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PM: Strong Pricing in Challenged Geographies

PM reported strong Q4 2013 results yesterday with revenues of $7.78B (slightly missing consensus expectations of $7.81B) and adjusted diluted EPS that beat consensus by 1 cent at $1.37. 


The headwinds we see for the company over the next two quarters have not changed – what’s impressive however is how well PM has been able to take pricing in the quarter to make up for volume declines and tax increases across most of its geographies. Overall volume declined -4.3% in Q4 and -5.1% in FY2013 while net pricing rose a robust +6.9% in Q4 and +6.6% in FY2013. Additionally, the company gained market share in all four of its main regions.


Concerns for us over the coming quarters remain volume declines in many of its core geographies on additional excise tax hikes, weak macro and consumer environments, and currency and illicit trade headwinds. In 2014, excise tax hike concerns remain in Japan, Indonesia, and the Philippines; weaker macros include Europe and Russia; and we expect currency weakness across much of the emerging market, including the Russian Ruble, Turkish Lira, and Argentine Peso, as the illicit trade across the region skims results.   


The company announced that it has issued 60% of its pricing for 2014 as of today (versus ~75% this time last year). We think the significant risks to it making its 1H numbers include: its ability to take additional pricing in Japan (it has submitted requests to the government for price hikes in April but has yet to be approved); weakness beyond its forecasts in the Philippines as the Mighty Corporation continues to undercut price (it only declares half of its production for tax); and macro weakness in Europe beyond its forecast of -6% to -7% (versus previous 2014 guidance of down -7% to -8%).


The company forecasts EPS guidance for 2014 of $5.02 to $5.12 (including a currency headwind of $0.71). It said it expects industry volumes to be down 2-3% in 2014 (ex-China), versus ~4% in 2013 and it will spend $4Billion in share repurchases in 2014 versus $6B last year. The company spent a very small amount of time discussing its Reduced Risk Products (RRPs), including e-cigs, despite major investments and partnerships that were announced in Q4 of last year -- this is concerning unless the company is particularly good at hedging its excitement about the segment (and contribution to earnings down the line). Remember late last year it announced  €500MM to build a RRP manufacturing facility in Italy, to be operation in 2016 with capacity of 30B units, and a strategic partnership with Altria (MO) to sell and partner with its non-combustion technology.  


We’ve had a bearish bias on the PM over the last two quarters and continue to suggest a pair trade of long LO versus short PM. See chart below on price performance.


What We Liked

  • Illicit trade in Europe has moderated. Sales in back half of 2013 have moderated versus larger declines in1H 2013.
  • In EU Region grew market share by 0.5% to 38.5% in 2013 vs 2012. Increases were across all brands.
  • Russia strong: pricing actions expanded profitability despite volume -7.6% in Q4. It increased pricing in December, and expects another hike at the end of February.  Volume in 2014 expected to be down 9 to 11%.

What We Didn’t Like

  • Japan still remains a challenged market. Company believes it will be able to fully meet consumption price tax increase in Japan from 5% to 8% in Japan in April with pricing, however risk that the government doesn’t approve it.
  • PM says demand for e-cigs in Europe has decelerated, which PM posits should boost traditional cigarette volumes in 2014.
  • Italian tax environment continues to be unfavorable.
  • Moderation in Turkey results on increased competition in Low and Super-Low segment. 

Call with questions. Have a great weekend!


Matt Hedrick


PM: Strong Pricing in Challenged Geographies - yy. spread


This morning’s Employment data for January confirmed the slowdown observed in December and, on balance, was a disappointment vs NFP consensus at +180K. 


We highlighted, in detail, the emergent deceleration in the domestic, fundamental macro data in our flash call on Wednesday. 


The link to the presentation and replay is below and I would direct you to that for a fuller discussion of the data and how to be positioned for (on the margin) #InflationAccelerating and #GrowthDecelerating.







BULL/BEAR:  The January employment data was soft on balance but again offered a bevy of talking points for the bull & bear contingents.


On the BEAR side, the Establishment Survey was weaker for a second month with Non-farm and Private payrolls increasing +113K (vs. +180K exp.) and +142K (vs. +185K exp), respectively. 


Further, there was no meaningful, positive revision to the December figures which were revised +1K to +75K. 


With the NFP numbers now beginning to decelerate on a Trend (3M/6M) basis the implications for prospective policy adjustments become more substantive.   


On the BULL side, the incremental improvement in the unemployment rate to 6.6% was a function of positive dynamics, specifically higher employment and higher labor force participation.  


The Household Survey showed a strong gain in employment with an estimated +638K jobs added in January with Total Unemployed dropping -115K sequentially. 


The labor force participation rate increased to 63% from 62.8% as the net change in the labor force (+523K), driven by the positive change in employment, increased at a premium to the +170K increase in the Civilian Population. 


Overall, despite the ongoing decline in the U-3 rate, the preponderance of labor market metrics remains largely middling – expect the Fed to highlight that reality and increase discussion around an inflation floor or similar as we move toward breaching the unemployment ‘target’ on the downside.  




SEASONALITY:  The marked deceleration in the reported, seasonally adjusted payroll numbers is, perhaps, even more remarkable given that seasonality should be serving to buttress the numbers as we build towards the positive peak in seasonality in February. 




INDUSTRY EMPLOYMENT: Construction and Manufacturing were the notables, reversing last month’s weakness, gaining +48K and +21K, respectively


The laggards were Retail (-13K) and Education and Health Services (-6K).  In fact, Healthcare saw a net decline in employment MoM for the first time since July 2003!




GOVERNMENT EMPLOYMENT:  Federal Gov’t Employment Declined -12K MoM  (-4K ex-Postal Service).  State & local Government lost -17K jobs in December, but on a year-over-year basis growth remains positive at +0.17%. 


HOURS & WAGES:  Hours and wages, which shouldn’t show material distortion from weather, were largely flat sequentially.  Weekly hours worked held at 34.4 while hourly earnings grew +1.9% YoY – note that the longer-term trend in wage growth is ~ +3% and with PCE growth running at +3.6% as of the latest December reading, wage growth has some heavier lifting to do to maintain the current pace of household spending.


WEATHER:  Unlike last month, employees out of work due to bad weather wasn’t an upside outlier in January.  BLS reported that 262K individuals missed work due to inclement weather in January, which compares to the longer-term January average of ~250K. 




CES Benchmark Revision: The BLS revised the total nonfarm employment level for March 2013 upward by 369K with the total level of NFP employment for year-end 2013 revised from 136.9M to 137.4M, or a positive revision of ~500K. 




Employment By Age:  Employment growth by age accelerating sequentially for all age cohorts except 20-24 year olds.   Despite the sequential improvement from -0.9% YoY to -0.5%, 45-54 Yr. olds remain the lone age demographic still mired in negative employment growth.  With the exception of a few months in mid-2012, 45-54 years olds have yet to see positive job growth in any post-recession month according to BLS data.





Christian B. Drake


Sell'em: SP500 Levels Refreshed

Position:  4 Longs, 5 Shorts @Hedgeye


We highlighted the emergent deceleration in the domestic fundamental macro data in a flash call on Wednesday (ping for the replay) and, on balance, this morning’s payroll data confirms that broader slowdown.   


Sure, there was plenty of fodder for both perma-camps in this morning’s employment release with the Establishment Survey discretely soft (+113K vs 180 exp) while the Household Survey (+638K employment, 6.6% Unemployment, Higher Participation Rate) was almost unanimously positive – but from a quantitative perspective, virtually nothing has changed. 


The dollar is down and ten year yields are off 3bps with equities bouncing on the expectation of Yellen-being-Yellen in the face of #GrowthSlowing


So, inclusive of this morning’s price action, the SPX, $USD and 10Y all remain Broken TREND while the VIX remain in BULLISH Formation and well above TREND Support at 14.91.


For the S&P500, here are the lines that matter:

  1. Intermediate-term TREND Resistance = 1786
  2. Immediate-term TRADE Support =1735
  3. Long-term TAIL support = 1683


In other words, if we can’t close above 1786 with volume confirming and the price signals across the constellation of macro factors mentioned above corroborating, further drawdown risk remains acute and we’ll remain sellers of strength.   


Still keeping it tight here with a low gross and tight net.   


Christian B. Drake


Sell'em: SP500 Levels Refreshed - Levels


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Mr. Market: Beware of Disappointing Growth

Takeaway: The market is signaling that growth is poised to continue to disappoint.

Editor's note: The excerpt below is a complimentary look at Hedgeye's Morning Newsletter written by CEO Keith McCullough. This morning's missive was delivered by Daryl Jones, Director of Research, who filled in for Keith who is currently meeting with institutional clients in Boston. To learn more about Morning Newsletter click here

Mr. Market: Beware of Disappointing Growth - hedgeye slab

Currently, the SP500, Dax and Nikkei are all broken on the TREND duration (three months or more) in our quantitative model.  Conversely, equity market volatility via the VIX and U.S. Treasury bonds are breaking out to the upside.


Clearly, the market is signaling that growth is poised to continue to disappoint.  In the year-to-date, the score on that front is really crystal clear.   In the “Chart of the Day,” we show a summary of the 34 U.S. economic indicators that we focus on.  As the table shows, 23 of those indicators slowed from December to January.  Not even the best portfolio defense is going to stop an equity market that is going down because of that kind of economic deceleration.

Mr. Market: Beware of Disappointing Growth - glass

In my mind, the most disturbing recent data point was the ISM Manufacturing New Orders reading for January.  On a month-over-month basis, new orders were down -13.2, which is the largest single month decline since December 1980, or more than 30 years ago.  The economy slowed from December to January and if forward looking orders are any indicator, it is not out of the woods yet.


Yesterday, the weekly initial jobless claims data was released and they were largely a non-event, though even there we are seeing incremental slowing.  We key off the year-over-year rate of change in rolling NSA (non-seasonally adjusted) initial jobless claims. This week the data was better by 5.5% vs the same period last year. However, if you compare that with the preceding three weeks of data, it reflects a modest deceleration. The last four prints have been: -8.5%, -7.9%, -7.2% and -5.5%. So, yes, the strength of the labor market has cooled off modestly.


On the labor and employment front, the January Employment Report at 8:30am will be the main event this morning.  Currently, consensus estimates are for 180,000 jobs to be added in January.  It is also widely expected that last month’s big miss will be revised significantly higher due to weather.  So, the expectations table has been set but, as always, expectations are likely to be the root of all heartache.


…perhaps today’s employment report is highly positive and gets the market back into bullish beast mode, though the probability seems higher that today is a non-event with the potential for a mild disappointment.  But, as always, by 8:31 a.m. it is definitely going to be all about that action.


Speaking of action, we finally got some validation on our short thesis on Twitter yesterday as the company reported its first quarterly results as a public company.  Admittedly, revenue did beat our number (although that was obviously priced in), but Twitter showed a real deceleration in user growth and user engagement.  On that last point, user engagement, as measured by time line views, was down -3% year-over-year . . . not good for a growth company.


… $TWTR remains on our Best Ideas list as a short.  Email us at sales@hedgeye.com if you want to review our 50+ page short report on the company.

Mr. Market: Beware of Disappointing Growth - Beast Mode 020614

Join the Hedgeye Revolution. 



[video] Macro Notebook 2/7: ASIA EUROPE UST10YR

Downside Risk Remains

Client Talking Points


Sure, Asia bounced across the board... but there are two important caveats. A) the Nikkei's +2.2% bounce (it's still down -11.2% year-to-date) is not seeing any bearish Yen follow through; B) not one single Asian equity market bounced back above our Hedgeye TREND resistance. Careful.


European stocks continue to look better than their U.S. or Japanese counterparts. (Italy up +2.9% and Spain +1.4% year-to-date). But the pre-US-jobs-lottery report bounce isn’t doing anything for the DAX or FTSE; both broke my TREND lines this week.


The bounce in the 10-year yield looks identical to the bounce in the S&P 500 – lower-highs, and still well below what’s developing as TREND resistance up at 2.80%. That’s probably why Gold still looks good this morning. If the jobs report isn’t good enough, you buy Treasuries, Utilities, and Gold and short the Consumer (XLY).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.

Three for the Road


Expectations are the root of all heart ache . . .Jan US Nonfarm Payrolls +113K vs. StreetAccount consensus +175K @HedgeyeDJ


"If you think you are too small to be effective, you have never been in the dark with a mosquito." - Betty Reese


Apple bought $14 billion of its own shares in the two weeks since reporting financial results that disappointed Wall Street. With the latest purchases, Apple has bought back more than $40 billion of its shares over the past 12 months; a record for any company over a similar span. (WSJ)

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%