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This Is Not 2013

This note was originally published at 8am on February 10, 2014 for Hedgeye subscribers.

“Everything is the same, until it is not.”

-Dr. Ellen Langer

 

Love that quote in chapter 3, “Variability”, in Langer’s #behavioral beauty, Counterclockwise. “People aren’t all that observant, although we think we are. We see what we expect to see, even to the point that we don’t notice things that others clearly do” (pg 33).

 

Growth investors want to see growth, Gold Bond investors want to see slow-growth, and I want to see Canada win medals at the Olympics. It is what it is – it’s called confirmation bias. And, on some level, most of us have it in us.

 

(Can you see both women in the picture below?)

This Is Not 2013 - oldyoung

 

So how do we become more objectively observant? How do we force ourselves to see what we don’t want to see? Since I’m talking about markets, I think you know where I wash out on this. Mr. Macro Market usually shows us the way.

 

Back to the Global Macro Grind

 

If you were looking to rekindle 2013’s bull market in US stocks, all you’d have to have done is look at the Dow on Friday. It was +165 points (+1.1%) on the second straight jobs report miss. Everything is the same as last year, right?

 

Nope. Including Friday’s low-volume rally (the Top 5 Volume days of 2014 have been down days), the Dow and SP500 are down -4.7% and -2.8%, respectively. And they’ll probably be down again today.

 

This is not 2013 (when inflation was falling and US consumption and employment growth were accelerating). This is 2014 and with #InflationAccelerating again last week, US consumption growth is slowing, faster.

 

Got Hedgeye Macro Theme #1 for Q114?

  1. US Dollar down -0.8% last week and back below @Hedgeye TREND support of $81.12
  2. CRB Commodities Index (19 commodities) +2.3% last wk to +3.4% YTD
  3. CRB Foodstuffs Index up another +1.1% last wk to +4.5% YTD

In other words, as the US economic data slows, Mr. Macro Market is starting to front-run proactively predictable behavior that Janet Yellen will back off on the tapering and/or change the goal posts again on the Fed’s dual mandate.

 

Everything that matters in macro happens on the margin, so don’t forget that last year the Fed got incrementally tighter – anything less would be dovish on the margin, including Yellen moving toward what print-money-forever PhDs call “forward rate guidance.”

 

Not to be confused with something that will work in getting early 2011-style #InflationAccelerating off the US consumer’s back, “forward rate guidance” is basically what Japan did decades ago in telling the world its rates would never go up.

 

Guess what, they didn’t.

 

With the 10yr yield on Japanese Government Bonds at 0.60% this morning, the US Treasury 10yr yield of 2.66% has a long way to go; if the USA wants to let an un-elected-central-planning-bureaucrat at the Fed make it like Japan, that is…

 

Who gets paid on Down Dollar, Down Rates, and #InflationAccelerating again?

  1. Gold and Silver Bulls (+1.9% and +4.3%, respectively last wk to +5% and +2.9% YTD)
  2. Real Estate Bulls (MSCI REIT Index up another +0.8% last wk to +4.9% YTD)
  3. Oil Bulls? Yep, that trade ripped on the jobs miss too – Brent Oil +3% last wk, most of it coming on Friday

Forget the lessons of 2011. In response to inflation expectations rising, we need the Fed to tell us we “need more inflation”… so that we can slow real-inflation-adjusted-growth more!

 

There’s “inequality” in America, so we definitely need to ramp up those prices at the grocery store and at the pump again. Definitely. No question. We need to re-ramp some asset prices and pulverize the purchasing power of the poor.

 

Captain Keynesian textbook will be quick to read this and say:

  1. But inflation is low, CPI is only 1.2%
  2. And if inflation rises, bond yields will rise …
  3. Because, the government says so

Gotit.

 

After deflating a small part of the mother of all inflations (Global Inflation’s all-time highs of 2011-2012), anyone who thinks there’s A) no inflation and B) no problem with inflation doubling sequentially from 1% to 2% needs their head examined.

 

If inflation expectations rise, commodities, wages, household debt levels, and breakevens rise (US 5yr Breakevens up another +4bps last wk to 1.93%); the 10yr bond yield won’t.

 

Why? Because the Fed has 0% credibility in fighting real world INFLATION. That’s why over 80% of the movement in the long-end of the yield curve can be explained by rising and falling GROWTH expectations.

 

In other news this morning:

  1. Dollar Down
  2. Rates Down
  3. US Equity Futures Down

No I didn’t buy the bounce last week (the Russell2000 actually didn’t bounce, it was down another -1.3% to -4% YTD – another growth slowing on the margin signal). Sorry, this is not 2013. Everything is the same until it isn’t.

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1735-1810

VIX 14.74-20.41

USD 80.41-81.03
Brent 107.61-109.92

Gold 1248-1274

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

This Is Not 2013 - Chart of the Day

 

This Is Not 2013 - Virtual Portfolio


THE WEEK AHEAD

The Economic Data calendar for the week of the 24th of February through the 28th 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.

 

THE WEEK AHEAD - week


INVESTING IDEAS NEWSLETTER

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 timely institutional research pieces we believe offer valuable insight into the markets.

 

INVESTING IDEAS NEWSLETTER - whiz

 

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. 

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

IDEAS UPDATES

 

CCL – Norwegian Cruise Line’s modest guidance and troubling commentary pressured all the cruise names this past week, including Carnival.  There is still unease among investors on whether a price war will erupt in the Caribbean. We believe there is already some evidence of that.

 

INVESTING IDEAS NEWSLETTER - ca4

 

While the Carnival brand may see some discounting in the coming weeks, the strong bookings environment will keep yields at or above management expectations for the year.  Meanwhile, Europe continues to be the bright spot for pricing and bookings in 2014 and CCL has the most exposure there.  The stock will exhibit some volatility as we get more Wave commentary but stand firm on this name.

 

For the record, CCL is up 10% since we added it to Investing Ideas versus a 2.4% return on the S&P 500.

 

 

DRI – Starboard Value announced in a 13D filing Thursday morning that it has retained former Olive Garden President Brad Blum to serve as an advisor in its battle against Darden Restaurants.  Starboard will pay $50,000 in cash to Mr. Blum who will, in turn, use the proceeds to purchase Darden stock.

 

We view this as a very favorable development and continue to believe there is the potential for significant shareholder value creation.  Managing Director Howard Penney wrote in an institutional research note on Thursday, “I have known Brad since his days at Olive Garden.  In all my conversations about DRI I have made no secret of the fact that I consider Brad uniquely qualified to head up a restructuring and turnaround at the company.  I believe his expertise and experience make him an extremely valuable asset.” 

 

A large part of our thesis revolves around the company’s ability to fix the crown jewel: Olive Garden.  We think Mr. Blum could play a critical role in this turnaround and, apparently, Starboard does as well.

INVESTING IDEAS NEWSLETTER - red44 

 

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). The BOE recently revised its 2014 GDP estimate higher, to +3.4% from +2.8% previously forecast.  We continue to expect a strong Pound to accelerate consumption growth in the UK. This week UK Retail Sales for January were up +4.3% year-over-year – yes up, even with the weather!

 

 

HCA – Since HCA Holdings was added to Investing Ideas on 6/14/13, the S&P 500 has risen 12%. HCA has doubled that gaining 24%. Healthcare Sector Head Tom Tobin will have a new update for HCA next week.

 

INVESTING IDEAS NEWSLETTER - hca


LVS – Las Vegas Sands has had the perfect start to Chinese New Year (CNY).  For the first time, LVS may end the month as the market share leader.  The company can thank its surging mass business, particularly at Sands Cotai Central. The numbers coming out of CNY have been spectacular. Better luck has played a part, but gaming volumes have also been quite strong. Can the momentum be sustained in the next few weeks as the holiday throng exits Macau?  We still expect +20% gross gaming revenues growth for February.  

 


RH – Here is a look at our Retail Sentiment Monitor for Restoration Hardware. Our sentiment monitor is a quantitative scale to combine Sell-Side Ratings, Buy Side Short Interest, and Insider Trading activity. We pretty much catch all angles.

 

INVESTING IDEAS NEWSLETTER - RH sentiment

 

We use this tool in two different ways; 1) First, we look at directional changes in sentiment for each stock. 2) Second, we analyze the absolute level for each security. A reading above 90 has statistically proven to signal that the market is overly bullish on a name, and that it’s often advantageous to go the other way. Conversely, a reading below 10 suggests that the market is overly bearish, at which time it is usually prudent to go long. 

 

The sentiment reading for Restoration Hardware is at an all-time low.

 

Fears over weather and the recent management shake-up have contributed to the fall in sentiment, but even before then, people were finding every reason they could to be bearish. We continue to view Restoration Hardware as THE name in retail with the greatest upside. Currently at around $63, we think that RH will touch $200 over 3-years. 

 

 

TROW – Equity mutual fund flow had another strong period of asset gathering this week posting $7.2 billion of net inflow, an acceleration from the week prior of just a $1.8 billion inflow. Importantly, equity mutual fund trends year-to-date have improved by a solid 60% over 2013 trends, with 2014 averaging a weekly inflow of $4.8 billion versus last year’s weekly average of a $3.0 billion inflow.

 

Thematically we estimate that the over allocation by retail investors to bond funds over the past 5 years is fueling the continued reallocation of investment funds out of fixed income and into equities. There is an undertow that the entire allocation to fixed income by retail investors in 2012 of $330 billion may be unwound and being that 2013 only resulted in an $80 billion annual outflow from fixed income means there could be a continued influx of retail money into stock and out of bond funds.

 

INVESTING IDEAS NEWSLETTER - caste

 

T Rowe Price benefits from this re-allocation as a leading provider of equity mutual funds. We are traveling with the company next week to see clients and will have a more detailed update on the story then.

 

 

WWW – We’re one of the few bulls on Wolverine Worldwide. More importantly, we have heard absolutely nothing that shakes our confidence in this story. We continue to believe (regardless of guidance) that WWW will print outsized revenue growth at an incremental margin nearly 2x the company average as it scales its newer brands over its superior international infrastructure and de-levers along the way.

 

We’re modeling $1.78 and $2.28 in 2014 and 2015, respectively, with ultimate earnings power of $4.18 out in 2018, which is roughly 50% above the consensus.  This stock used to be expensive, with earnings catalysts. Now it’s cheap with the same catalysts.

 

 

ZQK – Shares of Quiksilver have been under pressure since we added it to Investing Ideas on 1/8/14. This week, Retail Sector Head Brian McGough would like to highlight our continuing bullish case on the stock via this unlocked institutional note.

 

 

*  *  *  *  *  *  *  *  *  *

Click on the title below to unlock the institutional note.

 

Do Your Country Allocations Account for #GrowthDivergences? 

Our intermediate-term view calls for investors to be OVERWEIGHT/LONG UK, Germany, Eurozone and China vs. UNDERWEIGHT/SHORT US and Japan.

INVESTING IDEAS NEWSLETTER - e4

 

Potbelly (PBPB) Lays an Egg

It was a disappointing quarter. Potbelly remains on our Hedgeye Best Ideas list as a SHORT.

INVESTING IDEAS NEWSLETTER - pot7

 

Facebook: Does WhatsApp Have Any Value?

The acquisition price for WhatsApp is greater than its app's addressable market (assuming they can ever monetize it.)

INVESTING IDEAS NEWSLETTER - whats


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Daily Trading Ranges, Refreshed

Takeaway: The Burning Buck arrested its decline for all of 24 hours off its year-to-date lows.

Editor's note: This unlocked edition of Daily Trading Ranges note was originally published February 21, 2014 at 7:55am. For more information on how you can receive these levels every morning in your inbox click here.

Daily Trading Ranges, Refreshed - jose1 

BULLISH TRENDS

Daily Trading Ranges, Refreshed - Slide2

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Daily Trading Ranges, Refreshed - Slide6

Daily Trading Ranges, Refreshed - Slide7

Daily Trading Ranges, Refreshed - Slide8

Daily Trading Ranges, Refreshed - Slide9 

BEARISH TRENDS

Daily Trading Ranges, Refreshed - Slide10

Daily Trading Ranges, Refreshed - Slide11
Daily Trading Ranges, Refreshed - Slide12


$UA: Don't Blame Under Armour for Olympic Disaster

Takeaway: If UA's equipment really kept the U.S. off the Olympic podium, we can't imagine that they'd stay married to UA.

US Speedskating to Renew Under Armour Deal 

  • "US Speedskating and Under Armour Inc. will announce that they have renewed their partnership through the 2022 Olympic Games, the company confirmed, a deal that comes on the heels of a public flap over new Under Armour skinsuits that divided the team in Sochi."
  • "Under Armour Chief Executive Kevin Plank 'is a proud American and they will not retreat from supporting USS despite the challenges we've gone through together,' US Speedskating executive director Ted Morris said in an email to athletes, reviewed by The Wall Street Journal."
  • "A spokeswoman for Under Armour confirmed the deal, but the terms of the deal weren't immediately known Friday."

$UA: Don't Blame Under Armour for Olympic Disaster - us8

Takeaway from Hedgeye's Brian McGough

Everyone has an opinion on this issue. So here's ours. Simply put, this whole thing is ridiculous.

 

If you were going to 'go for gold' in the Olympics, do you think that just maybe you'd have tested out your suit before the games? We have to think that these athletes did (in fact, they did at the Olympic trials -- and did not complain when they were beating athletes wearing Nike suits).  

 

A few of the classier athletes -- like Shani Davis -- stood up and said something like "I'm not blaming the suit. I went out there and gave it my all, and other skaters were simply faster". #respect, Shani. We give the US credit for sticking to its guns with UnderArmour despite this PR mess. If they really thought that it was the equipment that kept us off the podium, we can't imagine that they'd stay married to UA.

Join the Hedgeye Revolution.


CONSUMER COMEDOWN: 4Q13 EARNINGS SCORECARD

Takeaway: With ~90% of companies having reported, 2 trends have been clear: The Neg. divergence for Consumer & the return of forecasting fundamentals

CONSUMER COMEDOWN:  As we’ve highlighted for a couple weeks now, consumer companies have turned in the notable, negative divergence in 4q13 earnings with just 30% of Consumer Staples companies besting revenue estimates. 

 

Consumer Discretionary sits just ahead of Energy to round out the bottom third in sector level topline BEAT percentage. 

 

Operating trends are diverging negatively as well with consumer facing companies reporting the worst momentum in operating performance with just 26% and 42% of companies registering sequential acceleration in sales and earnings growth, respectively, according to bloomberg data.   

 

That negative divergence continues to get discounted by investors as Consumer Staples now sits as the worst performing sector YTD despite relative outperformance in slow growth/yield chase equities and the balance of the defense trio in Utilities/Healthcare sitting at the top of sector performance. 

 

Our Best Ideas list has been burgeoning with consumer shorts YTD - some of which include WTW, CAKE, BLMN & PBPB – ping if you’d like to discuss any of those ideas in detail.   

 

CONSUMER COMEDOWN:  4Q13 EARNINGS SCORECARD - ES OP Table 022114

 

*Prices as of close 2/20/14  

CONSUMER COMEDOWN:  4Q13 EARNINGS SCORECARD - Sector Summary 022014

 

 

THE PRINT:  The mini-resurgence in the import of forecasting fundamentals has been notable this earnings season as companies missing earnings continue to be sold aggressively.  Of the minority of companies that have missed bottom line estimates, 71% have gone on to materially underperform (-5.1% on ave.) the market over the subsequent 3 trading days.

 

CONSUMER COMEDOWN:  4Q13 EARNINGS SCORECARD - ES BM EPS 022114

 

BEAT-MISS: No real change in trend WoW.  With ~90% of SPX constituent companies having reported, the Sales Beat percentage stands 63% - well above both the 53% in 3Q13 and the 54% TTM average.  At 73%, the EPS beat percentage is basically inline with the 3Q13 and TTM average of 74% and 73%, respectively. 

 

CONSUMER COMEDOWN:  4Q13 EARNINGS SCORECARD - ES Table 022114

 

 

 

 

Christian B. Drake

@HedgeyeUSA

 


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