I'm Thinking

“I’m thinking, Mom, I’m thinking.”

-Bill Gates


That’s how Joey Reiman starts Chapter 2 of Thinking For A Living – “The Golden Age of Ideas and Nine Thinkers Who Figured Out How To Make It Work For Them.” It’s a quick read and I’m enjoying it. Studying success inspires me more than Cyprus does.


Thinking for yourself isn’t easy. Maybe that’s why I find being on the road therapeutic. Since I’m not the brightest bulb on the tree to begin with, I’ll take every competitive advantage I can get. One of the big ones is having broad diversity in our client base.  Thinking for a living about markets wouldn’t be complete without feedback loops. Thoughtful clients provide those. So does Twitter.


I was in Philadelphia for the day yesterday and had a dinner in Delaware last night. I’ll be in Baltimore today. Every client has a different style. They have different questions too. Selfishly, sometimes the best answer I can give in a meeting is ‘I don’t know.’ It means I haven’t thought about that enough; it means I need to be more thoughtful; and it means there is work to be done.


Back to the Global Macro Grind


Got US #GrowthStabilizing and #HousingsHammer in the bag as your Big Macro Theme thoughts for Q113?

  1. US Durable Goods ramped +5.7% in February to a new intermediate-term TREND cycle high
  2. Case-Shiller’s US Home Price Index ramped to a new high of +8.1% vs 6.9% last month
  3. In response, the SP500 closed at its 2013 high of 1563 yesterday, two points off its all-time high

What about the Italian Election? What about Cyprus? What about the coffee you spilled on your white shirt?


There’s always something to be worried about in this good life. When it comes to your performance, the question is are you worried about the things that actually matter? And, if you are, have you expressed those concerns correctly in terms of your portfolio’s positioning? If you are bearish on Spain and Italy, why sell US Equities? Why don’t you just sell Spain or Italy?


To be sure, at the end of the world all of this will come home to roost. And the timing on that is something I think about a lot. It’s called mortality. But, in between now and then, I still need to grind through our interconnected Global Macro Risk Management Signals and see what we might want to be thinking about this morning:



  1. US Dollar: up for the 7th week in the last 8, #StrongDollar continues to be a pro-growth signal (for the USA) in our model
  2. US Stocks (SP500): making higher-lows and higher-highs, they remain in a Bullish Formation with a risk range of 1
  3. US Equity Volatility (VIX): making lower-highs and lower-lows, fear remains in a Bearish Formation (risk range 10.82-14.42)


  1. Chinese Stocks (Shanghai Comp): bullish TREND support of 2206 holds as economic data sets up to accelerate in March
  2. South Korean Stocks (KOSPI): trading back above its TRADE and TREND (1975) lines of support this morning
  3. Broad Based Rally: overnight, Philippines +2.7%, Indonesia +1.8%, Thailand +1.4%


  1. The Euro (vs USD): continues to break-down (lower-highs and lower-lows) with a bearish risk range now of $1.27-1.29
  2. German Stocks (DAX): testing immediate-term TRADE support of 7861 this morning; bullish TREND remains intact
  3. Spanish and Italians Stocks: both the IBEX (Spain) and MIB Index (Italy) are bearish on our TRADE and TREND durations

BREAKING NEWS: Italy is not the Philippines. Seriously.


Who cares about 92 million people and a stock market that’s up +15% YTD (Philippines) when we can freak ourselves out about 1 million people in Cyprus whose stock market is down 98% since 2007?


Who cares about the Philippines getting its sovereign debt upgraded to investment-grade for the first time ever (Fitch this morning – ever is a long time), when we can still try to sell crisis coverage advertising when Italy’s debt gets downgraded?


I am obviously not thinking about the #EOW (end of the world) thesis correctly. But neither are the Asian and US equity market bears. Henry Ford said, “thinking is the hardest work there is, which is probably why so few engage in it.” Indeed.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $106.74-110.29, $82.65-83.38, 94.02-96.71, 1.88-1.96%, 10.82-14.42, 941-955, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


I'm Thinking - Chart of the Day


I'm Thinking - Virtual Portfolio


The Macau Metro Monitor, March 27, 2013




Singapore expects overseas visitor arrivals to grow at a slower pace of between 2.8% and 7.6% this year, hurt by a tight domestic labour market that has made it harder for firms to expand, the Singapore Tourism Board said.


The city-state hopes to attract 14.8 to 15.5 million visitors this year, which is an increase from last year's estimated 14.4 million, STB said.  Visitor arrivals rose by 9.1% in 2012 over 2011, while tourism receipts grew around 3% to S$23 billion.



Wynn Macau was fined MOP20,000 (US$2,500) for breaching the privacy law by publicly disclosing the personal information of hotel guests.  The Personal Data Protection Office said yesterday that the gaming operator has already paid two MOP10,000 fines for breaching two principles regarding the handling of personal data.  The case refers to an investigation launched by Wynn Resorts in late 2011 into its former shareholder Kazuo Okada.

Wynn Macau disclosed “sensitive data” of its hotel customers to a third party, which was “already beyond the reasonable expectation of the hotel customers”, the office said in its annual report.  The gaming operator also failed to get the regulator’s approval before transferring data outside Macau, to the United States where its parent company Wynn Resorts Ltd is based, the office added yesterday.  


The total number of non-resident workers in Macau stood at 113,276, up by 13% YoY in February.  The majority – over 68,000 – came from the mainland.

The hospitality sector was the number one employer of imported labour, accounting for over 30% of the total. The number of imported workers is expected to continue going up, as several new casino projects in Cotai are in the pipeline.  The number of imported workers surpassed the 110,000-mark for the first time in November.



Macau unemployment rate (1.9%) held stable as the previous period (November 2012-January 2013).


TODAY’S S&P 500 SET-UP – March 27, 2013

As we look at today's setup for the S&P 500, the range is 13 points or 0.56% downside to 1555 and 0.27% upside to 1568.         










  • YIELD CURVE: 1.63 from 1.66
  • VIX  closed at 12.77 1 day percent change of -7.06%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am:  MBA Mortgage Applications, March 22 (prior -7.1%)
  • 10am: Pending Home Sales M/m, Feb., est. -0.3% (prior 4.5%)
  • 10am: Pending Home Sales Y/y, Feb., est. 8.7% (prior 10.4%)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: Fed’s Rosengren speaks on economy in N.H.
  • 12:15pm: Fed’s Pianalto speaks on monetary policy in Cleveland
  • 1pm: Fed’s Kocherlakota speaks on monetary policy in Minn.
  • 1pm: U.S. to sell $35b 5Y notes


    • 9am: Exec. Office of the Pres., OMB meet w/ EC’s Enterprise, Trade Directorates-General on promoting U.S.-EC regulatory compatibility
    • 9am: FCC Chairman Julius Genachowski, Google Fiber Vice Pres. Milo Medin, speak at Gigabit City Challenge
    • 2pm: American Society of Clinical Oncology, Conquer Cancer Foundation discussion on using big data to improve cancer care


  • Cyprus program isn’t “template” for Euro-area bailouts, EU says
  • Moynihan says he’d like to be BofA’s chief for rest of his life
  • Obama signs 2013 U.S. funding bill locking in cuts he opposes
  • Ericsson said to discuss buying Microsoft’s TV-software unit
  • Apple seeks new trial over appeal in Samsung patent dispute
  • Deutsche Telekom’s T-Mobile adds iPhone as MetroPCS deal looms
  • China said to let more foreign investors trade stock futures
  • Fannie Mae, Freddie Mac ruled exempt from paying transfer tax
  • Focus Media suit over Carlyle buyout is dropped by pension fund
  • Automakers display products at New York International Auto Show
  • Toyota’s U.S. auto outlook improves on consumer confidence
  • EU antitrust regulators may charge banks on CDS collusion: WSJ
  • Prosecutors probing JPMorgan on fullness of Madoff alerts: NYT
  • J.C. Penney raises prices at stores in policy change: NY Post


    • Lindsay (LNN) 7am, $1.29
    • UniFirst (UNF) 8am, $1.13
    • AGF Management (AGF/B CN) 8am, C$0.14
    • Steelcase (SCS) 4pm, $0.19
    • Synnex (SNX) 4pm, $0.88
    • Paychex (PAYX) 4:01pm, $0.39
    • PVH (PVH) 4:02pm, $1.50
    • Forest City Enterprises (FCE/A) 4:02pm, $0.27
    • Red Hat (RHT) 4:04pm, $0.30
    • Five Below (FIVE) 4:04pm, $0.38
    • Verint Systems (VRNT) 4:05pm, $0.75
    • Progress Software (PRGS) 4:30pm, $0.25
    • Texas Industries (TXI) 5:15pm, $(0.41)
    • HB Fuller (FUL) Aft-mkt, $0.50


  • Gold Declines a Fourth Day as U.S. Recovery Signs Curb Demand
  • Corn Supply Slumps Most Since ’75 on Ethanol Profit: Commodities
  • WTI Drops From Near Five-Week High as U.S. Crude Supplies Rise
  • Rebar Prices Rise as Spring Construction Demand Trims Stockpiles
  • Raw Sugar Falls to Five-Week Low on Stocks Buildup; Cocoa Drops
  • Wheat Heads for Quarterly Decline Before USDA Stockpiles Report
  • Nuclear Output at 17-Year High During Refueling: Energy Markets
  • Rubber Advances on Data Showing Expansion at U.S. Companies
  • Fonterra Raises Payout, Cushioning Blow From N.Z. Drought
  • China Revises Fuel-Price Controls; Sinopec, PetroChina Gain
  • South Korea’s Daehan Flour Mills Tenders to Buy Wheat Today
  • Gold in Yen Set for Record Bucks Bullion Slump: Chart of the Day
  • Falkland Oil Claimed by Argentina Sees Islanders Join 1%: Energy
  • Aluminum, Zinc Advance While Copper Little Changed: LME Preview 






















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UA: Looking Good in 1Q. Not 2H

Takeaway: UA is seeing a nice pop in sell-thru at retail, which clears the way for a 1Q beat. But be on the lookout for lower growth in 2H.

We think UnderArmour is seeing a nice pop in its first quarter performance at retail, buoying our view that there will be a bifurcation this year in the company’s earnings trajectory. The Street is at $0.03, we’re at $0.09, and the company earned $0.14 last year.  We think that UA set itself up for a beat in 1Q, but then by 2H when it needs to rely on Footwear and International, we’ll see its EBIT growth rate slow down as it invests more SG&A to grow those newer businesses.


What gives us confidence in the first quarter? Simply put, for 10 quarters, UA’s wholesale sell-in to retail outstripped sell-thru by about 1,000bps. To get those numbers, we took total apparel sales, backed out International, e-commerce and company retail to get a true like-for-like US wholesale number. Then we compared to the weekly SportscanINFO sell-through data. That fueled an average Gross Margin decline of over 100bp over the past two years.


UA: Looking Good in 1Q. Not 2H - sellinvssellthru


The good news is that in 1QTD, the retail sales data suggests that UA’s sell-through has been up near 30%. We should caution against simply jacking up UA’s top line in you model or taking up Gross Margins. Rather, this is the retailers clearing out inventory that has been building up for some time. But at a minimum, it should clear the way for the channel to accept Spring product at a clip sufficient enough for UA to deliver 20%+ growth in the upcoming quarter.



But Watch Out in 2H

We continue to think that UA will join the band of companies in the retail supply chain that is stepping up capital investment this year – both in capex and in SG&A -- but at the higher end. Growth in Footwear and International are both absolutely critical to UA’s aggregate top line. When that happens, we think that revenue and EBIT growth will diverge. If we’re wrong, then we think it is a matter of time until the top line slows, which would be even more damaging to UA’s multiple.


We still think that this is an exceptional brand, but simply think that it belongs to a company that needs to go through some growing pains before it could deliver upon the expectations currently embedded in the stock.


We think it’s more likely than not that earnings growth gets pushed out by a year sometime in 2H, and that investors should take advantage of this on or just after the 1Q print.


UA: Looking Good in 1Q. Not 2H - ua2


UA: Looking Good in 1Q. Not 2H - ua3 

Pinnacle Foods IPO - What's it Worth (Corrected)

Pinnacle Foods is offering 29 million shares of common stock (4.35 million additional shares in the overallotment) in an initial public offering set to price on Thursday the 28th. The Blackstone Group is the selling shareholder and will continue to own 68% of the shares outstanding subsequent to the IPO. The shares are expected to be offered in the range of $18-$20 per share, with a total market capitalization of $2.227 billion at the middle of the range assuming exercise of the overallotment (all of our math does). Proposed ticker is "PF".


Well-Known, Center of the Store Brand Portfolio


Pinnacle Foods is a single geography (the U.S. represents $2.454 billion of the company’s $2.478 billion in 2012 sales), center of the store grocery company that operates in 12 major product categories (as defined by the company):


Pinnacle Foods IPO - What's it Worth (Corrected) - Pinnacle Foods Summary


The company claims leading positions in 10 of the 12 major product categories in which it competes, though we think the definition of “product category” has to be tortured a bit to make that claim. For example, “frozen complete bagged meals” (25.1% share of market, #2 player according to the company) seems like a subset of “frozen” that is somewhat arbitrary. Further, within the Duncan Hines Grocery Division, we accept the company as the market share leader (31.3%) in shelf-stable pickles, but don’t see the category as particularly attractive.


We think investors should view the company as a pure play on the center of the grocery store or, said another way, the section of the grocery store with the least attractive growth profile and margin structure.

Company May Struggle to Grow Revenue

The company acquired Birds Eye Foods in December of 2009, adding approximately $1 billion in net sales to the company. In the years subsequent to that acquisition (’11 and ’12), the company grew revenues +1.3% and +0.4% respectively – given the categories in which it competes, we have a difficult time seeing the company with anything more than 1-3% organic revenue growth profile over time and that may be generous on our part. Our forecast for 2013 is 1.5%.

Based on our preferred metrics, we see the company as a well-run asset with brands that are well-supported by advertising and R&D (see charts below). Unfortunately, that means that we don’t see much opportunity for SG&A leverage going forward, particularly in light of our modest top line assumptions for the company.


Pinnacle Foods IPO - What's it Worth (Corrected) - PF chart2


Pinnacle Foods IPO - What's it Worth (Corrected) - PF Chart3


Margin Opportunities?

The company has cited on each of its last two quarterly conference calls a moderating cost inflation environment. This commentary is largely consistent with the sentiment coming out of CAGNY across consumer staples. Further, the company does have initiatives in place that focus on productivity savings in procurement, manufacturing and logistics that can serve to magnify any benefit to the gross margin line that might accrue from lower input costs.


That is a good thing, as we think any operating margin expansion is likely going to have to come from the gross margin line, and we do see some opportunity there as we move through 2013. The company faces some easy gross margins comparisons in 1H ’13, and we expect that the moderating commodity environment that we are currently in will start to benefit gross margins in 2H ’13, so we see a full year opportunity for gross margin expansion for the company – our assumption is 50+ bps of gross margin expansion in ’13. When we couple our gross margins assumption with our modest top line forecast and the lack of leverage in SG&A and other line items, our forecast is for EBIT to grow 5.5% in ’13 (approximately $100 million of EBITDA get us to a 2013 EBITDA forecast of a little more than $450 million).


What's it worth?


At $19 per share, the company is trading at 9.3x EV/EBITDA with the broader food group at 11.1x, so a discount to the broader group and one that we feel is deserved. We struggle to see material upside given the company's margin structure and brand portfolio and the current state of the grocery industry. Having said that, a couple of non-financial considerations may drive the valuation beyond the point we see as reasonable. To begin with, the yield at $19 will be 3.79%, not outsized, but chunky enough to provide support for the shares in the $18-19 range, limiting the downside.


The company also has about $1 billion in NOLs, shielding the company from cash taxes through 2015 - however, the S-1 doesn't make it clear that the NOLs would survive incremental sales by Blackstone (change of control), making the value difficult to determine. As it currently stands, the NOLs will preserve about $80-$85 million per year (assuming 100% utilized against a 36% tax rate) of income from taxes, through 2015 and "modest" amounts thereafter.  We should point out that Spectrum Brands (SPB) has NOLs that are of substantially longer duration than those at PF that the market doesn't seem to value at all, so we would be careful basing an investment decision on the market's ability to correct assign a value to those assets.


The company may benefit from a dearth of small and mid-cap names in the packaged food space. With a market capitalization of approximately $2.22 billion at the mid-point of the proposed offering range, PF will lie between POST (market cap $1.36 billion) and HSH ($4.16 billion) on the market cap spectrum. HAIN ($2.83 billion) is a different animal given its position in the faster growing natural and organic space.

Highly Levered Asset

Even subsequent to the repayment of approximately $550 million of debt (mostly 9.5% coupon debt, so expensive, to be sure), the company will still be a highly levered asset, trading at 4.5x net debt to trailing 12 months EBITDA. In 2012, FCF (cash from operations less capital expenditures) was $124.6 million – out of that, the company will have to pay approximately $84.4 million in dividends (proposed dividend is $0.18 per share, quarterly), leaving approximately $40 million per year to pay down debt (conservatively, as it assumes no growth). The company is a deleveraging story, though certainly not a rapidly developing one.


The level of debt currently on the balance sheet will likely make it difficult for the company to pursue any acquisition of meaningful size. At 4.5x net debt to EBITDA, PF is near the level where most consumer staples companies end up subsequent to doing a deal. Any acquisitions are likely to be relatively small in nature and not transformational, and that is even before taking into account an elevated valuation environment in the staples space.


Timing is everything they say


The Pinnacle IPO has been threatened for some time – beginning in early 2012. But, as they say, timing is everything and Blackstone has the wind at its back with takeover speculation rampant in the consumer staples space, strength in the broader market and valuations at a multi-year high. Further, and though no one could likely have timed the IPO so fine, the style factors that have been working in the market recently are high short interest (not applicable), low P/E (suggesting low growth) and high debt/EBITDA – or basically everyone’s short book and Pinnacle Foods. Bottom line, there is a good bit supporting this IPO.

While we expect some speculation that Pinnacle could be a target, we don’t see it right now. As we mentioned above, low-growth, center of the store company doesn’t check off any of the boxes that the bigger companies in the space are looking for – emerging market exposure, health and wellness, and categories with pricing power, to name a few. KRFT is a likely consolidator of grocery assets going forward, but that was a pretty easy call to have been made before the IPO.


Where does that leave us?

PF is a highly-levered, low-growth asset trading at only a slight discount to an already inflated peer multiple of EBITDA, and that is giving credit in our forecast to both top-line growth and gross margin expansion. We don't see the name a particularly compelling long-term investment though neither do we see significant downside from the proposed offering price range. Finally, buying from a private equity firm that seems to have timed the market well with regards to its sale doesn't strike us as a particularly good idea.


Robert Campagnino


Managing Director










Matt Hedrick

Senior Analyst

Is US Economic Activity Accelerating?

Takeaway: Strong durable goods orders and rising home prices signal that accelerating growth is officially in play.

This note was originally published March 26, 2013 at 15:27 in Macro

Our baseline view on domestic growth and consumption remains constructive.  Labor market trends have accelerated, home price appreciation should continue to be supported by rising demand and tight supply, and further dollar strength holds the potential to drive ongoing commodity deflation and support real, sustainable consumption growth. 


Our outlook is dynamic, particularly at growth inflection points, and remains data and price dependent, but the early data suggest #GrowthAccelerating may, indeed, be taking the hand-off from #GrowthStabilizing.   The slope of growth in today’s durable goods and Case-Shiller releases is supportive of an acceleration trend.   


Durable and Capital Goods:  However you parse the index and its sub-components, the slope on new order demand for durable and capital goods continues to improve. New Durable Goods orders in February came in at +5.7% month-to-month, ahead of expectations for +3.9% while January was revised higher from -5.2% to -3.2%.  On both a one-year and two-year basis, growth in the first quarter is registering a positive sequential acceleration.  If you exclude Transports, Defense, or Defense & Non-defense Aircraft, the positive growth trends all look the same through the February data. 


The takeaway for Business Investment was positive as well with Core Capital Goods growth (Nondefense Capital Goods, excluding Aircraft) accelerating on both a one-year and two-year basis through the first two months of the quarter.  Accelerating capital and durable goods demand rhymes with recent PMI trends and agrees with the Fed’s first quarter 2013 senior Loan Officer Survey which showed rising demand for both Auto and Business C&I loans.  As a quick math reminder, PCE accounts for approximately 70% of GDP and the durable goods component of PCE represents ~11% of the total. 


Is US Economic Activity Accelerating?   - Durable Goods 032613


Is US Economic Activity Accelerating?   - Durable Goods Scatter 2 032613



Housing: The S&P/Case-Shiller HPI continued to accelerate in January, rising 8.1% y/y against expectations for +7.8% and 6.8% prior.   Given the continued improvement observed in the more concurrent housing metrics (Mortgage Apps, NAHB HMI, New, Pending, & Existing Home Sales), the upside to the January Case-Shiller numbers isn’t particularly surprising.  We continue to like our first quarter #HousingsHammer investment theme and expect further pricing upside in the intermediate term.  


In our view of housing as a Giffen good, demand and price interact reflexively as demand chases price higher which, in turn, drives further price appreciation in a virtuous cycle.   The dynamics underpinning our bullish view on housing remain in place currently as the positive demand-price feedback loop continues to play out alongside further inventory tightening. 


Underneath the positive housing fundamentals, household formation growth remains elevated, Birth Trends are rising, Fed Policy remains explicitly supportive, and further improvement in labor market trends should remain supportive of housing consumption and loan demand growth.  We continue to like consumer facing and housing derivative domestic equity exposure.



Is US Economic Activity Accelerating?   - Case Shiller


Source: Hedgeye Financials

Is US Economic Activity Accelerating?   - 2yr comps normal  1




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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

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  • SHORT SIGNALS 78.35%