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Crude Intentions

Our thesis regarding the recovery of the US economy involves having a strong US dollar. A stronger dollar helps drive commodity prices down, which in turn helps boost consumption. Consumption is the key to recovery as people consume more and see a material improvement at places like the gas station and grocery store. Right now, the US dollar (DXY) continues to strengthen since the beginning of January while WTI crude oil falls lower. The one headwind we still face in the recovery of the economy is high energy prices and if we continue to see the dollar strengthen, that headwind could soon be a thing of the past.

 

Crude Intentions - USD CRUDE


HONG KONG STILL LOOKS AWESOME

Takeaway: We maintain our bullish intermediate-term bias on Hong Kong’s stock market as the territory's GIP outlook remains particularly robust.

SUMMARY BULLETS:

 

  • Hong Kong’s GIP outlook continues to look as robust as any across the Global Macro universe and remains supportive of our TREND-duration bullish bias on the Hang Seng and we remain well above the Street on 2013 GDP and well below the Street on 2013 CPI. Random bearish catalysts aside (Google: “comedian + Italy”), Hong Kong remains one of our favorite ways to play our #GrowthStabilizing theme across Asia – along w/ China and Singapore. Refer to our 2/4 note titled, “ON A TEAR, WILL ASIA #GROWTHSTABILIZING CONTINUE TO WORK?” for more details.
  • It’s worth noting that all three of the aforementioned countries are somewhat (SGD and  CNY) to heavily (HKD) pegged to the rising USD, meaning that they will reap an outsized tailwind (more disinflation + more room to ease) from the continued popping of Bernanke’s Bubbles because their currencies won’t be under as much selling pressure as many other Asian and LatAm currencies are likely to experience in the [likely] upcoming era of sustained USD strength.
  • Additionally, as it relates to the risk of negative absolute returns if the Global Macro environment deteriorates substantially in the near-term, Hong Kong, Singapore and China all have limited downside relative to the rest of the region from a mean reversion perspective (as opposed to a Philippines, Thailand or Japan). Speaking explicitly, if you have to remain allocated to Asian and/or int’l equities, we think those three markets will offer the least amount of downside risk over the intermediate term.
  • Moreover, from a factor risk perspective, Hong Kong, Singapore and China’s forward-looking GIP outlooks all compare quite favorably (each in their own ways) with the top five factors most associated with equity market outperformance on a 1M basis. As such, it is reasonable to anticipate “the machines” will start bidding up these three markets over the intermediate term.

 

Official reports released overnight showed Hong Kong’s Real GDP accelerated in 4Q12 to +2.5% YoY from +1.4% in the prior quarter. On a QoQ basis, the Hong Kong economy accelerated +1.2% from +0.8% in the prior quarter. The positive deltas in both the YoY and sequential figures provides a great handoff to the start of 2013 and this favorable growth outlook is confirmed by the +47bps widening of Hong Kong’s 10Y-2Y Sovereign Yield Spread in the YTD.

 

HONG KONG STILL LOOKS AWESOME - 1

 

HONG KONG STILL LOOKS AWESOME - 2

 

Also reported overnight was Financial Secretary John Tsang’s announcement of HK$33 billion of one-off relief measures in the upcoming budget, including lower taxes and electricity subsidies. The measures also include food assistance and the waiver of two-month’s rent for public housing tenants and are expected to boost growth by +130bps. With a budget surplus worth 2.7% of GDP and a deficit/GDP ratio of 33% (both are ~at their respective 10yr averages) Hong Kong policymakers do indeed have the fiscal space necessary to implement the aforementioned stimulus measures without imposing any undue economic or political risks.

 

HONG KONG STILL LOOKS AWESOME - 3

 

Hong Kong’s GIP outlook continues to look as robust as any across the Global Macro universe and remains supportive of our TREND-duration bullish bias on the Hang Seng and we remain well above the Street on 2013 GDP and well below the Street on 2013 CPI. Random bearish catalysts aside (Google: “comedian + Italy”), Hong Kong remains one of our favorite ways to play our #GrowthStabilizing theme across Asia – along w/ China and Singapore. Refer to our 2/4 note titled, “ON A TEAR, WILL ASIA #GROWTHSTABILIZING CONTINUE TO WORK?” for more details.

 

HONG KONG STILL LOOKS AWESOME - HONG KONG

 

In line with our previous work on the territory, we typically start off our analysis of Hong Kong (and Singapore) from a top-down perspective at the international level. That’s because:

 

  • At 226% and 209% of GDP, respectively, Hong Kong and Singapore are far and away the most export-oriented countries in Asia – far more levered to global demand than other noteworthy Asian economies (China: 31.4%; South Korea: 56.2%; Japan: 15.2%; Thailand: 76.9%; and Taiwan: 66.9%);
  • The ratio of Hong Kong and Singapore’s share of world exports to their individual shares of world GDP are 7.1x and 6.5x, respectively – besting the next closest economy in Asia (Malaysia) on this metric by a full 3.7 turns; and
  • Singapore and Hong Kong are home to the world’s second and third-busiest container ports, handling 29,937,700 and 24,384,000 TEUs, respectively, per the latest yearly data from the American Association of Port Authorities (2011).

 

HONG KONG STILL LOOKS AWESOME - 5

 

With that in mind, our global #GrowthStabilizing theme should continue to auger well for the Hong Kong economy and its financial markets; we remain above the Street on 2013 World Real GDP growth.

 

HONG KONG STILL LOOKS AWESOME - WORLD

 

It’s worth noting that all three of the aforementioned countries are somewhat (SGD and  CNY) to heavily (HKD) pegged to the rising USD, meaning that they will reap an outsized tailwind (more disinflation + more room to ease) from the continued popping of Bernanke’s Bubbles because their currencies won’t be under as much selling pressure as many other Asian and LatAm currencies are likely to experience in the [likely] upcoming era of sustained USD strength. Refer to our 1/25 note titled, “WHERE IS THE “GREAT INFLATION” GOING TO COME FROM?” and our 2/20 note titled, “CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL” for more details on this developing theme.

 

HONG KONG STILL LOOKS AWESOME - FX MoM

 

Additionally, as it relates to the risk of negative absolute returns if the Global Macro environment deteriorates substantially in the near-term, Hong Kong, Singapore and China all have limited downside relative to the rest of the region from a mean reversion perspective (as opposed to a Philippines, Thailand or Japan). Speaking explicitly, if you have to remain allocated to Asian and/or int’l equities, we think those three markets will offer the least amount of downside risk over the intermediate term.

 

HONG KONG STILL LOOKS AWESOME - Equities YoY

 

Moreover, from a factor risk perspective, Hong Kong, Singapore and China’s forward-looking GIP outlooks all compare quite favorably (each in their own ways) with the top five factors most associated with equity market outperformance on a 1M basis:

 

  1. Relatively more scope for monetary easing
  2. Relatively higher expectations for currency strength
  3. Relatively high growth
  4. Relatively low inflation
  5. A relatively strong currency

 

HONG KONG STILL LOOKS AWESOME - EQY FM

 

As such, it is reasonable to anticipate “the machines” will start bidding up these three markets over the intermediate term. Refer to our 2/11 note titled, “WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA AND LATIN AMERICA?” for a detailed walk-through of the methodology behind our bi-regional factor models.

 

From a quantitative risk management perspective, Hong Kong’s Hang Seng Index is bearish TRADE/bullish TREND and TAIL. breakout above the immediate-term TRADE line of resistance would confirm our bullish bias and a breakdown through the TREND line of support would force us to reconsider our base case scenario altogether.

 

Darius Dale

Senior Analyst


Looking for Value in Staples? Grab a BUD

This note was originally published February 27, 2013 at 10:43 in Consumer Staples

Anheuser Busch InBev (BUD, ABI BB) reported Q4 earnings this morning and we won’t dwell on the results versus consensus - suffice it to say that European sell side analysts make their U.S. counterparts look like the NASA team that put Armstrong on the moon.  The results were consistent with our slightly below consensus estimates, but there are several things we want to highlight from the release, particularly for investors that are scratching their heads and looking for “value” in staples (we do the same on occasion as we observe some stocks continuing to make multi-year highs – KMB, CLX, we are looking at you.)

 

ABI posted 8.8% constant currency organic revenue growth (against a +5.7% comp) – volumes improved 0.6% reported and declined 0.1% on an organic basis so much of the growth came from price/mix.  This top line performance (+7.2% for the full year) shames most staples companies and is a result that 80% of the executives in our sector would forego important body parts to realize.  The company delivered some leverage on this excellent top line result, with currency neutral EBIT +10.7% in the quarter – very few staples companies (PM and HSY come to mind) were able to leverage top line growth in any meaningful fashion.

 

In 2012, ABI generated $6.36 per share in FCF – at $92 per BUD share, 14.5x FCF is actually below the staples range that we generally reference (15-20x FCF).  Global multinational companies such as KO and CL trade in excess of 20x FCF and ABI certainly qualifies to be in that company.  As we mentioned above, ABI surpasses both those names in terms of recent top line performance.  We think a valuation case can be made for standalone ABI right here, right now.

 

We have become less vocal on STZ (we still expect upside toward $50 per share and a high probability of the deal gaining regulatory approval), but see an asymmetric risk/reward profile and a DOJ that has been willing, at least based on the initial filing, to suspend logic.  Based on the valuation case we made above, we think it can be argued that shares of ABI currently reflect no benefit from the transaction being approved.



In prior reports, we have mentioned the reason why ABI was likely willing to forego so much in the U.S. in pursuit of Grupo Modelo – the simple answer is, the rest of the planet.  We don’t usually go in much for revenue synergies, but we do see an opportunity for ABI to drive Modelo’s brands globally.  Further, even with the synergy estimate for the transaction upped to $1 billion, we point investors back to the transaction between InBev and Anheuser-Busch, where the original synergy estimate was $1.5 billion annually by 2010 and the company delivered $2.25 billion by 2011 (deal was announced mid '08).  The same math would imply the potential for another $500 million in synergies at Modelo, and we think we can make the case that the old Anheuser-Busch was run more efficiently than is Grupo Modelo.  Finally, one thing we don’t doubt is the ability of ABI management to cut costs – it is a core competency.

 

Finally, and this is a “softer” statement – buying staples companies that are integrating deals generally works – investors get a period of outsized EPS growth from the combination of deleveraging (in many cases) and merger synergies.  The income statement flexibility resulting from the business combination provides some certainty with respect to earnings visibility.  Make no mistake, this isn’t TAP management integrating a deal, ABI management has a long and envious track record in terms of business integrations.

So, bottom line for us that we can make a valuation case, have long been supportive of the rationale and regulatory likelihood of the Modelo deal, and are willing to bet on what we see as a superior management team going forward.




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Looking for Value in Staples? Grab a BUD

Anheuser Busch InBev (BUD, ABI BB) reported Q4 earnings this morning and we won’t dwell on the results versus consensus - suffice it to say that European sell side analysts make their U.S. counterparts look like the NASA team that put Armstrong on the moon.  The results were consistent with our slightly below consensus estimates, but there are several things we want to highlight from the release, particularly for investors that are scratching their heads and looking for “value” in staples (we do the same on occasion as we observe some stocks continuing to make multi-year highs – KMB, CLX, we are looking at you.)

 

ABI posted 8.8% constant currency organic revenue growth (against a +5.7% comp) – volumes improved 0.6% reported and declined 0.1% on an organic basis so much of the growth came from price/mix.  This top line performance (+7.2% for the full year) shames most staples companies and is a result that 80% of the executives in our sector would forego important body parts to realize.  The company delivered some leverage on this excellent top line result, with currency neutral EBIT +10.7% in the quarter – very few staples companies (PM and HSY come to mind) were able to leverage top line growth in any meaningful fashion.

 

In 2012, ABI generated $6.36 per share in FCF – at $92 per BUD share, 14.5x FCF is actually below the staples range that we generally reference (15-20x FCF).  Global multinational companies such as KO and CL trade in excess of 20x FCF and ABI certainly qualifies to be in that company.  As we mentioned above, ABI surpasses both those names in terms of recent top line performance.  We think a valuation case can be made for standalone ABI right here, right now.

 

We have become less vocal on STZ (we still expect upside toward $50 per share and a high probability of the deal gaining regulatory approval), but see an asymmetric risk/reward profile and a DOJ that has been willing, at least based on the initial filing, to suspend logic.  Based on the valuation case we made above, we think it can be argued that shares of ABI currently reflect no benefit from the transaction being approved.



In prior reports, we have mentioned the reason why ABI was likely willing to forego so much in the U.S. in pursuit of Grupo Modelo – the simple answer is, the rest of the planet.  We don’t usually go in much for revenue synergies, but we do see an opportunity for ABI to drive Modelo’s brands globally.  Further, even with the synergy estimate for the transaction upped to $1 billion, we point investors back to the transaction between InBev and Anheuser-Busch, where the original synergy estimate was $1.5 billion annually by 2010 and the company delivered $2.25 billion by 2011 (deal was announced mid '08).  The same math would imply the potential for another $500 million in synergies at Modelo, and we think we can make the case that the old Anheuser-Busch was run more efficiently than is Grupo Modelo.  Finally, one thing we don’t doubt is the ability of ABI management to cut costs – it is a core competency.

 

Finally, and this is a “softer” statement – buying staples companies that are integrating deals generally works – investors get a period of outsized EPS growth from the combination of deleveraging (in many cases) and merger synergies.  The income statement flexibility resulting from the business combination provides some certainty with respect to earnings visibility.  Make no mistake, this isn’t TAP management integrating a deal, ABI management has a long and envious track record in terms of business integrations.

So, bottom line for us that we can make a valuation case, have long been supportive of the rationale and regulatory likelihood of the Modelo deal, and are willing to bet on what we see as a superior management team going forward.

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst




Stock Report: Fedex (FDX)

Stock Report: Fedex (FDX) - HE II FDX 3 30 13

THE HEDGEYE EDGE

We believe FedEx has the ability to improve margins in its Express division.  With a large revenue base at a 30-year low in margins, the Express division could be a value driver over the next two years.  A tie-up with TNT could drive additional value for FDX shareholders, in our view.

 

Further, we see FedEx Ground as a winner in the US ground parcel market.  That division offers exposure to fast growing e-commerce package volumes.   Finally, FedEx Freight has been surprisingly profitable and may benefit from a rebound in US construction activity.

TIMESPAN

INTERMEDIATE TERM (the next 3 months or more)

Shares of FDX sold off sharply following its fiscal third quarter earnings release.  Markets responded negatively to a sequential decline in Express margins, even though the restructuring does not start until this (fiscal fourth) quarter.  A rebound from what we see as over-sold levels could support the shares near-term.  

 

Management has commented that we should see Express margin improvement in the fiscal fourth quarter.  The macro environment appears likely to be more supportive of Express services demand.  Should the company deliver in fiscal 4Q, the shares may begin to price in improving margins ahead of their actual acheivement.

 

LONG-TERM (the next 3 years or less)

FedEx is a long-term position, in our view.  Reorganizing the Express division is a slow process, in part because high service levels cannot be disrupted as adjustments are made.  Cost reductions build through FY2016 and the long-run result may surprise to the upside.  Margins at UPS and DHL are meaningfully higher, in our estimates, and we see no structural reasons why FedEx Express cannot match its peers.  A TNT tie-up could also facilitate restructuring, in our view.  FedEx Ground has been taking market share from UPS in US ground parcel for over a decade, but those gains may well reach a tipping point in coming years.

ONE-YEAR TRAILING CHART

Stock Report: Fedex (FDX) - HE II FDX chart 3 30 13


BEST IDEAS CALL TODAY: Materials & Dial-in Info

 

BEST IDEAS CALL TODAY:  Materials & Dial-in Info - Best Ideas 2

 

Hedgeye Risk Management invites you to join us today, February 27th at 1:00pm EST for our Best Ideas Launch Part 2.

 

This call will be a follow-up to the introductory call of our dynamic Best Ideas Product which was held on February 11th. The new dynamic Best Ideas Product will track, update and notify clients of important changes and additions to the Hedgeye Best Ideas list.

  

On the call we will highlight our highest conviction calls across Financials, Industrials, Energy and Macro offering at least two high conviction and differentiated investment ideas from each vertical over an intermediate term duration.     

 

 

CALL DETAILS 

  • Date: Today, February 27th at 1:00pm EST
  • Toll Free Number:  
  • Direct Dial Number:     
  • Conference Code: 865921#

CLICK HERE to access the slides associated with this call. For more details please email .  
 

 

 SPEAKERS WILL INCLUDE

  • Financials - Josh Steiner
    • Part of the #1 ranked Institutional Investor and Greenwich Survey team at Lehman Brothers. Buy-side analyst at Amaranth Group & Millennium Partners.
  • Industrials - Jay Van Sciver
    • Co-Founder/Partner at Bishop & Carroll Capital Partners. 12 years as a financial analyst with buy-side coverage of the Industrials Sector. 
  • Energy - Kevin Kaiser
    • Covers the oil & gas sector with a focus on fundamental research on E&Ps, oilfield services, MLPs and refiners.  Princeton hockey alumnus.
  • Macro - Darius Dale
    • Senior Analyst covering Asia and Latin America on the Macro Team. Yale BA.

Attention Students...

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