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Vacant Minds

This note was originally published at 8am on July 17, 2014 for Hedgeye subscribers.

“If you leave the smallest corner of your head vacant for a moment, other people’s opinions will rush in from all quarters.”

-George Bernard Shaw

 

Perhaps the most challenging part of the investment business is to control your own views.  After all, the world today is replete with conflicting opinions and research.  Some of it is very insightful, but the vast majority of these opinions are what we would characterize as the noise, versus the signal.

 

One point most of us can agree on is that when successful investors speak with conviction, it's worth giving them a little room in our ever so full minds.  In this vein, we thought that Stan Druckenmiller of Dusquesne and Soros Capital fame, had some apropos comments at the Institutional Investor “Delivering Alpha” conference yesterday.

 

Here are a few of Druckenmiller’s best quotes:

 

“I am fearful that today our obsession with what will happen to markets and the economy in the near term is causing us to misjudge the accumulation of much greater long term risks to our economy.”

 

“I hope we can all agree that once-in-a-century emergency measures are no longer necessary five years into an economic recover.”

 

“There is a heated debate as to what a 'neutral' funds rate would be. We should be debating why we haven't moved more meaningfully toward the neutral funds rate if for no other reason so the Fed will have additional weapons available if the outlook darkens again.”

 

His last point is perhaps most spot on.  Five years into the “recovery”, why are we still at extreme, once in a century emergency policy measures?  And given that, what, if any, options do policy makers have if the economy does sour?

 

Inquiring and non-vacant minds want to know Dr. Yellen!

Vacant Minds - Fed bubbles cartoon 07.09.2 14

 

Back to the Global Macro Grind...

 

To her credit, even if she didn’t give us any real insight on her strategy as it relates to monetary policy, Dr. Yellen did give us some decent stock advice in her recent congressional testimony.  Specifically, she said that she believed valuations for biotech and social media stocks were stretched.

 

While we would never recommend shorting a stock on valuation (sorry Dr. Yellen!), we absolutely agree with her call that certain social media stocks are overvalued.  In fact, our top pick on the short side is and continues to be YELP.

 

On that front, yesterday a key risk to the short idea disappeared as Yahoo effectively indicated they would use much of their Alibaba proceeds to return cash to shareholders.  While the company didn’t specifically say they wouldn’t buy YELP, buying YELP would certainly be inconsistent with returning cash to shareholders (to say the least).

 

Speaking of returning cash to shareholders and technology, we recently launched our newest sector, Semiconductors, led by Craig Berger.  A key theme of his launch was that there is a subset of semi-conductor stocks that have been returning cash to shareholders and will continue to aggressively do so.

 

Yesterday, Intel (INTC) reported strong numbers, which was capped with an additional $20 billion added to its stock buy back program. Intel, certainly, knows what to do with the Fed’s low interest rates!  While Berger remains cautious on the outlook for INTC because of the PC market (in effect: can things get better from here?), he continues to like this theme of owning companies in the semiconductor space that will increase dividends.

 

In the Chart of the Day below, we highlight this very investable theme with a slide from our Semiconductor launch presentation, which shows the companies that historically have returned the most cash back to shareholders. If you’d like to see Craig’s proprietary analysis on which companies are going to raise dividends next, or to set up a time to chat with him, please email sales@hedgeye.com.

 

Getting back to the global macro grind, a key derivative play of semiconductors doing well is of course to be long Taiwan on a country basis. My colleague Darius wrote the following back in early June and it holds today:

 

“While it’s hard to argue in favor of the predictability of YTD gains, Taiwan does have idiosyncratic country risk factors that support allocating capital to this market at the current juncture. Specifically, improving GIP fundamentals support chasing Taiwanese equities up here – particularly amid heightened prospects for M&A activity in the global semiconductor space. It’s worth noting that the Tech sector accounts for a whopping 46% of TAIEX market cap, with semiconductors alone accounting for 23%. 

 

Contrary to Brazil, it’s particularly difficult to find a meaningful economic indicator in Taiwan that isn’t accelerating on both a sequential and trending basis. While headline inflation is indeed accelerating, it’s accelerating off of extremely low levels and does not warrant any attention from the central bank – especially with WPI trends being so subdued.”

 

While Taiwan has been a strong market in the year-to-date, this morning might actually offer an opportunity to get in at a discount as Taiwan Semiconductor is trading down almost 6% on news that it is likely to lose some next generation chip orders in 2015 from Apple and Qualcomm.

 

Before you head off into the trading day and eventually the weekend, we did want to offer one last quote that goes back to the start of our note and that we hope will find a spot in your mind:

 

"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson] signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill."

-Charles A. Lindbergh, Sr. , 1913

 

Indeed Mr. Lindbergh, indeed.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Vacant Minds - Chart of the Day


YELP: Winter is Here

Takeaway: The turn happened sooner than we expected; now it just gets tougher. We don’t need to dig that deeply to realize the model is breaking down

NOTE SUMMARY

  1. BEAT & RAISE AGAIN: Once again, YELP didn’t produce much upside to the print, beating revenue estimates by only 3%.  The guidance raise wasn’t all that impressive either, up by $11-12M, which is a 4% raise on 2H14 after factoring in the 2Q beat.  Incremental detail on the core metrics below.
  2. FOOL's GOLD: There are some obvious metrics that the sell-side bulls will be touting.  We’re going to take a deeper look at what’s going on there, because most of it isn't that good, some of it is just scary.
  3. WINTER IS HERE: The turn happened sooner than we expected. We initially believed YELP's fundamentals would begin deteriorating in 2H14 and worsen through 2015, but YELP’s active business accounts took a sharp turn for the worse in 2Q14.  Further, there is another glaring sign that the business model breaking down.  

 

BEAT AND RAISE AGAIN

Once again, YELP didn’t produce much upside to the print, beating revenue estimates by only 3%.  The guidance raise wasn’t all that impressive either, up by $11-12M, which is a 4% raise on 2H14 after factoring in the 2Q beat.  Detail on the core metric below

  • Revenues: Growth decelerated to 61% y/y (from 66% last quarter), despite an acceleration in local advertising growth to 69% y/y , from 67% last quarter
  • Active Local Business Accounts: Decelerated sharply to 55% y/y growth in 2Q14 vs. 65% in 1Q14 (more detail below)
  • Customer Repeat Rate: 75%, consistent with last quarter, which was a record for the company in its reported history. 
  • Attrition Rate: accelerated to 18.6%, from 17.9% in 1Q14. 
  • Local Cohorts2005-2010 exhibited a sharp acceleration in revenue growth.  
  • Sales Headcount: Accelerated to 63% growth, vs. 55% in 1Q14

 

FOOL'S GOLD

There are some obvious metrics that the sell-side bulls will be touting.  We’re going to take a deeper look at what’s going on there, because most of it isn't that good, some of it is just scary.

 

Customer Repeat Rate

This is not a retention metric, it is a measure of mix (new vs. existing accounts).  The higher the customer repeat, the greater the mix of repeating clients, and the lower the contribution of new accounts.  Reporting record highs in customer repeat rate is not a good thing, because it means there is a lower percentage of clients locked into longer-term contracts.  When your business model is riddled by rampant attrition, that is a problem.

 

YELP: Winter is Here - YELP   Customer Mix 2Q14a

 

Surging ARPU

This is more of a function of revenue mix and the customer repeat rate than anything else. We estimate that Local Ad Revenue comes with a higher ARPU, so increasing mix there will drive the trend.  Further, If YELP's repeat rate is higher, it has a higher percentage of customers paying the full quarterly rate than its new customers who may have only paid for one or two months.  So while we have seen a surge in 2Q14, we suspect this has more to do with revenue sources vs. any underlying changes in the company's fundamentals.

 

YELP: Winter is Here - YELP   ARPU

 

Local Cohort Growth

This is going to get a lot of positive attention, but is actually one of our greatest concerns from the print.  YELP produced a massive acceleration across each of its legacy cohorts.  However, what isn't reported is the massive deceleration in its remaining cohort, which decelerated from 64% revenue growth in 1Q14, to 39% in 2Q14.  However, that is not our main concern.

 

YELP: Winter is Here - YELP   Cohort Growth 2Q14

 

There is really only one explanation for the bifurcation in cohort trends: YELP is redeploying its salesforce to attack the earlier earlier cohorts.  Maybe management is trying to juice its reported cohort metrics.  More likely, management has realized that its scattered TAM in the later cohort are tougher to penetrate, meaning its's business model isn't viable here.  Scary prospects when considering how large YELP's TAM really is.

 

WINTER IS HERE

We didn't expect YELP to begin showing signs of deterioration until 2H14, and it's net account growth decelerated sharply in 2Q14, with growth decelerating by 10 percentage points (the most since its hyper-growth phase in 2012).  

 

We also need to consider that SeatMe customers are included in its 2Q14 accounts.  YELP is no longer reporting this metric; management wouldn't answer the question during the call regarding the number of exclusive Seat-Me customers in 2Q14 (was last reported at 500 in 1Q14).  In short, its core business is likely seeing more pressure than its reported metrics suggest.

 

YELP: Winter is Here - YELP   Account Breakdown vs. y y growth

 

So what happened? New account growth just wasn't good enough.  It's not that the 20K new accounts added in 2Q14 is bad, it's actually a record (excluding the Qype transition in 4Q13).  It's because attrition is starting to exert more influence over the model, and that's because YELP's account base is larger.  So despite record new absolute account growth, net y/y account growth decelerated by 10 percentage points.

 

That is the problem with YELP's business model: the larger the account base, the higher its attrition, and the more new sales reps YELP must hire to drive enough new account growth to compensate.

 

This may be the more telling chart, because it calls the viability of its business model into question.    

 

YELP: Winter is Here - YELP   Sales vs. Net Account growth

 

YELP is moving in a direction where its net account growth can't keep pace with its salesforce hires; that is what happens when you have rampant attrition.  This means the long-term growth story doesn't have any legs.  YELP must consistently hire more and more reps just to tread water, and do so at a declining to an eventually negative yield when these reps can't deliver enough growth to support their own salaries.  

 

The company isn't dying, but its business model is, along with the +50% growth rates that street is paying 12x 2015 revenues for.  It only gets tougher from here.

 

 

Let us know if you have any questions or would like to discuss in more detail

 

Hesham Shaaban, CFA

@HedgeyeInternet


July 31, 2014

July 31, 2014 - Slide1

 

BULLISH TRENDS

July 31, 2014 - Slide2

July 31, 2014 - Slide3

July 31, 2014 - Slide4

July 31, 2014 - Slide5

July 31, 2014 - Slide6

July 31, 2014 - Slide7 

BEARISH TRENDS

 

July 31, 2014 - Slide8

July 31, 2014 - Slide9

July 31, 2014 - Slide10

July 31, 2014 - Slide11
July 31, 2014 - Slide12


Early Look

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.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 31, 2014


As we look at today's setup for the S&P 500, the range is 18 points or 0.51% downside to 1960 and 0.40% upside to 1978.                                                     

                                                                          

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: 2.00 from 2.00
  • VIX closed at 13.33 1 day percent change of 0.38%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: Challenger Job Cuts y/y, July (prior -20.2%)
  • 7:30am: RBC Consumer Outlook Index, Aug. (prior 50.5)
  • 8:30am: Employment Cost Index, 2Q, est. 0.5% (prior 0.3%)
  • 8:30am: Initial Jobless Claims, July 26, est. 300k (284k)
  • 9:00am: ISM Milwaukee, July, est. 61 (prior 60.57)
  • 9:45am: Chicago Purchasing Manager, July, est. 63 (prior 62.6)
  • 9:45am: Bloomberg Consumer Comfort, July 27 (prior 37.6)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change

 

GOVERNMENT:

    • President Obama at HUD, hosts celebration for Special Olympics
    • Rep. Eric Cantor’s last day as House majority leader
    • Sec. of State John Kerry in New Delhi for strategic dialogue
    • 10am: RNC Chairman Reince Priebus at Natl Assn of Black Journalists convention in Boston
    • 10am: Center for Global Development energy price discussion w/IMF’s Lagarde, World Resources Institute’s Steer
    • 10am: Senate Banking Cmte student financial products hearing
    • U.S. ELECTION WRAP: Big Money From Small Donor Base; Ernst & Oil

 

WHAT TO WATCH:

  • BNP Paribas posts record $5.8b 2Q loss after U.S. fine
  • Argentina declared in default by S&P as negotiations fail
  • Shell beats estimates amid $1.9b writedown on U.S. gas
  • Sony posts surprise profit on PlayStation, Hollywood movies
  • BlueCrest said to urge RadioShack to repay secured creditors
  • Apple said to cut ~200 jobs at Beats following acquisition
  • Suncor profit shrinks on costs of scaling back Joslyn project
  • Microsoft names former wireless executive Stanton to board
  • Ex-Goldman Vice Chair Evans joins Thornton on Barrick’s board
  • Target chooses PepsiCo executive as its next CEO: WSJ
  • Euro-area inflation unexpectedly slows to lowest since 2009
  • Adidas cuts profit forecast and 2015 targets on Russia, golf
  • Siemens profit beats estimates as revamp starts to pay off
  • Volkswagen confirms forecast, 2Q profit, rev. in line
  • Sanofi 2Q sales, EPS beat ests.; raises 2014 EPS forecast
  • Meda agrees to buy Rottapharm in $3.1b cash, stock deal
  • BofA raises cash portion in toxic-mortgage settlement: NYT
  • E.W. Scripps, Journal Communications to merge, spin off papers
  • Blackstone to invest as much as $800m in Tamarind Energy: WSJ
  • EU court orders Russia to pay EU1.87b for Yukos seizure
  • J&J planning voluntary recall of morcellators: WSJ
  • Treasury’s Financial Stability Oversight Council meets
  • U.S. House of Representatives votes on border plan
  • Israel calls more reservists as UN condemns attack on shelter

 

AM EARNS:

    • 3D Systems (DDD) 8am, $0.18 - Preview
    • Apache (APA) 8am, $1.64 - Preview
    • Automatic Data Processing (ADP) 7:30am, $0.63
    • Avon Products (AVP) 7:01am, $0.21 - Preview
    • Ball (BLL) 6am, $1.02
    • Baytex Energy (BTE CN) 8am, C$0.61 - Preview
    • Becton Dickinson (BDX) 6am, $1.67
    • BGC Partners (BGCP) 8am, $0.13
    • Bombardier (BBD/B CN) 6am, $0.09 - Preview
    • BorgWarner (BWA) 8am, $0.87
    • Bunge (BG) 6:30am, $1.37 - Preview
    • Cameco (CCO CN) 8:31am, C$0.16 - Preview
    • Charter Communications (CHTR) 8am, $0.29 - Preview
    • Cigna (CI) 6am, $1.84
    • CME Group (CME) 7am, $0.79
    • Colgate-Palmolive (CL) 7am, $0.73 - Preview
    • CommScope (COMM) 7am, $0.65
    • ConocoPhillips (COP) 7am, $1.61 - Preview
    • Delphi Automotive (DLPH) 7am, $1.33
    • Dentsply Intl (XRAY) 7am, $0.68
    • DirecTV (DTV) 7:30am, $1.53 - Preview
    • Discovery Communications (DISCA) 7am, $0.97
    • Endo International (ENDP) 6:32am, $0.89
    • Enterprise Products (EPD) 6am, $0.75
    • Exelon (EXC) 7:30am, $0.50
    • Exxon Mobil (XOM) 8am, $1.86 - Preview
    • Fortress Investment Group (FIG) 7am, $0.30
    • Generac Holdings (GNRC) 5:59am, $0.80
    • Gildan Activewear (GIL CN) 7am, $0.96
    • Goldcorp (G CN) 8am, C$0.14 - Preview
    • Hecla Mining (HL) 8am, $0.01
    • Helmerich & Payne (HP) 6am, $1.63
    • Host Hotels & Resorts (HST) 6am, $0.21
    • Hyatt Hotels (H) 7:30am, $0.45
    • Incyte (INCY) 7am, ($0.01)
    • Invesco (IVZ) 7:30am, $0.59
    • Iron Mountain (IRM) 6am, $0.42
    • ITT (ITT) 7am, $0.52
    • KBR (KBR) 6:01am, $0.27
    • Kellogg (K) 8am, $1.02 - Preview
    • L-3 Communications (LLL) 7am, $2.02
    • Legg Mason (LM) 7am, $0.55
    • LKQ (LKQ) 7am, $0.34
    • Maple Leaf Foods (MFI CN) 7am, (C$0.12)
    • Marathon Petroleum (MPC) 7:06am, $2.20 - Preview
    • MasterCard (MA) 8am, $0.77
    • McKesson (MCK) 7:30am, $2.33 - Preview
    • Mosaic (MOS) 7am, $0.74 - Preview
    • New Gold (NGD CN) 7:30am, $0.02 - Preview
    • Newell Rubbermaid (NWL) 6:30am, $0.54  - Preview
    • NiSource (NI) 6:30am, $0.24
    • Occidental Petroleum (OXY) 7am, $1.76
    • Ocwen Financial (OCN) 7:30am, $0.82
    • Pentair (PNR) 7am, $1.03
    • PG&E (PCG) 9:02am, $0.75 - Preview
    • Pharmacyclics (PCYC) 8am, ($0.19)
    • Pinnacle West (PNW) 8:30am, $1.15
    • PPL (PPL) 6:57am, $0.45
    • Quanta Services (PWR) 6:07am, $0.41
    • Quebecor (QBR/B CN) 6am, C$0.47 - Preview
    • RioCan Real Estate Investment (REI-U CN) 7am, C$0.41
    • Sally Beauty Holdings (SBH) 7:30am, $0.43
    • Scana (SCG) 7:30am, $0.62 - Preview
    • Starz (STRZA) 7:30am, $0.50
    • Stillwater Mining (SWC) 8am, $0.16
    • Teco Energy (TE) 7:30am, $0.27
    • Teva Pharmaceutical (TEVA) 7am, $1.22 - Preview
    • Time Warner Cable (TWC) 6am, $1.90 - Preview
    • Timken (TKR) 7:30am, $0.66
    • TransCanada (TRP CN) 8:30am, C$0.48
    • Ultra Petroleum (UPL) 7:30am, $0.53
    • Valeant Pharmaceuticals (VRX CN) 6am, $1.90 - Preview
    • Vantiv (VNTV) 7am, $0.46
    • Vonage (VG) 8am, $0.03
    • Xcel Energy (XEL) 6am, $0.41

 

PM EARNS:

    • Arch Capital (ACGL) 4:01pm, $0.98
    • Arris Group (ARRS) 4:01pm, $0.68
    • Ashland (ASH) 5pm, $1.57
    • Boyd Gaming (BYD) 4pm, $0.08
    • Canadian Oil Sands (COS CN) 5:01pm, C$0.28
    • CNH Industrial (CNHI) 4:44pm, $0.21
    • Community Health Systems (CYH) 5pm, $0.35
    • Constellation Software (CSU CN) 4:30pm, $2.93
    • DaVita HealthCare (DVA) 4:01pm, $0.89
    • Edison Intl (EIX) 4pm, $0.82
    • Eldorado Gold (ELD CN) 5:48pm, $0.05 - Preview
    • Expedia (EXPE) 4pm, $0.76
    • FleetCor Technologies (FLT) 4:01pm, $1.25
    • Fluor (FLR) 4:05pm, $0.99
    • Genpact (G) 4pm, $0.26
    • Kodiak Oil & Gas (KOG) 4:01pm, $0.18
    • LinkedIn (LNKD) 4:05pm, $0.39 - Preview
    • Live Nation (LYV) 4:01pm, $0.15
    • Microchip Technology (MCHP) 4:15pm, $0.67
    • Mohawk Industries (MHK) 4:01pm, $2.20
    • Nektar Therapeutics (NKTR) 4:15pm, ($0.37)
    • Northeast Utilities (NU) 4:15pm, $0.51
    • ON Semiconductor (ONNN) 4:05pm, $0.19
    • PerkinElmer (PKI) 4:05pm, $0.58
    • PMC-Sierra (PMCS) 4:05pm, $0.08
    • ResMed (RMD) 4:05pm, $0.66
    • Seattle Genetics (SGEN) 4:05pm, ($0.22)
    • Standard Pacific (SPF) 4:02pm, $0.13
    • SunPower (SPWR) 4:05pm, $0.27
    • Synaptics (SYNA) 4:05pm, $1.40
    • Tesla Motors (TSLA) 4:11pm, $0.04
    • Trulia (TRLA) 4:05pm, ($0.16)
    • Western Union (WU) 4:01pm, $0.36

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Zinc Declines as Aluminum Nears Longest Winning Run in a Decade
  • Platinum to Palladium Fixings to Join Precious Metals Revamps
  • Gold ETPs Halt Outflows as Buyers Return Amid Slump: Commodities
  • Oilseed Sowing in India Seen Lowest in 12 Years on Monsoon Delay
  • Thai Rice Output Threatened by Drought, State Forecaster Says
  • Gold Trades Near Week’s Low as Investors Weigh U.S. Economy
  • Ukraine Supply Concerns Push EU Gas to First Monthly Gain of ‘14
  • Japan Rice Sold for Animal Feed Eats Into 11-Year High Surplus
  • Corn Heads for Third Monthly Decline on Bumper U.S. Crop Outlook
  • Palm Oil Poised for Monthly Drop as Malaysian Exports Decline
  • Vale Profit Misses Estimates as Iron Supply Growth Sinks Prices
  • Commonwealth Bank of Australia Cuts Iron Ore Prices Through ‘17
  • U.K. Energy Import Dependency Rises to Highest in 39 Years: DECC
  • Iron Ore to Cap Biggest Monthly Gain in 2014 as Demand Increases

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


SAM – Impressive Results Continue! 2H More Challenging

SAM reported strong Q2 results, growing diluted EPS of $1.88 by 29.6% Y/Y above sales growth of 27.7%, or $231.6M (versus our estimate of $226.7M). The company achieved record depletion rates of 23% in the quarter on strength from its Samuel Adams, Angry Orchard and Twisted Tea brands.

 

The company continues to show prudence in its capital allocation and long-term strategy to invest to grow – we’d expect investors will applaud the narrowing of its FY 2014 capital spend (mostly to increase production), the reaffirming of guidance, and the growth response from its main brands to increased investments in media, local marketing and point of sale, and increased sales force.

 

The strength in the craft beer category, with 1H volumes up +18% Y/Y, and consumer trends towards “local” stand as headwinds to SAM moving forward, yet the company didn’t show it in the quarter. Tougher 2H comps, increases in freight and ingredient costs, and less product launches (most of the new offerings for the year were loaded into Q1 2014, including Samuel Adams Summer Ale and Samuel Adams Rebel IPA) pose threats to profitability in 2H, yet we expect this very rich stock to grind higher over the summer months on an existing pallet of stability.

SAM – Impressive Results Continue! 2H More Challenging - z. craft

 

Below we provide our update quantitative levels that show the stock trading in a bullish formation over the intermediate term TREND duration.  

SAM – Impressive Results Continue! 2H More Challenging - z. sam

 

What We Liked

  • FY 2014 estimated depletions growth increased to between 20% and 24% versus previously guidance of 16% to 20%
  • FY 2014 GM estimate maintained between 51% and 53%
  • FY 2014 diluted EPS reaffirmed at $6.00 to $6.40
  • FY 2014 capital spending estimate narrowed to between $160 million to $185 millionversus previous guidance of $160M to $220M
  • FY 2014 national price increases of approximately 2% reaffirmed

 

What We Didn’t Like

  • In the quarter, GM decreased 50bps to 53.1% Y/Y on product mix effects and increases in packaging and ingredient costs that were only partially offset by pricing
  • In the quarter, supply chain performance still remains under pressure with the opportunity for the company to improve operating costs.  Certainly higher freight costs pose a threat to profitability but we’re bullish on SAM’s ability to better integrate its breweries as it moves further through its expansion projects

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT

Takeaway: Recent data reduces the probability of our 2H14 US GIP outlook materializing as previously outlined – for now.

As Keith highlighted in today’s Early Look, we’ve been wrong on our forecast for USD debasement and commensurate commodity price inflation for 1-2M now. Moreover, the quantitative signals embedded therein are now at/near critical thresholds that would cause us to materially alter our fundamental views.

 

The US Dollar Index is flirting with a bearish-to-bullish reversal on our intermediate-term TREND and long-term TAIL durations. It’s super early, so we don’t want to get horned up chasing a potential head fake, but to the extent this signal is confirmed, it would represent a seismic shift in global monetary policy expectations and the direction of international capital flows:

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - DXY

 

In conjunction with the aforementioned developing bullish TREND signal on the DXY, our TACRM system is signaling the US Dollar Index (UUP) as a “BUY” and is also calling for investors to reduce their allocation to Foreign Exchange as a primary asset class, at the margins:

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - TACRM Heat Map

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - TACRM Summary Table

 

In the context of the quant signals highlighted above, the CRB Commodity Index is now literally dancing on its TREND line of support. Like with the DXY, we need to see price, volume and volatility all confirm any subsequent breakdown in the coming weeks:

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - CRB INDEX

 

For now, stick with the process and don’t get whipped around in the emotion of it all!

 

What Just Happened:

 

  1. Domestic Economic Growth Ripped in 2Q: GDP growth accelerated to +4% QoQ SAAR in 2Q14. The 1Q14 figure was revised up to -2.1% QoQ SAAR from -2.9% prior. The GDP deflator accelerated to +2% QoQ SAAR from +1.3% prior, making the headline growth figure even more robust. “C”, “I” and “G” all accelerated on a QoQ SAAR and YoY basis in the second quarter. “I” was the primary contributor to the massive acceleration in 2Q GDP, contributing a full 257bps to the headline figure. Some pundits are whining about inventories contributing 166bps, but we can literally go either way at this point (i.e. channel-stuffing or purchasing managers anticipating an economic cycle?).
  2. Consumer Confidence Ripped in JUL: The Conference Board Consumer Confidence Index ripped +4.5pts MoM to a new post-crisis high of 90.9, which is the highest reading since OCT ’07. Moreover, the trend in confidence continues to accelerate on a 3M, 6M and 12M basis. Lastly, the present situation component accelerated to 88.3, which is the highest reading since MAR ’08. We’d attribute this meaningful acceleration in consumer confidence to two things:
    • The Consumer Is Getting Un-Squeezed, At the Margins: Looking to our proprietary Consumer Squeeze Index, which is easily the most sophisticated model we’ve built to track market-based cost-push inflation, we’re now wrapping up our third consecutive month of sequential deflation. Per this metric, we need to see incremental cost-push inflation to support having anything more than a mildly bearish outlook for consumption growth. The consumer squeeze we’ve seen in the YTD is nowhere near the levels of inflation or duration that we saw in 2008 and 2011.
    • Job Growth Is Begetting More Confident Consumers: The trending improvement in domestic labor market conditions is not new-news, so we’ll refer you to our latest analysis of initial jobless claims trends and our detailed review of the JUN Employment Report for more details.
  3. Today’s FOMC Statement Was Hawkish, On the Margin: While continuing to paint both sides of the fence with their assessment of the path for prospective monetary policy, today’s FOMC statement is decidedly hawkish, on the margin, with respect to the committee’s assessment of economic conditions. Refer to the red H’s for “hawkish” and green D’s for “dovish” in the side-by-side statement below for more details. Remember, one month does not constitute a trend in official guidance, so we’ll need to closely monitor the Fed going forward to see if a discernible trend develops. Key Upcoming Monetary Policy Events Include:
    • Mid-to-late AUG: Janet Yellen participates in well-publicized discussions at the Fed’s annual conference in Jackson Hole, WY
    • 8/20: minutes released from the JUL 29-30 FOMC meeting;
    • 9/3: the Fed’s Beige Book is released;
    • 9/16: FOMC policy announcement;
    • 9/22: Bill Dudley speaks in NY;
    • 10/8: minutes released from the SEP 16-17 FOMC meeting;
    • 10/15: the Fed’s Beige Book is released; and
    • 10/29: FOMC policy announcement.

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - UNITED STATES

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - CONSUMER CONFIDENCE

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - CONSUMER SQUEEZE INDEX

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - 7 30 2014 3 00 14 PM

 

What Is Likely To Happen Next:

 

  1. Growth Will Slow… Duh: We maintain our view that domestic economic growth will slow in the third quarter and potentially well into the fourth quarter.
    • From a QoQ SAAR Perspective: The +4% figure seen in 2Q14 will represent a material challenge to growth accelerating from here. With a +3.1% forecast for 3Q14, consensus is well aware of that. The question is whether they are aware their forecast is 2-3x our current 3Q14 figure of around +1%?
    • From a YoY Perspective: Toughening GDP compares through year-end should cause real GDP growth to slow in 2H14 if economic activity does not accelerate on a sequential basis, which is the likely scenario – at least through 3Q14. This is especially true with the GDP deflator – which accelerated to +1.6% YoY from +1.4% prior – set to continue accelerating on materially easing CPI compares.
  2. The Fed Will Get Easier, At the Margins: Until the preponderance of our quantitative signals across the fixed income, currency, equity, commodity and volatility markets signal something different than what they’ve been signaling in the YTD, we will maintain our view that the Fed will get easier, at the margins, as the year progresses. The only question is will the ECB and BoJ beat them to it – in both timing and magnitude of easing. Remember, one or perhaps two months of decelerating economic data does not a trend make, so we might have to wait all the way until late-OCT before the Fed gets meaningfully dovish – if at all. This is especially true after a four-handle GDP print (i.e. of course growth will slow… but to what absolute levels?).

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - GDP COMPS

 

A MUST-READ ON THE 2Q GDP PRINT & JULY FOMC STATEMENT - CPI COMPS

 

All told, we don’t tell the market(s) what “valuation” and “survey data” would suggest it should be doing like a lot of our competitors; rather, we react to what markets are doing, backfill the storytelling with a heavy dose of economic and financial market history and make probability-weighted investment recommendations based on where said markets are likely to go next.

 

It sounds simple because it is. After six years of being as right as anyone on macro, this collection of football and hockey players is still not smarter than the market.

 

Thanks for continuing to pay attention to our dynamic process,

 

DD

 

Darius Dale

Associate: Macro Team


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