Keith’s comment says it all. “USD up = Strong America on stronger Consumption and Brian McGough is warming up to the Amazon when we can buy it on sale.”
Positions in Europe: Short EUR-USD (FXE)
The UK recovery is off-track, said Bank of England’s Mervyn King today. You think…?
Our thesis remains intact: the UK economy is experiencing stagflation that should persist for at least the next 2-4 quarters in an optimistic scenario. Real growth should remain impaired from domestic austerity that weighs on confidence, spending, and tax receipts, as sovereign debt and banking contagion fears across continental Europe expand and reduce appetite for UK goods and services. (Note: European nations are collectively the UK’s largest export partners).
Further, while members of the Bank’s Monetary Policy Committee voted 9-0 to increase its gilts purchasing program by £75B over the next four months [the BoE bought £200 Billion in asset purchases (QE) between March 2009 and January 2010] and keep its main interest rate at 0.50% in an attempt to will growth, we think the actions may do little to move the needle.
The BoE minutes from the October 5-6 gathering show that consensus believes Q4 growth will be close to zero. We see the UK dipping back into recession, as inflation continues to surprise the BoE to the upside for a protracted period. Yesterday’s release of September CPI at +5.2% year-over-year, versus 4.5% in August, on a tough +3.1% comp in September 2010, demonstrates the sticky stagflation hampering the economy. Equally, Input Producer Prices continue to drive Output Prices higher, another negative for spending (see charts below).
The components that saw the largest year-over-year moves were gasoline, up +22.3% and alcoholic beverages and tobacco, up 10.0%. Based on September monthly averages of Brent crude on a year-over-year compare, Brent saw a +28.5% gain, a pressure the country can do little to reduce given its dependence on foreign sources. NOV., DEC., JAN., and FEB. Brent comps should could well prove inflationary. Alcohol and tobacco gains came at the hands of higher taxed for these goods.
The broader UK fundamentals we follow also portend a negative set-up: PMI (Services and Manufacturing) have yet to confirm a positive uptrend, down around the 50 line for the last months that divides expansion (above) and contraction (below); the Unemployment Rate ticked up 20bps month-over-month to 8.1% in August; Retail Sales remain anemic, at 0.0% in August Y/Y; and housing has yet to show any meaningful improvement.
The downward revisions to Final Q2 GDP, bringing year-over-year growth down 10bps to 0.6% Y/Y and quarter-over-quarter growth down 10bps to 0.1% Q/Q have also contributed to the less-than-rosy outlook (see chart below).
We do not have an active position in the UK in the Hedgeye Virtual Portfolio, but have used the eft EWU as an investment vehicle in the past.
Galaxy is scheduled to report their 3Q results in the wee morning hours (at least for those of us in the states) tomorrow, and we’re expecting a pretty strong quarter with bullish commentary about their prospects. Of course they will be positive since they are holding well in the first half of what should be the biggest month ever in Macau. However, going forward, market share will moderate with hold and Galaxy Macau is vulnerable to the opening of Sands Cotai Central.
We project Galaxy Group will report HK$13.44BN of revenue and HK$2.08BN of EBITDA (US$268MM).
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In preparation for PENN's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.
Beulah Park gets upgrades, despite possible move to Dayton (10/19/2011)
Post Earnings Conference Commentary (Deutsche Bank AG/UBS Gaming Investment Forum; Telsey Advisory Group Fall Consumer Conference)
Q2 Conference Call:
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A HOUSING BOMBSHELL - The issues with employment, housing and policy-induced stock market volatility continue to weigh on economic growth and our overall prosperity.. For the week ending October 14, 2011, the MBA mortgage app composite index fell 14.9% WoW. The purchase index dropped 8.8% reinforcing the downward trend since April. Housing demand continues to struggle as homebuyers remain concerned over further price declines. The refinance index also plunged 16.6%, due in part to a jump up in mortgage rates.
Headline consumer prices rose 0.3% in September (in line with consensus), but accelerated to 3.9% YoY. The energy index accelerated to 19.6% from 18.5% YoY and food prices accelerated to 4.75 from 4.6% YoY. Inflation is not raging out of control, but is showing a worrying tendency to stickiness.
As we head into the EPS season the Hedgeye Restaurants Alpha list has MCD, YUM and EAT as LONGS and BWLD, PNRA and DNKN as SHORTS.
Food processing continues to gain ground as we continue to “Deflate The Inflation”. In that same vein, Keith bought is now long the XLY. As Keith said yesterday “The US Consumer Discretionary is making a credible threat to establish a bullish TREND as US Dollar strength continues to “Deflate The Inflation”..
Sonic (SONC) 4Q EPS missed estimates and SSS remain challenged. We cannot get behind the LONG side of this story. Although, comparisons get get very easy next quarter.
Arby's new marketing campaign, featuring the "Good Mood Food" original song, was named one of the worst ads in America by Consumerist.com. Arby's "Good Mood Food" was listed as an "original jingle that should be junked."
CMG initiated neutral at UBS - We still have CMG missing estimates this quarter by $0.04.
MCD - Janney franchise survey confirms our bullish thesis on MCD
CAKE EPS AMC the bar is set low for CAKE Consensus EPS growth is 2% on 4% sales growth. That being said, this is going to be a challenging quarter for the company - The trends in California could be an issue
BWLD EPS AMC - the consensus is at $0.59, which represents 25% EPS growth vs 16% in 2Q11. The revenue growth estimate of 26% also looks aggressive.
CHUX - announced a sale-leaseback of 50 units to STORE Capital, and plans to use the $105 million from that sale, plus cash reserves, to pay off debt. The stock was up 13.9% on big volume.
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