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VIDEO: Staying The Course

 

Hedgeye Director of Research Daryl Jones appeared on CNBC's Closing Bell this afternoon to discuss the US stock market. Daryl laid out his case for being long equities, noting that recent economic data like new home sales and Chicago PMI show real recovery in the economy. You can watch Daryl's full appearance in the clip posted above.


IS INDIAN TAIL RISK OFFICIALLY “ON”?

Takeaway: The weak FY14 budget proposal exposes the Indian economy and its financial markets to meaningful TAIL risks.

SUMMARY CONCLUSIONS:

 

  • For the third consecutive year, India’s beleaguered Finance Ministry disappoints investors with a complete joke of a budget outline, and, for the third consecutive year, Indian financial markets are threatening to selloff heading into [at least] the mid-summer months.
  • All told, India is a short here (equities and currency) until the market comes to grips with negative implications of this third-consecutive budget gaffe. As evidenced in the chart below which includes our refreshed quantitative risk management levels, India’s benchmark SENSEX is flirting with a TAIL line breakdown and is less than 2% away from that occurrence.
  • A confirmed breach of TAIL support will be explicit confirmation of our dour interpretation of India’s fiscal policy outlook, as well as our marginally hawkish monetary policy outlook. Specifically, the bear case for the Indian economy and its financial markets as outlined in our 1/8 note tiled: “PATIENCE SHOULD PAY DIVIDENDS IN INDIA” continues to be confirmed by the data.

 

***To get up to speed with our calls India’s previous two budget gaffes and the associated negative macroeconomic implications therein, please review the following two notes:

 

 

This past Monday, we put out a note titled, “MAKE IT OR BREAK IT TIME FOR INDIA” in which we laid the analytical groundwork for contextualizing today’s budget release. To the extent you’ve got exposure to Indian capital markets and are looking to get into the weeds a bit, please review that note as well. The key takeaway was as follows: “The FY13 budget stands to create either a meaningful buying opportunity or intense selling pressure across Indian financial markets.”

 

In the spirit of being frank, it is our view that Finance Minister Palaniappan Chidambaram missed big relative to expectations of meaningful fiscal retrenchment with his FY14 budget proposal. Moreover, today’s budget ‘miss’ is likely to apply “intense selling pressure across Indian financial markets” as we alluded to in Monday’s note.

 

To review the FY14 budget in greater detail, we posit the following highlights:

 

  • Total expenditures up +16.4% YoY to 16.7 trillion rupees;
  • Subsidy expenditures down -10.3% YoY to 2.3 trillion rupees;
  • Tax & fee receipts are projected to come in at +21.2% YoY to 10.6 trillion rupees;
  • Capital revenues are projected to grow +8.9% YoY to 6.1 trillion rupees (receipts from equity divestments projected up +132.6% YoY, LOL!); and
  • Real GDP growth in FY14 is projected to recover to +6.7% YoY from +5% in FY13-to-date (through 4Q), with the latter figure representing the slowest growth rate in 10 years and compares with a trailing 10Y average of +7.9%.

 

IS INDIAN TAIL RISK OFFICIALLY “ON”? - 1

 

IS INDIAN TAIL RISK OFFICIALLY “ON”? - 2

 

Simply put, relying on aggressive forecasts for tax & fee revenues growth predicated on an aggressive GDP growth assumption to help fuel a +16.4% ramp in public expenditures is a dangerous cocktail for India’s sovereign balance sheet. We expect official budget deficit projections to be revised wider in the coming quarters and for the associated markets to front-run this to some degree. Moreover, with India’s growth slowing to +4.5% YoY in 4Q12 (from +5.3% prior) as per this morning’s report, we do not consider it reasonable to anticipate such a demonstrable pickup in economic activity.

 

That said, however, India’s 2H13 growth outlook should brighten substantially, eventually giving Indian policymakers some degree of hope at least from a directional (i.e. not “absolute”) perspective. For now, however, the Indian economy is likely mired in Quad #3, as per our latest projections.

 

IS INDIAN TAIL RISK OFFICIALLY “ON”? - INDIA

 

IS INDIAN TAIL RISK OFFICIALLY “ON”? - 4

 

From an inflation perspective, the -10.3% decline in subsidies will translate directly to higher prices (i.e. inflation) for Indian consumers and businesses in the coming months. Specifically, energy subsidies are budgeted to decline -33%. While the +5.8% increase in food subsidies to 900 billion rupees is little more than a cunning attempt to buy votes ahead of the 2014 general elections, it should offset some of the inflationary pressures stemming from the de facto energy price hike.

 

On balance, any inflationary pressures stemming from the aforementioned decline in total subsidy expenditures should curb a fair amount of scope for the RBI to continue easing monetary policy at the margins, a view that is starting to be confirmed by India’s OIS market. That’s not good for foreign investors, who, until recently, were bidding up Indian capital markets on the heels of a [widely-perceived] outlook for aggressive monetary easing.

 

IS INDIAN TAIL RISK OFFICIALLY “ON”? - 5

 

Recall that on FEB 16, RBI Governor Duvvuri Subbarao said that he will “weigh the quality of the government’s fiscal adjustment,” and that “there is room for monetary easing, but that room is limited.” If Subbarao interprets this budget in line with our views, then that “room” just got a lot smaller.

 

A slowdown in “flows” similar to the ones we’ve seen in past cycles will, at the margins, exacerbate the funding of India’s twin deficits and further threaten the country’s already-shaky economic growth prospects. Moreover, a widening of either deficit relative to the economy will inch India closer to a full-blown balance of payments crisis. While that’s not necessarily a call we feel comfortable making at the current juncture, it remains a critical tail risk for India and a host of other EM economies.

 

IS INDIAN TAIL RISK OFFICIALLY “ON”? - 6

 

IS INDIAN TAIL RISK OFFICIALLY “ON”? - 7

 

For our updated thoughts on the rising potential for a broad swath of EM BOP crises over the long-term TAIL, please review our 2/20 note titled: “CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL”. FYI: the rupee (USD/INR cross) isn’t trading just above all-time lows for no fundamental reason whatsoever. It would be a real shame if the Singh administration ultimately failed to deliver on so many opportunities to get India’s fiscal house in order and the country’s rampant inflation under control…

 

IS INDIAN TAIL RISK OFFICIALLY “ON”? - 8

 

All told, India is a short here (equities and currency) until the market comes to grips with negative implications of this third-consecutive budget gaffe. As evidenced in the chart below which includes our refreshed quantitative risk management levels, India’s benchmark SENSEX is flirting with a TAIL line breakdown and is less than 2% away from that occurrence.

 

IS INDIAN TAIL RISK OFFICIALLY “ON”? - India SENSEX

 

A confirmed breach of TAIL support will be explicit confirmation of our dour interpretation of India’s fiscal policy outlook, as well as our marginally hawkish monetary policy outlook. Specifically, the bear case for the Indian economy and its financial markets as outlined in our 1/8 note tiled: “PATIENCE SHOULD PAY DIVIDENDS IN INDIA” continues to be confirmed by the data.

 

Darius Dale

Senior Analyst


MNST Q4: Where do we go from here?

This note was originally published February 27, 2013 at 21:26 in Consumer Staples

Coming into yesterday's earnings release, we had concerns that the company would disappoint versus consensus – those concerns were validated.  We like the category and we like the company, and we want to like the stock, but we still need to see 1H ’13 consensus come down a shade(2%).  Ultimately, we continue to believe that MNST’s superior growth profile isn’t being appropriately valued, in part because of ongoing regulatory overhang and in part because of weakness in the energy drink category in the U.S.



MNST reported Q4 results this evening, falling short of consensus on both the top and bottom line.  Revenue growth was 15.0% (versus 17.6% contemplated by consensus) while reported EPS of $0.39 was $0.02 light of consensus.

 

What we liked in the quarter (the good)

  • Sequential improvement in revenue growth versus a more difficult (420 bps) one year comp
  • Sequential improvement in EPS growth versus a more difficult (930 bps) one year comp
  • Sequential mitigation in gross margin declines against a marginally easier comp
  • Continued share gains by MNST in the energy drink category
  • Sustained strength in international sales (+29.6%)
  • Aggressive share repurchase by the company in the quarter

What we didn’t like in the quarter (the bad)

  • Continued year over year declines in the price per case (fourth consecutive quarter)
  • Weakness in the broader energy drink category

What else (the ugly)

  • Very difficult one and two year comps in 1H 2013
  • Pending adjustments coming out of this release, we remain below consensus for 1H ‘13

We continue to like the longer-term prospects for the energy drink category in general and MNST specifically, but this quarter’s results are precisely the reason we haven’t been as vocal as we have been in other situations – we prefer to see a clear path to EPS upside before we get excited about a name.


Early Look

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EAT STILL GOING STRONG AFTER THREE YEARS

Our bullish stance on Brinker remains firmly in place as the Investor & Analyst Conference was starkly different in tone to the unsettling Darden Analyst Meeting the couple of days prior.  Here are our summary thoughts on EAT:

 

  • Consistent with other industry players, Brinker said that Chili’s quarter-to-date same-restaurant sales are down 2-3%.  This implies industry sales are down more than -3.5% if the Gap-to-Knapp this quarter has remained constant versus that of 2QFY13. 
  • EAT guided FY 2013 to the low end of its prior guidance for EPS of $2.30-$2.45 but in line with consensus expectations.
  • The strong margin trends are insulating the company’s earnings from the current top line softness
  • Brinker indicated that it could meet its long standing $2.75-$2.80 EPS target in FY 2014, a year earlier than the initial goal that was set back in 2010.
  • Brinker's disclosed goal to double EPS again to $4 per share by FY 2017, driven by familiarity, variability and the continued benefit of new technology.
  • To reach that goal the company will drive 3-4% revenue growth and 10-15% EPS growth.
  • EPS will also benefit from the share repurchases are expected to exceed $1 billion over the next five years or 40% of the market cap of the company.
  • The company highlighted a diversified business model comprising of Chili’s and Maggiano’s, franchising royalty streams and the 2nd largest casual dining company in the world.
  • Management has earned the respect of Wall Street delivering 330bps of a targeted 400bps improvement in Chili's stet back in 2010.
  • EAT remains of the best run companies in the restaurant industry and a LONG on the Restaurant Position Monitor.

 

Conclusion

 

We believe that Brinker is well poised to deliver on its stated goals and remains one of our favorite names in the restaurant space.  The company is offering investors a differentiated focus on returns with a clear capital allocation strategy.  EAT is one of our favorite names in the restaurant space, even after this past three years.

 

 

EAT STILL GOING STRONG AFTER THREE YEARS - chili s pod 1

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


Initial Claims & GDP: Preparing for the Turn

Takeaway: Claims continue to look good alongside the peak tailwind in seasonal adjustments. GDP Revision light of estimates, supported by net exports

Investment Positioning Review:  With the Housing and Labor Market data remaining positive alongside a strong dollar and commodity deflation, we remain positive on equities (US/Asia, consumption focused) and negative on gold & commodities at current prices

 

4Q12 GDP – 1st Revision:  This morning’s first revision to GDP for 4Q12 registered a +20 bps improvement, shifting the growth reading from marginally negative (-0.1%) to marginally positive (+0.1%).   The Consumption, Investment and Government components were all revised down small while the downward revision to imports & upward revision to exports provided upside to the net export figure which drove most of the positive change in the aggregate revision. 

 

Residential and Nonresidential Fixed Investment growth were both revised higher while National Defense Consumption & Investment, the largest discrete drag in 4Q12, was largely unchanged at -22% Q/Q.  Inflation estimates were revised higher with the GDP Price Index revised +30bps to 0.9%. Overall, despite the miss to consensus at +0.5%, we'd characterize today's print as benign from an investment or catalyst perspective.   

 

Initial Claims & GDP:  Preparing for the Turn - GDP Revision Summary

 

Initial Claims:  Headline Initial Claims declined 18K taking the 4-week rolling average down 6.75K to 355K.  The direction trend in the 4-week rolling average of NSA claims remains positive but the rate of improvement declined sequentially, coming in at -2.6% y/y this week vs. -3.9% Y/Y in the prior week.  As a reminder, the seasonal distortion tailwind in the reported data  peaks in February before reversing course and serving as a headwind over the March – August period (more detail below).

 

 

Below is the weekly detailed analysis of the claims data from our head of Financials, Josh Steiner.  If you would like to setup a call with Josh or trial his research, please contact

 

 

One Away

Everything's coming up roses with the recent initial jobless claims data, this morning's better than expected print included. This should come as no surprise to anyone who's been following our work. The end of February marks of the peak of the seasonality distortion tailwind. Next week will mark the final tailwind datapoint. Then, beginning in March, we'll start to see the effect reverse and the market's perception around the momentum in the labor market will begin to weaken and ultimately will turn bearish as the reverse effect peaks in August. It's also worth noting that the sequester takes effect tomorrow, and may result in a notable short-term spike in jobless claims if Congress doesn't take action.

 

For reference, the XLF dropped 20% in 2010, 32% in 2011 and 15% in 2012 beginning in the late February through mid-April timeframe in each of those years. We think a major factor component of the decline is this labor market seasonality dynamic. It's important to note that the effect is getting steadily smaller over time due to weighting methodology in the government's seasonality models. It's also important to note that last year's decline was conspicuously smaller, and shorter in duration, than the previous two years. We think this owed to the ongoing strengthening housing recovery coupled with the lessening effect of the distortion. We think those two factors will again be present this year, likely making the pullback more comparable to that of 2012 than 2011.

 

For those with a longer-term view, looking past the next 3-6 months, they should take some comfort in the fact that the latest week's data, on a non-seasonally adjusted basis, showed continued improvement. The YoY change in NSA claims was better by 8.0%, the largest YoY improvement in the last 5 weeks. However, the rolling 4-week average of NSA claims improved YoY by 2.4%, which was modestly worse than the 3.2% improvement in the previous week. The bottom line is that the real labor market is still improving, just not by as much as the market thinks.

 

Prior to revision, initial jobless claims fell 18k to 344k from 362k WoW, as the prior week's number was revised up by 4k to 366k.

 

The headline (unrevised) number shows claims were lower by 22k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 355k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -2.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -3.9%

 

Initial Claims & GDP:  Preparing for the Turn - JS 1

 

Initial Claims & GDP:  Preparing for the Turn - JS 2

 

Initial Claims & GDP:  Preparing for the Turn - JS 3

 

Initial Claims & GDP:  Preparing for the Turn - JS 4

 

 

Joshua Steiner, CFA

 

 

Christian B. Drake

 


Jobless Claims: The Turning Point

We’re coming to a focal point in the initial jobless claims game. While today’s print of 344,000 was a positive (initial jobless claims fell 18,000 from 362,000 week-over-week), the seasonal adjustment factor will soon morph from a tailwind into a headwind. Beginning in March, we'll start to see the effect reverse and the market's perception around the momentum in the labor market will begin to weaken and ultimately will turn bearish as the reverse effect peaks in August. It's also worth noting that the sequester takes effect tomorrow, and may result in a notable short-term spike in jobless claims if Congress doesn't take action.

 

 

Jobless Claims: The Turning Point - 1

 

 

For reference, the XLF dropped 20% in 2010, 32% in 2011 and 15% in 2012 beginning in the late February through mid-April timeframe in each of those years. We think a major factor component of the decline is this labor market seasonality dynamic. We’ll continue to monitor the labor market to see how the recovery continues but we expect big changes to come now that March is right around the corner.

 

Jobless Claims: The Turning Point - 2

 

Jobless Claims: The Turning Point - 3


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 80.28%
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