prev

EAT: RISK MANAGEMENT UPDATE

Keith bought Brinker in the Hedgeye Virtual Portfolio today at $24.34. 

 

As I wrote in this morning's Early Look, Brinker is my favorite name in the restaurant space.  Top-line stabilization and an ongoing remodeling initiative will add to the ground the company has already made from a margin perspective.  After meeting with senior management and viewing remodeled stores in Oklahoma this past week, I am confident that this turnaround story has legs to carry on further.  The remodeling and “team service” initiatives will benefit both margins and employee morale.  The strides being made in food preparation processes will likely improve traffic and customer loyalty, and the kitchen technology improvements will enable the units to operate more efficiently. 

 

On the DRI earnings call, senior management emphasized that industry sales trends continues to get better.  While DRI may be underperforming today due to some issues specific to the company, it is possible that the improved performance of Chili's could be exacerbating some of Darden's problems!

 

 

EAT: RISK MANAGEMENT UPDATE - brinker chart

 

 

Howard Penney

Managing Director


The Week Ahead

The Economic Data calendar for the week of the 28th of March through the 1st of April is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - cal1

The Week Ahead - cal2


Japan: A Fiat Fool’s Game

Conclusion: Buying the dip in advance of the recovery story in Japan is as consensus as buying the top in Japanese equities was in February. Don’t be pulled into this value trap. Further, we use historical data to show how current Japanese monetary and fiscal policy may have Japan en route to 1930’s-40’s-style stagflation.

 

This morning, it was confirmed that foreign investors bought a net ¥955B ($11.8B) worth of Japanese equities last week – the most since 2004 – as “buy the dip” took on a whole new meaning. In comparing the week ended March 18th to similar weekly data, Japan’s Ministry of Finance confirmed that this is “substantially the most on record”.

 

In conjunction with the report, we also received more confirmation that the “flows” indeed drove the Nikkei 225 to its latest lower-high on February 21st, as foreign institutional investors were weekly net buyers of Japanese equities from Oct. 29 through Mar. 18 – the longest streak since the 26 weeks through Dec. 9, 2005. That’s not at all insignificant, as roughly 70% of the trading volume in Japan is the result of foreign institutional transactions – likely because most Japanese aren’t gullible enough to buy their own equities after two decades of lower-highs and lower-lows.

 

The comments provided by Richland Capital Management’s Alex Au to bloomberg.com support our view that foreign  investors have been and continue to plow money into Japanese equities because they are “cheap”:

 

“Foreigners are probably not necessarily bullish, but are thinking they can buy some cheap stocks at that moment.”

 

Given that foreign investors have been net buyers since October, the phrase “doubling-down” certainly comes to mind.

 

Switching gears, our bearish thesis on the Japanese economy hasn’t changed since early October. If anything, the accompanying sovereign debt issuance acceleration resulting from the reconstruction costs (upwards of ¥25 TRILLION or $308.6B) further depresses Japan’s long-term growth prospects. Empirical studies have shown sovereign debt buildup past the Rubicon of 90% Debt/GDP structurally impairs an economy’s long-term growth prospects, and Japan, with its ~210% ratio, has been no exception.

 

Japan: A Fiat Fool’s Game - 1

 

Given the last eight centuries of history’s lessons, the following questions should be considered: 

  • If you’re buying Japanese equities because they are “cheap”, what earnings forecast are you using?
  • What’s your duration?
  • What GDP forecast are you using and have you modeled in a potential 3-6 month slowdown?
  • What’s your inflation forecast? 

Regarding duration, anyone who’s in it for the long haul needs a refresher on history’s lessons, which indeed show us that buying and holding Japanese equities has been arguably the worst trade of the last twenty years.

 

Japan: A Fiat Fool’s Game - 2

 

Regarding growth, we’re almost certain the Keynesian Kingdom will find a way to pull-forward future demand to help finance this earthquake. We caution, however, that merely REPLACING what has been LOST due to the recent tragedy with unprecedented levels of government leverage is NOT growth. Using earthquakes, tsunamis, and nuclear meltdowns as catalysts on the long side are not investment processes we subscribe to at Hedgeye.

 

Regarding inflation, we got some positive news this morning that Bank of Japan Governor Masaaki Shirakawa is opposed to monetizing the aforementioned recovery-related sovereign debt issuance, out of fear it may stoke inflationary pressures. This is in stark contrast to the recent proposals out of the DPJ and LDP calling for the BOJ to monetize the incremental debt issuance, out of fear the additional supply wouldn’t be adequately absorbed by the market – i.e. the bureaucrats fear a higher cost of capital looms in Japan’s near future if more and more JGB supply hits the open market (exactly what the long-term component of our Japan’s Jugular thesis forecasts).

 

Currently, the BOJ limits itself to purchasing long-term JGB debt on the secondary market consistent with the amount of banknotes in circulation, meaning that the BOJ has "spare capacity" to purchase around ¥20 TRILLION yen to purchase long-term JGBs – on top of its current purchases of ¥21.6 TRILLION annually and its current Asset Purchase Facility, in which it is buying ¥5 TRILLION of short-term JGBs.  The issue with the current political proposals lies in the fact that the BOJ is reluctant to outright monetize the government’s debt by funding it on the primary market.

 

In spite of Shirakawa’s warnings about the inflationary impact of debt monetization, as well as the potential blow to Japan’s international credibility, Japanese legislators have pushed on, invoking parallels to the Great Depression – the last time the Japanese government used a special circumstance to justify funding a substantial increase in debt and deficit spending via BOJ debt monetization:

 

“Bank of Japan bond underwriting is a policy that is evaluated highly worldwide because it helped Japan recover from the Great Depression before others.” – DPJ member Yoichi Kaneko

 

“If this isn’t a special situation, what is?” – LDP member Kozo Yamamoto

 

Shirakawa aptly responded:

 

“If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives and the economy, as has happened in the past.”

 

As a recap, in 1932, Japanese Finance Minister Korekiyo Takahashi boosted spending by 34% with the aid of BOJ monetization, which peaked a year later at 89.6% of JGB issuance and continued for the next 14 years until the end of WWII. Takahashi was later assassinated in 1936 when tried to rein in these expansionary policies to fight inflation. It appears that even 80 years ago, those that get paid by The Inflation don’t like it when the government pulls the plug any more than they do today…

 

All told, if Japan is to avoid the structural stagflationary problems that persisted throughout the 1930’s and 1940’s whereby consumer and producer prices eventually grew at YoY growth rates north of +40% and real GDP growth slowed sequentially for nearly 15 years, the bureaucrats would be well-served to heed Shirakawa’s warning. Unfortunately, with the yen trading down on the day in spite of the BOJ’s sobering comments, we, alongside the global currency market doubt they will.

 

Darius Dale

Analyst

 

Japan: A Fiat Fool’s Game - 3


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 78.57%

TAILGATE PARTY

Keith McCullough ’99 and Daryl Jones ’98 (both members of the 1998 NCAA hockey team) will be hosting a tailgate party at their offices in New Haven on March 25th starting at 1pm in advance of the NCAA games in Bridgeport.  Their office is located at 111 Whitney Avenue, which is between Trumbull and Bradley.  This the Taft Mansion, and the name of their company is Hedgeye Risk Management, which is on the façade of the building.  Keith and Daryl would like to invite all members of the Yale Athletic Community to this event.

 

TAILGATE PARTY - Tailgate Invite


JOIN US FOR COCKTAILS NEXT THURSDAY, MARCH 31st

JOIN US FOR COCKTAILS NEXT THURSDAY, MARCH 31st - 1


TALES OF THE TAPE: MCD, DRI, WEN, KKD, SBUX, KONA

Notable news items/price action over the last twenty-four hours.

  • MCD franchisee Arcos Dorados files for IPO up to $1.08 billion.  The group sees proceeds of $163.5m coming from the deal.
  • DRI reported Q3 EPS $1.08 from continuing operations versus the Street expectations of $1.05.  The company guided to +1.5% to +2.0% blended comps but the 3Q number came in at 0.9%.  More on the quarter to follow the conference call today.  The company received a $0.03 benefit from the favorable tax rate this quarter.
  • WEN received a positive write up on NRN.com, expounding on a note by Morgan Stanley predicting that breakfast sales could reach up to $250k per store.
  • KKD gained 3.4% on accelerating volume following the distribution deal with SYY that closed this week.
  • SBUX traded up 2.4% on accelerating volume.  This stock is the best performing stock of the last week.
  • KONA gained 12% on accelerating volume.

TALES OF THE TAPE: MCD, DRI, WEN, KKD, SBUX, KONA - STOCKS 325

 

Howard Penney

Managing Director


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next