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Q3 #GROWTHSLOWING

Client Talking Points

VIX

+41% front-month move in less than 2 weeks reminds us that the 10 VIX line is the most asymmetric there is for reasons you’ll only be able to explain on a revisionist basis – what was TREND resistance (12.11) is now @Hedgeye TREND support - bad for mo mo stocks (we prefer being long slow-growth yield chasers).

RUSSELL 2000

Down -6.2% since July 7th and with a +41% move in volatility, that probably felt more like a 10% correction for some. We think bond yields and the Russell have the domestic consumption Q3 #GrowthSlowing call right.

UST 10YR

2.48% continues to signal a series of lower-highs and lower-lows – consensus can only blame everything other than the consumer for so much longer. We expect consensus to start cutting its Q3 growth expectations as some of the companies do.

Asset Allocation

CASH 20% US EQUITIES 6%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 24% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

EUROPE: Eurostoxx50 and DAX both red and remain below @Hedgeye TREND resistance

@KeithMcCullough

QUOTE OF THE DAY

Laughter is an instant vacation.

-Milton Berle

STAT OF THE DAY

Long-term Treasuries (TLT) were up +1.1% on the day Thursday, hitting fresh year-to-date highs as bond yields re-tested year-to-date lows.


CHART OF THE DAY: Snap Goes Growth Via Russell 2000 $RUT!

Takeaway: The relative (and absolute losses) in the Russell 2000 for 2014 YTD shouldn’t surprise anyone who has been following Hedgeye.

 

CHART OF THE DAY: Snap Goes Growth Via Russell 2000 $RUT! - Chart of the Day


Stumped?

“A remarkable aspect of your mental life is that you are rarely stumped.”

-Dan Kahneman

 

Lightning struck over 3,000 times in less than 2 hours in the UK last night. Thank God I got out of London in the morning! As I landed in New York, US stock market fear was crashing to the upside (VIX +41% < 2 weeks). Perma stock market bulls on my contra-stream (Twitter) were stumped.

 

The aforementioned quote comes from one of the forefathers of #behavioral finance (Kahneman wrote Thinking Fast, And Slow) and it’s cited in a book I was reading on the plane by Chip & Dan Heath called Decisive. It’s all about #process and how you make risk managed decisions.

 

Did you buy Gold Bond before your recent overseas flight? Did you sell the momentum stocks on the June bounce like you should have at the beginning of the year? Everything we do in both business and in life is a decision. It’s a lot easier to read about fighting your emotions and confirmation biases than it is to implement it in your risk management process. But neither life, nor this profession, is easy.

 

Stumped? - Gold Bond cartoon 07.10.2014

 

Back to the Global Macro Grind

 

Decisive is a relatively new book, but the risk management concepts in it don’t deviate much from how we roll here at Hedgeye. In Chapter 3, the Heath’s introduce the strategy of “multi-tracking.”

 

“When you consider multiple options simultaneously, you learn the shape of the problem.” (pg 67)

 

In other words, widen your scope. As I was reading this I realized this is the number one thing that has improved my #process since starting the firm. The more macro I’ve gone, and the more research analysts we hire, the more options I have. There are always bull and bear markets somewhere.

 

From a risk management perspective, I call our #process multi-factor, multi-duration. This stops me from naval gazing at US equities on a simple moving average, 1-factor (price), chart. It also helps me get bullish when I’m right bearish on US growth – bullish on Gold and Bonds, that is…

 

In addition to the rip in the VIX yesterday (see our recent Q3 Macro Deck on Volatility’s Asymmetry):

 

  1. Gold and Silver ripped +1.5-1.7%, compounding their absolute and relative 2014 gains
  2. Long-term Treasuries (TLT) had a +1.1% day, hitting fresh YTD highs as bond yields re-tested YTD lows
  3. Inflation Protection (TIP) had another up-day, moving to +5.1% YTD

 

Beats being long the Russell growth index.

 

But the relative (and absolute losses) in the Russell 2000 for 2014 YTD shouldn’t surprise anyone who is reading my rants. While it took 62 trading days to give the SP500 a -1% down day (longest streak since 1995), the Russell has already lost -6.2% since July 7th and is -2% YTD.

 

Consensus Macro can blame the weather, trains, planes, and automobiles at this point … but the reality is that it’s almost August now and excuse making is not where the performance is.

 

If the only reason why the US stock market was down yesterday was a Malaysian plane crashing in the Ukraine, why did both Chinese and Indian stocks close UP on the session overnight?

 

Other than the Down Bond Yields, Down Russell, Up Gold move, what else happened yesterday?

 

  1. Housing Stocks (ITB) -2.5% after a horrendous week of housing data (mortgage purchase applications continue to crash)
  2. Bank Stocks (KRE) -2.3% as the lead indicator for net interest margin (Yield Spread) collapsed to YTD lows
  3. Biotech Stocks (IBB) -2.2% after the entire edifice of the social-no-earnings thing made lower-bubble-highs vs FEB 2014 peaks

 

Put another way, what worked and didn’t work yesterday was pretty much the same thing that’s leading and lagging on the 2014 scorecard. If you are bearish on rates, the US consumer, US housing, and high-multiple-bubble stocks with no earnings, you’ve been rarely stumped.

 

Our immediate-term Global Macro Risk ranges are now:

 

UST 10yr Yield 2.46-2.55%

SPX 1

RUT 1123-1155

BSE Sensex 259

VIX 12.53-14.99

WTI Oil 102.01-104.83

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Stumped? - Chart of the Day


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July 18, 2014

July 18, 2014 - Slide1

 

BULLISH TRENDS

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BEARISH TRENDS

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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 18, 2014


As we look at today's setup for the S&P 500, the range is 21 points or 0.47% downside to 1949 and 0.61% upside to 1970.                                               

                                                                                

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: 2.01 from 2.00
  • VIX closed at 14.54 1 day percent change of 32.18%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:55am: UofMich Consumer Sentiment Index, July prelim., est. 83 (prior 82.5)
  • 10am: Leading Economic Indicators, June, est. 0.5% (prior 0.5%)
  • 1pm: Baker Hughes rig count

 

GOVERNMENT:

    • House, Senate out
    • 12pm: Congressional Internet Caucus Advisory Cmte holds panel discussion on NSA surveillance programs
    • UN Security Council holds emergency meeting on MH17 crash, may take place at 3pm
    • U.S. Election Wrap: Colo. Dead Heat; Immigration Concerns

 

WHAT TO WATCH:

  • Ukraine, Russia point fingers over downed Malaysia plane
  • United Nations Security Council to discuss MH17 crash
  • Israeli forces carry out Gaza entry via land, sea
  • AbbVie to buy Shire Pharmaceutical for $55b in cash, stock
  • Line said to seek U.S. IPO with confidential SEC filing
  • McDonald’s workers claim co. fired them for union activity
  • American Apparel investor said to be close to buying loan
  • DoJ alleges FedEx role in delivering misbranded drugs
  • SEC looking at 10 firms in probe of high-speed trading
  • Microsoft job cuts provoke Finnish demands of worker support
  • Energy Future lenders gang up to force talks on rival plan
  • Amazon considering subscription service for e-books: NYPost
  • Union plans more strikes at 9 German Amazon sites: Bild
  • Petsmart talking with investment banks amid activism: WSJ
  • Twitter to roll out 4 new metrics with earnings: WSJ
  • CBS interested in CNN purchase if channel becomes available
  • DirecTV offering NFL package via web at 10 universities
  • IMF, Home Sales, Apple, Facebook, Ifo: Week Ahead July 19-26

 

EARNINGS:

    • Bank of New York Mellon (BK) 6:30am, $0.57
    • First Horizon National (FHN) 7am, $0.16
    • General Electric (GE) 6:30am, $0.39 - Preview
    • Honeywell Intl (HON) 7am, $1.36 - Preview
    • Huntington Bancshares (HBAN) 5:55am, $0.18
    • Interpublic Group (IPG) 7am, $0.25
    • Johnson Controls (JCI) 7am, $0.83
    • Kansas City Southern (KSU) 8am, $1.17
    • Laboratory of America (LH) 7:03am, $1.77 - Preview
    • VF Corp. (VFC) 7am, $0.35 - Preview

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI, Brent Set for First Weekly Gain in a Month on Ukraine, Gaza
  • Gold Declines as Investors Weigh Dollar Against Global Tensions
  • Cocoa Grinding in Asia Climbs as Demand for Chocolate Increases
  • Glencore’s Woman Director Marks Progress for Mining: Commodities
  • ANZ Tightened China Commodity Financing Processes ‘A Little’
  • WTI Crude Seen Rising in Survey on Falling U.S. Supplies
  • MORE: Shanghai Exchange Copper Stockpiles Rise 29% to 108,851 Mt
  • Ban on U.S. Oil Exports Seen Dying One Ruling at a Time: Energy
  • Corn Volatility Rises as Options Traders Bet on Price Rally
  • Wheat Set for Weekly Climb as Investors Assess Black Sea Outlook
  • Buzzard Field Power Restored After July 13 Outage, Nexen Says
  • Colorado Governor Says He Opposes Measures Restricting Drilling
  • Kurdish Oil Grab Fuels Independence Dream as Iraq Unravels
  • Copper Traders Bearish for a Second Week as Supplies Seen Ample

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


CMG: THOUGHTS INTO THE PRINT

CMG: THOUGHTS INTO THE PRINT - chart1

 

CMG reports on Monday, July 21st AMC.

 

Takeaway: CMG has been the best performer in the restaurant space over the past year (+57.1%) and is a name we continue to prefer on the long side.  We are cautious, however, about the upcoming quarter given notable inflation in avocado, beef and cheese prices.  Recall that Chipotle only began taking ~6% of menu price in early June (~1,000 units), with the system-wide rollout likely completed by the end of 2Q.  Therefore, we question the extent to which management was able to protect margins in the quarter in the face of pressing inflationary pressures.  Looking out into 2H14, same-store sales momentum and the full impact of pricing suggests estimates are too low.  We'd therefore be buying on any post-earnings weakness.

 

Investment Thesis Overview

Chipotle continues to be one of our favorite longs in the big cap QSR space, highlighted by a best in class operating model and recent same-store sales momentum.  Traffic grew 13.4% in 1Q and management has several drivers in place (faster throughput, non-traditional marketing, GMO-removal, sofritas, catering) to help capitalize on this and enable them to deliver +15% revenue growth and +20% EPS growth for the next few years. 

 

Food inflation driven by high beef, avocado and cheese prices continues to be a cause for concern, but a MSD price increase should mitigate these pressures in 2H14 and 1H15.  We believe Chipotle has ample pricing power which should allow them to raise prices with little resistance and give another leg up to margins.

 

Chipotle also continues to attract investors with two potential growth drivers (ShopHouse, Pizzeria Locale) and a strong balance sheet (room to accelerate buybacks).

 

Earnings Expectations

For 2Q14, the street expects revenues of $989.1 million (+21% YoY), adjusted EPS of $3.09 (+9% YoY), and company owned same-store sales of +10.2% (incl. +2% price).  We’re cautious on earnings given food inflation and little impact on the Q from June price increases.

 

Same-Store Sales Trends

Given recent momentum and menu pricing of ~6%, we expect two-year same-store sales to accelerate throughout 2H14 and into 1H15.

 

CMG: THOUGHTS INTO THE PRINT - chart2

 

CMG: THOUGHTS INTO THE PRINT - 3

 

CMG: THOUGHTS INTO THE PRINT - 5

 

CMG: THOUGHTS INTO THE PRINT - 4

 

Margins

The 2Q margin outlook is dicey given food cost pressures.  As such, we expect to see notable restaurant level and operating margin contraction.  However, this trend should turn moving forward, as we expect price increases in 2H14 and 1H15 to drive restaurant level and operating margin expansion for the next several quarters.

 

CMG: THOUGHTS INTO THE PRINT - 6

 

CMG: THOUGHTS INTO THE PRINT - 7

 

CMG: THOUGHTS INTO THE PRINT - 8

 

Valuation

CMG is currently trading at 43.34x P/E and 21.92x EV/EBITDA on a NTM basis.

 

Risks

This quarter depends on the company’s ability to maintain prior same-store sales momentum and mitigate food cost pressure by leveraging labor and other operating expenses.  2H14 performance will also depend on these factors, but will have the full benefit of ample price increases, which should give restaurant and operating margins another leg up.  Any pushback to these price increases (though unlikely), would be a significant blow to our bullish thesis.  Highly promotional QSRs are trying their best to make this happen.  A decline in new unit productivity would also raise a red flag, as CMG begins moving into smaller markets.

 

Call with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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