TODAY’S S&P 500 SET-UP – August 20, 2013
As we look at today's setup for the S&P 500, the range is 34 points or 0.25% downside to 1642 and 1.82% upside to 1676.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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SBUX – Restaurants sector head Howard Penney continues to like Starbucks’ growth story. Penney says SBUX’ strong Q3 earnings report merely highlights the power of what he continues to see as one of the best pure plays in global growth in his sector. Cyclical factors, such as what appears to be improving coffee pricing, only add to the momentum as SBUX continues to push into new food and beverage segments worldwide, as evidenced by management’s focus on high-profile partnerships such as Danone and Google.
Penney sees continued strong growth in China, even in the face of slowing Chinese GDP growth, and would not be spooked by poor compares in other restaurant companies’ China operations. Penney acknowledges that SBUX is a “top pick” for many analysts. Would it be counter-intuitive to point out that sometimes consensus is actually right? Penney wouldn’t trade his high conviction call on SBUX for all the coffee in China.
NKE – Nike’s fiscal first quarter draws to a close in just another few weeks. Sales of footwear in the retail channel have been choppy in recent weeks – averaging about 1-2%, though apparel growth has been about 3x what we’re seeing out of footwear, which is a nice offset.
But the big data point we want to watch is Footlocker’s 2Q earnings, which are released on Friday the 23rd of August. The good news is that we think that expectations for Footlocker’s quarter are in check, which is positive because FL’s stock is often a barometer for NKE. After that we think that the near-term calendar lines up well for Nike with its results in late September, and then its analyst meeting in early October.
We would not want to bet against the name before then.
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Takeaway: We remain bearish on the casual dining sector.
This note was originally published August 09, 2013 at 14:58 in Restaurants
On Wednesday, Malcolm Knapp gave us a glimpse of how ugly sales trends were in July when he released his estimates for the month. Although the numbers released by Black Box yesterday are not as dire, it remains clear that the industry is beginning 3Q13 in a hole and must play catch up in order to make the numbers.
As a refresher, Knapp reported that July 2013 same-restaurant sales declined -3.8%, while traffic trends declined -5.1% -- both metrics slowed sequentially over a markedly weak June. Black Box numbers were slightly less gloomy, as same-restaurant sales declined -0.9%, while comparable traffic trends declined -2.2%.
Currently, our Casual Dining Index (a compilation of 29 casual dining chains) is estimated to post same-store sales growth of +1.4% in 3Q13, before accelerating to +2.8% growth in 4Q13. This would indicate, that for the balance of 3Q13, same-store sales need to accelerate by 200-300 bps to make the current estimates. Knapp noted that while all four weeks in July were negative, each successive week in the month was sequentially better than the prior.
We believe a massive acceleration in trends will be difficult to achieve. According to our Casual Dining Index, average same-store sales growth in 2Q13 was +2.1%, indicating that same-store sales for the period were up +1.7% on a LTM basis, down significantly from its +3.7% peak in 1Q12.
With the casual dining group trading at 23.5x P/E and 8.8x EBITDA (adjusted for CHUY and NDLS), it appears as though the market is expecting a noticeably sizeable acceleration in same-store sales. While the job market continues to show signs of improvement, at least in the headline numbers, it seems as though the weakness we have seen in July can be partially attributed to a surge in gas prices.
Our top short in the casual dining space remains RRGB. The company is due to release 2Q13 earnings on August 15h before the open. We will post on anything incremental after the call.
Takeaway: California housing affordability has backed off its highs and is now near the average of the last 25 years.
This note was originally published August 13, 2013 at 16:55 in Financials
Affordability Sinks, but Likely Will Sink Much Further Before the Current Rally Gives Way
Yesterday, the California Association of Realtors released its 2Q13 housing affordability index, which showed that affordability in the state declined to 36 from 44 QoQ. The index reading corresponds to the percentage of households in the state that could afford the median priced home based on current home prices and interest rates. We were admittedly surprised to see how large the drop was Q/Q. In fact, the 8-point sequential decline from 44 to 36 was the largest decline recorded in the history of the series, which dates back 25 years to the start of 1988. It was also the largest YoY decline in affordability at 15 points.
Most observers would argue that this is likely bad news for housing, and we're not going to dispute the fact that dimished affordability reduces the longer-term upside potential for both home prices and housing-levered equities. That said, we think it's equally important to note the autocorrelation of the affordability data. Affordability tends to exhibit long-dated boom/bust cycles rising or falling until the point at which it is at least one and up to two standard deviations overbought or oversold.
Currently, we are 0.28 standard deviations oversold en route to being 1-2 standard deviations overbought. This suggests that in spite of the run we've seen thus far, and the significant Q/Q drop in affordability, there is still considerable room for further upside in either home prices, interest rates or, most likely, a combination of the two.
On a national basis, US housing affordability declined to 60 from 65 Q/Q in the second quarter. Obviously, housing nationally is far more affordable than in the state of California, but we like to use CA because it has historically been a great proxy for the market as a whole.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: We profile Indonesia’s recent hardship as further supporting evidence of our #EmergingOutflows and #AsianContagion theses.
It’s been a long 3-4 months for investors operating in EM capital and currency markets. Since we outlined our structural bearish bias on Emerging Markets in our 4/23 presentation titled: “EMERGING MARKET CRISES: IDENTIFYING, CONTEXTUALIZING AND NAVIGATING KEY RISKS IN THE NEXT CYCLE”, the MSCI EM Index has fallen -5.1%; the JPM EM FX Index has fallen -5.8%; the JPM EM USD Bond Index (EMB) has fallen -11.3%; and the Market Vectors EM Local Currency Index (EMLC) has fallen -13.4%.
It’s been an especially long ~3M for investors operating in Indonesian capital and currency markets:
While the flows have certainly punished Indonesia simply for being an emerging market in 2013, we’d argue that the country’s own “fundamental misbehavior” has contributed to the aforementioned underperformance:
Indonesia’s most recently reported real GDP growth rate of +5.8% YoY (2Q13) was the slowest rate since 3Q10 and -1.5x standard deviations below the trailing 3Y mean. On this number, Bank Indonesia (the country’s central bank) revised down its 2013 GDP forecast to “the lower end” of its [new] +5.8% to +6.2% forecast range; prior to that, they had been expecting 2013 growth to come in at +6.6%.
This weekend, we received far worse news on the economic growth front: the current account deficit widened to a nominal record $9.8B in 2Q13; as a percentage of GDP, the current account deficit widened to 4.4% in 2Q13, which is also a record. In the context of capital outflows, the country will have an increasingly difficult time maintaining existing growth rates by plugging this savings/investment imbalance with outside capital. To the extent the country fails to do so, at the margins, economic growth will continue to slow.
Not ironically, Indonesia scored rather poorly (5th worst out of 29 countries) on our BOP/Currency Crisis Index, which was one of the “Four Pillars” in our EM Crisis Risk Model, so today’s current account deficit-induced issues Indonesia is experiencing across its capital and currency markets (Jakarta Composite Index tanked -5.6% DoD, while the IDR also plunged -1.9% DoD vs. the USD) comes as no surprise to us.
The country’s CPI rate hit a ~4.5Y-high in JUL, accelerating to +8.6% YoY from a reading of +5.9% YoY in the prior month. While currency weakness (IDR down -9.6% YoY vs. the USD) has definitely played a major factor in the recent ramp in reported inflation readings in Indonesia, President Susilo Bambang Yudhoyono raised domestic fuel prices for the first time since 2008 in JUN to help curb rampant fuel subsidy costs that is eroding the fiscal balance (more on this below).
We bold the word “help” in the previous sentence because, in reality, the recent fuel price hike is doing little to allay the aforementioned fiscal concerns: next year’s budget allocates 336.2 trillion rupiah ($32 billion) for total subsidies, which is little changed from the 346.4 trillion rupiah spent in the current fiscal year.
FISCAL AND MONETARY POLICY TIGHTENING
In the face of rampant inflation, Bank Indonesia has hiked interest rates by +75bps in the YTD, with 50bps of that tightening coming in the past two months alone (inclusive of the fuel price hike news). On Thursday, Bank Indonesia increased the country’s secondary reserve requirement ratio by +150bps to 4%.
Interestingly, there exists a divergence in the on-shore swaps market and the local currency sovereign debt market as it relates to the likelihood of further tightening over the NTM: 1Y OIS contracts are trading at a -140bps discount to the 6.5% benchmark reference rate; the 1Y sovereign debt yields are trading at a +63bps premium to the same rate.
We should expect to see this kind of confusion when in an environment of Growth Slowing as Inflation Accelerates. Also confused, it should be noted that Bank Indonesia held rates in its most recent meeting, opting for additional time to reassess the balance of risks facing the country’s beleaguered economy.
As it relates to Indonesia’s fiscal policy outlook, we’ll know more details later in the week when we receive the official 2014 budget outline. For now, investors can be assured of some meaningful degree of tightening, as the budget is expected to shrink the deficit/GDP ratio to 1.49% from a projected deficit equivalent to 2.4% of GDP in the current year.
All told, the Indonesian economy and its policymakers have not done themselves any favors as it relates to protecting investors from price declines consistent with our top-down #EmergingOutflows and #AsianContagion theses. The bottom-up GROWTH/INFLATION/POLICY fundamentals in Indonesia continue to deteriorate at the margins and that alone should continue to keep “the flows” from being supportive of Indonesian assets.
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