Client Talking Points
The key to our quantitative signal is price/volume/volatility, so we’ll be watching those volatility components (both Equities and OVX) very closely this morning. Front month VIX would need to break-down below 15.52 to turn the bearish SPX/Russell tide.
With the CRB Index closing at 162 yesterday (Oil sub $30, Copper $1.94, Nickel -5.7% on the day!, etc) macro markets are bouncing on those crashes bouncing, not Chinese trade data (Shanghai was -2.4%). #Deflation/Recession reports pending on Friday with USA’s PPI and Industrial Production reports.
Not much of a bounce in UST 10YR Yield terms this morning, the UST 10YR is at 2.14% with immediate-term downside to 2.06% this week if we continue to be right on that #Deflation data. We looking for the JPM report tomorrow to be bearish on the margin too.
*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE.
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Top Long Ideas
McDonald's boasts style factors that are best in class for turbulent times in the market, big cap and low beta and it has handily been outperforming the market and its competitors as of late. One of the biggest aspects of competing in their space is value offering.
McDonald’s has ceded share in the value category primarily to Burger King over the last two years. Now that they are launching a national value platform with a full slate of media support, MCD will recover the value customer.
General Mills' business seems to be starting to pick up steam, as the company is working to improve merchandising and advertising on core business.
In addition they have executed a few small, but meaningful M&A deals showcasing the change in managements thinking. The divestiture of Green Giant to B&G Foods, for instance, although a profitable business, was a good move for them given their lack of focus/investment in the brand (they have more opportunities like this throughout their portfolio, in addition to SKU rationalization).
GIS continues to look for more sizeable acquisitions in emerging markets, but the string of pearls approach may remain most effective domestically.
After the worst start to a year literally EVER for U.S. equity markets, TLT caught a bid in the first week of trading as the centrally-planned Chinese stock markets traded limit down earlier in the week. It was the largest central bank liquidity injection from Beijing since Chinese markets crashed in September.
TLT remains one of our strongest long idea calls heading into 2016 as junk bond markets begin to crack.
Three for the Road
TWEET OF THE DAY
Keith McCullough @KeithMcCullough 1h1 hour ago
VIDEO (3mins) Why Hedgeye Acquired Potomac Research https://www.youtube.com/watch?v=-kYtVLJc_y0 via @YouTube #SOTU
QUOTE OF THE DAY
The surest way not to fail is to determine to succeed.
Richard Brinsley Sheridan
STAT OF THE DAY
Christmas sales in the UK "disappointing", growing just 1% in December, after a 0.7% increase in November.
Takeaway: WETF assets-under-management finished '15 on a slippery slope and January '16 hasn't started much better.
WisdomTree assets-under-management (AUM) finished last year in fluid fashion with -$3.0 billion flowing out of the asset manager in December alone. This was the worst month in the history of the firm and January 2016 hasn't started in any better fashion. In the first five business days of the New Year, WisdomTree has shed another $686 million, essentially on par with the -$3 billion monthly run rate exiting '15. We can't exactly chalk up year end loses to seasonality, as December 2014 put up a +$1.0 billion inflow for WETF. Monthly inflows are now a pittance of their highs of over $6.0 billion from March '15. Over 90% of the losses in both December and January occurred in the firm's international hedged equity products.
The Tale of Two Products
We are chalking the exodus in the international hedged products to separate catalysts as firstly the firm's Japanese hedged product has fallen victim to a substantial rally in the Yen which has taken demand for the hedged FX fund off of the boil. We warned of a slack in demand should the U.S. dollar not continue to strengthen which has proven accurate over the very near term.
The firm's European product can't be painted with the same brush however as the Euro has maintained its price range against the U.S. currency.
It looks however that European woes are the result of new demand for the copy cat iShares hedged product (which is 5 basis points cheaper). The following chart shows how the HEDJ moved from a 91% share of the market’s three major hedged Euro products (WisdomTree’s HEDJ, BlackRock’s HEZU, and Deutsche’s DBEZ) at the beginning of December to 86% share through yesterday. This has increased the HEZU iShares Currency Hedged MSCI Europe share from 8% to 14% over the same period on net positive inflows respectively.
Additionally, DXJ’s share of the market’s three major hedged Japan products (WisdomTree’s DXJ, BlackRock’s HEWJ, and Deutsche’s DBJP) ceded another point of market share over the past month. The Deutsche and BlackRock products both gained incrementally in December finishing at just over 9% and 4% share respectively.
PRICING NOW IN QUESTION and Forward outlook
It looks like pricing is becoming a factor with the emergence of investor interest in the iShares hedged European product (or it was just a catch up trade to share that the Japanese product had already ceded to competitors). While the delta's of price decreases per basis point are quite small, we don't think Street estimates incorporate a lot, if any, pricing compression for WisdomTree. At a 1 basis point decline for HEDJ pricing on an annual basis, we calculate a -0.6% top line revenue impact, but with AUM in decline the impact could be worse. We calculate for every $1 billion in AUM lost for the hedged European fund that annual WisdomTree revenues decline by -3.2%. The impact on pricing and AUM are not as severe for the Japanese DXJ product.
The ongoing fundamental issue from our vantage point is Street consensus is way too high (which is increasing by the month with the development of net outflows). We calculate that 2017 consensus estimates of $0.97 per share (the out year numbers this growth stock is valued on) to be based on over $80 billion in AUM. With assets-under-management at $47 billion currently, this is a stretch at best. Even our $0.79 estimate for '17 based on $70 billion in AUM looks ambitious at this point. WisdomTree continues to trade at a substantial premium to the asset management group at over 20.0x next 12 month estimates versus the group at just over 13.0x '16 numbers which make estimate cuts problematic. The stock remains on our Best Ideas list as a Short.
Please let us know of questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
daily macro intelligence
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.
With the defense budget due out February 9th, we preview several key expectations with our new teammate, Lieutenant General Emerson “Emo” Gardner, USMC, (ret.). Emo brings unparalleled insight to the defense spending process with 37 years of distinguished service as a Marine officer and as the former acting Director of Defense Secretary Gate’s Cost Assessment & Program Evaluation.
We are very pleased to welcome the policy thought leaders from Potomac Research group to Hedgeye, and look forward to the differentiated perspective that Emo and his colleagues will bring.
About Lieutenant General Emerson “Emo” Gardner, USMC, (ret.)
Lieutenant General Emerson N. Gardner, USMC, (ret.) is a recognized expert on the Department of Defense programming and budgeting process and assists defense and non-defense companies in strategy development as an independent consultant.
From 2007 to 2010 Gardner was the Principal Deputy Director and then acting Director of Cost Assessment and Program Evaluation within the Office of the Secretary of Defense. In this billet he led independent evaluations of all major defense programs and managed the development of the Pentagon's $3 Trillion, six year Future Year Defense Plan for Secretary of Defense Robert Gates. He had previously been the Deputy Commandant of the Marine Corps for Programs and Resources where he was directly responsible for the development and execution of all aspects of the Corps’ $33 Billion annual budget.
Gardner completed 37 years of distinguished service as a Marine officer in 2010. As an aviator with 4300 hours of flight experience, his career highlights included tours as a Presidential Helicopter Command Pilot in HMX-1, operational deployments to the Middle East, Europe and Japan, and command in combat in Kuwait and expeditionary operations in Africa. As a flag officer, he was Assistant Deputy Commandant for Marine Aviation, managed the US Central Command's joint operations center during operations in Afghanistan after 9/11, and was the Director for Operations at US Pacific Command, which is responsible for US military activities in 42 countries.
Gardner is a cum laude graduate of Duke University and was an Olmsted Scholar for two years in Göttingen, Germany. He is a graduate of the Norwegian Defense College and the National Security Seminar at the Maxwell School of International Relations at Syracuse University.
Takeaway: We are adding Allscripts (MDRX) to Investing Ideas as a short.
Please note that we are adding Allscripts (MDRX) to Investing Ideas on the short side today. Hedgeye Healthcare Analyst Tom Tobin will send subscribers a full research report separately explaining our bearish thesis on the stock.
According to Tobin:
"While Allscripts reputation has markedly improved since the dark days of 2012-2013, the reality is that the damage is already done. Many Hospital Executives refuse to include Allscripts in RFPs and estimates of mind share vs. market share do not bode well for bookings growth. Based on industry ratings and anecdotes, the probability of Allscripts unseating the current acute care EMR vendor at any large IDN is low. We will continue to collect anecdotes from industry participants, including current Allscripts customers."
"Way too many investors are currently 'overweight' Healthcare," adds Hedgeye CEO Keith McCullough.
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