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BKW: Too Big To Fix?

Burger King (BKW) recently reported 3Q12 earnings and while it beat on the EPS estimates, it’s clear the company has a lot of work to do going forward. With competition from the likes of everyone from Wendy’s (WEN) to McDonald’s (MCD) to even Chipotle (CMG), BKW needs to grow SSS aggressively in the US and Canada while focusing on its four pillars strategy that involves Image, Menu, Marketing Communications and Operations. We consider this a problem that may be too big to fix.

 

BKW: Too Big To Fix?  - bkw1

 

BKW: Too Big To Fix?  - bkw2

 

Hedgeye Restaurants Sector Head Howard Penney laid out BKW’s future in our sales note this morning:

 

The performance in sales trends is what carries most weight for the Burger King investment thesis.  On that metric, the outlook is uncertain.  In the U.S., two-year average trends accelerated by 100 basis points, sequentially, from 2Q12 to 3Q12.  The U.S. constitutes almost 60% of the store-base.  As the charts below highlight, consensus is expecting a sharp acceleration in trends during the first half of 2013.  Holding current two-year trends level suggests negative same-restaurant sales trends for 1H13


Tech Mate

Client Talking Points

Tech Mate

Remember back in 2011 where you could be a great stockpicker by purchasing shares of Apple (AAPL) and letting them ride higher and higher like a balloon jammed to the gills with helium? Not the case these days, especially with management shakeups and disappointing price points on new products. Technology is performed awful in October as one of the worst sectors out there. The XLK fell a whopping -6.3% and Apple makes up a big portion of that ETF. So just think to yourself, with companies like Intel (INTL) and others missing on earnings, do you really think tech is still hot?

Asset Allocation

CASH 58% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
TCB

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.

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.

HCA

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road

TWEET OF THE DAY

"The irony is exquisite: Obama does his job for a couple days and everyone yells: Game changer!!!" -@JonahNRO

QUOTE OF THE DAY

"So much of what we call management consists in making it difficult for people to work." -Peter Drucker

STAT OF THE DAY

Pfizer's profits fall -14% thanks to generic Lipitor.


Pundit Bias

This note was originally published at 8am on October 18, 2012 for Hedgeye subscribers.

“Wherever there is human judgment there is potential for bias.”

-Nate Silver

 

That’s a quote from an excellent chapter titled “Are You Smarter Than A Television Pundit” in The Signal and The Noise. Before he moves onto baseball, Silver does a nice job differentiating between quantitative versus qualitative opinions in the partisan media.

 

So you will need to adopt some different habits from the pundits you see in TV. You will need to learn how to express – and quantify – the uncertainty in your predictions. You will need to update your forecast as facts and circumstances change.” (pg 73)

 

If that sounds familiar, it should. This is all encompassing in Hedgeye’s founding principles of establishing Transparency, Accountability, and Trust through independent research. Journalists are not analysts. And only the great analysts in our profession embrace the uncertainty of there being a high probability of being wrong. It’s ok to say it like that. We’re not on TV.

 

Back to the Global Macro Grind

 

China’s 7.4% GDP report for Q3 of 2012 provides a great example of where we were wrong this morning. In our Monday research meeting we discussed what we thought was a heightening probability that Chinese GDP surprised on the upside. It didn’t.

 

Now if you turn on the radio or TV this morning, you’ll probably see something very different than what I just wrote (or what I have been writing on Twitter). Since most of these sources are journalistically driven, they obviously don’t have forecasting models. Instead, they anchor on other people’s content (the sell-side’s), which at times can be even worse than a journalist’s opinion.

 

“China beat”, “China has bottomed”, “China is not Spain” – scanning the Old Media’s headlines will get you spew like that. Whereas I we’ll just show you the data within our analytical framework:

  1. China’s Q3 2012 GDP of 7.4% slowed sequentially (quarter-over-quarter) from 7.6% in Q2
  2. China’s Q3 2012 GDP of 7.4% slowed -19% year-over-year versus 9.1% in Q3 of 2012
  3. China’s Q3 2012 GDP of 7.4% slowed more than the low-end scenario in our forecasting model of 7.6%

In other words, across our risk management durations (TRADE, TREND, and TAIL):

  1. TAIL (3 years or less) – China continues to slow, and surprise both its government and the world on the downside
  2. TREND (3 months or more) – China continues to slow, at an accelerating rate, sequentially
  3. TRADE (3 weeks or less) – China’s stock market just moved to immediate-term TRADE overbought on the news

Maybe China has “bottomed.” But I have no high-probability edge on that and neither do you. Or, let me say that more democratically – if you can send me a model that shows me why and how China just bottomed, I’m happy to look at how you’ve analyzed the Chinese government’s made-up numbers. I’m even happier to change my mind.

 

Made-up, or Madoff? Yes, both American and Chinese guys make up the numbers. And this makes it all the more difficult to make a macro forecast that something has “bottomed” or “topped” with a straight face. It might get you on TV however.

 

Having had to learn from all the mistakes I have made the hard way, the best risk managed opinion I can give you is that both tops and bottoms are processes, not points.

 

In forecasting “Principle #1: Think Probabilistically” –Nate Silver

 

“Instead of spitting out just one number and claiming to know exactly what will happen, I instead articulate a range of possible outcomes.” (page 61)

 

I don’t love everything Silver thinks, but I do love that. That’s the closest thing I have read in the last year to what we call our Risk Range. That’s what you see at the bottom of every Early Look - our immediate-term range of probable upside/downside (risk) – and I think most people would say that’s the most accurate and repeatable forecast we give you every morning.

 

So skip my rants and go to the bottom of the note - save yourself some time.

 

One more point on China - to get Commodities right, we think you need to get the Dollar, Supply, and Demand right. If you think China has “bottomed”, you’re going to have a very different long-term forecast than ours right now. The risks are rising that there’s a decade long-cycle of price and demand topping.

 

Everything that happens in Macro that matters most happens on the margin. And if the new long-term range of Chinese GDP growth is 4-8% instead of what it’s been (8-12% for the last decade), that could matter, big time.

 

If and when we get that wrong, we’ll write about it transparently and accountably that morning.

 

Our immediate-term risk range for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Shanghai Composite, and the SP500 are now $1733-1761, $112.60-115.05, $79.01-79.69, $1.29-1.31, $1.73-1.83%, 2066-2139, and 1449-1469, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pundit Bias - Chart of the Day

 

Pundit Bias - Virtual Portfolio


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.

THE M3: OCT GGR RECORD

The Macau Metro Monitor, November 1, 2012

 

 

MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DSEC

Macau GGR rose 3.2% YoY to 27.7 billion MOP (26.9 billion HKD, 3.47 billion USD).

 



Moving Fast

“The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.”

-Rupert Murdoch

 

A friend of mine in Connecticut just sent me that quote. Like most of us on the East Coast, he’s up and at it early this morning. Risk happened fast. Now it’s time to slap on a pair of jeans, fire up our generators, and take on the day.

 

In The Signal And The Noise, Nate Silver calls out what physicist Didier Sornette alludes to as the “fight between order and disorder” (page 368). That fight isn’t new. However, through chaos theory, we are beginning to understand it more clearly.

 

Not unlike the world and its weather, I think about the Global Macro marketplace as one of interconnected factors that are colliding within a complex system. “Complex systems like this can at once seem very predictable and very unpredictable… they periodically undergo violent and highly non-linear phase changes from orderly to chaotic and back again.” (Silver, page 369)

 

Back to the Global Macro Grind

 

For most things Big Beta, October was gnarly. We won’t know what the fallout looks like on the buy-side until it’s old news. But the new news is that buying high-beta stocks and/or commodities at the Bernanke Top of September 14th, 2012 left a mark.

 

That’s not to say there weren’t what perma-bull marketing pundits tried to sell you yesterday morning as a “hurricane Sandy buying opportunity.” You just need to be selective about what you buy and when.

 

In the US stock market alone, look at the S&P Sector performance divergences for October 2012:

  1. SP500 = -2.0%
  2. Financials (XLF) = +2.0%
  3. Utilities (XLU) = +1.4%
  4. Basic Materials (XLB) = -2.1%
  5. Technology (XLK) = -6.3%

Markets rarely make perfect sense to me but, from a research perspective, these Sector divergences did.

  1. SP500 = bearish TRADE and TREND, so pervasive weakness into month-end made sense
  2. Financials = that’s the 1st Sector you buy if you think Romney wins (his closing the gap was enough, for starters)
  3. Utilities = that’s the low-beta trade that we recommended downshifting to last month; we’re still long it
  4. Basic Materials = get the Dollar right (Romney momentum = anti Bernanke momentum), you get commodities right
  5. Technology = Growth and #EarningsSlowing (our Top Macro Theme for Q412) matters, in the end

Where to from here? Let’s start with the Hedgeye Asset Allocation Model:

  1. Cash = 58%
  2. Fixed Income = 21% (Treasuries, Treasury Curve Flatteners, German Bunds – we still like them all during #GrowthSlowing)
  3. International FX = 15% (Strong US Dollar, stick with it unless it becomes clear that Obama is going to win)
  4. US Equities = 6% (Utilities and Financials we think continue to work; buy them on red)
  5. International Equities = 0% (with markets like Russia moving back into crash mode (-19.1% since March) we’re in no hurry)
  6. Commodities = 0% (we’ve been calling it Bernanke’s Bubble since March – sticking with it)

The asset allocation model isn’t for everyone. It’s actually for me. It’s how I think about my own money and what I am willing to put at risk at a given time and price. Since I own a lot of Hedgeye stock, my Cash position is overstated. This is meant to be a product whereby I can signal when/where I’d be adding to or subtracting from big liquid asset classes, on the margin.

 

The most important principle in my decision making process is uncertainty. I embrace it every minute of the day and reserve the right to change my mind, fast. That’s not for everyone. And I get that. I also get that, sometimes, it’s better than being slow.

 

After all, that’s what Rupert Murdoch is alluding to in the aforementioned quote inasmuch as the world’s largest sovereign governments have been reminding you of, almost daily, for the last 5 years. While Too Big To Move can be a problem for you when you have an 80 foot tree hanging on power lines across your driveway, you still need to be fast to adapt and change.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Technology (XLK), AAPL, and the SP500 are now $1, $107.41-109.09, $79.56-80.39, $1.28-1.30, 1.70-1.75%, $28.29-29.44, $586-616, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Moving Fast - Chart of the Day

 

Moving Fast - Virtual Portfolio


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