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Is Consensus Bearish Enough?

Client Talking Points

DAX

The slope of economic growth data in Europe continues to improve relative to the United States. That is why European stocks continue to outperform U.S. stocks. Over in Germany, the DAX is up +0.8% this morning after holding both TRADE and TREND supports. This is what we call #GrowthDivergences here at Hedgeye. Yes, it's real and yes it matters.

YEN

I issued an overbought signal in #RealTimeAlerts Friday, but the year-to-date corrections in the Yen versus the U.S. Dollar continue to be slim pickings. Meanwhile, the risk range for USD/YEN has tightened (that’s marginally Yen bullish) to 102.04-103.70 (lower-highs). Currencies matter.

SENTIMENT

So with U.S. #GrowthSlowing sequentially, market sentiment is reversing some. But is consensus Bearish Enough? Nope. This morning’s II Bull/Bear Survey is still +3780 basis points wide to the Bull Side (53.1% Bulls, 15.3% Bears) and the VIX is under 14.91. Bottom line is people aren't bearish enough, particularly if growth continues to slow. Careful out there, keep your head up.

Asset Allocation

CASH 43% US EQUITIES 10%
INTL EQUITIES 15% COMMODITIES 10%
FIXED INCOME 0% INTL CURRENCIES 22%

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

The bull case for $KMI rests upon financial engineering of some sort. The fundamental case is shot to hell @HedgeyeENERGY

QUOTE OF THE DAY

"Somebody may beat me, but they are going to have to bleed to do it." -Steve Prefontaine 

STAT OF THE DAY

If humans had the same mortality rate now as in 1900, more than half the people in the world today would not be alive.


THE M3: COD; GALAXY

THE MACAU METRO MONITOR, JANUARY 29, 2014

 

 

MELCO CROWN WINS MORE TIME FOR COD WORK Macau Business

Secretary for Transport and Public Works Lau Si Io has approved a new deadline for MPEL to complete the CoD resort.  Changes to the land concession announced in today’s Official Gazette give Melco Crown the right to build another five-star hotel at the site instead of an apartment hotel, and up to four years to complete the work. The company will pay a land premium of MOP187.1 million (US$23.3 million).

 

LUI SETS GALAXY'S COURSE FOR HENGQIN ISLAND Macau Business, Bloomberg

Galaxy chairman Lui Che-woo says his company may invest HK$10 billion (US$1.3 billion) in sport-related facilities and hotels on Hengqin Island.  The company plans to quadruple the size of its existing Galaxy Macau resort on Cotai, Asia’s equivalent of the Las Vegas Strip, by 2018.


January 29, 2014

January 29, 2014 - Slide1

BULLISH TRENDS

January 29, 2014 - Slide2

January 29, 2014 - Slide3

January 29, 2014 - Slide4

January 29, 2014 - Slide5

January 29, 2014 - Slide6

January 29, 2014 - Slide7 

BEARISH TRENDS

January 29, 2014 - Slide8

January 29, 2014 - Slide9

January 29, 2014 - Slide10

January 29, 2014 - Slide11
January 29, 2014 - Slide12

 

 


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Bear Droppings

“Daddy, that looks like bird poop.”

-Jack McCullough

 

Nah, he wasn’t talking about the complexion of yesterday’s stock market bounce or Obama’s class warfare speech. My son was talking about the risk-on trade my 2.5-week old baby girl placed all over my shirt last night.

 

Risk happens fast, and slow.

 

Back to the Global Macro Grind

 

Given that the Russell 2000 hit an all-time high on January 22nd, I think most of you will agree that the “risk-on” trade in being long of big US equity beta happened pretty fast.

 

The speed of an information surprise (real-time prices) to the downside can kill both confidence and returns. And I think this is what will keep volatility above @Hedgeye TREND support (VIX TREND = 14.91) for longer than consensus might think.

 

While consensus isn’t as bullish as it was 4 weeks ago, here’s one way to contextualize sentiment:

 

  1. The II Bull/Bear Spread (one of my favs) peaked at +4650 basis points wide to the bull side in DEC (all-time high)
  2. This morning’s Bull/Bear Spread is +3780 bps wide (that’s a 16% correction)
  3. The peak in Bulls was 61.7% and this morning it’s down to 53.1% (that’s a 14% correction)

 

As for the Bears, there still are none that survived all of 2013. By the time it was all over, very few long-only managers were allowed to remind clients they’d been bearish for the last 12 months. Even after last week’s -2.6% drop in the SP500, Bears went from 15.1% to 15.3%. I know, #scary.

 

Unlike the last three 3-4% US stocks market corrections that we told you to buy, this one has a glaring difference – rather than accelerating both month-to-month and quarter-over-quarter, on the margin, US growth is slowing.

 

Slowing? Yes. And very evidently so in some of the big stuff that matters:

 

  1. HOUSING: New Home Sales missed big on Monday and Case/Shiller Home Prices declined m/m (both are new)
  2. CONSUMPTION: from Retail Sales to ISM Services and every company check from my analysts = #GrowthSlowing
  3. ECON CYCLE: yesterday’s New Orders in the DEC Durable Goods report dropped -4.3% m/m (vs +2.6% last)

 

And sure, people who are in the business of being bullish will give you plenty of excuses (including the weather) as to why slowing is occurring, but few made the call 2-4 weeks ago when the call needed to be made.

 

Blame Turkey.

 

No thanks. Did consensus seriously think all these dysfunctional emerging market countries could try what we did (burn their currencies) and not see local inflation rise, consumption growth slow, and social unrest rip?

 

NEWSFLASH: devaluing the purchasing power of The People is called inflation.

 

And inflation pays the rich and starves the poor.

 

Obviously that whole money printing and political power thing (which crushes upward mobility in a society) didn’t make it into last night’s State of The Storytelling. But I digress.

 

Political digressions, transgressions, and obfuscations aside, what markets cannot seem to get away from is this thing called economic gravity. So let’s try an if/then risk management exercise. If…

 

A)     #InflationAccelerates

B)      #GrowthSlows

 

Then… the stock market sees multiple compression. Period.

 

If stagflation gets really amped up (think 1970s when American socialists perpetuated it through things like currency devaluation, price controls, and government spending), stock market multiples really get whacked.

 

Sorry Abby (as in Goldman’s Cohen, who says the SP500 is going to 18x EPS = 2088 this year). If inflation continues to ramp and growth continues to slow, you might have to slap a lucky 13 on that super-duper-magic-market-multiple thing you do.

 

Actually, god just called and told me 13 “feels a little low.” How about 14x the 2014 consensus EPS = 1624? Jack, that would look and feel like bear poop to me.

 

Our immediate-term Macro Risk Ranges (with bull or bear TREND in brackets) are as follows:

 

UST 10yr Yield 2.72-2.80% (bearish)

SPX 1 (bullish)

Shanghai Comp 1 (bearish)

VIX 14.91-18.55 (bullish)

USD 80.16-80.79 (bearish)

Pound 1.64-1.66 (bullish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Droppings - Chart of the Day

 

Bear Droppings - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 29, 2014


As we look at today's setup for the S&P 500, the range is 48 points or 1.20% downside to 1771 and 1.48% upside to 1819.              

                                                                                                                 

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: 2.39 from 2.41
  • VIX closed at 15.8 1 day percent change of -9.30%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Jan. 24 (prior 4.7%)
  • 7:15am: BoE’s Carney speaks in Edinburgh
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC Rate Decision, Jan. 29, est. 0%-0.25% (pr. 0%-0.25%)

GOVERNMENT:

    • President Obama speaks on economy in Md., Penn.
    • 10am: Senate Judiciary Cmte hears from Attorney General Eric Holder at oversight hearing

WHAT TO WATCH:

  • Obama income-gap message frames race for control of U.S. Senate
  • Obama seeks trade deals in speech backing U.S. cos.’ goals
  • FOMC rate decision expected at 2pm
  • JPMorgan said near decision on $2b commodities unit sale
  • Yahoo’s Mayer fails to revive growth 18 months into CEO role
  • Deutsche Bank cuts investment banker pay 23% as loss reported
  • AT&T forecasts profit on low end of estimates as rivalry grows
  • Caesars is said to weigh bid for Revel casino in Atlantic City
  • J&J gets $257m Louisiana Risperdal verdict thrown out
  • Lenovo said to agree to higher than usual break fee with IBM
  • Turkey raises rates to end lira fall as Basci defies Erdogan
  • Ukraine president fails to quell protests after ally quits
  • BP continued suspension from new contracts sought by U.S.
  • Biggest banks seen meeting Basel rules 5 yrs ahead of time
  • Goldman Sachs said to lead American Homes 4 Rent bond deal
  • Canon forecast misses analyst estimates amid camera slump
  • Novartis 4Q net drops on franc, emerging markets
  • Fiat 4Q profit misses est, won’t pay div.
  • Boeing’s testing on new tanker may face delays: Reuters

AM EARNS:

    • Ametek (AME) 7am, $0.54
    • Biogen Idec (BIIB) 7:15am, $2.27 - Preview
    • Boeing (BA) 7:30am, $1.54 - Preview
    • Canadian Pacific Railway (CP CN) 7:30am, C$1.92 - Preview
    • Capitol Federal Financial (CFFN) 9am, $0.13
    • CGI Group (GIB/A CN) 6:30am, C$0.71 - Preview
    • Dow Chemical (DOW) 7am, $0.43 - Preview
    • EMC (EMC) 6:52am, $0.59
    • Energizer Holdings (ENR) 7:30am, $2.13
    • Gentex (GNTX) 8am, $0.43
    • Hess (HES) 7:30am, $1.07 - Preview
    • Hudson City Bancorp (HCBK) 8am, $0.07
    • JetBlue Airways (JBLU) 7:30am, $0.13
    • Marathon Petroleum (MPC) 7:06am, $1.17 - Preview
    • McCormick & Co (MKC) 6:30am, $1.19
    • MeadWestvaco (MWV) 7:25am, $0.24
    • New York Community Bancorp (NYCB) 8am, $0.26
    • Phillips 66 (PSX) 8am, $1.10 - Preview
    • Praxair (PX) 6:02am, $1.55
    • Rockwell Automation (ROK) 7am, $1.39
    • SEI Investments (SEIC) 8:30am, $0.36
    • Southern (SO) 7:30am, $0.45
    • TCF Financial (TCB) 8am, $0.23
    • Tupperware Brands (TUP) 7am, $1.84
    • Valero Energy (VLO) 7:49am, $1.43 - Preview
    • WellPoint (WLP) 6am, $0.87

PM EARNS:

    • Amdocs (DOX) 4:01pm, $0.75
    • Cadence Design Systems (CDNS) 4:05pm, $0.23
    • Citrix Systems (CTXS) 4:05pm, $0.98
    • Concur Technologies (CNQR) 4:10pm, $0.13
    • Facebook (FB) 4:05pm, $0.27 - Preview
    • Flextronics Intl (FLEX) 4:01pm, $0.23
    • Fortinet (FTNT) 4:15pm, $0.14
    • Fortune Brands (FBHS) 4:01pm, $0.38
    • Hanesbrands (HBI) 4:01pm, $0.90
    • Idex (IEX) 4:35pm, $0.80
    • Intersil (ISIL) 4:05pm, $0.17
    • InvenSense (INVN) 4:05pm, $0.17
    • Lam Research (LRCX) 4:05pm, $1.03
    • Las Vegas Sands (LVS) 4:22pm, $0.84
    • Murphy Oil (MUR) 5:01pm, $1.18
    • Qiagen (QGEN) 4pm, $0.33
    • Qualcomm (QCOM) 4pm, $1.18 - Preview
    • ServiceNow (NOW) 4:01pm, $(0.02)
    • Symantec (SYMC) 4:01pm, $0.43
    • Tractor Supply (TSCO) 4:01pm, $0.65
    • Vertex Pharmaceuticals (VRTX) 4pm, $(0.56) - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • JPMorgan Said Near Decision on $2 Billion Commodities Unit Sale
  • WTI Slips From Four-Week High Before Supply Data, Fed Decision
  • Branson’s Butanol Heads to U.S. to Replace Ethanol: Commodities
  • Natural Gas Climbs for Second Day as Frigid Weather Sweeps U.S.
  • Copper Snaps 5-Day Drop as Turkey Raises Rates Before Fed Move
  • Cocoa Falls as ICCO Sticks to Shortage Forecast; Coffee Advances
  • Corn Drops First Time in Seven Days as Crop Prospects Improve
  • Gold Erases Decline in London, Following Gains in New York
  • Oilseed Harvest in India Heading for Three-Year High on Monsoon
  • Rebar Rises for First Time in Three Days on Production Cost Gain
  • Turkey Crisis Puts Jailed Millionaire at Heart of Gold Trail
  • Texas Vies With Saudi Arabian Oil in California Supply: Freight
  • Obama Touts Fracking Rule Opposed by Halliburton, Baker Hughes
  • California Farms Going Thirsty as Drought Burns $5 Billion Hole

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

 

 

 

 

 

 

 

 

 

 

 

 

 


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