-111.48, $3.51-3.61, $79.21-79.99, $1.31-1.33, 1.70-1.78%, and 1408-1430, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Rye and Coke - Chart of the Day

 

Rye and Coke - Virtual Portfolio


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