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Getting Crushed by Inflation

Client Talking Points

USD

Burn baby burn. US Dollar Index continues to front-run (as rates do) what I think will be a more dovish Fed (on the margin versus tapering) come summer time. Inflation slows growth, and the Fed gets easier (i.e. devalues Dollars) when growth slows – consumer stocks (XLY) are down -6% versus slow-growth-yield-chasing Utilities (XLU) up +12% year-to-date.

OIL

Now the only thing US consumer bulls ping me on (oil not going up) is going up. Both Brent and WTIC (up +1% and +0.7%, respectively, this morning) are confirming bearish to bullish Hedgeye TREND reversals. Love those…but the consumer doesn’t. Inflation is an unlegislated tax that will continue to matter to the 80% of America getting crushed by it (see our Q2 Macro Themes slide deck for details).

UST 10YR

The 10-year yield at 2.64% is down a beep in the last 24 hours (i.e. they might have bounced the Nasdaq and Russell off two-month lows on no-volume yesterday), but that didn’t change what the FX, Bond, and US Equity markets are pricing in – slower growth sequentially into Q314.

Asset Allocation

CASH 40% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 18%
FIXED INCOME 18% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its 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. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

DRI

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

TWEET OF THE DAY

EUROPE: 2014 YTD leaders leading this morning's rally - Italy +2% (+12% YTD), Denmark +1.3% (+12% YTD) @KeithMcCullough

QUOTE OF THE DAY

"Do not look where you fell, but where you slipped." - African Proverb

STAT OF THE DAY

President Barack Obama plans to announce an expansion of job-training and apprenticeship programs with a $600 million effort intended to equip workers with the skills sought by employers. The first initiative is a $500 million competitive grant program for community colleges linked with businesses to create programs to teach the specific skills needed for open jobs. (Bloomberg)


April 16, 2014

April 16, 2014 - Slide1

BULLISH TRENDS

April 16, 2014 - Slide2

April 16, 2014 - Slide3

April 16, 2014 - Slide4

April 16, 2014 - Slide5

April 16, 2014 - Slide6

April 16, 2014 - Slide7

April 16, 2014 - Slide8

BEARISH TRENDS

April 16, 2014 - Slide9

April 16, 2014 - Slide10

April 16, 2014 - Slide11
April 16, 2014 - Slide12


Contagious Exploration

This note was originally published at 8am on April 02, 2014 for Hedgeye subscribers.

“We shall not cease from exploration, and the end of our exploring will be to arrive where we started and know it for the first time.”

-T.S. Eliot

 

Yesterday we held our quarterly firm meeting in Stamford, CT.  It was by all accounts a very successful day.  We introduced new employees, celebrated recent wins and also contemplated strategic shifts to keep Hedgeye moving forward.

 

As an aside, it also coincided with my personal favorite day of the year, April Fool’s Day.  Unlike those April Fool’s days of prior years, like when I fired Keith one year, this year’s joke was more benign, though we did manage to “suck” a few people in again.  For those that didn’t see the faux press release about Wall Street 2.0: Hedgeye the Movie, it can be found here.

 

So at the company meeting, a key topic of discussion was how to generate contagious content / ideas.  For those that didn’t know, the term, “content is king”, was first used in 1994 and then popularized by Bill Gates in an essay about two years later.  So, as ideas go, the idea of content is king is not new, but it is certainly contagious.

 

Contagious Exploration - content is king1

 

Back to the Global Macro Grind...

 

In my mind, activist investment ideas are examples of ideas that need to become contagious before they become successful.  Yesterday activist Starboard filed a presentation outlining the potential for Darden Restaurants ($DRI).  A key take away from the presentation is that the Company’s EBITDA margins are at 7.4% versus the industry median of 10.3%.

 

As many of you know, Darden is also currently a favorite of Restaurant Sector head Howard Penney and is on our Best Ideas list.  As a result, Starboard was kind enough to reference our work on Darden in their presentation. Specifically, they referenced a recent poll that we did:

 

“According to a recent poll conducted by sell-side research firm Hedgeye Risk Management, 84% of respondents said that they did not believe that management’s plan to spin-off Red Lobster would create value.”

 

We actually have created a polling product to specifically gauge sentiment and opinion in a more quantified fashion, which has, obviously, also had the derivative impact of creating contagious content.

 

Included in the Starboard presentation as well was this tweet from Penney:

 

“$DRI management shuts me out of another earnings call. Running out of time is not an excuse. @jannarone article on #CNBC was $$”

 

This point goes to the crux of Penney’s thesis on Darden, which is that management operates in a vacuum and is totally unwilling to listen to new ideas, especially from analysts that may disagree with them.  Ignoring great ideas is the death knoll for any company.  If you’d like to learn more about our thesis on Darden before it goes too viral, please email sales@hedgeye.com.

 

While we are on the topic of contagious content, I thought it would be worth highlighting an essay that Warren Buffett wrote for Fortune in 1977 (back when periodicals like Fortune still published essays):

 

“There is no mystery at all about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn't going to be a big winner. You hardly need a Ph.D. in economics to figure that one out.

 

It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their Value in real terms, let the politicians print money as they might.

 

And why didn't it turn but that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds.”

 

As you can see this basic concept that we have been pounding on, which is that when a currency is devalued that devaluation naturally creates inflation in dollar denominated asset classes, is not new.  Neither is the idea that at a point, this inflation begins to negatively impact economic growth, which has the potential to have a negative impact on the returns of those assets classes levered to economic growth.

 

Certainly, of course, we aren’t suggesting we are in the midst of 1970s style inflation.  Or, frankly, on the path to that any day soon, but commodity inflation is here, is persistent and is likely to be sticky.  Most notably on the inflation front is what is happening to food (you know that stuff we eat).

 

In the chart of the day below, we’ve compared the performance of consumer discretionary stocks in the year-to-date versus the CRB Index versus the BLS Foodstuff Index.  For those that can’t read the fine print, I’ll give you the punch line. The CRB commodity index is up more than 7% in the year-to-date, the BLS Foodstuff Index is up more than 20%, and consumer discretionary stocks are down on the year.

 

As Warren Buffett might say, you don’t need an economics PH.D. to see that correlation!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.66%-2.80% 

SPX 1856-1888 

VIX 13.01-14.72 

USD 79.91-80.40

Gold 1270-1321 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Contagious Exploration - Chart of the Day

 

Contagious Exploration - Virtual Portfolio


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THE MACAU CORRELATIONS

Macau VIP vs China credit.

 

  • In past notes we’ve discussed the statistically significant relationship between VIP Rolling Chip (RC) Volume in Macau and China’s reserve ratio requirement and discount rate which we found peaked on an 8-9 month lag.  With little change in China’s monetary policy since Q2 2012 or 2013 (loosened), the softer Macau gaming revenues cannot be blamed on the China Fed.
  • Here we’ve plotted and regressed VIP Rolling Chip volume against China Yuan loan growth.  The correlation and significance peaks at a 1 month lag (0.37 and T-stat of 2.9).
  • Could the YoY decline in loans in March explain some of the weakness in RC thus far in April?
  • Probably but minor.  The March/April multi year comparisons are more difficult than March/May.  We’re projecting 20% YoY Macau total GGR growth in May.
  • Sentiment has turned decidedly negative with VIP and credit fears running rampant. While we predicted a disappointing March/April, we’re not sure fundamentals have changed much.  Look for a May rebound to catalyze the downtrodden Macau stocks.

 

THE MACAU CORRELATIONS - China Yuan Growth v Macau VIP RC 4 16 2014 7 52 22 AM


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 16, 2014


As we look at today's setup for the S&P 500, the range is 50 points or 2.06% downside to 1805 and 0.65% upside to 1855.                                                      

                                                                         

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2A

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.28 from 2.26
  • VIX  closed at 15.61 1 day percent change of -3.10%

MACRO DATA POINTS (Bloomberg Estimates):

 

  • 7am: MBA Mortgage Applications, April 11 (prior -1.6%)
  • 8:30am: Housing Starts, March, est. 970k (prior 907k)
  • 8:30am: Fed’s Stein speaks on QE at Atlanta Fed conf.
  • 9:15am: Capacity m/m, March, est. 78.7% (prior 78.8%)
  • 9:15am: Industrial Production m/m, March, est. 0.5% (pr 0.6%)
  • 10:30am: DOE Energy Inventories
  • 12pm: Fed’s Lockhart speaks at Atlanta Fed conf.
  • 12:25pm: Fed’s Yellen speaks to Economic Club of New York
  • 1:25pm: Fed’s Fisher speaks in Austin, Texas
  • 2pm: Federal Reserve releases Beige Book

GOVERNMENT:                 

    • President Obama, Vice President Biden visit Leetsdale, Pa., for an event on the economy
    • House, Senate not in session     
    • 9am: Energy Sec. Ernest Moniz speaks on energy policy at Sam Nunn Policy Forum          
    • 9:30am: Reps. Rosa DeLauro, D-Conn., Louise Slaughter, D-N.Y, on conf. call hosted by Economic Strategy Institute on Obama’s trip to Asia, refusal by Congress to provide fast-track trade authority

WHAT TO WATCH:

  • Ukraine says Russian forces helping separatists amid battles
  • China urged by U.S. to allow bigger mkt role in valuing yuan
  • NYSE owner said to buy Algo Technologies to modernize exchange
  • Citic Pacific to pay $36b for assets from Chinese parent
  • Moelis raises less than planned in investment-bank IPO
  • Ford, Dodge cars in focus at New York Auto Show
  • GM CEO Barra adds team to focus on safety
  • Anadarko joins ad blitz to pre-empt Colorado fracking limits
  • Obamacare sign-up extension closes regular enrollment for 2014
  • Credit Suisse net trails est. on lower investment bank income
  • Credit Suisse said to get N.Y. subpoena in tax-evasion probe
  • Deutsche Bank said to seek sale of Cosmopolitan Vegas resort
  • China’s expansion slows as property construction falls
  • Alibaba posts profit on sales promotion ahead of IPO
  • Alibaba said to plan Hong Kong-style fee as carrot for banks
  • BHP quarterly iron ore production rises 23% to beat forecast

AM EARNS:

    • Abbott Laboratories (ABT) 7:44am, $0.36 - Preview
    • Bank of America (BAC) 7am, $0.27 - Preview
    • First Republic Bank (FRC) 7am, $0.73
    • Huntington Bancshares (HBAN) 5:55am, $0.17
    • Kansas City Southern (KSU) 8am, $0.99 - Preview
    • Metro (MRU CN) 7am, C$1.02
    • PNC Financial (PNC) 6:24am, $1.65
    • St Jude Medical (STJ) 7:30am, $0.95 - Preview
    • US Bancorp (USB) 7am, $0.73 - Preview
    • WW Grainger (GWW) 8am, $2.96

PM EARNS:

    • Adtran (ADTN) 8:15pm, $0.20
    • Albemarle (ALB) 4:03pm, $0.95
    • American Express (AXP) 4:01pm, $1.30
    • Capital One Financial (COF) 4:05pm, $1.70
    • Crown Holdings (CCK) 5:03pm, $0.51
    • East West Bancorp (EWBC) 5:02pm, $0.53
    • Google (GOOG) 4:02pm, $6.39
    • International Business Machines (IBM) 4:05pm, $2.54 -Preview
    • Kinder Morgan (KMI) 4:05pm, $0.28
    • Noble (NE) 5pm, $0.70
    • People’s United Financial (PBCT) 4:03pm, $0.20
    • Plexus (PLXS) 4pm, $0.60
    • SanDisk (SNDK) 4:05pm, $1.27
    • SLM (SLM) 4:15pm, $0.55
    • Steel Dynamics (STLD) 6pm, $0.16
    • Triangle Petroleum (TPLM) 5:58pm, $0.12
    • United Rentals (URI) 4:15pm, $0.71

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 DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 



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