TODAY’S S&P 500 SET-UP – July 2, 2013
As we look at today's setup for the S&P 500, the range is 42 points or 1.42% downside to 1592 and 1.18% upside to 1634.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
With the exception of Burger King, the Street is expecting a continued recovery in same-store sales trends for the biggest QSR chains in 2H13. The following is a look at what each chain will be promoting for the balance of 2013 in order to drive incremental customers.
WEN - Wendy’s
HEDGEYE – Expectations are high for the Pretzel Bacon Cheeseburger. The product is different enough to potentially generate significant trial. The retail price for the burger is expected to be $4.69, which is an expensive burger, particularly when most consumers are looking for items with better value. Given the extremely difficult comparisons in 2Q13 and 3Q13, management is relying upon the new burger to drive traffic and check. Street expectations are for a 1.0% increase in 2Q13 same-store sales. We believe that the turnaround at Wendy’s is going to take time.
Given that this recent run has been driven largely by multiple expansion rather than earnings revisions, we expect the stock to “take a breather” at this point. Due to a lack of catalysts, it will be difficult for the stock to continue on its current trajectory. We believe the next two quarters are likely to see choppy top line performance from WEN.
YUM - Taco Bell
HEDGEYE – Taco Bell is up against a 13% comparison from last year. The trends in 1Q13 suggest that Taco Bell will be see same-store sales down by 1% in 2Q13 compared to Street expectations of a 1.3% increase. While this might be slightly disappointing, it is insignificant relative to the poor trends the company is seeing in China. YUM has underperformed the S&P 500 by 820bps year-to-date and it is our view that the company’s performance in 2Q13 will do little to change the Street’s perception.
MCD - McDonald’s
HEDGEYE – Despite all that MCD has going on, we don’t believe the company’s performance is going to match the lofty expectations embedded in the numbers for 2H13. While expectations are reasonable for McDonald’s USA to post 1.6% same-store sales in 2Q13, we suspect that 3% same-store sales estimates for 2H13 are too aggressive. We remain bearish on MCD.
BKW - Burger King
HEDGEYE – We do not see anything in Burger King’s new product pipeline that suggests the company will separate itself from others in a very competitive QSR landscape. BKW is comparing against 4.4% same-store sales growth and we believe the Street estimate of a 1.4% same-store sales decline in 2Q13 is too conservative. It is very possible that 2Q13 same-store sales could be down nearly 2%. We continue to believe the fundamental issues in the business model and the cash flow pressure on franchisees will prove to be two major headwinds sometime in the future; in the meantime, however, positive restaurant industry and macro data continue to support the stock.
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Takeaway: We are faced with two fundamental scenarios right now. It’s essentially a binary proposition in the market.
In today's Morning Newsletter, I wrote about what I think happens next in the market. The answer is simple. I don’t know.
Sometimes, “I don’t know” is the right answer. Be wary of snake oil salesmen selling “certainty”—they are selling something that isn’t certain at all. Time will reveal their true stripes.
With that said, we are faced with two fundamental scenarios right now. It’s essentially a binary proposition.
The first scenario is that our unelected Fed Overlords do the right thing and decide to taper.
In this case, the US Dollar likely strengthens and we get more of what has occurred over the last six months. Gold prices would continue to collapse. Oil prices would come down. It would basically be a pro-growth tax cut on consumption. US growth would continue to accelerate. It would clearly be a good thing for this country.
The second scenario is the Fed pulls a Charlie Brown, misses the football altogether, and decides against tapering.
If the Fed chooses to go down this road, I would obviously expect the US Dollar to weaken. Commodity prices would head higher. It would resemble what we’re witnessing in today’s trading with higher oil and gold prices.
Of course, this would all be a big negative for the US economy. We would see growth slow again, as we have seen multiple times over the last decade. We’re basically left with these two options. I have no idea which way we’re going to go. No one does, with the possible exception of Jon Hilsenrath and Ben Bernanke.
Unfortunately, there are huge constituencies who are on their knees right now, begging and pleading with the Fed not to taper. This anti-tapering cabal includes big bond managers like Bill Gross and charlatan editorialists like Paul Krugman.
For the record, I don’t think it’s possible for Bill Gross’ Easy-Money-Forever! campaign to be anymore public than it already is. It’s actually become nauseating. Nevertheless, the failure or success of this begging cabal is beyond my personal control.
Here’s the bottom line: I want to see a strong US Dollar here in America. I want to see rising interest rates. I want to see confident US consumers carry the day in this country. It would be a very sad sign if we get back in a position where Gold pawn shops and other regressive, dollar debauchery indicators start gaining momentum.
Look, Bill Gross and Paul Krugman can beg Bernanke & Co. all they want. It's their right as Americans. In the end, they may even “succeed.” But you can be sure any success they find would be a Pyrrhic victory.
As I recently wrote, the biggest threat to American Purchasing Power and sustainable US economic growth remains our unelected, omnipotent Central Planners at the Federal Reserve devaluing our currency. Dollar destruction has never and will never put America on a sustainable growth trajectory.
Enough ranting. It’s Canada Day. I’m just a man in a room overlooking a lake in Thunder Bay doing my best to manage risk for my firm’s clients, employees, and my family.
Takeaway: Nike's 4Q print was spot-on with our expectations. It's executing as it should. If it sells-off on guidance we'd look for an entry point.
This note was originally published June 27, 2013 at 23:14 in Retail
Nike's 4Q print was spot-on with our expectations. The company is executing as it should. If it sells-off on guidance we'd look for an entry point.
The company delivered on the top line, and the combination of strong futures, pricing increases and a favorable event schedule suggests that FY14's top line looks good. On top of that, gross margins are sequentially improving, inventories look good, and we have good visibility as to the timing of SG&A.
The downside (which we expected) is that the company backed off of its 'high end of mid-teens EPS growth' expectation to something in the 'low double digits'. The primary culprit was Japan, which showed a massive 23% spread between 6% C$ futures and -17% reported decline in the business. This is all completely manageable in the context of the broader portfolio -- particularly given the portfolio continues to hum. The US continues to crush it, Europe -- both Western and Central -- is stabilizing, and China is finally comping against steep declines at this time last year.
In all reality, Nike probably set a low bar with its earnings guidance. Our $3.10 for the year is about a dime above where the Street is likely to come in. The only thing that could stop Nike at this point is Nike. With its current management transition of no fewer than half a dozen senior roles, there will definitely be uncertainty in the organization. But aside from the now infamous Bill Perez CEO year (2005/06) we've never seen a Nike management transition that did not work. It's one area where the company is flawless.
And by the way, for anyone who still had a doubt about whether Charlie Denson was pushed out or retired on his own accord, all you had to do was listen to the conference call. It was as close to a love-fest as we've ever heard on a conference call with existing management bidding thanks and well-wishes.
POSITONS: 5 LONGS, 3 SHORTS @Hedgeye
Bullish, then bearish, then bullish – like sands through the hour glass (of Chaos Theory), these are the days of our lives…
As I get older, I don’t get caught up with the risk management style of being flexible as much as I worry about the results of the process. That’s what matters in this game. Quantitative signals within research views are constantly changing, so I try my best to change alongside them.
Across our core risk management durations, here are the lines that matter to me most:
In other words, the SP500 has quietly recaptured both TREND (1592) and TRADE (1617) lines of support and now has no resistance to 1637, then to the all-time highs (1669) after that.
This morning’s ISM New Orders data (51.9 June vs 48.8 May) supports more of the same in terms of old news (US #GrowthAccelerating in the April-June data series). The problem with that is June is over. The other problem with this rally is that it has occurred on no volume.
There are always problems in life – dwelling on the wrong problems at the wrong times can also be problematic.
Stay flexible out there and Happy Canada Day!
Keith R. McCullough
Chief Executive Officer
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