Job Strength and Market Highs

Client Talking Points

Jobless Claims

Once again, the employment picture shows signs of strength as today’s report of initial jobless claims checked in at 323,000 for the week. For followers of Hedgeye, we have been talking about an improved jobs environment for some time as part of our #GrowthAccelerating macro theme.

Strong Dollar, Lower Food Prices

With the SP500 up for the fifth consecutive day, hitting another all-time (which is a long-time) record closing high of 1632 (+14.4% year-to-date), Keith was selling all day as he watched the #Sohn2013 ideas roll on to the new tape. Three days ago we had 18% Cash in the Hedgeye Asset Allocation Model – this morning we have 32%. In other words, from a gross exposure perspective, we are raising some cash now.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.  


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.

Three for the Road


“Rumors of a low-cost iPhone heat up as a key Apple supplier goes on a hiring spree.” -- @CNET


“We are what we believe we are.” – C.S. Lewis


323,000, this week’s Jobless Claims Number


TODAY’S S&P 500 SET-UP – May 9, 2013     

As we look at today's setup for the S&P 500, the range is 34 points or 1.70% downside to 1605 and 0.39% upside to 1639.










  • YIELD CURVE: 1.57 from 1.55
  • VIX  closed at 12.66 1 day percent change of -1.33%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England monetary policy cmte decision
  • 8am: Fed’s Lacker speaks on financial stability in New York
  • 8:30am: Initial Jobless Claims, May 4, est. 335k (prior 324k)
  • 8:45am:  Bloomberg U.S. Economic Survey, May
  • 9:45am: Bloomberg Consumer Comfort, May 5
  • 10am: Wholesale Inventories, March, est. 0.4% (prior -0.3%)
  • 10am: Wholesale Sales, March. est.  0.1% (prior 1.7%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $1b-$1.5b TIPS in 2017-2043 sector
  • 1pm: U.S. to sell $16b 30Y bonds
  • 1:15pm: Fed’s Plosser speaks on monetary policy in New York


    • 9am: House Homeland Security hears from Boston Police
    • Commissioner Edward Davis on Boston bombings
    • 9:15am: Senate Environment Cmte hears from EPA administrator nominee Gina McCarthy at confirmation hearing
    • 10:30am: FCC holds open meeting to consider proposed rules to improve broadband access on airplanes and on access to spectrum for commercial space launch operators
    • 11am: Congressional-Executive Commission on China holds discussion on re-education through labor with Sen. Sherrod Brown, D-Ohio, Rep. Chris Smith, R-N.J.


  • Buffett’s MidAmerican plans $1.9b of wind farms in Iowa
  • Boeing supplier resumes 787 cell output, forecasts profit jump
  • JPMorgan says watchdog may seek to punish units, workers
  • BlackRock vote on Dimon’s future highlights links to JPMorgan
  • Rambus fined $250m in Hynix patent-infringement case
  • CFTC said to weigh lower price-quote in Dodd-Frank swap rule
  • Facebook in talks to buy Waze for up to $1b: Calcalist
  • Microsoft offering $1b for Nook’s digital assets: TechCrunch
  • Hess said to seek $1.5b for Thailand, Indonesia assets
  • Eni sells as much as $2b stake in gas network Snam
  • Highfields’ Jacobson: Digital Realty is stock to sell short
  • Gundlach says short Chipotle on unimpressive earnings growth
  • Softbank says deal can save Sprint $3b a year by 2017
  • Disney said to tell advertisers of live ABC app in mobile push
  • Sony says weak yen, games to drive sales; TVs to turn profit
  • Vestia asks court to void $924m of Credit Suisse swaps
  • China passenger-vehicle sales rise 13% in April, beat ests.
  • Bangladesh plant fire kills 8; Rana Plaza death toll hits 921
  • Millennial Media CEO says now not time to sell co.


    • Precision Castparts (PCP) 6am, $2.75
    • AES (AES) 6am, $0.28
    • Bombardier (BBD/B CN) 6am, $0.08
    • TELUS (T CN) 6am, $0.54 - Preview
    • MEMC Electronic Materials (WFR) 6am, $(0.14)
    • DISH Network (DISH) 6am, $0.53
    • EchoStar (SATS) 6am, $(0.06)
    • Visteon (VC) 6am, $0.88
    • Windstream (WIN) 6:15am, $0.11
    • Cineplex (CGX CN) 6:15am, C$0.24
    • Paladin Labs (PLB CN) 6:30am, C$0.53
    • Carlyle Group (CG) 6:30am, $0.96
    • MAXIMUS (MMS) 6:30am, $0.70
    • Manitoba Telecom Services (MBT CN) 6:30am, C$0.54
    • Starz-Liberty Capital (STRZA) 6:45am, $0.49
    • BCE (BCE CN) 7am, C$0.71 - Preview
    • Harsco (HSC) 7am, $0.05
    • Dean Foods (DF) 7am, $0.27
    • Walter Investment Management (WAC) 7am, $0.41
    • DENTSPLY International (XRAY) 7am, $0.56
    • WhiteWave Foods (WWAV) 7am, $0.15
    • Laredo Petroleum Holdings (LPI) 7am, $0.12
    • Rentech Nitrogen Partners (RNF) 7am, $0.54
    • Agrium (AGU CN) 7:15am, $1.08 - Preview
    • FTI Consulting (FCN) 7:30am, $0.50
    • Kosmos Energy (KOS) 7:30am, $0.07
    • Suburban Propane Partners (SPH) 7:30am, $2.50
    • Cominar REIT (CUF-U CN) 7:30am, C$0.44
    • Alere (ALR) 7:30am, $0.52
    • Cooper Tire & Rubber (CTB) 7:35am, $0.66
    • Teekay (TK) 8am, $(0.20)
    • Baytex Energy (BTE CN) 8am, C$0.22
    • Teekay LNG Partners (TGP) 8am, $0.46
    • TreeHouse Foods (THS) 8am, $0.70
    • Teekay Offshore Partners (TOO) 8am, $0.26
    • Apache (APA) 8am, $2.21 - Preview
    • NPS Pharmaceuticals (NPSP) 8am, $(0.13)
    • Brookfield Asset Management (BAM/A CN) 8am, $0.31
    • Crescent Point Energy (CPG CN) 8am, C$0.20
    • Canadian Tire (CTC/A CN) 8:07am, C$0.89
    • Dorel Industries (DII/B CN) 8:27am, $0.86
    • Coeur d’Alene Mines (CDE) 8:28am, $0.14
    • Cablevision Systems (CVC) 8:30am, $0.04
    • Granite Construction (GVA) 8:30am, $(0.22)
    • AMC Networks (AMCX) 8:30am, $0.79
    • Industrial Alliance Insurance (IAG CN) 9am, C$0.79
    • Stantec (STN CN) 9am, C$0.63
    • Inland Real Estate (IRC) 9:30am, $0.22
    • Inter Pipeline Fund (IPL-U CN) 11:19am, C$0.26
    • Diodes (DIOD) 4pm, $0.02
    • Assured Guaranty (AGO) 4pm, $0.71
    • Sotheby’s (BID) 4pm, $(0.12)
    • Salix Pharmaceuticals (SLXP) 4pm, $0.66
    • MannKind (MNKD) 4pm, $(0.13)
    • Air Lease (AL) 4pm, $0.38
    • Amarin (AMRN) 4pm, $(0.40)
    • Stifel Financial (SF) 4:01pm, $0.57
    • Air Methods (AIRM) 4:01pm, $(0.15)
    • (PCLN) 4:01pm, $5.27
    • Allscripts Healthcare Solutions (MDRX) 4:01pm, $0.14
    • Molycorp (MCP) 4:01pm, $(0.30) - Preview
    • PDL BioPharma (PDLI) 4:02pm, $0.36
    • CareFusion (CFN) 4:02pm, $0.53
    • Sapient (SAPE) 4:05pm, $0.13
    • ExactTarget (ET) 4:05pm, $(0.10)
    • Ubiquiti Networks (UBNT) 4:05pm, $0.22
    • Osisko Mining (OSK CN) 4:05    pm    , C$0.06
    • Medivation (MDVN) 4:09pm, $(0.40)
    • Advisory Board (ABCO) 4:10pm, $0.16
    • Universal Display (PANL) 4:11pm, $(0.10)
    • Nektar Therapeutics (NKTR) 4:15pm, $(0.43)
    • Nortek (NTK) 4:15pm, no est.
    • Bonanza Creek Energy (BCEI) 4:15pm, $0.41
    • NVIDIA (NVDA) 4:19pm, $0.15
    • Pembina Pipeline (PPL CN) 4:21pm, C$0.28
    • Darling International (DAR) 4:30pm, $0.27
    • Nelnet (NNI) 4:35pm, $1.27
    • Public Storage (PSA) 5:09pm, $1.62
    • Great Plains Energy (GXP) 5:15pm, $0.12
    • AuRico Gold (AUQ CN) Aft-mkt, $0.05
    • Bright Horizons Family Solutions (BFAM) Aft-mkt, $0.22
    • Algonquin Power & Utilities (AQN CN) Aft-mkt, C$0.12
    • Dundee International REIT(DI-U CN) Aft-mkt, C$0.21


  • Egypt’s Wheat Farmers Hobbled by Fuel Shortages as Silos Run Low
  • Corn Drought Easing Boosts Reserves Most Since 1960: Commodities
  • Gold Declines as ETF Withdrawals Continue and Commodities Fall
  • Brent Declines for Third Day as U.S. Crude Stockpiles Increase
  • Copper Slides Most in a Week as China Inflation Misses Estimates
  • Corn Swings Before USDA Report Predicted to Show Higher Supply
  • Iraq Resumes Northern Crude Exports via Turkey After Sabotage
  • Carbon Market Champions Undeterred by Kyoto Dead-End, EU Says
  • Sugar Falls to 3-Month Low on Sales From Thailand; Cocoa Drops
  • China Steel Production Rose to Record 89.6 Mt in March: BI Chart
  • Gasoline Imports Shrink in Mideast on Refineries: Energy Markets
  • China Dowry Filled With Gold Signals Gains for Jewelers: Retail
  • Rebar Drops as Producer Price Decline Boosts Concern on Economy
  • World Food Prices Rise as Drought Hurts New Zealand Dairies






















The Hedgeye Macro Team













In Emil Brolick, and the team he has assembled, Wendy’s have the executive leadership to bring the company back to its former place of prominence in QSR. The indications from the quarter are that the turnaround will take some time. 


Dublin Was Not Built in a Day


We believe that the turnaround at Wendy’s is going to take time. Given that this recent run has been driven largely by multiple expansion, rather than earnings revisions.  We expect the stock to “take a breather” at this point given a lack of catalysts for it to continue on its current trajectory.   The next two quarters are likely going to see a choppy top line performance from WEN.


1Q13 Results


Despite sales coming in below expectations, Wendy’s managed to print an in-line earnings number of $0.03 per share.  Management raised its Adjusted EPS Outlook to $0.20-0.22, largely due to the refinancing of its indirect wholly owned subsidiary, Wendy’s International, Inc.


Quarterly stats:

  • SRS gained 1% in 1Q13 “despite bank holiday and weather impact” vs consensus 2.3%
  • North America restaurant-level margins improved 100 bps yoy to 12.8%
  • North America co-op comps are guided to 2-3% (back end loaded)
  • Thinning out of the franchisee base as 90-100 closures expected in FY13


  • Discontinued breakfast offering will negatively impact ’13 comps, offsetting positive impact of reactivations.  The offset to this is the benefits from the image activation program. 
  • Wendy’s will serve as a backstop on GE loans to franchisees with at risk capital estimated to be “some fraction of $100mm”
  • Wendy’s is struggling with value-seeking customer – MCD is making life very difficult for WEN to talk about value.  We believe that SSS could decline 1-2% in 2Q13
  • Still difficult to gauge how successful Image Activation will be – Tier 1 restaurant are too expensive and not providing the require returns.  WEN still experimenting with Tier 2 and 3 design and cost package.
  • Total cost to company, of fixing the asset base, remains severe – The initial $10 million incentive program will likely more than double over time. 


Howard Penney

Managing Director


Rory Green

Senior Analyst







Early Look

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This note was originally published at 8am on April 25, 2013 for Hedgeye subscribers.

“Winning is not a sometime thing; it’s an all time thing. You don’t win once in a while, you don’t do things right once in a while, you do them right all the time.  Winning is habit.  Unfortunately, so is losing.”

-Vince Lombardi


Last week I took a few days of vacation and had the opportunity to catch up on some reading.  One of the key books I read last week was, “Top Dog: The Science of Winning and Losing”, by Ashley Merriman and Po Bronson.  As the title suggests, the book is a deep dive into the science behind winning, losing, and competitiveness and has applications that go well beyond athletics.


Last week I was also continuing to enjoy the fact that my alma mater Yale recently won the NCAA ice hockey championships.  To be fair, a NCAA championship, while a big deal to the players, fans and alumni, is a far cry from a gold medal, Stanley Cup, or World Championships.  Nonetheless, it is an example of a team achieving its ultimately goal in a very competitive situation.


Going into the 16 team NCAA hockey tournament, Yale was seeded 15th and a 60:1 underdog according to the Vegas odds makers.  On the path to the championship, Yale also achieved a few things that no team had every done before.  First, they beat three number one seeds (each regional of four teams has a number one seed).  Second, they are the only fourth seed in the Frozen Four to ultimately win.  Clearly, this is an example of a team that overcame significant obstacles to become a champion.


So, what is it that enables some teams to win against extreme odds?  Counter to intuition, team members getting along and being traditional team players is not the key.  In fact according to Merriman and Bronson:


“In the idealized notion of a team, everyone is equal and interchangeable, and this equality drives commitments to the team effort.  But the science argues that the ideal is, if anything, a distraction. The goal is not to live up to the ideal, but to perform.  In real life, teammates are rarely true equals, and they don’t always get along. Having a hierarchy, with its clear divisions of responsibility, is most often the solution to team performance.”


To use economic terms, great teams are usually much more capitalist than socialist.


Now as Keith would say, back to the global macro grind . . .


In terms of global economic statistics, Spain’s unemployment rate is certainly one that signifies that the nation continues to lose economic share.  At a 27.2% rate of unemployment, with an even larger unemployment rate for those new to the work force, Spain is not going to see economic recovery without some help from her teammates.


The key friend to Spain is likely to be ECB President Mario Draghi, especially if he decides to cut rates as he was hired to do.  Luckily for Spain, our quantitative models are also signaling that the ECB is likely to ease again.  Specifically, every major European equity market is now in a bullish formation in our models, expect Russia.  This makes sense as Europe easing would be U.S. dollar bullish, which is negative for the price of oil and Russia is the largest exporter of oil in total barrels per day terms in the world.


Key sovereign debt markets also appear to be signaling some chance of the ECB incrementally easing.  Since the world didn’t end with Cyrpus’ bail under as many market pundits were urging would happen, peripheral yields in Europe have tightened meaningfully.  Despite the aforementioned employment issues, Spain’s 10-year yield is now at 4.38% and Italy’s 10-year yield is now at 4.06%.  As it relates to Italy, this is the lowest yield on the 10-year in more than a year.


Much of the pin action this morning in global equity markets is coming from China.  For those that tuned into our conference call on emerging markets this week, this should be no surprise.  We came into the year bullish on Chinese equities and have reversed that stance based on new data.  The China section in the emerging markets presentation given by my colleague Darius Dale was titled, “Will China Blow?”. Increasingly, this is a very fair question to ask on China.


A key risk or concern over China is whether real estate market prices are in a bubble and whether there is too much debt behind the Chinese real estate market.  In effect, is China about to go through a real estate correction comparable to what the U.S endured starting in 2007?  Some would argue that the high pace of Chinese economic growth inherently supports a rapid increase in real estate values and this is likely true, to a point.


In general, debt and real estate are very much driving Chinese equity markets.  Overnight, the Shanghai Composite closed on its lows as the property subsector once again dramatically underperformed.  This was on the back of a Minister of Taxation official warning that if property prices in second tier cities continue to rise then more property taxes will be implemented.  On one hand, you do have to hand it to Chinese officials attempting to proactively manage bubbles.  On the other hand, the history of government intervention is that governments rarely get things right.


In the Chart of the Day below we’ve highlighted a key slide from the emerging market presentation from earlier this week.  This chart shows the performance of the SP500 and MSCI Emerging Market Index in strong dollar periods and weak dollar periods, respectively.  They key takeaway is that in strong U.S. dollar periods emerging markets underperform dramatically as, among other things, capital flows out of emerging markets.  On the back of this research, we added the emerging markets ETF, EEM, as a short idea on our best ideas list.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1321-1478, $97.31-103.34, $82.55-83.44, 97.45-101.36, 1.70-1.76%, 11.33-14.89, and 1564-1595, respectively.


Keep your head up, stick on the ice, and keep #winning,


Daryl G. Jones

Director of Research


#Winning - Chart of the Day


#Winning - Virtual Portfolio


The Macau Metro Monitor, May 9, 2013




In response to Hong Kong media reports that Sands China is selling its Four Seasons Hotel Macau through a timeshare arrangement, the government has asked the company to clarify the alleged sale.  The government has suggested that this form of sale might become an alternative form of real estate development, and the authority hinted the possibility of blocking any property transfer that violates the land concession contracts that the casino resorts signed with the authority.   


In a statement issued yesterday, Sands China said: “The Company wished to emphasize that although it has consistently stated in its annual reports that its business strategy includes the monetization of its non-core assets, there is absolutely no basis to the information in the news reports (on the alleged sales of the Four Seasons Hotel Macau and the alleged spinning off of the shopping mall). The company considers these reports to be intentionally false and is seeking legal advice accordingly.”  


Jaime Carion, the director of the Land, Public Works and Transport Bureau, said, “According to the land grant contract, any transfer [of ownership] needs the approval from the MSAR administration.  We have already sent the company [Venetian Macau] a letter asking them to explain to us what the whole thing is about”.


The sales of properties within casino-resorts is a public concern, as some critics stressed that the lands are granted to the operators at low prices and such sales may cause controversy relating to the fairness of the granting of the land concessions.  In addition, news reports also said Sands China is proposing the sale of its shopping mall project by way of BT or REITs for listing. The project is estimated to be worth HKD24 billion.

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