Takeaway: We'll take the other side of consensus.
“Because we naturally seek self-confirming information, we need discipline to consider the opposite.”
That quote comes from a block and tackle #behavioral chapter in Decisive titled Consider The Opposite (pg 114). If I was ever seeking self-confirming evidence of US GDP #GrowthSlowing, this morning I’ve got plenty of headlines on that.
The cover of this week’s The Economist has a picture of an American jockey riding a turtle with a header that reads: “America’s Lost Oomph – Why It’s Long-Term Growth Rate Has Slowed.” And on Friday, the WSJ ran a story titled “Survey Shows Economists Trimming Growth Forecasts.”
#Trimming? With both bond yields and the Russell 2000 US growth index falling back toward their YTD lows, isn’t the market telling us to go all-in US growth investing? No thanks. The only discipline that matters in considering the opposite of our research view is delivered to us daily via real-time market signals.
Back to the Global Macro Grind…
The best part about The Economist and Wall Street Journal articles is that they attempt to explain US #GrowthSlowing with the wrong reasons. The Economist, in its classic Keynesian style, suggests that the Fed keeping rates at 0% remains critical to growth and that the government needs to both spend more and expand immigration. #MustPrintAndSpendMoarrr
My colleague Darius Dale comically summarized the WSJ article this way on Friday: “Net Exports are a solid negative ~2% of US GDP… not sure how “negative international events” can ever be the largest downside risk to US GDP growth. Consensus Macro can’t even get their story straight at this point.” #BlameTheWeather
In other words, those who were looking for +3-4% 1990s style US GDP growth 6 months ago should cite anything but what’s slowing 70% of the number (US Consumption = 70% of GDP). And, whatever they do, they shouldn’t blame The Policy To Inflate’s impact on real cost of living in America either.
In other self-confirming USA #Q3Slowing news, here’s what big macro markets signaled last week:
- Russell 2000 lost another -0.7% on the week, falling back to -1.0% for 2014 YTD
- US 10yr Treasury Yield dropped another -4bps on the week, and is down -55bps YTD
- Yield Spread (10yr minus 2yr) compressed another -7bps on the week to fresh YTD lows
Don’t kid yourself, the economists who are now cutting their GDP forecasts know exactly what falling bond yields and a compressing yield spread means. On the other side of that, this is what consumption growth bulls are saying:
- Food prices dropped -0.1% last week
- Natural Gas dropped -4.7% last week
- Gold dropped -2.1% last week
Too bad you can’t eat Gold. If you contextualize those three data points however:
- Food Prices (CRB Food Index) is still up +19.1% YTD
- Natural Gas has round tripped back to flat YTD
- Gold made another higher-low and is up again this morning to +9.3% YTD
So, from an asset allocation perspective, what would you rather be long YTD – Gold or the Russell? That one is too easy to answer. How about The Dow, Coffee, or Cattle?
- Dow Jones was +0.9% last week to +3.2% YTD
- Live Cattle prices were up +1.8% last week to +17.7% YTD
- Coffee prices were up another +6.8% last week to +47.2% YTD
I know. Instead of citing the all-time high in both US rents (34% of the country rents) and meat prices during BBQ season, let’s talk about the corn chart rolling over from its all-time bubble highs as a “deflationary force” when the Food Index is +19% YTD.
As for the SP500, which hasn’t been as much a focus for us in 2014 as the #GrowthSlowing style factors within the market, there are plenty of components that we like on the #InflationAccelerating (Energy, XLE +11.8% YTD) and slow-growth #YieldChasing (Utilities, XLU +12.6% YTD) front.
I even went smart beta last week and sent out the buyback signal on AAPL during its correction to what we call immediate-term TRADE oversold (within a bullish intermediate-term TREND). While I can’t feed my kids iPads, apples are eatable – and, compared to a $12 “gourmet burger”, relatively “cheap” too!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.46-2.54%
WTI Oil 100.50-103.41
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – July 21, 2014
As we look at today's setup for the S&P 500, the range is 26 points or 0.97% downside to 1959 and 0.34% upside to 1985.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.00 from 2.00
- VIX closed at 12.06 1 day percent change of -17.06%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Chicago Fed Nat Activity Index, June (prior 0.21)
- 11:30am: U.S. to sell $26b 3-mo. bills, $24b 6-mo. bills
- Senate in session; House schedule TBA
- President Obama meets with Hispanic Caucus on immigration
- 12:30pm: Transportation Sec. Anthony Foxx at Natl Press Club
- WASHINGTON WEEKLY AGENDA
- U.S. ELECTION WRAP: Voter Attitude Shift on Immigration; Kochs
WHAT TO WATCH:
- Russia’s Severstal sells U.S. steel plants for $2.3b
- Reynolds loss in $23b smoker verdict likely to be cut
- Murdoch said to mull Sky proceeds to boost Time Warner bid
- Elliott Management takes over $1b stake in EMC Corp.: WSJ
- McDonald’s, Yum suspend orders from Chinese meat supplier
- Capital Research sells most of Allergan stake, WSJ reports
- U.K. prosecutors said close to opening FX-rigging probe
- General Motors tells dealers to halt sales of some Cadillacs
- Air Force examines anomalies as SpaceX seeks launch work
- Trinity guardrail whistle-blower case results in mistrial
- Gilead drug combination cures Hepatitis C in HIV patients
- Perrigo, Actelion lead tax-relief targets for U.S. drugmakers
- Putin says MH17 crash shouldn’t be used for political aims
- Bloody battle spurs diplomatic efforts to end Gaza conflict
- Court bars Nokia India from Chennai unit sale without approval
- Google mulls transforming NYC payphones into Wi-Fi hot spots
- Finance industry bonus suffering in poll as rev. disappoints
- Tesco replaces Clarke as CEO as grocer warns on profit again
- BB&T (BBT) 5:45am, $0.75
- Halliburton (HAL) 7am, $0.91 - Preview
- Hasbro (HAS) 6:30am, $0.36 - Preview
- Manpowergroup (MAN) 7:30am, $1.33
- SunTrust Banks (STI) 6am, $0.77
- BancorpSouth (BXS) 5pm, $0.33
- Brookfield Canada Office Properties (BOX-U CN) 5pm, C$0.41
- Brown & Brown (BRO) 4:30pm, $0.41
- Cadence Design Systems (CDNS) 4:10pm, $0.20
- Canadian National Railway (CNR CN) 4:01pm, C$1.00 - Preview
- Chipotle Mexican Grill (CMG) 4:02pm, $3.09
- Crown (CCK) 5:03pm, $1.00
- CYS Investments (CYS) 4:05pm, $0.33
- Hexcel (HXL) 4:06pm, $0.55
- Netflix (NFLX) 4:05pm, $1.15
- Rambus (RMBS) 4:05pm, $0.15
- Rent-A-Center (RCII) 4:32pm, $0.37
- Sanmina (SANM) 4:05pm, $0.47
- Steel Dynamics (STLD) 6pm, $0.30
- Texas Instruments (TXN) 4:30pm, $0.59
- Waste Connections (WCN) 4:05pm, $0.52
- Woodward (WWD) 4pm, $0.60
- Zions Bancorp (ZION) 4:10pm, $0.45
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Brent Steady as Supply Seen Safe Amid Russia Standoff; WTI Falls
- Hedge Funds Cut Bullish Gold Wagers as Rally Snaps: Commodities
- Corn Slumps to Four-Year Low as Global Supplies Seen Increasing
- Gold Gains in London as Unrest Weighed Against U.S. Outlook
- Speculators Cutting Bullish Oil Bets Miss Ukraine Rally: Energy
- Morgan Stanley Hires Former UBS Commodity Analyst Tom Price
- China’s Copper Exports Rise to 15-Month High Amid Qingdao Probe
- Two Indonesian Ore Miners Resume Concentrate Exports After Ban
- Nickel Reaches Lowest Price in Almost Four Weeks on Supply View
- McDonald’s, Yum Suspend Orders From Chinese Meat Supplier
- Gold Diggers Revive French Exploration as Prices Drive Hunt
- U.K. Gas Extends Declines as Ample Supplies Offset Ukraine Risk
- Russia Sold 300K Mt of Wheat to Indonesia Since May: Minister
- Iran Seen Keeping Oil Sales Steady as Nuclear Talks Extended
The Hedgeye Macro Team
daily macro intelligence
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
Hedgeye's Financials team of Josh Steiner and Jonathan Casteleyn discuss trends they've identified from this week's earnings reports from Bank of America, Citibank, Goldman Sachs, JP Morgan and Wells Fargo. ($BAC $C $GS $JPM $WFC)
Macro Analyst Ben Ryan discusses why Hedgeye remains bullish on gold despite recent news that Goldman Sachs has reiterated its bearish call. He speaks with Director of Research Daryl Jones.
Consensus Macro is still clueless over myriad market and economic moves and trends.
The relative (and absolute losses) in the Russell 2000 for 2014 YTD shouldn’t surprise anyone who has been following Hedgeye.
U.S. housing starts unexpectedly fell 9.3% to a nine-month low to an 893,000 annualized rate in June, versus a 985,000 pace in May which was weaker than initially estimated. For the record, Hedgeye has been bearish on housing since the spring. “Today’s number wasn’t pretty, it confirms our negative outlook,” said analyst Josh Steiner who co-heads Hedgeye's financials and housing sectors.
In our poll we asked: Are you bullish or bearish on housing over the next year?
At the time of this post, 71% were bearish, 29% were bullish.
Takeaway: Current Investing Ideas: BOBE, GLD, HCA, HOLX, LM, OC, OZM, RH, and TIP
Below are Hedgeye analysts' latest updates on our NINE current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.
We also feature three recent institutional research notes which offer valuable insight into the markets and economy.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
- "Trade" is a duration of 3 weeks or less
- "Trend" is a duration of 3 months or more
- "Tail" is a duration of 3 years or less
HEDGEYE CARTOON OF THE WEEK
BOBE – We sent out our high-conviction report on Bob Evans on Thursday. Click here to access.
GLD – Gold briefly tested our Long-Term TAIL Line of resistance late last week ($1324) before backing off into Janet Yellen’s testimony on Capitol Hill on Tuesday and Wednesday of this week. Our intermediate-term TREND level of support sits at $1281.
With our view that the price of Gold reflects the relative rate of dollars entering the system as a monetary policy response to the growth and inflation outlook, we must continue to compare our predictive-analysis of high-frequency data points against the Fed and consensus to front-run a surprise (upside or downside) in the rate of dollars coming into the system. The market reacted to Yellen’s Tuesday comments as if she was relatively more hawkish on the margin.
- Gold sold off on the news but regained ground the rest of the week (+1% from the Wednesday lows)
- Yield Spread (-6bps w/wà -2.9%) compression as the bond market remains a skeptic
- Sector divergences between consumer spending-sensitive sectors and those catching a tailwind off a flatter yield curve continue
Rates may be poised to increase (“eventually”), but the timing of the move is the key driver. We continue to believe growth will surprise to the downside given the aggregate position of consensus macro. This will likely debase the dollar, putting upward pressure on commodities (priced in U.S. dollars). To use just one example, if you are an average consumer living in a large city:
1. You will pay more for energy, food, and utilities
2. Your rent increases (present value effect on assets): A flatter yield curve has a present value effect on assets which means the person who owns the building benefits as the property value increases à you pay more rent
3. Your increase in cost of living (as of now) is not supplemented with an increase in real purchasing power: Real wage growth is being greatly outpaced by monetary expansion inflating USD-based consumption categories. Because the defense for printing money in the short-term to stimulate is defended by the assumption wage growth MUST follow over the intermediate to long-term, last year the Fed increased the amount of time allowed for this wage growth to happen (because it hasn’t inn the previously assumed timeframe)
This dollar debasement has a statistical relevance to Gold specifically and puts upward pressure on the commodity complex as a whole. Our negative call on the domestic consumer is rooted in our view on the outlook for the U.S. dollar vs. immediate or intermediate supply and demand shocks in the commodities people consume.
HCA – Hospital Corporation of America pre-announced 2Q14 earnings this week and raised the low end of their guidance for 2014. Shares were up 10% this week and are up well over 50% since sector head Tom Tobin added it to Investing Ideas in 6/14/13.
Actual earnings and admission results came in stronger at $1.07 EPS and 1.2%, respectively, versus our estimates for $1.02 and ~1%. Meanwhile, case mix, or acuity, increased 1.7% y/y.
While management increased ACA accretion estimates for 2014(in line with our models), the majority of the upside is coming from a more sustainable operational acceleration. EBITDA is likely heading higher and we expect the stock to be in $62-$64 range in the near term and in the mid $70s as attention turns to 2015.
Our forecast model for births, derived from monthly CDC and US Census data continues to suggest sequential improvement, while other trends, such as employment of women of child bearing age also continue to improve. A recovery in maternity trends from a multi-generational decline is a significant tailwind for HCA and medical cost trend more broadly. Continued growth in orthopedic surgeries, such as knee replacements, is another potential tailwind for HCA (see chart below).
HOLX – Sector head Tom Tobin has no update on Hologic this week.
LM – The next catalyst for Legg Mason shares will be the company's first quarter earnings (calendar second quarter) on Thursday July 31st. While the company's investment flows are known for the quarterly period via Legg's monthly assets-under-management reports, it will be important within the earnings result to ensure that Legg's expense base is not growing disproportionately to allow for positive earnings surprises.
We are 9% above the Street in our estimates for Legg next year, partly as we believe the company will have only modest needs to grow its spending. On our higher than consensus numbers at a normalized earnings multiple we get fair value on LM shares at $60.
OC – Here are three quick takeaways from our "Asphalt Roof Shingle Competition" call with Bob McNally, former GM of TAMKO building products:
1.) The asphalt roofing market is still off of normalized current demand as we head into hurricane season, a tailwind for the industry. Current demand is running at ~100 mil ssq/yr vs. normalized demand at ~125-135 mil ssq/yr (see table below). Capacity utilization is expected to tighten, a positive for roofing manufacturers, from 60% to 70% as the openings of new plants appear small relative to normalized demand.
2.) Plant efficiency does not seem to be a key concern. According to Bob, recent plant upgrades by TAMKO did not have a “significant change” on conversion costs. We see raw material cost variations having a more relevant impact on total product costs.
3.) Strategies among competitors are largely unchanged. We previously had concerns of a competitor (or competitors) keying on pricing after Owens Corning lowered its outlook for FY 2014 after disappointing roofing numbers in the first half of the year. This suggests the difference is in product quality perception and other factors challenging OC's roofing business, which we plan to target in a follow-up call focused on asphalt shingle distribution.
In other news, equipment rental company, United Rentals (URI), noted a “vigorous” pickup in nonresidential construction activity especially in the commercial and energy sectors in their 2Q 2014 earnings conference call.
Housing starts dropped 9.3% year-over-year. They came in at a disappointing 893k – way below consensus estimates of 1020k.
Owens Corning preannounced earnings last month and we suspect the earnings report Wednesday, July 23rd will carry less weight.
OZM – Och Ziff shares enjoyed a strong rebound this week up over 3% versus the financial sector which rose just 1%. The disproportionate decline last week of over 4% over worries in Europe and also a lackluster start to Financials earnings season created a good entry point for new investors in the OZM story this week.
Even after the slight outperformance over the past 5 days, Och Ziff shares are trading at just over 2x its year end incentive fees still below the midpoint of the historical range of 0-7x incentive fees. Coupled with a stated dividend yield of 9%, OZM shares offer continued solid prospects for returns from both capital appreciation and dividend yield.
RH – We hosted an institutional call this past Thursday outlining the key issues surrounding Restoration Hardware’s real estate build out.
These are the three key takeaways:
1) Stores can get a lot bigger - 25,000 square foot stores are not too big. They’re arguably too small. We analyzed spending patterns and demographics in each RH market, and believe that 25 markets can support a 50,000+ square foot store.
2) We think 85 markets can support a Full Line Design Gallery - Almost all of the 66 existing markets could support a Full Line Design Gallery. RH’s effort to purge bad real estate is largely complete. On top of the fill-in growth, we identified another 19 markets where the spending characteristics warrant RH’s physical presence.
3) Landlords are helping drive ROI - The paradigm around anchor tenant space is changing, and is creating space for RH that previously did not exist. In addition, we’re seeing landlords step-up by funding building costs in a way that is taking down the payback period for RH to under a year per store.
RH remains retail sector head Brian McGough's favorite name in retail.
TIP – Coming off what was a relatively quiet week, things picked up on the domestic inflation front as two relevant high frequency data points came out this week in regards to the U.S. cyclical inflation story:
- U.S. Import Prices are up 1.2% MoM from 0.6%
- U.S. PPI is up 0.4% MoM up from -0.2%
These data points reaffirm that investors should continue to remain long of the iShares TIPS Bond ETF (TIP) as a way to profit from what we continue to see as a forecasting no-brainer: accelerating rates of reported inflation over the intermediate. In addition, U.S. CPI is scheduled to be reported next week; we anticipate continued acceleration, which should continue to support our long idea in TIPS.
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Click on each title below to unlock the content.
Builder confidence appears to be decoupling from reality as actual construction activity plunges for the second month in a row.
Brazil is setting up as a short in 2H. Lots of capital has flowed into the country this year on a catalyst that is unlikely to materialize.
We're bullish on the Marlboro 2.0 architecture to attain new global customers from higher margin products and we believe PM is ahead of the curve on R&D behind its non-combustible Risk Reduce Product (RRP) category
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