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MCD : JUST A MATTER OF TIME?

February is only one month but MCD needs global sales trends to remain strong to maintain its current valuation.  February, if this morning’s release is any indication, could be the first sign that MCD is not immune to the global economic reality. 

 

Our stance on the stock at this point is to wait and see.  We are not buyers of the stock on this selloff.  In short, if austerity is having an impact it will not be a one month phenomenon.

 

 

FEBRUARY SALES

 

Adjusting for all the noise (weather and the trading days), in the month of February there was a sequential slow down in traffic trends in McDonald’s global business.  In Japan the “Great American Burger” promotion, in its third year, lost steam and the Chinese New Year also negatively impacted the headline APMEA number.  In Europe, France and Italy are a drag on same-store sales, while Spain – albeit modeslty – and Germany are having a positive impact.

 

Adjusting for calendar-shifts, all three divisions saw declines in two-year average comparable restaurant sales trends.  Japan reporting -1.2% was also a disappointment for the company. 

 

The February top line results in the USA adjusting for the leap year suggest a decline in two year trends as well as in the rest of the world.  Japan reporting down 1.2% was a big disappointment to the Asia region. 

 

McDonald’s reported sales of 11.1%, 4.0%, and 2.4% for the U.S., Europe, and APMEA, respectively.  Consensus was looking for 8.7%, 6.8%, and 8.6%, respectively.  Due to calendar shifts, the numbers include an adjustment ranging from approximately 3.1% to 3.4%. 

 

MCD : JUST A MATTER OF TIME? - MCD US

 

MCD : JUST A MATTER OF TIME? - mcd eu

 

MCD : JUST A MATTER OF TIME? - MCD APMEA

 

 

THOUGHTS ON INVESTOR EXPECTATIONS VS MGMT COMMENTARY

 

We were struck by the words “as previously communicated” in this morning’s press release because, while management did highlight the uncertain economy, austerity in Europe, and inflation as issues that posed business risk to the company, these factors have been withstood for some time by the McDonald’s business.  The oft-repeated explanation for MCD being the Teflon Don of the restaurant space last year was that the economic malaise actually benefitted the company.  Management’s commentary on conference calls never explicitly said this, but it was certainly inferred by many in the investment community;  management recently said, “…at the same time, Europe stayed committed to delivering compelling fourth-tier options and promoting everyday affordable pricing for consumers feeling the pressure in their local economies”… “despite this backdrop, our European business remains strong” (1/24 transcript).   The question is, from here, has the game changed for McDonald’s?  Was the investment community far too optimistic in its reading of management’s commentary and the apparent immunity of McDonald’s business to economic uncertainty?  Why is the soft economy now impacting results when it has little effect previously?

 

From a bottom line perspective, the impact of any top line slow down will be compounded by the fact that both D&A (from the all the remodels last year) and G&A, which will be up 6% in 2012 (due to technology, the Olympics, and world-wide franchise convention), are putting pressure on reported operating profit.

 

A quick scan of all of MCD recent filings terms “austerity” is mentioned two times in the  most recent 10-K and nine times in the most earnings call.  “Labor cost pressures” was mentioned once in the most recent 10-K and zero times in the most recent earnings call. “Economic uncertainty” was mentioned three times in the most recent 10-K and zero times in the most recent earrings call transcript. Again, management did communicate these issues, but we need to read between the lines to get to the conclusion about the impact on 1Q12.

 

The economic uncertainty and austerity measures in Europe are not new.  Commodity inflation is not a new trend either; beef prices have been moving higher but that is neither a new trend nor should it be a surprise.  Management highlighted mid-teen inflation in beef costs as being the most significant impact on COGS in 2011 and guided to a similar level in 2012 during the 4Q EPS call on 1/24. 

 

From the 10-K filed on 2/24/12: “In 2012, our European business will continue to face headwinds due to economic uncertainty and additional government-initiated austerity measures implemented in many countries. While we will closely monitor consumer reactions to these measures, we remain confident that our business model will continue to drive profitable growth.”   Again, no sign that there was going to be any real margin pressure – in fact this suggests less pressure in Europe this year versus last year.

 

From the most recent earnings transcript management filed on 1/24/12: “Europe's commodity inflation is expected to moderate a bit in 2012, with a projected increase of 2.5% to 3.5%.”  Additionally, the company said that the impact of “austerity” in 2012 was going to be less severe than in 2011, stating, “…some of these incremental austerity measures, so the increased social charges and some of the other taxes that are hitting the restaurants, those are going to be, while we'll have some new ones, the magnitude of those will be lower than we saw in 2011.”

 

Our stance on the stock at this point is to wait and see.  We are not buyers of the stock on this selloff.  In short, if austerity is having an impact it will not be a one month phenomenon.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL

When Confusion Reigns, Call in the Sine Wave

The headline initial claims number rose 11k WoW to 362k (up 8k after a 3k upward revision to last week’s data).  Rolling claims rose 0.3k to 355k. On a non-seasonally-adjusted basis, reported claims rose 32k WoW to 366k.

 

Today's print is consistent with our "Lehman's Ghost" thesis. To recap, the collapse of Lehman Brothers in late 2008 distorted the seasonal adjustment factors in various government data sets. The dislocation in the economic data was incorrectly read as a seasonal pattern and the factors were revised accordingly. 

 

The seasonal distortion plays out as follows.  Claims were understated in the last weeks of February by the largest amount. From now through May, the understatement disappears.  Absent an underlying trend in the series, this effect will drive claims higher by 20-30k over the next three months. This trend continues to push claims higher by another 20k through July, by which time the series will be seeing its peak overstatement (claims are being reported higher than they actually are). Thereafter, the cycle starts over again. We do our best to depict this graphically with the sine wave chart below. The red arrow represents the current underlying trend in the jobs series, which is improving at a rate of around 3k per month. The blue sine wave represents the distortive impact the seasonal adjustment model is having on the data.  

 

PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL - sine wave claims

 

PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL - Rolling

 

PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL - raw 2

 

PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL - NSA

 

PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL - S P

 

PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL - FED

 

2-10 Spread

The 2-10 spread widened less than 1 bps versus last week to 168 bps as of yesterday.  The ten-year bond yield also stayed relatively flat over last week, increasing less than 1 bps to 198 bps.

 

PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL - 2 10

 

PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

PREDICTING INITIAL CLAIMS: THE SINE WAVE MODEL - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

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


THE HBM: MCD, PNRA, AFCE, CBRL, BWLD

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Consumer

 

Initial jobless claims came in at 362k versus 352k consensus for the week ended 3/3 and 354k during the week prior (revised up from 351k)

 

THE HBM: MCD, PNRA, AFCE, CBRL, BWLD - claims

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: MCD, PNRA, AFCE, CBRL, BWLD - subsector

 

 

QUICK SERVICE

 

MCD: McDonald’s reported sales of 11.1%, 4.0%, and 2.4% for the U.S., Europe, and APMEA, respectively.  Consensus was looking for 8.7%, 6.8%, and 8.6%, respectively.  Due to calendar shifts, the numbers include an adjustment ranging from approximately 3.1% to 3.4%.  We will have a note up detailing our thoughts on MCD shortly.

 

THE HBM: MCD, PNRA, AFCE, CBRL, BWLD - MCD US

 

THE HBM: MCD, PNRA, AFCE, CBRL, BWLD - mcd eu

 

THE HBM: MCD, PNRA, AFCE, CBRL, BWLD - MCD APMEA

 

 

PNRA: Panera is featured in the Wall Street Journal today stating that it will increase its media investment by 26% this year.  "A lot of people think, if you do nothing, you will stay at zero. But the reality is, if you do nothing, you'll be at a negative," said Founder and Chairman Ron Shaich.

 

AFCE: AFC reported 4Q EPS of $0.24 versus $0.24 consensus.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

AFCE: AFC Enterprises gained 3% on accelerating volume.

 

 

CASUAL DINING

 

CBRL: Cracker Barrel continues to highlight gas prices as a potential risk going forward.  Most of the other restaurant companies that have addressed the topic have been downplaying the impact of gas prices and highlighting the consumer handling current levels quite well.

 

BWLD: Sanderson Farms CEO Joe Sanderson said yesterday that there is no chance of the supply of chicken growing this year.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

DIN: Dine Equity bounced back after three consecutive down days.

 

THE HBM: MCD, PNRA, AFCE, CBRL, BWLD - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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Politics and Prejudice

This note was originally published at 8am on February 23, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Politics and prejudice keep pushing their way into things.”

-Izzeldin Abuelaish

 

I’m often inspired by doers in this world. Instead of pandering to the political wind, they simply lead by example. Their respect is earned each and every day, not centrally allocated.

 

The aforementioned quote comes from a Palestinian doctor who was educated in Cairo and at Harvard. He practiced in both Saudi Arabia and Israel, and now lives in Canada. His story is called “I Shall Not Hate”, and I highly recommend reading it if you’re looking for cultural context in analyzing the Middle East.

 

The last decade has been a particularly disappointing period in this grinding conflict that keeps us apart. Our leaders bicker like children, breaking promises, behaving like bullies, keeping the kettle of trouble boiling. The people I talk to – patients, doctors, neighbors in Gaza, friends in Israel – are not like our leaders.” (I Shall Not Hate, page 121)

 

Until he mentions Gaza, you’d think he was writing about the 112th US Congress. But what is it about Iran or Illinois that keeps us from having a discussion about economic facts? Why are we wedded to Western Academic Dogmas gone bad? Why are we so partisan?

 

Unlike debating science and math (where there are actual answers to the questions), American economic opinions, strategies, and forecasts are heavily weighted to Politics and Prejudice – and massively underweight transparency, accountability, and trust.

 

Back to the Global Macro Grind

 

I was looking for a way to bridge the gap between what Inflation Expectations are doing (last price) and what partisan politicians are saying about oil prices this morning. In a globally interconnected marketplace of colliding factors, to call this rip to $124/barrel in oil prices simply a function of “Iran” is as simple does – un-American and uninspiring.

 

Multi-factor, Multi-Duration.

  1. Oil is up +11.7% in the last month
  2. Oil is up +193.4% in the last 3 years
  3. Oil is up +503.3% in the last 10 years 

This, of course, is what The Bernank calls The Deflation.

 

Iran is definitely a factor. But it’s certainly not the only factor. Having a dual mandate (monetary and fiscal policy) to debauch the Dollar puts the world’s reserve currency in a position where we are all subject to more volatility associated with “external shocks.”

 

If that’s not the case, why didn’t Oil go to $130 or $150 during the Reagan and/or Clinton years? There were plenty of Middle Eastern, Russian, and US supply scares over the course of the 1980s and 1990s, weren’t there?

 

Ah, but there was also a global expectation for Strong Dollar Policies from both the Reagan and Clinton Administrations: 

  1. Monetarily: Reagan was Strong Dollar (Volcker raising interest rates and the rate of return on American Savings, again, and again)
  2. Fiscally: Clinton was Strong Dollar (Balanced Budget Act 1997 and the only President since Truman to run 3 consecutive surpluses) 

Got Politics and Prejudice?

 

Oh there is plenty folks. But the beauty of being Canadian this morning is not only that we have Steven Harper instead of Santorum, but we can sit back and not be Republican or Democrat about this. Economic policy context here is critical, because when it comes to the last decade of Bush/Obama, both of these Presidents are much more like Nixon/Carter than anything else – Keynesians.

 

Solution?

 

Abuelaish says one thing they haven’t tried in the Middle East is empowering women to make decisions. I like that, because the American men running economic policy couldn’t be worse. And by the way, the only major head of State to be Strong Currency (both fiscally and monetarily) in the last 40 years was Margaret Thatcher. If I was Mitt Romney, I’d be doing the required Hayekian reading on that, fast.

 

In other news: 

  1. Japan – Former BOJ deputy chief Muto says the Japanese fiscal and monetary situation has reached a “trigger point”
  2. China – Premier Wen is whispering about cutting China’s GDP run rate below 8% at the National People’s Congress (March 5th)
  3. Europe – Economic Stagflation (rising inflation, slowing growth) is back in the headlines instead of Greece 

Maybe we should blame Iran (or Canada?) for Big Government Policies to inflate slowing global growth again too?

 

Macro Math on what those big 3 represent as a % of total Global GDP: 

  1. Japan = 9.3%
  2. China = 11.1%
  3. European Union = 28.1% 

So, that’s only 48.4% of the world’s economic output. I guess it’s a really good thing that Bernanke sees no inflation slowing real (inflation adjusted) economic growth in America. Sadly, Politics and Prejudice have made us willfully blind.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1736-1782, $119.45-123.86, $79.01-79.47, and 1353-1363, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Politics and Prejudice - Chart of the Day

 

Politics and Prejudice - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 8, 2012


As we look at today’s set up for the S&P 500, the range is 18 points or -0.56% downside to 1345 and 0.77% upside to 1363. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

 

THE HEDGEYE DAILY OUTLOOK - 2

 

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

 

With Bernanke’s Policy To Inflate back into the whispers of sweet nothing volume rallies again, we are still tasked with risk managing the immediate-term ranges of being long Inflation until the Growth music stops. Fun.

  • ADVANCE/DECLINE LINE: 1724 (4233) 
  • VOLUME: NYSE 800.91 (-8.76%)
  • VIX:  19.07 -8.62% YTD PERFORMANCE: -18.50%
  • SPX PUT/CALL RATIO: 1.74 from 1.63 (6.75%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 40.33
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 1.99 from 1.98
  • YIELD CURVE: 1.70 from 1.67 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England rate decision, est. 0.5%
  • 7:30am: Challenger Job Cuts (Y/y), Feb.
  • 7:45am: ECB rate decision, est. 1.0%
  • 8am: RBC Consumer Outlook Index
  • 8:30am: Jobless Claims, week of Mar. 3, est. 351k (prior 351k)
  • 9:45am: Bloomberg Consumer Comfort, week Mar. 4, est. -39.0
  • 10am: Freddie Mac 30-yr mortgage
  • 10:30am: EIA Natural Gas 

GOVERNMENT:

  • President Obama meets with Ghanaian President John Atta Mills
  • Treasury Secretary Tim Geithner will tour BNSF facility in, Texas, discuss economy at event hosted by Dallas Regional Chamber, 4pm
  • House, Senate in session
    • House Appropriations subcommittee hears from Transportation Secretary Ray LaHood on budget request, 9:30am
    • House Energy and Commerce panel holds hearing on FDA user fees, accelerated approval of treatments, with testimony from Alnylam Pharmaceuticals CEO John Maraganore, 10am
    • House Budget Committee meets on FY2013 budget, 10am
    • Senate Appropriations subcommittee hears from Attorney General Eric Holder on Justice Department’s budget request, 10am
    • House Energy and Commerce subcommittee hears from Energy Secretary Steven Chu on budget, 10am
    • Senate Appropriations subcommittee hears from acting Federal Housing Administration head Carol Galante, 10am
    • Senate Appropriations subcommittee hears from Homeland Security Secretary Janet Napolitano on budget request, 10am
    • Senate Homeland Security Committee hears from Homeland Security Secretary Janet Napolitano on budget request, 2:30pm 

WHAT TO WATCH:

  • ECB may lift its 2012 inflation forecast above the 2% price- stability threshold today, economists est.; interest rate seen to remain at 1%
  • AIG shares said to be offered at $29 each as Treasury reduces stake
  • AT&T in talks to sell a majority stake in its Yellow Pages unit to Cerberus
  • Investors with ~60% of the Greek bonds eligible for debt swap have so far indicated they’ll participate, putting it on verge of biggest sovereign restructuring in history
  • U.S. said to warn Apple, publishers over e-book pricing: WSJ
  • FDA staff issues report of new class of pain medicines that target nerve growth factor
  • Facebook gets $8b credit line while adding to banker list
  • Toyota revamps North American management to boost regional unity
  • McDonald’s to release monthly sales at 7:58am; Texas Instruments to provide mid-quarter update post-market
  • Rick Santorum-backers pressuring Newt Gingrich to drop out of Republican presidential contest
  • Italian-German 10-yr yield spread falls to least since Sept. 1 

EARNINGS:

    • Smithfield Foods (SFD) 6 a.m., $0.65
    • Canadian Imperial Bank of Commerce (CM CN) 6 a.m., $1.93
    • Williams-Sonoma (WSM) 6:30 a.m., $1.13
    • Navistar (NAV) 7 a.m., $(0.27)
    • Buckle (BKE) 7 a.m., $1.15
    • Viterra (VT CN) 7 a.m., $0.21
    • AltaGas Ltd (ALA CN) 7:24 a.m., $0.30
    • Cominar Real Estate Investment Trust (CUFu CN) 8 a.m., $0.43
    • John Wiley & Sons (JW/A) 8 a.m., $0.94
    • JinkoSolar (JKS), Pre-mkt, ($1.88)
    • Cooper (COO) 4:01 p.m., $1.04
    • Ulta Salon Cosmetics & Fragrance (ULTA) 4:01 p.m., $0.67
    • Aeropostale (ARO) 4:01 p.m., $0.38
    • Renren (RENN) 5 p.m., $-
    • Approach Resources (AREX) Post-Mkt, $0.22 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Drought Tightens Corn Supply Before Record Harvest: Commodities
  • World Food Prices Climb for a Second Month on Grains, Oils
  • Oil Rises a Second Day on Signs Sanctions Cutting Iran Exports
  • Copper Climbs Most in a Week on Signs of U.S. Rebound, Stocks
  • Gold Climbs as Decline in Dollar’s Value May Signal More Demand
  • Soybeans Gain on Speculation USDA to Cut Brazil Crop Estimate
  • BofA Says U.K. LNG Imports May Halt If Japan Reactors Stay Shut
  • Palm-Oil Stockpiles in Malaysia Set to Reach Six-Month Low
  • Sugar Imports by Bangladesh More Than Double on Crop, Price
  • BHP Stirs Memory of Alcan Writedowns as Shale Gas Sours: Energy
  • Asia Gasoil Crack Falls; Hin Leong Buys Fuel Cargo: Oil Products
  • Global Insurers Targeted in Proposed U.S. Sanctions Against Iran
  • China Said to Stop New Crushing Plants Using Imported Rapeseed
  • Oil Rallies More From Dollar Outlook Than Iran: Chart of the Day
  • China Wants India’s Cotton Ban Lifted as Ministers Review Curb
  • Sugar Falls as Producers Sell After Price Rises; Coffee Rose
  • U.S. Spring May Be Warmer Than Normal, AccuWeather Forecasts 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 



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