“People don’t just share information, they tell stories.”
Per Jonah Berger in his new best selling #behavioral book, Contagious, that’s one of six principles that “cause things to be talked about, shared, and imitated” – storytelling. Some of the others you might want to consider are things like “social currency”, triggers, and emotion (page 23).
What makes research content #contagious? That will be topic #1 at our company meeting day @Hedgeye HQ tomorrow. All 52 of our employees will get a copy of the book and be asked to answer that question in 140 characters or less.
So tell me a story about what’s happening in markets for 2014 year-to-date. It’s the end of the 1st quarter, so don’t forget to augment your story with last price. After all, storytelling in our profession starts with a rear-view looking score.
Back to the Global Macro Grind …
“What broader narrative can we wrap our idea in?” –Berger (pg 24). Given the US economic data and how markets have scored it YTD, I think the answer to that is pretty straightforward: inflation slows growth.
That, of course, is the opposite of where consensus was when 2014 started. Virtually all of the #OldWall and Washington economists and strategists were taking up both their US GDP and SP500 forecasts. On inflation, the cover of the (Keynesian) Economist (NOV 2013) was titled “The Perils of Deflation.”
Instead, 3 months into the year:
- #InflationAccelerating = CRB Commodities and Food Indexes +8.9% and +19.3% YTD, respectively
- #GrowthSlowing = 10yr UST Bond Yield -31bps YTD to 2.72%
- YTD US Stocks = Dow Jones -1.5%, Russell2000 -1.0%, Nasdaq -0.5%, and SP500 +0.5%
Not to be confused with the Italian Stock Market (MIB Index), which has been the recipient of a #StrongCurrency Tax Cut (CPI in March fell to +0.4% y/y), and is up another +0.7% this morning to +14.2% YTD, the US consumer side of the US stock market has been flat out ugly.
Within the SP500’s roaring +0.5% YTD gain there’s a significant amount of #SectorVariance:
- US Consumer Discretionary (XLY) down another -2.1% last week to -3.8% YTD
- Whereas slow-growth #YieldChasing Utilities (XLU) were +1.2% in a down SPX tape last wk to +8.0% YTD
While we realize that both the (un-elected) Fed and the (elected) US Government say there is no impact on America when food inflation accelerates, we’ll still keep reality on your radar:
- Coffee prices were up +5.5% last week to +59.9% YTD
- Corn prices were up +2.7% last week to +14.4% YTD
- Soy prices were up +2.0% last week to +12.5% YTD
Oh, that would be in US Dollar terms.
Yes, dear linear-economists, I have a non-fiction story for you - inflation is priced locally (i.e. in local currency). So, if you get the rate of change (slope of the line) in a country’s currency right, you’ll get inflation right. If you get the slope of inflation right, you’ll get the rate of change in real growth right.
With the US Dollar Index still below our long-term TAIL risk line of $81.17, maybe that’s why we are starting to see a resurgence in the mother of all Burning Buck trades – Emerging Markets. Yep, as in the ones in Asia and Latin America that hit all-time highs when the US Dollar Index hit all-time lows (2011).
With Facebook (FB) face planting last week, look at what Emerging Markets did:
- MSCI Emerging Markets Index = +3.2% on the week to -2.7% YTD
- MSCI Latin America Index = +5.2% to -1.9% YTD
Yep, the squirrels in Brazilian Equities are running wild again as Latin America goes nuts for an alternative to being long a US social-media-bubble stock that lost 30-40% of its value in a month!
So would you rather be long socialism or social media? Tell me a story.
With a 3-5 year old story about “Flash Boys” (machines front-running monkeys) being popularized by Michael Lewis and 60 Minutes last night, I’m looking for something no one has borrowed from someone else. I’m looking for a broader narrative that can make us money by being early, instead of popular.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.64-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP – March 31, 2014
As we look at today's setup for the S&P 500, the range is 32 points or 0.63% downside to 1846 and 1.10% upside to 1878.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.29 from 2.27
- VIX closed at 14.41 1 day percent change of -1.44%
MACRO DATA POINTS (Bloomberg Estimates):
- 9am: ISM Milwaukee, March (prior 48.59)
- 9:45am: Chicago Purchasing Mgr, March., est. 59.0 (prior 59.8)
- 9:55am: Fed’s Yellen speaks in Chicago
- 10:am: Annual Wholesale Inventory and Sales Revisions
- 10:30am: Dallas Fed Manufacturing, March, est. 3.0 (prior 0.3)
- Noon: USDA quarterly grain stocks report
- 8pm: St Louis Fed VP David Andolfatto on virtual currencies
- Obamacare reaches March 31 deadline
- Senate to vote on House-passed doc-fix legislation w/60-vote threshold to send to Obama for signature
- Senate vote on whether to take up HR2979, incl. extension of jobless benefits
- Senate Finance Cmte will likely vote during this week to revive dozens of tax breaks that expired Dec. 31
- IMF releases parts of Global Financial Stability Report
- 10am: Supreme Court releases case list, hears arguments in software patenting case
- 10:30am: FCC holds monthly open commission mtg; to consider Chairman Tom Wheeler’s multiple tv station mkt control proposal, Wi-fi use
WHAT TO WATCH:
- Kerry demands Russian retreat, Lavrov seeks federal Ukraine
- Putin calls Obama to discuss resolution to Ukraine
- World ill-prepared for global warming impact, UN panel says
- Obamacare deadline for some private insurance sign ups
- Banks including Citi, JPMorgan in Swiss regulator focus on FX
- GM air bag defect investigation considered by U.S. in 2007
- MH370 searchers operating on guesstimates, Abbott says
- Paramount’s “Noah” rises to top box office in weekend debut
- High-frequency traders ripping off investors: Michael Lewis
- Supreme Court releases case list, hears software patenting case arguments
- Apple-Samsung patents trial begins in San Jose
- Port Authority’s Samson resigns after report blasts agency
- Medtronic ends symplicity HTN-4 trial, mulls IDE path forward
- Medtronic novel aortic valve reduces deaths vs surgery
- Tesla says China general manager Kingston Chang left co.
- Blucora said to plan all-cash offer for Brookstone: WSJ
- Japan Feb. industrial production falls 2.3% m/m; est. up 0.3%
- Euro-area inflation lowest in more than 4 years, misses ests.
- Samsung SDI agrees to buy Cheil Industries for $3.3b
- Erdogan’s party wins Turkish municipal vote; lira rises
- Alibaba to spend $692m to partner with Intime Retail
- Daylight saving change takes place in U.K., most of Europe
- Cal-Maine Foods (CALM) 6:30am, $1.59
- Gas Natural (EGAS) 4:14pm, $0.30
- InterOil (IOC) 6am, $0.04
- Tribune (TRBAA) pre-mkt, $0.99
- UTi Worldwide (UTIW) 8am, ($0.12)
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Nickel Set for Biggest Quarterly Gain Since 2010 on Supply View
- Shanghai Gold Cheapest to London Since 2012 on Weak Demand
- Grain Bulls Proved Right With Best Rally Since 2010: Commodities
- WTI Trades Near 3-Week High on U.S.-Russia Talks; Brent Steady
- Nickel-Ore Supply in China Seen Lasting Five More Months on Ban
- Gold Trades Near 6-Week Low for Monthly Drop on Stimulus Outlook
- Wheat Pares Biggest Monthly Gain Since 2012 on Rains; Corn Falls
- Sugar Falls After Wk-Long Rally on Weather Doubts; Arabica Drops
- World Ill-Prepared for Global Warming Impacts, UN Panel Says
- Rebar Pares Biggest Quarterly Drop in 9 Months as Output Falls
- Record Natural-Gas Need Keeps Bulls Betting on Advances: Energy
- Former Xstrata CEO Davis Raises About $3.75 Billion to Buy Mines
- U.S. Thermal Coal Faces Tough Road on Retirements, Clean Energy
- Gold Sales by Japanese Retailer Jump Fivefold Before Tax Change
The Hedgeye Macro Team
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.
Editor's note: This was originally published March 28, 2014 at 15:09 in Macro. For more information on Hedgeye click here.
EM RELIEF RALLY “ON”
On Wednesday, we published our updated thoughts on EM capital and currency markets strategy. 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.
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,
Associate: Macro Team
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Takeaway: Current Investing Ideas: CCL, DRI, HCA, HOLX, LM, LO, OC, RH, TROW and ZQK
Below are Hedgeye analysts' latest updates on our TEN current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.
We added two new names this week: Hologic and Legg Mason.
We also feature three research notes from earlier this week which offer valuable insight into the market and economy.
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
HEDGEYE CARTOON OF THE WEEK
CCL – Carnival traded down 6.8% this week while the S&P 500 Index was down 0.5%. Last week’s optimism regarding improving European economies and stronger European consumer spending was quickly tempered when Carnival announced fiscal first quarter 2014 earnings on Tuesday prior to the market open. Recall, our proprietary March 2014 cruise line pricing survey indicated the Carnival brand showed the greatest positive pricing momentum in sequential pricing among the big 3 cruise line operators in March 2014.
During the company’s earning conference call, Carnival confirmed the uptick in pricing we saw in our survey – which is a positive fundamental trend. However, investors reacted negatively to Carnival’s forward earning guidance.
Our full-year fiscal earnings estimates remain above management’s guidance as we remain convinced the recent pricing power is both sustainable and enduring – and will ultimately translate into better than expected revenues and earnings. We view the recent price weakness as temporary, as well as a great entry point for accumulating CCL shares.
DRI – Earlier this week, Barington Capital wrote a letter to Darden’sindependent directors suggesting they begin their search for a new CEO. Barington CEO James Mitarotonda blasted current Darden CEO Clarence Otis, noting his concern with the “rapidly deteriorating financial performance” of the company.
It’s becoming an increasingly fragile situation over at Darden.
Shareholders and activists are beginning lose all faith in the current management team. Mitarotonda, who previously called for the Chairman and CEO role to be split, is leading an increasingly public campaign against the company.
In response to Mitarotonda’s letter, Darden once again urged shareholders to reject the special meeting and, once again, failed to provide a legitimate reason to do so. If the company is so confident in their plans, they should welcome the meeting and leave the floor open to debate. Instead, they are doing everything in their power to push forward with the plan to spin-off Red Lobster – without the approval of shareholders! This tells us they are hiding something and puts a huge question mark on the company’s already questionable credibility.
HCA – Since being added to Investing Ideas on 6/14/13, shares of HCA Holdings have risen 27% doubling the 13.5% return on the S&P 500. Healthcare Sector Head Tom Tobin will have a new update next week.
HOLX – Hedgeye Healthcare Sector Head Tom Tobin added Hologic to Investing Ideas earlier this week. Click here to read the full report.
LM – We added Legg Mason (click here to read the full report) an asset management company based in Baltimore to Investing Ideas this past week.
In a nutshell, we think shares have over 20% up over an intermediate term duration.
Our investment thesis on the stock is predicated that “at funded” U.S. corporate pensions are now de-risking from equities after over 5 years of outperformance in the asset class and are shifting asset allocation into fixed income and alternatives. This will benefit leading bond managers most specifically Legg Mason which has the largest exposure of the publicly traded asset managers to institutional fixed income assets.
Separately, we estimate that as the Fed starts to taper and come off of the bond curve, that interest rates will actually decline and not increase because a reduction in quantitative easing will slow growth. This will also benefit leading bond fund managers as fixed income performance can improve after last year’s dismal returns. 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.
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 this stock to a much improved valuation range.
LO – Shares of Lorillard were up 2.3% on the week – in-line with a stock we think will grind higher on advantaged menthol fundamentals, limited regulatory risk, and a growth engine in blu e-cigarettes.
This week we held conference call with the President of LOGIC, a private e-cig manufacturer since 2010 with the #2 national brand in unit and dollar share for C-Stores in the United States (according to Nielsen).The substance of the call substantiated our bullish outlook on the e-cig industry.
We continue to believe that the e-cig industry will consolidate, led by Big Tobacco, and in particular by Lorillard. We expect blu to continue to maintain its category leadership, despite increased e-cig competition from RAI (Vuse) and MO (MarkTen).
OC – This past Monday CEO Keith McCullough, appeared on “Opening Bell” with Maria Bartiromo and pointed out companies like Owens Corning which are able to absorb inflation in its pricing. While #InflationAccelerating is not the dominant point of our thesis, we believe it will not be a headwind compared to other companies, who are dependent on lower energy and food costs.
We are more interested in supply and demand imbalances. With residential and non-residential construction needing to double to return to post-WWII averages, the company with the largest market share (among other factors) in building products subsections can benefit tremendously from these imbalances. Owens Corning holds approximately 40% of a reasonably consolidated market for fiberglass insulation. OC shares ended the week up 2.3%.
RH – Shares of Restoration Hardware rocketed over 12% on Friday after the company reported better-than-expected results and guidance.
For the record, RH remains our highest conviction long idea in the Retail space, with ultimate earnings power of $11 per share and a stock price in excess of $200.
The company’s 4Q print supported our thesis in many ways. But despite all the positives around revenue outlook, store growth, and margin upside, the biggest growth in the quarter from our perspective was not found in a line item…it was in the CEO.
When we talk to investors about RH, almost every single critic lists Gary Friedman as a chief concern now that (former Co-CEO) Carlos Alberini has left the picture. In investors’ minds, Gary was the product guy, and Carlos did everything else. That’s an incorrect view, but like it or not, that’s the perception. Well, this quarter Gary literally sounded like a different person. He spent more time talking about ROI, capital deployment and managing risk in the business as he did talking about product and merchandising. The only question to be answered is whether this is just a temporary Gary we’re seeing in the immediate wake of Carlos’ departure, or if this marks a structural change to how he approaches his role. Critics will claim the former. We think it’s the latter. Time will tell, but there’s no disputing the change as it appears today.
We’re not making any material changes to our estimates. We still think that the company will have a far better year than it’s guiding. As much as that should make the stock continue to grind higher, the real upside comes from earnings expansion as this growth story plays out – which literally begins in April/May with the redesign of its product line, launch of its Sourcebook (all 3,200 pages of it), and the opening of the new store in Greenwich (which kicks off a mini-burst of square footage growth).
TROW – Shares of T Rowe Price are bouncing around with the market as of late, but we encourage investors to stay the course. In our initial asset management sector launch in the middle of last summer, we highlighted a forthcoming investable shift in mutual fund flows from outsized fixed income asset allocation by retail investors since 2008 and the Financial Crisis into equity mutual funds which hadn’t seen any annual inflow since 2007. This would benefit T Rowe Price as the leading equity mutual fund provider with the industry’s best performance in hoovering returning equity inflow.
The shift into equity funds from bond fund has been significant over the past 9 months and we estimate this will be well reflected in the upcoming 1Q 2014 earnings report from TROW, which will have the best numbers in the group. We then think shares will have appreciated to a level for investors to take a breather on TROW stock and focus on Legg Mason, which has better intermediate term prospects on institutional asset management trends as outlined above.
ZQK – One of the points of emphasis for Quiksilver is footwear. The company’s CEO, Andy Mooney, has a strong pedigree in the space having grown up at NKE, and it’s a category that is significantly underpenetrated accounting for just 25% of sales in 2013. There is opportunity for all three brands, but the main focus of that push will be concentrated on the obvious candidate, DC.
DC was in the worst shape post management shakeup in early 2013. Take a look at the brands recent US Wholesale sales trends below. What happened is DC rode a fashion trend from Spring ’12 through the end of that year and purchased inventory based on the assumption that those trends would continue. Except the trend didn’t continue into ’13 and the company was left with a pile of inventory on its balance sheet. In order to liquidate the excess, DC was forced to up its promotional cadence and ASP (average sale price) has fallen for 16 straight quarters.
Coming out of 1Q14 the company is in a much better inventory position and able to buy appropriately for the company’s push in 2H. This coincides with the brand repositioning itself in the vulcanized footwear segment. 120mm pairs of vulcanized shoes are sold per year at the $45-$55 price point – DC, who focused on higher priced technical product, has virtually no presence in this lifestyle segment which is dominated by Vans. Starting in the fall, DC will finally go to market with an assortment focused on the lifestyle consumer and we expect ZQK to leverage DC’s extremely relevant brand identity to kick start footwear.
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Restaurants Sector Head Howard Penney has upped his conviction in PNRA as a high-quality short.
We are inclined to believe the current relief rally across EM capital and currency markets has legs w/ respect to the intermediate term.
"I’ve seen a lot in trying to trade markets for the last 16 years," writes CEO Keith McCullough. "But I haven’t yet seen something like this."
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