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FEB KNAPP TRACK

The Knapp Track numbers from February were, on a two-year average basis, stronger than January’s. 

 

Malcolm Knapp released his Knapp Track casual dining sales numbers for February this weekend.  He cited weather as an important factor in the results; highlighting Texas, the Midwest, and the eastern region of the country as areas where the harsh weather of last year made for particularly easy compares in 2012 to-date.  On February 22nd, we highlighted data from the National Operational Hydrologic Remote Sensing Center in order to approximate the year-over-year difference in snow coverage in three regions: the Midwest, the East Coast, and the South.  We would make to statements about the Knapp Track numbers at this point.  First, it will difficult to ascertain the true underlying trend in this data set until April’s results emerge.  Second, traffic trends are disappointing when we consider that weather is boosting sales quite substantially in 1Q12.

 

Estimated Knapp Track casual dining comparable restaurant sales grew 2.8% in February versus a final accounting period number of 3.3% (prior estimate 3.2%) in January.  The sequential change from January to February, in terms of the two-year average trend, was +50 bps.

 

Estimated Knapp Track casual dining comparable guest counts declined -0.1% in February versus a final accounting period number of 1.2% (prior estimate 0.5%) in January.  The sequential change from January to February, in terms of the two-year average trend, was +35 bps.

 

It is disappointing to see traffic trends so soft even with the benefit of weather.  CPI for Food Away from Home clearly shows that prices are being raised more than last year at restaurants but the cushion that operators have at their disposal in terms of pricing (CPI for Food at Home versus CPI for Food Away from Home) is shrinking.  Companies facing high levels of cost inflation in 2012 (we would highlight TXRH and BWLD) may have to choose between margin and continued top line strength although we will have to wait until the weather impact falls off before becoming certain.  Please refer to our note, titled “BWLD UPDATE”, for our current thoughts on BWLD.

 

FEB KNAPP TRACK - food at home vs food away from home

 

Howard Penney

Managing Director

 

Rory Green

Analyst


The Trick

This note was originally published at 8am on March 05, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The trick was to focus narrowly… on numbers: lot number, number of bidders, paddle numbers, bid steps.”

-Benjamin Wallace

 

I’ve recently jumped into The Billionaire’s VinegarThe Mystery of the World’s Most Expensive Bottle of Wine – and, I must say, I can’t put the book down!

 

The aforementioned quote scrapes the surface of British wine critic and auctioneer Michael Broadbent’s process. Born in 1927, Broadbent “was twenty-two before he tasted a top wine”, but started out in the business by simply “taking notes on every wine he tasted. He never stopped.” (page 27)

 

Neither have I.

 

Back to the Global Macro Grind

 

I have 1-2 pages of hand-written notes of every market day of my working life. I’m not saying that makes me anything other than what it makes me – maniacal about my process. The way that I learn is through repetition. If I write down market prices, risk management levels, and economic data points every day, I have a much higher probability of not missing something.

 

That’s The Trick.

 

As far as I can tell (so far), The Trick to this game is not missing when the big things, like Growth and Inflation, are changing. That’s why, in principle, our Macro Models are grounded in Chaos Theory – we embrace the uncertainty that each day brings, because we have no idea what is going to be the proverbial grain of sand that knocks down that perfect pyramid of market expectations.

 

For the last 3 weeks I have been calling out Growth Slowing As Inflation Accelerates as the #1 risk factor that’s changing on the margin. Changing doesn’t mean the market realizes it instantaneously like a Janet Jackson moment at the Super Bowl. The difference between what’s changing on the margin and when markets are forced to react to it is time.

 

Get time and price right, and you’ll get mostly everything in the market right. Looking at last week’s Global Macro Performance Divergences, here’s where you didn’t want to be long:

  1. Small Cap US Stocks (Russell 2000) = down -3.0%
  2. India’s stock market (BSE Sensex) = down -1.6%
  3. The Euro (vs the USD) = down -1.9%
  4. CRB Commodities Index = down -1.5%
  5. West Texas Intermediate Crude Oil = down -2.8%
  6. Gold = down -3.7%

Now if you were long the Venezuelan stock market (+8.6% on currency devaluation) or the US Dollar Index (+1.3% after Mitt Romney solidified the Republican base in Michigan and Arizona), you were just fine last week.

 

Or were you?

 

The Trick about markets is that the tricks are always changing. Causality and correlation are very often two very different things, but Correlation Risks can sneak up on you like a Chinese Growth Slowdown in the night.

 

China Slowing?

 

Apparently both the data that we have been discussing since we sold our long China (CAF) position on February 16thand the guys running the joint agree – China’s long-term GDP growth rate looks like it’s going to be a lot lower than the +9-12% it’s been tracking since 2009. China’s Premier Wen guided to a 7.5% number for 2012. Global markets didn’t like that.

 

In addition to the guide down of Chinese Growth Expectations, here was the Asian economic data that mattered most on the margin overnight:

  1. Chinese Services PMI dropped to 48.4 in FEB vs 51 in JAN
  2. Chinese Vehicle Sales are tracking down -3% year-over-year for 2012 YTD (worst start to a year since 2005)
  3. Australian Services PMI got smoked to 46.7 in FEB vs 51.9 in JAN

I know. That data can be tricky when you convince yourself that the bad January data in Asia was all about the Lunar calendar – until the February data rolls in even worse!

 

To be fair, some of the data for Asia in February has been as good as you should expect it to be with the calendar shift. But the problem from here isn’t January’s calendar or what your run-of the mill Keynesian economist is going to tell you about rising oil prices not impacting real (inflation-adjusted) growth. For markets, it’s all about time, price, and expectations.

 

The Trick is to keep moving out there – across countries, currencies, commodities, etc. – and keep risk managing your gross and net positioning to account for multiple durations across multiple factors.

 

I’m not saying I see everything early. I’m saying quite the opposite really – I really have no idea what I am going to say about a market’s risk parameters until I write everything down in my notebook in the morning.

 

My immediate-term support and resistance ranges for the Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1691-1735, $120.57-123.64, $79.03-79.51, and 1356-1376.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Trick - Chart of the Day

 

The Trick - Virtual Portfolio


MONDAY MORNING RISK MONITOR: WAIT AND WATCH

Key Takeaways

*  There was little movement again this week in several key indicators. Euribor-OIS continued to trend downwards, falling 4 bps over last week. Over the same period, the TED spread remained flat. Both of these series have largely renormalized. 

 

* European and American Bank CDS tightened week over week.

 

* European sovereign swaps mostly tightened week over week with only Portugal and Ireland widening.

 

* The MCDX measure of municipal default risk fell 10.6% last week.  

 

* The 2-10 spread widened significantly week over week, ending 29 basis points higher. A sustained period of widening would be positive for bank margins. 

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 1 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - Summary

 

1. US Financials CDS Monitor – Swaps tightened for 20 of 27 major domestic financial company reference entities last week.   

Tightened the most WoW: BAC, GS, C

Widened the most WoW: MBI, MMC, CB

Tightened the most MoM: AIG, BAC, PRU

Widened the most/ tightened the least MoM: MBI, AON, MMC

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - CDS  US

 

2. European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 36 of the 40 reference entities. The average tightening was 3.9% and the median tightening was 5.9%.

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - CDS  EURO

 

3. European Sovereign CDS – European Sovereign Swaps mostly tightened over last week. German sovereign swaps tightened by 10.5% (-8 bps to 69 ) and Portuguese sovereign swaps widened by 3.9% (49 bps to 1283).

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - Sovereign CDS

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates were flat last week, ending at 7.01.

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - High Yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.6 points last week, ending at 1646.

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - LLI

 

6. TED Spread Monitor – The TED spread was flat last week, ending the week at 39.

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - TED

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 0.5 points, ending the week at -7.65 versus -8.1 the prior week.

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - 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 tightened by 4 bps to 49 bps.

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - 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: WAIT AND WATCH - ECB

 

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 115 bps versus 129 bps the prior week.

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - MCDX

 

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 50 points, ending the week at 874 versus 824 the prior week.

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - 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 to 193 bps, 23 bps wider than a week ago.

 

MONDAY MORNING RISK MONITOR: WAIT AND WATCH - 2 10

 

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: WAIT AND WATCH - 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. 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 19, 2012


As we look at today’s set up for the S&P 500, the range is 32 points or -1.93% downside to 1377 and 0.34% upside to 1409. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -285 (-864) 
  • VOLUME: NYSE 1648.04 (95.16%)
  • VIX:  14.47 -6.16% YTD PERFORMANCE: -38.16%
  • SPX PUT/CALL RATIO: 1.94 from 1.06 (-45.36%)

CREDIT/ECONOMIC MARKET LOOK:


TREASURIES – monster breakout in bond yields last week – was it the YTD top or can they hold; the intermediate-term TREND line of support for the 10yr = 2.03% and now immediate-term TRADE support = 2.12%. 

  • TED SPREAD: 39.24
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.27 from 2.29
  • YIELD CURVE: 1.93 from 1.94 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:35am, Fed’s Dudley to speak on Long Island about economy
  • 9:30am, Fed’s Killian testifies in Brooklyn on foreclosures
  • 10:00am, NAHB Housing Market Index, Mar., est. 30 (prior 29)
  • 11:30am, U.S. to sell $33b 3-mo., $31b 6-mo. bills
  • 1:40pm, Fed’s Dudley in roundtable on Long Island

GOVERNMENT:

    • Republican presidential candidate Mitt Romney swept Puerto Rico’s primary; Illinois tomorrow
    • Deadline for Wisconsin election officials to review petitions seeking the recall of Governor Scott Walker
    • Deadline is Tuesday for presidential candidates, super-PACs to file updated finance reports
    • House, Senate in session
    • Republicans in Congress may release details of plan to give businesses with fewer than 500 employees an extra 20% tax deduction
    • FCC Chairman Julius Genachowski joins Republican member Robert McDowell to testify on regulator’s budget to House Appropriations subcommittee. 3pm
    • Supreme Court in session 

WHAT TO WATCH:    

  • Apple to discuss plans for its $97.6b in cash, investments in call at 9am ET, may announce dividend: analysts
  • UPS will buy TNT Express for $6.8b, securing deal after raising offer to EU9.50 per share in cash
  • Vista Equity Partners agreed to acquire Misys for $2.1b
  • CVC Capital said to be looking to refinance Nine Entertainment’s A$2.7b ($2.86b) Feb. 2013 senior debt: WSJ
  • UTX has until midnight to determine how it wants to address EU concerns regarding GR purchase
  • Commerce Dept. to rule on claim by Bonn, Germany-based SolarWorld’s U.S. unit that Chinese competitors receive unfair government support
  • Fed corrected errors in loan-loss estimated for banks, financial firms including Citigroup in stress test of capital under hypothetical economic slump
  • FTC examining what impact hospital mergers have on health- care costs for consumers: WSJ
  • Brazilian prosecutor will file charges by March 22 for “environmental crimes” following oil spill off coast of Brazil involving Chevron
  • Five states said to be considering whether they’ll sue to challenge Express Scripts’s bid for Medco Health Solutions if federal antitrust regulators approve deal
  • Apple sought another court order to get Motorola Mobility Holdings to turn over information about its pending acquisition by Google, development of Android software operating system
  • Deutsche Lufthansa’s sale of its BMI Regional unit faltering as buyer struggling to raise money for purchase
  • “21 Jump Street” led U.S., Canadian box office over the weekend, generating $35m in sales for Sony’s Columbia Pictures
  • No U.S. IPOs scheduled: Bloomberg data 

EARNINGS:

    • SouthGobi Resources (SGQ CN) 8am, C$0.01
    • Adobe (ADBE) 4pm, $0.57    

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


OIL – both Brent and WTIC continue to hold all immediate-term price momentum lines of support and this will continue to be the most relevant Global headwind to real inflation adjusted growth going forward. We have no idea how some of the bulls are getting to +3% US GDP in Q1 and Q2; its mathematically impossible in our model using the right GDP Deflator. 

  • Speculators Dumped Crop Wagers Before Biggest Rally: Commodities
  • Oil Falls From One-Week High on Supply; BofA Boosts Forecasts
  • Copper Swings Between Gains, Losses on Chinese Housing, Stocks
  • Global Food Price Rally Will Drive Investment, Nestle Says
  • Gold May Decline as Advancing Growth Reduces Investor Demand
  • Coffee Climbs as Roasters May Tap Europe’s Stocks; Sugar Falls
  • Corn Climbs to Six-Month High as Rains May Hurt China Planting
  • UBS AG Reduces Gold Forecasts Amid ‘Challenging Environment’
  • Cocoa Harvest in Indonesia to Drop on Palm Oil, Rubber Lure
  • Funds Cut Bullish Gas Bets as Supply Glut Grows: Energy Markets
  • Fukushima Farmers Face Decades of Tainted Crops as Fears Linger
  • Gold Stock Premium at Record Low on ETF Demand: Corporate Canada
  • Germany $263 Billion Electric Shift Biggest Since War (Correct)
  • Speculators Dumped Crop Bets Before Rally
  • Jewelers in India Strike for First Time Since 2005 on Taxes
  • Sugar Exports From Philippines Set to Double as Supply Gains
  • Italian Refiners Make Initial Bookings for Iran Oil Shipments 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


INDIA – positive price momentum on the Sensex is nowhere to be found = down another -1.3% last night after the Indian government revealed more about its mounting deficit issues (-5.9% of GDP and rising); countries who are short oil are going to be in a world of hurt on a real inflation adjusted growth basis (India down -6.5% from its Feb 21 top).

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 

 



Tranquil Occupation

“It is neither wealth nor splendor, but tranquility and occupation, that gives happiness.”

-Thomas Jefferson

 

The first time I made the Inflation Slows Growth call (Q1 of 2008), I was a little stressed out. I was just starting a new company. I had everything to lose. Plenty of people were shooting against me.

 

The second time (Q1 of 2011), I had a much larger research team working alongside me and our confidence was high that consensus was way too bullish. People started to believe in our process.

 

This time (Q1 of 2012), from a fundamental Growth and Inflation perspective, very few factors in our risk management model suggest it’s going to be different. Growth continues to slow, globally, as inflation accelerates.

 

Back to the Global Macro Grind

 

While the calculus associated with how inflation slows real (inflation adjusted) growth is trivial, consensus calculations addressing this very basic real-world relationship are not.

 

Let’s look Credit Suisse’s latest “Reasons To Be Positive On Equities”:

  1. “Bond yields could rise further – this might help equities”
  2. “The Macro environment is supportive – Economic momentum indicators suggest global and US growth is still well above consensus”
  3. “The dovishness of central banks and the synchronized QE as the end game”

I’ll stop with their first 3 reasons as the next 6 have to do with the run-of-the-mill bull market thesis that has had people run right over if they bought Equities at the end of Q1 2008 or Q1 2011 (‘the world is awash with liquidity… stocks are cheap… blah, blah, blah’).

 

First, in addressing reasons 1-3 in order, I always start debates with my analysts with questions:

  1. Does the thesis change if bond yields don’t rise further?
  2. What’s consensus GDP; what’s your outside of consensus forecast; and what track record do you have in making these GDP calls?
  3. What’s different this time about central bank easing that won’t perpetuate inflation and, in turn, slow growth?

So, if you are meeting with Credit Suisse or JP Morgan’s Tom Lee in the coming weeks, see if they can answer those 3 questions.

 

Facts about reasons 1-3:

  1. Bond Yields rising to their YTD highs in Q1 of 2011 were not a buy signal for stocks – they were a huge head-fake
  2. US GDP growth slowed hard in the face of $120 (Brent) oil  in Q1/Q2 2011 to 0.36% and 1.34%, respectively
  3. On the margin, the only central bank of the 3 majors that can cut rates to 0% from here is the ECB

Furthermore, our risk management models suggest that reasons 1-3 need to be contextualized:

  1. 10-year US Treasury Yield TRADE, TREND, and TAIL lines are 2.12%, 2.03%, and 2.47%, respectively
  2. Our “low” and “high” scenarios for US GDP growth in Q1 and Q2 of 2012 are 0.9% and 1.7% (y/y), respectively
  3. The Sovereign Surprise of 2012 could be Japan, resorting to BOJ money printing, which would be US Dollar bullish (hawkish)

In other words, making a call that everyone is going to dog pile into Equities after this compressed smack-down move in Treasury Bonds is not one that is backed by anything that’s actually been happening in the world since 2008.

 

In theory, it makes sense. And in actuality, since Equity “fund flows” and volumes are dead, that’s what the Equity market needs (rotation out of bonds into stocks). But, to be clear, what people need in this business and what’s going to occur, can be two very different things.

 

Because an equity fund manager needs to chase performance or a pension fund needs to target a rate of return, doesn’t mean anything at all really. Markets do not care about what any of us need.

 

No matter what your successes or failures for 2012 YTD, what you need to get right from here are the slopes of Growth and Inflation. How does accelerating inflation infect growth? What pace of Deflating The Inflation could foster sustainable US Consumption Growth?

 

My Tranquil Occupation isn’t perma bull or perma bear – it’s perma process. In order to answer all of the aforementioned questions, you need a process that has proven to be both accurate and repeatable.

 

What would get me on board with some of Credit Suisse’s thoughts on US Equities:

  1. US Dollar Index breakout into the mid-80s (versus $79.81 this morning)
  2. US Treasury Yields (10-year) breaking out > 2.47% and holding there
  3. US Federal Reserve? Get them out of the way

My scenario is at least consistent. The Credit Suisse report wants you to believe that both bond yields and growth expectations can break-out to the upside while maintaining “synchronized QE” from central banks. By definition, all 3 of those things can’t happen at the same time. Unless, of course, the Fed is as conflicted and compromised as the world is beginning to believe it is.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, US Treasury 10-year Yields, and the SP500 are now $1, $124.69-127.49, $79.55-79.93, 2.12-2.38%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Tranquil Occupation - Chart of the Day

 

Tranquil Occupation - Virtual Portfolio


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