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Poll of the Day Recap: 77% Bullish on Gold Through 2014

Gold futures jumped sharply today to their highest settlement in nearly four months amid a pullback in U.S. stocks. Gold for August delivery climbed $14.90, or 1.1%, to settle at $1,339.20 an ounce on the Comex division of the New York Mercantile Exchange. The most-active contract hasn’t settled this high since March 19.

 

Gold is up over 10% YTD and is on Hedgeye’s Investing Ideas via GLD.

 

When growth surprises to the downside, and a run-up in prices for everyday necessities people actually consume increases, individuals obviously have less money to spend. Accordingly, Gold’s breakaway from the broader commodity complex and stronger linkage to the dollar and forward looking monetary policy makes intuitive sense.

 

In today’s poll we asked: Are you bullish or bearish on Gold through 2014?

 

77% of respondents voted they are BULLISH on Gold, while 23% voted BEARISH.

 

In the one-minute video below, macro analyst Ben Ryan briefly discusses some of the reasons we became bullish on Gold and added it to Investing Ideas.

 

 

As one respondent commented, “Jim Rickards' snowpack grows every day. Avalanche not an if but a when. “

 

More to be revealed.

 


Potbelly: Staying Short $PBPB

Takeaway: Hedgeye's Howard Penney is staying short PBPB.

Editor's note: This is a brief excerpt taken from a research report released earlier this afternoon by Restaurants sector head Howard Penney.

 

We added PBPB to the Hedgeye Best Ideas list on 11/19/2013 at $28.15/share.  Since this time, 2014 EPS estimates have been revised down from $0.39 to $0.18 and the stock has acted accordingly (down ~60%).  We remain short PBPB and continue to have concerns with the company’s aggressive growth strategy, particularly in the face of fundamentals that suggest the chain shouldn’t be growing at all.

 

Potbelly: Staying Short $PBPB - pbpb

 

Potbelly preannounced disappointing 2Q14 results yesterday, including revenues of $83.6m ($86.7m est.) and adjusted EPS of $0.06 ($0.12m est.).  In addition, same-store sales declined -1.6%, 240 bps below consensus estimates, and traffic declined for a sixth consecutive quarter.  Management guided down full-year adjusted EPS to the $0.18-$0.21 range ($0.34 est.) and full-year same-store sales to flat to negative low-single digits (+0.8% est.). 

 

Back in November, when we made our original short call, we wrote:

 

“At the heart of it, Potbelly is a single daypart, low margin, low return sub shop with declining traffic and little competitive advantage over its most basic competitors.”

 

Though this seemed harsh at the time, the company’s results as a public company have given us little reason to retract these words.


#WINNING: INDIA’S STRUCTURAL GIP IMPROVEMENT CONTINUES

Takeaway: The FY15 budget and out-year fiscal policy guidance are in line with the structural GIP improvement we’ve been calling for; buy the dip(s).

Newsflash to all Keynesians, monetarists, neo-monetarists and any other Ivory Tower economics gangs that I’m not yet familiar with: you don’t have to burn your currency at the stake for “exports” in order to generate economic and financial market prosperity (you actually can’t – at least not on a sustainable basis).

 

If you haven’t yet learned anything from the 2013-14 UK experience, you’re getting another opportunity to witness what sound monetary and fiscal policy can do for a country in present-day India. Specifically in the UK, real GDP growth accelerated +280bps or +1400% to +3% YoY from EOY ’12 through 1Q14; the FTSE All-Shares Index appreciated +15.2% in conjunction with a +5.3% appreciation in the GBP/USD exchange rate on David Cameron’s austerity and Mark Carney’s regime change at the BOE.

 

Looking to India, today new finance minister Arun Jaitley introduced the FY15 budget and out-year fiscal policy guidance and both were in line with recent, irrational fears of fiscal consolidation. Specifically, Modi’s new finance chief is maintaining the existing target of 4.1% for the FY15 deficit/GDP ratio – a seven year low – while pledging to reduce that ratio to 3.6% in FY16 and 3% in FY17.

 

Underneath the hood, both the guidance and commentary were quite hawkish as well:

 

  • “We can’t spend beyond our needs. We can’t leave debt and liability behind for our future generation.” – Arun Jaitley
  • “We are committed to providing a stable and predictable tax regime which will be investor friendly and spur growth,” said Jaitley. He also stated that he’d decide on a much-needed goods and services tax (GST) by year’s end. That, coupled with his pledge to limit retroactive tax demands on businesses, should actually help increase the nation’s tax take, at the margins, by promoting marginal capital formation and FDI. With respect to promoting the latter, we’re pleased to see that he lifted the FDI limits for the defense and insurance sectors to 49% from 26% currently.
  • Much to the chagrin of gold bulls, Jaitley also left import taxes on gold unchanged after hiking them from 2% to 10% over the past two years, while also mandating that 20% of imports be re-exported. The associated restrictions on gold imports help slash India’s current account deficit by more than half to $32B last fiscal year. The government is expecting a further decline in gold purchases in FY15 to 650 metric tons from 847 metric tons in FY14.
  • Perhaps most importantly, Jaitley also stated that the India’s new fiscal policy roadmap is “only the beginning of a journey” towards reviving India’s downtrodden economy (e.g. India’s latest real GDP growth rate of +4.6% YoY is in the bottom decile of all readings over the trailing ten years). He cautioned investors that it would be “several years” before growth would get back up to the 7-8% figures India had been putting up consistently.

 

The latter catalyst is a clear signal that the Modi regime is “in it to win it” for the long haul, opting to put the economy on a sustainable growth path rather than trying to jump-start the ailing economy in an inflationary manner – something we’d expect any long-term investor worth his/her shirt to adore. This is in stark contrast to the tactics of the previous administration led by the Monmohan Singh of the Congress Party.

 

While it will be somewhat difficult for India to meet the FY15 budget guidance given that 46% of the deficit target has been achieved through only the first two months of the fiscal year, we like that Jaitley is not relying on overly-optimistic growth forecasts to get the job done. In fact, he openly criticized the previous finance minister, Panaliappan Chidambaram for assuming pollyannaish revenue growth amid aggressive GDP growth forecasts, while consistently understating and deferring subsidy expenditures, which have grown fivefold over the past 10Y and now account for 16% of total expenditures.

 

All told, this the kind of structural improvement in India’s GIP fundamentals we’ve been calling for since last OCT and is in line with what Dr. Rajan has been promoting as governor of the RBI. On that front, “Dr. Raj” was out this morning reiterating his EOY ’14 CPI target and his previous guidance that controlling inflation is paramount for Indian growth and that the RBI and new administration are working in conjunction on that task.

 

Click on the following hyperlinks to review the aforementioned thesis, which was out in front of a +31.4% gain in the WisdomTree India Earnings Fund ETF (EPI) since then. That performance compares to a sample mean of only +3.4% across the 24 country level ETFs we track in the EM space. #Alpha:

 

 

As such, we’d expect continued improvement in India’s budget balance and current account balance over the intermediate-to-long term.

 

#WINNING: INDIA’S STRUCTURAL GIP IMPROVEMENT CONTINUES - BUDGET BALANCE

 

#WINNING: INDIA’S STRUCTURAL GIP IMPROVEMENT CONTINUES - CURRENT ACCOUNT BALANCE

 

Both would be positive for the Indian rupee (and Indian growth via current account financing) – which our FX valuation models see as roughly 6-16% undervalued at current prices.

 

#WINNING: INDIA’S STRUCTURAL GIP IMPROVEMENT CONTINUES - FX REER VALUATION

 

#WINNING: INDIA’S STRUCTURAL GIP IMPROVEMENT CONTINUES - FX CARRY VALUATION

 

In five years of writing research notes on India’s budget, this is the first one that has a takeaway that isn’t extremely negative; in fact, it’s overwhelmingly positive. India’s new “management team” is flat-out killing it. We’ve said this before and we’ll say it again: if we could LBO entire countries, India would be our primary acquisition target!

 

Feel free to ping us with any questions, comments or concerns.

 

Cheers,

 

DD

 

Darius Dale

Associate: Macro Team


Daily Trading Ranges

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Q3 2014 Macro Themes Conference Call: U.S. Consumer Beware

Q3 2014 Macro Themes Conference Call: U.S. Consumer Beware - HE MT 3Q14

 

Hedgeye's Macro Team will be hosting our highly-anticipated Quarterly Macro Themes conference call tomorrow, July 11th at 11:00am EDT. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and related investment opportunities.

 

Q3 2014 MACRO THEMES OVERVIEW:

  • #Q3Slowing:  Against a backdrop of harder growth and easier inflation compares in 3Q14, the conflation of rising inflation, static nominal wage growth, and an ongoing deceleration in housing should drive a sequential deceleration in domestic economic growth. Growth sentiment, meanwhile, has been improving with 3Q GDP estimates rising as consensus again back-end shifts misguided 1H estimates. We expect that optimism to be marked to [a more dour] reality as we progress through 3Q.  
  • #DollarDevaluation: Given that the Fed's 2H14 and full-year growth forecasts are still too optimistic, the outlook for an easier Fed and future dollar devaluation looks probable. The negative correlations between the dollar and commodity prices should tighten further as the Fed surprises consensus by getting more dovish. 
  • #VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.

 

CALL DETAILS

Attendance on this call is limited. Please note if you are not a current subscriber to our Macro research there will be a fee associated with this call. Ping for more information.


PBPB: Staying Short

We added PBPB to the Hedgeye Best Ideas list on 11/19/2013 at $28.15/share.  Since this time, 2014 EPS estimates have been revised down from $0.39 to $0.18 and the stock has acted accordingly (down ~60%).  We remain short PBPB and continue to have concerns with the company’s aggressive growth strategy, particularly in the face of fundamentals that suggest the chain shouldn’t be growing at all.


Potbelly preannounced disappointing 2Q14 results yesterday, including revenues of $83.6m ($86.7m est.) and adjusted EPS of $0.06 ($0.12m est.).  In addition, same-store sales declined -1.6%, 240 bps below consensus estimates, and traffic declined for a sixth consecutive quarter.  Management guided down full-year adjusted EPS to the $0.18-$0.21 range ($0.34 est.) and full-year same-store sales to flat to negative low-single digits (+0.8% est.). 

 

Back in November, when we made our original short call, we wrote:

 

“At the heart of it, Potbelly is a single daypart, low margin, low return sub shop with declining traffic and little competitive advantage over its most basic competitors.”

 

Though this seemed harsh at the time, the company’s results as a public company have given us little reason to retract these words.

 

Management provided few details, but did note that they are maintaining their guidance for 40-48 new unit openings in 2014 – a foolhardy decision, in our view.  This range implies 12-15% unit growth for the full-year when, in fact, the chain hasn’t justified any form of expansion.  It is likely that we will continue to dislike the company until management pulls their foot off the accelerator.  PBPB currently trades at 50.05x P/E (FY14), a multiple that typically reflects a strong growth company.  Considering declining same-store sales, traffic, margins and a questionable growth strategy, we continue to view the stock as unattractive.

 

As it stands, we believe FY15 estimates are too aggressive and will be revised down over the coming weeks.  At that time, we will reassess our positioning.

 

PBPB will hold its 2Q14 earnings call on Tuesday, August 5th, 2014 at 5:00pm EST.

 

Research Recap:

Investment Ideas: Shorts (04/16/2014)

PBPB Lays an Egg (02/19/2014)

PBPB: Not Worth of the Multiple

Potbelly (PBPB): The Latest Restaurant IPO

 

 PBPB: Staying Short - chart1

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Cartoon of the Day: What's In A Name?

 

 

Cartoon of the Day: What's In A Name? - Gold Bond cartoon 07.10.2014

 

In this case, it’s  two long ideas for investors. 

SUBSCRIBE TO CARTOON OF THE DAY.


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