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Monday Mashup

Monday Mashup - CHART 1

 

Two quick changes to our LONG bench we wanted to make you aware of, we removed MJN and added HSY. We will be releasing a note on these changes later today.

 

RECENT NOTES

8/31/15 HAIN | LOW QUALITY & INCREASED BUSINESS RISK

8/28/15 GIS | Time to Close this Deal

8/21/15 WWAV | DON’T PANIC, BUY MORE…HAIN | PANIC, SHORT MORE

8/21/15 UNFI | GOING AGAINST THE GRAIN

8/20/15 LNCE | Black Book Presentation Replay

 

RECENT NEWS FLOW

Monday, August 31

BETR | Initiated neutral at Goldman Sachs (underwriter of the IPO), price target $18. Current price is $13.31, we see downside from here and continue to have it on our SHORT bench.

 

Friday, August 28

GIS | Rumors continue to swirl around the divestiture of the Green Giant assets (click here for Hedgeye article)

 

Wednesday, August 26

THS | Upgraded to overweight from equal-weight at Stephens, target increased to $85 from $75. Treehouse seems to be the leader in the deal for the Ralcorp assets.

 

Tuesday, August 25

KHC | Recalled turkey bacon products (click here for article)

 

Monday, August 24

POST | Reinstated outperform at BMO Capital Markets, target is $72

 

SECTOR PERFORMANCE

Food and organic stocks that we follow outperformed the XLP last week. The XLP was down -0.1% last week, the top performer from our list was Amira Natural Foods (ANFI) posting an increase of +29.1%. Worst performing company on our list was ConAgra (CAG), which was down -2.8%.

Monday Mashup - CHART 2

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is bearish on a TRADE and TREND duration.

Monday Mashup - CHART 3

 

Food and Organic Companies

Monday Mashup - CHART 4

Monday Mashup - CHART 5

 

Consolidated Consumer Staples Valuation

After the volatile market last week, valuations remain near two standard deviations above the five year average EV/EBITDA multiple.

Monday Mashup - CHART 6

 

Keith’s Three Morning Bullets

  1. FEDERAL RESERVE – Fischer opted for dovish comments on Friday, making his Saturday comments more hawkish – I guess they look at the S&P Futures now before saying anything of consequence (today he’d be dovish); Fed Fund futures have ramped back up to 38% on a SEP hike probability – reminder: the Fed has never hiked into a slowdown
  2. COMMODITIES – dovish = commodity reflation; hawkish = commodity #Deflation – so the deflation TREND is right back on this morning w/ Oil, Copper, and Russia down -2-3%; WTI’s risk range blew out to $36.99-45.32 on Friday, all but ensuring that massive volatility remains in this asset class
  3. SP500 – still has the widest risk range my model has generated since 2008 at 1 with the more probable level being the downside one (-7.7% from Friday’s close), given that the Fed could be tightening into a 0.1% GDP environment here in Q3 (our low-end scenario with the high end being at 1.5% and the Atlanta Fed tracking 1.2%)

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS

Takeaway: Dovish comments from the Fed and a favorable US GDP reading led short-term risk perception to cool, but intermediate term risk remains high.

Key Takeaway:

The VIX has "cooled off" to ~26 following an intraday surge above 50 last week - the highest reading since early 2009. Global markets bounced on Wednesday following comments from Federal Reserve President William Dudley that a September rate hike now seems less compelling and a favorable revision to US GDP (+3.7% vs +2.3%) restored a degree of confidence. Risk warnings in our heatmap below eased off for the week with slightly more green than red in the short term. However, looking at the intermediate term, risk perception remains one-sided in favor of the negative; eight out of twelve measures are red. From our standpoint, nothing has changed fundamentally. The key risk metrics we watch in China remain on the same negative trend. 

 

Current Ideas:

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM19 

 

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 8 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM15

 

1. U.S. Financial CDS – Swaps tightened for 14 out of 27 domestic financial institutions on positive GDP data and dovish comments from Fed President William Dudley. U.S. GDP came in at 3.7% in the second quarter, and Mr. Dudley commented that the case for a September rate increase is now less compelling.

Tightened the most WoW: ALL, CB, ACE
Widened the most WoW: BAC, C, MS
Tightened the most WoW: CB, ACE, AXP
Widened the most MoM: GNW, MET, GS

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week as a global market recovery began on Wednesday.

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM2

 

3. Asian Financial CDS – Swaps were a mixed bag across Asian Financials last week. Chinese banks were mostly tighter, while Japanese banks widened. 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM17

 

4. Sovereign CDS – Sovereign Swaps were little changed over last week. Spanish swaps widened the most, by +3 bps to 101.

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM18

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM3

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM4

 

5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian swaps saw the largest move, tightening by -45 bps to 375.

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM16

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM20

 

 

6. High Yield (YTM) Monitor – High Yield rates fell 3 bps last week, ending the week at 7.37% versus 7.40% the prior week.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM5

 

 

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4.0 points last week, ending at 1862.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM6

 

 

8. TED Spread Monitor – The TED spread fell 4 basis points last week, ending the week at 27 bps this week versus last week’s print of 31 bps.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM7

 

 

9. CRB Commodity Price Index – The CRB index rose 1.7%, ending the week at 197 versus 194 the prior week. As compared with the prior month, commodity prices have decreased -2.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM8

 

 

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM9

 

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 7 basis points last week, ending the week at 1.77% versus last week’s print of 1.85%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM10

 

 

12. Chinese Steel – Steel prices in China fell 2.5% last week, or 58 yuan/ton, to 2273 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM12

 

 

13. 2-10 Spread – Last week the 2-10 spread widened to 146 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM13

 

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 4.0% upside to TRADE resistance and 7.4% downside to TRADE support.

 

 

MONDAY MORNING RISK MONITOR | VOLATILITY ABOUNDS - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 

 



HAIN | LOW QUALITY & INCREASED BUSINESS RISK

HAIN remains on the Consumer Staples Best Idea list as a SHORT.

 

We continue to believe that HAIN is a collection of brands and businesses that are not deserving of the premium valuation.  The company is only one of a few that participate in the “better-for-you” space, but not all companies are created equal.  HAIN’s business model is a risky roll-up story whose better days are in the past. 

 

The most recently reported 4Q15 only confirms this belief and the issues the company faces today are very relevant to the future of the company. 

  1. Business trends and a sum of the part analysis suggest that the UK business is overvalued
  2. The drive to cut costs increases business risk
  3. The quality of earnings is the lowest in the Consumer Staples sector

 

SUM OF THE PARTS

The performance of the UK business last quarter was anything but organic.  The company reported a -7.8% decline in revenues and a 210bps decline in operating margins, before currency adjustments.  Management alluded to the UK segment net sales being up in “constant currency,” but the retailer environment remains very competitive. Consistent with past quarters management did not comment on real organic growth, but went on to say “we saw good growth from our soup, grocery, desserts, rice and plant-based beverages.”  With private label at 40% of sales in the UK segment and seeing declining volumes, the organic growth on the business is limited.  Taken together; the 4Q15 performance, limited visibility to organic growth in FY16, and significant exposure to private label should lead the UK business to be valued at a substantially lower multiple than the U.S. business.  

 

As we have demonstrated in our past Black Books, HAIN is less than forthcoming with detailed information on how the core business is preforming and clearly overstates the positive business trends.  This past quarter is just another example of the company hiding what the true organic growth is of the UK business.

 

HAIN | LOW QUALITY & INCREASED BUSINESS RISK - CHART 1 

 

CUTTING INTO THE MUSCLE

One of our biggest issues with the company is the secular decline in gross margins.  As the environment for “better-for-you” products in the U.S. gets more competitive, HAIN will not be able to defend brands or market position.  The only weapon the company has to defend itself on declining gross margins is to take massive cuts in G&A.  Cutting G&A is never a long term winning proposition, and cutting too deep can put the business model at risk.  This quarter looks as if they are cutting into the muscle of the company.  With the current G&A cuts the company is now taking a big risk with their most important distribution channel.  

 

In 4Q15, HAIN announced that they were moving their natural channel merchandising team to Advantage Sales & Marketing to “drive SG&A productivity.” Advantage is a third party national sales and marketing company that works with many companies within the consumer packaged goods space.

 

This is just the latest move by HAIN to reduce costs, saving them roughly 20-25% per year. Advantage is used by some of the big players to supplement their sales and marketing in the natural & organic channel, specifically on slower moving sku’s. The problem with HAIN’s use of this company is its sole dependence on it, as they said they moved their entire natural channel merchandising team to Advantage.

 

Transferring the entire operation out of HIAN is strategically a very risky idea and could lead to a loss of brand expertise at the company.  HAIN will effectively go from managing their brands first hand to having a third party manage them, depending on how their contract is structured (dedicated resources or not) will be a pivotal factor.  The biggest advantage of an internal sales force is, share of mind, you want your employees pitching your products. How do you know the third party will be representing your brands in the best light?

 

Advantage is a middle market provider from a cost perspective, definitely cheaper than others, such as Crossmark.

 

LINE ITEM ADJUSTMENTS LOWER THE QUALITY OF EARNINGS

The company’s ability to make the numbers is growing increasingly challenged and management is being forced to adjust more lines to meet expectations.   

 

HAIN | LOW QUALITY & INCREASED BUSINESS RISK - CHART 2

 

 


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

CHART OF THE DAY: Head Fake Or New Bull Market?

Editor's Note: This is a chart and brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here if you'd like to join us in staying a step or two ahead of consensus. 

 

...So, as Ray Dalio would ask, what is the truth – head fake or the new bull market?

 

It’s definitely a bull market in long-term US Treasury Bonds. In today’s Chart of The Day we show you how well the Long Bond has done versus something that we have not liked (the Russell 2000) going back to 2014.

 

CHART OF THE DAY: Head Fake Or New Bull Market? - z bird 08.31.15 chart


No Cowbell?

“When there is trust, conflict becomes nothing but the pursuit of truth.”

-Patrick Lencioni

 

That’s one of the better risk management and leadership thoughts that came out of The Advantage – a book I just finished reading this weekend. For those of you looking for help refining and/or reworking your #process, it’s worth your time.

 

Far from its constitutional mandate established in the Federal Reserve Act of 1913, this Fed’s thought process appears to very much include what the US stock market is doing on any given day in order to give the market clarity on their decision making process.

 

When markets were on their lows last week, both the NY and Atlanta Fed heads (Dudley and Lockhart – both voters) went dovish. Then, post the bounce, Vice Chair Fischer went hawkish in his Jackson Hole speech on Saturday. In other words, no #cowbell.

No Cowbell? - Jackson Hole cartoon 08.238.2015

 

Back to the Global Macro Grind

 

To be clearer than they have been (Fed Fund Futures, which measure the probability of a SEP rate hike, have been trading all over the place in the last week), there should be very little trust that the Federal Reserve is in pursuit of anything but pro-cyclical truths.

 

Pro-cyclical means that #LateCycle economic readings look “really good” at the end of the cycle. Since things like employment and “wage growth” are already slowing in rate-of-change terms, you’re one bad jobs report away from #truth there.

 

But, if the S&P Futures are up – we’re “all set” and readying for the 1st modern Federal Reserve rate hike, into a slowdown. I’m sure consensus is right and that “won’t be a big deal” at all. It’s “just 25 basis points.” And Q3 GDP might just be 0.1%.

 

The scarier part of last week’s bear market bounce was that it was led by markets that are, well, in bear markets!

 

  1. Oil (WTI Crude) was +11.8% on the week, but remains -22.5% in the last 3 months (and is -2.3% this am)
  2. Russian Stocks (RTSI) were +8.9% on the week, but remain -16.2% in the last 3 months (-2.6% this am)
  3. Energy Stocks (XLE) were +3.5% on the week, but remain -16.2% in the last 3 months (will lead lower this am)

 

And most of this is wasn’t based on anything other than the mid-week begging for more Federal Reserve, European Central Bank, and Chinese #Cowbell… so, we’ll reverse some of that “reflation” this morning as Stanley Fischer pivoted from saying that “market volatility affects our timing” (on Friday) to “we shouldn’t wait for 2% inflation” (on Saturday).

 

But, since it’s in every cycle-top’s consensus character to chase bounces as opposed to selling them, on the way down today we’re going to have less people who are hedged. That’s right, less. Check out the consensus hedges in CFTC non-commercial options:

 

  1. SP500 (Index + Emini) net SHORT position dropped to its lowest in 3 months, +86,285 on the wk to -40,845
  2. EUR/USD net SHORT position dropped to its lowest of the year, +29,934 on the wk to -59,250

 

In English, that means:

 

  1. Why the Worst May Be Over” (cover of Barron’s on US stocks) had bears covering and bulls getting longer
  2. Consensus Macro was betting the Fed was going to be MORE dovish than the Europeans (ECB)

 

And, since less people trust that this morning than they thought they could on Friday, the pursuit of expectations continues…

 

Where else might you have risk this morning? Look no further than US Equity Market Style Factors that looked a lot like Fed/Reflation speculation last week:

 

  1. High Short Interest Stocks got squeezed +2.2% off the lows, but are still -9.7% in the last 3 months
  2. High Beta Stocks bounced +2.9% off the lows, but are -12% in the last 3 months

 

Like Oil, Russia, and Brazil (Bovespa +3.1% on the week, but still -12.6% in the last 3 months), these Style Factors (High Short Interest and High Beta) in your portfolio had what we call a head-fake bounce (if you’re bearish) or a positive divergence (if you’re bullish).

 

So, as Ray Dalio would ask, what is the truth – head fake or the new bull market?

 

It’s definitely a bull market in long-term US Treasury Bonds. In today’s Chart of The Day we show you how well the Long Bond has done versus something that we have not liked (the Russell 2000) going back to 2014.

 

Much like another place we have not liked during this #Deflation phase transition (Junk Bonds), small and mid-cap stocks also have one of the top risk factors you want to protect against during an economic slowdown – liquidity.

 

What is the #truth about market liquidity right now? Have we, as a profession, told the world what is really going on here on that risk factor? Has the Federal Reserve? Without #Cowbell, but plenty of obvious Liquidity Traps, who do you trust?

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.99-2.22%

SPX 1
RUT 1085-1193
VIX 20.12-43.28
EUR/USD 1.09-1.16
Oil (WTI) 36.99-45.32

Gold 1110-1167

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

No Cowbell? - z bird 08.31.15 chart


More #Cowbell?

Client Talking Points

FED

Federal Reserve Vice Chairman Stanley Fischer opted for dovish comments on Friday, making his Saturday comments more hawkish – we guess they look at the S&P Futures now before saying anything of consequence (today he’d be dovish). Fed Fund futures have ramped back up to 38% on a SEP hike probability – reminder: the Fed has never hiked into a slowdown.

COMMODITIES

Dovish = commodity reflation; hawkish = commodity #Deflation – so the deflation TREND is right back on this morning with Oil, Copper, and Russia down -2-3%; WTI’s risk range blew out to $36.99-45.32 on Friday, all but ensuring that massive volatility remains in this asset class.

S&P 500

The S&P 500 still has the widest risk range our model has generated since 2008 at 1,835-2,017 with the more probable level being the downside one (-7.7% from Friday’s close), given that the Fed could be tightening into a 0.1% GDP environment here in Q3 (our low-end scenario with the high end being at 1.5% and the Atlanta Fed tracking 1.2%).

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 30% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

We recently tried out the "Create Your Taste" experience at the newly remodeled McDonald’s location in Midtown East on the corner of 58th street and 3rd Ave. Walking into the newly remodeled MCD, we were greeted by the brand new self-order kiosks with attentive staff there to assist you. Customers were very interested in using the kiosks, and everyone using them seemed to be having an easy time with it.

 

For it being only two weeks into the process we were very impressed by the efficiency and mastery the staff is already displaying. We plan to head back to the same McDonalds location and check on their progress.

PENN

Our Gaming, Lodging & Leisure team is going to furnish a new update following their recent meeting with Penn National Gaming's management. They note that the stock has held up quite well despite increased market volatility. The bullish thesis on shares of PENN remains intact. Regional revenues remain strong in addition to the 2-year growth story, etc. Stay tuned.

TLT

As we outlined through various channels, we expect that high levels of volatility are here to stay for the foreseeable future. The biggest shift last week that we’ll call out is a bullish to more neutral intermediate-term view on the U.S. dollar which is why we added GLD to investing ideas in replace of UUP. To be clear, if growth continues to slow we want to be long of bonds (that view hasn’t changed in a year and a half).

 

From an asset allocation perspective here is the set-up:

  • Growth slowing: Long bonds and low-beta yield chasing sectors (TLT, EDV, XLU)
  • Shift to more dovish policy: long of GOLD as the shift weakens the value of the USD

We re-iterate the same view we’ve had since the beginning of 2014: Growth is slowing, and deflation remains a real risk (central bankers can’t solve this by talking down the currency). The fed will continue to push out the dots on “policy normalization.”

Three for the Road

TWEET OF THE DAY

COPPER: the Doctor didn't follow through either, -1.4% as #Deflation TREND remains

@KeithMcCullough

QUOTE OF THE DAY

When there is trust, conflict becomes nothing but the pursuit of truth.

Patrick Lencioni

STAT OF THE DAY

Last Monday Facebook, founder and CEO Mark Zuckerberg announced, Facebook hit a record of 1 billion people visiting the service in a single day. Facebook has about 1.5 billion active monthly users, this is the first time the site has had 1 billion unique people visit in a day.


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