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TRADE OF THE DAY: RH

Today we bought Restoration Hardware (RH) at $37.60 a share at 10:28 AM EDT in our Real-Time Alerts. Nice pullback (on no volume) to immediate-term TRADE support here for Hedgeye Retail Sector Head Brian McGough to hit the buy button on. Shorts are going to keep getting squeezed here is our call. Fundamentals are solid.

 

TRADE OF THE DAY: RH - TOTD


ECB to Cut?

On Thursday the ECB convenes to discuss an interest rate cut. This is a highly anticipated meeting, with 43 of 70 Bloomberg economists estimating a 25bps cut to the main refinancing rate (to 0.50%), 26 of 70 on HOLD, and 1 of 70 forecasting a 50bps cut. The last major inflection point in ECB policy came in the September 2012 meeting in which Draghi announced the OMT facility. Since then our call has been for no change in rates. 

 

ECB to Cut? - vv. rates

 

We’ve been calling for an interest rate cut in 2H 2013 but think the probability of a 25bps cut has gone up in recent weeks and it may come as soon as this Thursday. In the Early Look today Keith noted that the EuroStoxx600 outperformance last week, closing +3.7%, is one indication of increased expectations around a cut. That said, we’re less optimistic that a cut will be an outright panacea to the real economy that shows (among other factors) lending activity clogged (chart below), even if fundamentals are beginning to show a bottoming process.  

 

ECB to Cut? - vv. loans

 

We continue to expect the ECB to move in a reactive fashion and therefore to save its powder until economic conditions get noticeably worse.  Assessing where we’re at on the front shows a mixed picture:

 

Of the positive signs (= no rate cut): Cyprus is rear view; Slovakia is out of sights (for now at least); Italy formed a coalition government (confidence vote pending); the European Commission (alongside the key Eurocrats) remain dovish and positioned to extend deficit targets (in Spain, France, Portugal, to name a few) and lessen the bite of austerity; there’s an improved risk picture, with 10YR sovereign yields across the periphery at some of their lowest levels in years (Italy hit 3.94%, this morning!), and bond issuance YTD has largely been priced at lower yields.  Equities continue to reflect weekly headline risk, but here again we see continued support behind Draghi’s OMT to prevent an exit of any countries and stabilize the EUR. 

 

Of the negative signs (= rate cut): high frequency data continues to show that the bottom may not in fact be in. For example, Eurozone confidence figures out today were all down versus consensus and last month’s print. Political and sovereign risk remains high in Spain, Portugal, and Italy given the tenuous popular support for governments and the impact of Austerity’s Bite.

 

ECB to Cut? - vv. eurozone confidence

 

EUR-USD

 

If the ECB cuts the main interest rate, we believe that’s bad for the EUR, good for the USD, and bad for commodities, which is in turn good for the consumer.

 

Our critical quantitative lines on the EUR/USD are outlined in the chart below. Beyond immediate term TRADE support of $1.29 we do not see any meaningful support until around $1.22.

 

 ECB to Cut? - vv. eur levels

 

The most recent weekly CFTC data is somewhat stale (from 4/23) but shows that April has largely been a less bearish month for the cross.  

 

ECB to Cut? - vv. cftc

 

Without a crystal ball we will be waiting and watching for market price signals into Thursday.

 

Have a great week!

 

Matthew Hedrick

Senior Analyst


USD: Still Plenty To Like

The US dollar has been in bullish formation for the past three months, as displayed in the chart below. The PowerShares DB US Dollar Index Bullish ETF (UUP) is up +2.8% over the last three months due to significant appreciation in the value of the dollar. In turn, commodities have taken a hit across the board, which has become quite evident in gold, oil and agricultural commodities like corn. 

 

The strong dollar is a catalyst for a stronger America. A boost in consumption will help drive economic growth in the United States and that's accomplished through lower gas prices and cheaper groceries. The dollar might be down today but it will continue to rise over the coming months and that's something investors and consumers can get excited about.

 

USD: Still Plenty To Like - UUP TODAY


Early Look

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SBUX: STILL TOP DOG

This note was originally published April 26, 2013 at 10:39 in Restaurants

Starbucks (SBUX) is the best-run company that we follow and the long-term TAIL seems unlimited. The company’s geographical reach and size is highly impressive. Even more impressive is the performance of the Americas business, given its size and maturity.

 

We maintain a positive view of Starbucks as an effective way to play improving US consumption.  While sell-side analysts this morning are correct that the global macro outlook is challenging, it is important to know where SBUX has its exposure.  The U.S. is what will drive beats and misses in the near term, despite much unit growth being focused in China/Asia-Pacific. ~88% of company stores and ~85% of licensed stores within the "Americas" division are located in the United States.

 

SBUX: STILL TOP DOG - yum mcd sbux opinc

 

 

The Good

 

Last night, Starbucks reported global same-store sales growth of 6% (13th consecutive quarter above 5%).  Same-stores sales in the Americas division grew 6% (including 5% traffic). Total revenue growth of 11% produced a 1.8% increase in operating margin and a 20% increase in earnings per share (EPS). 

 

Americas:

  • Revenues + 10% year-over-year
  • SRS two-year comp sequentially declined 1%
  • Operating Income +22%
  • Operating Margin +2.2% to 21.1% (highest 2Q ever)

SBUX: STILL TOP DOG - sbux americas pod1

 

 

EMEA:

  • Revenues unchanged, operating margin unchanged
  • -2% second quarter of fiscal year 2013 comps implies 2-year  comps negative
  • Emphasis is on improving profitability by refranchising (“sold to you!”)
  • Applying Americas “learnings” not trumping macro

SBUX: STILL TOP DOG - sbux emea pod1

 

 

CAP:

  • Revenues grew 22%
  • Comps at +8% came in light vs consensus
  • Operating margin down -7.1% on investment spending on China growth

SBUX: STILL TOP DOG - sbux cap pod1

 

 

The Less-Good: Expectations, Food

 

The only slight negative stemming from what was, overall, a bullish conference call was management reigning in expectations for 2H13, but upping the official guidance. During the call management guided for third quarter fiscal year 2013 EPS of $0.50-0.53 and fourth quarter fiscal year 2013 EPS of $0.54-0.57, versus consensus of $0.54 and $0.57, respectively. The coffee cost tailwinds should continue well into fiscal year 2015 now, offsetting continued investments in growth-related initiatives. 

 

Food remains Starbucks’ Achilles’ heel.  The acquisition of La Boulange is a long way from being branded a “success”.  As of yesterday, there were 439 stores carrying La Boulange products, including all stores in the San Francisco Bay Area.  The company is planning a rollout of La Boulange pastries in the Pacific Northwest including Seattle in June, then will expand to cities including Los Angeles and Chicago, followed later in the year by New York and Boston. The company is on track to have La Boulange products in all of our U.S. company operated stores by the end of 2014.


Booking Gains: SP500 Levels, Refreshed

Takeaway: We'll continue to risk manage the range, booking gains on the way up to 1,603.

Positions: 12 longs, 7 shorts @hedgeye

 

In our real-time alerts product, the last ten booked positions have been gains. Certainly, that is better than bad and has been in-line with our market call this year that with #GrowthStabilizing equities in the U.S. should outperform.  Increasingly, our view is that stabilizing growth is morphing into accelerating growth domestically.

 

Admittedly, the Dallas Fed Manufacturing Index coming in this morning at -15.6 versus +5.0 expected was a soft reading and certainly a data point to consider.  That said, and more important to our thesis was pending home sales, which were up +1.5% versus +0.7% expected and saw a sequential acceleration from -0.4% in the prior month.

 

As we saw in last week’s GDP report, consumption was up +3.2% last quarter and is the key factor driving U.S. GDP recovery.  In fact, consumer spending contributed +2.24% of the total growth of GDP last quarter.  To the extent that housing demand remains strong and inventory continues to tighten, this will be positive for home prices, the consumer balance sheet and discretionary consumption.

 

This morning we have made three key changes in our Real-Time Alerts:

1)      Sold Budwesier (BUD)

2)      Covered Gold Miners (GDX)

3)      Bought Restoration Hardware (RH)

 

Currently, as outlined in the chart below, the TRADE range for the SP500 has immediate term support and resistance at 1567 and 1,603, respectively.  We'll continue to risk manage the range, booking gains as we move towards the high end. 

 

Daryl G. Jones

Director of Research

 

Booking Gains: SP500 Levels, Refreshed - SPX


European Banking Monitor: Green Means Go

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

* European Financials - There are a lot of roses coming up in Europe lately. European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.

 

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European Financial CDS - European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.

 

European Banking Monitor: Green Means Go - ww. banks

 

Sovereign CDS – So much for Cyprus. European sovereign swaps continue to tighten. Italy, Spain, Portugal and Ireland all came in by 9-19 bps week-over-week, and are down 19-50 bps over the past month. Meanwhile, the U.S., Germany, France and Japan all remain a yawn with 1 bp moves.

 

European Banking Monitor: Green Means Go - ww. sov 1

 

European Banking Monitor: Green Means Go - ww. sov 2

 

Euribor-OIS Spread – The Euribor-OIS spread remained flat last week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Green Means Go - ww. euribor

 

ECB Liquidity Recourse to the Deposit Facility – ECB deposits were up 5.8 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Green Means Go - ww. facility

 

 

 


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