This note was originally published at 8am on January 23, 2014 for Hedgeye subscribers.
“In theory, there is no difference between theory and practice. In practice there is.”
I had a ton of feedback on yesterday’s Early Look (on how and why I use Twitter), so I wanted to thank you for that. Without having to answer to and consider your objective questions and thoughts, I’d just be a man in a room who is hostage to my own thinking. #scary
Your feedback generates more questions and ideas for our research team to work on. So I decided to take 6 minutes to walk through who scores as The 3 Most Overrated Economists in The World (for @HedgeyeTV video CLICK HERE ). I also crowd-sourced (on Twitter) who my followers thought were the most overrated. We came up with completely different answers.
Today, I’d like to throw that right back at you and add the follow-on question – who are The Most Underrated Economists (and/or strategists) that you follow? This has nothing to do with being mean or nice. This has everything to do with competence. We all need to find a better way. In theory, there are “experts” spewing on TV all day long. In practice, you (the players) know who gets it.
Back to the Global Macro Grind…
#Davos is a big deal. CNBC focused on Matt Damon’s "Save the World’s Water" thing yesterday and Reuters is all over actress Goldie Hawn this morning. Up next, after living large last night, Nouriel Roubini is Snapchatting the world a picture of him pecking Arianna Huffington on the cheek.
In other news, 2 of our Top 3 Global Macro Themes are trending in markets this morning, big time:
On Inflation, just to clarify:
Got Commodity inflation in 2014 YTD?
In stark contrast to what you would have seen in the Hedgeye Asset Allocation Model for the better part of the last year (0% allocation to Commodities), we have a 9% asset allocation to Commodities right now. From here, that’s going up, not down.
In Real-Time Alerts we are long of Gold in Gold terms (GLD) and Coffee via the CAFÉ (take the little chapeau off the French spellchecker and you’ll see the Coffee ETN – not a perfect security, so if you’re an Institutional investor, just buy the futures).
On the other side of this Q1 theme, there are plenty of short ideas to sink your teeth into; Restaurant Shorts in particular (Slowing Sales and Rising Food Costs). This is the highest # of short ideas our Food/Bev guru Howard Penney has had since 2008. He held a Best Short Ideas call last week @Hedgeye on Cheesecake Factory (CAKE). And he’ll write the Early Look for you tomorrow.
With Roubini going bullish, got short ideas? Here are some high-quality Food #InflationAccelerating ideas currently in Real-Time Alerts:
In other words, 50% of my #timestamped short book is in Restaurant Shorts (10 LONGS, 8 SHORTS currently @Hedgeye after selling into yesterday’s all-time Russell2000 high of 1181).
In another @HedgeyeTV video this week titled Here’s What’s Working (for video CLICK HERE), I made a very simple point about our #GrowthDivergences theme (which syncs with #InflationAccelerating): country and sector picking matters as much as stock picking right now (i.e. pick the right sectors in the right countries and you’ll look like a good stock picker!).
If you really want to boil that macro point down, for now you want to be:
A) Long Inflation Expectations assets (like breakevens)
B) Short US Consumption assets (like restaurants)
Since the European growth recovery is 1-2 years behind the US (and most of Asia, including Japan), that’s the other reason why we think you’re going to continue to see European Equities outperform the Global Equities league tables.
Remember, in theory consensus might think it’s about absolute levels of growth. In practice, it’s all about the rate of change of growth. And that’s all I have to say about that.
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
In preparation for BYI FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.
SYSTEMS GROSS MARGINS
WAP YIELD/INSTALLED BASE
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Below we update the chart of PMIs (Manufacturing and Services) for the month of January -- the Eurozone aggregate continues its bullish outlook in expansionary territory above the 50 line.
From a research perspective, we continue to see strong European PMIs, a reduction in sovereign debt levels, and outperformance from the periphery (of note is Spain) as continuing signals that support our Q4 2013 and Q1 2014 macro themes of #EuroBulls and #GrowthDivergences, respectively, that forecast a bullish growth recovery in Europe, specifically with a bullish outlook for UK and German equities and the British Pound vs the USD.
While our research view remains intact, we want to make note that our fundamental view has currently diverged from our quantitative view with key signals coming from the TREND lines in the DAX and Russian equities breaking down. While we’ve favored European equities over U.S. equities on the margin in 2014, the signal here trumps the research and so we are not invested in European equities in our Real-Time Alerts Portfolio.
As the signals change, we change. It’s after all not always the case that our fundamental view matches our quantitative view… and we’re fine with that. Managing risk is dynamic.
Takeaway: Keep your head up out there. You don't want the Fed to smash your face in.
By Keith McCullough
Earlier this morning, a listener on my firm's morning macro call asked me an important question.
What is the biggest threat to the bear case right now?
Economic growth slowing?
Emerging market contagion?
Janet “Mother of All Doves” Yellen reverting the Fed back to full blown dove?
Stop right there. From my market perch, the greatest threat to the bear case right now is Janet Yellen. In other words, Janet Yellen being Janet Yellen.
Here’s how this risk might hypothetically play out: our new, all-knowing, omnipotent Fed Head recognizes a day late and a dollar short that growth is slowing. She says to herself, “We’ve got to stop this tapering!” She picks up her phone, calls the Fed’s mouthpiece Jon Hilsenrath over at the Wall Street Journal, and shows him her cards.
You know what happens next. Someone gets an early whiff of the leak. Voila! “Suddenly” the S&P 500 is up 5 percent. Just like our Founding Fathers envisioned in 1776.
That there is the key risk to being bearish right now.
The other risks? They are “known knowns.” I’m not worried.
Emerging market contagion? Are people seriously still debating that? We’ve been bearish on emerging markets for over a year now. That’s nothing new and certainly not something I’m losing any sleep over at night. Look, emerging markets have been a total disaster. Just to get anywhere near back to breakeven, emerging market bulls are probably going to have to fast forward to the year 2020.
Incidentally, the “Tail” line (a duration of 3 years or less in our model) of support on the S&P 500 is 1,683. That’s the key line to keep in mind. The “Tail” is really important because it’s binary. (I can get you a lot lower than that if I were to use fundamentals.)
What I mean by that is that when you break the “tail,” there’s basically no support whatsoever down 300-400 points below. It’s really not something you want to mess with. The corollary is like walking up to some dog you don’t know and pulling on its tail. Now, you can go ahead and roll the bones on that. Have at it. Maybe the dog will even lick you. But there’s also an outside chance it’ll turn around and bite your arm off.
As far as the “Trend” (a duration of 3 months or more) is concerned, it has the best back test in our model. The math works really well here. When trends reverse from bullish to bearish (or the other way around), that’s when we make our best calls, because it’s typically where consensus gets caught offside’s. I really like to lean when the trend breaks one way or another.
Right now, the trend is breaking the wrong way, and gold is breaking the right way. That’s why we’re doing literally the opposite of what we were doing a year ago. If you were on our morning macro call a year ago, you would have heard me saying short gold and buy U.S. stocks.
A lot of people are still scratching their heads over this pullback. Why? The writing was on the wall. The Financials (XLF) -2.5% snapping our TREND last week was a huge signal. It was one reason why we were advising caution, getting short, and telling people to look out below. (For the record, if my S&P 500 line wasn't broken, I'd be buying the damn-bubble like I did numerous times recently. But it is. And bubbles pop.)
At any rate, the biggest bear risk right now is clearly “Mother Dove.” She’s the most important wild card that I would be worried about right now.
Central Planners remain the greatest market and economic risk out there.
HAIN reported its fiscal Q2 2014 earnings after the close yesterday. The report was mixed: while the company achieved double digit sales growth in the quarter, the trend is slowing, and CEO Irwin Simon noted commodity headwinds in the remainder of the year. While we remain bullish on HAIN’s portfolio – which meets customer demand of organic and natural products – we think this richly valued stock is heading lower based on our quantitative setup and profitability concerns in an environment of #InflationAccelerating.
The stock took a leg down after the print and has traded down as much as -10% intraday today.
As you can see from the chart below, sales of $535M in the quarter (an increase of 17.5% Y/Y) took a leg down in the quarter. The Q&A was filled with the management team explaining away what was a weaker quarter based on price and inventory shifts, particularly in the U.S. and U.K. that negatively impacted results.
Gross margins fell in the quarter (26.8% vs 28.7% in the year-ago quarter) and we think investors are concerned with rising commodity prices in 2014, in line with our macro team’s Q1 theme of #InflationAccelerating. Starting with a base of higher costs to produce organic and natural products, its two largest commodities in almond and dairy have already seen significant price gains. The company expects its basket of commodities to inflate by +3.2% this year – we think a big threat to the company is its inability to expediently take pricing, especially in a macro environment that see the consumer still challenged in the U.S. and Europe.
We’re bullish on the company’s recently completed acquisition of Tilda (a rice company) and its integration in the Middle East and Asia, in particular. The company boosted its full-year earnings and revenue outlook, now expecting per-share profit of $3.07 to $3.15 and a top line of $2.12 billion to $2.15 billion. In November, the company said it expected $2.95 to $3.05 and $2.03 billion to $2.05 billion, respectively.
Call with questions,
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