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THE HBM: SBUX, CMG, YUM, JACK, MSSR

THE HEDGEYE BREAKFAST MONITOR

 

MACRO

 

Comments from CEO Keith McCullough

 

Squeeze me, please me – its 2012, here we go!

  1. SQUEEZE – in both Asian and European Equity squeezage (yesterday + today) there actually was some economic data supporting it; China (which I bought on last day of 2011) printed a 50.3 on its PMI for DEC and Germany’s unemployment rate dropped in DEC to 6.8% vs 6.9% last month, with both economies proving you don’t need Keynesian fear-mongering to generate a solid employment base.
  2. EUR/USD – get the US Dollar’s daily direction right and you’ll get most things beta right; that’s not a perpetual correlation, but it certainly still matters this morning. Euro’s new TRADE range = 1.28-1.31, so we’re dead cat bouncing this thing right back up to the top end of the range and Gold (which has a stunning -0.91% inverse cor to USD right now) pops for a +1.5% gain (covered our GLD short at $1538/oz)
  3. COMMODITIES – as important to watch as European equities as they test their TAIL lines of resistance in early 2012 will be Copper and Oil testing their TAIL lines of resistance of $111.61 (brent) and $3.99/lb, respectively.

 

Don’t be stuck bullish or bearish in 2012. Be right.

 

Game on.

 

KM

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: SBUX, CMG, YUM, JACK, MSSR - subsector fbr

 

 

QUICK SERVICE

 

SBUX: Starbucks is raising prices by an average of roughly 1% in the U.S. Northeast and Sunbelt regions today.  Major cities being affected include New York, Boston, Washington DC, Atlanta, Dallas and Albuquerque. Spokesman Jim Olson said that the hike is coming as a result of “balancing the cost of doing business with competitive dynamics in the markets”.  Starbucks expects high prices for coffee, milk and fuel to cut into profits this year. 

 

CMG: Chipotle Mexican Grill was raised to “Buy” at Deutsche Bank.  The twelve month price target is $390 per share.

 

YUM: The Malay Chamber of Commerce Malaysia said it is prepared to outbid CVC Capital Partners Ltd. for control of the nations KFC franchise operator as it seeks to keep the business in local hands.

 

JACK: Jack In The Box was raised to Top Pick versus Outperform at RBC.

 

 

CASUAL DINING

 

MSSR: Landry’s announced today the successful completion of its tender offer for all of the outstanding shares of common stock of McCormick & Schmick’s Seafood Restaurants at a price of $8.75 per share.  Landry’s now owns, together with its affiliates, roughly 88% of the outstanding shares of MSSR.

 

THE HBM: SBUX, CMG, YUM, JACK, MSSR - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK

Highlights from this week's Risk Monitor

* The TED spread declined by one basis point (57.1 bps) vs. last week's value of 58.1 bps. We're hesitant to read much into this as it is essentially unchanged and reflected a quiet week. Euribor/OIS showed similar trends with that metric coming in at 97.4 bps this week vs. 97.3 bps last week. For reference, intra-week the measure peaked at 98.8 bps. These are important gauges of perceived risk among interbank participants. We continue to monitor these two measures closely for signs of improvement or further deterioration in participant confidence.   

 

 * Even Steven - Our macro quantitative model indicates that on a short term duration (TRADE), there is equal upside and downside in the XLF (3.2% downside vs. 3.2% upside).

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Neutral / 1 of 11 improved / 1 out of 11 worsened / 9 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 5 of 11 worsened / 4 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 9 of 11 worsened / 1 of 11 unchanged

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - summary 3

 

1. US Financials CDS Monitor – Swaps widened for 14 of 27 major domestic financial company reference entities last week.            

Widened the most vs last week: C, COF, RDN

Tightened the most vs last week: ACE, TRV, AGO

Widened the most vs last month: C, AXP, AIG

Tightened the most vs last month: MTG, RDN, AGO

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - CDS  us

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 30 of the 40 reference entities. The average widening was 0.4% and the median widening was 1.4%

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - CDS  europe

 

 3. European Sovereign CDS – European sovereign swaps remained relatively flat over last week. Irish sovereign swaps widened by 1.3% (+10 bps to 726) and Spanish tightened by 3.1% (-12 bps to 410).

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - Sovereign 1

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates fell 6 bps last week, ending the week at 8.86 versus 8.92 the prior week.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5 points last week, ending at 1583.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - LLI

 

6. TED Spread Monitor – The TED spread fell 1 basis point last week, ending the week at 57.1 this week versus last week’s print of 58.1.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index fell less than a point, ending the week at -23.9 versus -23.6 the prior week.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - JOC

 

8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.  The Euribor-OIS spread widened by less than 1 bp to 97 bps.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - Euribor OIS

 

 9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding.   The Liquidity Recourse hit a new all time high on Tuesday but has since fallen.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - ECB liquidity facility

 

10. 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. Last week spreads tightened, ending the week at 180 bps versus 182 bps the prior week.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - MCDX

 

11. Baltic Dry Index – Data on The Baltic Dry Index was not available at time of publication.

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 164 bps, a decline of 10 bps from a week ago.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 3.2% upside to TRADE resistance and 3.2% downside to TRADE support.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - XLF setup

 

Margin Debt in November

We publish NYSE Margin Debt every month when it’s released. 

 

 NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.43 standard deviations in September, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October and November’s print of +0.78 and +0.55 standard deviations.  But overall, this setup represents a material headwind for the market.  

 

One limitation of this series is that it is reported on a lag.  The chart shows data through November.

 

TUESDAY MORNING RISK MONITOR: NOT MUCH CHANGED LAST WEEK - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

 

 

 


THE M3: DEC GGR; S'PORE GDP; S'PORE HOME PRICES

The Macau Metro Monitor, January 3, 2012

 

 

MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DSEC

December GGR came in at MOP23.608 BN (HKD22.92 BN, USD2.95 BN), up 25% YoY.

 

SINGAPORE'S Q4 GDP GROWS BY 3.6% ON-YEAR, CONTRACTS BY 4.9% Channel News Asia

Singapore's economy grew by 3.6% YoY in 4Q 2011.  On a quarter-on-quarter basis, the economy contracted by 4.9%, following the 1.5% gain in the previous quarter.

 

INCREASE IN PRIVATE HOME PRICES CONTINUES TO MODERATE Strait Times

Singpoare private residential property index rose from 205.7 points in 3Q 2011 to 206.2 points in 4Q 2011.  This represents an increase of 0.2%, compared to the 1.3% increase in the previous quarter.  This is also the 9th consecutive month of slowing growth. 

 



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Simple Explanations

This note was originally published at 8am on December 29, 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 can’t explain it simply, you don’t understand it well enough”

– Albert Einstein

 

For some reason, finance and science maintain a rather unique fascination with generating overly complicated and confounding verbiage to describe fairly straightforward and pedestrian concepts.  In my 30 years, I have had the lamentable pleasure of being a professional in both vocations. 

 

Before joining HEDGEYE, I was a molecular biophysicist.  I’m still not sure I can tell you exactly what that is, but it sure sounds impressive.  I’ve also been a dishwasher, business owner, carpenter, physiologist, bartender, Ph.D researcher, industrial sheet metalist, and successful self-taught trader.  Wandering philanderer? I like to think of it as Generation Y’s version of a renaissance man. 

 

Across disciplines, many times a process that, superficially, appears complex is really only the summation of a series of simple questions asked and answered.  The trick, of course, is in asking the right questions and then having the ability to successfully source the correct data as inputs for the model.

 

In finance and science, it just so happens that the canonical blueprint for increasing scarcity values calls for the addition of unnecessary technical jargon and intentional obfuscation of the details around the process in a way that makes the output appear overtly complex and thus, through the trappings of behavioral psychology, more desirable.

 

So, as the edifice of Wall street 1.0 has continued to implode under the weight of institutionalized, levered conventions of its own creation, on the healthcare research side, we’ve been working to develop an investment research process that successfully functions outside of the legacy construct of management one-on-one’s, recycled expert opinion, and valuation-in-isolation and intuition driven decision making. 

 

At the heart of the HEALTHCARE MACRO modeling effort has been the analysis and integration of government data sets which have proven effective in helping us create a quantitative, independent, and thus far, successful process for tracking real-time consumption across the health economy broadly and major sub-industries specifically.  Longer-term, healthcare consumption growth continues to be defined by domestic demographic trends. 

 

From a macro level, understanding how this approach functions from a practical investment research perspective can be explained fairly simply.  Broadly speaking, the consumption curve for healthcare services across the age continuum is fairly static with elastic demand occurring largely at the margin.  Given fixed census trends, if one is able to determine per capita consumption by age for a particular procedure or service type, a reasonable estimate for the underlying growth trend can be derived.

 

Having a quantifiably justified estimate for underlying organic growth, finding higher frequency data sets that accurately reflect real-time demand and solving for the shorter-term impacts of larger, more acute factors such as employment/insurance status makes it possible to both identify and forecast cyclical growth inflections as well.  Conviction is found where the demographic, per capita consumption by age, and the higher frequency macro data function to drive company model inputs that back test with strong correlations across durations. 

 

Taking a TAIL perspective on the healthcare sector, as an example, let’s take a short walk down demography lane and examine the consequences of the existent, secular domestic demographic shift and some of the resulting longer-term investing implications. 

 

Given that the consumption curve for healthcare services across age buckets remains relatively fixed, the glacial movement of U.S. demographic trends holds specific consequences both for healthcare and the larger economy broadly.  Therefore, it is important to understand that the period of greatest acceleration in per capita healthcare consumption comes as people age into their 50’s. Equally important is the fact that this 50-64 year old subset is covered, in large part, by high margin, commercial insurance.

 

The largest acceleration in medical consumption in combination with high margin insurance, places the 50-64 year old demographic as the heart, and profit center, of the health economy. This demographic is now in a secular decline (although the continued acceleration in employment for this age bucket remains a near-term positive for healthcare consumption). In fact, extending current census trends and per capita healthcare consumption by age out over the coming decades reveals a secular bear market for healthcare that won’t see its trough until 2024! 

 

This trend has definite and specific consequences for the hospital industry as well.  With roughly 30 cents of every healthcare dollar flowing through the hospitals, the industry sits at the heart of the healthcare economy and is inextricably beholden to meaningful shifts in utilization and service consumption growth.

 

At present, the current demographic setup is one which will see the 45-64 year old age group graduate into Medicare at a faster rate than those underneath can fill the void.  In other words, the spread between those aged 45-65 and those aged 65-85 will reach its narrowest point in 2011 before embarking on a protracted expansion where hospital margins will face a secular decline as negative margin Medicare volumes grow faster than commercial admissions.

 

In this scenario, we continue to believe high-tech, med-tech remains the relative loser as hospitals focus cost initiatives across controllable supply expenses.    ZMH remains our favorite long-term short in the space.

 

The outlook isn’t completely dismal, however.   The 30-40 year old demographic will continue to accelerate for the better part of the next decade.   Here, women’s health and companies levered to birth volumes remain favorably positioned to benefit from this secular trend.  Moreover, women’s health, along with dental and domestic U.S. physician office exposure, continues to sit positively across a number of our strategic TRADE & TREND themes as well.

 

(Please email sales@hedgeye.com  for more on our ZMH specific fundamental and demographic work, additional detail on where we’re targeting long exposure, or further detail on how we marry the HEALTHCARE MACRO process with our fundamental, company research.)

 

As the transparency curtain gets pulled further back on the collective global balance sheet, staring into the mirror of a leveraged overconsumption past will continue to reveal some painful realities.  Growth will remain impaired as developed economies deal with structural debt/deficit issues.  Beta will continue to auger to the latest centrally planned headline, and government intervention will continue to sponsor market volatility.

 

And while Euro & Bureau – Crats continue to hold summits and engineer soundbytes in a flagging attempt to placate markets looking for tactical solutions to structural problems, we’ll continue to evolve our own process. 

 

It’s not perfect, but it has worked a lot more than it hasn’t – and it’s repeatable. 

 

Buy Low. Sell High. Repeat.  Pretty Simple. 

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Italy’s MIB Index, and the SP500 are now $1537-1568, $106.01-107.93, $1.28-1.30, 14,466-15,094, and 1240-1260, respectively.

 

Christian B. Drake

Analyst

Hedgeye Healthcare

 

Simple Explanations - Demographic Trends 122911

 

Simple Explanations - hvp



Believe The Evidence

“A wise man proportions his beliefs to the evidence.”

-David Hume

 

If there’s one thing that Hume, Hayek, and Hedgeye may have had in common, it’s that free-market pricing bears evidence of the truth. That’s my 2012 Global Macro Strategy - Believe The Evidence.

 

For Global Macro investors managing risk across asset classes in 2011, evidently US Treasuries outperformed mostly everything else. With Global Growth Slowing and the 10-year UST Yield dropping -43% on the year (from 3.31% to 1.88%), America’s long-bond zoomed higher as the MSCI All-World Stock Index and the 19 component CRB Commodities Index dropped -7.2% and -8.1% respectively.

 

In the USA, primarily due to a +9.9% rally in the US Dollar Index (from testing a 30 year low post QE2), the last 8 months of 2011 were very different from the first 4 months of 2011. While US Dollar strength may have been what Keynesians fear-mongered as a “deflationary force” on certain stock and commodity market prices, it provided the tail-wind needed for the largest part of the US Economy – Consumption.

 

Believe The Evidence: C + I + G (EX – IM) = GDP. And 71% of the US GDP number comes from the C, Consumption.

 

From a Q1 of 2011 low of 0.36% US GDP growth (and an unemployment high of 9.2%), US GDP growth recovered to 2.0% by Q3 of 2011 (and unemployment fell to 8.6%). *Note to Bernanke: stay out of the way, it’s working.

 

Therefore, the most contrarian bullish call we can make on US GDP Growth in 2012 is that the US Dollar continues to strengthen. Not to be confused with what the US stock market or commodity markets do, employment and economic growth is what really matters. Any sniff of a QE3 implementation will drive inflation higher and stymie whatever real (adjusted for inflation) growth Americans can look forward to.

 

Back to the Global Macro Grind

 

With 13 consecutive booked gains in the Hedgeye Portfolio into the final day of the 2011, I’m feeling as good as I can feel about our risk management process. The goal in December was neither being bearish or bullish – it was simply to keep moving as prices did and to be right.

 

Rather than give you a reckless wire-to-wire “2012 Outlook” call this morning, I’ll give you our positioning (Hedgeye Asset Allocation Model):

  1. Cash = 61% (down from 70% before last week’s Global Equity and Commodity selloff)
  2. Fixed Income = 18% (Long-term Treasuries and a Treasury Flattener – TLT and FLAT)
  3. Int’l Currency = 12% (US Dollar – UUP)
  4. US Equities = 6% (Consumer Discretionary – XLY)
  5. Int’l Equities = 3% (China – CAF)
  6. Commodities = 0%

FYI: I haven’t worked alongside or know one top performing Portfolio Manager from the 2008-2011 period that deals with his or her Portfolio Strategy on a trivial duration of exactly 12 months starting January 1st.

 

Leading Portfolio Managers of the Wall Street 2.0 era have learned to be:

  1. Multi-duration
  2. Multi-factor

As the evidence changes, they do.

 

Absorbing all that’s new in my trusty notebook this morning, here’s how I think about the evidence in market pricing related to our aforementioned positioning:

 

1.   TLT and FLAT: Whether I look at the Bloomberg Consensus US GDP estimates or the 10-year trading at 1.94% this morning, it’s all signaling the same thing to me again this morning. Consensus has finally appropriately priced in the 2011 Growth Slowdown and now we can deal with Growth’s Pricing Signals day-to-day. A breakout > 2.03% on 10-year yields would have me sell TLT and FLAT.

 

2.   UUP: Strong Dollar = Strong Consumption = Stronger Employment. Rinse and Repeat. Whoever (Obama or his Republican challenger) figures this basic economic relationship out in 2012 is going to have a good shot at becoming the next President of the United States. US Dollar Index is in a Bullish Formation with its first line of immediate-term support = $79.37.

 

3.   XLY: There should be no confusion as to why I had a 0% asset allocation to US Equities in either July of 2008 or July of 2011. I fundamentally Believe The Evidence that debauching the dollar kills US Consumption (and confidence). Strengthen and stabilize the currency of a country and the volatility of its economic cycle (and how markets price it) will break down; equities then break-out.

 

4.   CAF: Pardon? Yep. TimeStamp us as being long Chinese Equities as of 3:19PM on December 29th, 2011. Call us the scions of “valuation” intellect buying a legitimately “cheap” Global Equity market or just call us names, we’ll either not sell this position for a few years or we’ll sell it tomorrow and smile either way. Strong Dollar = Deflating The Inflation (bullish for Chinese Consumption).

 

5.   COMMODITIES: Zero means zero. With the Gold price up for 11 consecutive years and Oil prices up for the last 3 in a row, I have zero problem calling a 0% asset allocation to this asset class as contrarian right here and now.

 

While Cyprus, Greece, and Egypt seeing their stock markets evaporate on the order of -72%, -52%, and -49%, respectively in 2011 has our eyes open to “value” opportunities outside of Chinese Equities, this morning there’s reason to believe that cheap can get cheaper. Poor Cyprus is down -4% to start 2012, and I’m going to Believe The Evidence rather than believing I’m smarter than Mr. Macro Market.

 

My immediate-term support and resistance ranges for Gold (covered our short position last week), Oil (Brent), and the SP500 are now $1, $107.86-110.26, and 1, respectively.

 

Best of luck out there this year,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Believe The Evidence - Chart of the Day

 

Believe The Evidence - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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