TODAY’S S&P 500 SET-UP – September 2, 2014
As we look at today's setup for the S&P 500, the range is 29 points or 1.17% downside to 1980 and 0.28% upside to 2009.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on August 18, 2014 for Hedgeye subscribers.
“They got their politics on TV and were not persuaded by policy descriptions or rational arguments.”
I showered, shaved, and slapped on a suit to do Fox News in NYC yesterday (yep, just what I wanted to do on a summer Sunday). On my way out, my son Jack was riding his bike in the driveway and said to me “Dad, good luck.” I thought to myself, man isn’t this country going to need it.
The aforementioned quote comes from a book I’m reading right now that I highly recommend: The Unwinding – An Inner History of The New America. It cuts through many of the threads I’ve been trying to weave in 2014 (history, behavioral, demographics).
From Jay Z to Newt to Oprah and Sam Walton, this collection of histories contextualizes why so much of what this country has become is made for TV. Sound bites, quick fixes and bling. “Yes We…” … uh… maybe No We Can’t, from here…
Back to the Global Macro Grind…
No we can’t get back to 3-4% US GDP growth. Not this year. And probably not next year either. Never mind what you hear on TV. The real US economy is slowing in Q3. The bond market reiterated that last week, big time.
The 10 yr US Treasury Yield dropped another -7 basis points last week to 2.34%. In case you are keeping context’s score, that’s:
Alongside falling bond yields and the Russell 2000 (a proxy for US growth expectations) being -1.9% YTD what’s interesting now is that some of the more cyclically sensitive (read: LATE CYCLE) stuff like inflation and employment growth is starting to wane:
Let me write that one more time – inflation and employment gains are late, not early, cycle indicators. “So”, as both the European and US economies slow in Q3 of 2014, why can’t we see both inflation and employment rates of change deteriorate from their 1H 2014 peaks?
One way to play this from a US stock market investors perspective is:
That’s a later cycle portfolio move than the early cycle ones we have been signaling since the beginning of the year (which we’d stay with and include):
Getting out of late-cycle commodity inflation is also very defensive in the sense that you can’t be as “invested” as we thought you should be in #inflationAccelerating for the first 6 months of the year. You won’t hear this on TV either, but in risk management speak that means RAISE CASH.
At 52% Cash in the Hedgeye Asset Allocation model this morning, that’s the highest Cash position we have had in at least 2 years. On the 48% “invested”, my Top 3 positions (rank ordered in terms of size) would be:
In other words, if I was running my old hedge fund, I’d still be running net long Bonds and International Equities in Global Macro, but scaling into net short positions in both US growth and European Equities.
While we haven’t re-signaled the short calls in places like Portugal (PGAL), Italy (EWI), or the SP500 (SPY) yet, the best way to see me do that in real-time is in our Real-Time Alerts product. From a short seller’s perspective, you won’t get that trying to learn market timing on TV either.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.34-2.43%
BSE Sensex 25689-26391
WTIC Oil 95.41-98.46
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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Takeaway: Current Investing Ideas: BOBE, FXB, GLD, HCA, HOLX, OC, OZM, RH and TLT.
Below are Hedgeye analysts’ latest updates on our nine current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
We also feature three recent institutional research notes that offer valuable insight into the markets and the global economy.
Have a great Labor Day weekend!
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.
BOBE: As it turns out, activist investor Sandell was only able to secure four seats on Bob Evans’ board. This is after reports surfaced that the investor had successfully secured five. An incremental seat always helps, but four is still a significant number and should be enough to influence change within the company. Considering that three other nominees joined the Bob Evans’ board in April 2014, we’d argue that majority of the board (7 out of 12 members) is new.
BOBE reported another uninspiring quarter on Wednesday when they released 1QF15 results. To be blunt, the call was rather painful to listen to. But not all is lost. We continue to believe there is significant upside in BOBE, but it is likely this upside will not be realized until we see several changes at the senior level. We do find solace, however, in the fact that we are one step closer to this becoming a reality.
It’s difficult to get excited about this company until the new board members complete their “initiation” to every aspect of the business. Shortly thereafter, we would expect to see material changes to the operating structure of the company in order to unlock significant underlying value. We knew this would be a bumpy ride, but we’re in it for the long haul. Buckle up.
FXB: Down ~ -3.5% since early July, we believe the GBP/USD (via the etf FXB) has found support above its long-term TAIL line of $1.65.
Our positioning in the currency cross remains based on what we see as relatively healthy underlying fundamentals for the country into 2H (to drive strong UK = strong Pound), versus our forecast for decelerating growth trends in the U.S. and Eurozone, combined with dovish policy expectations from central bank heads Janet Yellen and Mario Draghi.
In contrast, recent Bank of England Minutes revealed that for the first time in over three years, there were 2 votes to increase interest rates (by 25 basis points). We expect this bullish tone (on the margin) coupled with the outperformance of UK growth over the US and Eurozone in 2014 to push the GBP/USD higher.
GLD: With continuing monetary policy uncertainty in the coming weeks, we have no reason not to have an allocation to Gold. Until the market confirms that 1) Gold is not a hedge to USD exposure 2) the outlook for forward-looking monetary policy is more definitive, we’ll continue to treat it in currency-like fashion:
USD +1.8% m/m
CRB -2.4% m/m
Gold -1.6% m/m
EUR/USD -1.9% m/m
For the record, Janet Yellen’s ideology gives us no reason to believe she’ll be pulling back the dots, but the market has clearly heightened the expectation for a further devaluation in the Euro from Mario Draghi in the near future.
The next important catalyst is the September 4th ECB meeting. We find no reason to take a position in front of the meeting without market confirmation, but we expect:
Bottom line: We are sticking with our year-to-date call on the long-side for a 7% winner.
HCA & HOLX: Our monthly OB/GYN survey will deploy next Tuesday as physicians get back to work just like the rest of the country. Our survey will ask OB/GYNs what trends they are seeing in patient visits, pregnancy, deliveries, and Pap testing. The survey results will be important for our outlook for both companies.
For HCA, the delivery trend should continue to accelerate this month, as we compare to the extreme weakness this time in 2013. In recent months the trend in pregnancy has been improving, which should lead to deliveries increasing in upcoming months.
For Hologic, the trend in Pap testing, which continues its expected decline, is key. We’re looking for an unsurprising result and continued declines in the low double digits or better.
For both HCA and HOLX, patient volume is the most important metric. As we’ve seen some retail companies struggle with customer traffic, housing trends weaken, and broader measures of economic activity slow in 3Q13, we’re interested in how consumers have changed medical consumption patterns, if at all.
OC: Industrials analyst Jay Van Sciver has no update on Owens Corning.
OZM: Please click here to access the research note financials analyst Jonathan Casteleyn's sent out on Och Ziff earlier this week.
RH: Williams-Sonoma's (WSM) print earlier this week which sent shares southbound is a factor we won’t ignore as it relates to Restoration Hardware. Even though the customer mix is very different, WSM is RH’s closest publicly-traded comp. The reality is that this is an environment where a poor quality retailer (M, KSS, TGT) could hit numbers with horrible quality earnings and the stock trades up, where great (and higher multiple) companies smoke estimates but say one word wrong and the stock is down 10-20% (KATE). That’s our greatest concern near-term.
But for many reasons, after taking in this data point we don’t think this WSM print can be extrapolated to RH.
We think RH will beat the quarter in two weeks, and more importantly will ultimately print $2.70 this year versus the Street at $2.30. We’re still at $11 in 2018, and think that this stock will be well in excess of $200. We still think RH is perhaps the most powerful story in retail. A bad quarter at WSM does not change that.
Some key points to consider…
1) The WSM concept that overlaps most with RH is West Elm. Though it is only 12% of sales, it comped 16.7%, and accelerated by 140bp on a 2-year basis.
2) WSM called out ‘seasonal’ product as being weak. That’s little concern for RH. Less than 10% of the RH assortment is considered ‘seasonal’. WSM is more tied to seasonal promotions in the first nine months of the year. That’s not an issue for RH.
3) Let’s not confuse ‘seasonal’ for ‘outdoor’. People familiar with the RH story know that so-called ‘outdoor space’ is critical to the economic model of its new design galleries. Yes, that’s where they sell outdoor furniture – but it’s not what WSM is referring to as ‘seasonal’. A $3,000 teak outdoor dining table isn’t exactly what WSM was referring to as being promotional. It simply does not compete much with RH’s core.
4) Weakness that WSM might be seeing in kitchen and tabletop is nothing compared to what it will see when RH launches its Kitchen business in the Spring of 2015.
5) To put these stories in context, RH square footage growth is accelerating from -5% to over 40% in just two years. WSM, on the flip side, is shrinking its US store base in the Pottery Barn and Williams-Sonoma concepts. And with the exception of West Elm, its only new sq. ft. is coming outside of the US. In total WSM has 1.5% unit growth and 3.7% sq. ft. growth for the year. There’s very little leverage left to the model from unit growth.
TLT: CEO Keith McCullough summed it up well on Friday morning:
Score: Long Bond (TLT) +17.2% vs. Russell 2000 0.0% YTD #timestamped (10yr yield = 2.34%)
*that’s pre-reinvesting dividends if you are long the 30yr UST Bond, the absolute return is even better
But you won’t hear that on Old Wall TV. You probably won’t read that in the paper either (I certainly haven’t – mainly because I don’t read newspapers!). Instead, you’ll hear something from the cheap seats like, “look at the Dow – its above its 50-day moving avg.”
The Dow, btw, is up less than 3% for 2014.
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We’ve been waiting for an entry point on European equities, with major indices broken TREND for nearly two months in our model. We were afforded the opportunity this week with ~ 50bp bounce in the EWQ as the CAC remains broken TREND and fundamentals support economic weakness ahead.
This week was another busy week in the Semiconductor space for Merger & Acquisition activity, with two deals both priced at a greater than 70% enterprise value premium to prior day's closing price...wow!!
Despite a slight rebound in equity fund flow trends last week, fixed income demand still outpaced stocks by a 2-1 ratio.
Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Q&A: Is The Stock Market Cheap?
In the Q&A portion of Tuesday's Morning Macro Call, Hedgeye CEO Keith McCullough answers a subscriber question about whether or not stocks are cheap.
Deep Dive Into Semi Sector
Hedgeye semiconductor analyst Craig Berger discusses major trends in semis including M&A activity, and gives us his take on three key stocks in the sector.
All Time SPY-Highs
Keith McCullough wrote in Wednesday's Morning Newsletter, "While the stock, bond, and commodity market bubbles have all had different narratives, one thing is not different – prices go up, then down, a lot."
ECB chief Mario Draghi is evidently a bigger fan of monetary cowbell than previously imagined.
U.S. Personal Savings Rate vs. Asset Price Inflation
As you can see in the Chart of The Day from Wednesday, the U.S. Personal Savings Rate (% of Disposable Income) has been falling for the past 3 years (as the stock market makes new highs).
Right or wrong, Burger King's merger with Canada-based Tim Hortons has been lumped into the growing public outcry over tax inversions. Does this spell trouble for their merger? Cast your vote and let us know your thoughts.
Nike or Under Armour?
Which brand would you rather be wearing? Cast your vote and leave a comment in our Poll of the Day.
Takeaway: 3Q growth estimates coming down....again. Don't say we didn't warn you.
This note was originally published August 29, 2014 at 13:56 in Macro
We’re seeing 3Q growth estimates come down today (again) alongside soft consumer spending data in July.
Real consumer spending declined the most in 6 months to start 3Q, decelerating on both a 1Y and 2Y basis with softness ubiquitous across Services, Durables and Nondurables. Notably, the savings rate ticked up to 5.7% - the highest level in 18 months.
In short, while the income-savings dynamics are shifting favorably for forward consumption, in the immediate/intermediate term (& inclusive of today’s negative growth revision), we think consensus estimates - which remain laughably linear – need to come in further.
Christian B. Drake