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A Picture Is Worth 1,000 Words (Or Maybe 100 Points on the S&P 500)

Takeaway: Correlation matters.

A Picture Is Worth 1,000 Words (Or Maybe 100 Points on the S&P 500) - FEDEX CHART

 

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#PROCESS: Summarizing our Current View

"If I see an ending, I can work backwards"

- Arthur Miller

 

 

Keith outlined the thought process behind our view of yesterday’s Fed announcement and the how/why of our subsequent positioning in this morning’s strategy note (Early Look: Fade The Fed's Forecast). 

 

Below we summarily recapitulate that thought process in the context of both our research and risk management views.   

 

 

#PROCESS: Summarizing our Current View - Fed Forecast CoD

 

1Q14 Macro View Redux:  We became incrementally more bearish on growth at the beginning of 1Q alongside the breakdown in the $USD and 10Y Yields the breakout in the VIX. 

 

From a positioning perspective, we increased our cash allocation and shifted away from pro-growth consumer leverage towards slower-growth (bonds, gold, slower growth equities, inflation hedge commodities) exposure.

 

The subsequent and significant deceleration in the preponderance of fundamental macro data served to confirm the price signals. 

 

Recall, we love the pro-growth, factor constellation of #StrongDollar + #RatesRising that characterized most of 2013,  

 

A return to the Dollar Up/Rates Up/Stocks Up regime, confirmed by both the price and research signals, would certainly shift our intermediate term growth outlook upward but the data doesn't support that shift in view here (yet). 

 

 

#PROCESS: Summarizing our Current View - Inflation CoDl

 

THE RISK MANAGEMENT:   Inclusive of yesterday’s price action, the $USD and 10Y Yields remain broken Trend while the VIX and Gold remain bullish on a Trend basis.   

 

In the context of our view of the Risk Management Signal as a leading indicator of fundamentals, from a quantitative perspective, we’d need to see the following occur for us to get back behind the growth trade 

  1. US Dollar Index breaks out > $81.14 TREND resistance
  2. US 10yr Yield breaks out > 2.81% TREND resistance
  3. Gold snaps $1278 TREND support

 


#PROCESS: Summarizing our Current View -  USD

 

#PROCESS: Summarizing our Current View - Gold

 

#PROCESS: Summarizing our Current View - 10Y


THE FUNDAMENTAL:  The fundamental data decelerated materially in 1Q14.  We saw some multi-decade/record sequential drops in various ISM sub-indices (for example) and while the weather did have some impact, we’d argue the slope of growth was negative vs 2H13 levels even if you discount for the weather distortion. 

 

Indeed, it’s likely we get a post-weather distortion bounce in the reported data over the next couple months – the question, however, will be whether we can recover to a positive slope of growth from a trend perspective. 

 

Growth math, after all, is geometric – you have to go up more than you went down on a percentage basis to get back to breakeven.

 

In the context of the summary table below, we expect the “latest data” column to improve from the homogenous sea of “Worse” that existed in February to a more heterogenous mix of “Better”/”Worse” as we comp exaggerated Jan/Feb declines.   

 

From a fundamental perspective, we’ll be looking for the TREND data  (3M/6M/TTM Ave) to reflect a re-acceleration.  

 

#PROCESS: Summarizing our Current View - Eco Summary 031914

 

 

THE COMPS In short, the comp setup gets progressively tougher for two more quarters as Growth Comps get increasingly difficult while inflation comps ease into 3Q14. 

 

At the least, progressively harder top line comparisons alongside increasingly harder margin comparisons is a comp dynamic to be wary of on the long side – particularly when both the quant and fundamental data aren’t yet confirming the pro-growth call.   

 

#PROCESS: Summarizing our Current View - UNITED STATES

 

THE PLAN IS THE PLAN WILL CHANGE:  The above highlights the summary output of our integrated research-risk management process post the hawkish lean out of Yellen et al. 

 

The process isn’t perfect, but it’s dynamic, quantified and repeatable and its happened to work a good deal more than not over the last 6 years.  

 

Of course, the process also dictates we change our view/positioning alongside the collective change in the price signals and fundamental data.  The above outlines the primary metrics and levels we’ll be using to manage our exposure from here.

 

Fascinating and frustrating, but definitely not boring.  

 

Current Positioning:  15 Longs, 5 Shorts 

 

 

Christian B. Drake

@HedgeyeUSA

 


3/20 COMMODITY CHARTBOOK

Takeaway: We continue to favor DRI, YUM, KKD and JACK on the long side and CAKE, BLMN, PNRA and PBPB on the short side.

The Big Picture

Food prices have surged in 2014, with the CRB Foodstuffs Index up +16.5% YTD and +4.8% YoY.  While rapid advances in coffee, beef, cheese and milk have largely fueled the overall basket, all of the commodities we track are in the green YTD.

 

Commodity prices up YoY:

  • Cheese Block
  • Lean Hogs
  • Rough Rice
  • Soybean
  • Live Cattle
  • Milk
  • Natural Gas
  • Coffee

Commodity prices down YoY:

  • Wheat
  • Chicken Whole Breast
  • Chicken Wings
  • Gasoline at the Pump
  • Corn
  • Sugar

 

Notable trends:

Coffee prices declined -12.1% over the past week.  However, they have surged +60.2% YTD and remain up +21.5% YoY due to a prolonged drought in Brazil that has hampered national productivity levels.  The two largest players in the coffee space, SBUX and DNKN, are essentially hedged for all of FY14, but we believe this increase has negatively affected sentiment within the space and could be a headwind in FY15.  Takeaway – bearish for SBUX, DNKN, GMCR, KKD and THI.

 

Pork and Beef prices continue to tick higher, up +3.2% and +1.8%, respectively, over the past week.  They are now up +50.1% and +16.0% YoY, respectively.  Don’t expect much relief anytime soon – pork prices continue to be pressured by low slaughter rates and a tight supply, while the overall impact of PEDv remains unknown.  Beef prices continue to rise amid a decline in cow herd sizes.  Operators don’t expect much relief anytime soon as cattle herds take approximately two years to hit the market.  Takeaway – bearish for TXRH, RRGB, BLMN, CMG, MCD, JACK, SONC, WEN and others with notable exposure.

 

Cheese Block and Milk prices are now up +49.4% and +37.6% YoY.  Many operators expect, and have expected, these prices to moderate, but we have yet to see any signs of a slowdown.  CME cheese block prices remain close to a decade high.  We’ll continue to monitor these trends closely, as we have identified them as one of several critical factors in our short CAKE thesis.  Takeaway – bearish for CAKE, DPZ, PZZA, TXRH, BLMN, SBUX, DNKN and others with notable exposure.

 

Wheat prices surged +5.6% over the past week, while Corn declined -0.1%.  Both commodities are down -6.8% and -16.9% YoY and continue to provide some relief for operators.  However, this benefit will continue to deteriorate if wheat stays on its current trajectory.  Takeaway – has been bullish for everyone in Q1, but the trajectory has been decidedly bearish, on the margin, over the past month.

 

Chicken and Chicken Wing prices continue to provide relief to operators with notable exposure and menu flexibility.  Both commodities are down -7.3% and -26.6% YoY, respectively.  Takeaway – bullish for YUM, PLKI, BWLD and others with notable exposure.

 

Gasoline at the Pump is down -4.6% YoY, despite ticking up +0.3% over the past week.  Takeaway – despite being down on a YoY basis, gasoline prices have been quietly ticking over the past month.  Any sustained increase or decrease in gas prices could have a significant impact on the direction of discretionary spending and the consumer’s willingness to eat out.  While current prices are a bullish data point for the industry, current trends suggest this may soon change.

 

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Howard Penney

Managing Director

 

Fred Masotta

Analyst


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ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks

Takeaway: The most recent ICI fund flow survey relayed the strongest taxable bond fund flow in well over 3 quarters since May of 2013

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, while equity mutual funds continued positive flow trends the real story was the continued momentum in fixed income with the highest weekly inflow into taxable bond products since the second week of May last year:

 

Total equity mutual funds produced another week of inflow with $3.1 billion of net subscriptions, a deceleration from the $5.3 billion inflow the week prior. The $3.1 billion inflow had a domestic fund bias during the most recent 5 day period ending March 12th, with $1.9 billion flowing into U.S. equity funds and $1.2 billion flowing into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.7 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds continued improving fund flow trends for the week ending March 12th with $5.2 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $4.7 billion into taxable products and a $551 million inflow into tax-free or municipal products. The inflow into taxable products this week was the largest subscription in 44 weeks since the second week of May last year and the inflow into municipal or tax-free products was the 9th consecutive week of positive inflow. The 2014 weekly average for fixed income mutual funds now stands at a $1.4 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).

 

ETFs had mixed trends during the week, with a positive week of subscriptions in stock ETFs with $5.4 billion in net inflow with bond ETFs experiencing a slight $940 million outflow. The 2014 weekly averages are now a $337 million weekly outflow for equity ETFs and a $888 million weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.2 billion spread for the week ($8.5 billion of total equity inflow versus the $4.3 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.5 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Continued positive equity mutual fund inflow currently supports our long recommendation on T Rowe Price (TROW) which benefits from this trend with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the nascent trends on the institutional side of the industry, which is seeing a shift in asset allocation into fixed income and alternatives as pensions de-risk away from equities  (see our Legg report here).

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

 

ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks - ICI chart 1

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks - ICI chart 2

 

ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks - ICI chart 3

 

ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks - ICI chart 4

 

ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks - ICI chart 5

 

ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks - ICI chart 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks - ICI chart 7

 

ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks - ICI chart 8

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.2 billion spread for the week ($8.5 billion of total equity inflow versus the $4.3 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.5 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

 

ICI Fund Flow Survey - Best Taxable Bond Fund Flow in 44 Weeks - ICI chart 9 

 

 

Continued positive equity mutual fund inflow currently supports our long recommendation on T Rowe Price (TROW) which benefits from this trend with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the nascent trends on the institutional side of the industry, which is seeing a shift in asset allocation into fixed income and alternatives as pensions de-risk away from equities  (see our Legg report here).

 

 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 



LULU: SURVEY RESULTS PREQUEL #4/BRAND LOYALTY

Takeaway: Here we explore a) brand loyalty and b) why people spent less - critical factors we'll be looking at for incremental change on Mon 3/24

Here's the fourth note in a series of five in advance of our LULU Consumer Survey results on Monday March 24th at 11am ET.  When we polled consumers three months ago, we pulled away some clear insights. The concerns largely outweighed the strengths, which foreshadowed the company's results, and ultimately the stock price.

 

We're re-running our survey to gauge the incremental change over the past quarter, with the goal of seeing whether LULU is making progress (which could get us more constructive on the name) or not.

 

In preparation for 'Round 2' we want to offer up some of the notable takeaways from our last survey, as they'll be framing the discussion on Monday.

 

'LIKELY TO RECOMMEND'

 

We asked consumers which Yoga brands they are likely to recommend to friends. The highest scores were Sweaty Betty, Prana, Nike, UnderArmour and Idealogy (Macy's). At the other end of the spectrum, unfortunately, was Lululemon, Old Navy, Puma and Roxy.  Definitely a problem for LULU -- one that few people, even the company, are likely to debate.

 

LULU: SURVEY RESULTS PREQUEL #4/BRAND LOYALTY - likey reco

 

On the flip side, we asked which brands are highest on the list of brands that you are UNLIKELY to recommend to friends. This is slightly different than the inverse of the first question, as it looks to measure negativity as opposed to lack of positivity.  But the results are the same in that Lululemon scored higher than any other brand on the 'unlikely to recommend' scale. Other notables include Old Navy and VS/Pink.  

 

LULU: SURVEY RESULTS PREQUEL #4/BRAND LOYALTY - unlikely reco

 

WHY NOT PURCHASING

 

Next we asked the people who have never purchased anything at Lululemon why they don't shop there (this was about 30% of our sample). The primary factor is that there are no stores in their area -- which is actually a bullish factor for LULU. That speaks to the square footage growth opportunity for the company.   The next factor -- and only other one that registered at a notable level -- is that prices are too high. We discount this to some degree, as certain people in the sample simply might not be able to afford high end Yoga apparel.

 

LULU: SURVEY RESULTS PREQUEL #4/BRAND LOYALTY - purchasingless why

 

WHY PURCHASING LESS

 

More interesting to us is the rationale people who are purchasing less product than they used to gave as to their altered purchasing habits. This one was interesting.

 

The top answer -- by a country mile -- is that the prices are too high. In fact 76% of the people in this group said so. Importantly, they are preexisting customers of LULU, so you can't just say that they can't afford it. The reality is that at one point price was not a factor, but three months ago, it was.

 

#2 answer = Dislike Corporate Management. Seriously, have you ever heard Main Street talk about not liking a corporate management team? Wall Street says it all the time, but for this to be an issue with Main Street it has to be really bad.

 

#3 answer = Poor Reputation. Again, this is likely a function of LULU's self-inflicted wounds. It had nothing but a stellar reputation 13 months ago.

 

#4 answer = Poor Quality Products. We're the first to admit that Lululemon's product -- generally speaking -- is outstanding quality. In fact, that may be an issue for them in that a pair of Yoga pants can literally last 5-years (not good for the replacement cycle). But that's not a bad problem to have. In this case, most of us agree that any ding to LULU's reputation on quality is entirely a function of Luon. We'll see with our next survey on Monday if public perception on this issue is getting a bit more forgiving.

 

LULU: SURVEY RESULTS PREQUEL #4/BRAND LOYALTY - never why


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