“He knew that he had a gift: the power to make people trust him.”
With the Chinese allegedly hacking US corporations and the Keynesians in an all-out currency war with the world’s savers this morning, what could possibly go wrong? The US stock market doesn’t seem to care. Do you trust it?
The aforementioned quote about old-school trust comes from an excellent leadership book I’m reading titled “Ike’s Bluff: President Eishenhower’s Secret Battle to Save The World.” Since I am finishing up our year-end review process, trust is a factor I thought a lot about while I was in London last week. The people you choose to work with either get it, or they don’t.
Americans believed in President Dwight Eisenhower, big time. He had the highest approval rating of any post WWII President, not because he gave the best speeches (he hated the teleprompter, and it showed) – it was because poll after poll revealed an endearing quality that the modern polarizing #PoliticalClass has not been able to achieve – the underlying trust of The People.
Back to the Global Macro Grind…
I trust Mr. Market. I believe in his real-time signals. I trust that The People ultimately trust his scorecard too (he might be a she by the way). You don’t have to like someone in order to trust them.
You don’t get paid to play the market you’d like to have either. You get paid to play the game that’s in front of you.
“That’s just too complicated for a dumb bunny like me.” –President Eisenhower (page 29)
Or is it?
At the end of the day, it’s all about your attitude. Sure, it really is hard to let Mr. Market humble you into the daily position of A) embracing uncertainty and B) accepting that risk doesn’t care about your positioning.
You can, however, dynamically (daily) risk adjust your positioning based on the highest probabilities that Mr. Market is giving you. Would you play any other game any other way? For us, since late November, that overall Global Macro position has been:
I can be a dumb bunny too. That’s why I maintain a model that accepts dumb government policy as causal to currency moves. That’s also why we get currencies more right than wrong. Stocks, Bonds, and Commodities tend to react to big policy driven currency moves.
The US Dollar was up for the 2nd consecutive week last week (+1.8% over that time) and for the #1 concern my competitors are signaling as the US stock market’s greatest risk (inflation), Strong Dollar did what it should have done – it Deflated The Inflation:
Now a lot of people in this world (especially Americans) like it when the purchasing power of their hard earned currency appreciates. Others (like Venezuelans for example) don’t have a say in the matter. Their overlords debauch their currency whenever they please.
Eisenhower was lucky in that he was able to compete with British and French debaucherers of currency. These were weak governments who were addicted to debt and the cowardly messaging of #ClassWarfare. No one trusted that then – and they don’t trust it now.
Not all Equity markets like Commodity Deflation. Brazil’s Bovespa Index is the poster child for commodity exposure – it was down another -1% last week and is now down -5% for 2013 YTD.
What could really get this US and Asian Equity party started would be another blast higher in the US Dollar from here:
What’s actually quite amazing is that US Consumption hasn’t been hammered with Brent Oil trading up here at $117-118. In our GIP Model (Growth, Inflation, Policy), a Brent Oil price that is in a Bullish Formation is an explicit headwind.
But maybe that’s more of a headwind for those cheering on a weak currency in Europe. Enter France:
So, the French have economic issues that, evidently, weren’t resolved with a 75% tax rate…
Now that their economic data really sucks again, the first thing their conflicted and compromised #PoliticalClass does is jawbones for a weaker Euro – then they tell the world they really didn’t do that at the G20 meetings, n’est-ce pas? But, with the CAC and the Euro breaking immediate-term TRADE support, who do you trust? Mr. Market doesn’t trust them.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $116.09-118.91, $3.67-3.72, $1.31-1.33, 92.53-94.38, 1.96-2.05%, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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I wrote in an earlier note that a short position in CPB would make me uneasy given some of the characteristics it shares with HNZ. In this note, I take a look at the reasons why CPB’s operating performance doesn’t warrant the recent move up in the company’s share price.
Since December 31st, CPB’s share price has gone from $34.89 to $39.40 (as of Friday’s close), a year to date performance of nearly 13% versus the S&P’s YTD performance of 6.6%. Admittedly, CPB has been a multi-year laggard, and so the company’s ability to exceed consensus estimates in the most recently reported two quarters has helped the share price performance, as has the HNZ deal. However, chasing laggards solely because they have lagged doesn’t represent a compelling long-term investment process to me – I need to start seeing some improvement in the company’s business momentum.
I attribute the better than consensus results to the sell-side’s inability to model in conjunction with CPB’s acquisition of Bolthouse Farms, which has muddied the income statement a bit. Keep in mind that buying a staples company that is in the process of integrating an acquisition usually isn’t a bad idea, in my experience. The sell-side is generally crappy at modeling to begin with, and the top line becomes optically much more attractive, and the company has some income statement flexibility as the merger synergies start to flow through – to be honest, it’s a part of the reason I like CAG, STZ, K and BUD. But it can’t be the only reason.
While reported revenue growth has been close to double-digits (against declines in the comparable quarters of 1H 2012), constant currency organic growth has been +1.1% and +1.5% in the first two quarters of 1H ’13, again against declines in 1H ’12. The comps turn positive in 2H ’12, though the next two quarters are less seasonally important than the two reported thus far. Keep in mind that my view is that the primary driver of multiple expansion/contraction in consumer staples is changes in top line momentum – it doesn’t appear to me that CPB has reached that type of inflection point with regard to its core business.
Importantly, EBIT growth (absent the acquisition) was only +1% in the quarter, and this result was flattered by a 14% decline in advertising and consumer promotion expense – never a good sign, in my view. Even with the acquisition, the company posted only a 7.6% year over year increase in EPS, against a -10.1% comparable in Q2 2012 – and that is with some help from a lower tax rate year on year. The EPS comps as we move through the remaining two quarters of the company’s fiscal 2013 don’t stiffen all that much.
Taking all that together, I don’t see a path to an EPS miss as consensus currently contemplates the pacing of the remaining two quarters, and that is central to wanting to be short a name. As we move out closer to calendar ’14, with the HNZ transaction in the rear-view mirror and CPB moving toward more difficult comparisons, I think a short position might make more sense, but I reserve the right to change my mind in either direction or any time should the data suggest.
While I don’t do shorts purely on valuation, it appears to us that a nearly 2 turn improvement in CPB’s P/E multiple (currently 15.0x calendar 2013) to close the gap with the peer average isn’t based on the underlying strength of the company’s business – neither is it a particularly demanding multiple. Further, I think consensus is secure for the balance of fiscal 2013 and am therefore content to watch and wait.
Call with questions.
HEDGEYE RISK MANAGEMENT, LLC
We’ve got the numbers for the first half or so of the month and they’re not pretty. Despite the favorable calendar shift of Chinese New Year (CNY) into February this year, Macau gross gaming revenues (GGR), could actually fall YoY. With 17 days in the bag, we’re now projecting February GGR of $23.0-24.5 billion which would represent growth of -2% to +4%. These soft results have to be a disappointment to the Macau bulls who had been calling the market as essentially impervious to the smoking ban and the junket crackdown by the Chinese government.
So why are the numbers so weak? Last February was actually quite a strong month with volumes higher than January despite CNY falling in January. We believe the smoking ban may have been more impactful on table productivity during the busy CNY period. We’ve also heard that VIP hold may have been a little low although there is no hard evidence of that. Finally and most importantly, we think there is a government crackdown on corruption in China which is impacting the junkets. Some specific junkets may be targeted. We found this article interesting and relevant:
In terms of market share, Wynn is making a surprising breakout although most of it is likely hold related and comes at the expense of MPEL. Sands China is having a strong month and we expect that trend to continue absent any hold fluctuations. Galaxy’s market share is back up after a few disappointing months while MGM and SJM are posting shares below trend.
Following the disappointing last half of January and February’s results so far, we believe Q1 estimates could be at risk. However, while we fully expected the junket crackdown to have a material impact on Macau’s VIP numbers, we maintain our belief that the impact will be short lived, 2-3 months. Our best guess is that the crackdown, while real, is window dressing to show the populace that the new government is serious about combating corruption.
This note was originally published February 18, 2013 at 08:05 in Consumer Staples
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.
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