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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 29, 2014


As we look at today's setup for the S&P 500, the range is 29 points or 1.14% downside to 1888 and 0.38% upside to 1917.                                                                

                                                               

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

 

  • YIELD CURVE: 2.07 from 2.08
  • VIX closed at 11.68 1 day percent change of 1.48%

 

MACRO DATA POINTS (Bloomberg Estimates):

 

  • 8:30am: GDP Annualized q/q, 1Q (S), est. -0.5% (prior 0.1%)
  • 8:30am: Initial Jobless Claims, May 24, est. 318k (prior 326k)
  • 8:30am: Personal Consumption, 1Q (S), est. 3.1% (prior 3%)
  • 8:30am: Fed’s Pianalto gives opening remarks at conf. entitled, “Inflation, Monetary Policy and the Public”
  • 9:45am: Bloomberg Consumer Comfort, May 25 (prior 34.1)
  • 10am: Pending Home Sales m/m, Apr., est. 1% (prior 3.4%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: DOE Energy Inventories
  • 9:30pm: Fed’s George speaks at Stanford

 

GOVERNMENT:

    • Push grows for Shinseki to go as report cites veteran-care flaws
    • Senate out; House in session
    • U.S. Chamber of Commerce Pres. Thomas Donohue speaks at University of Havana; leads delegation of business leaders, including Cargill CFO Marcel Smits, on fact-finding trip
    • 11:05am: President Obama to announce public, private commitments to raise awareness about concussions at summit on youth sports injuries
    • 1pm: House Small Business Cmte holds hearing on EPA’s “Waters of the United States” rule
    • U.S. ELECTION WRAP: Democrats’ Local Strategy; GOP on VA Scandal

 

WHAT TO WATCH:

  • Microsoft, Salesforce said to be discussing cloud partnership
  • Apple agrees to buy Beats for $3b in biggest-ever deal
  • Ackman looks to raise money from fund listed in London: NYT
  • Costco quarterly profit trails estimates even as sales increase
  • Google vows to improve diversity after disclosing staffing data
  • AIG sees labor-cost arbitrage as jobs move to Philippines, TEX
  • Phillips 66 says tribunal supports Sweeny takeover from PDVSA
  • Man Group considering purchase of quant money manager Numeric
  • RBS said to sell stake in private-equity arm to Adams Street
  • Energy Capital hires banks to explore EquiPower sale, IPO: WSJ
  • GIC to sell Florida Golf property purchased from Paulson Group
  • U.S. states meld zero-emission car plans in drive to sales goal
  • Russia urges “emergency steps” on Ukraine after rebel losses

 

AM EARNS:

    • Abercrombie & Fitch (ANF) 7am, $(0.19) - Preview
    • CIBC (CM CN) 5:50am, C$2.02 - Preview
    • Fred’s (FRED) 7:45am, $0.20
    • Pall (PLL) 7am, $0.83
    • Sanderson Farms (SAFM) 6:30am, $1.70

 

PM EARNS:

    • Avago Technologies (AVGO) 4:05pm, $0.77
    • Express (EXPR) 4pm, $0.14
    • Guess (GES) 4:03pm, $(0.07)
    • Infoblox (BLOX) 4:05pm, $0.03
    • Lions Gate Entertainment (LGF) 4:01pm, $0.43
    • OmniVision Technologies (OVTI) 4:25pm, $0.26
    • Pacific Sunwear (PSUN) 4pm, $(0.13)
    • Splunk (SPLK) 4:02pm, $(0.06)
    • Veeva Systems (VEEV) 4:05pm, $0.05

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

  • WTI Trades Near One-Week Low After Stockpiles Grow; Brent Steady
  • Sugar Output in Thailand Seen Climbing to Record as Area Expands
  • Cocoa Shortage Looms as Growers Opt to Farm Rubber: Commodities
  • Gold Falls to 16-Week Low as Palladium Near Highest Since 2011
  • Copper Drops From 11-Week High as Investors Capitalize on Gains
  • Corn Heads for Biggest Monthly Drop Since June on Sowing in U.S.
  • Sugar Bounces With Newfound Demand After Losses; Coffee Advances
  • Scrap Copper Imports by China Seen Recovering With Refined Price
  • Nickel Pig Iron Output Costs in China Seen Surging as Ore Jumps
  • Blackstone Unit Foreshadows Google Path to Power Company: Energy
  • Minister’s Platinum Strike Plan Seen Unlikely to Bring Quick End
  • Birthplace of USS New Jersey Saved by Shale Production: Freight
  • London Bullion Market Gold Fix May Go the Way of Silver
  • Steel Rebar Falls as Iron Ore Price Drops to Lowest Since 2012

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 


Video | Schiff to McCullough: 'Reckless' Government Behavior Leading to Currency Crisis, Will Boost Gold

This is a brief excerpt from a wide-ranging discussion Hedgeye CEO Keith McCullough had with Euro Pacific Capital CEO Peter Schiff as part of HedgeyeTV's "Real Conversations" series. While Schiff advocates policy that would actually be bad for gold, he has no faith that the government will do the right thing. The full interview runs Thursday.


Poll of the Day Recap: 83% Expect GDP to Be Below 3%

Takeaway: 83% expect it to be BELOW 3%; 17% said ABOVE 3%.

We’ve been making the #GrowthSlowing call here at Hedgeye for months, so when the government reported first quarter GDP growth of 0.1% last month, it didn’t surprise us. It also won’t surprise us if the government revises its Q1 GDP estimate to a negative number tomorrow.
 

That said, #OldWall sees GDP accelerating in Q2. According to a Wall Street Journal survey of 48 economists, the consensus forecast is for the economy to expand 3.3% next quarter.
 

But we wanted to know what you thought.

 

Today’s poll question was: Do you expect GDP to be above or below 3% at the end of Q2?

 

Poll of the Day Recap: 83% Expect GDP to Be Below 3% - flattire


At the time of this post, 83% of voters expect it to be BELOW 3%; 17% said ABOVE 3%.


Of those who voted BELOW 3%, one person explained, “Corporate America is not going to invest capital needed to grow when you have an anti-capitalist President who believes in higher taxes, more government regulations and redistribution of wealth.  This is a ‘no-confidence’ economy.”

 

Additionally, this voter agreed the GDP would be BELOW 3% because it has “been declining since Q32013, 10 yr yields continue dropping since Dec2013…now @ 2.44% and housing has gotten bleaker; certainly makes a GDP > 3% truly improbable, if not impossible.”

 

Another voter said that though they expected it to BELOW 3%, “when you are able to change the rules and how they are calculated like in Italy recently adding prostitution and illegal drugs...anything is possible!”

 

On the opposite end, one ABOVE 3% voter noted: “Q1 will probably be revised to negative. But the YoY rate of change is likely to be flat-to-down. And down even more so as we progress throughout 2H14.”

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TIME TO COVER ABENOMICS SHORTS?

Takeaway: While dicey from a seasonal perspective (VIX/JPY mid-summer ramp?), investors should begin the process of covering their Abenomics shorts.

With the Nikkei 225 up +4.5% WoW, the index is now down only -0.6% since our 2/19 note calling for consolidation in the Abenomics Trade (vs. -4.9% 1W ago). Inclusive of a -0.5% WoW decline, the JPY is now up only +0.4% vs. the USD since the aforementioned date (vs. +0.9% 1W ago).

 

If you’ve been inappropriately levered long of the Abenomics trade since then, ~150bps of wrong-way PnL probably feels more like a ~1,500bps squeeze in the context of the Nikkei 225 being down -9.9% YTD and the JPY being the 2nd strongest G10 currency vs. the USD in the YTD at +3.4%. As an aside, that is just shy of the +3.5% advance for the AUD, in line with the +3.4% advance for the NZD and followed next by the NOK’s +1.6% gain. Did someone say, “#InflationAccelerating will matter in 2014?” I digress…

 

You know why we’ve been calling for said consolidation (refer to the aforementioned note), but to recap:

 

  1. US economic growth is slowing.
  2. The Fed will react to slowing growth by getting easier, at the margins – effectively perpetuating the growth slowdown via monetary inflation.
  3. All of this will occur before the BoJ expands its QQE program, effectively making the Fed the more dovish of the two central banks for at least 3-6M.

 

In the context of a Japanese fiscal policy vacuum (see: “missing Third Arrow”), we appropriately thought this setup called for a consolidation of the Abenomics Trade. We’ve certainly seen that in the data:

 

  1. The net length of the non-commercial futures and options positions in the JPY has tightened from a 6+ year low on 12/24 of -143.4k to -54.7k as of the latest reading.
  2. That delta puts the current TTM z-score at +1.4x, versus a reading of -3.1x on 12/24, which was precisely 1W prior to the cycle-peak of 105.31 on the USD/JPY cross.
  3. Speculators now have a cumulative $6.6B net short position in the JPY – good for the lowest level since early NOV ’12… which is coincidentally when we began marketing the subsequently nicknamed Abenomics Trade as one of our core research ideas.

 

TIME TO COVER ABENOMICS SHORTS? - SPECULATOR SENTIMENT MONITOR

 

We’ve been writing about points #1 and #2 daily since JAN, so there’s no need for us to waste any of your time proving that out in this note. In fact, our conviction on the intermediate-term outlook for US economic growth remains unshaken amid what has been a golf clap-worthy weather-related bounce domestically. What we will focus on, however, is the next 3-6M outlook from here with respect to Japan’s GIP fundamentals.

 

Starting with our proprietary GIP process, we do not currently hold out-of-consensus expectations for Japanese growth and inflation dynamics – i.e. a sharp, inflationary slowdown in 2Q followed by a fleeting, disinflationary recovery in 2H.

 

TIME TO COVER ABENOMICS SHORTS? - JAPAN

 

TIME TO COVER ABENOMICS SHORTS? - GROWTH

 

TIME TO COVER ABENOMICS SHORTS? - INFLATION

 

GDP comps level off from here while CPI comps ramp in 2H. In the context of now-sideways trending inflation in Japan, that only increases pressure on the BoJ to ease by the end of 3Q – especially if Japanese consumer sentiment continues to careen to the downside (think: emerging pressure upon the Abe administration that may lead to intraparty dissension).

 

TIME TO COVER ABENOMICS SHORTS? - GDP COMPS

 

TIME TO COVER ABENOMICS SHORTS? - CPI COMPS

 

TIME TO COVER ABENOMICS SHORTS? - CPI

 

TIME TO COVER ABENOMICS SHORTS? - CORE CPI

 

TIME TO COVER ABENOMICS SHORTS? - CONSUMER CONFIDENCE

 

Giving respect where it is due, Japan’s economy has been handling the +300bps consumption tax hike perhaps a little better than expected (but still terribly on an absolute basis). In going through all of Japan’s key high-frequency economic data that has been reported for the 2nd quarter, there are three trends that jump out to us thus far:

 

  1. The initial decline was very sharp, but the 2nd derivative ceases to remain negative on a forward looking basis. The juxtaposition between APR and MAY PMI data, as well as current and future expectations for the Economy Watchers Survey and Small Business Sentiment support this conclusion.
  2. The sharp deceleration in growth was most felt in the consumer facing sectors, while the manufacturing and export sectors showed resiliency. The juxtaposition between APR Retail Sales and Imports data and APR Machine Tool Orders, Exports and Trade Balance data supports this conclusion.
  3. The tax hike was definitely passed on to producers and likely to consumers as well, given the weakness in Retail Sales. This means the GDP Deflator will play a prominent factor in determining the rate of Japanese Real GDP growth in 2Q. This hasn’t been the case since 4Q08, when the GDP Deflator jumped from -0.8% QoQ to +1.5%; it came in at -0.2% QoQ for 1Q, which is in line with its trailing 3Y average of -0.2%.

 

TIME TO COVER ABENOMICS SHORTS? - Japan High Frequency GIP Data Monitor

 

TIME TO COVER ABENOMICS SHORTS? - 11

 

We are also no longer out of consensus with regards to our outlook for Japanese fiscal and monetary policy – i.e. we also think the BoJ expands upon its QQE program by the end of 3Q or early into 4Q (statements on JUN 13, JUL 15, AUG 8, SEP 4, OCT 7 and OCT 31) and we think the Third Arrow of Abenomics has increasing potential to surprise consensus expectations to the upside with respect to corporate tax cuts, GPIF reform, corporate governance and/or labor market reforms come next month’s supposed introduction.

 

Basically anything that will be interpreted as simulative to meaningful domestic CapEx expansion should be taken as a major positive amid continued #PayMeNow corporate governance in Japan; dividend payments by Japanese enterprises grew +20% in FY13 to a record ¥6.9T and 47% of companies plan to resume or hike payments further.

 

Rather than speculate on either of these fiscal/economic policy catalysts amid their respective deliberative processes, we’ll just continue to read the tea leaves and react accordingly; email us if you’d like us to discuss the latest happenings further.

 

All told, our fundamental GIP outlook leaves us very much in consensus on a lot of things Japan – which means we should not be trying to call for contrarian outcomes with respect to Japanese capital and currency markets on Japanese fundamentals alone.

 

We still have a ton of conviction in our contrarian bear case on US GIP fundamentals, so assuming we’re in the area code of right on both catalysts, it’s hard to know which will be more favored by investors going forward (we’d argue that it’s been all US #GrowthSlowing thus far).

 

As such, it no longer makes sense for investors to continue aggressively playing for counter-trend deltas in Japanese stocks and the JPY. To the extent you’ve done so – either by pairing back equity long holdings or outright selling them short – we think it makes sense to begin the unwind process of that trade.

 

This is especially true in the context of TACRM signals that, for the first time since 2013, are showing DM Equities gain relative momentum at the primary asset class level in lieu of FX and Commodities. Assuming this is the start of a trend, that Global Macro beta would be positive for Japanese equities and negative for the JPY.

 

TIME TO COVER ABENOMICS SHORTS? - TACRM Global Macro Weathervane

 

TIME TO COVER ABENOMICS SHORTS? - TACRM Global Macro Barometer

 

TIME TO COVER ABENOMICS SHORTS? - TACRM Heat Map

 

In short, the risk of consensus finally being right on Japan – based solely on Japanese fundamentals alone – is a lot higher now than it has been in the YTD.

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team


MCD: All The Hype For This?

We pulled MCD from the Hedgeye Best Ideas list as a short on 2/14/2014 at $94.17/share, largely due to an underleveraged balance sheet and the potential for shareholder friendly financial engineering. 

 

Today, McDonald’s management revealed several new initiatives the company will undertake to enhance shareholder value:

  1. Optimize the capital structure
  2. Optimize the ownership structure
  3. Scrutinize G&A

 

The company expects to return $18 to $20 billion to shareholders between 2014 and 2016 through a combination of dividends and share repurchases, representing a 10% to 20% increase over the amount of cash returned between 2011 and 2013.

 

McDonald’s CFO Pete Bensen stated, “Our 3-year cash return target is based on several activities including the significant free cash flow generated from our operations, as well as the use of cash proceeds from our debt additions and refranchising activity.”

 

Hedgeye McDonald’s stated back in March that it was looking at ways to “optimize [its] capital structure” to create value.  We find today’s news disappointing, as we believe the company could leverage its balance sheet significantly more.  We have always felt that any financial engineering event would only be a temporary boost to the stock given the decelerating sales environment.

 

On June 9th, MCD will release its May sales data.  Our current read is that sales trends will be uninspiring, even with the rollout of the high density tables.  With the financial engineering news in the rear view mirror, we’d be tempted to revisit our short thesis in the coming months.  The company plans to report 2Q14 results on July 22nd.

 

 

MCD: All The Hype For This? - 1

 

MCD: All The Hype For This? - 2

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Hedgeye Retail: $DSW, $BWS Earnings Wildly Out Of Synch

Takeaway: DSW and BWS have essentially traded places.

Hedgeye Retail: $DSW, $BWS Earnings Wildly Out Of Synch - 1

DSW and BWS Earnings


Hedgeye Retail: $DSW, $BWS Earnings Wildly Out Of Synch - chart4 5 28 large

 

Hedgeye Retail: $DSW, $BWS Earnings Wildly Out Of Synch - chart5 5 28 large

TAKEAWAY FROM HEDGEYE’S BRIAN MCGOUGH:

One company missed by 13%, the other beat by 13%.  One comped down 3.7%, and the other comped up 1.3%. One guided up. The other guided down. One blamed weather. The other did not. One SIGMA improved, the other eroded. All else equal, we'd bet that 9 out of 10 people would say that that the company that surprised on the upside is DSW, and the loser is Brown Shoe. But today, they'd be wrong.

 

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Editor's Note: This is a research excerpt from Hedgeye Retail Sector Head Brian McGough. Follow Brian on Twitter @HedgeyeRetail

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