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THE HBM: DPZ, PNRA, TAST, MCD, CMG, RT, EAT

THE HEDGEYE BREAKFAST MENU

 

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

 

 

MACRO

 

Casual Dining

 

Malcolm Knapp released the Knapp Track Casual Dining data for June over the weekend.  Another strong month, as the estimated comparable restaurant sales change in June 2011 is 2.4% and traffic increased 0.5%.  I suspect that the strong performance of Red Lobster is helped to drive the 40 basis points sequential improvement from May to June.

 

 

Commodities

 

In terms of commodity news, corn and soybeans may rise as the hot weather of last week threatens yields.   The Japanese Food Chain is being impacted by a radiation fallout from the Fukushima nuclear plant as unsafe levels of cesium have been found in beef in supermarket shelves and in vegetables and in the ocean.

 

 

Subsectors

 

Bucking a trend that has been in place for the last 6 months or so, food processing stocks outperformed over the last couple of months.  Full service restaurants lagged their food, beverage, and restaurant peers over the same duration.

 

THE HBM: DPZ, PNRA, TAST, MCD, CMG, RT, EAT - subsector fbr

 

 

QUICK SERVICE

  • DPZ UK and Ireland SSS increased +2.4%; UK increased +3.4%; Republic of Ireland (8.4%). Management is confident the company will see SSS growth in the next 26 weeks; marketing spend will be three times the amount versus last year, combined with new products. DPZ is set to report global results for 2Q tomorrow.
  • PNRA has been reiterated Buy, with a Price Target of $134, by Sterne Agee.
  • TAST, MCD, and CMG gained on Friday on accelerating volume.  COSI declined 7.4% on accelerating volume.


FULL SERVICE

  • RT reported a disastrous quarter last week and its share price declined -14% on accelerating volume.  BJRI also declined on accelerating volume.
  • EAT gained on accelerating volume despite the nosedive in RT’s stock.  This also confirms out view that EAT is taking share from RT.

 

THE HBM: DPZ, PNRA, TAST, MCD, CMG, RT, EAT - stocks 725

 

Howard Penney

Managing Director

 

Rory Green

Analyst


MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN

This week's notable callouts include financial and sovereign CDS plummeting in the wake of the Greek debt deal.  While this clearly reflects increased bullishness by the market, it also appears likely that the CDS market is pricing in the loss of hedge effectiveness created by policymakers adamant about avoiding a technical credit event. Bucking the trend were the mortgage insurers, where swaps blew out further across the group. 

 

Margin Debt Continues to Fall

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 $9.5B to $306B.  On a standard deviation basis, margin debt fell to 1.21 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 June.

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - margin debt

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 5 of 11 improved / 2 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Negative / 6 of 11 improved / 2 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Negative / 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - summary

 

1. US Financials CDS Monitor – Swaps were mixed across domestic financials last week, tightening for 16 of the 28 issuers and widening for 12.  Mortgage insurers took it on the chin in the swaps market as well as in equity, as investors increasingly question their solvency.  Meanwhile, the moneycenters and large broker-dealers benefited from the Greece deal.

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

Widened the most vs last week: PMI, MTG, GNW

Tightened the most vs last month: C, WFC, MBI

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

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - US cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter last week.  34 of the 38 swaps were tighter and 4 widened.   

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - euro cds

 

3. European Sovereign CDS – European sovereign swaps collapsed following the Greece deal last weekend.  Despite the haircuts included in the deal, ISDA ruled that the restructuring does not constitute a credit event, which means that CDS will not be triggered.  As such, we expect that the CDS market is currently pricing in both improvement in sentiment around sovereign solvency and decreased hedge effectiveness.  A credit default swap is a useless hedge instrument if policymakers manage to create bailout packages designed not to trigger it.   

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates were flat last week, ending at 7.36 versus 7.37 the prior week.

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index was close to flat last week, ending at 1610. 

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - lev loan

 

6. TED Spread Monitor – The TED spread fell slightly, ending the week at 22.3 versus 24.5 the prior week.

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index was close to flat, falling less than one point to 7.2. 

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 289 bps or 16%, ending the week at 1469.

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - 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.  After bottoming in April, the index has been moving gradually higher.  Last Friday, spreads closed at 119 bps.

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - 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 fell 30 points to close at 1323.

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - 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 2 bps to 257 bps.   

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0.7% upside to TRADE resistance, 1.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MORTGAGE INSURANCE SWAPS CONTINUE TO WIDEN - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: MACAU DEMOGRAPHICS; S'PORE JUNE CPI; MBS BLACKOUT

The Macau Metro Monitor, July 25, 2011

 

 

HOW NOT TO UNDERSTAND MACAU Intelligence Macau

IM says the driver behind Macau's growth is not China's middle class but rather its newly rich elite and its underclass.  IM characterizes the "real mass market" in Macau as people who cannot afford to gamble.  They represent more than 2/3 of the visitor market to Macau and don't say in a hotel room.  IM adds that as China's economy develops further, there will be more sophisticated spenders on a wide range of entertainment options, which would suggest, over the long term, MPEL's House of Dancing Water was the right business decision.

 

SINGAPORE'S JUNE INFLATION UP 5.2% ON-YEAR Channel News Asia

S'pore CPI in June rose 5.2% YoY but fell 0.2% MoM, in-line with expectations.  Core inflation rose 2.3% YoY and unchanged MoM.

 

MBS HOTEL TOWER HIT BY BLACKOUT Strait Times

Marina Bay Sands was hit by another power failure on Friday night, plunging all the guestrooms in one of the three towers (783 rooms) into total darkness.  Power was restored an hour later.


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 25, 2011

 

Newsy morning on the Debt Ceiling, but where it would really matter (US Treasury rates) if these professional politicians were not going to get something done within the next week, nothing is being priced in.  As we look at today’s set up for the S&P 500, the range is 27 points or -1.71% downside to 1322 and 0.30% upside to 1349.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 725

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -145 (-2000)  
  • VOLUME: NYSE 738.24 (-23.832%)
  • VIX:  17.52 -0.23% YTD PERFORMANCE: -1.30%
  • SPX PUT/CALL RATIO: 1.58 from 1.16 (-35.41%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 21.75
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 2,99 from 3.03  
  • YIELD CURVE: 2.59 from 2.63

MACRO DATA POINTS:

  •  8:30 a.m.: Chicago Fed: est. (-0.40), prior (-0.37) 
  • 10:30 a.m.: Dallas Fed Manufacturing: est. (-5.2), prior (-17.5)
  • 11 a.m.: Export inspections: corn, wheat, soybeans
  • 11:30 a.m.: U.S. to sell $27b 3-mo., $24b 6-mo. bills
  • 4 p.m.: Crop conditions, corn, cotton, soybeans, winter wheat
  • 6 p.m.: Greece Finance Minister Venizelos speaks at Peterson Institute

WHAT TO WATCH:

  • Greece’s credit rating was cut three steps by Moody’s following EU support plan
  • E*Trade Financial Corp. (ETFC) is hiring Morgan Stanley to explore a sale following criticism from holder Citadel
  • Google (GOOG) may be the best stock pick on the outlook for mobile computing and social networking, Barron’s reported.

COMMODITY/GROWTH EXPECTATION

  • GOLD – and Silver are busting a big move to the upside on a newsy morning where people who don’t do markets (politicians) are running their mouths; we’re long both but would be selling gross exposure on this move; Gold immediate-term TRADE overbought

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Oil Declines After U.S. Lawmakers Fail to Agree on Debt Ceiling
  • Wheat Slumps as Russian Exports Erode Demand for U.S., EU Grain
  • Sugar Rises to Five-Month High on Tight Supply; Coffee Advances
  • Copper May Drop for Fourth Day on Concern About a U.S. Default
  • North Dakota Soggy Wheat Fields Dimming Prospects for Harvest
  • Gold at $1,600 ‘Fundamentally Justified,’ Franklin’s Land Says
  • Food Prices to Stay High on Underinvestment, Climate, IFAD Says
  • BHP Miners Extend Strike at World’s Biggest Copper Mine
  • Food Costs Rising as Coke, Chipotle Pass on Commodity Increases
  • Cotton Output May Climb in India as Farmers Boost Plantings
  • Corn, Soybeans May Rise as Hot Weather Threatens U.S. Yields
  • Gold Advances to Record as U.S. Debt Deadlock Boosts Demand
  • Japan’s Food Chain Threat Multiplies as Radiation Spreads
  • India Lifts 2010-11 Cotton Output Estimate to 32.5 Million Bales

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: Italy and Spain fail right where they should have post last week's squeeze to lower-highs; Italy down another -0.9% = bearish TREND

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: China got rocked (down -3%)  and the rest of Asia was weak w/ exception of India +1%.
  • CHINA – the most concerning move from overnight, with Chinese stocks getting rocked for a -2.96% loss after a tragic rail accident. Higher lows for the Shanghai Comp, but tomorrow will be important to watch on follow through. Copper down -0.4%.

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


Top-Notchers

This note was originally published at 8am on July 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 like them more than all of the top-notchers.”

-Harry Truman  

 

I smiled last night as I was reading that passage on page 808 of what my son calls the “heavy book” – David McCullough’s “Truman”:

 

“He liked the Secret Service agents who watched over him, most of whom came from small towns or backgrounds much like his own and none of whom ever asked anything of him. “I like them more than all of the top-notchers,” he once told Margaret.”

 

Harry Truman, like all of us, had his issues – but, ultimately, he was victorious in what most of us want to accomplish in life. He achieved above and beyond what anyone ever expected of him.

 

Markets, too, are like that. They are all about expectations. I think that’s why they resonate with so many of us. They can make you laugh. They can make you cry. And, every once in a while, they can put a sparkle in your eye.

 

Apple did that last night. The proverbial love-affair Americans have had with this stock extends itself from the product all the way back to the man who bet on himself to create it. Steve Jobs is another great American success story who has travelled the broken road of expectations to infinity and beyond.

 

With a Debt-Ceiling Compromise finally appearing in the rear-view mirror, Americans have a great opportunity to move forward today. No matter what you think about Steve Jobs or the Global Market – I can assure you of this on both - they are looking forward. And they will both leave those who are caught up in yesterday behind.

 

Back to the Global Macro Grind

 

1.   ASIA - surprisingly Asian stocks had a mixed reaction to Debt Ceiling Compromise and the Apple news. Both China and India closed down overnight (-0.1% and -0.8%, respectively), while Korea, Australia, and Japan all closed up over +1%. China and India in particular did not like the food and energy inflation that was marked-to-market yesterday. So keep your eye on that.

 

2.   EUROPE - wet Kleenex reaction to American earnings and Italian Equities in particular look very vulnerable if the MIB Index fails to overcome the 19,559 line in the very immediate-term. We don’t think that there is any irony in the timing of $12.4B in Italian CDS that traded last wk (2x that of the next country in terms of notional size - France). Sovereign Debt maturities for both Italy and Spain are going to be huge in August and September - and the EUR/USD remains bearish/broken below my $1.43 TREND line.

 

3.   USA – S&P futures look as good as they should look with Apple taking over from the Bankers of America and changing the tone of the earning season to something the winners in this world can believe in. The idea is to think, re-think, and evolve; not suck compensation from a Europig’s nipple of a socialized banking system. That’s all I have to say about that.

 

In terms of risk management levels in the US, as usual, I think you need to take the Apple out of your eye and focus on being multi-factor and multi-duration. That means Stock, Bond, and Currency market moves altogether:

 

1.   STOCKS – what was our intermediate-term TREND line resistance in the SP500 at 1319 is now support. For the immediate-term TRADE (different duration) that’s bullish and should support a new Risk Ranger range for the SP500 of 1319-1352. From a long-term TAIL perspective, my topside target for the SP500 in 2011 remains 1377.

 

2.   BONDS – on our Q3 Macro Themes conference call last week, and really since April, we’ve been saying that A) a Debt-Ceiling Compromise will get done and B) that’s very bullish for US Treasuries. Why? It takes out some of the shorts that are either trading on lagging indicators (Moodys and S&P ratings fears) or short UST bonds on US credit risk. We are long both long-term Treasuries (TLT) and a US Treasury Flattener (FLAT) as we think the long-end of the bond market will continue to see yields fall.

 

3.   CURRENCY – in a strong US Dollar can Americans trust? I guess that depends on which constituency of Americans you ask. I think well over 90% of us say yes (lower gas prices, Deflating The Inflation, and higher employment correlate with a strong US currency). The other 5-10% of you who want to Debauch The Dollar can’t possibly want that for your country in the long-run – you probably want it for yourself.

 

Whether it’s some Top-Notcher in Washington or a lobbyist trying to convince a professional politician of another policy to inflate, Americans have had enough. They get it. They are America’s “Secret Service.” From small towns to big ideas and sweat capital to big hiring, they are The People who make this country work.

 

My immediate-term support and resistance ranges for Gold (we’re long), Oil (we covered our short on Monday), and the SP500 are now $1572-1623, $95.51-99.20, and 1319-1352, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Top-Notchers - Chart of the Day

 

Top-Notchers - Virtual Portfolio



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