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Call Summary and Replay: The Impact of Currency Wars on the S&P 500

Takeaway: Our Financials team hosted a call with the Accounting Observer outlining which companies are most disadvantaged from a strong dollar.

The Hedgeye Financials team hosted a conference call with the CEO of the Accounting Observer, Jack Ciesielski who has done deep dive work on the current impact of the strongly trending U.S. dollar on the constituents of the S&P 500. The replay of our call is below:


Call Summary and Replay: The Impact of Currency Wars on the S&P 500 - chart1


Launch audio replay HERE

Materials for the presentation are HERE


The 3 most important takeaways from the call in our view were:


1.) The impact of the U.S. dollar continues to increase into 2015, with the +11.3% increase in the U.S. currency in 2014 accelerating into the first quarter of this year with another +7% rally. In totality, 296 companies out of a pool of 336 companies on a December fiscal reporting schedule reported declines in cash and cash equivalents from a stronger dollar.


Call Summary and Replay: The Impact of Currency Wars on the S&P 500 - chart2


Call Summary and Replay: The Impact of Currency Wars on the S&P 500 - chart3


2.) Exposure is not created equal with 24 companies experiencing a greater than 7% decline in their cash balances in the first quarter of 2015 alone. Losses in cash and in equity balances are a new phenomenon over the past 6 quarters, with very little impact being felt in 2013. Bellwethers including Philip Morris, McDonald's, and Kimberly Clark have lost -19.8%, -10.9%, and -7.1% of their cash resources respectively due to currency fluctuations net of hedges thus far year-to-date.


Call Summary and Replay: The Impact of Currency Wars on the S&P 500 - chart4


3.) Industrials, Healthcare, and Financials are shouldering most of the currency load with the Energy sector not too far behind. Although, most investors think that matching revenues and expenses in foreign operations as well as financial hedging is the most effective way to manage FX risk, the Account Observer outlined that only matching foreign subsidiary equity with the consolidated parent equity balance is a way to truly nullify FX exposure.


Call Summary and Replay: The Impact of Currency Wars on the S&P 500 - chart5


Macro Team



Cartoon of the Day: Tick... Tock...

Cartoon of the Day: Tick... Tock... - Aging America cartoon 06.09.2015


Editor's Note: Below is one of our Macro Team's Q2 2015 macro themes. 


#DemographicYields: Year after year in the post-crisis era, investors, economists and policy-makers alike have consistently seen their estimates for GDP growth, inflation and interest rates surprised to the downside. Perhaps there is some merit to the “secular stagnation” thesis most recently highlighted by Bernanke’s blog. In this theme, we pull back the curtains on the impact of demographics on the domestic and global economy. The conclusion? Lower-for-longer...


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SJM Getting Grinded

The 4Q FY15 SJM earnings raised a lot of questions about the direction of the company. 


Although the company is not currently on our ideas list, we have some initial thoughts on the Q4 print and the FY16 outlook. After experiencing a challenging FY15, SJM management expects to recover in 2016, and years to follow.  At the same time the company is digesting the largest acquisition in the company’s history.  Given the flow of cost savings and commodity tailwinds, the recovery isn’t expected to occur until 2H16. They are projecting an aggressive assumption of 3% organic growth for FY16 and attributing it mainly to volume increases coming from new coffee products.




COFFEE (Q4 Results: $468.6mm Net Sales, -1% growth, SOP Growth -19%)

Volume decreased 15% in Q4 and operating profits declined 19%, primarily driven by the Folger’s brand. Volume softness attributed to “customer response to higher promoted price points on shelf, competitive activity, and reduced promotional effectiveness,” said Smucker. A more compact-size line of Folger’s canisters, ability to merchandise the entire Dunkin’ Donuts line, and marketing budget increases are expected to yield overall growth. Overall, SJM’s volume of Keurig K-cups increased 2% and net sales up 20%, management is going to lean heavily on this growth to drive sales in the segment. Management anticipates that coffee will face challenges in the first quarter of FY16 as they will not benefit from lower commodity costs.  Management has high expectation for the coffee segment in FY16:


  1. The company will see lower green coffee costs as FY16 progresses.  Volume should benefit from lower promoted price points on the Folgers' mainstream offerings.
  2. This summer SJM will complete the conversion of the Folger’s large cans to a reduced canister size.  The cost savings will be passed along to customers and the company will benefit from increased units sold.
  3. The Dunkin' Donuts K-Cup launch.  Over time, management believes the offerings could double the current K-Cup business which is nearly $300 million in net sales in FY15.


HEDGEYE – The commodity tailwind is real but the Folger’s brand continues to struggle and K-Cups will likely disappoint on the top line.  It will be a challenge for the company to hit the internal target s in FY16.



CONSUMER FOODS ($427.5mm, -8%, -5%)

Jif branded peanut butter volume decreased 6% and net sales decreased 18% due to a 7% price decrease in November 2014 and promotional spending recognized in the quarter. Volume for the Pillsbury brand decreased 8% and net sales decreased 18%. Per our previous research on GIS, we have determined the dry mix dessert business is not a good one to be in. We want to give them some credit here, Smucker’s Uncrustables volume increase 21% and net sales increased 14%. Although the U.S. packaged foods environment has been a tough one for a lot of companies, SJM is lagging behind the competition.


HEDGEYE – There is a reason why SJM bought Big Heart Pet Brands!  SJM’s consumer food business is a collection of brands in unattractive segments of the industry.  The business will continue to be challenged in FY16.


PET FOOD ($239.1mm, n/a, n/a)

SJM closed the acquisition of Big Heart Pet Brands on March 23, 2015, introducing them to an entirely new category. Management is targeting synergies for FY16 of $25 million, which is extremely low considering that their three year target is $200 million. Year one goals are said to be on the conservative side by counsel of the consultant they are working with on the integration.


HEDGEYE - Integrating the largest acquisition in the company’s history will take time.  The company has not scaled back the synergy benefits, but the timing of the benefits have been delayed. 



The International, Foodservice, and Natural Foods segment say 10% profit growth in 4Q FY15, follow a 13% increase in 3Q FY15. For FY15 net sales and profit were flay year-over-year. In FY16, foreign currency (Canadian dollar) will be an incremental profit headwind of approximately $20 million, or $0.11 a share.  There is not incremental good news in this segment, but looking forward the business will see a higher cost of goods sold due to a significant headwind brought on by foreign currency exchange. Management anticipates growth in the segment going forward, especially with the addition of Big Heart.


HEDGEYE – A brighter spot, but still nothing to get excited about!



The 4Q FY15 earnings report raised more questions than it answered, and overall, SJM seemed to be playing defense throughout the call. Their outlook seems ambitious, and it is difficult to determine the feasibility of their goals given the company’s recent performance.



Despite a significant decline in the stock since the call, we would not be buyers.  Competition is tight and we remain skeptical that their new products will deliver on the intended growth. We’ll stay on the sidelines here and continue to monitor this situation.





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CPB Chasing Growth – a little too late?

Organic consolidation continues


The Organic consolidation trend continued, with this latest news that CPB announced today, that it has entered into a definitive agreement to acquire Garden Fresh Gourmet for $231mm. This is now Campbell’s third acquisition in three years focused on the healthy consumer, first with Bolthouse Farms (2012), then Plum (2013) and now Garden Fresh Gourmet.


Campbell’s expects the transaction not to affect FY2015 as it ends on July 31, and to be slightly accretive beginning in FY2016. This continues to help extend CPB into the perimeter aisles and beyond the center-of-store.


In a move that has become popular amongst large traditional food manufacturers when acquiring a smaller competitor, Garden Fresh Gourmet will be operated from their HQ in Ferndale, MI. Founder and CEO Jack Aronson will stay on board as an advisor to the business.


This acquisition will do little to reshape the company’s struggling portfolio of brands.


Below is a one page summary of the Campbell’s Garden Fresh Gourmet deal: 


CPB Chasing Growth – a little too late? - CPB to acquire Garden Fresh Gourmet

This Sector Is Breaking Down and That’s Bad News for the Stock Market

Takeaway: Transports are breaking down and have led the losers over the past month. Not a good sign.

We guess this time is “different” with Dow Transports (IYT) not being a leading indicator for the cycle?

*  *  *  *  *  *  *

This Sector Is Breaking Down and That’s Bad News for the Stock Market - boom 06.09.15 chart


Leading losers from a Sector Style perspective yesterday, IYT was down -2.1% on the day versus a -0.65% decline for the S&P 500. Transports are down -4.9% month-over-month and have fallen almost -9% year-to-date.


The reality is that in macro strategy, there are some leading indicators that even the most creative storytellers can’t convince you that “it’s different this time.”


When we went bullish on US #GrowthAccelerating in 2013, the Transports index was breaking out to the upside. Now, after 73 months of this U.S. economic expansion, it’s breaking down.


No, that’s not a good sign.


Meanwhile, Global Equities look worse than the Transports! And we know one of our competitors is saying “growth is back”, but seriously – month-over-month Global Equity moves = Russia -12%, Portugal -9%, Greece -8%, Germany -7%, Brazil -7%, Turkey -7%... we’ll stop there.


*This is an excerpt from Hedgeye morning research. Click here for more information on our products and how you can subscribe.

LEISURE LETTER (06/09/2015)



  • June 9: ISLE F4Q 2015 CC


HOT/HST - HOT sells The Phoenician, a Luxury Collection Resort, in Scottsdale, AZ to HST for $400m.  Under Host’s ownership, The Phoenician will undergo a complete renovation.

Takeaway: Assuming the multiple is right, should be a good transaction for HOT by getting rid of a property needing substantial capex and standing by its asset-light strategy. Price per key on the transaction is ~$622k. HOT will continue to manage the property and fees will go higher when renovation is complete.


SGMS - has signed a new contract with Norsk Tipping (the "Lottery"), the National Lottery of Norway, to provide instant games and related marketing services. Awarded through a competitive procurement process, the three-year contract began January 29, 2015 and may be extended by the Lottery for an additional term.Scientific Games currently supplies Norsk Tipping with gaming system and retail technology.  Total sales were 26.9 billion Norwegian Kroner in 2014.


HT- acquires St. Gregory Hotel & Suites in Wash DC for $57m. Based on the company’s underwriting assumptions, the company anticipates the purchase price reflects a forward economic cap rate and EBITDA multiple of 7.0% and 12.9x, respectively. 


WYNN - Steve Wynn was in Kazakhstan May 25, apparently pitching resort ideas. According to media reports, Wynn met with President Nursultan Nazarbayev about possible joint projects in the central Asia country that is trying to develop casino resorts. One project, Tengri Resort, already is under construction near the city of Almaty.


Junket layoffs - A trade union leader says two Macau gambling junket operators will together lay off about 400 employees this month.  Forefront of Macau Gaming VP Lei Kuok Keong said David Group told its staff that it will close two VIP gaming rooms, but did not tell them which.  Lei estimates that the closures will cost nearly 100 jobs.  Lei said Neptune Guangdong Group intended to lay off 300 employees but keep all its VIP gaming rooms open.


According to the official website of David Group, it has two VIP rooms respectively in MGM Macau and Galaxy Macau, with another two in Wynn Macau. The union vice-head estimated that the imminent closure of David Group will lead to nearly 100 gaming workers losing their job.


Takeaway: VIP business may see further compression in June, maybe at MGM and/or WYNN.


Macau May visitation - Macau Government Tourist Office (MGTO) Director Maria Helena de Senna Fernandes said that based on data from the travel and hotel sectors the number of visitor arrivals in May is believed to have risen compared to March or April. The city’s tourism chief also said she was confident that the number of visitor arrivals in the second half of the year will be “stable”.


Takeaway: If Maria is correct, visitation for May will show growth following YoY declines in March and April


Singapore visitation - visitor arrivals fell 3% in April 2015, 14th consecutive month of declines.  A bright spot was Mainland Chinese visitation which rose 22% on a super easy comp of -43% (Malaysian Airline 370 disappearance on March 8th); however, sequentially, visitation gained 18%. 


Mass segment - Indonesia/Malaysia-  visitation continued to fall.  Indonesia visitation dropped 10% YoY in April, a 9th straight monthly decline. Malaysian visitation slipped 5%, similar to March's performance.  

LEISURE LETTER (06/09/2015) - 6 9 2015 8 11 30 AM


Takeaway: While visitation declined again in Singapore, the strong uptick in Mainland visitation was a positive surprise in April.


Smoking ban - David Chow acknowledged that implementing a full smoking ban could hurt gaming revenue. The casino tycoon recalled that competition within the gaming industry is high, and other jurisdictions across Asia and other parts of the world still allow smoking inside casinos. “We need to see whether it’s good for competition. This is a special industry."



Health Bureau raises MERS alert level to high - Macau’s health authorities raised their response to the Middle East Respiratory Syndrome (MERS) from a standard alert to a high-level alert yesterday evening, as the virus’s outbreak in South Korea was regarded as placing neighboring regions at greater risk.  The number of inbound passengers from Korea to Macau is estimated at 500 to 700 every day, most of whom disembark from a total of three direct flights.


Takeaway: Will MERS affect visitation?


MD removing slots for tables - Over the past 15 months, Maryland’s three largest casinos — Maryland Live, Horseshoe Casino Baltimore and Hollywood Casino Perryville — have kicked 1,350 slot machines to the curb. That’s a 16% cut to their slots to make room for more table games, restaurant space, entertainment and other amenities, all of which are increasing in value to casinos as interest in slots slides, particularly among millennials.


 Takeaway: MD removing slots ahead of MGM's Prince George opening in 2016. Pressure from a high slot tax rate may be at play here.


Regional gaming revenues - 

  • LA SSS: -0.3% YoY (vs HE projection of +1%)
  • OH SSS: -3% YoY

Takeaway: More evidence that May may end up flattish on regional revenues.


Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

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