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MCD SALES PREVIEW

McDonalds is set to release its May sales results before the market open on Monday. We expect sales to disappoint versus consensus expectations as the difficult competitive environment in the U.S., as well as economic malaise in Europe, continues to impact results.

 

We’ve been the lone bears on Wall Street when it comes to MCD since turning negative on the name on 4/25.  For May, much of the downside in global same-restaurant sales growth expectations comes from Europe. See our recent work on this here. For 2013, we still believe MCD is not going to hit the numbers that Wall Street is expecting.

 

Below, we provide charts with our estimates for each region of the world versus consensus expectations. We will follow up Monday’s release with our thoughts on the data and our updated view of the stock. The long-term trend in MCD’s sales trends needs to reverse. As things currently stand, we believe the data suggests a strategic failure on the part of the company as well as a disconnect between investors’ expectations and the reality of the company’s fundamentals. As this continues, we are looking for more underperformance versus peer consumer and S&P 500 benchmarks.

 

MCD SALES PREVIEW - mcd may sales

 

MCD SALES PREVIEW - mcd us sales preview

 

MCD SALES PREVIEW - mcd euro preview

 

MCD SALES PREVIEW - us apmea sales preview

 

MCD SALES PREVIEW - mcd global preview

 

MCD SALES PREVIEW - mcd srs global ttm

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


HEARD ON THE MORNING CALL: #BurningYen

Takeaway: Japan is a completely dysfunctional country. If you live there, you may want to consider moving.

HEARD ON THE MORNING CALL: #BurningYen - yen

 

If you’re living in Japan, you should probably think about moving. It is a completely dysfunctional country. My favorite guy over there right now, Finance Minister Taro Aso (the guy who is going to rip his country a new one) came out yesterday and basically said, “We’re not going to intervene – yet.

 

Guess what? The market understands what that means. That’s the big move that really caught people offside’s yesterday—the currency move. It stoked a massive mean reversion move on the order of five standard deviations in my model. What did I do? I took the other side of it. I’m very comfortable with #StrongDollar. I’m even more comfortable #ShortYen relative to the USD.

 

Bottom line is that it was a freak out day and you’ve just got to deal with it. There’s nothing you can do about it, other than make a decision. You’re either not going to be short the Yen and long the Dollar, or you’re going to do more of both which is of course precisely what we’re telling you to do.

 

(Excerpted from Hedgeye's morning conference call)


YEN CAPITULATION?

Takeaway: If you weren’t long the dollar-yen rate prior to yesterday’s bloodbath, you’re getting an excellent buying opportunity here.

SUMMARY BULLETS:

 

  • While the confluence of events that occurred this week to trigger yesterday's move are increasingly obvious in the rear-view mirror (Abe’s disappointing “Third Arrow” outline, rising US growth fears and ECB “hawkishness”), we think the events – or lack thereof – that perpetuated yesterday’s downside are even more important to elucidate: 1) a lack of liquidity as stop-loss programs were triggered; 2) the FX market betting that the BOJ would remain a lame duck over the immediate-term; and 3) the FX market betting that the MoF would refrain from outright intervention.
  • Since we are firm believers that relative monetary and fiscal policy deltas is the primary factor(s) in determining exchange rates, we continue to think the structural bear case for the yen is even better than the commensurate bear thesis for the USD was, say, over the past 3-4 years. Moreover, the USD/JPY cross more or less banged right off of our 95.66 TREND line of support this morning and is now a full +2% higher intra-day.
  • As long as that cross remains bullish from a intermediate-term TREND perspective, we are inclined to maintain our bearish bias on the Japanese yen and we will continue to fade any JPY strength at key risk management levels.

 

After a move like the one we saw in the USD/JPY cross yesterday (-2.1%; the largest 1-day decline since MAY 20, 2010), it would be natural for us to start this note off by pointing to how much the yen has declined since we introduced our bearish thesis late SEP ‘12. We have no intention of doing so; that would be embarrassingly akin to Tom Brady calling up ESPN to remind the world about how many Super Bowls he used to win.

 

Rather, we’d thought we take a few moments to dissect why we have had this call wrong in recent days and weeks; the JPY has traded up +3.2% WTD vs. the USD and is now up +6.0% from its YTD low on MAY 17. As a quick aside, we are keen to remind investors something we’ve been aggressively stating since we first opened the doors here @Hedgeye; specifically, Big Government Intervention has two very critical unintended consequences:

 

  1. Shortened economic cycles; and
  2. Amplified market volatility.

 

While the confluence of events that occurred this week to trigger yesterday's move are increasingly obvious in the rear-view mirror (Abe’s disappointing “Third Arrow” outline, rising US growth fears and ECB “hawkishness”), we think the events – or lack thereof – that perpetuated yesterday’s downside are even more important to elucidate:

 

1. NO LIQUIDITY

Breaking the 99 barrier on the USD/JPY cross looks like it triggered a massive stop loss program and, because of the new rules issued by Japan’s FSA last Friday (designed to “protect investors” and “limit speculation”), there’s hardly any liquidity left in the marketplace to take the other side of the trade via intraday speculation. Per StreetAccount:

 

Under a self-regulation proposal to be adopted on Friday, forex firms will be required to settle a trade even when the move is in the trader's favor. The FSA also plans to restrict trading in binary option and as early as this year, the FSA will ban trades that are looking fewer than 2 hours ahead. The FSA also plans to strengthen oversight of forex companies which offer automated trade programs.”

 

2. NO KURODA

On monetary policy, it’s important to remember that the BOJ is already committed to monetizing ¥132 trillion through EOY ’14 (27.7% of 2012 nominal GDP) vs. the Fed’s $2.04 trillion (13% of 2012 nominal GDP) over the same time period – assuming the Fed continues at the current pace of $85 billion per month through EOY ’14 (a very unlikely scenario in our opinion). The BOJ’s relative aggression limits what they can do in short order due to international pushback with regards to the yen’s precipitous decline on a trade-weighted basis.

 

YEN CAPITULATION? - 1

 

We believe the BOJ will have to wait to be disappointed on the nominal GDP and CPI front several quarters from now before they can reasonably justify any demonstrable, market-moving increase in the pace of their asset purchases – unless, of course, they use elevated JGB volatility as political cover to get more aggressive. Time will tell on that, but board members are indeed openly concerned with respect to that political headwind (as evidenced by them increasing the frequency of their JGB purchases in the current month).

 

At any rate, our best guess is that the BOJ board will be inclined to continue waiting and watching, and that’s clearly what forex market participants were betting on this week/in recent weeks. BOJ board members have been aggressively marketing the recent regime change which took place upon Kuroda’s arrival, so doubling down this soon would be a tacit admission of defeat and a return to the old days of ineffective, incremental easing.

 

3. NO TARO ASO

Overnight, Finance Minister Taro Aso was out stating that the MoF had no intention of direct intervention in the FX market. We don’t blame him; that would A) markedly increase the international scrutiny upon Japan’s Policies To Inflate and B) remind investors of the old days of ineffective one-off interventions.

 

The last thing the Abenomics agenda needs right now is another blow to market confidence – especially one that stems from them looking more and more like previous LDP regimes. Aso astutely recognizes this risk and is willing to take the short-term pain for the long-term “gain” that is outsized currency debauchery.

 

WHERE TO FROM HERE?

Since we are firm believers that relative monetary and fiscal policy deltas is the primary factor(s) in determining exchange rates, we continue to think the structural bear case for the yen is even better than the commensurate bear thesis for the USD was, say, over the past 3-4 years. Moreover, the USD/JPY cross more or less banged right off of our 95.66 TREND line of support this morning and is now a full +2% higher intra-day.

 

YEN CAPITULATION? - 2

 

As long as that cross remains bullish from a intermediate-term TREND perspective, we are inclined to maintain our bearish bias on the Japanese yen and we will continue to fade any JPY strength at key risk management levels.

 

At this point, it's not a matter of "if" the Fed will tighten US monetary policy at the margins, but "when". More importantly, that "when" is sure to be well ahead of any tightening out of the BOJ. Layer on the impact of sequestration domestically and the impact of recent stimulus spending in Japan and we continue to have a meaningful fiscal policy bifurcation to layer on to the thesis as well. At any rate, we're still waiting to hear a legitimate bull case for the yen...

 

YEN CAPITULATION? - 3

 

Global macro risk management is not easy, folks, but it sure is exiting!

 

Darius Dale

Senior Analyst


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Housing's Parabola

Takeaway: Corelogic HPI data for April/May showed housing's parabolic recovery remains ongoing. Household net wealth set for new highs in 1Q13.

This note was originally published June 04, 2013 at 15:19 in Macro

 

Housing's Parabola - housing recovery

 

Yesterday we highlighted the expedited back-up in mortgage rates as an emergent headwind to the sustainability of housing’s accelerating  recovery.  While higher rates do represent a drag on affordability, in the more immediate term, housing’s momentum is showing no signs of deceleration. 

 

This morning’s Corelogic Home Price Index showed home prices accelerating to +12.14% Y/Y in April with the Preliminary May estimate reflecting further acceleration to 13.2% Y/Y.  Moreover, the M/M Home Price changes observed in April and May represented the fastest rates of appreciation in the last 20 years, inclusive of the 2004-2006 bubble period.  In short, the recovery in housing remains almost perfectly parabolic at present.   

 

Relatedly, ongoing home and financial asset price re-flation continue to drive the Household balance sheet recovery and should serve to further support consumption as the wealth effect increasingly manifests (see Here for fuller discussion of housing’s wealth effect) alongside rising confidence and domestic labor market strength.  

 

Collectively, Real estate and Equities (Corporate Equities & Mutual Fund shares), represented ~44% of Household assets as of 4Q12 and have appreciated ~10% and ~12% year-over-year in 1Q13, respectively.  Given the magnitude of Q/Q and Y/Y real estate and financial asset appreciation, even under aggressive assumptions for growth in Household liabilities,  the Fed’s Flow of Funds report scheduled for release on Thursday should reflect further acceleration and another new, nominal high, in Household Net Worth in 1Q13.  

 

In addition to driving some manner of wealth effect, the strengthening of the Household balance sheet and rising net wealth are supportive of credit expansion, on the margin, as household capacity for credit increases alongside rising collateral values.  A positive change in the flow of net new credit would provide an incremental tailwind to consumption growth as well.   

 

We’ll follow up with any notable highlights from the Flow of Funds release on Thursday.  

 

Housing's Parabola - Corelogic May Prelim 060313

 

Housing's Parabola - Household Balance Sheet 1Q13E

 

 

Christian B. Drake

Senior Analyst 



MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN

The May Payroll data improved sequentially, confirming the ongoing strength observed in the NSA Jobless Claims numbers over the last month.   Private and Nonfarm Payrolls both improved sequentially, the Unemployment Rate increased to 7.6%  with mixed job growth across age demographics, Temp employment growth accelerated for a third consecutive month and State & Local government employment growth went positive for the first time since June 2009.   After seeing a collective +114K revision for Feb/March in the April release, today's NFP estimates reflected a net two month revision of -12K with March revised from +138K to +142K while April was revised from +165K to +149K.

 

Conclusion:  On balance, today’s employment report leaves our fundamental view in the same place it has been for the YTD.   The Macro data (Labor/Housing/Confidence/Credit) in the U.S. continues to look good on an absolute basis and better than good on a relative basis vs. the EU, China, Japan, Russia, and the bulk of emerging markets.  

 

The domestic growth dynamics along with an improving federal fiscal position and incrementally hawkish monetary policy outlook still has us liking #StrongDollar, favoring domestic consumption and growth positive equity exposure, and disliking negative dollar/growth leverage (Gold, Commodities, Russia, select EM markets).

 

6% Unemployment:  Given the Fed’s explicit targeting of 6.5% unemployment and the likelihood for market expectations to continue to attempt to front run the slope in the unemployment rate – how do the numbers have to move for the unemployment rate to move below 7% in 2013?   

 

If we make the simplifying assumptions of stable population growth and a static Labor Force Participation Rate from here we need to average net payroll adds of ~253K/mo over the next 7 months to breach 7% on the downside in December. 

 

If we use Nonfarm Payrolls as our proxy for monthly employment gains, year-over-year growth would need to average ~1.85% over the balance of the year.  With NFP employment growth averaging 1.57% and 1.61% over the last 6M and 12M, respectively, this equates to ~27bps acceleration from current levels. 

 

Below is a summary review of the April employment trends observed across both the Current Population Survey (Household Survey), which drives the Unemployment Rate, and the Establishment Survey (CES) which drives the NFP Number.

 

Non-Farm Payrolls (Establishment Survey):  NonFarm Payrolls rose 175K in May on expectations of 163K and 165K prior with y/y growth accelerating a marginal 3bps sequentially to +1.58%.   Private payrolls rose 178K on expectations of 175K and 176K prior with y/y growth accelerating 5bps sequentially to +1.9%.   The revision to the March and April estimates  saw March revised +3K from +138K to +142K while April was revised lower by 16K from +165K to +149K.

 

Household Employment:  BLS’s Household survey of employment showed total employment increased 319K m/m with y/y employment growth flat sequentially.

 

Unemployment Rate:  The Unemployment rate increased to 7.6% in May from 7.5% with Total Employmed rising +319K and Total Unemployed rising +101K.  Recall that the Unemployment Rate simply = Unemployed/(Employed + Unemployed) – thus, if the rise in the numerator is higher on a percentage basis than the rise in the denominator, as occurred in May, the unemployment rate will rise.  Note also, if you carry the unemployment rate out an extra decimal point, the unemployment rate increased 5bps sequentially from 7.51% in April to 7.56% in May. 

 

Labor Force Participation:  The Labor Force Participation rate (LFPR) ticked up 12 bps to 63.44% in April vs 63.32% in March, essentially flat with recent trough levels. As a reminder, the LFPR = Total Labor Force (Employed + Unemployed)/Civilian Non-institutional Population.  The Civilian non-institutional population was up +188K m/m  while the total Labor Force rose by +420K.  Here, the greater relative increase in the numerator = a marginal increase in the Labor Force Participation Rate. 

 

Employment By Age:  Employment by age demographics were mixed in May with 25-44 YOA and 65+YOA accelerating while all other age buckets slowed sequentially.  Employment growth remains positive across all age cohorts on both a monthly and quarterly basis with the exception of 45-54 year olds where, after managing to go positive briefly in 2012, payroll growth has remained mired in negative territory. 

 

Part-Time & Temp Employment: Part-time employment (household survey) increased 150K m/m while Temp employment (establishment survey) rose 26K in May.  While the growth trend in part-time employment remains one of deceleration, growth in Temp Employment accelerated on both a 1Y and 2Y basis for the 3rd consecutive month.  

 

Obamacare remains a factor we continue to monitor as it relates is the potential for accelerating part-time and Temp employment.  Corporate attempts to manage worker hours under the 30-hr threshold dictated under Obamacare would serve as a tailwind for employment growth but likely act as a drag across hours worked and weekly earnings metrics.  The re-acceleration in Temp hiring appears supportive of the thesis while the trend in hours worked and real weekly earnings (which has been positive the last 3 months) are largely equivocal at present. 

 

State & Local Gov’t Employment:  After five years of negative growth, collective State & Local Gov’t employment growth managed to go positive in May, growing 0.08% y/y.   With labor trends positive and state tax revenues making higher nominal highs we expect employment & investment trends at the state and local level to remain positive, on balance.

 

Average Weekly Hours:   After declining 0.6% m/m in April, average weekly hours for private employees held at 34.5 hrs in May,  flat m/m and +0.3%  y/y.

 

 

BLS Household Survey Data

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Unemployment Rate

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - CES vs CPS

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Employment by Age Qtrly

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Unemployment Rate vs LFPR Monthly

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Parttime

 

 

 

BLS Establishment Survey Data  

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - NFP Qtrly

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - NFP   Household Survey 2Y

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Temp Employment

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - State   Local Govt empl

 

MAY EMPLOYMENT: END OF WORLD STYMIED AGAIN - Ave Weekly Hours of Private EMployees

 

Christian B. Drake

Senior Analyst 


ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET?

Takeaway: The case for shorting Chinese financials stocks, frontier markets and EM LC and USD debt is becoming stronger by the minute.

SUMMARY BULLETS:

 

  • Next Wednesday, June 12th at 11AM EST, we will be hosting a flash call titled: “Are You Short China [and Other Emerging Markets] Yet?”. The format of the call will be as follows: 10-15 minutes of prepared remarks and 10-15 mins (or more, depending on interest) of live Q&A. Specifically, we are now adding the following four ideas to our Best Ideas list and we will detail exactly why on next week’s call: Short CHIX, Short FRN, Short EMLC and Short EMB.
  • In addition to these latest editions to our Best Ideas list, we are content to “book” the gain in our EEM short call. The ETF is down -2.6% since we introduced the idea on our 4/23 conference call titled: “Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle”.
  • While 260bps may not seem like all that much, we were able to extract a considerable amount of alpha from the position – particularly relative to our favorite equity market (USA); the EEM ETF has underperformed the SPY by a whopping 693bps since we introduced the thesis. While we still think there is room for this spread to widen, we are focusing our sights on the aforementioned new tickers, as we seek out more “juice” amid rising conviction in our views (see: Stanley Druckenmiller’s mantra on “spreading your wings”).

 

Next Wednesday, June 12th at 11AM EST, we will be hosting a flash call titled: “Are You Short China [and Other Emerging Markets] Yet?”. The format of the call will be as follows: 10-15 minutes of prepared remarks and 10-15 mins (or more, depending on interest) of live Q&A.

 

Normally, we aim to provide more lead time to get our Black Books and conference calls into your respective calendars, but the recent volatility across Global Macro markets has provided us with a strategic opportunity to expand upon our #EmergingOutflows theme. To that tune, the $5.5B in EM equity fund outflows per the most recent week of data was the largest weekly withdrawal since AUG ’11!

 

Specifically, we are now adding the following four ideas to our Best Ideas list and we will detail exactly why on next week’s call:

 

 

As an aside, we like to use ETFs in order to #TimeStamp our positions, but for those of you whose funds are larger in size and require additional liquidity, we encourage you to express these views at the asset class level as well.

 

In addition to these latest editions to our Best Ideas list, we are content to “book” the gain in our EEM short call. The ETF is down -2.6% since we introduced the idea on our 4/23 conference call titled: “Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle”.

 

ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET? - 1

 

While 260bps may not seem like all that much, we were able to extract a considerable amount of alpha from the position – particularly relative to our favorite equity market (USA); the EEM ETF has underperformed the SPY by a whopping 693bps since we introduced the thesis. While we still think there is room for this spread to widen, we are focusing our sights on the aforementioned new tickers, as we seek out more “juice” amid rising conviction in our views (see: Stanley Druckenmiller’s mantra on “spreading your wings”).

 

At any rate, if you plan to join us live next Wednesday at 11AM EST or plan catch the replay, we encourage you to review our 4/23 EM Crises presentation, as that will form the basis for our upcoming discussion(s):

 

 

Our sales team will be out momentarily with the dial-in details to the call; email if you don’t receive them by Monday morning.

 

Lastly, if you're getting bear'd up here, don't lazily join the consensus crowd that has been getting squeezed trying to short US equities throughout the YTD. Short stuff like Emerging Markets that A) have a legitimate bear case and B) will actually decline in value for more than 1-3 days.

 

Have a great weekend,

 

Darius Dale

Senior Analyst


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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

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