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DG: Tough to Smoke’em if you Don’t Got’em

Takeaway: DG’s EPS beat this morning is uninspiring. The bottom-line is that the top-line is slowing…

DG’s EPS beat this morning is uninspiring. The key trend to watch continues to be the rate of consumables growth. For the third quarter in a row consumables grew as a percent of sales, but at a decelerating rate sequentially (on a TTM basis).  This trend is notable because 1) consumables tend to be a lower gross margin business – a positive, and 2) they are a key traffic driver – not good. As such, it’s not surprising to see DG post comps +4% shy of expectations+4.6%E in the quarter. In addition, DG’s 4Q comp outlook of +3%-4% vs. +4.3%E suggests continued pressure on the top-line over the near-term.


One of the key factors to consider here is the recent introduction of tobacco at FDO. As one of DG’s chief competitors, this is a notable shift as it’s the only dollar store to sell tobacco to consumers over-indexed to smoking. It’s hardly a game changer for DG today, but when a key competitor needs to shift to Smokes to get its comp, it’s not exactly a positive sign for the space. We continue to think that ‘the consumables shift’, which has been driving comp for both major Dollar Stores, is getting long in the tooth to say the least.


Lastly, with inventories outpacing sales growth this quarter and a tough comp ahead in 4Q (including an extra week), this is not a good setup near-term for DG.

 

DG: Tough to Smoke’em if you Don’t Got’em - DG CatMix

 

DG: Tough to Smoke’em if you Don’t Got’em - DG S

 

 


Bursting Bubbles

Client Talking Points

Das DAX

Germany’s DAX is the new killing it. The index is hitting highs not seen since 2008; that includes holding above September closing highs (7451). That level has now become support instead of resistance. While the mainstream media is focused on the Dow, the DAX is where the real action is. Keep in mind that the DAX’s performance does not mean that the German economy is A-OK. Sure, it’s in better shape than our economy right now, but Germany has plenty of issues to deal with. The Eurozone crisis is still a crisis and is far from over.

Holler At The Dollar

Since 2007, we’ve had the pleasure of watching Hank Paulson, Tim Geithner and Ben Bernanke destroy the value of the US dollar. All this printing of money was supposed to fix all the bad stuff that happened to us but instead, we still have $3.50 a gallon gas, expensive food at the grocery store and bubbles all over the commodity space. Since the Bernanke Top (Sept. 14, 2012), we’ve seen the CRB Commodities Index drop -8.7% while the S&P 500 is only down -3.8% during the same time period. Our global macro theme of commodity bubbles deflating is coming true and strength is finally coming back to the US dollar, which has been up for 8 of the last 11 weeks.

Asset Allocation

CASH 55% US EQUITIES 12%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
YUM

New unit openings in China and strength in YRI and US should offset China weakness in 1H13. China SRS growth is sensitive to the economy but new unit growth and ROIIC are likely to be supported by continuing growth of the consuming class in China. Looking at operating income by geography for YUM/MCD/SBUX, we can see that YUM is the most geographically diverse. This is manifest in YUM’s more stable EPS growth and price performance over the last 10 years.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“If you were lucky enough to buy $AIG shares from the gov't at $32.50 last night in the follow-on, you're very happy right now.” -@GTWNJACK

QUOTE OF THE DAY

“There is danger from all men. The only maxim of a free government ought to be to trust no man living with power to endanger the public liberty.” -John Adams

STAT OF THE DAY

Baltic Dry Index falls by 3.9% to 900, the biggest drop since January.


THE M3: ALIPAY; CHINA LOANS; AERL

The Macau Metro Monitor, December 11, 2012

 

 

SANDS CHINA STARTS ACCEPTING ALIPAY Macau Business

The Venetian Macao and Sands Macau now accept payments via Alipay, China’s most widely used third-party online payment solution.  The service provider had more than 700 million registered accounts as of June, and began facilitating transactions from the Venetian Macao and Sands Macao websites on November 28.  Alipay is an affiliate of Alibaba Group.


“Offering Alipay as an additional payment option when booking our hotels online represents a fabulous convenience for our guests who book online from the mainland,” said David Sisk, COO of Sands China.

 

CHINA NOV LOAN DATA POINTS TO GRADUAL BUT BUMPY RECOVERY Reuters

November new yuan loans totaled 522.9 BN yuan, missing estimates of 550 BN yuan.  M2 money supply grew a slower-than-expected 13.9% YoY in November.

 

AERL TO LIST IN HONG KONG Macau Business

Nasdaq-listed VIP room gaming promoter Asia Entertainment & Resources Ltd announced yesterday it intends to file a formal listing application with the Hong Kong Stock Exchange in the first half of 2013.    The company further announced yesterday that it has entered into engagement letters with professional advisors in order to complete the listing.

 

AERL promotes four VIP gaming rooms, all in Macau. They are located in StarWorld, Galaxy Macau, Venetian Macao and City of Dreams, respectively.  For the first 11 months of 2012, AERL’s rolling chip turnover was US$16.83 billion (MOP134.64 billion), down 7.4% YoY.

 

 



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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 10, 2012


As we look at today's setup for the S&P 500, the range is 16 points or 0.96% downside to 1405 and 0.17% upside to 1421.    

                                                                                                                                                           

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.40 from 1.38
  • VIX closed at 16.05 1 day percent change of 0.94%

MACRO DATA POINTS (Bloomberg Estimates):

 

EARNINGS:

  • Dollar General (DG) 7am, $0.60
  • Hudson’s Bay (HBC CN) Pre-mkt
  • Fed’s 2-day meeting begins
  • 7:30am: NFIB Small Business Optimism, Nov. (prior 92.5)
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Trade Deficit, Oct., est. -$42.6b (prior -$41.5b)
  • 8:30am: Wasde report on agricultural commodities
  • 10am: Wholesale Inventories, Oct., est. 0.4% (prior 1.1%)
  • 10am: IBD/TIPP Economic Optimism, Dec. est., 50.0 (prior 48.6)
  • 10am: JOLTs Job Openings, Oct. (prior 3.561m)
  • 11am: Fed to buy $1b-$1.5b notes due 1/15/19-2/15/42
  • 1:30am: U.S. Treasury to sell 4W, $25b 52W bills
  • 1pm: U.S. Treasury to sell $32b 3Y notes
  • 4:30pm: API inventories

GOVERNMENT:

    • House, Senate in session
    • Bunge CEO Alberto Weisser speaks at Johns Hopkins Univ. on global issues in agriculture, Noon
    • Weekly release of FDA warning letters
    • ITC issues final ruling on whether to uphold penalties on imports of washing machines from Korea, Mexico, 9:30am
    • Global Intellectual Property Center hosts U.S. Patent and Trademark Office intellectual property attaches from around world to discuss enforcement of IP rights outside U.S., 9:30am

WHAT TO WATCH

  • Fed seen expanding assets to $4t with Treasury buying
  • U.S. fiscal dispute shows sign of thaw before year-end deadline
  • U.S. Treasury to sell last 234.2m shares in AIG at sixth offering
  • Blackstone said to seek over $2b for Asia property
  • BofA gets judge’s approval to proceed with Taylor Bean fraud suit
  • HSBC to pay $1.92b to settle U.S. probes of laundering
  • ThyssenKrupp scraps dividend after $4.7b writedown at Americas unit
  • Diageo ends talks with Jb Y Compania, Lanceros on Cuervo brand
  • AMR’s Horton open to private-equity funding for bankruptcy exit
  • Spain borrowing costs fall as Treasury boosts 2013 prefunding
  • Texas Instruments sees 4Q sales in line with estimates

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


OIL – Bernanke’s Bubbles look like bubbles in the rear view mirror more and more by the day; CRB Index is down -8.7% from the Bernanke Top (SEP14) and Oil continues in a Bearish Formation as food prices deflate as well. All very good developments for global consumption.

  • Oil Rebounds From One-Month Low on German Investor Confidence
  • Tightest Corn Crop Since ‘74 as Goldman Sees Rally: Commodities
  • Contango in Gasoil Reaches Longest in 16 Months: Energy Markets
  • Wheat Reaches 8-Week Low on Signs of Waning U.S. Export Demand
  • Gold Halts Three-Day Advance as Investors Await Fed Meeting
  • Copper Slides as Investors Await Fed’s U.S. Economic Forecasts
  • Sugar Rises on Signs of Processor Demand in Brazil; Cocoa Falls
  • OPEC November Crude Output at Lowest in One Year as Saudis Cut
  • Russia Cuts Grain Exports, Seen by SovEcon Raising 2013 Imports
  • Iron Ore Climbs to Four-Month High as China Growth Boosts Demand
  • ThyssenKrupp Cancels Dividend After $4.7 Billion Writedown
  • Scorpio Seen Rising as Tanker Rates Gain Most Since ’08: Freight
  • Cooking Oil Imports by India Seen Dropping on Reserves, New Crop
  • Angola Says Only Iraq, Saudi Arabia in Race for Top OPEC Job

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS


GERMANY – impressive is as impressive does; the DAX shrugged off the Italians yesterday and has held its ahead above the SEP closing highs (7451); that level was resistance – now its support, as the DAX crushes the Dow for 2012 YTD.


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


CHINA – Shanghai Comp failed to follow through 2095 TREND resistance overnight after Chinese Yuan based loans continued to surprise on the downside (523B in loans for NOV = down -7% y/y); don’t expect them to do what we do – reflating the credit bubble not in their plan, yet.

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 



It Happened

“It would all be as if nothing had happened.”

-Michael Sallah & Mitch Weiss

 

That’s a quote from the end of the book I cited in last week’s Early Look,  Tiger ForceA True Story of Men and War. It’s a true story about American war crimes in Vietnam (Pulitzer Prize, 2004). Sadly, it’s how a lot of cover up stories involving the #PoliticalClass end.

 

“The Pentagon had decided that is was better to cover up what had happened. Let the country move on… there would be no press conferences. There would be nothing at all… and so it was.” (page 306)

 

To be fair, maybe our central planning overlords do know what’s best for the country. But maybe they don’t. All I know is that whether it’s Bernanke, Geithner, or Petraeus – as Canadian-American Patriots, it’s our responsibility to keep questioning.

 

Back to the Global Macro Grind

 

I’ve been questioning Bernanke and Geithner’s Keynesian Policy To Inflate via US Dollar Debauchery for 6 years. Even if they refuse to acknowledge what has happened publicly, proving this out has been a daily dog fight – and I’m proud to have done the work.

 

All-time highs in food and energy prices? It Happened in the last 6 years. It all happened under Bernanke and Geithner’s watch. Causality was both fiscal (debt/deficit spending) and monetary (money printing). They both deserve their #FairShare of the blame.

 

As Bernanke and Paulson promised “shock and awe” rate cuts and bank bailouts, the all-time high in Oil prices happened during the economic crisis (2008). Think about that. Then think about why Gold and Food prices hit their all-time highs in 2011 and 2012, respectively as net long positions in futures & options commodity positions hit all-time highs (twice) in 2012.

 

All-time is a long-time. It Happened.

 

Now, deflating these policy mistakes, and popping the bubble in commodity price expectations, perversely, becomes the American and Global consumer’s greatest opportunity to get a real-time tax cut. I like that. If you don’t take car service to D.C. to work every day on US tax moneys and have all your meals bought and paid for, you should too.

 

From a Global Macro perspective, I also like the following positions:

  1. LONG Consumption
  2. SHORT Commodities

Perma marketers can attempt to label me whatever they want. Our clients only pay us if A) we are helping them avoid blowups and B) we are helping them get things right. Never mistake “negativity” with reality. Reality is that, since we launched our Bernanke’s Bubbles Theme, it started happening – the commodity bubble has started to pop, faster, and louder.

 

Since Bernanke’s Top (September 14th, 2012 when he decided to print to infinity and beyond), the CRB Commodities Index (19 commodity basket) is down -8.7%. That compares with the SP500 that is now down only -3.8%. Some global equity markets (like Germany’s DAX, which is crushing the Dow YTD) are now up versus their early September highs.

 

The US Dollar, of course, has been up for 8 of the 11 weeks since Bernanke’s last decision. Tomorrow’s FOMC meeting offers him an opportunity to get out of the way. We’ll see if he has the political spine to do that now that the election is out of the way.

 

All the while, you have had great buying opportunities presented by the #PoliticalClass and their cliff babbling along the way. Our critics will be the last to remind you that on the Hedgeye Best Ideas Conference Call on November 15, 2012, 6 of our 8 Best Ideas were actually longs. Timing matters. And we have a great deal of pride focusing on it.

 

To review, our 6 LONG US Equity Ideas have returned, on average, +9.9% (versus SP500 +5% off the lows) during the same period:

  1. International Game Technology (IGT) – Todd Jordan idea = +14.3%
  2. C&J Energy Services (CJES) – Kevin Kaiser idea = +12.4%
  3. Jack in The Box (JACK) – Howard Penney idea = +10.4%
  4. Paccar (PCAR) – Jay Van Sciver idea = +6.5%
  5. Nike (NKE) – Brian McGough idea = +8.0%
  6. TCF Financial (TCB) – Josh Steiner idea = +4.8%

That’s not a victory lap. That’s just the score. In what most would agree is a tough alpha generation environment, It Happened.

 

And I think, for me at least, it’s really important to highlight all the great work the men and women who grind it out for us every day do. They are both resilient and adaptive. They are also transparent and accountable. And for that, I am thankful to have the opportunity to work alongside them each and every day.

 

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, $105.99-109.26, $3.62-3.72, $80.01-80.51, $1.28-1.30, 1.59-1.65%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

It Happened - Chart of the Day

 

It Happened - Virtual Portfolio


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