“C’est la dissymetrie, qui cree le phenomene.”
Translated, what French Physicist (1) Pierre Curie meant by that was asymmetry creates evolutionary change. He and his wife, Marie Sklodowska-Curie, won the Nobel Prize in Physics in 1903. Their lesson needs to be re-learned by market participants, every day.
I’ve always been trying to re-learn. While you cannot tell by my last name, I’m French too. I’m at least half-francophone (French Canadian). My Mom’s side of the family is French as a first language (Les Thiboutots). I didn’t learn how to properly read, write, and do math in English until the 6th grade. That explains partly why I am slow to grasp British concepts like Keynesian economics.
Markets don’t care about what you or I know. They are going to do what they do, irrespective of our respective market positions. That, alongside the non-linearity of it all, humbles me, daily. C’est L’Asymmetry, mes amis. That’s de stuff we want to be looking for, eh.
Back to the Global Macro Grind…
Professional Top Callers (#PTCs) have been calling for the top in stocks for a good 3-6 months now. To be fair, maybe when they said sell in May, they meant to tell you it was going to be from the all-time closing high of 1617 in the SP500 (yesterday). They nailed it. I’ll piggy back on their call and tell you to sell some too this morning (SP500 is immediate-term TRADE overbought at 1621).
Maybe they meant sell Treasuries in May? That would’ve been a more asymmetric call. Given that long-term US Treasuries just made another lower-high (vs her all-time closing high of November 2012), at least there’s a case to be made for the final Bernanke Bubble to start popping now; especially if we’re right on US employment, housing, and consumption #GrowthAccelerating.
Now that many of the well bandied about bearish “catalysts” of 2013 haven’t panned out (sequestration, Cyprus, etc.), our channel checks are revealing more creative ones like Cicadas (locusts). Hedgeye Senior Jedi Analyst, Christian Drake, reminded me yesterday that 2013 is year 17 in their seventeen year hibernation cycle. The cicada cacophony is set to potentially engulf the East Coast.
In other news, 2013 is also the 100 year anniversary of the Fed (US Federal Reserve Act of 1913). In order to celebrate:
- The US Dollar has finally had it with being devalued to a 40 year low (2011)
- The price of Gold has finally had it with going up (every year since 2001)
- The Japanese, Europeans, and now Australians are opting to devalue
I’ve written this many times before, but it’s worth mentioning again – if the US Dollar were to continue to breakout from her 40 year low, this will be the most asymmetric move you have seen in Global Macro since the 1990s.
So, you don’t want to miss that.
Markets certainly aren’t missing what was long considered the improbable (#StrongDollar) becoming increasingly probable. There are two causal factors driving this (absolute and relative) - both have had big news in the last 3 trading days:
- ABSOLUTE - #StrongDollar gets stronger as US employment growth surprises on the upside
- RELATIVE – the Australians joined the Europeans, cutting rates overnight to a record low (2.75%)
Hindsight is now becoming crystal clear and consensus is actually going to where the puck is going this morning:
- Australians cut rates
- AUS/USD breaks TREND support on the news (only 8 of 29 “economists” expected the cut)
- Gold falls -0.7% to the lows of the day ($1459/oz)
Makes sense. Or does it? And to who?
I see a lot of #AngryBugs (Gold Bulls) trying to justify their long gold position (which is -13% YTD) with the same thesis – “everyone is printing money.” Got it. But that’s not what really matters to Gold right now. What the market is saying matters is that if the Japanese, Europeans, and Australians devalue, that’s bullish for the US Dollar, and bearish for Gold.
If you disagree, that’s fine – that’s what makes a market. This is what the market is telling us on the USA vs Gold relationship:
- On a 6 month duration, the inverse correlation between USD and Gold is -0.72
- On a 6 month duration, as US Treasury Yields (10yr) have made higher-lows, Gold has made lower-highs
- On a 6 month duration, US employment, housing, and consumption growth have been inversely correlated to Gold too
Is it interconnected? What kind of asymmetry do you think you get if Hedgeye is right (and Bernanke wrong) on the US unemployment rate? Remember, the biggest risk to Bernanke’s policies has always been his forecast. He still hasn’t signaled to the market that the US economy could see a 6% handle on the unemployment rate in 2013-2014 (he’s forecasting 2016-2017).
I know. No one thinks anything about Fed policy will change until he leaks it to his boys. While that may be true, also remember that A) markets front-run the Fed and B) no one has an edge on delaying economic gravity. The US Dollar, Gold, Stocks (and maybe even Treasuries now that it’s May) are signaling it might be time for Bernanke’s policies to change. C’est L’Evolution!
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $99.04-105.95, $81.56-83.11, 97.61-100.43, 1.71-1.82%, 12.43-14.07, 942-963, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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In May 2012, we suggested that there was 60% of upside in JACK over the long-term TAIL. Since then, the price has risen by 64%. What now?
We think the run Jack in the Box has had merits caution on the near-term duration. Over the long-term TAIL, there remains plenty of upside.
Jack in the Box has been one of our favorite longs since February 2012. The stock has performed well since we first turned positive in February of 2012 but, while our conviction remains firm in the long-term upside in the stock price, we want to remain disciplined. With respect to many of the tenets of our long thesis (valuation, fundamentals, sentiment), we believe that the investment community consensus has caught up with reality.
We believe that the longer-term potential of the company remains underappreciated, particularly with respect to Qdoba’s future growth, and that is reflected in our Sum-of-the-Parts analysis, below. Our original SOTP analysis, published on 5/8/12, described Qdoba as the “JACK Option” and suggested 60% of upside. A significant part of what has gotten the stock higher has been a revaluing of the stock by investors. The refranchising story, along with improved same-restaurant sales performance, transpired as we expected. The outsourcing of the company’s distribution model, announced (exactly) three months after our original call for 60% upside, expedited the upward move as the market recognized the sale of non-core assets as positive for returns and margins.
Below is a refreshed SOTP analysis:
Why We Would Stay Away (For Now)
- Valuation: The stock’s multiple has appreciated 1.5 EV/EBITDA turns since we turned bullish
- Sentiment: Bearishness that emerged in November ’12 has evaporated
- Qdoba: The story seems to be taking time to materialize
Why We Would Get On Board
- Valuation: The stock remains cheap using our forward estimates
- Sentiment: Skepticism on Qdoba remains high
- Qdoba: Growth potential with a highly-credible mgmt team to execute on it
Charts of Note:
We do not anchor on valuation for “buy” or “sell” signals, but it seems that the stock could be expensive here. Our earnings estimates deviate further from consensus in FY14 and FY15 than over the next twelve months. On that basis, our view of the stock is that it is fairly- or slightly-over-valued on a near-term basis and under-valued on a longer-term basis.
As our charts, below, illustrate, the investment community’s disposition towards the stock has improved considerably over the last year-to-eighteen months. We do not see improving sentiment as an immediate-term catalyst for the stock price to move higher.
We believe the most significant opportunity for JACK at this point is to prove to Wall Street that Qdoba can achieve the unit economics we are expecting as the system matures.
Here are Hedgeye CEO Keith McCullough’s quantitative levels for JACK.
Recent reports suggest that the People's Bank of China (PBOC) may lift the upper limit of the floating range for deposit interest rates to 1.2 times the benchmark rates. While it’s tough to discern whether or not the Shanghai Composite Index was up on this today, as the rumors have apparently been circulating, it’s interesting to see the PBOC continue with its financial system reform agenda. Recall that a full liberalization of deposit rates is something that would materially erode the asset quality and the Net Interest Margin/profitability of the Chinese banking system. Roughly 25% of the Big 5 banks’ portfolios are in bonds that are marked-to-model yielding at or below the benchmark one year deposit rate.
While a move from 110% to 120% of the benchmark isn’t necessarily a game changer, it does raise serious questions about what Chinese banks plan to do when D-Day finally comes. Another major recapitalization of the banks, which would be the third time in the last 10 years, is not out of the question. The prospect of major secondary issuance could potentially hang over the Shanghai Composite Index for the foreseeable future, creating a headwind for the Chinese stock market.
While five days of data is not enough from which to draw many conclusions, the May holiday is off to a strong start. Average table revenues for 5 days spanning April 30-May 4th were HK$1.2 billion, up 24% YoY (HK$975 million) and up 36% from last week’s HK$886 million. In-line with our earlier projections, we expect May GGR growth to accelerate to 16-20% or HK$29.5-30.5 billion.
In terms of market share, Galaxy and Wynn were big gainers. Galaxy’s share shot up to 21.1% from 17.8% share in April while Wynn’s share rebounded to 12% from the April low of 9.2%. MPEL gave back its massive share gains in April and dropped back to its 6M average share of 14.0%.
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