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Old Slate

“We’re not just going to start with a clean slate, we’re going to throw the old slate away.”

-Vince Lombardi (1959)

 

That was one of the first iconic leadership quotes to come out of Vince Lombardi’s mouth when he moved his family to Green Bay, Wisconsin in 1959 (page 207 of “When Pride Still Mattered”, by David Maraniss).

 

As all great leaders across history have proven, results matter more than rhetoric. But, when you can combine both, you have the holy grail of life’s opportunities – to “be the change you want to see in this world” (Gandhi).

 

Barack Obama and Johnny Boehner are not Gandhi. Neither are they Lombardi. These two gentlemen would have a tough time leading me to the men’s room at a Yale Hockey game without forming a committee. And, sadly, after we get this morning’s stock market rally out of the way, we’re all going to be stuck with their same Old Slate.

 

This isn’t to say that this gong show of a Debt Ceiling Debate isn’t going to help America start with a clean slate. First though, we need to throw away the old one! That will take time. Change is a process; not a point.

 

Back to the Global Macro Grind

 

With the most anticipated headline since ‘sun rising in the East’ behind us, the question for Risk Managers now isn’t about the mechanics of the debt “deal” (it will be back end loaded and will not move the dial until all of these politicians are gone) – it’s about Global Growth and Earnings Expectations – both are still too high.

 

Here’s how the globally interconnected market is reacting to the “news” that Washington does career risk management:

  1. STOCKS – Asia rallied across the board to lower-highs and remains the best looking region of the 3 majors (Asia/Europe/USA); European Equities are up marginally on low volume and basically still look awful; US Equities have immediate-term downside support at 1286, but a wall of intermediate-term TREND resistance up at 1319 on the SP500.
  2. TREASURY BONDS – We’ve been on the other side of the PIMCO “credit risk” trade (El-Erian) and focused more on the two things that have really provided a bid for bonds since April – US Growth Slowing and Inflation Expectations coming down. We saw new highs in 10 and 30-year UST bonds on Friday into the “news.” Now Treasuries are immediate-term TRADE overbought.
  3. EUR/USD – This is the one strike price that should continue to whip around in the next 48 hours as we finally put this debt deal dog to bed. Watch $1.43 as your TREND line that inflates/deflates everything else (across asset classes). The global market’s Correlation Risk moves off that.

From the Eurocrats to the Fiat Fools of the Keynesian Kingdom in America, do any of these people realize the causal relationship between debt and growth?

 

Republicans and Democrats, Reid my Boehner on this:

 

DEBT STRUCTURALLY IMPAIRS GROWTH.

 

That’s it. So keep it simple stupid. The only thing that you are really doing to global markets and economies are:

  1. Shortening economic cycles
  2. Amplifying market volatility

How short was the last “bullish” economic cycle? You tell me (if you are a Washington/Wall Street person you will have a different answer to this question than Main Street, fyi). The only thing worse than Friday’s Q2 US GDP report of 1.3% is the thought that the government’s made-up number could be off by 81%! (Q1’s was restated at 0.36% versus 1.92% prior!!!)

 

I think that’s the first time I have used 3 exclamation points in an Early Look. Re-read that fact about reported US GDP. Maybe I should have used six!!!!!!

 

Either these Republicans and/or Democrats figure out how to throw out this Old Slate of failed economic policy, or The People are going to throw all of them out. That’s the change I can believe in.

 

My immediate-term support and resistance ranges for Gold (sold ours last week), Oil (no position), and the SP500 (no position) are now $1, $95.96-100.49, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Old Slate - Chart of the Day

 

Old Slate - Virtual Portfolio


WEN - A SMOOTH TRANSITION FOR THE NEW BURGER?

The central tenet surrounding the bull case for Wendy’s which lies at the core of fixing the Wendy’s brand is the rollout of the new hamburger, beginning in 2H11.  In January, our fundamental view of the stock was positive but, various red flags over the past six months have moved us to change that stance.  The most important of which is this: we are now in 2H11 and there still appears to be issues with rollout of the new product.

 

It was reported on Friday that WEN is suing franchisees Lewis Topper and Jeffrey Coghlan and their WendPartners Franchise Group, alleging breach of contract and claiming they missed deadlines to buy and install bun toasters.

 

Lewis Topper and Jeff Coghlan are not insignificant franchisees.  Both have been inducted into the Wendy's Hall of Fame and sit on the board of directors of OFFA - the Old Fashioned Franchise Association.   According to the OFFA web site, the purpose of the organization “is to give Wendy’s franchisees a voice.”   

 

The OFFA Mission states, “By positively representing the collective interest of the franchise community, we are reasserting the importance of franchisee involvement in the management decision making process.  We are the only independent franchisee organization in the Wendy’s system. We are dedicated to preserving the values Dave Thomas instilled in Wendy’s franchisees from the beginning and to enhancing our members’ investment and profitability.”

 

The key part of the mission of OFFA is “enhancing our members’ investment and profitability.”  The WEN system seems to be fully behind the idea of the new hamburgers, but there has been some disagreement around the type of toasters to be used and the appropriate testing of the product since January.  Toasting the buns of the new hamburger was emphasized as a key component of the new product by management.  An example of the one of the toasters that was tested by Wendy’s is pictured below.  The machine costs approximately $10,000. 

 

WEN - A SMOOTH TRANSITION FOR THE NEW BURGER? - wen toaster

 

 

My guess is that the disagreement between management and the franchisees anchors on the question of who is going to pay for the equipment and whether or not the company has provided adequate evidence that the franchisees’ investment in the equipment will yield an adequate ROI.  We believe that WEN management is on the right track, but the path to recovery is clearly taking longer than had been expected.  As the news on toasters is hitting the tape, it seems that the breakfast rollout and remodel program are also experiencing some difficulties. 

 

If the issue of paying for the toasting equipment could very important if it is a leading indicator for the larger discussion of which parties will bear what proportion of the cost of upgrading the asset base.  While I think the company may have gone back to the drawing board for a better plan as it relates to the remodels, the most crucial question at this juncture is how much, if any, financial support the company will provide the franchise system in carrying out the program.  Needless to say, the impact of these disputes has the potential to be a drag on EPS which may not be factored in to consensus estimates for 2012.  Indeed, as MCD marches forward with its remodel program, the longer WEN takes to resolve these issues, the more share the company is likely to lose to MCD.  The potential turmoil between the franchisees and management can only slow the potential progress of breathing life back into the Wendy's brand!

 

The street has been getting slightly more bullish of late, while the short interest in the stock is low but rising.  MCD has been posting some strong sales results, which is likely making life more difficult for Wendy’s.  Each issue that arises, whether it is around investing in new kitchen equipment, reaching consensus on breakfast, or the remodel program, pushes out the timeline for the turnaround further. 

 

At Hedgeye, we define our investment stance on each stock on three distinct durations: “Trade”, meaning three weeks or less, “Trend”, meaning three months or more and “Tail” meaning three years or less.  Given the issues that are weighing down WEN’s turnaround story, we are currently negative on a Trade duration, but bullish on the Tail. 

 

WEN - A SMOOTH TRANSITION FOR THE NEW BURGER? - wen rating historical

 

WEN - A SMOOTH TRANSITION FOR THE NEW BURGER? - WEN buyside sentiment

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 


Weekly Asia Risk Monitor

Positions in Asia: Long Chinese equities (CAF); Long Indian equities (INP); Short Japanese equities (EWJ).

 

We’re keeping this piece short and sweet going forward. Email us at if you’d like to dialogue more deeply about anything you see below.

 

PRICES

 

It was a rough week for the bellwether markets in Asia (China’s Shanghai Composite down -2.5%: Japan’s Nikkei 225 down -3%; India’s SENSEX down -2.8%). On the positive side, Thailand’s SET Index continues outperform the broader region, up +1.1% wk/wk and up +9.7% mo/mo. On both a median and average basis, Asian equity markets are down for the YTD – not confirming the “global growth will come roaring back in 2H” sentiment embedded in consensus estimates. The Japanese yen stole the show on the currency front (+1.8% wk/wk) and we think BoJ intervention is just around the corner from current levels. In the fixed income market, Indian sovereign debt yields ripped across the curve after the RBI hiked rates more than anticipated (+50bps vs. consensus estimate of +25bps). U.S. dollar correlations to Asian asset classes picked up noticeably over shorter durations – mostly inverse, though Chinese equities stand out as having a positive correlation of r² = .50 on a trailing 3wk basis. Dollar UP = Deflating the Inflation.

 

Weekly Asia Risk Monitor - 1

 

Weekly Asia Risk Monitor - 2

 

Weekly Asia Risk Monitor - 3

 

Weekly Asia Risk Monitor - 4

 

Weekly Asia Risk Monitor - 5

 

Weekly Asia Risk Monitor - 6

 

Weekly Asia Risk Monitor - 7

 

Weekly Asia Risk Monitor - 8

 

KEY CALLOUTS

 

China: A tragic bullet train accident dominated the headlines earlier in the week followed by accelerating industrial earnings growth (+28.7% YTD). Though nothing more than consensus hearsay at this point, rumors which suggest that China is looking to accelerate diversification of its $3.2T of FX reserves (at least $1.2T are denominated in US dollars) continue to pickup as the debt ceiling drama accelerates. The “China diversification story” is not new news, FYI.

 

Japan: The key callouts out of Japan this week are directly related to monetary and fiscal policy. BoJ governor Masaaki Shirakawa signaled to the market that the BoJ stands ready to intervene (again) in the global FX market to stem the yen’s rapid appreciation. We’ve been bullish on Japan’s currency for the last few months, but are now bearish as BoJ intervention and a likely government shutdown in early fall looms large. Japan’s manufacturing data continues to improve on the margin, but it remains decidedly negative and our models point to a continuation of that phenomenon throughout the remainder of the year. Household spending growth slowed to -4.2% YoY in June and we do not see a meaningful acceleration on the horizon in 2012 if the consumption tax is doubled in upcoming Diet legislation.

 

India: The RBI hiked rates by double that of consensus estimates and we used the resulting equity market weakness to buy Indian equities. We’ve been the bears on India since early November and we see the vast majority of our negative catalysts in the rear-view mirror. Food inflation slowed to the weakest pace of growth since February ’09 and our models point to India’s monthly WPI figure to peak in August. We look for the implementation of Prime Minister Singh’s rice subsidy and health insurance to be bullish near-term for Indian growth (our models point to the first sequential acceleration since 1Q10 in 4Q). Further out, the program is likely to incrementally stoke inflation (wider fiscal deficit) and slow growth (higher interest rates), so, needless to say, we’ve got this position on a tight leash in the absence of further color.

 

South Korea: GDP growth slowed sequentially in 2Q (+3.4% YoY), while June industrial production growth slowed to the lowest rate in nine months (+6.4% YoY). Our models put us 100-200bps below the Bank of Korea’s GDP estimates for 2H11 and we expect their hawkish talk to subside on the margin as Korean economic growth comes in below their forecast. Korean growth is healthy; it’s just not as healthy as they’d like.

 

Australia: Both CPI and PPI came in faster on a YoY basis and slowed on a QoQ basis in 2Q – in line with our expectations – and created incremental RBA rate hike speculation in the FX and swaps markets. We think Stevens would be foolish to hike rates on Monday and risk sending the Australian economy into a potential recession. Simply put, there is not end demand on the ground: corporate credit growth contracted in June on a MoM basis for the first tin since October ’09 and mortgage origination grew at the lowest rate ever (+6% YoY). Forget the Chinese demand story; Australia’s housing market remains anemic and looks to hang over the economy for the foreseeable future (RPData’s House Price Index posted a sixth-consecutive monthly decline in June: -0.2% MoM).

 

New Zealand: Rates are going up in New Zealand soon (bullish for NZD). Reserve Bank of New Zealand governor Alan Bollard said it and recent economic data supports it: widening trade balance in June (+9.3M NZD YoY); rising business confidence in July (47.6 – a 14-month high); faster Money Supply growth in June (M3 = +7.3% YoY). The bifurcation between the Australian and New Zealand economies continues to widen.

 

Thailand: The Bank of Thailand reiterated our call that populist Pheu Thai policies will stoke inflation by stating, “The risk to inflation outweighs the risk to growth – especially in light of continued fiscal stimulus”. We remain bullish on Thai interest rates over the long-term TAIL, as we see little way around the government’s stated objectives other than higher rates of growth and inflation. Nearer term, accelerating industrial production growth (+3.3% YoY), quickening trade balance growth (-$656M YoY vs. -$2B YoY prior), and improving business sentiment (53.1 vs. 50.9 prior) all proved bullish for Thai stocks.

 

Singapore: CPI accelerated in June to +5.2% YoY alongside a sharp acceleration in industrial production growth to +10.5% YoY. The pickup was driven largely by pharmaceutical output (+41.5% YoY) while electronics production fell (-15.3% YoY). The jobless rate ticked up +20bps to 2.1% in 2Q and we should see that edge down in 3Q as growth reaccelerates. The inflation reading continues to support our bullish bias on the Singapore dollar (SGD).

 

Taiwan: GDP growth slowed in 2Q to +4.9% YoY alongside a deceleration in industrial production growth to +3.6% YoY – a 21-month low. As we called out in November of last year, Asia’s weakening manufacturing statistics continue to stand counter to overly-bullish expectations for U.S. GDP growth in 2H11 (Asian factories produce the stuff we consume typically 6-9 months before we buy it).

 

Darius Dale

Analyst


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CONSUMER CONFIDENCE FALLS IN JULY

The University Of Michigan Survey Of Consumer Confidence Index collapsed in July.  The ongoing employment crisis, reduced home prices, and still-elevated gas prices are weighing on sentiment.  The embarrassing debacle in Washington is also likely causing concern. 

 

Looking at the components of the Index, it was telling that expectations came down so sharply, from 64.8 in June to 56 in July.  This is the lowest level since November 2009.  The overall Sentiment Index declined 7.8 points to 63.7 in July.  This month brought the largest decline since March and the lowest level for the Index since March 2009.   Current Attitudes declined by 6.2 points to 75.8, the lowest level since November 2009.

 

With GPD growth slowing to a measly 1.3% in the second quarter, the employment situation showing no real signs of turning around, and gasoline prices at $3.70 per gallon on a national basis, it makes sense that consumers are fearful.  The ceaseless media focus on the debt ceiling debate and the apparent incapability of the nation’s elected representatives to reach a resolution is also heightening concerns.

 

CONSUMER CONFIDENCE FALLS IN JULY - umich sentiment july

 

CONSUMER CONFIDENCE FALLS IN JULY - umich expectations july

 

CONSUMER CONFIDENCE FALLS IN JULY - umich attitudes july

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


CONSUMER CONFIDENCE FALLS IN JULY

The University Of Michigan Survey Of Consumer Confidence Index collapsed in July.  The ongoing employment crisis, reduced home prices, and still-elevated gas prices are weighing on sentiment.  The embarrassing debacle in Washington is also likely causing concern. 

 

Looking at the components of the Index, it was telling that expectations came down so sharply, from 64.8 in June to 56 in July.  This is the lowest level since November 2009.  The overall Sentiment Index declined 7.8 points to 63.7 in July.  This month brought the largest decline since March and the lowest level for the Index since March 2009.   Current Attitudes declined by 6.2 points to 75.8, the lowest level since November 2009.

 

With GPD growth slowing to a measly 1.3% in the second quarter, the employment situation showing no real signs of turning around, and gasoline prices at $3.70 per gallon on a national basis, it makes sense that consumers are fearful.  The ceaseless media focus on the debt ceiling debate and the apparent incapability of the nation’s elected representatives to reach a resolution is also heightening concerns.

 

 

CONSUMER CONFIDENCE FALLS IN JULY - umich sentiment july

 

CONSUMER CONFIDENCE FALLS IN JULY - umich expectations july

 

CONSUMER CONFIDENCE FALLS IN JULY - umich attitudes july

 

 

Howard Penney

Managing Director



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