FDA Closer To Online E-Cig Ban?

Yesterday the WSJ reported that the FDA is considering a ban on online sales of e-cigs as part of broader regulatory restrictions that are expected to be announced in October.


What’s Our Take?

  • It wouldn’t be a huge surprise to see online sales of e-cigs banned.  The FDA is well aware how easy it is for consumers to purchase e-cigs online– one simply has to put in a birth date of at least 18 years of age
  • The FDA is also concerned with the appeal of flavored e-cig offerings (like bubble gum or coffee) that may attract a younger demographic
  • Estimates suggest the online e-cig market to be worth ~$500MM of the total $1-1.5B category
  • We expect any restrictions on online sales to favor Lorillard’s Blu e-cig and NJOY (private), the two companies with the greatest retail market share and nationwide presence. [Blu is estimated to have under 20% of its total sale online]
  • Additionally, as RAI (Vuse) and MO (Mark-Ten) expand distribution (they’ve rolled out brands in the last two months across test markets in one state each), we’d expect an online ban to benefit big tobacco due to their retail leverage over smaller e-cig players
  • We expect future FDA regulatory restrictions to include at least advertising (same or more similar standards to traditional tobacco) and nicotine levels (at most equivalence with traditional tobacco) 


Matthew Hedrick

Senior Analyst

Eurozone PMIs Inch Higher

  • Eurozone fundamentals inching higher, including stronger PMIs; investor sentiment improving on weak comps. On a relative basis the Eurozone is well below its historical growth average and churning only modestly higher as deep structural imbalances and the lack of credit drag on growth.
  • We underline the significance of Eurocrat and ECB resolve to lend support to the region and markets (at all costs), which, along with marginally better data, should continue to support Eurozone capital market performance.
  • Bullish position on the UK (etf: EWU) and Germany (EWG) remains.

Yesterday, preliminary August PMIs for the Eurozone, Germany, and France were released, and short of France’s Services figure that contracted month-over-month (and is below the 50 line at 47.7), the European aggregate and Germany numbers are showing 2 year highs, resting above the 50 line.  


Eurozone PMI Manufacturing 51.3 AUG (exp. 50.7) vs vs 50.3 JUL

Eurozone PMI Services 51 AUG (exp. 50.2) vs 49.8 JUL

Eurozone PMI Composite 51.7 AUG (exp. 50.9) vs 50.5 JUL


Germany PMI Manufacturing 52 AUG (exp. 51.1) vs 50.7 JUL

Germany PMI Services 52.4 AUG (exp. 51.7) vs 51.3 JUL


France PMI Manufacturing 49.7 AUG (exp. 50.3) vs 49.7 JUL

France PMI Services 47.7 AUG (exp. 49.2) vs 48.6 JUL


Eurozone PMIs Inch Higher - zz. pmis



What’s Our Read? 


Our European call for fundamentals to stabilize remains underway.  While we expect protracted below trend growth in the region, the Eurozone Q2 GDP print of +0.3% Q/Q ushered in an end to the 18 month recession, and we’re seeing positive follow-through on the data. Germany is leading the growth charge at +0.7% Q/Q with strong export and import figures (+2.2% and 2.0%, respectively), and we continue to like UK fundamentals – today in a second estimate, Q2 GDP was revised 10bps higher to +0.7% Q/Q.   


Yet while there’s optimism to be had on improving data, Eurozone GDP was still down -0.7% year-over-year in Q2 and we expect a very slow churn higher in Eurozone GDP in the balance of 2013 (we are not getting over our ski tips). Certainly GDP will remain well below the pre-crisis average of 2.1% (since 2000) as the region hits the reset button on standards of spending and lending as budgets are readjusted at the government and household levels.  We maintain our call for 2013 GDP between -0.8% and -0.6% year-over-year.


Beyond struggling to reset spending and lifestyles habits, here are some significant hurdles that we expect will continue to weigh on Eurozone GDP:

  • The slim availability of credit, in particular to the small and medium sized businesses, the core drivers of growth and employment
  • Diminished credit quality of banks, especially across the periphery, as they report increasing non-performing loans
  • Further bank write-downs of non-performing assets
  • Labor market reforms slow to enact or institute at all
  • A protracted unemployment overhang, especially youth unemployment across the periphery, that will limit consumer spending and confidence
  •  Political uncertainty, in Italy (Berlusconi remains the lynchpin), Spain, and Portugal


Concluding Thoughts


Into Q4 we expect European PMIs to hover around the 50 line (ups and downs) but not to show a material breakout given the very weak structural issues that we do not see inflecting materially over the intermediate term, including weak credit conditions, high unemployment, alongside political uncertainty at the country level – Italy, Spain, and France in particular.  We continue to be fundamentally bullish on German and the UK equities, so should we see any outperformance from PMIs, we would expect it to come from these two countries.


As it relates to the capital markets, we think a much larger force versus marginal improvement in fundamental data is the political resolve of the Eurocrats and Draghi to lend fund if needed (back-pocket OMT ready) and prevent any country from leaving the Eurozone, which we think can continue to stabilize and push markets higher. Already we’re seeing domestic and international investors become increasingly confident in Draghi’s heavy hand and buying distressed asset, for example housing in Spain and bank debt across the periphery, as the EU banking system slowly continues to heal.


Matthew Hedrick

Senior Analyst    


Hedgeye Risk Management CEO Keith McCullough delivers his latest market musings and insights during his morning conference call with investors. As usual, he pulls no punches on stocks, bonds and the economy.


Daily Trading Ranges

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Sell Bonds, Buy Stocks

Client Talking Points


One of the main reasons why it has been "less easy" to be bullish on the S&P 500 and the Nikkei was that the Yen was stabilizing versus the US Dollar. Not this week. And the Nikkei loved that Yen breakdown of 97.71 support overnight. It busted a big +2.2% move off the @Hedgeye TREND line of 13,330 support. Correlations matter. 


#RatesRising remains our top Global Macro Theme for Q3. The 10-year is yielding 2.89% this morning. That's up +6 basis points week-over-week and up +38 basis points year-to-date. Boom. This debate should be moving toward when we hit 4% on the 10-year instead of 3%. If the US Dollar joins this breakout in rates, it will continue to be very bullish for growth investors. Bearish for slow-growth positions like Utilities (XLU). Sell bonds, buy stocks.


One of the nice little perks to a #StrongDollar versus weak Yen is a consumption tax cut via #CommodityDeflation. Both the US Dollar and S&P 500 are up now on the week, but the CRB Index is down -1.7% after failing at our 293 TREND line of resistance. Again, correlations matter. Rinse and repeat.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

Three for the Road


After a 1.5-3% correction from the YTD highs in the SPY, QQQ, and IWM, I’m seeing the least amount of bulls of the yr


"We should be dreaming. We grew up as kids having dreams, but now we're too sophisticated as adults, as a nation. We stopped dreaming. We should always have dreams." -Herb Brooks 


The Indian rupee hit a record low on Thursday at 65.56 per dollar and is down roughly 17% this year. It has overtaken the yen as the world's worst performing major currency this year. #AsianContagion anyone?


Grind It Out

This note was originally published at 8am on August 09, 2013 for Hedgeye subscribers.

“Success is stumbling from failure with no loss of enthusiasm.”

-Winston Churchill


Four years ago, Keith, myself and Todd Jordan, our Managing Director of our Gaming, Lodging & Leisure team, embarked on a journey in which many people predicted we had little chance of succeeding at. With the support of our colleagues at Hedgeye, we entered the process to purchase the Phoenix Coyotes, a bankrupt NHL franchise.  Our proposal to purchase the team was seemingly received well (as you might imagine Keith played the lead role in that meeting!) and enabled us to become the key contender to own the team.


Our analysis of the situation in Phoenix was vintage Hedgeye. We started with a macro perspective that it was likely the ideal time to buy a distressed asset in the Phoenix region as housing was literally in free fall.  Our view was that housing would ultimately revert to the mean, and thus home prices would see a strong recovery, which would then drive discretionary spending on things like sporting tickets.  In the Chart of the Day, we show the improvement in home prices in Phoenix since that period.


We then took a hard look at the financials of the team (hat tip to our colleague Anna Massion for some good work here), we found a business that was bloated on the cost side with some easy pro-forma cost reductions.  On the revenue side, we developed a plan for steady revenue growth with the unique idea of playing five games in another market (think the Buffalo Bills playing in Toronto).  Even though we came to agreement with the NHL on the parameters of a purchase via a letter of intent, the deal ultimately fell through as we were unable to agree to terms on an arena lease.


At that point, we chalked it up as a loss, but a win on the learning side, and watched over the last couple of years as various other groups attempted, yet failed, to purchase the franchise.  With the advent of the new collective bargaining agreement in 2013, which from our view created a very compelling economic situation for smaller market NHL teams, we decided to revisit the opportunity, almost three and half years after first looking at the team.


Over the course of the last few months, we and our partner Anthony LeBlanc were able to put together a very intriguing financing package with a major hedge fund as the lender. With Anthony’s guidance, an arena lease was negotiated that exemplifies a true public / private partnership.  And finally we found a lead equity investor in my friend George Gosbee from Calgary, who is now the Governor of the franchise, and closed the transaction earlier this week.


For Hedgeye and our partners, the deal was a true lesson in perseverance and teamwork.  Quitting at any point would have been easy, but ultimately we persevered and put the puck in the net.  While we are quite excited about the prospects for NHL hockey in Phoenix, I will ease the minds of any NHL hockey fans out there . . .  despite owning a small piece of the team, you can be rest assured Keith and I won’t be getting on the ice any time soon!


Switching back to the global macro grind, we have a slew of data out this morning.  It was a big macro day in China, in particular with Chinese CPI coming in at +2.7%, PPI declining for the 17th straight month down -2.3% y-o-y, and retail sales up a solid +13.2% y-o-y.  That last data point continues to be supportive of our view that Chinese GDP is in a phase transition from an export led economy with a focus on infrastructure build out, to a consumption driven economy, with a lower aggregate growth rate.


This Sunday we will be getting preliminary GDP numbers from Japan and this will undoubtedly be the focus of many global macro investors. The main event in global macro this year has clearly been the rapid decline and volatility of the Yen.  In turn, this has supported strength in the U.S. dollar, which has implications across asset classes with varying degrees of correlations. 


We have a lot of things at Hedgeye, but a crystal ball is not one of them, so we aren’t going to attempt to tell you where the number will come in.  That said, we continue to have conviction that regardless of any short term data, the Japanese will have to continue to stimulate, and aggressively so, in order to get anywhere in the zip code of their long run inflation target of 2% and nominal growth of 3%. To get to these targets, the Japanese policy makers will require a whole lot of “Control P” (printing), which makes the long run bear case on the yen very compelling.


Back in the U.S., the ferocious bear raid in U.S. equities (to quote my colleague Christian Drake) took its toll with a cumulative decline of 71 basis points over the last four days (#SarcasmAlert). We’ve been harping on this all year, but as the U.S. economy continues to transition from stabilizing to accelerating with labor and confidence hitting levels not seen since 2007, U.S. equities will continue to find a bid on any sell off.


The longer term supporting bid in U.S. equities is, of course, the theme that our financials team has been focused with their recent launch on asset managers, which is the current, and we expect continued, outflows from fixed income assets as interest rates grind higher.  This will only accelerate if U.S. economic data continues to come in strong.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.57-2.73%

SPX 1676-1714

DAX 8233-8456

VIX 11.62-13.94

Yen 96.16-98.71

Copper 3.05-3.25


Have a great weekend with your friends and families!


Keep your head up and stick on the ice,


Daryl G. Jones


Grind It Out - Chart of the Day


Grind It Out - Virtual Portfolio






Visitor arrivals increased by 4.9% YoY to 2,565,170 in July 2013.  Visitors from Mainland China increased by 14.0% YoY to 660,096, coming primarily from Guangdong Province (738,106) and Fujian Province (74,292).  Mainland visitors traveling under the Individual Visit Scheme was 730,405. Moreover, visitors from the Republic of Korea (38,416) and the Philippines (18,859)  increased by 6.6% and 0.9% respectively, while those from Hong Kong (598,200); Taiwan (91,226); and Japan (20,593) decreased by 6.5%, 18.7% and 41.4%. 
The average length of stay of visitors held stable from a year earlier, at 1.0 day in July 2013.



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