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Slippery Slopes

Client Talking Points

Slowing Growth

Since we transitioned from #GrowthSlowing to #GrowthStabilizing back in November/December, things have been relatively uneventful as the Dow hit 14,000 and the S&P 500 climbed to 1500. Now, with Brent crude oil approaching $118 a barrel, we have to worry about consumption slowing which in turn slows growth. People paying $5 to $6 a gallon for gas start pinching pennies instead of going out to Applebee’s every night for dinner. Oil is a big headwind for global growth and we’ll have to see what it does over the next week in order to asses what happens next.

Heads Or Tales

This morning we had the pleasure of waking up to the EuroStoxx 50 breaking down on both a TRADE and TREND basis. It’s clear that much like America, the European political class is intent on screwing things up. Draghi wants to “jawbone the Euro back down” as Keith put it this morning and do the opposite of what helped Germany’s economy recover. Currency does have a positive correlation to growth expectations believe it or not; just look at Japan.

Asset Allocation

CASH 55% US EQUITIES 10%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 5% INTL CURRENCIES 15%

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

“Final paper on the table. "It's the Final Countdown", as Europe would sing. #EUCO #MFF” -@alexstubb

QUOTE OF THE DAY

“I quit therapy because my analyst was trying to help me behind my back.” -Richard Lewis

STAT OF THE DAY

Canadian International Merchandise Trade (CAD) (Dec) -0.90bln vs. Exp. -1.45bln (Prev. -1.96bln, Rev. -1.67bln)


PM – Hard to Poke Holes in the Quarter

PM put up a solid print yesterday - here's what we liked



Constant currency organic revenue growth accelerated to 6.8% in the quarter versus a reasonably difficulty comparison (+8.2%) in the year ago.  Even better, we saw that top line strength leveraged into +12.3% currency-neutral operating income growth, an enviable result versus the balance of the consumer staples names that have reported thus far.  The company exceeded our volume estimate, posting volume growth of 2.7%, with strength in the Eastern Europe, Middle East and Africa region (+7.1%), as well as the Asia region (+5.7%)  – meaningful reacceleration of the volume momentum in both regions.



EPS exceed consensus by $0.02 in the quarter, but guided below consensus (range of $5.68 to $5.78) versus consensus of $5.79 (we are at $5.71, but still see some risk to that number as the yen continues its downward spiral.



We need to see consensus move down closer to our estimate (it should) given the company’s commentary yesterday in order for us to get more constructive on the name.  We prefer to have a positive bias on names with a clear path to EPS upside (CAG, for example).



Having said that, PM’s results in the quarter shame a number of other large cap staples names whose multiples exceed that of PM (in some cases by a 1 or 2 P/E turns).  If only PM shipped diapers instead of cigarettes…

 

Call with questions,

 

Rob

 


Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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P:



Matthew Hedrick

Senior Analyst



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Oh Snap

“I hated every minute of training, but I said, ‘Don’t quit. Suffer now and live the rest of your life as a champion.’”

-Muhammad Ali

 

Winning is never easy.  It requires early mornings and working hard.  That is true regardless of what your field of competition.  It may be producing research, it may be investing, it may be athletics, and so on.

 

Last night I joined the men of Ivy League Football for a few cocktails post the dinner they hold every two years.  Now I’m going to admit it, I definitely would have preferred to continue to sleep in this morning (so, yes, perhaps I had too many cocktails), but the only type of winning I understand is that which requires getting up and grinding. So here I am.

 

As usual when I get up, I’m greeted by a few emails from my colleague Keith McCullough regarding the global macro news and data flow.  The most notable one this morning related to the Stoxx 50, which is the “blue chip” index for Europe. (Think Dow Jones with a few more names.)  His email simply stated, “The Stoxx 50 snapped.”

 

For those of you that have been subscribers for awhile, you know that the price of securities and indices in our model are critical to determining future outlook.  When something snaps, that is not a good thing for those investors that are long of that market.  So, yes, as it relates to Europe, oh snap indeed.

 

Should any of us be surprised that the blue chip European index has snapped this week? Well, not really given that the European Union leaders were all convening in Brussels and that T.V. cameras were omnipresent.  In fact, according to the news releases this morning, they actually pulled an all-nighter last night.  I was out late with the boys from the grid iron, but I certainly didn’t pull an all-nighter, so kudos to them.

 

That said, the fundamental problem with politicians getting too much air time is that it is usually not great for equity returns.  Or, really, any asset price returns.  The funny thing about policy and policy makers is that they actually do influence markets and sometimes to a greater degree than they realize.  The perfect recent example of this phenomenon is the Japanese Finance Minister, Taro Aso.

 

Mr. Aso has been quite explicit since coming into office that he believes Japan needs to devalue and create inflation.  That is obviously all fine and good, until the market corrects more than said policy maker hopes.  As it relates to Mr. Aso and the Yen, it seems that has happened this morning.  According to this Aso:

 

“It seems that the government's policies have fueled expectations and the yen weakened more than we intended in the move to around 90 from 78.”

 

Markets are funny critters, aren’t they? They often do more than we expect.  (And sometimes less for that matter.)

 

This morning, there is a fair amount of pin action. As Keith also highlighted this morning:

 

“Plenty of cracks in my country level TRADE and TREND signals (Equities) now – tops are processes, not pts:

 

1.   FX WAR – Draghi is now trying to do precisely the opposite of what helped Germany recover, jawbone the Euro back down; overlay the slope of German economic recovery w/ the Euro in the last 3 months and you will see the pt western academics don’t get – currency has a POSITIVE correlation to growth expectations.


2.   INDIA – India’s Sensex joins the KOSPI (and Italy, France, Spain, Brazil) as the latest Equity market to snap my immediate-term TRADE line of 19,839 support. In isolation, I wouldn’t bother w/ a signal like this – but when the big country indices start to pile up, I move. Took down our Global Equity asset allocation yesterday.

 

3.   10YR  - the long bond looks almost identical to the VIX on price/volume/volatility factors – both signaled their first higher-lows of the yr in the last 48hrs. The upside down of that now makes last week’s closing high for the 10yr of 2.01% immediate-term TRADE resistance. Brent Oil > $115 is a headwind to global growth. Period.”

 

Incidentally, if you are not on the Direct from KM email list, ping and let them know you want to be upgraded.

 

As for the points above, the most noteworthy callout from my seat is that the Indian equity market has also snapped.  When equity indices start to snap, it is time to reduce equity exposure. 

 

Despite some of these major indices snapping, not all is negative this morning.  In fact, China reported some solid economic data.  Specifically, Chinese trade data for January  beat expectations as exports rose +25% versus estimates of +17.5% and imports were up +28.8% versus estimates of +23.5%.  Those are darn good numbers, even if it is the year of the snake!

 

I’m going to cut it a little short this morning as I’m sure many of you are busy prepping for the snow storm.  As always, let us know if you need help with anything.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $115.78-118.03, $79.79-80.29, $1.33-1.35, 92.20-94.29, 1.92-2.01%, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Oh Snap - Chart of the Day

 

Oh Snap - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 8, 2013


As we look at today's setup for the S&P 500, the range is 24 points or 1.15% downside to 1492 and 0.44% upside to 1516. 

                                                                                                                              

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: 1.69 from 1.71
  • VIX  closed at 13.5 1 day percent change of 0.67%

MACRO DATA POINTS (Bloomberg Estimates):

  • 6am: ECB announces 3-yr LTRO repayment
  • 8:30am: Trade Balance, Dec., est. -$46b (prior -$48.7b)
  • 10am: Wholesale Inventories, Dec., est. 0.4%  (prior 0.6%)
  • 11am: Fed to purchase $1b-$1.5b debt in 2017-2042 sector
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • Defense Dept. has ordered Army, Navy, Air Force, Marines to submit specific spending cuts they’ll make if across-the-board reductions take effect on March 1 under sequestration
    • CFTC holds closed meeting on surveillance matters. 10am
    • House Fin Svc Cmte holds hearing on FHA actuarial report, w/ Commissioner Carol Galante, 10am
    • Oral arguments at U.S. Court of Appeals for the Federal Circuit in Washington in CLS Bank Intl case that may clarify rules for when software is eligible for patent protection, 10am

WHAT TO WATCH

  • Trade deficit in U.S. probably narrowed as exports climbed
  • EU leaders prepare for budget cuts in bow to Cameron’s demand for thrift
  • China’s exports and imports rose more than estiamted in Jan.
  • German exports climbed in Dec. to propel year to record $1.5t
  • Charter to buy Cablevision’s Optimum West for $1.63b
  • S&P may face lawsuits by more states, Connecticut’s Jepsen says
  • Peugeot takes $5.5b writedown as sagging auto market saps assets
  • Boeing seen forced to alter 787 battery after U.S. NTSB findings
  • McDonald’s Jan. global comp sales may fall 1.1%
  • Warner Music agrees to buy Coldplay label for $764m
  • N.Y,, New England prepare for blizzard; 2,000 flights canceled
  • State of the Union, G-20, Cisco, Grammys: Wk Ahead Feb. 9-16

EARNINGS:

    • Soufun (SFUN) 5:45am, $0.56
    • Carlisle (CSL) 6am, $0.78
    • Corporate Office Properties Trust (OFC) 6am, $0.48
    • Sirona Dental Systems (SIRO) 6:30am, $0.84
    • Laboratory of America Holdings (LH) 6:45am, $1.62
    • AOL (AOL) 7am, $0.53
    • Apollo Global Management (APO) 7am, $0.93
    • Buckeye Partners (BPL) 7am, $0.82
    • Entergy (ETR) 7am, $1.71
    • Moody’s (MCO) 7am, $0.71
    • CBOE Holdings (CBOE) 7:30am, $0.42
    • Louisiana-Pacific (LPX) 8am, $0.21
    • American Axle (AXL) 8am, $0.06
    • Beacon Roofing (BECN) 8am, $0.40
    • Brookfield Infrastructure (BIP) 8am, $0.32
    • TC Pipelines (TCP) 8am, $0.63
    • IGM Financial (IGM CN) 9:39am, C$0.73
    • Emera (EMA CN) 10:20am, C$0.41
    • Cameco (CCO CN) Post-Mkt, C$0.41

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Arabica Coffee Premium Over Robusta Falls to Lowest Since 2009
  • Wheat Slump Seen Extending on Growth in Stockpiles: Commodities
  • Diesel Slumps in Europe as Output Capacity Soars: Energy Markets
  • Platinum Trades Near 16-Month High as Rally May Spur Selling
  • Brent Crude Advances to Nine-Month High, Boosts Premium to WTI
  • Copper Rises as Chinese Trade Tops Estimates and Car Sales Jump
  • Robusta Coffee Climbs to Four-Month High on Vietnam; Sugar Gains
  • Soybeans Head for Fifth Weekly Gain as U.S. Exports Cut Supplies
  • Brazil Prepares to Surprise Drillers This Time With Gas: Energy
  • TransCanada Says East Route Eases Oil Discount: Corporate Canada
  • Deutsche Bank Said to Fire 10 Traders as Banks Retrench
  • Chocolatier Petra Seen Targeted in Asia’s Deal Spree: Real M&A
  • Rebar Rises for Fourth Week as China’s Exports Beat Forecasts
  • Oil May Fall as Technical Tools Signal Pullback, Survey Shows

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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