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Buyem: SP500 Levels, Refreshed

Takeaway: This is only the 3rd oversold cover/buy day our models have signaled in the past 35 trading days.

POSITIONS: 14 LONGS, 2 SHORTS @Hedgeye

 

Let me re-phrase that: Buy Consumption, Short Commodities (and proactively manage the risk of the range).

 

Strong Dollar is finally getting oil. That was the only big headwind we had left in our model for both Asian and US #GrowthStabilizing. We understand our models are different. And we are comfortable with that. This is only the 3rd oversold cover/buy day our models have signaled in the past 35 trading days.

 

Across our core risk management durations (TRADE, TREND, and TAIL), here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1530
  2. Immediate-term TRADE support = 1502
  3. Intermediate-term TREND support = 1458

 

In other words, you buy securities that are signaling immediate-term TRADE oversold here, then you wait. If the Dollar was being debauched and Oil was ripping, the title of this note would probably say sellem. Not happening; neither is inflation.

 

#Process

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buyem: SP500 Levels, Refreshed - SPX

 


INITIAL CLAIMS - LABOR MARKET STILL IMPROVING

Takeaway: NSA claims show underlying improvement in the labor market for the second week in a row.

Last week's initial claims data was distorted by the DOL's incorporation of estimates for CT & IL as both state offices were closed due to the snowstorm and unable to report official figures - meaning we had to wait for this week's data for a true update on the underlying labor market trend.   With non-seasonally adjusted claims registering further sequential improvement, this week's data indicate that labor trends continue to strengthen. 

 

Below is the detailed, weekly analysis of the the Jobless Claims data from our Head of Financials, Josh Steiner.  Email  if you would like to trial Josh’s work.   

 

 

Labor Market Improves Further In Latest Week

This week's backup in initial claims (SA) was a bit of a negative surprise, as the last four years have shown steady improvement throughout February. As a reminder, the seasonally-adjusted tailwinds will be coming to an end in a few weeks. 

 

Prior to revision, initial jobless claims rose 21k to 362k from 341k WoW, as the prior week's number was revised up by 1k to 342k.

 

The headline (unrevised) number shows claims were higher by 20k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 8k WoW to 360.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -2.7%. This is good news, as it signals that the real labor market is, in fact, still strengthening.

 

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Joshua Steiner, CFA

 

 


HOUSING: Is Momentum Slowing?

The market’s response to Toll Brothers’ (TOL) earnings yesterday was not pretty, but it’s not a cause for concern like many would like to think it is. Housing sales volume continues to increase with the MBA mortgage purchase applications index having printed 20% over the last five weeks. Mortgage insurers, large cap banks and select regional banks (MTG, BAC, TCB) all stand to benefit from the recovery in housing. Title insurers like FAF and FNF are also levered to a recovery in the purchase market.

 

 

HOUSING: Is Momentum Slowing? - purch yoy shark normal

 

 

Mortgage production revenue, however, will likely see a decline quarter-over-quarter as we move further into 2013. So the question remains: can housing survive the recovery without quantitative easing from the Federal Reserve? The answer is yes, with the reason QE is being removed is because of underlying strength in the economy. If the economy isn’t actually strengthening, then it’s back to the drawing board.

 

HOUSING: Is Momentum Slowing? - mortg production revenue normal

 

HOUSING: Is Momentum Slowing? - qe vs rates normal


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CAKE PERFORMING WELL

The Cheesecake Factory should continue to outperform its peer group in casual dining.  The stock has underperformed the market of late as broader industry concerns have weighed on sentiment but we continue to see this as the best long opportunity in the category. 

 

Macro Challenging But Company Performing

 

While the macro environment remains difficult, The Cheesecake Factory continues to perform strongly from a top-line perspective.  4Q12 same-restaurant sales grew 1.3% at The Cheesecake Factory and declined -3.2% at Grand Lux Cafe.  Consensus was looking for +1.7% and -1.6%, respectively.  Overall comps grew 0.9% but there was a -60bps impact from Hurricane Sandy.  The consolidated comp, excluding the impact of Sandy, is estimated by management to have been 1.5%.  The Street was looking for 1.5% system same-restaurant sales in 4Q.  We believe the strong performance in 1Q, while facing strong macro headwinds, is a positive indication of the strength of CAKE’s business.

 

CAKE PERFORMING WELL - cake pod1

 

 

Showing Resilience in Difficult Macro

 

While the stock price reacted negatively to the company guiding below Street expectations, the same-restaurant sales performance versus the Knapp Track industry benchmark was approximately +160bps.  The company guided to 0-1% comparable sales growth in 1Q13, including one-time items impact of 95bps.  Our expectation, based on casual dining trends in 1Q to-date, is for that outperformance versus Knapp to sequentially expand in 1Q by 0-50bps.  Over the last few quarters, CAKE has established strong outperformance versus the industry and we expect that to continue in 1H13.

 

The management team faced down three questions on the earnings call on current sales trends.  Despite the noise in the 4Q12 results and difficult comparisons versus a 53rd week in 2011, the underlying business trends of this company have been in line with our expectations. 

 

International development should continue to drive a greater portion of earnings growth, expanding margins over time.  The company announced a new international development agreement yesterday while reporting that the sales performance of the international restaurants is exceeding expectations. 

 

 

Margin Expansion Story Intact

 

Restaurant-level margins expanded by 90bps in the fourth quarter and we expect continuing margin expansion throughout 2013 as food cost inflation expectations are declining.  International growth, as we mentioned above, should also add to the growth of operating margins this year.

 

CAKE PERFORMING WELL - cake pod two

 

 

Attractive FCF Yield

 

Cash flow from operations was $195 million in 2012.  The company allocated roughly $86 million to capital expenditure, implying free cash flow of $109 million for the year.  We estimate that 2013 free cash flow will come in at roughly $100 million, which implies a FCF yield of ~6%.

 

 

Outlook

 

For 1Q13, comparable sales growth is being guided to as 0-1%, including the closure of a Hawaii location due to fire and snowstorm Nemo in the Northeast.  The combined impact is estimated to be 95bps.  Adjusting for the impact of the storm, underlying trends at The Cheesecake Factory seem to be accelerating on a two-year average basis.

 

1Q13 earnings guidance is $0.40-0.43 per share.  The storm has cost the company roughly $0.01 in EPS. FY13 EPS guidance is for 12-15% growth, or a range of $2.10-2.18, based on an annual comparable sales range of 1.5-2.5%. 

 

Commodity inflation is expected to be 3%, lower than prior expectations of 3-5%. 

 

The company plans to develop between 8-10 new stores in 2013, or 5% growth, having opened 10 new locations over the last 15 months.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


INITIAL CLAIMS - LABOR MARKET STILL IMPROVING

Takeaway: NSA claims show underlying improvement in the labor market on a second derivative basis for the second week in a row.

Labor Market Improves Further In Latest Week

This week's backup in initial claims (SA) was a bit of a negative surprise, as the last four years have shown steady improvement throughout February. As a reminder, the seasonally-adjusted tailwinds will be coming to an end in a few weeks. 

 

Prior to revision, initial jobless claims rose 21k to 362k from 341k WoW, as the prior week's number was revised up by 1k to 342k.

The headline (unrevised) number shows claims were higher by 20k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 8k WoW to 360.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -2.7%. This is good news, as it signals that the real labor market is, in fact, still strengthening.

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 1

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 2

 

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Yield Spreads Widen Further

The 2-10 spread rose 3.8 basis points WoW to 175 bps. 1Q13TD, the 2-10 spread is averaging 167 bps, which is higher by 24 bps relative to 4Q12.

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 15

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 16

 

Joshua Steiner, CFA


PODCAST: Buy The Dip?

On today’s Morning Investment Call held for Hedgeye Subscribers, we discuss how permabulls would say to buy the dip in US equities today after yesterday’s pullback or whatever you want to call it. Just because stocks fell for five hours of trading doesn’t mean that everything is going to come crashing down. If you want to short something, short commodities because the US Dollar is strong. Strong Dollar = Strong America and Consumption. Meanwhile, Europe is getting smacked around, so if you’d like to be short something look there.

 

 

You can listen to the full call in the audio posted above.

 

 


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