“The main question is where this movement will lead us.”
Today is his big day. Today is the 1st day in US economic history that the Almighty Central Planner of US Monetary Policy will hold a press conference with the media immediately following his decision to pander to the political wind. Currency Crashers and Yield Chasers, unite!
As Hayek predicted 70 years ago in “The Road To Serfdom” (which Keynes himself called “a grand book” that he agreed “morally” with), this is the long hard road towards socialism that traverses many political conflicts and compromises. Before you watch The Bernank today, take a step back and really think about how Big Government Intervention in our markets has become; you’ll see this certified gong show of Gaming Policy for what it is.
“Where these common beliefs of our generation will lead us is a problem not for one party, but for every one of us – a problem of the most momentous significance… Is there a greater tragedy imaginable than that? In our endeavor consciously to shape our future in accordance with high ideals, we should in fact unwittingly produce the very opposite of what we have been striving for?” (Hayek, “The Road to Serfdom”, page 60)
As the Monkey Movement hustles us toward prime time advertising dollars, please don’t listen to what storytellers of the Keynesian Kingdom say – watch how they get paid. If there’s any lesson we’ve learned from the Greeks by now it’s that markets don’t lie – politicians do (Greece’s stock market is down another -1.6% this morning, taking its straight down decline since February 18th to -18.3% as Greek bond yields hit record highs).
So what do you do with that today?
My risk management strategy into the Fed presser is very simple – don’t chase returns; take down your net long exposure; sell high.
I made this call in April of 2010 (SP500 dropped -15% to its August low). I made this call again in November of 2010 (November was down, and I got crushed in December). And again in February of 2011 (another -6.5% correction to mid-March where I covered at the YTD low)… again!
Two for three in calling for corrections from blow-off US Dollar Debauchery driven tops isn’t good enough. So I am looking at improving upon that … with my longest of long-term risk management calls not changing – BURNING YOUR CURRENCY AT THE STAKE will not end well.
If you want to get the US Dollar right, you need to get policy right – and The Bernank, sadly, will remain Indefinitely Dovish.
So what do you do with that? I usually start with the what not to do’s:
- Don’t go ideological in your portfolio (I’m leaning long ahead of the Fed today – 15 LONGS, 9 SHORTS in the Hedgeye Portfolio)
- Don’t sell The Inflation trade (it’s outperforming every global equity market other than maybe Russia for the YTD)
- Don’t be a monkey
What are the intermediate to long-term TREND and TAIL implications of the Monkey Movement perpetuating a US Currency Crash?
- It perpetuates The Inflation priced in US Dollars
- It structurally impairs the sustainability of long-term economic growth
- It dares institutional investors to chase “yield”
What am I seeing in the Global Macro Grind this morning that confirms any or all of these realities related to inflation and/or growth?
- Chinese stocks closed down for their 4th consecutive day (we’re long them) as the USD hits new lows, inspiring global inflation risk
- Brazilian stocks remain down -3.1% for the YTD and bearish from an intermediate-term TREND perspective = inflation risk
- Copper continues to breakdown (bearish TRADE and TREND) as global growth slows in the face of USD perpetuated inflation
- US Equities are rallying to lower-long-term highs (like Japan’s have for 20 years) on anemic volume and very concerning skew signals
- US Financials (XLF) are bearish TRADE and TREND (worst S&P Sector YTD) as a Currency Crash will enforce counterparty and haircut risks
- US Treasury Yield Spread continues to narrow (we are long a UST Flattener – FLAT) as US Growth Slows and long-term yields decline
All the while, US Housing is turning into the train wreck (double dip) that we have been calling for in the last year (Case Shiller Home Price Index saw prices drop on a year-over-year basis in 19 of the top 20 US markets yesterday - Washington, DC was the only bull market in housing – long live Julius Caesar’s Roman Empire that plunders its citizenry by clipping their coins).
US Housing Demand? The MBA mortgage applications index (our best high-frequency data gauge for demand) plummeted by -13.7% week-over-week this week. Apparently Americans aren’t dumb enough to take on The Bernank’s dare to lever themselves up with a “cheap” long-term liability. Short-term Central Planning, press conferences, and marketing events be damned!
My immediate-term support and resistance levels for Oil are now $109.98 and $114.11, respectively (we are long). My immediate-term support and resistance levels for Gold are now 1491 and 1524, respectively (we are long). My immediate-term support and resistance levels for the SP500 are now 1324 and 1350, respectively (we are short).
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
The Macau Metro Monitor, April 27, 2011
MELCO EYES YUAN BOND WORTH MOP 2.8 BILLION Macau Daily Times
MPEL is launching a RMB-denominated bond offering of USD $350 MM (MOP $2.8BN). The proceeds would be used "to fund potential future growth and expansion opportunities, which may include acquisitions”. Proceeds would also be used to repay existing debt, to partially pre-fund interest payments on the bonds, and for working capital and general corporate purposes. The company has hired BofA/ML, Citi, DB and RBS to assist with the Yuan bond offering. MPEL also said it has reached an agreement with lenders to underwrite credit facilities of US$1.2BN primarily to refinance CoD, a move that will reduce covenant restrictions but will increase debt cost and extend the maturity date of the existing CoD project facility.
SINGAPORE HAS NO EFFECT ON MACAU: LEVEN Macau Daily Times
LVS COO Leven says the Singapore market is not cannibalizing Macau, although he acknowledged that some Mainland high-rollers will go to Singapore, Australia, Las Vegas and other destinations. He also said Sands China will hire someone who can manage government relations. Leven also mentioned LVS's continued interest in Japan but that the tsunami catastrophe will likely delay any gaming developments. Leven also disclosed South Korea and Vietnam as other interests.
MORE TOURISTS ON EASTER HOLIDAYS macaubusiness.com
475,500 tourists entered Macau from April 22 to April 25, a 12.79% YoY increase.
EMPLOYMENT SURVEY FOR JANUARY-MARCH 2011 DSEC
Unemployment rate for January-March 2011 was 2.7%, down by 0.1% point from Dec-Feb period. Total labor force was 334,000 and the labor force participation rate stood at 71.5%, with the employed population increasing by about 800 over the previous period to 325,000.
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THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP - April 27, 2011
As “the Bernank” prepares the manic media for his 1st Central Planning Conference ever, the US Dollar makes fresh new lows. As we look at today’s set up for the S&P 500, the range is 21 points or -1.14% downside to 1320 and 0.43% upside to 1341.
SECTOR AND GLOBAL PERFORMANCE
The Financials remain the only sector broken on both TRADE and TREND.
- ADVANCE/DECLINE LINE: 1362 (+1621)
- VOLUME: NYSE 909.36 (+30.29%)
- VIX: 15.62 -0.95% YTD PERFORMANCE: -12.00%
- SPX PUT/CALL RATIO: 1.15 from 1.30 (-11.82%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 21.70
- 3-MONTH T-BILL YIELD: 0.07%
- 10-Year: 3.34 from 3.39
- YIELD CURVE: 2.69 from 2.72
MACRO DATA POINTS:
- 7 a.m.: MBA Mortgage Applications
- 8:30 a.m.: Durable Goods, est. 2.3%
- 10:30 a.m.: DoE inventories
- 11:30 a.m.: U.S. to sell $35b in 5-yr notes (note earlier time)
- 12:30 p.m.: FOMC Rate Decision (note earlier time)
- 2:15 p.m.: Bernanke speaks at Fed press conference
WHAT TO WATCH:
- Nokia to cut 4,000 jobs as it combines research, product development sites
- Japan debt outlook cut to negative by S&P as quake rebuilding adds to debt
- The Fed concludes its two-day meeting, and Fed Chairman Ben Bernanke holds his first post- meeting press conference.
- Barclays falls up to 4.6% in London as 1q net misses est.
- Euro-area banks are tightening credit standards on uncertainties about the economic outlook and their access to market financing, the ECB said, citing its Bank Lending Survey.
COMMODITY HEADLINES FROM BLOOMBERG:
- Oil Trades Near One-Week Low as Rising Stockpiles Signal Slow Fuel Demand
- Malaysia Rubber Output May Grow as Higher Prices Spur Tapping, Board Says
- Sugar Production in Thailand to Reach Record on Yield, Boosting Shipments
- Copper in London Declines for a Second Day as China Supply Outpaces Demand
- Wheat, Corn, Soybeans Decline as Investors Await Federal Reserve Meeting
- Gold, Near Record, Trades Little Changed as Investors Watch Fed Meeting
- Coffee Crops in Vietnam Benefit as Rainfall Eases Drought Across Dak Lak
- Fonterra Ships Record Dairy Volumes as 560 Containers Sent to Asia Daily
- Cocoa Arrivals Drop 14% From Brazil’s Bahia Region, Analyst Hartmann Says
- Hong Kong Mercantile Bourse to Start Trading With Gold Futures on May 18
- China’s Wen to Spur Investment, Tap Resources in Visit to Southeast Asia
- Europe Commodity Day Ahead: Gold Climbs to Near All-Time High as Fed Meets, Car Output
- European equity markets trade mixed.
- French President Nicolas Sarkozy’s endorsement of Mario Draghi as the next ECB chief pressures German Chancellor Angela Merkel to follow
- European stocks gain for fifth day as technology stock improve
- Greek, Portuguese yields reach records amid El-Erian ‘lost decade’ warning
- UK GDP data weaken case for BOE rate increases - 1Q GDP +0.5% Q/q, est. +0.5% (prior -0.5%) 1Q GDP +1.8% Y/y, est. +1.8% (prior +1.5%)
- Germany May GfK consumer sentiment 5.7 vs consensus 5.8, prior 5.9
- France April Consumer confidence 83 vs consensus 83, prior 83
- UK Mar mortgage approvals 31,660 vs prior 30,178 -- BBA
ASIA PACIFIC MARKTES:
- Japan March retail sales (8.5%) y/y.
- Asian stocks trade mixed.
- South Korea’s economic growth accelerates, adding pressure to raise rates
- Singapore economic expansion to spur inflation pressure, central bank says
- Australian consumer prices jump most since 2006 - Australia Q1 CPI +1.6% seq vs +1.2%; Core inflation +0.9% seq vs +0.7% survey.
- The Aussie today rose to $1.0852, strongest since it was allowed to trade freely in 1983.
BWLD put together a rare quarter for the restaurant industry, with food costs declining and same-store sales accelerating. From a ROI perspective, management continues to alter the store base to improve performance by closing underperforming stores. It was very difficult to poke holes in this quarter.
Buffalo Wild Wings announced earnings of $0.81 versus the street at $0.73. Company same-store sales came in at +3.9%, which implies an 80 basis point sequential acceleration in two-year average trends. Franchise same-store sales grew +1.6% in the first quarter which implies a sequential acceleration in two-year average trends of 70 basis points. Consensus was expecting comps at 3.4% and 1.8% for company and franchise restaurants, respectively. Net earnings grew by 40% year-over-year, far in excess of the annual guidance of 18%.
As discussed above, comps were impressive for the first quarter of the year and I would expect same-store sales to remain strong in 2Q. As the chart above shows, 2Q is a relatively easy comparison on a year-over-year basis. For 1Q, the company stated that there was 2.4% of price on the menu during the first quarter. Management stated on the earnings call that same-store sales for company restaurants during the first four weeks of April were tracking at +5.3% versus -3.7% during the same period of 2010. While this is encouraging, it is important to remember that the early part of 2Q10 was a low point, and the intra-quarter comparisons become more difficult as we begin to lap the World Cup. On a year-over-year basis, April comparable restaurant sales growth included 1.9% of price.
The limited-time offers, including burgers, that the company promoted during the quarter proved popular with customers. A new menu, rolled out during the quarter, also helped drive sales as management noted increased popularity for several new products and sauces recently released.
Management engaged NFL fans as the “NFL Pick ‘Em” promotion winners received a trip to the Rose Bowl. Another initiative that helped to capture attention for BWLD was the petition the company formed to encourage owners and players to reach an agreement and save the fall football season. Basketball fans were also engaged with heightened media presence during the NCAA basketball season. BWLD occupied T.V. spots during every NCAA men’s championship game on CBS including the championship game on April 4th.
Average weekly sales growth for 1Q11 grew by 7.8% year-over-year at company restaurants versus same-store sales of 3.9%. 150 basis points of that outperformance was attributed to the closure of lower-volume restaurants while the remaining 240 basis points, according to management, was due to “quality operations” in the new 2010 and 2011 company owned units.
From an operating margin perspective, BWLD had a fantastic quarter. As the chart above illustrates, restaurant operating margins two-year trends improved 120 basis points. Much of this was due to the deflation in chicken wing prices as well as moderate year-over-year gains (in percent-of-sales terms) in Operating and Occupancy expenses. Chicken wing prices for the quarter were $1.22 per pound, down 36% from the average price of $1.91 during 1Q10. From a cost-of-sales perspective, the outlook for chicken wing prices appears favorable for – in all probability – the remainder of the years. The boneless wing contract has been extended through March 2012.
The new menu boosted sales but, of course, came at a cost in terms of training expense. However, despite this training expense and added investment in hourly labor to drive improve guest service during lunch and happy-hour, leveraging sales growth and management wages enabled the company to keep labor expenses as a percentage of sales flat year-over-year.
Management struck a confident tone on the call and, given the performance in 1Q and the favorable post-market reaction in the stock, it is no surprise. Clearly, the prospect of losing any of the NFL season is a threat to BWLD’s profitability. However, management emphasized that the 18% growth is achievable even if part of the NFL season is lost. New markets, most notably California, are performing well and there seems to be ample runway for unit growth to continue. The company’s cash balance is currently at $91.3 million versus $71.2 million but the company remains conservative on the topic of returning capital to shareholders. Capex spending in the first quarter was a mere $18.7 million. For the year, capex is due to total $120-125 million ($100m new company restaurants, $17m remodels, and $6m maintenance capex). Lastly, the company is guiding to a 34% tax rate for 2011.
MCD was covered yesterday in the Hedgeye Virtual Portfolio. Although, I still remain bearish on the name for 2011.
In 1Q11, MCD continued to post industry-leading same-store sales in the U.S. (above my estimate), but now below the rate of inflation the company is experiencing. While the company has raised prices to absorb some of the commodity inflation, there is a strong possibility this could dampen sales trends given that MCD’s U.S. comps are largely guest-count driven (influenced by significant discounting).
Compound this scenario with the difficult year-over-year compares MCD U.S. is facing over the summer months and there is heightened risk of sales trends missing consensus in 2Q and 3Q11. Keith covered the stock today in the Hedgeye Virtual Portfolio and the quantitative risk management set up is illustrated in the chart below.
One pair-trade that could be of interest if you do not agree with my fundamental thesis on MCD would be short YUM and long MCD. The valuation spread between the two stocks is the widest it has been for some time on an EV/NTM EBITDA basis. Additionally, it is typically MCD that has been awarded a higher cash flow multiple by the street. As the chart below indicates, YUM is currently trading at significant premium to MCD.
YUM's premium multiple is being driven by strong trends in YUM's China division. To the degree that YUM's +13% same-store sales in China for 1Q is not sustainable, the valuation disparity between the two name could correct.
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