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THE HBM: DNKN, SBUX, MCD, DIN, THI, YUM, EAT

Notable macro data points, news items, and price action pertaining to the restaurant space.

 

MACRO

 

Commodities

 

Supply-side uncertainty is said to be the driving force behind the raised net-long positions across eleven agricultural futures and options in the week ended August 23rd, according to Bloomberg.  Speculators increased bullish bets on agricultural commodities to the highest level since early May after adverse weather further eroded yield prospects for corn and soybeans crops in the U.S.

 

Subsectors

 

Quick Service restaurant stocks continue to outperform on all durations and the food processors continue to lag as commodity price uncertainty weighs on sentiment.  SAFM’s recently reported 3QFY11 earnings miss did little to convince investors that the sector is out of the woods.

 

THE HBM: DNKN, SBUX, MCD, DIN, THI, YUM, EAT - subsectors fbr

 

 

QUICK SERVICE

  • DNKN shares are pricy at current levels, according to Barron’s.  Echoing some of what we have been saying for some time, the article points out that DNKN is trading at a premium to SBUX, MCD, DIN, and THI.
  • YUM is lobbying the federal government, using a little-used provision from the 1970’s allowing states to permit restaurants for Supplemental Nutrition Assistance Program (SNAP) benefits.  The provision allows the elderly, disabled, or homeless the option of exchanging food stamps at participating restaurants.  Thus far, only a few states have opted into the program.

 

CASUAL DINING

  • EAT raised its quarterly dividend to 16c per share from 14c.

THE HBM: DNKN, SBUX, MCD, DIN, THI, YUM, EAT - stocks 829

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


THE M3: MORE CHINESE BANK TIGHTENING; CASH HANDOUT; UNEMPLOYMENT (MAY-JULY);

The Macau Metro Monitor, August 29, 2011

 

 

CHINA EXPANDS BANK RESERVE RULES Channel News Asia, Intelligence Macau

According to Xinhua news agency, the People's Bank of China has ordered commercial lenders to include margin deposits in the reserves they must set aside.  The margin deposit is the collateral used for banks' off-balance sheet and securities transactions.  This move to further restrict bank lending indicates that containing inflation remains a government priority despite signs of a domestic slowdown.

 

IM believes this clamp on liquidity will pull 1 trillion yuan out of the banking system; in context, China is expected to see bank loans rise by ~6x that amount in 2011.

 

CASH HANDOUT TO START THIS WEEK Macau Business

Macau government said the second government cash handout of 2011 will be implemented starting tomorrow.  Each Macau permanent resident will receive MOP3,000 while each non-permanent resident will get MOP1,800.  Earlier this year, the government had already handed out MOP4,000 to each permanent resident while each non-permanent resident got MOP2,400. The cash handout program was first unveiled in 2008, when inflation in Macau peaked.

 

EMPLOYMENT SURVEY FOR MAY-JULY 2011 DSEC

Unemployment rate for May-July 2011 held stable at 2.7%, same as the previous period (April-June 2011).  Total labor force was 340,000 in May-July 2011 and the labor force participation rate stood at 71.8%, with the employed population increasing by about 2,200 over the previous period to 331,000.

 



MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN

This week's notable callouts include a new YTD high in the TED spread and continuing widening of US and European financial CDS.


Financial Risk Monitor Summary (Across 3 Durations):

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

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - summary

 

Margin Debt Flat in July

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 July, margin debt held close to flat at $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 July.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - margin debt

 

1. US Financials CDS Monitor – Swaps widened across domestic financials last week with 27 of 28 issuers widening.  Only BAC swaps tightened, falling from a high of 387 bps on Tuesday to 334 bps on Friday following the injection of $5B from Warren Buffett.  On a month-over-month basis, not one issuer was tighter. 

Widened the most vs last week: PMI, LNC, PRU

Tightened the most/widened the least vs last week: BAC, WFC, JPM

Widened the most vs last month: PMI, LNC, HIG

Widened the least vs last month: ACE, AON, MMC

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were wider last week.  35 of the 39 swaps were wider and 4 tightened.   The average widening was 10%, or 40 bps, and the median widening was 3%. 

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - euro cds

 

3. European Sovereign CDS – European sovereign swaps were wider week over week across the continent. We are keeping a close eye on France, which is critical to the EFSF, and where swaps widened by 12 bps to 165 bps week over week. We believe the CDS market is currently pricing in decreased hedge effectiveness in addition to improvement in sentiment around sovereign solvency.  Judging by the Greek bailout, regulators are making a concerted effort to design a bailout that does not trigger CDS.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - sov 1

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - sov 2

 

4. High Yield (YTM) Monitor – High Yield rates fell last week, ending at 8.13 versus 8.20 the prior week.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 14 points last week, ending at 1500. 

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - leveraged loan

 

6. TED Spread Monitor – The TED spread rose to a new YTD high, ending the week at 32.8 versus 30.3 the prior week.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index was flat at to –5.3.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields hit a new all-time high before backing off, ending the week at 1786.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - greek bond

 

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 higher.  Last Friday, spreads closed at 164 bps.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY 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 index rose, climbing 79 points to 1541.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY 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 14 bps to 201 bps.   

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF suggests bias to the upside as follows:  4.9% upside to TRADE resistance, 7.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: FRANCE, SPAIN & ITALY CONTINUE TO WIDEN - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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Random Illusions

“Make it less random to make it feel more random.”

-Steve Jobs

 

That’s not a quote to explain why Greek stocks can move up +10.2% this morning (after having crashed -48% since February). That’s what Steve Jobs said about getting the “shuffle” feature right for your iPod.

 

Dan Gardner (author of “Future Babble – Why Expert Predictions Fail and Why We Believe Them Anyway”) used this Apple analogy to hammer home his point about what psychologists call “the illusion of control.”

 

“People are particularly disinclined to see randomness as the explanation for an outcome when their own actions are involved. Gamblers rolling dice tend to concentrate and throw harder for higher numbers, softer for lower.” (Future Babble, page 75)

 

This, of course, is ridiculous. But only the ridiculous can explain much of the “expert” storytelling in our profession.

 

Last week, I kicked off Monday’s Early Look with a note titled “Uncertainty and Non-Linearity” and I had a tremendous amount of feedback from clients (thank you) on the concept of embracing Uncertainty in both our lives and risk management processes. This morning the process has not changed. My positioning has.

 

With plenty of asset classes on sale throughout different parts of the week, I was able to put 9% of our 70% Cash position to work by buying Corporate Bonds (LQD), Silver (SLV), and taking up our US Equity exposure from 0% to 3%.

 

I know, call me a wild and horned up bull.

 

Here’s how the Hedgeye Asset Allocation Model looks this morning (8 positions):

  1. Cash = 61% (down from 70% last Monday)
  2. Fixed Income = 21% (Corporate Bonds, Long-term Treasuries, and a US Treasury Flattener – LQD, TLT, FLAT)
  3. International Equities = 6% (China and S&P International Dividend ETF – CAF and DWX)
  4. International Currencies = 6% (Canadian Dollar – FXC)
  5. Commodities = 3% (Silver – SLV)
  6. US Equities = 3% (Utilities – XLU)

People always ask me what would get me to change my “market view.” I then have to ask them what market they are asking about. I am a Global Macro man who works with a 40 person team across countries, currencies, commodities, etc, so the answer isn’t as random as where the Dow is going next.

 

The answer actually gets down to last price. Prices Rule in my multi-factor, multi-duration, Global Macro risk management model. To put that more simply – as prices, volumes, and volatilities change, I do.

 

A lot of people do not deal with managing risk that way. Some are absolutely certain that God endowed them with a super special ability to think about “valuation” better than you or I can. Some think that markets owe them a “rate of return above the risk free rate.” Some actually don’t put much thought into it at all and just buy all dips.

 

Across asset classes, here’s what my core 3 factor model (PRICE/VOLUME/VOLATILITY)  said the market was saying week-over-week:

  1. US DOLLAR INDEX = DOWN -0.3% week-over-week and down for the 2nd consecutive week, reminding us that there is no strong US Dollar policy that the Globally Interconnected Marketplace actually believes. If I have written this 100x since 2007, I have written it 1000x - devaluation is not the best path to long-term economic prosperity. It perpetuates short-term inflations.
  2. CANADIAN DOLLAR = UP +2% week-over-week and proving itself where both US Congress and Les Eurocrats can’t (political solidarity). Canada is being led toward a majority that the Globally Interconnected Currency Market can attempt to trust.
  3. EURO = FLAT week-over-week as the Europeans do nothing to change the world’s view that they have no political union that can be believed in. The ever so important vote on the EFSF (European Financial Stability Facility) is up next (late September).
  4. COMMODITIES (CRB Index) = UP another +1.8% week-over-week and holding above both its long-term TAIL and immediate-term TRADE lines of support. This is the Stag in Stagflation that is associated with a debauched US Dollar policy.
  5. OIL = UP +3.8% week-over-week outperforming overall commodity inflation by more than a 2:1 ratio. Getting the stock market up by getting the energy stocks up also gets consumers a nice tax at the pump for Labor Day weekend.
  6. COPPER = UP +2.7% week-over-week to $4.11/lb but not enough to get Dr. Copper back above either its long-term TAIL or immediate-term TRADE lines of resistance (both are converging around $4.17/lb). Copper trading sustainably above $4.21/lb would be one of the key leading indicators that would change my Global Growth Slowing research view.
  7. GOLD = DOWN -3% week-over-week after making all-time weekly closing highs for almost every week of Q3 2011 before that. If you shorted Gold last week, you feel shame this morning. We are long Silver as we think it has less hedge fund risk right here and now than Gold does. Gold and Silver will continue to outperform when real-interest rates are negative.
  8. VOLATILITY (VIX) = DOWN -17% week-over-week and while it’s not conventionally considered an asset class, I don’t see why it shouldn’t be given that the Fed, ECB, and BOJ (Fiat Fools): A) shorten economic cycles and B) amplify market volatility.
  9. US TREASURIES = FLAT on the short end and DOWN on the long end last week as long-term Treasury bonds were immediate-term TRADE overbought in the week prior. Nothing has changed the Treasury Bond Market’s view from an absolute yield pricing perspective. For me to change, I’d need to see greater than 0.28% and 2.49% on 2-year and 10-year yields, respectively.
  10. US TREASURY YIELD SPREAD = UP 13 basis points week-over-week as the long-end of the Treasury curve rallied (10-year went from its YTD low of 2.06% to 2.19% by Friday). We continue to see the intermediate-term TREND of Yield Curve COMPRESSION as one of the most important leading indicators of both US Growth Slowing.

All the while, US stock market bulls had a wonderful week with the SP500 closing up +4.7% (up for its 1stweek in the last 5). But, Prices Rule, and while I moved off of the ZERO bound last week (asset allocation to US Equities = 3%), that certainly doesn’t make me a bull on either an intermediate-term TREND or long-term  TAIL duration. I’d need to see an SP500 close above 1263 for that.

 

“For humans, inventing stories that make the world sensible and orderly is as natural as breathing. That capacity serves us well, for the most part, but when we are faced with something that isn’t sensible and orderly, it’s a problem” (Future Babble, page 81). That’s why I’ll stick with my own storytelling that both accepts Uncertainty and that the market’s last price makes perfect sense.

 

My immediate-term TRADE ranges of support and resistance for Gold, Oil, and the SP500 are now $1, $81.35-88.58, and 1154-1191, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Random Illusions - Chart of the Day

 

Random Illusions - Virtual Portfolio


The Quitting Time

This note was originally published at 8am on August 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time.”

-Chinese Proverb

 

While it’s both sad and pathetic to watch our said “free market” system come to this, the entire asset management world is being dared to bet on either black or red going into Ben Bernanke’s “event” in Jackson Hole, Wyoming on Friday.

 

If you must play (going to 70% Cash this week, we have decided not to), you should have already decided on 3 things:

 

1.   RULES: seeing that Japan, Europe, and the US effectively change the rules as we go, this is a tough one! If you have inside information on what Bernanke is going to say, enjoy that and some orange jump suit risk out on your life’s tail.

 

2.   STAKES:

A)   bet BLACK on Bernanke and the elixir of another short-term stock market inflation is yours

B)   bet RED on no QG3 (Quantitative Guessing III) and there’s a high probability that your P&L doesn’t blow up in 2011

 

3.   QUITTING TIME: don’t bet at all – go to cash and/or tighten up your net exposure like we have (10 LONGS, 10 SHORTS)

 

I’m not a big fan of blowing up. When I started in the hedge fund business, my first 3 years (2000, 2001, and 2002) were down markets. Not losing money was the name of the game. Since 2008, I haven’t had other people’s money on the pass-line (betting rules are different when the money isn’t yours). I’ve been “all-in” with my own money. Not interested in rolling the bones, Benny – sorry, “bro.”

 

This is what the ZERO Percent Interest Rate Policy has done to this gargantuan game of Globally Interconnected Risk. Big Government Intervention is designed to debauch your currency and dare you to bet on the stock market. That’s a dumb long-term strategy. Period.

 

In the past, we’ve also called this 3D-Risk – ZERO percent cost of “risk free” capital does 3 things:

  1. DARES investors to chase “yield” (stocks over zero percent “risk free” bonds)
  2. DISGUISES financial risk (think Bank of America’s net interest margins and liquidity gap – both in big trouble)
  3. DELAYS balance sheet restructuring (uh, got some Greek or Italian banking sausage?)

So… for me at least, the next 3 days will remain The Quitting Time – and I’m totally cool with that. Call me whatever you want to call me in the meantime. It took me a long time and a lot of mistakes to come to grips with this, but doing nothing with my hard earned capital is sometimes the best decision to make.

 

Back to the Global Macro Grind

 

On this day in 2006, the planet Pluto was downgraded by the powers that be in Astronomy to “dwarf planet.” While I’m not an astrology expert, I think that math and physics had something to do with the downgrade. Fancy that.

 

Shockingly, 5 years later, Japan is getting downgraded this morning from land of Keynesian Nod to something less than getting the nod. On the “news” that Japan is an economic disaster, the Nikkei crashed again (down -20.4% since February 2011) for the umpteenth time since Paul Krugman and the Princeton boys told the Japanese to “PRINT LOTS OF MONEY.”

 

Nice.

 

But have no fear, the aliens are here…

 

On Fareed Zakaria’s GPS a few weeks ago, CNN teased that they were going to “explore the most important topic (the economy) with the most important voices” (Zakaria was interviewing Krugman). And I couldn’t make this up if it tried, but the venerable Keynesian of Nobel’s Social Study Experiment said:

 

“If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months…”

 

You know, space aliens, Ben… We need to be thinking cowboys and space aliens down there in Jackson Hole!

 

God help us. The Quitting Time with failed Keynesian policies is here.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1809-1901, $81.28-89.28, and 1108-1165, respectively. Yesterday was just another Japanese-like rally to lower long-term highs in US Equities. If people are seriously betting on Bernanke BLACK on Friday, I’ll tell you that this Canadian is in Cash and won’t be surprised whatsoever to see those expectations crash.

 

Best of luck out there today and a special prayer goes out to my brother Ryan and his beautiful family,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Quitting Time - Chart of the Day

 

The Quitting Time - Virtual Portfolio


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