• run with the bulls

    get your first month

    of hedgeye free


The Chart That No One In Obamerica Is Allowed To Talk About...


Or is Washington The New Reality Wall Street now? Who knows... Rhetorically, the politicization of the US Financial System is making this very hard to follow...


What is never hard to follow is the money. If you want to gain a clear understanding of where economic systems have a high probability of playing out, follow how people get paid.


In sharp contrast to the made-up rules to made-up "stress tests", the US Dollar trades on a marked-to-market basis. In global currency trading, there is no such thing as a newly implemented American Idol like "save." The chart below is the chart that matters. American Idol season is over, and the world has voted. The US currency continues to lose its credibility.


There are two TREND lines that matter in the chart below. The intermediate-term TREND line that broke in late April ($85.29) and the long-term TREND line that broke last week ($81.51). It's the latter TREND line that has the hair standing up on my back - Washington ignoring the alarm bell just makes thing worse. If Bush was willfully blind, Obama is apparently willfully deaf.


Is the brain-trust of Wall Street/Washington paid to be willfully blind and deaf? You tell me. The compensation structure of the current system will give you the bipartisan answer. Thankfully, as of yesterday's Opinion piece in the Financial Times by Stanford professor John Taylor, titled "Exploding debt threatens America", I'm not the Lone Survivor of sight and sound.


With regards to the groupthink associated with the Obama one liner of "we inherited this mess", Taylor poses an interesting question: "The debt was 41 per cent of GDP at the end of 1988, President Ronald Reagan's last year in office, the same as at the end of 2008, President George W. Bush's last year in office. If one thinks policies from Reagan to Bush were mistakes does it make any sense to double down on those mistakes, as with the 80 per cent debt-to-GDP level projected when Mr Obama leaves office?"


This chart isn't about being political. The American Financial system is becoming as political as politics get. The world is watching this real-time, and voting with their wallet.


Keith R. McCullough
Chief Executive Officer


The Chart That No One In Obamerica Is Allowed To Talk About...  - flames

Germany Grinding It Out


Research Edge Position: No Active Position


A German survey points to an optimistic outlook; a number of new fundamental data points confirm that economic improvements will be mild.


GFK survey reports are signaling that the worst may be over for the German economy as its consumer climate index remains stable for May, with economic expectations improving marginally and consumer propensity to buy unchanged, but at a healthy level. Concerns over income and joblessness remain, yet in aggregate the survey is signaling the steep contraction of the German economy is bottoming out.


The survey provides an optimistic outlook, yet the fundamentals continue to yield a modest forecast for stabilization late this year and mild growth starting early next year. German GDP contracted 3.8% in Q1 on a quarterly basis according to the German Federal Statistics Office. For the export-dependent economy it comes as no surprise that the decline was mainly due to the balance between exports and imports. This will continue to be a headwind for the economy. The chart below shows this steep decline. 


Based on the previous quarter, Q1 exports declined 9.7% while imports were down 5.4% versus a quarter earlier, with the balance contributing to a 2.2 percentage points of decline to GDP.  The good news for Germany is that the country is beginning to see improvements in exports in key industries. For example, the percentage change in exports of transport equipment and machinery and equipment orders are declining sequentially over the last months, bending the curve in a positive direction. These few data points do not confirm a positive trend, yet are optimistic on the margin. Additionally Eurostat posted March industrial orders for the Eurozone today and German orders improved 3.3% M/M and declined at a lesser rate on a year-over-year basis, down 28.3%, marking another sign of marginal improvement.   


With PPI down 1.4% in April on a monthly basis and down 2.7% on a yearly basis, producers are incrementally benefitting from the reduced cost of raw materials.  The bulk of decline was attributed to fuel, down 18% Y/Y, and heating oil that declined 40% Y/Y; yet any savings that the producer can pass on to the consumer will benefit the domestic "health" of the economy.  Today the statistics office reported that CPI in May likely fell on a monthly basis in 4 of the 6 German states surveyed, with food prices falling between 0.2% and 1.0% on a monthly basis and between 0.4% and 2.1% on a year earlier.  Finally, a recent report by the office showed consumer spending rose 0.5% in the Q1 on a quarterly basis, even as households' disposable income declined 0.9%. All of this signals that consumer confidence may be rising as the cost of goods and services backs off.


A headwind for German exports continues to be the Euro. Despite substantial interest rate cuts by the ECB in the last months, leveling the rate to 1.0%, the Euro has appreciated due to the decimation of the US dollar. This morning the Euro was trading as high as $1.40. For Germany, getting past the lack of global demand will be trying.


Unemployment remains a major theme in Germany, and though a lagging indicator, may be a driving force in overall sentiment. Limiting unemployment, which stands at 8.3%, has been a central issue for Chancellor Merkel and the other parties vying for the head seat in government as elections approach in September.  Pressing for Merkel and Co. continues to be the selection of a buyer for GM's Opel unit in Germany, a decision which should come this week and includes bids from Italy's Fiat, Canadian car-parts maker Magna International, and RHJ International SA. In the balance hang thousands of jobs; her decision may very well favor an owner that can save the most jobs.


We believe Germany will have a larger upside than many of its European peers in the months ahead, especially as global economies melt up. We've been in and out of Germany on the long side via the etf EWG this year. We currently like the technical set-up and will be looking to take a position at the right entry point.  


Matthew Hedrick



Germany Grinding It Out - ger12


Yesterday, CKE rose 13% on the back of Jim Cramer recommending it as a turnaround play. His case was based on the premise that CKE is "the worst of breed" and therefore has the most upside potential. He noted that the company's operating margins of 5.7% lag behind its peers, like Burger King (BKC), with margins of 14.5% and Jack-In-The Box (JACK), with 8.5% margins.

I have some issues with his analysis. First, BKC is primarily a franchised company, while CKE is a company-owned operation; as a result comparing operating margins is a useless exercise. Although, it's relevant when looking at JACK, the analysis is still misguided.


When looking at any restaurant company, restaurant level margins are the best barometer of how a company is performing and on this metric CKR is the "best of breed."


Looking at restaurant level margins, CKE has better margins than both JACK and BKC. In the most recent quarter FY2Q09 JACK reported restaurant level margins of 16.5% versus my estimate of 19.9% for CKE restaurants (FY1Q10.) In FY3Q09 Burger King's restaurant level margins are 11.4% - ouch! So any turnaround in CKR margins is not going to come from better sales trends and/or lower food costs, but from management getting religion cutting fat from the company's bloated cost structure. Thus the difference in operating margins cited by Cramer

Having analyzed this company for years, management is not going to give up the Cessna Citation or the other perks that keep the company cost structure bloated. As a side note JACK's senior management flies commercial and the market value of JACK is $1.8 billion and CKR's is $750 million.

Today, CKR reported that its Carl's Jr. Restaurant reported a decline of 6.2% in the period ending May 18th. Assuming 2-3% pricing, this suggests that traffic trends at Carl's Jr. are down 8-9% -- that is a problem! CKR management cites the poor economic conditions in California as the main reason for the decline in traffic trends, but the competition is significantly outperforming in that market.

Recently, JACK reported that 2Q09 same-store sales for its Jack in the Box company-owned restaurants were up 0.4%. Importantly, they said on a regional basis, same-store sales remained positive in California, Texas, and Las Vegas.

CKR takes the high road as it relates to maintaining the company's profitability and brand image, therefore significant discounting is not an option. Maintaining the company's industry leading margins is a higher priority than generating short-term positive same-store sales!

If there is a turnaround in top line sales at Carl's Jr. concept, it will come from increased discounting, which carry lower margins. This is not the type of turnaround I would be looking for!



Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

RL: Still One To Ride in ‘09

As usual, there's a ton of noise in these RL numbers, but by my math the company came in at around $0.68 vs. my model at $0.52 and the Street at $0.42. This was a clean beat all around. Revenue, margins and capital intensity all looked better than I modeled - and I was well above consensus. Was this a 'great' quarter? No - it was not. Let's face it, these guys are perennial sandbaggers, and with sales down 1% and EBIT off by 27% there was nothing to write home about here.  But all things considered, this company continues to prove that its multi-pronged execution around an extremely focused strategy is second to none.


Ok, so back to the sandbagging comment. Management came out with guidance that genuinely represents uncertainty around the global economic environment. But as I hash through my model, I get to $4.25 for next year, and $5.50 the year after. Yes folks, that's a 15% CAGR, and is 16% and 27% above where I think the consensus will shake out in '10 (ending March) and '11, respectively.


Similarly, the first quarter guidance is a bit perplexing. Double digit decline in revs with growth in operating expenses? This comes at a time when FX hurts the top line, but helps opex. To get there, I need to assume a big sequential erosion in wholesale sales AND margins, as well as a slowdown in either .com or new store productivity (unlikely when new store growth is slowing meaningfully).  In fact, if I model the company's guidance to a 'T' I can get to a 1Q estimate as low as $0.10-$0.15 per share. Call me a perma-bull, but I'm getting to a number North of $0.50.


So what DOES concern me?  FX, for one. I could care less about the negative impact RL is feeling today from FX. But anyone who 'does macro' has got to be watching the dollar, which has been in a freefall for the past two weeks. While I highly doubt that RL as an organization is a fan of weak dollar policy, this trend may set up RL for a nice little top-line and margin pop by the September quarter. But the flips side is that this is also a time when it is investing capital in Europe and Asia to fill out the next leg of its global brand expansion. I like the fact that RL has not printed a disproportionate amount of its FX benefit in recent years (unlike WRC, GES and others), but I can't escape the fact that it is potentially investing capital at a time when a devalued currency could hit incremental ROIC.


Does threaten my EPS estimates for the next 18 months? No. But realize it or not, incremental ROIC has been THE key driver to this stock over the past two cycles, and I'll be hyper focused on how proactive the company is approaching this issue this time around. This is now one of my key issue on this name right now. Stay tuned for more analysis.


RL: Still One To Ride in ‘09 - 5 27 2009 1 14 33 PM

Brian McGough

Republican Popularity For A Trade?


My colleague Casey Flavin and I are up in Alberta (my home province), visiting a number of our Canadian clients.  Writing a note about the recent decline in President Obama's approval rating from Alberta seems somehow appropriate.  Many people refer to Alberta as the Texas of Canada.  As a native Albertan I tend to agree, except for one thing, Albertans are more conservative than Texans! 


In the last Canadian Federal election, it was considered a watershed moment when the leftist New Democratic Party won one seat in Alberta.  The Conservative Party won all 27 other seats.


But enough about these Alberta rednecks (since I'm both, I'm allowed to say that!) and on to Obama.  As we've outlined in the chart below and have been highlighting on the morning call to that clients that subscribe to the call,  Obama's approval has taken a sharp decline in the past couple of weeks.  Yesterday, according to the Rasmussen Tracking poll, Obama's approval ranking, the difference between Strongly Approve and Strongly Disapprove, was at +1, which is close to the lowest of his Presidency.


Some other data points that suggest that President Obama's influence may be waning and that Republicans may be gaining ground include:


  • Rasmussen poll from last week indicated that 49% of respondents disagreed with President Obama on closing Guantanamo and 38% agree with the decision. Given that this was a key focus for Obama during the campaign and a key recent decision he has made, this poll has relevance on the electorate's view of the President;


  • In a CNN Opinion poll from last week, former Vice President Dick Cheney approval rating was 37%, which was up 8% points from when he left office. Cheney is likely one of the most vilified politicians in the nation, so a dramatic increase in his approval rating, even if still low over all, likely indicates a marginal shift towards the Republican party


  • Rasmussen did an online poll Friday of last week that indicated that 70% of respondents, out of ~2,300, said they did not believe Tim Geithner would be Treasury Secretary by December 31, 2009. This is likely a decent proxy for how the electorate thinks about Obama's economic policy so far, although, admittedly, it is also a vote of disapproval on a particularly ineffective Treasury Secretary.


While broadly speaking, President Obama's approval is still high based on the Real Clear Markets poll summary, which shows that based on an average of polls his approval rating is at 60.5%, even that is near the lowest of his Presidency.  In aggregate, the confluence of events relating to foreign policy, domestic economic policy, broad based "socializing" and the burgeoning debt balance are starting to pierce the armor of President Obama.  It seems likely that over the coming months, he could see a more broad based correction in both his and his party's approval rating.


Perversely, this could actually be positive for the U.S. Dollar as both global currency and debt investors begin to realize that President Obama has less influence to promote legislation that could be perceived as socialistic.   


As Keith has said since the inauguration, "the REFLATION trade really works when Obama threatens to socialize the country to smithereens" (meaning Dollar Down = Stocks UP). If the Republicans keep picking up points, that could signal the last stand for a currency that is trending towards crisis.


Daryl G. Jones
Managing Director


Republican Popularity For A Trade? - obama


McCarran Airport posted its best month in almost a year with only a 5.9% drop from April of 2008.  Combined with automobile traffic, the "strong" air visitation should translate into total visitation falling only around 4%.  However, "lucky" play by the casinos last year causes a pretty difficult comparison.  We estimate total Strip gaming revenues could fall by a rate in the mid-teens, with 9% of the drop caused by the high hold percentage last year.  In April 2008, slot and table hold percentage was 30bps and 230bps above normal.  The following table shows our projections for April 2009.


BETTER AIRPORT DATA BUT… - estimated april strip metrics


So while the airport data is somewhat encouraging, the actual revenue data will likely look weak.  The good news is that the May hold comparisons are much easier.  The Strip won't face a difficult hold comparison until September.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.