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EMPLOYMENT DATA REMAINS BULLISH FOR RESTAURANTS

Employment data released on Friday by the Bureau of Labor Statistics support the notion that restaurants saw strong top line trends in 1Q.  Of course, this is not new news and whether or not those trends can meet expectations remains to be seen.

 

We continue to like EAT, PFCB, JACK and SBUX.  DNKN and MCD are our favorite names on the short side.

 

As the chart below shows, all of the age cohorts we track on a monthly basis saw employment gains in March.  Besides the 45-54 YOA cohort, all of the age groups we track saw sequential declines from February’s year-over-year growth levels.  This could be due to a fading of the impact of favorable weather versus last year, which is expected to have boosted 1Q employment figures and in some sectors pulled demand forward to the detriment of 2Q. 

 

EMPLOYMENT DATA REMAINS BULLISH FOR RESTAURANTS - Employment by Age

 

 

Hiring trends within the restaurant industry remains strong as of February (this data set lags by one month).  As the chart below illustrates, hiring growth in the full service and limited service dining industries are growing at prerecession levels.  The sequential slowdown in full service’s employment growth versus January is worth noting, however, with employment growth in that industry near peak levels.

 

EMPLOYMENT DATA REMAINS BULLISH FOR RESTAURANTS - restaurant employment

 

 

This data is more impactful for casual than for quick service.  As with the initial claims data, the correlation is far tighter between the casual dining datasets.  The chart below shows an index of casual dining stocks versus full service employment annual growth.  The correlation between the two datasets is almost 0.9 and tightens further when the casual dining index is lagged by one month.  This makes sense, given that hiring and firing is generally reactionary.  Nevertheless, in the event of a slowdown in casual dining stocks – which we expect – we will be looking to the employment data to confirm. 

 

EMPLOYMENT DATA REMAINS BULLISH FOR RESTAURANTS - casual dining index vs full service hiring

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Bearish Break: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU) and Financials (XLF); Short Industrials (XLI)

 

Growth Slowing, globally, includes the USA. I should have told myself that 100 more times over before I bought the Financials late last week. There’s obviously massive mean reversion risk in just about everything that’s mean reverting today.

 

Across my risk management durations (TRADE, TREND, and TAIL) here are the lines that matter most: 

  1. Immediate-term TRADE resistance = 1391
  2. Immediate-term TRADE support = 1374
  3. Intermediate-term TREND support = 1331 

In other words, now that we have snapped both my hyper-immediate-term TRADE support line of 1406 and immediate-term support line of 1391, people are snapping.

 

Oh snap. Provided that Growth Slowing continues, there’s no reason why the pro-cyclical Sectors (Industrials, Basic Materials, Energy) don’t continue to map those growth expectations.

 

From a price, US Consumption Growth should stabilize, if the US Dollar does. That’s a big if – people are already out there early today begging for Bernanke and some more QE (i.e. more of what got growth to slow in February/March).

 

Nice, 

KM 

 

Keith R. McCullough
Chief Executive Officer

 

Bearish Break: SP500 Levels, Refreshed - SPX


RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK

A RARE GROWTH STORY IN FINANCIALS: OPPORTUNITIES IN PAWN/PAYDAY

CONFERENCE CALL THIS WEDNESDAY 11 am

 

Please join us for a conference call this Wednesday, April 11th at 11am EDT, to discuss the outlook for the Specialty Consumer Finance (Payday/Pawn) space. Dial-in and materials for the call will follow. 

 

Risk Monitor Key Takeaways

* High yield rates rose sharply over the week, underscoring increased risk in the market.

 

* The Euribor-OIS fell 1 bps to 41bps while the TED spread remained roughly flat. These measures of interbank risk are flattening out. We expect to see very little improvement from here.     


*The 2-10 spread fell 5 bps points WoW. On a MoM basis, the 2-10 spread has widened by 14 bps. This is incrementally positive for Q1 bank margins. Earnings season is set to kick off this Friday for financials. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Negative / 0 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged  

• Intermediate-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged  

• Long-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Summary3

 

1. US Financials CDS Monitor – Swaps widened for 24 of 26 major domestic financial company reference entities last week.    

Widened the most WoW: JPM, C, MS

Tightened the most/ widened the least WoW: COF, UNM, MBI.

Widened the most MoM: PRU, ACE, ALL

Tightened the most MoM: COF, MTG, HIG

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - US CDS1

 

2. European Financials CDS Monitor –  Due to technical difficulties this week we were unable to pull swap rates for the European banks.

 

3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. German sovereign swaps widened the least (+0.2 bps to 74 ) and Spanish sovereign swaps widened the most (+28 bps to 464).

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Sovereign 1

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Sovereign 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 18.8 bps last week, ending the week at 7.33 versus 7.14 the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell  less than a point last week, ending at 1652.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - LLI

 

6. TED Spread Monitor – The TED spread fell less than a point last week, ending the week at 39.5 this week versus last week’s print of 40.0.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 0.8 points, ending the week at -8.7 versus -9.5 the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 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 1 bps to 41 bps over last week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 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.  

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Recourse to the deposit facility

 

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 widened , ending the week at 118 bps versus 112 bps the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 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 fell -6 points, ending the week at 928 versus 934 the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - BALTIC

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 184 bps, 5 bps tighter than a week ago.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and 0.9% downside to TRADE support.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - XLF

 

Margin Debt - February: +0.85 standard deviations 

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, it 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. 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. 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 February.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below 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 HBM: PNRA, WEN, YUM, RT, RRGB

THE HEDGEYE BREAKFAST MONITOR

 

PORTFOLIO POSITIONS

 

LONGS: PFCB, EAT, JACK, SBUX

 

SHORTS: DNKN, MCD

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

Growth Slowing, globally, will be a lot easier for consensus to see once this market opens:

  1. CHINA – Dollar Debauchery (Bernanke on Jan 25th, pushing easy money to 2014) fired up commodity inflation sequentially in FEB/MAR, and accelerating inflation then slowed real growth, globally. Same model we have been using for 5yrs – China’s inflation data for MAR rises to 3.6% vs 3.4% FEB.
  2. BOND YIELDS – as far as 1-day moves go, Friday’s reaction in the 10yr was violent; now you have 10yr Treasuries yielding 2.06% (down 35bps in a month!) and the Yield Spread just compressed -14bps in 1-day, wow – just like that growth slowing gets marked to market before everyone thought they could get out.
  3. SP500 – my math says the SP500 closes higher than where the futures are trading, but it also says that a close below 1391 would be bearish if sustained – so wait/watch that line throughout the wk as the inflation data domestically gets reported wed-fri (it will rise again sequentially) and earnings season, which will be one of the slowest growth ones in years, is upon us.

KM

 

SUBSECTOR PERFORMANCE

 

THE HBM: PNRA, WEN, YUM, RT, RRGB - subsector

 

 

QUICK SERVICE

 

PNRA: Panera Bread was rated “New Outperform” at Credit Suisse.

 

WEN: According to an SEC filing filed Friday, Emil Brolick’s total comp for 2011 was $4.6mm after taking the CEO position at Wendy’s in September.

 

YUM: Yum Brands CEO David Novak earned $20.4mm in 2011 versus $14.6mm in 2010.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

SBUX: Starbucks gained 2.1% on accelerating volume on Thursday.

 

CASUAL DINING

 

RT: Raymond James is standing by Ruby Tuesday, according to the WSJ.  The stock sold off on Thursday on weaker-than-expected comps and guidance provided last Wednesday after the close.

 

RRGB: Red Robin Gourmet Burger has commissioned a study that has revealed that “pink slime” related concerns are impacting Americans’ behavior.  The company has never served beef containing the ingredient, according to a press release.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

RT: Ruby Tuesday declined 18% on accelerating volume

 

THE HBM: PNRA, WEN, YUM, RT, RRGB - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Deflated Illusion

This note was originally published at 8am on March 26, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Failure deflates illusion, while success only makes illusion worse.”

-Nassir Ghaemi

 

“This isn’t a settled debate, and these interpretations could be proven wrong. But if they are correct, they raise several questions. Why do positive illusions occur? Can we only arrive at realism through personal hardship?” (A First-Rate Madness, page 55)

 

This weekend, as I was reading through Ghaemi’s provocative psychological discussion in chapter 3 of A First-Rate Madness (“Heads I Win, Tails It’s Chance”), I couldn’t stop thinking about our profession. Oh how the last 4 years have deflated our illusions of our analytical competence.

 

Or have they? Every time we’ve seen asset prices inflate (Q1 of 2008, Q1 of 2010, Q1 of 2011), we’ve seen the said seers of this business attempt to convince you that it’s “different this time.” Every time there is a “successful” rally, the consensus illusion of inflation morphing into sustainable growth gets worse.

 

Back to the Global Macro Grind

 

The good news is that you can only pretend Growth Slowing doesn’t matter for so long. You can only ignore some of the worst volume and skew signals in global market history until you can’t. Gravity eventually bites.

 

Instead of Greece or Apple, this morning’s Top 3 Most Read on Bloomberg are as follows:

 

1.       “Monti Signals Spanish Euro Risk as EU to Bolster Firewall”

2.       “China Soft Landing May Be Hard For Commodity Exporters”

3.       “Asia Stocks Fall as US Home Sales Damp Economic Outlook”


Hoo-wah!

 

Wasn’t Europe fixed? Isn’t China “decoupling” from the US? Can’t we pretend that Asian stocks and US Housing don’t matter until we get to quarter end?

 

“Under normal conditions, normal people overestimate themselves. We think we have more control over things than we do; we’re more optimistic than circumstances warrant…” (A First-Rate Madness, page 54)

 

There is absolutely nothing normal about the current Global Macro Economic conditions. Sure, you can be “optimistic” about life. I sure am. But realists tend to not blow their entire net worth to smithereens buying into fairy tales.

 

What is not normal and is not going away anytime soon?

  1. The Global Sovereign Debt Crisis
  2. The Bubble in Keynesian Economics (money printing)
  3. The Economic Reality that debt and inflation slow real (inflation adjusted) economic growth

If the US Stock market were to crash tomorrow, you’d have no business telling people you didn’t see any of this coming. This is the most obvious slow moving train wreck in world history – one that plenty of professionals still get paid to willfully ignore.

 

Since I doubt we’ll crash, that means the probability of a crash is going up as market prices do. Last week, global stock markets stopped going up (worst week for Asian and European stocks for 2012 YTD). Commodities have already started their decline.

 

Back to what’s just not normal:

  1. Sovereign Debt Crisis – we could have a healthy debate this morning as to who (Spain or Japan) has the more plainly obvious sovereign debt, deficit, and funding issues. The former Executive Director of the Bank of Japan (BOJ) said overnight that Japan has “crossed the Rubicon with really desperate measures.” Sounds like he was channeling his inner Hedgeye.
  2. Keynesian Policy Bubble – India (down another -1.8% overnight) has tried what every single Western academic dogma has suggested the Indians try, and it’s not working. They’ll be importing $125/barrel Brent Oil like the Japanese will in Q2 as their citizenry sees inflation running higher than real (inflation adjusted growth) = Stagflation.
  3. Inflation Slows Growth – yes, that is not only happening around the world (Commodity Inflation is generally priced in debauched Dollars), but you’ll see it in US Growth. So, when you see 3% US GDP growth for Q4 of 2011 (released on Thursday), pinch yourself and remind the person next to you that US GDP could be running at half of that growth rate right now.

The flip side of all this is that the success of our Global Macro model in forecasting intermediate-term growth slowdowns is making me delusional. Potentially, but that would imply that hedge funds who chased another top in commodity inflation are perfectly sane.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD) and the SP500 are now $1637-1675, 124.55-126.62, $79.09-79.61, $82.22-$84.02, and 1397-1411, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deflated Illusion - Chart of the Day

 

Deflated Illusion - Virtual Portfolio



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