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TALES OF THE TAPE: MCD, SBARRO, MSSR, OUTBACK

Notable news items from the past few days and Friday’s price action.

  • MCD is experiencing difficulty in its efforts to attract jobseekers as Starbucks, Panda Express and Chick-fil-A have built credibility in recent years according to the Chicago Tribune.
  • MCD’s Jan Fields appeared on CNBC and refused to comment on Joe Kernen’s questions regarding 1Q11 sales trends.
  • MCD’s Ronald McDonald is back in the spotlight, not long after industry watchers had speculated that McDonald’s advertising for adult-focused menu items and activists’ criticism would marginalize the character.
  • Sbarro sought Chapter 11 bankruptcy protection after sales slowed, cheese costs rose, listing assets of $471m and debt of $486.6m, in documents filed today in bankruptcy court in New York.
  • MSSR is a target of Tilman J. Fertitta as the investor intends to commence a (low-ball) cash tender offer for McCormick & Schmick’s Seafood Restaurants at $9.25 per share.  We see fair value for the stock closer to $11.
  • OSI Restaurant Partners LLC said it planned to remodel as many as 150 Outback Steakhouse units and focus new unit development on the Bonefish Grill brand.  Chief executive Liz Smith said OSI is planning to renovate about 400 Outback units over the next several years and would explore similar remodeling strategies for its other brands.
  • KKD declined 21% on accelerating volume after the company said late Thursday that it had lost 2 cents per share in the fourth quarter versus street expectations of a gain of $0.04.

 

TALES OF THE TAPE: MCD, SBARRO, MSSR, OUTBACK - stocks 44

 

Howard Penney

Managing Director


WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS

This week's notable callouts include financial company swaps tightening and the Baltic Dry Index falling.  It's also worth pointing out that the government's temporary budget expires this Friday, potentially setting the stage for a government shutdown thereafter if no budget agreement is reached. We consider this an underappreciated risk factor facing the markets in the short term (for more details see this morning's Early Look from our Macro team).


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 11 improved / 4 out of 11 worsened / 5 of 11 unchanged
  • Intermediate-term (MoM): Negative/ 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - summary

 

1. US Financials CDS Monitor – Swaps were mixed to positive across domestic financials, widening for 11 of the 28 reference entities and tightening for 17. 

Tightened the most vs last week: MET, XL, HIG

Widened the most vs last week: JPM, PMI, RDN

Tightened the most vs last month: UNM, MMC, WFC

Widened the most vs last month: RDN, ACE, MBI

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter, tightening for 30 of the 39 reference entities and widening for 9.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - euro cds

 

3. European Sovereign CDS – Sovereign CDS were mixed across Europe, rising in Greece, Portugal, and Ireland, but holding flat in Spain and falling in Italy. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell slightly to close a volatile week, ending at 7.85, 2 bps lower than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose last week to end the week at 1617.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - lev loan

 

6. TED Spread Monitor – The TED spread rose last week, ending the week near a new high at 23.6 versus 22.0 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell to end the week at 32.9, 2.2 points lower than the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 17 bps.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  As of Thursday, the most recent data available, spreads rose to 138. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - markit

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30%. Since then it has bounced off the lows.  Last week it fell slightly, dropping 65 points to 1520. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened to 265 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0% upside to TRADE resistance, 1.1% downside to TREND support.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FINANCIALS SWAPS TIGHTEN AS US GOVT SHUTDOWN RISK LOOMS - xlf

 

 

Joshua Steiner, CFA

 

Allison Kaptur


Shutdown

“Sometimes we stare so long at a door that is closing that we see too late the one that is open.

-Alexander Graham Bell

 

Finally, we’re here. This week we’re finally going to see US Professional Politicians face the door that’s closing on their conflicted and compromised careers of debt-financed-deficit-spending. This isn’t the time to give into their fear-mongering. This is going to open he door for a generational opportunity in America. This is great news.

 

On Friday, the stop-gap bill to keep the US Government open for business expires. With $14,272,778,776,442 in US Debt + another $55,800,000,000,000 in unfunded Medicare and Medicaid liabilities, I say shut these politicians down. The biggest risk to America today isn’t what’s happening in the Middle East or Japan – it’s the 112th Congress.

 

And no, Mr. Jaime Dmon, we don’t measure America’s risk solely in terms of the price of its stocks and bonds. America is bigger than that. America is a place that puts a higher multiple on liberty than it does the sustainability of your earnings. America is a place where The People who stand up for the truth will be heard.

 

From a fiscal and monetary policy perspective, the sad truth about last week in Global Macro markets was more of the same. The US Dollar Debauchey continued – and, as a result, The Inflation that’s priced in US Dollars pushed higher.

 

With the US Dollar Index closing down for the 10th week out of the last 14, here’s what else happened to prices week-over-week:

  1. Euro = +1.4% to $1.42 versus the USD closed out the best quarter that it’s had since it started trading in 1999
  2. Canadian Dollar = +2% to $0.96 versus the USD and continues to ake higher-highs
  3. CRB Commodities Index (19 commodities) = +0.3% to 360, testing its highest weekly closing highs since The Inflation of 2008
  4. West Texas Crude Oil = +2.4% to $107.94, making a fresh 30-month high just in time for your weekend at the pump
  5. Gold = +0.10% to $1428, closing just a hair inside its highest weekly closing price ever – ever is a long time
  6. Copper = -3.6% to $4.25/lb as the world comes to realize that Global Growth Slows As Inflation Accelerates
  7. Volatility (VIX) = -2.7% to 17.41 as month and quarter-end trading volumes slowed to a pay-day halt
  8. 2-year US Treasury Yields = +9.5% to 0.80% as the politicization in the short end of the curve comes under global pressures
  9. Yield Spread (10-yr yields, minus 2-yrs) = -7 basis points on the week, upsetting the piggy banker’s net interest margin spread

US Equities ralliedto another long-term lower-high because, well… as Gordon Gekko might say, debt-financed-deficit spending “is good”…

 

Until it isn’t.

 

Interestingly, but not surprisingly. It was all good for Greek Equities too … until the Free-Moneys-Forever monetary policy of the European Central Bank (ECB) stopped playing the music.

 

With the ECB set to raise interest rates on Thursday, Euroe’s currency and interest rates continue to strengthen. This is great news for the conservative Euro dweller who has cash in that old tickle trunk that we old fashioned folks call a savings account. It’s really bad news for the Greek Gekkos out there who are laden with deficits and debts.

 

Greece’s stock market is down another -2.1% this morning, taking its cumulative swoon to -12.9% since what Wall Street called the “reflation” trade sarted to morph into The Inflation problem on February the 18th. Interestingly, but not ironically, that was the same day that the SP500 peaked for 2011. This should remind us all that what goes up with Big Government’s help, can come down – and quickly.

 

If you want to look at The Inflation being priced into Global Market prices for the YTD, it’s pretty straight forward: TOP Global Stock Market YTD = Russia +17.2% versusBOTTOM Global Stock Market YTD = Egypt -23.0%.

 

I know - which one of the affluent American Senators of the Fiat Republic really cares about starving young people in the Middle East or the 44,000,000 Americans (new all-time high) on food stamps anyway? Social revolutions be damned. Obama’s got the guns.

 

In the US stock market, The Inflation trade continues to be the only one that’s really getting people paid: S&am;P Sector Performance YTD: Energy (XLE) = +17.2% versus Consumer Staples (XLP) = +2.6%.

 

Of course, everyone on Wall Street and in Washington knows this – we just don’t like to talk about it so plainly. The Inflation is a policy to get the stock market “going” – The Bernank has all but told you that. Now it’s time for us to start dealing with its unintended societal consequences.

 

In the edgeye Asset Allocation Model, I drew down my Cash position week-over-week. Here are the allocations ahead of this week’s trading:

  1. Cash 46% (down from 52% last week)
  2. International Currencies = 27% (Chinese Yuan, Canadian Dollar, British Pounds – CYB, FXC, and FXB)
  3. Fixed Income = 12% (Long-term Treasuries and US Treasury Flattener – TLT and FLAT)
  4. Commodities = 9% (Oil and Gold – OIL and GLD)
  5. International Equitie = 6% (China – CAF)
  6. US Equities = 0%

That’s right. At this stage of the game, I have the same policy as The Bernank in trusting the 112th Congress with The Inflation – ZERO. That’s marked-to-market with a zero percent allocation to US Equities until the US Dollar stops being debased. If it takes a Shutdown of these professional politicians and the storytelling they employ – so be it. In the long-run, wersquo;ll all be better off with them just stopping what they’ve been doing anyway.

 

My immediate-term support and resistance levels for the SP500 are now 1314 and 1339, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Shutdown - Chart of the Day

 

Shutdown - Virtual Portfolio


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - April 4, 2011

 

Interestingly, but not surprisingly, Inflation Accelerating in Europe has both expectations for an ECB rate on Thursday and the Euro pushing higher. This is not good for debtors (another way to be long The Inflation), and most obviously expressed in Greek stocks. They are down a full -2.1% this morning but, more impressively, down -12.9% since a lot of the “reflation” mean reversion trades peaked on FEB 18th.  As we look at today’s set up for the S&P 500, the range is 25 points or -1.38% downside to 1314 and 0.49% upside to 1339.

 

GLOBAL PERFORMANCE:

 

Day 1 of PERFECT; we have 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND. 

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

 

  • ADVANCE/DECLINE LINE: 1163 (+648)  
  • VOLUME: NYSE 902.12 (+16.15%)
  • VIX:  17.40 -1.92% YTD PERFORMANCE: -2.15%
  • SPX PUT/CALL RATIO: 2.22 from 2.10 (+5.58%)

CREDIT/ECONOMIC MARKET LOOK:

 

  • TED SPREAD: 25.03
  • 3-MONTH T-BILL YIELD: 0.07% -0.03%
  • 10-Year: 3.46 from 3.47
  • YIELD CURVE: 2.66 from 2.67

 

MACRO DATA POINTS:

  • 9:05 a.m.: Fed’s Lockhart speaks in West Palm Beach, Fla.
  • 9:30 a.m.: Fed’s Evans speaks at Money Smart Week
  • 11 a.m.: Export inspections (corn, soybeans, wheat)
  • 11:30 a.m.: U.S. to sell $32b 3-mo. bills, $30b 6-mo. bills
  • 3:15 p.m.: Fed’s Evans speaks on CNBC
  • 4 p.m.: Crop progress plantings
  • 7:15 p.m.: Bernanke speaks on clearinghouses and stability in Georgia 

WHAT TO WATCH:

  • Larry Page takes over as Google CEO today
  • Vivendi agrees to buy Vodafone’s 44% stake in French mobile- phone operator SFR for EU7.95b ($11.3b)
  • Belgium’s Solvay agrees to buy Rhodia for EU3.4b ($4.8b) in cash, boosting shares of other European chemicals stocks on speculation of more M&A
  • President Barack Obama will file Federal Election Commission paperwork for his re-election bid as early as today, according to a person familiar with the planning
  • Muammar Qaddafi’s acting foreign minister met with Greece’s prime minister in what Greek govt. described as an attempt to find a political solution to hostilities in Libya. Fighting continued in the besieged rebel- held city of Misrata on Sunday, AP reported

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

COMMODITY HEADLINES FROM BLOOMBERG:

 

  • Copper Seen Rising 18% to Record as Shortages Overcome Weaker China Demand
  • Cocoa Seen Dropping 12% Once Fight for Ivory Coast Presidential Power Ends
  • Corn Rallies to Highest Since 2008 as Stockpiles Drop, Goldman Sees Record
  • Oil Rises to 30-Month High in New York on Fuel Demand Outlook, U.S. Jobs
  • Lead Reaches Three-Year High on Speculation Demand Will Gain; Copper Rises
  • Gold Advances on Conflict in Libya, Concern About European Sovereign Debts
  • Tainted Pork Becomes Latest Inflation Driver for China: Chart of the Day
  • Anglo American Will Struggle to Meet Collahuasi Copper Goal After Floods
  • China's Minmetals May Need to Raise Its $6.5 Billion Equinox Offer by 29%
  • Mitsubishi Materials to Increase Lead Output by 16% on Post-Quake Demand
  • Palm Oil Advances, Tracking Gain in Soybeans, Corn on Lower Inventories
  • Fight for Ivory Coast's Abidjan Enters Fifth Day, Food Supplies Run Short
  • Japan Quake Recovery, Atomic Concerns Drive Demand for Copper, Iron, Beef

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

EUROPEAN MARKETS

 

European stocks are little changed near three-week highs as losses by financial companies offset takeover bids from Vivendi and Solvay. 

 

MACRO DATA POINTS:

 

  • Eurozone Apr Sentix Index 14.1 vs consensus 16 and prior 17.1
  • UK Mar Construction PMI 56.4 vs consensus 54.9 and prior 56.5
  • Eurozone Feb PPI +6.6% y/y vs consensus +6.7%

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA PACIFIC MARKTES:

 

The Asian markets turned in a stronger relative performance lead by China up 1.34%

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 4

 

Howard Penney

Managing Director


CHART OF THE DAY: No Shutdown of The Inflation in Sight

 

 

CHART OF THE DAY: No Shutdown of The Inflation in Sight -  chart


Leaders At The Front

This note was originally published March 30, 2011 at 07:59 in  

“Disaster was caused by errors committed by the leaders at the front.”

-George McClellan, 1861

 

I’m in the middle of reading an outstanding US history book that one of our star analysts, Allison Kaptur, recommended: “Team of Rivals – The Political Genius of Abraham Lincoln”, by Doris Kearns Goodwin.

 

The aforementioned quote comes from Chapter 14 which is titled “I Do Not Intend To Be Sacrificed.” As I was reading it last night, I couldn’t help but think about the parallels between America’s political leadership, then and now…

 

McClellan was a Major General in the American Civil War who served a very short term as Lincoln’s General-In-Chief of the Union Army (from November 1861-1862), before ultimately falling on his own sword of accountability.

 

Whether on the ice of athletic competition or in the arena of professional asset management, I’ve seen plenty of McClellans in my day. Their biggest problem is one of perception. However talented and resume’d up they may be, they don’t quite get what it means to lead people – by example.

 

Consider the following contrast between McClellan’s public representation of himself: “You have no idea how the men brighten up, when I go among them.” (“Team of Rivals”, page 378)…

 

And how he behaved when he thought no one was looking: “The whole thing took place 40 miles from here without my orders or knowledge… it was entirely unauthorized by me and I am in no manner responsible for it.” (“Team of Rivals”, page 383)…

 

It’s both sad and pathetic to think that the said leaders of this world, both then and now, think that they can fool history into believing not only the facts, but their intentions in representing their version of the “truth.”

 

McClellan’s finger pointing and excuse making came on the heels of a big mistake he made that led to a Union loss at Ball’s Bluff. This wasn’t a one-off event. To the contrary, if you follow a man’s behavior long enough – the leadership methods he employs, the decisions he makes, and the reactions he has to wins/losses – you’ll figure him out. That’s the point, in principle, that I want to make this morning about risk management.

 

Back to the Global Macro Grind

 

I’m certainly not suggesting I don’t make mistakes. But I’ll be one of the last guys who goes to war with you who will be accused of being gutless. And no, that doesn’t mean I’m the prettiest player in this game – neither the most polite. It just means my friends call me Mucker.

 

We’ve created a culture here at Hedgeye that resembles that of the 4-wall dressing room we fostered at the Yale Whale in 1995. We are accountable to our performance in real-time. Everyone faces each other. There is nowhere to hide.

 

No matter where you go this morning, there it is – the score. As we push into both month and quarter end, however “light the volume” has been for the last week in Global Equity market trading – the price performance has been up into the right. Thankfully, I’ve drawn down my cash position in the Hedgeye Asset Allocation Model by 18% (to 43% from 61%) in the last 6 weeks.

 

While I made the right “Short Covering Opportunity” call on March 16th, I’ve made the wrong call in not holding the line on a very net long position (16 LONGS and 4 SHORTS in the Hedgeye Portfolio) until the very end of the month. That would have made our navigation of the last 2 weeks of Q1 2011 perfect – and perfect we are not.

 

We do have a risk management process however. That’s what guides us in asking questions as to where we could be right or wrong next. The #1 question on my mind right now is can we see a DEFLATION of The Inflation?

 

On that score, there are two scenarios I see playing out – they are both US Dollar based:

  1. US Dollar UP  - through an end to the unaccountable outcomes of QG1 and QG2 (The Bernank Perpetuating The Inflation), I think this would relieve a huge consumption tax on the American people. With 72% of US GDP being tied to Consumption, we have to get this right.
  2. US Dollar DOWN - through a continued Debauchery of the Dollar, Americans will face either a currency or bond market crisis (or both). This will be a massive headwind for all US capital markets (currency, stocks, and bonds) as it was in the 1970s.

On the short side of US Equities, I’m not brave enough to fight a bullish breakout in the US Dollar again. Been there, tried that in December of 2010. And I don’t think those who have been as bearish as we have on US stocks since Valentine’s Day should be testing bravery-to-the-death on that front (if we see it again) either.

 

As is always the case when fighting the proverbial Fed War, our risk management process defers to the highest probabilities embedded in the math. That is, in the correlation risks we see developing between our most heavily weighted Global Macro Factor (US Dollar Index) and everything else.

 

As of the last 6 weeks, it’s critical to note that the long standing 2-year inverse correlation between the USD and the SP500 has changed (DOWN Dollar = The Reflation trade). Whether you look at it on a 3 week or a 6 week duration, this is the latest math:

  1. 3-week TRADE: USD versus SP500 = +0.29
  2. 6-week TREND: USD versus SP500 = +0.67

Don’t fight the truth. Embrace it. This means that our ultimate strategy for the President of the United States holds true where it matters most. On the battlefield of American currency.

 

Dear Mr. President, if you strengthen the US Dollar, you will DEFLATE The Inflation – and stocks will go up. Alternatively, if your General-in-Chief of the US Federal Reserve continues to point fingers at everyone in this global market system other than at himself, your currency will burn and your citizenry will lose confidence in whatever confidence they have left in our Leaders At The Front.

 

My immediate-term TRADE lines of support and resistance for WTI Crude Oil are $104.09 and $108.03, respectively. My immediate-term TRADE lines of support and resistance for the SP500 are 1306 and 1328, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Leaders At The Front - Chart of the Day

 

Leaders At The Front - Virtual Portfolio


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 80.33%
  • SHORT SIGNALS 78.51%
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