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Short Selling Opportunity: SP500 Levels, Refreshed

POSITIONS: Short Industrials (XLI) and SPY

 

Since February 15th, 2012 this is the 9th time I have issued a Short Selling Opportunity note. Maybe this will be the 1st time out of 9 that I am wrong. Maybe not. That’s the game. You either buy or sell here. You don’t hide from accountability.

 

Across my core risk management durations, here are the lines that matter to me most: 

  1. Immediate-term TRADE resistance = 1405 (lower highs)
  2. Immediate-term TRADE support = 1388 

Every time I do this, I feel like I have to re-live the last 5 years. It’s weird. People are pressured to buy high and sell low, I guess.

 

Given the fundamental growth picture in the world, this one looks as clear to me as the other 8 shots were.

 

As Gretzky said, you’ll miss 100% of the shots you don’t take.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Short Selling Opportunity: SP500 Levels, Refreshed - 1


HedgeyeRetail Visual: SNAP/FDO Update

 

Latest data shows modest uptick in the percent of Americans benefitting from food stamps (otherwise known as SNAP – Supplemental Nutritional Assistance Program) to about 15%. Don’t be fooled. The year/year growth rate is actually declining at an accelerated rate. At the current trajectory, it should go negative by October.


We think that growing SNAP participation has been a significant tailwind for dollar stores over the last 5-years. The absence of which we think is something that will temper their top-line growth rate on the margin. We remain bearish on FDO.  

 

HedgeyeRetail Visual: SNAP/FDO Update       - SNAP

 



 

 


DRI: THE UNTHINKABLE SHORT CASE

We held a call with clients on July 19th discussing our concerns about the long-term outlook for Darden’s stock.  We have written a longer - Black Book - that offers a comprehensive account of our thoughts on what we see as the most important factors affecting Darden’s financial health over the next three years.  Our view is that burgeoning growth in the company’s net units has masked some serious deficiencies in Darden’s two largest chains: Olive Garden and Red Lobster. 

 

The poor trends at Olive Garden and Red Lobster are pressing the company towards an impasse.  Specifically, the company is burning cash and the stock can no longer be all things to all investors.  A rich dividend, aggressive growth profile, and sturdy balance sheet have attracted investors of all different styles to buy Darden’s stock over the past few years.  One, or more, of these attributes is likely to fall away as maintaining all three becomes unsustainable.  A proactive reorganization, including a cessation or slowing of unit growth, would be preferable to the more likely reactive lowering of margins or slashing of the dividend that we think is becoming inevitable.

 

We have seen this movie before in the Restaurant Industry, and are advising clients to avoid Darden as a long-term buy idea until, at least, the facts change.

 

One of more daunting macro charts from the Black Book is the long-term trend in the population growth of the 55-64 YOA cohort.  The trend is decelerating and is set to continue decelerating for years to come.  This age group is a high-frequency customer within the industry, especially Red Lobster and Olive Garden. As Brinker CFO Guy Constant said at a recent conference: 

 

"What got you to win historically in casual dining was demographics in trade area and real estate. That's how you won. We all built many, many restaurants over many, many years and that's how you won. And in many ways we open the doors and they came because there were a lot of macroeconomic tailwinds who were contributing to that"

 

DRI: THE UNTHINKABLE SHORT CASE - 55 64 pop growth

 

This trend is not encouraging for a company that is focusing on growing the unit count of concepts not producing consistent guest count growth.  

 

Call me with any questions.

 

 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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AXP: More Signs That Growth Is Slowing

It should come as no surprise that our call on Growth Slowing has come into fruition over the first half of the year. More and more companies are putting up numbers, metrics and comments that reflect the state of today’s economy. The latest company to own up to this theme is American Express (AXP).

 

American Express hosted its semi-annual Investor Day this week and the commentary from management was not positive to say the least. July billing numbers have slowed sequentially versus Q2 and only provided updates on an FX-adjusted basis, saying that global billed business grew 6% year-over-year in July, 2012 vs. 9% in 2Q12 and 13% in 1Q12. In other words, there’s a -7% of slowing growth in only four months.

 

 

AXP: More Signs That Growth Is Slowing  - AXP billing

 

 

While 93% of Street analysts have a buy/hold call on AXP, Hedgeye Financials Sector Head Josh Steiner has taken the contrarian route and remains bearish on the stock. The comment below from AXP CEO Ken Chenault backs up Steiner’s thesis:

 

“…there is no one specific driver of the recent trend; the Company’s billed business in July appears to reflect a weak overall economic environment, which shows up in a number of areas, including small business and corporate spending.”

 

The problem is obvious at this point to most people. Consumers are still worried about the economy and until we get some form or indicator that things have stabilized and are improving, they are more hesitant to go out and use their charge card for purchases. Some merchants are hoping that they’ll enjoy strong Back To School numbers for August but as we’ve said before: hope is not a risk management process.

 

The next quarter and back half of 2012 does not look good for AXP. When the time and price is right, we’ll be shorting it.


CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER

Real Employment Improvements Continue to Slow

Non-seasonally adjusted claims, on a 4-week rolling average, were down 6% this week vs. last year. That's consistent with the trend over the past few weeks. Importantly, this is a significant change from where we were 14 weeks ago. Going back roughly 3 months, the rolling NSA claims series was improving at ~12% on a YoY basis. Six hundred basis points of improvement deceleration in 3 months is notable. Extrapolating that trend, the positive economic tailwind from claims will have run its course by the end of October.

 

As a reminder, YoY changes in rolling NSA claims are our preferred measure of the true underlying health in employment as there are substantial errors in the seasonal adjustment factors making them unreliable.

 

The headline initial jobless claims print fell 4k to 361k last week. Incorporating the 2k upward revision to the previous week's data, claims fell by 6k. On a rolling basis, initial claims rose by 2.25k to 368k. We're not aware of any distortions to last week's print, making it largely uneventful.

 

That Said, An Illusory Tailwind Is Coming Soon

As a reminder, August should represent the peak for the seasonal adjustment factor headwind, and should begin turning into a tailwind beginning in September, i.e. on the fourth anniversary of Lehman's bankruptcy. Since the market tends to focus on the SA data's week to week change, the perception of the jobs environment should turn increasingly more favorable in the coming months. This comes with the obvious caveat that this is solely the seasonal adjustment factor we're describing. The real underlying data, as we pointed out above, is showing signs of decelerating improvement. 

 

It's also worth noting that with last week's print and the recent market rally, the market is now back in equilibrium with claims, as we show in our fifth chart below.

 

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Raw

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Rolling

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - NSA

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - NSA rolling

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - S P

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Fed

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - YoY NSA change

 

The 2-10 Spread

The 2-10 spread widened 9 bps WoW to 138 bps. The ten-year treasury yield rose 12 bps to 165 bps.

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - 2 10

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - 2 10 QoQ

 

Financial Subsector Performance

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

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Subsector Performance

 

CLAIMS: REAL IMPROVEMENT DECELERATES, BUT AN OPTICAL TAILWIND IS JUST AROUND THE CORNER - Companies

 

Joshua Steiner, CFA

 

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.  

 


Quit Chasing Beta

Quit Chasing Beta

 

 

CLIENT TALKING POINTS

 

CHINA’S INFLATION

These days, when a leading economic indicator comes out of China, you have to approach any number with a bit of caution. China saw its July inflation rise +1.8% year-over-year, more than the consensus expectation of +1.7%.Considering that the Chinese are still experiencing pain at the pump, this number is likely to be revised at some random point in time. As for the media, they hopped all over this number, declaring it an arbiter for a bailout. As a result (get your golf claps ready), stocks are up +0.6%.

 

In May, not only Chinese growth, but global growth really started to accelerate on the downside. That’s why almost every major stock market in the world stopped going up in March-April. Markets discount future events.

 

 

FOLLOW THE PLAN

“It’s all part of the plan,” a wise man once said. We’re inclined to reason that if you’re trading these markets, you’ve got a plan. For us, it’s about using the range and the numbers. We are not chasing beta like a couple kids running after an ice cream truck. That’s how you get smoked.

 

Jesse Jackson really wasn’t kidding when he said to “keep hope alive” - that’s exactly what market participants are doing right now. The bulls are trying to do all they can to save this 1400 S&P 500 level alive. Have fun with that. We’re moving into fixed-income via Treasuries. Our next move is to get long the US Dollar when the timing and price is right.

 

 

PAY ATTENTION

We’ve got our levels and our durations. We use this process, along with consideration for time and price, to make trading decisions. Seeing as how we’re in an election year, this is what we have ahead of us. It should sound familiar to you at this point:

 

A)                  The long-term (TAIL) of lower-highs on lower volume (bearish)

B)                   The immediate-term (TRADE) short squeeze (bullish)

C)                   The ongoing hope that bailouts will earn everyone a year-end bonus sticker

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  DOWN

 

U.S. Equities:    Flat   

 

Int'l Equities:   Flat   

 

Commodities:    Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“JPM SEES UP TO $5.3B 'REASONABLY POSSIBLE' LEGAL LOSSES, HAD SEEN POSSIBLE BUYBACK LOSSES UP TO $2B 3 MONTHS EARLIER” -@zerohedge

 

 

QUOTE OF THE DAY

“A lie told often enough becomes the truth.” – Vladimir Lenin

 

 

STAT OF THE DAY

Greece Unemployment Rate 23.1% MAY vs 22.5% APR


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