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Trusting Fear-Dwellers

This note was originally published at 8am on March 18, 2013 for Hedgeye subscribers.

“Let no such man be trusted.”

-Shakespeare

 

According to John Meacham (author of Thomas Jefferson: The Art of Power), that was one of Jefferson’s favorite passages from Shakespeare’s Merchant of Venice – the tragic comedy about a man (Shylock) lending to another man (Antonio) for a pound of his flesh.

 

Thank goodness for Portia – in the end, she reminded Shylock that he must remove Antonio’s “flesh” (not the blood) and warned him that if he went a hair beyond a pound, “Thou diest and all thy goods are confiscate."

 

Written at the end of the 16th century (between 1596 and 1598), these were some pretty serious times of debate about debt and default. But looking at today’s consensus fear-mongering about Cyprus screwing its depositors, what has changed? Is the world about to end, again?

 

Back to the Global Macro Grind

 

I realize that’s maybe a little too philosophical for the monkey getting whipped around by the futures this morning. As Meacham himself points out, “Plenty of philosophical men live in abstract regions, debating types and shadows.”

 

But, my friends, behold! “The rarer sort is the reader and thinker who can see the world whole.” (Jefferson: The Art of Power, pg 47) And our risk management duty this morning is not to freak-out Italian Election style; it’s to see the world for what it is, not what Fear-Dwellers who have been getting run-over shorting US stocks for all of 2013 want it to be.

 

“To be, or not to be”, scared out of your mind this morning - remains the question. Todd Jordan and I took our wives to see Paul Giamatti in Hamlet this weekend so, admittedly, I have the Shakes; please bear with me as you read the Top 3 Most Read on Bloomberg this morning:

  1. “CYPRIOT OUTRAGE COULD DERAIL EURO-AREA BAILOUT”
  2. “ASIA STOCKS DROP ON CYPRUS BANK LEVY”
  3. “GOLD, GERMAN BONDS RALLY ON CYPRUS”

I know, I know – this is some scary stuff. If you’d like to freak-out alongside Old Media (must have crisis for ratings to stop crashing), I have a new hash-tag for you: #EOW (End Of World).

 

All of this comes after the US Dollar had its 1st down week in the last 6 (one week does not a new intermediate-term TREND make) – so what is a man or woman to do this morning but look at everything else that’s born out of the horror that is Cyprus:

  1. German and British stocks (after hitting new highs last wk) are down a whole -1% and -0.7%, respectively
  2. The Euro is actually now up on the session (versus the USD) at $1.29
  3. Irish stocks are up on the day too

Irish stocks? Yes me friends – ‘twas Saint Patty’s day yesterday. So, if the world is going to end today, have another pint, and smile about it will ya!

 

To be sure, at some point we will actually see the end of the world (and that day I will not be writing an Early Look), so I don’t want to be too complacent here. But I don’t want you freaking-out at another lower-high for the VIX and higher-low in the US stock market either.

 

Contextualizing where people are freaking-out from is usually more important than the why (their storytelling) after the correction (it’s called mean reversion, and yes it happens after stocks are up for 10 of the last 11 weeks).

 

First, here’s the context of Cyprus’ stock market:

  1. Down -8% in the last month
  2. Down -16% in the last 3 months
  3. Down -62% in the last year

Evidently, aside from some Russian money launderers (who don’t do Macro) getting smoked this morning, someone down there in the Socialized South of Europe knew something was going on, for a while now.

 

Then, there’s the US stock market’s context:

  1. Immediate-term TRADE overbought line = 1567
  2. Immediate-term TRADE support line = 1535
  3. Intermediate-term TREND support = 1486

In other words, with US Equity Volatility (VIX) down another -10.2% last week to a fresh 5-yr weekly closing low of 11.30, the Fear-Dwelling (front-month VIX) is down -41% from the last day you could have freaked right out and sold low (February 25th, Italian Election Day). So you might not want to do that again today. After selling some on green last week, we’ll be covering shorts and getting longer again, on red.

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000 and the SP500 are now $1569-1605, $107.27-110.17, $81.94-83.04, 93.64-97.39, 1.91-2.01%, 10.72-14.47, 938-958, and 1535-1567, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Trusting Fear-Dwellers - Chart of the Day

 

Trusting Fear-Dwellers - Virtual Portfolio



The Great Contest

“Well, I understand that you are to beat me in this contest.”

-John Adams

 

That, of course, is what Adams told Thomas Jefferson when it became clear to him in 1800 that Jefferson was going to replace him and become the 3rd President of the United States.

 

Mr. Adams, this is no personal contest between you and me… Two systems of principles on the subject of government divide our fellow-citizens into two parties. With one of these you concur, and I with the other.” –Thomas Jefferson (The Art of Power, page 327-328)

 

In all great contests, there are two competitors, teams, and/or ideas. In all great contests, someone wins and someone loses. In the greatest of contests, the winner is gracious in victory – and the loser learns from defeat.

 

Back to the Global Macro Grind

 

Let us, then, fellow-citizens, unite with one heart and one mind” (Jefferson during his inaugural address of 1801), and become Yale Hockey fans as they head to the Frozen Four, for the first time since 1952!

 

(I had to find a way to slip that in there)

 

In other news, crisis-mongering remains in crisis and US stocks hit an all-time high last week.

 

As we like to say here at Hedgeye Risk Management – all-time is a long time, and this all-time high was driven by the fulcrum point of our bull case for US (and Chinese) Consumption Growth – a Strong US Dollar.

 

With the US Dollar up for the 7th week in the last 8 (+0.74% to 83.14 on the US Dollar Index):

  1. Down -3% in the last 2 months, Brent Oil Prices stopped going down last wk (+2.2% to close the wk at $110.02/barrel)
  2. Food Prices continued to get pulverized week-over-week (Wheat -5.8%, Corn -4.3%, and Soy -2.5%, last wk alone)

And the net long positions in commodities (futures and options contracts) continue to go squirrely:

  1. Gold – net long positions fell another -14% on the wk after Gold’s price fell -0.7% (net long position -41% YTD)
  2. Silver – net long position continued to crash (-77% on the wk!) to its lowest level since 2007
  3. Copper – built a record net short position of -30,036 contracts

The thing about shiny metals is that (after Gold went up for 12 years in a row) a lot of people own them now in lieu of what were Burning Bernanke Bucks. That (and all those Gold commercials you still hear on the radio) is a rear-view looking thesis. So is the end of the world.

 

As the great USA Olympic Hockey Coach, Herb Brooks, might say about this morning’s metals update – “Again!”:

  1. Gold is flattish around $1598/oz (down -4.6% YTD)
  2. Silver is down another -0.9% to $28.04/oz (down -13% from its early 2013 high)
  3. Copper leads losers in Global Macro trading this morning, down another -1.3% to $3.35/lb

All the while, The Great Contest between #PTCs (professional top callers) and those of us who change as the game does rages on. Are Food, Energy, and Metals prices deflating a good or a bad thing for the global consumption economy?

 

What do we know, but the last time our models were this bullish on US economic growth prospects relative to consensus was in 2009 when many of these same factors rhymed. The Dollar rose from its ashes and Commodity prices kept crashing well into Q209.

 

But if you sold in May of 2009 and went away, was that a good decision or a bad one? What if you sold in April of 2009? My keen sense from my latest institutional client meetings is that a lot of people are still looking for a big Q2 correction. What if it doesn’t come?

 

Risk obviously happens fast, so we’ll be sure to let you know if anything changes in terms of our intermediate-term TREND view (bullish on Asian and US stocks; bearish on Commodities, Yens, Treasuries). In the meantime, may the great contest between bulls and bears continue!

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $106.75-110.39, $3.34-3.44, $82.61-83.49, 93.44-96.35, 1.84-1.95%, 12.13-14.26, 947-955, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Great Contest - Chart of the Day

 

The Great Contest - Virtual Portfolio


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 1, 2013


As we look at today's setup for the S&P 500, the range is 16 points or 0.84% downside to 1556 and 0.18% upside to 1572.            

                                                                                                                   

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10a


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.62 from 1.61
  • VIX  closed at 12.7 1 day percent change of -3.42%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:58am: Markit US PMI Final, March, est. 55.2
  • 10am: Construction Spending M/m, Feb., est. 0.8% (prior -2.1%)
  • 10am: ISM Manufacturing, March, est. 54.2 (prior 54.2)
  • 10am: ISM Prices Paid, March, est. 59.5 (prior 61.5)
  • 11am: Fed to buy $2.75b-$3.5b in 2020-2023 sector
  • 11:30am: US to sell $35b 3-mo., $30b 6-mo. bills
  • U.S. Rates Weekly Agenda

GOVERNMENT:

    • Washington Week Ahead
    • Rule governing high-risk loans takes effect; may change how FDIC-insured banks invest in CLOs
    • USTR releases annual assessments of global trade barriers, incl study on technical, health, safety trade restrictions
    • Homeland Security to begin cutting staffing hours
    • FAA will begin furloughing staff, closing more than 230 control towers at smaller and midsize airports

WHAT TO WATCH

  • Federal court judge dismisses civil claims against U.S. banks over Libor manipulation; rules some commodities-related suits may proceed
  • Verizon sued for $2.85b in debt, interest from Idearc spinoff
  • Dell said to consider Blackstone LBO with CEO guarantee
  • Proxy statement has PC sales falling by $10b over 4 years
  • Chesapeake names Dixon acting CEO, to hold conf. call on ops
  • Beijing, Shanghai boost home curbs as China acts to cool mkt
  • Wal-Mart to spend 500m yuan ungrading Chinese stores, China National Radio says
  • All Nippon Airways plans for June restart of Dreamliner flights
  • Boeing canceled test flight of 787, Seattle Times says
  • Cerberus may begin more formal steps in Freedom Group sale
  • Exxon to excavate Pegasus oil pipeline to find cause of leak
  • Google is biggest threat to TripAdvisor, CEO Steve Kaufer says in FT
  • Panasonic said to be under U.S. probe over bribery: WSJ
  • Apple iRadio may be introduced in summer 2013, AppleInsider says
  • Tesla turned profitable in 1Q; Model S sales exceeded forecast
  • Amazon buying Goodreads book-review site irks author group
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • BOJ Meeting, U.S. Jobs, China Index: Wk Ahead April 1-April 6

EARNINGS:

    • Cal-Maine Foods (CALM) 6:30am, $1.40

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Corn Heads for Bear Market After U.S. Stockpiles Beat Estimates
  • Bullish Bets Rebound at Fastest Pace in Four Years: Commodities
  • Rubber Falls Into Bear Market as Stockpiles Swell, Demand Eases
  • Indonesia to Review Rubber Exports After Prices Tumble in Tokyo
  • Brent-WTI Crude Spread Widens as Exxon Shuts Pipe to Texas
  • Spot Gold Little Changed as Silver Nears Bear-Market Threshold
  • Copper Drops to 8-Month Low in Shanghai on China Manufacturing
  • Hedge Funds Backing $100 Crude Lift Bullish Bets: Energy Markets
  • Asia Gasoil Contango Narrows; Fuel Oil Crack Drops: Oil Products
  • Mitsubishi Materials to Cut First-Half Copper Output by 6.8%
  • Palm Oil Drops to Two-Month Low as Europe Crisis to Curb Demand
  • Russia Sets Minimum Prices for Grain Purchases for Stockpiles
  • China Manufacturing Rises at Faster Pace in March, Gauges Show
  • Coffee Exports From Indonesia’s Sumatra Fall as Inventories Drop

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 


Staples - Q1 in the Books, A Look Back

"May you live in interesting times."

 

-Reputed Chinese curse

 

It has been an interesting start to the year, to say the least, for the consumer staples sector.  The sector's leadership status in a strong tape is certainly an unfamiliar and perhaps uncomfortable position for many investors.

 

In review, another month in the books and another month of out-performance for our coverage.  On average, consumer staples stocks rose 4.8% in March, with only the household and personal care sector and the tobacco sector lagging the S&P's +3.6% rise during the month.

 

Staples - Q1 in the Books, A Look Back - Sector Performance 3.29.13

 

Staples - Q1 in the Books, A Look Back - Consumer Staples ETF  corrected

 

Packaged food continued its strong performance (+7.0% in March) in the wake of the Heinz transaction, lagging only the protein sector (+9.0%) in terms of monthly performance.

 

We continue to struggle (based on our conversations with clients it seems many dedicated staples investors share the sentiment) with valuation.  However, we recognize that valuation in and of itself is not a catalyst and that valuation may not matter for periods of time, perhaps extended periods of time.  The simple fact is that a number of staples names have outstripped the multiple that we are comfortable paying for the cash flow stream, even considering earnings upside from potential margin improvement driven by lower commodity costs and improvements in business momentum driven by improved consumption trends.  That doesn't mean that we are in a hurry to run out and short everything, but we caution investors to recognize that at some point, valuation will matter.

 

Staples - Q1 in the Books, A Look Back - Consumer Staples Forward PE 3.29.13

 

Staples - Q1 in the Books, A Look Back - Packaged Food Relative PE

 

This month we have added a look at several quantitative factors in relation to the staples sector.  Keep in mind that all these factors are relative within staples (i.e. smaller capitalization does not meet the technical definition of small cap, but rather represents a name within the lower half of the cap spectrum within staples).


Staples - Q1 in the Books, A Look Back - Beta Chase 3.3.29

 

Staples - Q1 in the Books, A Look Back - Debt to EBITDA

 

Staples - Q1 in the Books, A Look Back - Quant Factors   Dividend Yield

 

Staples - Q1 in the Books, A Look Back - Quant Factors   Market Cap

 

Staples - Q1 in the Books, A Look Back - Quant Factors   Short Interest

 

Based on the above analysis, we can develop several themes in terms of what has worked within the staples sector:

  1. In March, lower beta (lower growth, perhaps 2012 laggard) outperformed higher beta names
  2. Higher short interest has been a consistent out-performer in 2013
  3. Smaller capitalization names had a very good month in March
  4. Dividend yield doesn't tell us much of a story - lower yield had a period of out-performance that has since reversed
  5. Higher debt to EBITDA has been a consistent outperformer, likely representing outperformance of lower "quality" names

Bear in mind, the performance of the staples sector has largely been absent any significant, positive EPS revisions.  Further, absent any material change in business momentum or margins, consensus estimates should head lower on the strength of the dollar to the extent a company has businesses outside the U.S.  While we acknowledge the impact of translating a set of results from one currency to the next is largely irrelevant to the value of a business, optics do matter.

 

Staples - Q1 in the Books, A Look Back - EPS Revision Chart

 

Revisiting an analysis from last month, we see that performance was balanced across PE quartiles, with the modest relative under-performance in higher multiple names largely caused by BNNY's monthly performance (-9.5%).  In fact, it was nearly impossible to find a consumer staples stock that didn't go up in the month of March.

 

Staples - Q1 in the Books, A Look Back - Monthly Performance by Quartile 3.30.13

 

Similar to last month, multiples expanded across all quartiles.

 

Staples - Q1 in the Books, A Look Back - PE by Quartile 3.30.13

 

In keeping with a familiar theme, the yield spread between the 10 year treasury and the XLP has widened in recent days, making the XLP marginally more attractive to investors seeking yield.  Further, we think it is possible that yield bearing assets in the U.S. (XLP and consumer staples stocks included) might see inflows to the extent that confidence in the European banks has taken a hit in the wake of the Cyprus situation.

 

Staples - Q1 in the Books, A Look Back - XLP vs. 10 year 3.30.13

 

Staples - Q1 in the Books, A Look Back - Yield Spread 3.30.13

 

Finally, taking a look at the performance of the XLP in relation to a basket of economic indicators and the performance versus consensus shows us that the broader economy continues to surprise to the upside (consistent with Hedgeye's macro call) driving performance of the XLP.

 

Staples - Q1 in the Books, A Look Back - XLP and economic surprises  corrected

 

Staples - Q1 in the Books, A Look Back - Economic Surprise Index

 

 

Where does that leave us?

 

Valuations suggest that we should stick to the sidelines, but it is difficult to ignore/fight improvements in the economy and money flows.  Therefore, we are going to stick with value where we can find it and our preferred list remains unchanged:

  1. ADM
  2. BUD
  3. CAG
  4. NWL

Our least preferred list could be much longer based solely upon our concerns surrounding valuations in the sector, but for the moment we will add two names as we approach Q1 EPS:

 

  1. KMB
  2. GIS
  3. TAP
  4. CL (new)
  5. K (new)

Enjoy the rest of your weekend.

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst


THE WEEK AHEAD

The Economic Data calendar for the week of the 1st of April through the 5th is full of critical releases and events. Attached below is a snapshot of some (though far from all of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - WeekAhead


Early Look

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