prev

Keith's Top-5 Tweets Today

Takeaway: Stocks, Goldman Sachs and Doug Kass.

Almost everything on my shopping list is saying, wait - you can buy me lower

@KeithMcCullough 3:17 PM

 

Sometimes doing nothing is the hardest thing to do - but precisely what you should do

@KeithMcCullough 3:06 PM

 

You have to be kidding me on the Goldman call here - its raining, so they now forecast rain

@KeithMcCullough 10:45 AM

 

When my signal and my research team are immediate-term bearish; my decisions to not buy become a lot easier

@KeithMcCullough  10:38 AM

 

@KeithMcCullough Sincere congratulations - you performed both the roles of market obstetrician and mkt mortician with precision in 2013. @DougKass 5:32 AM

Retweeted by Keith McCullough

 


CHART DU JOUR: US GAMING: SOFT SLOTS

Q2 top-line growth should be weak, again

 

  • Despite an improvement in US consumer discretionary spending and sentiment trends in 2013, domestic gaming continues to lag.  Demographic headwinds are to blame, in our opinion.
  • US domestic gaming revenues (excluding Indian casinos) growth has been slowing since Q3 2012 despite the recent opening of new casino markets
  • Q1 2013 US gaming revenues grew a pathetic 0.5% YoY; on a same-store basis, Q1 revenues dropped 4.2% YoY
  • For the mature regional gambling markets, April same-store revenues tumbled 4% YoY, in-line with our projections.  We believe May revenues could be flat, followed by further declines in June. 

 

CHART DU JOUR: US GAMING: SOFT SLOTS - b


The Case against Consumer Staples Stocks

It’s been a tough Q1 (and then some) for many staples investors that have to make a living generating alpha on the short side, or at least have to try and have their shorts go up less than their longs.  As with most market moves, there are multiple factors to which we can point as contributing causes to the run up in consumer staples:

  1. Investors chasing yield
  2. Inflows into low volatility ETFs
  3. M&A speculation in the wake of the HNZ acquisition
  4. Declining commodity prices and the associated expectation for improvement in gross margins
  5. Investors skeptical of the broader market rally and playing staples as a “safe” way to be long

Conspicuous by its absence is any case for the valuation of the consumer staples sector, broadly.  Valuation is always a tough one – it doesn’t matter until it matters, then when a stock heads lower (or higher, as the case may be), people point to valuation.



The Case against Consumer Staples Stocks - Sector PE 5.23.13

 

Generally speaking, we like to see stocks heading higher as estimates head higher - that has not been the case.  Through Q1 earnings season, the "average" staples company missed revenue expectations by 0.4% and beat EPS by a meager 3.3%.

 

The Case against Consumer Staples Stocks - Q1 EPS Summary

 

We have long made the case that investors have been using the staples sector (and utilities) as bond proxies.

 

The Case against Consumer Staples Stocks - Yield Spread 5.23.13

 

The Case against Consumer Staples Stocks - XLP vs. 10 yr. 5.23.13

 

With interest rates starting to creep higher, we may start to see money flow out of the consumer staples sector that was chasing yield and not invested for (or with, quite frankly) any fundamental view of the sector or the companies.

 

We also believe that certain stocks have benefitted from the inclusion in low volatility ETFs and associated money flows into those ETFs. 

 

The Case against Consumer Staples Stocks - CPB and CLX 5.23.13

 

The Case against Consumer Staples Stocks - GIS and KMB 5.23.13

 

In recent weeks, inflows into these ETFs have become decidedly less one directional.

 

The Case against Consumer Staples Stocks - Low Vol Inflows

 

M&A speculation is more difficult to argue against.  We think some names continue to make sense over longer durations as potential targets of either activists (MDLZ - known) or strategic investors (BEAM, HSH, POST, DF).  We have always viewed the possibility of some sort of transaction as another reason to own a stock, but not the primary reason (unless you happen to work on a special situations desk, then have at it).  Therefore, names such as CPB or even TAP, that have benefitted in part from low-quality speculation remain squarely on our least preferred list.

 

As to commodity prices, we believe that the companies in our universe will see a benefit, but on a lag (3-12 months, depending on the hedging programs).  However, current multiples appear to be baking in a whole lot of good margin news, that may be fleeting in terms of duration given the competitive environment.  Most staples companies can't stand prosperity, and are likely, in our view, to deal back margin in an effort to support top line momentum, which is still faltering.

 

Where does this leave us?

 

Quite frankly, it leaves us with a long list of names where we have a hard time seeing how the marginal investing dollar makes money at current levels.  Our least preferred list is long and not so distinguished:

 

  1. KMB
  2. TAP
  3. CPB
  4. PM (more of an issue with the strength of the dollar)
  5. CLX
  6. CL
  7. GIS
  8. MKC

What we like remains largely unchanged:

 

  1. ADM
  2. CAG
  3. NWL
  4. BUD
  5. DF
  6. SPB

Call with questions,

 

Rob



Robert Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



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.

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD

Takeaway: After a brief misfire last week, the labor market appears to again be moving in the right direction. YTD trend-line acceleration continues.

Below is the breakdown of this morning's claims data from our head of Financials, Josh Steiner.  If you would like to setup a call with Josh or trial his research, please contact 

 

 

Labor Market: Back to the Races

After taking a breather last week, the labor market came roaring back this week. Taking a look at the YoY trend in NSA initial claims over the last five weeks, they look like this (newest to oldest): -8.9%, -1.3%, -10.5%, -9.7%, -12.1%. That is an extraordinarily strong run. The real takeaway, however, remains that the YoY rate of improvement in rolling NSA claims continues to accelerate in 2013. This is different than what we've seen in the prior three years. The chart below shows this. The black dotted line shows that the slope in the rate of claims improvement is negative for 2013, whereas 2010, 2011 and 2012 all had positive slopes (a negative slope in this instance is better as it means the rate of improvement is accelerating).

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - JS 1

 

To reiterate our comments from last week, we have subscribed to a simple philosophy since Lehman Brothers. We consider three macro factors paramount in gauging the overall direction for the sector: labor, housing and the Fed. On that score, YTD all three factors had been moving in the right direction.We continue to view labor and housing as moving in the right direction from an intermediate and longer-term standpoint. The Fed, however, now seems the odd man out, and in the short-term we continue to expect weakness. 

 

Contrary to the prior three years, however, where it was unclear whether the weakness constituted a falling knife or buying opportunity, this time around, we would view any weakness as a buying opportunity for those with a horizon beyond a few weeks. Our basis is primarily the ongoing recovery in both housing and labor. Moreover, a steepening curve is obviously a good thing for lenders, even if it retards some of the progress we've seen in housing.

 

The Data

Prior to revision, initial jobless claims fell 20k to 340k from 360k WoW, as the prior week's number was revised up by 3k to 363k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.5k WoW to 339.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.5%.

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - JS 2

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - JS 3

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - JS 4

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - JS 5

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - JS 6

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - JS 7

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - JS 8

 

 

Joshua Steiner, CFA

 

 


Initial Claims: Back in Business

Takeaway: After last week’s hiccup, the US labor market appears to be moving in the right direction again.

After taking a breather last week, the labor market came roaring back this week.Taking a look at the YoY trend in NSA initial claims over the last five weeks, they look like this (newest to oldest): -8.9%, -1.3%, -10.5%, -9.7%, -12.1%. That is an extraordinarily strong run.

 

The real takeaway, however, remains that the YoY rate of improvement in rolling NSA claims continues to accelerate in 2013. This is different than what we've seen in the prior three years. The chart below shows this. The black dotted line shows that the slope in the rate of claims improvement is negative for 2013, whereas 2010, 2011 and 2012 all had positive slopes (a negative slope in this instance is better as it means the rate of improvement is accelerating).

 

Initial Claims: Back in Business - steiner


DRI’S JAMIE QUESTION

We still like the stock but, in light of recent events at JPM, DRI shareholders should ask some questions of the leadership team in Orlando.

 

Darden’s Chief Executive Officer and Chairman of the Board, Clarence Otis, has been keeping a low profile of late. The industry-lagging operational performance of Darden’s brands has led others to join us in expressing doubt about the effectiveness of his strategy for the company. Despite JP Morgan shareholders affirming their confidence in Jamie Dimon’s ability to execute both roles, we believe the broader conversation of single persons holding the dual role of CEO and Chairman will have an impact on the leadership structure of many companies going forward. Within our space, Darden is the first that comes to mind in this respect.

 

 

 

Where is the New Plan?

 

 

Darden’s plan, outlined in its 2012 Annual Report, has been badly discredited virtually since the quarter it was released as many of the doubts we expressed in our reaction to that report came to the surface in the company’s results. We were bearish on the stock from July to February before turning bullish in early March.

 

 

Since turning positive, we have been arguing that substandard operational performance could potentially be ameliorated by structural changes to the multi-brand portfolio company. While the stock has recovered well since late-February, the operating strategy of the company remains - we assume - unchanged. Perhaps, in the event that a separate Chairman of the Board was in place, there would be added impetus for the current management team to devise a new, more effective, strategy for the company.

 

 

 

Leadership

 

 

We’ve been surprised by Clarence Otis not taking a more active role - or any role - in recent presentations by the management team. It’s almost an American tradition in corporate America, that the same person occupies the role of Chief Executive Officer and Chairman of the Board. Although it should be noted, according to some corporate governance experts, that a separation of these roles is starting to become more common. According to Spencer Stuart’s 2011 board index, only 41% of S&P 500 companies separate the job of chairman and CEO, up from 26% in 2001. We think Darden continues to be vulnerable to changes in the corporate structure.

 

 

Over the past three years DRI has underperformed the S&P 500 by 25% and the average casual dining stock by 59%. At the same time the company has spent nearly $2.0 billion in capital spending, and showed no growth in EBITDA. Despite these metrics, management has not been held accountable for mismanaging the company. One key reason for the underperformance was that management was late to recognize the secular changes in the casual dining industry, leading to misuse of shareholder capital. By separating the CEO and Chairman of the Board roles, thereby making the CEO more accountable, shareholders could benefit significantly if the change were to bring about better governance of the company, and higher returns to investors.

 

 

Combining the roles might have its advantages in certain instances but, in Darden‘s case, there appears to be little evidence that such an arrangement is benefiting shareholders. Corporate governance advocates submit that the CEO acts as his own boss because he reports to himself in his chairman role. Some corporate governance experts submit that a CEO serving as Chairman of the Board acts as his own boss, leading to a lack of accountability and a tendency for unchecked risks to be taken, which can end up harming the company’s financial health. We think this line of reasoning applies directly to DRI as the many decisions by the current CEO have led to suboptimal results for the company and its shareholders.

 

 

If Darden is going to keep the current operating structure of a complex multi-branded company then it is even more imperative to separate the two roles. Splitting the roles at DRI will allow the CEO and Chairman to focus on different, equally vital aspects of the company’s performance. DRI is in need of a CEO that is focused on the operations of the individual brands. We have heard from more than one shareholder suggesting that the current CEO is detached from the operating side of the business and does not know the numbers. Perhaps some overview from a separate Chairman of the Board could rectify that alleged detachment.

 

 

DRI is getting ready to close the books on a dismal FY13, with EPS expected to decline 11% and the outlook for FY14 also uninspiring. In 4Q13, DRI is estimated to report $1.04 in EPS, down 10% from last year. The 4Q13 results will see a sequential improvement in top line trends, but there is still no cohesive strategy to fix the longer-term issues that plague the company. Some creative thinking may be in order!

 

 

 

Howard Penney

 

Managing Director

 

 

 

 

 

Rory Green

 

Senior Analyst

 

 

 

 

 

 

 

 

 

 

 


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next