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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 27, 2012


As we look at today’s set up for the S&P 500, the range is 17 points or -0.81% downside to 1349 and 0.44% upside to 1366. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 07/26 NYSE 1406
    • Up versus the prior day’s trading of 226
  • VOLUME: on 07/26 NYSE 897.88
    • Increase versus prior day’s trading of 14.60%
  • VIX:  as of 07/26 was at 17.53
    • Decrease versus most recent day’s trading of -9.36%
    • Year-to-date decrease of -25.09%
  • SPX PUT/CALL RATIO: as of 07/26 closed at 1.62
    • Up from the day prior at 1.23 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.46%
    • Increase from prior day’s trading at 1.44%
  • YIELD CURVE: as of this morning 1.23
    • Up from prior day’s trading at 1.21 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP (Q/q), 2Q A, est. 1.4% (prior 1.9%)
  • 8:30am: Personal Consumption, 2Q A, est. 1.3% (prior 2.5%)
  • 8:30am: GDP Price Index, 2Q A, est. 1.5% (prior 2%)
  • 8:30am: Core PCE (Q/q), 2Q A, est. 1.8% (prior 2.3%)
  • 9:55am: U. Michigan Confidence, July final, est. 72.0 (prior 72)
  • 11am: Fed to sell $7.0b-$8.0b notes due 5/15/15-9/30/15
  • 1pm: Baker Hughes rig count 

GOVERNMENT:

    • House Minority Leader Nancy Pelosi speaks to intl AIDS conference at 3:35pm; former President Bill Clinton at 4:25pm
    • Commerce Department announces preliminary anti-dumping duties on Chinese and Vietnamese-made wind towers 

WHAT TO WATCH: 

  • U.S. GDP probably rose at 1.4% annual rate in 2Q, slowest pace in a year
  • Samsung increases lead over Apple in global smartphone mkt
  • Facebook shrs fall amid concerns about pace of growth
  • Universal in talks to sell most of Parlophone to BMG
  • Whole Foods Market reviewing health claims about DHA
  • Cnooc hires U.S. lobbyists to avoid Unocal-style problems with Nexen acquisition
  • Federal Reserve Bank of NY urged federal judge to dismiss Starr International’s lawsuit over govt. bailout of AIG
  • Ecuadorian judge ruled Chevron must pay $19b in environmental damages from ops in the country, higher than $18.2b original ruling: DJ
  • Amarin won FDA approval for first drug, Vascepa, to combat high levels of blood fat that lead to stroke, heart attack
  • Booz Allen Hamilton said to have cut size, rate on term loan B it’s seeking to pay dividend
  • Prologis may sell ~$800m of U.S. properties by end of 2012, co-CEO Hamid Moghadam told Bloomberg News
  • Spanish unemployment rises to highest in democratic history
  • Italy borrowing costs fall at 6-month bill auction
  • U.S. Congress probably will delay action on legislation to ease trade relations with Russia until after country joins WTO next month
  • Burberry to buy out license rights of Inter Parfums for $220m
  • Fed, ECB Meet; U.S. Jobs; Olympics: Week Ahead

 EARNINGS:

    • Calpine (CPN) 6am, $0.01
    • Colfax (CFX) 6am, $0.36
    • Helmerich & Payne (HP) 6am, $1.15
    • TMX Group (X CN) 6am, C$0.73
    • LyondellBasell (LYB) 6am, $1.40
    • Prosperity Bancshares (PB) 6:02am, $0.77
    • Magellan Health Services (MGLN) 6:30am, $0.91
    • WABCO Holdings (WBC) 6:30am, $1.17
    • Coventry Health Care (CVH) 6:30am, $0.64
    • Newell Rubbermaid (NWL) 6:30am, $0.45; Preview
    • Barnes Group (B) 6:30am, $0.48
    • Aon (AON) 6:30am, $1.02
    • DTE Energy Co (DTE) 7am, $0.70
    • LifePoint Hospitals (LPNT) 7am, $0.81
    • Merck (MRK) 7am, $1.01; Preview
    • Eldorado Gold (ELD CN) 7am, $0.12
    • DR Horton (DHI) 7am, $0.19; Preview
    • Pilgrim’s Pride (PPC) 7am, $0.23
    • Legg Mason (LM) 7am, $0.03
    • OneBeacon Insurance Group Ltd (OB) 7am, $0.26
    •  Alliance Resource Partners (ARLP) 7am, $1.64
    • Alliance Holdings GP (AHGP) 7am, $0.84
    • NV Energy (NVE) 7am, $0.18
    • Celestica (CLS CN) 7am, $0.24
    • HMS Holdings (HMSY) 7:30am, $0.21
    • First Niagara Financial Group (FNFG) 7:30am, $0.18
    • American Axle (AXL) 7:30am, $0.50
    • TransForce (TFI CN) 7:30am, C$0.37
    • Arch Coal (ACI) 7:45am, $(0.18)
    • Cameco (CCO CN) 8am, $0.21
    • KKR (KKR) 8am, $0.16
    • Moog (MOG/A) 8am, $0.85
    • Atco Ltd/Canada (ACO/X CN) 8:07am, C$1.36
    • Canadian Utilities Ltd (CU CN) 8:16am, C$0.86
    • Chevron (CVX) 8:30am, $3.23
    • TransCanada (TRP CN) 8:45am, C$0.48
    • NuStar Energy (NS) 8:45am, $0.25
    • NuStar GP Holdings LLC (NSH) 8:45am, $0.35
    • Forum Energy Technologies (FET) Pre-Mkt, $0.47
    • Highwoods Properties (HIW) Post-Mkt, $0.69 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

USD will Bernanke drive home the 1-2 #BailoutBull punch next week? I don’t know; neither does the Dollar or Gold, yet – need more times/prices; both are trading right at the lines where we could go either way. We'll let the market tell me what to do on this as usual.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

SPAIN – reports another record unemployment rate (24.6%), so it looks like Draghi is going to need one heck of a whatever to get that colossal failure of Keynesian sense under control; Spanish stocks lead losers this morning, down -1.7% (down -30% since March), bearish on all 3 of our risk mgt durations.


THE HEDGEYE DAILY OUTLOOK - 6

 


ASIAN MARKETS

 

CHINA – Chinese and Singaporean stocks couldn’t care less about Draghi’s drivel; if not going up on the “news” tells you anything, it’s a reminder that Qe and anything that looks like it jacks up what is perpetuating #GrowthSlowing to begin with, rising food/oil prices.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


THE M3: UNEMPLOYMENT RATE

The Macau Metro Monitor, July 27, 2012

 

 

EMPLOYMENT SURVEY FOR APRIL-JUNE 2012 DSEC

There were more people looking for work during the Summer Holiday; consequently, the unemployment rate for April-June 2012 increased slightly to 2.1%, up by 0.1% point respectively from the previous period (March-May 2012).  Total labour force was 346,000 in April-June 2012 and the labour force participation rate stood at 71.9%.  Total employment was 339,000, an increase of 1,300 over the previous period.

 


SBUX: STILL NOT BEARISH ENOUGH

We changed our fundamental stance on Starbucks on June 12th.  The reason for this change was a combination of the Hedgeye Macro Team’s call on Global Growth Slowing, the La Boulange acquisition, and our conviction that managing five concepts at once was likely to lead to inefficiency.

 

Starbucks reported worse-than-expected 3QFY12 earnings after the close.  There were not many positives to salvage from the call other than comps do not look too bad.  Given the unmistakable slowing in trends, however, this is scant consolation.  The macroeconomic environment is playing a role, certainly, but company specific issues are also a factor.   

 

We will advise our clients to remain on the sidelines until consensus expectations come closer in line with reality.  The Starbucks business model is sensitive to economic volatility.  Additionally, to become bullish on Starbucks again, we would need to see management focus on fewer concepts.  Within its core business, CPG, and its Verissimo home brewer, the company can easily satisfy investor appetite for growth.  Increasing the number of “four-wall” concepts under its umbrella is, in our view, not the correct move at this stage.  Below is a summary of the quarter with some of our takeaways.

 

Guidance:

  • 4QFY12 revenue growth of 10-12%
  • 4QFY12 EPS of $0.44-0.45, growth of 19-22% versus consensus of $0.48
  • FY13 targeted revenue growth of 10-13%
  • 1,200 net new stores – acceleration in U.S., China, possible acceleration of closures in Europe
  • FY13 EPS of $2.04-$2.14 versus consensus of $2.29, according to Consensus Metrix
  • FY12 impact of commodity costs remains $230mm
  • FY13 is locked for coffee costs through 11 months at favorable prices. ~100m tailwind to operating income
  • FY13 new unit growth of 1,000 stores
    • Americas +500
    • CAP +400
    • EMEA +100

3QFY12 Consolidated

  • 3QFY12 EPS of $0.43 versus $0.45 consensus represented 19% y/y growth
  • Sales increased 13% to $3.3 billion on 6% Global Consolidated comps

HEDGEYE: Consensus was disappointed by 3QFY12 and still needs to lower expectations for FY12 and FY13 to avoid further disappointment.  SBUX is one of the most loved names in the industry; sell-side sentiment has a long way to go.  Margins should pick up going forward as commodity cost pressure on the P&L eases.

 

SBUX: STILL NOT BEARISH ENOUGH - sbux cons pod1

 

SBUX: STILL NOT BEARISH ENOUGH - SBUX pod 2

 

 

Americas:

  • Comps gained 7% during 3QFY12
  • Slowing trends in June was primary driver behind EPS miss
  • Evolution Fresh drinks in 800+ stores in Seattle, LA, San Diego. Plans to 2x in coming months
  • SBUX operates one of the largest mobile payment programs globally. ~1m U.S. payments/week

SBUX: STILL NOT BEARISH ENOUGH - sbux americas pod1

 

EMEA

  • Mgmt “seeing tangible benefits” of ongoing initiatives in the region but “long road” back
  • Seeking to “optimize” portfolio, possibility of increased closures and possible charges

HEDGEYE:  The comps and margins in Europe, obviously, imply a dire situation in that geography for Starbucks.  Despite management’s apparent determination to turn things around there, we feel it is largely out of the company’s hands.  Obviously continuing to operate competitively is crucial, but we believe it could possibly be a sustained period of time before Europe is a meaningful profit-driver again.

 

SBUX: STILL NOT BEARISH ENOUGH - sbux emea pod1

 

 

CAP

  • On track for 1500 stores on mainland China by 2015
  • China representing 1/2 of 400 (up from 300) projected FY12 CAP openings
  • Management believe the brand has “turned the corner” in terms of growth in China
  • Contribution to company profitability 13% YTD versus 9% two years ago

HEDGEYE: This remains a high-margin, high-growth region for Starbucks that seems to be generating a lot of excitement.  Two-year average trends sequentially accelerated in 3QFY12.    

 

SBUX: STILL NOT BEARISH ENOUGH - sbux cap pod1

 

 

CPG & Other

  • CPG segment reached $1 billion for first time
  • Premium coffee now 50% of total U.S. grocery aisle coffee sales
  • Starbucks brands leading with 28.2% share
  • Advance commitments for Verissimo from retailers bode well for holiday season
  • 15% share of premium single-cup market with more than 230 million cups shipped in 5 months

 

SBUX: STILL NOT BEARISH ENOUGH - sbux earnings recap

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst 

 


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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Facebook, Starbucks and Gold

 

Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money tonight. Three huge topics dominated the show, and with good reason: Facebook (FB) and Starbucks (SBUX) reported earnings. Panelists also discussed gold.

 

We’ve owned Starbucks since 2009 – but there is no reason to own it here. Growth is slowing and it’s going to get more expensive for SBUX as a company as sales slow.  This coincides with our #GrowthSlowing macro theme.

 

The gold case is that Bernanke will retain his job, Draghi will continue what he wants to do. If the US dollar continues to strengthen and gold continues to make lower highs, gold will continue to drop. Pawn shops have felt the heat (CSH, EZPW) from this: lower prices and volumes and gold are putting a squeeze on their earnings.

 


FNP: Better Than Expected

About a year ago, Fifth & Pacific (FNP), better known as the former Liz Claiborne, was around $5. Our case for the company was bullish was it looked to cut costs and shed non-performing brands and assets. The stock now trades over $11 a share and has moved from a cost cutting stock to a growth stock. FNP continues to focus on growing core bands and getting the most out of them.

 

After reporting very good earnings today, it’s clear that Kate Spade is the knockout brand within the company. They’ve experienced hyper growth and comp’d up about 70% last year and this quarter they’ve done +34%. That’s a really strong number. The brand, along with Lucky, has solid strength and continues to perform. Keep in mind that Kate Spade is 50% of the company’s EBIT.

 

 

FNP: Better Than Expected - LIZ comps

 

 

The one caveat is Juicy Couture, which underperformed a bit weaker, primarily in their accessories business. The issue at hand is that they launched new product in February and it’ll take time to flush out the old product and bring in the new. We expect a turn in Juicy come the back half of 2012.

 

We remain bullish on all durations: TRADE, TREND and TAIL. This stock should be $25 and we think it could double within a year from its current ($11) number, but not necessarily in a straight line.


HOT 2Q REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL

  • LITTLE WORSE:  Last quarter, HOT thought that 2012 was more likely to surprise to the upside than downside.  Given the larger FX headwinds and weakness in Europe, Argentina, Canada and greater deceleration in China, it now looks like things are trending at the mid-point of their expectation.   

 

HOT 2Q REPORT CARD - 7 26 2012 9 51 53 AM 

 

REVPAR MOMENTUM AND MIX

  • SAME: US RevPAR picked up to 7.9% in 2Q. Rate growth of 4.8% accounted for 60% of RevPAR growth.
  • PREVIOUSLY: 
    • "Primarily driven by rates, we expect RevPAR growth momentum to be sequentially stronger from Q1 to Q2." 
    • "Rate in the first quarter was roughly 50/50 and we're heading towards more like a 60%-plus rate to occupancy mix as we head into the latter part of the year."
    • "Occupancies are getting to the point where rates should begin to move more than it has to date.

GROUP BOOKINGS

  • LITTLE WORSE:  "Corporate momentum remains robust, group pace is tracking in the mid- single digits" There was a lot less discussion surrounding the strength of group bookings on this call.
  • PREVIOUSLY:  "We're now booking on the group side is clearly at a much higher rate. Recent group bookings have been at rate increases that are in the range of 7%, 8%, 9%."

CORPORATE NEGOTIATED RATES

  • BETTER:  HOT expects an even better outcome from 2013 corporate rate negotiations compared to the rate increases realized this year.
  • PREVIOUSLY: "Corporate negotiated rates always take a little while to catch up, but they are beginning to catch up. We've had some rate increases in the negotiated rates. The corporate negotiated rate business that we're getting this year is 6%-plus more than last year."

SUPPLY OUTLOOK/DEMAND OUTLOOK

  • SAME:  Low supply growth continues to offset the impact of the "new normal" 1-2% economic growth.  Corporate profits remain healthy and they have had no indication of plans to cut back on travel.
  • PREVIOUSLY: "Commercial real estate loans in general and especially construction loans continue to decline. So supply is tight and it looks set to stay that way for a while, but demand in North America, Europe and Japan has continued to build. Companies are profitable and in great financial shape and they're in search of growth."

EUROPEAN REVPAR

  • WORSE:  Trends in Europe must have deteriorated since April.  European RevPAR grew 2.3% in constant currency and was down 8% in actual dollars.  Expect a slow and steady improvement in the business with 3Q getting a boost from the Olympics and the strong dollar driving leisure travel from the US.
  • PREVIOUSLY: "Despite continuing concerns around the outcome of the French election or Spain's refinancing needs, we are seeing improving business trends in our key European markets. These trends would suggest that RevPAR growth in Q2 should approach 4% in local currencies from under 2% in Q1. We are currently tracking at a 4% level in April."

ASIA REVPAR

  • SLIGHTLY WORSE: Asian RevPAR picked up from 6.7% in 1Q12 to 9.3% in 2Q 2012, but didn't quite get to those double-digit rates that HOT had hoped for. Expect the 2H to come in at the high end of their 6-8% WW range.
  • PREVIOUSLY:  "We expect a sequential acceleration in Q2, with RevPAR growth returning to a double-digit pace."

MIDDLE EAST & AFRICA REVPAR

  • BETTER:  2Q RevPAR in this region increased to 11.2% from 2.3% last quarter
  • PREVIOUSLY:  "In the Middle East and Africa, we saw big jumps in RevPAR in March, as North Africa started to lap the start of Arab Spring events of last year. However, in absolute terms, business is still weak in countries like Egypt, where the situation remains unsettled for travel. Saudi and the Gulf, on the other hand, are on a strong cyclical recovery track, and sub-Saharan Africa is delivering solid double-digit growth. As a result, we expect RevPAR growth to accelerate in this region in Q2."

LATIN AMERICAN REVPAR

  • WORSE:  Since 1Q, Latin America has lost its momentum.  It was HOT's second slowest region with RevPAR growth of 6.1%. The slowdown in Latin America was attributed to instability in Argentina, which is expected to get worse in 2H12 and continue to drag down RevPAR for that region. 
  • PREVIOUSLY: "All indications are that Latin America will remain our fastest growing region."

CHINA PIPELINE

  • SAME:  HOT has not see any development delays in their 100 hotel pipeline. YTD signings have picked up to 30 new hotels vs. 27 last year.
  • PREVIOUSLY: "Although there have been concerns about the real estate sector in China, the pace of hotel signings and openings remains steady and strong, especially in tier two and tier three markets, where we have been focused for the past few years."

BAL HARBOUR CLOSINGS

  • BETTER:  HOT closed on 60% of the condo units at Bal Harbour through 2Q
  • PREVIOSULY:  "To date, we have closed on 138 condo units, 102 this year and 36 last year. 32 units have been sold but not yet closed. As such, the project will be over 50% sold and closed by the end of this quarter."

M&A

  • BETTER:  They still have several assets where sale discussions are underway and they expect to close on a few by the end of the year.  However, management stated that they were more discussions underway with potential buyers than there were 3 months ago.
  • PREVIOUSLY: "In terms of assets sales, we are always exploring opportunities to sell our owned hotels at attractive prices to high quality, long-term owners. We have several conversations currently underway. We expect some or all of these transactions to close later this year."

BUYBACK

  • BETTER:  HOT repurchased 2.84MM shares for $140MM during 2Q through July 25th
  • PREVIOUSLY: We have a share buyback authorization already; we've had it for a while. I think the timing of our share buyback is going to be linked more to assessment of intrinsic value than any kind of trigger around asset sales and so on."

INVESTMENT GRADE RATING

  • BETTER:  HOT got BBB ratings from 2 rating agencies this quarter. Goal of keeping the rating through cycles remains.
  • PREVIOUSLY:  "Our goal is to stay investment grade through cycles. We're there with the next paydown. We pretty much brought our debt down to levels where we want it to be. We think, over time, the ratings will all line up at BBB."

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