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Ya EURO – Busta Move!

The EUR/USD has put on a nice move of +3.4% YTD and is up +10.3% since Draghi issued his all hands on deck to save the common currency (via the  introduction of the OMT bond purchasing program) in early August 2012. This conviction in the EURO is expressed well by looking at CFTC contracts of net positions in the EUR/USD (1st chart below). Coming off a net short bottom last summer, contracts are decidedly now net long in the new year -- seemingly there has been a lot of firepower behind the possibility that Draghi could use the OMT!

 

In the second chart below we update our quantitative risk levels for the EUR/USD, with topside immediate term TRADE resistance at $1.37 and intermediate term TREND support at $1.31. Our call remains to trade the range and it’s worth noting that there’s a pretty light formal calendar ahead.

 

What to watch for:

  • ECB Meets: Thursday the ECB’s governing council convenes. We expect no change to the main interest rates. This position is grounded in recent data that is supportive of an “accommodative” hand’s off approach from Draghi – CPI came down 20bps to 2.0% Y/Y in JAN, exactly at the ECB’s targeted level; PMIs across the region looked broadly better, and importantly showed improvement in the Eurozone average and in Germany; and while the unemployment rate remains nominally high (10.7%), it saw no increase in the DEC reading. We think investors are beginning to price in much of the bad ‘crisis’ news, in that case what’s left in play is a long runway of slow, low growth, and unexpected sovereign/banking flair-ups across the periphery.
  • Italian Election February 24-25: we expect to see much political uncertainty heading into the general election which may influence the EUR/USD. The largest and most recent scandal to shake political posturing ahead of the vote involves a 3.9B EUR government bailout to one of Italy’s oldest banks, Monte dei Paschi di Siena, due to derivatives deals gone wrong. The scandal has been a polarizing force because the commoner still feels badly hit by austerity measures while banks are seen as getting free handouts. As it turns out the bank is closely aligned and supported by the Democratic Party, and now you have the leading center left candidate, Pier Luigi Bersani, insisting that his party bears no responsibility, and blaming Mario Monti, the head of a centrist coalition of small parties, for the bank largess. Yet it’s likely the support of Monti’s side that Bersani needs to establish a coalition as his faction can’t win an outright majority. The result is that the scandal has helped boost former PM Berlusconi’s right-of-center Freedom Party, and therein fueled more uncertainty on how a coalition government will be formed.

 

Ya EURO – Busta Move! - yy. cftc

 

Ya EURO – Busta Move! - yy. eur

 

Ya EURO – Busta Move! - yy. pmi manuf


How We Are Thinking About Next Week's Earnings

Heading into a busy EPS week (again) we offer the following quick views on how we would be positioned into and following next week’s EPS results. Most of these comments represent shorter duration ideas or simply an indication that we don’t see anything to do in the short-term.  We know these comments aren’t for everyone, but in addition to shorter duration ideas we have taken the opportunity to discuss some long-term views that are (hopefully) of interest to shareholders with a longer duration.

 

Since nothing in staples (or the market) goes down for long (see our short CL call and today's "follow through"), we have looked hard for places where investors can generate some alpha on the short side - where we see risk to the multiple or EPS or both.  The two next week that we have are admittedly lower conviction - LO and CHD, but if you have to be short something....



February 4th



CLX – We would be short this name if we had a clear view on EPS weakness this quarter (we don’t).  The multiple (18.4x ’13) doesn’t make sense to us when we look at it in terms of the company’s long-term top line and EPS growth profile.  We have a $0.01 beat for the quarter.



February 5th



HAIN – Business momentum remains intact but we would prefer to own BNNY at the right price rather than the aggregation of tail brands and subpar management that is HAIN.



EL – This one is a little tricky.  We have a high multiple (24x ’13), a deceleration in constant currency organic growth in the last quarter and some conflicting laterals (RDEN/bad, Shiseido/bad, and LVMH/good).  LVMH is the best lateral in our view, so we think the top line will be fine (+7%).  We don’t have to do anything so we won’t do anything.



CHD – This is another name that we want to be short, except in this case we would take in a small short position.  The multiple is aggressive (20.8x ’13) and we see some risk to 2013 numbers based on what PG is saying and doing, so our view is take a small short in and stick with it.



K – Valuation is as reasonable as you will find in staples, 15.8x, and we see upside to this quarter’s result.  Guidance should encompass consensus, so we think you can be long for the print.



ADM – We like the name here, but no clear view on EPS.  Modeling out the quarters is probably better done by rolling chicken bones that using Excel, but any weakness associated with the quarter is an opportunity.  For the record, we do have a model, and we are $0.04 below consensus.



February 6th



SMG – No view into quarter as it is a seasonally unimportant quarter.  The fun starts when spring starts.



February 7th



CCE – We just heard from the company back in December, so little risk to numbers.  Fine to own, quarter won’t likely be a catalyst in either direction.



PM – This is another tough one as we remain below consensus for 2013.  However, the multiple (15.2x) versus the top line growth rate is compelling versus other staples names.  Recent move in the Euro helps, recent move in the Yen hurts.  Until we can see a clearer path to EPS upside, we will trade from the short side.



IFF – Volume trends from PG and Unilever are constructive, multiple is not (17.7x). Do nothing.



KRFT – We like the management and margin opportunity story here, but we like it lower.  Risk/reward range in the short term is $44 – $52; at $47 we do nothing.



February 8th



RAI – Our view is to trade the domestic tobacco names from the short side, but since we are modeling a small $0.02 beat by RAI in Q4 and the growth rate in 2013 (6%) seems reasonable, we will watch the print.



LO – We see some risk to Q4 consensus EPS of $0.76, so we can abide by a small short position.



BG – This is the same theme as ADM (global agricultural play) but with a better view on EPS, fine to own into Q and fine to buy on weakness.



Have a good weekend and be careful out there.



Call with questions,

 

Rob


Hedgeye In The News

Hedgeye In The News for the week ending February 1, 2013:

 

The latest gaming revenue figures from Macau seem to indicate that the feared ban on smoking... (via Seeking Alpha)

 

First 3 tasks for Mary Jo White at the SEC (via Fortune)

 

Hedgeye report questions if Herbalife (HLF) is a pyramid scheme (via Ransquawk)

 

Beef price spike makes $1 McDouble harder to stomach (via Chicago Tribune)


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%

ILMN: Time To Like This Stock?

Takeaway: Illumina (ILMN) stands to benefit as changes in funding and successful treatments revolutionize cancer research.

Illumina (ILMN) is a leading maker of sophisticated genetic screening equipment.  After reaching nearly $80 a share in 2011, the stock fell to a low of $37.77 this year.  We have been negative on the stock for some time, but a new environment may provide a lift as ILMN’s diagnostic systems emerge as possible leaders in key areas of cancer research.  

 

Today our Health Care sector head, Tom Tobin, hosted a conference call for our institutional clients with Dr. Gary Palmer of Foundation Medicine , a private company at the forefront of transforming cancer care using genomic screening to analyze how cancers develop.  Cancer specialists say the use of genomics screening is fast becoming the diagnostic approach of choice and Foundation Medicine is the go-to lab to perform the analysis.  This is important for doctors wishing to get their patients enrolled in clinical trials, and for practitioners testing off-label uses for approved treatments.  Of particular interest for our ILMN thesis, Foundation uses ILMN diagnostic equipment for its genomic screening.

 

Foundation Medicine and Cancer Treatment

Dr. Palmer walked us through Foundation’s genomic testing process.  Genomic testing is revolutionizing cancer treatment, because researchers have found that gene mutations correspond to broad varieties of cancers that were previously believed to be unrelated.  By approaching the disease from the genomics level, Foundation has helped doctors achieve startling results – Dr. Palmer cited breast cancer patients who were described as going from “hospice care to objective remission.”  While these treatments are still in early stages, it is clear that the genomic screening is a revolutionary diagnostic tool with the potential to dramatically advance cure rates.

 

The American Cancer Society reports over 12 million Americans have some history of cancer, and over 1.6 million new cases will be reported annually.  With over 1,500 Americans projected to die of cancer every day, the disease is the number 2 killer of Americans – but most Americans fear “the C-Word” more than any other health threat.

 

Foundation Medicine believes that genomics screening can dramatically accelerate the process of identifying effective treatments.  Dr. Palmer went so far as to say the targeted treatments arising from Foundation’s screening results are forcing a Paradigm Shift in the way cancer is treated.  Genomics screening has been able to identify up to 70% or more treatable cancers than are found with existing testing procedures.  Their ultimate goal, says Dr. Palmer, is to turn cancer from a life-threatening critical illness, into a chronic condition that can be managed using targeted therapies, similar to the model of long-term HIV treatment.  

 

Foundation is in conversation with a number of insurance providers and third-party payers.  Insurers have not yet embraced genomics testing as the diagnostic of choice, but Dr. Palmer says they are aware of the dramatically higher effectiveness and reduced cost of this approach.  It is not clear how many case studies will have to be presented before the insurers accept genomic screening as a diagnostic of choice, but Dr. Palmer believes this is inevitable.  

 

What does this mean for ILMN?

In our conversations with cancer researchers we have heard a distinct shift in tone.  Researchers used to speak of dramatic advances in cancer therapy that they could see “in the next five years.”  Now they are saying these advances are happening “now.”  This is critical to our thesis on the stock.  In 2010-2011, the academic community was in the grip of doom and gloom, as funding for genomic research from the National Institutes of Health, and demand for ILMN equipment, had gone into a steep decline but there was little offset from clinical applications such as Foundation’s.  Health Care sector head Tobin says his team’s analysis of current trends in NIH funding shows Illumina is getting a second wind as volume and dollars geared to ILMN’s products appears to be reaccelerating.  Foundation Medicine appears to indicate growth from clinical applications will be additive to ILMN’s growth among academics.

 

NIH awards appear not to be affected by the talk over sequestration and the Fiscal Cliff in recent months, although the risk of Sequestration remains.  Says Tobin, “This is in contrast to the 2011 debate that caused a substantial slowdown in awards.”  Sequestration may be a risk, but NIH appears to be largely ignoring the risk.

 

ILMN stock

ILMN is a mid-cap stock, with a market capitalization of over $ 6 billion, and average daily trading volume of about 1.6 million shares (source: Yahoo! Finance.)  Recently it has built up a short position of about 25% of the outstanding shares, creating the possibility of a Short Squeeze.  While the stock has a relatively low Beta of 0.77 (meaning that 77% of the action of the stock price is attributable to tracking the broad market averages – 23% of the price action is attributable to other factors, such as news coming out about grant funding, successful clinical trials emerging from diagnostics using ILMN equipment and the like) the high level of short interest means there could be a sharp upward reaction if a solid piece of good news comes out.  At the same time, we can not rule out continued volatility in the shares until meaningful news emerges.

 

Conclusion

Tobin considers ILMN an attractive stock with potential for a sound recovery over the intermediate to longer term.    

Dr. Palmer was very upbeat on the outlook for genomics testing as the new wave of cancer research.  The idea of moving from a long process of uncoordinated and expensive tests, to a single screen that identifies a broad range of threats and potential treatments, is a very exciting prospect.  The term “Paradigm Shift” is certainly appropriate.  We see the possibility of important news from a number of potential sources: greater adoption of ILMN equipment as new companies enter the genomics testing space; greater acceptance of genomics testing as the preferred diagnostic, leading to successful treatments; and acceptance by third-party payers, which would establish genomics testing as a preferred approach.  In all these scenarios ILMN has the potential to be a sought-after provider as the space grows.  Finally, the projected stability of government research funding brings all these outcomes closer to possible realization, as it provides ongoing resources carry through to the next breakthrough.


DOW 14,000: WHAT NEXT?

The Dow Jones Industrial Average hitting 14,000 has a lot of amateur and retail investors excited. However, the Dow hitting 14k is largely a symbolic event and nothing more. Stocks are still in a bullish formation as fund flows continue to shift into equities and our overbought signals are beginning to heat up a little with the S&P 500 above 1500. Many wonder how much higher can we go before a pullback or correction? We'll find out soon enough.

 

DOW 14,000: WHAT NEXT? - 5yearSTOCKS


VIDEO: Housing Takes Hold


The housing market has undergone a remarkable recovery over the last year as home prices increase, inventory falls and mortgage applications rise. The second theme of our Q1 2013 Global Macro Themes call is long housing (aka #HousingsHammer) and we're confident that recovery in the market will not be short-lived.

As a result of the positive recovery in housing, regional banks like TCF Financial (TCB) also stand to benefit from the improving nature of the market.


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