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The Game Of Risk

Client Talking Points

Play The Hand You’re Dealt

The market is very much like a poker game at a casino: you have to play the hand you’re dealt. Monday and Tuesday of this week, we bought US equities. Yesterday, we sold ‘em. Today, we’ll follow the risk and the range combined with our fundamental research to make a decision on what we’re going to do. This recent bull market is so driven to continue going up and to the right that the Chicago PMI numbers out today may not even make a dent in the SPX. It’s important to keep an eye on other asset classes, too.

 

If bonds and gold keep declining and stocks keep going up, we’ve got the growth the market is looking for. Throw in $130 a barrel oil and now you have a problem as global consumption growth stalls. It all revolves around The People of this great country. If gas prices are $6 a gallon and bread and milk cost $10 combined at the grocery store, they will not be going out and buying shoes, iPhones and other goods.

Housing Recovery

We continue to see recovery in the housing market with data point after data point coming out each week that signals that the recovery is underway. Inventory is falling, prices are going up, people are taking out mortgages and buying homes; things are good. This recovery may soon trickle over to the regional banks who are involved with housing. Hedgeye Financials Sector Head Josh Steiner put out a note on TCF Financial (TCB) yesterday summed up by this:

 

"TCB remains a favorite long idea of ours on an ongoing housing recovery which is just starting to have a powerful influence on fundamentals."

 

Asset Allocation

CASH 56% US EQUITIES 10%
INTL EQUITIES 10% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“One theme I'm noticing in earnings this season... "performed well despite challenging times" has replaced hand-wringing.” -@HerbGreenberg

QUOTE OF THE DAY

“Physicists like to think that all you have to do is say, these are the conditions, now what happens next?” -Richard P. Feynman

STAT OF THE DAY

U.S. consumer spending rose 0.2% in December as incomes jumped 2.6%, most in eight years.


HLF: Expert Call Today @ 10:30

Takeaway: Today's conference call featuring multi-level marketing expert Dr. Jon M. Taylor will explore key topics surrounding HLF.


Call: Thursday, January 31, 2013 at 10:30am EST 


If you would like to receive the dial-in information for this call please email .



The Hedgeye Consumer Staples Team, led by Rob Campagnino, will be hosting an expert conference call entitled "An Expert's Opinion on Multi-Level Marketing, Pyramid Schemes and Herbalife" on Thursday, January 31st, at 10:30am EST featuring multi-level marketing expert Dr. Jon M. Taylor. 


KEY TOPICS WILL INCLUDE

  • What is a pyramid scheme?
  • Contextualizing Herbalife (HLF) and its peers within the history of multi-level marketing
  • What is the likelihood that the FTC will take significant action against HLF?
  • If in fact HLF is a pyramid scheme, as Ackman claims, how long can it continue its growth pattern before collapsing?

 

ABOUT DR. JON M. TAYLOR

Dr. Taylor has dedicated a majority of his career to researching multi-level marketing (MLM) and its impact on consumers. He has authored books and numerous analytical reports on profitability, viability, ethics and abuses of "product-based pyramid schemes" including The Network Marketing Game and The Case (for and) Against Multi-level Marketing. Through his research Dr. Taylor developed tools for evaluating MLMs and their profitability (or lack thereof).  


His Five-step Do-it-Yourself Evaluation of MLM Programs is an interactive program for visitors to his website - www.mlm-thteruth.com. His research has been confirmed by the analysis of over 400 MLMs and feedback from thousands of consumers. Dr. Taylor received an MBA degree from BYU and a Ph.D. in Applied Psychology from the University of Utah. He is currently President of the Consumer Awareness Institute and President of the Jon Taylor & Co., Inc.


Please contact to obtain the dial-in information for this call and a copy of the presentation, or to learn more about our research.

 

 

ABOUT ROB CAMPAGNINO
Rob has nearly 20 years experience in the industry and within the last 5 years on the buy side at some of the top hedge funds in the business, including Pioneerpath, Diamondback Capital, and Searock Capital. Prior, he was a senior equity analyst at Prudential Securities where he was consistently Institutional Investor ranked. Before Prudential he was at Sanford Bernstein as an equity research associate covering food, beverage, and retail. He began his career as a strategic consultant with PricewaterhouseCoopers. Rob has a MBA from Columbia and BA in Economics from Duke.



 


HLF: Expert Call Today @ 10:30am EST

Call: Thursday, January 31, 2013 at 10:30am EST 

 

If you would like to receive the dial-in information for this call please email .

 

The Hedgeye Consumer Staples Team, led by Rob Campagnino, will be hosting an expert conference call entitled "An Expert's Opinion on Multi-Level Marketing, Pyramid Schemes and Herbalife" on Thursday, January 31st, at 10:30am EST featuring multi-level marketing expert Dr. Jon M. Taylor. 

 

 

KEY TOPICS WILL INCLUDE

  • What is a pyramid scheme?
  • Contextualizing Herbalife (HLF) and its peers within the history of multi-level marketing
  • What is the likelihood that the FTC will take significant action against HLF?
  • If in fact HLF is a pyramid scheme, as Ackman claims, how long can it continue its growth pattern before collapsing?

 

ABOUT DR. JON M. TAYLOR

Dr. Taylor has dedicated a majority of his career to researching multi-level marketing (MLM) and its impact on consumers. He has authored books and numerous analytical reports on profitability, viability, ethics and abuses of "product-based pyramid schemes" including The Network Marketing Game and The Case (for and) Against Multi-level Marketing. Through his research Dr. Taylor developed tools for evaluating MLMs and their profitability (or lack thereof).  

 

His Five-step Do-it-Yourself Evaluation of MLM Programs is an interactive program for visitors to his website - www.mlm-thteruth.com. His research has been confirmed by the analysis of over 400 MLMs and feedback from thousands of consumers. Dr. Taylor received an MBA degree from BYU and a Ph.D. in Applied Psychology from the University of Utah. He is currently President of the Consumer Awareness Institute and President of the Jon Taylor & Co., Inc.



Please contact to obtain the dial-in information for this call and a copy of the presentation, or to learn more about our research.


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UA: Numbers Are Not What They Seem

Takeaway: Lower rev guidance plus lower SG&A on top of leadership chg does not fill us with confidence that UA will be smoking top line net yr.

Overall, a good print from UA with top line (+25%) and EBIT (+47.5%) both accelerating and beating expectations and EPS a penny ahead of consensus. The top line came in robust at face value – there’s no denying that. But after adjusting for retail gross-up it was slightly less impressive. That said, Gross Margins were weak – coming in -132bp vs last year, compared to guidance that they could be down at a rate nearing -100bp.

 

As an offset, SG&A grew at 13%, the slowest rate since 2Q09.  The reality is that guidance for the upcoming year is a tad light at +20-21% top line, and there was zero mention in the press release of the strategic issues that we think are looming in the footwear organization (evidenced by UA’s FW czar Gene McCarthy departing last week). If the company would have had a mor normalized SG&A rate, it would have missed by about a nickel. Perhaps there’s a great reason for that, which we’ll hear about on the 8:30 call. But given the lack of traction in FW, we’d rather see the company keep SG&A in the business in order to stimulate continued share gains.

 

Lower revenue guidance plus lower SG&A on top of leadership changes does not fill us with confidence that the company will be smoking top line estimates next year – something it will need to support its multiple.

 

Also, a little factoid to keep in mind as it relates to UA’s revenue… Given a $59mm sequential positive pop in direct-to-consumer revenue, we should juxtapose that against the -$69mm decline in aggregate revenue. We won’t penalize the company for going more direct. That’s the wave of the future. But booking retail revenue is optically more attractive than going wholesale. The way we look at it, if you ex out the retail gross up, there was no sequential uptick in revenue. In fact, it was down slightly.

 

One of the biggest positives was the improvement in inventories, which clocked in $5mm below last year despite a $100mm boost in revenue. A clean balance sheet is something UA needs right now. 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 31, 2013


As we look at today's setup for the S&P 500, the range is 16 points or 0.46% downside to 1495 and 0.60% upside to 1511.    

                                                                                                                           

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: 1.71 from 1.73
  • VIX  closed at 14.32 1 day percent change of 7.59%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: Challenger Job Cuts Y/y, Jan. (prior -22.1%)
  • 8:30am: Employment Cost Index, 4Q, est. 0.5% (prior 0.4%)
  • 8:30am: Personal Income, Dec., est. 0.8% (prior 0.6%)
  • 8:30am: Personal Spending, Dec., est. 0.3% (prior 0.4%)
  • 8:30am: Initial Jobless Claims, Jan. 26, est. 350k (prior 330k)
  • 9:00am: NAPM-Milwaukee, Jan., est. 52.0 (prior 52.2)
  • 9:45am: Chicago Purchasing, Jan., est. 50.5 (prior 50.0)
  • 9:45am: Bloomberg Consumer Comfort, Jan. 27 (prior -36.4)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2042 range

GOVERNMENT:

    • Senate in session
    • CFTC holds public roundtable on “futurization” of swaps market, 9:30am
    • SEC meets on federal securities rules, regulations affecting small businesses, 9:30am
    • FCC holds open commission meeting, 10:30am
    • Energy Secretary Steven Chu delivers keynote remarks on electric vehicles, Convention Center

WHAT TO WATCH

  • Facebook profit declines 79% on spending to lure advertisers
  • KKR, Apax said to team up for Vivendi’s GVT against DirecTV
  • Apollo chosen with Metropoulos as lead bidder for Hostess cakes
  • Paulson added to ACA Financial abacus suit against Goldman
  • Qualcomm forecasts profit, sales that top analysts’ ests.
  • Honda Motor cuts profit forecast on China, Europe sales drop
  • Shell misses profit ests., says investment costs to rise
  • Deutsche Bank posts $3b 4Q loss on costs
  • STMicroelectronics sees funding costs in chip venture exit
  • J&J’s Ekdahl says hips recalled because of unmet clinical needs
  • German Jan. unemployment unexpectedly declines
  • BOJ could add further easing if needed, Yamaguchi says
  • U.S. revisits AB InBev’s Modelo takeover plan, N.Y. Post says

EARNINGS:

    • Potash of Saskatchewan (POT CN) 6am, $0.57, preview
    • Enterprise Products Partners (EPD) 6am, $0.65
    • Time Warner Cable (TWC) 6am, $1.55, preview
    • Whirlpool (WHR) 6am, $2
    • Dunkin’ Brands Group (DNKN) 6am, $0.33
    • Aetna (AET) 6am, $0.94
    • Ball (BLL) 6am, $0.66
    • Thermo Fisher (TMO) 6am, $1.28, preview
    • Helmerich & Payne (HP) 6am, $1.29
    • PulteGroup (PHM) 6:30am, $0.31, preview
    • AutoNation (AN) 6:45am, $0.64
    • Dow Chemical Co/The (DOW) 6:55am, $0.34
    • Xcel Energy (XEL) 7am, $0.28
    • Viacom (VIAB) 7am, $0.90, preview
    • Zimmer Holdings (ZMH) 7am, $1.49, preview
    • Colgate-Palmolive Co (CL) 7am, $1.40, preview
    • Elizabeth Arden (RDEN) 7am, $1.64
    • Hershey Co/The (HSY) 7am, $0.76
    • Altria Group (MO) 7am, $0.55, preview
    • Nasdaq OMX Group (NDAQ) 7am, $0.61
    • Consol Energy (CNX) 7am, $0.23
    • Energizer Holdings (ENR) 7am, $2.15
    • Alliance Data Systems (ADS) 7am, $1.80
    • Pitney Bowes (PBI) 7am, $0.51
    • Hillshire Brands (HSH) 7am, $0.47
    • Penn National Gaming (PENN) 7am, $0.50
    • Under Armour (UA) 7am, $0.46
    • Occidental Petroleum (OXY) 7:30am, $1.66
    • Cameron International (CAM) 7:30am, $0.95
    • Mead Johnson Nutrition Co (MJN) 7:30am, $0.68
    • Invesco Ltd (IVZ) 7:30am, $0.47
    • Dominion Resources /VA (D) 7:30am, $0.69
    • AmeriGas Partners (APU) 7:30am, $1.01
    • Bemis Co (BMS) 7:30am, $0.50
    • United Parcel Service (UPS) 7:45am, $1.38, preview
    • Ryder System (R) 7:55am, $1.10
    • Royal Gold (RGLD) 8am, $0.43
    • Paccar (PCAR) 8am, $0.68
    • Blackstone Group (BX) 8am, $0.47
    • Sherwin-Williams (SHW) 8am, $1.16
    • Mastercard (MA) 8am, $4.80
    • Chubb (CB) 4pm, $(0.46)
    • Principal Financial Group (PFG) 4pm, $0.74
    • Fortune Brands Home & Security (FBHS) 4:01pm, $0.22
    • Wynn Resorts Ltd (WYNN) 4:01pm, $1.27
    • Bally Technologies (BYI) 4:01pm, $0.76
    • PMC - Sierra (PMCS) 4:04pm, $0.10
    • CR Bard (BCR) 4:05pm, $1.67
    • NetSuite (N) 4:05pm, $0.04
    • PerkinElmer (PKI) 4:05pm, $0.65
    • McKesson (MCK) 4:10pm, $1.63
    • Essex Property Trust (ESS) 4:12pm, $1.73
    • Validus Holdings Ltd (VR) 4:15pm, $(1.70)
    • Camden Property Trust (CPT) 4:15pm, $0.96
    • Manitowoc (MTW) 4:30pm, $0.24
    • Eastman Chemical (EMN) 5:01pm, $1.19

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Oil Trades Near Four-Month High as Fed Maintains Asset Buying
  • Rubber Extending Bull Market With Record Car Sales: Commodities
  • Soybeans Drop as Brazil’s Harvest Seen Proceeding Amid Rainfall
  • Copper Reaches Three-Month High as Fed Maintains Asset Purchases
  • Cotton Futures Decline in N.Y., Head for First Drop This Week
  • Gold Drops in New York as Metal Subject to ‘Opportunistic’ Sales
  • Palm Oil Surges to Three-Month High as Stockpiles Seen Falling
  • CME Retreat on Grain Hours Welcomed by Traders Who Need to Sleep
  • Rebar Gains for Second Month on Optimism for China Growth
  • India May Consider Ending Four-Decade Old Curbs on Sugar Mills
  • Silver Wheaton Attracts Capital-Hungry Miners: Corporate Canada
  • Polysilicon Seen Rebounding as China Plans Import Duties: Energy
  • U.K. Gas Stations Fairly Reflect Crude Prices: Chart of the Day
  • Robusta Coffee Gains to One-Week High on Stockpiles; Cocoa Rises

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS

 

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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