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Get Long The British Pound

Long GBP/USD (via the etf FXB)

 

Our bullish call on the British Pound vs the US Dollar was strengthen this morning with the ECB unexpectedly cutting its main interest rate by 25bps to 0.25%.  In our minds, it’s now anyone’s guess how the central bank currency wars between the USD and EUR will play out.  However, anchored on our Q4 2013 Macro theme of #EuroBulls (presented on 10/11/13), we continue to like British Sterling.

 

The Bank of England was also out this morning and announced no change to its interest rate (anchored at 0.5% since March 2009) and kept its asset purchase program target (QE) unchanged at £375B. 

 

Here are the main factors underpinning our bullish GBP/USD Call:

  • Regime:  we are bullish on the regime change at the BOE, replacing Mervyn King with Mark Carney – we believe Carney has fresh ideas and a focus to use forward guidance to direct the economy to stable growth
  • Fiscal Policy:  we expect (and are already seeing signs of) the country’s decision to issue austerity before its regional peers during the global recession as paying off in spades via accelerated growth over its European peers. We’ve seen steady improvement in the country’s deficit (as a % of GDP), from -11.4% in 2009 to -6.1% last year and is forecast to hit -4.4% in 2014
  • Monetary Policy:  we do not expect rate cuts or additional QE over the medium term. In the last policy meeting (October), the BOE voted (9-0) to keep rates on hold and the asset purchase program unchanged
  • Economic Data:  we believe that the health of an economy is reflected in its currency – the data suggests continued improvement (more below) which should bolster the GBP versus major currencies
  • Vs the USD:  we see a very favorable comparison versus the U.S. Dollar as Bernanke/Yellen burn the Greenback via delaying the call to taper (likely pushed out to March 2014)

 

By the Charts:

 

  • GBP/USD – the cross is trading comfortably above over our intermediate term TREND level of support

Get Long The British Pound  - zz. gbp usd

 

  • GDP – we expect outperformance versus most of its European peers, built largely on choking down austerity first during the great recession.  The European Commission in its autumn report this week raised UK GDP expectations, to +1.3% in 2013 from +0.6% and to +2.2% in 2014 versus a previous estimate of +1.7%.

Get Long The British Pound  - zzz. uk gdp

 

  • PMIs – UK Services and Manufacturing PMIs continue to outperform continental Europe.  UK Services PMI for October hit a 16 year high at 62.5! (above 50 = expansion). The UK PMI Construction also rose to 59.4 OCT (exp. 58.7) vs 58.9 SEPT

 

Get Long The British Pound  - zz. pmi

 

  • Confidence– Below we show business and consumer confidence, both trending higher since mid 2012

Get Long The British Pound  - zz. uk confidenc

 

  • Manufacturing and Retail Sales – confidence is a huge piece of the consumption puzzle; we see the trend in manufacturing and retail sales moving positively over the intermediate term. UK Industrial Production popped to 2.2% SEPT Y/Y (exp. 1.8%) vs -1.5% AUG

Get Long The British Pound  - zzz. retail sales and manufacturing

 

  • CPI – Inflation remains sticky and high, however we expect a #StrongCurrency to increase purchasing power by deflating imported inflation

Get Long The British Pound  - zz. uk cpi

 

Matthew Hedrick

Associate


INITIAL CLAIMS: THE VERDICT IS IN

Takeaway: The labor market deterioration observed over the last few weeks was largely optical as we revert back towards trend-line improvement.

The Initial Jobless claims data is taking a backseat this week to the advance estimate of domestic, 3Q13 GDP  (3Q13 GDP: Juiced By Inventories) and the surprise ECB policy decision - ECB Cuts, EURO Plunges! – which is serving as the lead driver of risk assets globally today. 

 

However, this week’s claims data provides important confirmation that the deterioration in the labor market observed over the last few weeks was largely optical and should reverse over the coming weeks as we revert back towards trend-line improvement. 

 

Below is the detailed breakdown of this morning's claims data from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

-  Hedgeye Macro

 

--------------------------------------------------------------------------------

 

 

The Jury is Back and Has Reached a Verdict (on the labor market)

Last week we lamented the inability to conclude whether a negative inflection in the labor market was occurring based on lagged CA state level data. This week can speak more definitively. The labor market remains strong. The chart below shows the Y/Y trend in NSA initial claims nationally. The red line highlights the trend rate of improvement prior to CA's IT-related fiasco. The data has now resumed that pre-CA trend rate of improvement.

 

We won't belabor the point other than to say that the labor market appears not to have skipped a step as we had potentially feared. One thing we will call out, however, is that consumer confidence/comfort has fallen to a new YTD low. We include a chart later in this note illustrating that. The chart shows the 4-week rolling average of the weekly Bloomberg consumer comfort survey, but the weekly data is no less reassuring. It's unusual to see a divergence between the labor market and the consumer comfort survey data. We'll take a closer look and report back with any worthwhile findings next week.

 

INITIAL CLAIMS: THE VERDICT IS IN - JS 1

 

Nuts & Bolts 

Prior to revision, initial jobless claims fell 4k to 336k from 340k WoW, as the prior week's number was revised up by 5k to 345k.

 

The headline (unrevised) number shows claims were lower by 9k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -9.25k WoW to 347.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -3.4%

 

INITIAL CLAIMS: THE VERDICT IS IN - JS 2

 

INITIAL CLAIMS: THE VERDICT IS IN - JS 3

 

INITIAL CLAIMS: THE VERDICT IS IN - JS 4

 

INITIAL CLAIMS: THE VERDICT IS IN - JS 5

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


THE CASUAL DINING BUBBLE

We’re stunned by the valuations we are seeing in the casual dining industry.  Is anyone even willing to buy casual dining names at these levels?

 

 

2013 Year-To-Date Casual Dining Statistics:


YTD Performance

  • Casual dining stocks are up +47% versus +24% for the S&P 500

 

YTD Macro

  • Conference Board Consumer Confidence is up +21.9%
  • The US Unemployment Rate has improved from 7.9% to 7.2%
  • US Initial Jobless Claims SA have improved from 373 to 340
  • Daily National Average Gasoline Prices are down -1.8%
  • US Disposable Income Per Capita is up +2.9%

 

YTD Fundamentals

  • On average, casual dining EPS revisions are down -2.9%
  • On average, calendar year revenue growth for companies in the Hedgeye Casual Dining Index is estimated to be +3.7%
  • On average, calendar year EPS growth for companies in the Hedgeye Casual Dining Index is estimated to be +8.6% on a normalized basis (excludes RT and RUTH)
  • On average, same-store sales for companies in the Hedgeye Casual Dining Index have declined from +1% in 1Q13 to +0.5% in 3Q13
  • According to Knapp Track, casual dining traffic is down -2.6% through September
  • According to Black Box, casual dining traffic is down -2.6% through September

 

YTD Valuation

  • On average, the EV/TTM EBITDA multiple for the Hedgeye Casual Dining Index is up +58.9%
  • On average, the P/TTM E multiple for the Hedgeye Casual Dining Index is up +48.9%
  • On average, the P/TTM CF multiple for the Hedgeye Casual Dining Index is up +50.5%

The late 1990s marked the beginning of a decade of growth for the casual dining industry.  During this time, the average cash flow multiple was 7x.  Today, we estimate the average cash flow multiple to be around 10.7x, as the majority of large, mature names have little to no growth.

 

Declining traffic, coupled with an earnings miss, used to instill fear in restaurant investors, often sending valuations for those companies to trade closer to 5x cash flow.  This has not been the case lately.  It is our view that the casual dining sector is in secular decline due, in large part, to the increased competition from fast casual restaurants and grocers.  Valuations are stretched and appear to be approaching peak levels.  We believe that the charts below are beginning to resemble a bubble.

 

THE CASUAL DINING BUBBLE - chart1

 

THE CASUAL DINING BUBBLE - chart2

 

THE CASUAL DINING BUBBLE - chart3

 

THE CASUAL DINING BUBBLE - Chart4

 

 

*The Hedgeye Casual Dining Index includes BOBE, BWLD, CAKE, CBRL, DRI, EAT, RRGB, RT, RUTH, TXRH.

 

 

 

Howard Penney

Managing Director

 


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$NSM: GET OUT OF THE WAY

Takeaway: We are removing NSM from the Hedgeye Best Ideas list as a long.

This note was originally published September 27, 2013 at 15:07 in Financials

We Think It Makes Sense to Step Aside For Now

We have been consistently bullish on Nationstar Mortgage since adding it to Hedgeye's Best Ideas list back on February 27, 2013 at a price of $38-39. The stock has had a good run since then, recently trading in the $56-57 range, but today many of the themes and catalysts we thought were misunderstood earlier in the year have either come to pass or are now far better understood and priced in. Consequently, we think most of the good news is now reflected in the valuation. Consider that in just the last few weeks there have been at least two positive initiation reports and one upgrade of the stock from the sell side. In fact, there are currently 8 buy ratings on the stock, more than at any other point in the company's history.

 

We expect there will likely be near-term positive catalysts in the form of deal announcements. Inside Mortgage Finance has written that sizeable MSR transactions are to be expected in the near-term from Wells Fargo ($40 Bn), JPMorgan ($70 Bn) and, most recently, Citi ($61 Bn). Recall that in their second quarter earnings release, Nationstar bumped up its guided pipeline for bulk deals by $100bn, or roughly in line with the sum of the reported WFC & JPM deals. Clearly, there is high probability, but also high expectations, that NSM will win a large share of those big deals. We wouldn't be surprised to see the stock rally further on such announcements. Historically, deal announcements have been a catalyst for upside as they often led to upward guidance/estimate revisions, not just for NSM but for peer companies OCN and WAC as well.

 

So, Why the Change?

We have always regarded three dynamics as paramount for NSM shares to move higher: Growing UPB, Improving Servicing Margins and Maintaining GOS. We think the company has delivered on all three fronts to date, and we are not concerned with the progress being made toward the first two dynamics. It's the third one that worries us.  

 

Our primary concern, and the reason for our change in view, is our expectation that Nationstar will struggle to beat estimates going forward due to pressure on both volume and gain-on-sale margins in the mortgage origination business. After spending considerable time working with our model, we are now currently expecting $1.14 in 3Q13 earnings, which is down from our prior expectation of $1.72 and is now below Street expectations for $1.27. Further, we have baked 15 bp sequential quarterly increases into our expectations for long term interest rates throughout 2014 and this has had a profoundly negative effect on our outlook for next year's earnings power. Based on that bump up in rate expectations, we're now expecting NSM to earn $5.37 in 2014, down from our previous expectation for $8.30-9.35. You may find yourself at odds with our assumption of rising rates throughout 2014, particularly in light of the Fed's recent pronouncements and Summers' withdrawal from consideration. Our basis rests upon the strengthening labor market data we track in the initial jobless claims series, which we think will exert growing pressure on prices and, in turn, should pressure the Fed to begin to constrict credit.

 

HARP & Non-HARP 

We've assumed that HARP volumes are relatively unaffected by the rate change. The guidance is for half of 2013's core production target of $23 billion to be HARP, or roughly $11.5 billion. In the first half of the year, we estimate the company originated $4.5 billion in HARP loans, leaving $7 billion in production for the back half of the year. We've split this evenly at $3.5 billion per quarter. However, the remaining non-HARP origination business we have haircut by 40% vs. our prior baseline forecast. Multiple datapoints support the appropriateness of such a haircut. Cardinal Financial recently pre-announced the quarter citing a 40% drop in Q/Q mortgage origination volume (both purchase & refi) coupled with material compression in gain-on-sale margins. MBA volumes 3QTD are down Q/Q by 47% for refi and purchase volumes are down 9% 3QTD vs 2Q13. Given that most of NSM's volume is refi-based, we think a 40% haircut outside of the HARP channel is reasonable. 

 

$NSM: GET OUT OF THE WAY - stein1

 

Gain-On-Sale 

We've also assumed gain-on-sale margin pressure. Here's the comment management made on the 2Q13 earnings call, hosted in early August: "With the recent rise in interest rates, we've seen some pressure on market pricing, mainly in the premiums on HARP originations." Generally speaking, HARP loans fetch a 250-500 bps GOS premium to non-HARP loans based on a December 2012 Fed study, which can be found here: Fed Study. Taking the mid-point of the 250-500 bps premium, we estimate that last quarter HARP GOS revenue accounted for roughly 60% of total GOS revenue while only accounting for 38% of volume. The average 30-Year FRM rose to 4.45% thus far in the third quarter, up from the 2Q13 average of 3.67%. That 75-80 bps Q/Q increase in rates is likely to weigh heavily on HARP premiums. Remember, HARP loans fetch a smaller premium in a rising rate environment as traditional loans become more valuable. We've nevertheless been conservative in our treatment and assumed roughly a 25 bps decline in Q/Q total GOS margins.  

 

Based on the combination of these factors, reduced volume vs. prior baseline and lower GOS margins, we've lowered our expectation for GOS revenue to $288mn in 3Q down from our prior thinking of $365mn. While management has indicated that they can and likely will bring some further efficiency to the cost side of this business, we doubt it will be enough to offset the compressed volumes and spreads especially considering the magnitude of efficiency improvement seen in 2Q13. #ToughComps

 

In short, while we think the long-term opportunity in the servicing business remains attractive, we think expectations are already high on that front without sufficient deference being paid to the pressure on the originations business. We would sell Nationstar at these levels and consider an alternative without heavy origination exposure, like Ocwen.

 

Ocwen (OCN) as an Alternative

We think it makes sense to roll out of Nationstar and into Ocwen, ticker OCN, where investors can still benefit from the secular trend in servicing but without the significant risk to the GOS business. 

 

Our expectation is that 3Q13 earnings from NSM will disappoint and likely will serve as a catalyst for a rotation out of NSM and into OCN.

 

$NSM: GET OUT OF THE WAY - IS

 

$NSM: GET OUT OF THE WAY - 2

 

$NSM: GET OUT OF THE WAY - 3

 

$NSM: GET OUT OF THE WAY - 4

 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com

 


INITIAL CLAIMS: BACK TO STEADY

Takeaway: This week we're able to state definitively what's happening in the labor market, but what's less clear is why confidence is plunging.

This note was originally published November 07, 2013 at 11:00 in Financials

Editor's note: What follows below is an abridged report from Hedgeye Financials Sector Head Josh Steiner and Jonathan Casteleyn.

 

The Jury is Back and Has Reached a Verdict (on the labor market)


Last week we lamented the inability to conclude whether a negative inflection in the labor market was occurring based on lagged CA state level data. This week can speak more definitively. The labor market remains strong. The chart below shows the Y/Y trend in NSA initial claims nationally. The red line highlights the trend rate of improvement prior to CA's IT-related fiasco. The data has now resumed that pre-CA trend rate of improvement.

 

We won't belabor the point other than to say that the labor market appears not to have skipped a step as we had potentially feared. One thing we will call out, however, is that consumer confidence/comfort has fallen to a new YTD low. We include a chart later in this note illustrating that. The chart shows the 4-week rolling average of the weekly Bloomberg consumer comfort survey, but the weekly data is no less reassuring. It's unusual to see a divergence between the labor market and the consumer comfort survey data. We'll take a closer look and report back with any worthwhile findings next week.

 

 INITIAL CLAIMS: BACK TO STEADY - 20

 

Nuts & Bolts 


Prior to revision, initial jobless claims fell 4k to 336k from 340k WoW, as the prior week's number was revised up by 5k to 345k.

 

The headline (unrevised) number shows claims were lower by 9k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -9.25k WoW to 347.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -3.4%

 

INITIAL CLAIMS: BACK TO STEADY - 1

 

INITIAL CLAIMS: BACK TO STEADY - 2

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com


 


ECB Cuts, EURO Plunges!

Who saw the 25bp interest rate cut coming this morning?  We didn’t!  In fact, what puzzles us is that we saw no need to use monetary “powder” this month given improving economic data across the region supporting our call for #GrowthAccelerating. Interestingly, Mario Draghi’s economic and inflation assessment of the Eurozone also didn’t change much today – while he underlined a forecast of a “prolonged period of low inflation”, his subdued inflation outlook (below the 2% target) had been well communicated over the last two meetings, including forecasts for low levels of inflation to extend late into 2014. So why then the cut today, especially if, as Draghi says, the level of the EUR/USD does not factory into the policy rate consideration? ... You got us!

 

Alas, we have to play the game that is front of us.

 

If you’ve been following our research, you’d know one of our Q4 macro themes is #EuroBulls, which included a bullish call on the EUR/USD and German and UK equities.

 

Today’s decision certainly moved markets:  The EUR/USD is down as much as -1.2% intraday, and European equities are shooting to the upside.  From here we’re going to re-access our positioning around the #EuroBulls theme.  However, this morning Keith made some changes to our Real-Time Alerts:

  • We sold our long EUR/USD position (via the etf FXE)
  • We sold our long Germany equity position (EWG)
  • We sold our long Swiss equity position (EWL)

On the currency front, the signal from the central bank currency wars between the USD and EUR is a lot less clear this morning, whereas before this morning we expected the Bernanke/Yellen no taper call (likely out to March 2014) to weaken the Greenback vs the EUR. Of note, we think a relative winner in all of this is the British Pound, which we’re currently long of in our Real-Time Alerts via the eft FXB

 

On the equities front, before today’s meeting we were seeing a strong correlation between the EUR/USD and the DAX.  That’s obviously inflected today. Today’s decision could well facilitate more liquidity in the system, or at least a positive psychological response, which could be bullish for equities. On this front we’re still going to let the dust settle on today’s decision.

 

To read a copy of Draghi’s prepared remarks click here.

 

Here’s a look at our EUR/USD levels going into today’s decision:

 

ECB Cuts, EURO Plunges!  - zzz. eur usd

 

Matthew Hedrick

Associate


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