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SHORT THE CHILEAN PESO?

Takeaway: We see real interest rate expectations dragging down the CLP another 10-15% vs. the USD from here amid unnecessarily easy monetary policy.

This note was originally published January 21, 2014 at 12:53 in Macro

SHORT THE CHILEAN PESO? - chile

 

CONCLUSIONS:

  1. Specifically, our GIP Model puts the Chilean economy squarely into Quad #2 (i.e. Growth Accelerating as Inflation Accelerates) for at least the next 3-6 months. By the end of 2Q14, we see Chilean CPI threatening the upside of the central bank’s 3% (+/- 100bps) target aided by a supportive base effect (i.e. easy comps) and annualized currency weakness.
  2. Ironically, this comes at a time when Central Bank President Rodrigo Vergara is stepping up dovish commentary amid the existing monetary easing cycle (-50bps of cuts since OCT).
  3. With the advent of this commentary, Chilean swap rates are hitting multi-year lows; the current 4.08% rate on the 1Y tenor is the lowest price since DEC ’10. Relative to the benchmark monetary policy rate, it has declined -10bps WoW to -42bps – effectively implying ~two additional rate cuts over the NTM. Assuming that comes to fruition, such policy would make absolutely no sense in the context of our intermediate-term GIP outlook for Chile.
  4. Moreover, with the Fed at least appearing set to continue tapering the pace of its asset purchases over the intermediate term, we think the spread between CLP and USD monetary policy will continue to diverge in favor of the USD – threatening to push the USD/CLP spot rate to/through the ~625 level over the intermediate term.
  5. Lastly, 1Y currency forwards are pricing at the ~565 level, implying our view is not within the realm of consensus expectations.

 

One of the things our Macro Team likes to do is make strategic calls on currencies – especially when our expectations for the country’s intermediate-to-long-term GIP (i.e. growth/inflation/policy) fundamentals diverge from consensus expectations or those of that country’s policymakers.

 

We don’t care if it’s a liquid currency like the AUD or the JPY (down -20% and -26%, respectively, since we outlined our bearish biases on 7/27/11 and 9/27/12, respectively) or an illiquid currency like the ARS or the VEF (down -42% and -32%, respectively, since we outlined our bearish biases on 11/4/10 and 10/9/12, respectively).

 

The CLP probably falls into the latter category, so we’re guessing this is roughly the point in the note where most of you lose interest. We’ve been actively covering the country for over four years now (along with the rest of Latin America) and this is the first note we’ve ever published exclusively regarding Chile.

 

For those of you who are inclined to continue on, we think the CLP has 10-15% downside from here as unnecessarily easy monetary policy weighs on real interest rate expectations.

 

Specifically, our GIP Model puts the Chilean economy squarely into Quad #2 (i.e. Growth Accelerating as Inflation Accelerates) for at least the next 3-6 months. By the end of 2Q14, we see Chilean CPI threatening the upside of the central bank’s 3% (+/- 100bps) target aided by a supportive base effect (i.e. easy comps) and annualized currency weakness.

 

SHORT THE CHILEAN PESO? - dale

 

SHORT THE CHILEAN PESO? - CPI

 

SHORT THE CHILEAN PESO? - CPI Comps

 

SHORT THE CHILEAN PESO? - FX

 

Ironically, this comes at a time when Central Bank President Rodrigo Vergara is stepping up dovish commentary amid the existing monetary easing cycle (-50bps of cuts since OCT):

 

“There is a probability that we have an expansive monetary policy going forward. We don’t think it will be massive, that a huge monetary stimulus is needed, but there is a probability that an additional monetary push will be required. Faster inflation in the past two months is transitory, with little sign of wage pressures or international energy and food costs pushing price-increases toward the top of the target range in the foreseeable future.”

 

It’s not exactly as if the Chilean central bank was leaning hawkish when it kept rates on hold last week, so we think Vergara’s commentary represents a step forward in dovish guidance:

 

“The Chilean economy has continued to lose strength. The board estimates that in the coming months it might be necessary to increase the monetary stimulus to ensure that projected inflation will stand at 3 percent in the policy horizon.”

 

With the advent of this commentary, Chilean swap rates are hitting multi-year lows; the current 4.08% rate on the 1Y tenor is the lowest price since DEC ’10. Relative to the benchmark monetary policy rate, it has declined -10bps WoW to -42bps – effectively implying ~two additional rate cuts over the NTM. Assuming that comes to fruition, such policy would make absolutely no sense in the context of our intermediate-term GIP outlook for Chile.

 

SHORT THE CHILEAN PESO? - Swaps

 

Keep in mind that our call for Chilean inflation to accelerate over the intermediate term is in line with our #InflationAccelerating Q1 Macro Theme:

 

“Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. Moreover, the reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.”

 

Moreover, with the Fed at least appearing set to continue tapering the pace of its asset purchases over the intermediate term, we think the spread between CLP and USD monetary policy will continue to diverge in favor of the USD – threatening to push the USD/CLP spot rate to/through the ~625 level over the intermediate term.

 

Structurally speaking, the Chilean peso is a dog. Chile scores very poorly on Pillar I of our proprietary EM Crisis Risk Model (i.e. BoP/Currency Crisis Risk), which is designed to rank emerging market economies according to their level of risk by capturing deviations from the sample mean across key metrics. Some noteworthy lowlights for Chile:

 

  • A bloated current account deficit of -3.4% (3Q13); and
  • A structurally-impaired outlook for the current account with the busted bubble that is commodities accounting for 85.8% of exports (2012 annual data).

 

SHORT THE CHILEAN PESO? - PILLAR I

 

SHORT THE CHILEAN PESO? - EXPLANATION TABLE

 

Lastly, 1Y currency forwards are pricing at the ~565 level, implying our view is not within the realm of consensus expectations. Recall that there are three main “states” for consensus to adopt with respect to contrarian investing:

 

  1. Bullish enough
  2. Bearish enough
  3. Not enough of either

 

SHORT THE CHILEAN PESO? - USDCLP NDF

 

Right now, we think consensus is a clear #3 with respect to the Chilean peso. Happy shorting,

 

DD

 

Darius Dale

Associate: Macro Team


PIIGS Performance Shines in 2014!

What an incredible start to 2014 from the peripheral European equity markets!

  • Portugal +8.8% ytd and +16.0% in 2013
  • Ireland +6.9% ytd and +33.6% in 2013
  • Greece +6.2% ytd and +28.1% in 2013
  • Italy +5.8% ytd and +16.6% in 2013
  • Spain +5.3% ytd and +21.4% in 2013

We believe the outperformance of the periphery is driven on continued accommodative ECB policy, and reflective of fiscal consolidation from sovereigns and an improved risk/exposure profile from the banking sector.

 

The macro team remains committed to our Q1 2014 macro investment theme of #GrowthDivergences in which we’ve outlined a favorable growth outlook for the Eurozone, driven by easier fundamental comparisons and given that the region’s recovery is lagging the U.S. by roughly two years. (click to review the Q1 2014 presentation and listen to the webcast).

 

As a continuation of our Q4 2013 Macro theme #EuroBulls we remain bullish on German equities (+25.5% in 2013) and UK equities (+14.4% in 2013), in particular, which we’ve expressed via the etfs EWG and EWU, respectively.  We currently favor a slightly overweight allocation of European equities to U.S. equities.

 

As a further sign that risk is abating from Europe’s once most troubled peers, the spread on both the Spanish 10YR bond and Italian 10YR to German Bunds remains ground near/below the 200bp line -- where levels stood back when Greece received its first bailout. And just this morning the Portuguese 10YR dipped below 5.0%, the first time since August 2010! 

 

PIIGS Performance Shines in 2014!  - ww. spreads

 

Matthew Hedrick

Associate


European Banking Monitor: The Intermediate and Long Term Outlooks Remain Favorable

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - The most recent week saw swaps widen nominally in Europe's banking system, but the bigger takeaway remains the still-substantial tightening on a m/m basis. 

 

European Banking Monitor: The Intermediate and Long Term Outlooks Remain Favorable - a. banks

 

Sovereign CDS – Sovereign swaps mostly tightened last week with the exception of Japan where they rose 2 bps. Portuguese sovereign swaps tightened by -7.6% (-22 bps to 269 ) and U.S. sovereign swaps were unchanged. Overall, the trend of ongoing improvement in European sovereign risk profiles continues.

 

European Banking Monitor: The Intermediate and Long Term Outlooks Remain Favorable - a. sov1

 

European Banking Monitor: The Intermediate and Long Term Outlooks Remain Favorable - a. sov2

 

European Banking Monitor: The Intermediate and Long Term Outlooks Remain Favorable - a.sov3

 

Euribor-OIS Spread – The Euribor-OIS spread was essentially unchanged at 12 bps last week. Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: The Intermediate and Long Term Outlooks Remain Favorable - a. euribor

 

Matthew Hedrick

Associate


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%

What's New Today in Retail (1/21)

Takeaway: UA lands biggest endorsement deal in years. Anticipatory Shipping? Seriously AMZN? Big IP win for COH. VFC talks labor costs (rising).

EVENTS TO WATCH OVER THE NEXT 24 HOURS

 

COH - Earnings Call: Wednesday 1/22, 8:30 am

 

COMPANY NEWS

 

UA, ADDY - Under Armour and Notre Dame Fighting Irish Join Forces

(http://investor.underarmour.com/releasedetail.cfm?ReleaseID=820306)

 

  • "The University of Notre Dame and Under Armour today announced their new partnership at a press conference on the school’s Indiana campus...As part of the 10-year agreement, Under Armour will exclusively design and supply the footwear, apparel and equipment for training and game-day uniforms for each of the university’s men’s and women’s varsity athletics teams."
  • "In addition to outfitting Fighting Irish athletic teams, the brand plans to integrate the university into its wide-ranging story-telling efforts, including global marketing campaigns, social media initiatives, in-store promotions and grassroots activations."
  • "This new affiliation further expands Under Armour’s leadership in providing proven performance benefits to college athletes on all playing fields. Notre Dame is the brand’s thirteenth Division 1 all-school partnership."

 

What's New Today in Retail (1/21) - chart2 1 21

 

Takeaway: This is perhaps the biggest win for UA since it landed Lindsey Vonn. Notre Dame has been perennial Adidas school -- it's top US franchise outside of the NY Yankees. But one of two things happened here, UA seriously paid up to steal the deal away from AdiBok, or b) Adi is in serious cost-cutting mode and is walking away from high ticket deals that might not be brand-accretive. We think it was a little of both. What's interesting at face value is the Nike did not come out on top. But Notre Dame is the biggest Anti-Nike school out there.

 

WMT - Wal-Mart sets up new company in India

(http://www.livemint.com/Industry/9n7Z8CJxviXWavLO3YU14M/WalMart-sets-up-new-company-in-India.html)

 

  • "...Wal-Mart has registered a new company in India as it prepares to enter the country’s lucrative multi-brand retail market with a new partner."
  • "The retailer has registered a new company called Wal-Mart India Pvt. Ltd. in the country, according to the data available with the ministry of corporate affairs. According to the information, the new entity was registered on 15 January 2014."

 

Takeaway: Walmart is going to give India another go. It was clear that international was the #1 priority after the promotion of Doug McMillon to CEO in late November. India remains an untapped market, but Walmart is now competing with the likes of Carrefour, Tesco, etc. who have stated their intentions to enter the Indian market since the termination of Walmart's Bharti partnership in early October.

 

AMZN - Amazon Wants to Ship Your Package Before You Buy It

(http://blogs.wsj.com/digits/2014/01/17/amazon-wants-to-ship-your-package-before-you-buy-it/)

 

  • "The Seattle retailer in December gained a patent for what it calls 'anticipatory shipping,' a method to start delivering packages even before customers click 'buy.'"
  • "The technique could cut delivery time and discourage consumers from visiting physical stores. In the patent document, Amazon says delays between ordering and receiving purchases 'may dissuade customers from buying items from online merchants.'"
  • "So Amazon says it may box and ship products it expects customers in a specific area will want – based on previous orders and other factors — but haven’t yet ordered. According to the patent, the packages could wait at the shippers’ hubs or on trucks until an order arrives."

 

What's New Today in Retail (1/21) - chart1 1 21

 

Takeaway: This sounds like a redux of those CD clubs of the 80s and 90s that send you music before you ask for it. First drones - now 'anticipatory shipping'. Amazon is doing everything in its power to further its competitive advantage -- regardless of how outrageous these initiatives might seem. This sounds and looks like a logistical and inventory management nightmare to us, but if anyone can execute it effectively it would be Amazon. You've got to wonder how the shippers will be able to handle this type of uncertainty. After all, UPS already missed its latest quarter because Amazon jammed it with packages.

 

MW, JOSB - Men's Wearhouse Responds to Jos. A. Bank Announcement

(http://ir.menswearhouse.com/press-releases/detail/1214)

 

  • " The Men's Wearhouse today issued the following statement in response to the announcement by Jos. A. Bank Clothiers, Inc. that its Board of Directors has rejected Men's Wearhouse's all-cash $57.50 per share offer."
  • "Given that the Jos. A. Bank Board has publicly acknowledged the compelling strategic logic of this transaction, we think Jos. A. Bank shareholders should question why their Board is refusing to negotiate with us to reach an agreement that will deliver to them significant value.  Accordingly, we call on the independent directors of Jos. A. Bank to promptly form a Special Committee that will objectively evaluate our offer and sit down with us to begin discussions."
    "At Jos. A. Bank's 2014 Annual Meeting, both of Jos. A. Bank's non-independent directors, Robert N. Wildrick, Chairman of the Board, and R. Neal Black, President and Chief Executive Officer, are standing for re-election. Jos. A. Bank shareholders can send a powerful message to their Board of Directors by voting to replace Messrs. Wildrick and Black with the independent candidates that Men's Wearhouse is nominating for election at the upcoming Annual Meeting."

 

Takeaway: MW has an extremely valid point. JOSB publicly touted the validity of the combined entity. But now it has a problem when it's the one being acquired? Sounds like either a) JOSB was not genuine in its initial comments, or b) the Board and Management of JOSB are trying to protect their jobs.

 

VFC - 5 Questions for The North Face's Brian Moore

(http://www.wwd.com/footwear-news/markets/5-questions-for-the-north-faces-brian-moore-7378638)

 

  • "Years ago, when labor costs were really low, you could put a lot of parts and pieces [on a shoe] and stitch them all down, because stitching was essentially free. Now you have to limit yourself to only one or two layers and weld it more than sew it, trying to find ways to make it that don’t require a lot of [expensive] handwork."
  • "Does this mean the industry-wide search for less-expensive labor is a thing of the past? BM: I really do believe — and I could be wrong — that those days [with a] market that will give us an unlimited sourcing base are essentially over. I don’t think there is another China after China. We no longer have anywhere else to go to make product cheaper."

 

Takeaway: Two points of particular interest. 1) Labor costs are rising, and 2) the only way to curb rising input costs is through design process innovations. This is a trend we've been watching for the past few months. Particular call out for NKE whose FlyKnit may be the least labor intensive product on the market right now.

 

COH - Coach Gets $5.5M in Fakes Case Settlement

(http://www.wwd.com/business-news/legal/coach-gets-55m-in-fakes-case-settlement-7381866?module=hp-topstories)

 

  • "...Coach Inc. scored a $5.5 million win last month by settling with the owner of a well-known Fort Lauderdale, Fla., flea market that was selling fake Coach goods."
  • "Coach’s Axilrod hopes its Swap Shop news will help to set a precedent. Since launching Operation Turnlatch, a national anticounterfeiting program, Coach has filed more than 700 lawsuits, and Axilrod added, 'I’m happy to say we haven’t lost a single one…'"

 

Takeaway: Stopping counterfeiters has been a point of emphasis for a number of brands recently, but COH takes it to a whole new level with 700+ lawsuits. The interesting thing with this case is that COH may actually get paid since the suit involves a legitimate business entity operating in the US. Many brands could learn a thing or two about defending its IP by watching COH. We still wouldn't touch the stock.

 

SP, DEB - Sportswear tycoon Mike Ashley smashes tank into Debenhams with plan to sell his sportswear

(http://www.dailymail.co.uk/money/markets/article-2541792/Sportswear-tycoon-Mike-Ashley-smashes-tank-Debenhams.html)

 

  • "Sportswear tycoon Mike Ashley will meet Debenhams boss Michael Sharp as early as this week over a plan to flood the department store with the billionaire’s clothing."
  • "The talks come after Ashley’s Sports Direct piled into Debenhams shares last week with trades that one source described as ‘parking a tank’ on Debenhams’ lawn."
  • "Ashley, main shareholder of Sports Direct, and his chief executive Dave Forsey plan to use the stake and Ashley’s ownership of the Slazenger and Donnay brands to push for a major role to supply an enlarged Debenhams sportswear department."

 

Takeaway: Ashley is one dangerous dude. You don't want him buying up your stock and then requesting a meeting to 'ask' you to carry his product.  Trust us…he'll win, you'll lose.

 

LVMH - Appointments at the helm of LVMH Watches & Jewelry Division

(http://www.lvmh.com/investor-relations/press-releases)

 

  • "Having successfully led the integration of Bulgari within LVMH, Francesco Trapani has decided to relinquish his operational duties as head of Watches and Jewelry division from 1st March 2014. He becomes an adviser to the Chairman, on matters relating to the Group’s jewelry operations, and remains a Director on the Board of LVMH."
  • "The Group’s jewelry Maisons (Bulgari, Chaumet, Fred and De Beers) will now report to Toni Belloni, LVMH Group Managing Director. Jean-Claude Biver, currently President of Hublot, will also take responsibility for the other watch brands TAG Heuer and Zenith."

 

 

 

 

 


#INFLATIONACCELERATING: SHORT THE CHILEAN PESO?

Takeaway: We see real interest rate expectations dragging down the CLP another 10-15% vs. the USD from here amid unnecessarily easy monetary policy.

CONCLUSIONS:

 

  1. Specifically, our GIP Model puts the Chilean economy squarely into Quad #2 (i.e. Growth Accelerating as Inflation Accelerates) for at least the next 3-6 months. By the end of 2Q14, we see Chilean CPI threatening the upside of the central bank’s 3% (+/- 100bps) target aided by a supportive base effect (i.e. easy comps) and annualized currency weakness.
  2. Ironically, this comes at a time when Central Bank President Rodrigo Vergara is stepping up dovish commentary amid the existing monetary easing cycle (-50bps of cuts since OCT).
  3. With the advent of this commentary, Chilean swap rates are hitting multi-year lows; the current 4.08% rate on the 1Y tenor is the lowest price since DEC ’10. Relative to the benchmark monetary policy rate, it has declined -10bps WoW to -42bps – effectively implying ~two additional rate cuts over the NTM. Assuming that comes to fruition, such policy would make absolutely no sense in the context of our intermediate-term GIP outlook for Chile.
  4. Moreover, with the Fed at least appearing set to continue tapering the pace of its asset purchases over the intermediate term, we think the spread between CLP and USD monetary policy will continue to diverge in favor of the USD – threatening to push the USD/CLP spot rate to/through the ~625 level over the intermediate term.
  5. Lastly, 1Y currency forwards are pricing at the ~565 level, implying our view is not within the realm of consensus expectations.

 

One of the things our Macro Team likes to do is make strategic calls on currencies – especially when our expectations for the country’s intermediate-to-long-term GIP (i.e. growth/inflation/policy) fundamentals diverge from consensus expectations or those of that country’s policymakers.

 

We don’t care if it’s a liquid currency like the AUD or the JPY (down -20% and -26%, respectively, since we outlined our bearish biases on 7/27/11 and 9/27/12, respectively) or an illiquid currency like the ARS or the VEF (down -42% and -32%, respectively, since we outlined our bearish biases on 11/4/10 and 10/9/12, respectively).

 

The CLP probably falls into the latter category, so we’re guessing this is roughly the point in the note where most of you lose interest. We’ve been actively covering the country for over four years now (along with the rest of Latin America) and this is the first note we’ve ever published exclusively regarding Chile.

 

For those of you who are inclined to continue on, we think the CLP has 10-15% downside from here as unnecessarily easy monetary policy weighs on real interest rate expectations.

 

Specifically, our GIP Model puts the Chilean economy squarely into Quad #2 (i.e. Growth Accelerating as Inflation Accelerates) for at least the next 3-6 months. By the end of 2Q14, we see Chilean CPI threatening the upside of the central bank’s 3% (+/- 100bps) target aided by a supportive base effect (i.e. easy comps) and annualized currency weakness.

 

#INFLATIONACCELERATING: SHORT THE CHILEAN PESO? - CHILE

 

#INFLATIONACCELERATING: SHORT THE CHILEAN PESO? - CPI

 

#INFLATIONACCELERATING: SHORT THE CHILEAN PESO? - CPI Comps

 

#INFLATIONACCELERATING: SHORT THE CHILEAN PESO? - FX

 

Ironically, this comes at a time when Central Bank President Rodrigo Vergara is stepping up dovish commentary amid the existing monetary easing cycle (-50bps of cuts since OCT):

 

“There is a probability that we have an expansive monetary policy going forward. We don’t think it will be massive, that a huge monetary stimulus is needed, but there is a probability that an additional monetary push will be required. Faster inflation in the past two months is transitory, with little sign of wage pressures or international energy and food costs pushing price-increases toward the top of the target range in the foreseeable future.”

 

It’s not exactly as if the Chilean central bank was leaning hawkish when it kept rates on hold last week, so we think Vergara’s commentary represents a step forward in dovish guidance:

 

“The Chilean economy has continued to lose strength. The board estimates that in the coming months it might be necessary to increase the monetary stimulus to ensure that projected inflation will stand at 3 percent in the policy horizon.”

 

With the advent of this commentary, Chilean swap rates are hitting multi-year lows; the current 4.08% rate on the 1Y tenor is the lowest price since DEC ’10. Relative to the benchmark monetary policy rate, it has declined -10bps WoW to -42bps – effectively implying ~two additional rate cuts over the NTM. Assuming that comes to fruition, such policy would make absolutely no sense in the context of our intermediate-term GIP outlook for Chile.

 

#INFLATIONACCELERATING: SHORT THE CHILEAN PESO? - Swaps

 

Keep in mind that our call for Chilean inflation to accelerate over the intermediate term is in line with our #InflationAccelerating Q1 Macro Theme:

 

“Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. Moreover, the reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.”

 

Moreover, with the Fed at least appearing set to continue tapering the pace of its asset purchases over the intermediate term, we think the spread between CLP and USD monetary policy will continue to diverge in favor of the USD – threatening to push the USD/CLP spot rate to/through the ~625 level over the intermediate term.

 

Structurally speaking, the Chilean peso is a dog. Chile scores very poorly on Pillar I of our proprietary EM Crisis Risk Model (i.e. BoP/Currency Crisis Risk), which is designed to rank emerging market economies according to their level of risk by capturing deviations from the sample mean across key metrics. Some noteworthy lowlights for Chile:

 

  • A bloated current account deficit of -3.4% (3Q13); and
  • A structurally-impaired outlook for the current account with the busted bubble that is commodities accounting for 85.8% of exports (2012 annual data).

 

#INFLATIONACCELERATING: SHORT THE CHILEAN PESO? - PILLAR I

 

#INFLATIONACCELERATING: SHORT THE CHILEAN PESO? - EXPLANATION TABLE

 

Lastly, 1Y currency forwards are pricing at the ~565 level, implying our view is not within the realm of consensus expectations. Recall that there are three main “states” for consensus to adopt with respect to contrarian investing:

 

  1. Bullish enough
  2. Bearish enough
  3. Not enough of either

 

#INFLATIONACCELERATING: SHORT THE CHILEAN PESO? - USDCLP NDF

 

Right now, we think consensus is a clear #3 with respect to the Chilean peso. Happy shorting,

 

DD

 

Darius Dale

Associate: Macro Team


Just Charts: Early Merger Winds

In this note, we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

Consumer stocks are off to a tough start in 2014.  From a quant setup Keith McCullough said over the weekend that “I’d short 80% of this market cap.”  As you can see from the charts below, there is a bearish set up for the largest names in Consumer Staples. 

 

We generally believe that the group is way over-owned and loaded with premium valuations in a US consumption growth slowing world.  To that end, the most recent data on Disposable income per capita is making new lows and the high frequency Bloomberg weekly consumer comfort index has not seen any real improvement over the past 6 months.

 

Uniliver started the current earnings season saying that “first-quarter underlying sales will rise at the low-end of 3 percent to 5 percent guidance.”  The biggest issues for Uniliver is stemming from the slowdown in emerging markets, although according to the company Europe is showing few signs of improvement as consumers remain wary.

 

The sector received the spotlight this morning with news that Mondelez (MDLZ) appointed Nelson Peltz of Trian Partners to its board.  Trian is the fourth largest shareholder of MDLZ (2.33%) and was very public in July 2013 issuing a white paper encouraging the company to merge with PepsiCo and spin off its beverage business. This announcement, which heightens animal spirits based on Peltz’s track record of restructuring companies to unlock shareholder value, follows the BEAM acquisition by Suntory last week and offer exciting merger winds from a group that otherwise has had a slow start to the new year. 

 

We will be hearing from PG and KMB on Wednesday and next week begins the earnings deluge.  

 

Just Charts: Early Merger Winds  - 1 21 2014 12 27 53 PM

 

Just Charts: Early Merger Winds  - chart2

 

Just Charts: Early Merger Winds  - 14

 

Just Charts: Early Merger Winds  - 13

 

 

BULLISH


BUD – looks almost identical to DEO – big beta trade that’s starting to come undone for the group overall (XLP is bearish TRADE now, and that’s new); $101.24 is TREND support; above that bullish; below it bearish

Just Charts: Early Merger Winds  - chart3

 

DEO – after failing to breakout to higher-highs (vs the DEC 2013 closing highs), now the TREND line of $126 is under attack here and that is new (and bearish if it breaks)

Just Charts: Early Merger Winds  - chart4

 

 

KMB – next to MDLZ its one of the few stocks on this list I’d buy if blindfolded w/ no research; part of that is that the stock was so bad that its in a classic @Hedgeye bearish to bullish reversal (might not last, but looks good as long as $103.02 TREND support holds)

Just Charts: Early Merger Winds  - chart5

 

 

MDLZ – best looking name on your roster; still in a Bullish Formation (bullish TRADE, TREND, and TAIL) with immediate-term TRADE support of 34.65 being the important line to use as a momentum stop

Just Charts: Early Merger Winds  - 6

 

 

MO – doesn’t look nearly as bad as PM, so an interesting pair there, but that can change if MO’s TREND support breaks (36.69, so its close by); just broke its immediate-term TRADE line of 37.41 in 2014 too

Just Charts: Early Merger Winds  - 7

 

BEARISH

 

GIS – if you told me to, I’d short this stock on the open tomorrow; brand new bearish TREND developing with $49.55 being TREND resistance

Just Charts: Early Merger Winds  - 8

 

 

KO – just broke its TREND line too (that’s new), with TREND support of 39.96 now being resistance, if you have bearish catalysts, good chance this stock retests the OCT 2013 lows

Just Charts: Early Merger Winds  - 9

 

PEP – doesn’t look as bad as KO, but pretty close – looks a lot like sector beta for XLP that just flagged bearish in the last few weeks; TREND line of $82.74 broke

Just Charts: Early Merger Winds  - 10

 

 

PG – looks like GIS; if you tell me to short this, I will. What was TREND support at 81.29 is now a freshly established wall of resistance; no support for this stock to $74-75

Just Charts: Early Merger Winds  - 11

 

 

PM – continues to look horrible on both an absolute and relative basis. TAIL risk resistance remains in place overhead at 86.63; no support to the SEP 2013 closing lows.

Just Charts: Early Merger Winds  - 12

 

 


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