Asia, FTSE and #Deflation

Client Talking Points


Back out a completely manipulated Chinese stock market and look at Dr. KOSPI vs Semis (SMH) this morning (both making fresh 6 month lows – not exactly your “ex-PMIs” global growth charts!). Taiwan is down another -1.9% overnight taking its 1 month decline to -11.3%, Vietnam devalues Dongs, and India is starting to freak about Rupee weakness…


The FTSE is down another -0.9% this morning taking its 1 month drop to -4.5% and testing new 6 month lows as well – FTSE isn’t London, but London isn’t a #Deflation-free zone either! Lots of moneys piled up there on inflation expectations.


Are the bounces in Oil now ½ day affairs? Copper didn’t bounce at all – our immediate-term risk range process continues to signal lower-lows in both Oil and Copper (and Russia and Junk Bonds … and pretty much every deflation domino the Fed will perpetuate with a rate hike).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

"We are very bullish on McDonald’s," says Restaurants Sector Head Howard Penney. "We like where this company is going. We like the new CEO and the changes they’re making."


Penney notes that there are a lot of things going on inside the company which we can’t see that are extremely meaningful to where this company will be in 12-18 months.


"I’ve said this a dozen times recently, but 2015 will be the last year McDonald’s trades at an average price below $100," he says. 


"As we predicted, regional gaming revenues surged in July which gives us confidence in our Q3 EPS estimate of $0.23, which is $0.04 above the Street," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. "We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story."


The set-up for the September FOMC meeting is as follows:

  1. The Fed runs the risk of tightening into a late-cycle slowdown which could ultimately flatten the yield curve (BULLISH for TLT, EDV, VNQ).
  2. Slower growth and deflationary headwinds are acknowledged and the can is kicked on a rate hike which should also be good for bonds. Until growth inflects positively, you’ll see TLT in our investment conclusions as the yield curve is the best proxy for forward looking growth expectations. 

Three for the Road


VIDEO (2mins) Here’s The Problem With 50-Day Moving Averages… via @hedgeye



In the end, it's not the years in your life that count. It's the life in your years.

Abraham Lincoln


According to a Gallup survey, 58% of Americans have a favorable view of labor unions.


We hosted a live Black Book presentation on Snyder’s-Lance August 19th at 11:00am ET.


Watch a replay of this presentation below.



We view LNCE as a high quality, small cap name in the Consumer Staples space.  The company’s brands are well positioned in the snacking category to allow for sustainable volume growth and margin expansion for the next 3-5 years.  


Their direct-store-delivery distribution network (DSD network) is vital to success. It allows LNCE to have feet on the street, being stewards of the brand, working with store management and making sure product is always on shelf. Think about the power Coca-Cola harnesses by having their own distribution network, this is the same thing but for snacks.


LNCE is gone through a period of capex investment over the last three year. Now we are on the other side of that and seeing the company investing in advertising to grow volumes, while expanding their distribution. This will lead to great margin expansion over the near term as they gain efficiencies.


M&A opportunities are abundant for this company as they look across the landscape. Management has stated that when thinking about returning cash to shareholders the first thought is on M&A, then share buybacks and dividends come second. Angie’s, KIND Snacks, Justin’s and thinkThin jump to mind as possible acquisition targets.



Toll Free:


Confirmation Number: 13616471

Materials: CLICK HERE



Howard Penney

Managing Director


Shayne Laidlaw



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Here’s The Problem With 50-Day Moving Averages


After reviewing his risk ranges for INDA (the India ETF which probably faked-out chart chasers), Hedgeye CEO Keith McCullough voices his distaste for 50-day moving averages ("the moving monkey," as he affectionately calls them).


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Cartoon of the Day: A Crude Reality

Cartoon of the Day: A Crude Reality - Oil cartoon 08.18.2015


From yesterday's Early Look by CEO Keith McCullough:


...[It's] rather damning for the USD to have one of its biggest down weeks of the summer and see both the commodities index and oil continue to crash/deflate (for those who remain long of them, that is).


TJX | Takeaways From the Quarter

Takeaway: The stock is at an all-time high for a reason. At a 21x multiple, there’s higher-quality growth elsewhere at a better price.

Conclusion: The stock is at an all-time high for a reason – the company executes better than perhaps any retailer out there. That said, its ‘beat and guide down, and then beat again’ trend might come to an end sooner-than-later. Comps look fine – more than fine, actually. But the pressure on the cost side is simply unmistakable. With that staring us in the face along with a 21x multiple, we think there’s higher-quality growth elsewhere at a better price.


What We Liked:

  1. Tough to argue with a company that is printing accelerating comps in this environment. TJX doubled up the consensus number for the quarter at +6% which was a 150bps acceleration on the 2yr trend line. Every segment accelerated sequentially in the quarter on a 2yr basis except for Europe which held flat at 5.5%.
  2. Home Goods comps continue to rip at 9% for the quarter. While not a direct competitor to the RHs of the world, this coupled with the retail sales data which ticked up on both a 1 and 2yr basis in July gives us a lot of confidence in the strength of the home furnishings space (at least on the décor side of things).
  3. Guidance looks beatable. At least on the comp line. 3rd quarter guidance assumes a 200bps deceleration on the 2yr trend line similar to the what guidance implied in 2Q15. The company has beat guided comp numbers by a minimum of 160bps over the past 3 quarters.

What We Disliked:

  1. Cost pressures from both wage increases and incremental investments in the business led to the worst deleverage we’ve seen in a quarter since 2012. That’s just heating up for TJX and will continue to be a headwind – especially on the wage side – until it laps the $9.00 minimum wage it put into effect in June of 2015. Check out the table below – SG&A growth has gone from 3% to 11% in just 3 qtrs.  Today we saw both WMT and TJX feel a considerable amount of pressure from wages – any other retailers operating in this space were officially put on notice.
  2. Guidance for 3Q leaves a lot to be desired. The $0.07 guide down implies -3.5% to -6% EPS growth on a 2-3% comp with 13 percentage points of growth being taken out due to Fx, wage inflation, incremental investments, and pension costs. That pushes growth expectations into the toughest comp of the year in 4Q. Comp guidance is likely conservative, but costs are what they are.
  3. The SIGMA chart, which triangulates inventories, sales and margins looked a lot like the department store group with margins eroding and inventory growth ahead of sales. That’s not a great set up for TJX if we believe the 2-3% comp guidance. Especially when you consider the cost pressure on the SG&A line. We know that TJX can manage through it, but we’re more worried about what happens if the department stores become overly promotional.

TJX | Takeaways From the Quarter - TJX SIGMA

TJX | Takeaways From the Quarter - TJX table

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