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BKW: Bearish on the King

Takeaway: Hedgeye's restaurant sector team likes Burger King Worldwide ($BKW) on the short side.

Hedgeye's restaurant sector team is bearish on the stock of Burger King Worldwide ($BKW) on all three TRADE, TREND and TAIL durations. Our analysts cite the following reasons:

  • The company simply might be too big to fix. It has been dogged with a number of issues for the past decade, and our analyst remain skeptical that those issues have been resolved conclusively.
  • There appears to be little cash flow for the franchisee to reinvest in his/her own business.
  • Probable higher beef prices over the next few years due to supply issues.
  • Obamacare could add financial strain.
  • McDonald's ($MCD)  is aggressively protecting its market share.

 

Here's our quantitative setup (see chart below) on BKW on a TRADE duration.

 

BKW: Bearish on the King - bkw

 


Buyem! SP500 Levels, Refreshed

Takeaway: If you can’t buyem here, you’re not as bullish as you thought you could be.

POSITIONS: Long Consumer Discretionary (XLY) and Apple (AAPL)

 

Our process hasn’t changed; prices have. This meltdown in Bernanke Oil Inflation Expectations is very good for US Consumption (i.e. the 71%).

 

Admittedly, I’m making this call for the month and quarter-end bounce from oversold lows (this is the 7th down day in the last 8 for the SP500). As we’ve just witnessed, however, 25-45 handle moves in the SP500 matter.

 

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

 

  1. Immediate-term TRADE resistance = 1458
  2. Immediate-term TRADE support = 1430
  3. Intermediate-term TREND support = 1419

 

That 1458 TRADE break signal we have you earlier in the week mattered as much as this 1 support zone does. If you can’t buyem here, you’re not as bullish as you thought you could be.


KM

 

Keith R. McCullough
Chief Executive Officer

 

Buyem! SP500 Levels, Refreshed - 1


Staples: Coming Unglued?

Takeaway: There is severe risk in Staples ($SPLS) “change everything” move.

Hedgeye's retail sector team says that Staples (SPLS) vast and sweeping restructuring plan, which the giant retailer unveiled earlier this week, looks incredibly risky. 

 

SPLS says it will do the following:

  • Integrate its online and retail offering
  • Increase investment in its online business
  • Reorganize its operations
  • Implement senior leadership changes
  • Start a multi-year cost savings plan
  • Restructure international operations 

Our team says that tackling one of the above items looks risky, but the fact that the company wants to do all of the items above means there is little chance that the company's plans will work - at least not with some more severe pain before it sees any relief.

 

For example, let's look at Staples' online business (see chart below). Online's contribution to the company's overall growth has slowed from 8% per year to only 2% per year in the last two years. Additionally, online sales topped out at 42% of overall sales each of the last two years. If the company spends now on its online operations, it means it will benefit two years from now, not today. 

 

Staples: Coming Unglued?  - spls


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

FED CREDIBILITY

CLIENT TALKING POINTS

 

 

BERNANKE EFFECT: With every quantitative easing, we have been met with a shorter, steeper, asset price rally, but a faster correction. What we’re experiencing these past two weeks is no exception, and it doesn’t inspire price stability and employment. Financials (XLF) and Commodities (CRB) down 4.2% and 4.3%, respectively, since what will be remembered as a historic morning-after in US economic history on September 14, the last time Fed Chairman Bernanke announced quantitative easing.

 

GET THE US DOLLAR RIGHT…

When you get the US Dollar right, you get a lot of other things right. That’s the story of the last seven trading sessions – stocks are down six of the last seven sessions as the US Dollar  bounces straight up  off its TAIL support line of $78.11 on the US Dollar Index. Right here the USD is immediate-term TRADE overbought while the Euro at 1.28 is immediate-term TRADE oversold.

 

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  Down

 

U.S. Equities:   Up

 

Int'l Equities:   Up 

 

Commodities: Flat

 

Fixed Income:  Down

 

Int'l Currencies:Down  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

WENDY’S COMPANY (WEN)

Our conversations with Wendy’s franchisees indicate that sales have been trending sequentially higher in 3Q versus 2Q. We believe the company is about to announce the end of the company’s Sisyphean breakfast initiative after a prolonged “testing” phase. Given the capital demands on the company over the next few years as it invests to upgrade its asset base, shifting capital from the distraction that has been breakfast is a positive. The tail is less certain as it will take years for the system to rejuvenate the asset base and push out the older franchisees that don’t want to make the necessary investments to bring the asset base in line with contemporary industry standards..

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

 

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

“Plenty of mixed messages out there - your job is to balance them and remain sane” -@KeithMcCullough

 

QUOTE OF THE DAY

“If you put the federal government in charge of the Sahara desert, in 5 years there’d be a shortage of sand.” -Milton Friedman

  

STAT OF THE DAY

$16 million, the amount of money that separates the NFL owners and referees from reaching a conclusion to their standoff

 



Free-Market Confidence

“Free-Market capitalism offers the most efficient and just way to order an economy.”

-George W. Bush

 

While it’s a shame that when short-term politics met economic gravity that neither Bush nor Obama gave anything other than lip service to one of America’s greatest economic ideals, that doesn’t mean all is yet lost. Arresting the un-American trend of centrally planned markets may very well be our greatest opportunity.

 

While I’ve had some big market calls wrong in the last month, I haven’t been wrong on the fundamental realities born out of Big Government Interventions. First, Policies To Inflate slow growth. Then they slow corporate earnings. Bernanke Bailout Bulls can blame Europe for yesterday’s decline, or they can pull up a chart of Caterpillar (CAT). Markets don’t lie; politicians do.

 

To give the aforementioned quote the appropriate context, it comes from a book I’ll be critically reviewing in the coming weeks: The 4% Solution. Bush wrote the Foreword and admirably prefaced his comment about American Liberty by holding himself accountable. He admits that “market-distorting government policies” played a big part in the 2008 crisis. God help our children if we can’t learn from that.

 

Back to the Global Macro Grind

 

At the top of the market’s performance chasing squeeze (September 14th), we didn’t hide from our Q2 2012 Macro Theme, The Last War: Fed Fighting. We dug in our heels and stayed true to our process. Commodity inflation is not economic growth. It slows growth.

 

Headline this morning from Bloomberg: “Fed’s Plosser Says QE3 Risks Fed Credibility, Won’t Boost Jobs”

 

Agreed.

 

I’ll get to why I started covering shorts and buying stocks more aggressively yesterday in a moment, but first let’s rewind the tapes on what just happened after Bernanke pinned market prices at their YTD highs on no-volume:

  1. US stocks are down for 6 of the last 7 days (down -2.2% from the intraday high of 1474 Friday September 14th)
  2. CRB Commodities Index has lost -4.3% of its value in a straight line; Oil snapped TAIL risk support of $111.44 (Brent)
  3. US Treasury Bonds (10yr yield) just ripped a +13% move (yields down from 1.9% to 1.65% this morning)

I think Bernanke calls this something like “price stability.”

 

To their credit, a Perma-Bull might say, “a 2.2% correction is nothing.” Agreed. It’s only something if you bought the 1474 SP500 top in the Big Beta Sectors, with leverage. Underneath the beta-chasing hood, here’s what’s happened from the September 14th high:

  1. Financials (XLF) = down -4.2%
  2. Basic Materials (XLB) = down -4.2%
  3. Energy (XLE) = down -4.0%

While bulls sounded more like crickets into yesterday’s close, I can assure you that buying high and selling low, if done repeatedly for no other reason than chasing a benchmark, will leave a short-term performance mark.

 

What did we do? It’s all #timestamped, so you don’t have to take my word for it, but I’m encouraged that I didn’t meet my pre-September 14th mistakes with more mistakes-upon-mistakes. During the 1.5 week correction we sucked +1.71% of alpha out of the long side of Utilities (XLU) and, instead of buying a US Index into yesterday’s oversold close, we bought Apple.

 

Bought APPL? Yep. Not my 1st rodeo riding beta – it’s all about managing the risk of the immediate-term range. In a world where both Growth and #EarningsSlowing are going to dominate fundamental news-flow, I think investors will buck up for the growth that they can find.

 

Under the current US central planning regime of Obama, Bernanke, and Geithner, I think there’s a better chance of my becoming an adjunct professor of charlatan Economics at Yale than the USA seeing a 4% GDP print anytime soon. That’s what makes growth stocks attractive when A) you can find them, and B) they are on sale.

 

To review our Real-Time Positions, we have 10 LONGS and 6 SHORTS. On the long side, the best long-term Growth Ideas are:

  1. Las Vegas Sands (LVS)
  2. Apple (AAPL)
  3. Paccar (PCAR)
  4. Starbucks (SBUX)
  5. Under Armour (UA)
  6. Urban Outfitters (URBN)
  7. Brinker (EAT)

We also bought Brazil (EWZ) on red yesterday. While the government is moving towards making up its inflation numbers like Japanese, US, and European governments do, Brazilian economic growth looks ready to slow at a slower-rate. On the margin, that’s better than bad.

 

Unlike in the USA, where the manic media is attempting to tell you that yesterday’s Consumer Confidence print of 70.3 for September is bullish (see Chart of The Day for the historical context of US confidence – it’s lower than where it was in the 1970s), Brazilian Consumer Confidence clocked a 122.1 for September! That’s the kind of confidence we need.

 

To Review: during the only 2 sustainable +4% US GDP Growth runs of the last 40 years:

  1. 1 (Reagan, Strong Dollar) = US Consumer Confidence tracked between 90-120
  2. 1 (Clinton, Strong Dollar) = US Consumer Confidence tracked between 100-140

In other words, USA is not Brazil. Today’s American Consumer Confidence (oscillating between 40-70 during Bush & Obama Dollar Debauchery Administrations) reflects, precisely, what the zeitgeist in America feels like. Brazil's confidence tracked between 95 and 120 from 2005 to 2010. That's the kind of confidence we need.

 

This is not the country I came to in the mid-1990s. This is not a “free-market” either. This needs to change, just like my positioning did.

 

My immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar,  EUR/USD, UST 10yr Yield, AAPL, and the SP500 are now $1, $105.74-111.44, $79.15-80.59, $1.28-1.30, 1.63-1.72%, $671-693, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Free-Market Confidence - Chart of the Day

 

Free-Market Confidence - Virtual Portfolio


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