Russian Stocks Crash And Burn

Russia's stock market continues to be one of the worst performing in the world with the RTS Index down another -0.93% to start off the month of April. The RTS Index is down -11.6% since hitting its year-to-date high in January. Comparatively, the S&P 500 is up +9.5% year-to-date and closed at a new all-time high yesterday.


Russian Stocks Crash And Burn - Russia equities

Food Prices Plummet

The US dollar is up for the 7th week in the last 8 posting a gain of +0.74% on the US Dollar Index. As the dollar continues to strengthen, commodity prices will continue to fall lower, which is a positive for consumption and in turn, is a positive for global growth. Food prices got pulverized last week with wheat, corn and soy dropping -5.8%, -4.3% and -2.5%, respectively, on a week-over-week basis. When you go grocery shopping next month, you're bound to see a material change in the price of food you shop for. That's the power of a strong dollar at work.


Food Prices Plummet  - food prices

MKC - Valuation is Absurd, but Q1 Consensus is Achievable

Investors are in a tough spot trying to short anything in consumer staples these days and MKC is an excellent example of why that is the case.  The company guided down 2013 significantly when it reported Q4, to the point where Q1 is achievable based on where consensus has settled ($0.56).  Since the guide down, the company’s multiple has expanded significantly (and significantly may be understating it, massively may be a better word).  At some point, valuation is going to matter in this name, but as we are fond of saying, valuation isn’t a catalyst.  Earnings are, however, a catalyst, so here is a quick look at where we shake out on the quarter:

MKC is up against its toughest revenue comp of the year (+15.8% reported, +9.5% constant currency organic).


The company’s 2013 outlook contemplates a 1% benefit from pricing, which seems reasonable to us - keep in mind that the company anticipated pricing of 5% across both of its segments in 2012, and was only able to achieve that target in 1H (Q3 pricing +4.5%, Q4 +3.2%).

The company’s 2-4% volume/mix forecast is likely 2H weighted given the progression of volume/mix in 2012 (+4.3% in Q1 moving to -0.3% in Q4).


We are at the lower end of the company’s range for our Q1 estimate.  Acquisitions won’t be a factor in sales growth in Q1 and currency should remain a drag on top line – the net result is our revenue forecast of $924.8 million, slightly below consensus of $925.7 million.


However, the company’s gross margin comp (-274 bps) is the easiest year over year comparison of 2013 as the company is lapping a significant increase in input costs.


Material cost increases are forecasted to increase 3% in ’13 (high single digit cost inflation in 2012), and that should be a trend that improves throughout the course of the year.  Consensus gross margin is 39.4%, only a slight improvement versus 2012 (39.19% reported).  We think consensus may be too conservative on this metric – we are looking for a 50 bps increase, with a net result of a 3.3% increase in gross margin dollars versus 2012.


While SG&A as a % of sales declined 102 bps in Q1 2012 and the company is lapping a $9 million increase in brand marketing support, we are forecasting a modest increase in this metric - +15 bps.


Taken together, we forecast a modest gain in EBIT margin of 35 bps.  In Q1 2012, the company’s EBIT margin declined 172 bps making this quarter the the easiest comparison of the year for MKC.


Finally, the tax rate will be lower year over year (29.5% forecasted full year annual tax rate).


Where does that leave us?


Our forecast is for EPS of $0.60 per share, $0.04 ahead of consensus, recognizing that Q1 2012 consensus declined versus the prior year (-2.9%).   This is precisely why it has been so tough to be short anything in staples – the combination of money flows and the fact that there aren’t a heck of a lot of names where we have a clear path to an earnings miss.  Having said that, we don’t see beating a sandbagged Q1 as a positive catalyst for MKC, particularly in light of the recent multiple expansion in the name.  Quite frankly, it’s hard for us to see how you get hurt on the short side here, but in the spirit of full disclosure we have thought that for about $3, or 1 full P/E turn.  Also, it seems that unless a staples company posts a clear EPS miss followed up by a conference call where management lights themselves on fire, staples names only go up on EPS, regardless of quality (GIS?).  Finally, we should also point out that short interest has crept up in the name in recent weeks and, unfortunately, it seems that any short in consumer staples is a weak short, so we wouldn’t take in a full position and would be prepared to short higher – the multiple will matter at some point.


MKC - Valuation is Absurd, but Q1 Consensus is Achievable - MKC PE 4.1.13

Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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All-Time Is a Long Time

Client Talking Points

US Stocks Hit New Highs

As we often say at Hedgeye, all-time is a long time, and that’s just what happened to US stocks, which hit their all-time closing highs last week. Those highs were driven by our fulcrum point for the bull case – a strong US dollar. That drives US and Chinese consumption, which drives economic growth.



Strong Dollar, Lower Food Prices

As the US dollar strengthens – up for the seventh week in the last eight – food prices are heading lower. On a week-over-week basis, wheat fell 5.8%, corn fell 4.3% and soy prices dropped 2.5%. Cheaper food prices make things easier on a consumer’s wallet, which in turn could help drive consumption elsewhere.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“Happy Opening Day” – John Sterling, New York Yankees’ play-by-play radio announcer


“Live as if you were to die tomorrow. Learn as if you were to live forever.” – Mahatma Gandhi


22 points, the margin of victory for Louisville in its NCAA basketball tournament game against Duke Sunday night

Trusting Fear-Dwellers

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

“Let no such man be trusted.”



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:


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,



Keith R. McCullough
Chief Executive Officer


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