prev

YUM CALL PREVIEW

One theme we will be highlighting on Thursday’s call is Return on Incremental Invested Capital.  Yum! Brands has proven itself reliable when it comes to generating returns.

 

Setting Expectations

 

YUM’s management team is set to present at the company’s annual Investor & Analyst Conference in New York on December 6th.  Our conference call with clients, on November 29th, will outline our thoughts on the outlook for 2013 and what we expect management to focus on the following week. Please contact for access to our call on Thursday, November 29th, at 1:30pm.

 

 

Diversifying Growth

 

We expect the company to emphasize YUM’s increasing geographic diversification during the Investor & Analyst Conference.  The case will be made that increasing the deployment of capital to emerging markets within the YRI division will generate higher incremental returns on capital than the overall enterprise currently produces. 

 

We believe that ROIIC (chart below) is an important metric for restaurant companies focused on growth and expect YUM’s strong share price performance to continue throughout 2013. 

 

 

YUM CALL PREVIEW - yum roiic

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Changes In Housing

For the last five years, the housing market has been a headwind for many banks, including regional player TCF Financial (TCB). The recession’s impact in the midwest affected the company greatly as borrowers lost jobs and dealt with falling home prices. These days, the outlook is improving as the worst is over with in terms of the housing bubble. Housing prices in markets like Denver and Phoenix are rising and will strengthen TCF. The stock remains one of our favorite long positions for all three durations: TRADE, TREND and TAIL.

 

Changes In Housing - image003


Energy Capex Growth

Compared to other industries that are part of the S&P 500, energy takes the lead for the amount of dollars spent in terms of capital expenditures. In 2012, energy companies in the S&P500 will spend 38% of all S&P500 capex; this compares to just 12% in 1999 and 2000.  Oilfield service and equipment companies are the least capital intensive and include names like Dril-Quip (DRQ), National Oilwell Varco (NOV) and Core Laboratories (CLB). 

 

While we expect a slight tick down in capex for the energy sector in 2013, between 1996 and 2012, nominal capex for the S&P500 increased 108%; nominal capex for the energy sector increased 472% over the same time period.  Energy accounted for 61% of total S&P500 capex growth from ’96 – ‘12, while utilities was second at 20% of the growth.

 

Energy Capex Growth - 1 normal


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.

Cheat 'Em

Client Talking Points

Three-Card Monte

The market can sometimes feel like  a guy with a cardboard table, hidden in an alleyway with some playing cards and the odds stacked against you. Yesterday, the US equity market rallied on “Greek” news and then promptly did an about-face and proceeded to sink lower along with European and Chinese equity markets. A lot of investors probably feel cheated, especially those who though that China had “totally bottomed.” Remember: cheap can always get cheaper. Stocks can always go lower. #GrowthSlowing continues in full force.

Asset Allocation

CASH 58% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 18%

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.

IGT

There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.

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

“‘China has bottomed’ bulls, very quiet” -@KeithMcCullough

QUOTE OF THE DAY

“Bore, n.: A person who talks when you wish him to listen.” -Ambrose Bierce

STAT OF THE DAY

ConAgra to Buy Ralcorp Holdings for $5 billion.



Looking Backward

"The farther backward you can look, the farther forward you are likely to see."

-Churchill

 

If you think it’s more progressive to look forward than backward, we should take a walk in the bush together on Northern Ontario right before the black bears go into hibernation. My Dad and I recommend keeping your head on a swivel.

 

Looking back at sovereign debt cycles (Reinhart & Rogoff go back to the year 1500) helps us look forward at how ridiculous expectations are that Greece is going to be fixed.

 

I couldn’t make this up if I tried this morning, but this is what Greece Prime Minister, Antonis Samaras, had to say about the latest Greek debt deal: “A new day begins for all Greeks!”

 

Back to the Global Macro Grind

 

A new day in storytelling it is. World Equity markets initially rallied on the Greek “news”, then reversed, and quickly. Chinese stocks closed down -1.3% making fresh new lows, Greek stocks went from +1% to -1.5%, and US Equity Futures went from green to red.

 

If you’ve never played a shell game, this is how it works: now you see it, now you don’t. Here’s an abbreviated version of the Greek debt deal: €40B in debt is evaporated, then they get a fresh €44B in bailout debt within the next few months (€34.4 billion paid out in Dec and €9.3 billion in Q1 linked to MoU milestones agreed by Troika).

 

Great. Right? Yeah, just great. For those of you still looking backwards as you attempt to proactively risk manage forward, you can see what all this Greek noise has added up to over the years in Josefine Allain’s Chart of The Day:

  1. Greek stocks -1.5% on the news to 831 on the Athens Stock Exchange Index
  2. Greek stocks -7% from their lower long-term highs in October (894 on the Athex)
  3. Greek stocks -49% from the lower highs they established 2 years ago (November 2011)

To be fair, 2 years ago requires a decent look back. And, admittedly, I forget what the bailout rumors on Greece were 3 years ago. All I know is that whatever the rumors were, they were lies.

 

Martin Luther King, Jr. said “a lie cannot live.” And, if you have the risk management mandate to look forward far enough, that’s generally an accurate mean reversion assumption to make.

 

But, if you have an investment mandate to chase weekly and monthly performance bogeys, you’re probably ok to suspend disbelief and pretend the lies are realities. I read my kids fairy tales at bedtime too.

 

Reality: if you bought Greece (Athex Index) or Apple (AAPL) in November 2011 or September of 2012, you need to be up +96% and 19%, respectively, to get back to break-even. That’s just math.

 

Ultimately, betting on more of what has not worked (more debt financed government spending) is destroying the world’s long-term equity capital. That’s why I am wedded to looking back at LOWER-HIGHS in long-term prices. While this is a relatively new phenomenon to those who got plugged buying American or Greek stocks in 2007-2008, it’s been happening in Japan for 20 years.

 

Back to China (and Global #GrowthSlowing)…

 

Evidently those who were suggesting “China has bottomed” a few months ago were a little off on the timing. Last night’s -1.3% smack-down in the Shanghai Composite puts China 90 basis points away from going back into crash mode.

 

A crash, by our risk managed definition, is a price that’s made lower-highs on the order of 20% or more. Try it at home with your own money. I can promise you it will feel like what I just called it.

 

The Shanghai Composite is down -19.1% since #GrowthSlowing started, globally, in March of 2012. While it’s fun for passive Captain Stock Picker to talk about what the Dow is “up year-to-date”, real money that’s managed from a global macro perspective has been seeing lower-highs in prices in pretty much everything that matters since the March-April 2012 highs.

 

Here’s one really simple 3-factor Hedgeye Global Macro Growth Model to beam up onto your globally interconnected screens:

  1. CHINA (Shanghai Composite in a Bearish Formation = bearish TRADE, TREND, and TAIL)
  2. COPPER (Bearish Formation as well, down -11% from its Q112 lower-high)
  3. BONDS (US Treasuries in a Bullish Formation as Bond Yields are in a Bearish Formation)

Now, if my #OldWall competition wants to tell me that China, Copper, and Bond Yields are flashing a “back to growth” global economy, I’m happy to debate them live anywhere, anytime. Looking Backward, they’ll be forewarned that the Thunder Bay Bear will hold them accountable for missing the 2012 US and Global Growth slowdown just like they did in 2008.

 

Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.91-111.48, $3.43-3.56, $80.05-80.61, $1.28-1.30, 1.54-1.68%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Looking Backward - Athens2

 

Looking Backward - vp


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next