Please see our detailed note:
Takeaway: Higher EPS guidance from lower fuel is very much expected. However, all eyes on yield guidance which could disappoint.
Earlier today Hedgeye’s Macro Team hosted a 1 hour conference call with Russia authority Anders Åslund to continue our special “Behind the Curtain” series to discuss Russia’s Crash.
Anders provides a number of great insights on this call – we highly encourage you to check out the Audio Replay CLICK HERE; we also offer up his key take-aways below.
Key Summary Points
- Russia’s GDP to plunge -10% this year
- 3 reasons for decline:
- bad economic policy
- falling oil prices
- Concentration of wealth hurting economy: The total number of enterprises has actually decreased since 2009. Large state-owned companies are eating up smaller companies creating these large national conglomerates
- Financial sanctions are 1) More stringent than many originally expected 2) Completely squeezing Russia’s access to capital markets (‘Liquidity Crisis’). Even those international banks allowed to do business are deciding not to because of compliance and credit-risk reasons, 3) Will stick (next key decision meeting to take place ahead of July 31, 2015, or one year expiration date)
- Inflation is a huge risk (currently at 11.4% Y/Y), squeezing consumers, particularly with rising food prices, and influencing the Russian Central Bank to raise rates (currently at 17%). He says food costs increased about 70% last year, and prices are now increasing about 2x as fast as reported inflation. He expects CPI will approach 15% by end of Q1 2015
- Net Russian reserves have fallen by $125 Bn in 2014 and Anders expects another $100 Bn loss in 2015 (with Q3 2015 the time when things get much worse)
- Investment will fall 30% and this will translate to 6-7% of GDP lost
- Consumption will fall at least 6% which would mean a decline in GDP of around 8%
- On Policy Failures: Russian government makes decisions between Putin and state enterprise managers. It’s very corrupt. They don’t discuss anything in large groups = no policy coordination
- Putin is making a mistake saying Russia’s situation is similar to 2008 for two reasons:
- funding isn’t available because of the capital markets sanctions
- oil prices will remain low for a long time, in Anders’ opinion for the coming 10 years
- On Putin: Anders says his strength is that he’s deliberate, but works at his own independent pace and this is highly dangerous in a financial crisis... Anders says his counterparts portray an environment in Moscow in which everyone waits for something to happen [from Putin], and no one takes any initiative
- On Weak State Banks: expects bank recapitalizations to the tune of $40-50 Bn in 2015
- On Ukraine: Anders was in Kiev last week and met with Ukrainian PM. Says economic policy makers are impressive and top quality (ex. 38 year old investment banker-type); expects to see massive reforms of government agencies and state enterprises; but financial side looks much worse – budget is a joke, inflation rampant, and he expects that IMF will have to come in with a heavy hand and restructure the debt
- On the Fight over Ukraine’s Eastern Territories: he expects Russia to show its military might, but says Crimea was the real prize. Anders assesses Putin’s strategy as neither solely focused on territory nor the structure of the government, but as one centered on showing that Ukraine cannot establish a democracy, for he fears an Orange Revolution at home
- On Rosneft: it will be the major destabilizing factor in Russia. The USD-denominated debt will have to be restructured. Rosneft had to get a state-bond in Rubles in December, and they paid it off in dollars. This told the market a lot about corrupt Russian economic policy, and triggered the big slide in the Ruble
- On Russia’s Liquidity Crisis: Although the Chinese state-bank said they would provide funding to Gazprom and Rosneft, they haven’t actually done it now that Russia is in much worse shape. Both companies will have to completely cut-off cap-ex because any new projects will be value-destroying
- On Reserve Policy: Only about $175 Bn of Russian reserves are currently liquid and in the hands of Moscow. He says the Russian central bank is actually highly professional and competent, but they aren’t given much power from Moscow. They can’t do much in terms of monetary intervention because their access to reserves is so little. Nevertheless, the central bank is set on fighting inflation in 2015
Takeaway: We are removing YUM from Investing Ideas.
Please be advised that we are removing Yum! Brands from Investing Ideas today.
According to Hedgeye CEO Keith McCullough, "I don’t want to be long it for the EPS report. I’d rather put it back on after that and have the activist optionality without the event risk."
Our long-term value thesis has not changed. We still believe this is a stock to own for the long haul. YUM continues to trade at a significant discount to its intrinsic value, making it one of our favorite long-term buys in the restaurant space.
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“Skeptical of Oil & Gas Capital Spending…Energy-related capital spending looks like ‘mining capital spending-lite’”
– Hedgeye Industrials 4/21/2014 CAT: Defining Differences & The Segment Formerly Known As Power Systems
Given the convergence of 2015 guidance and our estimate range, one of the primary downside catalysts has been realized in our CAT thesis. The pull-back in the "resources capital spending tide" is better recognized now (to see slides from earlier CAT calls, CLICK HERE, or CLICK HERE, or CLICK HERE etc). The lower guide may be a bit of a near-term ‘cover the news event’.
We are trying to use the Best Ideas list better; we view it as a signal for where we think it is worth initiating positions and spending research time.
We would stay short some CAT through the mid-February release of the firm’s 10-K. The 10-K should update such interesting items as the SEC investigation and credit exposures at CAT Financial (Textron-lite?). CAT really does have some dicey exposures at CAT Financial, but, as we wrote yesterday, it will take some time for those to play out. We may add CAT back to the list, but for now we don’t want to press current relative lows. We may be getting too cute, but its hard to control 'position size' in a research note.
"The mainstream financial media and sell-side wants to talk about anything besides earnings right now," Hedgeye CEO Keith McCullough wrote this morning. "It's the worst start to an EPS season in six years."
Takeaway: Dollar Down, Rates Down = #StrongGold
Gold tested and confirmed its BEARISH to BULLISH TREND reversal, and we sent out the buy signal today in GLD (10:28 a.m. at $124.00) to our real-time alerts subscribers for a trade into the FOMC announcement tomorrow afternoon. We will continue to manage this exposure with a BULLISH intermediate-term TREND bias. Stay tuned for updates on this trade.
GLD Risk Management Levels:
- BUY TRADE = $119.51
- SELL TRADE = $127.34
- BUY TREND (BULLISH) = $118.69
With the continued deterioration in U.S. economic data, we believe there is a probability Yellen’s language will be interpreted by the market as more dovish than her previous path as she attempts fight the pain of global deflation within the fed framework.
One of the last Q4 data points, A durable goods orders print this morning, showed a large sequential deceleration of -3.4% in December. The number was slightly positive on a year-over-year basis, the general TREND since we moved into QUAD#4 reeks #deflation, which we fully expect to be a big talking point tomorrow.
Yellen will anchor on 1) deflationary headwinds and 2) the recent deterioration in the labor market in tomorrow’s speech.
A more dovish policy path could be perpetuated with a GDP miss on Friday (which we model as more likely than not with a very difficult Q4 comp on a year-over-year basis). Under this scenario pressure on the dollar should bode well against a long gold position for a TRADE. Please reach out with any questions.