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HEARD ON THE AM CALL: BANGING THE DRUM

Takeaway: We remain strong buyers on the dips. The trend is your friend on the long US equity side.

We’ve been banging the People Aren’t Bullish Enough drum for a while now. We're doing that for a reason.

 

People haven’t been, and still aren’t long enough. That’s the glaring bottom line right now. Look, the numbers aren’t lying. US growth continues to surprise on the upside. It’s that simple. Just look at the numbers.

 

This morning’s US jobless claims number fits this trend like a glove. Sure, it was up slightly week-over-week, but don’t miss the forest for the trees folks.  Non-seasonally adjusted claims were better by 8.2% vs last year, as compared with the 8.0% improvement in the previous week. The labor market is improving and it is doing so at an accelerating rate. The trend is your friend here.  

 

The bears are waiting for the boogeyman. Look, we'll be the first to tell you that there are plenty of things to short out there. We’ll short JGBs and the Weimar Nikkei until the cows come home. We’ve been very clear on that. But the S&P 500 isn’t one of them.

 

We remain strong buyers on the dips. The trend is your friend on the long US equity side. 


MAY FLOWERS: STILL LONG #GrowthAccelerating

Takeaway: The TREND in the economic data continues to confirm our Research and Risk Management views on improving domestic growth.

With the TREND in the economic data continuing to confirm our Research and Risk Management views, the Hedgeye Redundancy Department has been at productive capacity since late November repeatedly highlighting the key factors at work supporting the ongoing improvement in the domestic growth outlook.  We’ll keep it tight here in highlighting May’s macro manifestations of domestic #GrowthAccelerating

 

First, to be clear, we don’t like everything at every price but, on balance, with the $USD still in bullish formation (Bullish TRADE, TREND, TAIL), commodity deflation persisting, and Labor, Housing & Confidence (and to a lesser extent Credit and now Real Earnings) working reflexively, we continue to like the Dollar and domestic, consumption oriented equities on the long side and Gold, Yen, and the broader commodity basket on the short side.   

 

 

INITIAL CLAIMS:  This morning’s Department of Labor data showed NSA claims accelerated to -8.3% y/y growth compared with -8.0% improvement the prior week and -2% two weeks prior.   So, not only is the labor market improving, it is doing so at an accelerating rate at present.  The organic improvement in the underlying labor market YTD has bucked the trend of the past three years, continuing to overwhelm the negative March-to-August seasonal distortion and any sequestration related drag.   

 

Source: Hedgeye Financials

MAY FLOWERS:  STILL LONG #GrowthAccelerating - Claims 1

 

MAY FLOWERS:  STILL LONG #GrowthAccelerating - Claims 2

 

REAL EARNINGS:  Mirroring the broader TREND in nearly every macro chart, real earnings growth troughed and inflected positively back in November.  The Trend on both a 1Y and 2Y basis remains one of acceleration and with modest comps and persistent commodity deflation, expectations for sustained positive growth appear reasonable.   

 

We would note that a continued rise in temp and part-time employment growth and corporate attempts to manage worker hours under the 30-hour threshold dictated under Obamacare is a trend we’re monitoring and one which, while positive for employment growth broadly, may serve as a drag to hours worked and weekly earnings growth as we move towards ACA implementation deadlines.   

 

MAY FLOWERS:  STILL LONG #GrowthAccelerating - Real Earnings 053013

 

$USD/Commodities:  The Dollar remains in bullish formation and with the domestic growth outlook improving on both an absolute and relative basis, deficit spending declining, and monetary policy more hawkish on the margin, we continue to think the dollar holds further upside.  

 

With USD correlations to the SPX (+) and Gold/Commodities (-) remaining strong across durations, #StrongDollar, long stocks, short commodities remains the baseline macro strategy playbook.   *Note: Keith bought the dollar via UUP this morning in our Real-time Alerts  

 

MAY FLOWERS:  STILL LONG #GrowthAccelerating - DXY 053013

 

MAY FLOWERS:  STILL LONG #GrowthAccelerating - Gas vs. Real Earnings

 

MAY FLOWERS:  STILL LONG #GrowthAccelerating - Inflation vs Real Earnings

 

CONFIDENCE:  The Bloomberg Consumer Comfort Index, Univ. of Michigan Consumer Confidence, and the Conference Board Consumer Confidence Index all accelerated in May while making fresh 5Y highs.  As we have highlighted, economic activity relationships with confidence have completely broken down over the last 4 years but, historically, consumer confidence has been a good-to-very good leading indicator for economic activity metrics such as new orders, consumer spending, and money velocity.  A sustained breakout of the trough channel we have been in since 2008 may augur a re-tightening in historical confidence-econ correlations.   

 

MAY FLOWERS:  STILL LONG #GrowthAccelerating - Consumer Confidence 053013

 

HOUSING:  Purchase Applications continue to accelerate in 2q13TD despite the recent back-up in rates, the NAHB (Home Builder) HMI advanced in May, Existing Home Sales remain strong and the latest New Home Sales, Pending Home Sales and Home Price (FHFA & Case-Shiller) data all accelerated sequentially. 

 

Admittedly, the comps on pricing continue to steepen and a significant, expedited back-up in rates may prove a marginal headwind but we continue to view the housing recovery as a multi-year story and wouldn’t view a move from the current low-double digit parabolic recovery to steady high-single digit HPA growth as a material negative.    

 

Mortgage Application and Pending Home Sales data suggests forward housing activity will remain healthy and, over the next few years, we continue to believe a move towards 2M housing starts represents a high probability scenario.   

 

MAY FLOWERS:  STILL LONG #GrowthAccelerating - Purchase Apps

 

Yield Spread (10’s-2’s):  In so much as a widening in the yield spread = expectations for QE Taper = Improving Domestic Macro is a transitive relationship, the recent expansion in the yield spread would serve as positive confirmation of an improving domestic growth outlook.  The positive price divergence from financials (+4%) MTD, negative divergence from Utilities (-8.7%) MTD and ongoing outperformance for Consumer Discretionary would seemingly concur as well.   

 

MAY FLOWERS:  STILL LONG #GrowthAccelerating - 2  10 Spread

 

Christian B. Drake

Senior Analyst 

 

 

 


SOME QUICK THOUGHTS ON BRAZIL

Takeaway: While we continue to generally shun EM exposure, patience is poised to provide investors with a good opportunity on the long side in Brazil.

Down -2.5%, the Bovespa Index was hammered yesterday (closed today) on a +50bps rate hike that generally surprised the bulk of consensus expectations of a +25bps hike (per 38 of 57 economists polled by Bloomberg). After the cut, the 1Y OIS market is now pricing in just one more +25bps hike over the NTM, which may come as soon as the JUL 10 meeting.

 

SOME QUICK THOUGHTS ON BRAZIL - 1

 

SOME QUICK THOUGHTS ON BRAZIL - 2

 

This subdued outlook for incremental tightening is in line with our expectations given our views on global inflation dynamics (HERE and HERE) and that the hawkish trend in the leading IGP-M CPI already inflected in MAR with the benchmark IPCA CPI following suit in APR.

 

SOME QUICK THOUGHTS ON BRAZIL - 3

 

As we mentioned a few months ago, BCB was behind the curve with respect to inflation expectations, but their recent hawkishness has their credibility back on track. Moreover, Brazil’s 2H13 GIP outlook looks as robust as any country across Asia or Latin America.

 

SOME QUICK THOUGHTS ON BRAZIL - BRAZIL

 

As we’ve said all along, due to poor policy implementation and commodity deflation, patient international investors were going to get a chance to invest in Brazil on sale. In that vein, the next rate hike is likely to be the final catalyst for getting long the consumption side of the Brazilian economy (BRAQ).

 

All that being said, we don’t think the coast is clear just yet. Specifically, Finance Minister Guido Mantega’s most recent negative jawboning of the BRL (down -4.9% MoM) is still cause for alarm, given that Big Government Intervention in the FX market and in the Brazilian capital account has been one of the primary factors for the demonstrable underperformance of Brazilian equities and the BRL on a TTM basis.

 

SOME QUICK THOUGHTS ON BRAZIL - 5

 

SOME QUICK THOUGHTS ON BRAZIL - 6

 

All told, while we continue to generally shun emerging market exposure, a little more patience is poised to provide investors with a good opportunity on the long side in Brazil – particularly those investors that must remain allocated to the EM space.

 

Darius Dale

Senior Analyst


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WHY WE LIKE SBUX – DON'T LIKE MCD

Takeaway: We remain positive on SBUX and negative on MCD.

This note was originally published May 29, 2013 at 15:18 in Restaurants

Listening to each of these companies’ respective presentations today at the Sanford Bernstein conference, it was not difficult to understand why we like SBUX and are bearish on MCD.

 

Takeaways from the presentations:

 

MCD

 

We remain bearish on MCD as the stock has underperformed the S&P 500 by 550 basis points since we added it to our Best Ideas list on 4/25. On an absolute basis, the stock has declined -1.09%. We believe the Street’s expectations are still too aggressive, from a sales and earnings growth perspective, and the company needs to make structural changes to its U.S. business as the store has become too complex. Please click here for the materials for our presentation on McDonald’s from 4/25.

  • MCD CEO Don Thompson was cautious in his tone, citing soft economic environment and stagnant IEO industry
  • Comps have outperformed QSR sandwich operators in 16 of 19 weeks this year (we are wary of this statistic as sandwich concepts compete against everyone in food service)
  • Overall tone seemed to convey a message of near-term struggle with bright long-term ahead
  • Mgmt stating, first, that guest counts are important for franchisees was interesting – franchisees want higher margin items on the menu, there is a conflict between corporate and franchisees here in terms of priority
  • Unconvincing response as to what mgmt will do to revive U.S. business in ’13 – the menu is back and marketing is stronger and “more direct” – does not inspire confidence
  • Europe remains a significant problem for McDonald’s

 

WHY WE LIKE SBUX – DON'T LIKE MCD - best ideas mcd large

 

 

SBUX

 

Starbucks’ presentation represented a stark contrast to McDonald’s as the company offered a clear, positive and energized outlook for shareholders. The company’s data-anchored strategy is tailored for specific regions of the world, unlike the more general and now-outdated MCD strategy (three global growth priorities). We continue to view Starbucks as one of the best ways to play the strengthening U.S. economy and consumer.

  • Goals of the company remain as lofty as ever – no constraints being placed on Schultz’ ambition
  • SBUX foundation for growth is solid, primed for accelerated growth over the next 5, 10 years
  • Challenges in Europe are persisting and will persist for “quite some time”
  • Growth being supported by Via, K-Cups, home brewer systems, tea and other categories such as juice
  • Expanding the loyalty card into the grocery aisle and following the rise of mobile internet closely 

Conclusion

 

If you wanted to own a global company with strong growth prospects, sound fundamentals, high exposure to the U.S. recovery and low exposure to Europe’s travails, you would own SBUX and not MCD. We remain positive on SBUX and negative on MCD.

 

WHY WE LIKE SBUX – DON'T LIKE MCD - mcd operating income

 

 

Howard Penney

Managing Director

HPenney@hedgeye.com

862.217.9429

 

Rory Green

Senior Analyst

RGreen@hedgeye.com


TREASURY YIELDS VS. JOBLESS CLAIMS

Takeaway: The rate of improvement in the US labor market accelerated again last week.

As we've mentioned before, we prefer to look at the non-seasonally adjusted (NSA) jobless claims numbers. There’s not a whole lot of distortion there. NSA claims were better by 8.2% vs last year, as compared with the 8.0% improvement in the previous week. To be clear, not only is the labor market improving, but it is doing so at an accelerating rate. 

 

Meanwhile, rolling NSA claims vs. the 10YR still looks good, but has diverged directionally over the last few weeks.  

 

Bottom line: If we do get a correction in the coming weeks, we'd view it as a buying opportunity as the underlying health of both the labor and housing markets continue to show accelerating rates of improvement.

 

TREASURY YIELDS VS. JOBLESS CLAIMS - 10Y vs NSA claims 053013


Morning Reads From Our Sector Heads

Takeaway: A quick look at what we're reading this morning.

Keith McCullough - CEO

Treasuries Head for Steepest Loss in Three Years on Fed (via Bloomberg)

Shirakawa Gets Bonus as Kuroda Tackles Deflation (via Bloomberg)

U.K. Home Prices Rise Most in 18 Months (via Bloomberg)

 

Kevin Kaiser – Energy

OPEC Shifts Its Oil Trade Map After Shale (via Reuters)

 

Daryl Jones - Macro

German Companies Sip From Pool of Spain’s Young Joblesss (via CNBC)

Taking It Apart: The US LNG Export Fight (via Platts)

 

Rob Campagnino - Consumer Staples

China's Food Play Extends Its Reach, Already Mighty (via (New York Times)

 

Josh Steiner - Financials

Sallie Mae to Split Into Two Companies as Remondi Named CEO (via Bloomberg)

Citi CEO Corbat: Legal Costs to 'Stay Elevated for a While' (via WSJ)


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