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PESOFICATION A’COMETH IN ARGENTINA?

Takeaway: We remain the bears on the Argentine peso and continue to see heightened risk of yet another Argentine sovereign debt default.

  • Argentina faces threat of expulsion from the IMF: The Argentine peso, which is down -20.6% since we outlined our bearish bias back on 11/4/10, continues to get Cristina Fernandez’d. If Argentina does become the first country permanently expelled from the IMF as indicated by the recent censure, we would expect to see Argentine sovereign debt default risk accelerate with the loss of at least $3.2B in emergency aid. This is something already being priced into CDS markets: the 5Y tenor is up +933bps/+66.4% MoM to 2,338bps wide.
  • Because of phony inflation statistics (USA?): What would turn the aforementioned censure into a full-fledged expulsion is a failure to appropriately address INDEC’s official CPI calculation, which has been under intense scrutiny for consistently underreporting inflation since 2007. For example, 2012’s “official” +10% YoY CPI reading compares with the estimates of leading private sector economists – many of whom having absorbed substantial fines – in the area code of +26% YoY.
  • Argentine gov’t vs. the market: This serial underreporting of inflation has cost holders of the country’s inflation-linked bonds ~$6.8B over the past 5yrs. On a 2yr basis, Argentine inflation-linked notes are down -31% vs. a +25% gain for Brazilian linkers and a +27% gain for Mexican linkers. There exists an opportunity for material upside in these illiquid securities if Argentina gets its act together under intense international pressure, but betting on a sane response from Cristina Fernandez is like betting on a Chicago Cubs World Series pennant – possible, but don’t hold your breath!
  • Another sovereign debt default on the horizon?: Absent a complete reversal of Argentine fiscal and monetary policy, continue to see heightened risk of yet another Argentine sovereign debt default over the long-term TAIL. Key catalysts on that front include: 1) The 2/27 US court ruling that will determine if Argentina must pay $1.3B to holdouts from its 2005 and 2010 restructurings; and 2) Continued popping of Bubble #3 (i.e. commodities, which should continue to make lower-highs as an asset class over the TREND and TAIL durations). The CRB Index remains bearish TAIL from a quantitative perspective.
  • Commodity deflation is a key catalyst: Regarding point #2 above, it’s important to note that investors in commodities hedge funds redeemed over 20% of their capital last year following the worst annual industry performance in over a decade (-3.7% in 2012 vs. -1.4% in 2011). We expect to see continued pressure on commodities as an asset class over the long term as investors who have failed to heed our warnings should continue to carry on varying degrees of forced sales amid redemptions. As we highlighted in our APR ’12 note titled, “ARGENTINA, IMPLODING”, what’s bad for commodities is really is really bad for the Argentine economy and its fiscal health.
  • Unsound fiscal policy ramps risk: Specifically, the central government has been relying on international reserves to service international debt since 2010 ($20B to-date and another planned $8B in 2013 as the gov’t ramps up spending ahead of OCT’s mid-term elections). With the EM universe’s highest interest rates of ~13%, this payment strategy has left Argentina with int’l reserves of only $42.6B, down -19% from a JAN ’11 high of $52.6B. USD-denominated deposits at Argentine banks have fallen to a 4yr low of $7.7B – down roughly 50% since Fernandez’s reelection in OCT ’11.
  • The Fernandez administration fears capital flight: To stem the tide of capital flight and preserve these now-sacred reserves, the Fernandez regime has nationalized corporate and pension fund entities (see: YPF saga), as well as implemented a series of incredibly punitive capital controls with some even resulting in imprisonment as a punishment for violation.
  • ...Which continues unabated: Argentinians – who ultimately fear a mass “pesofication” of their USD deposits and cash flow streams at the official USD/ARS exchange rate – continue to find clever ways to help their hard-earned capital escape the clutches of Fernandez & Co. The unofficial “blue-chip” swap rate (i.e. obtaining and selling USD-denominated securities for access to USD) has dropped -39% YoY to 7.6948 per USD; that decline compares to a far more modest -13.1% YoY depreciation of the official exchange rate.
  • Don’t fight the tape: It’s also worth noting that 3M NDF contracts are pricing in an additional -6.7% of declines and the 1Y contracts are pricing in an additional -26.6% of further downside from the latest spot price.
  • What to do from here?: Stay long the dollar-peso rate (i.e. short the ARS). For as long as Cristina Fernandez is running the show in Argentina, this should remain a high-conviction investment thesis.

 

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Darius Dale

Senior Analyst


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


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 80.33%
  • SHORT SIGNALS 78.51%

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


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.

 

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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.

 

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