ISM SEES ITS SHADOW: 6 More Weeks (Months) of Slowdown?

ISM Services printed its worst headline number since February of 2010 as the Employment series went sub-50, posting its largest MoM decline since November of 2008 and its first contractionary print in 25 months. 


ISM SEES ITS SHADOW: 6 More Weeks (Months) of Slowdown? - ISM Services Employment MoM Chg2


The dead cat bounce for New Orders off its worst print in more than 4 years in December continued as the series gained just +0.4 MoM in February - with a cumulative 2-month gain of just 1pt. 


Indeed, the rolling averages (3M/6M/TTM) in New Orders across both the Manufacturing and Non-Manufacturing survey’s continue to slow. 


ISM SEES ITS SHADOW: 6 More Weeks (Months) of Slowdown? - New Orders


On the positive side, Prices Paid slowed sequentially and the Backlogs index ticked above 50 for the first time in 4 –months.  Unsurprisingly, weather remained the ubiquitous caveat for both pundits and ISM survey respondents


ISM SEES ITS SHADOW: 6 More Weeks (Months) of Slowdown? - ISM respondent 



In the end, the takeaway is really just this:   


We’ve seen multi-decade/record MoM declines across a number if the sub-indices in the two ISM survey’s in recent months.  Yes, perhaps the weather is providing a modest-to-moderate negative distortion but, even if you discount that, the current Trend is one of deceleration.    


Overall, the ISM data remains in agreement with the preponderance of fundamental, domestic macro data which continue to reflect a slowdown from a second derivative perspective.  


ISM SEES ITS SHADOW: 6 More Weeks (Months) of Slowdown? - Eco Table 030514


HOW IS THE MARKET SCORING 1Q14:  Equity Indices are up but the market continues to provide a relative bid to slower-growth sector/assets (Bonds/Utilities/Gold).


Low Beta/Large Cap/Low Leverage Style factors continue to outperform and, with commodities and inflation hedge assets outperforming as well, investors (seemingly) continue to expect a rhetorical shift in policy out of the Fed in response to the fundamental deterioration.


More broadly, if the high-end is reigning in consumption (see Monday’s note:  Consumer Spending: High End in Retreat) alongside a slowdown in housing and portfolio appreciation and energy and commodity inflation continues to drive the deflator higher while taking a larger share of wallet for the bottom 80%, the upside for consumption growth in the immediate/intermediate term remains limited. 


ISM SEES ITS SHADOW: 6 More Weeks (Months) of Slowdown? - SFP


TAKING HIGH PROBABILITY SWINGS:  Will warmer weather bring a bounce in the reported data and, in reflexive fashion, drive confidence/hiring/etc higher, and a resurgence in pro-growth equity flows? 


Perhaps, but neither the fundamental data nor the price signals are supportive of that probability currently.  


We’ll change alongside the data, but until then we’ll continue to keep our gross and net domestic equity exposure tighter than we did over the Nov 2012 – Dec 2013 period, tilting that exposure towards slower growth sectors or those with positive leverage to inflation (vs. our focus on high beta, pro-growth, consumer leverage in 2013) while holding higher allocations to bonds and select commodities. 


Looking forward to more manic weather and labor force participation rate related commentary come Friday…..


ISM SEES ITS SHADOW: 6 More Weeks (Months) of Slowdown? - ISM NMFG


Christian B. Drake



Just How Understated are E&P MLPs' Maintenance CapEx Figures?

CLICK FOR FULL REPORT: Just How Understated are E&P MLPs' Maintenance CapEx Figures?


Companies in this Analysis:

Atlas Resource Partners (ARP)

BreitBurn Energy Partners (BBEP)

EV Energy Partners (EVEP)

Legacy Reserves (LGCY)


QR Energy (QRE)

Vanguard Natural Resources (VNR)


Summary Points

  • In our view, understated maintenance CapEx (and overstated DCF) is endemic among the upstream MLPs.
  • VNR strikes us as especially aggressive, because they only replaced 17% of produced reserves with the drill bit in 2013, but did not include any capital spent on acquired PDs in maintenance CapEx.  We calculate that VNR’s maintenance CapEx should have been ~5x higher than what it was in 2013, which would've reduced VNR’s reported DCF to below $0.
  • Understated maintenance CapEx is not a free lunch.  While it boosts the distribution in the near-term, it’s a long-term headwind, as the MLP needs to raise additional debt and equity merely to sustain that distribution.
  • This is one important non-GAAP accounting issue with respect to the E&P MLPs, but not the only one.  Other issues that we often see include aggressive hedge accounting (like adding back the cost basis of commodity derivatives to DCF); adding back unit-based compensation to DCF; adding back non-cash interest expense to DCF; adding back acquisition-related G&A to DCF; and more.
  • We remain negative on the upstream MLPs.  Aggressive non-GAAP accounting, particularly with respect to maintenance CapEx, is a serious concern.  Valuations are difficult to justify on any metric other than reported DCF.

Kevin Kaiser

Managing Director


Even the ‘80s Couldn’t Save RadioShack | $RSH

Takeaway: RadioShack doesn’t need to close its stores. It needs to close RadioShack.

RadioShack to Close 1,100 Stores as Sales Slump

  • "The retailer has been retooling stores in response to competition from online rivals such as Inc. To help speed the comeback, RadioShack said today it will shut as many as 1,100 underperforming stores, leaving about 4,000 U.S. locations."

 Even the ‘80s Couldn’t Save RadioShack | $RSH - radioshack


Despite a clever and much-discussed Super Bowl '80s flashback advertising blitz (see video: "The '80s called; they want their store back.") the reality here is that RadioShack probably does not need to close stores.


It needs to close RadioShack altogether.


The store banner is hardly an asset, nor is the fact that it is the destination for replacement transistors, extension cords, cheap electronic toys, and mobile phones (and even that is underperforming). The greatest asset, in our opinion, is actually the 5,000+ US store locations.


Think about it.


If you wanted to build a small format retail concept in any other category -- apparel, sporting goods, or heck, even e-tail showrooms -- it would take at least a decade to build up that kind of scale.


If current management (who is quite good -- especially for Radio Shack) can pull off this turnaround, then we'll give 'em all the credit in the world. But we think a better answer lies in a different strategic direction. 


 Even the ‘80s Couldn’t Save RadioShack | $RSH - chuckie

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VIDEO | Keith's Macro Notebook 3/5: ITALY RUSSIA SENTIMENT

Mr. Market Getting All Frothy

Takeaway: It's getting frothy out there.

A return to all-time highs for US stocks is putting sentiment right back to where it was on 12/31.




Both front month VIX (volatility) and the bear side of the II Bull/Bear survey have dropped right back to where they were on January 1. No, that’s not a good thing.


Mr. Market Getting All Frothy - VIX


The Bull/Bear Spread has ripped right back towards its all-time highs at +3950 basis points wide to the bull side. Only 15% admit they’re bearish. That is a generational low.


Remember. Risk happens fast.

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Client Talking Points


As the U.S. "Burns the Buck" (see Obama’s spending ramp plan), #StrongEuro continues to perpetuate European purchasing power. Italy’s Service PMI has crossed the important 50 line to 52.9 in February (versus 49.4 January). Being long Italy’s stock market (up +8.3% year-to-date) sure beats banging your head against the wall on whether the Dow should be “up” or not yet YTD.


Mr. Putin may have ramped hedgie S&P 500 short positions for a day (there was a SPX net short position in Index + Emini of -41,486 futures/options contracts into the event), but both the Ruble and the Russian Stock market are still implying that being long anything Russian sucks. Russian Trading System down -0.4% after its 1-day bounce. It's still down over -18% YTD 


Both front month VIX and the bear side of the II Bull/Bear survey just dropped right back to where they were on Jan1. No, that’s not a good thing. The Bull/Bear Spread has ripped right back towards its all-time highs at +3950 basis points wide to the bull side with only 15.1% admitting they’re bearish. That is a generational low.

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.


Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.


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.

Three for the Road


Back to the all-time highs for US stocks is putting sentiment right back to where it was on DEC 31 #frothy @KeithMcCullough


“If you’re limiting yourself to what you experienced, you are going to be in trouble. . . . I studied the Great Depression. I studied the Weimar Republic. I studied important events that didn’t happen to me.” -Ray Dalio 


The EU is ready to provide $15 billion of financial support to Ukraine over the next couple of years via a series of loans and grants, European Commission President Jose Manuel Barroso said on Wednesday.


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