TODAY’S S&P 500 SET-UP – November 19, 2013
As we look at today's setup for the S&P 500, the range is 30 points or 0.87% downside to 1776 and 0.81% upside to 1806.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on November 05, 2013 for Hedgeye subscribers.
“The mechanization of ginning, spinning, and weaving the cotton launched the industrial revolution.”
The cotton gin was 1793. Twitter was 2006. Eli Whitney and Jack Dorsey had more than a few things in common. One was their age (Whitney was a 28 yr old teacher and Dorsey was a 29 yr old web developer/failed shoe salesman). That’s where revolutions come from, baby. As my man Brandon Flowers wrote in “Only The Young” (great tune):
“Look back in silence; the cradle of your whole life. There in the distance, losing its greatest prize. Nothing is easy, nothing is sacred. Why? Where did the bough break? It happened before your time. Only the young can break away, break away…“
And so it continues to begin – the unearthing of every single Western academic dogma about economics and markets ever spun. The unraveling of a weave of storytellers that only my God can be smiling down upon as stronger currencies lead new peoples to the promise land of purchasing power. Behold, the Information Revolution in financial markets is here!
Back to the Global Macro Grind…
Tomorrow at 11AM EST, Hedgeye veteran blue-liner, Daryl Jones, and Hesham Shaaban will host a Black Book conference call on the Twitter IPO (if you’d like information on how to access the call, ping Sales@Hedgeye.com). It’s a fascinating story within the history we are building here @Hedgeye. I see it as our Trojan Horse in taking down the #OldWall of aforementioned dogmas.
Mr. Market, take down that #OldWall!
How is that going to work? Let’s just look at what we did using Twitter yesterday in order to front-run a ridiculous #OldWall financial media meme that the Fed being on taper-hold is a “good” thing for growth:
In the stone age of perceived financial market and economic wisdoms, you didn’t have Twitter, Videostreaming, YouTube, etc. So you actually had to take the government’s (and the banks they bail out) word for it on these economic history matters.
Ginning, spinning, and weaving, these academic dudes (and dudettes) who have never risk managed markets can get really creative. So was Karl Marx in introducing the adored Obama concept of #ClassWarfare in the first sentence of the Communist Manifesto.
And who the heck am I to call these people out? Sometimes I feel like a modern day version of some Iroquois or Creek Indian who is sitting here creating things (like cotton and rubber - you know, the stuff all the white dudes actually started to use). But what do I know?
What do you know?
The more I read, the less I know. So, admittedly, I do get a little frustrated to see central planning bureaucrats like Jim Bullard @FederalReserve on Big Government Intervention TV spewing economic forecasts that are rarely right, but never in doubt.
At one point yesterday @CNBC, Bullard actually said that it’s time Americans see QE (money printing, Dollar Devaluation, and 0% rates of return on your hard earned savings accounts) as a “normal policy position.”
Go back to that Iroquois style @HedgeyeTV video Darius Dale and I did and see the next popular client question: “How Concerned Are You About A Major Dislocation in the Credit Markets?”
Bullard, dude, there is nothing normal about credit markets that go no-bid when a bond ticks down half a point. Wake up man. You and your boy Bernanke have a “new normal” alright. It’s called a MBS bond bubble that people can’t get out of!
In other counter-Keynesian-consensus-dogma-economic-news this morning:
BREAKING: UK Services PMI for OCT hits a 16yr high at 62.5
Huh? With austerity and a #StrongerCurrency (we’re long the British Pound) the United Kingdom is seeing #GrowthAccelerating? You bet your Danny Blanchflower (Dartmouth Dogma professor of Currency Devaluation and Big Government Spending) it’s accelerating.
This morning, to be sure on my historical account, I went back to the time period I reviewed with my kids this weekend in the movie “Free-Birds” (where turkeys try to turn back the clocks on being slaughtered for Thanksgiving), and the replay still shows that there has never been a country that has devalued its way to long-term economic prosperity. Danny, you can’t turn back the clock. Gobble, gobble.
#StrongCurrency = Deflates The Inflation and real (inflation adjusted) consumption #GrowthAccelerating.
On the margin, that’s Europe now (not the USA –it was the USA 10 months ago):
And on what planet are Old World pundits allowed to fear-monger you that Deflating The Inflation is a bad thing? I guess maybe Pluto, Dartmouth (sorry guys, I’m picking on Blanchflower), or one that doesn’t have Twitter. Good luck keeping that one alive. As another revered American revolutionary, Martin Luther King Jr. reminded us, “a lie cannot live” forever.
Our immediate-term Risk Ranges are now:
Swiss Market Index 8159-8232
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Takeaway: We remain bullish on the British Pound.
Our bullish call on the British Pound was borne out of our Q4 Macro themes call.
We believe the health of a nation’s economy is reflected in its currency. Likewise, we remain bullish on the regime change at the Bank of England, replacing Governor Mervyn King with Mark Carney.
If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
(Editor's note: This is a brief excerpt from Hedgeye research. For information on how you can subscribe click here.)
RAI’s Investor Day this morning, while comprehensive in updating the entire portfolio, focused on the launch of its electronic cigarette (e-cig) VUSE. In fact, the majority of questions (~ 12 of 15) asked following prepared remarks (from analysts and the investor community) centered on e-cigs. This further confirms to us that while e-cigs make up a tiny fraction of Big Tobacco’s portfolio (approx. 1%), the interest in and investment behind the e-cig category will remain a major focal point. We expect that investors will overweight e-cig results in gauging broader company performance as expectations continue to ratchet higher that e-cigs can replace declining traditional tobacco volumes (expected to be ~4-5% in 2013).
Position: We remain extremely bullish on the potential growth of the e-cig category. Our preferred Big Tobacco play remains Lorillard (LO), given its leading share in the e-cig category (~50%) and advantaged menthol portfolio.
Highlights of RAI’s presentation section on e-cigs:
On the Product (VUSE):
VUSE and E-cigs in Context:
Note that Altria (MO) also recently issued its own e-cig, MarkTen, in August. Both MO and RAI’s e-cigs distribution lag LO’s purchase of Blu in April 2012. We’re clearly seeing Blu enjoying first-to-market advantage, and taking significant market share in the category (from 40% to 49% in the last quarter alone), albeit on severe promotion and discounting. Given RAI and MO’s entrance, we’d expect more price wars as all try to stoke trialing and achieve brand loyalty.
We continue to see e-cig manufacturers favor the razor-razorblade model of a rechargeable unit and replacement cartridges to disposable e-cigs (the private manufacturer NJOY is one big exception among major distributors), with expectations that they’ll be margin enhancing. However the point on when, given the infancy of the category and desire by manufacturers to increase trialing, remains unanswered.
Another wild card remains when and to what degree the FDA will regulate the e-cig category. The agency was expected to announce regulations last month—the government’s shutdown may or may not have moved the goalposts. It’s anyone’s guess now just when that may happen, however manufacturers continue to expect something before year-end.
It’s our opinion that the FDA wants to protect the consumer, while not stifle e-cig innovation that can ultimately lead people away from the harmful combustible cigarettes. A few of the larger regulations expected to be addressed are online sales, flavors, and marketing, however regulations could go much further. It appears the science on e-cigs remains incomplete, which would suggest to us that the agency may err on the side of less regulation versus more regulation until the science is (more) conclusive.
Takeaway: Something is not resonating with McDonald’s customers.
This note was originally published November 08, 2013 at 09:40 in Restaurants
“Around the world, we are focused on providing the menu quality and choice, customer service and affordability that are the hallmarks of the McDonald’s experience.”
- McDonald’s October Press Release
Despite management’s aforementioned focus, there is something that is not resonating with McDonald’s customers. While MCD is a fundamentally strong company, we find it difficult to believe that it will be able to drive “initiatives that will deliver the greatest benefit” for McDonald’s customers, as promised.
The charts below show sales trends across MCD’s four main regions – and they are not pretty. October’s results prove that same-store sales continue to steadily decelerate on a two-year basis. That said, we are comfortable in reiterating our view that McDonald’s has legitimate, inherent issues that management must address.
Next week, McDonald’s will host its analyst day to address the initiatives management has lined up for 2014 in order to stem the decline in global sales. Our research tells us that the company will make an aggressive push to sell more coffee in attempt to capture incremental market share in the coffee category next year. We expect this to be a main topic at the analyst day on November 14, 2013.
Our goal is to understand the potential consequences, both good and bad, of this strategy. Delving more into this topic, we have conducted a proprietary Retail Coffee Consumer Survey, which features some of the top coffee retailers, including MCD, SBUX, DNKN, KKD, and Peet’s.
We will be holding a conference call on Tuesday, November 12th at 11: 00am EST in order to present our findings and analysis.
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