Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
In Part 2 of Real Conversations with Larry Kudlow, the CNBC senior contributor squares off with Hedgeye CEO Keith McCullough on inflation and whether market signals like gold and TIPs are forecasting higher prices.
In this excerpt from our Q3 Macro Themes call on July 11, Keith discusses #VolatilityAsymmetry. $VIX is up 50% since it was named a Q3 Macro Theme.
GDP Reality Check
US GDP for the first half of 2014 is 0.87% annualized (Old Wall was looking for +3-4%) and is slowing again sequentially in Q3.
GDP Newsflash: It's Q3
To be fair to the 2014 US Growth Bulls who are looking for +3-4% GDP and a 10yr Yield > 3%, with a Q2 +4% bounce off of one of the worst Q1s since WWII on an annualized basis, 1st half of the year GDP in the US wasn’t negative. It was +0.87%.
On Wednesday we asked if you were bullish or bearish on Chinese equities. As of 4pm on Friday 8/1, 69% of participants are BULLISH. In the video below, Senior Macro Analyst Darius Dale outlines Hedgeye's own bullish thesis.
Cast your vote below.
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 – Bob Evans and activist Sandell Asset Management are continuing to trade blows back and forth, both releasing investor presentations detailing their respective side of the case. In our opinion, it's simply no contest. Sandell has proposed a much more coherent and compelling plan for value creation than Bob Evans has.
After years of woeful underperformance, we’re confident frustrated shareholders are ready for significant change. That fact is, the future of the company largely lies in their hands. We’ll find out which way they decide to go on August 20th when BOBE holds its Annual General Meeting. We’re willing to bet Sandell gets control of the board. More to be revealed.
GLD – The GDP print this week was taken as a positive by the market and warranted a more hawkish tone from Yellen. In particular, she used more positive language around an uptick in fixed investment, inflation moving closer to the Fed’s target, and positive indicators from the labor market. As expected, this expectation for more hawkish policy induced a sell-off in Gold this week and an uptick in the 10-year yield. On Friday both markets reverted from the big moves (Gold bounced higher, while the 10-year moved back-down ~5bps:
- Gold closed in red territory Monday-Thursday with correlations over the last week and month moving much tighter relative to the longer term averages with the FOMC USD catalyst:
- Arithmetic mean of 1-week and 1-month correlations: r= ~.85
- Arithmetic mean of 3-month and 6-month correlations: r=~.41
- TREND support has now moved down to $1271 from $1281 week-over-week (a level we are now watching closely with the USD testing its TAIL line)
- The USD followed a bearish TREND from January to May and has since made a series of lower highs after Draghi:
- Cut the benchmark deposit rate from 0.25% to 0.15%
- Cut the marginal lending facility from 0.75% to 0.40%
- Cut the deposit facility rate from 0.0% to -.10%
- The 10-year ticked higher +~9bps week-over-week through Thursday and reverted -~5 bps Friday with Gold bounce
The Euro has backed-off 2% against the dollar since the end of June and on Friday we received much worse than expected Manufacturing PMIs on Friday out of countries that have been a staple of strength year-to-date:
- Germany - Markit/BME Manufacturing PMI 52.4 JUL Final (52.9 est.) vs. 52.9 prior
- U.K. - Markit Manufacturing PMI SA 55.4 JUL (57.2 est.) vs. 57.5 prior (57.2 revised)
In the currency war that is today’s centrally-planned main stage in Big Macro, the value of the dollar is directly related to the strength over other reserve currencies (whether economically or policy-induced). European economic data is retracting from the first half 2014 strength and European equities look bearish in our model. If this continues the expectation will be for a more dovish ECB.
Right now the USD is dancing around its long-term TAIL line of resistance and the quant signals suggest it’s looking for more clarity before confirming TREND and TAIL lines (either reversing to a bullish bias or continuing to confirm its bearish set-up). A one-quarter GDP bounce (off of a -2.1% Q1 print) and short-term commodity disinflation need to confirm sequential improvement for us to reverse our #growth-slowing, #Dollardevaluation Theme.
HCA – Hospital Corporation of America presented their quarterly report this week after pre-announcing upside to their 2Q14 result. The details of their beat were better than we were expecting.
One of the highlights was a material acceleration in maternity. During the conference call, HCA stated that "deliveries for the quarter grew 2.2%"... "Managed care and exchange deliveries grew 7.3%" and "Neonatal admissions grew 9.3%". All better than what we were looking for.
The Affordable Care Act tailwind was increased by an additional 1% to EBITDA, which is consistent with our view of modest upside from the newly insured.
Heading into 2015, we believe consensus is still underestimating HCA. If HCA can hit our 2015 estimates and hold the current multiple, we think the shares could trade into the $70s from here as consensus numbers move higher.
HOLX – Our recent note reviewing the HOLX quarter was titled “A LITTLE GOES A LONG WAY.” Revenue was better than consensus (as we expected) and guidance for the rest of the year was increased.
On Friday morning we updated our Tomo-Tracker which showed a material acceleration versus June. In July we see Hologic converted a total of 35 facilities putting them on pace for significantly better sales in the final quarter of the fiscal year than even their best quarter of the year.
We initially thought guidance seemed aggressive for FQ414 at $630-640M. Our initial estimate was $632 after reviewing all of the data from the filings and earnings call.
We now are more confident that management can at least be in the high end of their guidance range and perhaps even better.
Our OB/GYN survey for July/August is launching today and we’ll have an update for you next week.
LM – Legg Mason reported decent earnings this week with a slight revenue miss offset by strong operating margins and earnings per share of $0.61, which eclipsed consensus by over 10% with the Street expecting just $0.55 per share.
Our thesis on the stock is intact with the reallocation theme of institutions moving out of equities and into fixed income firmly in place. In this quarter alone, Legg netted more new fixed income assets than its entire fiscal year prior which created annualized organic growth for LM this quarter of +2.0%. This attribute should not be discounted being that the average organic growth rate for the "Big 6" traditional managers that have now all reported 2Q14 is actually a decay rate of -0.70%.
Although Legg's +2.0% annualized growth in the quarter is hardly break away expansion, we note this places Legg second in the group behind BlackRock despite having the cheapest valuation in the group.
Legg Mason (LM) continues on our Investing Ideas list under the guises of: 1.) Growth at a reasonable price 2.) As a beneficiary of the ongoing rotation away from equities and into fixed income 3.) Having favorable market setup with the sector's second highest short interest; second lowest sell-side sentiment; and the sector's biggest share buyback program.
OC – With 2Q earnings season winding down, we present some commentary from several construction companies. Carlisle Construction (CSL) noted that pricing for its roofing systems business was strengthening at the end of the second quarter. Saint Gobain, the French construction company, pointed out the despite the recent declines in roofing volumes they do not expect there to be a downward trend in volume and instead volume should progressively pickup in 2H 2014.
Furthermore, bitumen is a type of “asphalt concrete” for roofing and paving products. Bituminous prices have recently moved upwards along with the Bureau of Economic Analysis’s Asphalt & Coating Materials PPI Index. Owens Corning’s roofing segment benefits from these price increases as you can see in the graph below.
Lastly some put-and-takes from recent economic data:
- Dodge Index climbed to its highest level in 2014.
- Architecture Billings Index (ABI) continues to build on a strong May number.
- After 6 straight months of decline, private renovation spending on residential structures ticked up slightly for June.
- Nonresidential Construction YoY% experienced a drop from 8.1% to 4.6% month-over-month.
Typically the Census Bureau revises its construction spending estimates in the coming months so we will hold out for now. But the leading indicators show promise as they become tailwind for companies like Owens Corning heading into 2H 2014.
OZM – There is no update on our recommendation of Och Ziff Capital Management this week. We will have new fundamental information to analyze next week as the firm will report 2Q14 earnings on Tuesday August 5th.
RH – Restoration Hardware remains our top long idea in Retail by a country mile. We remain convinced that the company will see earnings grow from $1.71 last year to near $11.00 in five years time. If we’re right on that earnings number, which we think we are, we think that this is ultimately a $200+ stock.
We don’t think this is just a square footage growth story (which is impressive in its own right), but rather one of the biggest market share stories in retail today. In effect, we think that RH is doing to the high-end home furnishings space what Ralph Lauren did to apparel on 1980. The parallels are staggering.
Here’s a look at where we stand vs. Consensus for the balance of the year.
TIP – In a week where global equity and credit markets saw significant turmoil, the iShares TIPS Bond ETF came away relatively unscathed. Its -60bps WoW decline brings its YTD performance to +4.7% – far outpacing alternative investments like the SPY or IWM, which are up +3.8% and down -4.7% respectively.
In this week’s deluge of high-frequency economic data, we continue to see signs of #InflationAccelerating on a reported basis and #StructuralInflation coming down the pike:
- GDP Deflator: +2% QoQ SAAR in 2Q, up from +1.3% prior; +1.6% YoY, up from +1.4%
- PCE Core Price Index: flat at +1.5% YoY
- In a bid to counter the deflationary pressures in the casino gaming equipment sector via industry consolidation, Scientific Games Corp. (SGMS) bought Bally Technologies (BYI) for $3.3B ex-net debt
To be fair to inflation bears, this week we saw commodity prices (using the CRB Index as a proxy) take a major hit, down another -1.5%; that brings the MoM decline to nearly -5%. WTI Crude Oil, a key concurrent indicator for supply-side inflationary pressures dropped -4.7% WoW and are now signaling bearish TRADE, TREND and TAIL on our quantitative model.
To the extent this developing signal is confirmed and thereby confirming a peak in the rate of change in reported inflation statistics, we will strongly consider booking the gain in TIP.
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Our Hedgeye Housing Compendium table aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
We are bumping up short MCD to the Investment Ideas list.
Both our quantitative signals and fundamental research support buying China here. This stance is in stark contrast to our previous view.
the macro show
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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
In this excerpt from this morning’s macro call with institutional subscribers, Hedgeye CEO takes a granular walk through the worst day in the stock market all year.
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