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CHART DU JOUR: IS THE VEGAS RECOVERY OVER?

Takeaway: The all important slot volume metric has been consistently negative. RevPAR and visitation are now sloping lower as well.

  • July was a little misleading because it contained 2 fewer weekend days so this chart examines RevPAR and visitation on a 3 month moving average basis
  • RevPAR is trending dangerously low – probably needs to be at least +3% to offset inflation
  • Given the composition – fewer slot players – visitation growth needs to be higher over the long-term than 1-2%

 

CHART DU JOUR: IS THE VEGAS RECOVERY OVER? - FF


10 MIN CALL ON CAT, WHAT YOU NEED TO KNOW NOW

Takeaway: $CAT Flash Conference Call on Friday @11AM

CONFERENCE CALL DETAILS

Date: Friday, September 14th

Time: 11 a.m. EST

Toll Free Number:

Direct Dial Number:

Conference Code: 581552#

*Materials will be distributed prior to the call.

 

TOPICS

While a great company in many ways, we believe that CAT is exposed to declining investment in its core markets.  In particular, the potential decline in mining-related investment may be severe.  This does not appear to be priced into the market or reflected in profit estimates.

  • CAT: End Market Exposures
    • Coal
    • Mining
    • Construction
    • Oil & Gas
    • Part Sales At Risk
  • Backlogs & Orders
    • Potential order cancellations coming
    • Impact of slowing Chinese growth
    • Last Quarter’s Results
    • Impact of Tier IV
  • Management Strategy
    • Acquisitions
    • Capacity Addition
    • Inventory Trends
  • Disconfirming Evidence
    • Chinese Real Estate Price
    • July Order Trends
    • Manufacturing Flexibility
  • Valuation & Sentiment
    • Our Valuation
    • Market View of CAT
    • Centrality of Mining Underappreciated

 

If you have any questions regarding this call please contact us at .


MCD SALES HUNKERING DOWN FOR WINTER

Takeaway: $MCD faces a difficult top-line outlook over the next 5-6 months

McDonald’s sales improved on a sequential basis, partly due to calendar shifts, in the month of August.  The US number was in line with our estimate while APMEA and Europe exceeded and missed our estimates, respectively.  We do not read much into this one-month sequential improvement in the headline numbers.  From here, compares ramp up dramatically through February.  The downside in this stock is limited, in our view, but patience will be required for meaningful upside to come about; we are staying on the sidelines until catalysts emerge.

 

“Every mile is two in winter.”

-George Herbert

 

 

Trend Still Corroborating Hedgeye Macro’s “Growth Slowing” Thesis

 

McDonald’s released August comparable restaurant sales growth numbers this morning.  Versus consensus, Global, US, and Europe narrowly missed while APMEA posted a beat.  We discuss these geographies in greater depth below.  Given the significant calendar shifts that seem to have resulted in some distortion of the July and August headline numbers, we believe that looking at the average of the numbers for those months is useful when thinking about the underlying trend of the business.  In all geographies, taking the average of July and August, and considering the resulting numbers versus prior trends, implies a continuation of slowing growth.  Looking at the headline numbers on a month-by-month basis suggests a sequential recovery which, we believe, will not show up in the numbers from here on.

 

August was a “last chance saloon”, of sorts, for McDonald’s to post a strong sales headline.  As we have written over the last few days, the coming dividend announcement offers management the opportunity to send a positive message regarding the state of the business but, looking at the compares MCD must lap from here suggests that it could be a long, harsh winter from a sales headline perspective.

 

MCD SALES HUNKERING DOWN FOR WINTER - mcd global comps

 

 

United States

 

The US print came in at 3%, in line with our expectations and 10 bps below the Street, as breakfast contributed the results.  Any mention of beverages was conspicuous by its absence, despite the continuing advertising focus.  The outlook for MCD’s US business suggests that headline numbers may be depressed for the next six months as compares ramp up and traffic is flat (price running at roughly 3%).   McDonald’s will likely struggle to avoid posting some negative monthly comparable sales numbers for the US over the next six months.  As we wrote on 4/23/12, “The evidence suggests that beverages are increasingly becoming a less important part of the vocabulary from McDonald’s’ management team.  With that in mind, foremost in our thoughts is what the company’s strategy will be to maintain top-line momentum over the next few months.”

 

MCD SALES HUNKERING DOWN FOR WINTER - mcd us comps

 

 

Europe

 

Europe comparable restaurant sales grew 3.1% in August, missing Hedgeye and Consensus expectations by 50 and 20 bps, respectively, as positive results in the U.K., France, and Russia were offset by Germany and certain markets in Southern Europe.  The Olympics had, as we wrote in our preview, a positive impact on sales but, going forward, the macroeconomic environment remains a concern.

 

MCD SALES HUNKERING DOWN FOR WINTER - mcd eu comps

 

 

APMEA

 

APMEA comparable restaurant sales grew 5.7% as strong results in Australia and China, along with the positive impact from the Ramadan shift, were offset by ongoing weakness in Japan.  That APMEA was such an outlier to the downside in July, and to the upside in August, is likely due in no small part to the impact of the Ramadan calendar shift.  The macroeconomic data in major APMEA markets continues to suggest difficult conditions for MCD and, taking the average of July and August comps, we believe that the Growth Slowing theme, articulate by the Hedgeye Macro team earlier this year, continues to manifest itself in McDonald’s sales trends in APMEA and elsewhere.  We are not believers in any recovery narrative in MCD’s APMEA business from here.   As the chart below indicates, compares step up meaningfully from here through January 2013.

 

MCD SALES HUNKERING DOWN FOR WINTER - mcd apmea comps

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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FX Of The Dollar

FX OF THE DOLLAR

 

 

CLIENT TALKING POINTS

 

A GAME OF CHANCE

Some liken the stock market to a Vegas casino and while comparison can be debated and argued somewhat, we would call the market a particularly unique game of chance. Chinese stocks go up and then down after making YTD lows, US stocks have 2 up days then one down day and oil is up +31% since late June. If you’re looking for some magical pattern to follow, good luck finding it. The market is being whipsawed around these days by Federal Reserve whispers and rumors about market participation and bond buying programs over in Europe. One thing we can assure you is that this is NOT what growth looks like. Anyone telling you that inflation = growth needs to take a few more Flintstone’s vitamins and reconsider their career.

 

 

FX OF THE DOLLAR

Pardon the pun, but let’s examine the US dollar for a moment. The falling dollar, perpetuated by Bernanke & Co., inflates asset prices like stocks and commodities in the short-term. In turn growth slows and begging bailouts soon follow when the S&P 500 starts dropping a few handles each day. Meanwhile, you have speculators driving gold up higher and higher based on Fed action (or lack thereof) and next time you’re at the pump, you see $5 a gallon gas - we had the misfortune of paying $4.35 a gallon in New Jersey yesterday. Drive up food and fuel prices enough and you’ll have a lot of supporters of a stronger dollar soon enough.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                UP

 

U.S. Equities:   UP

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: UP  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE (NKE)

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.

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

 

PACCAR (PCAR)

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.

  • 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

“Times like #CTUStrike showcase the problematic ambiguity of liberal wonk writers. Are they reporters? (insta-)experts? opinion columnists?” -@rortybomb

 

 

QUOTE OF THE DAY

“Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are even incapable of forming such opinions.” –Albert Einstein

                       

 

STAT OF THE DAY

US August Budget Deficit Soars To $192 Billion, $1.17 Trillion In Fiscal 2012

 

 

 


President Obama’s Reelection Chances

Perhaps the success of last week’s Democratic National Convention is rubbing off on the President. After a slight decline last week, President Obama’s odds of being reelected increased 80 basis points to 60.7%, levels we haven’t seen since early April. He is closing in on his all time high of 62.3% attained back in late March.

 

It appears President Obama is on the fast track to another four years in the White House according to the latest results from the Hedgeye Election Indicator (HEI). President Obama’s reelection chances jumped 80 basis points (0.8%) to 59.8% and is fast approaching his peak of 62.3% that occurred back in March. No one knows what the catalyst is, but several weeks of consecutive gains indicate Mitt Romney has his work cut out for him going into September.

 

Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.

 

Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.

 

President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.

 

 

President Obama’s Reelection Chances  - HEI


THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK

 

 

TODAY’S S&P 500 SET-UP – September 11, 2012


As we look at today’s set up for the S&P 500, the range is 22 points or -0.71% downside to 1419 and 0.83% upside to 1441. 

                                            

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 09/10 NYSE -613
    • Decrease versus the prior day’s trading of 1083
  • VOLUME: on 09/10 NYSE 616.08
    • Decrease versus prior day’s trading of -9.39%
  • VIX:  as of 09/10 was at 16.28
    • Increase versus most recent day’s trading of -13.21%
    • Year-to-date decrease of -30.43%
  • SPX PUT/CALL RATIO: as of 09/10 closed at 1.61
    • Down  from the day prior at 1.82

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 30.79
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.67%
    • Increase from prior day’s trading of 1.65%
  • YIELD CURVE: as of this morning 1.43
    • Up from prior day’s trading at 1.41

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:30am: NFIB Small Business Optimism Index, Aug., est. 91.4 (prior 91.2)
  • 7:30am/8:45am: ICSC/Redbook weekly sales
  • 8:30am: Trade Balance, July, est. -$44.0b (prior -$42.9b)
  • 10am: IBD/TIPP Economic Optimism, Sept., est. 46.4 (prior 45.6)
  • 10am: JOLTs Job Openings, July, est. 3.740m (prior 3.762m)
  • 11am: Fed to buy $1.5b-2b notes due 2/15/2036-8/15/2042
  • 11:30am: U.S.to sell $40b 4-wk bills
  • 1pm: U.S. to sell $32b 3-yr notes
  • 4:30pm: API inventories

GOVERNMENT:

    • House, Senate in session
    • Senate Foreign Relations marks up bills including “Increasing American Jobs Through Greater Exports to Africa Act”
    • House Oversight holds hearing on Operation Fast and Furious, 9:30am
    • House Energy panel holds hearing on anti-terrorism standards for chemical facilities, 10am
    • House Energy panel meets on H.R.4255, the “Accountability in Grants Act,” 10:15am
    • House Natural Resources holds hearing on electricity costs, 11:30am
    • House Financial Services panel holds hearing on terrorism risk insurance program, 10am
    • House Ways and Means holds hearing on IRS implementation, administration of health-care law, 10am
    • House Transportation holds hearing on Amtrak passenger rail service monopoly, competition with regional services, 10am
    • American Institute of Certified Public Accountants holds its National Conference on Banks and Savings Institutions, with speakers including Fed Chief Accountant Steven Merriett; Office of Comptroller of the Currency Chief Accountant Kathy Murphy; and FDIC Chief Accountant Robert Storch, 9:55am

WHAT TO WATCH:

  • AIG shrs valued at $18b - ~553.8m shrs at $32.50 each - sold by U.S., converting 4-year bailout into profit for taxpayers
  • Morgan Stanley won dispute with Citigroup over value of Smith Barney, of which it owns 51%: N.Y. Post
  • U.S. trade deficit probably grew to $44b in July from $42.9m
  • Texas Instruments releases mid-qtr update post-mkt
  • Samsung’s request for judge to lift prelim. ban on U.S. sales of its Galaxy Tab 10.1 tablet computer opposed by Apple
  • HarperCollins reached agreement with Amazon, other e- commerce cos. that results in lower prices for electronic books
  • Glencore still waiting for decision from Qatar Holding on whether it will support takeover of Xstrata
  • General Growth rejected investor Bill Ackman’s call to put itself up for sale, said it plans to remain independent
  • Apple may sell as many as 10m redesigned iPhones by end of Sept. according to Piper Jaffray’s Gene Munster; expected to introduce new phone tomorrow
  • Burberry said full-year profit will disappoint amid more “challenging” environment; European luxury cos. drop
  • Infosys unit to buy Marsh & McLennan unit in India: WSJ
  • Assured Guaranty dodged downgrade as Moody’s failed to meet deadline, according to shareholder Wilbur Ross
  • Hiring plans among U.S. corps in 4Q little changed from previous 3 mos, ManpowerGroup said in employment index

EARNINGS:

    • United Natural Foods (UNFI) 7:30am, $0.51

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

OIL – so, Oil is only up +31% in basically a straight line since mid-June, and Bernanke will say there’s no inflation this wk; w/ unemployment and median incomes remaining a disaster, this is one of the biggest tragedies of the Qe experiment; what’s good for the few (stock market) is bad for the many (real-inflation adjusted consumption growth).

  • Soy Reserves Smallest in Four Decades After Drought: Commodities
  • Nuclear Repairs No Easy Sale as Cheap Gas Hits Utilities: Energy
  • Oil Supplies Fall to Five-Month Low in Survey: Energy Markets
  • Oil Trades Near Three-Week High on Outlook for Economic Stimulus
  • Corn Advances as Harvest Progress in U.S. Confirms Crop Damage
  • Copper Seen Declining on Speculation Two-Day Rally Was Overdone
  • Gold Advances on Outlook for Further Stimulus at Fed Meeting
  • Robusta Coffee Tracks Arabica as Investors Buy; Cocoa Advances
  • OPEC Sees ‘Abundant’ Oil Supply, May Cut 2013 Demand Estimates
  • Qatar Holds Out on Glencore Bid as Davis Heads for Xstrata Exit
  • Chemical-Tankers Seen Rallying 50% as Fleet Proves Busy: Freight
  • Sugar to Pile Up as Global Demand Stays Weak, Kingsman Says
  • Russia Volumes, LNG Cargoes to Weigh on Gas to 2013, SocGen Says
  • Talisman CEO Switch Speeds Up Sale Speculation: Corporate Canada
  • India’s Goa Bans Mining After Panel Pegs Loss at $6.3 Billion
  • German Next-Month Power Falls Before Court Ruling on Euro Fund

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


SPAIN – not clear what Rajoy was thinking by telling the truth, but Spain is now on the tape opposing bailout conditions; that’s good for another lower-high (since March) in Spanish Equities (and the Eurostoxx50); $1.28 Euro isn’t good for German exports either.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


ASIA – USD down is all good and fine for short-term politics (Bush did the same using Bernanke), but it’s bad for the rest of the world via commodity inflation; this continues to slow Asian growth and you can see that in the 2 big Asian Equity markets (China and Japan) that continued lower last night (-0.7%) after their 2-day squeeze.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


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