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DRI EARNINGS TOMORROW

Takeaway: We are bearish on DRI heading into earnings tomorrow.

Darden are reporting earnings tomorrow and, while we expect management to put as positive a spin on things as possible, we would not be betting on many positives emerging tomorrow.

 

Darden earnings are due out before market open tomorrow and we remain bearish on the stock as price action has decoupled from the fundamental reality that drives earnings.   Here is a quick update on our thoughts.  They have not meaningfully changed since our 8/30 post, “DRI: EXPECTATIONS ARE THE ROOT OF ALL HEARTACHE” but the price of the stock has.  We are expecting FY13 earnings to come in 3% below the Street’s expectations. 

 

DRI EARNINGS TOMORROW - dri price eps

 

 

Same-Restaurant Sales

 

We believe that the Street is far too bullish on the same-store sales recovery at Olive Garden and Red Lobster and, by implication, the casual dining industry.  As the Restaurant Value Spread continues to roll over and pressure the pricing power of the restaurant industry, we do not think the value proposition at Olive Garden and Red Lobster is appealing to consumers on an ongoing basis.  We expect Darden to lag the industry from a same-restaurant sales perspective in 1QFY13 and believe that, as bad as that would be for the stock, there is likely worse to come as the year progresses.

 

DRI EARNINGS TOMORROW - dri comps vs consensus

 

 

Quantitative Levels

 

This is a stock that will feel it as the US consumer feels the squeeze from higher gas prices and still-stagnant job growth.  We can only speculate as to the divergence between earnings expectations and the stock price, but our best guess would be that some safety- or dividend-seeking investors have been increasing exposure to Darden recently.  As our Black Book (email for a copy) argues, Darden's dividend is far from secure with the company burning cash to maintain its profile as a growing company with a best-in-category dividend yield.

 

As the chart below highlights, Keith's quantitative levels show TREND support at $52.34 and TRADE support at $53.61.

 

DRI EARNINGS TOMORROW - DRI levels

 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 

 


JCP: The RJ Reversal

Takeaway: Johnson just can't seem to get his act together; replicating the first half of the year is not what investors are looking for.

Yesterday’s Analyst Day at JCPenney (JCP) was a real hoot. Our Retail team remains bearish on the stock and it’s easy to see why when management just doesn't seem to understand how to placate investors.

 

Looking at the chart below, you can see a big pop immediately followed by a major drop. The pop is JCP CEO Ron Johnson coming out at just after 3:30pm and announcing that “new stores comps are up +20%.” Then he followed up and added 15 minutes later that he was planning “2H like 1H.” People don’t like what he’s done in the first half of 2012 and the sell off hit the market faster than a tricked out Ferrari.

 

 

JCP: The RJ Reversal  - JCP IntradayStockChart

 

 

The stock has now broken through our TRADE line of resistance of 28.11. Sorry, RJ, but you’ve got to do better than that. Here are some takeaways from yesterday’s event that our Retail team pointed out:

 

-Nearly 400 attendees were expected for the event

-The entourage from HQ to the JCP stores required 7 buses

-After a glimmer of hope from RJ “new shops comping +20%” he then followed up with “we expect the2H to be same at 1H.”

-Small sample to be pegging growth potential on, which Ackman wanted to amplify with his statement rather than question in Q&A suggesting that RJ highlight the performance of the StoneBrier store, which he had shared with the Board the day prior.

-After slapping Keith’s TAIL line of resistance up at $32, the sharp reversal strongly indicates that this is a broken tail risk call with TRADE resistance in the low $20s


OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE

Takeaway: Year-over-year claims improvement compressed by a fair amount this past week. Meanwhile, the claims/market divergence is at 2 standard devs.

Treading Water

Initial claims were flat last week at 382k (but fell 3k after a 3k upward revision to the prior week's data). Rolling claims rose 2k WoW to 378k and non-seasonally adjusted claims rose 28k to 328k.

 

Our preferred method of looking at the data is to look at the year over year change in the rolling non-seasonally adjusted series because it eliminates the distortion of bad seasonality adjustments. The rolling NSA data declined 7.9% YoY, which compares against -8.3% in the prior week. We would expect to see this improvement steadily converge toward zero, but second derivative inflections are notable. This week's inflection was negative, on the margin. 

 

Frothy

Another takeaway this week is the widening divergence between the S&P 500 and the rolling claims series. We profile this in the chart below entitled "S&P 500 vs. Rolling Initial Jobless Claims". These two series are cointegrated, meaning that they random walk (diverge) over short time frames but tether to each other over longer time periods. For reference, the current level of claims implies an S&P level of  ~1339, which is roughly 8% lower than the current S&P level of 1461. What the chart shows is that the market is currently two standard deviations above fair value, which, based on history, is unsustainable.

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - s p vs claims fair value

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Raw

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Rolling

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - NSA

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Rolling NSA

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - S P

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Fed

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - YoY NSA

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Recessions 1

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Recessions 2

 

Yield Spreads

The 2-10 spread fell 1 bp week-over-week to 150 bps as the 10 year treasury yield rose 1 bp and the 2-year treasury rose 2 bps. QTD, the 2-10 spread is averaging 1.36%, which is 15 bps lower than 2Q12.

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - 2 10

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - 2 10 QoQ

 

Financial Subsector Performance

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

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - Subsector

 

OUR WEEKLY TAKE ON THE CLAIMS SITUATION AND ITS RELATIONSHIP TO MKT FAIR VALUE - 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. 


Early Look

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2007's Lessons: SP500 Levels, Refreshed

Takeaway: Dips turn into draw-downs when the least amount of people are positioned for them.

POSITIONS: none on the SPY or Sector ETF side of the idea ledger        

 

We came into today long defensive (Consumer Staples, XLP) for the bounce in the US Dollar. Dollar up pounds the beta trade (Oil, Energy Stocks, Financials, etc). That’s why we call it the Correlation Risk. In the immediate-term, it matters, both ways.

 

I sold XLP and made a few short sales that were research driven (HSIC and TXRH) because there is a rising probability that the SP500’s immediate-term TRADE line of 1451 snaps. If and when immediate-term performance chasing snaps in Equities, you’ll see the kind of selling we saw yesterday in Oil. It happens fast.

 

Across our core risk management durations (TRADE, TREND, and TAIL), here are the lines I am focused on:

 

  1. Immediate-term TRADE resistance = 1474 (Friday’s Bernanke short squeeze high)
  2. Immediate-term TRADE support = 1451 (under attack)
  3. Intermediate-term TREND support = 1419

 

In other words, if Growth and Earnings Slowing weren’t a fundamental reality at this point, I’d be buying this dip. But they are, and dips turn into draw-downs when the least amount of people are positioned for them.

 

2007’s Lessons remain crystal clear in my mind. Eventually, hope for central planners to “smooth” the gravity of the economic cycle slowing runs out of catalysts. That’s why long-term tops are processes, not points.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

2007's Lessons: SP500 Levels, Refreshed - 9 20 2012 11 34 15 AM


Healthcare Vs The S&P 500

We took a look at the HRM Index’s average year-over-year sales growth and compared it against the S&P 500 (SPX). What we found was that healthcare outperformed the SPX when growth is accelerating relative to the index. Two points made by Hedgeye Healthcare Sector Head Tom Tobin are below, illustrating headwinds that may occur heading into the back half of the year and onward:

 

• Consensus growth estimates, however, look too optimistic given how fast the macro is slowing; job growth, industrial production, and GDP are all pointing lower into Q412

 

• QE3 could help, but history suggests Federal Reserve actions are weak and largely equivocal as it relates to its impact on employment.

 

Healthcare Vs The S&P 500 - healthcareSPX


CHART DU JOUR: DECLINING SLOT CONTRIBUTION

Higher margin slot play lagging

 

  • Strip slot revenue as a % of total gaming revenue has been sliding since its near-term peak in April 2009. 
  • This trend is alarming given the higher margin profile of slots versus tables.  The demographics - post baby boomer generations are not playing slots – suggests that the trend will continue.
  • Strong growth in Baccarat play from China drove all of the increase in table revenue vis a vis slot revenue over the past few years.  International visitors accounted for 16% of all Vegas visitors in 2011, up from 13% in 2000.

 

 CHART DU JOUR:  DECLINING SLOT CONTRIBUTION  - STRIP2


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