Client Talking Points
The Shanghai Composite is down -2.1% for very good reason. The FDI (foreign direct investment) print for August was a nasty 0.6% versus +24% in July. Now that's just nasty. Look, the Chinese don’t like the Down Dollar move inasmuch as I don’t. Asian Emerging Market currencies that float freely? They do.
Without question, the most bullish economic development of the last week is removing the Syrian Oil tax. After snapping our immediate-term TRADE line of $114.97 support, Brent is in a good spot to remain under pressure now. Don’t forget that only two weeks ago, we saw the highest net long (futures/options contracts) position ever in crude. Yup... ever is a long time.
Just 24 hours ago, bond bulls were hoping, begging and wishing for Janet Yellen to bring back the easy money Fed love. Instead, all the 10-year yield registered was yet another higher-low within our Bullish Formation. Don't look now, but it is holding all lines of TRADE, TREND, TAIL support. Repeat: All lines. The immediate term risk range now is 2.80-2.98%. The Queen Mary has turned ladies and gentlemen. There's no going back now.
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Top Long Ideas
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
QUOTE OF THE DAY
"I'm so fast that last night I turned off the light switch in my hotel room and was in bed before the room was dark." -Muhammad Ali
STAT OF THE DAY
Got #RatesRising yet? 10-year Treasury yields climbed as high as 2.999% Sept. 5 from 1.93 percent on May 21, the day before Ben Bernanke said that the central bank could “take a step down in our pace of purchases” in the “next few meetings.”
“Overall, we expect earnings growth for Q1 2014 to be solid but challenged as we expect headwinds year-over-year from fuel surcharge timing lag, one less operating day and continued pressure on international yields and Freight volumes. Also the benefits of the voluntary buyout program will ramp out throughout the year with the majority of those expense reductions occurring after the first quarter. Our businesses are cyclical in nature and seasonal fluctuations will affect volumes, revenues and earnings.” - Alan Graf, June 19 2013 FY4Q 2013 Earning Call
Last quarter, FDX changed its guidance practices and ceased providing quarterly guidance. We think consensus is a bit off for FY 1Q as a result. We again expect the market to focus heavily on the Express division adjusted margin. This will be only the second quarter in which we should “see” some benefit from Express restructuring and we would settle for a repeat of the YoY improvement shown last quarter. We continue to think that FDX will prove a rewarding long-term position, as FedEx Express focuses on profitability instead of market share. FedEx is also well positioned to benefit from signs of stronger economic growth.
Consensus May Be Too Pessimistic: We hate to make quarterly earnings forecasts, but it is difficult for us to get to the $1.50 consensus estimate for this quarter. Quarterly earnings can be volatile, but we get an adjusted EPS number north of $1.58. Forecasting may be more difficult in the absence of management guidance details. Current consensus for the quarter is below the full year earnings growth rate guidance of 7%-13%.
Positives in Quarter: FedEx gets the benefit of a lower pension expense in FY1Q without the headwind of the new USPS contract. The Express margin should also benefit from additional capacity actions, continued refleeting, and the first tranche of headcount reductions. There is little reason to expect Express to give up the benefit of shifting low yielding volume out of high cost channels, which helped the FY4Q Express margin. There are offsets, like a higher depreciation expense and one less operating day, but they net out favorably in our scenarios.
Economic Data: The operating environment should have been less challenging for FDX than FY4Q 2013. For instance, IATA FTKs grew in June in July amid improving economic indicators, although certain key regions still showed weakness. ISM new orders, industrial production in Europe and Chinese export data also point to improving conditions. Excess airfreight capacity appears likely to have kept pricing restrained, but likely less so sequentially.
Fuel Prices: FedEx highlighted the risk of higher fuel prices, but YoY average jet fuel prices for the quarter look fairly flat. The lag in fuel surcharge may have a relatively modest negative impact. We do not expect FedEx Express to trot out a Syria excuse, since jet fuel costs should not be a particularly meaningful headwind.
Express Margin: FedEx reported a 6.6% adjusted operating margin for its express division in FY4Q 2013, up 50 basis points from the FY4Q 2012 result. Sequentially, that was a significant improvement - FY3Q 2013 margins were down 130 basis points from the year ago quarter. Continuing those gains into FY1Q, which may be be too pessimistic, gives an adjusted express margin of 3.6%. An adjusted express margin exceeding 4% would likely be viewed as exceptionally good progress.
Capital Spending & Capacity: Growth capital spending for FY14 is to be directed at FedEx Ground, with FedEx Express spending targeted at lowering costs (not expanding capacity). Returns for both of those initiatives should be higher than the capacity additions to Express in recent years. We will look for more details around the Ground spending initiatives.
Trade Down: While there is a lot of focus on the trade down, much of FedEx Expresses recent improvements have come from ‘self-help’: adjusting capacity to meet the quantity and yield of volume. UPS said in its more recent earnings release that trade down was still a headwind. However, we will focus on FedEx’s adjustment to the mix shift, which should keep margins moving back toward those of competitors. As long as margins expand on the Express division’s huge revenue base in coming quarters, we do not expect trade down to be the share price driver.
About $8.00: We still expect FDX to generate FY2014 adjusted earnings just shy of $8.00. After all, current consensus barely secures management’s deferred compensation packages according to the recent proxy. Fortunately, if we are wrong, FedEx senior managers will probably be able to get by without it.
the macro show
what smart investors watch to win
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
This note was originally published at 8am on September 03, 2013 for Hedgeye subscribers.
“Economists everywhere have counseled governments to attend to everything except what matters most: innovation.”
When Adam Smith published Wealth of Nations (1776), he wasn’t thinking about the American Revolution or Twitter – neither was he considering real-time streaming information in the palm of your hand as a birth child of Silicon Valley-style free market capitalism.
“The Wealth of Nations depicts macroeconomics as a “Great Machine” in which every cog of every gear, governed by an “invisible hand,” functions perfectly in its time and place, as smoothly and reliably as Newton’s gravity.” (Knowledge & Power, pg 28)
While that might make for an tidy intro to an economics textbook at Yale, it doesn’t reflect the new reality of what we’ve learned about economies and markets. They are non-linear. And they observe large doses of surprise (entropy), whose “opposites are predictability, order, equilibrium, and tyranny” (pg 34 - Gilder absolutely nails our framework in chapter 4, “Entropy Economics”).
Back to the Global Macro Grind…
After the lowest volume week of 2013, the SP500 holds @Hedgeye TREND support of 1631 and #RatesRising looks just about right again this morning. We like growth stocks. We don’t like Gold or Bonds. Welcome to September.
“The most important feature of an information economy, in which information is defined as surprise, is the overthrow, not the attainment of equilibrium.” (Knowledge & Power, pg 30)
I make lots of little mistakes, but the baseline process behind not making the really big macro mistakes adheres to the 2nd law of thermodynamics (entropy). Assuming Bernanke’s Fed (and the entire bond market) wouldn’t be surprised by bullish economic surprises has rendered itself the biggest macro mistake you could have made in 2013.
Why did the SP500 hold TREND support last week?
- JOBS: US weekly jobless claims hit another fresh YTD low last week (NSA rolling avg = -10.6% y/y, YTD lows)
- GROWTH: New Orders component of the August PMI accelerated to 57.2 versus 53.9 in July (fresh YTD highs)
- CONFIDENCE: US Consumer Confidence (U of Michigan Survey) bumped back up to 82.1 AUG vs 80.0 last
Well, maybe that’s not why the US stocks held support – maybe it’s just coincidence. But in our model all economic surprises matter to the extent that the market says they do. Against the heavy-hands of your big government gods, US interest #RatesRising (see 10yr US Treasury Yield in our Chart of The Day) has fit US #GrowthAccelerating data since last November like a glove.
And, sorry Krugman fans – this simple real-time market model fits almost perfectly in the birthing zones of John Maynard Keynes and Adam Smith themselves. Check out the direness of it all, born out of UK style austerity:
- United Kingdom Producer Manufacturing Index (PMI) for AUG = 57.2 versus 54.6 in JUL = new highs
- United Kingdom Construction PMI for AUG = 59.1! (versus 57 in JUL) = new highs
- UK 10yr Gilts (Bonds) up to 2.84% this morning = +44bps (+18%) month-over-month (+121bps y/y)
Maybe that’s why the UK stock market (FTSE) held its intermediate-term TREND support line of 6378 too. Maybe not – maybe it’s just coincidence. Regardless, if the world is really ending, I don’t mind living in it while it lasts.
I know it’s crazy, but I have to say I’m loving life and Innovation’s Hand altogether this morning. Information empowers the average person like me to take on the tyranny of perceived wisdoms. Summer time is over, and it’s time to create!
Are you crazy? I can be; especially when I get bullish. June got me more bullish on buying growth (and shorting slow-growth assets like Bonds, MLPs, etc.). So did August. This time I could be dead wrong. But if I’m wrong that will mean consensus finally has it right.
Here’s my real-time sanity (consensus sentiment) check:
- Front-month fear (US Equity VIX) just ripped a +23% w/w move to another lower-high (TREND = 18.98 resistance)
- II Bull/Bear Survey just registered the least amount of Bulls in 2013 at 38.1%
- II Bull/Bear Spread (Bulls minus Bears) just dropped from +3310 in the 1st wk of AUG to +1460
In other words, since the US stock market registered all-time highs (1st week of August 2013):
- VIX = +44%
- II Bull/Bear Spread = -56%
And that’s ahead of the seasonal headwind in the most important leading indicator for US employment #GrowthAccelerating (NSA rolling Jobless Claims) turning into a tailwind (until February 2014) in September.
And so are the entrepreneurs and innovators who have been getting it done while a bunch of politically-partisan and compensation-conflicted folks in this country have spent the last 9 months whining.
We’ve always been the backbone of American Free-Market Capitalism, and unless you let some government dude take that liberty away from us, we’ll be cranking out the change you all want to see in this country while Krugman is sleeping.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield = 2.71-2.93%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – September 17, 2013
As we look at today's setup for the S&P 500, the range is 34 points or 1.33% downside to 1675 and 0.67% upside to 1709.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.45 from 2.48
- VIX closed at 14.38 1 day percent change of 1.55%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am/8:55am: ICSC/Redbook weekly retail sales
- 8:30am: CPI M/m, Aug., est. 0.2% (prior 0.2%)
- 8:30am: CPI Ex Food/Energy M/m, Aug., est. 0.2% (pr 0.2%)
- 9am: Total Net TIC Flows, July (prior -$19b)
- 9am: Net Long-term TIC Flows, July, est. -$15b
- 10am: NAHB Housing Mkt Index, Sept., est. 59 (prior 59)
- 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
- 11:30am: U.S. to sell 4W bills, $22b 52W bills
- FOMC Meeting starts, preview
- CBO releases long-term federal budget outlook. 10am; CBO Director Douglas Elmendorf holds briefing, 11am
- SEC Advisory Committee on Small and Emerging Companies meets to discuss rules including recently adopted measure lifting ban on general solicitation in private offerings mandated by the Jumpstart Our Business Startups Act, 9:30am
WHAT TO WATCH:
- Yellen said to top Obama’s Fed list post-Summers’s withdrawal
- Kerry says U.S. isn’t wavering on goal of ending Assad’s rule
- GM said to be working on electric car to rival Tesla: WSJ
- Take-Two’s Grand Theft Auto V to generate $1b in one month
- Barrick Gold investors seek Munk ouster, board changes: WSJ
- Brazil may require Google, Facebook to store data locally
- Penthouse owner FriendFinder files for bankruptcy protection
- UBS’s $120m Lehman investor settlement wins approval
- U.K. sees $95m profit on first Lloyds stake sale
- Philips sets 2016 targets, EU1.5b share buyback
- Ex-JPMorgan employees indicted over $6.2b derivative loss
- German ZEW investor sentiment beats est., gains for 2nd month
- Navy Yard shooter said to be Buddhist with anger-fueled past
- Adobe Systems (ADBE) 4:02pm, $0.34
- FactSet Research Systems (FDS) 7am, $1.19
- Tower Group International (TWGP) 4:07pm, $(0.82)
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Crude Falls as Syria Risk Wanes While Libya Output Recovers
- Milk Rally Reversing as New Zealand Drought Recedes: Commodities
- Festival Demand for Gold in India Seen Hurt by Slowing Economy
- Copper Steady as Investors Weigh U.S. Tapering Against Growth
- Soybeans Resume Rally on the Chicago Board of Trade
- Cocoa Drops on Speculation Investors May Sell; Coffee Retreats
- Wheat Seen by Australia Extending Slump as Production Climbs
- Rebar Trades Near Six-Week Low as China Steel Output Gains
- Natural Gas Futures Gain a Fourth Day on Stockpile Speculation
- Smallest Ships Profitable Again as Logs Feed China Boom: Freight
- Cocoa Supplies Seen in Shortage by Macquarie in Next Two Seasons
- New Copper Mine Supply Expansion Eases Tightness: Bear Case
- Crude Supplies Drop to One-Year Low in Survey: Energy Markets
- Japan Warned U.S. of Blackouts in Appeal for LNG Supply: Energy
The Hedgeye Macro Team