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BEST IDEAS UPDATE: PARTY TIME IN BRAZIL?

Takeaway: Our bullish bias on the BRL is working and, as anticipated, so are Brazilian equities & EM assets broadly. We see further upside from here.

EM RELIEF RALLY “ON”

On Wednesday, we published our updated thoughts on EM capital and currency markets strategy (CLICK HERE to review). That piece was long and thorough, so in the interest of not taking up too much of your time on a Friday afternoon, we’ll keep this note brief...

 

The key takeaway is simple:

 

We are broadly bullish on EM assets with respect to the intermediate-term TREND duration. On a forward-looking basis, we no longer see the same globally interconnected headwinds that caused us to get so pervasively negative on emerging markets roughly 1Y ago when we introduced the first of many subsequent presentations supporting our #EmergingOutflows theme.

 

Indeed, it would seem that the relief rally we started to call for on our FEB 27 conference call on Brazil has materialized and we anticipate further upside. Moreover, the nature of the rally (i.e. being led by the countries generally perceived as the most risky) is very much in line with our expectations.

 

  • EM assets are up +1.9% on average at the asset class level since then… that compares to a -0.3% decline for the US equity market over that same duration.
  • EM country-level ETFs are up +1.6% on average… India (EPI) at +11.9%, Turkey (TUR) at +10.6%, Indonesia (EIDO) at +7.6% and Brazil (EWZ) at +7.2% account for the four positive divergences (i.e. > +1 sigma vs. the mean) in the sample.

 

PARTY TIME IN BRAZIL?

Looking into Brazil specifically, yesterday we received the first of what is likely to be several supportive catalysts with respect to our bullish bias. Specifically, a CNI-Ibope poll showed President Rousseff’s approval rating  ticked down to a record-low of 51%; that marks the first sequential decline since JUL ’13, when millions of Brazilians took to the streets across the country in protest over inflation and the mismanagement of public funds.

 

The results of the poll are supportive of our belief that: A) the threat to Dilma Rousseff’s presidency is real come OCT 5th; and B) at the bare minimum, popular discontent will amplify the perceived failures of her economic policies during the campaign season, which opens the door for her Worker’s Party (PT) to cede share in the Brazilian legislature. One-third of Senate seats are up for grabs in the upcoming general election and as are all 513 seats in the Chamber of Deputies. To the extent opposition parties form a stronger mandate we could see a gridlock-induced cap on Rousseff and Finance Minister Guido Mantega’s expansionary fiscal policies – assuming they even return to power in 2015.

 

In conjunction with the news release yesterday, the BRL jumped nearly a full +2% vs. the USD; Brazil’s benchmark Bovespa Index ripped +3.5% and was led by state-run companies like Electrobras (+9.8%) and Petrobras (+8.1%). We continue to think contrarian equity investors will find PBR as attractive on the long side as we do amid the prospect for fuel pricing reform and a likely acceleration in production growth. Refer to our FEB 27 slide deck for more details.

 

Lastly, we just wanted to thank Standard & Poor’s for Monday’s downgrade of Brazilian sovereign debt for helping cement what we clearly think is: A) a bottoming process in the prices of Brazilian financial assets; and B) a topping process in pervasively bearish sentiment towards Brazil among international capital allocators.

 

IT’S NOT JUST A BRAZIL THING

If you are looking for some long ideas in the EM space, then you’ve come to the right place. We have a number of high-conviction ideas that: A) have been working; and B) we expect will continue working as additional catalysts materialize.

 

  • Long India: The EPI ETF is up +12.4% since we outlined our thesis on OCT 29; that’s good for the third best performance across the basket of EM country-level ETFs we track.
  • Long “New China” (CQQQ + CHIQ)/Short “Old China” (CHIX + CHXX): On an equal-weighted basis, this strategy is up +18.4% since we outlined our thesis on DEC 4.
  • Long Indonesia: The EIDO ETF is up +19% since we outlined our thesis on JAN 30; that is the best-performing EM country-level ETF over that duration.

 

BEST IDEAS UPDATE: PARTY TIME IN BRAZIL? - EM Divergence Monitor

 

BEST IDEAS UPDATE: PARTY TIME IN BRAZIL? - 2

 

We need to do more work on the long side of Turkey (TUR), lol… the mean reversion opportunity afforded by a -33.9% YoY decline is substantial indeed!

 

In all seriousness, please shoot us an email if you want to see our work on any of these plays and we’ll be happy to get the relevant materials over to you and/or to set up a call.

 

Have a great weekend,

 

DD

 

Darius Dale

Associate: Macro Team


Stock Report: Legg Mason Inc (LM)

Stock Report: Legg Mason Inc (LM) - HE LM T 3 28 14

THE HEDGEYE EDGE

A recent speaker’s series call with a leading pension fund consultant relayed that “at funded” U.S. corporate pensions are now de-risking from equities and are shifting asset allocation into fixed income and alternatives. 

 

The biggest exposure to institutional fixed income of the public asset managers is at Legg Mason with 71% of the company’s business within institutional mandates with the majority of that in bonds.

 

Separately we estimate that as the Fed starts to taper and come off of the bond curve that rates will actually decline and not increase because a reduction in quantitative easing will slow growth. This will also benefit leading bond managers.

 

 

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

With 11% short interest (the second highest in the group) and the lowest ranked stock of the big 6 public asset managers (with only 3 buys in coverage by 18 analysts) even just marginally improved trends should send the stock to the lows 50 per share range.

 

 

LONG-TERM (TAIL) (the next 3 years or less)

Within this pension de-risking theme we estimate that up to $500 billion should come into leading fixed income managers and up to $1 trillion should be redeemed within core S&P 500 institutional equity mandates. If this theme materializes Legg should see a disproportionate amount of inflow versus other managers which would lead to substantial earnings power above Street estimates.

 

We think the company can earn $3.50 next year, 10% above Street estimates, which at an industry multiple would translate into a fair value of $60 for the stock. 

 

  

ONE-YEAR TRAILING CHART

Stock Report: Legg Mason Inc (LM) - HE LM C 3 28 14


Stock Report: Hologic, Inc. (HOLX)

Stock Report: Hologic, Inc. (HOLX) - HE HOLX T 3 28 14

THE HEDGEYE EDGE

We think Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In out view, Hologic and it's new management are set to show solid growth over the next several years.

 

We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  

 

The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time.

 

In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading.

 

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

Carl Icahn has recently declared his interest in Hologic.  We are not quite sure what his plans are to improve the company. Speculation has been somewhat dampened by public comments made by management.  At a minimum, Icahn's involvement provides some downside protection for the shares.

 

 

LONG-TERM (TAIL) (the next 3 years or less)

If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.  When we measured the increase in products and services these typically younger uninsured individuals will consume when they get insurance, Hologic's products are at or near the top of the list.  As the ACA matures over the coming years, we'd expect a tailwind for HOLX.

 

  

ONE-YEAR TRAILING CHART

Stock Report: Hologic, Inc. (HOLX) - HE HOLX C 3 28 14


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Nike is Betting Big on Johnny Manziel | $NKE

Takeaway: We don't like the stock here. We like this development.

Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough. For more information on our services, click here.

 

Nike is Betting Big on Johnny Manziel | $NKE - 1b263215f5c9551a0593fa93de01ad79 crop north

 

Nike Showcases Johnny Manziel Pro Day Collection

 

• "Nike, which recently signed Johnny Manziel to an endorsement contract, is wasting no time cashing in. At Texas A&M's pro day on Thursday, Manziel elected to wear Nike full pads and helmet, a move that surprised scouts and the media since most players do not suit up with a helmet during these types of workouts. Nike tweeted out a link to buy all the items from the Manziel 'Pro Day Collection.'”

 

Nike is Betting Big on Johnny Manziel | $NKE - chart1 3 28 large

Takeaway from Hedgeye’s Brian McGough:

Let's be clear. We still think that Texas A&M quarterback Johnny Manziel is a colossal, gigantic, enormous, huge blow-up risk. 

 

But we give Nike a lot of credit on how they're handling this one.


Their old method was:

1)      Endorse big athletes;

2)      Stick them in ads; and

3)      Hope that it trickles down to the mainstream product.

 

In this case, though, Nike has a full array of products associated with Manziel for Pro Day –far from when he even will even see a snap in the NFL.  This marks a fundamental change for how Nike is handling endorsements.

 

We still don't like the stock here…but we do like this development.

Subscribe to Hedgeye.



STALL SPEED: INCOME, SPENDING & CONFIDENCE

Summary: 

  • Both incomes and spending decelerated in February while Core PCE inflation was static at a dovish, stall speed of just 1.1%. 
  • The income/spending deceleration was broad based with some negative weather drag, but the trend is one of deceleration and the primary pockets of spending strength in February are likely to be ephemeral.
  • High End Demand: It turns out that the rich are still pretty rich and high ticket discretionary spending saw a moderate bounce in February.  Wealth effect spending, however, probably continues to ebb.
  • Healthcare Spending:  At ~19% of Total household expenditures, spending on Medical Care matters, and Obamacare is distorting the numbers.  
  • Confidence: March marked a second month of mixed consumer confidence reports. Sentiment continues to meander alongside the dollars descent.  
  • FINALLY!:  Outside of some lagging housing data, all the material domestic, fundamental macro data for February has been reported….enjoy the oversold bounce and blithely enter the weekend knowing the vexatious ubiquity of weather caveat-ed macro releases has finally ended. 

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - Income   Spending Table Feb

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - Eco Summary Table 032814

 

 

PERSONAL INCOME:   3 Months of Deceleration

 

Weather probably served as a negative distortion on reported, aggregate personal income in February, but with total Personal Income, Disposable Personal Income (DPI), DPI per capita and Private Sector Salary & Wage growth all decelerating for the 3rd consecutive month in February it feels hard to argue that weather is masking a strong underlying trend of acceleration. 

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - Personal Income Feb

 

Private Sector Salaries and Wages decelerated by -60bps and -50bps on a YoY and 2Y basis, respectively, while aggregate government sourced wage income accelerated 30bps on a 1Y while holding flat sequentially on a 2Y basis. 

 

Alongside the spending friendly budget deal and ongoing positive state & local government employment growth, we continue to expect government salary and wage income to provide some modest upside to income growth in 2014. 

 

The savings rate ticked up to 4.3% from 4.2% but remains near historical trough levels.

 

The capacity for a further decline in savings to support incremental consumption growth remains very much constrained at current levels.   

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - Salary   Wages

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - Savings Rate 

 

CONSUMER SPENDING:  Healthcare & High End Discretionary supported February consumption expenditures.  The former is either transient or likely to be revised significantly and the latter isn’t likely to repeat last year’s performance.   

 

HIGH END DEMAND:  Last month we highlighted the deceleration in demand at the high end as implied by the slowdown in spending on luxury durables. 

 

As it turns out, however, the rich are still pretty rich and high ticket discretionary spending saw a moderate bounce in February (see yesterday’s note for more on the latest income division dynamics - INFLECTIONS OR FALSE POSITIVES?). 

 

The read through here is mixed as the contribution to total durables growth from higher-end discretionary helped mask more broader weakness. 

 

Further, with stocks flat YTD, housing decelerating and the Fed beginning to reign in their explicit, asset re-flation (i.e. wealth effect) policy agenda, the probability for the top income quartiles to provide incremental demand growth (in similar magnitude to last year) seems to be diminishing.

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - PCE Luxury

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - Luxury Goods   Contribution

 

HEALTHCARE SPENDING:  DISTORTED, TRANSIENT OR BOTH?

Spending on Healthcare Services has been the notable positive outlier over the last few month and the effect stems largely from the implementation of Obamacare.

 

The reported figures are very much an estimate and the preliminary data are likely to be revised significantly over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.   

 

With reported Hospital and Outpatient spending both accelerating materially, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes. 

 

Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~19% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth.    

 

To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend. 

 

Unfortunately, like the now ubiquitous weather asterisk, we’ll just have to hurry up and wait to get a clearer read on the magnitude of the impact. 

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - Healthcare PCE

 

 

 

CONSUMER CONFIDENCE:  Across the primary survey's, March proved to be a second straight month of meandering for consumer confidence. 

 

The final University of Michigan Consumer Sentiment reading for March declined -1.6pts sequentially to 80.0 – the worst reading in 4 months. 

 

The conference board and Bloomberg Surveys, meanwhile, showed consumer confidence improving by 4pts and 1.6pts, respectively, in March.    

 

Notably, the relationship between the $USD and confidence remains reasonably strong.   The dollar is currently in Bearish Formation (Broken Trade, Trend & Tail) and with growth slowing and commodity inflation accelerating the balance of risk for the currency remains to the downside, in our view.  

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - USD vs Confidence

 

STALL SPEED: INCOME, SPENDING & CONFIDENCE - Confidence Table 032814

 

 

Christian B. Drake

@HedgeyeUSA

 


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