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TALES OF THE TAPE: MCD, DPZ, GMCR, THI, DIN, BAGL, KONA, PFCB

Notable news items and price action from the past twenty-fours along with our fundamental view on select names.

  • MCD Global sales results were released this morning.  Global comps came in at +6%.  U.S. comps gained 4% while Europe and APMEA both produced comps of +6.5%.  The results were impacted by a calendar shift that impacted results by between 0.9% and 1.0%, depending on the area of the world.
  • MCD Japan sales results revealed that April comps came in +3.6% year-over-year.  24 of the 264 doors closed due to the March earthquake/tsunami disaster.
  • DPZ gained 3.7% on accelerating volume. GMCR, THI, and DIN were other gainers that traded with high volume Friday.
  • BAGL, KONA, and PFCB all declined on accelerating volume Friday.

TALES OF THE TAPE: MCD, DPZ, GMCR, THI, DIN, BAGL, KONA, PFCB - stocks 59

 

 

Howard Penney

Managing Director


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - May 9, 2011

 

Plenty of talk this morning about what’s not new news to European bond/equity/FX market prices: (1) Greek Bond yields have been pricing in restructuring/default for 6 weeks (10s at 15.65% this morn) and (2) Greek Stocks (ATG Index) have been crashing since FEB (down -0.87% this morn; down -20.8% since February 18th).  As we look at today’s set up for the S&P 500, the range is 18 points or -0.54% downside to 1333 and 0.81% upside to 1351.

 

SECTOR AND GLOBAL PERFORMANCE

 

The Hedgeye models now have 6 of 9 S&P Sectors bullish TRADE and 7 of 9 bearish TREND.  The XLE and XLF are broken on both durations.

 

THE HEDGEYE DAILY OUTLOOK - levels 59

 

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: +993 (+1731)  
  • VOLUME: NYSE 1026.81 (-7.78%)
  • VIX:  18.20 +6.56% YTD PERFORMANCE: +2.54%
  • SPX PUT/CALL RATIO: 1.85 from 1.94 (-4.41%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 26.19
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 3.19 from 3.18
  • YIELD CURVE: 2.62 from 2.60 

 

MACRO DATA POINTS:

  • 11:30 a.m.: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 4 p.m.: Crop progress (winter wheat, cotton, corn, soybean)

WHAT TO WATCH:

  • Hertz makes hostile cash & stock bid for Dollar Thrifty, offering $72-shr; $57.60 in cash, 0.8546-shr equal to $14.40. Offer is 3.3% premium over DTG’s Friday close $69.69.
  • Greece wants reduced interest rate on the aid it received from the IMF and the EU -- Reuters
  • Marriott increases quarterly dividend by 14.3% to $0.10 from $0.0875; increases stock repurchase program by 25M shares

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Commodities Rebound From Worst Week Since 2008 as Crude Oil, Silver Climb
  • Crude in New York Rebounds to $100 After Biggest Weekly Decline Since 2008
  • Copper Climbs on Speculation Biggest Weekly Drop Since March Was Overdone
  • Wheat, Soybeans Gain Second Day as Commodities Slump, Weather Lure Buyers
  • Silver Futures Rally From Worst Weekly Loss Since 1975 as Investors Return
  • Sugar Rises as Brazil Production May Miss Estimates; Coffee Prices Climb
  • Palm Oil Climbs First Time in Four Days as Commodities Rebound from Slump
  • Coal Prices Rise for Sixth Week to Two-Year High in China as Demand Surges
  • Mississippi to Crest Tomorrow in Memphis as Floods Expected to Move South

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • Eurozone May Sentix Index 10.9 vs consensus 12.0
  • UK Halifax Apr House price index (3.7%) y/y vs consensus (2.9%)
  • The periphery is dragging down the region on newspaper reports that Greece wants reduced interest rate on the aid it received from the IMF/EU

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIAN MARKETS

  • Most Asian markets rose today on the back of positive US employment data.

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Fiat Laws

“Man is free if he needs to obey no person but solely the laws.”

-Immanuel Kant

 

Kant was an 18th century German philosopher who over-weighted the value of real-life experience versus academic theory. Hayek used Kant’s aforementioned quote in “The Road To Serfdom” to support his point that unchecked government planning and the Rule of Law run counter to each other’s objectives.

 

“By giving the government unlimited powers, the most arbitrary rule can be made legal; and in this way a democracy may set up the most complete despotism imaginable.” (F.A. Hayek, “The Road To Serfdom”, 1944, page 119).

 

Since professional politicians gave Hank Paulson the TARP “bazooka” and started begging The Bernank for both “shock & awe” rate cuts to zero (2008), then The Quantitative Guessing (2009-2010), we’ve been waking up every morning trying to manage risk around Fiat Laws.

 

This morning’s speculation as to what the European Union is going to do with Greece’s $110,000,000,000 lifeline of bailout Euros is no different than the perpetual risk management exercise of Gaming Policy that we engage with here in the US. It’s a sad state of the “free” market union.

 

The good news is that we can measure the Global Macro risks embedded in the next Big Government Intervention mathematically. If the intermediate-term TREND of US Dollar Debauchery is going to change, the currency market is going to signal that to us in real-time.

 

Last week’s short squeeze in the US Dollar did exactly what we thought it would do if and when it stopped crashing – it started making everything else start to crash. The Bernank calls this “The Price Stability.”

 

With the US Dollar closing up +2.6% week-over-week (only it’s 5th up week in the last 19 weeks), here’s what The Correlation Risk looked like:

  1. Euro = DOWN -3.4%
  2. CRB Commodities Index = DOWN -8.9%
  3. WTI Crude Oil = DOWN -14.7%
  4. Gold = DOWN -4.2%
  5. Copper = DOWN -4.8%
  6. Volatility (VIX) = UP +24.7%

No, that’s not a typo on the marked-to-market pricing of The Price Volatility associated with The Bernank pandering to the political winds and keeping “hope” for a 3rd round of rule making (QE3) alive.

 

Now, for myself, The Price Volatility is cool because I’m trying to prove that Big Government Intervention in our markets does nothing but A) shorten economic cycles and B) amplify market volatility.

 

For our profession and the economy that we live in, it’s not so cool. Last week’s US jobless claims (474,000 – breaking out to the upside) reflect this. So does the weekly Bloomberg consumer confidence survey coming in at minus -46.1. Volatility crushes confidence.

 

While there is a lot of partisan fanfare about a “bull market in stocks”, I don’t think I have ever seen so much storytelling go alongside a +6.6% YTD return for the SP500 since I started in this business 13 years ago.

 

Globally, as of Friday’s closing prices, the big “bull market” in equities isn’t especially bullish looking either. Take a look at the Top 3 Global Equity market performers for 2011 YTD:

  1. Venezuela = +17.6%
  2. Hungary = +11.2%
  3. Romania = +10.0%

Go Chavez and the Keynesian Kingdom?

 

Notwithstanding The Price Volatility that it’s taken us to get to another lower-long-term high in US Equities (down -14.4% versus it’s October 2007 peak), isn’t it interesting that there are only 3 stock markets in the world with double digit returns for the YTD?

 

Markets aren’t “free” – at least not like they used to be. And being reminded of that last week is why I took up the Cash position in the Hedgeye Asset Allocation Model on the Bin Laden news. Here are my current asset allocations and positions:

  1. Cash = 43% (versus 34% last Monday)
  2. International Currencies = 24% (Chinese Yuan and British Pounds – CYB and FXB)
  3. Commodities = 12% (Gold and Oil – GLD and OIL)
  4. Fixed Income = 9% ( US Treasury Flattener – FLAT)
  5. International Equities = 6% (China – CAF)
  6. US Equities = 6% (Technology – XLK)

As a reminder, the way I think about asset allocation is the way I think about my own net worth. I’m not saying that’s a perfect methodology for everyone else – I’m just saying it’s the only one I can hold myself accountable to. So after a +98.2% two-year rally in US stocks (where we got bullish in 2009), it shouldn’t be a surprise to see me wait and watch for my spots to get invested again.

 

We made a call in April of 2010 called “May Showers” that saw The Price Volatility index (VIX) shoot up to 45 by June. Looking ahead at the US political calendar of deficit and debt ceiling debates this June, I’m not especially hurried to be levering myself up alongside my least favorite Fiat Fools either. I’d rather obey my own risk management laws.

 

My immediate-term support and resistance line for Gold are $1485 and $1521, respectively. Immediate-term support and resistance for oil are $98.63 and $109.11, and my immediate-term support and resistance lines for the SP500 are now 1333 and 1351, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fiat Laws - Chart of the Day

 

Fiat Laws - Virtual Portfolio


Correlation Risk

This note was originally published at 8am on May 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We are willing to accept almost any explanation of the present crisis of our civilization except one.”

-F.A. Hayek

 

That’s an important quote from page 65 of a chapter that Hayek wrote in “The Road To Serfdom” titled, “The Abandoned Road.” As I take a step back and think about what a tremendous opportunity our profession has had to learn about real-time risk management and the interconnectedness of Global Macro markets in the last 3 years, it’s somewhat sad to realize that consensus hasn’t been paid to learn much.

 

What we get paid to do is chase short-term returns. The Bernank perpetuates this performance pressure by marking the short-term “risk free” rate to model (or the ZERO bound) and, as a result, this gargantuan experiment of starving savers of returns imputes 3D Risk (3 D’s) into markets:

  1. The Dare – zero percent rates dare you to chase yield across asset classes where you can justify it
  2. The Delay – zero percent short-term financing for banks delays the financial restructurings that free market prices would impose
  3. The Disguise – zero percent expectations disguise the interconnected risks associated with carry trading, correlation risk, etc

The Disguise is the one that can really nip a perma-bull in the butt. That’s the one that, allegedly, “no one can see coming.” That’s the one that is being revealed real-time. In terms of making excuses for being willfully blind to it, this time is different because we have a modern day technological innovation in financial market transparency – it’s called Twitter.

 

Going back to Hayek’s aforementioned point, I think that’s the one thing our professional politicians do not get paid to understand. That would be called accountability. The Disguise in financial markets is The Correlation Risk – and while his original text was addressing a different kind of socialism and Big Government Intervention in 1944, I still think what Hayek goes on to say about explaining our perpetual financial “crisis” is very appropriate:

 

“… that the present state of the world may be the result of genuine error on our own part… and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.”

 

With another 78 Billion Bailout Euros being extended to the government of Portugal this morning, Spain seeing unemployment spike to 21.3% (new all-time highs), and Americans staring down $5/gas at the pump with jobless claims re-accelerating, wasn’t that some advice our “independent central bankers” and fiscal spenders should have considered?

 

Independent research? Should we just never mind silly old school things like the American Constitution or what John Locke wrote On Liberty 80 years before Hayek penned his original counter-points to Keynes? Just buy-the-damn-dips, chase yield, and believe that it’s going to end well this time?

 

Back to The Correlation Risk and playing the game that’s in front of you…

 

Given that the US Dollar is the #1 factor we are talking about when we say Global Macro Correlation Risk (say it central planners -“who –ho-wns de Campaigner-in-Chief?”), let’s  get a real-time price check on how that looks on our intermediate-term TREND duration (3 months or more):

  1. Crude Oil = -0.92
  2. Gold = 0.94
  3. Silver = -0.94
  4. Coffee = -0.84
  5. Pork Bellies = -0.92
  6. CRB Commodities Index = -0.87

I know, I know – The Bernank calls this commodity stuff that you put in your cars, stomachs, and teeth “transitory”…

 

How about the intermediate-term TREND inverse-correlations between the US Dollar Index and relatively larger matters like countries?

  1. USA (SP500) = -0.82
  2. Brazil = -0.88
  3. Mexico = -0.82
  4. Germany = -0.93
  5. Spain = 0.94
  6. Russia = -0.85
  7. China -0.85
  8. South Korea = -0.90
  9. Australia = -0.91

How about the obvious, the intermediate-term TREND inverse correlations between the USD spot price and the world’s currencies?

  1. Euro = -0.99 (not a typo)
  2. Swiss Franc = -0.96
  3. British Pounds = -0.95
  4. Chinese Yuan = -0.92
  5. Japanese Yen = -0.87
  6. Singapore Dollar = -0.96
  7. Aussi Dollar = -0.94
  8. Brazil’s Real = -0.92
  9. Canadian Dollar = -0.85

Really? Yes, President Obama – really. This Correlation Risk math checks out from Hawaii to Havana. We get it. Anyone gaming Geithner and The Bernank get it. The Chinese get it.

 

In the Peoples Bank of China’s Q1 Monetary Policy Statement last night (published on China’s website – not to be politically pandered to on 60 Minutes this Sunday or at a US Federal Reserve Presser), this is what the Chinese had to say about all of the aforementioned real-time prices:

 

“Stabilizing prices and managing inflation expectations are critical… given the loose monetary policies of major economies and gradual recovery of the global economy, commodity prices and global inflation expectations are rising significantly.”

 

“Significantly” versus “transitory.” Academic dogma versus independent analysis. Government storytelling versus Correlation Risk. It’s all out there folks. It always has been – and, sadly, when it comes to US policy, so has Hayek’s “Abandoned Road.”

 

My immediate-term support and resistance lines for Gold are now 1525 and 1565, respectively. For oil I’m at $109.39 and $114.21 – and for the SP500, my immediate-term support and resistance lines are now 1349 and 1373, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Correlation Risk - Chart of the Day

 

Correlation Risk - Virtual Portfolio


MCD: APRIL SALES PREVIEW

MCD will announce sales numbers for April on Monday, May 9th, before the market open. On the 1Q11 conference call, management indicated April comps were healthy, running at or above the +4.2% rate seen in 1Q11.  Therefore, how the different regions of the world performed will be the focus on Monday.

 

There was a slight calendar shift between the number of weekdays and weekend days in April 2011 versus April 2010.  April 2011 had one additional Saturday, and one less Thursday, than April 2010.  Easter 2010 and Easter 2011 both fell in April.  I would expect a slight, positive calendar shift in April 2011’s result due to the extra Saturday.

 

For the U.S., March comparable restaurant sales came in above my expectations, and those of the Street, at 3%.  I have b I have been bearish on the stock since December and released a Black Book to that effect in January.  While March was certainly a blow to my thesis, it by no means has led me to capitulate in my view that 2011 is proving to be a difficult year for the U.S. business overall.  I believe that comps will slow during the year due to a declining core business.  In addition, a complicated menu borne of management’s aim to offset the decline in the core menu with new menu items, it proving a hindrance for operators seeking to operate efficiently at this time with commodity costs so elevated. 

 

Below I go through my take on what numbers will be received by investors 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 a +3.15% compare (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world):

 

GOOD: A print above 4% would be received as a good result, implying two-year average trends that were roughly level with those in March.  The comparable restaurant sales growth in March, on a calendar-adjusted basis, implied a sequential acceleration in two-year trends of roughly 200 basis points.  While I remain bearish on the prospects of MCD “comping the comps” through the summer months when the compares significantly step up in difficulty, I think that April will likely be a stable month for MCD given the easier compare versus March and the strong performance management spoke to during the earnings call.  The Bloomberg Consumer Comfort Index trended positive overall during April, albeit peaking mid month and declining thereafter.  The decline has continued in May but it is likely, in my view, that April will be a solid month for MCD.

 

NEUTRAL: A print between 3% and 4% would imply two-year average trends slightly below those seen in March. However, I think it is unlikely that the two-year trend remains quite as robust as it did in the final month of 1Q.  While the mid-point of this range is below consensus, it would still be a healthy result for MCD and imply a two-year trend far in excess of the level seen during the malaise of December/January/February. 

 

BAD: A print below 3% would not be received well by the Street as it would imply a sequential deceleration in two-year average trends.  In addition, it would likely dampen investor sentiment given that concerns are arising around the pricing strategy that will be required to overcome inflation.  If the core business is not robust, it could be perceived that a price increase will adversely impact traffic, which of course is the lifeblood of MCD’s comps.

 

MCD: APRIL SALES PREVIEW - mcdusa

 

Europe:- Facing a difficult +5.30% compare (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world):

 

GOOD: A comparable restaurant sales number of 6% or higher would be received well by the Street as it would represent a sequential acceleration in two-year trends.  While this acceleration would be meager, I believe that with the austerity measures being implemented in Europe, MCD maintaining the ~5%+ two-year average trends that have been the norm in 2011 would be a positive.  In spite of the austerity measures and cloud uncertainty that remains over Europe’s political/fiscal future, MCD has been performing well in Europe this year and the recent Euro strength may also support confidence somewhat.

 

NEUTRAL:  Between 5% and 6% would imply two-year average trends slightly below those seen in March.  While a deceleration is never what investors are hoping for, I think a slight slowdown (~20 basis points) in this case would not raise too many concerns and two-year trends would remain above 5% and well above the trends seen in November and December in Europe.

 

BAD:  Below 5% would imply a significant sequential slowdown in two-year average trends.

 

APMEA:- Facing a difficult +10.1% compare (including a calendar shift which impacted results by +0.4% to +0.9%, varying by area of the world):

 

GOOD: Above 2.5% would imply a sequential acceleration in two-year average trends.  Inflation has been a concern for consumers in many Asian countries, and countries around the globe for that matter, and I believe an improvement in two-year trends would be received positively. 

 

NEUTRAL: Between 1.5% and 2.5% would imply two-year average trends slightly higher than those seen in March but still well below the average two-year comp over the last 6, 12, or 24 months. 

 

BAD: Below 1.5% would imply two-year average trends roughly in line with, or below, those seen in March which would raise concerns that last month’s poor result could be the start of a longer trend.

 

 

Howard Penney

Managing Director


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 80.28%
  • SHORT SIGNALS 78.51%
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