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July 3, 2014

July 3, 2014 - HE DTR JAN14


TODAY’S S&P 500 SET-UP – July 3, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 1.35% downside to 1948 and 0.12% upside to 1977.        













  • YIELD CURVE: 2.14 from 2.16
  • VIX closed at 10.82 1 day percent change of -2.96%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, June 28, est. 313k (prior 312k)
    • Continuing Claims, June 21, est. 2.560m (prior 2.571m)
  • 9:45am: Bloomberg Consumer Comfort, June 29 (prior 37.1)
  • 9:45am: Markit US Services PMI, June final, est. 61 (prior 61.2)
    • Markit US Composite PMI, June final (prior 61.1)
  • 10am: ISM Non-Manufacturing Composite, June., est. 56.3 (prior 56.3)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 1pm: Baker Hughes rig count



    • House, Senate on recess until July 8
    • 6am: Quinnipiac releases public opinion survey of Iraq troops, background
    • checks for gun purchasers, stricter gun laws
    • 12:30pm: Transportation Secretary Anthony Foxx, holds news conf. with Gov.
    • Lincoln Chafee, D-R.I., on Highway Trust Fund
    • U.S. ELECTION WRAP: Incumbency Worth $500k



  • ECB watchers seek Draghi illumination on path from low rates
  • Obama decries trader bonus system as risky even after Dodd-Frank
  • Arthur becomes hurricane off U.S. East Coast
  • VW rejects comments by Daimler’s Bernhard of possible Paccar bid
  • U.K. services employment rises at record pace as demand jumps
  • Ackman’s Pershing Square fund Is said to gain 25% in 1H
  • Occidental talks for Middle East unit stake sale said to falter
  • Dimon’s cancer has 90% cure rate with demanding therapy
  • Amazon plans to fight FTC over unauthorized mobile-app purchases
  • ‘Transformers’ shows worldwide appeal with China outdrawing U.S.
  • Siemens CEO chasing U.S. gas boom has ‘firepower’ for deals
  • Qualcomm buys Wilocity to step up challenge to Broadcom in Wi-Fi
  • Tesla approved by Pennsylvania assembly to add company stores
  • Salesforce considers acquisitions in Germany to spur growth
  • U.S. equity markets close 1pm ahead of July 4 holiday



    • International Speedway (ISCA) 7:30am, $0.48



  • Chinese Trader Said to Pledge Metals Three Times Over for Loans
  • World Food Prices Fall for Third Month as Grains Lead Decline
  • Cotton Boom Goes Bust as Texas Rains Revive Surplus: Commodities
  • Libya Reopening Two Oil Ports After Taking Control From Rebels
  • Arthur Strengthens to Become First Atlantic-Season Hurricane
  • Gold Retreats From Three-Month High Before U.S. Payrolls Report
  • Nickel Climbs to Highest Since May as U.S. Data Boosts Demand
  • Steel Rebar Falls From 1-Week High on Chinese Mills Supply Glut
  • Palm Oil Declines as Drop in Crude May Ease Demand for Biodiesel
  • Coffee Gains for Second Session; Sugar Drops as Surplus Raised
  • Sugar Millers in Thailand Urge Market Prices to Avoid Smuggling
  • Rupture-Prone Oil Trains Keep Rolling a Year After Quebec Crash
  • Conditions Not ‘Ripe’ to Decide Weda Bay Project in ’14: Eramet
  • Corn Nears Bear Market on Outlook for Biggest Ever U.S. Harvest


























The Hedgeye Macro Team
















VMR Products Call Replay And Key Take-Aways

Today we hosted a conference call on electronic cigarettes & e-vapor products with Jan Andries Verleur, CEO and co-founder of VMR products, a leading global online manufacturer with brands V2 Cigs and Vapor Couture.   


Jan co-founded VMR Products in 2009. Beyond the company’s online presence, its products are found in 40,000 domestic retail locations and 50,000 worldwide. The call is part of a series of talks we’ve held with industry experts (previous speakers included CEOs of NJOY, LOGIC, Ballantyne Brands and Victory). On the call Jan offers valuable industry commentary – including key insight on sales and consumer trends that may be shifting to larger e-vapor products and away from Big Tobacco’s smaller “cig-alike” e-cig offerings.


Below we provide key commentary from a robust Q&A with Jan.  We also encourage you to listen to the recording. 


Click for the replay podcast

Click for LOGIC’s presentation



Key Q&A Callouts:

  • Are Proposed FDA Regulations surprisingly light? There was no proposed bans or limits on marketing, flavors, or online sales?   Jan says VMR is very active in regulatory affairs and met with OMB prior to proposed regulations … he believes that regulatory proposals are responsible and take into account the importance of innovation.
  • Retail versus Online Consumer and Online regulatory concerns. He says in retail stores there’s only limited shelf space/limited SKU breadth, so you can only have so much of the consumer’s attention, however online is different… online users visit websites numerous times before making a buying decision, consult third party reviews and blogs, and so therefore they’re a higher educated consumer. The name of the game for online business is SKU breadth, but by limiting the sale of these products online you essentially hand the industry over to tobacco players. He thinks the OMB appropriately addressed this issue by not restricting (online) accessibility.
  • E-cig vs E-vapor trends. What is the function of the recent decline in measured e-cig sales? (Sales have flattened since the summer 2013 and are down a second consecutive month to -6.1%Y/Y in the four weeks ended June 15th, according to IRI). Jan underlines that the e-vapor category (and not the traditional e-cig or “cig-alike” aka micro-cigs category that most of Big Tobacco primarily sells) has not seen any substantial decline on volume, when looked at globally.  The area of decline is in micro-cigs, specific to trade, and he believes it’s a function of the lack of product quality (and therefore experience) delivered to the retail end user.
  • Large scale vaporizers appeal is the newest trend online, and their appeal is strong battery life (not limited to the confines of a small cig-alike) and amount of liquid they hold. These products are just now beginning to find their way into retail trade, but of course are not being specifically counted with Nielsen and SMA data, because they’re often sold in alternative (non-counted) channels.
  • “Cig-alikes” have Consumer Appeal? According to Jan, consumers are not looking for a product that looks identical to cigarettes they’re looking to leave behind (Hedgeye note: this flies squarely against NJOY’s  messaging), they are looking for a product that fulfills and satiates their appetite for nicotine without smoke (and less harm) that’s convenient. He believes larger devises are winning out because 1) they can provide a longer battery life, and 2) they offer a greater level of differentiation from traditional tobacco smoking.  He however doesn’t think the cig-alike category will disappear as there will be people that don’t wish to deal with refilling e-juice, etc. 
  • On optimism around future Cig-alike technology. He expects that improvement in future version of cig-alike versions will more evenly balance the playing field with larger e-vapor products, and that ultimately (regardless of form), both smaller and larger sized devises can win consumer appeal if the quality/user experience in delivering the nicotine is high (without combustion).
  • How large is the U.S. e-vapor category worth today?  Jan thinks the cig-alike category is around $350MM online, and large scale devises (or non cig-alike) are worth $200MM online to $350MM. For trade, in what can be tracked, the figure is near $1B, but there’s also offline trade that can’t be tracked.  All U.S. vapor products could be as high as $2B in 2014.
  • Any thoughts on blu's recently launching/testing a vapor product in the UK?   The product that blu has tested (blu pro kit) is essentially a private label technology that blu decided to sell. It is essentially a rebranded, generic product that’s similar to many like it produced in China. On July 4th, VMR is bring online V2 Pro series (3-in-one-vaporizer that can vaporize anything the consumer wants to).
  • Color on the quality of the e-liquid, battery, atomizer from China?  Manufacturing shifting to U.S.A.?  Jan says when it comes to product quality it’s all about who you are buying from, and this can be found in all places from Idaho to Uzbekistan, so manufacturing in China is all about quality of the relationship. He says companies that don’t have the staff on the ground to manage the manufacturing process will be at a great disadvantage when it comes to regulatory issues.
  • Geographic Opportunities?  Yes - Europe, China, Russia.  Today over 70% of VMR’s revenue is in the U.S., but Europe and PRoC are its targeted growth markets. In 2016/17 he thinks China will emerge as a huge opportunity for vapor technologies. He also views Russia favorably, especially as tobacco regulation comes down more heavily on where you can purchase it and higher excise tax. Finally, Europe, especially when talking about large scale devises has a lot of growth runway (the U.K. is currently the largest market worth around $350MM).   
  • Latin and South American Opportunities?  Jan says it’s a good market but there are a series of problems throughout the region. He say VMR is successful in Ecuador; growing in Colombia; had regulatory issues in Costa Rica, Panama is closed down; Brazil is difficult unless doing domestic manufacturing. From a regulatory and business perspective as of today, Jan is much more favorable on the opportunity in Europe, China, and Russia.
  • Disposables versus rechargables micro-cigs? Does one lead to the other, or based on occasion?  Jan believes that disposables play very well at retail, while they’re very hard to sell online. The reason for that is the online consumer will realize that best products aren’t disposables, and it’s more economical to buy rechargable (especially as online buyers tend more towards bulk buying at a discount). Unlike tobacco trends in where 70% of smokers buy a pack a day (rather than a carton), Jan believes that consumers that committed to the e-cig/e-vapor category will drift into rechargables and large scale devise products over disposables. Expects disposables to remain 50% of c-store sales, but to diminish in future years.
  • Consumer and Vape Shop Demands.  Jan describes a typical vape shop consumer looking for an endless supply of e-liquids, wants devise selection, and may look for the $50, $100, or $250 vaporizer. (There are roughly 15,000 vape shops across the U.S.).   He views this type of consumer very differently than a traditional cigarette smoker looking for an alternative to combustion, who likely gravitates towards the c-store. In any case, no c-store will be selling a $200 vaporizer, so he see some clear lines in the sand based on channel with some opportunity for product/consumer overlap. 


We invite you to read a note published this morning titled Tobacco Trends – PM Shorter Term Struggles Persist; LO Bulls that details our updated outlook on the tobacco and e-cig/e-vapor markets.  Jan’s commentary, along with all the CEOs we’ve profiled, in conjunction with new data we’ll soon be releasing on an e-cig/e-vapor survey, help to inform our thinking on the direction of the category, and therefore estimate the impact on Big Tobacco’s portfolio.


We hope you can join us for future expert calls, including our next E-cig Speaker Series featuring CEO John Wiesehan Jr. of Ballantyne Brands on July 16th at 11am EST. More details to follow. 


Happy 4th of July!!!



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


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Tea Leafing the June Jobs Report

Editor's note: This is a complimentary research insight from Hedgeye macro analyst Christian Drake. Click here for more information on our products and services.


On a month-to-month basis, the payroll estimates from ADP and the Bureau of Labor Statistics can differ substantially.  However, on a multi-month, moving average basis, the relationship between the ADP & Non-farm private payroll (NFP) figures is pretty decent. 


This is more analytic musing than convicted forecasting, but for the co-integration tea leafers…..the regression using the 3M rolling average in the ADP series (updated for this morning’s data) suggests +217,000 on the June NFP Private payroll print (current estimate = 213,000)

Tea Leafing the June Jobs Report - tea leaf reading


Historically, it appears the tendency is for NFP to re-couple to ADP after outlier moves (counting actual payrolls may be more accurate than calling up some smaller cross-section and asking questions….whoulda thunk). 


More to be revealed tomorrow morning...


Tea Leafing the June Jobs Report - ADP vs NFP

Sleepy Grain Markets

Takeaway: With the subdued threat of a U.S. drought affecting the harvest, volatility and bullish sentiment have collapsed from the April highs.

Volatility can turn quickly with high-frequency data, and currently equities aren’t the only asset class with a relatively complacent outlook on market catalysts into the summer months.     

With commodities being the biggest outperformer through the first half of 2014, the CRB Index (+8.50% YTD) is experiencing its largest YTD increase since 2009 (+13.20%). What started off as some of the most volatile markets across all asset classes on the speculation of a drought in the U.S., investors in the grain markets remain skeptical of a forward-looking catalyst for price action into the harvest.

  • Basis on 1st and 2nd month corn futures is trading at a year-to-date high (Jul-Sep. spread)
  • Spot implied volatility has trended back to historical averages from April highs

Sleepy Grain Markets - corn implied vol chart


Sleepy Grain Markets - soybeans implied vol chart


Sleepy Grain Markets - wheat implied vol



Arguably the most important grain number of the year into the heat of harvesting season, the USDA reported Q2 stockpiles. The report shuddered any pre-season threat of a drought-fueled rally into harvest season. The USDA estimates Corn and Soybean Stocks may reach record levels. Bullish sentiment as measured by the CFTC’s weekly reporting of the net length of aggregate futures and options positions in the market peaked with prices at the end of April and has since declined significantly:


Sleepy Grain Markets - Table of CFTC Sentiment


Sleepy Grain Markets - Chart of CFTC Contract Positions YTD


  • Corn: After rallying to +22% on the year through the end of April, corn is now trading in negative territory after the print showed higher than expected stockpiles for Q2. The USDA now estimates the largest stock ever for the 2014 harvest:
    • Q2 Stocks: 3.85Bn vs. 3.72Bn estimate
    • 2014 USDA estimate: 13.94Bn Bushels (all-time high)

Sleepy Grain Markets - USDA Corn Stocks


  • Soybeans: After reaching +17% YTD at the end-of-April highs, soybeans have since retreated -10% to +7% through Q2. The USDA report this week also exceeded expectations with record acreage expected to be planted
    • Q2 Stocks: 405MM vs. 382MM estimate

Sleepy Grain Markets - USDA Soybean Stocks


  • Wheat: Reached a may 6th YTD high of +21% and has since plunged to -7% through Q2 (-4.5% week-to-date)
    • Q2 Stocks: 590MM vs. 597MM estimate

Sleepy Grain Markets - USDA All Wheat Stocks


The consumption of commodities is paid for in real, inflation-adjusted U.S. Dollars. With the driving force of high-frequency macro data points changing forward-looking expectations for the dollar and rates on a daily basis, the outlook for those who consume in U.S. dollars moves in tandem. We observe a noticeable relationship between these marginal changes and commodity prices and believe this will continue to be a potentially catalyst inducing volatility in commodity markets, weather aside.


Ben Ryan






Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%