• run with the bulls

    get your first month

    of hedgeye free



"Confidence comes not from always being right but from not fearing to be wrong."
-Peter T. Mcintyre
Although the unemployment rate reached a 25 year high in May, it appears that most consumers are still relatively hopeful about our economic future.  The S&P 500 being up 40% since the March 9th low and the NASDAQ up 18% year-to-date has a little something to do with the increased confidence readings.  I'm not sure if the stock market can accurately reflect the strength of the current economy, but it has a great track record.
If the market goes up, most consumers are going to say, if asked, that they are confident or very confident in chances for a strong economy over the next six months.  There are other forces at works too.  On the margin, if consumers have less money in their pockets at the end of the month because of higher gas prices, are they going to be more or less confident?
With today's University of Michigan confidence reading, it appears that we are more likely to see that the numbers PEAKED sequentially last month rather than a big upside surprise.  Right now the consensus reading for the University of Michigan Confidence June number is 69.5 versus 68.7 in May.  A 67.7 reading would suggest that the best is behind us.  The market has been churning in a very tight range, as there has been no help from consumer related names.  Confidence has peaked!    
The call on today's confidence reading is a very important call for Research Edge given that we were one of the few macro strategy firms who proactively predicted that things were going to TROUGH sequentially, back in February when they did.  
Coming into today's confidence reading, the underperformance in consumer related names has become more pronounced and yesterday was no exception.  The Consumer Discretionary (XLY) has been underperforming on a relative basis for the past month, and is down 0.5% over the past week while the S&P 500 is up 0.5%.  The increase in interest rates and higher gas prices are two reasons for the underperformance and the consumer confidence number today could be the river card.  
The REFLATION trade is alive and well, but that is bad for the consumer and the consumer matters!  Inflation sucks!  Utilities, Energy and Materials were the best performers yesterday, as the dollar index finished down 0.8% yesterday.  
The dollar got smoked in the face of the Japanese Finance Minister Kaoru Yosano saying that they are confident about the outlook for U.S. Treasuries!  Committing hari-kari?   "We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental."  I'm happy the Japanese have confidence in us, but one thing is for sure, their Finance Minister is not on the Research Edge distribution list.  
The Chinese are on a roll - China's credit continues to grow at a breakneck pace and industrial output and retail sales climbed more than consensus expectations.  At this point, the Chinese are confident in the programs they have established to reinvigorate their economy.
The market's REFLATION story has been remarkable to watch, but knowing the end could be ugly does not instill CONFIDENCE.
Function in disaster; finish in style
Howard Penney
Managing Director


QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 as a better way to be long the US market than the SP500. The index includes companies with better balance sheets that don't need as much financial leverage.

FXA -CurrencyShares Australian Dollar Trust-Thanks to recovering Chinese demand for commodities, the sure handed management of RBA Governor Glenn Stevens and comparatively modest consumer debt levels -Australia's GDP continued to expand in Q1 while other industrialized economies saw double digit declines.  As with Canada, we like the Australian economy as an offset to the toxic US balance sheet.  

XLV - SPDR Healthcare -Healthcare looks positive from a TRADE and TREND duration. We bought XLV on 6/08 to get long the safety trade.

EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We bought Energy on 6/05. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.


SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser.

EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

Drill Baby, Drill: IEA Report on Energy Demand and the Services Markets


The International Energy Agency increased its forecast of global oil consumption by 120,000 barrels per day earlier today.   The Agency's new projection is for 83.3MM barrels per day in demand, which is down 2.9% y-o-y.  This data point is noteworthy for the fact that this is the first time in 10 months that the IEA has raised their oil demand forecast, so signifies an inflection point in demand even if levels are well below y-o-y levels.

Additionally, earlier in the week IEA's head Nobu Tanaka told Reuters that OECD stock levels for oil were at 63 days, but he expected them to be at 57 days by year end.   It is conventional wisdom that that 50 days of forward cover is very bullish for oil prices, 53 days is bullish, 57 days bearish and 60 days very bearish.  While the projected days coverage is not "bullish" per se, it is directionally positive, especially in conjunction with the demand data point above.

In the United States this week, we also had incrementally positive data from the weekly oil report from the Energy Administration.   U.S. crude stockpiles declined by 4.4 million barrels to 361.6 million barrels last week, which was notably higher than the 700,000-barrel consensus decline forecast.  This was largely attributable to lower imports into the U.S., but once again marginally and directionally bullish.

On May 19th, we wrote in note entitled "Are You Down With O-P-E-C? "Yah You Know Me", the following:

"The price of oil appears to be signaling one of two things:  either demand will at some point in the near future accelerate or that there is a geo-political event on the horizon that will reduce supply."

The river cards are starting to be shown and they seem to be that the supply / demand picture in the future will be tighter than today.  We want to be long of oil when the supply / demand picture is getting tighter, just as we want to be long of companies that will report better than expected fundamentals.

No doubt many investors have a psychological block against buying a commodity, stock, or asset that is up as much oil is year-to-date, but another way to potentially play oil's current resurgence and the potential follow through if the market tightens up like recent data points suggest is via the OIH, which is the etf that track Oil Services companies.

In the chart below, we've tracked West Texas Intermediate versus the OIH over a three year period.  Through that period, as of yesterday, the OIH has returned ~-23% and Oil has returned ~-2%.   The OIH has typically been a laggard versus oil, which makes sense fundamentally as higher oil prices should drive increased services activities and pricing power. 

In the three year time period, the OIH has been ahead of oil by almost 30% (mid 2007) in the return race and trailed by almost 40% (late 2008).  Year-to-date, the OIH is trailing, though a sustained oil price at or above these levels will lead to resurgence of services activity and higher prices for the OIH.  One thing we know for sure, if oil continues on its upward projector, we will hear chants of, "Drill Baby, Drill" once again, and that's good for the companies that do the drilling, the services names.

Daryl G. Jones
Managing Director


Drill Baby, Drill: IEA Report on Energy Demand and the Services Markets - oih


Claims data today was bullish for stocks

"I will not mince words - this week's 626,000 new jobless claims was a nasty number.....In a perverse way, this is going to ultimately end up as a positive for the US stock market. At this stage, I think the US market needs nasty and socialistic data in order to break the buck. If we break the buck, short sellers get squeezed, and the US market continues to make higher lows versus November's."

-IS THE NASTY GOOD? February 5, 2009

Today's Initial claims number arrived at 601K, 24k lower than the prior week's revised number and 21k below the four week moving average. Since initial claims first rose above 600k in February of this year the S&P 500 has risen by roughly 11%  on declining volatility and volume while the US Dollar index has declined by almost 7%.

As the pace of US job losses moderates (even as the unemployment rate, a lagging indicator, continues to rise) "glass half-full investors" shifting through economic data continue to find more signs of a bottom.  Meanwhile the self inflicted mauling of the US balance sheet continues; a degradation so complete that not only are nations who defaulted on their own sovereign debt just a decade ago now shunning US Treasuries for their reserves, media sources are reporting that the drug cartels of South America have abandoned the Dollar in favor of other currencies and gold as preferred forms of payment. As we have said over and over, a weaker dollar can have the perverse impact of aiding US equities as export industries become more competitive in foreign markets and asset valuations become more attractive for foreign buyers.

Our domestic equity exposure has gone from zero last week to 12% today, and all data continues to support the macro thesis for US stocks that we entered the year with.  As always however, we find a wealth of meaning in the margin -and less than bad is not the same as good for us.

We expect to continue to trade the equity market inside a narrow range for now, and have not quite seen enough to say goodbye to nasty news for stocks just yet.

Andrew Barber



Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

WEN – Milking the cash flows!

My first two meetings with Roland Smith, CEO of WEN, were extremely positive and I really thought the company was on the right track. The reality of the situation is much different due to Trian influence on the Board.


Today, Wendy's/Arby's Group (WEN) and Trian Fund Management, L.P. entered into a renewed services agreement and other "new" agreements. Trian's principals, Nelson Peltz, Peter W. May and Edward P. Garden are on WEN's board and effectively control 22% of WEN.

In addition, we recently learned that WEN also plans to issue $550 million in senior unsecured debt; the proceeds will be used to pay off about $125 million in existing debt and fund strategic initiatives. The key "strategic growth initiatives" include new unit development and acquisitions of other restaurant companies. WEN also suggested that they could return the capital to the stockholders.


Given the selfish nature of today's filing, my bet is that Train wants to "MILK" WEN of the cash.

The WEN story is cost cutting story. The new services agreement does not appear to help the company achieve those goals. There is NO REASON for WEN to be paying Trian any fees for their services. Every dollar in cash this company generates should be going to upgrading the assets and improving top line sales. Putting more money in the pockets of people who already have billions only destroys shareholder value.

According to the agreement, WEN will be paying for the following; "consultation and advice in connection with sourcing, evaluating and executing (including, without limitation, preparing financial models and other analyses and reviewing documentation) acquisitions of the capital stock or assets of other quick service restaurant businesses or other related or complementary businesses or assets; consultation and advice with respect to corporate finance and investment banking, including, without limitation, evaluating and executing capital markets and debt financing transactions and advice and assistance in connection with the negotiation of agreements, contracts, documents and instruments related thereto; consultation and advice with respect to strategic initiatives to increase stockholder value, including, without limitation, financial, managerial and operational advice in connection with the quick service restaurant business, including advice with respect to the development and implementation of strategies for improving the operating and financial performance of the Company; consultation and advice in connection with legal matters relating to the foregoing; and such other services related to the foregoing as management of the Company shall reasonably request from time to time."

WEN is paying $1 Million a year for this? Plus, Trian get a fee if WEN makes an acquisition.

What is even worse is the "Liquidation Services Agreement?" Trian Partners is going to help WEN in "liquidation or other disposition of certain investments that are not related to the Company's core restaurant business ("Legacy Assets")." For this privilege, WEN will pay Trian Partners a one-time fee of $900,000 for these services. Furthermore, if the disposed assets are valued in excess of $36.6 million then WEN will pay Trian Partners, in cash, a success fee equal to 10% of the aggregate net proceeds. Lastly, WEN is leasing Trian a plane.

Publically traded companies that are run like private companies make lousy investments for the remaining shareholders!


WEN – Milking the cash flows! - wen


Another observation corroborating our data dependent view that lodging is not yet in recovery mode:


In an interview on CBNC this morning, Expedia's CEO provided another data point on the state of the travel industry.  Dara Khosrowshahi said that business travel remains slow and that Expedia hasn't seen any patterns to indicate there is a recovery in progress.  As a reminder, Expedia is by far the largest online travel agency domestically.  With over $21BN of gross bookings in 2008, Mr. Khosrowshahi certainly has the credentials to comment on these matters.

A Theme You Can’t Ignore

Here's a pretty massive datapoint on one of our key themes for 2H09 - import prices and the subsequent impact on the supply chain.  Import prices for apparel had a huge drop off in the latest reported data -- down 5.85% after last month's down 3.4%.  Last time it was down this much was November 2005 (down 7%) and after that, October 2002 (prolonged period of -6% to -8%). Most notable is that the CPI is still hovering at +1%. Consumer prices up, import prices down...it doesn't take a rocket scientist to figure out that this is a positive margin event for the apparel retail supply chain.  Thanks McGough... but these datapoints are only for the month of April...I'm already starting to make July 4th barbecue plans.  Yeah... I get that. But this morning we see that unit imports from China are up 15%, and Vietnam are up 10% last month while total imports from all countries globally are down 8%. Translation, total imports are down, so inventories will remain in check. But the countries that are disproportionately gaining share (at an accelerating rate) are the ones that are cutting price. Bottom line: declining imports AND prices is a great setup for margins in 2H. Yet another reason why I find it tough to be bearish.


A Theme You Can’t Ignore - 1


A Theme You Can’t Ignore - 2

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.