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Nikkei: Good Time to Buy

Editor's note: This is a brief excerpt from Hedgeye research. For more information on how you can become a subscriber click here.

 

After posting the best Japanese auto sales number in 14 months, the Yen continued its latest run higher and is finally signaling immediate-term TRADE overbought vs US Dollar.

 

No. The Nikkei definitely does not like #StrongYen. It closed down -2.1%, leading the losers in Asia overnight. Japanese stocks are oversold right now.

 

Yes. It's a good spot to buy. 

 

Nikkei: Good Time to Buy - dale22


MCD: MIGHTY DISASTER PART II

MCD remains on the Hedgeye Best Ideas list as a short.


 

To be clear, we believe MCD has a secular top line issue and not a cyclical one.  That said, we don’t believe management is willing to acknowledge this.  So far in 2013, the new product pipeline has failed to stimulate incremental customer traffic and new products, such as Mighty Wings, seem like a desperate attempt to hide from reality.

 

We posted a note a couple of weeks ago titled, “MCD: A Pending Mighty Disaster,” in which we stated that MCD’s decision to sell wings this fall could be disastrous for the company.  Given current trends, we have no reason to back off this negative bias.

 

We have three main issues with the current MCD menu strategy:

  • Mighty Wings will not enhance the McDonald’s brand (Premium Wraps have not helped either)!
  • Both new products (Mighty Wings and Premium Wraps) have slow service times.
  • Adding new products to an already complex menu is the wrong direction for the company to go.

 

We also have two main issues with the Mighty Wings promotion:

 

Mighty Wings Are Too Expensive 

For the smallest portion, you are paying a dollar per mighty wing.  

 

McDonald’s Mighty Wings are available in three portion sizes. There is a 3-piece for $2.99, a 5-piece for $4.79 and a 10-piece for $8.99.  Across the pricing spectrum, this is equivalent to paying $0.99, $0.96, and $0.90 per wing, respectively.

 

Inconsistent Product From McDonald's

We are hearing that frequent visitors of McDonald’s are not used to the bone-in chicken wings product.  While bone-in chicken wings are standard fast food options for restaurants that specialize in fried chicken – for example, KFC and Popeyes – it does not seem to fit well with the rest of McDonald’s products.

 

 

Summary

This whole situation is all too reminiscent of the period from 1, when we witnessed the sad decline of a mismanaged McDonald’s brand.  During that time, the company was focused on unit growth and cost reduction rather than driving high margin, top line sales.

 

As the image of the brand began deteriorating, management failed to invest in the brand and customer experience.  Rather, they turned to monthly promotional tactics in order to drive short-term sales at the expense of brand equity and margins.  This strategy did not end well for either the company or investors and we’d be surprised if this time was any different.

 

MCD: MIGHTY DISASTER PART II - chart1

 

 

We continue to believe there is a disconnect between investors’ expectations and the company’s fundamentals.  As long as this remains the case, we are looking for more underperformance versus both peer consumer and S&P 500 benchmarks.

 

 

 

Howard Penney

Managing Director

 

 


Draghi Leaves Door Open For Rate Cut and Liquidity Injection

Mario Draghi and the ECB’s governing council voted today to keep rates unchanged, although a cut was suggested by some members.

 

Last month’s dramatic pivot to a dovish monetary tone that interest rates should remain “at present OR lower levels for an extended period of time” was reiterated again today in remarks that monetary policy will remain accommodative for “as long as is necessary”.  Draghi described an economy that is “weak, fragile, and uneven” and left the prospect of issuing another LTRO on the table. We expect that given the continued clog in the credit channel, a liquidity package could be released into year-end (see chart below).

 

Interestingly, and despite the dovish commentary, the EUR/USD rose following the announcement, which we think is reflective of the impact of Bernanke talking down U.S. growth prospects (and the USD), as well as the Eurozone economy showing improvement on the margin.  

 

As central bankers struggle to guide expectations (hint Fed’s no-taper decision and the ECB’s and BOE’s forward guidance) we wouldn’t be surprised to see Draghi keep his cards tight on when he may issue liquidity measures or cut rates, and continue to drag his feet on any policy action until more data confirms his team’s outlook.

 

As it relates to the Eurozone, our call remains that we expect Europe’s economy to gradually improve off low levels (we’re UK and German equity bulls) and bullish on the EUR/USD, which is in a bullish breakout above its TRADE, TREND, and TAIL levels (see chart below).

 

Draghi Leaves Door Open For Rate Cut and Liquidity Injection - zz. loans

 

Draghi Leaves Door Open For Rate Cut and Liquidity Injection - zz. eur usd

 

Draghi highlights from the Press Conference:

  • Somewhat weaker growth in the beginning of Q3, but still expects a gradual recovery
  • The recovery is “weak, fragile, and uneven” and starting from very low levels
  • Unemployment, especially youth, needs to be reduced from very high levels
  • Credit dynamics remain subdued with flows “still weak, very weak” 
  • On broader developments of liquidity: ECB is ready to use all available instruments, including LTRO
  • Inflation continues to be firmly anchored, on the very low side of the 2% target (at 1.1%), but the baseline scenario has been underpinned
  • Progress is being made on political reforms:  greatest pressure should come from the inside; don’t need to be pressed by markets
  • On political instability (Italy and the rise of anti-Euro parties in Germany and Austria): while instability hampers hopes for a recovery, it doesn’t hurt the foundations of the Eurozone as it used to do a few years ago -- that suggests that the Eurozone and Euro is more stable

 

Draghi Leaves Door Open For Rate Cut and Liquidity Injection - zz. interest rates

 

 

Matthew Hedrick

Senior Analyst


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Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on our radar screen.

Tom Tobin – Healthcare

Web traffic, glitches slow Obamacare exchanges launch (via Reuters)

 

Morning Reads on Our Radar Screen - huff78

 

Keith McCullough – CEO

Japan Auto Sales Climb Most in 14 Months (Bloomberg)

Letta Wins Confidence Vote After Berlusconi Support (via WSJ)

Israel PM calls Iran leader 'wolf in sheep's clothing' (via BBC)

Pirates' First postseason Win Since 1992 (via ESPN)

 

Jonathan Casteleyn – Financials

Gundlach’s Fund Had Its Biggest Redemptions in September (via Bloomberg)

Fed Said to Review Commodities at Goldman, Morgan Stanley (Bloomberg)

 

Howard Penney – Restaurants

McDonald’s Stores Trying Loyalty Program to Attract Millenials (via Bloomberg)

 

Brian McGough – Retail

Lululemon’s sheer yoga pants lawsuit gets lead plaintiff (via NY Post)

NBA Standout Stephen Curry Joins Under Armour Basketball Roster (via Sports One Source)

Jacobs Exits Vuitton To Focus On IPO (via WWD)

 

Kevin Kaiser - Energy

Kinder Morgan Detailed Analysis (via Scribd)



DECEIVING LOOKS PART TWO

Some are excited about a return to growth in August.  Time for a look under the hood.

 

  • US gaming revenues (from reporting jurisdictions) increased 5% YoY in August.  Even same-store revenues were positive, up 3%.
  • However, August received a 2% boost from a very high hold % in Strip Baccarat.  Subtracting out Strip revenues (to look at regional type markets), same-store revenue was actually flat in August.
  • Moreover, August contained one extra Saturday which likely contributed 2-3% to YoY growth
  • The takeaway is that August was actually another weak month overall in US gaming

DECEIVING LOOKS PART TWO - D4



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