prev

THE HBM: GMCR, MCD, RUTH

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

Greece, slowly, but surely falling off Most Read (Bloomberg) news wk-over-wk; China and Global Growth Slowing back in vogue:

  1. CHINA – worst Trade Deficit in 22yrs (let’s call that ever – and ever is a long time) at -$31.5B after last week saw that big sequential drop in Chinese IP growth (to 11% vs 14% in JAN despite Lunar shift). Growth Slowing. Chinese stocks looking for a rate cut.
  2. ISRAEL – someone knows something or someone thinks they do – what I can’t see here makes me call it out as the Tel Aviv25 Index not only moved to red for 2012 YTD last week, but is down another full 1% this morning (down -4% in since Feb 21). Iran?
  3. USD – the most important (and bullish on the margin for US Consumption Growth) recovery in the last few weeks has been the US Dollar Index recovering its intermediate-term TREND support of $79.36. With short-term Treasuries (2yr) breaking out above 0.26% TREND support and Gold struggling relative to oil, I’m out of Gold for now. Considering the short side GLD and looking to buy USD back.

VIX 15-17 range has proven to be the right zone to take down both gross and net for the last 4yrs.

 

KM

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: GMCR, MCD, RUTH - subsector

 

 

QUICK SERVICE


GMCR: Green Mountain Coffee was downgraded to Neutral from Buy by BofA on Friday. The price target was lowered to $63 from $70.

 

MCD: McDonald’s featured in a Barron’s article this weekend where “the Trader” column detailed why the stock may be overpriced. 

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

GMCR: Green Mountain declined almost 16% on accelerating volume as SBUX announced the arrival of its new brewer and David Einhorn said that Green Mountain’s install base has no “true protection”.

 

SBUX: Starbucks gained 2.9% on accelerating volume.

 

 

CASUAL DINING

 

RUTH: Ruth’s Chris announced 10% buyback of its 10% convertible preferred stock.  Retiring the 10% convertible preferred stock cost the company $60.2mm in cash which was funded by its $100mm senior revolving credit facility.  This move prompted Jeffries to raise its PT by $1 to $8.

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

RUTH: Ruth’s Chris gained 6.8% on accelerating volume.

 

THE HBM: GMCR, MCD, RUTH - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Complicating Life

This note was originally published at 8am on February 27, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You should know that correcting your intuitions may complicate your life.”

-Daniel Kahneman

 

That’s just a great risk management quote from Chapter 18 of “Thinking, Fast and Slow” – Taming Your Intuitions. While the Storytelling about oil prices, what caused them, and what they mean to your portfolios can be creative, it can also complicate your life.

 

Complicating Life for the small some of us whose life will not change by prices at the pump is not what I mean. I’m talking about the most obvious of obvious of life’s complications – what’s in your wallet versus what you need to buy to feed your family.

 

While that may be the most intuitive statement of the year for the rest of the world’s consumer population, on Wall Street we are often numbed to believe that making the most obvious of obvious calls on markets and economies isn’t “smart” enough.

 

Back to the Global Macro Grind

 

One obvious call that we pounded on last week is that Global Consumption Growth has never not slowed with oil prices running north of $100/barrel. We’ll reiterate that very simple fact this morning. I couldn’t have repeated it enough in February of 2008.

 

Barron’s Mike Santoli did a nice job of bringing back those 2008 memories this weekend when he pointed out that the price of Brent Oil has not traded below $100/barrel for 269 days. Make that 270 days now. The longest streak (ever) prior to this was 110 days in 2008.

 

2008 and 2011 are the years that the willfully blind at both the Fed and Sell-Side groupthink-tanks would like to just forget. That’s why we like to remember them. When Growth Slowing happens every few years after the price of oil ramps, there’s something obvious Complicating Life for those of us who don’t hang our hats about being “dead” in the long-run.

 

To review the Dollar Debauchery, Oil Up trade last week:

  1. US Dollar Index was down -1.3% to $78.35
  2. Brent Oil price was up +4.9% to $125.47
  3. WTIC Oil price was up +6.4% to $109.77

And, of course, the headlines into the weekend were that Oil was rising because the “economic recovery” was picking up steam…

 

Then, a not so funny thing happened on the way to the pre-market US Futures forum this morning. Stocks fell down … because of “rising oil prices” … but, uh… oil prices this morning are falling…

 

Got Storytelling?

 

The sad fact of the matter is that many market participants need oil prices to rise to get paid. That’s just a sad fact for the country, not for absolute returns. At +25.2% and +21.8%, respectively, Russian and Venezuelan Equities are 2 of the Top 3 performing Stock Markets in the world for 2012 YTD. These are called Petro-Dollar markets – awesome, right?

 

It really is awesome if you are long Inflation Expectations Rising. The problem with that is 2 fold:

  1. That, ultimately, leads to Growth Expectations Slowing
  2. Most people on this earth are short inflation in their wallets

The other thing here Complicating Life is that our industry chases prices at tops and sells bottoms:

  1. CFTC data for last week shows bullish Commodity Options contracts up +7.3% week-over-week
  2. At 1.03 Million call options on commodity inflation, that’s the biggest number since the week of September 13, 2011
  3. From the CRB Index’s September 2011 high to its October 2011 low (292) we saw a -14% crash in commodities

Yes, Commodities Crashed. That was last year, remember?

 

Last year, post Qe2, expectations continued to build for a Stronger Dollar. So commodities crashed. Period. Commodities didn’t fall because growth expectations were slowing. US GDP Consumption Growth rose steadily as the price of oil fell with US GDP going from 0.36% in Q1 to +2.8% in Q4 of 2011.

 

I’m not saying it’s easy being a Macro man trying to navigate the whip-saw of Big Government Interventions. If I have written this 100 times I have said it 1,000 times over – cheap money Dollar Debauchery policies A) shorten economic cycles and B) amplify market volatility.

 

What I am saying is Ben Bernanke’s Policy To Inflate to 2014 is Complicating Life for the rest of the world’s consumption.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), Oil (WTIC), US Dollar Index, and the SP500 are now $1749-1797, $120.78-126.21, $105.44-110.66, $78.38-79.11, and 1357-1370, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Complicating Life - Chart of the Day

 

Complicating Life - Virtual Portfolio


THE M3: NEVADA REGULATORS; SIDE-BETTING; WYNN-OKADA DIVORCE; LABOR

The Macau Metro Monitor, March 12, 2012

 

 

NEVADA PROBES JUNKET OPERATORS WSJ

Mark Lipparelli, chairman of the Nevada Gaming Control Board, said that outside junket operators are "becoming an area of increased attention for us."  Nevada regulators in the past six months have increased their scrutiny of whether junket operators that are business partners with casino companies have connections with people tied to organized crime, a person familiar with the matter said. That person declined to say what companies are under scrutiny or to cite any evidence.

 

US DROPS SIDE-BETTING ALLEGATIONS Macau Business

The latest annual U.S. State Department on international money laundering has dropped the claim that the value of side-betting in Macau could exceed GGR by ten times.  Several industry players had rebuffed the claim, made in last year’s report.

 

Even so, in its latest report, issued last week, the U.S. State Department continues to say “Macau’s gaming industry relies heavily on loosely-regulated gaming promoters. Increasingly popular among gamblers seeking inscrutability and alternatives to China’s currency movement restrictions, junket operators are also popular among casinos aiming to reduce credit default risk and unable to legally collect gambling debts in China. This inherent conflict of interest, together with the anonymity gained through the use of the junket operator in the transfer and commingling of funds, as well as the absence of currency and exchange controls, present vulnerabilities for money laundering,” the report says.

 

Even so, the U.S. State Department acknowledges Macau “continues making considerable efforts” to develop an anti-money laundering framework that meets international standards.


THE UNRAVELING OF A CASINO MARRIAGE WSJ

WSJ details signs of a waning Wynn-Okada partnership way before the current legal battle.  Okada needed cash to build his Phillippines project and to support his foundering pachinko business which was being cracked down by the Japanese government but he couldn't sell his Aruze shares, which holds the WYNN shares, due to an amendment which prohibits Wynn and Okada from selling WYNN shares without the other's consent.  Wynn feared his control over Wynn Resorts could be threatened if Okada sold shares in WYNN or lost control of Aruze.  Okada asked Wynn to allow him more control in the company and wanted the authority to nominate WYNN board members.  Okada also wanted more compensation on the board since he was seeking future business for the company in Asia.  Meanwhile, Okada kept trying to persuade Wynn to join the Philippines project.

 

On Sept. 30, 2010, two attorneys from Wynn Resorts presented Okada's attorney with the board's corruption concerns from its investigation and said that because Okada's casino in the Philippines may compete with Wynn's businesses, he was violating his fiduciary duties as a board member.  A few days later, Wynn and Okada, flanked by lawyers, met together in Las Vegas.  Wynn accused Okada of using the company's intellectual property and misrepresenting his project, including handing out his Wynn Resorts business cards.  He also raised corruption concerns connected to Okada's Philippines project.  Wynn told Okada he should step down from his role as a director.

 

LABOR FORCE TO INCREASE BY 10 PERCENT IN 2012 Macau Business

Macau's secretary for economy and finance, Francis Tam Pak Yuen, said Macau’s labor force could increase by as much as 10% in 2012.  According to the secretary, this figure takes into account the needs of small and medium-sized enterprises in hiring workers and also the current and future needs of the gaming industry.  To ensure 10% growth, the government would be forced to allow the number of imported workers to increase by over 30,000.


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

MONDAY MORNING RISK MONITOR: HOLDING STEADY

A Look at the Current Setup

* Greece's debt swap was largely in line with expectations last week; on a week-over-week basis, we saw relatively little movement in several key risk indicators. Most of the series were essentially unchanged or continued on their pre-swap trajectories. European and US interbank risk receded further last week with the Euribor-OIS shrinking 4 bps week over week, while the TED spread shrank 2 bps. This is less of a catalyst for further upside now that both of these measures have largely renormalized.


* Both European and American Bank CDS widened week over week.

 

* High yield rates rose 13 bps off of last week's YTD low, ending the week at 7.01.  

 

 * Fairly balanced short-term outlook - Our macro team's quantitative model indicates that on a short term duration (TRADE), there is 1.1% vs. 0.8% downside in the XLF.

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged  

• Intermediate-term(WoW): Positive / 7 of 12 improved / 3 out of 12 worsened / 2 of 12 unchanged  

• Long-term(WoW): Negative / 0 of 12 improved / 6 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - Summary

 

1. US Financials CDS Monitor – Swaps widened for 19 of 27 major domestic financial company reference entities last week.   

Tightened the most WoW: JPM, AIG, CB

Widened the most WoW: MBI, MMC, AGO

Tightened the most MoM: RDN, MTG, AIG

Widened the most MoM: MS, MBI, GS

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - CDS  US

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 31 of the 40 reference entities. The average widening was 2.6% and the median widening was 2.4%.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - CDS   Euro

 

3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. German sovereign swaps tightened by 2.6% (-2 bps to 77 ) and French sovereign swaps widened by 3.3% (6 bps to 181).

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - Sovreign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 13.3 bps last week, ending the week at 7.01 versus 6.88 the prior week.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index was flat over last week, ending at 1642.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - LLI 2

 

6. TED Spread Monitor – The TED spread fell 2.3 points last week, ending the week at 39.0 this week versus last week’s print of 41.2.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - TED

 

7. Journal of Commerce Commodity Price Index – The JOC index fell 2.7 points, ending the week at -8.12 versus -5.5 the prior week.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - joc 2

 

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 tightened by 4 bps to 54 bps.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - 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.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - ECB liquidity

 

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 the MCDX was flat, ending the week at 129 bps.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - mcdx 2

 

11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index rose 53 points, ending the week at 824 versus 771 the prior week.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - Baltic

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened by less than a basis point to 170 bps.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.1% upside to TRADE resistance and 0.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - XLF

 

Margin Debt - January

We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 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 last 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 2011. 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 +0.55 standard deviations in November, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in December and January's print of +0.53 and +0.70 standard deviations.  Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through January.

 

MONDAY MORNING RISK MONITOR: HOLDING STEADY - 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 HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 12, 2012


As we look at today’s set up for the S&P 500, the range is 19 points or -0.50% downside to 1364 and 0.88% upside to 1383. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1202 (-575) 
  • VOLUME: NYSE 719.04 (0.34%)
  • VIX:  17.11 -4.68% YTD PERFORMANCE: -26.88%
  • SPX PUT/CALL RATIO: 1.57 from 0.98 (60.20%)

CREDIT/ECONOMIC MARKET LOOK:


USD – the most important (and bullish on the margin for US Consumption Growth) recovery in the last few weeks has been the US Dollar Index recovering its intermediate-term TREND support of $79.36. With short-term Treasuries (2yr) breaking out above 0.26% TREND support and Gold struggling relative to oil, we are out of Gold for now. Considering the short side GLD and looking to buy USD back. 

  • TED SPREAD: 39.22
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.02 from 2.03
  • YIELD CURVE: 1.71 from 1.71 

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Export inspections: corn, soybeans, wheat
  • 11:30am, U.S. to sell $33b 3-mo., $31b 6-mo. bills
  • 1:00pm, U.S. to sell $32b 3-yr notes
  • 2:00pm, Monthly Budget, Feb., est. -$229.4b (prior -$222.5b)
  • 3:15 p.m. Bank of England’s Fisher speaks in London 

GOVERNMENT:

    • Rick Santorum, Newt Gingrich hold rival events in Biloxi, Miss. ahead of Tuesday primary
    • House not in session this week, Senate in
    • Supreme Court in session, rulings expected 

WHAT TO WATCH:

  • Glencore said to have made approach for Viterra; Cargill may have expressed interest: WSJ
  • World Trade Organization may rule on appeal of decision that Boeing got at least $5.3b of illegal U.S. subsidies
  • Boehringer Ingelheim will consider buying Pfizer’s animal health business, provided co. sells it in parts: Economic Times
  • Fed’s extension of maturities, known as Operation Twist, may lower 10-yr yield by 85 bps: Bank of International Settlements
  • Fed said to be pushing back against some banks’ proposals to pay dividends, buy back shares after concluding lenders underestimating potential losses on consumer debt
  • Wells Fargo, Citigroup may join banks unleashing more than $9b in div. increases, shr buybacks if they get passing grades this week on Fed’s annual stress test
  • Chevron aims to catch up on Marcellus gas drilling: WSJ
  • Asahi Kasei agreed to buy Zoll Medical for up to $2.2b
  • Temenos, Misys fail to reach agreement, terminate talks; Misys says talks with Vista, CVC/ValueAct continuing
  • Global banking regulators will seek accord later this month on changes to draft liquidity rules criticized by some govts, lenders as threat to economic recovery
  • Average price for regular gasoline at U.S. filling stations increased 12.31c to $3.8148/gallon over past 2 wks: Lundberg
  • Swatch to contest counterclaim by Tiffany & Co. over end of alliance between the cos.
  • Euro-area finance ministers meet to discuss Greece’s progress in fulfilling commitments under a 130b euro rescue program
  • Craig Bouchard, co-founder of Esmark, said to be close to announcing deal to buy HD Supply’s pipe, valve distribution unit for ~$500m
  • Disney’s “John Carter” took in $30.6m in U.S. Canada, trailing “The Lorax"; est. range: $25m-$38.9m
  • No U.S. IPOs scheduled 

EARNINGS

    • FuelCell Energy (FCEL) Pre-Mkt, $(0.06)
    • Silver Standard Resources (SSO CN) Pre-Mkt, $(0.12)
    • Urban Outfitters (URBN) 4pm, $0.29
    • Carmike Cinemas (CKEC) 4:02pm, $0.16
    • Clean Energy Fuels (CLNE) 4:05pm, $(0.17)  

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Hedge Funds Trimmed Wagers Before Prices Rebounded: Commodities
  • Oil Drops From One-Week High as China’s Exports Miss Forecasts
  • Coffee Declines to 17-Month Low on Speculation of Brazil’s Sales
  • Copper Falls on Signals of Slowdown in China, Largest Consumer
  • Gold Declines as Commodities Slide, Hedge Funds Cut Holdings
  • India Ends Cotton-Shipment Ban, to Revalidate Existing Permits
  • Palm Oil Inventories in Malaysia Climb 2% as Exports Drop
  • Soybeans May Gain After USDA Cut Forecast on Global Inventories
  • Rubber Top May Be 358 Yen, Fibonacci Shows: Technical Analysis
  • Aluminum Stockpiles in Japan Drop From Highest Since 2009
  • TNK-BP Yield Drops Below Gazprom as Oil Beats Gas: Russia Credit
  • Bullish Oil Bets Drop as Tension With Iran Eases: Energy Markets
  • Soybean Imports by China May Rise to Record, Grain Bureau Says
  • Cotton Declines as India Scraps Export Ban
  • Glencore Said to Express an Interest in Grain-Handler Viterra
  • Chesapeake CEO Courts Asians for $100 Billion Resource: Energy 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 6

 


ASIAN MARKETS


CHINA – worst Trade Deficit in 22yrs (let’s call that ever – and ever is a long time) at -$31.5B after last week saw that big sequential drop in Chinese IP growth (to 11% vs 14% in JAN despite Lunar shift). Growth Slowing. Chinese stocks looking for a rate cut.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST

 

ISRAEL someone knows something or someone thinks they do – what we can’t see here makes us call it out as the Tel Aviv25 Index not only moved to red for 2012 YTD last week, but is down another full 1% this morning (down -4% in since Feb 21). Iran?


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 

 



Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next