August 21, 2014

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The Hedgeye Daily Outlook

TODAY’S S&P 500 SET-UP – August 21, 2014

As we look at today's setup for the S&P 500, the range is 39 points or 1.59% downside to 1955 and 0.38% upside to 1994.                              




The Hedgeye Daily Outlook - 1


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  • YIELD CURVE: 1.97 from 1.96
  • VIX closed at 11.78 1 day percent change of -3.52%


MACRO DATA POINTS (Bloomberg Estimates):          

  • Kansas City Fed symposium at Jackson Hole, Wyo. (runs through Aug. 23)
  • 8:30am: Initial Jobless Claims, Aug. 16, est. 303k (prior 311k)
  • Continuing Claims, Aug. 9, est. 2.520m (prior 2.544m)
  • 9:45am: Markit U.S. Manufacturing PMI, Aug. preliminary, est. 55.7 (prior 55.8)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 17 (prior 36.8)
  • 10am: Philadelphia Fed Business Outlook, Aug., est. 19.7 (prior 23.9)
  • 10am: Existing Home Sales, July, est. 5.02m (prior 5.04m)
  • 10am: Index of Leading Economic Indicators, July, est. 0.6% (prior 0.3%)
  • 11am: U.S. to announce plans for auction of 3M/6M bills, 2Y/5Y/7Y notes, 2Y FRN
  • 1pm: U.S. to sell $16b 5Y TIPS in reopening



    • President Obama on vacation on Martha’s Vineyard
    • Senate, House out on August recess
    • 8:30am: FedScoop holds summit on lowering cost of govt with IT, with CIOs, CTOs from federal agencies panelists
    • U.S. ELECTION WRAP: McConnell’s Senate Plan; Ads Hit Sullivan               



  • Countrywide co-founder Mozilo said to face subprime lawsuit
  • BofAML mortgage settlement with U.S. may come today
  • BofAML said to plan salary increase for junior bankers
  • JPMorgan said to consider raising some staff salaries >20%
  • Citigroup said to consider ~20% raise for junior bankers
  • Wal-Mart to lower prices for iPhone 5c, 5s: L.A. Times
  • Dollar General says it was misled during Family Dollar talks
  • Northrup, BAE, GD among 5 cos. splitting Navy CANES contract
  • Carlyle’s 2012 buyout Axalta files for $100m U.S. IPO
  • Media General cut price for Lin Media on loss of CBS deal
  • TV networks seek larger share of pay TV channel sales: WSJ
  • Independent TV studios attract big media M&A: N.Y. Post
  • Chinese hackers affecting U.S. medical tech, pharma cos.
  • Ford planning new hybrid car for late 2018: Reuters
  • Hertz investors said to want former Dollar Thrifty CEO
  • USAF grounds 82 F-16 jets due to cracks: L.A. Times
  • GE considering S. Korean fighter jet development: Yonhap
  • Chinese PMI misses ests., falls for first time since March



    • Buckle (BKE) 7am, $0.53 - Preview
    • Dollar Tree (DLTR) 7:31am, $0.64 - Preview
    • Hormel Foods (HRL) 6:30am, $0.48
    • Nordson (NDSN) 7am, $1.13
    • Perry Ellis Int’l (PERY) 7am, ($0.12)
    • Sears Holdings (SHLD) 6am, ($2.58)
    • Stage Stores (SSI) 6am, $0.52



    • Accuray (ARAY) 4:01pm, ($0.06)
    • Aeropostale (ARO) 4:01pm, ($0.50) - Preview
    • Brocade Communications Systems (BRCD) 4pm, $0.19
    • Fresh Market (TFM) 4:02pm, $0.35
    • GameStop (GME) 8:30am, $0.18
    • Gap (GPS) 4pm, $0.69 - Preview
    • Intuit (INTU) 4pm, $0.07
    • Marvell Technology Group (MRVL) 4:05pm, $0.28
    • Mentor Graphics (MENT) 4:05pm, $0.15
    • Ross Stores (ROST) 4pm, $1.08 - Preview
    • (CRM) 4:05pm, $0.12



  • Gold Drops to 2-Month Low on Fed Rate Outlook as Platinum Falls
  • Palm Oil Seen by UBS Extending Decline on Outlook for Supplies
  • Philippines Nickel Exports to China Plug Gap Left by Indonesia
  • U.S. Mint Platinum Coins Bypassed in Rush for Gold: Commodities
  • All Eyes on Atlantic as Potential Tropical Storm Starts Stirring
  • Israel Nears Gas Sales to Egypt as Mideast Unrest Flares: Energy
  • Market Shrugs 3M B/D Oil Supply Loss to Geopolitics: Julian Lee
  • China Spot Copper Fees Seen Rising as Mine Output Increases
  • U.K. Natural Gas Options Trading Signals Ukraine Supply Concerns
  • Wheat Extends Decline as Ukraine Tension Fails to Disrupt Supply
  • Ebola Virus Threat Sees Sierra Leone Miner Cut Iron-Ore Target
  • India Raises Royalty on Iron Ore Output to 15% From 10%
  • Wheat Harvest in Australia Seen Exceeding Forecast After Rains
  • Brent Spread May Widen as Speculators Add Bets: Chart of the Day
  • Gold Refiner Predicts Import Curbs by India Probably Permanent


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The Hedgeye Macro Team
















Long the Long Bond: Hedgeye Reiterates Our Call on $TLT

Takeaway: We're sticking with TLT.

If you’re bullish, you should be bullish on the Long Bond.


It’s crushing every major US equity index YTD (Russell 2000 is in negative territory for 2014: -0.70%). The 10-year yield has immediate term downside to 2.34% into Janet Yellen’s “pushing out the dots” in Jackson Hole.


Long the Long Bond: Hedgeye Reiterates Our Call on $TLT - Staying Long TLT

HAIN: Strong Q Looks Stronger Than It Is

HAIN remains on the Hedgeye Best Ideas list as a short.


On the surface, HAIN reported a strong quarter and the stock responded nicely, trading up ~11% on the day.  4Q14 adjusted earnings from continuing operations were $0.90 compared to $0.65 in 4Q13, good for a 35% increase year-over-year.  On the call, management reported a strong 7.5% organic growth rate for 4Q14 and 8.5% for FY14.  Guidance for organic growth remains in the mid-single digit to high-single digit range for FY15.


The adjustments made to continuing operations are a list of recurring and non-recurring items that, in our view, lower the quality of the reported number.  Notably, these adjustments are getting bigger each quarter.  In 4Q14 the adjustments to net income totaled $0.15, 50% greater than the $0.10 of adjustments in 4Q13.


The current adjustments to net income of $10.3 million are principally from:

  1. $6 million related to the voluntary recall
  2. Start-up cost of $3.8 million primarily related to Project Castle (the chilled desserts facility in the UK)
  3. $2.9 million of acquisition related fees and expenses, including integration costs from Tilda and Rudi’s
  4. $2.2 million non-cash valuation reserve on net operating losses incurred along with the start-up of the non-dairy facility in Europe


It’s amazing to see that a company can get away with adjusting earnings for growth related innovation and operating costs that are desperately needed to grow organic revenues.  The company also reported $4 million of non-recurring income including a true-up of contingent consideration earn outs, unrealized currency gains and gains from the sale of shares.


On top of that, the company continues to push SG&A lower in order to drive operating margins.  In 4Q14, SG&A on an “adjusted” basis (excl. amortization of acquired intangible assets) was 14.4% of net sales, a 110 bps improvement versus last year. 


HAIN: Strong Q Looks Stronger Than It Is - 8 20 2014 2 25 28 PM


Therefore, despite higher commodity costs, HAIN “effectively managed operating expenses” to report a 49% increase in “adjusted” operating income to $73.9 million and a 200 bps improvement in operating margin to 12.7%.  We continue to view the steady, significant reduction in SG&A as a competitive long-term disadvantage.  In fact, we’d go as far as to say that the company’s margin structure is highly unsustainable and, as a result, it is currently over-earning in an increasingly competitive environment.


One of the core tenets of our short call was the lack of leverage in the business model.  Despite a 200 bps improvement in operating margins, the company only reported “adjusted” EBITDA of $79.5 million or 13.6% of net sales versus 13.5% last year.  It’s clear to us that the management is far away from hitting its objective of delivering long-term growth EBITDA of 15% to 18% of net sales.


The company’s inability to leverage its cost structure is clearly illustrated in the chart below.


HAIN: Strong Q Looks Stronger Than It Is - 22


The biggest risk to our short thesis was the strong revenue growth the organic sector is seeing.  But, as you can see below, sales trends are expected to continue to slow at HAIN.  In order to sustain its past level of growth, management will need to acquire more brands in FY15. 


HAIN: Strong Q Looks Stronger Than It Is - 33


Net sales guidance for FY15 is between $2.7 billion to $2.8 billion, with approximately two-thirds of growth coming from acquisitions and one-third coming from organic sales.  If this plays out, HAIN expects to deliver FY15 EPS within the guided range of $3.72 to $3.90.


While today is painful, we are sticking with our short thesis.


Call or email with questions.


Howard Penney

Managing Director


Fred Masotta


Cartoon of the Day: Ain't No Hawk!

Takeaway: Think the Fed's going to suddenly strike a hawkish tone? Don't hold your breath.

Cartoon of the Day: Ain't No Hawk! - JacksonHole cartoon 08.20.2014


Expert Call: Coffee Prices May Move Much Higher From Here

Expert Call: Coffee Prices May Move Much Higher From Here - 1


Hedgeye Macro is hosting an expert call this Thursday, August 21st at 11:00 a.m. EDT to better understand the developing risks to Brazilian coffee production capacity next year and beyond. Brazil accounts for more than 1/3rd of global coffee production, and the damage from an unprecedented drought in the first three months of 2014 may have caused irreparable damage to a much larger portion of the 2015-16 crop than believed by consensus.


Our expert speaker will be Judith Ganes-Chase, founder and president of Ganes Consulting, an independent agricultural softs commodities research and consultancy firm. Judy worked on the sell-side for 20 years before founding J. Ganes Consulting in 2001.

Call Objective:

  •  With irreparable damage from last winter’s ---(BRAZIL SUMMER) drought already manifest, consensus opinion is much too optimistic on Brazil’s production capacity into next year and 2016
  • Lifecycle of the Tree: The idea that above average rainfall can restore soil moisture and rehydrate the trees allowing the lack of vegetative growth to be offset is simply not true. Production estimates for a 2015-16 crop based on the coffee from trees that have not yet flowered are PREMATURE
  • End users may be able to hedge OTC through financial intermediaries, but the assumption that the crop paid for in the future is locked-in and available is an issue. Scarcity may be a problem à ESPECIALLY OF BETTER GRADES OF COFFEE.
  • Relevant Tickers: CAFE, JO, SBUX, DNKN, MCD, MDLZ, GMCR, THI, KKD  


Participant Dialing Instructions:

Toll Free Number:

Direct Dial Number:

Conference Code: 998836#

Materials: CLICK HERE


About Judith-Ganes Chase:

Judy has over 25 years of experience covering the agricultural softs space. Prior to founding Ganes Consulting in 2001, she spent most of her career as a senior softs analyst at Merrill Lynch and Shearson Lehman. Her most recent post was as the Director of News and Research at InterCommercial Markets.


Ms. Ganes-Chase is a contributing member to Elliott Associates, Gerson-Lehrman Groups Council, and Coleman Research Group. She is also a participant in the ICE (Intercontinental Exchange) research program and makes regular contributions to several industry-specific publications: Specialty Coffee Association of America, National Coffee Association, and the International Women’s Coffee Alliance (IWCA).    

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