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DF – Quick Update on When Issued Trading

WWAV shares began trading “when issued” this morning, and since you don’t need a borrow on when issued shares, investors are buying shares of DF and simply selling shares of WWAV/A and WWAV/B (when issued) – both those securities are now trading at a substantial discount to WWAV regular way (WWAV/B is trading nearly a $1 below WWAV).



There is also significant volume in the DF when issued (trading at $9.15), but keep in mind that value includes the remaining 19.9% interest in WWAV that DF will seek to monetize over the next 18 months.

 

Using the most aggressive value of the DF stub obtained by looking at all these moving parts – DF regular way less the value of WWAV/B, the stub is trading at approximately $6 per share, which still only equates to 5.1x EV/EBITDA for the fluid milk business, so there is still plenty of meat on the bone.

 

For investors that are able to trade when issued securities (not everyone), purchasing DF when issued makes a great deal of sense to us at this point.  Interestingly, while acknowledging that WWAV is a difficult borrow, investors so inclined and able to do so could by WWAV/B when issued and short WWAV regular way – the two values are nearly a $1 apart and that spread will move to zero over the next week.

 

-Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



Signs of European Strength?

Takeaway: Here's our take on the GDP numbers from Europe and what it means for the Euro and for stock markets in the region.

This note was originally published May 15, 2013 at 11:23 in Macro

European first quarter 2013 Final GDP figures were released today and confirm our call for protracted sluggishness across the region. Eurozone GDP has now contracted for sixth straight quarters and actual results for the region and major countries were lower than estimates on a quarter-on-quarter basis:  Eurozone -0.2% (est -0.1%), Germany +0.1% (est +0.3%), France -0.2% (est -0.1%), Italy -0.5% (est -0.4%).

 

Call: we expect the EUR/USD to be range bound over the intermediate term, anchored on the ECB’s backstop for the region (with long-term TAIL support at $1.22) and a TREND/TAIL line of resistance at $1.32. We think that as the market increasingly looks for another interest rate cut (which we’re not calling for over the next months as Draghi assesses the last cut), the EUR/USD may weaken as equities rise.  (This is also in line with our #StrongDollar call).

 

Signs of European Strength? - rr. eurusd

 

 

Negative France/ Positive Germany and the Periphery


We continue to wrestle with the miss-match on weak fundamental results and strong capital market performance across much of the region.

 

On the fundamental side, we highlight France as one nation that has not proven it has a credible plan of structural reforms to improve its competitiveness. We continue to think that Hollande’s budget policy of increased taxes without sufficient spending cuts and its outsized debt to GDP (now over 90%) will hamper the economy (and the region) more than it helps. That said, the European Commission is squarely on board to allow France two more years to reach its deficit reduction target level and has largely signaled a dovishness vis-à-vis further austerity. This could prove to be a tailwind.  

 

On the flip side, we like Germany on a relative basis. We see GDP gains coming in 2H and the EUR/USD price benefiting the export-heavy country. Chancellor Merkel should continue to talk-up her handling of the economy throughout the “crisis” in Europe as she prepares for re-elections in September. We see Germany playing ball in the European project (writing bailout checks if needed) versus the very adverse option of a return to a strong D-Mark.

 

Despite ongoing fundamental weakness across the periphery, we continue to believe that market participants will buy the periphery (equities and bonds) as the yield chase extends itself alongside the expectation that the ECB will backstop the Union at all costs. 

 

Sovereign bond issuance year-to-date continues to show paper being priced at lower levels, a positive sign, and in the coming months we may see steps towards setting up loan pools to small-and-medium-sized enterprises (SMEs), which would be another tailwind to a channel that is currently clogged.

 


Euro Tail Risk

European Q1 2013 Final GDP figures were released today and confirm our call for protracted sluggishness across the region. Eurozone GDP has now contracted for sixth straight quarters and actual results for the region and major countries were lower than estimates on a Q/Q basis:  Eurozone -0.2% (est -0.1%), Germany +0.1% (est +0.3%), France -0.2% (est -0.1%), Italy -0.5% (est -0.4%).

 

Call: we expect the EUR/USD to be range bound over the intermediate term, anchored on the ECB’s backstop for the region (with long-term TAIL support at $1.22) and a TREND/TAIL line of resistance at $1.32. We think that as the market increasingly looks for another interest rate cut (which we’re not calling for over the next months as Draghi assesses the last cut), the EUR/USD may weaken as equities rise.  (This is also in line with our #StrongDollar call).

 

Euro Tail Risk - rr. eurusd

 

 

Negative France/ Positive Germany and the Periphery


We continue to wrestle with the miss-match on weak fundamental results and strong capital market performance across much of the region.

 

On the fundamental side, we highlight France as one nation that has not proven it has a credible plan of structural reforms to improve its competitiveness. We continue to think that Hollande’s budget policy of increased taxes without sufficient spending cuts and its outsized debt to GDP (now over 90%) will hamper the economy (and the region) more than it helps. That said, the European Commission is squarely on board to allow France two more years to reach its deficit reduction target level and has largely signaled a dovishness vis-à-vis further austerity. This could prove to be a tailwind.  

 

On the flip side, we like Germany on a relative basis. We see GDP gains coming in 2H and the EUR/USD price benefiting the export-heavy country. Chancellor Merkel should continue to talk-up her handling of the economy throughout the “crisis” in Europe as she prepares for re-elections in September. We see Germany playing ball in the European project (writing bailout checks if needed) versus the very adverse option of a return to a strong D-Mark.

 

Despite ongoing fundamental weakness across the periphery, we continue to believe that market participants will buy the periphery (equities and bonds) as the yield chase extends itself alongside the expectation that the ECB will backstop the Union at all costs. 

 

Sovereign bond issuance YTD continues to show paper being priced at lower levels, a positive sign, and in the coming months we may see steps towards setting up loan pools to small-and-medium-sized enterprises (SMEs), which would be another tailwind to a channel that is currently clogged.

 

For more on our outlook on the Eurozone please see last Friday’s note titled “Where’s Europe At”.

 

Euro Tail Risk - rr. gdp

 

Matthew Hedrick

Senior Analyst


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.

Podcast: Q&A with Keith and Clients

 

Keith answers questions on professional top-callers, the importance of valuation and more.



Dollar Matters

Client Talking Points

Dollar Flexes Its Muscle

The US Dollar broke out to year-to-date highs yesterday, in a rally that Keith says is  “really starting to matter” from both correlation risk (lower commodities) and economic growth (strong consumption) perspectives. The US dollar is overbought immediate term, but the US Dollar index could push $90 in the intermediate term.

Gold Losing Luster

Gold, though, doesn’t like a strong dollar that confirms that growth is indeed accelerating. Gold is currently oversold at $1409, but Keith says gold is beginning to look like it did in the early 1980s. That’s anything but good for gold bugs.

Asset Allocation

CASH 39% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

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.  

WWW

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. 

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.

Three for the Road

TWEET OF THE DAY

“FX: Hell0 102, Burning Yen.” -- @KeithMcCullough

 

QUOTE OF THE DAY

“He who conquers, endures.” -- Perseus

STAT OF THE DAY

3.3%, the amount the S&P 500 is up so far in May


Distant Peoples

This note was originally published at 8am on May 01, 2013 for Hedgeye subscribers.

“the unnatural task of holding in submission distant peoples...”

-Edward Gibbon

 

Edward Gibbon was an 18th century British historian who became famous for his 6 volume work, The History of the Decline and Fall of the Roman Empire (published between 1776-1788). Contextualizing Roman history is critical in order to attempt to scrutinize the rise and fall of any post 18th century economic empires (Britain, USA, or Japan). Governments plundering their people doesn’t end well.

 

Alongside Clausewitz (Prussian military theorist), Gibbon was also a favorite of America’s 1st grand strategist in the US State Department, George F. Kennan, whose biography I am waist deep in right now (it starts off slow, but the meat and potatoes of this book start in the post WWII period; I’m studying it now so that I can contextualize Russian policy – a country ETF (RSX) that we re-shorted yesterday).

 

The reason why I’m highlighting Gibbon’s quote this morning is that it’s FOMC d-day. Via debauching the world’s reserve currency, Ben Bernanke’s Fed has held distant peoples (including those in the US who don’t live in D.C.) in an unnatural submission to a Policy To Inflate food and energy prices. End it man – let #StrongDollar manifest. The People need a consumption #TaxCut.

 

Back to the Global Macro Grind

 

For those who were paid to see no inflation at the all-time highs in Oil (2008), Gold (2011), and/or Food Prices (2012), all I can say is shame on you. The People know the truth. And now they are ready to receive the communion of #CommodityDeflation.

 

I never grew up thinking about which “class” I was in. Class warfare is stated plainly in the opening sentence to Marx’s Communist Manifesto. I’m more of a freedom and meritocracy type of a guy myself. The last word of the last sentence of Darwin’s On The Origin of Species is “evolved.” People who think they can centrally plan other people into submission should evolve too.

 

To be clear, these are two different ideologies that you see in both political and economic thought. One camp thinks the market and economic system is one that can be “smoothed” and controlled with certainty (policy action). The other believes the global economic system is open, interconnected, and non-linear. You know which camp I’m in.

 

If you study the last 42 years and back out the Bernanke years (Down Dollar, Up Commodity Inflation to all-time highs), most US market historians understand the power of a #StrongDollar (“tighter” money than you have today, combined with fiscal conservatism). Unless left wing Marxists are levered up on their credit cards at home, I think even they get the #StrongDollar thing too.

 

So when will Bernanke acknowledge economic gravity and get out of our way?

 

US economic growth has accelerated from +0.38% in Q4 of 2012 to +2.5% in Q1 of 2013. The US Dollar strengthened the entire way through this #GrowthAccelerating period as #CommodityDeflation took hold.

 

Look at both the US Consumption side of the US economy (very strong in Q113) and the consumption sectors of the US stock market (here are the inflations and deflations for 2013 YTD):

  1. US Healthcare Stocks (XLV) = +18.68% YTD
  2. US Consumer Staples Stocks (XLP) = +17.31% YTD
  3. US Consumer Discretionary Stocks = +15.12% YTD 

Vs.

  1. CRB Commodities Index (19 commodities) = -2.3% YTD
  2. Brent Crude Oil = -5.9% YTD
  3. Cattle = -6.7% YTD
  4. Corn = -7.6% YTD
  5. Wheat = -7.9% YTD
  6. Coffee = -9.7% YTD
  7. Sugar -10.8% YTD
  8. Gold = -12.1% YTD
  9. Copper = -13.2% YTD
  10. Silver = -20% YTD

Do you hear me now, Ben? Do more of this. Do more of nothing.

 

On a 3 month duration, the US stock market gets this inasmuch as it did in 1983-89 and 1993-99 (#StrongDollar periods). Our intermediate-term TREND correlation between the USD and US Stocks (SPY) = +0.72. USD vs Commodities (CRB Index) on a 3 month duration is -0.71. It’ll keep working, unless Bernanke says he’ll devalue the Dollar again. Distant Peoples, Unite!

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1367-1492, $98.07-104.83, $81.58-82.63, $1.29-1.31, 97.11-100.93, 1.66-1.76%, 11.67-14.29, and 1575-1610, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Distant Peoples - Chart of the Day

 

Distant Peoples - Virtual Portfolio


Hedgeye Statistics

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

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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