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MCD SALES PREVIEW

McDonald’s will release sales tomorrow before market open.

 

McDonald’s remains one of our favorite stocks in the restaurant space as the company continues to outmatch the competition in the United States (where the company derives almost 45% of its operating income) as it executes on its remodel program. 

 

Within the earnings, we will be focusing on management’s forward looking statements around 2012 guidance; in particular, commodity basket inflation and any update on capex related to the reimaging program for the next 12-24 months.  While additional pricing may need to be added to help the company absorb inflation, we expect December comps to impress once again and the top-line remains the primary focus for investors.

 

Below we go through our take on what numbers will be received by investors as good, bad, and neutral MCD comps numbers by region.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).

 

Compared to December 2010, December 2011 had one less Wednesday and one additional Saturday.  We expect a slight positive calendar shift as a result.

 

 

U.S.: facing an easy compare of +2.6%, including a calendar shift of between +0.4% and 0.7%, varying by area of the world and a negative impact of -2% related to weather:

 

GOOD:  A print of 8% or higher would be received as a good result.  Despite implying sequentially lower same-store sales on a two-year average basis, an 8% print would be a positive headline number and would beat consensus of 6.5% by a significant margin.  We believe that the company continues to capture share in the domestic business and macro trends in the U.S. from December point to a continuation of the positive momentum in MCD U.S. sales.   Our estimate is +8%.

 

NEUTRAL: A print of 7-8% would be received as a neutral result given that, on a calendar-adjusted basis, it would imply a significant sequential decline in two-year average trends while still coming in slightly above consensus.  With the stock having traded up 15% during 4Q11, investors are pricing in a strong top line and we believe that consensus is conservative for December U.S. comps.

 

BAD:  A result of less than 7% would disappoint investors as it would imply the lowest calendar-adjusted two-year average trends since May.  And the steepest sequential decline in calendar-adjusted two-year average trends since December 2010 (which was largely caused by weather).

 

MCD SALES PREVIEW - mcd sales chart

 

 

Europe: facing an easy compare of -0.50%, including a calendar shift of between +0.4% and 0.7%, varying by area of the world and a negative impact of -2% related to weather:

 

GOOD: A print of 11% or higher would be received as a good result for MCD Europe.  We are setting the bar a little higher than the Street, which is at +8.4%.  Our estimate for December is +11%.

 

NEUTRAL: A result of between 9% and 11% would be received as a neutral result for Europe as it would imply a print just above consensus but also a sequential decline in calendar-adjusted two-year average trends. 

 

BAD: A print of less than 9% would imply a steep decline in calendar-adjusted two-year average trends.

 

 

APMEA: facing a difficult compare of +8.90%, including a calendar shift of between +0.4% and 0.7%, varying by area of the world:

 

GOOD:  A result above +4.5% would be received as a good number as it would imply a sequential acceleration in calendar-adjusted two-year average trends. Our estimate is 4%.

 

NEUTRAL: A print of between 3.5% and 4.5% would be received as a neutral result as it would imply calendar-adjusted two-year average trends.

 

BAD: A print of less than 3.5% would imply a deceleration in calendar-adjusted two-year average trends.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Keith McCullough: The Larry Kudlow Show

Keith McCullough, CEO at Hedgeye Risk Management, discusses the dollar and the global economy.

 

[podcast| ]

Keith McCullough: the Larry Kudlow Show

Keith McCullough, CEO at Hedgeye Risk Management, discusses the dollar and the global economy.

 


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BBBY: TRADE Update

Keith is managing the immediate-term TRADE risk around one of our favorite shorts across all three durations covering BBBY in the Hedgeye Virtual Portfolio.


There is no change to our fundamental outlook.


BBBY: TRADE Update - BBBY TTT


Bullish TAIL: SP500 Levels, Refreshed

POSITIONS: Long Consumer Discretionary (XLY), Long Utilities (XLU), Short Russell2000 (IWM)

 

This melt-up scores very differently versus the ones we’d short on strength in 2011. This one is backed by our Fundamental Macro Modeling process (Growth, Inflation, Policy), with all 3 factors working in bullish favor of stocks (bearish for bonds).

 

As Growth Expectations rise, so will multiples people pay for US Equities. Growth Expectations should also pressure Ben Bernanke to be less dovish. Imagine the man ends up talking rate hike by Q3?

 

Don’t choke on your water bottle – no one else thinks he’d do that either – which is why we are thinking about it.

 

Across all 3 of my risk management durations, here are the lines that matter most to me right now: 

  1. Immediate-term TRADE resistance = 1325
  2. Immediate-term TRADE support = 1302
  3. Long-term TAIL support = 1267 

I’ve been saying this since the beginning of the year and I’ll say it again – the US stock market now has a Bullish TAIL.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish TAIL: SP500 Levels, Refreshed - SPX


European Banking Monitor

Positions in Europe: Short EUR-USD (FXE)

 

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor"

 

If you'd like to receive the work of the Financials team or request a trial please email .

 

* The Euribor/OIS Spread, our preferred measure of systemic risk in the banking industry, tightened 5 bps last week. This is a strong bullish signal in our model.  A similar trend has emerged in the TED spread, which fell by 3 basis points to 52 bps last week. Upward momentum in the TED spread is now definitively reversing. These trends are strongly positive for banking stocks as they reflate the existing European crisis discount. 

 

* Bank CDS in Europe saw CDS fall 20% or more.  The ECB Liquidity Recourse to the Deposit Facility made a cycle low on Wednesday at a much higher level than typical cycle lows before beginning to rise again. And the Securities Market Program bought €2.243 Billion in the week ended 1/20.

 ----------

 

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 tightened by 5 bps to 82 bps.

 

European Banking Monitor - 22. OIS

 

 

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 series made a higher low on Wednesday of last week but rose again to end the week at €492 Billion.  

 

European Banking Monitor - 222. ECB

 

 

European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 39 of the 40 reference entities. The average tightening was 9.1% and the median tightening was 16.8%.

 

European Banking Monitor - 22. banks

 

 

Securities Market Program – The ECB's secondary sovereign bond purchasing program bought €2.243 Billion in the week ended 1/20 versus €3.766 Billion in the week ended 1/12 to take the total program to €219.0 Billion.

 

European Banking Monitor - 22. smp

 

 

Matthew Hedrick

Senior Analyst


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