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Uber Bullish!

“If we can get you a car in 5 minutes, we can get you anything in 5 minutes.”

-Travis Kalanick

 

Travis, how about a massage? Or some turkey day beers and, bonds?

 

Everyone who has created an anti-consensus company likes how the CEO of Uber, Travis Kalanick, rolls. If this morning’s headlines about T Rowe’s investment are right, it looks like Uber is going to price its final private round at a $35-40B valuation too!

 

That’s almost as bullish as I am in 2014… on the Long Bond (TLT). In less than 3 minutes, I can get you anything you need to explain the bull case. As growth and inflation expectations slow, globally, bond yields go lower. Ok, maybe that was less than 1 minute.

Uber Bullish! - Fightin  Words 08.29.2014

 

Back to the Global Macro Grind

 

In less than 1 minute, I can get you a chart (see Chart of The Day) showing the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind.

 

To most of our “rate of change” fans,  the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…

 

Yesterday’s Consensus Media headlines on US GDP were classic. Sadly, Bloomberg (who we pay a lot of money to for rate of change data), continued down the all-time-CNBC-ratings-lows-perma-SPY-bull-spin-path by writing:

 

BREAKING: “SP500 Little Changed Near Record On GDP, Consumer Confidence”

 

In other real-world news yesterday, “Consumer Confidence” actually tanked (falling to 88.7 in NOV from 94.5 in OCT), and the rate of change in year-over-year US GDP growth slowed (again) to 2.4% in Q3 versus 2.6% in Q2.

 

#PermaBull says pardon?

 

Yes. Evolve your process, just a little, and stop staring at a next to useless GDP quarter-over-quarter SAAR (sequentially/seasonally adjusted) report and look at it how you look at the companies you invest in (i.e. on a year-over-year basis).

 

This isn’t rocket science. I can get you these numbers (and a whole lot more of them) in less than 3 minutes!

 

Again, to review why US bond yields continue to crash (10yr yield -26% YTD to 2.25% this morning):

 

  1. After topping at +3.1% year-over-year growth in Q4 of 2013, Q314 US GDP growth slowed to +2.4% and…
  2. While the +1.9% year-over-year growth report for Q1 was much uglier than the +3-4% “expected”…
  3. You can look forward to a Q4 GDP growth print in 2014 that is closer to +1.9% than Q3’s 2.4% was

 

Put another way, we still have US GDP growth (year-over-year dammit!) tracking to +2.2% for 2014 – and, magically, that’s exactly where the 10yr US Treasury Yield is trading this morning.

 

#Tah-dah! Get growth’s rate of change right – and you get bond yields right.

 

My inbox is fun. I often get forwarded other people’s macro work and, most of the time, I can’t particularly understand what it means. Mostly, I think that’s because I only care about rates of change. And most of that work doesn’t.

 

It’s not personal. It’s simply my perspective. And it’s this anti-consensus process and perspective that had us as bearish on the Long Bond in 2013 (when the rate of change in US growth was #accelerating) as we are Uber Bullish now.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.22%-2.33%

SPX 2020-2074

RUT 1154-1190

VIX 12.16-15.62

Yen 117.20-119.16

WTI Oil 73.03-77.04

Copper 2.94-3.01

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Uber Bullish! - 11.26.14 EL Chart


The Fade Trade

This note was originally published at 8am on November 12, 2014 for Hedgeye subscribers.

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius —and a lot of courage —to move in the opposite direction."

-E. F. Schumacker

 

The most challenging thing to do as a stock market operator is to make a trade or investment against consensus.  If you are wrong for any period of time, you hear about it in spades.  Especially in this day and age when every  Jamoke under the sun has a soapbox and/or a twitter feed.  (Admittedly, though, we do applaud the democracy that Twitter has brought to the media world!)

 

The fact is, the harder consensus leans, the higher your probability of being right in fading that view.   Conventionally speaking, one way in which this is manifested is in value investing.  Now, to some, value investing is about deep dive company analysis, which we get, but on a higher level it is really about the implications of company valuation.  Simply put: when a company’s valuation is high, the prospects for its future are perceived as rosier than when the valuation is low.  (That is a simplification, but you get the point.)

 

The Fade Trade - fish

 

In effect, valuation is an opinion, so when the vast majority of stock market operators give a company a low valuation, their opinion of that company is low.  Ironically, or not, this consensus opinion is consistently wrong over the long run.  In fact, Dreman Value Management proved this in spades in a study of “cheap” stocks:

  • First, the study showed that for the period of January 1st, 1970 to December 31st, 2010, stocks in the lowest P/E quintile outperformed stocks in the highest P/E quintile by a margin of 15.4% to 8.3% in terms of annual return;
  • Second, in the 52 quarters when the S&P 500 declined between 1970 – 2010, low P/E stocks outperformed the market by an average of +2.4% versus an under performance of -1.9%  for high P/E stocks; and
  • Finally, from 1973 to 2010 the lowest quintile P/E stocks went up +1.2% on a negative surprise versus a return of -7.4% for the highest quintile P/E stocks on a negative surprise.

Now valuation is obviously only one factor, and not always the best factor for shorter term tactical trading, but over the long run it is a great gauge of the consensus opinions of companies.  And over the very long run, fading well loved “names” as based on high P/E multiples has provided enormous outperformance.

 

Back to the Global Macro Grind...

 

This morning it is not difficult to find the consensus view of U.S. equities.  The II Bulll Bear Spread (bulls minus bears) is +99% to the bullish since October 12th.  As well, Bears are tracking near all-time lows at 14.8%.  If you are a lemming, of course, this makes sense.  As markets go up you get more bullish and as markets go down you get more bearish.  Practically speaking, as we highlight in the Chart of the Day, chasing this rally is fraught with risk given how unconvincing the volume has been.

 

Complacency seems to once again be setting into the view of European equity markets as well.  We’ve seen a few notable chart followers suggest the turn is in for European equities and today they may have some fodder for the case with Eurozone Industrial production, which beat expectations.

 

Specifically, Eurozone September Industrial Production rose by +0.6% year-over-year versus the consensus view of -0.3%.  This compared to the August reading, which was a -0.5% decline (also an upward revision from -1.9%).   As well, the German economic minister was out this morning saying that the “German economy stabilized in Q3 after a Q2 contraction and now has slight upward momentum”.  Now, of course, if this is the best the Eurozone can do, fading any rally is certainly worth considering.

 

Over at the Bank of England today, the honest Canadian, BOE Governor Mark Carney, is at least being forthright  in saying, "it’s appropriate that markets now expect easier monetary conditions” based on the real-time growth and inflation data the BOE is seeing.  The challenge with easier monetary conditions for many global central banks is that while they are not out of bullets, the bullets are increasingly ineffective.

 

Yesterday we hosted a call for our Institutional Macro subscribers with Professor John Taylor from Stanford on this very topic.  Taylor is an outspoken advocate for rules based central banking (hence the eponymous Taylor Rule) and also highlighted in spades a point we’ve been harping on for some time, which is that the extreme QE monetary policy in the U.S. has became increasingly ineffective.   As Taylor noted on QE3:

 

“When started 10-year Treasury was 1.7%, then rose and has remained higher

  •  Effects of QE on yield spreads

– 1-year vs 10-year US Treasury spread

– 2003-2008 non-QE period……1.3%.

– 2009-2013 QE period……………2.4%”

 

It obviously begs the question of whether the biggest no-brainer “Fade Trade” has become to fade the increasingly impotent global central banking regime?  You likely already know our answer on that.

 

If you’d like to listen to the replay of our discussion with Professor Taylor, the replay and his presentation can be accessed below.

 

***Click here for Replay

***Click here for Presentation Materials

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.26-2.39%

SPX 1965-2049

RUT 1135-1182
VIX 12.33-16.51

Yen 111.99-117.87

WTIC Oil 75.61-78.97 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Fade Trade - cod


Cartoon of the Day: A Global Currency Gong Show

Cartoon of the Day: A Global Currency Gong Show - Dollar cartoon 11.25.2014

Sure... when you compare the Dollar to its peers in this global #CurrencyBurning gong show, the greenback looks pretty good.


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Best Idea Call Invite: Long YUM

We recently added YUM to our Best Ideas list as a long.

 

We are hosting a call next Tuesday, December 2, 2014 at 10am EST to run through our thesis and field questions. We will send out dial-in information and materials for the call next week.

 

Key Topics Will Include:

  1. Vulnerable to Activism – There have been a number of events over the past two years that suggest the timing is optimal for YUM to simplify its corporate structure.  While there several different avenues of value creation, one thing is clear: YUM’s new corporate structure, multiple brands and underleveraged balance sheet almost ensure that the company is vulnerable to change.  What remains to be seen, however, is if the new CEO will be proactive and effect change or be reactive to the changing marketplace.
  2. Spinoff China (and/or Pizza Hut) – For the better part of the past two years, management has been asked about a potential spinoff of the China business.  In our view, this move would be the first step in a series of potential transactions that would simplify the structure and improve the operating performance of the company.  We find it likely that a group of influential shareholders begin to push the board in this direction.  It also makes sense to consider spinning off the dilutive Pizza Hut (co-owned stores) business, which would trade at a substantially higher multiple as a standalone entity.
  3. Multiple Ways to Win – The new global reporting structure of the company allows for a clean split of YUM's business units into multiple asset-light business models.  We also believe there is an opportunity to increase leverage (to repurchase stock or pay a special dividend), cut excess SG&A, refranchise additional restaurants and command a premium valuation. 

 

Under the scenario we will layout in our upcoming presentation, we see approximately 30-50% upside to the stock from current levels.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Are You (Still) Waiting for Godot on Treasury Yields?

The verdict is in. The UST 10YR Yield is reading Japanese/Chinese/European PANIC (i.e. global growth slowing) as bearish ... as it should.

 

Are You (Still) Waiting for Godot on Treasury Yields? - g7

It’s 2.29% for the UST 10YR this morning… That’s a 2 week-low as the total return of the Long Bond in 2014 continues to be:

 

A) higher than most U.S. stock market averages and

B) without all the SEP-OCT volatility

 

If you’re new to Hedgeye research, we’ve been making this non-consensus bearish call on Treasury yields and global growth slowing throughout 2014 despite a ton of naysayers.

 

Are You (Still) Waiting for Godot on Treasury Yields? - pck

 

Case in point was the first week of September when hedge fund manager David Tepper grabbed headlines proclaiming to Bloomberg’s Stephanie Ruhle that we were witnessing “the beginning of the end of the bond market rally."

 

That hasn’t worked out so well.

 

After beginning 2014 at 3%, the yield on the ten-year fell to less than 2.4% during the summer, and is currently trading south of 2.30%. Hedgeye CEO Keith McCullough and our macro team thinks yields go lower from here and are continuing to advise our customers to stay long TLT.


Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS

Takeaway: Odell’s ‘The Catch’ made wearing Nike gloves, big UA snub – again. WMT CMO leaves 3 days before Black Friday. TIF, DSW, BWS SIGMAs.

ECONOMIC DATA

 

Takeaway: Not the type of strength we'd expect to see out of the ICSC through Nov. so far in light of the fact that disposable personal income was slightly negative during the same month last year.  Comps get easier throughout the month and December when DPI was -3.1% YY. We could talk all day about cheap gas and easy comps, but the fact is that we haven't seen any data points during this earnings season that would make us get more constructive on the US consumer.

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - 11 25 chart1

 

  

COMPANY HIGHLIGHTS

 

WMT - Wal-Mart’s Chief Merchandising Officer to Leave

(http://online.wsj.com/articles/wal-marts-chief-merchandising-officer-to-leave-sources-1416895125)

 

Takeaway: What does this tell you when Wal-Mart loses (or fires) it's Chief Merchant three days before Black Friday?

 

TIF - 3Q14 Earnings

Takeaway: The US business continues to look rock solid and Europe surprised to the upside as comp trends improved by 1100bps sequentially and 400bps on the two year. The rest of the Globe underperformed expectations though each region improved sequentially on a 2yr basis. Comps get easier on the top line over the next 3 months, but over a little longer duration we don't love the set up. Gross margins are at peak and consensus has that expanding by another 100bps by 2018. SG&A is at post recession lows. Not a name that we want to put on our short bench -- yet at least -- but one we'll avoid on the long side unless an unwarranted price drop gives us an opportunity for a TRADE.  

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - TIF SIGMA

 

NKE - Odell Beckham Catch Means $2.2 Million for Nike Gloves

(http://www.bloomberg.com/news/2014-11-24/odell-beckham-catch-means-2-2-million-for-nike-gloves.html)

 

  • "Nike Inc.’s official football Twitter account sent a photo of the 22-year-old New York Giants rookie with the tagline 'Drop Jaws. Catch Everything Else.'"

 

Takeaway: That catch will be played on Sports Center's 'best catch' top ten (potentially in the #1 slot) for decades to come. Nike definitely is using that as a big authenticator for it's football gloves -- especially when the picture shows that Brandon Carr, the Cowboy cornerback who fouled Odell and still couldn't make him drop the ball -- was wearing UnderArmour gloves.

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - 11 25 chart5

Source: NBC Sports

 

BWS - 3Q14 Earnings

Takeaway:  Perennially-underperforming BWS definitely beats out DSW yet again this quarter.  Its SIGMA looks better, as margins remain strong and inventory position is right-sizing. Absolute EPS growth was 20.9% on top of 3.7% revenue growth. DSW, however, de-levered 5.8% sales growth into a -3.5% earnings decline, and inventories still look problematic.

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - 11 25 chart3

 

DSW - 3Q14 Earnings

Retail Callouts (11/25): NKE, UA, WMT, ICSC, TIF, DSW, BWS - 11 25 chart4

 

  

OTHER NEWS

 

AMZN - Amazon to team up with Royal Mail to allow parcel collection

(http://www.telegraph.co.uk/technology/amazon/11250237/Amazon-to-team-up-with-Royal-Mail-to-allow-parcel-collection.html)

 

KSS, TGT - ‘Frozen’ Overtakes Barbie as Holiday Season’s Most Popular Toy

(http://www.bloomberg.com/news/2014-11-24/-frozen-overtakes-barbie-as-most-popular-holiday-gift-for-girls.html)

 

Chow Tai Fook’s sales hurt by China’s economic slowdown

(http://www.ft.com/intl/cms/s/0/fa70b416-748d-11e4-b30b-00144feabdc0.html?siteedition=intl#axzz3K57t8w5Q)

 

WMT - Wal-Mart names former American Airlines CEO to board

(http://www.chainstoreage.com/article/wal-mart-names-former-american-airlines-ceo-board)

 

  • "Wal-Mart Stores Inc. has appointed Tom Horton, former chairman and CEO of American Airlines, as a new member of the company’s board, effective Nov. 21."

 

ODP - Office Depot using new location-based marketing app Shazam In-Store

(http://www.chainstoreage.com/article/office-depot-using-new-location-based-marketing-app-shazam-store)


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