How Many Macro Tourists Own #WeimarNikkei?

Takeaway: Let's not mince any words. China and Japan look nasty.

Two quick macro bullet points on the bloody mess that is Asia right now. We've been raising the red flag here for some time now. #EmergingOutflows.


How Many Macro Tourists Own #WeimarNikkei? - jacho



Did you know that foreign investors held a combined 28% of the market cap listed on Japan’s five exchanges (up +170bps YoY) at the end of 1Q13? Clearly international investors are betting on Abenomics delivering Japan from its 20-year hole. We'll see how that one works out. For the record, we're not holding our breath.


The Liberal Democratic Party (LDP) is ready to cut the corporate tax rate to in line with international levels and also plans to implement appropriate debt management policy to maintain fiscal discipline. Specifically, the Cabinet will seek to cap spending ex-debt service at the current level of around ¥70T through FY15.


Additionally, Prime Minister Shinzo Abe said that raising the country's 5% consumption tax to 8% next April (and 10% in 2015) would “depend on the strength of the economy”, as they are concerned about the negative impact that could have to growth – which could delay consumer price hikes out of Japanese corporations and complicate the BOJ’s monetary policy agenda.




By jove, China’s banking situation is actually getting worse!


Per StreetAccount: Bloomberg reported that China's benchmark money-market rates climbed to records as the PBoC refrained from using reverse-repos to address the cash crunch. The central bank didn't conduct open-market operations to add or drain funds today and sold 2B yuan ($326M) of three-month bills. The seven-day repo rate rose 270bp to 10.77%, the highest in data going back to March 2003. The one-day rate rose by an unprecedented 527bp to an all-time high of 12.85%. An intra-day gauge of the one-day rate touched a record 30%.”


How Many Macro Tourists Own #WeimarNikkei? - Monetary Tightness in China


Right in line with what we’ve been flagging for the past two months (i.e. tightening financial conditions perpetuating a slowdown in economic growth), the flash HSBC Manufacturing PMI ticked down to a 9-month low in June (48.3 from 49.2 prior). The sub-index for New Orders fell to a 10-month low of 47.1.


Stay on your toes out there.

Trade of the Day: BGG

Takeaway: We sold Briggs & Stratton (BGG) at 3:40 PM at $19.27.

Call me a scalper on this today. Yes - we took the 2.66% gain. That's fine. It’s better than being scalped. Especially on a day like today.


Trade of the Day: BGG - bgg

E-Cigs Take the Stage: Summary of Our Conference Call with Ballantyne Brands

Yesterday (6/19) we hosted a call on electronic cigarettes titled “e-Cigs: The Untapped Market for Electronic Cigarettes”, featuring John J. Wiesehan, Jr., CEO of the Charlotte based company, Ballantyne Brands. (Presentation: CLICK HERE ; Podcast: CLICK HERE)


On the call John provided an overview of his company, makers of the Mistic e-cig brand, and offered up some valuable industry insights, which we have included in summary form below.  


We are very bullish on the evolving e-cig category. There has been a rapid pace of innovation, which, along with increased marketing and distribution, is bringing significant awareness to the category. We believe e-cigs offer a compelling alternative to traditional cigarettes and offer a consumer a much different experience than a nicotine patch or gum. The involvement of Big Tobacco (RAI, LO, MO) in the category should continue to lend credibility to e-cigs and accelerate growth; we expect e-cigs to be margin-enhancing to the combined cigarette category for Big Tobacco and 2014 to be a breakout year for them, having tested the waters (through acquisition and mix) through 2013.


The runway for e-cig converters is huge globally:  in America alone, nearly one in five American adults smoke. We expect pending regulation from the FDA to deem e-cigs a tobacco product, and that the regulation could come down harder on online sales, and we expect that the taxation of the product will remain only at the state level. Finally, we believe e-cigs consumption will continue to benefit from its significant price point advantage over traditional cigarettes which will help to grow repeat purchase behavior. 


We think e-cigs is an exciting category with investible potential. For investors looking for a publically traded pure play on e-cigs there is one option, Vapor Corp (VPCO).



On the Category, Industry’s Size, and the Players:

John J. Wiesehan, Jr. is very bullish on the industry. Some analysts have suggested that over the next decade e-cigs could be as big as tobacco is today, a $90 billion industry. He estimates that sales in the U.S. were $150MM in 2011; $500MM in 2012 ($300MM across retail channels and $200MM over the internet); and are projected to be around $1-2B in 2013.


He thinks it is very positive that Big Tobacco has entered the market because it brings credibility (and marketing support) to the category, especially to retailers that will realize the category is not going away due to the backing of Big Tobacco.  He also views regulation from the Federal government (FDA) and regulation on a state-by-state basis as positive for the category.


Despite the involvement of Big Tobacco in the category, John thinks there is plenty of room for non-Big Tobacco players, like a Ballantyne Brands or NJOY.


[Note: Lorillard (LO) acquired e-cig maker Blu Ecigs in April 2012; Altria (MO) will launch its first e-cig under the MarkTen brand in August 2013; and Reynold American (RAI) has the Vuse e-cig].



On Retail Distribution, the Products, and Market Data:

Ballantyne Brands has a national footprint that distributes Mistic e-cigs  across Grocery stores, Drug stores, the Mass Channel, and Convenience stores.  The company notes that disposables sell well at convenience stores, whereas rechargables sell better across their other channels.


The company is focused on product quality, first and foremost the liquid that produces the vapor, insuring that it is consistent and safe.  The liquid is composed of four main ingredients: water, nicotine, propylene glycol (a bonding agent), and tobacco flavoring (traditional or menthol) -- making it an attractive substitute versus the some 4,000 to 7,000 ingredients in a traditional cigarette. None of its products are patented, however, there are some Chinese patents on the hardware that they assemble for the company. [Note: given the existing pace of innovation versus the long time frame for patent approval and desire to protect IP, most e-cig brands have not patented their products].


The company offers two different variations of e-cigs under the Mistic brand, a rechargeable and disposable. For the rechargeable option, customers buy an initial starter kit, which contains 2 cartridges with a MSRP of $14.99, and then buy replacement cartridges as needed (a box of 5 cartridges has a MSRP of $14.99).  John suggests each cartridge is equivalent to approximately two packs of traditional cigarettes.


Replacement cartridges come in traditional and menthol flavors, with 4 levels of nicotine respectively, including a zero percent nicotine level for both flavors. The company does not have any flavors (like coffee, vanilla, pina colada, chocolate, etc.), and markets strictly to tobacco users as an alternative product to traditional tobacco products; in John’s words, “The company is not in the business of recruiting new nicotine users.”


For the disposable e-cig, labeled under the MisticBlack brand (and available in Traditional or Menthol flavors), customers buy a pack of soft tip e-cigs that they dispose of after one use; they have the look, feel and size of traditional cigarettes.  [MisticBlack has a MSRP of $5.99 and will be on the market in July in places such as Wal-Mart.]


The company’s hope is to convert a MisticBlack user to a rechargeable user.  The rechargeable e-cig is in line with the razor, razor-blade model, and is a higher margin business than the disposable for the company and the retailer.  John suggests the gross margin for disposables is in the 40’s (%) for the company and that rechargeable e-cigs are north of that figure, considering the consumer already purchased the battery in a starter kit. 


After the consumer buys the start-up kit John thinks the conversion rate for rechargables will be high (more data supporting this claim is pending), while he thinks converting the disposable user (back to a disposable) will be at a lower rate. 


Mistic brands ranks #3 behind NJOY and BLU in terms of Sales Dollars and Sales Units (according to Nielsen data ended 3/16/13 that does not include internet sales). Importanly, Mistic has been able to holds its share with an average retail price at or above most of its competitors, which John attributes to its high marks on taste and marketing campaigns.



On the FDA, Regulation, and Clinical Studies:

The company believes its products will be treated as a tobacco product in a pending  FDA announcement. On regulations, John admits that it is unclear where the FDA will shake out on e-cigs.   He thinks that regulation is likely to be based on nicotine level, and speculates that a cap could be put in place. Further, the sale of e-cigs could be regulated differently on such factors as internet sales versus retail sales and tobacco flavor vs menthol and other flavors.


John expected an announcement from the FDA back in April. His team now figures that an announcement could be imminent to later this summer.


He notes, today there is no talk of the Federal government issuing an excise tax on e-cigs, but rather expects any taxes will be determined on a state-by-state basis. To date, there are only two states issuing a tax, Minnesota and Oklahoma. In Minnesota, 70% of the cost of goods is taxed, which retailers pass fully onto the consumer. In Oklahoma, e-cigs are taxed at 5% based on liquid content. For Mistic, that translates to a 5 cent tax on a pack of disposables and 25 cent tax on one package of cartridge refills (5 cartridges to one pack). The company is generally comfortable with the Oklahoma tax structure, and it believes that its value proposition over traditional cigarettes will remain a huge tailwind to consumer demand.


To date, there is no clinical study that the FDA recognizes supporting that e-cigs are less harmful than traditional cigarettes.  There are however many independent studies in which the results show that e-cigs are less harmful. He thinks that common sense would indicate that a product with 4 ingredients verses 4,000 that is not burned to consume is a “healthier” alternative, however it’s premature to speculate on how the FDA will rule on e-cigs. The company is pushing hard with its lobbyist in Washington, D.C. that the FDA suggests e-cigs are less harmful than traditional cigarettes.


On Value Proposition and Consumer Appeal:

An average cost of a carton of traditional cigarettes in the U.S. is $60. In comparison, a 5 cartridge replacement pack of Mistic, which is equivalent to a carton of cigarettes, has a MSRP of $14.99. [The company also has a 10pack with a MSRP of $24.99].


John argues that they are not marketing their products to stop smoking, but simply as an alternative to traditional smoking, and nothing else.  However, testimonials do suggests that consumers are using the products to reduce consumption of traditional cigarettes. John believes the consumer’s appeal to an e-cig, versus a nicotine patch or gum, is that that an e-cig satisfies four main desires of smokers: hand to mouth; inhale something and get a kick in the throat; exhale something (a vapor simulates smoke); and the taste of the nicotine (without the burning sensation of a traditional cigarette).


That is to say, with other products like a nicotine patch or gum, the consumer is really not getting a cigarette substitute, just the nicotine.



On Advertising and Restrictions:


The company launched the “Easy Choice” advertising campaign back in April 2013. It is 100% all print, including USA Today and WSJ, targeting 15-20 key metropolitan areas where distribution is strong. The company has chosen to be compliant with the advertising restrictions of tobacco companies, so it does not advertise on television or on billboards. 


It is also focused on age restrictions, and is a member of the WE Card Manufacturing Advisory Council, which forces anyone under the age of 18 at a retail store to be carded.



On International Involvement:

Ballantyne Brands is looking to Europe and Asia for distribution. There are, however, countries in which they are not allowed to sell into, including: China, Canada, Australia, and Brazil. John notes that some parts of Asia are “open”, while some are not.


In Europe, the UK will be a major focus.  A recent decision from the UK’s version of the FDA is to regulate e-cigs as medicines by 2016. The company is broadly comfortable with the regulation because it won’t take its product off the market, ban it, and any implementation of the regulation won’t come until 2016. The company believes that the regulation will fall on the level of nicotine in e-cigs, to make sure it is consistent with traditional cigarettes, which Ballantyne Brands believes it should have no problem complying with. 




Stay tuned as we continue to do work on the electronic cigarette space.


Matthew Hedrick

Senior Analyst

Early Look

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Dicey: SP500 Levels, Refreshed

Takeaway: If 1605 snaps, there’s no TREND support to 1583. As a result, the plan from here is to wait and watch.

This note was originally published June 20, 2013 at 10:31 in Macro


Dicey: SP500 Levels, Refreshed - bulls vs bears 

Dicey is as dicey does. US economic data is surprising on the upside (Existing Home Sales, Philly Fed) as Asian and Emerging Market data is surprising on the downside. Markets aren’t economies – anything can happen.


Our decision to sell stocks for the last few weeks was based on the signal. Our signal almost always trumps the research view. And in this case it’s the US economic data being too good that ultimately became the problem for Gold and Bonds. Who would have thunk.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1631
  2. Immediate-term TRADE support = 1605
  3. Intermediate-term TREND support = 1583


In other words, if 1605 snaps, there’s no TREND support to 1583. As a result, the plan from here is to wait and watch. I like to be in no hurry when consensus is clamoring to move.


Sometimes doing nothing is the best move you can make,



Keith R. McCullough
Chief Executive Officer


Dicey: SP500 Levels, Refreshed - SPX

Last of the Mohicans?

Takeaway: What an epic 48 hours it has been. Just. Total. Chaos. The reality? Everything is playing out precisely how it should have played out.

Last of the Mohicans? - mohicans


What an epic 48 hours it has been.  Just. Total. Chaos.


We are officially going over the “Waterfall” now. Boats are in midair. People are hanging on trees. Everybody is scrambling, trying to explain what they missed. Trying to make sense out of it all. Hat tip to Bernanke-sponsored bedlam with a big assist from our Central-Planning Fed Overlords.


The reality? Everything is playing out precisely how it should have played out.


If you’re data-dependent, if you have a rigorous quantitative process backing the research (God forbid), this was a fairly straightforward call to make. US growth has been accelerating as we have been saying all along (well ahead of consensus).


Here are the facts: US economic data stabilized from December 2012 through March 2013. From April to June, growth accelerated. On June 18th the Russell 2000 hit an all-time high. Yesterday, on June 19th, the Fed basically repeated all of this and outlined their view on tapering. Cue market mayhem.


All of these market dislocations (Treasuries, commodities, etc) were percolating underneath the surface of consensus well before yesterday and today’s frenzy.


The reality is that gold is crashing. Treasuries are crashing. Oil is crashing. As far as gold is concerned, the number one thing that has it down on its knees is rising bond yields. If you’re selling gold today, I don’t know what to tell you. Sorry? Gold could eventually go down to $800 for all I know.


This huge selloff we’re witnessing in gold, Treasuries and emerging markets – we are in the early innings of what could be a long-term macro trend.


Last of the Mohicans? - mohicans2


Turning our attention to the rest of the world: What a disaster. Asia is a bloody mess. Go back to the tapes, we’ve been sounding the alarm here for a while now. Asian markets overnight were a debacle with the Weimar Nikkei “outperforming” its peers by only declining 1.7% (no, we still don’t like Japan).


As for China—just nasty. I don’t know what else you would call it. Meanwhile, the Hang Seng is down 14.4% since the end of January. Now it’s not as nasty as Brazil, or Russia, but it’s pretty darn nasty. India down 2.9%; Indonesia down 3.7%. Even though we like the Philippines, (it’s an interesting micro story within the broader disaster which is Emerging Markets) we sold that as well. We realized the research there was going to be trumped by the risk management signal.


You can’t be dogmatic in your stance. When the macro flows take over, get out of the way.


Europe? It doesn’t look good, either. That’s not new. Now if the DAX trend line at 8013 breaks, that would definitely be news. That is a critical line. Most trend lines in Europe are broken. The FTSE just broke its trend. So if the DAX breaks, there will not be one—not one—out of the 86 countries whose equity markets we follow that will have held its trend line, other than the US stock market.


Investors are running out of places to put their money. So in a sense, the S&P 500 is the last of the Mohicans. Keep a close eye on the 1583 level on the S&P 500.


Now the question is at what point do growth expectations in equities get prices in? I don’t know the answer to that. That’s what we’ve been trying to convey recently. What we have been saying is number one: Don’t buy fixed income and don’t buy commodities or anything that we haven’t liked for six months. Number 2: Take down your equity exposure. That’s the risk management order of the day.


Ranting and raving about what has transpired these last six months is no longer my task. It’s history. Right now you take a deep breath. You wait and you watch.


One of the first things we’ll be buying is Financials (XLF). We like the Financials. Particularly with the yield spread at 211 basis points wide and climbing. That’s a very bullish indicator for the group. Your buy list should have a lot of financial names on it. After that, we’ll go to the old bailiwick which is consumption-oriented names in healthcare and consumer itself.


Keep an eye on that 1583 level on the S&P 500. It’s key. If that breaks, it’s bye-bye to the Mohicans.


(Editor's Note: This commentary comes from from Hedgeye CEO Keith McCullough's morning conference call. If you would like to learn more, please click here.)


Takeaway: Don't be fooled. The labor market is steamrolling ahead even though people think it's starting to weaken

Below is the breakdown of this morning's claims data from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact .


Fool Me Thrice

We've always been fond of our friend Peter Atwater's use of "The Lady or the Tiger" metaphor to contextualize different market dynamics, and the current setup in the labor market seems to us sufficiently apropos. In this case, the market thinks it's getting the Tiger, but in reality it's getting the Lady. In short, the labor market is now a total mirage.


The non-seasonally adjusted data is improving at the fastest rate we've seen year-to-date. NSA 4-wk rolling initial jobless claims are today 9.2% lower than at the same point last year. To reiterate, that's the fastest rate of improvement we've seen this year. We show this in the second chart below.


Meanwhile, the SA (seasonally-adjusted) data is showing total stagnation. The slope of the curve (the trend line) for SA claims since the start of March is now flat, as the first chart below shows. The interesting dynamic is that the labor market appears to be stagnating at the same time that the Fed is ratcheting up expectations for withdrawing support. This is almost identical to the setup we've seen in the prior three years. #PatternRecognition. 


The takeaway is that over the short to intermediate term we would expect weakness in the sector to continue. As a reminder, our simple model for thinking about the [Financials] sector revolves around three core tenets: labor, housing and the Fed. All three fronts are now under seige. 1. Tapering expectations are shifting rapidly. 2. The SA labor market data (the headfake) is stagnating. 3. Housing data remains very strong, but the swift backup in rates is raising fear about the sustainability of the recovery. At a minimum, it's pointing to a deceleration in the rate of recovery.


Taking a longer-term view, we see the setup as very favorable. The labor market is indeed improving rapidly. The Fed will likely be sucked back into the market by a) the rise in rates, and b) the perceived deceleration in the labor market, and c) (most importantly) by the selloff in equities. Housing remains a Giffen, so rising prices will continue to self-reinforce. 


We published a note in mid-April entitled "Beware the Ides of April", which was a sector-based risk management snapshot of how every name in the sector responded to the last go-around of perceived Fed exit/labor market deterioration. We'll be publishing a redux of that note this morning. 


The Data

Prior to revision, initial jobless claims rose 20k to 354k from 334k WoW, as the prior week's number was revised up by 6k to 340k.


The headline (unrevised) number shows claims were higher by 14k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 2.5k WoW to 349.25k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -9.2% lower YoY.
























Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


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