TODAY’S S&P 500 SET-UP – September 9, 2013

As we look at today's setup for the S&P 500, the range is 22 points or 0.74% downside to 1643 and 0.59% upside to 1665.                   










  • YIELD CURVE: 2.47 from 2.48
  • VIX  closed at 15.85 1 day percent change of 0.51%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed’s Williams speaks in San Francisco
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell $30b 3M, $25b 6M bills
  • 3pm: Consumer Credit, July, est. $12.3b (prior $13.8b)
  • 4pm: USDA crop-conditions report


    • Congress returns from summer recess
    • Senate, House convene at 2pm; Senate will proceed to consideration of joint resolution to authorize limited use of U.S. Armed Forces against Syria
    • National Security Adviser Susan Rice, Dir. of Natl Intelligence James Clapper, Sec. of State John Kerry, Joint Chiefs Chairman Martin Dempsey, and Defense Sec. Chuck Hagel brief House on plan to use military force in Syria, 5pm


  • Obama expands push to sell Syria attack in war-weary U.S.
  • Assad in interview said to deny using chemical weapons
  • Neiman Marcus said to be near $6b sale to Ares Management
  • Shuanghui, Smithfield deal obtains CFIUS clearance
  • China may cut annual growth target to 7%: state economist
  • China’s export growth beats ests. for a 2nd month
  • Suntory to buy Glaxo’s Lucozade, Ribena for $2.1b
  • Google made new offer to settle EU antitrust probe
  • Nasdaq tweaks IPO cross rules with “pre-launch period”
  • NYSE buys stake in private-placement startup ACE
  • Tokyo winning 2020 Olympicsis seen aiding eco. recovery
  • Monte Paschi wins backing from EU’s Almunia for aid plan
  • Vodafone may not get approval for Kabel Deutschland offer: FT
  • “Riddick” tops U.S./Canada box office w/ $18.7m


    • Casey’s General Stores (CASY) 4pm, $1.26
    • Five Below (FIVE) 4:01pm, $0.09
    • HD Supply Holdings (HDS) Aft-mkt, $0.31
    • John Wiley & Sons (JW/A) 8am, $0.43
    • Palo Alto Networks (PANW) 4:03pm, $0.06
    • PVH (PVH) 4:02pm, $1.37


  • Gold Sales From Perth Mint Drop in August as Fed Nears Taper 
  • Hedge Fund Gold Bets Climb to Highest Since January: Commodities
  • Gold Declines on Speculation Federal Reserve Will Curb Stimulus
  • Indonesia Seen Exporting Some Tin This Month by Trade Official
  • Copper Rises for Third Day as Chinese Exports Exceed Estimates
  • WTI Falls From Two-Year High as Obama Presses for Syria Action
  • Robusta Coffee Falls to 2-Month Low on Vietnam Crop; Cocoa Drops
  • Jiangxi Copper Sees Treatment Fees Advancing as Ore Supply Rises
  • Bullish Diesel Bets Spurred as U.S. Fuels World: Energy Markets
  • Soybeans Rise for Third Day as Midwest Dryness Curbs Crop Yields
  • U.S. Natural Gas Rebounds After First Weekly Loss Since Aug. 9
  • Chinese Zombies Emerging After Years of Solar Subsidies: Energy
  • Gradually Rising Capacity Rates Bullish for Steel: Bull Case
  • Gold Inventories Plummet 36%, Leverage Is Highest in Nine Years


























The Hedgeye Macro Team














Friday’s jobs report was a mixed bag and the narrower data sets released this morning followed suit.  The largest acceleration in employment growth came from the 20-24 YOA cohort, which suggests that sales at quick-service and fast casual restaurants are likely to remain strong through the rest of 3Q.  


Highlighted in the following charts, there is a notable inverse correlation between rolling initial claims and the performance of stocks within our space. 







Below, we discuss employment by age and restaurant industry employment.  These serve as proxies for demand and operator confidence, respectively, in our models.



Employment by Age (demand)


Employment growth by age skewed negatively in August as the 20-24 YOA cohort saw growth accelerate to +338 bps from +205 bps in July, the 25-34 YOA cohort saw growth decelerate to +185 bps from +204 bps in July, the 35-44 YOA cohort saw growth accelerate to +59 bps from +53 bps in July, the 45-54 YOA cohort saw growth slow at an accelerating rate to -113 bps from -94 bps in July, and the 55-64 YOA cohort saw growth decelerate to +257 bps from +348 bps in July.


Employment by age is an important metric for the restaurant industry.  Given the discretionary nature of casual dining expenditure, and the highly-competitive nature of the industry, we infer that sustained employment growth in core demographics is necessary for continued comp growth in the absence of new unit growth or income per capita growth.  The sequential acceleration in growth slowing in the 45-54 YOA cohort and the deceleration in the 55-64 YOA cohort reflect negatively upon casual dining companies, indicating that we could see weakness persist within the sector.


Within the QSR segment, we continue to find that the majority of management teams we track are consistently highlight the importance of employment growth to the success of their business.  The strong sequential acceleration in the 20-24 YOA cohort, offset marginally by the small deceleration in the 25-34 YOA cohort, should sit well with quick-service and fast casual restaurants.






Restaurant Industry Employment (confidence)

The Leisure & Hospitality employment data, which leads the narrower food service data by one month, suggest that employment growth in the food service industry decelerated sequentially in August.  Leisure & Hospitality employment data did, however, register a month-over-month gain of +27k (second chart below), an acceleration from July’s +13k month-over-month gain.


The more narrow restaurant-focused data sets paint a less clear picture.  Limited-service employment growth decelerated sequentially in July, while full-service employment growth accelerated sequentially in July.


Sequential Moves

Leisure & Hospitality: YoY employment growth at +3.08% in August, down -14 bps versus July


Limited Service: YoY employment growth at +4.9% in July, down -3 bps versus June


Full Service: YoY employment growth at +2.97% in July, up +34 bps versus June










Howard Penney

Managing Director



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).



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



(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.

Early Look

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The Week Ahead

The Economic Data calendar for the week of the 9th of September through the 13th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - weekahead

The Draghi Shift: Door Open for An Interest Rate Cut

Bullish: Germany (EWG) and UK (EWU) equities


Draghi pivoted substantially in the ECB’s tone on monetary policy expectations in his press conference yesterday in which he kept rates on hold, presenting a dovish tone in which he said that interest rates should remain “at present OR lower levels for an extended period of time.”  In his commentary, he referred to the green shoots of economy (terminology he has not used this year) as “very, very green” and that there’s still no indication of domestic demand recovery across the whole of the Eurozone.


In short, Draghi has reset market expectations that were suggesting a hike in rates over the intermediate term, rather than a cut. Our assessments is that Draghi will continue to watch the data roll in and will need a number of months to confirm or change his outlook that could influence his monetary policy stance.  


Two pressing areas of concern remain the repayment schedule of LTROs and lack of credit across the region. While the swift repayment of the LTROs has boosted the health of the ECB’s balance sheet, it represents a tightening of liquidity, some of which is reflected in the poor data observed from ECB loans to corporations and households (chart directly below). The larger credit clog across the region should continue to suppress economic expansion and we believe that in the coming months Draghi may issue a facility to better extend loans to small and medium sized enterprises, the lifeblood of the Eurozone economy.  [Draghi’s full prepared remarks can be found here.]


The Draghi Shift: Door Open for An Interest Rate Cut - zz. rates


The Draghi Shift: Door Open for An Interest Rate Cut - zz. ECB balance sheet


The Draghi Shift: Door Open for An Interest Rate Cut - ZZ. LOANS



UK and Germany Bulls on Gradual Eurozone Improvement

As we’ve noted in previous notes, Eurozone data has improved over recent months, however we’ve tempered expectations that given the still very weak underlying structural state of the Eurozone, in particular the periphery, the data suggests an improvement off the bottom but still at low levels.  We see this clearly with PMI results, which we’ve forecast to make mild improvement and hover around the 50 level (dividing contraction and expansion), and outperformance from Germany and the UK given their stronger underlying fundamentals (see the chart below).


The Draghi Shift: Door Open for An Interest Rate Cut - ZZ. PMIS


We continue to be bullish on German and UK equities. Along with our U.S. call of #RatesRising, we’ve seen a similar trend in many European credit markets, which has solidified our call to stay in equities.  Of note, German’s 10yr bund yield reached a high of 2.04% this week (that level was last seen in DEC 2011!) and are up 26bp M/M, while UK 10yr Gilts are up 45bps M/M and France’s 10yr yield is up 30bps M/M.  While we expect yields to contract as follow-through to yesterday’s announcement, we do expect rates to remain elevated over the intermediate term as investor push into equities.



Given Draghi’s shift to a dovish interest rate outlook, we wouldn’t be surprised to see more follow-through selling in the EUR/USD, however we still very much think that Draghi’s OMT firepower has put great support in the common currency and expect the cross to trade in a tight range of $1.29 – $1.33 over the intermediate term.


Below we show CFTC data on the EUR/USD net non-commercial positions outstanding.  Regrettably the data is a bit stale (the newest as of 8/27), however the level suggests migration to the neutral level, consistent with an increasingly bullish outlook on the region’s improvement.


The Draghi Shift: Door Open for An Interest Rate Cut - zz.eur


The Draghi Shift: Door Open for An Interest Rate Cut - zz. cftc



An Italian Political Mess on Monday?

As a quick warning as you head into the weekend, we want to make you aware of what may develop on the Italian political front on Monday and the impact it could have on the market. Reuters has suggested that former PM Berlusconi has prepared a video message that could announce a decision (along with his PdL party) to bring down PM Letta’s coalition government (which has been in a tenuous state at best since elections in February) if on Monday the special Senate committee votes to strip Berlusconi of his seat in the chamber.


It’s hard to say just what may be decided on Monday, but certainly the situation creates potentially more downside than upside across Italian capital markets.  It’s such political risk that has largely kept us away from taking an investment position in Italy for many months. We’ll sleep deeply this weekend without a position in Italy.  We hope you can too.


The Draghi Shift: Door Open for An Interest Rate Cut - zz. silvio


Enjoy your weekend!


Matthew Hedrick

Senior Analyst

Stock Report: Annie's, Inc (BNNY)

Stock Report: Annie's, Inc (BNNY) - HE II BNNY table 9 6 13


Despite slightly disappointing top and bottom line Q1 2014 results (released on 8/8/13), the company maintained its FY revenue outlook of +18-20% and EPS range of $0.97 to $1.01. We believe that BNNY’s premium valuation is justified by higher growth rates across organic offerings, of which Annie’s is a leader, especially as it increasingly moves its products to the mainstream aisle from the organic aisle.


BNNY caters to a higher income demographic, one we think will continue to pay a premium for organic foods despite fluctuations in macroeconomic conditions. 


INTERMEDIATE TERM (TREND) (the next 3 months or more)

Q2 may see another quarter of challenged gross margins (expected to fall -100 to 150bps), however we expect a rebound in the top line (Q1 is typically the weakest revenue quarter) as advertising spend increases, and it further rolls out its frozen pizza and family sized frozen meal offerings, and continues to take share across mac & cheese, crackers and fruit snacks from more traditional branded players.


LONG-TERM (TAIL) (the next 3 years or less)

We believe that BNNY’s strategy to innovate everyday foods and create healthier and better tasting options than its competitors is one that should sustain long-term growth versus traditional CPG innovation that focuses on new and “different” SKUs that may miss consumer trends.


Organic product offerings will become more competitive in the coming years, however we believe that Annie’s can maintain its market leadership and take share from more traditional brand players as it moves more of its items to the center of the store. 


Stock Report: Annie's, Inc (BNNY) - HE II BNNY chart 9 6 13

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