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Morning Reads From Our Sector Heads

Todd Jordan (GLL):

 

Carnival cruise offers cruise to Caribbean for $38 a night (via ABC15)

 

Brian McGough (Retail):

 

Chinese Sportswear Company Sues MJ (via SGI News)

 

Kevin Kaiser (Energy):

 

Oxy Plus Proxy Would Shake Big Oil (via WSJ)

 

Jay Van Sciver (Industrials):

 

Shanghai in China Confirms Start of Carbon Emissions Trading in June (List of Initial Companies Named) (via IBT)

 


Treasuries And Jobless Claims

If we take a look at the yield of the 10-year Treasury and put it up against non-seasonally adjust (NSA) jobless claims, you can see that there's a correlation. Yields on Treasuries tend to increase after a decrease in jobless claims and vice versa. When things are bad and jobless claims rise, so does the yield on the 10-year. Does this mean that investors are looking for allocate capital to a safe haven like Treasuries when things begin to go to hell in a handbasket? Could be.

 

Treasuries And Jobless Claims - image001


The Consumption Game

Client Talking Points

Strong Dollar

Our non-consensus bull case for US growth is something we've been talking about for awhile now and we think that it sells itself. It all revolves around consumption growth which in turn boosts US consumption stocks. The three pillars of our case are:

 

1.       #StrongDollar continues to make a series of higher-lows and higher-highs (vs its 40yr low in 2011)

2.       #CommodityDeflation continues to make a series of lower-highs and lower-lows (vs their 40yr high in 2011)

3.       US Consumption Growth occurs when the real purchasing power of the US currency rises

 

 

 

Changing Our Mind

What would get us to move away from our consumption plan outlined above? Easy: a change in monetary policy. If Bernanke starts printing money again, then we're in for a rough ride. Commodity prices would like jump as the US dollar was debauched. As US food and gas prices increase, consumption in the US decreases. It's as simple as that. We'll have to wait and see what the Fed is up to. Who knows if QE will ever truly end at this rate?

Asset Allocation

CASH 28% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 26%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.

 

FDX

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

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

TWEET OF THE DAY

"Failed HLF distributor files first lawsuit post-Ackman @nypost Salesman’s suit says $HLF a ‘scheme’, nyp.st/14dXaMC" -@hedgeygrl

QUOTE OF THE DAY

"Laughing at our mistakes can lengthen our own life. Laughing at someone else's can shorten it." -Cullen Hightower

STAT OF THE DAY

U.S. weekly jobless claims drop 42,000 to 346,000


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

MCD OPERATIONAL ISSUES ARE REAL

One of the concerns we have expressed about MCD for roughly a year now is that self-inflicted wounds are taking a toll on operations and, as a result, speed of service. This has been a  factor behind the decline in the core business.

 

An article in today’s WSJ titled, “McDonald's Tackles Repair of 'Broken' Service” effectively confirms our thesis.

 

Our bearish bias in 2013 has been wrong with MCD up 15.1% year-to-date versus the S&P 500 up 11.4%.  We don’t see any need to change our thesis at this time. Today’s article in the WSJ, coupled with the company’s recent admission that they have a millennial problem, suggests that a snap back in sales is unlikely. 

 

As we have discussed in prior notes, the Street is anticipating an inflection point in McDonald’s sales trends in 2013.  In late 2003, the aggressive push for positive comparable sales growth via the dollar menu did not fix the underlying problems with the business.  The 2013 rehash of this strategy is also unlikely to work.  Sustainable top line growth will be achieved through driving efficiency in the stores, and clearly MCD still has issues to address.  Changes in service standards require training and investment and don’t happen overnight. As a result, addressing the current operational issues will have a negative impact McOpCo store-level margins and franchisee cash flow.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst



Feel The Heat

“Energy itself can neither be created nor destroyed, though its many forms can change.”

-Eric Chaisson

 

That’s pretty much the first law of thermodynamics. The second law is that there is a price that gets paid when forms of energy change – it’s called entropy.

 

Entropy is also a measure of the disorder (or randomness) of a system… some of these basic thermodynamic ideas date back to 1824, when a young French army officer, Sadi Carnot, sought to understand the rudimentary elements of an ordinary steam engine… engines work because of a temperature difference…” (Cosmic Evolution, pg 17)

 

In market speak, you might insert words for entropy like “rip” or “meltdown” – but, to me at least, it’s all about the same thing – rates of change. And for those of us who aren’t on the Federal Reserve’s inside information leak-list, I guess that’s the best we can do. Think for ourselves and do our own work in a transparent and accountable way.

 

Back to the Global Macro Grind

 

“Literally, thermodynamics means movement of heat” (Chaisson). That’s why I call my rants on Twitter #TweetHeat. And oh were the #PTCs (Professional Top Callers) feeling it yesterday.

 

No matter what your market views have been for 2013, here we are – at all-time closing highs for the SP500 (+11.3% YTD at 1587). Consumption stocks continue to lead the charge (Healthcare (XLV) +18.82%, Consumer Discretionary (XLY) +13.13%) and Commodities continue to get hammered.

 

To review our non-consensus bull case for US Growth (and US Consumption Equities):

  1. #StrongDollar continues to make a series of higher-lows and higher-highs (vs its 40yr low in 2011)
  2. #CommodityDeflation continues to make a series of lower-highs and lower-lows (vs their 40yr high in 2011)
  3. US Consumption Growth occurs when the real purchasing power of the US currency rises

Pretty simple really. Wouldn’t it be nice if the President of the United States (either Bush or Obama) A) understood these basic concepts and/or B) had financial advisors who made these fundamentals crystal clear to them instead of focusing on leaking whispers about their spurious economic policy conclusions to the #OldWall?

 

Sadly, Margaret Thatcher passed away this week. She taught Ronald Reagan a lot about the real purchasing power of a currency and the real impact a political leader can have with her people (trust) by calling out all the conflicted and compromised bureaucrats. She was a patriot. God rest her soul.

 

We made some sales yesterday (I don’t like buying on green), but what would really get me to change my economic and market views?

  1. If Bernanke debauched the Dollar again

What would happen if Obama let that happen?

  1. Dollar Down = Commodities Up
  2. Commodities Up = Food and Gas Prices Up
  3. Food and Gas Prices Up = US Consumption Growth Down

Again, it’s not that complicated. Really.

 

What is complicated is comprehending A) Bernanke’s “transparency” model (leaking information selectively? #embarrassing) and B) how he has the “best inflation track record of any central banker since World War II” (that’s what he whined to Senator Bob Corker, under oath, earlier this year after Corker called him the biggest dove in modern history).

 

Bernanke has been wrong on this growth forecasts at least 70-80% of the time since he took over at the Fed in 2006. Remember, he got the job with his thesis of the “Great Moderation” (he was talking about volatility, after it hit generational lows). Not that he wants to talk about that anymore (his Fed has overseen the Greatest Volatility in US market history).

 

Maybe we should call his legacy The Great Transparency? Nah. Maybe Obama should put Bernanke on trial. Give the man his fair share already. Please have him explain (with someone who isn’t a market moron asking the questions):

 

A)     How leaking information selectively = #transparency

B)      How the all-time lows in the US Dollar (2011) = #trust

C)      How the all-time highs in Commodities (2011) = #accountability

 

To be balanced, the all-time highs for Food Prices (globally) didn’t happen until 2012 (Gold and the CRB index topped in 2011). So there’s still a fighting chance that Bernanke’s final rip to all-time bubble highs comes in either his reputation amongst people who get paid to believe him or in the US Bond market.

 

Q: (in this order) Housing, Commodities, Gold, Food, Treasuries, and now US Stocks (again). He Who Saw No Inflation at the all-time highs in all of those prices – what does he really see? Or like any un-elected and un-accountable central planner with a confirmation bias, does he see what he wants to see?

 

What he’s hiding from you is what you really don’t trust. And you shouldn’t. Fortunately, the other side of his storytelling doesn’t cease to exist. The popping of his Commodity Bubble is becoming self evident. That’s a real-time Tax Cut. That’s good. So will be the inevitable leak that you are no longer getting 0% on your hard earned savings account.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, USD/EUR, UST10yr Yield, VIX and the SP500 are now $1, $102.39-107.38, $3.29-3.45, $82.24-83.34, 97.62-101.63, $1.27-1.31, 1.71-1.88%, 12.04-14.41, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Feel The Heat - Chart of the Day

 

Feel The Heat - Virtual Portfolio


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