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Overbought: SP500 Levels, Refreshed

Takeaway: Now is a good time to be booking gains in US equities as fundamental tailwinds and upside beta risk deteriorate on the margin.

Has the beta juice been squeezed dry for now? That’s certainly the appropriate question to be flagging here with domestic equities registering immediate-term TRADE overbought signals on our quantitative factoring.

 

For the SPX specifically, the key levels to watch are:

 

  • TRADE resistance = 1517
  • TRADE support = 1492
  • TREND support = 1442

 

In other words, book gains at 1517 and increase exposures at 1492. If the latter level is violated to the downside, there’s no real support to our intermediate-term TREND line of 1442. That would be a great price for those who may have missed some or all of this rally to get involved on the long side – assuming the fundamental research signals remain supportive.

 

To recap, those signals are: #GrowthStabilizing, #Housing’sHammer, investor rotation out of bond and gold funds, and a [welcomed] lack of headlines out of the Axis of Central Planning in Washington D.C. (White House/Congress/Federal Reserve).

 

For our latest deep-dive on these factors, please refer to our 2/5 note titled: “IS IT TIME TO HEDGE FOR A SELLOFF ACROSS “RISK ASSETS”?”. For our up-to-the-minute thoughts on the factors that have deteriorated since then and could lead to a modest correction in equities, please review our 2/7 note titled: “JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE?”.

 

All told, equities is still our favorite major asset class, but we certainly don’t like them at every price. With respect to the domestic equity market, now is a good time to be booking gains as fundamental tailwinds and upside beta risk deteriorate on the margin.

 

Darius Dale

Senior Analyst

 

Overbought: SP500 Levels, Refreshed - SPX


GMCR REALITY BITING

Green Mountain Coffee Roasters’ 1QFY13 earnings beat expectations but guidance and current trends continue to suggest a more competitive market place.

 

Green Mountain Coffee Roasters reported 1QFY13 EPS of $0.76, 9 cents ahead of the high-end of guidance, driven primarily by better gross margins.  Favorable green coffee costs, lower warranty expense, and lower sales returns accounted for +250 bps, +130 bps, and +100 bps, respectively. 

 

 

Outlook

 

The company’s guidance for FY13 is resetting the investment community’s expectations this morning as management guided below consensus.  Embedded in the company’s outlook is a forecast for brewer shipments to decline slightly in 2QFY13, while POS will continue to grow.  The company struck a cautious tone when discussing the growth outlook for the overall coffee and espresso maker category.  The increase in FY13 guidance seems entirely attributable to the 1Q beat with the outlook for the year remaining unchanged.

 

 

Demand

 

Consumer demand for K-Cups is an important component of the GMCR story.  Sales trends seem to be slightly weaker than what the Street has been expecting.  The new revenue guidance implies 2QFY13 K-Cup sales growth roughly in line with 1QFY13 levels despite a growing installed base.  Our concern is that attachment rates going forward as it seems that management has “stuffed the channel” recently and is betting that K-Cup sales pick up.  Management’s commentary on the inventory within the distribution channel was less-than-convincing.  We believe that management would have guided higher for revenues over the remainder of FY13 if there was true visibility on K-Cup sales going forward. 

 

 

Competitive Pressures Mounting

 

Some recent press items have stated that the competitive pressures on Green Mountain have been less-than-expected following the expiration of the company’s K-Cup patent.  Whatever expectations have been, the numbers have been less than encouraging.  1QFY13 POS volume growth was 26% while revenue from single serve packs grew 21%.  This negative price/mix number of -5% is an acceleration from the -3% price/mix figure of 4QFY12. 

 

 

New CEO Impressed

 

The new CEO, Brian Kelly, gave a good account of himself and the strength of his background in consumer products was apparent for all to hear.  He is only a couple of months into his new role so more time will be required to gauge his ability to right the GMCR ship.

 

 

Investigation and Litigation

 

There are several class action lawsuits ongoing and the SEC investigation into Green Mountain is yet to conclude.  Mentions of these issues were conspicuous in their absence from management commentary.  We believe there is some event risk as the company will be responding to litigation in late February and early March.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


Retail Sales: No EPS Upside, But Clearance Is Good

Takeaway: Comp w/o EPS = discounts. But that's better than being left with heavy inventories against the toughest (Spring) compares of the year.

If there’s one trend that is obvious to us with same store sales, it’s that while the department store put up blockbuster comps – all the major retailers in the double digits – we simply did not see any meaningful earnings guidance increase to speak of. Macy’s took up guidance by 3 cents…but on an 11.7% comp? Gap was about the same in percentage terms, but still only 2% on an 8% comp. Neither show anywhere near the kind of leverage we should be seeing if this was, in fact, a real consumer-driven upside.

 

What the lack of earnings shows us is that this was driven by promotional activity. The market's reaction today shows that this is the consensus view -- and it's right. Many companies commented that the first part of the month was stronger than the second, which supports the premise that post-holiday markdown activity and giftcard redemption drove sales. We don’t have a problem with this by any means, as the worst thing the retailers could be faced with is bloated inventories as we head into Spring. It looks like most of them ameliorated that potential issue.

 

In addition, the months of February and March were very strong last year, and the softline space is up against its toughest compares of the year this spring. The last thing they want is high inventories headed into that event. Clean is good. But we still need the consumer to show up for business.

 

 

One of the key charts that we think matters today relates to performance by price point. This month is the first time in three years that ‘Good, Better, Best’ has been inverted such that Kohl’s came in on top, then Macy’s, then JWN. People will ask the question as to whether this means that JCP is losing share. And the answer is ‘Yes’, they are. But we struggle to find anyone on the planet who does not know.

Retail Sales: No EPS Upside, But Clearance Is Good - GBB


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JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE?

Takeaway: A relatively uneventful week in the labor market as claims go down slightly. The NSA trend, however, appears more negative this week.

 

In the note below Josh Steiner provides an updated view on this morning’s claims data.  Summarily, while the seasonally adjusted numbers were largely uneventful WoW, the trend in the NSA figures is flashing some weakness

 

Independent of the claims data we would flag some further, emergent risks to a successful hand-off from #growthstabilizing to growth accelerating from here.  We caught the positive inflection in the slope of growth back in late November.  Currently, however, the quantitative and global macro factoring is suggesting the easy alpha may now be rearview – from here it gets a little more interesting. 

 

Quantitative Factoring:  For the 1st time in a while, our model is signaling lower highs for the SPX and higher lows for the VIX.   All 9 S&P Sectors have been Bullish Trade/Bullish Trend for 24 of the last 25 sessions – being perma-anything is generally not a winning long-term strategy, and the extended positive price action, alongside rising oil and a cresting in sentiment, has mean reversion risk percolating here in the more immediate term. 

 

Globally, the Bovespa and the KOSPI have both moved to Broken TRADE & TREND and the EuroStoxx50 is barely holding Trend support at 2615.  TREND line breakdowns are a new development and are not insignificant, particularly when the signal confirms over multiple days and multiple markets. 

 

Oil:  Huge headwind developing for global consumption #GrowthStabilizing with Brent Oil signaling higher-highs and higher lows on our intermediate-term TREND duration. If you need a reason to start selling some stocks and covering Treasury shorts, that’s it.

 

Sentiment: With both the Bull-Bear Spread & NYSE Margin Debt making new cycle highs thru January,  investor sentiment has moved towards the historical red flag region.

 

Seasonality:  The employment shock experienced during the great recession was captured as a seasonal factor, creating a statistical distortional in the government reported employment and econ data  persisting for five years (we're in year 4). The net effect of the distortion is that seasonal adjustments act as a tailwind to the SA labor market data from September – February, then reverse to a headwind over the March-August period.  What’s the date today, again?

 

Congress:  Congress remains the usual wild-card.  What we do know is they will again attempt to save us from a problem they, themselves, perpetuated.  The rhetoric and partisan acrimony will re-crescendo as we move through this month & beyond as congress seeks resolution to the fiscal policy trifecta of the Sequestration, Federal Budget, & the Debt Ceiling issues.  As an aside, total debt now stands at $16.44T as of 2/5; approximately $50B higher than the previous Statutory limit of $16.394T.   

 

As Keith highlighted this morning:  “good spot to sell some stocks & cover some Gold/bonds”

 

- HEDGEYE Macro

 

 

JOBLESS CLAIMS - ARE WE NEARING THE END OF THE LINE?

 

Initial claims continue to follow their predictable path of improvement through February, although this week's improvement was slightly more muted than expectations. To reiterate, there is another 3 weeks of improvement ahead, which will likely be followed by a ~1 month honeymoon period before the SA data starts to turn. Prior to revision, initial jobless claims fell 2k to 366k from 368k WoW, as the prior week's number was revised up by 3k to 371k. 

 

The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.5k WoW to 350.5k. The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -0.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -4.7%. This raises an interesting question about whether the payroll tax hike and high-earner tax rate changes are, in fact, having a negative impact on employment beneath the seasonal adjustment factors.

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 1

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 2

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 3

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 4

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 5

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 6

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 7

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 8

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 9

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 10

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 11

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 12

 

JOBLESS CLAIMS & #GrowthStabilizing - ARE WE NEARING THE END OF THE LINE? - JS 13

 

 

Joshua Steiner, CFA

 

 


JOBLESS CLAIMS: End Of The Line?

Jobless claims ticked down slightly by 5000 to 366,000 week-over-week, which was basically a non-event. Looking at the numbers on a seasonally-adjusted basis, however, it appears the labor market could be taking a turn for the worse. The 4-week rolling average of seasonally-adjusted claims fell -1.5k week-over-week to 350,500. The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -0.9% lower year-over-year, which is a sequential deterioration versus the previous week's year-over-year change of -4.7%. The payroll tax hike could in fact be having a negative effect on employment.

 

JOBLESS CLAIMS: End Of The Line? - 1 normal

 

JOBLESS CLAIMS: End Of The Line? - 2 normal

 

JOBLESS CLAIMS: End Of The Line? - 3 normal


PODCAST: Scary Stuff

 

On today’s Morning Investment Call for subscribers, CEO Keith McCullough discusses how frightening it is that the political class is capable of creating another financial disaster.

 

It’s scary to think that politicians can take credit for “saving us” from disaster when in reality, they’re quite capable of making it happen all over again. When we look at what the #OldWall media is saying, combined with our signals, things are looking bearish to us. 


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