prev

TIME TO BOOK GAINS IN THAILAND?

Takeaway: Price signals and reversal of sentiment are two factors that may converge to help perpetuate a further breakdown in Thai equities.

SUMMARY BULLETS:

 

  • If you’re looking to reduce you’re international equity exposure from here, Thailand may be a good place to start as price signals and reversal of sentiment are two factors that may converge to perpetuate a further breakdown in Thai equities.
  • While there’s not necessarily a high-conviction short call to be made here (the slowdown in growth from the flood comp-related acceleration in 4Q is both obvious and expected) we are monitoring the SET closely here to see if it holds or breaks down below our intermediate-term TREND line; the immediate-term TRADE line was violated to the downside just yesterday (inside baseball on the margin hike or a mere coincidence?).
  • Needless to say, a confirmed TREND-line breakdown would be a clear signal for investors to dramatically reduce their Thai equity exposure. Punitive capital controls and a dramatic acceleration of political instability are two proactively predictable negative fundamental outcomes that would likely take consensus by surprise, potentially perpetuating a noteworthy reversal of international capital flows.

 

The Stock Exchange of Thailand announced today an increase of the cash-account rule for securities trading by brokers to 20% of a customers’ credit line, which weighed heavily on the overall SET Index (down -3.3% on the day and -7.5% wk/wk). While we expect declines specifically related to this margin hike to be short-lived, the broader question of “where to from here?” is begged by the SET’s negative delta from previously outperforming the region to now underperforming the region.

 

In our Asia+LatAm universe, the SET is the third-best performing index on a YoY basis at +24.2% and the second-worst performer on a MoM basis at -4%.

 

TIME TO BOOK GAINS IN THAILAND? - 1

 

TIME TO BOOK GAINS IN THAILAND? - 2

 

One has to wonder if all the good news (slowing, but very robust growth, slowing inflation and reasonably insulated from JPY debauchery as Japan is Thailand’s largest source market at 18.4% of imports and 64% of FDI) is priced in. The THB is outperforming (i.e. either #1 or #2) on all three of our core Asia+LatAm factor risk durations: +1.9% MoM, +4.5% over 3M and +5.1% YoY, indicating a high degree of foreign capital inflows.

 

TIME TO BOOK GAINS IN THAILAND? - 3

 

TIME TO BOOK GAINS IN THAILAND? - 4

 

TIME TO BOOK GAINS IN THAILAND? - 5

 

Evidence of froth are indeed present, even as the fundamental underpinnings for further upside in Thai financial markets appears to be abating: 1M 25-delta risk reversals for the USD/THB are at -14bps, which is the lowest since mid-2008 and equity market valuations, while not dramatically overstretched, are definitely at the high ends of their respective ranges; meanwhile, Thailand’s 10Y-2Y sovereign yield spread (a key proxy for growth expectations) has pancaked in recent months.

 

TIME TO BOOK GAINS IN THAILAND? - 6

 

TIME TO BOOK GAINS IN THAILAND? - 7

 

TIME TO BOOK GAINS IN THAILAND? - 8

 

While there’s not necessarily a high-conviction short call to be made here (the slowdown in growth from the flood comp-related acceleration in 4Q is both obvious and expected) we are monitoring the SET closely here to see if it holds or breaks down below our intermediate-term TREND line; the immediate-term TRADE line was violated to the downside just yesterday (inside baseball on the margin hike or a mere coincidence?). Needless to say, a confirmed TREND-line breakdown would be a clear signal for investors to dramatically reduce their Thai equity exposure.

 

TIME TO BOOK GAINS IN THAILAND? - THAILAND

 

TIME TO BOOK GAINS IN THAILAND? - Thailand SET

 

Punitive capital controls, while not a near-term risk per the latest commentary out of both Finance Minister Kittiratt Na-Ranong and Bank of Thailand Governor Prasarn Trairatvorakul, could eventually be implemented if the Thai baht remains on fire. Specifically, the JAN minimum wage hike to 300 baht/day may start to weigh on the competitiveness of Thailand’s export sector (57.6% of GDP), which would increase corporate pressure upon the now heavily-scrutinized Shinawatra administration to act.

 

In regards to the aforementioned scrutiny, it should be noted that Prime Minster Yingluck Shinawatra is facing legal pressure for misrepresentation of familial assets and for issuing her brother, former Thai Prime Minster Thaksin Shinawatra (currently a wanted fugitive in Thailand that lives abroad to evade prosecution), a fresh Thai passport.

 

Her ethics are being questioned by rival parties and a full investigation by the Ombudsman’s Office is not out of the question. A revocation of her ruling mandate is a key tail risk to consider – especially given Thailand’s well-documented recent history of political instability. Recall that consternation on the political front weighed heavily on the SET Index in the Springs of 2010, 2011 and 2012 (full disclosure: we held a bearish bias heading into the 2011 correction and reinitiated appropriately bullish at the bottom the 2012 one).

 

All told, if you’re looking to reduce you’re international equity exposure from here, Thailand may be a good place to start as price signals and reversal of sentiment are two factors that may converge to help perpetuate a further breakdown in Thai equities. Watch that TREND line closely!

 

Have a great weekend,

 

Darius Dale

Senior Analyst


DRI OSTRICHES

We still see the stock setup as a win-win for investors.  Management continues to fall short of the standards we believe the investment community is demanding but equity holders shouldn’t panic.

 

Win-Win

 

Holders of the stock can win in two ways:

  • Management continues to demonstrate that it cannot effectively manage the business as it exists today, rolling out the red carpet for an activist or group of activists
  • Sequential improvement in industry trends should help Darden in 4QFY13.

 

Conference Call Underscores the Need for Change

 

In our Black Book outlining our short thesis on Darden, published in July 2012, we highlighted a disconnect between management’s commentary and reality.  We described a “problematic line of reasoning in Darden’s quarterly discussion of sales results”.  If anything, our rating of management’s grasp on its business has deteriorated further since then.  The investment community clearly sees that the strategy being employed by the company is proving ineffective.  From our perspective, it seems they are attempting to limit check growth by:

  1. Introducing promotion to only those that need it
  2. Betting that there are customers willing to pay more to offset margin degradation

 

We believe this strategy will prove as ineffective as the majority of the company’s recent efforts.  We have seen management struggle to forecast customers’ adoption rate of various promotions over time and do not buy into the “new learnings” idea that is repeated each quarter as a reason why the same strategies will yield different results.

 

 

Bottom Line

 

The company is trying to manage margin without attacking the middle of the P&L.  Until we hear management change course, and follow Brinker’s lead, we believe that the company will continue to underperform versus its potential.  There is plenty of fat to cut at Darden but it may take an activist for shareholders to reap the rewards of it being shed.

 

 

Earnings Recap – Little Surprise Given Preannouncement

 

Darden delivered a slightly better-than-expected quarter this morning with same-restaurant sales for the blended “Big 3” (Olive Garden, Red Lobster, LongHorn), coming in at -4.6% in 3QFY13 versus -4.5% preannounced in February.  Earnings per share for the quarter came in at $1.02 versus the Street at $1.01.

 

DRI OSTRICHES - dri gap to knaoo

 

DRI OSTRICHES - dri eps recap

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

e

 


Monster Beverage: The Blindingly Obvious

Takeaway: Weakness in Monster Beverage shares this morning weakness highlights the sensitivity of the share price to incremental, non-financial news.

This note was originally published March 22, 2013 at 09:55 in Consumer Staples

Shares of Monster Beverage (MNST) are weak this morning on the news of a new study (presented at a meeting of the American Heart Association) that suggested that energy drinks can raise blood pressure and produce an irregular heartbeat in some people.  In lieu of a study, we suspect the American Heart Association could have simply asked anyone who has ever had a Red Bull, espresso, or a grande latte.

 

What this morning’s weakness does highlight is the sensitivity of the share price to incremental, non-financial news – a phenomenon that we think will persist until we get some clarification with respect to what role the FDA will have, if any (our view is close to zero) in regulating energy drinks.

 

Today, we view this incremental news as a non-event, and anxiously await further studies that can reveal that water “is wet” and the sun is “kind of hot”.  Our primary concern with respect to shares of MNST is not based on nonsense such as this headline, but the fact that we

remain below consensus for EPS for 1H 2013.

 

Finally, we hope the group funding this study saved the receipt and we also hope that it wasn’t our tax dollars doing the funding, because that kind of news is no way to start a weekend.

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

MNST – A Blinding Glimpse of the Obvious

Shares of MNST are weak this morning on the news of a new study (presented at a meeting of the American Heart Association) that suggested that energy drinks can raise blood pressure and produce an irregular heartbeat in some people.  In lieu of a study, we suspect the American Heart Association could have simply asked anyone who has ever had a Red Bull, espresso, or a grande latte.

 

What this morning’s weakness does highlight is the sensitivity of the share price to incremental, non-financial news – a phenomenon that we think will persist until we get some clarification with respect to what role the FDA will have, if any (our view is close to zero) in regulating energy drinks.

 

Today, we view this incremental news as a non-event, and anxiously await further studies that can reveal that water “is wet” and the sun is “kind of hot”.  Our primary concern with respect to shares of MNST is not based on nonsense such as this headline, but the fact that we

remain below consensus for EPS for 1H 2013.

 

Finally, we hope the group funding this study saved the receipt and we also hope that it wasn’t our tax dollars doing the funding, because that kind of news is no way to start a weekend.

 

Have a good weekend,

 

Rob

 

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

 

E:

P:


Cyprus: Defibrillator Needed

Takeaway: Take a look at this chart of the Cyprus stock market. It doesn't get much uglier than this.

Investors in Cyprus have been wearing hard hats for the last five years as the market there has been throwing up nothing but bricks. In case you haven't pulled up a chart longer than one-year in duration, check out the five-year chart below.

 

The official observation from Hedgeye's Inflection Inspection Department? Defibrillator needed.

 

Cyprus: Defibrillator Needed - Cyprus Stock Market Annotated  3



PEP/MDLZ Speculation – Intuitively Compelling, But Not so Fast…

This morning, The Telegraph in the UK reported that Nelson Peltz’s Trian Funds has taken a position in both MDLZ and PEP, with the hope of agitating a merger between the two companies.  We would like to make a couple of quick points on the topic:

  1. The Telegraph is a legitimate source, so this strikes us as more than the normal spivvy hedge fund rumors that bubble up occasionally across the pond, meaning that the positions mentioned have a decent shot at being real
  2. We have to balance that with our innate distrust of Friday rumors toward the end of the quarter
  3. Mr. Peltz has owned PEP as a passive investor previously (November 2011) and the speculation back then was that he would agitate for a separation of the beverage and snack assets (his duration as a shareholder was very short, in that case)
  4. PEP separation speculation makes sense, and may be a matter of if not when, but it has been a matter of speculation for a long time (multi-year duration) but faces several hurdles, not the least significant of which is management reluctance
  5. PEP CEO Indra Nooyi, while a source of frustration for some shareholders, does have the benefit of a reasonable share price performance (+12% YTD) to help keep some potential wolves at bay
  6. MDLZ may be a passive position as well, though we should point out that the legacy Cadbury business is one that Mr. Peltz knows well, so the possibility of more active role in that company is the better possibility, in our view
  7. Mr. Peltz has an intimate knowledge of the beverage business, having bought and sold Snapple, then sold again (sort of) as an activist investor in Cadbury
  8. In this case, PEP takes on the role of the old KFT (business to be broken up) while MDLZ, well, is the old (and new) Cadbury business – circle of life
  9. MDLZ CEO Irene Rosenfeld has been a source of frustration as well for investors in recent quarters, but does deserve credit for the separation of the Kraft assets and the associated valuation creation there – we suspect she has a longer rope with MDLZ shareholders than Nooyi does with PEP shareholders to the extent that she has actually done something in recent years with respect to reshaping her company
  10. The second level of speculation that we have heard regarding PEP is that as part of the separation of snacking and beverage assets, Anheuser-Busch InBev would look to acquire the beverage business, though we are not sure ABI desires either the competitive positioning or the growth profile.
  11. Finally, to wrap all the speculation of the last couple of months into one note, we suspect investors may try to weave POST into this narrative as well, as break up of PEP may be into three parts – snacks, beverages and cereal, with cereal combining with the POST assets
  12. Finally, we think investors have to contextualize all these rumors within the current market valuation of staples post-HNZ, recognizing that being the second company to make an acquisition in a consolidation “wave” makes it much more difficult (or unlikely) to create value for shareholders

Bottom line, the speculation as outlined in the article makes sense to us, but intuitively compelling and likely are often two very different things and we would caution against basing a shorter-term investment thesis based on this type of speculation.  Of the two companies speculated, we prefer MDLZ on a longer-term basis, but think that near-term earnings expectations may be too optimistic.

 

Also, the current multiples in the staples group makes us loathe to chase anything.

 

Here is the article:

 

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9947125/Nelson-Peltz-plots-112bn-Cadbury-merger.html

 

-Rob 

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next