Time Changes Things

"They say that time changes things, but you actually have to change them yourself"
-Andy Warhol
Yesterday's intraday reversal in the US stock market was one of the most confusing of the year. Stocks opened higher, REFLATING alongside a deflating Dollar (makes sense)... then completely collapsed, breaking the macro inverse correlation (USD vs. SP500) that has held for the better part of 2009. I guess that's why correlations aren't 100%.
This of course was only a 6-hour affair and, as such, can hardly be considered an immediate term TRADE (3-weeks or less), never mind an intermediate term TREND (3-months or more). That said, prices rule in our macro models and when they change, we do.
Trading volumes were light, but volatility (measured by the VIX) shot above its immediate term TRADE line of resistance (30.64) to 32.68 in conjunction with the SP500 breaking down through its immediate term TRADE line of support (917). With the US Dollar down on the day, why did this happen? Sometimes the answer is I don't know. Sometimes I just call it squirrely. Sometimes, real-time prices end up discounting something that I can't quite see, yet. Remember, market prices don't lie; people do.
Are we starting to discount the end of the inverse correlation between REFLATION in Global Equities and the US Dollar? At this juncture, that would be a very premature conclusion to make - we don't have anywhere near the amount of days or volume in the data series to confirm anything other than what you see in front of you today. That said, extremely high r-squares like this aren't perpetual. When consensus hits its crescendo, correlations start to unwind.
Three and six months ago, when I'd write about Breaking The Buck, some people saw what my investment team was seeing. Today, when I write about Burning The Buck, most people do. Those who are ultra patriotic about the currency or their politics don't see anything other than the qualitative stories they like to tell themselves, but quantifying things seems to at least tone them down.
Being politically polarized or ragingly bullish/bearish probably isn't going to help you at this stage of the game. This game of global investing is as interconnected across asset classes and geographies as it has ever been. No matter how politicized the US Financial System has become, you have to accept it for what it is, and keep playing the game that's in front of you.
Why does the US Dollar continue to trade lower this morning? I see two reasons - both are political:
1.       The BRIC Summit is ending with explicit comments from the Brazilians, Chinese, Indians, and Chinese that the world needs a new reserve currency
2.       The US Federal Reserve is starting to signal to the manic media that they won't be talking about raising interest rates at next week's FOMC meetings
Both of these lines of political rhetoric are perfectly predictable. There is no way on God's good earth that President Obama is going to let Bernanke be objective and address where inflation expectations are going come the 4th quarter - at least not next week. Obama signaled this last night on Bloomberg, floating the 10 bagger out there (as in 10% unemployment), as his political trial balloon. The US Treasury market bought that hook line and sinker, as it should have, and bond yields are treading lower for the 3rd straight day.
In the face of the yield on 10-year US Treasuries dropping 32 basis points since last Thursday's crescendo of consensus that printing money forever doesn't end well, can the US stock market put in her 3rd consecutive down day? We will have to see wont we...
The New Reality remains: Americans aren't stupid like some of the economic savants from Washington to Wall Street consider them to be. When Joe Biden starts framing up the unemployment line political football on Meet The Press by talking about his team's "Econometric Models", what do you think your average American sniff tester smells? I can tell you this - this morning's ABC/Washington Post Consumer Confidence survey tells you this smells like a fart.
Consumer confidence erosion is collateral damage that the US stock market has to deal with as REFLATION moves towards INFLATION. Prior to this 3-day drop in bond yields and oil prices, the US Consumer was faced with higher cost of capital, higher gas prices, and a credibility crisis in her currency. That's why the ABC confidence reading dropped to -49 versus -47 last week. Americans vote with their wallet.
This morning, our macro models are showing a price of oil at $71.31 or higher as the elasticity point that triggers turning REFLATION into INFLATION. If the US Dollar can regain some credibility, the Obama "econometric" team doesn't have to worry - a stronger dollar will imply a lower oil price. Stay tuned on that front...
For now, across asset classes, the real-time marked-to-market prices that matter to Americans are at a very critical stage. "They say that time changes things, but you actually have to change them yourself." My downside support level for the SP500 is now 904, and I have immediate term upside +3% higher than yesterday's close at 936. Trade the range and  keep moving out there. After a day that was as confusing as yesterday, that's all you can do.
Best of luck out there,


EWZ - iShares Brazil - President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

SPY - SPDR S&P 500 - The S&P500corrected on 6/15 from the YTD high on low volume.  The S&P 500 is positive from a TREND duration and negative from a TRADE duration. This is a market that has a very predictable range, one we'll trade with a bullish bias.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

XLV - SPDR Healthcare -Healthcare looks positive from a TREND duration and moved to negative territory for a TRADE. We bought XLV on 6/08 to get long the safety trade.  

EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.  Bearish TRADE and bullish TREND.

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package.  To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS -The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.



SHY- iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic. 

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.  

EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

UA: Q&A on Footwear Mgmt Change

Last night's resignation of UA's SVP footwear is a near-term casualty of a meaningful growth offensive started six months ago. If the market shoots before it thinks (which it is very good at doing), UA is a great oppty. Heck, it's a great oppty anyway. Here's Q&A on the topic...


Was I surprised that Raphael Peck, SVP of Footwear at UnderArmour resigned? No. Kevin Plank (CEO) sent a clear message earlier this year that the footwear org needed more firepower to go from 'good to great.' This was clear in my mind for the past year, was reaffirmed with org comments in 1Q, and confirmed during my visit to UA's HQ 2 weeks back.


Is this a signal that footwear is underperforming at Under Armour? No.


C'mon McGough...are you sure? Yes, I am sure.


Does this mean that there will be transitional pains? Yes - but they did not start last night. They started early this year when the company told him that more firepower was needed up top. That's when the management transition REALLY began.


What do I think about the bench at UA? When I had Plank and new President David McCreight in the room at the same time, I put them on the spot and asked what David would be judged on at the end of the year. Without hesitation, David said "That's easy... " and then like two of the Hanson Brothers from Slapshot "Building The Best Team Possible."


What does this mean for the P&L? Near term - no impact. Long term, to the extent that a higher-end footwear-geared mgmt team is running the show in that product area it should make it easier to model UA becoming a real player in the space. Remember, share today is >1%. If it can get to an Asics, Reebok, or Puma level, we're talking an incremental $500mm in revs (40% north of where it is today). I have a very high degree of confidence we'll see that.


On a relative basis, Malcolm Knapp is reporting casual dining sales numbers that are modestly positive for the industry. In absolute terms things are still challenging.

For May 2009, same-store sales were down 6.7% versus 4.9% in April. On a two-year basis same-stores sales improved sequentially from 3.5% to 3.1% in May. Importantly, the traffic trends look even better. May traffic is being reported down 6.0% versus 6.0% in June. The two-year traffic trends improved 100bps to down 4.4%. Last year, May sales trends were heavily influenced by the stimulus checks and it was the best performing month of the year.

The spread between the best and worst week for May is -1.5%, with the first week being the best and the last week being the worst. This trend would suggest that as gas prices rose during the month, sales trends suffered.

It's interesting to see that traffic trends were better than sales, as the month was heavily influenced by deep discounting.


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.



Macau's future leader gathered 286-out-of-300 nominations from the Election Committee members and will be the sole contender of the chief executive race.  He pledged to work hard and work with Macau residents to achieve Macau's "long-term prosperity and stability".   Two other residents submitted forms without any nominations. 50 nominations are required to run in the July 26 election. 



The Delta Forum initiative that started in 2004 has failed to aid regional integration between Hong Kong, Macau, and nine mainland provinces.  Official figures show more than 15,000 collaboration projects valued at over 1.6 trillion yuan were signed under the co-operation framework between 2004 and this year in the transport, environmental protection and other sectors. 

Experts doubt the credibility of these numbers because most of the contracts were merely collaboration frameworks, with a rough estimate of economic output in the coming decades.

SBUX VERSUS MCDONALD’s – The debate rages on

I still believe that there is a significant catalyst coming for Starbucks when the world realizes that McDonald's McCafe is not taking significant share from SBUX.

The other night, not knowing I was an analyst (not that it matters), an acquaintance of mine was talking about "investing". So I asked him about McDonald's and if he had tried the new coffee drinks. He said yes and that he was very disappointed and it's not likely he will have another one. The McDonald's media blitz is clearly stimulating significant trial, but if they don't have the products engineered perfectly, that all its going to be - a onetime purchase.

The amount of media that McDonald's is throwing at coffee is coming at the expense of other parts of the menu. In the areas where they have reduced media spending, it's only natural that the trends for those products will slow. Is the coffee news enough to keep the overall sales growing? Coffee is not a core competency for McDonald's and there is a big risk that McDonald's is too focused on coffee! If June is like May, McDonald's will have a hard time explaining away a soft comp. This will be good for SBUX!

Given my friends response I sought out the bloggers to see if he the exception or the norm. All of the following comments are from the blogs debating the issue:

If anything, I think the McCafe launch has made people appreciate the taste and quality of Starbuck's beverages. I remember the first time I tried the McCafe Mocha - when I asked how many shots of espresso was in it, the person working at McDonalds didn't even know what espresso was. Starbuck's specialty is coffee and good, quality beverages. McDonalds specializes in... Sandwiches! The companies should stick with what works best for them.
The companies should stick with what works best for them." Unfortunately, Starbucks doesn't know how to do that and has alienated many a customer with decisions such as not brewing decaf and bold after noon etc. I don't really see a McCafe hurting sbux so much as the economy and the fact we raised prices during a recession....ummm...can you say stupid move

Had a few customers comment that their experience was not good at McD's. Cheaper price but less quality beverage. As for trends, seeing lots of iced coffee sales rather than iced lattes or blended beverages. I think the 1.95 price point is good for people. My opinion is that McD's can't really compete right now with espresso. If they get a good iced coffee, then it could compete. Their current iced coffee is weak tasting. Sbux breakfast sandwiches don't compare. Not fresh enough. I don't eat fast food breakfast for health reasons. Personally, I think it is dangerous for Sbux to compete with fast food... FOOD. The less like a coffee house and focus on drinks means less quality of beverages and service speed.

I'm not a SBUX employee, I'm a regular customer. The McDonalds rollout hasn't affected my consumption patterns one bit. I'll go to McDonalds if I want a fast-food hamburger. The McCafe marketing plan just sounds like a clumsy attempt to get some of Starbuck's and Dunkin Donuts' market share.

Truthfully, having a mcd's ten feet away has NOT affected my store. They post signs pointing directly at my store for their mccafe' and yet...we still get THEIR employees buying our coffee. We've had customers go there and get a drink, only to dump it out and get a drink from us.

Ugh, I had a vanilla latte at McDonald's for the first time yesterday. So gross. It tasted exactly like the vending machine coffee I used to get in college. This is about right, considering it was "made" by pushing a button.
We have a McDonald's across the street from my store and I have made it a point to ask many of our regulars: "Have you tried any of the McCafe drinks? What were your thoughts?" I also tried the iced mocha myself. The results were simple... You pay for what you get. Argue the details all you want. The fact remains that value is up for the customer to decide.

We have three McDonalds within a five minute drive of us (including one within four blocks) and our trends are:
-increase over target sales by at least 25%
-increase in average check by almost a dollar
-increase in customers asking us at the window if we can throw away their nearly-full McCafe cups after we hand them our coffee and I believe that says all I need to know about it.

I'm seeing a really interesting effect because our store is just a row of parking spaces away from a McDonald's. We're getting customers who come in saying they tried the McCafe and were thoroughly disappointed. A couple of days ago they weren't able to make any iced coffee for some reason and I actually had a customer tell me they suggested they come to our store! I had another customer who said they got mocha there, took a few sips, and drove right over to our store to get something that didn't taste awful. Also, I'm seeing more customers recently who are totally unfamiliar with anything Starbucks. I'm wondering if the McCafe got some of those people who don't normally drink coffee interested in coffee drinks, tried it, left disappointed and decided to compare it to Starbucks.

I agree with the comments that it has not hurt my SBUX at all and I would argue that it has helped exponentially. My store has been in the same location for over ten years and it has NEVER seen business like we are experiencing now. Our store is up 25% in sales over last year alone. We have a DD right next door with a drive-thru (my SBUX has no drive-thru thank god), and there is a McDonalds 2 minutes down the street. I agree that McDonalds has done us a GREAT service in drawing attention to coffee. Unfortunately for them, once people try both, they then realize that you DO get what you pay for and maybe paying a little more for a perfectly customized beverage is a better value for their money. People are certainly entitled to their opinion and if they like McD's better, then good for them... I just don't see the masses embracing their coffee products. I continually express my belief that the draw to SBUX is also the feeling that people get when they carry around a SBUX cup. It sends a subliminal message, "I'm successful, I'm trendy, and I'm sophisticated". Anyone who thinks otherwise is not in touch with the human psyche.



Floating lower, for now

In the UK, where fixed rate loans of durations over 10 years are not typically available, floating rate and variable mortgage products comprise a significant portion of the total. According to the Council of Mortgage Lenders, fully 49% of total mortgage debt in the UK is either variable, discounted variable (a variable rate with a  teaser) or a tracker, which follows the BOE rate in lock step.

As such, the current low rate environment is having a significantly larger impact on the UK consumer than their US counterparts. National Statistics Office retail price Index levels reported today registered at -1.07% on a year-over-year basis but at +1.58% Y/Y with mortgage payments excluded from the basket (see chart below).

Clearly the impact of changing rates will be felt earlier and harder by consumers in the UK than in the US.

Andrew Barber




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.