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Capital Brief: 6 Things to Watch During Another Tough Week for Trump

Capital Brief: 6 Things to Watch During Another Tough Week for Trump - trump texture image

 

Choose your adjective. It's shaping up to be another tough/busy/interesting week for President Donald Trump. Last night, national security advisor Michael Flynn resigned (more on that below), while judges on both coasts have now issued rulings against Trump's executive order closing U.S. borders to travelers from seven mostly Muslim countries.

 

Here's a quick, distilled look at the related issues all investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

RIGHTING THE SHIP

#Trump #Pence #Flynn

 

Capital Brief: 6 Things to Watch During Another Tough Week for Trump - michael flynn

 

National security advisor Michael Flynn resigned amid the latest news that he misled Veep Mike Pence and the Department of Justice informed the White House that he could be subject to blackmail by the Russians. Following days of speculation whether President Trump would fire him, the controversial Flynn was forced to take matters into his own hands.

 

Trump now has the ability to tap a seasoned advisor who can lend stability to a National Security Counci staff in disarray -- though the pool is limited given that last April, fifty Republican senior national security officials signed a letter stating that a Trump presidency would put our nation at risk.

 

Our seasoned colleague General Emo Gardner has more insight here. He's hosting a "flash call" today and lists Retired General Keith Kellogg, Former CIA director and General David Petraeus, and Retired Vice Admiral Robert Harward as potential replacements.

CAN’T STOP, WON’T STOP

#Obamacare #GOP

 

Capital Brief: 6 Things to Watch During Another Tough Week for Trump - obamacare trump

 

The regulatory reform train will keep moving forward with no plans of slowing down. The House is lining up a slew of regulations they want to overturn through the Congressional Review Act: from one that determines states’ abilities to conduct drug testing programs for people applying for unemployment insurance to another that establishes how states can set up payroll deduction savings programs for private sector workers.

 

While many Republicans have complained about the pace of ACA and tax reform, regulatory reform is going full steam ahead.

NORTHERN PASSAGE

#Trudeau #NAFTA #Canada

 

Capital Brief: 6 Things to Watch During Another Tough Week for Trump - trudeau canada

 

President Trump and Justin Trudeau met for the first time as the Canadian Prime Minister tried to find some common ground all the while trying to avoid contentious discussions on immigration and instead focussed on economic issues.

 

The president’s calls to renegotiate NAFTA will have a major effect on our neighbors to the north as 75% of Canadian exports come to the United States, but the trade deficit is considerably lower at $15B than with our neighbors to the south - $58B.  First daughter Ivanka Trump smoothed any tensions with Trudeau as they were able to connect over their shared desire to promote women in the workplace.

CONFIRMATIONS PICKING UP ... FOR NOW

After what has seemed like a long confirmation process, the pace is picking up speed. Treasury Secretary Steve Mnuchin and Veterans Affairs Secretary David Shulkin were confirmed last night and Small Business Administration-designate Linda McMahon will receive a full floor vote this week.

 

There’s even a chance Trump could get Energy-designate Rick Perry and Interior-designate Ryan Zinke confirmed later this week.

 

Only 10 more Cabinet and 1,000 more sub-Cabinet positions- and a SCOTUS Justice left to go.

HURRY UP AND WAIT

Movement of President Donald Trump’s nominees and major policies on Capitol Hill has been slow - which is the norm as Hill watchers will rush to tell you. But influential Ohio Senator Rob Portman has given Trump and other Republicans reason to be hopeful as he expects to see tax reform as early as this summer and since his plan is revenue neutral and is more likely to become permanent at the end of the tenth year of reconciliation.

 

Trump may be a little behind in his confirmations, but if Democrats keep dragging their feet and chew up valuable floor time, there won’t be quite as much time for the Republican agenda - or the Portman plan for that matter - to move forward on their terms.

*AUDIO REPLAY | TAX POLICY UNDER TRUMP

Last week we hosted a call with Dorothy Coleman, Vice President, Tax and Domestic Economic Policy at the National Association of Manufacturers, to discuss tax policy on the manufacturing sector. You can find the replay here.

 

 

*Email sales@hedgeye.com for more access to and information on our institutional research.


Sector Spotlight | Replay with Financials Analyst Jonathan Casteleyn

Missed it? No worries catch the replay below

 

Financials analysts Jonathan Casteleyn and Drago Malesevic reviewed the most important issues impacting their sector and how it's affecting their favorite stock ideas. 

 

And fielded questions live from the audience Q&A session at the end of the presentation.

 

CLICK HERE to access the associated slides.


Our Take: The Long-Term Market Picture Versus the Short-Term

Our Take: The Long-Term Market Picture Versus the Short-Term - tightrope

 

Balancing your long-term investing view against the short-term is one of the hardest things for investors to do. 

 

"I’ve spent 18 years trying to figure out the difference between my short and long-term market views," writes Hedgeye CEO Keith McCullough in today's Early Look, "And I’m still working on it…"

 

So here's our current market view right now across durations, according to McCullough:

 

Short-Term 

(TRADE duration, 3-weeks or less)

Both the US Dollar and sectors most tethered to the S&P 500 like Financials (XLF) are overbought.


Long-Term 

(TAIL duration, 3-years or less)

Super bullish on both the US Dollar and the prospects for Millennial Generation Consumption Growth Accelerating 

more On the Short-Term...

#Dollar $SPY #Nasdaq

 

We've been writing a lot about the short-term lately and how the U.S. stock market might be topping (click here for more). We say U.S. equities, in particular the Nasdaq, is overbought.

 

Case in point, total stock market volume (aggregate buying and selling) continues to decelerate on up days in the market, as conviction dissipates with each all-time high. Stock market volume was down -10% versus its 1-month average yesterday. 

 

Our Take: The Long-Term Market Picture Versus the Short-Term - volume 2 14 17

more On the long-term...

#Millennials #Consumption

 

See the Chart of the Day below.

 

According to Pew Research, "Millennials" (the word coined by Hedgeye Demography head Neil Howe) are defined as those ages 20-36 in 2017. There are a grand total of 75.4 million Millennials, now surpassing the 74.9 million in Baby Boomers (ages 53-71).

 

Our research suggests that halfway through Trump's term, at the beginning of 2020, Millennials will reach the key consumption threshold of 35 to 54 years old. In other words, the private sector deleveraging will begin to dissipate and add to U.S. economic growth. 

 

That's bullish for the U.S. Dollar.

 

Our Take: The Long-Term Market Picture Versus the Short-Term - 02.14.17 EL Chart

Bottom Line

"No one ever went broke booking gains," McCullough wrote earlier today. With the market at all-time highs and market signals like volume breaking down, we say book some gains so you can buy the long-term bull case back lower. That's it.


Cartoon of the Day: Me-OW!

Cartoon of the Day: Me-OW! - Market cat cartoon 02.13.2017

 

As Hedgeye CEO Keith McCullough is fond of saying, "Risk happens slowly at first, then all at once."

 

 

Click here to receive our daily cartoon for free.


PREMIUM INSIGHT

Here’s Why Twitter Is Not A Takeout Target

Here’s Why Twitter Is Not A Takeout Target - Internet Twitter Hesham 2.2.2016 NO TEXT 3

“At $10 billion, I don’t really think there are a lot of CEOs that would stick their neck out for a company that is producing declining revenues,” says Hedgeye Internet & Media analyst Hesham Shaaban.


Sell Hain Celestial: The Company's Own Words Betray Them

After the close on Friday, Hain Celestial Group (HAIN) issued a press release that said, "The SEC has issued a formal order of investigation and, pursuant to such order, the SEC issued a subpoena to the Company seeking relevant documents. The Company is in the process of responding to the SEC's requests for information and intends to cooperate fully with the SEC."

 

As a reminder, the last time HAIN reported financials was for their 3Q16 ended March 31, 2016, on May 4, 2016, which is now roughly nine months ago! Since the company's announcement of accounting irregularities in 8/16, the stock is only down 23% and consensus estimates have only come down marginally. Therefore, the company is trading at a stale NTM EBITDA multiple of 11.8x. As we have done in the past, we will make the case that HAIN is a great SHORT because the company's business model is broken and management can't be trusted with their words.

Operational Challenges

Whatever they found under the hood, whether illegal or not, will likely not be good news for the company and will likely cause restatements of the financials retrospectively. Who knows what the trends will look like once these changes are made and we actually get to look at the financials? One thing is for sure: the lack of investment that HAIN has made in their corporate infrastructure (accounting, finance, IT, etc.) has come back to hurt them. Going forward, the "strengthening of internal controls," as Irwin put it, will undoubtedly cost HAIN more money and bring operating margins down.

 

During this period of darkness, short interest has declined from 10.4% to 6.3%, while the sell-side has gotten increasingly cautious: hold ratings have increased from 33% to 53% and sell ratings are a paltry 13%. We often ask ourselves: do people actually believe in the story, or do people just not care about HAIN anymore? In our opinion, HAIN is uninvestable given the lack of financials, but we believe there is great opportunity in shorting the stock here, especially as it scraps around $40.

 

Let's think about what has transpired over the course of the last nine months. United Natural Foods (UNFI), their largest customer (represents 12% of sales), has experienced a slowdown in their business, missing consensus top line expectations the last five quarters, which has partially been driven by deflation. Whole Foods (WFM), a big customer and the natural channel more broadly, has also underperformed, driven by the proliferation of natural & organic products across all channels. Additionally, many bigger branded packaged food players have brought down top-line growth expectations due to industry dynamics. And this is just the USA!

 

Their international business, which represented 41% of sales in 2015, is also under pressure due to industry dynamics. UK grocers (28% of sales in 2015) have continued to push out more private label products. Just this week, McCormick stated during their earnings call in regard to private label in the UK:

 

In Europe, the big customer in the UK, this is part of a deflationary environment in the UK. The customer has, that particular customer, again, has a particular [private label] strategy that goes well beyond spices and herbs, but that did impact us, and it was a drag on our performance in the EMEA."

 

That spells trouble for HAIN's below par UK business.

Reading Between The Lines - The Verbal Deception Is Real

As part of our original SHORT thesis, we enlisted the services of ex-U.S. Marshal Mark McClish, who is trained in statement analysis, to dig into HAIN's earnings call transcripts to find signs of deception. It took Mark about an hour to point out where management was less than truthful with their spoken words. We recently asked Mark to look at the latest HAIN press releases to get to the bottom of what HAIN is actually saying. We believe it's clear from Mark's comments that the HAIN management team is hiding something and the fact that they can't get out historical financials is very telling.

 

Below are Mark's key takeaways in bold:

 

Hain Celestial Announces Completion of Independent Audit Committee Review

LAKE SUCCESS, N.Y., Nov. 16, 2016 /PRNewswire/ -- The Hain Celestial Group, Inc., a leading organic and natural products company with operations in North America, Europe and India providing consumers with A Healthier Way of Life™, announced today that the Audit Committee of the Company's Board of Directors has concluded its independent review with external counsel into concessions with respect to certain distributors in the United States.

 

We see that the company's Board of Directors Audit Committee is the one that conducted the review. Based on this statement, the review was done internally.

 

Hain Celestial had previously announced on August 15, 2016, that during the fourth quarter of fiscal year 2016 it had identified concessions that were granted to certain distributors in the United States and that the Audit Committee had retained independent counsel to assist in its independent review of such matter.

 

The Audit Committee did hire an independent counsel. The independent counsel did not conduct an independent review. They only assisted with the review.

 

The word "its" is tricky. They probably want us to believe the word "its" refers to the independent counsel and their review. However, based on the first sentence of their press release, "The Audit Committee... has concluded its independent review" it appears the word "its" refers to the Audit Committee and not the independent counsel.

 

The review, which was extensive, found no evidence of intentionalwrongdoing in connection with the Company's financial statements. Hain Celestial has begun to implement a remediation plan to strengthen its internal controls and organization.

 

The key word is "intentional." A better statement would have been to say, "Found no evidence of wrongdoing." However, that is probably a false statement so they added the word "intentional."

 

Saying they are implementing a remediation plan indicates that something was wrong and they are now fixing it.

 

The Audit Committee is pleased to conclude our thorough review with independent counsel," said Andrew R. Heyer, Chairman of the Audit Committee of Hain Celestial. "The Board of Directors believes this is an important step toward releasing the Company's financial results."

 

The word "with" always indicates distance. We see the distance in that the Audit Committee is at the beginning of the sentence and the independent counsel is at the end of the sentence. This shows us that the Audit Committee is the one primarily responsible for the review. A better statement would have been to say that the "Audit Committee AND the independent counsel is pleased to conclude..."

 

Hain Celestial is committed to transparency of our financial reporting, and we are taking concrete measures to remediate as well asstrengthen our internal controls. We are extremely pleased that the Company can now move forward with its reporting process as we put these challenges behind us," said Irwin D. Simon, Founder, President and Chief Executive Officer of Hain Celestial. "Our business is uniquely aligned with consumer habits and lifestyles, and we are excited about the fiscal year 2017 launch of our five new core platforms for growth."

 

In taking about their financial reporting, they used the word "remediate." The word "remediate" means "The act or process of remedying something that is undesirable or deficient."

 

They also talk about strengthening their internal controls. It sounds as if they are having financial problems.

 

Hain Celestial will not be in a position to release financial results until the completion of the Company's internal accounting review and the audit process. The Company is working diligently on this matter and will,as soon as reasonably practicable, make a further announcement regarding the timing of the release of its financial results.

 

"As soon as reasonably practicable" sounds as if it will happen soon. However, it could be years. Only the company knows what time frame they are talking about.

 

It sounds to me like they are having financial problems. They did an internal review and found some things that were wrong but not intentionally wrong. They brought in an independent counsel to give the review some legitimacy. However, it appears the independent counsel played a small role in the review. It will probably be a while before they release their financial records.

Timeline Of The Press Releases

For purposes of this exercise, we are going to ignore the various product launch announcements and partnerships created in India because we believe the sole purpose of those have been to distract investors into thinking everything is fine. We are in the camp of believing it is a smokescreen to levitate the stock so the CEO can get paid.

 

8.15.16 - HAIN Announced Delay of 4Q and Full-Year Results (Stock Performance: Down -26% on the day)

 

"The company noted they identified concessions that were granted to certain distributors in the United States. The Audit Committee of the Company's Board of Directors is conducting an independent review of these matters and has retained independent counsel to assist in that review. Previously, the Company has recognized revenue pertaining to the sale of its products to certain distributors at the time the products are shipped to such distributors. The Company isevaluating whether the revenue associated with the concessions granted to certain distributors should instead have been recognized at the time the products sell through its distributors to the end customers."

 

11.03.16 - NASDAQ Granted HAIN an extension through February 27, 2017 (Stock Performance: Down 33% since announcement of delay, down 3% on day of this announcement)

 

"The Company is currently evaluating whether the revenue associated with those concessions was accounted for in the correct period and is also currently evaluating its internal control over financial reporting."

 

11.16.16 - HAIN Announced Completion of Independent Audit Committee Review (Stock Performance: Down 35% since announcement of delay, flat on the day of this announcement.)

More details on this statement above.

 

"The review, which was extensive, found no evidence of intentional wrongdoing in connection with the Company's financial statements. Hain Celestial has begun to implement a remediation plan to strengthen its internal controls and organization."

 

12.07.16 - Announced Executive Changes (Stock Performance: Down 29% since announcement of delay.)

 

It's interesting to point out that Stephen Smith, ex-CFO of HAIN, who left HAIN in September 2015 to "pursue other opportunities," is still, as written on his LinkedIn page, "seeking new opportunities." Stephen Smith was previously a partner at PWC for 20 years. Did he see something in his two years at HAIN he didn't like? Likely no one will ever know, but it is odd timing/circumstances nonetheless.

What Is The Stock Worth?

Our base case sees 31% downside based on $350 million in EBITDA, but who knows what they are going to earn? That being said $320 million is a real possibility, putting the potential downside at 50%.

 

Sell Hain Celestial: The Company's Own Words Betray Them - hain bull bear

Editor's Note:

This is an institutional research note written by Hedgeye Consumer Staples analyst Howard Penney. To read more institutional research ping sales@hedgeye.com.


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