January 30, 2014

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Beware of Green Arrows

Client Talking Points


Never mind those “green arrows” in the futures this morning. Buying them in any of the last 3-4 days was a costly mistake. Instead, focus on the VIX TREND which is 14.91 and S&P 500 TREND which is 1779. Both remain very credible and sizable threats to the Old Wall Street consensus that’s still way too long.


Our #InflationAccelerating call here at Hedgeye (Macro Theme #1 for Q1) is performing well. The CRB Index was up another +0.8% yesterday in a very red tape to up +1.8% year-to-date. Look, very few people came into the year long commodities. Guess what? That’s why they’re working right now.


The 10-year yield failed rather hard at our Hedgeye TREND resistance of 2.80% yesterday (2.69% this morning), and this sucks for the Financials (XLF) as the yield spread gets smushed. The XLF joined the Consumer stocks as bearish TREND in our model yesterday

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


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


COMMODITIES: best bullish call of 2014 to-date is being long. CRB Index (19 Commodities) = +0.8% in a very red tape yesterday to +1.8% YTD vs $SPY -4% @KeithMcCullough


The higher a monkey climbs, the more you see of its behind. -Joseph Stilwell


19%: Facebook's growth might be slowing somewhat, but it keeps finding new ways to make money off of its users. The social network reported sales and profits that beat Wall Street's expectations, sending the social network's stock soaring. FB shares are up over 19% in premarket trading Thursday.


TODAY’S S&P 500 SET-UP – January 30, 2014

As we look at today's setup for the S&P 500, the range is 27 points or 0.97% downside to 1757 and 0.55% upside to 1784.                          










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.34 from 2.33
  • VIX  closed at 17.35 1 day percent change of 9.81%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init Jobless Claims, Jan. 25, est. 330k (prior 326k)
  • 8:30am: GDP Annualized q/q, 4Q Advance, est. 3.2% (pr 4.1%)
  • 9:45am: Bloomberg Consumer Comfort, Jan. 26 (prior -31.0)
  • 10am: Pending Home Sales m/m, Dec., est. -0.3% (prior 0.2%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change


    • 9:30am: Senate Energy and Natural Resources Cmte meets on whether to end ban on U.S. crude oil exports
    • 12:20pm: Obama delivers remarks at GE’s Waukesha Gas Engines plant in Wis.
    • 4:15pm: Sen. John McCain, R-Ariz.; Sen. Chris Murphy, D-Conn., speak at CSIS on trans-Atlantic ties
    • 4:50pm: Obama in Tenn. for economic opportunity speech


  • 4Q U.S. growth probably boosted by stronger spending
  • Facebook mobile push fuels bulk of sales to top ests.
  • Lenovo to buy Google’s Motorola Mobility for $2.91b
  • Google Motorola sale shows limits of Microsoft-Nokia strategy
  • Google’s Motorola sale underscores primacy of patent portfolio
  • Dassault Systemes offers $750m to acquire Accelrys
  • Starbucks CEO Schultz hands daily operations to CFO Alstead
  • China’s manufacturing shows first contraction in 6 months
  • German joblessness falls more than forecast as economy grows
  • Euro-area eco. confidence rises for 9th month on services
  • Qualcomm’s profit tops analysts’ ests. on smartphone demand
  • Ericsson CEO plans to stay amid interest from Microsoft
  • Shell CEO pledges spending cuts, asset sales to restore profit
  • Samsung sanctioned by U.S. judge in Apple patent lawsuit
  • J&J becomes first drugmaker to open clinical data to academics
  • Soros-backed OneWest said to seek buyers as prepares for IPO
  • Deutsche Bank suspends NY head of emerging FX trading: Reuters


    • 3M Co (MMM) 7:30am, $1.62 - Preview
    • ADT (ADT) 6am, $0.49
    • Airgas (ARG) 7:30am, $1.18
    • Alexion Pharmaceuticals (ALXN) 6:30am, $0.84
    • Altria Group (MO) 6:58am, $0.58 - Preview
    • AutoNation (AN) 6:15am, $0.76
    • Ball (BLL) 6am, $0.73
    • Bemis Co (BMS) 7am, $0.54
    • Blackstone Group LP (BX) 7am, $0.83
    • Brunswick (BC) 7:39am, $0.13
    • Cameron International (CAM) 7:30am, $0.96 - Preview
    • Cardinal Health (CAH) 7am, $0.84 - Preview
    • Celgene (CELG) 7:30am, $1.51 - Preview
    • CMS Energy (CMS) 7:30am, $0.37
    • Colgate-Palmolive Co (CL) 7am, $0.74 - Preview
    • ConocoPhillips (COP) 7am, $1.32 - Preview
    • Dover (DOV) 7am, $1.27
    • Eli Lilly & Co (LLY) 6:30am, $0.73 - Preview
    • Enterprise Products Partners L (EPD) 6am, $0.71
    • Exxon Mobil (XOM) 8am, $1.91 - Preview
    • Franklin Resources (BEN) 8:30am, $0.93
    • Harley-Davidson (HOG) 7am, $0.33
    • Harman International Industrie (HAR) 7am, $0.94
    • Helmerich & Payne (HP) 6am, $1.46 - Preview
    • Hershey (HSY) 6:58am, $0.86
    • Hillshire Brands Co (HSH) 7:30am, $0.50 - Preview
    • Imperial Oil (IMO CN) 7:55am, $0.93 - Preview
    • Invesco (IVZ) 7:30am, $0.57
    • L-3 Communications Holdings In (LLL) 7am, $1.98
    • Manpowergroup (MAN) 7:30am, $1.25
    • Northrop Grumman (NOC) 7am, $1.94 - Preview
    • Occidental Petroleum (OXY) 7:30am, $1.67 - Preview
    • Peabody Energy (BTU) 8am, ($0.10)
    • Pitney Bowes (PBI) 6:30am, $0.45
    • Potash of Saskatchewan (POT CN) 6am, $0.32 - Preview
    • PulteGroup (PHM) 6:30am, $0.45 - Preview
    • Quest Diagnostics (DGX) 7am, $0.93 - Preview
    • Raytheon Co (RTN) 7am, $1.35 - Preview
    • Royal Gold (RGLD) 8am, $0.23
    • Sherwin-Williams (SHW) 7am, $1.29
    • TECO Energy (TE) 7:30am, $0.20
    • Thermo Fisher Scientific (TMO) 6am, $1.38 - Preview
    • Time Warner Cable (TWC) 6am, $1.73 - Preview
    • Timken Co (TKR) 7:30am, $0.73
    • Under Armour (UA) 7am, $0.53 - Preview
    • United Parcel Service (UPS) 7:45am, $1.25
    • Valley National Bancorp (VLY) 7am, $0.14
    • Viacom (VIAB) 6:45am, $1.16 - Preview
    • Visa (V) 7:30am, $2.16 - Preview
    • Whirlpool (WHR) 6am, $3.03
    • Xcel Energy (XEL) 6am, $0.29
    • Zimmer Holdings (ZMH) 7am, $1.62 - Preview


    • Align Technology (ALGN) 4pm, $0.43
    • (AMZN) 4pm, $0.69 - Preview
    • Broadcom (BRCM) 4:05pm, $0.58
    • Canadian National Railway Co (CNR CN) 4:01pm, $0.77 -Preview
    • Canadian Oil Sands (COS CN) 5:01pm, $0.48 - Preview
    • Celestica (CLS CN) 4pm, $0.23
    • Chipotle Mexican Grill (CMG) 4:01pm, $2.52
    • Chubb (CB) 4:03pm, $2.04
    • CNH Industrial NV (CNHI) 4:44pm, $0.24
    • Computer Sciences (CSC) 4:15pm, $0.83
    • CR Bard (BCR) 4:05pm, $1.39
    • Eastman Chemical Co (EMN) 4:36pm  , $1.24
    • Google (GOOG) 4:01pm, $12.26 - Preview
    • JDS Uniphase (JDSU) 4:05pm, $0.14
    • Manitowoc (MTW) 4:25pm, $0.33
    • McKesson (MCK) 4:10pm, $1.84 - Preview
    • Microchip Technology (MCHP) 4:15pm, $0.61
    • NetSuite (N) 4:05pm, $0.07
    • PerkinElmer (PKI) 4:05pm, $0.70
    • PMC - Sierra (PMCS) 4:05pm, $0.08
    • Riverbed Technology (RVBD) 4:05pm, $0.31
    • Robert Half International (RHI) 4pm, $0.48
    • Validus Holdings (VR) 4:15pm, $1.56
    • Wynn Resorts (WYNN) 4:05pm, $1.75


  • Aluminum Touches Four-Year Low as China Manufacturing Contracts
  • Barclays’s Asia-Pacific Markets Business Said to Lose Eight MDs
  • Goldman Sees Gold to Corn Losses After Bear Markets: Commodities
  • Gold Horses Lead Chinese Retailers to Profit on Bullion’s Slump
  • WTI Rises to Four-Week High as U.S. Chill Boosts Fuel Demand
  • Gold Falls on Stimulus, Demand Outlook as Monthly Gain Narrows
  • Wheat Recovers From 42-Month Low on Speculation Demand to Build
  • Sugar Rebounds as India Fails to Discuss Subsidies; Coffee Gains
  • Rubber Near 16-Month Low as Yen Gains After Fed Cuts Bond Buying
  • Rebar Caps Worst Monthly Drop in Four on Iron Ore, China Holiday
  • Bird Flu Seen by Zhongda Futures Curbing Soybean Demand in China
  • Oil, Mining Stocks Face Emerging-Currency Risk: Chart of the Day
  • Capital May Shift Toward Gas as Prices Top $5 on Polar Vortexes
  • Natural Gas Poised for Biggest Monthly Gain Since 2009


























The Hedgeye Macro Team















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What's New Today in Retail (1/30)

Takeaway: HBI sandbag comes out -- but watch inflation. JCP taking up prices. China’s JD frontrunning Alibaba deal. TGT SHLD and Canada. AMZN Levis



AMZN - Earnings Call: Thursday 1/30, 5:00pm




Takeaway: Strong quarter for Hanesbrands with higher guidance that was entirely driven by Maidenform -- an acquisition that we're stated for a while that management is completely sandbagging on synergies. On the core business, trends were positive in October and November, but were inconsistent in January. Management cited weather as the primary factor. One factor that caught us by surprise was CEO Rich Noll's comment about inflation. We've never heard him say anything that's other than overwhelmingly positive about inflation -- in that it drives up their prices, and helps retailers make money. But this time he said that inflation was partially offset by product costs. That's still a positive trend. But let's keep a close eye on costs here. If they catch up to the price increases to retailers -- which is possible, then it turns into a margin-draining event.


What's New Today in Retail (1/30) - chart3 1 30

*adjusted for debt repayment expenses in Q412 and Maidenform acquisition charges in Q413


JCP - JCP hikes prices for bigger discounts later



  • " quietly jacking up prices on everything from jeans to kitchen appliances, a risky move designed to make room for steeper, more eye-catching discounts this year, sources told The Post."
  • "Chief Executive Mike Ullman...hatched the stealthy strategy this month with especially lofty markups in the jewelry department, sources said."


What's New Today in Retail (1/30) - chart1 1 30


Takeaway: The first step was getting things into the store that people actually want. Step two is raising prices to allow for discounting to protect Gross Margin. This all makes sense, actually. But the obvious risk is that sticker shock keeps some customers away. We're going to give Ullman the benefit of the doubt that he's managing this appropriately (even though we'd rather have someone else be managing it).


TGT - Target Sets Nine Canadian Openings in 2014



  • "Target Corp. intends to add nine stores to its 124-unit fleet in Canada this year, the majority of them in Ontario."
  • "Target, which acquired the rights to acquire up to 220 Zellers store leases from Hudson’s Bay in 2011, said it will open five stores in Ontario and single units in the provinces of Quebec, Manitoba, Alberta and British Columbia."


Takeaway: Why?


JD - files for IPO of up to $1.5 billion



  • ", China's second-largest e-commerce site, said on Thursday it plans to raise up to $1.5 billion in an initial public offering of American depositary shares."
  • ", which competes with Alibaba Group Holding Ltd, listed BofA Merrill Lynch and UBS Securities LLC as lead underwriters to its offering, in a filing with the U.S. Securities and Exchange Commission."
  • "Alibaba, which controls nearly 80 percent of China's internet shopping market, has been planning to list its shares but has struggled to reach an agreement with Hong Kong regulators over its proposed IPO, expected to be worth around $15 billion."


What's New Today in Retail (1/30) - chart2 1 30


Takeaway: JD is totally riding the coattails of big brother Alibaba. If there was ever a time to raise capital for JD, this is it. If they did it after the Alibaba deal, then they'd be competing in the marketplace against it's top business competitor -- and it would probably lose. But in anticipation of the Alibaba transaction, people will probably gobble this one up. Let's hope they don't get too greedy with valuation.


LS&C - Levi's Entering Men's Underwear Category



  • "Levi Strauss & Co. is getting ready to hit the men’s underwear category. The company confirmed that, beginning in fall 2014, it will begin to market men’s underwear and hosiery through two licensing agreements, one for the Americas region with Mad Projects Industries, a New York-based firm, and the other, for European markets, with Dobotex, the long-time Puma licensee of which Puma acquired full control in 2011."


AMZN - Amazon to Offer Kindle Checkout System to Physical Retailers



  • " Inc. plans to offer brick-and-mortar retailers a checkout system that uses Kindle tablets as soon as this summer, people briefed on the company's plans said."
  • "In one scenario, the Seattle company would give merchants Kindle tablets and credit-card readers, the people said. Amazon also might offer retailers other services, such as website development and data analysis, the people said."
  • "Because many of the largest physical retailers have extensive, complicated checkout systems that may be difficult or costly to give up, Amazon is likely to focus on smaller retailers."


SCC - Sears Canada Sets 624 Job Cuts



  • "Sears Canada will shed another 624 jobs in an elimination of middle-level managers in its full-line stores."
  • "The cuts, which follow the elimination earlier this month of 1,583 jobs due to reductions in its logistics operations and the outsourcing to IBM of positions in its customer contact centers, will result in an average decrease of five associates per store across its network of full-line stores in Canada." 



Persistently low Singapore hold is frustrating, but the dual appeal of this stock continues to grow.



The value and cash return part of the LVS thesis took a major turn positive last night.  For Q4, what would’ve been considered a great quarter one month ago should now be perceived as just ok.  LVS delivered a beat but on a hold adjusted basis.  As you know, I’ve liked LVS for a long time and certainly on the recent pullback.  However, I didn’t see Q4 as necessarily a positive or negative catalyst following the Q4 run up in stock price and positive estimate revisions.  We’ll get into what we liked and didn’t like about the quarter but the LVS story certainly got a lot more interesting last night.


For me, LVS began its transformation from a growth to growth/value/cash flow/cash return stock 2 quarters ago with a sharp dividend hike and the start of a meaningful share repurchase program.  See our 10/28/13 note “LVS: WHAT TYPE OF INVESTOR SHOULDN’T THIS APPEAL TOO?”


Minor “issues” with Q4 notwithstanding, that transformation took a few major steps forward last night.  Another ramp in stock buybacks, a huge dividend increase, and the revelation of yet another cash/value driver crystallizes the “other” side of the LVS story.  The growth side remains intact and should continue to attract the growth



As a born skeptic, I’ll hit on the negatives of Q4 first and then move to the overwhelming positive takeaways:


What we didn’t like:

  • Marina Bay Sands hold was low again. We’re using 2.65% as our normal hold, below theoretical and management’s recommendation for normal.  But 1.92%?  Until they can post a good hold Q, investors are going to assume low hold is structural and that could continue to suppress MBS’s valuation.
  • Rolling Chip volumes were 2% below our expectation and promotional expenses were a little higher.  However, slot volumes were better, RevPAR off the charts, and Mass was in-line.
  • Expenses were higher than we thought in Macau but given the rapid growth in volumes in Q4, this isn’t that surprising

What we liked:

  • Sequential dividend hike of 43%.  Though a monster growth story, LVS now yields 2.7%, above the S&P yield.
  • For the 2nd straight Q, LVS repurchased more than $200MM in stock at an average price near yesterday’s close
  • Despite dividend increases and share repurchases, net leverage is only 1.3x. Management indicated they would be willing to go 1.5x higher.  An increase to their limit would generate an additional $7 billion cash return to shareholders.  Phenomenal.
  • Another major value enhancer, management indicated they are commencing the approval process to sell retail assets that could drive another $12-14 billion in cash.
  • Venetian and Four Seasons volumes were terrific but held below normal.  Low hold on Mass is NOT included in management’s projection for hold adjusted EBITDA.
  • Management was bullish regarding the prospect of casinos in Japan and its prospects for a license in that country.  They consider MBS’s appeal to Japanese tourists and convention planners as a major selling point to the Japanese government.


The usual hold concerns at MBS could weigh on the stock as usual, but the takeaways from last night are overwhelmingly positive.  Any price weakness should be seen as an opportunity.  After all, how many other stocks can offer this kind of growth and value while lining your wallet with a rapidly growing cash stream?

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