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Poll of the Day Recap: 60% Voted For Clear Spirits

Takeaway: 60% voted for Clear Spirits, 40% voted for Brown Spirits.

Hedgeye’s Consumer Staples team is interested in consumption trends of spirits as part of its alcoholic beverage coverage universe. So for today’s poll, we wanted to know what you're consuming more of this year; brown spirits (whisky, scotch, bourbon, brandy, cognac) or clear spirits (vodka, gin, rum, tequila, sake). Our poll question was straightforward:

 

Are you drinking more brown spirits or clear spirits this year versus last?

 

 

At the time of this post, 60% voted for Clear Spirits, 40% voted for Brown Spirits.

 

Those who voted for Clear Spirits had this to say:

  • I drink both bourbon and gin and have enjoyed exploring many of the new boutique products in both categories, but have spent more time exploring the gins.  There a simply a lot more to choose from now than a year or two ago.
  • I like to nurse scotch in the winter, but prefer clearer spirits in mixed drinks over the spring and summer, even leading into the early part of the autumn.  It's a seasonal issue.

Voters who chose Brown Spirits had this to say:

  • Recently, I have settled down a bit and my trend is more towards darker spirits, but much less consumption.  Back in my high consumption and possibly alcoholic days, I would consume large amounts of clear spirits. So overall, I think clear spirits have more potential to be consumed in mass, and if I were to suddenly decide to get re-open that can of worms, it would probably be back to the clear spirits if I were planning on buying in bulk and also consuming in bulk.
  • I'm not a character from Sex and The City. Clear spirit guys, enjoy your cosmopolitans with the little umbrellas!


DRI: MANAGEMENT'S PERPETUAL, MISGUIDED VISION

Upon further review of Darden’s disastrous 4Q earnings release and outlook for FY15, we have updated some of our thoughts on the company’s vision for the future.  To be clear, following the divestiture of Red Lobster, we believe the company will struggle to pay its current dividend in FY16 without levering up.

 

For the sake of shareholders, Starboard must get control of the Board on September 30th.  Without a change of this magnitude, shareholders can expect more of the same: dismal returns, value destructive initiatives, and a complete disregard for shareholder concerns.

 

We’ve attached our commentary in a 12 page slide deck below.

 

CLICK HERE

 

Call with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Just Charts – Grinding Higher

INVESTMENT IDEAS

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

 

Just Charts – Grinding Higher - 1

EVENTS THIS WEEK

 

6/25/14 GIS Earning Call 8:30am EST

6/25/14 TAP Analyst Meeting

6/26/14 PMI Investor Day 1

6/26/14 MKC Earnings Call 8:00am EST

6/26/14 CAG Earnings Call 9:30am EST

6/27/14 PMI Investor Day 2

 

XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

Just Charts – Grinding Higher - 1. xlp

 

The Hedgeye U.S. Consumption Model has shown steady improvement over the past month, with 5 of the 12 U.S. Economic Indicators flashing green.

Just Charts – Grinding Higher - 1. consumption indi

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

 

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 20.0x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but rose to 37.1 versus 35.5 in the prior week

Just Charts – Grinding Higher - 1. pe

Just Charts – Grinding Higher - 1.consumer comf

Just Charts – Grinding Higher - 2. us personal incfome

 

 

RECENT NOTES

 

Quantitative Setup

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

Just Charts – Grinding Higher - a. bud

Just Charts – Grinding Higher - b. deo

Just Charts – Grinding Higher - c. ko

Just Charts – Grinding Higher - d. pep

Just Charts – Grinding Higher - e. gis

Just Charts – Grinding Higher - f. mdlz

Just Charts – Grinding Higher - g. kmb

Just Charts – Grinding Higher - h. pg

Just Charts – Grinding Higher - i mo

Just Charts – Grinding Higher - j. pm

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

TACRM SAYS BUY ARGENTINA??

Takeaway: Top-down signals and bottom-up fundamentals support chasing Argentine equities (ARGT) to new highs.

On JUN 18 the US Court of Appeals for the Second Circuit lifted the stay on Judge Thomas Griesa’s (NY-Southern District) previous ruling after Argentina was denied an opportunity to have its case against bond restructuring holdout NML Capital heard by the Supreme Court two days prior.

 

This effectively forces Argentina to make good on $1.5B of overdue credit on JUN 30 (or be forced to via seizures of int’l assets) – the same day it owes an additional $900M to bondholders that took place in the country’s 2005 and 2010 restructurings of 92% of the country’s 2001 $95B sovereign default at 29 cents on the dollar. Moreover, the ruling prevents Argentina from prioritizing payments on restructured bonds over those of the holdout paper.

 

Argentine policymakers rightfully fear the ruling opens the country up to an additional ~$15B of likely claims by other holdout creditors – effectively putting more than half of the country’s $28.8B in FX reserves at risk. It’s worth noting, that Argentina uses FX reserves as it primary source of USD liquidity.

 

TACRM SAYS BUY ARGENTINA?? - 1

 

One key issue to monitor over the next week is that a clause in the aforementioned restructuring contracts prevents other bondholders from receiving better deals in subsequent negations – an option Argentine leaders have signaled they are likely to pursue.

 

This intention was stated less than a week after Argentine financial markets were roiled by Argentine President Cristina Fernandez de Kirchner and Economy Minster Axel Kicillof’s aggressive remarks following the decision to lift the stay; they referred to the decision as “extortion” and said they would attempt to transfer their restructured foreign law bonds to local legislation in order to skirt the ruling.

 

Specifically, the Buenos Aires Stock Exchange’s benchmark Merval Index dropped -10.9% and -4.9% on JUN 16 and JUN 19, respectively. The Argentine peso declined -6% the black market to 12.40 per USD on JUN 19, its first day back “trading” since JUN 13. Fast forward to today, the Merval Index is up +10.4% since last Monday (JUN 16) on what appears to be a change of heart among the Argentine brass with respect to the ruling and threats of technical default.

 

TACRM SAYS BUY ARGENTINA?? - 2

 

There’s follow-through in the bond market as well; the country’s 2021 notes have rallied 9.63 cents on the dollar from their JUN 16 low to 97.27. Argentina’s 5Y CDS have tightened -1190bps from their JUN 17 wides to 1437bps. The market likes what optically appears to be a shift, on the margin, in the direction of less-crazy policy out of the Fernandez regime. Her decision to eventually award Spain’s Respol $5.1B after their 2012 expropriation of YPF and her decision to settle $9.7B worth of obligations with the Paris Club in late-MAY is supportive of this view.

 

TACRM SAYS BUY ARGENTINA?? - 3

Source: Bloomberg


Perhaps the “Fernandez discount” is on the brink of being sustainably eroded. If that is the case, Argentina is a country that could stand to see increased international interest in its financial markets on the political change catalyst; in fact, Argentina is not unlike India or Brazil in this regard.

 

In addition to this, our TACRM system is giving us two thumbs up on the ARGT etf here. From a quantitative perspective, the index fund is signaling “buy” on an idiosyncratic basis and, from a top-down perspective, both EM Equities and Commodities remain “buys” at the primary asset class level. The latter is supportive of marginal improvement in Argentina’s creditworthiness due to likely improvement in the current account balance (commodities account for ~65% of Argentine exports).

 

TACRM SAYS BUY ARGENTINA?? - TACRM Heat Map

 

TACRM SAYS BUY ARGENTINA?? - TACRM Summary Table

 

TACRM SAYS BUY ARGENTINA?? - 6

 

We don’t think it’s prudent to build a materially sized position in Argentine stocks; nor do we think it’s a long-term holding without further color on the holdout negotiations or a continued willingness for the Fernandez government to be less crazy. Moreover, the country’s debt ladder would seem to suggest that it’s far from out of the woods; it owes $10.3B  to international creditors in 2015, $12.7B in 2017 and $12.1B in 2018.

 

TACRM SAYS BUY ARGENTINA?? - 7

Source: Bloomberg

 

Time will tell. For now, happy squirrel hunting!

 

DD

 

Darius Dale

Associate: Macro Team

 

***To the extent you’d like to learn more about TACRM and how we apply its consistent and robust quantitative signals to our decision-making process, please review the following white paper, which can be accessed via the following link: http://docs.hedgeye.com/HE_TACRM_2014.pdf. In short, TACRM systematically distills actionable investment color from the global financial marketplace in a manner that is consistent with quantitative rigor that investors have come to expect from Hedgeye.***


LULU - Flash Call Wednesday 6/25 11am ET

Takeaway: We'll be hosting a flash call to discuss why we turned positive and added LULU to our Best Ideas List - tomorrow, June 25th, at 11am ET.

Please join us for a Flash Call on Lululemon (LULU) tomorrow, June 25th, at 11am ET. The purpose of the call is to review why we turned positive and added LULU to our Best Ideas list as a Long following the company’s latest disappointing quarter.

 

Simply put, our view is that things are so bad, that it’s good – and the subsequent activism by Chip Wilson supports that case.  Don’t get us wrong, Wilson is as much a liability now as he ever has been. But, we think that the path he’s marching down leads this company, and the stock, down an array of very defined outcomes - most of which are positive for LULU shareholders.  Our math suggests at least 3-to-1 upside/downside.

 

We’ll be exploring the following…

  1. A key focus for us is the decision tree facing this company based on Wilson’s effort to regain control of the Board. If he wins, certain things will happen. If he loses, there’s a completely different set of outcomes. We look at all outcomes that have a remote chance of happening and look at likely ensuing stock price.
  2. What obstacles does Wilson face in going activist on the company that he created? There are many. We’ve done the deep dive on the Board history and relationships.
  3. We’ll analyze the governance factors surrounding anyone who wants to influence this Board.
  4. What factors could lead to a take-out? Who could absorb a deal this big, and more importantly, who wants to?
  5. What’s the worst case scenario, and what would need to happen for us to back off of our thesis?
  6. Yes, there’s this thing called Selling Yoga Apparel. That matters. We’ll outline what fix we think the company needs in order to jump start its financial model.  

 

CALL DETAILS

Toll Free Number:

Direct Dial Number:

Conference Code: 619868#

Materials: CLICK HERE

 


Cartoon of the Day: Kicked Consumers

Takeaway: U.S. consumers are experiencing some significant headwinds.

Cartoon of the Day: Kicked Consumers - consumer cartoon 06.24.2014


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