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TALES OF THE TAPE: WEN, MCD, CMG, PNRA, JACK, CBOU, PEET, AFCE, KONA, EAT, DRI

Notable news items and price action from the restaurant space as well as our fundamental view on select names.

 

MACRO

 

Wheat and corn prices rose in Chicago on speculation that last week’s losses, which brought the lowest prices of 2011, may have fueled demand from importers.  On Friday last, the Department of Agriculture said that exporters in the U.S. sold 1.14 million metric tons of corn. 

 

 

QUICK SERVICE

  • WEN this morning announced that it has completed the sale of Arby’s Restaurant Group, Inc. on the terms previously announced, to Roark Capital Group, effective as of July 4, 2011.
  • MCD is looking to Twitter as one forum for advertising its products.  On Friday, it is estimated, the company spent $80,000 on purchasing two promoted trends: #ANewMcDFavorite and #LoveMcDsSmoothies.  The response from the twitterverse has been heavily negative and perhaps brings into question the wisdom of spending such sums of money on 24 hour promoted trends.  It will be interesting to see how the company’s sales of smoothies fare this summer, especially given the difficult comps the company is faced with.
  • MCD is set to accelerate expansion into South Africa after striking a developmental license transaction with Cyril Ramaphosa’s Shanduka Group Ltd.
  • CMG has gained confidence in its business’ viability in the UK and Europe following the opening of its Charing Cross store last year.  The Independent (London) reports that it has just signed up for its second site in Baker Street, as well as hiring the property agent Michael Peddar & Co to search for sites in London and the UK.
  • PNRA, JACK, CBOU, PEET, and AFCE all gained on accelerating volume on Friday.


FULL SERVICE

  • KONA, EAT, and DRI gained substantially on accelerating volume on Friday following DRI’s earnings call.
  • RT - Ruby Tuesday appoints Steven Becker and Matthew Drapkin to the board.

TALES OF THE TAPE: WEN, MCD, CMG, PNRA, JACK, CBOU, PEET, AFCE, KONA, EAT, DRI - stocks 75

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Retail Fuel

 

Conclusion: Sales look decent headed into Thurs. But we think that anecdotes We will fuel the fire for the Street on 2H margin weakness – especially as it relates to earnings season beginning for the vendors in 2 weeks. This has been our call (4.5 Below – 450bos of margin weakness beginning in 2H) and we’re sticking with it. Short JCP, HBI, GIL, COH, CRI, JNY. Long NKE, LIZ, FL.

 

 

Before looking forward, let’s set the context as to where we stand today, and what we’ve been fed over the past year at a Macro level.  

 

As important as things like weather and calendar shifts are, let’s start off with a couple of bigger picture points about the Macro climate ‘then versus now.’

  1. Gross Personal Income was running at about 2.5% compared to about 4.5% today. That’s a function of slightly lower unemployment and marginally higher nominal wage. (positive point)
  2. The two main levers that account for the delta between Gross Income and Personal Consumption pretty much wash each other out.
    1. The consolidated personal tax rate has risen above 10% vs 9.1% this time last year. (negative point)
    2. The personal savings rate, which had been running at 6.1%, has since trended back to 5%.
  3. When we look at what we call ‘essential spending’ (food, energy, healthcare), we’ve seen growth go from 2.6% last year up in nearly a straight line to around 4.3% today.
  4. All that’s left goes into the ‘discretionary spend’ bucket which is far more volatile.  This stood at a healthy 7.5% a year-ago – a level that remains today (at least for now).
  5. Based on our read out of POS data (NPD, SportscanINFO), sales for the month of June were pretty much middle of the road. Apparel decelerated over the course of the month, albeit still positive. Footwear unit growth accelerated, though it the direct result of slightly lower price points. Overall there are nit picks here and there, but the trend overall is unremarkable.

What’s Next?

  1. We think that sales day will be another domino to tip as it relates to giving additional datapoints to the Street about margin weakness – especially as it relates to earnings season beginning for the vendors in 2 weeks. This has been our call (4.5 Below – 450bos of margin weakness beginning in 2H) and we’re sticking with it.
  2. The consumer’s top line – believe it or not – strengthened materially beginning in July of last year. Personal income growth accelerated over 3% -- -and hasn’t looked back. Now we go against that in 2H. Perhaps it stays at that level. But our point is that the yy delta helped out so many in retail – and that’s no longer there.
  3. Could we get a few bps of tax relief to buoy spending? Maybe. But not over 100bp. It’s simply not there – even with the political calendar heating up.
  4. Is the consumer going to draw the personal savings rate back down to 2-3% to free up a few points of spending? It’s possible – especially given US consumer spending habits. This is the biggest area where we could be wrong with our call in 2H. But that will make the setup for 1H12 very grim – i.e. low taxes, trough savings rate, with interest rates nowhere to go but up. That’s the ultimate defensive position for the consumer.
  5. Check out the weekly average earnings chart below. There was a whole lot of nothing until May 2010, until growth accelerated meaningfully – peaking in October, and remained at healthy levels throughout year-end. We’ve got to comp against this.

MIND THE LAG!!!

 

We all know that ‘the cotton trade is dead.’ That’s been the consensus for 7 months now. But we still think that the ‘earnings trade’ is very much alive. Remember that cotton, oil and other raw materials generally have a 9-12 month lead time. That means that what is selling today was procured last summer/early fall of last year. That’s precisely when costs started their precipitous ascent. We’ll have to deal with this for the next year at a minimum. Likely longer. We still don’t think we’re looking at a recovery until 2013 in this space.

 

Retail Fuel - SSS CIS 6 11

 

Retail Fuel - SSS Earnings 6 11

 

Retail Fuel - SSS Unemployment 6 11

 

Retail Fuel - SSS FW App June 6 11

 

Retail Fuel - SSS Cotton 6 11

 

Retail Fuel - SSS Gas 6 11

 

Retail Fuel - SSS Otexa 6 11

 

Retail Fuel - SSS 6 11 YY Chart

 

 


WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE

All our indicators looked better following Friday's rally. Big picture risks we remain focused on include the ongoing slowdown in the JOC Industrial Commodity Index signaling ongoing slowdown in the global economy and the relentless drive higher in EU sovereign swaps.  In the short-term, however, the EU/Greece bandaid has put concerns on hold. 


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 8 of 11 improved / 0 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 4 of 11 worsened / 6 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 6 of 11 worsened / 3 of 11 unchanged

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - summary

 

1. US Financials CDS Monitor – Swaps tightened for all domestic financials last week, with the moneycenters and brokers leading the charge.

Tightened the least vs last week: UNM, AGO, GNW

Tightened the most vs last week: C, WFC, GS

Widened the most vs last month: PMI, MTG, ALL

Tightened the most vs last month: JPM, GS, PRU

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mixed last week.  11 of the 38 swaps were wider and 28 tightened.   

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - euro cds

 

3. European Sovereign CDS – European sovereign swaps corrected amid good news from Greece.

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates edged dropped sharply on Friday of last week, ending at 7.38 versus 7.57 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index climbed slightly last week, ending the week 7 points higher than the previous week at 1605.   

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - lev loan

 

6. TED Spread Monitor – The TED spread fell slightly, ending the week at 23.0 versus 24.1 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index rose less than one point to 8.6. 

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields came in 44 bps, ending the week at 1634.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - 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 six 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. We track the 14-V1.  Last week spreads dropped 13 bps to 109. 

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - mcdx

 

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.  Last week the series remained close to flat versus the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread widened to 271 bps.   

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.0% upside to TRADE resistance, 3.4% downside to TRADE support.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - XLF

 

Margin Debt Back Off of Recent Highs

We publish NYSE Margin Debt every month when it’s released.  This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (expressed as standard deviations from the long-run mean).  As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market.  Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous.  In May, margin debt decreased $5.3B to $315B.  On a standard deviation basis, margin debt fell to 1.36 standard deviations above the long-run average.

 

One limitation of this series is that it is reported on a lag.  The chart shows data through May.

 

WEEKLY FINANCIALS RISK MONITOR: RISK RETREATS FOR NOW POST-GREECE  - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


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.

THE M3: IMPORTED LABOR

The Macau Metro Monitor, July 5, 2011

 


MACAU GOVERNMENT APPROVED MORE IMPORTED LABORS Macau Daily News

The government approved 8,560 imported workers in May, significantly higher than the numbers in the first four months.  Over 6,600 foreign workers were hired by the construction industry in the first five months, followed by maids at 6,500. The number of approved foreign workers for hotel and dinning industry also increased.

 

MACAU ENCOUNTERED PROBLEM HIRING IMPORTED LABOR FROM THE MAINLAND Macau Daily News

China passed the proposal of raising the personal income tax threshold from RMB 2,000 to RMB 3,500 in end of June, making it more difficult for Macau enterprises to recruit mainland employees. As a growing number of employees are not renewing their contracts, Macau enterprises are now turning to hiring Filipinos.


Optimistic Pessimists

This note was originally published at 8am on June 30, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

-Winston Churchill

 

Earlier this week, I appeared on BNN, which is the Canadian equivalent of CNBC to discuss some of our key recent macro thoughts (the clip can be found here: http://watch.bnn.ca/#clip491722 ).  Shortly after the appearance, our COO Michael Blum emailed and said I need to smile more.  I then was told by one of our top Canadian subscribers that I could use some rose colored glasses.  These comments made me wonder: am I too pessimistic? Further, is Hedgeye too pessimistic?

 

Admittedly, our morning missives at times can come across with a pessimistic tone.  This is a function of the early mornings, our legitimate concerns regarding the global economic outlook, and, candidly, some disdain for the decision making and leadership currently coming out of Washington, DC.   Now some might argue we could simply ignore Washington, DC, but the reality is that we are in an economic and market environment in which Washington decision making is critical to investment decision making.

 

Despite our tone in the Early Look some mornings, as a firm I can ensure you we are incredibly optimistic. The simple fact that we started this firm in the middle of 2008 shortly ahead of one of the most dramatic equity sell-offs in our lifetimes is probably the best validation of our optimism.  We continue to be optimistic about the future of our business, the businesses of our subscribers, and our collective ability to continue to find interesting and alpha generating investment opportunities.  Moreover, we are also optimistic about our ability to help shape and inform economic policy.

 

We currently share our thoughts and research with decision makers within the Obama administration, with certain Presidential hopefuls, and with members of Congress on both sides of the aisle.  Our goal is not to someday become rich selling research to the government, but rather to do our part to get this fine country to a better fiscal, monetary, and economic place by providing input and ideas where we can.  While there are certainly economic storm clouds on the horizon, as Churchill said long ago there is “opportunity in every difficulty.”

 

Currently, the Hedgeye research team sees a number of interesting opportunities on the long side.   Below I’ve outlined a number of our team’s top investment ideas that were circulated in May’s version of the Hedgeye Edge on May 27th 2011:

  1. Visa (V) – We remain strongly of the view that Durbin will be softened, and that this will remove a meaningful source of overhang on the stock. While MasterCard has already had a major run, Visa has lagged considerably behind. Update: Durbin was softened and V is up +8.5% since May 27th.
  2. Buffalo Wild Wings (BWLD) - The last quarter was very difficult to poke holes in and it remains one of our favorite ideas as its primary food cost, chicken wings remain suppressed. We see sales continuing to accelerate and a focus of management on deploying further cash into the business which should fuel further growth. Update: Chicken costs have remained soft and BWLD is up +5.8% since May 27th.
  3. Nike (NKE): Over the intermediate and longer terms this is McGough’s favorite big cap long idea. He thinks that it grows from doing $20 billion in sales to $28 billion in 3 years. Update: NKE reported strong earnings earlier this week and is up +6.1% since May 27th.

Since May 27th, the SP500 is down -1.8%, so these ideas did quite well on relative basis.  Now to be fair, not all of the ideas in Hedgeye Edge fared this well (and some such as KONA fared much better), but the point is really to emphasize that even when our Macro view can sometimes be pessimistic, our research can still find interesting opportunities on the long side.  If you are an institutional subscriber and would like to connect with a Sector Head on these ideas or other stock ideas, please email sales@hedgeye.com.

 

Today is both quarter end and month end for the investment management community.  The SP500 as of the close yesterday is down -2.8% for the month and -1.4% for the quarter, which is depressing even for an Optimistic Pessimist like myself.  The end of the quarter also signals the end of the Federal Reserve’s program of Quantitative Easing II, which is certainly a positive for anyone other than those still clinging to the ideology of Keynesian economics.

 

The key potential impact of the end of QEII is a strengthening U.S. dollar, which will perpetuate the continued deflation of commodity prices.  Far be it for me to call out too many positives this morning, but commodity prices deflating will be positive for corporate earnings (eventually) and incrementally positive for consumer spending. 

 

Now as for Standard & Poor’s warning this morning that it will cut the U.S. to its lowest rating of “D” if the government fails to increase the debt limit, I would recommend disregarding Standard & Poor’s with impunity.  The 10-year yield for U.S. Treasury is trading at 3.097%, which means that the U.S. is not defaulting on its obligations any time soon.  While we may not particularly like the debt ceiling resolution, a default is not imminent.

 

Our job as market operators is not to be pessimistic, optimistic, bearish, or bullish, but ultimately it is to be right.  Trust me, even if we sometimes sound dour, the Hedgeye Research Team is always finding nuggets of optimism somewhere.  As the famous Persian proverb goes:

 

“I had the blues because I had no shoes until upon the street, I met a man who had no feet.”

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Optimistic Pessimists - Chart of the Day

 

Optimistic Pessimists - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 5, 2011

 

In Global Equities, a lot changed for the positive last week, but in a Fiat Fool world that only A) shortens economic cycles and B) amplifies market volatility.  We have been focused on the Euro/USD intermediate-term TREND line of 1.42 as support (the line that needs to hold or else a lot of other asset prices - particularly stocks) will start to break. Now that line = 1.43. Time and prices change my risk management scenarios. 

 

Euro/USD trading down -0.55% this morn to 1.44 is nothing to stress about.  Interestingly, on another sequential slowdown in high-frequency German data (Services PMI for June was 56.7 vs 58.3 in May), the DAX held its bid (we're long EWG and Germany is up +7.8% YTD).

 

China is the other equity market we really like and it just moved back to positive for the YTD this morn after a bigger rally from the lows than US stocks had. If the world isn't melting down, buy China and Germany at these prices before you buy USA.  As we look at today’s set up for the S&P 500, the range is 26 points or -1.92% downside to 1340 and 0.02% upside to 1340.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 75

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1973 (+575)  
  • VOLUME: NYSE 865.08 (-13.15%)
  • VIX:  15.87 -3.93% YTD PERFORMANCE: -10.59%
  • SPX PUT/CALL RATIO: 1.30 from 1.38 (-5.50%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 23.56
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 3.22 from 3.18
  • YIELD CURVE: 2.72 from 2.73 

 

MACRO DATA POINTS:

  • 10 a.m.: Factory orders, est. 1.0%, prior (-1.2%)
  • 11 a.m.: Weekly export inspections
  • 11:30 a.m.: U.S. to sell $27b 3-mo. bills, $24b 6-mo. bills
  • 4 p.m.: Crop conditions: corn, cotton, soybeans, winter wheat

WHAT TO WATCH:

  • An EU-approved payout for Greece may result in a default rating, S&P said yesterday
  • Australia leaves cash rate unchanged at 4.75%, as expected
  • Eurozone May retail sales (1.9%) y/y vs consensus (0.5%) and prior revised to +0.8% from +1.1%
  • ECB will continue to accept Greek debt as collateral- FT


 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Bear Market in Tin Ending as Shortages Mean PT Timah’s Profit Advances 55%
  • Crude Oil Halts Two-Day Decline in London on Speculation of Rising Demand
  • Wheat, Corn Gain on Speculation Lowest Prices of 2011 Attracted Importers
  • Copper May Slide on Report Top Consumer China Is Set to Raise Rates Again
  • Sugar Climbs as Brazil’s Output May Miss Initial Estimate; Coffee Slides
  • Gold Climbs in London Trading as China Bank Exposures May Boost Demand
  • Palm Oil Dropping to Lowest in More Than Nine Months May Reduce Food Costs
  • Copper May Reach Record High by October on ‘Bull Flag:’ Technical Analysis
  • Vale Has No Concern Iron-Ore Demand in China May Slow, CFO Cavalcanti Says
  • Soybean Oil Imports by India to Drop 40% as Premium Widens Over Palm Oil
  • India’s Farm Ministry ‘Not Pushing’ for Exports of Wheat, Rice, Pawar Says
  • Rapeseed Imports by Pakistan to Slump as Prices Climb, Buyers’ Group Says
  • Rubber Drops Most in a Week on Concern Chinese Demand May Weaken on Rates
  • Hedge Funds Reduce Natural Gas Bets by Most in Four Months: Energy Markets

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: holds up reasonably well given the German Services PMI slowed sequentially (were long $EWG); Spain remains below its TREND line

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: Chinese stocks (were long $CAF) continue higher, now back into the green for the YTD, but the Hang Seng not confirming, still below TREND

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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