“As teachers, we want to move people.”
That’s such a simple but solid leadership thought from Daniel Pink in the latest #behavioral book I’ve cracked open, To Sell Is Human (pg 39). “The capacity to sell isn’t some unnatural adaptation to the merciless world of commerce. It is part of who we are.”
Pink goes on to make an astute point about the information laden world in which we now live in, suggesting that the most successful companies are going to be “curators and clarifiers” of everything that’s being tweeted, googled, and facebooked at you “… helping to make sense of the blizzard of facts, data, and options…” (pg 56)
While we have plenty of work to do, lots of people to hire, and many improvements to make, that’s pretty much how we see Hedgeye helping you. We aren’t waking up every morning to punch clock. We want to synthesize and analyze every lick of information we can find, and move you to move when consensus won’t.
Back to the Global Macro Grind…
Moving you out of consumer growth stocks and into Commodities, Gold, and Bonds is where we’ve been at now for almost 6 weeks. That didn’t change at yesterday’s low-volume-lower-high for the SP500 either. That’s where we tried to move you more aggressively.
Getting people (including ourselves) to move isn’t easy. We get that. We also get that we need to build your trust in our process so that you understand why we are telling you that we think you should move and when.
Our communication process continues to evolve, but the best way for us to move you is:
- Get up at the top of the risk management morning and write you this strategy note every day
- Update you on the top trending Macro Themes that we don’t think are yet consensus
- Dynamically update (real-time) both our asset allocation and long/short position shifts
In terms of asset allocation shifts, you see that in the Early Look every day – the big ones in the last 2 months have been:
- Raising Commodities from 0% for most of last year to 15% this morning
- Raising Fixed Income from 0% for most of last year to 15% this morning
- Cutting our US Equity exposure from our top allocation for all of 2013 to 0% this morning
Yep. I’m un-elected too don’t forget. When I want to move you, I can cut to 0% too!
And that’s really the point. We get that each and every person reading this note has different risk tolerances and investment durations. But you don’t pay us to boil the ocean on every single thing for every single person. I think we’re more like your Big Macro weather insurance policy. When we want you to get out of something, we mean it.
On the long/short signaling shifts, the only way for me to show everyone what I really think and when is via #RealTimeAlerts:
- In the last 3-days (on the way up in stocks), I went from 4 LONGS, 6 SHORTS to 4 LONGS, 10 SHORTS
- Of the 4 LONGS, I sold equities like WWW and replaced them with bonds (yesterday bought BND)
- Of the 10 SHORTS, I re-shorted most of the names we covered when the SP500 was on its YTD lows
As you all know, I don’t always nail it in terms of my net positioning and long/short security selection. But that’s not the point about giving you 100% transparency in terms of what we do and when. The point is to help you A) understand why we are moving and B) hold us accountable to the timing of every move we make.
Back to the macro market, the most important things in my notebook this morning are as follows:
- US Dollar Index continues to breakdown, testing its YTD lows, confirming its bearish @Hedgeye TREND
- US 10yr Treasury Yield of 2.74% failed to overcome @Hedgeye 2.80% TREND resistance
- SP500 has immediate-term TRADE downside to 1728
- VIX has immediate-term TRADE upside to 20.41
- Yen continues to signal a bullish developing TREND vs USD (very bearish for the Nikkei, -10.8% YTD)
- CRB Commodities Index outperformed SP500 again yesterday, +0.5% to a fresh YTD high of +4.3%
In other words, if the both the research and risk management signals are:
- Bullish on Commodity #InflationAccelerating (our Top Macro Theme for Q114)
- Bearish on rate of change in US Consumption Growth
- Bearish on US currency and bond yields
Then why wouldn’t I try to keep moving you out of consumer growth equities and into commodities and bonds? Always right? No. Simple and solid. Yes. That’s what the insurance policy on your long-term investments should be.
Our immediate-term Macro Risk Ranges are now:
UST 10yr Yield 2.59-2.80%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – February 13, 2014
As we look at today's setup for the S&P 500, the range is 108 points or 5.02% downside to 1728 and 0.92% upside to 1836.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.43 from 2.39
- VIX closed at 14.3 1 day percent change of -1.45%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Retail Sales Advance m/m, Jan., est. 0.0% (pr 0.2%)
- 8:30am: Initial Jobless Claims, Feb. 8, est. 330k (pr 331k)
- 8:45am: Bloomberg Feb. U.S. Economic Survey
- 9:45am: Bloomberg Consumer Comfort, Feb. 9 (prior -33.1)
- 10am: Business Inventories, Dec., est, 0.4% (prior 0.4%)
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change
- POSTPONED:Fed Chairman Janet Yellen’s testimony before the Senate Banking Cmte
- POSTPONED: Senate Health, Education and Labor Cmte hearing on proposals to raise minimum wage
WHAT TO WATCH:
- Comcast said to agree to buy Time Warner Cable for about $44b
- Charter said unlikely to match Comcast’s Time Warner Cable bid
- U.S. to shut Washington offices as snowstorm hits Northeast
- POSTPONED: Fed Chair Yellen’s testimony to Senate Banking Cmte
- Royal Mail, Asos, Inter Pipeline, Seiko Epson join MSCI World
- China said to target export growth at slower pace than 2013
- Volcker Rule bankers’ lawsuit dropped as regulations revised
- Merck & Co.’s sale of consumer unit may top $10b, WSJ reports
- Buffett in talks to exit stake in former Washington Post owner
- Apple adds Macs assembled in Texas by Flextronics in U.S. push
- Lenovo projects end to Motorola losses With China phone plan
- ITC to review Avago decision in Mellanox patent case
- BNP Paribas profit drops on $1.1b U.S. legal provision
- Lloyds posts fourth consecutive loss on costs of redress
- Nestle forecasts sales growth in 2014 near low end of target
- Rolls-Royce falls after forecasting unchanged profit growth
- Oil inventories fell most since 1999 on demand in IEA estimate
- China January auto sales miss estimates as economy slows
- China Trust assets surge to $1.8 trillion amid default risks
- Storm causes havoc on U.K. rail as flooding forecast to worsen
- Amtrust Financial Services (AFSI) 7am, $0.78
- Apache (APA) 8am, $1.80 - Preview
- Avon Products (AVP) 7:01am, $0.30
- Barrick Gold (ABX CN) 6:30am, $0.41 - Preview
- Bombardier (BBD/B CN) 6am, $0.11 - Preview
- BorgWarner (BWA) 8am, $0.71
- Bunge (BG) 6:30am, $2.12
- Burger King Worldwide (BKW) 7am, $0.23
- Calpine (CPN) 6am, ($0.09)
- Canadian Tire (CTC/A CN) 7:46am, $2.26
- Cenovus Energy (CVE CN) 6am, $0.33
- Diebold (DBD) 8am, $0.58
- Discovery Communications (DISCA) 7am, $0.90
- Encana (ECA CN) 6am, $0.18 - Preview
- EQT (EQT) 7am, $0.68
- Generac Holdings (GNRC) 5:59am, $0.90
- GNC Holdings (GNC) 8am, $0.64
- Goldcorp (G CN) 8am, $0.23 - Preview
- Goodyear Tire & Rubber (GT) 7:30am, $0.63
- Great-West Lifeco (GWO CN) 12:44pm, $0.61 - Preview
- International Flavors & Fragrances (IFF) 7am, $0.91
- Jarden (JAH) 6:50am, $1.30
- Louisiana-Pacific (LPX) 8am, $0.05
- Manulife Financial (MFC CN) 6am, $0.43 - Preview
- Molson Coors Brewing Co (TAP) 7:30am, $0.72
- Nielsen Holdings NV (NLSN) 7am, $0.71
- PBF Energy (PBF) 7am, $0.56 - Preview
- PepsiCo (PEP) 7am, $1.00 - Preview
- Precision Drilling (PD CN) 6am, $0.17
- Realty Income (O) 9:15am, $0.21
- RioCan Real Estate Investment (REI-U CN) 7am,
- Sonoco Products Co (SON) 7:30am, $0.58
- Starwood Hotels & Resorts (HOT) 6am, $0.70
- Teck Resources (TCK/B CN) 5am, $0.43 - Preview
- TELUS (T CN) 8:30am, $0.48 - Preview
- Vantiv (VNTV) 7am, $0.44
- WhiteWave Foods (WWAV) 6am, $0.20 - Preview
- Agilent Technologies (A) 4:05pm, $0.66
- Allison Transmission Holdings (ALSN) 4:01pm, $0.37
- American International Group (AIG) 4pm, $0.97
- Brocade Communications Systems (BRCD) 4pm, $0.20
- Cliffs Natural Resources (CLF) 4:22pm, $0.79
- Cloud Peak Energy (CLD) 4:10pm, $0.23
- Ingram Micro (IM) 4:05pm, $0.79
- Key Energy Services (KEG) 6:18pm, ($0.06)
- Kraft Foods Group (KRFT) 4pm, $0.61 - Preview
- Liberty Global PLC (LBTYA) 5:40pm, $0.25
- Regal Entertainment Group (RGC) 4pm, $0.25
- Trulia (TRLA) 4:05pm, $0.07 - Preview
- Weight Watchers International (WTW) 4:05pm, $0.61
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Oil Inventories Fell Most Since 1999 on Demand in IEA Estimate
- Rice Exports From India Rising to Record as Iran Boosts Reserves
- WTI Crude Declines From Four-Month High as Gains Seen Excessive
- Gold Falls in New York After Gains Seen Encouraging Metal Sales
- Copper Drops as China Said to Target Slower Growth in Exports
- Rubber Falls a 2nd Day as Stronger Yen, Falling Oil Cut Appeal
- Soybeans Rise as Supply May Tighten Before South America Harvest
- Shree Renuka to Buy More Indian Raw Sugar as Exports Subsidized
- New Smelter Pipeline Threatens Any End to Aluminum Overcapacity
- Washington Offices to Close as Winter Storm Approaches Northeast
- Barrick Gold Earnings Trail Estimates as Production Declines
- U.K. Farmers Contend With Floods as Wheat to Pasture Submerged
- Coal Burns Bright as Utilities Switch From Gas: Carbon & Climate
- Palm Rises to Highest This Year on Exports Amid Brazil Dryness
The Hedgeye Macro Team
daily macro intelligence
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
This note was originally published at 8am on January 30, 2014 for Hedgeye subscribers.
“Emotions are short lived.”
Whereas “a mood is slower, more like a long-term attitude, a background and slow-burning emotion which slants our view of the world” (The Hour Between Dog and Wolf, pg 107).
I don’t know about you, but up until a few weeks ago, my view of the being long stocks was pretty damn bullish. That’s a good thing, because the US and many European stock markets kept hitting all-time highs. Now they aren’t.
And while there was definitely some emotion associated with fear (VIX) ripping +45.8% last week, I’m not so sure consensus is yet in the mood to sell every bounce. Too many bear scars from 2013, and the mood of those stock market bears doesn’t matter on the margin here anyway. It’s the mood of the bears who turned bullish too late that I think matters most.
Back to the Global Macro Grind…
When my man Nouriel Roubini went bullish in December, that definitely got my attention. Then the #OldWall (sell-side economists and strategists) rolled out their bullish US growth and SP500 targets for 2014, and a credible contrarian bear case for US stocks began.
As I pointed out in yesterday’s rant, while he may call the Barron’s Roundtable, god doesn’t call me with a super-secret market multiple for the SP500. There isn’t one. That said, #history fans will note that the stock market’s multiple:
A) Goes UP with #InflationSlowing and Consumption #GrowthAccelerating
B) Goes DOWN with #InflationAccelerating and Consumption #GrowthSlowing
The lowest multiples in post WWII US stock market #history go to the dogmatic Republican/Democrat Keynesian presidential duos of:
Both duos had bearish US Dollar TRENDs because:
- FISCAL POLICY = spend, spend, spend
- MONETARY POLICY = print, print, print
And, with the Purchasing Power of The People burning (US Dollar DOWN) and #InflationAccelerating, the SP500 traded at 7-11x EPS. Seven times earnings? Yep. Ole Jimmy Carter was a beauty.
I’m not saying the SP500 is going to 7-11x earnings. I’m saying that the probability of the SP500 seeing multiple compression from 16x (instead of consensus multiple expansion) goes up as A) inflation accelerates and B) growth slows.
Consensus multiple Expansion? Yep, here’s where my friends wash out on this (after having a mean estimate of 1528 for the SP500 for 2013 – nice call):
- #OldWall mean estimate for 2014 year-end = 1946
- Abby Joseph Cohen = 2088 target for 2014
- Tom Lee = 2075 target for 2014
Then you have the funny guy at Morgan Stanley who had the SP500 target of 1434 in 2013 (Adam Parker) who takes himself very seriously with his 2,014 SP500 target for, uh, 2014. It’s a good thing the sell-side has learned from 2008 and evolved…
The #OldWall’s magic-multiple thing is based on a consensus estimate for SP500 earnings of around $117/share. Tom Lee is up at $120, so he slaps a 17x “multiple” on that. Meanwhile Abby goes with the 18x, and there you have it – tah-dah!
But what if they are wrong on growth, inflation, and the SP500 earnings numbers? That’s when the consensus poop hits the fan. So watch out for stepping in that. Bear Droppings can ruin your bullish mood.
What about that Hedgeye Macro Theme #1 (#InflationAccelerating)?
- CRB Index (19 Commodities) was up another +0.8% yesterday (with the SP500 -1%) to +1.7% YTD
- Natural Gas Prices (for those of you who don’t live in a government hotel) = +30.3% YTD
- Oats (yes, I eat Oatmeal, every day!) = +18.9% YTD
So the other Goldman guy who is running the NY Fed now (Dudley) eats iPads and I eat oatmeal. No one cares. What Mr. Macro Market cares about is the 2nd derivative move – the slope of the line – the rate of change! And the fact of the matter is that #InflationAccelerating right now alongside US Consumption #GrowthSlowing is bearish for consumer stocks.
That’s a big reason why US Consumer Discretionary stocks (XLY) are -6.2% YTD and why the US stock market (SPX) is -4.0% YTD vs the CRB Index +1.7%. Dollar Down, Rates Down = Stocks Down. God called me on that too – it’s called a real-time US GDP #GrowthSlowing signal, and America’s mood will be changing if it becomes a reflexive one.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.67-2.80%
Nat Gas 4.79-5.49
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
CAKE remains on the Hedgeye Best Ideas list as a SHORT.
Blame the Weather!
CAKE delivered disappointing 4Q results yesterday after the close, missing comp, traffic, revenue and EPS estimates by 90 bps, 100 bps, 191 bps and 256 bps, respectively. Total comparable sales (+0.9%) and traffic (-1.0%) in the fourth quarter represent sequential slowdowns on a two-year average basis of 80 bps and 130 bps, respectively.
Management blamed unfavorable weather for the poor comp performance in the quarter, estimating that it impacted comparable sales by approximately 70 bps. This number strikes as us rather arbitrary and facile, particularly when considering this estimate excludes a positive impact from favorable weather on the West Coast and a positive impact from lapping Hurricane Sandy.
Our skepticism, however, doesn't end here. We also believe the estimate ignores any pent up demand as a result of unfavorable weather. A couple of weeks ago, we heard CMG management speak directly to this point, noting that higher volume days typically followed periods of poor weather. We didn't hear any of this on the CAKE call. Management also denied any benefit from patio utilization, particularly on the West Coast, which benefitted from record dry and warm weather. Back on the 2Q13 earnings call, management was quick to blame the inability to fully utilize patio space for the disappointing comp performance. The point is, we have reason to believe the underlying trends are weaker than management is leading on.
Any way you slice it, these trends need to be reversed for CAKE to appease investors. Traffic has now been declining for the past 5 quarters (both in favorable and unfavorable weather environments) and, unless fixed, will begin to manifest in margins.
Guiding Down 1Q14 Numbers
Management did its best to reign in 1Q14 expectations during the call by guiding to EPS of $0.48-$0.50 ($0.51 estimate) on 0-1% comp growth (+1.5% estimate). An unfavorable calendar shift (Easter and spring break pushed into 2Q14) and poor weather are expected to negatively impact comps by 50 bps and 90 bps, respectively, in the first quarter. The estimated negative impact from weather (storms in the Northeast, Southeast, and Midwest) factors in everything as of February 11th.
Prior to the release, we surmised the street was too bullish on 4Q13 and 1Q14. This has now been confirmed. We believe the street will need to revise down 1Q14 estimates and, subsequently, FY14 estimates.
Maintaining Full Year Guidance?
Despite the negative recent trends and downward 1Q14 guidance, management reaffirmed FY14 EPS guidance of $2.29-$2.41 on comp growth of 1-2%. Management cited a better than expected outlook for food cost inflation in 2014 (now 3-4%), largely due to a benefit from lower meat, some cheese, and grocery costs. Dairy prices continue to rise and management noted there is not any less risk associated with the potential continuation of this trend.
We believe the bar for FY14 is set too high for CAKE and wouldn’t be surprised if management is forced to guide down full-year numbers after a disappointing 1Q14. The street is currently looking for full-year EPS of $2.38 on comp growth of 1.8%, both of which are at the high end of management’s guidance. We continue to believe a slow start to 2014, softening trends, and downward estimate revisions will lead to multiple contraction throughout the year.
Call with any questions.
Takeaway: The British Pound remains our favorite major currency.
In case you're unable to read between the lines, Janet Yellen opened the door for “un-tapering” yesterday. No surprise there from the “Mother of All Doves.”
Ducks quack, doves print.
The slow-growth commodity inflation rip-trade loves Yellen. Utilities and Gold are leading the V-bottom S&P 500 parade as the US Dollar remains bearish TREND versus both the Euro and Yen now.
Got Pounds? Because the Bank of England's Mark Carney is definitely not Janet Yellen.
The BOE doesn't have to do the whole lingo thing about “taper” or un-taper in the UK; they just need to talk about rates and currency higher, which perpetuates purchasing power, consumption growth, etc.
At $1.65 versus the USD, the British Pound remains our favorite major currency.
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