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Short Low, Cover High? No Thanks

Client Talking Points

EURO

Despite terrible economic data this week (or is that what European Equities really need, and a commensurate Down Euro?), the EUR/USD is having a hard time breaking down through the low-end of our current $1.08-1.12 risk range. We believe that’s why European Equities stop going up (again) here – if Mario Draghi doesn’t walk on water next week, watch out below.

RUSSELL 2000

Post the short squeeze “off the lows” the Russell’s draw-down is still -18.6% since July – if you haven’t been short small/mid cap, junk, illiquidity, high beta, high short interest, etc., here’s another bite at a big apple of alpha. There is immediate-term downside in the Russell to 991 (short/sell lower-highs, cover lower).

UST 10YR

To end on a bullish note, Donald Trump would characterize today’s excellent buying opportunity in the Long Bond as very very super huge with the UST 10YR at 1.84% (on a whiff of a rate of change slow-down jobs report on Friday, our risk range implies 20 basis points of immediate-term downside to 1.64%); buy TLT, ZROZ, EDV, XLU, etc.

 

*Tune into The Macro Show with Hedgeye Macro and Housing Analyst Christian Drake live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 2%
FIXED INCOME 26% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

Our preferred growth slowing vehicle remains Utilities (XLU) in equites. Hitting on Friday’s revised GDP report (Q/Q SAAR Q4 GDP revised to +1.0% from +0.7%), a deep-dive into the number doesn’t support an incrementally stronger economy:

  • Consumption was revised down marginally but net exports were up with the negative revision to imports outweighing the negative revision to exports. That’s good for the number but lower global trade activity is not a good sign for global growth;
  • Much of the actual change in the revision was due to inventories, which contributed +0.31pts to the headline number
GIS

General Mills (GIS) hit an all-time high last week when it reached $60.18 on Thursday. Although this would not be a great entry point, it is also not a reason to get out if you have a long-term view. Nothing has changed in our fundamental story and we have no reason to lose faith in our thinking to date.

 

Over the course of the past few years, GIS has made strategic acquisitions within the natural & organic / wellness space (we call it the string of pearls approach). Although they are not largely meaningful to top or bottom-line right now, they are changing the way the company thinks about its broader portfolio.

 

We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.

TLT

Our preferred growth slowing vehicle remains (Long-Term Treasuries) TLT in fixed income. A flattening in the yield spread (10YR Treasury Yield – 2YR Treasury Yield) continued last week into double digit basis point territory (currently at 96 basis points). Year-to-date the yield spread has declined 44 basis points while the 10YR Treasury Yield has dropped 47 basis points. As a reminder the yield curve flattens as the economy slows with policy and/or liquidity management driving the short-end higher and defensive positioning and/or discounting of lower future growth/inflation driving the long end lower. 

Three for the Road

TWEET OF THE DAY

$CMG has competitive issues too! The meat you eat is more likely to be antibiotic-free this year http://www.huffingtonpost.com/entry/antibiotic-free-meat-subway-perdue-tyson_us_56d49d09e4b0871f60ec465c

@HedgeyeHWP

QUOTE OF THE DAY

The prettier the garden, the dirtier the hands of the gardener.    

B.E. Barnes                                               

STAT OF THE DAY

Today in 1797, The Bank of England issued the 1st one and two Pound banknotes.


The Macro Show Replay | March 2, 2016

CLICK HERE to view the asscoaited slides.

An audio-only replay is available below:

 


CHUY | SOMETIMES YOU NEED TO KNOW WHEN TO WALK AWAY

We are removing Chuy’s Holdings (CHUY) from our Hedgeye Restaurants Best Ideas list as a SHORT.

 

HEDGEYE OPINION

Last night CHUY reported 4Q15 and full year earnings results that beat our expectations as well as consensus expectations. In addition, their guidance looking out into 2016 and beyond was relatively in line with consensus. A core aspect to our short thesis was a continuing decline in traffic due to their pricing, and heavy concentration in Texas, specifically oil markets such as Houston and San Antonio. Although management spoke to softening in these regions it was not enough to greatly affect the overall business. Sometimes you need to know when to walk away, and this is that time for us, we are removing it from our list altogether, and will watch this one from the sidelines.

 

4Q15 RESULTS

CHUY reported revenue of $71.0 million, slightly beating out estimates of $70.4 million. Same-store sales growth in the quarter was +3.2%, handily beating consensus estimates of +2.8%. The comp was entirely built up by price, as traffic was flat in the quarter. Earnings per diluted share was $0.18 in 4Q15 versus consensus estimates of $0.13.

 

DEVELOPMENT

During 4Q15, four new Chuy's restaurants were opened - in Tuscaloosa, Alabama; Columbus and Beavercreek, Ohio; and Orlando, Florida, which was right on par with consensus estimates. Subsequent to the end of the fourth quarter, one additional Chuy's restaurant was opened inWoodbridge, Virginia.

MANAGEMENT GUIDANCE

The company expects 2016 EPS to be between $1.01 and $1.05, current consensus estimates were pegged at $1.03 for full year 2016. Management expects comparable restaurant sales growth of approximately 2.0%, slightly below consensus estimates of 2.6%.  And the company intends to open 11 to 13 new restaurants in the quarter, which is in line with current consensus projections of 12 new restaurants in 2016.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


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LAZ: Adding Lazard to Investing Ideas (Short Side)

Takeaway: We are adding Lazard to Investing Ideas today.

Editor's Note: Please note that our Financials analyst Jonathan Casteleyn will send out a full report outlining our high-conviction short thesis later this week. In the meantime, below is a brief summary of our thesis sent yesterday by Hedgeye CEO Keith McCullough in Real-Time Alerts.

 

LAZ: Adding Lazard to Investing Ideas (Short Side) - z laz

 

Looking for great ways to play the end of the levered investing cycle? Look no further than bankers at Lazard (LAZ). Per Jonathan Casteleyn's most recent research note:

 

"Like most cyclical stocks, Lazard "looks" cheapest at market tops as its earning downturn is just getting started versus at market bottoms when the company is underearning and shares "look" expensive (but they are actually great early cycle longs). 

 

We have earnings flat at $2.80 for 2016 and 2017 which we capitalize at 8-9x for a fair value of $25. However in a 1 Emerging Market type downcycle, Lazard asset management with ~50% of its asset-under-managments in EM credit and equity will cause LAZ stock to overcorrect and spit off more downside (substituting current day China for Thailand in '97 in running out of FX reserves to support its currency and plugging in Venezuela or the Ukranine for Russia's '98 default)." 


[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns

Takeaway: Investors made the first contribution to taxable bonds in 15 weeks, although only a modest +$107 million.

Editor's Note: This is a complimentary research note which was originally published February 25, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

*  *  *  *

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending February 17th, taxable bond funds saw their first inflow in 15 weeks, although only a modest +$107 million. Also within bonds, fixed income ETFs took in +$2.9 billion. That amount included +$448 million in contributions to the long duration Treasury TLT fund, which has now increased year-to-date assets by an astounding +$3.0 billion or +44%. Meanwhile, investors continue to exit equity mutual funds and ETFs, drawing down another -$4.1 billion from the category, even during a week with declining volatility. International equity funds, however, were the exception within total equity products, taking in +$1.0 billion, as the category continues to experience stable inflows. Finally, investors seeking safety shored up +$8 billion in money market funds as the move to build cash is accelerating.


[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI1 large 3 1 16

 

In the most recent 5-day period ending February 17th, total equity mutual funds put up net outflows of -$1.2 billion, trailing the year-to-date weekly average outflow of -$1.0 billion but outpacing the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$1.0 billion and domestic stock fund withdrawals of -$2.3 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 5 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net inflows of +$964 million, outpacing the year-to-date weekly average outflow of -$873 million and the 2015 average outflow of -$475 million. The inflow was composed of tax-free or municipal bond funds contributions of +$857 million and taxable bond funds contributions of +$107 million.

 

Equity ETFs had net redemptions of -$2.9 billion, slightly better than the year-to-date weekly average outflow of -$4.4 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.9 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI2 2

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI3

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI4

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI5

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI12

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI13

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI14

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI15

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI7

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: With Treasury inflows trending, the long duration Treasury TLT ETF took in another +$448 million or +5% last week. Also, the utilities XLU fund took in +$469 million or +6%.

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI17

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$8.0 billion spread for the week (-$4.1 billion of total equity outflow net of the +$3.9 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$475 million (more positive money flow to equities) with a 52-week high of +$20.5 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] Fund Flow Survey | Small Reprieve from Taxable Drawdowns - ICI11 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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