The Economic Data calendar for the week of the 28th of April through the 2nd of May is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Takeaway: 63% YES; 37% NO.
“[Vladimir] Putin gets paid in Petro Dollars,” CEO Keith McCullough wrote in today’s Morning Newsletter. “I wouldn’t be surprised if he tries to solve the aforementioned trifecta of sovereign risk (Russian CDS up to 282 bps wide now – a 2 yr high) by firing up the geopolitical risk news flow.”
We know what we think here at Hedgeye. We wanted to know what you think. So we asked in today’s poll: Is Putin going to do something big to send oil prices higher?
At the time of this post, the votes leaned toward YES at 63%; 37% NO.
“What choice does he have?” asked one YES voter. “Failed bond offering; collapsing ruble; currency outflows. At a minimum he will force the market to react which, most likely, is all he wants.”
Another person who voted YES said, “Putin is not going to sit here and take a beating from the Western powers. He's a thug at heart, besides [retaliating] violently through war, the next best weapon is the oil price. He will make the Western economy suffer from high oil prices.”
On the other side, however, one NO voter argued that “Putin will act within his immediate sphere of control. He can manipulate oil/gas supply and prices in Ukraine/Germany etc but not likely to try - or succeed - on the world stage in a lasting way.”
Additionally, another NO voter questioned what Putin could do and that “almost all the Russian outcomes have already been considered by the big oil market participants.”
Or as this NO voter cleverly pointed out: “The truth is that no one has a crystal ball. But if the debate gets loud on whether he'll do something, the market will react and he might not have to.”
Earnings in 4Q13 were marked by two distinct trends.
At the midpoint in 1Q14 earnings, the trends are looking very much the same as those that prevailed in 4Q13.
BEAT-MISS: With ~50% of SPX constituent companies having reported 1Q14 results, the Sales BEAT-MISS spread is trailing both the 4Q and TTM averages while the EPS beat percentage stands at 74.5% - ahead of both the 4Q13 and TTM average of 72%.
Of course, as has been the case for the last 4 years, the progressive deflation of expectations ahead of the quarter remains the best means to manufacturing a “beat”.
This quarter has not been an exception as topline estimates for 1Q14 have drifted steadily lower for SPX constituents into and through the new year.
BEAT/MISS vs SUBSEQUENT PERFORMANCE: Of the minority of companies that have missed bottom line estimates, 81% have gone on to materially underperform (-3.2% on ave.) the market over the subsequent 3 trading days.
Similarly, 69% of companies missing topline estimates have subsequently underperformed the market by -2.9% on average over the following three days.
OPERATING PERFORMANCE: Despite the generally positive Beat-Miss trends, operating performance has once again been underwhelming with just 42% and 40% of companies registering sequential acceleration in sales and earnings growth, respectively.
Margin performance has been similarly unimpressive with only 47% of companies reporting sequential operating margin expansion according to bloomberg data.
From a sector perspective, Utilities and Energy have led operating performance while everyone else sits on the wrong side of the 50% Mendoza line.
STYLE FACTOR PERFORMANCE: From a style factor perspective, High Short Interest. Low Yield, and High Sales Growth names have performed notably better vs. prevailing topline expectations than their inverses.
Christian B. Drake
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Yesterday we hosted a special call Marijuana Legalization: The Debate Begins, featuring Dr. Beau Kilmer, Codirector of RAND Corporation’s Drug Policy Research Center, to kick off a series of speakers on the topic.
Replay of the call is available here
Supplemental call materials available here
Dr. Kilmer walked though a number of key topics on the call, including in the Q&A session that begins at 43’16”on the replay. Below we’ve spelled out Dr. Kilmer’s “Eight P’s,” his key policy design factors for thinking about Marijuana Legalization.
We recognize that from an investment perspective we are early on marijuana, but we would rather be early than too late – and one day we do believe that marijuana has the potential to be a real business sector. We will not be making any investment recommendations on any marijuana stocks at this time, but we hope that speakers like Dr. Kilmer can help elucidate such topics as policy and legal frameworks, economics of marijuana, and social implications around marijuana legalization and help lay the groundwork for an emerging investment thesis. We hope you can join us for future calls.
Dr. Beau Kilmer’s Eight P’s Framework
Production – Where will legal pot be grown: outdoors on commercial farms, inside in confined growing spaces, or somewhere in between? What’s clear is legalization is going to drive down production and distribution costs, which equates to a reduction of risk. As people move away from basement production to industrial cultivation, we’ll also see changes in technology. Initial work shows that if you want to buy 1 pound of farm-grown marijuana from northern California it runs about $2,000, but if legalized and grown at home, the cost could be reduced to $400/pound. However, if it was cultivated like other agricultural produce grown on an industrial scale, production and processing costs would be around $40/pound. Also there are a number of choices that governments have to inflate the price, including taxation, licensing, or outright price controls. Dr. Kilmer clarified that the Netherlands actually is not a model for legalization: personal marijuana use has been decriminalized in the Netherlands, but the “backdoor” (growing, producing, importing, and selling beyond small amounts at a coffee shop) is still illegal.
Profit Motive – If marijuana is legalized, states and governments can choose whether private companies can enter this industry. CO and WA are following the “alcohol model,” and private companies are welcome, yet there’s a lot of policy space between prohibition and legalization. The range of policy choices could include limiting marijuana growing to private home cultivation, but could also include non-profits, coops, or even state monopolies. While a state-run monopoly is probably the least likely in the U.S., there are numerous ways to control marketing and supply, and therefore price and profit incentives.
Promotion – What will promotion and advertising regulations look like from state to state? Will they follow the alcohol and tobacco models? Regulators know that 80% of tobacco and alcohol revenues come from 20% of consumers, the heaviest habitual users, so these industries have great incentives to target youth to turn them into life-long users. At the same time, U.S. jurisprudence against curtailing what’s known as “commercial free speech” could make it tough to regulate the promotion of marijuana.
Prevention – If marijuana is legal for adults, how will school and community prevention programs adapt their messages to prevent kids from using? Both sides of the legal/illegal spectrum agree on reduced consumption among kids, but what type of prevention methods should be used? Dr. Kilmer believes that in order for prevention programs to work, they need to be firmly in place, and the costs associated with them allocated, before legalizing marijuana.
Potency – There are dozens of cannabinoids in marijuana. THC is the major one, responsible for getting people high, but can also be responsible for panic attacks. An estimated 40-50% of marijuana in the U.S. comes in from Mexico and has a THC level of 4-8%, lower than what’s available from dispensaries that can range from 10 to 25% THC. In the 1970’s marijuana THC was around 3-4%, so there’s definitely a trend over the years of higher THC. Policy makers will have to consider that limiting available quantities, or taxing by unit or weight, would probably create incentive to breed higher potency strains. There’s not enough data yet to determine an ‘ideal” THC content. There’s talk now to limit THC to 15%, but is that an arbitrary figure?
Purity – It’s clear there must be testing for mold and pesticides. The other question is whether marijuana can be combined and sold with other products like flavorings, or mixed with nicotine or alcohol. CO has already said no to all of that, but how might other states decide?
Price – Research suggests that a 10% decrease in the price of marijuana leads to a 3% increase in use, but there’s no good data about total price elasticity. Current thinking seems to tend towards pricing marijuana per unit of THC, given number of marijuana products and how they’re proliferating. There’s concern that if marijuana is taxed too high, a black market could develop. Conversely, if it’s priced too low, tax revenues may be too light to support the industry and prevention groups. For example, if marijuana is taxed by weight, it could incentivize people to grow/use more potent marijuana. Government policy around pricing will be critical to how the industry develops.
Permanency – early adopter states will suffer growing pains and they’re likely going to want to make changes. This raises questions about how much flexibility to build into these regimes, especially around taxation. What’s the best way to tax marijuana: Dr. Kilmer believes by percentage of THC. But it could be the case that in 5-6 years, with more experience, this is not the best strategy. States will want to design a flexible regime that will allow them to make necessary changes to regulation. Dr. Kilmer believes it is important that all these laws contain a “sunset clause,” where marijuana laws will have to be put to a vote after a certain period of time. Sunset provisions offer the citizens breathing space to assess the effectiveness of their policies, and may enable legislators to escape the likely onslaught of lobbyists that accompany any new industry. As Dr. Kilmer observes, “it’s much harder to put the genie back in the bottle, once it’s been let out.”
Takeaway: The U.S. housing market is going downhill (just when many economists thought annual sales would be heading up.)
From Hedgeye's Q2 Macro Themes:
#HousingsSlowdown: We have been big housing bulls over the last 18 months. But the party is ending. Asymmetry in being long has flattened. Price follows demand on a lag and demand is slowing as affordability declines, regulatory changes drag on liquidity, and institutional interest ebbs. We will walk through our updated view on the Supply/Demand/Price dynamics prevailing in the housing market and our forward outlook for prices.
Hedgeye CEO Keith McCullough shares his views on European markets with Maria Bartiromo, host of Fox Business' Opening Bell.
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