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Big Day for Fed Overlords

Takeaway: If we get some tapering and that equates to Strong USD, we’re going to do more of what we’ve been doing successfully for the last 6 months.

Today of course is a big day for Ben Bernanke and his fellow Central-Planning Overlords at the Fed. Everyone is fixated on their comments, the media will be all excited, etc. You know the drill.

 

Big Day for Fed Overlords - bbo8

 

What do you do from here?

 

If you know what Bernanke’s going to say, you know more than me. Because I have no idea what he’s going to say. I do know what I think he should say, and I do know what I think he should do. But that’s an entirely different matter.

 

Last week, the whispers and leaks were indicating that Bernanke would push out the tapering; this week’s rumor is that he has the tapering back on. Now, if the Fed made a decision based solely from an economic fundamental (e.g. housing, consumption and employment growth) perspective, they of course should have already started tapering.

 

The reality here is that tapering would be good.

 

For the record, there’s a good reason why I’ve taken down my gross exposure to equities. I have no idea what’s going to happen this afternoon and what this guy is going to say. That’s just the simple fact of the matter. So I have to be in a position where I’m able to react to that, and I will.

 

You know what I’m going to do? If he tapers, and the US Dollar strengthens, you’re going to see me out there buying stocks. Of course, some people are saying, “Tapering scares me! We need the Fed to hold our hand!” Come on. Get off the pot already. Seriously. It’s been five years of this scaring the hell out of people, worrying about everything under the sun.

 

People are really regressive out there. I want to be progressive. I want to be invested.

 

Bottom line is if we get some tapering and that equates to #StrongDollar, we’re going to be doing more of what we’ve been doing successfully here at Hedgeye for the last six months. That of course is being bullish on U.S. equities and bearish on all the things I’ve already outlined like gold, Treasuries and commodities.

 

More to be revealed. 

 

(Editor's Note: This was an excerpt from Hedgeye CEO Keith McCullough's morning conference call. If you would like additional information please click here.)


THE JACK OPTION: PART II

We continue to believe that the long-term potential of JACK is underappreciated, particularly with respect to the future growth of Qdoba.  The company’s recent announcement to restructure enhances this view.

 

Looking Back

On May 8, 2012, we published our SOTP analysis describing Qdoba as the “Jack Option” and suggesting significant upside.  Since that time, Qdoba’s performance has stagnated while Jack in the Box has performed quite well.  The recent Qdoba announcement included a strategic review of store-level market performance, geared toward correcting growth related issues and setting the stage for stronger performance moving forward.  We have seen similar initiatives before, where concepts have successfully shrunk to a core base of stores, establishing new platforms and leading to significant value creation.

 

Sometimes Less Is More

The announcement included the planned closure of 67, or 21% of, Qdoba company-owned stores by the end of FY13.  The vast majority of these stores are cash flow or EBITDA negative and only represent 13% of Qdoba brand company sales.  Yesterday, JACK disclosed the following estimates of the pro forma impact the closures would have had on Q2 fiscal year-to-date results:

  1. 500bps increase in Qdoba restaurant operating margin
  2. $4.5mm increase in EBITDA
  3. $7mm increase in operating profit
  4. $750,000 decrease in G&A

Updated Development Plans

The strategic decision to close these unprofitable stores represents a meaningful positive for the stock and the overall operating performance of the enterprise.  Management also reiterated its FY13 development plans and suggested that there will be approximately 12% unit growth at company and franchised stores in FY14.  We believe these recent actions, coupled with the analysis of consumer insights and a new brand positioning, should allow for continued improvement in Qdoba’s performance.

 

Potential Upside In The Stock

In our view, the company’s aggressive move to restructure Qdoba is likely to improve the brand’s profitability and should provide investors with the confidence to assign the brand a growth multiple.  In the past we have described Qdoba as a call option for shareholders given the concept’s long-term growth potential.  Due to this renewed growth profile, we see approximately 30% potential upside in the stock over the next 2-3 years from current levels.

 

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


#BULLISH BUILDER CONFIDENCE

Takeaway: Builder confidence has historically trended to 65-78 after crossing positively through 50, making today's reading of 52 noteworthy.

This note was originally published June 17, 2013 at 12:42 in Financials

#BULLISH BUILDER CONFIDENCE  - hous5

Reflexivity

Typically we pay little attention to the builder confidence survey, but given the recent underperformance in the builder complex we thought it was worth some further consideration. Looking at the history of the series, which unfortunately only dates back to 1985, there have been four prior episodes of builder confidence crossing above 50 and then moving on steadily to 65-70. In the first chart below we illustrate this tendency. The four prior peaks were 65 in June, 1986, 71 in November, 1993, 78 in December, 1998 and 72 in June, 2005. We find it interesting that builder confidence tends to autocorrelate (i.e. move in the same, self-reinforcing direction for long periods of time), just as home prices and housing demand do.

 

#BULLISH BUILDER CONFIDENCE  - nahb peaks

 

If we assume that builder confidence continues to trend higher, toward its prior peaks in the 65-78 range, what are the implications for construction activity? The chart below shows the historical relationship between builder confidence and construction activity. There are several takeaways from this chart. The x-axis shows the HMI (builder confidence) reading, while the y-axis is the concurrent level of single family housing starts in thousands of units annualized. Over the history of the series (1985-Present), we've seen a 16k change in SF starts for every one point change in the HMI index. Interestingly, based on today's builder confidence reading of 52, the fair value for SF starts is 1.137 million vs. the current reading of 610k, or 87% above where it is today. If we assume that confidence rises to 65, then SF starts should reach 1.35 million and if we assume 78, we get 1.56 million. 

 

#BULLISH BUILDER CONFIDENCE  - mr

 

Bear in mind, this is single family starts. Historically, as the chart below shows, single family starts have averaged 72% of total starts from 1960-present. The most recent reading was identical at 72%, but if we take the average of the last six months, single family starts have been averaging 67% of total starts. If we divide the above figures by the long-term average of 72%, it translates to high side estimates for total starts of 1.58 million (today's HMI of 52), 1.875 million (HMI 65), and 2.17 million (HMI 78). These rates of construction are generally consistent with the levels we would expect to see given the current rates of new household formation we're seeing coupled with the historical relationship between household formation and housing construction.

 

#BULLISH BUILDER CONFIDENCE  - starts to total

 

It's also worth noting that the recovery in builder confidence remains more parabolic than linear, i.e. supportive of our conclusion that the housing recovery continues to show signs of acceleration. It doesn't hurt that mortgage rates have also backed off their recent highs, ticking down to 3.94% from their recent highs of 4.16%. As the chart below shows, the second order measure of trajectory remains much stronger (0.92) than the first order (0.76).

 

#BULLISH BUILDER CONFIDENCE  - parab

 

Conclusion 

Housing's momentum has been one of the three central tenets of our bullish stance on Financials, alongside the labor market recovery and the Fed's asset purchase program. Today's signs of ongoing recovery, and even acceleration, are a welcome sign suggesting that our bullish intermediate to long term view on the Financials remains on track. However, in the short-run, we remain cautious for several reasons including the predictable deceleration in seasonally-adjusted labor data, elevated uncertainty around the Fed's willingness to continue its asset purchase program, and steadily deteriorating conditions in the credit markets.

 

 

The two charts below look at the long-term as well as the short-term relationship between builder confidence and builder activity levels. 

 

#BULLISH BUILDER CONFIDENCE  - lt

 

#BULLISH BUILDER CONFIDENCE  - st

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com

 


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Morning Reads on Our Radar Screen

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

Daryl Jones – Macro

Inflation at 53-Year Low Gives Bernanke Time to Press on With QE (via Bloomberg)

 

Morning Reads on Our Radar Screen - radar

 

Keith McCullough – CEO

Brazil sends national security force to quell protests (via BBC)

China Billionaire Invests $1.6 Billion in London Land, Boats (KM note: #EmergingOutflows out of China …  via Bloomberg)


Josh Steiner – Financials

Mortgage-Bond Auction Failures Reach Most in 2013 as Prices Drop (via Bloomberg)


Howard Penney - Resturants

Red Robin Garden Burger Ad Under Fire For Dissing Vegetarians (via Huffington Post)

McDonald's Worker Says She Was Required to Receive Pay on Fee-Laden Debit Card (via ABC News)


Matt Hedrick – Macro

Doctors Call for Halt to Energy Drink Ads to U.S. Youths (via Bloomberg)


"I Got Nowhere Else to Go!"

Client Talking Points

YEN

Keeping a close eye on currencies remains key. Yen vs USD is failing at our 96.17 intermediate-term TREND line of support this morning. This comes after the propaganda of down currency, up exports (Japan reported +10% exports for May, but their 3rd worst monthly trade deficit ever) was being cheered on by Japanese bureaucrats. The #WeimarNikkei gained +1.8%, but failed to close above 13,641 TREND resistance again.

CHINA

#GrowthSlowing in most things Chinese continues... Meanwhile, the rest of Asia (ex-Japan) traded very poorly again overnight. Over in Hong Kong, the Hang Seng led the losers, down another -1.1%. It is now down -5.1% year-to-date. It's bearish TRADE and TREND for most Asian Equity markets now, including Singapore, KOSPI, and BSE Sensex. Be alert here.

RUT

All the while the Russell 2000 quietly (volume was -15% yesterday vs my TREND duration average) clocked a new all-time closing high yesterday of 999. Yes, all-time is a long time. The continuing flows to US Equities (and out of everything Treasuries, Gold, Sovereign Debt, etc) make sense to me. A lot of sense. The world is running out of places to flow capital. That's bullish for US stocks.

Asset Allocation

CASH 53% US EQUITIES 17%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
NSM

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  

WWW

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

Marty Feldstein on @SquawkCNBC : I think the Fed made a mistake in doing as much as it has ... it's created a bubble in the long-term bond

@beckyquickcnbc

QUOTE OF THE DAY

Be wary of the arrogant intellectual who comments from the stands without having played on the field.

-Ray Dalio

STAT OF THE DAY

The IRS is about to pay $70 million in employee bonuses despite an Obama administration directive to cancel discretionary bonuses because of automatic spending cuts enacted this year.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 19, 2013


As we look at today's setup for the S&P 500, the range is 38 points or 1.26% downside to 1631 and 1.04% upside to 1669.                       

                                                                                                        

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.92 from 1.92
  • VIX closed at 16.61 1 day percent change of -1.13%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, June 14 (prior 5%)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC seen Fed Funds rate target between zero and 0.25%
  • Release of Fed’s Summary of Economic Projections
  • 2:30pm: Fed’s Bernanke to hold news conference on FOMC

GOVERNMENT:

    • 9:30am: Senate Appropriations Cmte panel on Joint Strike Fighter FY14 budget request
    • 10am: Natl Governors Assn., Natl Conf. of State Legislatures hold discussion of Marketplace Fairness Act, with 7 tech cos. making software to collect remote sales tax online
    • 10am: Senate Commerce, Science and Transportation Cmte hearing on improving passenger, freight rail safety
    • 10am: Senate Judiciary Cmte hears from FBI Director Robert Mueller at oversight hearing
    • 10am: House Oversight and Govt Affairs Cmte holds hearing on biometric ID use in fed govt
    • 2:30pm: Senate Commerce, Science and Transportation Cmte panel on airline industry consolidation, with reps. from US Airways, American Airlines

WHAT TO WATCH

  • Google considering PE alliances amid buying spree
  • Icahn urges Dell to buy back shrs at $14 in revised approach
  • Dish won’t make new Sprint bid by deadline
  • Microsoft said to add Qualcomm as supplier for Surface RT
  • BC Partners to buy Springer Science for $4.4b
  • Shuanghui getting $7.9b financing for Smithfield bid: WSJ
  • Smithfield got another $34/shr bid prior to Shuanghui deal
  • GE sees $20b order tally from Paris Air Show: Aviation CEO
  • Tesla issues recall for some Model S vehicles
  • Netflix to expand streaming service to Netherlands by yr-end
  • GM says China luxury vehicle demand slower than expected
  • U.K. banker bonuses face decade delays in industry overhaul
  • HSBC cuts China growth forecasts to 7.4% in 2013 and 2014
  • Japan’s exports surge by most since ‘10 in boost for Abenomics
  • Porsche $2.6b hedge-fund suit moved to Hanover court
  • King loses final BOE vote as majority sees recovery strength
  • Cuomo said to win agreement for four upstate N.Y. casinos

EARNINGS:

    • FedEx (FDX) 7:30am, $1.95 - Preview
    • Actuant (ATU) 7:30am, $0.59
    • Finisar (FNSR) 4pm, $0.17
    • Steelcase (SCS) 4:01pm, $0.13
    • Jabil Circuit (JBL) 4:02pm, $0.54
    • Red Hat (RHT) 4:04pm, $0.31
    • Micron Technology (MU) 4:05pm, $0.03 - Preview
    • Clarcor (CLC) 5:30pm, $0.67

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Timah Sees Tin Climbing 20% as Supply Curbed From Indonesia
  • Mining CEOs Punished as FTSE 100 Peers Keep Pay: Commodities
  • WTI Crude Advances to Nine-Month High as U.S. Stockpiles Decline
  • Copper Swings Between Gains and Drops Before Fed Meeting’s End
  • Hog Futures Rise in Chicago, Heading for Biggest Gain in a Week
  • Gold Holds Above Three-Week Low Before Fed Concludes Meeting
  • Arabica Coffee Gains as Investors May Start Buying; Sugar Slides
  • Rice Exports From Thailand to Advance as Support Prices Reduced
  • Carbon Rescue Seen Surviving European Panel Vote: Energy Markets
  • Aluminum Contango Widest in Four Years as Stockpiles Swell
  • Singapore Urges Naming of Firms After Worst Smog Since 1997
  • Argentina Banks on Railroads to Prolong Soybean Boom: Freight
  • Copper Slump Longest Since 2001 on Supply Gain: Chart of the Day
  • Corn Falls on Outlook for U.S. Supply and Signs of Weaker Demand

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 


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