MCD: The Bigger Picture

Takeaway: Put the focus back on the core menu and worry less about expanding it.

McDonald’s (MCD) has faced pressure from the overall global macroeconomic environment this year. It’s not like high unemployment in the US and the problems facing Europe are helping sales on a global basis. But McDonald’s faces issues other than the global macro problems out there as sales slow; companies like Five Guys and Shake Shack are slowly creeping in and taking away share from MCD.


We believe McDonald’s needs to refocus its attention to its core business. All the expansion over the years has left this segment vulnerable and management needs to make changes to its strategy in order to succeed. Simplifying the menu rather than expanding it would be one positive step in the right direction, as well as toning down the company’s overall complex strategy. Perhaps then we’ll be less bearish on the stock than we are now.



MCD: The Bigger Picture - MCD chart

Crushing The Insurance Industry

The Federal Reserve’s perpetuation of near-zero percent interest rates has been a bane for the insurance industry. With the Fed keeping rates to 0% until 2015 at Thursday’s FOMC meeting, the insurance industry is really in a bind that will be difficult to overcome.


Consider that insurance companies have investment portfolios similar to those of public pension plans around the United States. To meet their obligations, they’re expected to earn a certain rate of return per year – maybe 8%. In a normal rates environment, you’d be able to buy some Treasuries and earn 3-4% off those instruments alone, meaning you wouldn’t need to put up a lot of risk in stocks and derivatives markets to earn the difference to 8%.



Crushing The Insurance Industry - KIE



Instead, Treasuries are offering little-to-no return and continue to go lower. This forces the insurance company to look elsewhere for yield and it’s tough to find these days. The portfolio manager is forced to go further out on the risk curve in order to satisfy that 8% return; maybe he needs to buy some risky junk bonds or invest in some tech IPO that just hit the market. Or maybe he can’t because it’s simply too risky and there’s a need to preserve capital.  


And should this happen, the company is really in trouble. Profits go down, jobs get lost and claims risk becomes heightened all because the investment portfolio can’t maintain this set percentage it has to meet. This is just one of the many problems (and effects) with the current interest rate policy at the Federal Reserve.



Takeaway: Better than expected headline but worse underlying metrics

  • In our 9/4/12 note, “LV STRIP: JULY DECEPTION” we had projected a strong headline revenue growth rate of high teens for July due to low slot and table hold last year – actual Strip gaming revenues grew 27% with an additional boost from very high baccarat hold and better baccarat volume
  • The important metrics – slot volume and ex baccarat table drop – fell 7% and 13%, respectively.  This was actually worse than our projection of -3% and -2%, respectively.  Two fewer weekend days versus last year did play a role but the numbers were still bad.
  • July represented the 4th consecutive month of slot volume declines.  For tables, July was the worst monthly decline for non-baccarat drop since August 2009.  



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%

European Banking Monitor: Draghi’s Rally

Takeaway: Draghi's "unlimited" asset purchases tip credit markets scales yet long-term Eurozone structural flaws remain.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


 * Last week saw the largest single week of improvement in credit default swaps ever for EU sovereign credits on the heels of the ECB's Draghi pledging "unlimited" asset purchases via the new Outright Monetary Transactions Program (OMTs). Spanish, Italian, German and French banks as well as sovereign credit default swaps were sharply lower, reflecting optimism that the ECB will avert the crisis.


For more on the OMTs see our notes:

Draghi’s Newest Rescue Plan Revealed in September ECB Presserfrom 9/6

Weekly European Monitor: Buying Timefrom 9/7


Draghi also announced that with the new buying program the SMP is terminated, effectively meaning that that there will be no more buying but that the existing holdings will be retained until their maturities expire. We will therefore discontinue our reporting of the SMP data and replace it with the OMTs.


OMT Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.



If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor Italian, German, French and British bank default swaps were down approximately 20% across the board last week, on ECB commentary


European Banking Monitor: Draghi’s Rally - 11. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 3 bps to 18 bps. 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.


European Banking Monitor: Draghi’s Rally - 11. euribor


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.  


European Banking Monitor: Draghi’s Rally - 11. facility


Takeaway: Macau jumped out nicely in September, adding credibility to our double digit growth expectation for the month.

Average daily table revenues were HK$789 million, 17% higher than last year at this time and higher even than August’s HK$775 million and July’s HK$735 million.  Taking into account the number of weekend days remaining and about HK$1 billion in slot revenue, we are now projecting full month GGR of HK$23.0-24.5 billion.  That range would represent YoY growth of 12-18%.  Growth in that range would be the highest since April 2012.




We are not hearing anything out of the ordinary with regard to hold percentage with the exception of some of the LVS properties that seem to be holding below normal.  Wynn has apparently held very high to start the month. 


Overall, we believe the numbers are a positive for the Macau and with our daily checks on the Mass floors (all strong), we remain very constructive on the near-term performance of the Macau stocks.  Depending on how much marketing and liquidity pumping is performed by Sands Cotai, the high end of our growth range is certainly within reach.



Cheap Money







What matters most at the end of the day is how we can continue to juice the market further and further. It’s all about the easing these days and the Federal Reserve looks about ready to deliver another round of it. Friday’s jobs numbers essentially sealed the deal, all but guaranteeing the Fed will step into the markets yet again. We suppose that people don’t mind the high gas prices and $8 boxes of Pop Secret at the supermarket. It’s all part of the plan, so just go with the flow, right?




People are still going out and saying that stocks are cheap at these levels and there’s room to buy. They continually remind us that the market is up year-to-date. We kindly ask them to remember October of 2007 when the S&P 500 was at 1565 – was that considered cheap back then? 18 months later Starbucks (SBUX) was at $11 a share and you could go on a buying spree like a kid with a dollar at a penny candy store. Central planners continue to shorten economic cycles and amplify price volatility. This market is not cheap by any means. It is toppish and we are comfortable trading the proper risk and range.






Cash:                  Flat


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



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.

  • TAIL:      NEUTRAL







“Today we learn how much more student debt and subprime GM loans US consumer took out in July” -@zerohedge




“A pessimist sees only the dark side of the clouds, and mopes; a philosopher sees both sides, and shrugs; an optimist doesn't see the clouds at all - he's walking on them.” – Leonard Louis Levinson




$8.5 billion. The amount of money Japan Airlines is expected to raise in an IPO.



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