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CAGNY Day 1 - KRFT Wins

You wouldn't think that a VP of Breakthrough Innovation could steal the show, but KRFT takes day one with a management team that hit that right notes.  SYY was at the other end of the spectrum highlighting commercials targeted at consumers that don't even buy the company's products.

 

 

General Mills (GIS)



Operating environment across key US categories is improving – much improved versus a year ago.  Trends are improving, inflation is moderating, and new product news is accelerating.  Advertising dollars are down in 2013?  Don’t like to see that.

 

So, in summary – losing share across categories, lower advertising spend and 2014 growth to be driven by acquisitions.

 

ConAgra (CAG)

 

Ralcorp will improve the long-term earnings algorithm.  Private label has been going through an evolution to private brands that offer a compelling value proposition to both retailers and consumers.  Private label and branded can synergize procurement.  Acquisition is beneficial to scale, makes CAG the clear leader in private brands.  Cost synergies will come from supply chain as well as SG&A - $225 million by year 4 post transaction.  Transaction will add $0.05 to FY 2013 EPS and $0.25 to FY 2014 EPS.

 

Kraft Foods (KRFT)

 

Company has iconic brands with near-perfect household penetration, focused on execution across the portfolio.  Company has made significant progress against a “bloated” overhead structure – targeting being the leanest company in packaged food.  New KRFT is about consistent, sustained, profitable growth with innovation at its core.  KRFT was worst – on just about any metric, aspires to be first.  Our favorite on the day, may be damning with faint praise, but the company hit all the right notes.

 

SABMiller

 

The company provided a solid overview of operating units, with generally positive business momentum across multiple regions.  Interesting comments regarding China, as the company is seeing a slowing industry and heightened competition.  Beer industry has structurally changed over the past ten years due to consolidation – beers are made to a much higher quality standard, bottles and labeling have improved as well.  Image has changed, as beer is now a beverage to which emerging market consumers aspire.   Graham Mackay remains one of the more impressive CEOs across all sectors.

 

Altria (MO)

 

The presentation began by highlighting the overall attractiveness of the U.S. tobacco manufacturers profit pool – note that management didn’t frame the discussion as cigarettes alone.  Cigarettes are plagued by the weakest recent and long-term volumes trades as adult smokers switch to alternative products.  Despite some promotional challenges in the cigarettes business, Altria’s business is in a position to grow profitably and in the process return cash to shareholders via dividends (primarily) and share repurchases.

 

Mondelez (MDLZ)

 

CEO Irene Rosenfeld was her usual bullish self, despite some recent EPS prints that would argue against a significant degree of optimism.  To Irene’s credit, she continued to speak candidly about some of the issues that have caused MDLZ’s top line to drag (lower coffee pricing, capacity constraints and some execution issues).  Some of those issues will mitigate over time, hence her confidence that the company can see a return to a more robust top line growth profile.

 

Sysco (SYY)

 

A less than inspiring presentation from SYY. The company outlines a number of cost savings initiatives through FY2015, however case volume is down and doesn’t look to inflect without further bolt-on acquisitions in a very competitive space.  The company sees a choppy (read negative) microenvironment ahead in which it expects restaurant traffic to be down (restaurants = 57% of its overall business). We expect its big share of food sales across the U.S., Canada, and Ireland to be challenged through this business transition.

 

Smucker’s (SJM)

 

The company is seeing improving trends across its focus areas of Coffee, Peanut Butter, and Fruit Spreads and will increase cap ex to over 3% of sales over the next couple years to support these areas. FY 2013 earnings outlook of $5.17 – 5.22, with top line of 6%, aided by lower commodity costs and integration of the SaraLee coffee business.  SJM is making a strong push in China with innovation and know-how with its minority interest in Seamild. Expects peanut butter sales to be resilient and follow on strength from K-cups with new users still coming into the category and existing increasing buying in 2013.

 

 

Call with questions.

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst

 


MACAU: MORE COLOR ON SLOWDOWN

After speaking with some contacts in Macau, we’ve got some more color on the softness.  It appears that Mass hold percentage may have been low in February.  We would attribute this in part to the smoking ban.  During busy periods such as Chinese New Year (CNY), it makes sense that table productivity would go down as players take breaks to smoke or smokers can’t get a seat at the table.  Velocity of play goes down which would reduce the hold percentage.  On the VIP side, we’re hearing that volumes were weak and hold was fairly normal.  This would suggest that the China corruption crackdown is having an impact although some disagree.  On a positive note, we’ve heard that non-gaming spend was quite high given the Mass crowds.

 

Going forward, there seems to be some opposing factors.  On the positive side, there is some speculation that some big VIP players stayed away during CNY because of the crowds.  If this is true, we may not see as much of the typical post CNY slowdown.  However, on the negative side, there is news of an important China central government figure visiting Macau this week which usually means some junkets and players will stay away.  Either way, we’ve had about 4 weeks of disappointing numbers.  We think the softness could continue, mainly due to the corruption crackdown, for a few months but we remain bullish on Macau over the intermediate (trend) and long-term (tail).

 

Here are some other tidbits we picked up from our contacts:

  • Hainan Island casino – at least one sell side analyst highlighted this in a note as a potentially big competitor for Macau.  Well, we heard this morning that the government already closed it down.  The bear thesis of China allowing casinos outside of Macau will have to be shelved for now.
  • Taiwan – there is speculation that the Taiwanese investigation into an MPEL junket is the cause of MPEL’s market share dip in February.  While we will concede that it may have had an impact, we think it was slight and that low hold explains the majority of the market share decline.  We estimate that Taiwan generates 7-8% of Macau’s GGR. 

As the chart below shows, CNY 2013 ADTR has been disappointing.  Compared with CNY 2012 (Jan 16-29) ADTR and also YoY (Feb 1-19), CNY 2013 (Feb 1-17) ADTR only grew in the mid single digits.  We are currently projecting YoY growth of -2% to +4% for the full month of February.

 

MACAU: MORE COLOR ON SLOWDOWN - macau111


#AngryBears: S&P 500 Levels, Refreshed

Takeaway: There is no long-term resistance in the SP500 to the prior closing all-time highs (1565).

This note was originally published February 19, 2013 at 13:04 in Macro

POSITION: 10 LONGS, 6 SHORTS @Hedgeye

 

Overbought signals come and go. They are very short-term in nature. We’ll get another one > 1528 in the SP500. But Bullish Formations (bullish TRADE, TREND, and TAIL) that are making higher-highs are tough to sell until you get those signals.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1528
  2. Immediate-term TRADE support = 1516
  3. Intermediate-term TREND support = 1458

 

In other words, higher-lows and higher-highs are bullish, until they are not – that’s why we are trying to dynamically measure exhaustion within this Bullish Formation. As volatility drops, exhaustion can get more exhausted than a classical technician thinks.

 

Long-term, as you can see in the 10yr chart there is no long-term resistance in the SP500 to the prior closing all-time highs (1565). The Russell2000 has been making higher-all-time-highs, every other day.

 

Keep moving out there,

KM

 

Keith R. McCullough
Chief Executive Officer

 

#AngryBears: S&P 500 Levels, Refreshed - SPX


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BUYING CHINA ON WEAKNESS

Takeaway: We’ve used the post-Lunar New Year weakness driven by property curb speculation to increase our allocation to Chinese equities.

SUMMARY BULLETS:

 

  • All told, we’re using the weakness induced by rising speculation of incremental property curbs to increase our allocation to Chinese equities – one of our team’s top global macro investment ideas since DEC 10.
  • Specifically, we have been particularly keen on the outlook for the Chinese consumer and stocks that have exposure to that sector and the outperformance has been noteworthy: +12.7% for the MSCI China Consumer Discretionary Index since DEC 10 vs. +5.1% for the MSCI China Index over that same duration.
  • Based on our analysis of recent supply/demand/price trends in the Chinese property market and recent policy maneuvers, we think it is unlikely Chinese policymakers will pursue any draconian curbs at the current juncture. Moreover, we anticipate any developments in the way of incremental property market  curbs to be eventually overshadowed by the introduction of growth-friendly economic reforms at the 12th National People’s Congress (~MAR ’13).

 

Overnight, Chinese property stocks dropped -4.6% on speculation that the Chinese Communist Party leadership is considering additional property market curbs. That was the largest day/day % decline since early AUG and the speculation was driven by a recent trend of higher imposed LTV ratios and/or loan caps in the Zhejiang, Jiangsu and Guangdong provinces.

 

BUYING CHINA ON WEAKNESS - 1

 

Weakness in the developers – which we consider a key leading indicator of Chinese economic activity (Real Estate Development is ~20% of China’s Fixed Capital Formation and Land Sales account for ~40% of local gov’t revenues) – dragged the broader index lower to our immediate-term TRADE line of support.

 

BUYING CHINA ON WEAKNESS - 2

 

To some degree, recent weakness in the CNY has been foreshadowing this brief move lower in Chinese equities, though, to some degree, the PBOC has been combating appreciation pressures born out of Japan’s recent Currency War tactics.

 

BUYING CHINA ON WEAKNESS - 3

 

The speculation on additional property curbs also came on the heels of weak Lunar New Year Retail Sales growth figures (+14.7% YoY vs. +16.2% in 2012 and the slowest since 2009’s +13.8% YoY advance). The fact that the Finance Ministry is developing incremental curbs to be applied on local gov’t debt also continues to weigh on Chinese growth expectations.

 

A subdued Chinese growth outlook is something we’ve been calling for many months now. Specifically, we continue to see directional improvement in the Chinese economy, but not to absolute levels previously associated with peak growth rates of Chinese demand. This view remains both accurate and supportive of our bearish TAIL-duration bias on commodities.

 

You can see evidence of this real-time in the forex market having priced out expectations for structural yuan appreciation amid China’s drive to rebalance its economy away from investment, manufacturing and exports towards increased household consumption. That will obviously weigh on China’s trade and current account balances going forward.

 

BUYING CHINA ON WEAKNESS - 4

 

BUYING CHINA ON WEAKNESS - 5

 

With respect to this  ongoing theme of Chinese economic rebalancing, the next major catalyst to come down the pike on the policy front is the 12th National People’s Congress, which will likely convene in MAR. There, members of the new seven-man Politburo will assume their formal roles as leaders of the Chinese state and formally outline their strategies to promote domestic demand.

 

We’re hoping for meaningful advancement of social security expenditures and perhaps some degree of early hukou reform(s) that may help advance China up the urbanization curve, but we’d settle for a continued focus on tax incentives (such as expanding the VAT reform to more regions and/or industries or incremental tax cuts for SMEs) and subsidies for now. Rome wasn’t built in a day and the Chinese consumer won’t be either.

 

With respect to the aforementioned property curb speculation, we do expect the CCP to announce additional measures in line with what various officials have been hinting at for weeks. As such, we don’t think any new curbs will be as punitive as the market anticipated this morning. The recent indefinite postponement of the nationwide property tax trial is but one piece of evidence the CCP isn’t looking to get too aggressive just yet.

 

And there’s little reason for them to be aggressive right now. Per our latest monthly data (Hedgeye China 20-City Nominal Price Index), we have Chinese nationwide property prices growing at only +2.3% YoY (from +0.5% in NOV). The MoM gain of +0.5% in DEC actually slowed -10bps from NOV’s +0.6% reading. By our count – which is as good as any we can find – Chinese property prices are down -10.2% from their JAN ’10 all-time peak.

 

BUYING CHINA ON WEAKNESS - 6

 

Looking to data from Soufun Holdings Ltd., Chinese property prices rose +1% MoM in JAN – the largest gain in two years according to their index. Inclusive of the aforementioned peak-to-present decline, average square meter prices in the 100 cities tracked by SouFun are roughly five times the average Chinese consumer’s disposable income. Obviously, prices remain somewhat frothy with respect to incomes, but certainly not to the extent they once were or will be amid the CCP’s structural consumer income growth agenda. Hence, we don’t find it prudent for the CCP to authorize draconian curbs (such as meaningfully tightening credit policies for 2nd and 3rd homes or raising/implementing punitive taxes) at the current juncture.

 

As the following chart highlights, overall activity in China’s real estate sector remains incredibly subdued. Sure, it’s improving from an intermediate-term perspective, but we’d have to see a lot more activity here for us to get worried about another round of major, growth threatening curbs. There’s likely a fair amount of equity market upside between now and then – particular when factoring in China’s TREND-duration GIP outlook.

 

BUYING CHINA ON WEAKNESS - 7

 

BUYING CHINA ON WEAKNESS - CHINA

 

On balance, trends across the supply/demand/price dynamics of China’s property market continue to suggest little in the way of curb-requiring exhaustion:

 

  • YTD Land Areas Purchased: -13% YoY in DEC from -14.8% in NOV
  • YTD Starts: -6.7% YoY in DEC from -7.2% in NOV
  • YTD Construction: +12.9% YoY in DEC from +13.3% in NOV
  • YTD Completions: +11.4% YoY in DEC from +14.1% in NOV
  • YTD Floor Space of Buildings Sold: +1.2% YoY in DEC from +2.4% in NOV
  • YTD Total Sales of Buildings: +9% YoY in DEC from +9.1 in NOV
  • YTD Funds Earmarked for Real Estate Development: +16% YoY in DEC from 14.1% in NOV
  • Outstanding residential mortgage loans grew +12.9% in 2012 – the slowest pace of growth in four years
  • DEC Steel Products Production: +14.5% YoY from 15.9% in NOV
  • DEC Copper Products Production: +8.6% YoY from +0.5% in NOV
  • DEC Cement Production: +3.8% YoY from +6.9% in NOV

 

BUYING CHINA ON WEAKNESS - 9

 

BUYING CHINA ON WEAKNESS - 10

 

BUYING CHINA ON WEAKNESS - 11

 

BUYING CHINA ON WEAKNESS - 12

 

BUYING CHINA ON WEAKNESS - 13

 

BUYING CHINA ON WEAKNESS - 14

 

BUYING CHINA ON WEAKNESS - 15

 

BUYING CHINA ON WEAKNESS - 16

 

All told, we’re using the weakness induced by rising speculation of incremental property curbs to increase our allocation to Chinese equities – one of our team’s top global macro investment ideas since DEC 10.

 

Specifically, we have been particularly keen on the outlook for the Chinese consumer and stocks that have exposure to that sector and the outperformance has been noteworthy: +12.7% for the MSCI China Consumer Discretionary Index since DEC 10 vs. +5.1% for the MSCI China Index over that same duration.

 

Based on our analysis of recent supply/demand/price trends in the Chinese property market and recent policy maneuvers, we think it is unlikely Chinese policymakers will pursue any draconian curbs at the current juncture. Moreover, we anticipate any developments in the way of incremental property market  curbs to be eventually overshadowed by the introduction of growth-friendly economic reforms at the 12th National People’s Congress (~MAR ’13).

 

Darius Dale

Senior Analyst


ISLE YOUTUBE

In preparation for ISLE's F3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

ISLE COMPLETES SALE OF BILOXI, MISS. PROPERTY (NOV 30)

 

YOUTUBE FROM F2Q 2013 CONFERENCE CALL

  • "Cape is ramping up to our expectations."
  • [Nemacolin] "We're looking forward to an opening of the property in the summer of 2013."
  • [Lower capitalized interest] "until we ramp up in earnest in Nemacolin which will start to build up here, but, obviously with the project of less than half the size, it won't be of the magnitude that it has been."
  • [Corporate expense] "We've just had some costs that we've incurred related to a couple of disputed matters, or some legal matters that came up in the quarter. We wouldn't expect that to continue at that rate going forward."
  • [Capex] "But the balance of this year, we expect to be somewhere between $80 million and $90 million, probably $20 million to $30 million of that in Nemacolin, depending on how fast we get construction rolling. We still have a lot of settling up to do in Cape Girardeau and some stuff that wasn't paid for by the end of the quarter that's going on currently and will continue to go for the next little bit of time here until we get everything kind of wrapped up finally and then the balance of our maintenance capital for the rest of the year as well."
  • "The renovation of the Lake Charles hotel rooms will be done by the end of this calendar year."
  • [Acquisition strategy] "As our leverage gets down in a more kind of the lower fives or under five times, I think, that's probably when we would start to look at that a little bit. We're still probably somewhere between half a turn and a turn higher than ideally, I think, where we want to be leverage wise."
     

What’s Going on in Staples Today?

There are some unusually severe moves today across the sector – it strikes us as being partially driven by HF capitulation as lower multiple, lower quality names that are the usual targets for short sellers are outperforming the bulk of staples today.



Similarly, we are also seeing some modest outperformance in the higher multiple names, suggesting some additional short covering in what may be valuation shorts.

 

What’s Going on in Staples Today? - 2.19 Forward PE v perform today



However, short covering doesn’t seem to be the sole determinant of today’s stock price movements as seen below.  Nor are we seeing any meaningful disparity in performance based on beta.



What’s Going on in Staples Today? - 2.19 SI ratio v perform today

 

What’s Going on in Staples Today? - 2.19 Beta v perform today



Bottom line, it seems as if the HNZ transaction and the continued resilience of the market have caught some HFs offside, and we are seeing scrambling and associated “odd” moves as investors take down/take up exposure or reposition their books to reflect a more bullish stance.

 

Call with questions.

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst




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