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Idea Flow

This note was originally published at 8am on August 21, 2014 for Hedgeye subscribers.

“I don’t really make decisions, I go with the flow.”

-Nicole Kidman

 

For most, Academy Award-winning actress Nicole Kidman requires no introduction; in this analyst’s humble opinion, her role as Dr. Chase Meridian in Batman Forever should forever be remembered as one of cinema’s all-time great damsels in distress.

 

Idea Flow - forever08

 

Lacking adequate contextualization for her quote above, we thought we’d spend some time this morning discussing “flow” in a more relevant context: investment ideas.

 

Be it the Surf Lodge in Montauk or the White Briar/Princeton combo in Avalon, NJ, I’ve done my fair share of “going with the flow” this summer. In fact, how I’ve approached social life in my late-twenties is not unlike how I’ve approached generating investment ideas – by remaining open-minded and gravitating towards those destinations that others are also likely to find most attractive.

 

That’s easier said than done, however, especially in the context of investing. How does any investor – fully equipped with his or her confirmation biases – remain open-minded enough to consistently and presciently spot those attractive destinations? While I’m sure asking 20 different analysts and portfolio managers will net about 19-20 different responses, my answer to that omnipotent question is simple: by doing the same thing each and every day.

 

Back to the Global Macro Grind...

 

My repeatable process commences each morning by writing down 186 unique, color-coded quantitative signals into my notebook. These signals can be anything from the MoM delta in India’s OIS spread, to the SPY’s Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) score per our Tactical Asset Class Rotation Model (TACRM), to the top-20 and bottom-20 VAMDMI scores across the universe of global macro ETFs. It culminates with absorbing all of the relevant economic data and policy rhetoric in my geographical coverage area and categorizing the deltas as sequential accelerations, decelerations, tightenings and/or easings.

 

While this process is far from perfect, it does tend to afford me a consistent opportunity to kick the tires on many developing investment themes and ideas. From there, we apply a healthy dose of “secret sauce” to determine whether or not a particular theme or idea is worthy of communicating to our subscribers.

 

For those of you who with the ability to invest capital internationally, we thought we’d create the table below to help synthesize and hold accountable our investment ideas across the Asia, LatAm and EM space, which is my primary coverage responsibility for the team. In addition to updating you on the active recommendations therein, we are also taking this opportunity to provide post mortem on our closed ideas over the TTM.

 

Active Long Ideas:

 

  • FXI: We continue to think the shaky foundation on which the Chinese economy currently resides will force officials to ease monetary and fiscal policy, at the margins. This should be supportive of industries tethered to China’s fixed asset investment bubble. (TREND duration)
  • EPI: If we could LBO a country, India would be our top choice. The country’s new “management team”, led by RBI Governor Dr. Rajan and Prime Minster Modi, is implementing the kinds of policies needed to structurally elevate India’s growth potential. (TREND and TAIL durations)
  • EEM, EMB, EMLC and CEW: When we were making the opposite call ~18M ago, there were not a lot of investors who agreed with us that US monetary policy was the driving factor behind capital flows, monetary conditions and asset prices in emerging markets. Now everyone gets it and the fundamentals (i.e. US #GrowthSlowing) and quantitative signals (see slide #4 of TACRM deck above) support remaining long of EM assets here. (TREND duration)
  • EIDO: Definitely long in the tooth as it relates to Jokowi hoopla, but the comps in our GIP (i.e. Growth/Inflation/Policy) model portend a favorable investing environment for at least the next 2-3M. (TREND duration)

 

Closed Long Ideas (TTM):

 

  • ARGT: Booking the loss here. Loose fundamental thesis on our part with even looser results.
  • EWT: Great trade. Semiconductor stocks (SOX Index) have done nothing but go straight up over the past two weeks; a failure to make a higher-high would auger negatively for the consensus storytelling about a sustained recovery in CapEx.
  • ENZL: Decent timing on booking the gain. It’s been lower-highs and lower-lows for New Zealand for ~3M now amid marginally dovish monetary policy.
  • EWZ, BZF and PBR: Great [near] bottom-tick back in FEB; booked the alpha too early amid fears of a growing probability of a Rousseff reelection. Silva’s entrance into the presidential race throws a wrench in the trade, but we think Brazil is setting up to be a nice short heading into 2015 if either of the female candidates emerges victorious.
  • FXY: Not much to see here; we merely traded around what we saw as likely consolidation amid a fiscal and monetary policy vacuum in Japan.
  • CQQQ and CHIQ: Great trade. Our long “New China”/short “Old China” theme would’ve returned +1,154bps on an equal-weighted basis.
  • EPI: Booked substantial alpha ahead of the election, fearing consternation. Rotated back into it a few weeks later and haven’t looked back since.
  • DXJ: Calling for Japanese equity reflation to occur concomitantly with aggressive yen debasement back in 4Q12 remains one of the hallmark calls of my analytical career.

 

Active Short Ideas:

 

  • FXA: While his latest guidance on rates isn’t necessarily supportive of our view, it’s clear that RBA Governor Glenn Stevens wants a lower Aussie dollar, citing Australia’s deteriorating labor market. Just wait until Aussie CPI decelerates for the next 1-2 quarters, which is something our GIP model currently identifies as the most probable outcome.
  • General commentary: You’ll note that there aren’t a ton of active short ideas here. That’s by design, as both the bottom-up fundamentals and top-down quantitative signals continue to support a long bias towards EM assets at the current juncture.

 

Closed Short Ideas (TTM):

 

  • KRW: Booking the loss here. We couldn’t have been more right about South Korea’s deteriorating GIP dynamics or the aggressive spate of fiscal and monetary easing we’ve seen in recent months. Conversely, inflows from international equity investors have buoyed the won – likely well above where the BoK and Finance Ministry want it to trade.
  • EWA: Booking the absolute return loss/relative return alpha here. The glass half-empty reads: we underestimated the resiliency of the Aussie housing market and the Aussie consumer. The glass-half full reads: Australia’s substantial underperformance relative to global equities highlights some of the structural headwinds we were calling for back in mid-2012.
  • DXJ: Good trade. As we predicted, Japan did not participate in the rally across global equities from the early-FEB lows through our late-MAY note to stop fading consensus on the “Abenomics Trade”.
  • CHIX and CHXX: See commentary above RE: CQQQ and CHIQ.
  • EPHE: A bad play by us that could’ve been much worse. The EPHE ETF has appreciated +15.5% since we turned broadly positive on EM assets earlier this year – inclusive of backing away from the short side of Filipino equities.
  • CLP: A decent play by us that could’ve been much better, had we stuck with it. The Chilean peso has declined an additional -5% versus the US dollar since we backed away from it on the short side.
  • EWZ: Outstanding call. Not much more to be said.
  • EEM, EMB, EMLC and CEW: This round of #EmergingOutflows was far less severe than the first (see below).
  • FXY: This is the centerpiece of the aforementioned Abenomics Trade (i.e. short yen/long Nikkei) and one of the best calls of my analytical career. We more-or-less top-ticked the all-time lower-high in the Japanese yen. It’s been mostly straight down ever since – and by a lot!
  • CHIX: Great thesis; terrible timing. Reminded us of the one thing many investors forget when they ponder Chinese tail risk: China is a state-run economy. At the drop of a dime, they can manufacture both liquidity and economic growth. While reflation policies are obviously unsustainable over the long term, they can be a lot more sustainable over the near-term than the P&L of anyone trying to short China at such favorable turns in policy.
  • EEM, EMB, EMLC and CEW: Another one of the hallmark calls of my analytical career. Turning bearish on EM assets when we did was greeted with a substantial amount of disbelief and contempt from investors – until after they went down in price… by a lot!

 

Obviously the nuggets above are intended to be brief, so please feel free to reach out if you’d like additional color on anything you see above.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.34-2.46% 

SPX 1955-1994 

RUT 1120-1167 

VIX 10.83-15.52 

USD 81.48-82.39 

Gold 1271-1321 

 

Keep your head on a swivel,

 

DD

 

Darius Dale

Associate: Macro Team

 

Idea Flow - Asia COD


September 4, 2014

September 4, 2014 - Slide1

 

BULLISH TRENDS

September 4, 2014 - Slide2

September 4, 2014 - Slide3

September 4, 2014 - Slide4

September 4, 2014 - Slide5

September 4, 2014 - Slide6

 

BEARISH TRENDS

September 4, 2014 - Slide7

September 4, 2014 - Slide8

September 4, 2014 - Slide9

September 4, 2014 - Slide10


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 4, 2014


As we look at today's setup for the S&P 500, the range is 19 points or 0.64% downside to 1988 and 0.31% upside to 2007.                                 

                                                                                              

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: 1.89 from 1.88
  • VIX closed at 12.36 1 day percent change of 0.90%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England seen maintaining bank rate of 0.5%
  • 7:30am: Challenger Job Cuts y/y, Aug. (prior 24.4%)
  • 7:30am: RBC Consumer Outlook Index, Sept. (prior 51.5)
  • 7:45am: ECB seen maintaining refinancing rate of 0.150%
  • 8:15am: ADP Employment Change, Aug., est. 220k (prior 218k)
  • 8:30am: ECB’s Draghi hold news conference in Frankfurt
  • 8:30am: Trade Balance, July, est. -$42.4b (prior -$41.5b)
  • 8:30am: Initial Jobless Claims, Aug. 30, est. 300k (prior 298k)
  • 8:30am: Nonfarm Productivity, 2Q final, est. 2.4% (prior 2.5%)
  • 9:45am: Markit US Services PMI, Aug. final, est. 58.5 (pr 58.5)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 31 (prior 37.3)
  • 10am: ISM Non-Mfg Composite, Aug., est. 57.7 (prior 58.7)
  • 10:30am: EIA Natgas storage change
  • 11am: DOE Energy Inventories
  • 11am: U.S. to announce plans for auction of 3M/6M bills, 3Y/10Y notes, 30Y bonds
  • 12:30pm: Fed’s Mester speaks in Pittsburgh
  • 7pm: Fed’s Powell speaks on Libor in New York
  • 8:15pm: Fed’s Fisher speaks in Dallas
  • 9pm: Fed’s Kocherlakota speaks in Helena, Mont.

 

GOVERNMENT:

    • Obama attends NATO summit, meeting of NATO-Ukraine Commission, attends dinner on security challenges at Cardiff castle
    • Senate, House out on final week of summer recess
    • 11am: Investors, activists hold news conf. on 1m comments filed in support of political spending petition to SEC “to expose the hidden influence of corporate money”
    • 11am: FCC Chairman Tom Wheeler delivers remarks on future of broadband
    • Noon: Treasury Sec. Jack Lew delivers remarks commemorating Treasury Dept’s 225th anniversary
    • U.S. ELECTION WRAP: Ballot Initiatives; Ads Pulled in Alaska

 

WHAT TO WATCH:

  • Tibco said to pitch sale to private equity amid strategic review
  • Manulife strengthens Canada hold with Standard Life purchase
  • Commerzbank said near $650m settlement on Iran violations
  • August U.S. comp. sales seen in line on school shopping
  • Home Depot working with Symantec to investigate suspected breach
  • Samsung unveils wraparound Note to counter large-screen iPhones
  • Draghi push for ECB easing intensifies as ABS plan in focus
  • Germany’s factory orders rebound in sign of returning growth
  • BOJ keeps record easing as Kuroda aims to sustain recovery
  • Computers for hire said to send stolen JPMorgan data to Russia
  • Export-Import plan said to leave companies without loan clarity
  • PVH rises after second-quarter profit tops analysts’ estimates
  • China said to limit foreign TV content on streaming websites

 

AM EARNS:

    • Ciena (CIEN) 7am, $0.29 - Preview
    • Hovnanian Enterprises (HOV) 9:15am, $0.09 - Preview
    • Joy Global (JOY) 6am, $0.84 - Preview
    • Mattress Firm (MFRM) 6am, $0.60
    • UTi Worldwide (UTIW) 8am, $0.01
    • VeriFone Systems (PAY) Bef-mkt, $0.35 - Preview

 

PM EARNS:

    • Ambarella (AMBA) 4:05pm, $0.28
    • Cooper Cos (COO) 4pm, $1.90
    • Finisar (FNSR) 4pm, $0.32
    • Infoblox (BLOX) 4:05pm, $0.01
    • Quiksilver (ZQK) 4:04pm, $0.03
    • Seachange Intl (SEAC) 4:02pm, $(0.21)
    • Verint Systems (VRNT) 4:05pm, $0.60
    • Zumiez (ZUMZ) 4pm, $0.23

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Nickel Rises to Seven-Week High on Philippine Ore-Export Concern
  • Iron Ore Slump No Bar to Supply as China Mines Shut: Commodities
  • WTI Crude Declines on Rising U.S. Fuel Inventories; Brent Falls
  • Philippine Ore Ban May Almost Triple Nickel Deficit: Bull Case
  • Gold Trades Little Changed Above 11-Week Low on Demand to Dollar
  • Corn Holds Near Lowest Since 2010 as U.S. Harvest Seen at Record
  • Vegetable Oil Prices Seen Recovering, Oil World’s Mielke Says
  • LME to Start Aluminum Premium Contract Early 2Q15: Chamberlain
  • U.K. Power Jumps as EDF Delays Start of Four Nuclear Reactors
  • Christie in Mexico Calls for U.S. to End Oil Export Restrictions
  • Saudi Arabia Selling Oil to U.S. Imperiled by Shale Boom: Energy
  • Rio’s Andrew Woodley to Take Over Oyu Tolgoi Mine Amid Disputes
  • Bean-Hoarding Epidemic Deepens Dollar Shortage: Argentina Credit
  • Philippine Ore Ban Wins Support While Implementation Far Off

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Cartoon of the Day: Russian Circus

Takeaway: Russian President Vladimir Putin tries to be the global ringmaster.

Cartoon of the Day: Russian Circus - Putin 09.03.2014


5 Reasons Why Pigs Will Fly Before Lebron James Accepts Payless' $500 Million Offer

Takeaway: Pigs will fly before Lebron leaves Nike for Payless.

Payless to Revive Pro Wings, Offer LeBron James $500 Million Contract

  • "Following Kevin Durant’s monstrous deal with Under Armour, Payless ShoeSource has offered LeBron James an unprecedented contract which would pay him $50 million per year for 10 years.
  • Payless spokesperson James Weilen admitted the company drew inspiration from Under Armour, who recently offered Kevin Durant a 10 year contract worth $285 million. 'The deal with Durant proved stars will sign with smaller companies if the situation is right,' Weilen stated. 'The prices of shoes have climbed to astronomical heights, and many of today’s stars have realized the need to offer affordable, quality shoes to their supporters and fans. We believe LeBron will make the correct decision for both himself, his fans, and his family.'”
  • "In addition to the large sum of money, the company has offered the Cleveland Cavaliers superstar a large portion of stock in the company. Payless, which has existed since 1956, brings in over $3 billion in sales annually."
  • "The company wants LeBron to revive their sports line Pro Wings, which reached its height in the early 90′s. Pro Wings were often styled similarly to expensive alternatives created by ReeBok and Nike."

5 Reasons Why Pigs Will Fly Before Lebron James Accepts Payless' $500 Million Offer - 445

 

Hedgeye's Brian McGough: 5 Reasons why Payless Has No Prayer of Getting Lebron 

 

1) You're not making money.

2) LeBron couldn't care less about lowering the price of his shoes. Nike has sold LBJ footwear for over $300 and he laughed all the way to the bank.

3) LBJ is not gonna wear Red Wings.

4) Do you really think he can be incentivized by stock in Payless?

5) Last we checked, he's in bed with a company called Nike that won't let him go. 


DRI: A Logical Fallacy

Darden’s board is so desperate that it wants us to believe the company is on a slippery slope, which is also known as a logical fallacy.

 

A slippery slope is a fallacy in which a person asserts that some event must inevitably follow another without any argument for the inevitability of the event in question.

 

This argument typically assumes the following form:

  • Event X might occur or has occurred
  • Therefore, Event Y will inevitably happen

 

In this case, Event X is Starboard getting all 12 board seats and Darden wants us to believe it will be a destabilizing event for the company.  This is simply not true.  In fact, Starboard getting control of the company might be exactly what the company needs at this point.  Look at the strength of the potential independent directors Starboard has proposed.

 

Yesterday’s announcement about the continued shakeup at Darden is another example of how poorly managed and desperate the company is.  As of yesterday, Starboard will be awarded four board seats and Darden will replace four other board members at its October shareholder meeting.  We’d note that we believe two of the five directors that are leaving the board (Leonard L. Berry, Victoria D. Harker, Charles A. Ledsinger, William M. Lewis and William S. Simon) would have been strong members of the new Darden board, but we can certainly understand why they are leaving.

 

The four remaining directors are:

  1. Michael W. Barnes – 53 years old; 2 years on the board
  2. Christopher J. Fraleigh – 50 years old; 6 years on the board
  3. Michael D. Rose – 72 years old; 20 years on the board
  4. Maria A. Sastre – 59 years old; 17 years on the board

 

Now shareholders are faced with backing the eight directors nominated by the company or throwing out the entire board and electing the 12 directors nominated by Starboard.  It’s come down to which group of independent directors shareholders want to oversee the company: Darden’s or Starboard’s?  We believe Starboard’s slate is better qualified.

 

The person directly responsible for the aforementioned logical fallacy is the ex-Lead Director and now ex-Chairman of the Board, Charles A. Ledsinger Jr., who also publically supported the Red Lobster spinoff.  According to Ledsinger, “We believe this slate avoids many of the risks and destabilization that would result from full board turnover and giving control to a single shareholder’s nominees, particularly given the positive momentum we are achieving in Darden’s operations.”  If all of Starboard’s slate is elected, why can’t the departing board members assure the transition goes smoothly?  After all, management is running the day-to-day operations, not the board!

 

Additionally, why should shareholders trust a board member who apparently knows he’s not going to be re-elected to the board and is effectively abandoning the company?  The WSJ even challenged the company’s and Ledsinger’s credibility with shareholders in a recent article titled “Fishy Financial Disclosure at Darden’s Red Lobster.”  Ledsinger would not be leaving the company if he didn’t fail to fulfill his fiduciary duties to shareholders.

 

Some sell-side analysts are even buying into Ledsinger’s logical fallacy.  According to the WSJ, a KeyBanc analyst is quoted as saying: “We expect shareholders will like this plan as it should provide the change agents that shareholders are seeking without giving Starboard complete control.”  The article also goes on to quote a Barclays analyst who called Darden’s board offering “more balanced” and a “reasonable concession, particularly along with the company’s improving results.”

 

Let’s be clear about a few things:

  1. Massive changes are needed at DRI.
  2. “Reasonable concessions” will not return the company to its former leadership role.
  3. Starboard must get a majority of the board to effect meaningful change.
  4. The Brand Renaissance plan at Olive Garden was developed under the watch of a soon to be ex-CEO and should be scraped because it is not the proper way forward for the brand.

 

On the surface, it may appear as though giving Starboard control of the company could be a destabilizing force, but an important piece of the puzzle is missing: Starboard’s plans to revitalize Darden and, more importantly, Olive Garden.  While we don’t know all the details of Starboard’s plan, we’re confident it’s a better way forward for the company.  The people that Starboard has retained to form its advisory group for the Darden investment are some of the very best players in the restaurant industry.

 

Let’s take a quick look at Starboard’s slate of directors.  You have a past Vice Chairman of Darden and President of Olive Garden, the former CFO of Brinker, the Founder of Friday’s and others with significant experience in the casual dining industry.

 

Looking at Darden’s slate, you have long-tenured Darden directors who voted for the sale of Red Lobster, someone who ran a third-tier regional brand (O’Charley’s) into the ground the same way Otis destroyed Darden and someone running a drive-thru burger joint (Checkers) who previously served in a mid-level operations role at Burger King.  Restaurant experience is important, but running a quick-service restaurant is much different than running a casual dining restaurant.

 

We disagree with the notion that giving control to Starboard would be a destabilizing force.  In fact, it’s exactly what the company needs at this point.  The next big event for Darden shareholders will be when Starboard reveals their plans to revitalize operations at the company.

 

In the meantime, try not to get sucked into Darden’s logical fallacy.

 

No Evidence of a Brand Renaissance at Olive Garden


DRI: A Logical Fallacy - 1

 

DRI: A Logical Fallacy - 2

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Early Look

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