Sentiment Dogs Bite

This note was originally published at 8am on January 11, 2013 for Hedgeye subscribers.

“I have a feeling that the bark is worse than its bite.”

-Winston Churchill


That’s what Churchill said about Joseph Stalin in 1944.


For their part, Churchill and Roosevelt never entirely trusted Stalin… they weighed every decision against the possibility that Russia might quit the war, as the Bolsheviks had done in 1917.” (The Last Lion, pg 445).


While I don’t make market calls based on “feeling”, how people feel about markets matters. America’s historical risk management lesson with Russia feels very familiar. Now that the shorts have been squeezed, do I entirely trust being long stocks right now? Of course not.


Back to the Global Macro Grind


The SP500 and Russell2000 finally delivered the Canadian Bacon yesterday, making higher-highs versus their September 2012 and all-time closing highs, respectively.


With the Financials (XLF) leading the charge on the day (+1.3%) and already up +4.6% for the YTD (the SP500 is +3.2%), those who stayed short this market definitely feel more than a little barking out there – these newfound fund flows to equities are like dogs panting.


To review our recent bullish call on Global Equities, there are 3 big parts:

  1. Global #GrowthStabilizing as Hedge Fund Short Interest was rising (NOV-DEC)
  2. Treasury Bonds and Gold breaking down (NOV-JAN)
  3. Fund Flows shifting from bonds to equities (DEC-JAN)

Since Global Macro markets are reflexive, it’s been nice to see these 3 things happen in order:

  1. US Equity Short Interest peaked (sequentially) in the last week of November at 3.98%
  2. Gold stopped going up at another lower all-time high in the 3rd wk of November ($1753)
  3. Global Equity Fund flows just had one of their biggest weeks since 1992 (see Merrill data this morn)

That, of course, is bearish for Treasury Bonds (we are short TLT) – and why we re-shorted Gold (GLD) on green yesterday (see our #RealTimeAlerts product for intraday signaling if you can stand watching me day-trade).


So, with all of this new “news” becoming rear-view mirror events, you don’t want to be getting piggy here; you want to be booking some gains. Depending on how hot these Financials Earnings Reports are for Q412, you can determine how leisurely you can take your time. Wells Fargo (WFC) reports first this morning and the belly of the money-center banks will be out next week.


Why would you make some sales on green?

  1. Global #GrowthStabilizing won’t last forever (remember, Keynesian economic cycles are short and volatile)
  2. #EarningsSlowing will be more readily apparent in late January to early February (Financials as good as it gets)
  3. It’s just generally cool to sell high after you bought low

That last one-liner might annoy some people, but it was pretty annoying seeing people short every up move for the last month as the economic data was improving too.


It’s one thing to be bearish on government; it’s entirely another to be a perma-bear of all things, all of the time.


In an over-supplied industry (asset management), this is why getting the Behavioral side of the market right matters more than it has ever mattered before. Sentiment is a factor that you fade. But it’s also one of the toughest market factors to quantify.


I’m constantly trying to find new channels and data to quantify sentiment. Currently, my Top 3 Sentiment Checks are:

  1. My research team’s proprietary data
  2. My Institutional Client base (our team collaborates best data with theirs)
  3. My Twitter stream

That last one is the one that fascinates me the most. I have built a “contrarian stream” of market pundits that are getting really good at chiming in, almost like an orchestra, on market direction (intraday). They have been trying to sell every down-move to lower-highs since the Fiscal Cliff low of 1400 SPX in the last week of December. #wrong


More on that later. For now, it’s important to realize that Institutional Short Sellers (Short Interest as a % of the total float for stocks listed in the SP500), just dropped from 3.98% in the last week of November to 3.74% into the 1st week of January. At the same time, the Institutional Investor Bull/Bear Spread just went from +950 basis points wide (wk of Nov19) to +2,770 bps wide this week.


Sentiment is a dog to follow, and it bites.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1642-1678, $110.33-111.48, $3.64-3.75, $79.48-80.11, $1.30-1.32, $87.41-89.10, 1.86-1.96%, and 1452-1494, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Sentiment Dogs Bite - Chart of the Day


Sentiment Dogs Bite - Virtual Portfolio


1Q13 Starbucks comps in the Americas and China, Asia Pacific were impressive and, despite EPS only meeting expectations, the outlook for the company's earnings is positive with many tailwinds coming into play as we move through FY13.





Starbucks posted a solid quarter, albeit with unit growth missing expectations and some weakness in CPG.  Along with unusual items that negatively impacted margin, these factors prevented the strength in comps from flowing through to the bottom line.  We believe that FY13 consensus estimates for SBUX Americas SSS are conservative. and that the positive traction that has been gained in China will become more meaningful, complementing the strategies being executed on in other markets.   The company is laying the foundation for consistent EPS growth over the coming years. 


Below, we go through a quick recap of 1Q13 earnings and, following that, our thoughts on the company’s earnings potential for FY13. 



1Q13 Earnings

  • Revenues came in slightly lower than expected as CPG sales lagged expectations
  • Comps in Americas, CAP ahead of expectations and encouraging commentary on conference call
  • China continues to be a strong market, no impact on traffic from recent dissatisfaction with other western brands
  • Restaurant operating margin was slightly disappointing given the coffee cost tailwind (that is still growing) but unanticipated, unusual costs had a 130 bps impact on consolidated operating margin
  • Opened 212 net new stores globally versus consensus 283



  • Americas comparable sales grew by 7% in the quarter, including over 4% transaction growth
  • Promoted beverages, including the pumpkin spice latte, added more than a point of comp
  • The division saw operating margin contract by 50 bps due to expenses related to the global leadership conference (90 bps), litigation charges (70 bps), and the impact from Sandy (30 bps)
  • 86% more customers signed up for My Starbucks Reward card in 1Q13 vs 1Q12
  • 80 net new units opened in 1Q versus consensus expectations of 126



  • CAP comparable sales grew by an impressive 11%, including 8% transaction growth
  • Sales growth of 20% was reassuring after recent uncertainty in region
  • Holiday promotions performed well, loyalty card adoption rate encouraging across region
  • Unit growth is having a temporary negative impact on op margin – more than 60 bps in 1Q
  • 125 net new units opened in CAP during 1Q.  The Street was anticipating 136



  • EMEA comparable sales declined -1%, including 2% traffic growth.  Check declined, suggesting a trade down impact driven by difficult consumer environment in the region
  • Largest market, the U.K., received the pumpkin spice latte well
  • Operating margin expanded by 110 bps as a result of cost efficiencies and license stores’ revenue growth



  • VIA Ready Brew grew 16% in the quarter
  • 175 million K-Cups sold in the quarter
  • 150,000 Verismo machines sold across each channel since launch
  • Schultz underlined the company’s intention to provide incentives, going forward, for customers “to not only buy Starbucks coffee, but integrate that even further in the Starbucks ecosystem” with the card loyalty and mobile



SBUX COMPS A SIGN OF STRENGTH - sbux americas sss cons


SBUX COMPS A SIGN OF STRENGTH - sbux cap sss cons


SBUX COMPS A SIGN OF STRENGTH - sbux emea sss cons





The company remains well-poised to take further share of the US coffee market while growing its presence internationally.  In our view, this quarter’s revenue shortfall is not indicative of any significant issues within the business.  Initiatives within the CPG business, such as expanding the Blonde Roast offering and introducing new varieties of K-Cups, are set to maintain momentum in the category.  New unit growth, which missed expectations, is likely not a concern for the full-year since management reiterated its guidance of 1,300 net new stores globally (600 Americas, 600 CAP, 100 EMEA).  We are modeling $2.19 in EPS for FY13.


The long-term challenge for Starbucks is going to be maintaining control of its brand through every channel it pushes product.  As we wrote almost two year ago, “the future of the single-serve category is Starbucks’ to shape”.   The tone of today’s call certainly firmed that conviction.  


One risk that is in play during this quarter is the pending Kraft arbitration ruling.  Kraft is reported to be seeking as much as $2.9 billion plus legal fees.  Although no resolution has yet been reached, Starbucks management anticipates a ruling to be delivered later in the second quarter (ending March). 



Howard Penney

Managing Director


Rory Green

Senior Analyst

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Today we bought International Game Technology (IGT) at $14.81 a share at 9:37 AM EDT in our Real-Time Alerts. Todd Jordan was back on our Morning Call reviewing the long-term bull case for IGT. Cheap stocks with improving fundamentals are what people have to chase, especially after a solid earnings report.




Chicken wing prices are, like last year, moving sharply higher to start the year.  The difference in 2012 is that prices are moving above $2 per pound for the first time with a possibility of further upside.  We continue to see risk to BWLD’s multiple.





In 2012, during the first 24 days of the year, chicken wing prices gained 14%.  For much of the remainder of last year, prices stayed within a range of roughly 180-190 cents per pound.  Year-to-date in 2013, wing prices are again moving higher: +7.2% YTD.  During the 3Q earnings call, management warned that the price of wings was trending to $2.07 for the first two months of the fourth quarter and stated that they expected it to exceed that level heading into the super bowl. 


The question is whether or not this expectation is baking in the possibility of McDonald’s expanding its testing of wings, currently in being sold in Chicago after a successful run in Atlanta, to its national system.  BWLD’s guidance for earnings growth of 20% seems dependent on a number of factors, one important one being some moderation in wing prices in 2H13, per remarks from CFO Mary Twinen in October.  MCD getting in on the act won’t help that happen.




  • We still believe that BWLD’s multiple needs to reset much lower as earnings move lower
  • Wing prices moderating in 2H13 could be difficult given industry conditions, wing demand, and potential weather impact on corn
  • Moderating wing prices seem to be central to the bull case
  • Selling wings by weight, rather than number, is likely to damage the brand and management knows this
  • The first six weeks of 1Q12 saw co-op SSS increase 12.9%, presenting a difficult compare for the same period in ’13.  If the switch is made to selling wings by weight, that could make comping last year’s strong first quarter even more difficult.




PERFECT TIME TO PANIC AT BWLD - chicken wings 6mo




Howard Penney

Managing Director


Rory Green

Senior Analyst

Hedgeye Best Ideas: Federal Express (FDX)

Thank you for the feedback last week related to the revised format we're considering for the Hedgeye Hot Sheets (to be renamed Hedgeye Best Ideas). For those who have not responded, please take a moment to review the revised format of the stock report and let us know what you think.

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We believe FedEx has the ability to improve margins in its Express division.  With a large revenue base at a near 30-year low in margins, the division could be a value driver over the next two years.  Further, we see FedEx Ground as a winner in the US ground parcel market.  That division offers exposure to fast growing e-commerce package volumes.   Finally, FedEx Freight has been surprisingly profitable and may benefit from a rebound in US construction activity.



INTERMEDIATE TERM (the next 3 months or more)

We believe we are past the trough in FedEx Express margins.  Cost improvements are already underway and the macro environment appears likely to be more supportive of express services demand.  Estimates for fiscal 2014 should benefit from that momentum, in our view, and fiscal 4Q 2013 guidance may well be positive at the next report. We view an expanded network in Europe as a positive for FedEx Express, should the FDX end up acquiring TNT at an attractive price.


LONG-TERM (the next 3 years or less)

FedEx is a long-term position, in our view.  Reorganizing the Express division is a slow process, in part because high service levels cannot be disrupted as adjustments are made.  Cost reductions build through FY2016 and the long-run result may surprise to the upside.  FedEx Ground has been taking market share from UPS in US ground parcel for over a decade, but those gains may well reach a tipping point in coming years.  In our view, shares of FDX could offer 50% upside to fair value should the margin expansion at FedEx Express match its competitors'.



Hedgeye Best Ideas: Federal Express (FDX) - he bi FDX chart



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