prev

ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL?

Takeaway: On balance, equity investors should be increasing their exposure to US companies that have a large domestic footprint.

SUMMARY BULLETS:

 

  • We are buyers of US equities here provided that the US Dollar Index holds its intermediate-term TREND line of support and subsequently recaptures its immediate-term TRADE line of resistance. This, of course, assumes the broader equity market remains bullish TRADE and TREND in the process. For now, there is little fundamental reason to suspect that it won’t.
  • We ran a equity screen for publically-traded, domestically-domiciled corporations that break out their revenue by geographic segment. In the large cap bucket, our screen returned 270 names; in the small-to-mid cap bucket, our screen returned 1,684 names. The charts below show that, on balance, companies with a low degree of foreign currency exposure have been demonstrably outperforming those that have a high degree of foreign currency exposure.
  • All told, whether you’re a large-cap stock-picker or small-cap investor, you should be demonstrably increasing your exposure to US companies that have a large domestic footprint, on balance. Needless to say, continued underperformance awaits those funds whose managers fail to do so.
  • But don’t just take our word for it. Pull up the 2Q earnings releases from MCD, KMB or CAT. Those management teams will tell you all you need to know about our #StrongDollar call and its impact on various segments of the domestic equity market. Please email us if you’d like to dialogue with Howard Penney, Rory Green or Jay Van Sciver regarding their bearish theses on each of those three names, respectively.

 

FOLLOW THE BOUNCING BALL

We’ve often remarked that front-running inflections and/or sustained trends in the US dollar is integral to staying afloat in today’s increasingly policy-driven, globally-interconnected web of financial markets.

 

As the USD has appreciated in the YTD (up +4.1% on a trade-weighted basis), this rhetorically-simple, yet analytically-complex strategy has continued to work like a charm for us and our clients:

 

ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL? - 1

 

Moreover, it’s not enough to simply know what direction the US dollar is likely headed in; rather, the “why” is important as well. To recap:

 

  1. We think this latest USD rally has legs with respect to the intermediate-term TREND and long-term TAIL largely due to a positive resetting of structural growth expectations in the US, which itself is being driven by a reflexive recovery in the housing and labor markets, as well as accelerating household formation and birth trends.
  2. Additionally, we continue hold a demonstrably-bearish outlook for the JPY in the context of the BoJ’s monetary policy outlook and we also hold a structurally-subdued outlook for EUR appreciation in the context of the two-speed European economy.
  3. Lastly, we think the confluence of #StrongDollar and #RatesRising will create a reflexive feedback loop whereby global capital allocators continue to flow out of EM local currency exposure and back into USD exposure, at the margins.

 

As an aside, one of the ways we determine if the USD is appreciating because of rising growth expectations vs. international investors de-risking their portfolios is through cross-asset class regression analysis. In the event of the latter scenario, one would expect to see the USD hold positive correlations to various measures of financial market volatility and credit spreads, while registering inverse correlations to growth assets, such as equities.

 

That has certainly not been the case over the past year, which is consistent with our view that the USD is appreciating for growth reasons and not due to investor fear/economic uncertainty (TTM correlations to the DXY):

 

  • S&P 500: +0.75
  • Russell 2000: +0.70
  • CBOE SPX Volatility Index (VIX): -0.25
  • US Corporate BBB/Baa vs. US Treasury 10Y (bps Spread): -0.61

 

What is not consistent with our view, however, is the past three weeks of consensus anti-growth, anti-tapering speculation (trailing 3W correlations to the DXY):

 

  • S&P 500: -0.81
  • Russell 2000: -0.80
  • CBOE SPX Volatility Index (VIX): +0.59
  • US Corporate BBB/Baa vs. US Treasury 10Y (bps Spread): +0.80

 

We’ll continue to monitor these most recently developing price signals in real-time; for now, we hold the view that this is an immediate-term head-fake within the construct of an intermediate-term fundamental story. See the forest, not the trees…

 

HOW TO PLAY THIS

So what does this all mean for US equities? Simply put, we are buyers of US equities here provided that the US Dollar Index holds its intermediate-term TREND line of support and subsequently recaptures its immediate-term TRADE line of resistance.

 

ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL? - 2

 

This, of course, assumes the broader equity market remains bullish TRADE and TREND in the process. For now, there is little fundamental reason to suspect that it won’t.

 

ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL? - SPX

 

MACRO MEETS MICRO

For those of you who have been following our macro calls since the start of the year, you’ll quickly note that this strategy directive isn’t anything new. What is new, however, is the analysis below, which supports our view that equity market participants have been doing just that (i.e. taking up their gross exposure to the US dollar).

 

We ran a equity screen for publically-traded, domestically-domiciled corporations that break out their revenue by geographic segment. In the large cap bucket, our screen returned 270 names; in the small-to-mid cap bucket, our screen returned 1,684 names. The charts below show that, on balance, companies with a low degree of foreign currency exposure have been demonstrably outperforming those that have a high degree of foreign currency exposure.

 

ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL? - 4

 

ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL? - 5

 

ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL? - 6

 

ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL? - 7

 

(NOTE: The first two columns on each chart show the average performance of securities in excess of -1x and +1x standard deviations of the average percentage of revenues derived from the US for all companies less than 100%; the far right column captures the rest (i.e. those companies with 100% of their revenues sourced domestically). Per this calculation method, the average, -1x STDEV and +1x STDEV domestic revenue exposure for the large cap sample was 58.3%, 31.3% and 85.2%, respectively. For the small-to-mid cap sample, those figures were 61.9%, 36.6% and 87.2%, respectively.)

 

All told, whether you’re a large-cap stock-picker or small-cap investor, you should be demonstrably increasing your exposure to US companies that have a large domestic footprint, on balance. Needless to say, continued underperformance awaits those funds whose managers fail to do so.

 

But don’t just take our word for it. Pull up the 2Q earnings releases from MCD, KMB or CAT. Those management teams will tell you all you need to know about our #StrongDollar call and its impact on various segments of the domestic equity market. Please email us if you’d like to dialogue with Howard Penney, Rory Green or Jay Van Sciver regarding their bearish theses on each of those three names, respectively.

 

In a world were consistent alpha generation is increasingly hard to find the legal way, we continue to sing the praises of marrying top-down macro analysis with bottom-up fundamental analysis. Long live Wall St. 2.0!

 

Darius Dale

Senior Analyst


Still Bullish: SP500 Levels, Refreshed

Takeaway: With both USD and the UST 10yr yield holding TREND supports, this remains a pro-growth investors market.

POSITION: 8 LONGS, 2 SHORTS @Hedgeye

 

I am on a Delta flight right now, so I’ll keep it brief. With both USD and the UST 10yr yield holding TREND supports, this remains a pro-growth investors market.

 

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

 

  1. Immediate-term TRADE resistance = 1699
  2. Immediate-term TREND support = 1675
  3. Intermediate-term TREND support = 1612

 

Pretty simple. This market remains the one consensus loves to hate – but it also continues to signal higher-lows of support and higher-highs of all-time resistance. We call this a Bullish Formation.

 

On pullbacks toward 1675, you keep buying the darn dip.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Still Bullish: SP500 Levels, Refreshed - SPX


HOT 2Q 2013 REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL:  

  •  SLIGHTLY BETTER:  HOT beat the quarter but left guidance substantially unchanged with minor revisions.  Fears that RevPAR could worsen were diminished by mangament commentary on the call.

BAL HARBOUR

  • BETTER:  Mgmt raised Bal Harbour EBITDA expectations by $20MM to $110MM.  At the end of 2Q, 22 condos were left to sell or close.  HOT has been raising prices and recent square footage rates have exceeded $1,500.
  • PREVIOUSLY:  "As of the end of the quarter, we sold and closed about 86% of Bal Harbour residences. That means there's only about 40 units left, and we expect to complete the sellout this year."

CHINA

  • WORSE:  Growth in Q2 (0.9% constant-currency) was slower than expected.  3 headwinds at work:  1) govt's austerity policy, 2) natural events (e.g. bird flu, earthquakes) and 3) slowdown in GDP growth
  • PREVIOUSLY:  "As we look at China, our business is generally picking up...we expect the Q2 REVPAR trend in China to be in the middle of our worldwide outlook range of 5% to 7%. New deal signing and new hotel opening pace remain robust."

NA REVPAR

  • SAME:  NA revpar was 5.2%, constant-currency.  HOT expects RevPAR growth in North America to step up in Q3 from June trends driven by transient demand.  Leisure travel in both July and August is looking strong based on business on the books.
  • PREVIOUSLY:  "Helped by the holiday shift, we expect North American REVPAR growth to be sequentially higher at the high end of our Q2 outlook range of 5% to 7% for company-operated hotels. Rate increases should approach 5% as we hit peak occupancies."

GROUP BUSINESS

  • WORSE:  Group business has been tracking in the low single digits, while bookings for future years have been strong. Group paid for 2014 and 2015 is currently tracking in the mid single digits.  HOT expects group softness to persist through the year.
  • PREVIOUSLY:  "Group business continues to pace in the mid-single digits."

SG&A

  • BETTER:  HOT lowered SG&A guidance to 2-3% for FY 2013, from 3-5% previously
  • PREVIOUSLY:  At the same time, we don't see the need to grow our SG&A faster than 3% to 5% a year. And most of our capital investments in making our system more attractive for owners is covered by our breakeven funds."

EUROPE

  • SAME:  Slow and sluggish.  Mgmt expects similar performance in Q3.
  • PREVIOUSLY:  "As maybe expected, European companies are watching their costs, groups are smaller, staying closer to home and booking."

AFRICA/MIDDLE EAST

  • SAME:  REVPAR was up 7.5% in Q2.  HOT expects growth rates in Q3 to tick down in this region for a couple of reasons. Egypt was impacted by the recent turmoil and Saudi restrictions are sharply reducing Ramadan-related travel.
  • PREVIOUSLY:  "With REVPAR up 7.1%, Africa and the Middle East was our fastest-growing region in Q1. Perhaps it has something to do with the fact that we were all there for the month of March. Jokes aside, the UAE is booming again with REVPAR growth of almost 14%. Saudi was up 8%. In North Africa, while the situation remains volatile, we are seeing some visitors return to the region. Egypt was up 30% in the quarter. We expect these trends to continue into Q2."

M&A

  • SAME:  HOT's actively in the process of selling our hotels.  Overall hotel transaction market suggests that the first half of the year saw an uptick in volume in both the U.S. and Europe.  Despite this, the market is still well below where it was pre-crisis when large portfolio deals were not unusual.
  • PREVIOUSLY:  "Our sense is that volume in this kind of environment should continue to pick up. In the U.S., it's the public REITs. There's the sovereign-wealth funds and high net worth outside the U.S. We are not yet seeing a market that is looking for what you might call large deals, truly multi-hotel deals, billion-dollar plus deals. It is still a market for one and two hotels at a time."

BUYBACKS

  • SAME:  Stock buybacks remain a priority
  • PREVIOUSLY:  "On buybacks, too, our goal is to be disciplined and be focused on buying back when we can, buy back at levels that are good relative to intrinsic value. You have seen us be very aggressive on buybacks in the past. So, again, this is something that we will review on a regular basis, and you should expect that our past behavior will tell you a lot about what we might do in the future."

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

HSY – A Sweet Runway Ahead

Hershey’s Q2 performance shows it is running on all cylinders. HSY is lapping 2012, a year in which it took price to offset inflated input costs; it’s now seeing significant volume gains, up +6.6% versus the prior-year quarter, lower input costs, and solid market share gains in the U.S. in every channel that it competes in (including mints and gums that are typically weak). We expect this strong momentum to continue in 2H, especially given the strong merchandizing around Halloween and the holidays.

 

Our quantitative set-up shows HSY trading near its immediate term TRADE resistance level of $93.95. We’re waiting and watching to see if it can break through this level; if it can we like that it’s firmly anchored by its support lines (the two green lines), over the TRADE and TREND durations.

 

HSY – A Sweet Runway Ahead - vv. hsy

 

 

What we liked:

  • Q2 EPS beat consensus ($0.72 vs $0.71), up 9.1% versus the prior-year quarter
  • Revenue in line with consensus at $1.51B, or 6.7% versus the prior-year quarter
  • Volume rose 6.6% (including 1% from Brookside and +0.1 FX benefit)
  • GM up 290bps in the quarter on lower commodity costs, profitable sales mix, and cost savings
  • Input cost deflation of $29MM was better than original estimates
  • Momentum in U.S. and key international markets
  • In the US, with the exception of gum, sales increased at the high end of the historical growth rate
  • Gained market share in the U.S. in every channel that it competes in., and overall took a 1.3% market share gain in chocolate
  • Strong performance from Brookside and expected to contribute 1pt of growth in 2013
  • International - China, Mexico, and Brazil solid performance
  • International sales (excluding Canada) up 8% in the quarter. Expects international to accelerate over 2H and FY sales up 15-20%
  • Q2 interest expense of $21.1MM, declined vs $24.3MM last year
  • In 2013 expects interest expense to be $90-95MM and FY adjusted tax rate to be the same as last year [35.7% tax rate in Q2 (in-line with expectations) vs 32% last year]
  • Expects FY advertising up 20%. Specifically for International, advertising up 45-50%

 

Guidance FY:  Net Sales up 7% (including the impact of FX); EPS $3.68-3.71 (up 14% year-over-year vs previous 12% guidance); GM up 220-230bps (vs prior estimate of 190-210bps, due to improved sales mix and higher productivity, and sees no change due to input cost inflation).

 

 

Matthew Hedrick

Senior Analyst

 


Larry Summers = Bad News

Takeaway: This is not the guy you want running the Fed.

Earlier today, on Hedgeye's morning conference call, Hedgeye CEO Keith McCullough was asked the following question by a Hedgeye client.

 

Q. In the past few days you have remarked that Larry Summers would be unfit for the role of Fed Chairman. Can you explain exactly what the appointment of Larry Summers would mean to the markets?

 

 

Larry Summers = Bad News - summ1

 

KM: The problem with Larry Summers is number one, he’s not a risk manager. He blew up the Harvard endowment. Royally.

 

Number two, he’s equally, if not more dogmatic than Ben Bernanke. Number three, getting more of a personality, or more personal opinion into all this. That is is one of the big issues I obviously have with Bernanke and the Fed overall. It’s an unelected, unaccountable post.

 

If you have ever had a meeting, or done a breakout session with Larry Summers, and you have any knowledge whatsoever on the subject matter, you’re going to see pretty plainly that he is one of the more condescending guys out there in terms of talking down at people. When somebody does that, typically you would expect them to be like Tiger Woods used to be, somebody who is literally perfect, someone with a perfect track record. 

 

But this guy has been so wrong, for so long, but rarely, if ever in doubt. That’s the kind of thing that scares the hell out of me. He really is scary.

 

And I think if you were to fast-forward six to twelve months from now, and this guy is running the show, and the dollar is going down every day, that’s your bear case. He would be the biggest threat to the US currency since, well since Ben Bernanke. 

 


CAT: When 795F’s Fly

Summary

 

CAT reported a disappointing quarter and again lowered guidance.  Earnings summaries abound and we’ll keep our comments to just three key topics:

  • CAT On the Roof:  Guidance is still too high for 2013 and management is still letting us down easy.
  • Backlog Decline Matters, Too:  The drop in backlog more than offset the 2Q dealer inventory liquidation excuse.  When dealer inventories and backlog changes are stripped out, there is nothing particularly interesting about 2Q revenue (i.e. it reflects underlying demand).
  • Pricing Down:  CAT has often cited 2009 pricing strength as a reason not to worry about Resource Industries.  Pricing was down in 2Q and the incremental mining capex declines in 2014 are likely to accelerate pricing pressure.  We see risks to oil & gas capital spending in Power Systems, where pricing held in 2Q.

 

If you are interested in other items, like the growth in receivables with reserve release, lack of transparency, or the impairment charges/restructuring that we expect to be announced in the next month or so, feel free to ping us.  We have been negative on CAT for over a year and our thesis appears to be playing out well.

 

 

They Can’t Do $6.50, EitherTo hit guidance, CAT’s margins in 2H would need to improve ~30% vs. 1H with NEGATIVE MIX and NEGATIVE PRICING in Construction Industries and Resource Industries.  Sure, that might happen – and 795F Trucks might fly.   As we have written repeatedly – CAT is letting us down easy (gradually) and we have a tough time getting to $6.00 in 2013 EPS.  This is just a rough sketch of guidance - not what we expect, which we published here:

 

CAT: When 795F’s Fly - re1

 

 

Guidance also excludes whatever charges the company takes when it announces further cost reductions in the next month or so.  On the topic of a potential BUCY impairment, Bradley Halverson stated “we certainly wouldn’t be using a cyclical low straight-line going forward,” which we assume was meant to imply that these 2Q results are cyclical low results.  That is odd, because the survey CAT referenced suggested that mining capex is not at a cyclical low – it is going 20% lower next year.  Expect impairment charges in coming quarters.  (We would bet that a BUCY impairment charge comes with a CEO severance charge, too.) 

We factor in share repurchases in the table above.  However, on the call management said that “Repurchasing stock in a downturn has been a key part of our cash deployment strategy.” As we will see discuss below, there hasn’t been much of a downturn yet.  They have been repurchasing cyclically inflated shares, in our view.

 

Backlogs vs. Dealer Inventories – This Is Normal:  CAT said revenues in the quarter were negatively impacted vs. “end-user demand” by the decline in dealer inventories.  We are all supposed to back that out and expect an acceleration as soon as dealer destocking is finished.  However, revenues were puffed-up vs. “end-user demand” by the decline in backlog (i.e. revenues recognized in this quarter from end-user demand in prior periods).  Management doesn’t mention the draw on backlogs, but it undermines the dealer inventory drawdown excuse for the 2Q 2013 miss.

 

CAT: When 795F’s Fly - re2

 

 

When adjusted for both the change in dealer inventories and the draw on backlog, 2Q results do not look nearly as weak.  They actually look fairly normal – even sequentially better.  We think this is a better metric for evaluating normalized results.  Second quarter results are not depressed so much as prior results were inflated.  With most of the mining down-cycle still ahead, 2Q results do not appear to be abnormally low, with a spring back just around the corner.

 

Importantly, the favorable back half guidance does not mark the bottom – it marks another pending guidance cut, as previously noted.  To hit the current revenue guidance, management will need to draw heavily on its order backlog (the effect of which we left at zero in the table).  CAT would need to draw backlog down by $1-$1.5 billion in each of the next two quarters to have a shot at hitting the new revenue guidance, in our view.  Leaving 2013 with a drained backlog would likely reset 2014 expectations much lower.

 

Some Additional Notes on Dealer Inventory Excuse

  • First, 2013 is not a bad year for the mining industry – that is delusional.  2002 probably was, when many mining companies were suffering heavy losses.  Mining can get really ugly. 
  • Second, one should ask why management allowed dealers to get stuffed with customized mining inventory and why they aren’t being more transparent on cancellations (A $19.3 billion order backlog and excess CAT inventory is an oddly tough position to get into). 
  • Third, the comparison of dealer deliveries to end-user demand is misleading, in our view.  Comments in the release like “would have needed to increase more than 50 percent to match what dealers were delivering to end users” mismatch the timing of that demand.  Deliveries are a function of demand when orders were placed, which might be quite a long time ago.  Aggregate dealer orders would be useful, but those are not provided.
  • Finally, from what we can see of dealer inventories (Finning, Toromont, other public dealers) they don’t look low at all.  We’ll see where they come out at 2Q end.

 

Pricing Down

 

Resource Industry Pricing Weakness:  A major leg of the “don’t worry, be happy” view of Resource Industries is that pricing actually increased slightly in the 2009 downturn.  It may have only been a ~1% decline in 2Q, but it is something they implied would not happen.  This industry has too much capacity and we believe that pricing will get much worse as volumes drop into 2014.  It is hard to model stable margins with price declines, excess inventory and overcapacity (and a lack of disclosure on aftermarket vs. new equipment).

 

On Mining Equipment - “Yes, I mean, if I go back to the end of the first quarter when we adjusted the guidance for the year, at that point in time, we talked about the price realization for the year being positive about 1%.  That's not much of a change from what we were thinking from January. It's been tight, but the idea that there is giant discounting or something like that going on is just not the case. Even in 2009 we had a 3% price increase. I mean, so it's not as sensitive, I think, as most people think either going up or going down.” - Michael DeWalt 6/5/2013 i.e. recently

 

Power Systems Next?  Oil & gas capital spending should follow a similar pattern as mining’s if oil & gas prices remain stagnant.

 

 

CAT: When 795F’s Fly - re3

 

 

Conclusion:  The decline in resources-related capital spending is a multi-year return to normal levels, not a decline from them.  CAT finally acknowledged that mining capex (a portion of resources-related capital spending) isn’t rebounding in 2014.  We don’t think it rebounds for – well- decades.  We also think that oil & gas related capital spending could be the next shoe to drop for CAT.

 

 

 

 


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