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    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Takeaway: Editor’s Note: We added Annie’s (BNNY) and Restoration Hardware (RH) to our list of Investing Ideas, and we removed Melco Crown Ent, (MPEL).

INVESTING IDEAS

BNNY: Consumer Staples analyst Matthew Hedrick is bullish on Annie’s (BNNY), a producer and distributor of organic foods and snacks. We added Annie’s to the Investing Ideas list this week. Please click here to view that Stock Report.

FDX: FedEx took delivery of its first 767 Freighter, an aircraft that is a key component of the firm’s fleet renewal strategy, writes Industrials sector head Jay Van Sciver.  One reason why FedEx Express’ margins lag those of competitors has been its operation of a high cost aircraft fleet.  The 767-300Fs offer up to a 30% cost improvement versus older MD-10 aircraft.  FedEx has already been converting 757s to replace less efficient A310s, which offer up to 20% improvement.   FedEx expects a $300 million annual profit improvement by  fiscal year 2016 from modernizing its air fleet.

HCA: Hospital employment continues to decelerate with yesterday’s labor report.  On the margin, this is a negative update, but a minor one.  We’ve begun tracking monthly data on Medicare Part A payments, or those for Hospital care. 

We’ve seen some steep deceleration in Medicare Part A payments, which has shown up in company results across all the publicly traded hospitals, although HCA has done much better than others.  We’ll get the next update to this important series next week. 

We did some additional work to understand Medicare trends, adding a prescription tracking tool that should show us the shorter term trends as they occur.  As we mentioned previously we’ve been running a monthly survey of OB/GYN offices which has been showing doctors are seeing some better results in patient volume and maternity. We could be finally seeing the recovery Medical Economy that has been frustrating healthcare investors for over five years.

HOLX: Thursday, the Health Care sector team lead by sector head Tom Tobin updated market data for mammography industry growth.  In terms of the total number of facilities and mammography boxes in the field, both continue to show acceleration.  Our proprietary Tomo-Tracker also showed solid growth for August.  We’re expecting Medicare to issue a reimbursement code for 3D Tomo this Fall, clearing the path for a big surge in demand. 

Additionally, Obamacare gets going at the start of next month.  We believe HOLX is one of the best positioned players to take advantage of newly insured heading to the doctor’s office. 

MD: Employment trends for women aged 20 to34 continues to improve on the employment report released yesterday.   As employment recovers in this age group we expect to see improving maternity trends and improving revenue growth for MD.  We noticed the US Census updated 2012 birth data earlier this week showing a flat 2012, the first year without a decline since 2008.  We think there are one million or more mothers who deferred having a child the last few years and a turn would be a big deal for MD.

NKE: The latest Nike US Footwear retail sales data leaves us less than inspired. Specifically, it shows that footwear sales are growing, but are in a clear downward trend. Two factors keep us optimistic:

  1. Even though the intermediate-term trend is easing, the latest week was up 9%, which is a number we’d consider to be respectful by any means.
  2. US footwear is only 25% of Nike’s total sales – there’s a LOT more to the story.  The punchline here is that we’re going to raise a yellow flag to see how the next two to three weeks weeks perform. They’ll be critical with Nike reporting earnings in late September.

NSM: Nationstar Mortgage hit a new high this week, rising to a closing price of $52.44 on Thursday. Our value estimate for the stock remains in the $67 to $70 range, implying approximately 30% further upside from that level.

We continue to expect that the company will announce further servicing acquisitions between now and year-end and into the first half of 2014. Historically, these acquisitions have been catalysts to push shares higher. For reference, the big three specialty servicers (NSM, OCN, WAC) all raised their acquisition pipeline estimates during their most recent second quarter 2013 results (by a combined $145 billion). Interestingly, NSM accounted for 70% of the increase.

The main risk to keep tabs on with Nationstar is interest rates rising. The reality is that rates continue to rise on the back of strengthening US economic data and a growing expectation that the Fed will begin tapering asset purchases sooner than previously expected.

Rising rates are inversely correlated with mortgage origination volumes, as refinancing activity drops rapidly in response to higher rates. Nationstar derives a significant portion of its earnings from mortgage origination, but is more defensive than a traditional mortgage bank as their originations are largely sourced through the HARP channel, which is less rate-sensitive than the traditional refinancing channel. Nevertheless, origination volumes are likely to come under pressure amid further increases in rates and this will weigh on earnings upside going forward.

  • TRADE: In the short-term, the two main drivers of NSM shares will be interest rates and deal announcements.
  • TREND: Over the intermediate term, the stock will key off 3Q13 earnings results and deal announcements.
  • TAIL: In the long-term, there is still a tremendous opportunity for non-bank servicers like Nationstar to roll-up the servicing business. NSM is well positioned to be a prime beneficiary. We continue to think consensus earnings estimates remain too low for 2013/2014.

RH: We added Restoration Hardware (RH) to our Investing Ideas list this week. Click here to see the full Stock Report on the company.

SBUX: Hedgeye Restaurants sector head Howard Penney has no update on Starbucks (SBUX) this week.

TROW: Hedgeye Financials director Jonathan Casteleyn has no update on T. Rowe Price (TROW) this week.

WWW: The catalyst calendar is lining up for Wolverine World Wide (WWW). In the upcoming quarter, we’re modeling $1.20 earnings per share, which compares to the Street estimates of $1.02. That’s something that we’re known for several months now, as the Street is far underestimating the accretion of its recently-acquired PLG brands (Sperry, Keds, Stride Rite, Saucony).

But now the company bolstered the catalyst calendar by adding an analyst meeting on Oct 15, which is within a week of reporting earnings. A powerful catalyst calendar, indeed.

INVESTING IDEAS NEWSLETTER - Screen Shot 2013 09 07 at 7.22.05 AM

MACRO THEME OF THE WEEK: TIME TO TAPER! 

(Editor’s Note: Below is a column from Hedgeye CEO Keith McCullough that ran in Forbes this week. We believe the column is prescient, and that’s why we wanted to include it in today’s newsletter.)


“The physicists have known sin; and this is a knowledge which they cannot lose.”

-Robert Oppenheimer

Do you have introspective accountability?

Six decades or so ago, shortly after he began to fully grasp the unspeakably fearsome reality of the nuclear weapons he helped unleash, Robert Oppenheimer—“The Father of the Atomic Bomb”—became a rather unpopular man with the U.S. government.

After provoking the ire of politicians with his outspoken opinions during the Second Red Scare, Oppenheimer’s security clearance was revoked in a much-publicized hearing in 1954, and he was effectively stripped of his direct political influence.

Oppenheimer once remarked that his creation brought to mind words from the Bhagavad Gita: "Now I am become Death, the destroyer of worlds." In essence, Oppenheimer ultimately held both himself and the government to account.

Now stop for a moment and ask yourself: Can you imagine a central planner of the Bernanke epoch holding themselves accountable for the highest levels of food, energy, education, etc. inflation in world history?

Most likely, the answer is no. That would require an incredibly uncomfortable un-spinning of the truth.

And the truth is that American “political scientists” who systematically engaged in devaluing the purchasing power of the American people to four-decade year lows in 2011 know that sin. It is market knowledge that history will not soon forget. Facts don’t lie, politicians do.

If you’ve ever sat across the table from me and my macro research team during the monetary mayhem and tumult of these last few years, you’ll know that I refuse to have a debate about mean reversion risks without contextualizing the post-Nixon low in the world’s reserve currency (see chart):

  1. Got Causality? Of course, when a country cuts rates to zero then whispers to everyone front-running their next move that zero really isn’t zero (for Bernanke 0 = 0 minus 1, 2, 3, 4? QE5?), its currency goes down, hard.
  1. Post Nixon (i.e. post his devaluing the Dollar by abandoning the Gold Standard in 1971, purely for political gain), the US Dollar Index has never seen a lower-low versus the 2011 low. Surprise, surprise. That’s also when gold hit its all-time high.

Since most global commodities settle in Dollars, why there’s been raging inverse correlation (Dollar Down = Commodities InflationUp) alongside causality in this relationship is trivial to everyone other than the people who should be held responsible for it.

What is less trivial is all of the unintended consequences associated with the ultimate central planning sin (an un-elected overlord confiscating the purchasing power of The People). Here are some of the big ones:

  1. Commodity Bubble
  2. Bond Bubble
  3. Emerging Market Bubble

Yep, that’s going to be a lot for Bernanke’s children (and theirs) to noodle over for the next century. That is, of course, unless the next guy or gal running the un-elected agency does what no modern Federal Reserve Chairman has ever not done – raise rates.

For the last year or so, I’ve spent a considerable amount of time ranting about these Global Macro Themes:

  1. Commodity Deflation
  2. Rising Interest Rates
  3. Emerging Market Outflows

These are relatively easy long-term risk calls to make because all three of them are basically about unwinding all three of the aforementioned bubbles.

Once prices stop making all-time highs (commodities, bonds, or currencies), there’s this big little risk management critter Ben Bernanke has never mentioned under oath called asymmetry.

So, at this stage of the cycle this is what you get:

  1. US Dollar making a series of intermediate-term TREND higher-lows (off her all-time lows in 2011)
  2. US Interest Rates making a series of intermediate-term TREND higher-lows (off their all-time lows in 2012)
  3. Gold and food prices making a series of intermediate-term TREND lower-highs (off their all-time highs of 2011-2012)

All the while, what we still get from the consensus TV circus that is “Government Access Media” is a bunch of uninformed people begging for more of the drugs that the political scientists got rich selling us.

If I am not clear on my long-term policy view, let me state it plainly – stop devaluing the Dollar. Stop trying to smooth economic gravity. Stop the monetary madness. Start tapering. Now.

If you ever want to see US growth expectations come back (yes, markets and business run on expectations, fyi), you have to let the US Dollar come back and let rates rise right alongside her.

Just this morning, we received additional support that the economy doesn’t need any more of the Fed’s monetary amphetamines. In case you missed it, the US jobless claims trend is near a six-year low. Meanwhile, Q2 US economic growth was revised up to a 2.5% annualized rate.

What will it take to get the Fed out of the way once and for all?

We are at a critical crossroads in America right now. Unwinding the monetary sin embedded in Bernanke’s post 2012 Jackson Hole policy is what markets have been doing for 10 months.

Collectively, we either have the responsibility within all of us to rise up against the tyranny of easy money and currency debauchery, or we do not. At this point, I can only hope the people who voted for this government hold it to account.

Robert Oppenheimer eventually got it. He had introspective accountability. The $3,600,000,000,000 question is whether Ben Bernanke ever will.