TODAY’S S&P 500 SET-UP – July 2, 2014
As we look at today's setup for the S&P 500, the range is 27 points or 1.23% downside to 1949 and 0.14% upside to 1976.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: 58% voted NO, 42% voted YES
If you follow Hedgeye, you know that one of Keith’s key themes has been #InflationAccelerating. That’s very evident when it comes to oil prices, which have been climbing.
In the video below Macro Senior Analyst Darius Dale discusses the Fed’s monetary policy and geopolitical risks that are impacting on oil prices and the energy sector.
Now, as the summer driving season gets into full swing ahead of the July 4 holiday, we want to know: Will gas prices hit $5 a gallon in your area this year?
At the time of this post, 58% voted NO, 42% voted YES.
Those who voted NO gas prices will not hit $5 a gallon in their area this year reasoned:
Voters who said YES gas prices will reach $5 had this to say:
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Editor’s Note: Below is an excerpt of an institutional research note written earlier today by Josh Steiner and Christian Drake, who run our Housing coverage.
CoreLogic released its monthly home price report for May/June earlier this morning. Unlike S&P/Case-Shiller, which is a rolling three-month average repeat sales index,CoreLogic is a single month index released on almost no lag. Essentially, it gives you information three months more current than what you get from Case-Shiller.
CoreLogic estimates that home prices rose +7.7% YoY in June, a deceleration vs the +8.8% in May and +10.0% in April. We show this in the first chart below.
Interestingly, in the past few months we've seen material upward revisions to the preliminary estimates for the most recent month-ended. This month, however, the revision was almost non-existent and actually was revised lower. The preliminary estimate for May was +8.9% and the final number came in at +8.8%.
Its also worth noting that while sales comps begin to ease through 2H14, price comps don’t really begin to ease until Feb 2015 (hardest near-term comp is Oct which was +11.8% YoY). As such, we think the next 8 months of worsening pricing data will weigh on the housing complex.
We are adding LONG Diageo (DEO) to our Hedgeye Best Ideas list.
In July 2013, newly appointed CEO Ivan Menezes established a new vision for Diageo: “To create one of the best performing, most trusted and respected consumer product companies in the world.” In our view, Diageo is a strong company that has the brands, margins and returns to achieve this. However, we believe Mr. Menezes plan and timeline is inadequate. Diageo is struggling to translate its industry leading position into shareholder value and, as a result, its stock has significantly lagged its consumer product peers. DEO is up +6.5% over the past year, while its peer group is up +37%.
To get Diageo to the next level as a leading consumer product company, it will likely need to be 1) pushed by an activist or 2) taken out in the global M&A wave.
We’ve been working on the Diageo story closely for a couple of months now and our timetable for launching on the name has been accelerated by current rumors. This morning, speculation hit the tape that SABMiller may launch a defensive bid for Diageo in order to fend off Anheuser-Busch InBev.
Our thesis on Diageo is very straightforward – the company’s global beer business is not consistent or aligned with management’s aforementioned vision. Diageo’s global spirits business is dominant and holds the number one market position in a number of key categories, but its beer business will never see this type of penetration. We believe the current M&A environment in consumer staples, particularly in global alcohol, represents an ideal environment for Diageo to sell Guinness. A divestiture of this nature would properly align DEO’s business and allow for a substantially stronger growth profile.
Currently, Diageo’s global beer business, which is primarily the Guinness brand, represented 16.3% of the company’s total volumes in 2013 and has a significant presence in Africa and the emerging markets. Diageo’s business in these markets was initially jumpstarted by the acquisition of Meta Abo Brewery from the government of Ethiopia in late 2010. It was therefore a key milestone in the company’s strategy to participate in each of the growth markets of Africa. As good as the acquisition looked in 2010, the current performance of the beer business in this market is dragging down Diageo’s consolidated results. Furthermore, beer is roughly 6% in Diageo’s most profitable market, North America, and will never see significant market share or organic growth.
There has recently been speculation that worldwide brewing M&A is poised to accelerate, centered largely on exposure to emerging markets. Brewing assets in emerging markets (Africa, China and other markets in Southeast Asia) are in high demand as they are likely to offset the slower growing markets in the U.S. and Europe. With that being said, we believe Diageo’s brewing assets in the emerging markets, particularly Africa, would be a nice addition to the SABMiller portfolio.
We will provide more details on Diageo and our long thesis in the coming weeks.