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Asking For More

This note was originally published at 8am on June 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"I could not have asked for anything more... I played great for four days and couldn't be happier."

-Rory Mcllroy

 

Feel-good fans couldn’t have asked for more in Rory McIlroy’s victory at the 2011 US Open yesterday. Irish eyes were smiling on the 22 year old European as he bear-hugged his Dad on Father’s Day.

 

And then, Europe decided not to bailout Greece…

 

As a result, Global Macro markets are Asking For More this morning. Unfortunately, more debt is not enough. While I am not sure who remains sober enough to realize that this time isn’t any different than most of the sovereign debt crises of the last 600 years (they end in restructuring and/or default), it seems there are at least a few fiscally conservative members of the Fiat Fool Coalition who are willing to concede that point.

 

On the heels of the Irishman’s victory, German Finance Minister, Wolfgang Schaueble, delivered the tough love concession to world markets this morning: “If the Greeks can’t or don’t want to make the necessary decisions, then we can’t move forward on this track.”

 

Risk Manager’s translation: first, deliver on the promises you made on spending cuts and selling assets, or stop Asking For More.

 

Fair enough Germany. Greece, play the ball as it lies.

 

Confusion is starting to breed contempt across asset classes this morning: 

  1. CURRENCIES: EURO/USD is re-testing it’s critical intermediate-term TREND line of $1.42 support
  2. COMMODITIES: Oil prices are getting hammered down to 4-month lows on US Dollar strength ($91.61/barrel)
  3. COUNTRIES: Spanish and Italian stocks are getting tagged (down over 2%) as peripheral contagion concerns mount 

This, of course, should all make sense to everyone who has been in Hedgeye’s camp that The Correlation Risk associated with La Bernank debauching the US Dollar can start as the US Dollar stops going down.

 

As a reminder, into and out of La Bernank’s last rock-star presser (April), the US Dollar Index was down -17% since Obama & Geithner started overseeing Nixon/Carter Deficit/Devaluation life in America (2009). In April, the USD was testing its all-time lows.

 

Today, the US Dollar Index is bidding for its 3rd consecutive UP week, and it’s up a full +3.8% since the beginning of May. Again, if you didn’t know what The Correlation Risk to an up US Dollar looks like, look at the prices of virtually everything priced in US Dollars (housing, stocks, commodities, etc.) since, well, the beginning of May!

 

Hedgeye calls this Deflating The Inflation (Q2 Macro Theme).

 

And, yes, like Growth Slowing As Inflation Accelerates (which we called for 6 months ago), we will be extra sure to remind our competition that we called this first too. As Rory Mcllroy reminded us yesterday – it’s ok to be young, confident, and on your risk management game.

 

What could continue to strengthen the US Dollar from here (and Deflate The Inflation)? 

  1. Quantitative Guessing (QG2) ending 10 days
  2. US Debt Ceiling compromise within 3-6 weeks
  3. European Contagion (ongoing) 

No, this Global Macro Risk Management setup isn’t very difficult to understand. It’s pretty simple to get right – if you get the US Dollar right. And since we have been right on 21 of the 22 calls we have made on the US Dollar since the founding of Hedgeye in 2008, we think we get this.

 

We also get being in Cash.

 

Here’s how the Hedgeye Asset Allocation Model flushed out week-over-week: 

  1. Cash = 49% (down 3% week-over-week from 52% last Monday)
  2. Fixed Income = 18% (Long-term Treasuries and US Treasury Flattener- TLT and FLAT)
  3. International Currencies = 18% (Chinese Yuan – CYB)
  4. International Equities = 6% (Germany and China – EWG and CAF)
  5. Commodities = 6% (Gold – GLD)
  6. US Equities = 3% (US Healthcare – XLV) 

As US Dollar strength Deflates The Inflation, we’ll be in a very good position to buy things on sale. The key will be to be patient on prices. Ultimately, a strong US Dollar is the only way out of this Keynesian mess. Lower-prices are going to be an important catalyst for Global Consumption. In terms of bullish catalysts for Chinese, German, and US Equities, I couldn’t Ask For More than that.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1532-1549, $91.60-98.29, and 1259-1276, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Asking For More - Chart of the Day

 

Asking For More - Virtual Portfolio



Keynesian Confusion

“Confusion now hath made his masterpiece!”

-William Shakespeare

 

So… according to La Bernank in his Fed Presser yesterday, US Growth Slowing As Inflation Accelerates is “part temporary” … but “part longer lasting”… and while “we don’t have a precise read on why”… we are confident that the entire market should trust our forecasts for growth to re-accelerate.

 

Ben Bernanke’s growth forecasts haven’t been sort of wrong in 2011 - they have been wrong by almost a half! So how can a country that was founded on such fiercely independent principles put up with this level of analytical incompetence from its economic Central Planner in Chief?

 

I don’t know. But after doing a full day of meetings with major money managers in NYC yesterday, I can tell you that Keynesian Confusion is starting to breed contempt. Dollar Debauchery was all good and fine, until people stopped getting paid.

 

What we do know is that economics, never mind Keynesian economics, is a social science (Mr. Krugman, that’s different than a hard science, fyi). We also know that market-based practitioners who apply math to markets make a living off of the academic dogma of Keynesian economists.

 

This is great for my Research and Risk Management business – but really bad for the US economy. My team and I get paid to be right. These guys at the Fed get paid what they’d be worth to an asset management firm managing Globally Interconnected Risk - not much.

 

Back to this morning’s Global Macro Grind

 

USA

  1. CURRENCY – we’ve had a bullish bias towards the US Dollar since the beginning of June; now the USD Index is breaking out above its $74.41 immediate-term TRADE line of support. This is bad for asset prices that are highly correlated (inversely) to the US Dollar.
  2. TREASURIES – we’ve been bullishly positioned on the long-term Treasury (TLT) side of the bond market since May. Yes, we understand that bond yields are low – but we think they are going lower – primarily because people aren’t yet Bearish Enough on US Growth.
  3. STOCKS – we re-shorted the SP500 (SPY) at 3:14PM EST on Tuesday, June 21st ahead of the Greek confidence vote in socialism and La Bernank walking down this forecasts for US Growth. Timing matters.

EUROPE

  1. CURRENCY – having a bullish bias towards the US Dollar (with near-term catalysts that are USD bullish – QG2 ending, a mid-July Debt Ceiling compromise) is reason enough to be bearish on Euros. But the bigger bear brewing in the FX market is Europeans behaving European on go- forward monetary policy. There’s an increasing probability that the ECB considers going for a hybrid version of Quantitative Guessing II.
  2. EUROCRAT BONDS – plenty of European Sovereign bonds look like the Sovereign Debt Default Cycle is just getting started. If you think this is isolated to Greece, market prices are pricing in the other side of that thought. Major risks – and they are not going away anytime soon.
  3. STOCKS – we are long Germany (EWG) and short Spain (EWP). Germany’s PMI (Producer Manufacturing) print slowed significantly in June (54.9 versus 57.7 in April) and we’d be unaccountable to not call that data point out for what it is – Growth Slowing, globally. Across European Equities, the only major market that has not broken its intermediate-term TREND line yet is the German DAX (7103 support), but it’s close!

ASIA

  1. CURRENCY – since one of our Q2 Macro Theme remains “Deflating The Inflation”, we finally sold our 2-year (buy and hold!) long position in the Chinese Yuan (CYB) this week. We think Asian currencies will weaken as commodity inflation does. Don’t forget that most of these countries (China, Australia, India, etc.) have been vigilant in raising interest rates – now they can stop with that.
  2. CHINESE STOCKS – after being bearish on China for the last 15 months, we’ve been on the road articulating the research scenario analysis around A) Chinese Growth Slowing At A Slower Rate and B) Chinese Inflation Deflating. The research and the risk management calls are two very different things (one is research, the other timing), but we did finally buy exposure to the A-shares on June 16th and we are in the money. Despite the Keynesian Confusion, Chinese stocks were up +1.5% last night and have been up for 3 consecutive days, outperforming most of the majors in Global Equities.
  3. JAPANESE STOCKS – we remain long-term bears of the gigantic Keynesian Experiment in Japan and we remain short of Japanese Equities (EWJ) here. Yes Japanese stocks are down -6% YTD and, yes, they had a natural disaster. But the real long-term disaster in Japan is that the average annual GDP Growth rate since 1992 has been 0.85%. Bernanke would be less confused if he embraced Richard Koo’s economic ideas about “Balance Sheet Recessions” and what perpetuates them (cutting rates to the ZERO bound and scaring the hell out of your people).

COMMODTIES

  1. OIL – we remain on the other side of Goldman’s call to buy oil and see immediate-term downside in WTIC Oil to $91.22 this morning.
  2. GOLD – we remain long Gold (GLD) and think it will continue to perform as long as real-interest rates in America remain negative.
  3. COPPER – we remain respectful of Dr. Copper’s Ph.D in the antithesis of Professor Bernanke’s confusion. Bearish TREND is as bearish does. 

Otherwise, in the land of nod, it’s a pretty quiet morning. We don’t see any probability of Keynesian Confusion leading to any level of American style accountability and/or change in whatever it is that they do to come up with these embarrassingly bad forecasts.

 

My immediate-term support and resistance ranges for Gold, Oil and the SP500 are now $1, $91.22-95.98, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Keynesian Confusion - Chart of the Day

 

Keynesian Confusion - Virtual Portfolio


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SONC: SOLID BEAT, BUT...

Sonic reported earnings after the close yesterday and beat expectations for both revenues and earnings.  The focus of the call was on sales trends that slowed in May and June.  Is the slowdown temporary or will hot dogs save the day?

 

Management went through a very detailed explanation as to why sales trends slowed in May and June but stopped short of saying what the magnitude was.  All they said was that the slowdown was limited to guests coming in after 8pm.  In May and June 2011 the company is lapping a buy-one-get-one-free shake promotion, which generated significant traffic; expectations are for low single same-store sales for 4Q11. 

 

For the balance of the quarter the “hope and expectation” is that the BAJA hotdog (along with a new line of shakes) at $1.99 will bring back some incremental traffic.  The irony in all this is that despite the SONC customer having been so responsive to the company’s value initiatives, management apparently feel comfortable raising menu prices.  

 

Sonic reported EPS of $0.21 excluding extraordinary items on the back of strong same-store sales growth and improved margin that management attributed to labor efficiencies that were offset by increased commodity costs and investment in product quality.

 

Company-operated same-store sales came in at +6.5%, beating expectations of +6.1%, which implied a two year average trend of +0.1% or 650 basis points higher than the two-year average trend in 2QFY11.  Management stated that the premium six-inch hot dog promotion which is driving traffic across all day parts.  The company had an effective year-over-year price increase of +1.5% on the menu in April and May which was then increased at the beginning of this month as an additional 0.5% price increase was implemented with the new menu.  The 2% price currently on the menu is not expected to begin rolling off until April of next year.

 

SONC: SOLID BEAT, BUT... - sonc pod1

 

The improvement in the company’s performance is reflected by the marked improvement in customer satisfaction scores at company and franchise stores versus the satisfaction scores that the company was reporting in fall 2008.  Over that period, company and franchise customer satisfaction scores have improved from 59% to 78% and 69% to 77%, respectively. 

 

Restaurant level operating margins expanded for the first time since 2009.  The improved top-line performance helped margins as food and packaging costs were better than expected due to less discounting and more aggressive price increases than originally planned.  Other operating expenses were favorable reflecting leverage from the company-owned same-store sales trends.

 

SONC: SOLID BEAT, BUT... - sonc pod2

 

 

Sonic is launching a new Baja hotdog in July that it hopes will, in combination with the loaded burger promotion, drive traffic and check.  In addition a new line of Real Ice Cream Shakes will be released which, in conjunction with the other products and promotions on offer, management is expecting to drive positive sales in the fourth quarter. 

 

One area management is focusing on going forward is the after 8pm day part which was slower in the third quarter than one year prior and has been a primary contributor to the slowing of SONC’s business over the last few weeks.  With respect to margins, labor costs are expected to be favorable in the fourth quarter and the other operating expense line is expected to improve again.

 

Food cost inflation in the third quarter came in lower than expected, between 5 and 6%, and management expects fourth quarter food inflation to come in below that range.

 

 

Howard Penney

Managing Director



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