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DIAL IN & MATERIALS: "WHAT'S NEXT FOR THE EUROZONE?"

CONFERENCE CALL TODAY THURSDAY, SEPTEMBER 22nd at 11am EDT

 

Valued Client,
 
5-10 minutes prior to the 11 AM EDT start time please dial:

(Toll Free) or (Direct)
Conference Code: 936363#
  

Materials: "WHAT'S NEXT FOR THE EUROZONE?"

                 
To submit questions for the Q&A, please email .

****************************************************************************** 
 

"WHAT'S NEXT FOR THE EUROZONE?"  

 

In 1993, the Maastricht Treaty established the European Union and the path towards a monetary union and common currency in Europe.

 

On this path, the euro was launched in 1999 and has been a particular catalyst for criticism. Most notably, Nobel Laureate Milton Friedman stated in 1999 that he did not believe the euro would last ten years.

 

In contrast to Friedman's prognostication, the euro has lasted more than ten years, but just barely. In fact, many global markets are currently implying that Europe's monetary union and common currency are on the precipice of collapse.

 

Today Thursday, September 22nd, 2011, Hedgeye will be hosting a conference call to discuss the future of the Eurozone and the implications for global markets. The call will focus specifically on three topics: 

  1. Review of the history and structure of the Eurozone
  2. Assessment of the current situation and imminent risks and opportunities
  3. Analysis of potential and realistic scenarios to solve the crisis in Europe 

Please contact if you have any questions.  

Regards,

 

The Macro Team


THE HBM: SBUX, CHUX, DNKN, DRI, KKD, YUM and DPZ

THE HEDGEYE BREAKFAST MENU

 

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

 

MACRO

 

Jobless claims are uncomfortably close to their recent highs - weakness in the labor market continues.  I continue to believe that consumer demand over the past nine months wasn’t strong enough to overcome another bump in unemployment. 

 

SUB-SECTOR PERFORMANCE

 

The QSR sector continues to be the safe-haven of the group…. 

 

THE HBM: SBUX, CHUX, DNKN, DRI, KKD, YUM and DPZ - hfbrd

 

QUICK SERVICE

 

DNKN - SSS are tracking in the MSD range QTD (see my note from yesterday)

 

CKE - Blended same-store sales for company-operated units climbed 2.2% in 2Q, with Carl’s Jr. up 2% and Hardee’s showing a 2.5%.

 

KKD - September 29 Krispy Kreme  will celebrate National Coffee Day and its new Krispy Kreme Signature Coffee Blends by giving a FREE 12oz cup of House Blend Coffee to its guests. No Purchase Necessary.

YUM - Niren Chaudhary, managing director of Yum! Restaurants India Pvt. Ltd., said the company is aiming at total sales of $1 billion from India by 2015 and it will invest $150 million to take the number of its restaurants in India to 1,000 by 2015, from 400 currently. 

 

SBUX - Robert Luciano, director of store development for Starbucks Coffee Canada is talking about significant growth opportunities in Canada.

 

SBUX - Bloomberg is also reporting that “Starbucks Corp. plans to double or triple the company’s outlets in Germany from 150 in the next several years, Handelsblatt reported, citing an interview with Chief Executive Officer Howard Schultz.”

 

DPZ - The new pizzas from DPZ look to be hitting home with consumers priced at $7.99

 

THE HBM: SBUX, CHUX, DNKN, DRI, KKD, YUM and DPZ - dpz

 

FULL SERVICE

 

CHUX - FNF files 13D.  Bill Foley is back!

 

CHUX - Standard & Poor's lowered its corporate credit rating on O'Charley's Inc. to 'B-' from 'B'. The outlook is negative.

 

DRI - will be webcasting their 2011 Shareholder's Meeting today starting at 10:00 am ET to 11:00 am ET.

 

DRI and Publix will work with the nonprofit Sustainable Fisheries Partnership to help rebuild fish populations.  Darden unveiled the plans Wednesday at the Clinton Global Initiative's seventh annual meeting and said its first goal is to focus on rebuilding commercial grouper and red snapper reef fisheries in the Gulf of Mexico.

 

THE HBM: SBUX, CHUX, DNKN, DRI, KKD, YUM and DPZ - qsr

 

THE HBM: SBUX, CHUX, DNKN, DRI, KKD, YUM and DPZ - fsr

               

Howard Penney

Managing Director

            

 

Rory Green

Analyst


15 Things That Caught Our Eyes This Morning

We have not seen a 24 hour turn in global macro market prices like this since 2008.  No, this is not 2008.  This is 2011, but globally interconnected market risk remains very real.

 

Below we’ve outlined 15 key points that matter based on our screens this morning. 

  1. SP500 breaks the only line (other than the prior closing low) of immediate-term TRADE support (1181); not good
  2. VIX breaks out back above TRADE line resistance (34.61) and moves right back into a Bullish Formation
  3. US Financials, Basic Materials, Energy, and Industrials all move back into 2011 crash mode (down -20% from cycle peak)
  4. US Dollar confirms its Bullish Formation and picks up a big momentum line of support at 76.89; watch that line like a hawk
  5. EUR/USD remains in a Bearish Formation (bearish TRADE, TREND, and TAIL with TAIL line resistance = 1.39)
  6. DAX fails at TRADE line resistance of 5489, and has no support to prior closing lows
  7. CAC/IBEX/MIB indices look no different than the DAX – all in Crash Mode
  8. Russia down -5.4% and crashing (down -31% since April!)
  9. Hong Kong blasted for a -4.9% move and its now in crash move alongside the KOSPI
  10. Indonesia (one of the world’s best economies in 2011) down -8.9% on no news!
  11. CRB Commodities Index has broken its TAIL line of 333 and confirmed what Dr Copper and Oil prices see
  12. Copper down -5% in a straight line and it moves into crash mode for 2011 now too (down -21% since FEB)
  13. Oil confirms yesterdays TRADE line break; what was support is now resistance at $86.91
  14. Gold is now a source of funds; that’s $1821 TRADE line break that got me out, puts $1630 in play on the downside
  15. 10-year US Treasury yields blew through the stop sign making lower-lows at 1.80%; that’s just bad for a lot of reasons 

Bernanke couldn’t have fundamentally understood that a 1-day 21bps compression move (11%) in the Yield Spread would do this to both the Financials (net interest margins, cash earnings, stock prices, etc), the bond market, and Global Macro risk. He’ll start to get it now.

 

This is a serious risk day for serious people. We are not being alarmist. We weren’t in Q3 of 2008 either.

 

KM

 

Keith McCullough

Chief Executive Officer


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JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY

Initial Claims Fall 5k WoW

Initial claims fell 5k WoW last week (9k net of the revision to the prior week).  This brings the level to 423k.  On a 4-week rolling basis, claims are up 1k WoW to 421k. As a reminder, in looking at the spread between the S&P and 4-wk claims, the current S&P level would equate to a rolling claims level of 460k.

 

Our general take here remains that the market and economy are reflexive, as George Soros would say. In other words, markets don't predict recessions, they cause them. The volatility over the past few months, and continuing this morning, is creating a profound loss of confidence among consumers and employers. We have been surprised to date by the resiliency of the claims figures in the face of this. We would be equally surprised if it persists. To reiterate, based on our simple mean reversion framework highlighted above, we would expect to see claims rise to ~460k mean reverting to where the market is.

 

In the fourth chart below we show the relationship between the Fed's Treasury and Agency holdings and initial claims.  The two series appear to be related.  Both series also show a relationship with the S&P.  The direction of causality isn't certain here.  Our understanding is that Fed purchases boost risk assets, particularly equities, and an increase in equity levels drives claims lower.  According to that scheme, if Operation Twist fails to boost risk assets, we would not expect a positive reaction in initial claims. 

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - rolling

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - raw

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - fed and claims

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - sp and claims

 

2-10 Spread Not Letting Up 

Acute margin pressure remains in force, looking at the 10-year yield and the 2-10 spread.  The 10-year yield is now 133 bps lower than it was at the end of 2Q. 

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - 2 10 Yield Spread by Quarter

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - 2 10 Yield Spread by Quarter QoQ Sequential Change

 

Subsector Performance

The chart below shows the performance of financial stocks by subsector.

 

JOBLESS CLAIMS RESILIENT (FOR NOW) IN THE FACE OF INCREDIBLE VOLATILITY - Subsector Performance Chart

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Having trouble viewing the charts in this email?  Please click the link below to view in your browser.   


THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP - September 22, 2011

 

Do not buy this dip. This is not a dip.

 

As we look at today’s set up for the S&P 500, the range is 40 points or -2.21% downside to 1141 and 1.22% upside to 1181.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - hrmsv

 

THE HEDGEYE DAILY OUTLOOK - bpgm1

 

THE HEDGEYE DAILY OUTLOOK - sv

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -2152 (-1338) 
  • VOLUME: NYSE 1210.29 (+20.66%)
  • VIX:  37.32 +13.57% YTD PERFORMANCE: +110.25%
  • SPX PUT/CALL RATIO: 2.66 from 1.91 (+38.96%)

 

CREDIT/ECONOMIC MARKET LOOK:

 

FIXED INCOME: by our score this is a 3.7 standard deviation move in 10yr UST bonds; Bernanke made the entire fixed income complex go haywire.  The 10 year yields making lower-lows is very bearish for both economic growth and confidence.

  • TED SPREAD: 35.80
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.88 from 1.95     
  • YIELD CURVE: 1.67 from 1.77

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Jobless claims, est. 420k, prior 428k
  • 9:45 a.m.: Bloomberg consumer comfort, prior (-49.3)
  • 10 a.m.: Leading indicators, est. 0.1%, prior 0.5%
  • 10 a.m.: House price index, M/m, est. 0.1%, prior 0.9%
  • 10 a.m.: Freddie Mac mortgage rates
  • 10:30 a.m.: EIA natural gas storage
  • 1 p.m.: U.S. to sell $11b 10-yr TIPS reopening

 

 WHAT TO WATCH:

  • United Technologies agrees to buy Goodrich for $16.5b, or $127.50-shr
  • Hewlett-Packard’s board said to meet today; said to plan to consider firing CEO Leo Apotheker
  • Hewlett-Packard deal to buy Autonomy will still go through, absent “material adverse change,” even if CEO ousted: Bernstein
  • Australian dollar drops to parity with U.S. currency
  • LivingSocial may seek more than $200m in private funding rather than seek IPO
  • Mosaic to replace National Semiconductor in S&P 500

COMMODITY/GROWTH EXPECTATION

 

COMMODITIES: crashing Copper looks like the Hang Seng this morning; down -5% in a straight line and down -21% since QE2 (Februray)

 

OIL: is in what I call a Bearish Formation - bearish on all 3 of my risk management durations (TRADE, TREND, and TAIL)

 

GOLD: this is key and why I don't own it; now Gold becomes a source of liquidity for any Global Macro hedge fund; $1821 support broke

 

THE HEDGEYE DAILY OUTLOOK - dcommv

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Iron Ore’s Four-Year Slide Hitting Mining Earnings: Commodities
  • Gold’s Price Surge Skews Inflation Numbers Across Asia
  • Commodities Erase This Year’s Gains as Slowdown Concerns Swell
  • Oil Drops to Four-Week Low as Fed Sees Downside Risks to Economy
  • Managers Prefer Gold to Bonds on Faster Inflation: India Credit
  • Copper Slumps Into Bear Market as Fed Assessment Hurts Outlook
  • Gulf Cargo Gap Spurs Dubai-Abu Dhabi Rail Link: Freight Markets
  • Foreign Investor ‘Land Grabs’ Harm Poor Farmers, Oxfam Says
  • Copper Declines to One Year Low as China Manufacturing Contracts
  • Metal Price Drop Attracts Buying by South Korea State Agency
  • Pakistan to Boost Palm Oil Imports From Indonesia on Tax Cut
  • Copper Falls to 10-Month Low on U.S., China, Europe: LME Preview
  • Commodity-Ship Demolitions to Be Record in 2011, Bimco Says
  • Sime Darby Sees Higher Palm-Oil Production as Yields Improve
  • Rubber Tumbles to 10-Month Low as Economic Risk May Cut Deman
  • China’s 2020 Corn Imports May Be 20 Million Tons, Cofco Says
  • Brazil Sugarcane Harvest May Fall 10%, Rabobank’s Duff Says
  • Bullion Vaults Run Out of Space as Gold Rallies: Commodities

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - dcurrv

 

EUROPEAN MARKETS

 

EUROPE = train wreck - Period.  If you're a European country index down -3% this morning you are outperforming!

 

Russia is called a “Petro-Dollar” market; this stupid twist is Dollar bullish; Dollar bullish bearish for Oil, bearish for Russia

 

GERMANY: down -3.9% as the DAX fails at its immediate-term TRADE line of 5480; no support to 5019 - could re-test the lows.

 

THE HEDGEYE DAILY OUTLOOK - bpem1

 

ASIAN MARKETS

 

ASIA: put the crash helmets back on and do up your chinstraps; Indonesia was down -8.9% last night; Hong Kong down -5% moves into crash mode

 

THE HEDGEYE DAILY OUTLOOK - bpam1

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - me

 

Howard Penney

Managing Director


The Only Wall Street Strategy Note Without the Name Of A 1960s Dance In It This Morning

“We can never be gods, after all--but we can become something less than human with frightening ease.” 

-N.K. Jemisin, “The Hundred Thousand Kingdoms”

  

I think we can all be thankful for one thing this morning: we no longer have to talk or joke about “The Twist”.  The current Federal Reserve Board once again proved their incompetence as it relates to managing the monetary affairs of the nation.  Not only did the stock market not twist, or torque (as Morgan Stanley so calls it), it tanked. 

 

Yesterday actually harkens back to the heady days of 2008 when former Secretary of the Treasury, Hank “The Market Tank” Paulson, would get on T.V. to ostensibly calm the markets and inadvertently talk the Dow down a few hundred handles. 

 

We’ve said it once, and we’ll say it again, the best action that the Federal Reserve can take is to stop what they are doing.  QE 1 was ineffective, QE 2 was ineffective, and QE 2.5 Twistaroo will not work either. 

 

As The Economist wrote back in March 2011:

 

“Operation Twist has long been considered a failure. Early studies found little impact on yields, vindicating those who argued that the price of a security depends only on expectations—of inflation, for example, or monetary policy—not its relative supply.”

 

Not only did QE1 and QE2 not work, but The Twist itself was tried before in 1961 and deemed a failure.

 

In case you missed the Fed’s announcement yesterday, or have just decided to tune the Fed out, I’ll explain their intention.  The plan is for the Federal Reserve to buy $400 billion of bonds with maturities of six to 30 years, while at the same time selling an equal amount of debt maturing in three years or less.  These actions will occur between now and next June.

 

Ostensibly, the intention of such an action would be to narrow the yield curve and bring down long term interest rates.  Undoubtedly the Fed Heads are hoping this will lead to a rash of mortgage refinancing, which will free up cash for consumers to spend.  This idea is cool in the theories of macroeconomic textbooks. . . unfortunately real life is not theoretical.  This action actually has very negative implications for an already tenuous global banking sector.

 

Simply, a narrowing of the yield curve hurts financial stocks.  The cash flow of financial companies is driven by a funny little critter called net interest margin, or NIM.  Banks borrow short and lend long, and thus collect a spread on the transaction.   As the yield curve naturally narrows, or forcefully narrows by Keynesian intervention, the margins for banks compress. 

 

Our Financials Team, led by Josh Steiner, actually discussed this very topic a few weeks via a 65+ page in-depth study on the topic (ping if you’d like to trial our Financials vertical and receive access to the deck and Steiner’s team for dialogue).  In the Chart(s) of the Day today, we borrowed two charts from Steiner’s presentation.  The first chart shows that asset yields for the major banks, Bank of America, JP Morgan, Citigroup, and Wells Fargo specifically, track the 10-year yield with a very high correlation.  So, as 10-year yields decline, so too do asset yields for major banks.  In the second chart we show the potential impact on margins.  In short, as we think 2012 earnings estimates for the major banks could get cut in half.

 

The credit default swap markets for the major banks reacted as we expected yesterday and widened dramatically.  Specifically:

  • Bank of America 5-year CDS widened 11.7% to 372 basis points;
  • Wells Fargo 5-year CDS widened by 12.6% to 142 basis points;
  • Citigroup 5-year CDS widened by 12.5% to 260 basis points;
  • Morgan Stanley 5-year CDS widened by 12.0% to 355 basis points;
  • JP Morgan 5-year CDS widened by 10.6% to 146 basis points.

It’s worth mentioning that Moody’s came out and downgraded the long-term credit ratings of Bank of America and Wells Fargo, citing, “an increased likelihood that the federal government allows a large U.S. bank to collapse.” We’re not so sure how much, if at all, impact this had on the credit markets, given that: a) ratings agencies are lagging indicators and b) the results of allowing a “large U.S. bank to collapse” didn’t go so well the last time (Lehman Bros.).

 

As indicated by the moves in the CDS markets, the irony is that the Fed’s actions yesterday negatively impacted the creditworthiness of major banks and, no doubt, their willingness to more aggressively extend loans and credit. 

 

For those of you that aren’t applying for Canadian passports after the Fed’s actions yesterday, we are hosting call at 11am eastern today titled, “What’s Next for the Eurozone?”  Akin to the idea of being the tallest dwarf, the intermediate term future looks increasingly negative for Europe, which on a relative basis actually makes the U.S, in particular the U.S. dollar, look good.

 

On the call today we are going to spend time going through the history of the European Monetary Union, discuss the lead up to the beginning of the sovereign debt crises, as well as potential outcomes.  A key focus on the call will be on the exposures of the European banking sector to PIIGish sovereign debt.  In some instances, these exposures make subprime look like a speed bump.

 

We will be sending the presentation and dial in materials for the call to our clients later this morning, but if you are not a client and would like to trial our institutional service then please email our head of sales, Jen Kane, at .  Jen recently returned from maternity leave and would love to chat with you.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Only Wall Street Strategy Note Without the Name Of A 1960s Dance In It This Morning - 1

 

The Only Wall Street Strategy Note Without the Name Of A 1960s Dance In It This Morning - 2

 

The Only Wall Street Strategy Note Without the Name Of A 1960s Dance In It This Morning - Virtual Portfolio


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