“The last of human freedoms - the ability to chose one's attitude in a given set of circumstances."
Typically over Thanksgiving, I head over to Keith’s house and join his family for a masterfully prepared feast by his wife. This year they’ve headed out of town, so I joined some friends on an impromptu basis in Williamsburg, Brooklyn. No, I didn’t don skinny jeans for the adventure, but I did experience a gluten-free Thanksgiving for the first time.
As a Canadian in the United States, I have always been thankful for the great American holiday of Thanksgiving. It is the ideal opportunity to reconnect with old friends and establish new friendships. And if you are a fan of the correct NFL team, it is also a chance to cheer your team to victory. Unfortunately, for those fans of the New York Jets, the last point doesn’t exactly hold.
Given the elongated nature of the holiday this year, I’ve also been doing some reading for pleasure and have picked up Viktor Frankl’s best-selling book, “Man’s Search for Meaning.” For those that haven’t read this great book, it is basically the story of Frankl’s time in the Nazi German concentration camps. The gist of the book is that humans can, and should, find meaning in even the most sordid of situations.
It goes without saying that we have had a relatively negative outlook on global growth this year. Even as a resolution of the Fiscal Cliff becomes possible, we aren’t likely to be persuaded that global growth is set to accelerate. As it relates to equities, the key issue of tepid economic growth is that the pace of earnings growth will ultimately slow, as it has and is in the United States (one of our key Q3 themes).
Even as bearish as we are and have been on economic activity, we are certainly not as pessimistic as Jeremy Grantham, who wrote the following in his most recent quarterly letter:
“The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.”
Certainly, Grantham has an impressive long run track record, but there is always danger in predicting out for long time frames. In this case, Grantham is actually saying that the United State’s historic growth rate of 3% is gone forever. As much respect as we have for Grantham, we wouldn’t bet against the American people and their ability to innovate and create economic growth in the long run.
In the short term, akin to Frankl’s ideas of finding a positive in the most sordid of situations, housing is starting to become a real positive factor in the U.S. economy. Our Financials Team led by Josh Steiner has done much of our housing work and on the way down was correct in his analysis that housing would take longer to bottom than consensus expected. Conversely, on the way up, Steiner is starting to develop the thesis that housing may recover quicker than expected.
The most recent data point on housing was mortgage applications from last week that rose 3.0% week-over-week, which is on the back of a 11.0% increase in the prior week. In the Chart of the Day, we show mortgage application data going back to 2009. The key takeaway is that mortgage applications are starting to accelerate on a year-over-year basis.
The conundrum of the housing market for many has been the fact that mortgage applications, and thus purchases, have remained at anemic levels despite all-time lows in interest rates. In part, of course, this is due to tighter lending standards from banks, but the other key component is psychological. In effect, housing is a virtuous cycle in which rising prices and falling inventory actually stoke demand. So when potential home buyers see that prices are starting to accelerate, or there is less inventory, they get more excited to buy. A shocking concept we know – people chase price!
To be clear, a stabilization in the housing market is basically a consensus call at this point. There is an alternative scenario from the simple linear recovery though, which is that the housing recovery could become parabolic. As my colleague Josh Steiner wrote last week:
“Fundamentally, the data suggests that over the long run total housing starts have grown at a rate slightly above the growth rate in household formation. From 1 housing starts have averaged 1.468 million per year while over that same time period new household formation has averaged 1.287 million per year. Recently, household formation rates have picked up sharply.
From 3Q11 through 2Q12, household formation growth has risen at an annualized rate of 1.739 million, yet housing starts have been running at an annualized rate of 0.673 million during that same time period. Our parabolic extrapolation from above projects that housing starts would rise to an annualized level of 1.318 million and 1.886 million by year-end 2013 and 2014, respectively, whereas a linear extrapolation gets to 1.012 million and 1.180 million by year-end 2013 and 2014.
While the parabolic extrapolation may seem high, it exceeds recent household formation rates by just 147k units. This compares with the 53 year trend (1) of starts exceeding HH formation by an average of 181k.”
Simply put, the combination of rising prices, tight inventories, and increasing household formation may lead to an accelerating recovering in housing. This would certainly be beacon of positivity in sordid economic recovery.
Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Natural Gas, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.21-111.48, $3.73-3.94, $80.53-81.36, $1.26-1.28, 1.54-1.68%, and 1, respectively.
Happy Thanksgiving to you and your families.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: DRI is one of our least favorite names in casual dining as industry- and company-specific factors dampen our view of the stock
Keith shorted DRI this year as his quantitative analysis lined up with one of the most important calls we made in 2012.
Darden remains one of our top ideas on the short side. Company- and industry-specific issues that we highlighted in our July black book, “DRI: THE UNTHINKABLE SHORT CASE”, are coming to the fore.
- Industry trends are slowing (see Knapp Track chart, below)
- Darden likely needs a recovery in industry trends to achieve its targets of 1-2% SRS growth at Olive Garden, Red Lobster and LongHorn (again, see Knapp Track chart, below)
- Darden’s two most important chains, Olive Garden and Red Lobstser, continue to underperform versus the industry
- With jobless claims and difficult comparisons versus a year ago (weather) over the next few months, we are not expecting much good news on Darden’s top-line
- The company’s CMO leaving is a negative, particularly seen as the management team did not announce a replacement. Marketing is a key factor in driving traffic in casual dining and this news only adds to our bearish view of Darden’s sales outlook
- While earnings expectations continue to decline, we believe the Street’s expectations remain too bullish on this name
- The company's growth, dividend payments, and share repurchases are becoming more and more difficult to sustain under the company's current path.
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This note was originally published at 8am on November 09, 2012 for Hedgeye subscribers.
“Buying is a profound pleasure.”
-Simone de Beauvoir
You want to buy when people are forced to sell.
If you proactively prepare for these manic market moments: A) you have cash and B) your buy list is locked and loaded. While your shopping list may not be as long as it was 2 months ago, that’s ok. I’m picky about what I buy too.
Back to the Global Macro Grind…
In New Haven, CT, rain, wind, or snow, this is what we call The Flush. That’s when you “break” a couple of the moving monkey lines (50 and 200 day simple moving averages) and you get to capitalize on your competition’s emotional selling mistakes.
I’m not saying “buy everything.” Neither am I saying everything is fixed. I am simply saying that everything in markets has a time and price. From a purely quantitative perspective, this morning’s Macro Grind is signaling the best time to sell bonds and buy stocks in 2 months.
- BONDS – US Treasuries (10yr immediate-term TRADE oversold at 1.60% yield) and German Bunds are overbought
- CURRENCIES – The Euro (EUR/USD) is immediate-term TRADE oversold at $1.27 (still bearish TREND)
- STOCKS – The SP500 is holding my long-term TAIL risk line of 1364 support
*Note: I don’t use the moving monkey other than for entertainment purposes.
Also note that the main reason for the word “buy” being in the title of my note is not “China has bottomed.” As we have said, multiple times, China’s bottom will be a process, not a point. The Shanghai Composite was just down for the 5th day in a row (down -16% since growth slowing began, globally, in March). Peculiar looking bottom to me.
As a Chaos Theorist who uses Bayesian conditional probability theory in my decision making process, it’s also critical to note that if we snap my 1364 TAIL risk line today (and close there), I reserve my Canadian and US Constitutional right to change my mind.
But, for now – let’s not stress out about that. We don’t have to. We didn’t buy the Bernanke Top (September 14th). Neither do we have to be up +32% (from here) to get back to break-even buying AAPL at its all-time high.
We’ve earned the opportunity to be patient (picky) here, and take our time.
Top 3 Long Ideas?
1. International Game Tech (IGT) – Always start with what’s working. In a growth and #EarningsSlowing market like this, you should pay more for the growth that you can find. Visibility matters. Todd Jordan said IGT delivered the bacon last night, beating handily on both the top and bottom line, so buy more (email Sales@Hedgeye.com for Jordan’s note)
2. Starbucks (SBUX) – Back to the old well works for me, big time – especially now that one of America’s top capitalist innovators (CEO Howard Schultz) looks forward to selling you his Verisimo machine domestically for holiday, and continues to have one of the most visible expansion plans, globally, of a legal drug. Coffee price deflation is a big margin kicker too.
3. Federal Express (FDX) - As the world bakes a potential recession into the expectations cake, you want to be buying high-quality (non-mining capex bubble) cyclicals that have already guided down. Especially with our short Oil call working, the margin of safety buying FDX improves (email Sales@Hedgeye.com for Van Sciver’s slide deck presentation)
You’ll also note that my Top 3 Long Ideas are US Equities. That could change if German, Dutch, or Taiwanese Equities flash my immediate-term TRADE oversold signal. They have not yet. The Post Election Flush, is very American.
Whoever bought US stocks at the YTD top needs to be up, a minimum +7.5% (from here), to get back to that September 14th break-even. With the Russell2000 down -8.3% over the same 2 months, you’d have to be up +9% to get back to break-even there. With real money, timing matters. Return of your money is geometric.
This is why we are so focused on earning your respect as the top risk management source you have in your inbox every morning. Buying is a pleasure. We get it. But someone also needs to tell you when to sell. Put another way, as one of my best investors reminded me in NYC yesterday, “Keith, your job isn’t to make me rich – it’s to keep me rich.”
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, IGT, SBUX, FDX, and the SP500 are now $1708-1740, $105.22-108.44, $80.41-81.12, $1.27-1.29, 1.60-1.72%, $12.69-13.73, $49.27-54.21, $89.21-91.98, and 1364-1410, respectively.
Enjoy the weekend and best of luck out there today,
Keith R. McCullough
Chief Executive Officer
We will be releasing a black book on YUM! Brands and hosting a Conference Call at 1:30pm EST on Thursday, November 29th.
Hedgeye Black Books are deep dive research projects which expose all details of a company, examining past, present, and future; they are valuable tools to be saved. This presentation will discuss how the current macro environment and company specific data points are setting up positively for YUM investors into the new year.
Topics Will Include
- As sluggish growth causes anxiety among investors, we believe that YUM's growth plan offers attractive returns for investors
- Yum! Brands is a leading global restaurant company offering, in our view, best-poised to deliver on - and exceed - its targets over the next 12-24 months
- Yum! Brands' stock is viewed as a China play by investors but there are other significant drivers of the stock that we expect to come into play in the intermediate term
- Shares in the company have appreciated 22% YTD but we believe a case can be made for continued gains in 2013
Takeaway: It’s tough to call the SP500 safe and clear.
POSITIONS: Long Bonds and the Dollar (TLT and UUP), Long Utilities (XLU), Short Industrials (XLI) and The Euro (FXE)
Climbing back above my long-term TAIL line (1364) on no-volume is less bearish than it is bullish, until it isn’t. If I broaden the risk management survey to the Dow, Nasdaq, and Russell2000, their TAIL lines are all broken. So it’s tough to call the SP500 safe and clear.
This is not good. The average up day volume this week has been 23% below the average down day volume for the last 2 months of the correction. And, US Equity Volatility (VIX) while an imperfect index, tested 14 today – and that’s been a clean cut sell signal for stocks and commodities for 5 years.
Across our core risk management durations:
- Intermediate-term TREND resistance remains overhead at 1419
- Immediate-term TRADE resistance is baking in lower-highs at 1398
- Long-term TAIL support = 1364
In other words, you have maybe +0.7% of immediate-term upside left in this mean reversion bounce and at least -1.7% downside. But (and this is an important but), if we snap 1364 again, there’s no longer-term support to 1258.
The high probability pitch to swing at here is buy what’s been working for 2 months – Bonds and The Dollar.
Keith R. McCullough
Chief Executive Officer