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YUM – WATCH CHINA CONFIDENCE

Conclusion: Yum has seen strong sales performance lately in its China division.  The downturn in consumer confidence in the People’s Republic is worth monitoring for a view to how 4Q is trending.

 

Chinese consumer confidence fell for the first time in six quarters in the third quarter.  The drop is believed to be largely attributable to inflation expectations.  Pan Jiancheng, deputy-general of the National Bureau of Statistics’ monitoring center, said, “Inflation has been triggered mainly by increases in food prices which has pushed up inflation expectations, especially among low-income workers”. 

 

Specific to YUM, management has consistently called out consumer confidence in China as a key driver of sales.  On October 6th, from the 3Q10 earnings call transcript: “we continue to benefit from the improvement of the Chinese consumer where consumer confidence has now been positive year-over-year in the last nine months”.  During the 2Q09 earnings call, in discussing the top  line trends of -4% in China, management said, “when you look at consumer confidence, actually it’s kind of bumping along the bottom.  So that may be a reasonably good indicator of the consumer side of the equation”.  Later, during the 4Q09 earnings call, management again called out the bottoming of consumer confidence in China in the early part of 2009 and same-store sales subsequently posted strong gains in 1Q10.   Just as the inflection in consumer confidence proved to be an indicator of Yum China sales in 2009, the recent sharp downturn should also be taken into account when thinking about future quarters. 

 

While 4Q09 was a difficult quarter from a  top line perspective, and therefore may be easily comped by Yum in the upcoming quarter, 1Q11 will present a difficult challenge for Yum China if consumer confidence does not rebound in the interim.  Additionally, MCD announced yesterday that it has increased prices in China by between 0.5 yuan and 1 yuan to offset higher raw material costs.  YUM management stated on the most recent earnings call that it expects inflation to be a headwind in 4Q10 and 2011.  Should margins compress under rising costs, that would obviously present an additional challenge for the company.  Alternatively, following MCD’s lead and raising prices could negatively impact sales trends, particularly if consumer confidence does not rebound.

 

YUM – WATCH CHINA CONFIDENCE - china consumer confidence

 

YUM – WATCH CHINA CONFIDENCE - yum china sales

 

Howard Penney

Managing Director


Initial Claims Approach YTD Lows

Initial Claims Approach YTD Lows

Initial jobless claims seem to be getting better. The headline initial claims number rose 4k last week to 439k, but rolling claims fell 4k to 443k. As the following two charts show, both reported and rolling claims are knocking on the door of their YTD lows, but have yet to break through. Claims still need to be in the 375-400k range for unemployment to meaningfully improve - still well below where we are now.

 

Initial Claims Approach YTD Lows - 1

 

Initial Claims Approach YTD Lows - 2

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

Initial Claims Approach YTD Lows - 3

 

Joshua Steiner, CFA

 

Allison Kaptur


FINANCIAL SECTOR TAILWINDS: CLAIMS AND SPREADS CONTINUE THEIR IMPROVEMENT

Initial Claims Approach YTD Lows

Initial jobless claims seem to be getting better. The headline initial claims number rose 4k last week to 439k, but rolling claims fell 4k to 443k. As the following two charts show, both reported and rolling claims are knocking on the door of their YTD lows, but have yet to break through. Claims still need to be in the 375-400k range for unemployment to meaningfully improve - still well below where we are now.

 

 FINANCIAL SECTOR TAILWINDS: CLAIMS AND SPREADS CONTINUE THEIR IMPROVEMENT - claims rolling

 

FINANCIAL SECTOR TAILWINDS: CLAIMS AND SPREADS CONTINUE THEIR IMPROVEMENT - claims

 

Yield Curve Widening

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. After falling sharply for two quarters, the 2-10 spread has stabilized thus far in 4Q.  Yesterday’s closing value of 238 bps is up from 224 bps last week.

 

FINANCIAL SECTOR TAILWINDS: CLAIMS AND SPREADS CONTINUE THEIR IMPROVEMENT - spreads

 

FINANCIAL SECTOR TAILWINDS: CLAIMS AND SPREADS CONTINUE THEIR IMPROVEMENT - spreads QoQ

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

FINANCIAL SECTOR TAILWINDS: CLAIMS AND SPREADS CONTINUE THEIR IMPROVEMENT - perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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Big Week in Athletic Footwear & Apparel Sales

The athletic industry reported a solid week. Underlying trends improved across the board with apparel coming in hot last week. Here are our key takeaways: 

  • Both footwear and apparel sales improved sharply on a sequential weekly basis sparking a rebound in underlying trends. Importantly, the quality of sales acceleration is notable in the absence of promotional activity with ASPs remaining firm up low-to-mid single-digit.
  • Apparel is the key callout with Athletic Specialty sales up +31.5% on the week building on reaccelerated trends from last week. Despite facing its second easiest compare of the year (this week is the easiest), the underlying trailing 3-week on a 2yr basis rebounded sharply.
  • Footwear posted a solid week +5.9% suggesting the deceleration reported last week up +1.2% compared to +10.9% in the prior week was more likely an anomaly than trend.
  • Broad-based strength across regions with each posting double-digit gains suggesting improved underlying demand.
  • Skechers officially broke its positive sales momentum posting the first decline in year-over-year sales since June 2009 with toning trends (sales and ASPs) continuing to deteriorate.
  • Nike remains strong though the clear standouts are Under Armour with sales rebounding sharply following tough apparel compares in mid-October with sales up 45% and significant outperformance at outdoor outerwear brands Columbia up +31% and VFC (The North Face) up 59% - positive for DKS/HIBB.

Big Week in Athletic Footwear & Apparel Sales  - FW App Ind 1Yr 11 17 10

 

Big Week in Athletic Footwear & Apparel Sales  - FW App Ind 2Yr 11 17 10

 

Big Week in Athletic Footwear & Apparel Sales  - FW App FW Table 11 17 10

 

Big Week in Athletic Footwear & Apparel Sales  - FW App App Table 11 17 10

 

Casey Flavin

Director

 


General Mobama

“There is, in a competitive society, nobody who can exercise even a fraction of the power which a socialist planning board would possess.”

-Friedrich Hayek

 

Hayek is to the Keynesians of Big Government Intervention what capitalism is to socialism. Watching some Americans beg for the scraps of a short-term socialist experiment this morning is apparently the kind of groupthink that President Obama supports:

 

“Through the IPO, the government will cut its stake in GM by nearly half, continuing our disciplined commitment to exit this investment while protecting the American taxpayer" –Barack Obama

 

Really?

 

Hearing our used-car salesmen of professional American politicking talk about “disciplined” investing for the American people must be some sadistic form of a joke. I, for one, will go on the record today calling this GM deal out for what it really is – socialism. General Mobama, nice trade.

 

Co-founder of investment banking outfit Evercore Partners, Roger Altman, loves this short-term trading of American capitalism for privileged socialist handouts. His firm was paid upwards of $46 MILLION in pre-GM bankruptcy fees and allegedly wants another $17-18 MILLION in what bankers call “success fees” for this GM deal going off with a bang this morning. Roger, nice trade.

 

I couldn’t make this up if I tried, but Roger met with General Mobama earlier this week to talk about his post GM deal day job. Roger likes to trade the banking-fee-cycle with time moonlighting in DC. And apparently the President of the United States liked doing this GM deal so much that he is considering Altman as Larry Summers replacement at the White House.

 

Wait, is Altman a banker or a politician? Sadly, when getting in tight on these socialist handout jobs, one is a prerequisite for the other. Roger Altman has an impeccable resume in old-boy network banking and politics:

  1. 1974 he became Partner at Lehman (banker)
  2. 1 he served as Assistant Secretary of the Treasury (politician)
  3. 1 he went back to Lehman and became co-head of investment banking (banker)

Oh yeah baby, that’s the change General Mobama is talking about. Let’s bring back someone who really understood Jimmy Carter and Arthur Burns style economics and let’s get this Jobless Stagflation party started.

 

Don’t worry, you won’t be disappointed in this storytelling. The deeper you dig into a pile of dogma the more it smells. Altman loves working at places that lever and lather themselves up with cheap moneys. After Lehman, he did LBOs at Blackstone (banker). Then, in 1993, he went back to Washington as Deputy Treasury Secretary (politician) for the only 2 years that resembled 1970’s style US Jobless Stagflation until… well… today!

 

No matter where you go in America this morning, this is where we are. I, for one, won’t let my son and daughter YouTube me on this day of November 18th, 2010 as one of the pretending patriots who supports socialist bailouts.

 

Back to the market…

 

Today’s pump and dump government rally should provide a fantastic opportunity to put some of our short positions back on (in the Hedgeye Portfolio we currently have 15 LONGS and 10 SHORTS). The US stock market has only had 1 UP day in the last 8. In the last 2 days the SP500 became what our Hedgeyes call immediate term TRADE oversold.

 

Yes, like your US government, we trade…

 

In terms of the Hedgeye Asset Allocation Model, in the last week, on weakness, we’ve scaled back up to 6% positions across the board (from ZERO percent at the market top on November 8th) in US Equities, International Equities and Commodities. We are long US Healthcare (XLV), Germany (EWG), Corn (CORN), and Gold (GLD). All of these positions are candidates to be sold. Our current asset allocation to Cash = 58%.

 

Yes, like any free market capitalist, we reserve the unalienable right to see this government sponsored casino for what it has become…

 

In terms of levels on the SP500, going into today’s open, from the 1178 level, we measure 2:1 upside with a significant level of immediate term TRADE resistance up at 1191. If the SP500 closes above 1191, that’s bullish. If it breaks, that’s bearish.

 

In the face of 1. Global Growth Slowing 2. Global Inflation Accelerating, and 3. Interconnected Risk Compounding, I don’t want a banker or a politician telling me how to manage risk. I need a transparent and accountable General who I can trust gets this game – and I guess, for now, that will have to be me.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

General Mobama - JC


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 18, 2010

As we look at today’s set up for the S&P 500, the range is 20 points or -0.64% downside to 1171 and 1.05% upside to 1191.  Equity futures are trading higher tracking strength in European and Asian equities. Concern over the Irish debt situation eased, while the Spanish bond auction did not go as bad as feared. In important economic data today: Initial Jobless Claims, October Leading Indicators, November Philadelphia Fed Index.

  • Dendreon (DNDN) won backing of FDA advisory panel for Provenge
  • DryShips (DRYS) reported 3Q adj. EPS 38c vs est. 25c
  • Limited Brands (LTD) raised FY adj. EPS forecast to $1.82-$1.97, vs est. $1.94; also declared special $3-shr dividend
  • PetSmart (PETM) reported 3Q EPS 38c vs est. 38c

 PERFORMANCE

  • One day: Dow (0.14%), S&P +0.02%, Nasdaq +0.25%, Russell 2000 +0.34%
  • Month-to-date: Dow (0.99%), S&P (0.39%)%, Nasdaq (1.25%), Russell +0.63%
  • Quarter-to-date: Dow +2.18%, S&P +3.28%, Nasdaq +4.53%, Russell +4.68%
  • Year-to-date: Dow +5.56%, S&P +5.69%, Nasdaq +9.12%, Russell +13.17%
  • Sector Performance: Disc +0.7%, Energy +0.4%, Healthcare +0.1%, Consumer Spls (0.01%), Tech (0.05%), Utilities (0.1%), Industrials (0.1%), Materials (0.1%), Telecom (0.2%), Financials (0.6%).

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 611 (+2860)  
  • VOLUME: NYSE - 943.05 (-30.23%)
  • VIX: 21.76 -3.63% - YTD PERFORMANCE - (+0.37%)
  • SPX PUT/CALL RATIO: 1.60 from 1.80 -11.24%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 15.15 -0.101 (-0.665%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%
  • YIELD CURVE: 2.39 from 2.34

COMMODITY/GROWTH EXPECTATION:

  • CRB: 295.43 -0.27%
  • Oil: 80.42 -2.31% - BULLISH
  • COPPER: 373.40 +0.08% - BULLISH
  • GOLD: 1,337.32 flat - BULLISH

CURRENCIES:

  • EURO: 1.3531 +0.33% - BEARISH
  • DOLLAR: 79.084 -0.16%  - BULLISH

OVERSEAS MARKETS:

 

European markets:

  • FTSE 100: +1.41%; DAX: +1.42%; CAC 40: +1.64%
  • European markets are posting solid gains as investor appetite for risky assets returns amid rising hopes a solution to Ireland's banking crisis is near at hand.
  • The rally is being led by gains across most sectors with Basic resources, Construction Banks and Auto names prominent.
  • A number of strong earnings reports have also lifted sentiment with SABMiller posting consensus beating interims.
  • UK Oct Retail Sales (0.1%) y/y vs cons (0.1%)  

Asian markets:

  • Nikkei +2.06%; Hang Seng +1.8%; Shanghai Composite +0.94%
  • Asian markets were mostly up today, on speculation that concern over China’s anti-inflation policies may have been a bit too much.
  • Resource stocks powered much of the region's rises.
  • Financials led gains in Japan up 4-9%, as all 33 sectors rose.
  • Resource shares led a rise in Hong Kong.
  • Bargain-hunting lifted South Korea as worries about Ireland’s debt crisis eased.  Technology shares gained.
  • On a softer dollar, resource stocks outperformed after recent falls in China.
  • Australia was lifted by resource stocks, as banks declined slightly. 

Howard Penney
Manging Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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