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The indication of strong employment growth in April, in the quick service and casual dining industries, was positive news for the restaurant industry. However, mixed employment by age demographics warrant attention going forward as the United States saw sequential deceleration in the 20-24 YOA cohort's employment growth.


Generally, Friday’s jobs data were positive for the U.S. economy as the important macro metrics (Labor, Housing, Confidence, Credit) remain attractive on an absolute and relative, versus the rest of the world, basis. We like SBUX and EAT as ways to play this theme.


Below, we discuss employment by age and restaurant industry employment. These serve as proxies for demand and operator confidence, respectively, in our models.



Employment by Age (demand)


Employment growth by age was mixed in May as the 20-24 YOA cohort saw growth decelerate to +4 bps from +170 bps in April, the 25-34 YOA cohort saw growth accelerate to +200 bps from +140 bps in April, the 35-44 YOA cohort saw growth accelerate to +50 bps from +30 bps in April, the 45-54 YOA cohort saw growth decelerate to -80 bps from -70 bps in April, and the 55-64 YOA cohort saw growth decelerate to +280 bps from +320 bps in April.


This is an important metric for the restaurant industry. Given the discretionary nature of casual dining expenditure, and the highly-competitive nature of the industry, we infer that sustained employment growth in core demographics is necessary for continued comp growth in the absence of new unit growth or income per capita growth. Within QSR, also, the majority of management teams that we track have highlighted employment growth as being crucial to the ongoing success of their businesses. The sequential deceleration in 20-24 YOA employment could, if it continues into May and June, be a cause for concern for some QSR shareholders.





Restaurant Industry Employment (confidence)


The Leisure & Hospitality employment data, which leads the narrower food service data by one month, suggest that employment growth in the food service industry ticked up in May. The more narrow restaurant-focused data sets also suggest an increase in operator confidence in April versus March (narrow data released on a lag). On a sequential basis, Leisure & Hospitality employment data registered a month-over-month gain of 43k (second chart below), an acceleration from the prior month’s 38k month-over-month gain.


We would caution that Knapp Track comps and traffic have implied two successive quarters of two-year average trend decelerations in the casual dining industry, for April and May, and that industry hiring has generally been reactive, not proactive, in the past.



Sequential Moves:


Leisure & Hospitality: Employment growth at +3% in May, up 28 bps versus April


Limited Service: Employment growth at +4.4% in April, up 20 bps versus March


Full Service: Employment growth at +1.7% in April, up 8 bps versus March











Howard Penney

Managing Director


Rory Green

Senior Analyst


Sell Some: SP500 Levels, Refreshed

Takeaway: Every time this US stock market corrects we get a whole new bear case and each bear case is different than the one prior.



Ok, I sold more than some. I actually sold ½ my long positions this morning. But not because I am all beared up or anything like that – it’s just process. We bought the oversold signal well last week < 1601, and now the SP500 is 50 handles higher!


I usually don’t use exclamation marks but, this year deserves one. Every time this US stock market corrects we get a whole new bear case. Each bear case is different than the one prior, but it feels equally as tough to buck up and buyem when you should.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1662
  2. Immediate-term TRADE support = 1624
  3. Intermediate-term TREND support = 1583


In other words, now we’re just trying to manage the risk of the intermediate-term TREND range (1). If you want to think about where I’d be as a % of a full intermediate-term TREND position in US Stocks, I went to 97% of my max allocation last week.


If we test 1583 again this summer, I’ll probably do that again.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Sell Some: SP500 Levels, Refreshed - SPX

Morning Reads From Our Research Team

Takeaway: A quick look at some stories on Hedgeye's radar screen.

Keith McCullough – CEO

Latin America Can Handle Fed’s Post-Stimulus Effects, IMF Says (via Bloomberg)

Merkel: Euro Nations Must Follow Germany’s Lead on Growth (via Bloomberg)


Daryl Jones – Macro

Chinese Economy Grows at Slowest Pace in 13 Years; What's Next for China? (via Mish’s)

Former CIA Officer: Intel Considering NSA Whistleblower 'Potential Chinese Espionage' (via Breitbart)


Kevin Kaiser – Energy

China's Addax locked in $1 billion oil dispute with Gabon-sources (via Reuters)

Kinder Morgan Energy Partners to Start New Business of Owning, Leasing and Acquiring Natural Resource Properties (via press release)


Howard Penney – Restaurants

People of Dunkin' Donuts and Starbucks (via boston.com)

Restaurants boost late-night business with live music (via Nation’s Restaurant News)          


Matt Hedrick – Macro

London’s Forced Renters Fuel Apartment Investing Boom (via Bloomberg)


Morning Reads From Our Research Team - nyc newsstand

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

European Banking Monitor: Periphery Widening

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 .




European Financial CDS - European financials swaps widened considerably, increasing by a median of 18 bps. The U.K., Spanish and Italian banks widened sharply. Italian banks, in particular, were materially wider.


European Banking Monitor: Periphery Widening - ww. banks


Sovereign CDS – Sovereign swaps were wider around the globe with the sole exception of Germany, which tightened 3 bps to 24 bps., and now trades inside the U.S. by 4 bps. The biggest movers were Portugal, Spain and Ireland at +16, +12 and +8 bps, respectively. 


European Banking Monitor: Periphery Widening - ww. sov 1


European Banking Monitor: Periphery Widening - ww. sov 2


European Banking Monitor: Periphery Widening - ww. sov 3


Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 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: Periphery Widening - ww. euribor png


ECB Liquidity Recourse to the Deposit Facility – 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: Periphery Widening - ww. facilty



KMB – Removing From Our Best Ideas List

On February, 11th, 2012 our Consumer Staples team added Kimberly-Clark (KMB) to the Hedgeye Best Ideas list and we are officially removing it this morning, June 10th, 2013.  The sell-off in KMB from May 28th at a price of $104.28 to Friday’s close of $97.87 - a decline of just over -6.5% - is an opportune time for us to remove KMB as a short.  For much of that period, the idea had been solidly against us, but we are now removing it at a price where it underperformed the SP500 during the same period.


Just to rewind from a fundamental perspective, KMB had a very solid Q1, which was reported in mid-April.  The key attributes of the quarter included:

  • Big beat and flow through on full-year guidance (Q1 EPS of $1.48, well ahead of consensus of $1.33 and guidance for the full year going up $0.10)
  • Solid performance against difficult comparisons on revenue and gross margins
  • Superb operating leverage with +15.6% EBIT growth on 1.5% sales growth
  • Company overcame $35 million of commodity inflation in the quarter
  • Well-managed balance sheet as accounts receivables (+1.7% year over year) and inventories (+0.4%) increased in line with sales growth

In hindsight, the quarter was much better than we expected. As noted in the chart below, KMB reported one of the better quarters in the consumer staples sector.


KMB – Removing From Our Best Ideas List	 - vv. staples


The question, as always, is what to do with the KMB stock from here?  Since we are officially removing KMB as a short idea; does that make it a long from here? On the long side, there are some worthy points, including the following:


1)      Expectations are low – Even though the company adjusted earnings guidance higher after the Q1 beat, it really only accounted for the beat in the quarter and, as a result, earnings for the remainder of the year appear low.  For starters, the current EPS estimate for Q2 2013 is $1.39, which implies 7% y-o-y growth in earnings.   Last quarter’s EPS was up 19% y-o-y . . .


2)      Commodities have been stable – In its Q4 2012 results presentation, in February 2013, KMB gave its planning assumption of northern bleached pulp at $890 - $910 per metric ton and oil at $90 - $100 per barrel. In total, the Company guided to $150 - $250 million in cost inflation.  So far, commodities are in those ranges with WTI oil trading at $95.00 per barrel and northern softwood pulp at $930 in the U.S. and $857 in Europe. 


3)      Returning capital aggressively – KMB guided to $1.0 - $1.2 billion in share purchases for all of 2013 and repurchased a total of $500 million in Q1 alone.   From 2004 – 2012, KMB repurchased more than $10.5 billion in shares.  In that period, shares outstanding have declined from 502 shares outstanding to 384.7 million at the end of Q1 2013.


4)      Valuation is reasonable – With a dividend yield of 3.3% and P/E of 16.8x on 2013E and 15.8x P/E of 2014E, valuation seems reasonable, especially with a likely upward bias in numbers in the short term.  At this valuation, KMB is basically just below its average P/E of the last 2-years.


The biggest issue facing KMB, and Consumer Staples in general, is the potential for a continued shift away from high yielding stocks to those stocks with higher organic growth. In fact, in the year-to-date, based on our Macro team’s factor analysis, low dividend yielding stocks are up +20.9% and high dividend yielding stocks are up +12.0%.  In the same vein, utilities have been underperforming the market dramatically this year.


If treasury yields continue to tick higher, this macro headwind is likely to continue for slower growing and higher yielding staples names like KMB.  But at 15 -16x earnings with a 3.3% dividend and an aggressive buy-back (oh and an upward bias in numbers), we at the very least wouldn’t be short the name here.


Daryl G. Jones

Director of Research



Macau is off to a slow start in June with average daily table revenues up “only” 5% from the comparable week last year.  June is typically a much slower month than May.  Last year, June GGR fell 12% MoM and 15% the year before.  For the full month June 2013, we are projecting YoY GGR growth of 8-14% which implies a MoM decline of 10-16%.  We’d be happy with double digit YoY growth as we move into July which should be a huge month.  July could be up as much as 20% YoY.




In terms of market share, MGM continues to impress.  While share north of 11% is probably not sustainable for the month, we continue to be impressed with that property’s operations.  MGM Macau is doing a terrific job in the face of the Cotai onslaught.  LVS was the big loser although it’s only been 9 days so not much to worry about.



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.