Snap, Crackle, Pop?

Client Talking Points


Financials snapped our Hedgeye TREND line this week and closed just above it yesterday (TREND = 21.21). This is the single most important sector signal for me today. Right now the Yield Spread is compressing -- fast -- as the 10-year yield remains below our TREND  of 2.80%. Meanwhile, whatever yesterday’s low-volume U.S. stock pop was (month-end?), it’s not popping this morning.


Most of Asia was closed last night (Happy New Year!) but I found it very interesting (revealing) to see them sell the Nikkei in the face of a U.S. bounce. The Nikkei is now confirming bearish TREND at -8.4% year-to-date. 


Copper is diverging negatively versus the CRB Index (commodities) as it slices back through our Hedgeye TREND support of 3.31/lb. Not all commodities are the same obviously – copper’s long-term supply (mining) bubble remains very relevant.

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


Amazon now bigger than Target on revenues, 5x larger mkt cap, 1/5th as much income @JeffMacke


"The world ain't all sunshine and rainbows. It is a very mean and nasty place and it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain't how hard you're hit; it's about how hard you can get hit, and keep moving forward. How much you can take, and keep moving forward." - Rocky Balboa


It’s been 835 days without a 10% correction. That’s the 5th longest streak of its kind, and the third in the past 25 years. Of course, it still has a long way to go to compete with the mystifying seven-year stretch starting in 1990, when we had 2,553 correction-free days. (Bespoke)

Valuation Shmaluation

“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.”

-Albert Einstein


Valuation is an analytical staple in deciding whether an asset, company or asset class should be bought or sold.  The challenge with valuation? As a decision making tool, the inputs are often more important than the outcome.  Regularly on Wall Street, especially when some of the large investment banks are involved, valuation becomes an even more amorphous thing.


Yesterday our CEO Keith McCullough discussed price targets for the S&P 500 in 2014 (see video "Is Consensus Too Bullish?") that are being established by some of our peers and the arbitrariness of the multiples being applied to come up with the target.  Now to be fair, coming up with a view on the future price of a market is difficult at best because as Einstein notes all the factors that matter “cannot necessarily be counted”.   (In part, this is why we stay away from precise long-term price targets on the broad market.)


Valuing a company has its challenges as well.  Take for instance the Kinder Morgan companies, which are a massive group of pipelines, terminals and oil and gas productions assets cobbled together by billionaire Rich Kinder over the years.  We are currently short $KMI and $KMP on our Best Ideas list because we, simply put, think the company is grossly overvalued.


I won’t steal his thunder but my colleague Kevin Kaiser will be giving an update on his short thesis on Kinder Morgan today at 1pm EST and his presentation starts with the following views on valuation:

  • “Cheap” is a LONG WAY DOWN.  We believe Fair Values are:
    • KMI: $15 - $20/share
    • KMI Warrant: near $0
    • KMP/KMR: $30 - 40/unit (Preferred Way to Play This)
    • EPB: $25 - 30/unit

As always valuation is an opinion, but this opinion is way outside of consensus and likely worth considering if you are invested in or looking at Kinder Morgan.  Please email for details.


Back to the Global Macro Grind...


In my inbox last night was a summary note on the equity markets that was titled, “Equities Explode.”  I’m hoping it was a tongue in cheek title because up 1.1% on less than impressive volume was far from an explosion.  In the Chart of the Day today, we take a look at the last three weeks and highlight the point of accelerating volume on market down days.  


The equity bulls are trying to regain the market’s upward momentum, but meanwhile the bond bulls have just experienced the euphoria of a meaningful move in rates.  Since January 2nd the 10-year bond yield has declined from +3.0% to the most recent yield of +2.7%, for a +12% expedited move down in the last twelve days.   So, now the Fed has finally starting tightening by the way of tapering, why are yields falling?


Simply put, economic growth is decelerating in the U.S. and Mr. Market is beginning to price this in.  As a result, the SP500 is down -2.9% on the year and the VIX is up +26.0%.  We see these market signals even more glaringly in sector performance.  The only sectors that have had positive performance in the year-to-date are healthcare up +1.8% and utilities up +2.1%.  Meanwhile the most negative two sectors in terms of performance are staples down -4.7% and energy down -4.6%.


In a recent book by Frank Partnoy, he shows that decisions of all kinds, whether “snap” or long-term strategic, benefit from being made at the last possible moment. The art of knowing how long you can afford to delay before committing is at the heart of many a great decision—whether in a corporate takeover or a marriage proposal. 


The reality in the investment management business though is that you literally can’t wait until the last minute unless you have unlimited duration on your capital, like say Warren Buffett.  The rest of us market minions actually have to try and stay ahead of market moves and shifts in economic outlook.  This is why in our macro process identifying economic and market changes on the margin is so critical, and why long term valuation targets can be so misleading.


The question of course is whether it is possible to front run (legally) moves in the market.  For example, did any of the bulls on Japanese equity shift quickly enough in 2014 to avoid the almost -9% drawdown in the Nikkei in January? Perhaps, but unlikely.  After all it is human nature to value and project things for perpetuity based on the most recent data points.


An example is Kinder Morgan using $95 oil in their projections for oil or European bears projecting an abject failure of European markets when the sovereign debt turmoil was at its worst.  On the last point, the healing of Europe and European credit markets has been staggering over the past few quarters.


Currently, the Spanish 10-year yield is +3.73% and the Italian 10-year yield is +3.85%, which are literally the lows for the Eurozone.  This morning Italy also sold five year notes at a record low yield of 2.43% with a bid/cover of 1.49 versus a bid/cover 1.28 on December 30th.


This rampant improvement in European sovereign debt obviously begs the question of whether we are closer to the bottom then the top in European debt.  But one thing is for certain, if the European debt markets are again working fluidly, it is positive for corporations that need to borrow to grow. It also begs the question of whether a short European debt and long European equities play is the best relative value play around.  But, as they say, valuation shmaluation!


Our immediate-term Global Macro Risk Ranges are now:


SPX 1 (bearish)

Nikkei 141 (bearish)

VIX 15.31-20.41 (bullish)

USD 80.17-81.19 (neutral)

Gold 1 (neutral)


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Valuation Shmaluation - Chart of the Day


Valuation Shmaluation - Virtual Portfolio

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Game Changer?

Takeaway: In over two decades covering this game, I have never seen such an effective jab thrown at Nike.

Under Armour's UA Speedform™ Apollo Breaks New Ground

  • "As part of the brand’s four-day take-over of New York City’s Grand Central Terminal, Under Armour held a press event today to debut the UA SpeedForm™ Apollo running shoe and 'THIS IS WHAT FAST FEELS LIKE,' the newest iteration of the brand’s I WILL™ global marketing campaign."
  • "Under Armour Founder and CEO Kevin Plank unveiled the latest spot and introduced the game-changing running shoe, which was recently named 'Best Debut' by Runner's World magazine in the 2014 Spring Shoe Guide. NFL Pro Bowler Cam Newton, MMA legend Georges St-Pierre and American Ballet Theatre® soloist Misty Copeland joined Plank at the event."

Game Changer? - ua1


Takeaway from Hedgeye Retail Analyst Brian McGough: In over two decades covering this game, I have never seen such an effective jab thrown at Nike. This Speedform shoe is a direct response to Nike's FlyKnit -- which uses a modified cotton loom to weave the upper. UA responded by using its compression fabric and technology -- which it is producing in a bra manufacturing plant -- to create similar product that eliminates waste, lowers cost, and just flat-out looks cool.


Of course, they followed up with an edgy ad that will likely get consumers pumped about the product, while simultaneously making a few hundred people in Beaverton irate at the competitive response. If one thing is certain, it's that when Nike and UnderArmour compete head-to-head (and even AdiBok -- when they show up to the game), the retailers and the consumers always win. 

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JANUARY 31, 2014

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Bad baseball references aside, we were relieved to see Wynn’s Mass aggression drive high revenue growth and deliver an outstanding quarter.



“Whoa! You guys are way too high” – Hedgeye client in December regarding our Q4 EBITDA estimate


Au Contraire Mon fraire.  Wynn beat our Street high EBITDA and EPS estimates quite handily, although high hold in Las Vegas certainly helped.  While there weren’t quite as many positive longer-term takeaway as with LVS the day before, WYNN’s quarter was certainly stronger. 


WYNN became our favorite long in the gaming space in early December.  As we articulated in our 10/25/13 note “WYNN TO FEAST ON THE MASS COMPETITION”, Wynn Macau began (finally) to push Mass marketing and promotional activity in October.  For this reason, the stock moved into our #1 position in the space – WYNN was going to become a growth story again!  The bear thesis that Wynn Macau was running at full capacity? Not true.  


Well, once again Steve Wynn knocked it out of the ballpark – or as Wynn Macau’s GM Ian Coughlan said, “we smacked others out of the park”.  We can forgive the Irish lad for the not so perfect baseball reference, after all he is great at hurling references I’m sure, and of course running Macau properties. 


As we saw from the monthly Macau GGR reports, Wynn was a Mass market share gainer in Q4 and clearly the flow through was quite strong, as we saw from the earnings release.  Shareholders are rejoicing that there is a near-term angle to this great long-term story.




Speaking of the long-term, we again heard an interesting South Korea reference.  Steve Wynn mentioned he was in Seoul last week on top of Sheldon Adelson, unsolicited, bringing up the prospects for South Korea integrated resorts during the LVS conference call Thursday night.  South Korea has fallen into the background with all the Japan focus but as we wrote about last year, it’s a real and potentially huge market.  Back to Japan, here is where we heard arguable the only negative takeaway.  Steve Wynn laid out a longer time horizon – possibly 2 years – for the legalization of gaming in Japan.


So where do we go from here?  After a likely strong opening today, WYNN should trade within 5% of the January 17th high.  More near-term catalysts remain.  Notwithstanding bad luck at Wynn Macau here in January, Wynn should continue to pick away a little Mass market share over the coming months.  Moreover, market growth should accelerate into the 20%+ area in February from 11-15% here in January.  Longer-term Wynn may not be quite as well positioned at LVS but it’s hard to argue against this other long-term growth/cash flow story.

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