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CASUAL DINING CORRELATION RISK

The casual dining space, as we wrote 3/2, anchors heavily on the employment market.  A rollover in headline initial jobless claims trends could lead the space lower.  Here we highlight two names we see as being most at risk. 

 

When positive or negative macroeconomic news that pertains to the restaurant industry hits the tape, casual dining stocks tend to move somewhat in unison.  Similarly, a preannouncement of sales results significantly above or below consensus can lead to the whole group trading on the news.  The risk of jobless claims rolling over as a tailwind related to a distortion in the labor statistics (see our 3/2 note for details) could be the next macro catalyst for casual dining.  As the two charts, below, indicate, claims tend to be far more consequential for casual dining than quick service.

 

CASUAL DINING CORRELATION RISK - inverted claims vs qsr

 

CASUAL DINING CORRELATION RISK - inverted claims vs casual dining

 

 

As our post on 3/2 outlines, the distortion in the seasonal adjustment factor stemming from the Lehman-related shock in initial jobless claims in 2008/09 began in week 36 of 2008.  Looking at the correlation between jobless claims (inverted in the chart) and the stock prices of some of the casual dining names, we can get a sense for which companies may have benefited most from the distortion that our Financials team dubbed “the Ghost of Lehman”.  As the Ghost of Lehman turns from tailwind into headwind, we can infer that those same companies that outperformed during 4Q and into 2012 could be at risk of underperforming over the next few months. 

 

The first stock we would like to call out in this regard is Cheesecake Factory.  The stock has moved largely in step with jobless claims’ improvement since March 2009 and, as the employment picture improved in 4Q11 and into 2012, the stock continued to gain.  The correlation between initial jobless claims and CAKE’s stock price from 9/1/11 to present is -0.83.  We highlighted yesterday that the ICSC Chain Store Sales Index data is hinting at a slowdown in CAKE’s top line in 1Q12.  That is a metric worth monitoring as we progress through the quarter.

 

CASUAL DINING CORRELATION RISK - cake vs inverted claims

 

CASUAL DINING CORRELATION RISK - cake icsc

 

 

Cracker Barrel is a second stock that we would highlight as being particularly exposed to a meaningful reversion in jobless claims.  The stock has appreciated greatly due to an improving top line but, given that the correlation between jobless claims and CBRL’s stock price is -0.95, we think that this stock could underperform in a scenario where employment trends soften.  While many observers like Clarence Otis, CEO of Darden Restaurants, believe that the US consumer has become more resilient to elevated gas prices, if the trend in retail gasoline prices continues and the miles driven data in the U.S. trends lower, we believe that there could be an adverse impact on CBRL’s restaurant traffic.  If gasoline prices can rise to, and remain at, prices close to $4 in the second quarter, we expect Cracker Barrel’s business to be affected.

 

It is also worth bearing in mind that Cracker Barrel’s advertising spending is being targeted on the second and fourth quarters of its fiscal 2012.  This advertising spend helped the company outperform Knapp Track traffic trends during the same period.  The company is guiding to its advertising spend in 3QFY12 being down year-over-year by $1-2mm and 4Q advertising year-over-year being flat.  We are not expecting a significant boost, if any, from 4Q advertising on a year-over-year basis, certainly not as meaningful as the impact was in 2Q.  If the employment outlook and gasoline prices become a negative factor for the stock, we believe there could be a substantial drop in same-restaurant sales at Cracker Barrel.  Lastly, while weather lifted the entire industry over the winter months, we believe that Cracker Barrel may have been a larger beneficiary than some competitors but this is obviously difficult to prove.

 

CASUAL DINING CORRELATION RISK - cbrl vs inverted claims

 

CASUAL DINING CORRELATION RISK - miles driven cbrl

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


FL: Second Act: Roadmap Intact

 

We attended FL’s headquarters analyst meeting to review Ken Hicks’ report card on the 2010-2014 Plan and to walk through his goals for the next 5-years. We came away with essentially the same view that we walked in with. The stock has a favorable risk/reward profile and trades at a reasonable multiple if not at a discount, but faces increasingly tougher comps in the 1H at the same time growth out of Europe is slowing limiting upside surprises to earnings over the intermediate-term. As a result, we think there will be a more attractive opportunity to get involved in the stock at lower prices.

 

Not surprisingly, many of the key initiatives of Hicks’ new 2012-2016 Plan were layovers from two years ago given the opportunity for further progress. The two new initiatives include an increased focus on both the customer as well as high-growth businesses (i.e. Women’s, Apparel, Kids, & Team). The bigger callout on the day was the introduction of Hick’s long-term targets (see below), which were higher than we expected suggesting $3.50 in earnings power at a 14% CAGR over the next five years.

 

Naturally, we take a critical look at targets like this and ask if we think they’re achievable. However, given Hick’s track record at JCP and now FL, where he hasn’t missed a number, perhaps the better question is WHEN, not IF these goals will be met. Here’s a look at the latest key objectives compared to the 2010 plan as well as the key takeaways from the meeting:

 

FL: Second Act: Roadmap Intact - FL 5YrPlan

 

Key Takeaways:

  • There are multiple operational systems that the company currently has in various stages of testing and implementation that are at the core of the first initiative in Hicks’ new plan. These include systems for planning product allocations, labor management, measuring shelf productivity, as well as heat mapping technology for use in tracking traffic flow. We think each will play a role in not only improving the customer experience, but also driving incremental sales productivity and margins (objective #5). The potential timing of these systems are less certain, but the labor management piece will be rolled out this Spring and is expected to start yielding results as early as this fall.

 

  • Customizing locally relevant assortments is another key element to better address customer needs from urban to suburban locations down to specific differences in cross town purchasing preferences. While there are systems currently in place that enable management to tailor assortments, improved data mining from additional tools will increase the impact of these efforts and productivity particularly as it relates to apparel product assortments (think colorways, team preferencess, etc.).

 

  • We think the high-growth opportunities with the greatest upside are women’s and apparel. Management sized each as an incremental $100mm opportunity along with kid’s and Team. It’s important to note that these aren’t mutually exclusive efforts. In fact, Hicks suggested that women’s stores will start to look more like an apparel store than its traditional footwear format. This could translate into a mix of 75/25 apparel to footwear shown in store resulting in sales of roughly 50/50. Whatever the mix shakes out, Hicks stated emphatically that FL will significantly step up its commitment in apparel. In addition to working with a new design firm to test formats, Lady Foot Locker will be undergoing transformational change in 2012/2013. 

 

  • Besides ramping net store growth for the first time since 2006, FL is also testing new store formats at Champs, Lady Foot Locker and Kid’s Foot Locker. New store formats at Champs include a change in presentation with apparel on the walls and footwear on floor on bleacher-like shelving. Make no mistake, it’s not a coincidence that FL is taking a page right out of Nike’s retail efforts. One of the pleasant surprises in terms of unexpected detail on the day was slide #32 showing apparel/accessories penetration as a percent of sales at 24% today compared to 31% back in 2003. While the firm’s selling strategy was decidedly different then and referred to as ‘when they sold cotton by the pound,’ if management can get apparel share up 3pts it would equate to nearly $200mm in incremental revenues.

 

  • The growth opportunity in Europe remains a key element of management’s brand expansion strategy. This includes both stores in new underpenetrated markets in Eastern Europe as well as a new banner concept altogether. The company is currently testing a new banner called the Locker Room in the UK that features performance product (e.g. cleats, sticks, uniforms, shoes, etc.) in a larger 4,000 sq. ft. footprint compared to the average 2,900 sq. ft. European store with two more slated to be open in time for the 2012 London Olympics in July and August. The majority of FL’s new store growth (60-70 net openings annually) will continue to be European based.

 

  • Within stores, House of Hoops remains an important brand expanding initiative. There are now 50 House of Hoops shops up from just 10 at the start of 2010 and management sees an opportunity for over 100+ in total globally with the potential to add an incremental $50mm. Assuming a similar rate of growth, House of Hoops rollouts could add 40-50bps to top-line growth in each of the next two years.

 

  • With a strong balance sheet including $850mm in cash at year end, it is clear that management is committed to investing in growth, but at a measured pace. While the company could accelerate store openings, it plans to thoroughly test new formats before committing the capital to support it. Importantly, the company just raised the dividend by 9% and announced a new $400mm SRA where it can put excess FCF to work.

All in, there were few surprises. There is clearly a substantial opportunity for further development of initiatives that are already in progress, which should ultimately help to drive earnings towards $3.50 overtime.

 

In the meantime as we look out over the next twelve months, year-end results came in right in-line with our expectations. The two biggest deltas were a stronger than expected start to Feb up mid-teen on a tough comp and incremental weakness in Europe (down -9% in Q4). Net net, we are shaking out at $2.25 in EPS for this year. We like the name over the long-term TAIL duration (3-Years or Less), but think that the later could limit upside surprises to earnings over the intermediate-term and present a more attractive opportunity to get long FL stock.

 

Casey Flavin

Director

FL: Second Act: Roadmap Intact - FL LTTgts

 


Legislating Inflation

This note was originally published at 8am on February 22, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Inflation is taxation without legislation.”

-Milton Friedman

 

Since one of America’s chief champions of free-market capitalism, Milton Friedman, died in 2006, we’ve had Ben Bernanke running the US Federal Reserve. Bernanke has never raised interest rates. Never is a long time.

 

The Bernank’s fans (most of them get paid by inflation) will tell you that, in the short-run, Legislating Inflation is what we need to stop The Deflation (i.e. free-market prices falling). In the long-run, I think that conflicted and compromised policy for the few will be dead.

 

It’s a good thing President Obama is considering a cut in the US corporate tax rate today – because Bernanke’s 2014 cheap money policy is imposing a Consumption Tax on the 71%.

 

Back to the Global Macro Grind

 

The way that my Keynesian Economics professors at Yale taught me to calculate US GDP Growth is as follows:

 

GDP = C + I + G + (X-M)

 

C = Consumption. That’s 71% of US GDP. Genius calculus will reveal rising “export/manufacturing” doesn’t budge the GDP number.

 

So, if you have a Policy To Inflate via US Dollar Debauchery, you are putting a Consumption Tax on the American People. Most human beings who drive to work, pay for their kids to go to school, and feed their families get this.

 

Yesterday, the US Dollar Index was down another -0.45%.

 

At the same time: 

  1. Oil was up another +2.5%
  2. Gold was up another +2.0%
  3. Energy Stocks led SP500 advancers at up +0.7% 

But…

 

On the day, the SP500 barely closed up (+0.07%).

 

So, this whole Legislating Inflation thing that is occurring both fiscally (no budget yet; no deficit discipline either) and monetarily, is only good for the US stock market to a point.

 

This revelation, of course, is not new. Almost the exact same thing happened to commodity and stock prices into the highs of February 2011. All the while, Obama’s central planning advisors (David Axelrod, Larry Summers, Tim Geithner, etc) couldn’t believe that US Growth slowed like it did in Q1 of 2011 (down to 0.36%!).

 

How? Who? Why?

 

After you calculate the C + I + G + (X-M), you have to subtract what we call the “Deflator” from the GDP number. As inflation rises, the deflator gets bigger, and yes, sorry, real economic growth (adjusted for inflation) gets smaller.

 

This is why we are so intensely focused on the marginal relationship between Growth and Inflation. Since everything that matters in Global Macro is priced on the margin, this is what we need to solve for within the aforementioned GDP equation.

 

My call here is as crystal clear as it was at this time of last year. From this time and price, Inflation Expectations Rising Will Slow Growth sequentially (as in month-over-month). Markets typically don’t like that.

 

Where’s the Inflation Rising data? 

  1. Hong Kong’s Consumer Price Inflation rose to 6.1% in JAN vs 5.7% DEC
  2. India’s Consumer Price Inflation rose to 7.7% in JAN vs 7.5% (WPI) DEC
  3. Italy’s Consumer Price Inflation stayed sticky at 3.2% JAN vs 3.2% DEC 

Where’s the Growth Slowing data? 

  1. Germany’s manufacturing PMI stopped improving in FEB at 50.1 vs 51.0 JAN
  2. Japanese Exports plummeted to -9.3% y/y in JAN and Japan printed their largest monthly trade deficit ever!
  3. Taiwan Exports were down -8.6% y/y in JAN (lowest demand reading since 2009) 

*Some obvious points about all this data: A) its Global Macro data, not Greek, B) there’s plenty of January data here instead of February and C) the inflation data (causal in slowing real growth) has only accelerated to the upside here in February.

 

So, do we suspend all disbelief and chase 3-year highs in US Equity prices because the Dow is approaching a big round number? If I’m paid to do it with other people’s money, I might roll the bones on that. Then again, I might not.

 

Until we stop Legislating Inflation to cheer on stock and commodity markets (David Axelrod), we won’t A) stop seeing shortened economic cycles and B) amplified market volatility.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1731-1756, $118.72-121.78, $1.30-1.33, and 1352-1365, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Legislating Inflation - Chart of the Day

 

Legislating Inflation - Virtual Portfolio


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 7, 2012


As we look at today’s set up for the S&P 500, the range is 23 points or -0.55% downside to 1336 and 1.16% upside to 1359. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

 

THE HEDGEYE DAILY OUTLOOK - 2

 

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -2509 (-1923) 
  • VOLUME: NYSE 877.82 (24.29%)
  • VIX:  20.87 15.62% YTD PERFORMANCE: -10.81%
  • SPX PUT/CALL RATIO: 1.63 from 2.04 (-20.10%)

CREDIT/ECONOMIC MARKET LOOK:


USD – this is not a political comment, it’s a correlation one – Romney’s momentum rising/falling is starting to track the US Dollar Index and our new Hedgeye Election Index (Obama at 58.4% before Super Tuesday results). The back-test is meaningful – send us a note if you want the data series. US Dollar Index = +2% since Romney won Michigan/Arizona and you see what happened to inflation in the face of that (deflated, fast). 

  • TED SPREAD: 40.85
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 1.96 from 1.94
  • YIELD CURVE: 1.68 from 1.67 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:00am: MBA Mortgage Apps, week of Mar. 2 (prior -0.3%)
  • 8:15am: ADP Employment Change, Feb., est. 215k (prior 170k)
  • 8:30am: Nonfarm Productivity 4Q F, est. 0.8% (prior 0.7%)
  • 10:30am: DOE inventories
  • 3:00pm: Consumer Credit, Jan., est. $10.45b (prior $19.308b) 

GOVERNMENT:

  • President Barack Obama visits Daimler truck manufacturing plant in Mt. Holly, N.C., delivers remarks on economy, 12:45pm
  • House, Senate in session:
    • House Financial Services subcommittee holds hearing on modernizing Securities Investor Protection Corp., 9:30am
    • Senate Agriculture holds hearing on healthy food, nutrition as part of farm bill drafting, 9:30am
    • House Energy and Commerce hearing on gasoline prices, 10:30am
    • Congressional Progressive Caucus holds news conference on home foreclosures, 12:15pm 

WHAT TO WATCH:

  • Apple to host iPad event; watch for details on processing speed, display, pricing, effect on potential suppliers, 1pm
  • Mitt Romney won 6 states including Ohio; Rick Santorum captured 3, signaling fight for Republican delegates may last months
  • SocGen, Generali, UniCredit joined firms saying they would participate in Greece’s debt swap
  • Sprint said to plan end to network-sharing deal with Falcone’s LightSquared
  • Netflix explores putting film streaming service on cable systems
  • JHL Capital Group says subsidiary of Clear Channel Communications Inc. improperly moved $656m to its parent
  • Freddie Mac faulted with FHFA for oversight of loan servicers
  • Calpers may cut assumed rate of return for 1st time since 2004
  • Delphi investors can’t block Tokio Marine offer, judge ruled yesterday 

EARNINGS:

    • Fresh Market (TFM) 6 a.m., $0.38
    • Children’s Place (PLCE) 6:30 a.m., $0.90
    • Ciena (CIEN) 7 a.m., $(0.04)
    • Brown-Forman (BF/B) 7:30 a.m., $1.01
    • American Eagle Outfitters (AEO) 8 a.m., $0.35
    • Laurentian Bank of Canada (LB CN) 8:54 a.m., C$1.26
    • Hot Topic (HOTT) 4 p.m., $0.20
    • Men’s Wearhouse (MW) 4:01 p.m., $(0.13)
    • Express (EXPR) 4:01 p.m., $0.68
    • H&R Block (HRB) 4:03 p.m., $0.07
    • Semtech (SMTC) 4:30 p.m., $0.31
    • Pall (PLL) 5:01 p.m., $0.74
    • Canadian Western Bank (CWB CN) 7 p.m., C$0.55
    • HudBay Minerals (HBM CN) Post-Mkt, C$0.15 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


OIL  - both Brent and WTIC continue to hold all 3 durations of support  (TRADE, TREND, TAIL) in our model with Brent Oil’s refreshed risk management range = $120.83-123.98. It would have to break $118 (and WTIC break $102) for us to consider this a tailwind of Deflating The Inflation for the benefit of US Consumption. 

  • Boar Hunter Sets Sights on China After MF Global: Commodities
  • Oil Rises on Forecast of U.S. Fuel Supply Drop, Jobs Increase
  • Copper Swings Between Gains, Losses on Stocks, Slowdown Signals
  • Soybeans Climb for Second Day as Chinese Demand May Strengthen
  • Gold Gains in London as Drop to Six-Week Low Attracts Buyers
  • Robusta Coffee Falls as Supplies May Increase; Cocoa Advances
  • Palm Oil Seen Rallying 24% as World Cooking-Oil Supply Drops
  • Australian Beef to Compete With Brazil, India as Demand Surges
  • Jinchuan Plans to Raise Nickel Output, Look for Mines Abroad
  • Goldman Takes Lead in M&A List Spurred by Natural-Resource Deals
  • New Iraq Oil Terminal Starts Pumping Today, Minister Says
  • California Nuclear Backlash Mounts After Japan Meltdown: Energy
  • Netanyahu Sees Red Sea-Negev Rail Spurring China Trade: Freight
  • China to Buy Corn If Prices Are Right, Reserve Chief Says
  • India’s Singh Demands Urgent Review of Cotton-Export Ban
  • Australian Wool May Tumble 8% as Slowing Economy Hurts Demand
  • Copper Demand to Grow At Least 6% This Year, Tongling’s Wei Says 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


SPAIN – never mind Greece, pull up a chart of the IBEX = straight down and, more importantly, this is the 1st major European stock market to snap its intermediate term TREND line (8499). Spanish Equities are down -4% all of a sudden YTD. Debt structurally impairs growth – these economies and markets are stagflating, big time – and even a Keynesian can’t stop gravity in perpetuity.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 



Old Habits

“He was a man of habits.”

-Benjamin Wallace

 

Earlier this week I cited a book I am enjoying, “The Billionaire’s Vinegar.” Today’s quote summarizes the unique persona of Michael Broadbent. Becoming the world’s most prominent wine auctioneer didn’t just happen.

 

Neither does risk in these globally interconnected markets. There is no such thing as “risk on” and “risk off.” In real life, risk is always on. Risk never sleeps.

 

Habits in this business can be as polarizing as a legacy media channel’s partisanship. Fortunately, Old Habits on Wall Street and News Media 2.0 are dying on opacity’s vine.

 

Back to the Global Macro Grind

 

I personally have a habit of selling on green and buying on red. Most of the time it saves me from grossly violating Rule #1 – Don’t Lose Money. Some of the time it doesn’t.

 

Buying too early is also called being wrong. The lynx-eyed Jeff Gundlach at Doubleline says “an investor is a trader who is under-water.” Great one liner – primarily because it royally annoys Captain Stock Picker. Especially after a day like yesterday.

 

Yesterday’s Short Covering Opportunity in everything that was immediate-term TRADE oversold was as obvious to me as the Short Selling Opportunities we were signaling 2.5% higher with the SP500 at its YTD highs last week.

 

On red, after a 3-day correction in Global Equities and Commodities, here’s what I’ve done in the Hedgeye Asset Allocation Model:

  1. Cash = 46% (down from 58% on Friday)
  2. Fixed Income = 24% (no change)
  3. US Equities = 18% (up from 12% on Friday)
  4. Commodities = 9% (sold Corn, bought Oil)
  5. International Equities = 3% (bought Canada)
  6. International FX = 0%

I’m not saying this positioning is right or wrong. The market will decide my fate on that. I’m just TimeStamping what I did. Repeatable Process is a habit too.

 

Getting longer here certainly has risks. In the Hedgeye Portfolio I went into yesterday’s open with 11 LONGS, 9 SHORTS. This morning I have 13 LONGS and 7 SHORTS. I’ll most likely tighten that up, selling some on green today.

 

Why sell on green? Isolating the USA, here are some of the risk management signals jumping off my notebook page today:

  1. SP500 broke immediate-term TRADE support of 1364 and now has a lower-high of resistance up at 1359
  2. Equity Volatility (VIX) broke out above immediate-term TRADE resistance of 17.72 yesterday; upside to 23.17
  3. US Equity Volumes continue to flash gnarly negative skew – accelerating volumes on the down days, not up ones
  4. S&P Sector Rotation call we made last week remains crystal clear (Utilities (XLU) best yesterday; Financials (XLF) the worst)
  5. S&P Sectors that have broken their immediate-term TRADE lines = 5 of 9 (XLB, XLI, XLF, XLV, and XLE)
  6. 10-year US Treasury Yields continue to signal Growth Slowing (trading below my TREND line of 2.03%)
  7. Yield Spread (10yr minus 2yr) is down 3bps week-over-week; benign but not bullish at 167bps wide
  8. US Dollar Index has moved back to bullish TRADE and TREND after Romney wins in Michigan and Ohio

That last point is probably the one that rings the political gong louder than any other. Why? Because people are partisan. But the math trumps partisanship and the fact of the matter is that the US Dollar Index is up +2.1% since Romney won in Michigan last week (see our newly minted Hedgeye Election Index). Causal? Correlated? Does it matter which?

 

Strong Dollar = Strong America. Period.

 

That’s the most bullish long-term (and sustainable) economic strategy I can paint for Americans right now. Sadly, it’s also the most unexpected. Old Habits, and the economists and politicians who get paid to pander to them, won’t agree with this because none of them have tried it in the last decade (i.e. so none of them can take credit for it when it works).

 

To get a stable and strong US Dollar will take both fiscal and monetary sacrifice. God forbid the stock market goes down for a few weeks to get there. But inflation expectations will go down too. Whether it was $20/barrel (average price of oil) between 1 or 1, these were the most bountiful decades or US job creation and economic prosperity, ever.

 

Ever is a long time. Old Habits of debauching your currency for short-term political votes should be held accountable to ever, too.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $120.83-123.89, $79.32-79.91, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Old Habits - Chart of the Day

 

Old Habits - Virtual Portfolio


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