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Why Hedgeye’s Howard Penney Is Advising Investors to Short Hain Celestial | $HAIN

Editor’s Note: Below is an abridged excerpt of a recent research note written by Hedgeye Managing Director Howard Penney. If you’re an institutional investor and would like more info on how you can subscribe to Howard’s Restaurants and Consumer Staples research please email sales@hedgeye.com.

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Hain Celestial Group (HAIN)  remains on our Best Idea list as a SHORT.

 

Why Hedgeye’s Howard Penney Is Advising Investors to Short Hain Celestial | $HAIN - z red

 

We continue to believe that the company is a collection of brands and businesses that are not deserving of its current 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. 

 

Why Hedgeye’s Howard Penney Is Advising Investors to Short Hain Celestial | $HAIN - z hain 1

 

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

 

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

 

As our analyst team has demonstrated in our past Black Books, HAIN is less than forthcoming with detailed information on how the core business is performing 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.


Jobs, Yields and the Eurozone

Client Talking Points

JOBS

Consensus is looking for +217K on headline NFP – what hyper-sophisticated, super secret quant gets you to that number? …. Carry July’s year-over-year growth rate to August and calculate the implied month-over-month change.  #Wahlah.  NFP growth peaked in February, net monthly payroll gains have transitioned from great (2014 =260K) to good (2015 YTD = 211K) and Initial Jobless claims hit their low watermark ~6 weeks ago.  Economic cycle tops are process but we’re late-cycle currently and the clock tick is getting louder on the current expansion.  Today’s Jobs data and the read-through to policy notwithstanding, slower-for-longer remains the intermediate-term call.  

YIELDS

The Fed has never hiked into a slowdown and, with both global and domestic growth decelerating, a policy mistake looks more likely to drive yield spread compression than not.  In high yield land, Deflation’s Dominoes land in Junk and spread risk remains alive and investible.  We took the other side of Fischer yesterday and shorted JNK in RTA.  

EUROZONE

German Factory Orders fell (-1.4% in JUL year-over-year vs. -0.6% forecast and +1.8% prior) and August Retail PMIs across the Eurozone, Germany, France, and Italy all declined versus the prior month.  Mario Draghi attempted to stoke the prospect of increasing the ECB’s QE program yesterday, but we continue to state that the trend of #EuropeSlowing cannot be fixed simply by magical QE fairy dust. Eurozone equities are all down a solid -1% to -2.5% today following central bank speak.  

 

**Tune into The Macro Show...special jobs report edition with Macro Analyst Christian Drake 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

In 2016 if $MCD does 5% same-store sales it will generate over $1.5B in incremental system-wide sales. No one is immune from the ADB pain..

@HedgeyeHWP

QUOTE OF THE DAY

In 2016 if $MCD does 5% same-store sales it will generate over $1.5B in incremental system-wide sales. No one is immune from the ADB pain..

@HedgeyeHWP

STAT OF THE DAY

TV ad spending alone is expected to reach $4.4 billion (including the general election campaign). The total spent so far by the GOP campaigns and the outside groups backing them: about $14 million.


The Macro Show Replay | September 4, 2015

 


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September 4, 2015

September 4, 2015 - Slide1

 

BULLISH TRENDS

September 4, 2015 - Slide2

September 4, 2015 - Slide3

 

 

BEARISH TRENDS

September 4, 2015 - Slide4

September 4, 2015 - Slide5

September 4, 2015 - Slide6

September 4, 2015 - Slide7

September 4, 2015 - Slide8

September 4, 2015 - Slide9

September 4, 2015 - Slide10


CHART OF THE DAY: The Clock Is Ticking > Trend in Goods vs Services Employment

Editor's Note: The chart and excerpt below are from today's Early Look which was written by Hedgeye U.S. Macro Analyst Christian Drake. Click here if you'd like to subscribe and begin your market day on the right foot. 

 

...In the Chart of the Day below we show the trend in Goods vs Services employment over the last four cycles.  As can be seen, employment growth in the goods producing sector tends to presage the trend in services and aggregate employment.

 

The bottom-line is that the clock tick is getting louder on the current expansion and it’s time to start preparing for the inevitable cyclical downturn. 

 

CHART OF THE DAY: The Clock Is Ticking > Trend in Goods vs Services Employment  - z CoD


Reps

“At this moment, the decision to begin the normalization process at the September meeting seems less compelling to me than it did several weeks ago.”

-William Dudley

 

When I was a kid you didn’t take Tae Kwon Do.

 

If you actually got into a full fledge karate stance during an escalating confrontation, you were just going to get beat up worse … and more often. 

 

My son takes jiu jitsu 2 -3 nights a week.  At 5 years old, he’s the youngest kid in the class and he doesn’t really get it, but that’s okay.  

 

Roll  … get beat up … do it again, figure it out.  

 

It’s all about the reps. 

 

Back to the Global Macro Grind …

 

Last week, Dudley front ran the Jackson Hole festivities with the comment in the headline quote above.

 

Reps - Jackson Hole cartoon 08.238.2015

 

What’s the takeaway?

 

It hints at his preferred policy preference but, more than that, I think it offers compelling confirmation of the reactive nature of conventional policy. 

 

The reality of global growth slowing seemingly wasn’t apparent until the China data was overtly terrible, DM markets were treading correction territory, and EM and commodity markets were already in full crash mode.   Shifting growth/inflation/market data needs to actually be reported for it to become reality. 

 

Conventional monetary policy and its neoclassical underpinnings are kind of like tae kwon do – pretty and elegantly conceived, but you can’t really use it to manage real-time risk. 

 

Meanwhile, back on the Macro mat, it’s Jobs Friday and there’s no shortage of high-frequency, fundamental reps to be taken on the labor side of the domestic economy, so let’s strap it on.

 

Macro Melodrama:  The manic media and market melodrama that accompanies the monthly employment report is both amusing and annoying.  The trend in employment is certainly important but the noise in the month-to-month figures is substantial.  Recall, the standard error on the NFP estimate is +/-90K jobs.  In other words, if the NFP print was 100K, the BLS is 90% sure we gained between 0 (as in “zero”) and 200K jobs.   Given the monthly volatility and the margin of error, it’s all very silly when pundits convictedly opine on the underlying state of the labor market in response to a headline beat/miss of +/- 10K on a given month. 

 

Tracking the Trend:  Historically, Initial Jobless Claims have been the most consistent, lead labor market indicator for the economic cycle.  While total employment peaks coincident to the end of the cycle (which, of course, is not surprising – how do you think economists retrospectively pick when the cycle peaked/recession started?), peak improvement in initial claims occurs ~7 months ahead of the economic cycle peak and coincident with or slightly ahead of the equity market peak.  

 

The Transition: As we highlighted in reviewing this week’s claims data, the current labor market trend is showing a subtle shift from great to good.  Initial claims put in their low watermark ~6 wks ago and are now in a 1.5 steps back, 1 step forward re-convergence higher, moving back toward 300k. While anything sub-300k isn't "bad" per se - remember, it's what happens on the margin that counts. This is especially true when the market is stretched on longer-term valuation metrics and is entering the upper echelons of historical bull market duration.

 

The same great-to-good trend dynamic has characterized the ADP and NFP data in recent months.  From a rate-of-change perspective, February marked the peak in employment growth and while net gains of 211K on average YTD are “good” per se, on the margin, they are less good than the 260K average observed last year. 

 

The (Cycle) Tea Leaves:  As Josh Steiner, our Financials sector head surmised yesterday -  It's not easy to tease out exact causation here, but a few possibilities come to mind. One possibility is the inevitability of late cycle reality --> great becomes good (early late cycle --> mid late cycle) and then good becomes less good (mid late cycle --> late late cycle) and, eventually, less good becomes bad (late late cycle --> recession).

 

Another possibility is that the confluence of fears from real energy sector headwinds, August market weakness and rising Global Macro uncertainty are conspiring to facilitate that first shift downward from great to good. It's also possible (likely, even) that the latter is simply this cycle's causal factor for the former.

 

In other words, markets are non-linear and critical state thresholds (i.e. when a particular stimulus becomes sufficiently strong enough to trigger a large-scale and cascading reaction) are often only clear after the fact.   

 

Goods vs Services:  Another relatively low-intensity means of tracking the evolution of the cycle is through the monitoring of spending on and employment in the goods producing and services producing sectors. 

 

Due to consumption smoothing, household spending is typically less volatile than the other GDP expenditure buckets.  Consumption of durable goods, however, is more sensitive to macro conditions than is consumption of services and can serve as a decent lead indicator for broader consumption/growth.  In short, spending on higher-ticket durables is more cyclical and tends to peak ahead of the peak in demand for more inelastic consumption. 

 

In the Chart of the Day below we show the trend in Goods vs Services employment over the last four cycles.  As can be seen, employment growth in the goods producing sector tends to presage the trend in services and aggregate employment.

 

The bottom-line is that the clock tick is getting louder on the current expansion and it’s time to start preparing for the inevitable cyclical downturn. 

 

Preparing, however, does not necessarily mean going full hazmat suit bearish at every time and price.  While we’re late-cycle currently, historical cycle precedents suggest there’s still some modest runway left to the current expansion. 

 

On the employment front specifically, while we’re past peak in employment growth and monthly gains have transitioned from great-to-good, the combination of flattish monthly gains, positive mix (i.e. more higher paying jobs) and a longer work week have, to-date, driven aggregate personal and salary/wage income higher.  With credit growth still muted, improving wage income remains the sangre vital of our modern consumption economy.

 

Tops are processes.

 

If this morning’s labor data is trend consistent, the normal mania will only be amplified and speculative angst around September lift-off will see its final crescendo.  

 

Slower-for-longer remains the call.  More forest, less bark, more risk-managed, late-cycle allocation reps to execute.   

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.22% (bearish)

SPX 1 (bearish)

VIX 21.69-41.95 (bullish)
USD 93.65-97.19 (neutral)
Oil (WTI) 36.47-49.63

Gold 1113-1165 (bullish)

 

Good luck out there and Happy Labor Day, 

 

Christian B. Drake

U.S. Macro Analyst

 

Reps - z CoD


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