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Two Countries, Two Directions

Takeaway: The Philippines earns its first-ever investment grade while Cyprus stays a mess. Take a look at this chart of the countries' market indices.

If you look at the three-year performance of The Philippines key stock market index over the past three years on the chart below, it makes sense that Fitch just gave the country its first-ever investment grade rating. 

 

However, when you look at the Cyprus market over the same period, it tells a completely different story. The market knew what was happening there, too.

 

Two Countries, Two Directions - Phil Cyprus

 

 


Panera: HAPPY CAMPER, WOUNDED BEARS

Takeaway: As the shift in American attitudes toward fast food has changed in recent years, Panera has emerged as one of the happy campers.

This note was originally published March 26, 2013 at 11:46 in Restaurants

As the shift in American attitudes towards "traditional" fast food has become more pronounced in recent years, Panera (PNRA) has emerged as one of the happy campers of the restaurant industry.  Wounded bears, in the form of McDonald's (MCD), Wendy's (WEN), and others, pose a danger for PNRA. 

 

In February, we wrote that Panera’s mix growth outlook was negative.  Further evidence is emerging that competitors from quick-service restaurants (QSR) and Casual Dining are looking to challenge Panera’s position as the “healthy” option, a factor that could represent an added headwind to Panera comps going forward. 

 

Panera Bread’s position as a healthy QSR option that is relatively free of competitors is gradually changing as casual dining chains offer lower price points and chains like Wendy’s upgrade their menus to include items that are cheaper than Panera’s core offerings but are marketed as healthy eating options.  McDonald’s offering healthier menu alternatives, such as the McWrap, and investing in marketing the item aggressively, further underscores the industry-wide focus on healthier options that are sought by millennial consumers.  

 

Panera: HAPPY CAMPER, WOUNDED BEARS - pnra sss components

 

 

Happy Camper, Meet Wounded Bear(s)

 

We believe that the market has been shifting away from Wendy’s, McDonald’s, and other “traditional” QSR players for years.  The impact of this shift in consumer preferences on McDonald’s has been masked, to a degree, by successful but transient products like frappes and smoothies.  McDonald’s “millennial problem”, well described by Maureen Morrison at Ad Age is front-and-center for the company’s marketing strategy.   

 

We are not optimistic that McDonald’s marketing shift will solve its issues but we do believe that Panera’s traffic trends are likely to be, on the margin, negatively impacted.  Ultimately, when MCDonald’s hand is forced, the company will invest more meaningfully to change its brand’s perception among millenials who, increasingly, want fresh and organic food offered in a customizable manner. 

 

 

Takeaway

 

McDonald’s and other traditional QSR players are scrambling to change with the times.  Beverage initiatives at McDonald’s have worked as short-term panaceas but we contend that soft sales growth is symptomatic of a changing business environment as well as MCD's business becoming overly-complex.  We believe that traditional QSR management teams see Panera’s brand positioning as an attractive path for the future.  Given the deep pockets of this industry and the highly competitive nature of the companies involved, this will present a headwind to Panera’s same-restaurant sales going forward.

 

 


Under Armour: Looking Good?

Takeaway: Here's our take on Under Armour's first quarter performance, and our outlook for the second half of the year.

This note was originally published March 26, 2013 at 20:18 in Retail

We think Unde rArmour is seeing a nice pop in its first quarter performance at retail, buoying our view that there will be a bifurcation this year in the company’s earnings trajectory. The Street is at $0.03, we’re at $0.09, and the company earned $0.14 last year.  We think that UA set itself up for a beat in the first quarter, but then by the second half when it needs to rely on Footwear and International, we’ll see its EBIT growth rate slow down as it invests more SG&A to grow those newer businesses.

 

What gives us confidence in the first quarter? Simply put, for 10 quarters, UA’s wholesale sell-in to retail outstripped sell-thru by about 1,000bps. To get those numbers, we took total apparel sales, backed out International, e-commerce and company retail to get a true like-for-like US wholesale number. Then we compared to the weekly SportscanINFO sell-through data. That fueled an average Gross Margin decline of over 100bp over the past two years.

 

Under Armour: Looking Good? - sellinvssellthru

 

The good news is that in the first quarter to date, the retail sales data suggests that UA’s sell-through has been up near 30%. We should caution against simply jacking up UA’s top line in you model or taking up Gross Margins. Rather, this is the retailers clearing out inventory that has been building up for some time. But at a minimum, it should clear the way for the channel to accept Spring product at a clip sufficient enough for UA to deliver 20%+ growth in the upcoming quarter.

 

 

But Watch Out in the Second Half

We continue to think that UA will join the band of companies in the retail supply chain that is stepping up capital investment this year – both in capex and in SG&A -- but at the higher end. Growth in Footwear and International are both absolutely critical to UA’s aggregate top line. When that happens, we think that revenue and EBIT growth will diverge. If we’re wrong, then we think it is a matter of time until the top line slows, which would be even more damaging to UA’s multiple.

 

We still think that this is an exceptional brand, but simply think that it belongs to a company that needs to go through some growing pains before it could deliver upon the expectations currently embedded in the stock.

 

We think it’s more likely than not that earnings growth gets pushed out by a year sometime in the second half, and that investors should take advantage of this on or just after the first quarter print.

 

Under Armour: Looking Good? - ua2

 

Under Armour: Looking Good? - ua3 


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US Economic Strength, the Vix

Client Talking Points

Macro Themes Confirmed

At the beginning of the quarter, two of our three key Macro Themes that we saw were Growth Stabilizing and Housing’s Hammer. Data points from Tuesday confirmed what we already knew. Durable goods orders rose 5.7% in February and Case-Shiller’s home price index rose 8.1% last month. All of that helped send the S&P 500 to within two points of its all-time closing high in Tuesday trading.

A Look at the VIX

The VIX, the US equity volatility index, is making lower-highs, and lower-lows these days. That puts the VIX into a Bearish formation, essentially telling us that fear, too, remains in a bearish formation. It doesn’t mean that we don’t keep a close eye on what’s happening around the world or that we manage risk any less closely.

Asset Allocation

CASH 36% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“Raising money for some gardening tasks around the yard. #hedgefund.” -- @SteveMartintoGo

 

 

QUOTE OF THE DAY

“I am never going to have anything more to do with politics or politicians. When this war is over I shall confine myself entirely to writing and painting.” – Winston Churchill

STAT OF THE DAY

$155 million, the price SAC’s Steve Cohen paid for a Picasso painting, “La Reve”


Belittling Gold Markets

This note was originally published at 8am on March 13, 2013 for Hedgeye subscribers.

“Keep away from people who belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.”

-Mark Twain

 

The quote at the top of this note is certainly true for my experiences in life.  Every time I have met someone who has truly succeeded, whatever their domain, I’ve noticed they do their best to encourage others on the path to success. In the past week, I had a very good example of this when I met Senator John McCain.

 

Now setting aside your political affiliation, I think it is fair to say McCain has been one of the more successful politicians of this generation.  In this instance, I met him briefly in a small T.V. studio as he was going on to do a clip for CNN and I was waiting to go on for CNBC.  As we waited, he wolfed down a bag of chips, hopped on and off various calls, and planned out his town hall appearance in a small Arizona town for later in the day.

 

So, yes, at 76 years of age and after 26 years in the Senate, McCain is still grinding.  Therein lies the point of greatness and great people, they understand that the path to success is based on hard work and repetition. Investing in the public markets epitomizes this idea. 

 

The one market that has belittled us as of late is China.  Chinese equities remain one of our top long ideas, but as my colleague Darius Dale wrote in an update on the idea on Monday some of the recent economic data from China does give us pause. Specifically, industrial production, fixed asset investment and aggregate financing (a driver of money supply) were marginally below expectations and saw sequential declines.

 

Now to be fair, many of these economic metrics are showing year-over-year growth rates, that relative to the rest of the world, are outstanding.  In the Chart of the Day, we highlight this by showing Chinese Fixed Asset Investment for the last three years.  As the chart shows, in the most recent period fixed asset investment was up 21% year-over-year and remains well off its lows.

 

As it related to fixed asset investment in China, as the chatter out of China over night is that Shenzhen may implement a price cap at every housing project within 2013.  This pressure on Chinese property stocks was then compounded by the fact that Governor Zhou of the People’s Bank of China said he is on “high alert” in regards to inflation.  So the belittling point on China is that while growth remains relatively strong, the outlook for inflation and policy (the other two key factors in our country models) are more belittling to discern.

 

An investment asset class that has been less belittling for us to analyze recently is gold.  Yesterday, my colleague Christian Drake wrote a note titled, “Gold: Anatomy of a Breakdown”.  The breakdown of gold has been a key asset call on the back of our view that global growth is stabilizing.  This hasn’t been a popular call as many institutional investors have been over allocated to  gold based on the idea that as growth decelerates, expectations for future QE rise, the dollar depreciates and investors flock to gold as protection against further dollar debauchery.

 

The reality of the interplay above is that both the dollar and gold are large driven by economic data versus expectation and the view of future monetary policy.  As the note emphasized:

  • Gold versus Federal Reserve Balance Sheet:  The correlation between Gold and the Fed’s Balance Sheet is strong across durations with an R^2 = 0.92 over the last 14 years.  If you think this relationship makes common and economic sense (we do), a deceleration and unwind of policy (or the expectation for) on the back of an improving growth outlook is a decidedly bearish catalyst for gold; 
  • Gold vs. Dollar:  Gold’s Inverse correlation to the dollar has been moderate-to-strong across durations.  Gold is levered to the USD directly given that gold generally settles in dollars, and indirectly via expected inflation and policy impacts on fiat currency value.   Correlations aren’t perpetual – they build and decay - but when they start to tighten alongside other relevant/corroborating factors, it’s generally worth paying attention.  Gold’s 30D correlation to the dollar is currently -0.90;
  • Gold - CFTC Data:  Bullish Speculative positioning looks like its capitulating as net length in combined non-commercial futures & options contracts has collapsed since November.  It hasn’t paid to speculate on the end of the world (again) as extremes in bullish positioning (>1STDEV) have been followed by negative subsequent price performance in gold 100% of the time over the last year.  Net length is currently down ~62% from the late 2012 highs; and
  • Gold ETF Flows:  Gold flows to the GLD and ETFs in aggregate, have rolled over since the beginning of the year and have accelerated to the downside over the last month.  For example, total Gold Holdings in the SPDR Gold Trust (GLD) are down ~114 Tonnes (-8%) from peak 2012 levels according to Bloomberg data.

The summary of the points above are that gold will go down for exactly the same reasons it went up – slow growth and loose monetary policy.  So if the dollar continues to strengthen and growth continues to stabilizes, the record outflows from gold ETFs will only continue.  Thus as Mark Twain wrote:

 

“Moralizing, I observed, then, that "all that glitters is not gold."

 

Indeed.

 

Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1569-1604, $109.02-110.78, $82.36-82.97, 93.76-96.82, 1.96-2.09%, 11.21-13.83, and 1538-1565, respectively.

 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

 

 

Belittling Gold Markets - Chart of the Day

 

Belittling Gold Markets - Virtual Portfolio



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