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VIDEO: Staying Bullish

 

Hedgeye CEO Keith McCullough appeared on CNBC this afternoon to discuss his bullish thesis on the stock market. It comes down to three simple themes: a strong dollar to help drive consumption, low volatility and a rotation out of gold and Treasuries and into equities.


Key Themes From CAGNY

Last week, Hedgeye Consumer Staples Sector Head Rob Campagnino attended the 2013 Consumer Analyst Group of NY (CAGNY) Conference. His Twitter feed (@HedgeyeStaples) was quite active with takeaways from the conference; here's his review:

 

Each year, 25-30 of the largest and most recognizable names in consumer staples – from cigarettes to eyeliner and from beer to hand sanitizer, attempts to lay out its objectives for the coming year for over 600 analysts and portfolio managers.  We have been a regular attendee for many years now and we wanted to offer our views coming out of CAGNY 2013.

To be frank, we would characterize CAGNY 2013 as largely uneventful and in some cases downright boring – no preannouncements or big strategic announcements (HNZ supplied that the week before).  We didn’t hear much that changed our thinking relative to how we came into the year or how we left Q1 earnings season.  Briefly, the key themes running through the presentations were:

  1. Innovation – it’s the cost of doing business in the “new normal”.  Consumers will pay a premium for value, perceived or real.  Given the prominence of this topic, we wonder if companies are finding it necessary to spend more to stay in place.
  2. Advertising – companies have to communicate the benefits and differences of product offerings, old and new, to both consumers and retail partners
  3. Emerging markets – characterized as a “once in a generation” opportunity, the potential represented by an expanding global middle class was consistently referenced
  4. Productivity – doing more with less is necessary in a world where pricing is elusive, consumers are fickle, private label is growing and commodities are a wild card
  5. M&A – not a presentation topic, but certainly a topic of cocktail conversation – who’s next?  We don’t see the Heinz deal as a catalyst for wide spread M&A across staples.  However, some names make sense as potential targets – HSH, for one.  “Bolt-on” or smaller “tuck in” acquisitions were a consistent theme, but nothing transformative seemed on the horizon.
  6. Cash – dividends are share repurchases seem to be the order of the day for the cash generative consumer staples sector.
  7. Economic climate – The consensus seemed to indicate that the consumers’ health was improved versus the same time last year, but was still “fragile”.  We saw more optimism for 2H ’13 and ‘ for ’14.

Where did our thinking change?

We won’t rehash the presentations, but as a quick summary:

CPB – less likely to want to short as core potentially stabilizes

KRFT – one of our favorite presentations, would be a buyer lower – upside to low $50s

HSH – again, one of our favorite presentations, more constructive

BG – doing more work here on the long side after an awful quarter, good long-term theme

PG – less impressed with potential progress on top-line, but cost-savings likely preserve EPS

CLX – can’t abide by the multiple, but with good visibility on margins and innovation, tougher short

MDLZ – feels earlier, but risk/reward profile strikes us as very favorable over longer duration

NWL – we liked the story going in, presentation reinforced our belief that the stock can continue to rerate.

KO – interesting commentary on incremental bottler consolidation.  Does Iberia represent a new potential acquirer for German assets?

 

Bottom line, sometimes a boring consistency is a good thing, and the consistent nature of the staples sector was what was on display at CAGNY.

 


Consumption Junction

Housing, labor markets, commodity deflation and a strengthening US dollar have kept us bullish on consumption over the last month. We expect consumption, which is a driver of growth in the economy, to continue to improve going forward as home prices rise while existing inventory falls and commodity prices fall lower.

 

Last week’s housing data was decidedly positive as existing home inventory declined 24.7% on a year-over-year basis to 1.74 million units and sits around 50% below the 2007 peak. The National Association of Realtors (NAR) reported that median home prices rose 12.2% year-over-year in January, marking the 13th consecutive month of acceleration. We’re of the belief that rising prices will continue to drive demand which should drive further pricing gains.

 

 

Consumption Junction - homes1

 

Consumption Junction - homes2

 

 

As for the US dollar, a stronger US dollar drives down commodity prices which drives consumption as more consumers head out to the grocery store and gas station and see a material change in price when shopping. The only remaining economic headwind that we still face is oil prices, which have shifted downward over the last two days but are up again this morning. When gas prices drop significantly and oil prices come down, we will really see consumption take off in a meaningful way.


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STRONG REBOUND WEEK IN MACAU

Macau seems to have bounced back last week following a disappointing 1st half of the month.  This past week posted average daily table revenues of $1.107 billion, up 43% over last year.  Our guess is that hold played at least some role but we have no confirmation of that.  We are upping our full month projection to HK$25.0-25.5 billion, up 6-8% YoY.  While that growth rate is probably disappointing given the favorable calendar shift of Chinese New Year (CNY) into February this year, on the margin, it’s better than the flattish growth expected just one week ago.

 

STRONG REBOUND WEEK IN MACAU - m1

 

Market shares have normalized somewhat with Wynn falling back to Earth and MPEL rebounding from low hold.  With limited rooms MPEL also seemed to have spread some of its VIP and Direct Play business beyond just the CNY period.  Consistent with a trend we foresee for the entire year, Sands China’s share continues to climb.

 

STRONG REBOUND WEEK IN MACAU - m22


Best Ideas Product Launch Part 2

Best Ideas Product Launch Part 2 - BestIdeas part2

 

Hedgeye Risk Management invites you to join us Wednesday, February 27th at 1:00pm EST for our Best Ideas Launch Part 2. This call will be a follow-up to the introductory call of our dynamic Best Ideas Product which was held on February 11th. The new dynamic Best Ideas Product will track, update and notify clients of important changes and additions to the Hedgeye Best Ideas list.

  

On the call we will highlight our highest conviction calls across Macro, Financials, Industrials and Energy, offering at least two high conviction and differentiated investment ideas from each vertical over an intermediate term duration.  

 

     

SPEAKERS WILL INCLUDE:

  • Macro- Daryl Jones
    • Sector Head at Brightpoint Capital. Founded the public investment effort at Onex Corporation, a leading private equity firm. Yale BA and Columbia MBA.
  • Financials- Josh Steiner
    • Part of the #1 ranked Institutional Investor and Greenwich Survey team at Lehman Brothers. Buy-side analyst at Amaranth Group & Millennium Partners.
  • Industrials- Jay Van Sciver
    • Co-Founder/Partner at Bishop & Carroll Capital Partners. 12 years as a financial analyst with buy-side coverage of the Industrials Sector. 
  • Energy- Kevin Kaiser
    • Covers the oil & gas sector with a focus on fundamental research on E&Ps, oilfield services, MLPs and refiners.  Princeton hockey alumnus.


CONTACT

Materials and dial-in information will be distributed the morning of the call. If you have any further questions please email .  


MONDAY MORNING RISK MONITOR: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION

Takeaway: Europe shows very modest deterioration, while the U.S. holds up well. Sequestration's imminent threat seems not to be worrying US investors.

Key Takeaways:

 

* 2-10 Spread – Last week the 2-10 spread widened to 176 bps, 4 bps wider than a week ago. 

 

* Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 13 bps. 

 

* TED Spread Monitor – The TED spread fell 2.7 basis points last week, ending the week at 16.41 bps this week versus last week’s print of 19.11 bps.

 

* ECB Liquidity Recourse to the Deposit Facility – Deposits at the ECB liquidity facility rose 30 billion euros WoW. 

 

* Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 92 bps versus 90 bps the prior week. 

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Positive / 8 of 12 improved / 3 out of 12 worsened / 2 of 12 unchanged

 • Long-term(WoW): Positive / 9 of 12 improved / 1 out of 12 worsened / 3 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION - 15

 

1. American Financial CDS -  US financials were, on average, tighter by 2 bps week-over-week. Morgan Stanley posted an 8 bps improvement (to 136 bps) while BAC worsened by 3 bps to 121 bps. Swaps tightened for 20 out of 27 domestic financial institutions.

 

Tightened the most WoW: ACE, MET, MS

Widened the most WoW: AON, MMC, BAC

Tightened the most WoW: RDN, HIG, MET

Widened the most MoM: MMC, AON, SLM

 

MONDAY MORNING RISK MONITOR: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION - 1

 

2. European Financial CDS - The median European financial widened 6 bps WoW, while the worst EU financial was Credit Agricole at +11 bps (to 167 bps). Greek banks were the best performing group on the week.

 

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3. Asian Financial CDS - Asian banks were mostly tighter WoW with China's Export-Import Bank the worst performer at +6 bps.

 

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4. European Sovereign CDS – Sovereign swaps, with the exception of a modest widening in Italy, were largely unchanged last week. 

 

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5. High Yield (YTM) Monitor – High Yield rates were up nominally last week (+0.5 bps), ending the week at 6.08%.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.2 points last week, ending at 1771.3.

 

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7. TED Spread Monitor – The TED spread fell 2.7 basis points last week, ending the week at 16.41 bps this week versus last week’s print of 19.11 bps.

 

MONDAY MORNING RISK MONITOR: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -3.7 points, ending the week at 7.47 versus 11.2 the prior week.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 13 bps. 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. 

 

MONDAY MORNING RISK MONITOR: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits at the ECB liquidity facility rose 30 billion euros WoW. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 92 bps versus 90 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION - 11

 

12. Chinese Steel – Steel prices in China rose 2.0% last week, or 76 yuan/ton, to 3866 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: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 176 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.3% upside to TRADE resistance and 1.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SURPRISINGLY QUIET AHEAD OF SEQUESTRATION - 14

 

Joshua Steiner, CFA


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