prev

Virtue's Lie

This note was originally published at 8am on March 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“So our virtues Lie in the interpretation of the time.”

-William Shakespeare

 

This morning Global Equity markets are begging for Libyan resolve. The Chinese and Russians talking down a US no-fly zone notwithstanding, fidgety bulls are trading on a tick with the direction of the price of oil. That is “the interpretation of the time.” That price volatility is also becoming this market’s greatest risk.

 

The longer term risk management question as to the pace of Global Inflation Accelerating remains – if peace and love were to breakout across the Middle East tomorrow, will that stop the world’s reserve currency from being debauched?

 

Looking at the Global Currency market’s real-time vote on money printing, Ben Bernanke’s 2-day Semi-Annual Storytelling on US Monetary Policy was a disaster. Whether The Ber-nank chooses to be willfully blind to this or not, the US Dollar Index is now down for 8 of the last 10 weeks and collapsing to lower-lows.

 

Proving that petrodollars are indeed affected by the dollar’s price or that US Dollar priced inflation at the pump is a consumption tax on US growth is a trivial exercise. What isn’t trivial to the American public is the math. And that’s not because the math isn’t trivial. It’s because we have allowed an Almighty Central Planner to garner so much political power that he can not only obfuscate things like math – but make up his own interpretations of the times.

 

Before I get into Bernanke’s definition of what the US Dollar is (Ron Paul asked him for it yesterday), here’s the math on the inverse correlations between US Dollars and things that are inflating:

  1. Oil = -0.86
  2. Gold = -0.90
  3. CRB Commodities Index = -0.90

*Note to Fed: this correlation risk is running extremely high

 

And if you want the R-squares on these relationships they run between 0.74-0.82, so the correlation between what the US Dollar is doing and inflation is doing is crystal clear. Now some academic brainiac who is defending the Keynesian Kingdom of thought is going to quickly say something in response about “causality versus correlation” and, while there may be differences in certain scientific exercises, it’s a crock when it comes to analyzing the Fed’s mandate.

 

The Fed’s official marketing mandate is “price stability.” Whereas the Bernanke Fed’s operative has been to print money and inflate. He has only raised interest rates ONCE (2006) and he has overseen the highest levels of PRICE VOLATILITY that modern day markets have ever seen. Ever is a long time.

 

What is causality? What are the root causes of inflation? Is the global market place or The Bernank going to resolve this debate? Mr. Macro Market all but evaporated the Keynesians with The Inflation of the 1970s – are we looking to roll the bones to see if we get one of those again? (see the chart below of long-term median price inflation going back to the year 1500 from Reinhart & Rogoff’s This Time Is Different, page 181)

 

First, to attempt to briefly address some answers to these questions, let’s define what the US Dollar and Causality are:

  1. Causality (per Wikipedia) – is the relationship between an event (the cause) and a second event (the effect), where the second event is understood as a consequence of the first (agreed).
  2. The US Dollar (per Bernanke yesterday) – is the buying power of a piece of paper for things that people actually need to buy (agreed).

Now, since Bernanke says there is no inflation, he says the “price stability” and buying power of the US Dollar are just fine. And every American who doesn’t have a car service take them to work will tell you that’s the most ridiculous conclusion they’ve ever heard. In fact, most Americans think Bernanke is simply part of the government lying to them about real-world inflation – and you know what, most Americans aren’t as stupid as Bernanke must think they are – they are right.

 

Back to causality - to understand the cause of inflation, one must study the history by which The Inflation is priced – fiat currencies:

 

Pre-WWI

  1. 1913 – US Federal Reserve Act allows the US to move towards a money printing model that would eventually abandon the Gold Standard
  2. 1917 – US Treasury is given discretion to issue US Treasury Debt (to finance War, not national deficits and political careers)
  3. 1919 – Post WWI, 60% of Global Reserves are denominated in US Dollars

Post-WWII

  1. 1950’s – France ran deficit and devaluation policies (debauching the franc and France’s currency credibility)
  2. 1960’s – Britain ran deficit and devaluation policies (debauching the pound and Britain’s currency credibility)
  3. 1970’s – USA ran deficit and devaluation policies (debauching the dollar and America’s currency credibility)

Do we need to bring back a great American leader (Herb Brooks) to line The Bernank up on the blue line and repeat – “Again”… “Again”… “Again”? Or do we need a Miracle? Developed economies (including our own) have tried this over… and over… and over again with the cause (politics) and effect (inflation) being the same.

 

To make matters worse, it appears that the Big Government Spenders of longstanding European and modern American ilk haven’t learned a damn thing from all this. Bernanke seems readily prepared to blame any unintended consequences associated with this US Dollar Crisis on either Congress or someone in the Middle East. Gotta love the accountability in that. ‘Congress needs to stop spending, but I need to keep printing’ – he said it, not me.

 

My bearish view of Bernanke’s process isn’t a new one. Neither is managing the systemic risk that the Federal Reserve imposes on global market prices. Anyone who has been managing market risk for the last decade has been paid to accept and understand that the Greenspan/Bernanke interpretations of the times have not worked. As the late Murray Rothbard (distinguished Austrian School of economics professor) wrote in “The Case Against The Fed” in 1994:

 

“The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations… and this strange situation, if acknowledged at all, is invariably trumpeted as virtue.”

 

Maybe it has become the virtue of the few who hold centralized power in the palm of their hands – but this is not the virtue of the American Constitution. Neither is it the virtue of this Canadian who thought he was building an American family and firm under a President’s marketing pitch about Transparency, Accountability, and Trust. This virtue is a lie.

 

My immediate term support and resistance lines for the SP500 are now 1291 and 1319, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Virtue's Lie - f1

 

Virtue's Lie - f2


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - March 8, 2011


As we look at today’s set up for the S&P 500, the range is 19 points or -1.00% downside to 1297 and 0.45% upside to 1316.  The futures are trading higher as Oil falls for the first day in three.  Most Asian stocks climb on speculation Chinese regulators will stop measures to cool lending and European markets are mixed as German factory orders rise more than expected in January.

 

MACRO DATA POINTS:

  • 7:30 a.m.: NFIB Small Business (Feb.) est. 95, prev. 94.1
  • 7:45 a.m.: ICSC Weekly retail
  • 10 a.m.: Fed nominee Diamond testifies at Senate panel
  • 11:30 a.m.: U.S. to sell $23b in 52-wk bills, $40b in 4-wk bills; 1 p.m.: $32b in 3-yr notes
  • 12 noon: DoE energy outlook
  • 4:30 p.m.: API energy   

WHAT TO WATCH:

  • U.S. Treasury Secretary Geithner to visit Frankfurt, Berlin, Germany, on March 8 to discuss global economic outlook, financial reform, “global efforts to impose sanctions applying maximum pressure” on the regime of Libya’s Qaddafi, sanctions against Iran for “its failure to meet its international obligations”
  • Outside advisers to the FDA meet to discuss findings of report on Novartis’s Arcapta Neohaler in people with chronic obstructive pulmonary disease
  • Israel may seek an additional $20b billion in U.S. security aid to deal with potential threats stemming from Middle East turmoil, the Wall Street Journal says, citing an interview with Defense Minister Ehud Barak

PERFORMANCE:

 

For the second day we have 5 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND. 

  • One day: Dow (0.66%), S&P (0.83%), Nasdaq (1.40%), Russell (1.54%)
  • Month-to-date: Dow (1.11%), S&P (1.29%), Nasdaq (1.32%), Russell (1.36%)
  • Quarter/Year-to-date: Dow +4.43%, S&P +4.17%, Nasdaq +3.5%, Russell +3.65%
  • Sector Performance: - Materials (1.72%), Tech (1.27%), Consumer Discretionary (0.99%), Healthcare (0.77%), Industrials (0.93%), Energy (0.70%), Financials (0.67%), Consumer Staples (0.27%) and Utilities +0.39%

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1614 (-696)  
  • VOLUME: NYSE 1035.64 (-0.28%)
  • VIX:  20.66 +8.39% YTD PERFORMANCE: +16.39%
  • SPX PUT/CALL RATIO: 2.28 from 1.98 (+15.65%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries finished weaker following some intraday strength

  • TED SPREAD: 20.81 -0.102 (-0.486%)
  • 3-MONTH T-BILL YIELD: 0.11% -0.01%
  • 10-Year: 3.51 from 3.49
  • YIELD CURVE: 2.81 from 2.81

COMMODITY/GROWTH EXPECTATION:

  • CRB: 362.88 flat YTD: +9.04%  
  • Oil: 105.44 +0.98%; YTD: +13.26% (trading -0.09% in the AM)
  • COPPER: 432.70 -3.53%; YTD: -3.76% (trading -1.20% in the AM)  
  • GOLD: 1,432.03 +0.27%; YTD: +1.12% (trading +0.18% in the AM)  

COMMODITY HEADLINES:

  • Copper Falls to Two-Week Low as Higher Oil Prices May Curb Economic Growth
  • Wheat Drops for a Second Day on Steady Winter-Crop Conditions in the U.S.
  • Silver, Close to 31-Year Peak, Displays Bearish Signal: Technical Analysis
  • Cotton Futures Plunge by Daily Limit After Rally to Record Seen Overdone
  • Gold Erases Decline in London Trading, Advances 0.2% to $1,434.98 an Ounce
  • Ivory Coast Conflict Escalates as Gbagbo Seizes Control of Cocoa Exports
  • Japan to Revise Mine Law to Access Subsea Resources of Up to $3.6 Trillion
  • India Aims to Double Milk Output Growth, Become `Major Player' in Dairy
  • Palm Oil `Volatile' as Biofuel Role Increases Mideast Impact, Bursa Says
  • Malaysia Taps Persian Gulf to Boost Commodities Trading: Islamic Finance
  • Lynas's Chief Turns Contrarian $5 Million Rare Earth Bet Into $3.5 Billion

CURRENCIES:

  • EURO: 1.3965 +0.16% (trading -0.27% in the AM)
  • DOLLAR: 76.496 +0.13% (trading +0.25% in the AM) 

EUROPEAN MARKETS:

  • FTSE 100: (0.10%); DAX (0.15%); CAC 40 +0.25%
  • European indices are trading mixed helped by easing crude prices on reports the OPEC may raise production.
  • German factory orders rose 2.9% M/m in Jan. vs est. 2.5%.
  • Telcos are among the biggest gainers as Morgan Stanley raises European Telecom Services sector to attractive.
  • Greek is the worst performing market - banks continue to slide after Moody’s yesterday cut its credit rating three notches to B1.

ASIAN MARKTES:

  • Nikkei +0.19%; Hang Seng +1.71%, Shanghai Composite +0.12%
  • Mast Asian markets traded higher this morning.
  • Construction stocks led South Korea higher, though tech stocks fell.
  • Japan rose slightly on short-covering and acquisition activity. Tech shares followed their US peers down, but bargain-hunting more than made up for the declines.
  • Rumors floated around Europe that China might raise reserve requirements post-close, but citing sources, Reuters actually reported that the country reversed requirements that had been imposed on some banks after they curtailed their lending

Howard Penney

Managing Director

 

THE HEDGEYE DAILY OUTLOOK - setup



real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

The 2008 Sequel: Are We Headed Past $150 Oil?

Conclusion: The growing divide in monetary policy relative to the US suggests current FX trends may continue and perpetuate crude oil prices beyond their summer ’08 peak. At the bare minimum, elevated prices are here to stay over the intermediate-term TREND – irrespective of the turmoil in the Middle East and North Africa.

 

Position: We remain long of inflation via crude oil, gold, agricultural commodities, and energy stocks. We remain short bonds, emerging markets, and US consumer and industrial stocks.

 

Perhaps the most important piece of economic data to hit our screens in recent weeks is ECB President Jean-Claude Trichet’s hawkish comments following the latest ECB policy meeting last Thursday. Regarding those comments, Matt Hedrick, our European Analyst writes:

 

“In a Q&A session after the ECB announced no change to its key interest rates this morning, ECB President Jean-ClaudeTrichet said that an “increase of interest rates in the next meeting is possible… but not certain.” Despite all attempts by Trichet to be close-lipped on future actions by the governing council, the sentence was largely interpreted by the market as proof that the ECB will hike in the near-term.

 

And both the EUR and European equity markets cheered on the news. The EUR-USD rose to an intraday high of $1.3966 and European equity indices gained to close up +50 to 150bps today.

 

Trichet also made it clear that today’s decision was based on data taken from mid-February, and therefore did not include the recent move in crude prices, which created further speculation that greater inflationary readings next month may boost the probability of an interest rate hike.”

 

Regarding these rising inflation expectations, Matt writes:

 

“In comments today, Trichet said the range for Eurozone inflation (CPI) has shifted upwards to between 2.0% and 2.6% in 2011 and between 1.0% and 2.4% in 2012, mainly due to “the considerable rise in energy and food prices.””

 

It has long been our stance that Bernanke & Co. will continue to be willfully blind to inflation pressures, as neither $100-plus crude oil or world food prices at all-time highs directly manifest themselves in the Fed’s preferred “Core” CPI reading. While refraining from the debate on the analytical merits of “core” vs. “headline” inflation, the key takeaway here is that the ECB just confirmed that they’ll be quicker than the Fed to react to rising inflationary pressures resulting from commodity inflation.

 

The ECB now joins the Bank of England, the Bank of Canada, Sweden’s Risbank, and the Swiss National Bank as key constituents of the US dollar basket that are exhibiting hawkish monetary policy on a relative basis to the Fed. Together, these currencies make up 86.4% of the US Dollar Index.

 

As we often say, “everything that matters in Macro occurs on the margin”, and, on the margin, the foreign central banks most important to determining the value of the US dollar are moving away from Bernanke & Co. on monetary policy.

 

The 2008 Sequel: Are We Headed Past $150 Oil? - 1

 

As a result of this collective marginal shift in monetary policy, these currencies are appreciating relative to the US dollar: 

  • Euro (57.6%) of DXY: +9.5% since Aug 27;
  • British Pound (11.9%) of DXY: +4.3% since Aug 27;
  • Canadian Dollar (9.1%) of DXY: +8.1% since Aug 27;
  • Swedish Krona (4.2%) of DXY: +15.5% since Aug 27;
  • Swiss Franc (3.6%) of DXY: +11% since Aug 27; and
  • Weighted average appreciation since Jackson Hole: +8.5%. 

Understanding that currencies can only appreciate/depreciate relative to each other, it’s no coincidence that the US Dollar Index is down (-7.7%) over the same duration. The effect of monetary and fiscal policy on currencies does not happen in a vacuum; all deltas and inflection points must be considered relative to competing currencies.

 

Up until last week, it can be strongly argued that the dollar’s decline has been aided by a confluence of dovish US monetary policy (QE2) and incredibly lax fiscal policy (the CBO revised up the US federal budget deficit by +46% through FY13). With this news largely baked into the cake, we argue that incremental US dollar weakness (down -2.7% since it rallied to a lower-high in mid-Feb) is being driven largely by strength in the dollar’s counterparts, rather than incrementally-weak policy home: 

  • Euro (57.6%) of DXY: +3.6% since Feb 14;
  • British Pound (11.9%) of DXY: +1% since Feb 14;
  • Canadian Dollar (9.1%) of DXY: +1.7% since Feb 14;
  • Swedish Krona (4.2%) of DXY: +2% since Feb 14;
  • Swiss Franc (3.6%) of DXY: +4.7% since Feb 14; and
  • Weighted average appreciation since mid-Feb: +3%. 

The chart below shows the inverse relationship between the US Dollar Index and strength/weakness in its constituent counterparts (ex-Japan):

 

The 2008 Sequel: Are We Headed Past $150 Oil? - 2

 

It’s no coincidence that mid-Feb corresponds with the latest jump in global crude oil prices, which have an incredibly high inverse correlation to the US Dollar Index: 

  • Brent: +11.1% since Feb 14 with an inverse correlation of -0.90 (r² = 0.81) on an immediate-term TRADE basis; and
  • WTI: +18.2% since Feb 14 with an inverse correlation of -0.93 (r² = 0.87) on an immediate-term TRADE basis. 

This price action underscores a developing trend we see picking up steam over the near term: increased hawkishness relative to the Fed out of the central banks within the US dollar basket as a result of rising crude oil prices will put upward pressure on their currencies and incremental downward pressure on the US Dollar Index – in addition to the USD’s own dovish fundamentals. Perhaps the most alarming part of this trend is that it has a self-perpetuating tendency: 

  1. Crude Oil up;
  2. Increased hawkishness out of the ECB, BoE, BoC, Risbank, and SNB;
  3. Euro, Pound, Canadian Dollar, Swedish Krona, and Swiss Franc up;
  4. US Dollar Index down;
  5. Crude Oil up;
  6. Rinse & repeat. 

Indeed, this self-perpetuation of global FX trends vividly reminds us of early 2008, where the monetary policy backing each of these currencies was hawkish relative to the Fed (with the notable exception of Canada, which was more impacted by the US’s burgeoning recession). Even the Bank of England, which was cutting rates at the start of 2008, was more hawkish than the Fed by cutting at a significantly slower pace. The ECB and the SNB were on hold after hiking rates in mid-to-late 2007 and the Riksbank was outright raising rates until September of 2008.

 

The 2008 Sequel: Are We Headed Past $150 Oil? - 3

 

This collective hawkishness relative to the Fed from mid-to-late ‘07 through mid-2008 contributed to widening interest rate differentials across the board, as the spread between German, British, Canadian, Swedish, and Swiss 2Y bonds each increased vs. 2Y US Treasury bond yields (using German bunds as a benchmark for EU yields). This widening of spreads supported the appreciation of each currency (Euro, Pound, Canadian Dollar, Swedish Krona, and Swiss Franc) vs. the USD.

 

The 2008 Sequel: Are We Headed Past $150 Oil? - 4

 

The 2008 Sequel: Are We Headed Past $150 Oil? - 5

 

Understanding full well that the Fed did its best to debauch the dollar during this period, the US dollar would not have declined much without the aid of this relative hawkishness out of competing central banks – the buck can’t truly burn without help. Thus, as each currency appreciated relative to the USD, the US Dollar Index correspondingly depreciated. Given, we argue that much of the run-up in crude oil prices from late-2007 to mid-2008 was, in fact, due to strength in the USD’s counterparts as much as it was due to Bernanke Burning the Buck.

 

The 2008 Sequel: Are We Headed Past $150 Oil? - 6

 

Fast forward to 2011, and we have a very similar scenario whereby competing central banks are getting tighter on the margin relative to the Fed by a combination of hawkish rhetoric and rate hikes. This marginal hawkishness is supporting each of their currencies to varying degrees (excluding Japan, which continues to hint at additional easing, but is handcuffed by rising import prices) and keeping the selling pressure on the US dollar, which keeps buying pressure on crude oil and other commodities.

 

While the US Dollar Index may be oversold on an immediate-term TRADE basis, the broader intermediate-term TREND suggests that this self-perpetuating cycle is already underway and will only be alleviated by some combination of dovishness out of the aforementioned foreign central banks or hawkishness out of the Fed from a policy perspective – which is unlikely given that Bernanke was unable to see inflation at $150/bbl. crude oil; nor could he hike rates when GDP growth was at +5% on an annualized basis.

 

We know QE2 is ending in three months; will the Fed be tempted to step on the gas pedal some more? Reasonably strong US GDP growth forecasts of around +3.5% for 2H11 suggest that QE3 is not consensus – yet. If, however, we are correct in our call for a measured rollover in consumption growth and expedited housing deflation over the intermediate-term TREND, calls for additional monetary easing in the US will indeed become consensus – making US monetary policy incrementally dovish vs. competing central banks, as well as giving the US dollar an incremental push to the downside relative to its counterparts.

 

Of course, the Eurozone continues to have its sovereign debt issues, so we’ll be acutely focused on their monetary policy as well, measuring the slope of any hawkishness or dovishness on the margin. For now, their relative hawkishness combined with that of the BoE, BoC, Riksbank, and SNB is supporting the price of crude oil, which, ironically, supports additional hawkishness.

 

Will the cycle extend itself as it did in early 2008? As always, time and space will tell.

 

Darius Dale

Analyst


LIZ: We Like The Set-up

 

A confluence of thoughts this morning made me come back to one of the most hated names in retail – Liz Claiborne.

 

US investors didn’t pay much attention this morning to the LVMH acquisition of a majority stake in Bulgari. It’s not the $5.2bn price tag or 27x EV/EBITDA multiple that matters to us as much as the simple fact that there will always be a market for great content. LVMH would have no interest in LIZ, but it took me back to the following comments, which are more relevant.

 

On Feb 17th PPR’s (Gucci parent) Francois Pinault is on the tape in saying that acquisitions remain core to the story (though he did note that the luxury side of the house will grow organically). PPR is not afraid to step outside its traditional box to buy a good brand that gets them to a new luxury consumer. The best case there is Puma ($7bn) deal in April 2007.

 

That brings me to Liz Claiborne. I know that it’s tough to use Liz Claiborne in the same sentence as Gucci or Bulgari. Trust me, I’m not going to make the case that they compete.

 

But can anyone explain to me why there are so many LBOs and activist investors hitting the tape for retail-related businesses at peak margins? But no one wants to get their hands dirty on the junk?

 

Yes, LIZ has major problems. Not the least of which is that I can’t even get people to give 5 minutes of their calendar to discuss this name. But we get to a sum of parts between $10-$12 per-share. Interesting that we model Kate Spade to be worth $3.75 per share alone. LIZ is at $5.41 today.

 

I understand that ‘break up values’ never work for valuation purposes. On the same token, my handy dandy valuation textbook doesn’t tell me why ‘problem child’ stocks gap up massively when management changes are announced. Try using a p/e analysis on that one.

 

I noted the ‘good is good/bad is good’ call over a year ago and I proved to be flat-out wrong. Perhaps the biggest area I was wrong was in my opinion that no Board worth its salt would ever let these results continue without major management changes, or an outright breakup of the company.

 

Well…The environment has changed, and the Board is allowing McComb to move forward with his current plans to; a) grow JCPenney/QVC, b) close underperforming retail stores, and c) fix Mexx.

 

Thus far, he’s underperforming on the margin – though cash flow is still not near a level that would threaten covenants. We’ll know that within two quarters.

 

In the end, will the nine outside Directors (three seats turn each year) allow this ship to sink if the current initiatives don’t work? Never say never. I hope that the answer is ‘No.’ But Hope is not part of Hedgeye’s investment process. Before that question needs to be answered I’m going to bet on a) our earnings and cash flow model, and more people taking the time to analyze it over the next 3 weeks.

 

As an aside, LIZ is hosting a March 31st analyst meeting in NYC. This is one where they’ll have all the heads of all business units. It should be insightful, to say the least.


MCD: FEBRUARY SALES PREVIEW

MCD is scheduled to report its February sales results before the market open tomorrow, the 8th of March.  There was no difference in the number of weekdays and weekend days in February 2011 versus February 2011. 

 

Below I go through my view on what sales results the Street will receive as “GOOD”, “BAD”, and “NEUTRAL” for each region.  To recall, January’s U.S. result was a mere 10 basis points above my expectation and represented a slowdown for the company’s domestic business.  I expect this slowdown to continue in February.  There is plenty of time for my thesis on MCD in 2011 to play out, so I will not be discouraged by an upside surprise in February.   I am below the Street’s estimate and would note that a miss in February may spur the sell-side to rethink expectations ahead of 1Q results.  As gas prices creep higher, putting pressure on casual dining chains, MCD may actually benefit slightly but certainly not enough to dissuade me from my bearish thesis on 2011.  After all, as I noted in last month’s sales preview, drive-thru sales are important for MCD’s sales, so any share gained from casual dining may be offset, likely depending on just how high gas prices climb.

 

Below I go through my take on what numbers will be received by the street as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts. 

 

 

U.S. – Facing an easy +0.6% compare (there was no calendar shift in February 2010):

 

GOOD: A print of roughly 3% or higher would be perceived as a good result, implying that the company has improved two-year average trends from January.  I believe that any improvement in two-year average trends would be met positively by investors.  I believe a result in the NEUTRAL range – closer to the lower end of roughly 2% - is most likely.  To reiterate, I expect a greater proportion of the slowing in top line trends that I have projected for the U.S. business in 2011 to take place after compares step up in difficulty from March onward.  At that stage, I expect a more obvious divergence to emerge between my projections and those of the sell-side.  Of course, weak results tomorrow may precipitate a correction in Street expectations ahead of 1Q results but, given the darling status currently enjoyed by MCD on Wall Street, I anticipate some stickiness in current consensus.

 

NEUTRAL: Roughly 2% to 3% implies two-year average trends that are approximately in line with the calendar-adjusted two-year average trend in January.  I would add that, in reality, a result towards the lower end of this range will not be received well and that is where I expect the U.S. comp to come in. 

 

BAD: Below 2% would imply a significant deceleration in two-year average trends on a calendar-adjusted basis.  Headline comps for the U.S. were low for December and January with similarly easy compares.  A further deceleration in two-year average trends would likely call into question the direction of the U.S. business for 2011.

 

MCD: FEBRUARY SALES PREVIEW - mcd preview february

 

 

Europe – Facing a compare of +5.4% (there was no calendar shift in February 2010):

 

GOOD:  A print of approximately 6% would imply two-year average trends significantly higher than those see in December and marginally better than the strong two-year average trends in January.  An improvement, or even maintenance, of trends from January would be well-received given that the compare in February is significantly more difficult than that of January.

 

NEUTRAL: Between roughly 5% and 6% would imply a two-year average trend slightly below January’s trend.  While a deceleration is usually received negatively, a slowdown is almost expected following a sharp gain in two-year average trends in January. 

 

BAD: Below 5% would imply trends significantly below January’s and, while I believe some allowance will be made for a deceleration given the improved levels of two-year average trends on an absolute scale, the perception of January’s Europe result as being anomalous will likely drag sentiment.

 

 

APMEA – Facing a difficult 10.5% compare (there was no calendar shift in February 2010):

 

GOOD:  Any positive same-store sales result from APMEA would be well-received by investors.  Given the difficulty of the compare from February 2010, +10.5%, a same store-sales print of roughly 0.0% would imply two-year average trends approximately in line with January’s result.   Additionally, a third consecutive month of strong two-year average trends flowing November’s disappointing number would bolster confidence in the APMEA business.

 

NEUTRAL: Between -1% and 0% would imply two-year average trends roughly in line with January. 

 

BAD: Below -1% would obviously look bad from a headline perspective but, also, on a two-year average basis, this would imply a significant deceleration in two-year average trends from January.

 

 

Howard Penney

Managing Director


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next