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The fundamental outlook for Estée Lauder remains favorable versus its Personal Care peers. For a candidate to short against an EL long position, we would look no further than KMB.


Estée Lauder surprised the Street to the upside on 8/15 with 8% organic sales growth in 4QFY13 and strong operating leverage. Subdued guidance for FY14 was largely shrugged off by the market since, with the stock outperforming the S&P 500 and peer consumer staples stocks by 14 bps and 182 bps, respectively, since the earnings release. We believe that EL is likely to raise its conservative guidance as accelerating sales and margin growth drives shareholder returns. At 22x earnings, the stock is valued roughly at the mid-point of its historical range and in line with slower-growth, higher-yielding stocks like PG that are more susceptible to the downside of rates rising.


Kimberly Clark disappointed investors with its 7/22 earnings release as soft volumes in the U.S. and FX headwinds in emerging markets combined to disappoint investors. We believe the possibility of a guide-down increased since the last earnings release, with management stating that share repurchases and cost cutting measures would fill the void left by slower-than-expected revenue growth in FY13. As a result, the company reiterated its FY13 earnings growth guidance of 8%. In light of inflation costs accelerating, we believe a guide-down is likely in 2H13. See charts below for more details.



Revenue: EL, in our view, has the more favorable revenue growth outlook with management expecting 6-8% organic sales growth for FY14. Exposure to the high end consumer remains a strong point, with premium brands’ sales growing much more rapidly (~20%) than the overall portfolio (6%) in 4QFY13. Earnings across retail have continued to suggest a bifurcation among consumers that is leading the high end to outperform the mid- and low-tier concepts.


KMB is seeing weakness in developed markets like the U.S., Australia, and South Korea. U.S. Personal Care volumes declining despite negative product mix was a concern. For household product makers like KMB, growing volumes in the U.S. could remain challenging with disposable incomes in the U.S. stagnating. Emerging markets continued to be pressured by unfavorable currency rates of ~3%.



Margin Outlook: EL continues to drive margin expansion through its long-term strategies aimed at increasing efficiency in its business model. Over the past four years, sales have grown by 40% and operating margins have doubled. Management is confident that the FY16 operating margin target of 16.5% is achievable.


KMB faces several headwinds, with respect to its operating margin, in 2H13, as commodity inflation has been accelerating during 3Q to-date. We believe this heightens the likelihood of a guide-down from KMB during 2H13.


EL – A CUT ABOVE THE REST - kmb inflation chart1


EL – A CUT ABOVE THE REST - kmb cost savings



Quantitative View: Our macro team’s quantitative view of EL and KMB corroborates our fundamental view of the respective stocks. EL needs to hold above its intermediate-term TREND line of $66.68. KMB has broken its intermediate-term TREND line of $97.96.


EL – A CUT ABOVE THE REST - el levels 8.27


EL – A CUT ABOVE THE REST - kmb levels 8.27



Rory Green

Senior Analyst



Patience: SP500 Levels, Refreshed

Takeaway: It’s a range bound bullish TREND in SPY with immediate-term TRADE resistance, for now. Growth stocks still look great.



I didn’t play the 1st correction as well as I would have liked, but I’m happy with how we faded the bounce. Now I need to make decisions on not only buying this dip, but selling this rip (in Gold, Treasuries, etc.). There’s plenty to do out there today,


Across our core risk management durations in the SP500, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1670
  2. Immediate-term TRADE support = 1637
  3. Intermediate-term TREND support = 1631


In other words, its game time. The US stock market either holds here or it does not. Same thing with both Gold and Treasuries – they either fade at lower-highs (again), or they do not.


Have some patience – this isn’t the all-or-none market people want it to be. It’s a range bound bullish TREND in SPY with immediate-term TRADE resistance, for now. Growth stocks still look great.



Patience: SP500 Levels, Refreshed - SPX

[VIDEO] FLASHBACK: JCPenney Wise, Pound Foolish


A little over two years ago, the market went bananas over news J.C. Penney hired Ron Johnson away from Apple to lead the struggling retailer as its new CEO. While consensus celebrated the announcement, sending the stock up almost 20%, Hedgeye Retail Sector Head Brian McGough didn’t budge on his bearish forecast for the company.


As this interview with CNBC’s Maria Bartiromo shows, McGough unequivocally told investors to get out of JC Penney and that Wall Street got it wrong. If Bill Ackman had listened, he could have saved himself about $500 million. 


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Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen.

Keith McCullough – CEO

Ackman Folds (via Zero Hedge)

Emerging Stocks Fall Most in Eight Weeks (via Bloomberg)

Dubai Market Down 7% (via Bloomberg)

Japan's newest rocket fails to lift off (via Reuters)

India lower house of parliament passes cheap food plan (via BBC)


Morning Reads on Our Radar Screen - ack2


Brian McGough – Retail

His Links Severed, Ackman Sells Stake in J.C. Penney (via New York Times)

Billabong brand declared worthless as company posts huge loss (via CNNMoney)


Josh Steiner – Financials

Facebook friends could change your credit score (via CNNMoney)


Jonathan Casteleyn – Financials

America Resilient Five Years After Great Recession (via Bloomberg)

Bats Agrees to Merge With Direct Edge as Volume Shrinks (via Bloomberg)


Howard Penney – Restaurants

Cosi CEO Blames The Chain's Troubles On His Employees (via Business Insider)

McDonald's Japan appoints new leader as sales slump (via Reuters)


Client Talking Points


EEM is not the perfect ETF representing the Emerging Markets short call, but it’s the most widely held. And guess what? It's for sale right now, provided that we continue to see pressure on Emerging Market currencies. We do think we will continue to see #GrowthSlowing on a real-inflation adjusted basis in EM. Basically, we are as bearish on EM as we are bullish on US Growth (QQQ). Yes I know. It's weird, but it's working.


India is the poster child of currency crisis developing into a current account deficit problem (as overall growth slows and inflation accelerates). India’s Sensex was hit hard down -3.1% overnight. It's down -11.5% since mid July. That said, it actually outperformed Indonesia and the Philippines overnight which were smoked for big -3.9% and 4% losses, respectively. Don't forget: #AsianContagion is one of Hedgeye's top Q3 Macro Themes. It's working out well for us, not so much for them.


We don’t like everything US Equities. In fact, we definitely don’t like slow growth sectors like Utilities and Consumer Staples. Not at all. The number one thing that concerns me on growth stocks is Oil being so sticky up here. $108.11 is the long-term TAIL risk line for Brent, and SPY just failed at my immediate-term TRADE line of 1671 resistance. We are watching this relationship closely.

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


COMMODITIES: Gold and Oil continue higher; rarely a good thing for Global Growth expecations @KeithMcCullough


"I'd rather roll the bones at Mohegan Sun than try to trade some of these 2013 commodity blowups." -Keith McCullough


Average 401(k) balances were up more than 10% in Q2. Fidelity Investment's average 401(k) balance came in at $80,600 at the end of the second quarter of 2013 -- up more than 10% from the same time last year, according to a report released Tuesday by Fidelity, which represents 12.4 million U.S. workers.

Staying Imbalanced

This note was originally published at 8am on August 13, 2013 for Hedgeye subscribers.

“To achieve an extraordinary result you must choose what matters most and give it all the time it demands.  This requires getting extremely out of balance in relation to all other work issues, with only infrequent counterbalancing to address them.”

-Gary Keller, “The One Thing”


Yesterday, I presented to the global finance team of a Fortune 100 company.  Don’t worry, they weren’t paying us and we don’t do research on the company.  In fact, the presentation came at the request of a friend who is the number two person in their finance department.  He wanted to provide his direct reports some insights into how Wall Street research works.


The presenter that went before me was a former bulge bracket analyst covering their company.  He was a thoughtful guy and talked about the importance of setting guidance that could consistently be beat.  His view was that that investors don’t like to be surprised, and in part of course he is right.  The perception of predictable returns gives comfort to investors that don’t really do the work (think LINN energy).


He went on to talk about the fact that sell side analysts compete for commissions to get paid and try to make a lot of noise so as to garner “II votes”.   This description of traditional sell side analysts obviously gave me the opening to discuss how our model is different.  As I explained to the group, we get paid for two reasons: a) two have investment ideas that work and b) to make our clients think.


If we are not succeeding at those two objectives, then our business likely would not be sustainable as we have no asset management, trading, investment banking, or prop desk to cover the overhead.   In his recent book, Gary Keller calls this pursuing the One Thing and explains that the pursuit of this One Thing will ultimately determine your personal or professional success.  Hedgeye’s One Thing is research, what is yours?


Back to the global macro grind . . .


Every quarter we try to boil down the global macro markets to three key themes.   But in the spirit of this note, I’m going to distill this down to One key theme: #RatesRising.  Especially in light of the Wall Street Journal headline that emerging market growth is trailing the developed world, and thus indicative of our view of slowing emerging market growth being reflected in consensus, it seems likely that the direction of interest rates are likely to be the One Thing (as always subject to change as the facts change).  But consider the following:


1.  The Queen Mary of macro trends has inflected– We often use the analogy of the Queen Mary turning to describe the long term trend in interest rates.   The Queen Mary, of course, is the massive ocean super liner that dominated transatlantic voyage before the jet age.  Like any vehicle that is more than 300 meters in length, turning the Queen Mary was no easy task and not without its implications.


This analogy is appropriate for interest rates as they have literally been in decline for the last 30 years since peaking in the early 1980s.  This long term decline has enabled any business that depends on borrowing money to fund its business to have a steadily declining cost of capital.  In addition, this has made bonds a compelling asset class with a long term underlying bid to price.


In our models in Q2, yields inflected notably and broke out above our TRADE, TREND and TAIL levels.  In fact, as shown in the Chart of the Day, 10-year yields had their largest percentage increase quarter-over-quarter in more than a decade.  Even though 10-year yields have broken out, they remain well below the mean yield since 1989 of 5.21%.


2. The market is chalk full of debt – Given the generational trend in interest rates going lower and thus providing a tail wind for bonds, it should be no surprise that investors’ portfolios are chalk full of fixed income.  According to the most recent data, there is $38 trillion of bonds outstanding across all subsectors of the bond market.  Further, bonds outstanding have increased every single year since 1990.


The more critical data point from an asset flow perspective is that the notional value of bonds outstanding is currently at 68/32 versus the market capitalization of equities.  This, too, is an extreme ratio based on history and is literally the highest we’ve seen.   For comparative purposes, this ratio was at 50/50 as recently as 1999.


3. Volatility and duration across the bond market are in a set up that could lead to meaningful losses – As volatility in an asset class increases, so too does the expected loss and/or return.   According to Merrill Lynch’s MOVE index, bond volatility has almost doubled in the last quarter and is at two year highs.  Meanwhile duration is at close to all-time highs.  My colleague Jonathan Casteleyn of our financials team highlighted this in his recent presentation on asset managers (ping sales@hedgeye.com if you haven’t seen it yet), but based on current duration a roughly 100 basis point move in yields equates to a 8.9% loss on the 10-year treasury.


In part we are already starting to see the sort of generational losses in bonds that we should expect from the dynamics outlined above.  Specifically, the Barclay’s Aggregate Bond Index is set for its first loss in 14-years and only third loss since 1990.  While gentleman may prefer bonds, they don’t prefer losses.


The reality in markets is that there is rarely One Thing that dominates, but the seismic shift in interest rates will certainly be one of the most critical factors over the coming quarters and years.  As money flows from the bond market to avoid losses, equities will be awaiting with open arms.


Our immediate-term Risk Ranges are now as follows:


UST 10yr 2.57-2.74%

SPX 1680-1714

Nikkei 13339-14023

USD 80.82-82.11

Yen 96.69-98.44

Gold 1276-1341


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Staying Imbalanced - Chart of the Day


Staying Imbalanced - Virtual Portfolio

Daily Trading Ranges

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