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ARE YOU SHORT CHINA YET?

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

This note was originally published June 07, 2013 at 11:44 in Macro

SUMMARY BULLETS:

 

  • Next week we will be hosting a flash call titled: “Are You Short China [and Other Emerging Markets] Yet?”. 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”).

 

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 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”).

 

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


MAY SALES SURPRISE – BUT!

Strong headline numbers belie the fact that promotional activity around new product introductions and trading day benefits masked the real issues at McDonald's in May. We continue to believe it will not be until July that we see what MCD normalized trends look like. Adjusted for the calendar/trading day impact, global comps actually registered a sequential deceleration in the two-year average trend.


MCD reported May global same-store sales growth of 2.6% versus 3.3% last year.

 

All the regional results showed positive same-store sales growth with the U.S. up 2.4% versus 4.4%; Europe up 2% versus 2.9%; and APMEA up 0.9% versus 1.7%.

 

The results benefitted from positive trade day variances of approximately 1% for the global business and between 0.6% and 1.4% for the balance of the regions.

 

The positive takeaway for the month is Europe, which reversed a string of 5 consecutive months of declining same-store sales.   The strength in the U.K., and to a lesser degree Russia, continues to offset weakness in France and Germany as the comps become very difficult in June for many European markets.  

 

U.S. same-store sales were better than our estimate, helped by the significant promotions following the introduction of the new Egg White Delight and, to a lesser degree, the McWrap.

 

APMEA posted slightly positive comps of 0.5%.  Positive same-store sales were achieved on the back of better sales in Japan, offsetting declining sales in China, where Avian flu issues persist, and Australia.

 

MAY SALES SURPRISE – BUT! - MCD US SSS

 

MAY SALES SURPRISE – BUT! - MCD Europe SSS

 

MAY SALES SURPRISE – BUT! - MCD APMEA SSS

 

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Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 


EMPLOYMENT DATA MIXED FOR RESTAURANTS

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.

 

EMPLOYMENT DATA MIXED FOR RESTAURANTS - employment by age 610

 

 

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

 

 

EMPLOYMENT DATA MIXED FOR RESTAURANTS - restaurant employment

 

EMPLOYMENT DATA MIXED FOR RESTAURANTS - knapp comps vs L H

 

EMPLOYMENT DATA MIXED FOR RESTAURANTS - leisure   hospitality

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


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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.

POSITIONS: 6 LONGS, 5 SHORTS @Hedgeye

 

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,

KM

 

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


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 .

 

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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

 

 


Hedgeye Statistics

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

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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