The Economic Data calendar for the week of the 17th of February through the 21st is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
This note was originally published at 8am on February 03, 2014 for Hedgeye subscribers.
“Welcome to game day… Now it’s real. The score counts. And you either win or lose.”
That’s how golf and life coach John Hamm opens Part Two of Unusually Excellent: Competence – Leading on the Field With Skill. Russell Wilson did just that last night. Seahawks 43 vs. Broncos 8.
Credibility, Competence, and Consequence – per Hamm’s framework, that’s the epicenter of leadership skill. And since I can’t argue with that, I like it.
Note that in this game there is no credibility in A) cheating and/or B) making a few big “calls.” Credibility is scored in our profession by repeatable processes. If you can score in both up and down markets, you win. So let’s get at it this morning and try to do more of that.
Back to the Global Macro Grind…
What’s winning so far in 2014 is not what was winning for most of 2013. That’s because:
A) Global Inflation is no longer deflating, it’s re-flating
B) Growth (particularly in the US and across most of Asia) is slowing, not accelerating
On the Asian #GrowthSlowing scene, China’s manufacturing PMI came in at 50.5 (which is a six month low) and non-manufacturing PMI came in at 53.4, lowest reading since December 2008.
All of this, of course, will be reported to you by the ultimate lagging indicators (your central bankers and consensus economists paid by Big Government), on a lag. So keep it here, where Game Day happens every morning at 4AM.
In terms of our Top Global Macro Theme for Q114, #InflationAccelerating:
So we hope you enjoyed flipping out of some of that long-term Starbucks (SBUX) idea and into some CAFÉ (the coffee ETN). One’s price is winning YTD; one’s is losing.
On the #GrowthDivergences front (Hedgeye Macro Theme #2) YTD:
In other words, being long inflation expectations (particularly via breakevens or food inflation) is crushing it YTD, and so is being long European Equity exposure relative to the slowing growth exposures you could be long in the USA or Japan.
That’s not to say that the score may not continue to trend this way. You can make that change in momentum bet this morning if you’d like. You could have doubled down on the Denver Broncos when they were down 22-0 last night too.
Competence in risk management starts the way Seattle started last night; with their defense scoring a safety! Not getting scored on in this game is easily the best way to win. If your shorts can generate positive P&L, all the better.
From a Style Factoring perspective in US Equities, here’s what’s getting lit up like Denver’s defense did:
In other words, if you’re overweight any of these Style Factors in a US Equity only portfolio, that’s bad. This is what we call a bullish to bearish reversal in big beta!
But as the game goes on, the score makes more and more sense. With #InflationAccelerating, who gets hurt the most? The Consumer. But don’t tell the Fed that. If growth continues to slow, Janet Yellen’s 1st move will probably be to stop tapering (i.e. devalue the Dollar) and perpetuate more purchasing power pain on The People.
If you don’t like that game recap, go buy another house – and like it. Because, like Barney Frank, Janet Yellen is big on housing, irrespective of it being the mother of all bubbles that got the US consumer into this savings mess to begin with.
Got Savings? At 3.9% (current US Savings Rate as a % of Disposable Income – see Chart of The Day), Americans are once again dipping into those in order to keep up with their over-spending neighbors (and the government’s understated cost of living).
But no worries, Game Day for the government will include some cochamamy narrative about “inequality” in America while they dream up the next currency devaluation policy to encourage The People to lever up again. If they go for it, the score of that policy will count too – and this time the Keynesians will lose as big as the Broncos did.
Our immediate-term Risk Ranges are now (Our Top 12 Global Macro Ranges are in our Daily Trading Range product):
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Current Investing Ideas: CCL, DRI, FXB, HCA, LVS, RH, TROW, WWW and ZQK
Please see below Hedgeye analysts' latest updates on our high-conviction stock ideas and CEO Keith McCullough's updated levels for each stock.
At the conclusion of this week's edition of Investing Ideas, we feature three institutional research pieces we believe offer valuable insight into the markets.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
CCL – Shares of Carnival are up 13.6% since it was added to Investing Ideas versus a 2.4% return for the S&P 500. Investors will be keeping a close eye on Norwegian’s (NCLH) earnings next Tuesday to see if there’s any indication of a price war in the Caribbean. CCL has the easiest comps among the big 3 operators, so even if discounting picks up, CCL has the most cushion. We remain bullish on CCL.
DRI – Earlier in the week, activist investor Starboard Value expressed its intent to “hold the board accountable for its actions” if the company decides to follow through with its plan to spin-off, or sell, the struggling Red Lobster chain. Darden has plans to act upon this plan before the company’s annual meeting at the end of March and if they do, Starboard plans to assume control of the company through a shareholder vote.
Red Lobster has significant real estate value that Starboard argues would be lost if the company were to divest the brand. Managing Director Howard Penney sides with Starboard, citing Darden’s real estate value as one of the many features that makes this company so valuable. All told, the activist pressure continues to build.
We continue to like Darden as a long-term investment and believe the company has the potential to create substantial shareholder value with the right management team in place.
FXB – Hedgeye remains bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from the Bank of England (BOE). We received updated economic and monetary policy guidance this week from the BOE’s Quarterly Inflation Report. 2014 GDP was revised higher to 3.4% from 2.8% previously forecast and the unemployment rate is expected to reach the 7% threshold target in January. In response, this week BOE governor Mark Carney amended his “forward guidance” to increase rates at the 7% unemployment level to signal that the Bank is not yet ready to hike rates despite the improvements seen in the economy and unemployment level.
The GBP/USD acted favorably to the news, up +1.83% week-over-week.
HCA – There is clearly a lot going on these days with hospitals. Earlier this week, reports from Health and Human Services indicated a million people had signed up for Obamacare last month, a huge number. Unfortunately, in a separate report, only a fraction of those who enrolled in the previous months paid their first bill, which means after going through the hassle to fill out the forms, they did not actually get health insurance.
We received the latest update of our doc survey this week. The big finding, and negative for our HCA position, was a huge drop in patient visits for patients with private insurance. If it persists through the quarter AND the balance of our other inputs such as orthopedic case volume and Obamacare enrollment, will probably get us to close the HCA long. But we will run the survey two more times before getting to that point. We are monitoring this closely.
LVS – Chinese New Year off to a rocking start in Macau. Through February 9, daily table revenues averaged $1.464 billion up 78% over comparable period last year. The more appropriate comp is the 3rd week of February last year when table revs averaged HK$1.107 billion – so peak CNY is up about 32%. While it’s still early, Las Vegas Sands is the market share leader at 25.3% thanks to its success in the mass business. We expect another strong week of revenues as VIP high rollers start rolling into town. For the month of February, we expect revenue growth to exceed 20%.
RH – We hosted a conference call with our Institutional subscribers earlier this week to address issues facing Restoration Hardware over the 3 durations that we typically look at when making investment decisions. Those of course are Trade (3 weeks or less), Trend (3 months or more), & Tail (3 years or less). RH is still our favorite long in the retail space by a long shot. Here is a quick summary of the points we addressed as it relates to the Trade duration.
During the retail meltdown during December and January – RH was hit far worse than the rest of the retail sector. We’d argue that silence hurt the company more than anything. In our opinion, the market is severely overestimating the impact that the competitive retail environment and cold weather will have on RH. Remember, nearly 50% of RH sales come from the dot-com channel. We are going to have to wait to hear the company’s 4Q numbers – likely until late March, but we think that the company will report numbers in line with their previous guidance, which calls for revenue growth in the mid-to-low 20’s and earnings growth in the high-20’s to low-30’s range.
TROW – The historical relationship of lagged retail mutual fund flow to performance continues to hold into the first part of 2014 with equity mutual fund flow continuing to be positive despite a negative start to the year for U.S. stocks. Our research shows that over a 12 year period, fund flow has trailed performance by an average of 6 months which means that the +30% return in the S&P 500 in 2013 can create continued stock fund inflow through the first half of 2014 (barring any major change to the trajectory of stocks).
While most fund flow surveys focus on net flows (which is new fund sales less fund redemptions) a snap shot of solely mutual fund sales shows the strength in stocks and the continued weakness in bonds. Through December of last year, all stock fund sales are breaking to new highs which means that demand from retail investors continues to increase.
Conversely, all bond fund sales continue to trend lower from their all time highs in early 2013, in an indication of decreasing demand from retail investors. T Rowe Price is well positioned to benefit from this environment as a leading stock fund manager with 85% of its assets in equities. TROW also has de minimus exposure to emerging markets which could be a real negative theme for 2014 and beyond.
WWW – Wolverine Worldwide reports its 4Q Earnings on Tuesday (2/17). While we don’t expect any fireworks on the call due to the company’s preannouncement in early January - we do like WWW going into the print and think that it will print upside to earnings. One thing that we will be looking for on the call is an update on the company’s new international partnership agreements for the recently acquired PLG brands. Other than that, everything has been pretty much spelled out in the company’s press release and at its presentation at the ICR conference.
The company already gave preliminary guidance for FY14 and it called for “mid-single digit” revenue growth and “solid double-digit” earnings growth. One thing to keep in mind is that WWW may be the best company in retail at managing the Street’s expectations. In the chart above you can see the change in consensus’ ’13 EPS estimates since the company reported earnings in February of 2013. Originally the Street was looking for 15% earnings growth. That number has inched its way up to where it currently sits at 25%. We expect more of the same in ’14.
Consensus is seriously underestimating the top line growth potential for the acquired PLG brands in the international marketplace. We continue to see upside potential in these markets and expect to see continued strength in WWW’s core brands.
ZQK – The key callout for ZQK comes from Friday’s less-than-stellar VF Corp results. VFC management noted that the #1 use of cash is for acquiring other businesses. Of course, that is only intensified during times like this when organic growth is tough to find, like they’re faced with today. Management noted quite clearly that debt-to-capital is 19%, lower today than when they bought Timberland. In other words -- 'we can buy something big'. We still think that VFC will ultimately own ZQK. The only catch is that VFC is not good at buying things that are broken. And ZQK -- though there is an exceptional plan in place to fix the company -- is broken. Our sense is that VFC will have a greater appetite for buying ZQK when at $12 once it starts growing again, than at $7 when its' top line is struggling. But it's a matter of time, in our opinion.
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We’ve been calling for investors to get longer of inflation-oriented assets in lieu of consumption-oriented assets, at the margins, as it becomes increasingly likely the Fed stops tapering (or incrementally eases) over the intermediate term.
The Cheesecake Factory (CAKE) remains on the Hedgeye Best Ideas list as a SHORT. The company delivered disappointing 4Q results earlier this week. When in doubt, blame the weather!
An historic week within ETFs with record outflows in equities and record inflows into bonds...trends unchanged within mutual funds.
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We’ll keep the prose pithy here on this week’s earnings scorecard update:
Christian B. Drake
We continue to be bearish on MCD, but we are removing it from the Hedgeye Best Ideas list as a SHORT.
Our bearish thesis is centered on structural (internal and external) issues within the McDonald’s U.S. business. While the company addressed some of its issues with the rollout of high density tables, we believe McCafe’s status as a “sacred cow” will continue to cause throughput issues.
On the positive side, however, it appears Europe has stabilized despite persistent softness in the region’s most important market – Germany. Asia also looks to be stabilizing despite Japan finding itself in the same boat as Germany.
McDonald’s business model is resilient and the stock has benefitted from a healthy 3.4% dividend yield, which we expect to increase in 2014. What concerns us the most in being short the name is the potential for an activist to step in or the potential for a “financial engineering” event.
Whether it is the real estate or the potential for incremental leverage, there is inherent value in McDonald’s balance sheet. We believe someone, at some point, will come along and take advantage of this. If Carl Icahn can push APPL to buy back more stock, we surmise he’d be able to do so for MCD as well.
For the time being, McDonald’s is treading water. The business plan the company presented to the investment community at last November’s analyst meeting is, in our view, unlikely to deliver the intended results. We believe the required changes this company needs will happen soon – and they are significant.
Below we highlight a few changes that we believe need to be made at MCD:
Given the changing consumer needs, wants, and desires, the MCD business model is in need of a major overhaul. Thanks to CMG and these developing consumer trends, MCD is being forced to look into selling sustainable beef. This is only the tip of the iceberg for McDonald’s. Its entire menu, packaging and carbon footprint will eventually need to be reengineered. The question is: at what additional cost?
Takeaway: Our intermediate-term view calls for investors to be OVERWEIGHT/LONG UK, Germany, Eurozone and China vs. UNDERWEIGHT/SHORT US and Japan.
All week we’ve been pounding the table on our #InflationAccelerating Q1 Macro Theme, which continues to broadly manifest itself in buy-side PnLs (in one direction or the other). Today, we wanted to briefly update you on our #GrowthDivergences Q1 Macro Theme, which called for investors to be OVERWEIGHT/LONG UK, Germany, Eurozone and China vs. UNDERWEIGHT/SHORT US and Japan.
Like our #InflationAccelerating theme – which continues to be VERY non-consensus based on a number of dialogues we’ve had with our always-sharp subscriber base – this theme has, on balance, worked like a charm:
These deltas are generally supported by each of the respective GIP (i.e. Growth/Inflation/Policy) outlooks. Below, we offer up some quick-and-easy one-liners summing up our intermediate-term view on each economy. Lastly, we outline what we are seeing in the model that makes us sound so directionally negative on the macroeconomic setup in the US (vs. leading the bull charge in 2013).
UK: Probably the best looking economy of the bunch; the threat of +6% nominal GDP growth in 2014E plus deteriorating BoP dynamics underscore Carney’s increasingly hawkish bias – which only insulates our #StrongPound = #StrongUKConsumer view.
Germany: Our model has German GDP growth continuing to materially accelerate in 1H14, helping the country achieve 3Y highs in economic growth for 2014E. The acceleration in inflation should lend marginal support to the EUR by allowing Draghi to back off of his easing bias to some degree.
Eurozone: Very similar [bullish] setup to Germany, though we see less upside in both GDP growth and CPI on a full-year basis as structural headwinds persist throughout the periphery.
China: Our lowest-conviction bullish bias. If Chinese GDP growth doesn’t show strength against ridiculously easy compares in 1H14, the back half of the year could be a disaster from a growth perspective. Still, our analysis shows that the PBoC has adopted a marginal easing bias in the YTD, which should be supportive of our base case scenario.
US: Inching towards a deep trip to Quad #3 (i.e. growth slowing as inflation accelerates). Refer to the analysis below for more details.
Japan: Careening towards a deep trip to Quad #3. The only call to make here is whether or not the BoJ accelerates its timeline for incremental easing, which, on the margin, would be bearish for the JPY and the Japanese consumer, but bullish for manufacturing, exports, employment and wage growth. We’ll learn more post the BoJ’s policy meeting next week, but our base case scenario is that they’ll be dangerously slow to react as a result of their previous guidance and out-year inflation targets.
MODELING THE US ECONOMY
Growth: As compares get tougher at the margins, think real GDP growth comes in at the low end of our current forecast range for 2014E. This is a markedly different setup from 2013E, where we thought GDP would come in at the high end of our target range and accelerate throughout the year on a sequential basis.
Now we are below both the Street – which continues to take up their numbers in recent weeks – and the Fed. If we’re right on growth, the FOMC will be forced to react to a fair amount of negative economic surprises as the year progresses, likely forcing them to shift back to an easing bias.
It’s important that we make the following statistical point regarding our predictive tracking algorithm: when compares for any rate-of-change series get tougher at the margins, you need a commensurate increase in sequential momentum to prevent a deceleration in the first derivative.
In light of that, it’s important to note that recent trends in the broad balance of economic data do not support expectations for an increase in said momentum over the intermediate term. Consumption growth continues to accelerate on a trend-line basis, but industrial production growth and PMI data is clearly slowing, while confidence readings are more-or-less flat (on a trend-line basis).
Inflation: The confluence of easy compares, annualized currency weakness, a commodity base effect and the recent acceleration in commodity reflation continues to support our directionally hawkish view of the domestic inflation outlook. Moreover, we are now well ahead of both the Street and the Fed with respect to our full-year expectations for CPI. If that view proves correct, consumption growth (i.e. ~70% of GDP) will slow domestically.
In summary, hopefully this note was helpful to further elucidate our views and is additive to your individual thought process around where to allocate risk capital. As always, feel free to ping us with any questions, comments, concerns, etc.
Happy Valentine’s Day,
Associate: Macro Team
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