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WTW: Best Idea Call

Takeaway: Please join us for a brief call on Thursday, January 30th at 11:00am EST to discuss the key points of our thesis and field questions.

WTW: Best Idea Call  - WTW client 2

 

The Hedgeye Internet & Media and Healthcare Teams, led by sector heads Hesham Shaaban and Thomas Tobin, are adding SHORT Weight Watchers (NYSE: WTW) to our Best Ideas list. We will host a brief call on Thursday, January 30th at 11:00am EST to discuss the key points of our thesis and field questions.

 

 

WTW IS A HIGH-CONVICTION SHORT IDEA GIVEN THE COMPANY'S

  • Secular headwinds from heightened competition and cheaper options
  • Waning investment in member acquisition
  • Expectations for pronounced weakness in 2014 trends

 

ABOUT WTW 

Weight Watchers International, Inc. (WTW) is a leading, global-branded consumer company and the world's leading provider of weight management services, operating globally through a network of Company-owned and franchise operations.  The company provides group meetings, Internet subscription products sold by WeightWatchers.com, products sold at meetings, licensed products sold in retail channels and magazine subscriptions and other publications.

 

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 923753#
  • Materials: CLICK HERE (slides will be available approximately one hour prior to the call)

 

Please email for more details.

 

 



Emerging Markets: Were You Prepared?

Takeaway: We remain broadly bearish on EM assets and continue to think that absolute returns for EM assets will be negative over the intermediate term

Editor's note: This complimentary, unlocked research note was originally published January 27, 2014 at 13:23 in Macro. For more information on how you can subscribe to Hedgeye click here.

Emerging Markets: Were You Prepared? - bull9

CONCLUSIONS:

  1. We continue to think it’s of utmost importance for investors to proactively prepare their portfolios for what we continue to see as the next cycle of emerging market crises.
  2. We remain broadly bearish on EM assets and continue to see them for what they are: overpriced relative to a long-term TAIL investment cycle that has clearly turned in favor of DM assets, at the margins. For some long ideas in the DM space, look no further than our #EuroBulls theme, which continues to augur well for appreciation across the UK and German capital and currency markets.
  3. We continue to think that absolute returns for EM assets will be negative over the intermediate term. In fact, we continue to believe that EM assets lose in two out of the three most probable intermediate-term global macro scenarios. As such, we don’t think discretion is overly warranted until investors drill down into the country level.
  4. Here are three more important things to highlight: 1) the US Dollar Index remains broken TREND and TAIL (old news); 2) the 10Y Treasury Yield is now below its TREND line (new news); and 3) the CRB Index is now trading above its TREND line (new news). If this setup continues to manifest in the face of declining risk aversion, then we could get behind EM assets on the long side for trade.
  5. For now, however, we’re comfortable with our current positioning. The SPX is now testing its TREND line of support (1779); a confirmed breakdown below that level in conjunction with the VIX remaining above its TREND line does not augur well for declining risk aversion with respect to the intermediate term.

 

Needless to say, last week was a brutal week if you were running a EM FX carry-trading strategy(ies) or, if you’ve been conditioned by the past ~10Y to be permanently bullish on emerging market assets.

 

As of Friday’s close, the JPM EM Currency Index had fallen -1.8% WoW; LatAm – which remains our favorite region on the short side of EM capital and currency markets – led decliners with the Bloomberg/JPM LatAm Currency Index falling -3.2% WoW. The iShares MSCI Emerging Markets Index ETF (EEM) declined nearly -4% last week and is now down -8.5% for the YTD.

 

Emerging Markets: Were You Prepared? - dale1

*As of Friday's close.

 

Emerging Markets: Were You Prepared? - FX

*As of Friday's close.


The Argentine peso was undoubtedly the life of the party, declining over -15% last week. If you missed our note from last Thursday titled: “ARGENTINE DEFAULT 2.0?”, we encourage you to review it whenever you have a few minutes to spare; it’s a must-read for any investor attempting to understand the myriad of idiosyncratic risks that one must consider when allocating capital to emerging markets at this stage in the cycle.

 

We continue to think it’s of utmost importance for investors to proactively prepare their portfolios for what we continue to see as the next cycle of emerging market crises. Contrast the following preparation below with the hyperbolic and emotional research that you’ve likely been spammed with from the sell-side over the past ~72 hours:

 

 

All told, we remain broadly bearish on EM assets and continue to see them for what they are: overpriced relative to a long-term TAIL investment cycle that has clearly turned in favor of DM assets, at the margins. For some long ideas in the DM space, look no further than our #EuroBulls theme, which continues to augur well for appreciation across the UK and German capital and currency markets.

 

When we last left off, we had a number of ways to play this view within the construct of EM assets; below is a review of that strategy:

 

Emerging Markets: Were You Prepared? - OW LONGS

 

Emerging Markets: Were You Prepared? - UW SHORTS

 

  • ASSET CLASS LEVEL: a cumulative -117bps of equal-weighted performance
    • Overweight EEM: -6.5%
    • Underweight EMLC: -5.4%
  • REGIONAL LEVEL: a cumulative +18bps of equal-weighted performance
    • Overweight GUR: -7.5%
    • Underweight GML: -7.7%
  • COUNTRY LEVEL: a cumulative +614bps of equal-weighted performance
    • Overweight EWW: -8.6%
    • Overweight EPOL: -3.6%
    • Overweight RSX: -9.5%
    • Overweight EWY: -6.6%
    • Overweight EWT: -2.4%
    • Underweight EWZ: -8.6%
    • Underweight ECH: -7.4%
    • Underweight EIDO: +1.2%
    • Underweight THD: -5.9%
    • Underweight TUR: -14.7%

 

Obviously if we were running a fund, we would not have these positions on in equal weights; we’ve obviously been the loudest EM bears on the street since last APR, so it would only make sense to size the shorts appropriately larger than the longs.

 

From here, we continue to think that absolute returns for EM assets will be negative over the intermediate term. In fact, we continue to believe that EM assets lose in two out of the three most probable intermediate-term global macro scenarios. As such, we don’t think discretion is overly warranted until investors drill down into the country level.

 

Emerging Markets: Were You Prepared? - Global Macro Scenarios

 

In that vein, the only change we would make there would be to remove Russia (RSX) and Mexico (EWW) from the overweight ideas. Crude oil is now bearish TREND and TAIL on our quant factoring and we no longer wish to seek out that exposure on the long side. Indonesia (EIDO) is nowhere near as compelling on the short side as it once was, given the recent acceleration in hawkish rhetoric out of Bank Indonesia; still, we’d like to see them put their money where their mouth is in that regard (i.e. hike rates again) before we can get behind a turnaround story here.

 

Emerging Markets: Were You Prepared? - Crude Oil

 

Here are three more important things to highlight: 1) the US Dollar Index remains broken TREND and TAIL (old news); 2) the 10Y Treasury Yield is now below its TREND line (new news); and 3) the CRB Index is now trading above its TREND line (new news). If this setup continues to manifest in the face of declining risk aversion, then we could get behind EM assets on the long side for trade.

 

Emerging Markets: Were You Prepared? - DXY

 

Emerging Markets: Were You Prepared? - 10Y UST Yield

 

Emerging Markets: Were You Prepared? - CRB Index

 

For now, however, we’re comfortable with our current positioning. The SPX is now testing its TREND line of support (1779); a confirmed breakdown below that level in conjunction with the VIX remaining above its TREND line does not augur well for declining risk aversion with respect to the intermediate term.

 

Emerging Markets: Were You Prepared? - SPX

 

Emerging Markets: Were You Prepared? - VIX

 

For more details about our multi-factor, multi-duration quantitative overlay, please refer to slide #5 of our 1Q14 Macro Themes presentation. It remains unclear to us how so many strategists make calls on markets without a proven process to contextualize critical inflection points in global markets in real-time, but to each his/her own.

 

At any rate, we’ll stick with our process for marrying bottom-up macro fundamentals (e.g. our proprietary EM Crisis Risk Index and our deep-dive research on the previous two EM crisis cycles) with a top-down overlay (e.g. our quantitative market timing signals).

 

Don’t fix it if it ain’t broken!

 

DD

 

Darius Dale

Associate: Macro Team


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No Silver Linings: December Durable Goods

The weather, expiration of investment tax credits, exclusion of commercial aircraft orders in the advance estimate (Boeing orders that will probably show up in the Jan data) and seasonality will all be held out as potential distortions in the December figures. 

 

With Durable Goods being one of the more volatile series, subject to significant revision, and negatively diverging from the ISM mfg data for December, we may indeed see a positive revision and sequential acceleration next month, but the reality is that the deceleration reflected in this morning’s durables data agrees with the sequential slowdown observed more broadly across the domestic macro data. 

 

Headline Durable Goods printed its worst number in five months, accelerating to the downside sequentially with New Orders declining -4.3% MoM while decelerating meaningfully on both a YoY and 2Y basis. 

 

Core Capex Orders growth accelerated to the downside as well, declining -1.3% MoM and >300bps on a 2Y.  If there was a lone positive in the release, it’s that core capital goods orders growth did accelerate 70bps sequentially to 6.2% from +5.6% in November. 

 

Additionally, both headline New Orders and Core Capex figures for November were revised lower by -80bps and -150bps, respectively.

 

No silver linings to be had in the sub-aggregates either with (perhaps) the cleanest read on household consumerism - New Durable Goods Orders Ex-Defense & non-defense Aircraft - decelerating on a MoM, 1Y and 2Y.  

 

In short, today’s durable goods data agrees with our expectation for a sequential slowdown in domestic growth and suggests some emergent weakness in what has been a key source of macro strength over 2H13 (with wage inflation still muted and services consumption growth flagging). 

 

As we highlighted in our 1Q14 Macro themes call (HERE), easy 1H14 inflation comps and our expectation for a deceleration in the rate of change in reported growth has us incrementally more cautious on U.S. equities than we have been over the TTM.   

 

Now, with the risk management/price signals flashing red with a breakout in equity volatility above TREND resistance and the S&P500 flirting with a TREND breakdown (SPX Trendline = 1779), in the more immediate term, we’ll keep our net exposure to domestic equities relatively tight.

 

No Silver Linings: December Durable Goods - Durable Goods

 

No Silver Linings: December Durable Goods - Eco Table 012814

 

 

Christian B. Drake

@HedgeyeUSA

 


Keep Your Noggin Up!

Client Talking Points

VIX

The good news is that the S&P 500 held our Hedgeye TREND support (1779) yesterday. The bad news is that front-month VIX is still solidly above TREND support of 14.91. So I’d sell an up open in US stocks unless volatility calms. Unlike the UK (whose Q4 GDP accelerated sequentially this morning to +2.8% year-over-year, USA’s should slow on Thursday from the Q3 peak).

EUROPE

If you’re long European Equities versus virtually any other region of the world year-to-date, you are less miserable and sleeping a little bit better. Europe is bouncing as Germany's DAX holds our Hedgeye TREND support of 9166. Meanwhile, Portugal was up +1.2%, Denmark +0.8%, and Austria +0.6%. All of them are still up +3-4% year-to-date versus the S&P 500 which is down -3.6% YTD. The rate of change in growth is our #GrowthDivergences theme. 

UST 10YR

It's game time again for the 10-year yield as our TREND level of 2.80% and yield just bounced 6 basis points off of Friday’s lows. Gold didn’t like that, so we’re waiting and watching for the next Gold buy signal. If the 10-year fails at 2.80% again, buying back Gold is at the top of my macro menu. We will let the market decide.

Asset Allocation

CASH 39% US EQUITIES 12%
INTL EQUITIES 15% COMMODITIES 10%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
JPM

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.

FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

No one but baby boomers play slots! that's the long-term problem for regional gamers and slot companies $IGT. also a near term problem @HedgeyeSnakeye

QUOTE OF THE DAY

"Oh yes, the past can hurt. But you can either run from it, or learn from it." - Rafiki, from The Lion King

STAT OF THE DAY

The U.S. retail price for regular gasoline fell to $3.279 a gallon yesterday, according to AAA, the nation’s largest motoring company. The countrywide average rose to within a cent and a half of $4 in April 2011.



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