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BEAM - What Were They Thinking?

About a week ago (2/11), in a move right out of the saloon owners manual in the Wild West, BEAM announced that it would be cutting the alcohol content of its Maker's Mark bourbon to 42% from 45%.  The company reversed that ill-conceived decision today.

 

The initial move came about as the result of a high-quality problem - short-term demand in excess of supply.  However, high quality problems demand high-quality solutions, and the initial "solution" boiled down to serving everyone that purchased a bottle of Maker's Mark a watered-down drink.  It was a decision that would have had serious repercussions in 1890's Tombstone as well as 2013 Tribeca.

 

The company reversed its decision today:

 

"You spoke. We listened. And we’re sincerely sorry we let you down."

 

Note to management - all you had to do was ask, or use some common sense.

 

This note is admittedly more fun than actionable, but I think there is a lesson to be learned about managing the equity of a brand.  Maker's Mark is a great brand whose equity has been built up over many years - it should be tinkered with only after great deliberation and always with an eye toward enhancing the long-term value of the brand.

 

May your drinks never be watered down.

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matt Hedrick

Senior Analyst

 

 

 


Flows Follow

This note was originally published at 8am on February 04, 2013 for Hedgeye subscribers.

“You have to be the first one in line. That’s how leaders are born.”

-Ray Lewis

 

Did global growth stop slowing in mid-to-late November? Is #GrowthStabilizing bad for Gold and Bonds? These questions are now rhetorical ones.

 

When you want to win a game, you have to teach. When you lose a game, you have to learn.” -Tom Landry

 

Our congratulations to Ray Lewis and the Baltimore Ravens. #winning

 

Back to the Global Macro Grind

 

US Equities were up for the 5th consecutive week and long-term US Treasury Yields continued to breakout to the upside last week (10yr Yield up another +6bps to 2.01%) as fund flows into US Equities continue to surprise on the upside.

 

How did this all happen so fast?

  1. Sentiment was bombed out in mid-November and short interest was high
  2. Fundamental global economic growth data steadily improved for 2 consecutive months
  3. Equity Fund Flows Followed

The 1st two points of the process were trivial. We wrote about them every day. The last point about flows was the hardest to nail down. While we usually get the memo on flows after the fact, we do know what leads them.

 

Q: What leads people out of Gold/Bonds and into Equities? A: Growth Expectations.

 

Example (Gold):

  1. Gold made a long-term lower-high in mid November at $1755/oz (versus the all-time high in 2011)
  2. Gold snapped our intermediate-term TREND line of $1698 in early December
  3. Gold net long positions (futures and options contracts) crashed to 82,081 last week

Crashed? Yes. Last week the bulls (who had been buying Gold contracts the whole way down from October to January) capitulated, selling the net long position in Gold contracts down -24% wk-over-wk.

 

Despite Gold and Silver being down another -0.2% and -1.1%, respectively, this morning, from an immediate-term TRADE duration perspective this is obviously an interesting contrarian indicator. But what does it tell you about longer-term growth expectations?

 

What has the Treasury Bond market been telling you?

  1. 10yr US Treasury Yields made higher-long-term lows in November-December in the 1.57-1.61% range
  2. 10yr US Treasury Yield broke out above our intermediate-term TREND line of 1.73% in mid-December 2012
  3. 10yr US Treasury Yields are up another 5 basis points this morning (that’s a lot in a day) to 2.05%

At the same time, the HYG (High Yield) and Junk (JNK) Bond ETFs finally broke my immediate-term TRADE lines of support last week. With Investment Grade and Junk Bond yields up another +1.9% and +3.3% last week, that was new for this cycle (not new at turns in other major cycles).

 

The concept of buying “High Yield” debt (that has record low yields) is far from simple; especially if people start to bake in that Ben Bernanke’s money printing days are over. This is why we are so focused on the slope of growth expectations for:

  1. Global GDP Growth
  2. US Employment Growth
  3. US House Price Inflation Growth

All 3 of these factors can drive Gold/Bond prices down until people actually start to believe we could re-flate the Commodity Inflation Bubble (which peaked alongside Gold in 2011). Which, in turn, could slow growth (again). That’s why:

  1. CRB Commodities Index closing 1 point inside of our long-term TAIL line of 306 last week is a NEW concern
  2. Oil Prices up another +1.8% and +2.9% on WTIC and Brent last week are a mounting concern
  3. 5-year Breakevens up +6.5% last week in the US (Bernanke’s former inflation expectations bogey) matter too

Whether you were bullish or bearish throughout this 2-month move doesn’t matter anymore. Today is a new day. You are either first on the line to register what is changing on the margin in macro, or you are not. We’ll do our best to stand alongside you.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1649-1676, $114.19-116.87, $79.01-79.71, $1.34-1.36, 90.67-93.12, 1.96-2.11%, and 1498-1517, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Flows Follow - Chart of the Day

 

Flows Follow - Virtual Portfolio


After Heinz, What's Next?

Both Berkshire Hathaway and 3G prefer to invest in iconic, global brands, and Heinz certainly is that.  3G also has a reputation for aggresive cost cutting, and there appears to be room for that at Heinz as well.

 

In order to answer the oft-posed (last week, at least) question of "what's next", we took a look at the companies in the packaged food space in terms of how efficiently capital (human and fixed) was utilized.  As it turns out, the answer at HNZ was "not particularly well".  The companies positioned in the lower left corner of the chart below are at the lower end of the packaged food space on the following two metrics:

 

  1. Sales per employee
  2. Sales/Average Property Plant and Equipment (PPE)

After Heinz, What's Next? - Fixed Asset Productivity

 

Based on that analysis (admittedly, imperfect), CPB as a short might cause me some sleepness nights given that someone may see an opportunity there beyond what current management has been able to exploit.  I think the analysis also supports our belief that HSH and POST could be targets at some point in the future.

 

We next wanted to look for brands that might not be as well supported as could be, with an asssociated low sales productivity as measured by sales per employee - again, imperfect, but directionally helpful.

 

After Heinz, What's Next? - Advertising and promotion as a   of sales

 

Again, Heinz appears in the "bad" quadrant, and HSH right next to it - though this is weakness recognized by HSH management, with a plan to improve upon the current level of brand investment.  In this case, POST brands appear well-supported.

 

HAIN's position on the chart surprised us at first, then we thought about it and remembered that management there prefers to buy someone else's hard work and grow through acquisitions rather than do the heavy lifting required to build brands.

 

Where does that leave us?

 

Well, looking at the data here, we can see the opportunity that Berkshire Hathaway and 3G may be poised to exploit.  Further, we continue to believe that HSH and POST could be targets at some point in the future.  Finally, given it's proximity to HNZ on the metrics we discussed, a short position in CPB makes us somewhat uneasy.

 

Enjoy the holiday tomorrow,

 

Rob

 


Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst


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THE WEEK AHEAD

The Economic Data calendar for the week of the 18th of February through the 22nd is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - WeekAhead


TRADE OF THE DAY: XLE

Today we covered our short position in the Energy Select SPDR ETF (XLE) at $78.42 a share at 1:06 PM EDT in our Real-Time Alerts. With crude oil down today and our signals flashing, we're booking the alpha. Worst S&P sector move on the day by a lot: -1.2%.

 

TRADE OF THE DAY: XLE - XLE


MNST - Friday Rumor Mill Grinds Some Shorts

It simply doesn't get any more spivvy than Friday rumors before a long weekend and into a short week where many investors will be on winter break with their children.  With MNST scheduled to report earnings a week from today (2/22) and a wall of worry for investors to climb regarding slowing top line and pricing in the U.S., today's speculation of a takeout just reeks of someone saying "get me out!" before the print.

 

While the timing of such speculation makes us "highly suspect" (I watched "Ratatouille" with my daughter last night), the notion isn't all that absurd (we have mentioned it from time to time).  Beverage companies struggle to find growth in today's environment, and MNST is working toward becoming a global growth story.  The size of the deal would be more than manageable for any of the multinationals in our coverage.

 

Having said that, we don't put much faith in this particular rumor given its timing (we have seen this movie more than once, just like "Ratatouille").  People don't want to be short going into a long weekend and the recent HNZ news has likely only made people more jittery regarding potential M&A activity.  We are also seeing call buying across multiple strikes as people position themselves for a possible deal or (more likely), buy some protection for their short position.

 

We think we are going to get a shot at this name lower, and so we are simply going to watch the headlines this weekend.

 

Have a good long weekend,

 

Rob


Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 


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