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The Macro Show, Unlocked for Real-Time Alerts Subscribers

Thanks to all our RTA subs that tuned in and asked questions. The replay of today's show is available below. 

 

Tune in again tomorrow at 8:30AM ET for another sneak peek of The Macro Show, this time featuring guest analysis from Internet & Media sector head Hesham Shaaban.  You'll receive a link in your email later today.

 

 

 

 


BULL VS BEAR: What’s Changed in Crude Oil? (And Commodities For That Matter) + 7 Excellent Charts

After declining nearly -60% in a 9-month period, WTI crude oil has moved 41% off the March lows. The logical question to ask is: what’s changed?

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BULL VS BEAR: What’s Changed in Crude Oil? (And Commodities For That Matter) + 7 Excellent Charts - Z O9

 

Aside from the obvious inflection in expectations for the direction of the U.S. dollar, a good argument can be made that not much has changed from a fundamental perspective. Below we outline the Bull/Bear debate:

 

BULLISH VIEW


Domestic production growth is decelerating and expected to go delta negative within the next couple of months (production has been much more resilient than originally expected—See below)

 

BULL VS BEAR: What’s Changed in Crude Oil? (And Commodities For That Matter) + 7 Excellent Charts - CHART 2

 

Rigs continue to come offline (although decelerating) while production per rig is still increasing sequentially       --> How long can production per rig continue to increase? It could be petering out..

 

BULL VS BEAR: What’s Changed in Crude Oil? (And Commodities For That Matter) + 7 Excellent Charts - CHART 3

 

After increasing for 16 consecutive weeks and sparking fear that the U.S. may be running out of storage space, crude oil inventories at commercial refiners have declined for 6 consecutive weeks coming out of the seasonal refinery maintenance season

 

BULL VS BEAR: What’s Changed in Crude Oil? (And Commodities For That Matter) + 7 Excellent Charts - CHART4

 

BEARISH VIEW


What we viewed as a big consensus short bias to crude (and all commodities for that matter), has been washed out.

 

Consensus Positioning usually chases price. We saw this at the lows in commodity prices in March (the market moved shorter of commodities the more they went down!)

 

As you can see in the chart below, the market is longest (most bullish expectations) when prices are highest.

 

BULL VS BEAR: What’s Changed in Crude Oil? (And Commodities For That Matter) + 7 Excellent Charts - CHART 5

 

BULL VS BEAR: What’s Changed in Crude Oil? (And Commodities For That Matter) + 7 Excellent Charts - CHART 6

 

While showing signs of deceleration, domestic crude oil production is still touching new highs not seen in 43 years. The EIA reported a 43-Year high of 9.6MM B/D of production in May (NOTE: The EIA has upwardly revised preliminary estimates for February, March, and April production numbers which originally showed a noticeable deceleration in production starting in March. The blue series in the chart below estimates their reported figures in March. They have since been upwardly revised.

 

BULL VS BEAR: What’s Changed in Crude Oil? (And Commodities For That Matter) + 7 Excellent Charts - CHART 7

 

On a global scale, oil markets are as competitive as they’ve been in a long time. Global crude production in 3 of the top 4 producing countries is up double digits YY and positive in 17 of the top 20 producing countries, also on a YY basis.

 

BULL VS BEAR: What’s Changed in Crude Oil? (And Commodities For That Matter) + 7 Excellent Charts - CHART 8

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Cartoon of the Day: Geriatric U.S. Growth

Cartoon of the Day: Geriatric U.S. Growth - Growth cartoon 06.10.2015

"There’s definitely a narrative out there (perpetuated by Mario Draghi which I think was a huge mistake) that both the European and US economies are accelerating," Hedgeye CEO Keith McCullough wrote earlier this week. "We hear it in investor meetings every day ... Unfortunately for the bullish growth narrative, both the economic data and market moves discounting future growth expectations are reminding you that #accelerating is exactly what it isn’t."

 


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Why Bigger Is Better In Alternative Asset Management

On today's edition of The Macro Show, Capital Markets analyst Jonathan Casteleyn spoke with CEO Keith McCullough about changes occurring in the hedge fund industry, which companies stand to benefit and why.


WWAV: VEGA IS A NATURAL FIT

Takeaway: Today, WWAV announced that it has agreed to acquire Vega for $550 million.

VEGA deal summary and WWAV Black Book date announcement

 

On Thursday June 18, 2015 at 3:00PM we will be releasing a Black Book video presentation on WWAV.  The VEGA acquisition is a great fit for the company and is an example of why WWAV is a long-term winner in the organic category!

 

Today, WWAV announced that it has agreed to acquire Vega for $550 million. Strategically, this is a natural fit for WWAV’s portfolio that strengthens their plant-based foods & beverages portfolio. Vega is the leader in plant-based nutrition products, further bolstering WWAV’s stable of #1 brands.

 

This marks WWAV’s third acquisition since spinning off from Dean Foods, starting with Earthbound in 2013, So Delicious in 2014 and now Vega. There is an obvious acquisition trend of diary-free and plant-based, better-for-you companies. These are very on-trend categories that are rapidly growing, making them very attractive pockets of growth for large CPG companies.

 

From looking at the sales multiple of 5.5x, it appears that WWAV may have had to beat out some competition for this asset. We believe that this is money well spent, Vega has been growing at a 30% clip and we believe this can accelerate further as they leverage WWAV’s supply chain in the U.S. and U.K. This is the right home for Vega, the partnership between the Vega and WWAV teams will allow for learning and best practices between both sides.

 

Below is a one page summary of the deal:

 

WWAV: VEGA IS A NATURAL FIT - WWAV to acquire Vega 

 

 

Longer term there are many way you can win with WWAV:

  1. Growth of the base business ― distribution growth & category expansions
  2. Growth through acquisitions ― string of pearls approach
  3. Sell the company ― many large CPG companies are looking for growth

We Still Believe This Disruptive Stock Is a Two-Bagger, If Not a Three-Bagger

Takeaway: When a Consumer story is this explosive and disruptive, every quarter is an event. Fortunately, this story is very much on track.

We remain convinced that Restoration Hardware (RH) is one of the unique TAIL* opportunities in Consumer/Retail as the company disrupts a large fragmented space of localized high-cost competitors, and changes the paradigm for how people shop for Home Furnishings.

 

This story is, at most, in the second inning and the types of changes we’ll see to product classification, consumer type, purchasing experience and ensuing financial characteristics are neither in Consumers’ sights, or Wall Street’s models.

We Still Believe This Disruptive Stock Is a Two-Bagger, If Not a Three-Bagger - rh 44

When all is said and done, we still think that this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115 (22% upside -- the highest sell-side price target out there), but rather when we all have to adjust estimates for last year’s convert, which becomes mildly dilutive at $172 (83% upside).

 

At that point, we’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end, but regardless, we’re talking a stock between $225 and $325. We won’t bicker which one it is with the stock at $94 today. So there’s our TAIL call.

 

And despite our confidence in where it’s headed long-term, we have to respect the near-term volatility in the market, and in particular, such dynamic transformational stories like RH.

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*Note: There are three durations over which we analyze investment ideas and themes here at Hedgeye. We 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.

 

"Trade" is a duration of 3 weeks or less

"Trend" is a duration of 3 months or more

"Tail" is a duration of 3 years or less

 

Interested in accessing our Retail research? Ping sales@hedgeye.com.


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