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Nasty Asset Price #Deflation

Client Talking Points

CHINA

They better re-halt – the Shanghai Composite Index was down -8.5% overnight (the biggest drop since the 2008 crash in global asset prices). They can halt and print, but they can’t print demand/growth (Industrial Profits move to negative -0.3% year-over-year in June – how is GDP +7.0%?). 

USD

As speculation rises that the Fed can’t raise rates into this slowdown (5YR UST breakevens are down -29 basis points in the last month as #deflation risk mounts), we should get an immediate-term oversold signal in the USD Index today (EUR/USD overbought at $1.10).

10YR YIELDS

We can’t count how many people told us the UST 10YR was going to “2.75%” (when it was at 2.50%); now it’s back down to 2.25%, German 10YR Bund yields 0.69% and Swiss 10s are back to negative -0.09% = Global growth and inflation slowing.

 

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Asset Allocation

CASH 50% US EQUITIES 6%
INTL EQUITIES 8% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
GIS

General Mills (GIS) remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Key segments across the company are turning the corner and improving performance. Specifically GIS has figured out the yogurt category, after 3 years of struggling with Greek and losing on the core business, management has turned the Yogurt division into a growth segment. Cereal has obviously been a struggle for all companies participating. Although still down, the trend is looking better, in FY16 we hope to see the switch to Gluten Free Cheerios and other improvement, turn performance around.

PENN

Penn National Gaming reported Q2 profit of $16.9 million on Thursday. The company's profit of 19 cents per share beat analysts' expectations.  PENN posted revenue of $701 million in the period, which also beat forecasts.  Shares have climbed 40% since the beginning of the year and 58% over the last 12 months, obviously much higher than the S&P 500. Gaming, Lodging and Leisure Sector Head Todd Jordan was at Penn National Gaming's investor day on July 24th. He will provide a detailed update this week.

TLT

Those long of #LowerforLonger enjoyed another solid week of 2%+ gains for TLT and EDV. VNQ followed up last week’s gains with a pullback of equal size, but we received a positive sloth of data this week that confirms our long housing theme. A positive housing outlook within a bearish rate environment should be positive for VNQ.

Three for the Road

TWEET OF THE DAY

Tom Tobin is reviewing his SELL call on Zimmer $ZBH @HedgeyeHC this morning

@KeithMcCullough

QUOTE OF THE DAY

The future belongs to those who see possibilities before they become obvious.

John Scully

STAT OF THE DAY

Tourism in Cuba has jumped, up 15% in the first 5 months of this year.


HAIN | ORGANIC DECEPTION PART TWO

If you own HAIN today you have to be scratching your head as to the rational for the company to buy an insignificant brand in the plant-based beverage category.

 

We have long argued that HAIN is overvalued on the sum-of-the-parts basis because the UK business is anything but organic in its product line and growth rate.  The Mona Group acquisition does nothing for HAIN strategically.  In the short run all it does is make the business look better optically.   

 

Looking at HAIN UK revenue growth better explains why HAIN is making this acquisition.

 

In 2Q15, HAIN UK revenue growth was 4%, and we’re looking for it to decline 2% in 4Q15.  For the year 2015 HAIN UK revenues will grow ~18%, bolstered by the acquisition of Tilda, which was fully built into comps starting in 3Q15.  As we look five quarters out to full year FY16, HAIN UK is expected to grow at a modest industry average of 2%. So if you are a management team that wants to make trends look better optically (to keep your multiple) what do you do?   Mask the reality of no organic revenue growth with another acquisition and hope nobody notices!

 

HAIN | ORGANIC DECEPTION PART TWO - CHART 1A

 

HAIN will never be a significant competitor in plant-based beverages in Europe.  The plant-based segment is a very competitive market, and as private label is getting more prominent it is imperative to have the top brand in your respective categories.  Joya and Happy are not top brands and they face an uphill battle in the plant-based beverage business. Alpro, a top brand for WhiteWave (WWAV) is a clear leader in European plant-based beverages with #1 brand position and $510 million in net sales in FY2014. Furthermore, Alpro has a 43% market share in plant-based beverages across Europe and the nearest competitor has only 7% (HAIN or Joya are not even in the top 5).

 

HAIN | ORGANIC DECEPTION PART TWO - HAIN CHART 1

 

 


TWTR: Thoughts into the Print (2Q15)

Takeaway: We're not sure what happens on this print since it all depends on mgmt. TWTR will need to rebase expectations again, question is when.

KEY POINTS

  1. 2Q15 = UGLY PUNT: We're not sure which way the ball is going to bounce on this print since it really depends on how mgmt chooses to address the street (appease or rebase).  We see some upside to the print off light 2Q guidance, especially if it can sustain its CPE tailwind from 1Q15.  Further, mgmt's cautious 2Q MAU comments on its 1Q15 call should offer some breathing room as well.  But we're not sure if mgmt is going to try to appease the street as they historically have and guide high 3Q/increase 2015, OR attempt to rebase expectations prior to its 2016 guidance release.        
  2. WILL NEED TO REBASE AGAIN: We remain short for this reason.  Even though the 2Q15 print can go against us, we suspect that upside to be short-lived at best.  For context, the bulk of TWTR's 2015 guidance cut was concentrated into 1H15.  In turn, that's where consensus has concentrated its estimate revisions as well.  Consensus is now looking for TWTR to essentially flat-line a +50% advertising revenue growth rate from now through the end of 4Q16.  That will be a tall order given its precipitous decline in ad engagements, which we expect to continue without a clear shift in its monetization strategy (see note below).

 

TWTR: Thoughts into the Print (2Q15) - TWTR   2Q13 Supply Shock slide

TWTR: Thoughts into the Print (2Q15) - TWTR   FC Ad Revenue

 

 

Let us know if you have any questions or would like to discuss further.

 

Hesham Shaaban, CFA

@HedgeyeInternet 

 

 

TWTR: Rock and a Hard Place (1Q15)

04/29/15 08:15 AM EDT

[click here]


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CHART OF THE DAY: Are You Long Inflation Expectations? (Hope Not)

Editor's Note: The chart and excerpt below are from this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe today. 

 

CHART OF THE DAY: Are You Long Inflation Expectations? (Hope Not) - Z 07.27.15 chart

 

...Uh, maybe we should be long, “decoupling”? Nope. We’ll stick with the #Quad4 asset allocations, which should have you long low-beta and yield chasing sectors (short Commodities). Currently I like Healthcare (XLV), REITS (VNQ), and Utilities (XLU); not the following...

 


Debt Deflation Knives

“Second prize is a set of steak knives.”

-Alec Baldwin

 

That, of course, was one of the best one-liners from the 1992 classic Chicago real-estate brokerage movie, Glengarry Glen Ross (which was based on a 1984 Pulitzer Prize winning book by David Mamet).

 

Baldwin played Blake and the aforementioned quote came during his epic “motivational” speech to the sales-force. As many of you economic-cycle fans will recall, it’s always toughest to create sales and demand, when growth is slowing (1 was no different).

 

Debt Deflation Knives - z ab stk

 

“So,” it’s probably not different this time. The cover of The (now for sale) Economist is trumpeting “The Empire of The Geeks” (Silicon Valley) at another #bubble peak for “growth” assets. Instead, they should be asking themselves if this is a 1999 or 2007 cyclical slow-down.

 

Back to the Global Macro Grind

 

When the cycle slows, those who rotate out of #LateCycle styles of investing like:

 

A)     Inflation expectations

B)      Cyclicals (think peak growth and margin expectations)

 

Get 1st place… and those who are long:

 

A)     “Reflation” (commodities, currencies, and countries linked to inflation expectations)

B)      “Global Growth is back” (energy, basic materials, industrials, etc.)

 

Get to own the falling steak knives…

 

Here’s how that marked-to-market Global Macro score looked last week (in the context of the last month):

 

  1. Commodities (CRB Index) down another -4.4% wk-over-wk = down -8.5% month-over-month
  2. Oil (WTI) down another -6.0% week-over-week = crashing -20.5% month-over-month
  3. Gold down another -2.1% week-over-week = down -7.6% month-over-month
  4. Copper down another -4.5% week-over-week = down -9.2% month-over-month
  5. Canadian Dollar (vs. USD) -0.6% week-over-week = down -5.1% month-over-month
  6. Canadian Stocks (TSX Composite) -3.1% wk-over-wk = down -5.1% in the last month

 

Blame Canada? Nah. In US Dollars, let’s keep going on these hot-commodity-currency-country-links to inflation expectations:

 

  1. Russian Ruble -2.5% week-over-week = -down 6.8% month-over-month
  2. Russian Stocks -5.8% week-over-week = down -8.9% month-over-month
  3. Brazil’s Real -4.9% week-over-week = down -7.6% month-over-month
  4. Brazilian Stocks -5.9% week-over-week = down -8.5% month-over-month
  5. Nickel -1.8% week-over-week = down -11.6% month-over-month
  6. Rubber -2.2% week-over-week = down -14.0% month-over-month

 

Nickel and Rubber? Two of the BRIC’s (Brazil, Russia, India, China)? Damn those people who have to sell things in #deflating prices and/or have to buy/consume things in devalued currencies. #Deflation during a global growth slowdown has to be bullish, right?

 

Right. Right. Steak knives for everyone with a “diversified” asset allocation pie-chart last week! The Latin American “emerging markets” (MSCI) Index was -7% last week (-11.2% in the last month), and Chinese stocks were -8.5%, overnight. Booyah!

 

Uh, maybe we should be long, “decoupling”? Nope. We’ll stick with the #Quad4 asset allocations, which should have you long low-beta and yield chasing sectors (short Commodities). Currently I like Healthcare (XLV), REITS (VNQ), and Utilities (XLU); not the following:

 

  1. Inflation expectations (5yr breakevens) dropped another -13bps = down -28 bps in the last month (1.42%)
  2. Energy (XLE) and Basic Material (XLB) stocks down -4.0% and -5.4% (-9.1-9.3% in the last month) respectively
  3. Industrial stocks (XLI) deflated another -3.7% to -6.5% YTD (down -4.5% month-over-month)

 

If you’re levered long to inflation expectations another way to look at your risk is from a Style Factor perspective (mean performance of the Top Quartile vs. Bottom Quartile in S&P 500 companies):

 

  1. LEVERAGE: High Debt (to Enterprise Value) stocks were down -3.3% last week and are down -7.0% in the last 3 months
  2. BIG BETA: High Beta stocks dropped -4.2% last week and are down -8.7% in the last 3 months

 

In other news, our long-standing (back to the beginning of 2014 when TLT was at $108) best way to be positioned for growth and inflation slowing (Long-term Treasuries) had a great week last week.

 

The yield on a 10yr US Treasury Bond is down to 2.25% this morning and I still think that 1.75% happens before 2.75% does. I also love being long Low-Beta vs. short things that are highly levered to falling #DebtDeflation knives.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.21-2.34%

SPX 2069-2098
RUT 1
Nikkei 202
VIX 12.53-14.58
USD 96.61-98.35
Oil (WTI) 47.07-50.49

Gold 1067-1117

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Debt Deflation Knives - Z 07.27.15 chart


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

7/24/15 SBUX | BEAST MODE

7/24/15 MCD | Right on Track

7/23/15 DFRG | HOPE IS NOT A PROCESS

7/22/15 CMG | Is a Friend to Investors not a Faux

7/21/15 FUNDAMENTAL WALK THROUGH | SBUX

7/20/15 MCD | FRANCHISEE NUMBERS SPEAK LOUDER THAN WORDS

 

RECENT NEWS FLOW

Friday, July 24

BWLD | Downgraded to neutral from buy at Dougherty & Co.  


Thursday, July 23

DNKN | In case you missed DNKN CEO blasting the NY wage board during their earnings call, here is a good summary (click here for article)

BWLD | Increases their credit facility from $100 million to $200 million (click here for 8-K)

SBUX | SBUX and PEP sign agreement to bring Starbucks ready-to-drink beverages to Latin America (click here for article)

 

Wednesday, July 22

DRI | Bondholders protest plan to spin off real estate (click here for article)

NY Board recommends phasing in $15 hourly wage (click here for article)

 

Tuesday, July 21

MCD | Might take all-day breakfast national (click here for article)

Lawmakers, White House explore tax revamp for U.S. firms with large overseas presence (click here for article)

 

Monday, July 20

DNKN | Announces plans for 26 new restaurants in Fresno and San Francisco (click here for article)

 

SECTOR PERFORMANCE

Casual dining and quick service stocks, in aggregate, underperformed the XLY last week. The XLY was down -0.4%, top performer from casual dining was RT posting an increase of 10.8%, while CMG led the quick service pack up 10.5%.

 

Monday Mashup - CHARt 2

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY remains bullish on a TRADE and TREND duration.

 

Monday Mashup - CHART 4

 

CASUAL DINING RESTAURANTS


Monday Mashup - CHART 5

Monday Mashup - CHARt 6

 

QUICK SERVICE RESTAURANTS


Monday Mashup - CHARt 7

Monday Mashup - CHART 8


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