The Economic Data calendar for the week of the 14th of November through the 18th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Positions in Europe: Short EUR/USD (FXE); Short France (EWQ)
Keith shorted the EUR/USD cross via the etf FXE in the Hedgeye Virtual Portfolio in the last hour of trading today. We’ll take the other side of Goldman’s bullish EUR call today and fade the bounce on the replacement of Papendreou in Greece and the likely removal of Berlusconi in Italy (in the coming days) as we see weakness associated with the inability of Europe to contain its sovereign and banking imbalances, and volatility ahead as specific terms on the expansion (or leverage) of the EFSF, banking recapitalizations, and Greek haircuts remain unanswered.
Compounding these factors, Italy’s sovereign and banking risks have move squarely in the spotlight and the threat of a downgrade of France’s AAA credit rating continues to loom large, which presents risk for the country, region, and EFSF. Finally, and here we’re stating the obvious—outsized public debt and deficit levels by Eurozone member states aren’t going anywhere despite leadership changes. The damage done will take years to hone in (if we don't see member states leave beforehand) and in the balance, growth should be crimped over the longer term.
For a market that is looking for quick answers to Europe’s ail, we’d expect disappointment and therefore want to be short the common currency.
Tomorrow, Italy’s lower house of Parliament will vote on the 2012 austerity budget. Berlusconi has indicated that its approval is conditional to his resignation. We’d expect its approval and Mr. Bunga Bunga’s resignation to give a short term boost to the currency pair. However, the pair remains broken on intermediate TREND and TAIL durations and should $1.37 not sustainably hold, we don’t see downside support in the EUR/USD until $1.21 in our quantitative models (see chart below).
Passa un buon fine settimana!
Yesterday, SBUX was up 1.3% on light volume but the nature of the announcement that the company made intra-day is bigger that the reaction in the stock price implies. Understanding that the implications on the P&L are years away, the call yesterday with senior management yesterday made it clear to us that it was a significant event for the future of the company. The announcement was made when the restaurant analyst community was in Oak Brook at the McDonald’s Analyst Meeting.
In announcing the acquisition of the Evolution Fresh Juice Company for $30 million in cash, Starbucks gave a clearer picture of the blueprint for future of the company’s “organic” growth beyond the coffee category. Unlike other retail companies, the Starbucks brand (changed the logo last year to be less coffee-specific) already competes in a number of different retail categories, so moving into the juice category was hardly a conceptual leap. Starbucks is using this acquisition to “build a broad-based multi-billion-dollar health and wellness category” under the Starbucks logo.
According to Starbucks, the category of Health and Wellness is a $50 billion category (US Coffee market is $38 Billion) and the acquisition of Evolution is to provide the foundation for the company’s entry into the business. Starbucks’ intention is to “re-invent” the category in the same they re-invented the coffee market. While I understand the company’s goal here, the comparison is not necessarily the same. The coffee segment lacked real innovation and was declining before Starbucks came along. The juice and the overall health and wellness category are growing rapidly and are seeing new innovation on an ongoing basis. To that end, just what Starbucks has up its sleeve will be important for how this plays out.
Evolution is not a concept we are overly familiar with but clearly it has been carefully selected to be the launch pad for a much larger strategic move. The High Pressure Processing technology that Evolution uses to pasteurize (without heating) its juice was a key characteristic pointed out by management in the press release and during the call yesterday as a differentiator for Evolution within the juice category.
HPP is a method of food processing where food is elevated to pressures of up to 87k lbs per square inch with or without the addition of heat. The method retains food quality, maintains natural freshness, and extends shelf life. Fans of the methodology contend that HPP provides juice drinks that are the equivalent of getting fresh-pressed juice with an extended shelf life.
Initially the Evolution Juice product and brand will “live nationally” in Starbucks stores and experience a sampling and trial to judge consumer acceptance. Assuming a successful introduction, SBUX will build a national business through its CPG channel. In addition, management intends to begin opening up a retail footprint towards the end of the first half of calendar 2012. Over time, it’s management’s intention to have a national footprint of health and wellness stores. Starbucks’ bold plans are to build the first consumer “juice” brand that has both the national distribution of a CPG company and the national footprint of retail stores base.
As Howard Schultz said on the conference call, “we are leveraging the core capability and infrastructure of our company, and we've identified a major growth vehicle that, over time, will be highly complementary to our core business, and that is the experience that we create in our stores around beverage, the romance, the theater, and obviously the momentum and trend of health and wellness, we think we can build a major business.”
I found it interesting that when asked about the potential for the new “national brand”, the comparison to Whole Foods came up and the response was as follows: “Other than Whole Foods, which is really not a health and wellness store but a grocery store selling high-quality products, we think we can bring this to life by really replicating the understanding we have about beverage capability, beverage recipes, and bringing the theater and romance, and ultimately the efficacy of juice, fruit and vegetables, to life in a unique way that positions us to build a health and wellness business.”
This suggests that this is not going to be a “juice bar” but a “juice/food bar”. It will be interesting to see if they really do create something that's unique and proprietary in the size and scale of an existing Starbucks store. The due diligence for the new concept included “traveling throughout the world, examining what others have tried to do around juice, health and wellness, tea, and things that are medicinal and have efficacy, and feel very strongly that we understand the beverage business perhaps better than anyone else who has been in small-box retail.”
As management said on the call - “We've done a lot of research and found out that two-thirds of U.S. consumers want healthier options with wholesome ingredients.” This is a strategy, from a marketing standpoint, that has served Chipotle well and, in time, Starbucks could adopt a similar angle.
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Conclusion: Asian financial markets, economic data, and official policy commentary continues to echo recent pessimism, which is ultimately reflexive in nature.
Asian equity markets completed another off week, closing down -2% wk/wk on a median basis. Hong Kong, our highest-conviction bearish thesis on the Asian equity front led decliners (-3.6% wk/wk). Asian currencies also broadly declined vs. the USD, closing down -0.5% wk/wk on a median basis. The Indian rupee was particularly weak, closing down -2.1%. FX-translation remains a key risk for U.S. investors on the emerging market front, as well as for emerging market corporations from a liability standpoint.
Asian sovereign debt markets continue to price in monetary easing, led by China’s -53bps wk/wk decline in 1yr yields. Australia, whose economic performance is highly correlated with Chinese demand, also saw yields decline on the short end of the curve to the tune of -29bps on the 2yr tenor. Both country’s interest rate swaps markets agreed with this dovish outlook, tightening -22bps and -23bps, respectively. Farther out on the sovereign debt maturity curve, the -18bps decline in Australia’s 10yr yield is noteworthy in the context of some “not-terrible” economic data from “down under” this week. Clearly the bond market isn’t impressed.
Asian 5yr credit default swaps markets were mixed for the first time in a while, widening a marginal +0.7% wk/wk. Notably, Chinese swaps widened +12bps (+9.4%) wk/wk, while Indonesia’s tightened -11bps (-4.8%) wk/wk – signaling to us a very short-term decoupling of risk perception throughout the region.
THE LEAST YOU NEED TO KNOW
Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:
Global Growth Slowing:
Deflating the Inflation:
Brinker was sold in the Hedgeye Virtual Portfolio this afternoon.
Keith just sold Brinker in the Hedgeye Virtual Portfolio as the quantitative setup, per his model, indicates that the stock is immediate-term overbought today. The chart below illustrates our TRADE and TREND levels for the stock. From a fundamental perspective, we like the name on the intermediate-term TREND. Today on Hedgeye’s Best Ideas call, we ran through our top ideas and Brinker was one of our longs alongside MCD and DNKN on the long and short side, respectively.
From a fundamental perspective, as we wrote in our note titled “EAT – CAN THEY EXECUTE?” on 10/27, we believe that the company is operating well and will continue to improve going forward. At Chili’s, the remodeling program, kitchen retrofits and other initiatives are going to boost sales and customer satisfaction. As our note following earnings (10/27) highlighted, we believe that the skepticism among the sell-side community is misguided and would not interpret this negative sentiment as being anything other than a positive for a buyer of the stock. Please refer to our note, referenced above, for further details or reply to this email for a copy.
This stock has been one of our favorite names for some time and is one of our top three long picks in the space over the intermediate term despite it being overbought on the TRADE duration.
Singapore casino gaming market rebounded in Q3, as gross gaming revenues rose 29% YoY and 15% sequentially. For comparison, Macau GGR grew 7% QoQ and 48% YoY. S’pore gaming EBITDA grew 3% QoQ to S$882MM, 2% lower than Q1’s high of S$902MM. Mass revenues grew 10% to S$640MM and VIP Rolling Chip Volume expanded 16% to S$36.8BN, a new record.
3Q hold was 2.9%, slightly higher than Q2’s 2.82%. Average hold in for the 2 IR’s since 1Q10 has been close to 3%. Sequential revenue growth has been falling since 3Q 2010.
It took MBS only 6 quarters to lead in every market share category in Q3. The biggest shift was in VIP RC Volume share where MBS surged from 48% in Q2 to 56% in Q3. Despite having a hold % that was 0.5% points lower, MBS extended its VIP win market share to 51.6%. While Genting’s bleeding may continue, its slot ramp towards the end of the year may help build mass share in Q4.
Singapore’s Q3 strength is a relief for the bulls as weak Q2 results had dampened optimism. However, as GENT pointed out in their Q3 conference call, caution is warranted at least for the rest of the year. We still see a cap on long-term growth in Singapore unless junkets are approved in the near future.
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