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Just Charts – Earnings Season Winding Down

INVESTMENT IDEAS

 

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

Just Charts – Earnings Season Winding Down - chart1

 

EVENTS THIS WEEK

 

8/11/14 DF Earnings Call 9am EST

8/11/14 SYY Earnings Call 10am EST

8/12/14 FLO Earnings Call 8:30am EST

8/14/14 VPCO Earnings Call 10:30am EST

8/15/14 EL Earnings Call 9:30am EST

 

WEEK-OVER-WEEK PERFORMANCE

Consumer Staples rose 0.9% week-over-week versus the broader market (S&P500) at 0.3%.  XLP is up 2.1% year-to-date versus the SPX at 4.5%. XLP is the third worst performing sector in the ytd, ahead of Industrials -0.2% (XLI) and Consumer Discretionary -0.7% (XLY).

 

Positive Divergence:  SAM 6.7%; MNST 6.5%; SMG 5.9%; THS 5.4%; TAP 5.2%

Negative Divergence:  NUS -18.7%; POST -16.7%; IFF -3.4%;  SODA -3.2%; ENR -2.2%

RECENT NOTES 

 

From a quantitative set-up XLP is broken its immediate term TRADE duration and bullish over the intermediate term TREND duration.

 Just Charts – Earnings Season Winding Down - chart2

 

The Hedgeye U.S. Consumption Model shows 6 of the 12 U.S. Economic Indicators flashing green.

 Just Charts – Earnings Season Winding Down - chart3

 

We continue to believe that the group is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, Q2 2014 theme of #ConsumerSlowing, and Q3 2014 theme of #Q3 Slowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.2x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 36.2 versus 36.3 in the prior week

Just Charts – Earnings Season Winding Down - chart4

Just Charts – Earnings Season Winding Down - chart5

Just Charts – Earnings Season Winding Down - chart6

 

 

QUANTITATIVE SETUP

 

In the charts below we look at the largest companies by market cap in the Consumer Staples space from a quantitative perspective.

 

BUD – bearish TREND resistance = 110.04

Just Charts – Earnings Season Winding Down - chart7

 

DEO – bearish TREND resistance = 125.48

Just Charts – Earnings Season Winding Down - chart8

 

KO – bearish TREND resistance = 40.66

Just Charts – Earnings Season Winding Down - chart9

 

PEP – bullish TREND support = 87.71

Just Charts – Earnings Season Winding Down - chart10

 

GIS – bearish TREND resistance = 52.68

Just Charts – Earnings Season Winding Down - chart11

 

MDLZ – bearish TREND resistance = 37.03

Just Charts – Earnings Season Winding Down - chart12

 

KMB – bearish TREND resistance = 109.95

Just Charts – Earnings Season Winding Down - chart13

 

PG – bullish TREND support = 79.40

Just Charts – Earnings Season Winding Down - chart14

 

MO – bullish TREND support = 40.59

Just Charts – Earnings Season Winding Down - chart15

 

PM – bearish TREND resistance = 84.78

Just Charts – Earnings Season Winding Down - chart16

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


MONDAY MORNING RISK MONITOR: MIXED SIGNALS

Takeaway: The signals remain bearish on an intermediate term duration but are more balanced in the short-term.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 19

 

Key Callouts:

Following the impressive correction two weeks ago, last week actually saw the XLF gain 0.7% bringing the YTD move to +2.4%. The outlook is fairly mixed at the moment. Based on our Financial Risk Monitor Summary below, there is a roughly even mix of positive and negative signals in the short-term but more red than green in the intermediate term duration.

 

Here are a few of the notable callouts on the week:

 

* High Yield (YTM) Monitor – High Yield rates fell 12.0 bps last week, ending the week at 5.95% versus 6.07% the prior week.

 

* 2-10 Spread – Last week the 2-10 spread tightened to 198 bps, -4 bps tighter than a week ago. 

 

* CRB Commodity Price Index – The CRB index fell -1.2%, ending the week at 292 versus 296 the prior week. As compared with the prior month, commodity prices have decreased -2.4% 

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 4 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 15

 

1. U.S. Financial CDS -  Overall it was a fairly uneventful week for US Financials as roughly half the complex widened modestly while the other half tightened. On balance, there was a net change of 0 bps.

 

Tightened the most WoW: RDN, AON, CB

Widened the most WoW: GNW, AIG, MET

Tightened the most WoW: AGO, MBI, RDN

Widened the most MoM: GNW, MET, PRU

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 1

 

2. European Financial CDS - Outside of Banco Espirito Santo, which tightened by 318 bps to 344 bps on the week, swaps were nominally wider across Europe last week (+2 bps). Russia's Sberbank continued to widen (+3 bps to 355 bps) though at a slower pace than in recent weeks.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 2

 

3. Asian Financial CDS - Indian and Chinese bank swaps were slightly tighter on the week with Bank of China tightening the most (-7 bps to 128 bps). In Japan, the picture was mixed as Daiwa tightened by 5 bps but Nomura, Sumitomo and Mizuho all widened by 2 bps.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 17

 

4. Sovereign CDS – Sovereign swaps widened across the board over last week. The usual suspects, Italy, Portugal and Spain, widened by 16, 17 and 9 bps, respectively. Meanwhile, German and US sovereign swaps widened by 1 bp. Japan was a notable mover on the week, widening by 7 bps (+19%) to 43 bps. 

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 18

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 3

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 12.0 bps last week, ending the week at 5.95% versus 6.07% the prior week.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1873.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 6

 

7. TED Spread Monitor – The TED spread fell 0.3 basis points last week, ending the week at 21.2 bps this week versus last week’s print of 21.51 bps.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.2%, ending the week at 292 versus 296 the prior week. As compared with the prior month, commodity prices have decreased -2.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 15 bps.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 16 basis points last week, ending the week at 3.04% versus last week’s print of 3.196%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 10

 

11. Chinese Steel – Steel prices in China rose 0.3% last week, or 8 yuan/ton, to 3139 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 198 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.2% upside to TRADE resistance and 2.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MIXED SIGNALS - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


ON THE MARGIN

Client Talking Points

CHINA

After having another +0.4% week (with all of Europe getting smoked) last week, Shanghai Comp added to its recent gains +1.4% overnight to +8.3% year-to-date. On the margin the Shanghai Comp is the most improved equity market in the world in the last 6 weeks.

EUROPE

Europe, on the margin, is the biggest mess in global equities in the last 6 weeks, so they’re trying to bounce them this morning but they’re nowhere near challenging their 1st lines of @Hedgeye resistance (Greece was -9.9% last wk, and is +2% here).

UST 10YR

The bond market couldn’t care less about people getting whipped around in spoos – 2.43% this morning with an immediate-term risk range of 2.40-2.50% (lower-highs and lower-lows being signaled) and Yield Spread at its year-to-date lows.

Asset Allocation

CASH 46% US EQUITIES 0%
INTL EQUITIES 14% COMMODITIES 6%
FIXED INCOME 26% INTL CURRENCIES 8%

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.

Three for the Road

TWEET OF THE DAY

INDIA (our fav Eastern Equity market) +0.8% to +22.2% YTD $EPI

@KeithMcCullough

QUOTE OF THE DAY

The farther back you can look, the farther forward you are likely to see.

-Winston Churchill

 

 

STAT OF THE DAY

Today in 1929, Babe Ruth became the 1st player to hit 500 homers (in Cleveland, Ohio).


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CHART OF THE DAY: 3% GDP? Seriously?

CHART OF THE DAY: 3% GDP? Seriously? - Chart of the Day

 

In a Wall Street Journal poll on Friday, 43 economists agreed to agree that US GDP growth will magically be 3% in the back half of 2014. That looks almost impossible.


Unwinding Growth

“The unwinding began at countless times, in countless ways.”

-George Packer

 

Yep. After a wonderful weekend with my family on the East Coast, I figured I’d get up early this morning and cheer you up with that quote. It comes from George Packer’s recent bestseller – The Unwinding: An Inner History of The New America.

 

Under both the Bush and Obama central-econ-planning regimes, what’s really been unwinding for the last decade is the bull case for sustainable and real (i.e. inflation adjusted) US GDP growth. But both you and the bond market probably already know that.

 

Who seems to miss this roughly all-of-the-time are America’s Old Wall “economists.” In a Wall Street Journal poll on Friday, 43 economists agreed to agree that US GDP growth will magically be 3% in the back half of 2014. In today’s USA, that looks almost impossible.

 

Unwinding Growth - unwinding

 

Back to the Global Macro Grind

 

In stark contrast to what I loved about the ole-school 1980s/1990s USA breakouts in both #StrongDollar and #RatesRising in 2013, today we have a Dollar that has done, well, absolutely nothing year-over-year, and interest rates crashing.

 

Crashing? Yep. The 10yr US Treasury Yield crashed (again) last week, falling -20.2% from where it started the year (at 3.03%). At 2.43% this morning, the 10yr couldn’t care less about the emotional roller coaster that is 80% of hedge funds trading the spoos.

 

Spoos (pronounced, spoo-z – or boo-hoo-zzz) are making grown men cry in 2014 as the net long or short position that the herd takes in these emotionally abused securities manifests into one of the best weekly contrarian market indicators in my notebook.

 

Check out this directional indicator for the last 3 weeks (SPX Index + Emini net LONG or SHORT position in CFTC non-commercial contract terms):

 

  1. AUG 11th (today) = net LONG +10,716 contracts
  2. AUG 4th = net SHORT -41,210 contracts
  3. JUL 28th = net LONG +614 contracts

 

Short low, cover high? The context of these weekly moves is critical. Don’t forget that the all-time-bubble-high for the SP500 was established on July 23-24 at 1987. As of Friday’s no-volume rally (Total US Equity Volume -18% vs. its 3-mth avg), there have only been 2 up days in the last 12 trading days.

 

While buying “dips” in anything early-cycle growth slowing has been painful in August, being long #GrowthSlowing via TLT (Long-Bond) +13.8% YTD vs Russell 2000 (US Equity Growth bogey) -2.8% YTD has been nothing short of fantastic. So let’s keep doing  more of that.

 

From a risk management (and relative performance) perspective, what you don’t do in this game is often more important than what you are doing. You don’t have to buy early-cycle stocks that are slowing just because they look “cheap.” You need to avoid that temptation before “cheap” gets cheaper.

 

If we’re right on #Q3Slowing, two major places to avoid on “valuation” are:

 

  1. US listed Industrials (which are really multi-nationals) = XLI
  2. European Equities = EZU, EWG, EWI, etc.

 

Last week in Europe was ugly:

 

  1. Greece led losers at -9.9% on the week (and is “bouncing” +2% this morning #hooray)
  2. Portugal was down another -6.7% to -17.5% YTD
  3. Germany was down another -2.2% to -5.7% YTD

 

No, Germany is not Greece. But my aunt’s sister is my Mom. And #interconnectedness matters.

 

Not only do my intermediate-term TREND signals continue to signal bearish for European Equities, but our proprietary GIP (Growth, Inflation, Policy) model is probability weighing the same for the next 1-3 quarters of European growth. #Q3Slowing

 

That’s probably why a lot of single stock setups are bearish TREND too (DEO, KO, GE, etc.). If your two main markets are USA and Europe, you want to be paying attention to this bullish-to-bearish TREND reversal @Hedgeye very closely. We haven’t had a coordinated unwinding of growth expectations since 2011.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.40-2.50%

SPX 1

RUT 1107-1143

DAX 8

VIX 13.89-18.43  

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unwinding Growth - Chart of the Day


Process & Spot

This note was originally published at 8am on July 28, 2014 for Hedgeye subscribers.

“Very simple. It’s going to be a big letdown for everyone. It was process and spot.”

-Rory Mcilroy

 

I don’t know about yours, but my multi-factor, multi-duration analysis this summer has revealed that my golf game needs some serious work. The hottest hand on the Hedgeye Research Tour, Howard Penney, reminded me that I need to get Rory’s #process.

 

After his British Open win, Mcilroy explained “with my long shots, I just wanted to stick to my process and stick to making good decisions… I just wanted to roll that ball over that spot. If it went in, then great. If it didn’t, then I’d try it the next hole.”

 

Process & Spot - #love that. If we can execute it, consistently, on the Global Macro course of interconnected risk, we’ll make less double bogeys. Remember, it’s those of you who don’t have a lot of blow-up holes that have the best performance track records.

 

Process & Spot - golf

 

Back to the Global Macro Grind

 

In Hedgeye-speak, making our tee-to-fairway swing (process) repeatable means embracing the uncertainty of Mr. Macro Market’s intermediate-term TREND signals:

 

  1. If something like Chinese Stocks or Copper signal a bearish to bullish TREND reversal, we buy/cover
  2. If something like the Russell 2000 or Bond Yields signal a bullish to bearish TREND reversal, we sell/short

 

In long-bond speak, when we sell bond yields, we buy bonds. And we like it.

 

When it comes to our shorter-term duration game (putting), we try to manage what we call the immediate-term TRADE risk of the range. In other words, we respect the breaks and try to take the highest probability line of the proverbial putt by:

 

  1. Selling if the price is at the high end of the range
  2. Buying if the price is at the low-end of the range

 

Yep. So easy a Mucker can do it. What’s differentiated in this process is that I’m consistent in being inconsistent:

 

  1. My long shots are playing with the wind (bullish or bearish TREND)
  2. My putts are playing the breaks (fading last price)

 

Consensus Macro tends to do the opposite:

 

  1. Longer-term – consensus tends to be late in acknowledging bullish and bearish TREND reversals
  2. Shorter-term – consensus tends to chase, rather than fade, last price

 

Across both short and longer-term durations, you can see this on the most emotional strokes the Consensus Macro takes (net long or short futures and options bets in Big Macro positioning):

 

  1. LONG BOND (10r Treasury) saw a +26,023 wk/wk swing to a net LONG position in bonds now of +5,282 contracts last wk
  2. SPX (Index + Emini) saw a +37,728 wk/wk swing to a net LONG position in SP500 of +614 contracts last wk

 

Now, if you only look at these putts in isolation, you’d say that week over week, these were the right lines to take. But if you look at all the swings it took to get to the green, this was the score:

 

  1. LONG BOND – consensus net SHORT bet on average of -21,204 and -43,289 contracts for the last 3 and 6 months, respectively
  2. SPX – consensus net SHORT bet on average of -65,318 and -44,327 contracts for the last 3 and 6 months, respectively

 

In other words, for the last 3-6 months, Consensus Macro was A) shorting 10yr Treasuries and B) shorting SPY (and C) making double bogeys). You don’t want to be doing that.

 

And now you don’t want to be getting net long US Equity beta A) after consensus hedge funds have covered SPX shorts, B) Russell 2000 continues to signal bearish TREND, and C) front-month VIX is testing an intermediate-term TREND bearish to bullish reversal.

 

Or at least my process says you wouldn’t…

 

With the CRB Food Index and Energy Stocks (XLE) both up another +0.9% last week to +19.7% and +12.8%, respectively (Coffee and Cattle prices are +52.9% and +28.2% YTD), you probably want to stay net LONG our 2014 #InflationAccelerating Theme and short US Consumers (discretionary and housing stocks) too.

 

In golf sometimes it’s the shots you don’t take that make all the difference. #Process, spot, #process. Rinse and repeat.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.44-2.54%

SPX 1966-1987

RUT 1133-1161  

VIX 11.94-14.29

Gold 1299-1323

Copper 3.20-3.28  

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Process & Spot - Chart of the Day


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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