• run with the bulls

    get your first month

    of hedgeye free


Can The Dollar Continue Its Bull Run?

The US dollar is on a tear and is helping the US economy grow through consumption. Remember that Strong Dollar = Strong America. Lower commodity prices are a boon for the American consumer. With the PowerShares DB US Dollar Index Bullish ETF (UUP) up +2.25% year-to-date, there's plenty of room for the dollar to head higher.


Can The Dollar Continue Its Bull Run? - uup ytd

NWL – Q1 Flattered by Tax Rate, Q2 and Q3 Likely Need to Come Down

NWL is on the tape this morning, and the quarter is decidedly unimpressive despite the optics of the better than consensus EPS result.  Adjusted “core” sales grew 2.5%, right smack in line with the company’s annual guidance, but you have to torture the numbers a bit to get there.  EPS was flattered by a lower tax rate, and the company changed the pacing of the quarterly EPS progression, so less Q2 and Q3 and more Q4.

What we liked:

  • Beating consensus is better than the alternative
  • Maintained full-year EPS guidance despite the dilutive ($0.03 per share) sale of assets
  • Sale of underperforming businesses (Bulldog, Ashland, Amerock, etc.) should be accretive to margins as well as the company’s revenue growth profile (60 bps accretive to top line based on the last three years and 40 bps accretive to EBIT margin)
  • Strategic spending behind the brands set to accelerate sequentially through 2013

What we didn’t like:

  • In Q1 2012, the company called out the timing shift of $28 million in sales associated with the European SAP conversion (pulled forward from Q2 into Q1).  This quarter, the company “normalized” the Q1 2012 income statement for SAP, rather than simply calling out the tougher sales comp.  It appears to us the company got the “benefit” of higher EPS last year, and this year wants to flatter the year over income statement comparisons by normalizing EPS.  It isn’t sitting right with us.
  • Lower tax rate (16.5%) versus our model added approximately $0.04 to earnings in the quarter
  • Company benefitted from lower advertising spend in the quarter due to period of management transition
  • Accounts receivable jumped 8.4% in the quarter
  • FCF declined substantially despite lower capital spending in the quarter
  • Writing business to suffer from consolidation of the U.S. office superstore channel (“overhang on the U.S. Writing business for some time to come”).  The company was asked about this specifically at CAGNY and stated it wouldn’t be a factor – it appears to be now.
  • Guided down Q2 and Q3 (“normalized EPS will be much more evenly distributed across the remaining three quarters of the year then it has been in past years”) – this implies a lower Q2 and Q3 and a higher Q4 – have to watch consensus here.

Our expectations were modest for the quarter, and the company managed to slide in under them, but there wasn’t anything in the quarter sufficient to move us off our decidedly positive view on the name.  We can still see a path to $1.80 per share in FCF over time and a stock price that more appropriately reflects the average staples multiple of FCF (15-20x).


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Tech: Back In Action

Technology (XLK) moved back into bullish formation today after being dragged down in large part by Apple (AAPL) over the past few months. It's only up +8.0% year-to-date, compared with the S&P 500 and Healthcare (XLV), which are up +13.4% and 19.8%, respectively. Still, the switch back into bullish formation is a welcome surprise for investors. After today's non-farm payroll numbers, the market is soaring like nobody's business and taking XLK along for the ride.


Tech: Back In Action - XLKtechytd

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.

Will We See 6.5% Unemployment in 2013?

Takeaway: Editor's Note: No one saw a 6-handle move in the unemployment rate coming back in January except us. Here's our highlight from January 23rd.

This note was originally published January 23, 2013 at 14:05 in Macro

As global macro data continues to confirm that growth is stabilizing, we’ve been discussing the possibility of seeing a 6-handle in the unemployment rate in 2013.   With Bernanke offering an explicit employment target of 6.5% for a cessation in QE initiatives, a significant decline in unemployment over the NTM may augur higher yields as the bond market attempts to front-run a prospective Fed exit.  


With market expectations for rates likely to follow the slope in unemployment rather than the actual realization of a 6.5% unemployment rate, we attempted to put some math around how the principal variables driving the Unemployment rate would have to trend for Unemployment to breach the 7% threshold over the next twelve months.  Below we include a quick review of the variables driving the unemployment rate, the summary conclusions, and some other considerations as it relates to the go forward dynamics likely to directionally impact unemployment.   


Of course, Bernanke could effectively hold the exit timeline hostage by again changing the rules mid-game and attaching conditions that a the sub-6.5% unemployment rate be accompanied by a “normalized Labor Force Participation Rate” or a “sustained, negligible output gap”.  We’ve ignored this potentiality here as its largely unmodelable and because the bond market could well move ahead of the Federal Reserve realizing their growth forecast batting average isn’t going to improve from 0%.  


Note that rather than attempting to provide an explicit year-end or 7% unemployment target date, the broader goal of this risk management exercise is to frame up the variable dynamics and quantify the magnitude of change in the relevant unemployment rate drivers necessary to take unemployment below 7.0% and towards 6.5% over the NTM.  Certainly, any number of variable assumptions and scenario iterations can be contemplated.  If you’d like to observe the impact of your own growth and participation rate assumptions on the unemployment rate timeline you can link to the associated model here >> Unemployment Rate Variable Analysis_HEDGEYE



UNEMPLOYMENT 101 - THE VARIABLES:  Below is a summary review of the variables that drive the unemployment rate.  Here, we’ve broken them down into the Input and the Dependent variables based on how we model them.   


Independent/Input Variable Description:

  1. Civilian Non-institutional Population Growth (CNP): The CNP represents persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions, such as penal and mental facilities, and homes for the aged, and who are not on active duty in the Armed Forces.
  2. Employment Growth:  Growth in Employed workers as measured by the BLS Household (CPS) Survey.
  3. Labor Force Participation Rate (LFPR):  Represents the Civilian labor Force as a percentage of the Civilian Non-institutional Population.  Equal to the sum of employed & unemployed workers. 


Dependent Variables:

4. Total Labor Force:  The Civilian Labor force is a product of the Civilian Non-institutional Population & the labor force participation rate

5. Unemployed Workers:   The total number of unemployed workers is the difference between the Labor Force and total employed workers. 


Unemployment Rate = the number of unemployed workers as a % of the Total Labor Force (i.e. the sum of employed and unemployed workers)


So, assumptions need to be made for the growth in the Civilian Non-institutional Population (CNP),  growth in the number of Employed Workers and the Labor Force Participation Rate (LFPR).  The Total Labor Force and the Total Number of Unemployed become a function of the three input variables and the direction in the unemployment rate is determined by the participation rate and the delta between CNP growth and growth in the employed.    



The CONCLUSION:  Can we get 2 out of 3?

In the chart below we provide a timeline view of the 2013 Unemployment Rate under a selection of scenarios.  Obviously, any number of iterations can be envisaged with respect to growth rates and interaction between the principle drivers of the unemployment rate but, in general, 2 of the 3 variables need to trend positively with respect to the unemployment rate for a move to 7% and below to be a 2013 event.  


It’s notable that the NTM moves don’t have to be extraordinary for this to occur.  For example, scenarios in which Employment growth accelerates 30bps (2Y basis) on average in 2013 and CNP growth declines linearly to the historical average over the NTM or the Labor Force Participation rate continues to decline at the 3Y CAGR both result in a move to/below the 7% unemployment level in 4Q13. 


If, however, positive acceleration occurs in just a single variable while the other two flat-line or trend negatively, the timeline for <7.0% unemployment extends significantly.  For example, if employment accelerates 50bps (2Y basis) on average in 2013 while Labor force participation remains static at the current level and CNP growth holds at the current rate, the implied unemployment rate would reach a 2013 low of 7.3% in December. 


In terms of thinking about the directional trend in the relevant variables – with housing continuing to accelerate, the domestic jobs data continuing to trend positively and our #growthstabilzing theme extending itself, we could make a credible case for seeing a modest acceleration in employment growth.  Given that growth in the civilian non-institutional population generally tracks population growth in the 16YOA+ cohort over the longer term and that volatility in active duty military status should be more subdued going forward, the assumption that CNP growth decelerates towards population growth probably represents the baseline case. 


The Labor Force participation rate, and the structural and behavorial psychology dynamics underpinning it, remains the largest wildcard.   The consensus logic goes that in a typical recovery, economic growth and employment growth drive renewed worker interest in employment in a reflexive fashion.  Discouraged workers, who are not currently seeking employment and are not included in the Labor force totals, again begin to actively seek employment.  To the extent that growth in workers coming back to actively look for work outpaces actual employment gains, the unemployment rate is negatively impacted despite the improved economic conditions/outlook.  Here, the transient increase in the unemployment rate would belie a positive economic inflection.


The current situation is complicated by the fact  that despite the ongoing, albeit tepid employment recovery, the resurgence in job seeking, which typifies the back end of business cycle slowdowns, has yet to materialize and the LFPR continues to slide.  Whether this behavioral dynamic continues and to the extent that structural unemployment/length of unemployment is a contributing factor remains an unknown.    Also unknown is the extent to which protracted fiscal policy uncertainty (Health Law, Fiscal Cliff, Budget Control Act/Sequestration, etc) has dragged on employer hiring decisions.  Regardless of the outstanding questions, labor force participation will continue as the real wild-card variable to watch relative to its impact on the unemployment rate.


Will We See 6.5% Unemployment in 2013? - Unemployment Scenario Analysis


Will We See 6.5% Unemployment in 2013? - 16YOA Population Growth


Other Considerations:

  • Annual Benchmark Revision:  the Census Bureau applies an annual population control adjustment to the Civilian Non-institutional Population alongside the January release every year.  Historically, the magnitude of the January adjustment has ranged from tens to hundreds of thousands or even millions of individuals.  An outsized revision to the January 2013 data could shift the unemployment variable dynamics from their current trend.
  • Employment – Growth Connection:  The historical frequency distribution for Employment and growth suggests we’d need to see #growthstabilizing transition to growth accelerating for a concurrent acceleration in employment to manifest.  While employment growth could run ahead of economic growth at the onset of a recovery, historically, employment growth >2% is typically associated with real GDP growth north of 3%.  We show the historical relationship between real GDP Growth  and y/y employment growth as measured by the BLS’s Household Survey below. 
  • Energy/Commodity Inflation:  In our 1Q13 themes call we highlighted the top 3 risks to #growthstabilizing as 1. Rising Oil Prices 2. Japan & 3. Earnings Slowing.  As it relates to risk #1 - as of this morning, both Brent and WTIC have re-captured their respective long-term TAIL risk lines of $92.04 and $111.48 support.  A continued reflation in oil and commodity prices broadly represents a real time tax on consumers, an input cost related margin drag on business, and a material headwind to growth accelerating from here.  


Will We See 6.5% Unemployment in 2013? - Employmet vs GDP Growth


Will We See 6.5% Unemployment in 2013? - Employmet vs GDP Frequency Distribution

Morning Reads From Our Sector Heads

Keith McCullough (CEO):


Rat Meat Sold as Lamb Highlights Food Fears in China (via NY Times)


Gold Traders Most Bearish in Three Years After Drop: Commodities (via Bloomberg)


Matthew Hedrick (Europe):


Slovenia Sells Bonds Despite Ratings Downgrade (via WSJ)


Brian McGough (Retail):


Impact on Bangladesh Victims Weighed (via WWD)


Kevin Kaiser (Energy):


Angola Plans to Simplify Tax Codes to Boost Non-Oil Revenue (via Bloomberg)


Josh Steiner (Financials):


MBIA Settles Flagstar Mortgage Lawsuit for $110 Million (via Bloomberg Businessweek)


Regulators Scrutinize Auto Lenders Over Add-Ons (via WSJ)


Jay Van Sciver (Industrials):


Fastenal April 2013 Report (via Fastenal)


Big Moves

Client Talking Points

Strong Dollar

The US dollar remains in bullish formation and had a big move to the upside yesterday to the tune of +0.7%. The Yen is coming down further while the dollar is appreciating and taking down commodities with it. This continues to be a bullish catalyst for US consumption stocks which is part of our growth thesis.

Tech Mate

Tech has lagged the broader market and select sectors considerably and is only up +7.2% year-to-date via XLK. Meanwhile, the S&P 500 is up +12% pre-NFP report. The sector has been lagging in large part due to Apple (AAPL) but that's starting to change and the sector is turning bullish. Keep an eye on it over the next week.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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 


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.


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.

Three for the Road


"Big upside revision for US nonfarm payrolls. Last month was an anomaly" -@NicTrades


"Talk sense to a fool and he calls you foolish." -Euripides


U.S. adds 165,000 jobs; unemployment 7.5% in latest NFP report.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.