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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 19, 2013


As we look at today's setup for the S&P 500, the range is 23 points or 0.96% downside to 1709 and 0.38% upside to 1732.                            

                                                                                                   

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.37 from 2.37
  • VIX  closed at 13.59 1 day percent change of -6.47%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init Jobless Claims, Sept. 14, est. 330k (pr 292k)
  • 8:30am: Current Acct Balance, 2Q, est. -$97b (pr -$106.1b)
  • 9:45am: Bloomberg Eco. Expectations, Sept. (prior -5)
  • 9:45am: Bloomberg Consumer Comfort (prior -32.1)
  • 10am: Leading Economic Indicators, Aug., est. 0.6% (prior 0.6%)
  • 10am: Philly Fed Business Outlook, Sept., est. 10.3 (pr 9.3)
  • 10am: Existing Home Sales, Aug., est. 5.25m (prior 5.39m)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Treasury’s plans for following wk sale, 2Y/5Y/7Y notes
  • 11am: Fed to buy $2.75b-$3.5b notes in 2020-2023 sector
  • 1pm: U.S. to sell $13b 10Y TIPS in reopening

GOVERNMENT:

    • U.S. House Speaker John Boehner, Majority Leader Eric Cantor, Majority Whip Kevin McCarthy, Republican Conf. Head Cathy McMorris Rodgers meet with Facebook CEO Mark Zuckerberg on immigration law
    • Finance ministers from Asia-Pacific Economic Cooperation group in Bali for 2-day summit
    • 9:30am: House Oversight Cmte hears from Thomas Pickering, chairman of Benghazi Accountability Review Board
    • 10am: Senate Homeland Security Cmte hearing on renewing U.S. Postal Service
    • 10am: Sen. Foreign Relations Cmte hears from Caroline Kennedy, nominated to be ambassador to Japan, at confirmation hearing
    • 3:30pm: House Armed Services hearing on lessons of Benghazi

WHAT TO WATCH:

  • JPMorgan said to pay $900m to settle London whale probes
  • CEO doesn’t expect criminal charges for bank, execs: NYPost
  • Wells Fargo eliminating 1,800 more mortgage production jobs
  • Activision’s stock sale blocked by judge over investor vote
  • Tesla CEO says co. to develop practical autopilot for Model S
  • Zuckerberg says undocumented in U.S. treated “unfairly”
  • Obama puts Lockheed, Merck, Pfizer, IBM CEOs on export council
  • Google may stop using cookies to track web users, WSJ says
  • Cisco execs accused in suit of aiding Falun Gong monitoring
  • Harrisburg, Pennsylvania, seeks court approval of debt plan
  • Grand Theft Auto sets $800m 1-day record for video game sales
  • JPMorgan said to underwrite Chrysler IPO, CNBC says
  • East West Bancorp to buy MetroCorp for $273m cash, stock
  • Icahn challenges corporate governance in WSJ opinion piece

EARNINGS:

    • Cintas (CTAS) 4:15pm, $0.63
    • ConAgra Foods (CAG) 7:30am, $0.39
    • IHS (IHS) 6am, $1.17
    • Pier 1 Imports (PIR) 6am, $0.21
    • Rite Aid (RAD) 7am, $(0.04) - Preview
    • TIBCO Software (TIBX) 4:05pm, $0.22

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Wall Street Defends Commodity Trades Against Regulatory Scrutiny
  • Lead Glut Diminishing as Bear Market Shuts Smelters: Commodities
  • Copper Touches Three-Week High as Fed Continues U.S. Stimulus
  • Brent May Target $115 If Resistance Breached: Technical Analysis
  • Soybeans Climb for Second Day as China Buys More U.S. Supplies
  • Sugar, Coffee, Cocoa Advance as Fed Unexpectedly Keeps Stimulus
  • Gold Fluctuates in London After Surging on Fed Stimulus Plans
  • Red Kite Spins Off RK Mine Finance Fund II Under Oskar Lewnowski
  • Commodity Revenue at Top Banks Climbs in Asia as Loans Rise
  • Carbon Trade Seen Losing Globally in Aussie Vote: Energy Markets
  • Cotton Output in Australia to Drop as Drought Curbs Planting
  • Cheese Maker Uses Pig and Cow Poop to Trim U.K. Energy Bills
  • Copper Exchange Stocks-to-Use Ratio at 10-Month Low: BI Chart
  • JPMorgan Leads Banks in Commodities Revenue Followed by Goldman

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 


FDX: Another Notch of Credibility

Summary

 

We will save our main commentary until after the 10-Q tomorrow, but we think it is fair to say that the FedEx report today exceeded muted expectations and added credibility to the Express restructuring program.  FedEx continues to show that it can deliver higher Express margins and, as it does, the market should move to price in continued success.  We continue to think that there is significant potential value at FedEx Express that the market is not pricing in. 

 

 

The Quarter vs. Our Thesis

  • Express Margin:  Despite continued negative mix of IE/IP, FedEx Express held onto its 50 basis points of margin expansion from FY4Q (YoY).  That is good enough, since we would guestimate a net headwind of 10 to 30 basis points from mix, fuel, depreciation etc.
  • Valuation & Sum of the Parts:  As the shares move higher, our DCF-based fair value range suggests a bit less upside.  That said, in this market, the potential still looks favorable.  There was nothing new that moved the needle on our valuation.  An updated sum of the parts presentation showing the low implied market valuation for FedEx Express is presented below.

FDX: Another Notch of Credibility - as1

 

  • Thesis Playing Out:  We think the market has been overly fixated on the 'trade down' headwinds at FDX, while missing the underlying potential of FedEx Express.  FedEx Express is a competitively advantaged player in a structurally favorable industry.  Many of its challenges have been self-imposed, with higher energy costs and inventory trends filling the balance that are not.  We believe that FedEx Express should be able to meet or exceed competitors’ margins in pretty much any operating environment.  This was just the second quarter where we have seen a focus on closing that gap, with further progress likely through FY14 and FY15. 
  • Pricing In Success:  As FedEx gains credibility on the Express restructuring, the market is likely to price in success well before it is actually completed.   That anticipation may explain the strong reaction to merely maintaining the FY4Q 2013 Express margin gains amid a more difficult operating environment.  

 

We continue to think that FDX will prove a rewarding long-term position, as FedEx Express focuses on profitability instead of market share.  FedEx is also well positioned to benefit from signs of stronger economic growth.

 

 

 

 

 

 

Jay Van Sciver, CFA

Managing Director


HEDGEYE RISK MANAGEMENT
111 Whitney Avenue

New Haven, CT 06510


 


The Outlook on U.S. Debt + Growth

In the Hedgeye Chart of the Day below, we show the trend in the Deficit-to-GDP ratio. After reaching a peak of ~10% in 2009, the ratio has showed steady decline with accelerating improvement over the last year, alongside stronger economic growth, higher taxes, a retreat in stabilizer payments, and a number of non-recurrent inflows.   

 

The Outlook on U.S. Debt + Growth - drake1

 

We expect the ratio to retreat further as the domestic macro data continues to reflect ongoing, albeit modest, improvement. 

 

Indeed, yesterday, in its latest update to the long-term budget outlook (Here), the CBO projected deficit spending would continue to drop over the next few years, falling to 2% of GDP by 2015 with the Debt-to-GDP ratio declining to 68% from its current level of ~73%. 

 

Yes, we are keenly aware that the long-term budget outlook, saddled with unsustainable growth in entitlement obligations, remains dire. We’ll break down the budget outlook in detail, by duration, in subsequent notes, but the key takeaway here is that the outlook for both growth and debt spending over the intermediate term remains positive.   

 

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Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on our radar screen.

Keith McCullough – CEO

Options market has eyes on Fed, but more worried about weeks ahead (via Reuters)

6 Fun (Frightening?) Fed Facts (via Hedgeye)

Berkshire Billionaire Found With More Shares Than Gates (via Bloomberg)

Syria tells Russia it has proof rebels used chemicals (via BBC)

Irish to Keep Chunk of Anglo Irish Loans as Wealth Funds Circle (via Bloomberg)

China woman survives 15 days trapped in well (via BBC)

 

Morning Reads on Our Radar Screen - beb

 

Kevin Kaiser - Energy

WEBCAST: Kinder Morgan Conference Call (via Videonewswire)

 

Daryl Jones – Macro

With the end of Fed's QE in sight, U.S. public says 'Huh?' (via Reuters)

 

Jonathan Casteleyn – Financials

Bernanke Saves Companies $700 Billion as Verizon Leads Sales (via Bloomberg)

 

Jay Van Sciver – Industrials

FedEx posts profit; express shipping rates will rise next year (via Reuters)

 

Tom Tobin - Healthcare

Medicare and Reform: Fifty States of Confusion (via Express Scripts)        

 

Matt Hedrick – Macro

BOE Officials See No Case for More Stimulus (via Bloomberg)


Pummeling of the Perma-Bears

Client Talking Points

US

The Trend slope of improvement in U.S. growth, credit and confidence are all positive. Meanwhile, both Treasury Yields and the US Dollar remain Bullish from a price perspective. #RatesRising has been reflecting that positive fundamental reality as have market prices as pro-growth exposure continues to get marked higher (new year-to-date highs yesterday for the QQQ’s and another new all-time high for the Russell 2000). Meanwhile the underperformance spread for slow growth, yield chasing assets (Utilities, MLP’s) continues to expand.   

COMMODITIES

You may recall that #CommodityDeflation was our Macro call in Q1 2012. Well, it continues. Gold remains an unmitigated train wreck. It's still crashing with $1304 the last print. Gold bugs are down -22.4% year-to-date and down -32% from the 2011 Bernanke Bubble high. Hedgeye risk range on gold is $1288-1349. We're still keeping a close eye on Brent oil which obviously has important economic implications. Brent range is $107.58-111.43. If there's one thing Obama can do for this economy it's tell Janet Yellen to bring back #StrongDollar which will lead to Down Oil.

Asset Allocation

CASH 30% US EQUITIES 24%
INTL EQUITIES 22% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
WWW

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.

HCA

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Yield Spread (10yr minus 2yr) plenty wide at +246bps - Financials $XLF +25.2% YTD for good reason @KeithMcCullough

QUOTE OF THE DAY

Always forgive your enemies - nothing annoys them so much.

- Oscar Wilde

STAT OF THE DAY

The median wage of workers age 25-34 with a bachelor's degree is $44,970. The median wage of workers age 25-34 with a high school diploma is $29,950. The median student loan balance is $12,800. 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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