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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 23, 2013


As we look at today's setup for the S&P 500, the range is 42 points or 1.80% downside to 1723 and 0.59% upside to 1765.                                  

                                                                                             

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: 2.20 from 2.22
  • VIX closed at 13.33 1 day percent change of 1.29%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Mortgage Applications Index, Oct. 18 (prior 0.3%)
  • 8:30am: Import Price Index M/m, Sept., est. 0.2% (prior 0.0%)
  • 9am: House Price Index, Aug., est. 0.8% (prior 1.0%)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector

GOVERNMENT:

    • President Barack Obama meets with Pakistani Prime Minister Nawaz Sharif to discuss security concerns
    • 8:30am: CSIS, Finl Svcs Roundtable discussion on cybersecurity
    • 10am: SEC meets on proposed rules, forms on offer and sale of securities through crowdfunding
    • 10:30am: House Education and the Workforce ranking member Rep. George Miller, D-Calif., Reps. Jan Schakowsky, D-Ill., Alan Grayson, D-Fla., host forum on Wal-Mart wages
    • 11am: House Judiciary Chairman Bob Goodlatte, R-Va. to announce introduction of bill “to address ever increasing problem of abusive patent litigation.”
    • 2pm: House Financial Services panel hearing on reducing impediments to capital formation
    • 2pm: House Armed Services Cmte hearing on Navy’s 30-year shipbuilding plan
    • 3:30pm: House Armed Services hears from Pentagon officials on spending cuts, effect on acquisition, modernization

WHAT TO WATCH:

  • Icahn’s Netflix sale shows differences with son over value
  • JPMorgan close to $6b settlement with institutional investors: FT
  • Men’s Wearhouse said to mull bid for shoemaker Allen Edmonds
  • ECB stress test to use stricter capital definition than review
  • Peugeot reviews GM alliance as savings goal proves tough to meet
  • Rabobank said to agree to $1b settlement over Libor claims
  • Biggest Chinese banks triple debt write-offs
  • Twitter secures $1b credit line before initial share sale
  • Carlyle, KKR, CVC join initial bid for Woori F&I: Maeil
  • Amgen boosts 2013 forecast after third-quarter sales rise
  • Buffett praises IBM profit prospects, says cos. have blips
  • Spanish GDP rises 0.1% in 3Q, ending nine-quarter recession
  • Heineken cuts profit outlook as central European sales slide

AM EARNS:

    • Airgas (ARG) 7:30am, $1.23
    • Allegheny Technologies (ATI) 7am, $(0.28)
    • American Electric Power (AEP) 6:57am, $1.08
    • Boeing (BA) 7:30am, $1.52 - Preview
    • Brinker Intl (EAT) 7:45am, $0.45 - Preview
    • Bristol-Myers Squibb (BMY) 7:30am, $0.44
    • Canadian Pacific Railway (CP CN) 7:30am, $1.71 - Preview
    • CapitalSource (CSE) 8am, $0.15
    • Caterpillar (CAT) 7:30am, $1.67 - Preview
    • Commercial Metals (CMC) 7am, $0.17
    • Dr Pepper Snapple (DPS) 7am, $0.83
    • Eli Lilly (LLY) 6:30am, $1.04 - Preview
    • Encana (ECA CN) 6am, $0.16 - Preview
    • General Dynamics (GD) 7am, $1.68 - Preview
    • Hudson City Bancorp (HCBK) 8am, $0.08
    • Lorillard (LO) 7am, $0.81 - Preview
    • Medicines (MDCO) 8am, $0.16 - Preview
    • Molex (MOLX) 7:30am, $0.37
    • Motorola Solutions (MSI) 7am, $1.02
    • NASDAQ OMX (NDAQ) 7am, $0.62
    • New York Community Bancorp (NYCB) 8am, $0.26
    • Nielsen (NLSN) 6am, $0.48
    • Norfolk Southern (NSC) 8am, $1.39 - Preview
    • Northrop Grumman (NOC) 7am, $1.82 - Preview
    • Omnicare (OCR) 7am, $0.90
    • Owens Corning (OC) 7:28am, $0.64
    • Popular (BPOP) 8am, $0.70
    • Prologis (PLD) 8am, $0.41
    • Six Flags Entertainment (SIX) 8am, $1.66
    • Thermo Fisher Scientific (TMO) 6am, $1.28
    • Tupperware Brands (TUP) 7am, $1.04
    • US Airways Group (LCC) 8am, $1.14 - Preview
    • WellPoint (WLP) 6am, $1.82 - Preview
    • WR Grace (GRA) 6am, $1.03
    • Wyndham Worldwide (WYN) 6:29am, $1.36

PM EARNS:

    • Agnico Eagle Mines (AEM CN) 5pm, $0.09 - Preview
    • Akamai Technologies (AKAM) 4:01pm, $0.46
    • Angie’s List (ANGI) 4:05pm, $(0.20)
    • Assurant (AIZ) 4:05pm, $1.50
    • AT&T (T) 4:01pm, $0.65 - Preview
    • AvalonBay Communities (AVB) 4:01pm, $1.18
    • Brandywine Realty Trust (BDN) 4:15pm, $0.40
    • Cadence Design Systems (CDNS) 4:05pm, $0.21
    • Citrix Systems (CTXS) 4:05pm, $0.69
    • CoreLogic (CLGX) 4:15pm, $0.42
    • E*TRADE Financial (ETFC) 4:05pm, $0.16
    • Equifax (EFX) 4:11pm, $0.88
    • Equinix (EQIX) 4:01pm, $0.60
    • Everest Re Group (RE) 4:05pm, $4.76
    • F5 Networks (FFIV) 4:04pm, $1.19 - Preview
    • Fortinet (FTNT) 4:15pm, $0.11
    • Fortune Brands Home & Security (FBHS) 4:01pm, $0.41
    • Fusion-io (FIO) 4:05pm, $(0.11)
    • Infinera (INFN) 4:15pm, $0.04
    • KKR Financial Holdings (KFN) 4:21pm, $0.38
    • Lam Research (LRCX) 4:05pm, $0.70
    • Leggett & Platt (LEG) 4:05pm, $0.44
    • LSI (LSI) 4:01pm, $0.16
    • NXP Semiconductor (NXPI) 8pm, $0.83
    • O’Reilly Automotive (ORLY) 6:30pm, $1.65
    • Polycom (PLCM) 4:05pm, $0.11
    • Raymond James Financial (RJF) 4:13pm, $0.63
    • Service Corp (SCI) 4:03pm, $0.20
    • ServiceNow (NOW) 4:01pm, $(0.02)
    • SL Green Realty (SLG) 5pm, $1.28
    • Stericycle (SRCL) 4:02pm, $0.94
    • Susquehanna Bancshares (SUSQ) 4:30pm, $0.23
    • Swift Transportation (SWFT) 4pm, $0.29
    • Symantec (SYMC) 4:01pm, $0.44
    • Teradyne (TER) 6pm, $0.44
    • Terex (TEX) 4:46pm, $0.59
    • Torchmark (TMK) 4pm, $1.43
    • Tractor Supply (TSCO) 4:01pm, $0.41
    • TripAdvisor (TRIP) 4:04pm, $0.44 - Preview
    • TriQuint Semiconductor (TQNT) 4:02pm, $0.10
    • Varian Medical Systems (VAR) 4pm, $1.11
    • Whiting Petroleum (WLL) 4pm, $1.06

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • JPMorgan Said to Draw BTG Bid for All of Commodities Business
  • Tyson Chases Hormel by Targeting Moms With Burritos: Commodities
  • WTI Drops to 5-Month Low; Discount to Brent Widest Since April
  • Copper Slumps From One-Month High as Chinese Interest Rates Rise
  • Gold Declines as Investors Sell After Rally to Three-Week High
  • Wheat Nears Fourth-Month High as South American Demand May Climb
  • Robusta Coffee Halts Decline After Falling 8.3% in Past Six Days
  • Petroineos to Decide on Future of Grangemouth Oil Refinery
  • U.S. Pump Prices Seen Dropping to Three-Year Low: Energy Markets
  • Rebar Falls, Erasing Earlier Gains, After China Money Rates Jump
  • Natural Gas Consumption Likely Sluggish Into 2014: Bear Case
  • Pig Iron Cost Structure May Put Floor Under Nickel as 4Q Evolves
  • Japan Mulls Plan for One Operator to Run All Reactors: Energy
  • Ineos Will Keep Grangemouth Refinery Open, U.K. Minister Says

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

 

 

 

 

 

 

 

 

 

 

 

 

 


KMB DE-SHEETS OUR BEAR CASE

But it’s still not a long.

 

Kimberly Clark reported $1.44 adjusted EPS this morning versus consensus of $1.40. The better-than-expected results were driven by organic sales growth of 5%, which is being well-received by the market. Management raised the lower end of its FY13 guidance range to $5.65-5.75 versus $5.60-5.75 prior. Strong organic sales numbers took us by surprise; we see no reason to be involved in KMB at this stage.

 

 

Summary


We have been bearish on Kimberly Clark since mid-July and, while the stock has underperformed, the recent performance strength and strong organic growth numbers reported by the company have weakened our conviction in shorting the stock here, in a pair with EL (as we proposed) or otherwise.

 

Contrary to our prior expectations, KMB will likely meet the Street’s FY13 EPS expectations as top line performance has accelerated into 2H13, despite some industry data previously suggesting that this could be a tall task. Dollar weakness is certainly helping and will be worth monitoring going forward.

 

 

Risks

  • EBIT growth is being driven by cost savings alone as revenue growth remains anemic. The market may be unwilling to pay an above-average multiple for peer-lagging revenue and earnings growth.
  • We believe that input costs are worth monitoring over the remainder of the year as management’s guidance may be underestimating costs in 4Q13.

KMB DE-SHEETS OUR BEAR CASE - kmb cost savings chart

 

What we liked in 3Q13 Results:

  • EPS beat, supported by organic sales growth of 5%
  • Mgmt raised the low end of the guidance range by 5 cents
  • Strong KC-International organic sales of 10% boosted by emerging markets (China, Russia, to a lesser extent Brazil) accelerating
  • Sustained strong volume growth in emerging markets
  • Operating cash flow aided by improved working capital efficiency

 

What we didn’t like in 3Q13 Results:

  • EBIT growth decelerating further to 1% despite easier comp
  • No Operating Margin expansion year-over-year
  • Personal care operating margins declining 20bps
  • Organic growth in Europe being boosted by phasing out of weak businesses
  • Negative 3Q FCF growth (-0.5%) with EBIT growth slowing to +0.9% from +5.8% in 2Q13 despite management expecting cash flow generation to improve in 2H13 as of 7/22

 

Quantitative Levels


From a quantitative perspective, KMB has broken out above its intermediate-term TREND line of $98.24.

 

KMB DE-SHEETS OUR BEAR CASE - KMB levels

 

 

Rory Green

Senior Analyst

 

 

 

 

 


LINN Pleads the Fifth: S-4 Ammendment #5 Recap

This morning (10/22) LINN Energy filed the 5th Ammendment to its Form S-4 Registration Statement for the LINE / LNCO / BRY merger.  For the second time, LINN changes verbiage and disclosure, but not distributions.  The market is taking these changes to be quite positive (LINE +2% at the time of writing), though it's not clear to us why... 

 

The key change in this version is that LINN will no longer use the non-GAAP measure "Adjusted EBITDA."  In fact, it has removed substantial disclosure and reconciliations related to “Adjusted EBITDA,” “Credit Facility EBITDA,” and “EBITDA” in the latest S-4/A.  This comes after removing "Distributable Cash Flow (DCF)" in the S-4/A #4.  The market's positive reaction to this latest change could suggest that investors believe that LINN has done enough to satisfy the SEC, as the SEC was concerned with LINN's use of non-GAAP measures, and LINN has solved the problem by no longer using them...  We have no view as to what the SEC will or will not do, though the optimism seems excessive, in our view.

 

With Adjusted EBITDA and DCF out of the picture, the key non-GAAP measure that remains is what was formerly known as "maintenance capital expenditures," but is now "discretionary reductions for a portion of oil and natural gas development costs."  Importantly, "This change in terminology, however, does not reflect any change in LINN’s methodology for determining the amount of these costs" (pg. 233); in other words, nothing has changed except for what LINN is calling it; same as the prior S-4/A.

 

LINN did include new data for the amount of reserves estimated to be converted to the PDP status via discretionary reductions CapEx (pg. 236 and cut out below):

 

LINN Pleads the Fifth: S-4 Ammendment #5 Recap - linn1

 

The F&D (finding and developing) cost for this capital is remarkably low compared to LINN's consolidated metrics.  For instance, discretionary reductions F&D was $1.37/Mcfe in 2012, 36% below the PUD Conversion Cost and 64% below LINN's organic (ex. acquisition) proved developed F&D cost.  LINN's numbers imply that it's non-"discretionary reductions" capital had a staggeringly-high F&D cost of $13.85/Mcfe in 2012 ($886MM to move 64 Bcfe into the PD category).

 

LINN Pleads the Fifth: S-4 Ammendment #5 Recap - linn2 

 

How anyone can take these numbers seriously, we don't know.  LINN's total PD F&D cost over the last three years is $3.41/Mcfe ($20.46/boe).  Based on that number, at current production levels, LINN needs to spend at least $250MM/quarter to keep reserve and production flat, not the ~$110MM/quarter it's currently calling "discretionary reductions."  Of course, LINN's distribution would be cut by ~100% should it deduct that amount of capital from the cash available for distribution - hence its reluctance to change.

 

Other Notable Changes in the 10/22 S-4/A (#5):

  • Page 50: Change in wording for the “discretionary reductions” risk factor.  Dropped terms "natural decline," "cash production," and swapped "producing assets" our for "producing reserves."
  • Page 171 on the “remedial method”: “Additionally, the pro forma financial information does not represent the actual results of allocating depreciation, depletion and amortization and other cost recovery deductions generated from the “remedial allocation method” pursuant to Treasury Regulation Section 1.704-3(d). The total tax liability generated from the remedial allocation will be recognized over the remaining life of the underlying assets, which could extend beyond 50 years. See footnote (d) to LinnCo’s notes to the unaudited pro forma condensed combined financial statements for additional information.”
  • Page 210: David Hall vs. Berry Petroleum Company – “parties are currently engaged in settlement discussions” was removed.
  • Page 233-4: Significant changes in wording / disclosure re: distribution calculation; and no longer using “Adjusted EBITDA.”
  • Page 235: LINN clarifies funding, “LINN intends to fund interest expense, a portion of its oil and natural gas development costs and distributions to unitholders from net cash provided by operating activities. LINN funds premiums paid for derivatives, acquisitions and other capital expenditures primarily with proceeds from debt or equity offerings, borrowings under its Amended Credit Facility or other external sources of funding. Although it is LINN’s practice to acquire or modify derivative instruments with external sources of funding, any cash settlements on derivatives are reported as operating cash flows and may be used to fund distributions.”
  • Page 235 footnote 1: LINN acknowledges that even through premiums paid hit the GAAP cash flow statement as CFFO, it considers them investments, so it will add them back to operating cash flow to arrive at cash available for distribution.

Kevin Kaiser

Senior Analyst



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EMERGING MARKETS LOVE DOWN DOLLAR

Takeaway: Emerging markets love dollar debauchery.

Click image to enlarge. 

EMERGING MARKETS LOVE DOWN DOLLAR - DXY vs EEM


CONFERENCE CALL WITH CFO OF BRINKER INTERNATIONAL

Takeaway: Join us for a conference call with Guy Constant, CFO, of Brinker International.

Friday, October 25th at 11:00am EDT  

For details please email 

 

We will be hosting a call with the CFO of Brinker International, Guy Constant, to discuss 2Q14 results, the outlook for the balance of the year, and the emerging role of technology in the casual dining industry.

 


TOPICS TO BE DISCUSSED:

  • Bringing technology to the casual dining industry.
  • Closer look at 2Q14 results and a detailed outlook for the balance of the year.
  • Incremental topics TBD post the 2Q14 earnings call.

 

 

GUY CONSTANT

Guy Constant is Executive Vice President, Chief Financial Officer and President of Global Business Development for Brinker International.  In this role, he is responsible for overseeing Planning and Analysis, Mergers and Acquisitions, Investor Relations, Treasury, Tax and Accounting, Domestic Franchise Business Development, and Corporate, Chili’s and International Finance in addition to overall Development.  Guy added his global responsibilities in January 2013 and is responsible for overseeing global operations.

 

 

CONTACT 

Please email or call to learn more about the event. Attendance is limited. Please note if you are not a current client of our Restaurants research there will be a fee associated with this call.

 

 

 

Howard Penney

Managing Director

 


EMPLOYMENT DATA: MARGINALLY NEGATIVE

September’s jobs report was disappointing, as employers added 148,000 jobs in the month, well below the 180,000 that economists expected.  Following suit, the narrower data sets released were, on balance, negative for the restaurant industry.  Employment growth across all cohorts decelerated on a sequential basis, suggesting that sales at QSR, fast casual, and casual dining companies could remain weak in the early stages of 4Q.

 

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 across the board in September as the 20-24 YOA cohort saw growth decelerate to +128 bps from +338 bps in August, the 25-34 YOA cohort saw growth decelerate to +152 bps from +185 bps in August, the 35-44 YOA cohort saw growth decelerate to +37 bps from +59 bps in August, the 45-54 YOA cohort saw growth slowing accelerate to -124 bps from -113 bps in August, and the 55-64 YOA cohort saw growth decelerate to 172 bps from 257 bps in August.

 

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 continue to see weakness persist within the sector.

 

Within the QSR segment, we continue to find that the majority of management teams we track consistently highlight the importance of employment growth to the success of their business.  The sequential deceleration in the 20-24, 25-34, and 35-44 YOA cohorts, suggest that demand for quick-service and fast casual restaurants could wane.  

 

EMPLOYMENT DATA: MARGINALLY NEGATIVE - age

 

 

Restaurant Industry Employment (Confidence)

The Leisure & Hospitality employment data, which leads the narrower food service by one month, suggests that employment growth in the food service industry decelerated sequentially in September.  Furthermore, the Leisure & Hospitality data also registered a month-over-month decline of -13k (second chart below), a stark contrast from August’s +21k month-over-month gain. 

 

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

 

 

Sequential Moves

Leisure & Hospitality: YoY employment growth at +2.60% in September, down -32 bps versus August

Limited-Service: YoY employment growth at +4.86% in August, down -6 bps versus July

Full-Service: YoY employment growth at +2.85% in August, up +4 bps versus July

 

EMPLOYMENT DATA: MARGINALLY NEGATIVE - yy employment

 

EMPLOYMENT DATA: MARGINALLY NEGATIVE - ye

 

EMPLOYMENT DATA: MARGINALLY NEGATIVE - Knapp Comps

 

 

 

Howard Penney

Managing Director

 


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