Hedgeye CEO Keith McCullough gives his takes on events in the Ukraine and what it means for global stocks, markets and currencies.
Hedgeye CEO Keith McCullough gives his takes on events in the Ukraine and what it means for global stocks, markets and currencies.
Takeaway: Brace yourselves for more tipping points ahead.
I penned a note back before Christmas entitled “Putin’s Silver Spoon” which suggested that despite an uptick in protests and violence in the capital city of Kiev, to expect President Viktor Yanukovych to align squarely with the East (President Vladimir Putin’s Russia) and for his iron grip to eventually overcome growing rumblings in the street.
Well, in hindsight, Yanukovych’s grip was certainly far from “iron.” Surprisingly so.
It’s obvious that Yanukovych didn’t have the full backing of his country’s oligarchs. And yet, despite Russia’s heavy hand in his pocket (Putin agreed to loan the Ukraine $15 Billion on December 17, 2013) the speed at which he exited is a puzzling tipping point. Some people are attributing it to social media. Whatever the reason, Yanukovych tried to play the heavy hand to overpower the opposition in the streets.
Yanukovych lost. He now sits in a Russian outpost.
The main actor on stage is of course Vladimir Putin who is fresh off the Sochi Olympics and has parked his troops on the Ukrainian border to reassert his power and influence at home. Putin is also attempting to up the ante in his chess match with the West and see if he can get the pro-Russian South and East of the country to leave Ukraine.
That original Russian $15B loan now appears frozen. But how big of a check will the West write to get Ukraine out the headlines and prevent a split up of the country? Remember, the EU is not interested in folding Ukraine in as a member state, nor is it interested in the country beyond its capacity as a transit hub of energy from Russia.
Here’s what is so troubling about this particular tipping point in the Ukraine: unlike the Orange Revolution of 2004, there’s essentially no leadership strength whatsoever in the opposition. Sure, there’s former PM and (recently released-from-prison) Julia Tymoshenko. And while she may be vying for a seat to replace Yanukovych, she has proven herself to be a crook, personally profiting from gas deal arrangements with Russia back in 2009.
What about Vitaly Klitschko? Well as far as the physically opposing Klitschko is concerned (he’s the 6’7” former WBC heavyweight boxing champion who heads the Udar “Punch” party), he may have size, but he lacks key experience and credibility to lead his country right now. For the time being, the country has an interim President in Oleksandr Turchynov at the bare minimum before scheduled elections on May 25th.
So, where does this power vacuum leave us? At another tipping point.
For starters, the country is bankrupt. Its 50/50 divide on support of the West vs. the East will vex any candidate, even a good one. We would postulate that money talks (once again), and to expect the next 72 hours to be critical in the how the West (European Union, IMF, and possibly United States) vs. the East (Russia) mark their stakes in Ukrainian soil.
In the near term, we’d expect any announcement about a loan package (more likely from West) and any clear signal on the political state to greatly impact its financial markets in tandem with the idea – at least from a global perspective – that the country is “secure.” For reference, most financial metrics have come off their highs following Yanukovych’s exit. That said, they remain elevated.
Where does all this leave us? We believe the Ukrainian mess is a long way off from resolution—never mind the implementation of a stable, capable and functioning government.
This global chess match is bound to get interesting. Brace yourselves for more tipping points ahead.
Associate - Macro
Takeaway: Current Investing Ideas: BNO, CCL, DRI, FXB, HCA, LVS, RH, TROW, and ZQK
Please see below Hedgeye analysts' latest updates on our nine current high-conviction stock ideas and CEO Keith McCullough's updated levels for each stock.
At the conclusion of this week's edition of Investing Ideas, we feature three recent research notes we believe offer valuable insight into the market and economy.
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.
BNO – Got #InflationAccelerating yet? Hedgeye's macro team added Brent Oil to Investing Ideas this past Thursday after the convergence of several key macro price signals. We will be sending out a full report outlining our case.
CCL – Micky Arison’s (Chairman of Carnival) 5 million share sale put a damper on an otherwise good week for Carnival. While Arison's sale was due to estate planning, we do wish Arison would focus more on his Miami Heat games and less upon his stock ownership. At any rate, the sell-side is (finally!) warming up to CCL. Several reports this past week indicate that.
As we have mentioned before here, Mother Nature has been a fortuitous bullish catalyst for CCL shareholders. This winter's unrelenting bitter cold and above average snow fall has certainly been boosting bookings in addition to a very promotional environment. While discounting is now a given, we still haven’t seen pricing fall off a cliff for CCL during Wave season. We’ll have another important pricing update next week. Stay tuned.
DRI – We woke up to news Monday morning that Starboard Value is seeking to put Darden management’s controversial plan to spin-off Red Lobster to a shareholder vote. We continue to express our concerns with management’s plan because, to us, it makes very little strategic sense and fails to get to the heart of the problem. Darden remains a company saddled with an inefficient operating structure.
On the day Darden’s strategic plan was announced, the stock closed down 4% to $51. While we can't speak for others, this didn’t exactly strike us as a big vote of confidence in management’s plan to create value. Just two days later, activist Starboard Value announced a 5.5% position in the company. Voila! The stock rallied 6%. For the most part, the stock has traded sideways since then, until rallying 3% on the news that Starboard retained former Olive Garden president Brad Blum to serve as an advisor in its battle against Darden.
The takeaway from stock action (and, in our opinion, sentiment since 12/20/13) is that DRI rallies when there is movement toward replacing management and sells off when management publicly digs their heels in.
We continue to prefer Darden on the long side with the expectation that the activists will be successful in forcing significant change.
Finally, our old friends over at CNBC are apparently hot on the DRI case now. In case you missed it, their website featured an interesting front-page critique on Friday "Darden Uses Lobster Claws on Critical Analysts" exposing DRI's woeful management style and and highlighted the work of Hedgeye Restaurants analyst Howard Penney.
FXB – We remain bullish on the British Pound versus the US Dollar (etf FXB) over the intermediate term TREND duration. On Friday (2/28) we sold FXB to take a gain on a currency we’ve liked for the past 6 months as it signaled immediate-term TRADE overbought.
Data out of the UK remains strong.
This week preliminary Q4 GDP was released at +2.7%, or 10 basis points below the initial reading, with private consumption and government spending slightly underperforming expectations. House Price data according to Nationwide remain elevated, registering +9.4% in February year-over-year.
Over the longer term, we continue to expect prudent management of interest rate policy from the Bank of England. GDP estimates continue to move higher (according to the BOE +3.4% in 2014 vs a previous estimate of +2.8%) and we expect a strong Pound to accelerate alongside a rosier growth profile and a more confidence consumer.
LVS – It was a very good week for Las Vegas Sands shareholders with the stock gaining 5.4%.
Early next week, Macau’s February gross gaming revenues will be released. This is a big deal for the company. We think it will show spectacular growth (+30%) with Las Vegas Sands as the prime beneficiary and market share leader. The question now becomes whether modest growth can be sustained as we roll into more tougher comparisons in March and April? While the bar is set high, LVS has surpassed that recently.
HCA – It was a good week for HCA Holdings with shares finishing the week up 2.4%, doubling the gain for the S&P 500. I
Universal Health Services (UHS), a great hospital company, reported their Q413 results last night which largely disappointed sell-side expectations. Despite weak volumes and pricing, the stock price has held up rather well on Friday.
With all of the Hospital operators having reported similar results (lower volume and better pricing) UHS largely followed the script. Sometimes the reaction to a number like UHS reported can be far more negative than what happened today when expectations and the multiple are stretched.
Right now it looks like expectations and the multiple for HCA Holdings (while having had a huge move) remain essentially subdued relative to its Healthcare peers and the S&P 500. HCA's growth will outpace the broader market yet the multiple remains well below the market multiple. In fact, HCA's relative multiple has grown even cheaper in the last several months.
This isn't to say we don't see any risks to HCA's stock price from here. We do. And there is plenty to be concerned about fundamentally. Next week we'll get the February survey data on physician visits. January was exceptionally weak. A weak February and we'll be looking to sell some longs including HCA. We are watching these developments very closely.
RH – Pier 1 Imports took down its 4Q EPS guidance by 15% Friday morning. The company cited weather as the main culprit in this revision, but noted that e-commerce traffic and sales were up. The biggest problem it faces is that e-commerce is only 5% of total sales. Stack that up against Restoration Hardware at 47% and it puts considerable risk on the business when store traffic is under pressure due to factors like weather.
Numbers like this strengthen our conviction that RH will be able to weather the 4Q storm (pun intended) because of the strength in its direct channel. And, it seems like the market is beginning to see it our way, with RH shares up ~15% over the past 2 weeks.
TROW – The proprietary fund flow survey Strategic Insight (SI) is flagging that T Rowe Price in January had the strongest net inflow in over 3 months. This is consistent with our short term thesis that the company should now have a positive inflection point after burning off historic institutional outflows in the second and third quarter of last year. We report on industry related mutual fund trends weekly from the Investment Company Institute (ICI) which outline broad mutual fund trends for the sector but the SI survey quantifies fund flow trends at the manager specific level.
According to SI, TROW gathered $3.3. billion in net new inflow in January alone, substantially higher than the results it produced in October, November, and December which averaged over $1.0 billion in inflow per month. We are looking for a positive result for the company’s first quarter in both earnings and net inflows which will assist the stock in the short term.
ZQK – Quiksilver reports 1Q14 earnings on Thursday, March 6th after the close. One of its biggest competitors Billabong (BBG-AU) reported earnings last week and one thing was abundantly clear. ZQK is light years ahead of BBG in terms of organizational health.
Quiksilver started the restructuring process over a year ago. While that process isn’t complete, good progress has been made and we continue to believe that we will see the fruits of the company’s new strategy starting in FY15. Billabong is only starting that process and from a much worse starting point. On the call, management outlined the progress it has made on its profit improvement plan since the infusion of capital and management change implemented in September. The front office is just starting to take shape with a number of key hires still left to be made. Significant spending cuts are also needed in order to free up capital to fuel growth in the company’s core – consisting of RVCA, Element, and the company’s flagship Billabong.
We expect ZQK to leverage its brand awareness from a position of strength as it begins to re-invest in its brands to grow the top line and steal market-share from the companies like Billabong.
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We’ve been vocal in our expectation for a deceleration in the slope of domestic growth over the last couple months and while Friday's downward revision to 4Q13 wasn’t particularly surprising, it does offer some positive confirmation to that view.
We have been mulling over what to do with WTW shares, wondering if there was anymore downside left in the short after selling off almost 30% since its earnings release. WTW price suggests limited room for error moving forward; in other words, we can stay short until the street finally gets the secular decline theme.
We are increasingly of the view that the People's Bank of China might be setting up to ease monetary policy over the intermediate term.
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Takeaway: Our price signals were spot on regarding #GrowthSlowing.
So...U.S. Q4 GDP was revised sharply down this morning from 3.2% to 2.4% in the latest sign of slowing economic growth. For the record, we were virtually alone in our #GrowthSlowing macro call made back a couple weeks before Christmas.
Here's an excerpt:
Today, we received a great follow-up question from a very sharp client in the fixed income space: “What is the data you’re looking at to support your view that GDP growth will slow down?”
As with any inflection-based call on growth and/or inflation, we start with the market’s risk management signals – which tend to lead the reported data. The USD is decidedly broken from a quantitative perspective and long-term interest rates are making lower-highs vs. the YTD peak in both growth data and #GrowthAccelerating expectations.
In short, this is how we have managed and communicated our non-consensus macro call over the last 3 months:
Now here we are.
Hedgeye CEO Keith McCullough goes no holds-barred on the Fed's serial dollar debauchery and how this "Burning Buck" policy is creating major risks and opportunities.
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