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(Staying) Long the British Pound!

Takeaway: USD and EUR currencies wars suggest the Pound is the relative winner.

This note was originally published November 14, 2013 at 13:58 in Macro

Long GBP/USD (via the etf FXB)

(Staying) Long the British Pound! - 999

Our bullish call on the British Pound remains, an anchor of our Q4 2013 Macro theme of #EuroBulls presented on 10/11/13.  (Click here for our previous note “Get Long the Pound”)


We’re buyers of the cross above our TREND support line of $1.58 and long term TAIL support line of $1.56.  We could see the cross heading to the $1.65 - $1.70 range over the intermediate term. 


(Staying) Long the British Pound! - pound


In short, we expect currency wars to devalue the USD and EUR, and expect the British Pound to be the relative winner across both crosses. Here are some updated developments since the ECB unexpectedly decided last Thursday (11/7) to cut the main interest rate by 25bps to 0.25% that we think will boost our #PoundBullish call:

  • Continued signs that Bernanke/Yellen will burn the Greenback via delaying the call to taper (likely pushed out to March 2014); a very dovish Q&A from Yellen today (11/14) before the Senate Banking Committee suggesting the call to taper pushed further out.
  • Members of the ECB governing council suggesting further policy easing measures (since the cut):
    • ECB Executive Board member Peter Praet said negative interest rates could be adopted or assets purchased from banks if needed.
    • ECB Executive Board member Joerg Asmussen said that depending on how inflation develops, the central bank has not reached the lower bound on interest rates. He added that while he is wary of such a move, the ECB could also push the deposit rate into negative territory.
    • ECB Executive Board member Benoît Cœuré said that the central bank can further cut interest rates and provide the banking system with additional liquidity.
    • Austria’s Central Bank head and Governing Council member Ewald Nowotny said that the central bank's main concern is stagnation, not inflation. He added that unlike the Fed, the ECB had not yet reached the lower zero bound on interest rates.


In contrast, we expect sober hawkish policy from the BOE.  The UK was the first to issue austerity, which we think will continue to boost its growth profile above most of its European peers.  Improving economic data (more below) continues to confirm this position.  On policy, we expect interest rates to be on hold over the medium term, with expectation for a hike over the longer term, and the asset purchase program target (QE) to remain unchanged.  Both positions should strengthen the GBP/USD and GBP/EUR. 



Improving UK Data This Week:

BOE’s  Inflation Report-

  • brought forward the likelihood of 7% unemployment rate to Q3 of 2015
  • raised 2014 GDP forecast to 2.8% from 2.7%

High Frequency Data-

  • UK Retail Sales 1.8% OCT Y/Y vs 2% SEPT
  • UK ILO Unemployment Rate 7.6% SEPT vs 7.7% AUG
  • UK Jobless Claims Change -41.7K OCT vs -44.7K September
  • UK PPI Input -0.3% OCT Y/Y (exp. 0.1%) vs 0.9% SEPT
  • UK CPI 2.2% OCT Y/Y (Exp. 2.5%) vs 2.7% September.  We expect this move downward in inflation to aid consumer spending. 

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Consumer Staples Highest Conviction Ideas - Longs & Shorts

With a good majority of consumer staples companies having reported their quarterly results, below we give a round-up of our highest conviction ideas on the long and short sides over the intermediate term TREND.


Looking back at the quarter it’s interesting to note that while some things changed versus Q2 most remained the same. Here’s our update:

  • Valuation remained elevated: the Consumer Staples sector remains richly valued, with P/E at 18.9x, or two standard deviations above the five year mean of just under 15x (see valuation charts below).
  • The Fed’s Easy Policy: the reversal of our Q3 Theme call of #RatesRising has encouraged investment back into the yield chasing Consumer Staples sector. We expect this development to continue into the remaining weeks of the year and into the beginning of next year. From our purview, we expect Yellen to remain the ueber dove on policy and push out any QE taper expectations to at least late in Q1 2014.
  • The Macro Is Still Impactful: food and beverage companies such as KO, KRFT, K, and GIS (to name a few),  continued to site a challenged macro environment, be it continued weakness in Southern Europe and slower growth in the emerging market (China and Brazil in particular). Spirits and tobacco companies have cited lower demand due to a hangover of weaker economic and consumer confidence across geographies.
  • Policy Impacts: looking at the spirits companies, for example, China recently banned public funded gift giving during/for the Chinese New Year. This stands to greatly impact companies like Remy, Pernod, DEO, and LVMH. For tobacco companies with international exposure we continue to hear how excise tax hikes will erode future earnings. PM cited weakness due to such hikes in the Philippines and Russia in particular.  CCE has also long been a company to cite the impact of French excise tax hikes (and as a crutch to broader demand weakness).
  • Organic Is the Growth: for yet another quarter we remain interested in investing behind higher growth organic companies.  BNNY is included in our high conviction long list below, and we like the prospects of HAIN and Boulder Brands (BDBD), at a price, as a play to the evolving organic (and gluten-free) movement.
  • M&A Speculation Continues: interestingly there’s been no new news around PEP and MDLZ since the noisier activism witnessed last quarter.
  • Revenue Misses: of the Consumer Staples companies in the S&P500 that have reported results, on revenue just 15 Beat and 23 Missed, or 39% beat, which is tied with Materials for the worst performance of the 9 S&P500 sectors). On EPS, 26 Beat and 12 Missed, or 68% beat, putting Consumer Staples at the mid to lower range of the pack.  In fact, Consumer Staples underperformed the broad S&P500 (revenues beat 54%, and EPS beat 75%).

As a point of reference, directly below we’ve included the price performance of our highest conviction stocks following last quarter’s reported results (Q2). The price performance is somewhat arbitrary, as the entry price reflects the date of this report’s release last quarter (8/14/13) and not our specific entry point targets (the closing reports are based on yesterday’s close), however the numbers provide a reference point for our calls.


Q2 Top Longs: LO (43.52 – 51.54, +18.4%), HSY (96.09 – 97.72, +1.7%), TSN (31.80 – 31.65, -0.5%), SAM (211.70 – 246.20, +16.3%)


Q2 Top Shorts: PM (88.18 – 85.50, +3.0%), DPS (45.86 – 48.47, -5.7%), CCE (38.37 – 42.16, -9.9%), K (65.42 – 60.88, +6.9%), KMB (96.78 – 108.22, -11.8%)



Highest Conviction Stocks Following Reported Q3 2013 Results

Long Ideas

  • LO – we expect Lorillard to continue to see outperformance on strong demand for its full-flavored offerings and dominate share of menthol, both contributing to volume outperformance versus the industry (in the quarter LO’s +3.5% versus industry’s avg. -4%). Gross profit margins improved 80bps to 37.1% in the quarter as domestic retail share of the menthol market reached 40.4%, an increase of 0.8 share points versus the prior-year quarter, and the company rolled out Newport Gold, a non-menthol compliment to Red in the quarter. Electronic cigarettes continue to garner huge interest from the investor community. Despite only representing ~ 1% of the portfolio, LO was the first Big Tobacco company to market with Blu in April 2012, and in the quarter took leading market share from 40% to 49%! Further, the company became an international e-cig dealer through its purchase of UK-based SKYCIG in October 2013.
  • SAM – it’s hard to argue with Boston Beer’s results. We remain committed to this stock, but are closely managing its up-on-a-rope price level (up +17% since we published a similar note highlighting our bullish conviction on SAM last quarter). The company ever so slightly lowered its FY 2013 guidance range by 5 cents in the quarter to $5.05 – $5.35, and we see good runway in 2014 on balanced comps, continued support from Twisted Tea and Angry Orchard, and broad interest in the craft segment, in which SAM continues to be a favored, recognized brand. We expect the company’s increased cap-ex spend to build brewery capacity (including a new bottling and can line, announced last quarter) to boost 2014 shipping volumes and reverse recent bottle necks resulting from overcapacity and the higher costs associated with using third party breweries.  
  • HSY – Hershey’s reported another strong quarter, furthering our bullish outlook on the stock since last quarter, through solid core brand performance with momentum building going into the holiday season.  Net sales were driven squarely by volume (Volume +6.1%; Net Price +0.5%; FX -0.5%) in the quarter. Similar to SAM, we’re bullish on its intermediate to longer term strategy to build to grow: it announced plans to invest $250MM in cap-ex to build a new plant in Malaysia (to supply markets in Asia and assist existing capacity in China). Heading into year-end, the company reiterated its expectations for FY 2013 net sales of 7%, with no change to the input cost outlook, revised up its FY Gross Margins expectations to 240 to 250 bps vs a previous estimate of 220 to 230, and said it sees a more favorable tax rate and earlier Chinese New Year offsetting an increased marketing spend in Q4.  We’re bullish on HSY’s performance across retail channels and its determination to grow its international business, in particular China to its second largest business, and believe the additional cap-ex spend will allow it to enhance its manufacturing scale in China (currently it has a manufacturing JV facility) and across Asia.
  • BNNY – the company reported strong top and bottom line fiscal Q2 2014 results, yet saw some gross margin pressure from frozen pizza results. Despite some unevenness in the quarter we remain bullish on the company as its 2H outlook stands to benefit from product roll-out, COGS and SG&A efficiencies, including from its acquisition of Safeway’s manufacturing plant in Missouri, where the company has been producing over 50% of its snacks business since inception in 2002 (again, spending to grow similar to SAM and HSY). Over recent weeks the stock saw underperformance around a CFO shake-up and a secondary offering of 2.5MM common stock shares. We however remain long term bulls on Annie’s based on the company’s advantaged organic portfolio, strong retail positioning for growth, and easier top line and gross margin comparisons going into the back half of its fiscal year.  

Short Ideas

  • PM – Philip Morris’s headwinds are a continuation of last quarter’s: FX hits, large volume declines (-5.7%, a deceleration vs last quarter’s -3.9% and underperformance vs the industry) on weakness in core geographies (including the EU down -7% to -8% in 2014), increased excise taxes in key geographies like Russia (hit to volume est. -9% to -11%) and the Philippines (no guidance, could be larger than Russia), and an uptick in illicit trade. The company announced plans to accelerate the launch of an electronic cigarette to mid-2014 versus previous guidance of 2016/7.  While we applaud PM’s desire to keep up with its peers in the e-cig category (which as mentioned has captured huge investor attention) but it comes at an incremental $100MM price tag, which could also drag on results.  For now, for the third straight quarter this year the company revised down its FY EPS guidance, to $5.35-5.40 vs prior guidance of $5.43-5.53.
  • CPB – Are you into catching falling knives? The stock is down over -18% since its summer high of $48. In our minds CPB has failed to turn around its portfolio since it offered up big restructuring plans at CAGNY in FEB 2012, however the stock wouldn’t tell such a negative story over this period.  Management lowered its 2014 FY guidance in the quarter; we expect US Simple Meals and US Beverages to continue to underperform expectations next quarter, and margins to be hit as CPB plans to increase its marketing spend and accelerate the launch of 8 new products. We see more difficult comps ahead and no clearance on the value proposition of its strategy to offer more premium soups given a still strapped U.S. and global  consumer. We think there’s more room to run on the short side.


Our quantitative real-time set-up for Consumer Staples (etf: XLP) is bullish, trading above its intermediate term TREND line. 


Consumer Staples Highest Conviction Ideas - Longs & Shorts - zz. staples trade trend


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Consumer Staples Highest Conviction Ideas - Longs & Shorts - z. alcohol pe


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Consumer Staples Highest Conviction Ideas - Longs & Shorts - z. hpc pe



Matthew Hedrick




Global Macro Doesn't Sleep

Client Talking Points


While the day after Thanksgiving is historically the lowest volume trading day of the year, there has actually been some important data out over the last 24 hours including: 1) Euro-area unemployment dropping to 12.1% from 12.2% in October and Eurozone flash CPI coming in at a anemic 0.9% (but higher versus last month’s 0.7%). Also, German retail sales came in at -0.8% month-over-month versus and estimate of +0.5%. These big macro data points don't point to any reason for European policy makers to change their views. If anything, there's only increased support for the current extremely dovish policies that are in place.


Last week we encouraged investors to consider taking off the Abenomics trade. As our analyst Darius Dale pointed out, there are a number of reasons to consider booking gains. 

  1. The Fed will likely dominate headlines with surprising levels of dovish monetary policy amid a 3-6 month monetary and fiscal policy vacuum in Japan;
  2. Sentiment towards Japanese equities amongst foreign speculators has reached euphoric levels; and
  3. Speculators have recently adopted an overwhelmingly bearish position on the yen. Historically, the USD/JPY cross has faded hard from such asymmetric setups in the futures and options market. Moreover, what’s bullish for the yen has been almost perfectly bearish for Japanese stocks.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  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.


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.


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


Just keep moving out there and take what these bubbles are going to give you. Don't get piggy. @KeithMcCullough


"Everyone thinks of changing the world, but no one thinks of changing himself." - Leo Tolstoy


Americans consume approximately 46 million turkeys on Thanksgiving Day compared to 22 million at Christmas and 19 million at Easter. 88% of Americans ate turkey this year. (Benzinga)

Early Look

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CHART OF THE DAY: The Veil of Ignorance


CHART OF THE DAY: The Veil of Ignorance - US Oil Production

November 29, 2013

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The Veil of Ignorance

“Whenever you feel like criticizing any one . . . just remember that all people in this world haven’t had the advantages you’ve had.”

-F. Scott Fitzgerald


Yesterday, I read a great column in the New York Times by Nicholas Kristof about compassion and empathy.  The point of the article was to look at the distinction between asking someone to be personally accountable versus recognizing in a civil society that it is our responsibility to help others.


The origin of the article was based on some comments Kristof had received from a number of recent columns he’d written on the federal food stamps program. The gist of the feedback was that we shouldn’t be subsidizing families that are “too lazy” to take care of themselves.  As Kristof writes:


“Let’s acknowledge one point made by these modern social Darwinists: It’s true that some people in poverty do suffer in part because of irresponsible behavior, from abuse of narcotics to criminality to laziness at school or jobs. But remember also that many of today’s poor are small children who have done nothing wrong.


Some 45 percent of food stamp recipients are children, for example. Do we really think that kids should go hungry if they have criminal parents?”


The current public debate over healthcare personifies this dilemma we face when trying to emphasize with those that were given less in life.  (Unfortunately, the inability of the government to execute on the implementation of Obamacare has somewhat tainted this debate.)


In “A Theory of Justice” the philosopher John Rawls proposed the veil of ignorance to help us in determining our role in helping others and as a way to find morality in many situations.   According to Rawls, under the veil of ignorance:


“No one knows his place in society, his class position, or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like.”


As a result, since a person may occupy any position in society after the veil is lifted, the person must then evaluate any position from all perspectives of society.  


Certainly, the idea that I could wake up one day and not be preparing for a festive thanksgiving with friends and family, but rather be a homeless person wandering the icy streets of New York provides a different perspective as to how to treat those that are less fortunate.   


Back to the global macro grind...


As it relates to the U.S. equity markets, today is a day that is a bit of a market veil of ignorance as it is historically is the lowest volume trading day of the year.  As a result, there probably won’t be a lot of read through from the market action today.  Internationally, there has actually been a slew of data out over the last 24 hours and some key points to highlight include:

  1. Euro-area unemployment dropping to 12.1% from 12.2% in October and Eurozone flash CPI coming in at a anemic 0.9% (but higher versus last month’s 0.7%);
  2. German retail sales came in at -0.8% month-over-month versus and estimate of +0.5%; and
  3. Japanese unemployment came in at 4.0%, CPI inline at 1.1%, and industrial production disappointed versus growing 0.5% month-over-month versus an estimate of 2.0%.

In aggregate the big macro data points this morning do not point to any reason for the policy makers in Japan or Europe to change their views.  If anything, there is only increased support for the current extremely dovish policies that are in place.


As it relates to Japan, though, late last week we actually encouraged investors to consider taking off the Abenomics trade, as my colleague Darius Dale wrote there are a number of reasons to consider booking gains, namely:

  1. The Fed will likely dominate headlines with surprising levels of dovish monetary policy amid a 3-6M monetary and fiscal policy vacuum in Japan;
  2. Sentiment towards Japanese equities amongst foreign speculators has reached euphoric levels; and
  3. Speculators have recently adopted an overwhelmingly bearish position on the yen. Historically, the USD/JPY cross has faded hard from such asymmetric setups in the futures and options market. Moreover, what’s bullish for the yen has been almost perfectly bearish for Japanese stocks.

In my purview the point on sentiment may be the most compelling reason to take a break on the long Japan equity trade.  Specifically, in the YTD, foreigners have purchased a net ¥13-plus trillion of Japanese shares – the highest total on record. This contrasts with a net ¥6T of net sales amongst Japanese institutional investors.


Moreover, the aforementioned foreign/domestic bifurcation has intensified in recent weeks. The most recent weekly data shows a net purchase of ¥1.3T by foreign investors, which represents a 7M-high.  Conversely, net sales of domestic assets by Japanese retail inventors hit ¥174B last week – the largest weekly divestment since 2008. 


I think we can all agree, buying when the locals are selling is rarely a good thing!


Switching gears, in the chart of the day today we highlight a key point from our expert call last week with Dr. Tancred Lidderdale from the Energy Information Administration.  As the chart shows, for the first time in more than twenty years, U.S. production of crude oil has surpassed imports.  Arguably, even the environmentalists when wearing the veil of ignorance would agree that increased U.S. oil independence is a good thing.


I’ll be heading to my first Apple Cup later today, which is the annual match-up between Washington University and Washington State in Seattle.   Wherever you spend the rest of the holiday weekend, I hope it is a great one.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.69 - 2.82%



VIX  11.91 - 13.31
USD 80.35 - 81.15

Gold 1


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Veil of Ignorance - US Oil Production


The Veil of Ignorance - rta

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