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ISM: Oct-Taper Whispers

No September slump for domestic manufacturing with the ISM Mfg data - the first (and arguably most impactful) private sector release of the month – strengthening for a 4th consecutive month.    The Composite index advanced to 56.2, New Orders remained north of 60 and the Employment and Backlog components both improved sequentially.    

 

Across each of the five sub-components of the index,  the TREND remains one of improvement with the trailing 3M/6M/12M averages all advancing in the latest month.   

 

For now, strength across the balance of domestic macro metrics continues to belie the extraordinary, dovish policy lean out of the Fed while markets and main street continue to largely ignore the latest iteration of fabricated brinksmanship out of the beltway.   

 

With both equities and yields advancing and gold rolling over in the wake of this morning’s ISM and Markit PMI strength, fundamentals appear to be prevailing as the principal market driver here. Let's hope that continues.   

 

Economic Gravity 1, Government 0 to start October.  

 

ISM: Oct-Taper Whispers - ISM 100113

 

 

Christian B. Drake

Senior Analyst


LO Acquires UK E-Cig Maker SKYCIG to Expand Internationally

  • LO announced this morning its acquisition of SKYCIG for £30MM in cash, plus an additional £30MM to be paid in 2016 based on the achievement of certain financial benchmarks
  • SKYCIG is a three year old UK based company with ~ 300,000 users that offers e-cigs in traditional and flavored offerings (including vanilla, cherry, and cinnamon)
  • LO has indicated the it plans to leave the current management in place
  • Among Big Tobacco, LO was first to the U.S. e-cig market through its acquisition of Blu in April 2012
  • LO currently enjoys the largest market share in the U.S.; today’s acquisition, while relatively small, allows LO to expand internationally in a developed and fragmented e-cig market
  •  We’ve expected Big Tobacco to look outside the U.S. shores for growth, and LO remains ahead of the pack, with both RAI and MO only releasing their e-cig brands in initial test states in the U.S. within the last two months
  • We believe there’s huge runway for the e-cig category in the U.S. and internationally, as we’re in the early innings of manufacturers creating brand awareness, identity, and appeal (for now consumer preference has been anchored on availability and taste)
  • We’re focused on what restrictions the FDA may place on e-cigs in the U.S. If, for example, the FDA decides to restrict online sales and/or flavored offerings, we believe that Big Tobacco and select e-cig manufacturers with strong retail relationships will stand to benefit 

Investment: we remain bullish on LO’s portfolio of full-flavored and menthol offerings and leading share in e-cigs. We’re cognizant that any restrictions that the FDA may place on menthol would have material negative implications for the stock. For now, we’re bullish on the stock over the immediate term TRADE and intermediate term TREND durations (see chart below).

 

LO Acquires UK E-Cig Maker SKYCIG to Expand Internationally - zz. lo


BIGGEST LOSER: D.C. EDITION

Editor's note: The brief excerpt and chart below are from Hedgeye CEO Keith McCullough's "Morning Newsletter." For more information on this product and how you can become a subscriber please click here.

 

BIGGEST LOSER: D.C. EDITION - dale1

What’s fascinating about watching both the US stock market futures and the bond market this morning is that neither of them seem to care whatsoever about Old Media’s politicized fear-mongering. Mr. Market is shutting the media’s message down.

 

That shouldn’t surprise you. As newspaper editors and television producers look backward, markets look forward. Up next is the US Employment Report for the month of September.

 

September (and the 3rd quarter in general) was one of the best quarters for US growth expectations in half a decade:

  1. US Growth Stocks hit all-time highs (for SEP Industrials (XLI) +5.4% and Consumer Discretionary (XLY) +5.1%)
  2. US (slow growth) Bonds and Utility stocks hit their YTD lows (for SEP Utilities (XLU) only +0.18%)
  3. US Equity Volatility (VIX) hit YTD lows as well

Then, mid-September, along came Bernanke, Boehner, and Obama …. and:

  1. US Growth Stocks started making a series of lower highs (down for 7 of the last 8 days)
  2. US (slow growth) Bonds and Utilities outperformed everything growth
  3. US Equity Volatility (VIX) ripped a +26% move to the upside in less than 2 weeks

Congrats to the Federal Reserve, Democrat, and Republican parties. It’s a tie – you all get a Hedgeye sticker for America’s biggest losers!

 

 


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 1, 2013


As we look at today's setup for the S&P 500, the range is 27 points or 0.39% downside to 1675 and 1.22% upside to 1702.                               

                                                                                                

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: 2.30 from 2.29
  • VIX closed at 16.6 1 day percent change of 7.37%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 8:58am: Markit US PMI Final, Sept. (est. 53.1)
  • 10am: Construction Spending M/m, Aug. (est. 0.4%, pr 0.6%)
  • 10am: ISM Manufacturing, Sept. (est. 55.0, prior 55.7)
  • 10am: ISM Prices Paid, Sept. (est. 55.0, prior 54.0)
  • 4:30pm: API weekly oil inventories

 GOVERNMENT:

    • Obamacare insurance marketplaces open for enrollment, whether or not federal govt shuts down
    • U.S. Supreme Court may say whether it will consider Argentina’s appeal of lower-court decision on debt payments
    • Microsoft holds discussion on changes in immigration policy that would benefit the economy, with Labor Dept Chief Economist Jennifer Hunt, 8:30am
    • World Bank President Jim Yong Kim will speak about global poverty, bank’s efforts to end most extreme forms by 2030 a week before the bank’s annual meeting, 11am
    • Officials from Comcast, Cisco and Toyota testify before House Subcmte on Communications and Tech hearing on using spectrum in the 5 GHz band, 10:30am

WHAT TO WATCH:

  • U.S. govt. shutdown idles 800k as Congress spars on Obamacare
  • ROUNDUP: U.S. shutdown begins as deadlocked Congress flails
  • Shutdown confrontation may take momentum from standoff on debt
  • Cameron says U.S. government shutdown is risk to world economy
  • Shutdown would cost U.S. economy $300m/day, IHS says
  • Health exchanges begin enrollment, some delays expected
  • JPMorgan employee said to be cooperating in U.S. RMBS probe
  • Labor Day quirk hit auto sales for Sept., analysts say
  • Google said to avoid U.S. antitrust challenge over Waze deal
  • Google offer paves way for end to antitrust clash: Almunia
  • Activision may seek shareholder vote on Vivendi buyout
  • Dish reaches extension w/ Disney, avoids ESPN/ABC blackout
  • Wells Fargo agrees to $869m settlement with Freddie Mac
  • Toyota loses bid to get acceleration-injury suit thrown out
  • CFTC enforcement chief David Meister to step down this month
  • China Sept. manufacturing index rises less than forecast
  • Euro-Area jobless rate unexpectedly declines
  • Abe confirms Japan to compile JPY5t stimulus plan
  • KKR buys 10% of appliance maker Haier in biggest China deal
  • Cooper Tire shrholders vote to accept merger with Apollo Tyres
  • Amazon to hire 70,000 seasonal workers to meet holiday demand
  • Intel’s Eric Huggers seen as Hulu CEO candidate: N.Y. Post
  • Indigo Partners agrees to buy Frontier Airlines: WSJ
  • Intel to buy Sensory Networks for about $20m: WSJ

EARNINGS:

    • Actuant (ATU) 7:25am, $0.50
    • Acuity Brands (AYI) 8:25am, $1.02 - Preview
    • Global Payments (GPN) 4:01pm, $0.95
    • Walgreen (WAG) 7:30am, $0.73 - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Copper Falls on Concern U.S. Government Shutdown to Sap Demand
  • Biggest Raw-Materials Rally of Year Seen Stalling: Commodities
  • WTI Crude Drops a Third Day as U.S. Government Shutdown Begins
  • Gold Futures Fall Below $1,300 an Ounce on Comex
  • Soybeans Drop on Higher U.S. Supply as Corn Hits Three-Year Low
  • Sugar Falls After Rally Before Record Delivery; Coffee Advances
  • India’s Gold Imports Seen Declining on Curbs to Contain Deficit
  • Coffee Held by Vietnam Farmers Climbs to Highest Since 2009
  • Brazil Sugar Exports to China Advance to Record, ITC Data Show
  • Exploding Fuel Tankers Driving U.S. Army to Solar Power: Energy
  • Diesel Tankers Turning Profitable After Five-Year Rout: Freight
  • Saudi Arabian Oil Output Soars to Highest on Record: BI Chart
  • Chile, Peru Dominate New Copper Supply as Africa, Asia Trail
  • Stocks Rally Most Since ’12 in Quarter, Beating Dollar, Bonds
  • MKS Sees Its Physical Gold Sales Reaching Record on Asia Demand

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

 

 

 

 

 

 

 

 

 

 

 

 


Dollar, Bonds & Fear

Client Talking Points

US DOLLAR

This is key: Both the US Dollar Index and the USD vs YEN are trading at critical lines of support ($79.21 is the long-term TAIL risk line for US Dollar Index and USD/YEN TREND support is 97.71). So, which way do we go from here? It's gravity (Friday jobs report) vs government now (Bernanke/Congress). It ought to get interesting. 

UST 10YR

The bond market is ignoring the government gong show and shutdown noise and looking forward (as usual) to the jobs report. If 2.55% TREND support on the 10-year holds (2.65% and #RatesRising this morning) and that jobs report is a big one, look for big time volatility in bonds to remain.

VIX

Front month fear is now officially back above my immediate-term TRADE breakout line of 14.64. So I’m watching that as closely as I am 1686 support (now resistance) in the S&P 500. Since the Bernanke Fed has successfully confused the entire market on the taper, this upcoming jobs report really matters this time. I will let Mr. Market tell me where to go next.

Asset Allocation

CASH 50% US EQUITIES 16%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 16%

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

So is the next market catalyst Congress savings us from themselves, again? @KeithMcCullough

QUOTE OF THE DAY

The best minds are not in government. If any were, business would steal them away. -Ronald Reagan 

STAT OF THE DAY

$300,000,000: A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc. While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers. (Bloomberg)


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