TODAY’S S&P 500 SET-UP – April 15, 2014
As we look at today's setup for the S&P 500, the range is 51 points or 1.45% downside to 1804 and 1.33% upside to 1855.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.28 from 2.28
- VIX closed at 16.11 1 day percent change of -5.40%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am: ICSC weekly sales
- 8:30am: Empire Manufacturing, April, est. 8 (prior 5.61)
- 8:30am: CPI m/m, March, est. 0.1% (prior 0.1%)
- CPI Ex Food and Energy m/m, March, est. 0.1% (prior 0.1%)
- 8:30am: Fed’s Lockhart speaks at Stone Mountain, Ga., conf.
- 8:45am: Fed’s Yellen speaks to Stone Mountain, Ga., conf.
- 8:55am: Redbook weekly sales
- 9am: Net Long-term TIC Flows, Feb. est. $30b (prior $7.3b)
- Total Net TIC Flows, Feb. (prior $83b)
- 10am: NAHB Housing Market Index, April, est. 49 (prior 47)
- 3pm: Fed’s Plosser moderates panel at Stone Mountain
- 4pm: Fed’s Rosengren speaks in Bangor, Maine
- 4:30pm: API weekly oil inventories
- 8pm: Fed’s Kocherlakota speaks in Fargo, N.D.
- FEC 1Q filing deadline for congressional campaign cmtes, some PACs and some party cmtes
- 2pm: Bloomberg Government holds “Is This The First (And Final) Act of the Tax Overhaul?” Webinar
- House, Senate on recess
- U.S. ELECTION WRAP: RNC’s Focus on Women; First Quarter Funds
WHAT TO WATCH:
- Diageo offers $1.9b to gain United Spirits majority stake
- China new credit declines as money-supply growth slows
- Obama warns Putin on Ukraine after deadly clashes in East
- German investor confidence declines for fourth month in April
- Nestle reports slowest 1Q sales growth since 2009
- Roche’s 1Q sales fall on strength of Swiss Franc
- SABMiller considers options for $1.04b Tsogo Sun stake
- Moelis IPO offers founders riches as investment bank shrs fall
- GM CEO seeks new top spokesman, replaces human resources chief
- Heartbleed hackers steal encryption keys in test showing danger
- Hedge fund’s gains on distressed debt decline to 7-month low
- Dell extends offerings for SAP’s Hana to win business clients
- JPMorgan, Citigroup, others release monthly delinquencies
- Encana seeks to tap oil royalties demand with unit IPO by June
- Rio produces record iron ore output as global supply gains
- Onex, Cineplex said in lead to buy Dave & Buster’s: WSJ
- Fed’s Yellen speaks via video to Stone Mountain conf.
- Charles Schwab (SCHW) 8:45am, $0.22
- Coca-Cola (KO) 7:30am, $0.44 - Preview
- Comerica (CMA) 6:40am, $0.72
- Johnson & Johnson (JNJ) 7:45am, $1.48 - Preview
- Northern Trust (NTRS) 7:30am, $0.78 – Preview
- Boston Private (BPFH) 4:05pm, $0.19
- CSX (CSX) 4:03pm, $0.37
- Intel (INTC) 4:01pm, $0.37 - Preview
- Interactive Brokers Group (IBKR) 4:01pm, $0.30
- Linear Technology (LLTC) 5pm, $0.53
- Wintrust Financial (WTFC) post-mkt, $0.67
- Yahoo! (YHOO) 4:05pm, $0.37 – Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Nickel Drops Most in Nine Months as Metals Fall on China Concern
- WTI Falls From Six-Week High With Brent on U.S. Supply Forecast
- Profit Tastes Like Chicken in Search for Cheap Meat: Commodities
- Palm Oil Crop at Risk Across Southeast Asia as El Nino Looms
- Gold Falls From 3-Week High on U.S. Outlook as Palladium Drops
- White Sugar Halts Decline Before Delivery as Coffee Also Climbs
- Corn Declines as Planting Concerns Ease While Soybeans Advance
- China Gold Demand Rising 25% by 2017 as Buyers Get Wealthier
- Rio Produces Record Iron Ore Output as Global Supply Gains
- Coal Returns to German Utilities Replacing Lost Nuclear: Energy
- Canada’s Climate Warms to Corn as Grain Seeks Great White North
- Pump Prices in U.S. Climb to Eight-Month High as Supplies Slide
- Nestle Sees 2H Commodity-Cost Rise, Will Raise Prices: BI Chart
- Gold Seen Losing 22% by Westpac’s Smirk to End Year at $1,025
The Hedgeye Macro Team
This note was originally published at 8am on April 01, 2014 for Hedgeye subscribers.
“It’s ok to eat fish because they don’t have any feelings.”
One of the core #behavioral principles in Jonah Berger’s Contagious is emotion. You need to make people feel something. And that something can be positive or negative, provided that it delivers what he calls “high arousal.” Awe, Amusement, Anger, and Anxiety (pg 109) will all do the trick.
Whether it was Janet Yellen telling you she is “extraordinarily committed” to burning your currency or Michael Lewis proclaiming his book is for the “little guy,” it was all out there yesterday.
So let’s do it for the children. Let’s keep the risk free rate of return on American Savers at 0% forever and have the FBI raid high-frequency-tweeters. We commoners of capitalism don’t have any feelings anyway.
Back to the Global Macro #Grind…
On literally no volume yesterday, the SP500 made its best attempt to bubble itself back up to her all-time-closing high of 1878. Just wait until they ban all technology and bring back the NYSE dinosaurs – when you get squeezed, you’ll feel no volume at all.
I better be careful about calling anything we do innovative, or the fun-cops are going to come after me too. The “little guys” (read big lazy guys at bailed out #OldWall banks that can’t compete with math) have their biggest lobby yet.
At the risk of explaining how fractal math helps investors reading this note front-run the machines, let’s just keep our market update to a simple 3-factor model this morning instead:
And let’s score the US stock market (SP500) on all three:
- PRICE - making higher-lows, but not yet higher-highs (vs. the all-time closing high)
- VOLUME – decelerating on up days; accelerating on down days
- VOLTILITY – front-month VIX continues to signal higher-lows and that the term-structure of VIX is way too complacent
Notwithstanding Biotech and Social Media stocks dropping 15-35% in 2-weeks, what could possibly go wrong in Q2?
- FX – the US Dollar continues to signal long-term TAIL risk (trading below our TAIL risk line of $81.17 on the US Dollar Index)
- 10YR – continues to signal a series of lower-highs and remains below @Hedgeye TREND resistance of 2.81%
- SECTOR VARIANCE – Consumer Stocks (XLY) -3.2% vs slow-growth #YieldChasing Utilities (XLU) +9.2% YTD
I know. I know. Yellen has an implicit policy to Devalue the Dollar, let #InflationAccelerating (Food Prices +19% YTD) rip America’s poor a new one, and slow 71% of the US economy (Consumption), but you can go eat a REIT (+8% YTD), and like it.
If inflation slowing real US consumption growth wasn’t enough, now we have a series of non-weather related #GrowthSlowing data points interconnecting around the world. Here’s this morning’s macro data:
- CHINA – HSBC PMI (producer manufacturing index) slowed yet again in March to 48.0 vs 48.5 in February
- JAPAN – PMI slowed again in MAR to 53.9 vs. 55.5 in FEB
- UK – PMI finally slowed sequentially to 55.3 MAR v. 56.9 in FEB
Yep, in spite of its strong (relative) fiscal, monetary, and currency policy, even the United Kingdom is subject to gravity (i.e. at some point the rate of change in the economic acceleration slows). But, don’t worry, Keynesian economic policy makers say you don’t have to feel that.
They’ll smooth it out. You know, rig gravity. Right, right. And Larry Summers is my uncle.
Amused or anxious yet? No worries - all the backward looking political economists will not be writing about any of this today, because they’re still trying to fit the #weather data to a real consumption #GrowthSlowing narrative that they have once again missed.
If you’re in the 10% of America who gets rich on government spending, money printing, and selling books to mediocre minds in the media, you don’t have to have any feelings about that either. Remember, it’s for the children.
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Takeaway: When we get our five minutes with LULU's CEO at the company's analyst day on Thursday 4/17, here's what we'll ask.
We’ve been highlighting ‘3 Key Questions’ for CEOs of different companies in retail. The premise is that you have five minutes with the CEO and need to maximize your time by asking only the key critical uncertainties that exist strategically for the company in question. For the most part, the exercise has been theoretical, as not many people will have time with most of these CEOs. But this Wednesday and Thursday, Lululemon will host an analyst meeting in Vancouver, and most people that are interested in the name will have the chance to meet new CEO Laurent Potdevin on his new home turf. When we get our five minutes with him, this is what we’ll ask.
1) Like it or not, you have a lot to prove. It’s easier for most people to doubt you than believe in you. Sorry, but it’s reality. You come from Toms Shoes and Burton Snowboards – two solid brands in their own right – but both are tiny relative to Lululemon, and neither of those brands have any exposure to vertical retail. There were so many eligible executives LULU could have chosen at the time, including several in C-Suites at some of the largest and most successful companies in retail. To your credit, something in you impressed Chip and the Board enough to give you the title shot in running what was a $9bn Enterprise Value (at the time of your appointment). So the questions here are… a) can you shed some light for us on how exhaustive the interview process was (the purpose is to drill down if this was a multi-month courting process, or if it was a matter of weeks – which would be troubling)? Do you have a mandate to transform this company even if it is counter to what Chip wanted? (keeping in mind that he still owns half a billion worth of stock). What can you do for this company that Christine – or a proven CEO of a $3-4bn company cannot? Are there any advantages to not being jaded by having worked for a retailer before?
2) All companies go through different stages of maturation. After each burst of growth, there’s usually some kind of negative margin event as a) sales slow and b) the company properly reinvests in the business to fuel the next burst of top line growth. Some companies manage this better than others. Nike, for example, has had mixed results in this arena (but the end result is always positive) while UnderArmour has proven to avoid margin hiccups due to a steady, methodical and extremely effective investment philosophy all along. With that narrative set, where do you think Lululemon fits in? Clearly, the brand momentum has slowed. There’s nothing wrong with that – it happens to every brand. But we have yet to see a material hit to margins in order to fuel the next leg of growth. We’re not talking a 100bp hit in margins to fuel another $300-400mm in sales. That won’t get you the multiple you want. What’s it going to take to add another $1.5bn in revenue over 3-5 years? And if it amounts to a 500bp hit to margins, are you willing to make that investment? (Wall Street might hate you for a quarter, but it might be the best thing you can do for your brand). Do you have the Board’s authority to think and act that big?
3) Lululemon is notorious for not discounting its product – which is an envious position to be in for any brand. But that strategy works when a brand is $500mm, but not when competition is exploding (Nike, UnderArmour, Athleta, Betty, H&M, VS, Prana, Ideology, etc…), and the sales line is topping $1.5bn. To boot, now the brand is clearly moving outside of its traditional core into seasonal products – and is even going so far as to test dresses (about as far from the Performance category as you can get). The point here is the business has been inching closer to having to put in place a more comprehensive promotional strategy, but it seems like it might be at the point where it has to be more draconian in its actions. The big question for us is a) what do you think of the narrative we set forth? If we are wrong, then why is that the case? b) if you start discounting more aggressively, do you have the information systems, logistics network and outlet centers to clear excess inventory in a way that is brand appropriate? c) if you agree that you need these things, but do not have them, how much of a capital outlay should it require?
Note: While we think margins need to come down at LULU as the company invests capital and becomes more promotional, we think that it will ultimately be a significant top line driver. There’s an important nuance here, in that if margins come down because of a weak top line, then this multiple is in serious trouble. But if the company deploys capital on the balance sheet and SG&A line in an offensive way to facilitate an appropriate product clearance strategy, then margins might come down, but the top line should balloon. While stocks rarely go up when margins are coming down, we’d argue that this does not matter with the stock in the low $50s. We’d be more concerned about the margin trend if the stock starts with a 7-handle.
I-gaming revs are growing in AC but way below expectations. We don’t find that as relevant as poker share. Here, BYD leads the pack.
- NJ I-Gaming revenues increased 15% MoM to $11.9 million while I-Poker eked out only a 3% gain
- The reality was that New Jersey online gaming was never going to move the needle for the publicly traded gaming companies
- We continue to focus on Poker share as I-Poker is likely the only form of internet gaming to roll out nationally (through interstate or federal legislation). Poker relies heavily on player liquidity and with New Jersey the most populous state to offer the online game, first mover advantage here is critical.
- While most of the investment community has downplayed online gaming as a value driver for any of the stocks, BYD’s interest in the market leading Borgata poker effort has us excited as the site’s share grew in March and commands 51% of the volume.
Takeaway: At the time of this post, the majority went to 66% saying YES and 34% voting NO.
The price of crude oil has been volatile. WTI broke out above Hedgeye’s TREND line last week, and it was up again this morning to +6% year-to-date.
Our question was simple today: Do you see oil prices heading higher the next three months?
At the time of this post, the majority went to 67% saying YES and 33% voting NO.
Voters who said YES largely agreed that it had to do with two things: geopolitics and inflation.
- “Geopolitics [in terms of] mostly Russia holding the Ukraine hostage until the West backs down. If the EU doesn't back away from Ukraine, Russia will invade. This dance could escalate before there is relief.”
- “Inflation is accelerating. Oil is the liquid gold; therefore, it's accelerating as well.”
- “The combination of geopolitics and the upcoming summer driving season will lead to prices trending higher.”
- “Commodities have been ripping humanity a new one all year. If global central Keynesian drug overlords want the inflation, they will get it.”
Of the group who voted NO, one person explained, “I don't see consumer demand for gas as particularly high these days. All data points to people driving less, and that's a crucial point ahead of the summer driving season.” Another believed a drop in oil price is the United States’ best weapon against Russia.
This morning Hedgeye CEO Keith McCullough noted that he gets a lot of questions specifically about oil because it was one of the few commodities not going up. But now, he said, “this move plus Natural Gas up +13% YTD isn’t good. It equals #ConsumerSlowing.”
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