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Just Charts - #EuroBulls

Our Top Q413 Global Macro Theme remains #EuroBulls.

 

The heart our #EuroBulls call is a bullish position on the GBP and EUR versus the USD and a bullish position on UK and German equities, built on a few central factors:

  • Central Bank Intervention: we expect Janet Yellen to remain the ueber dove on policy and push out any QE taper expectations to at least late in Q1 2014, which should burn the Greenback lower (etf UUP). 
  • BOE “Hawks”: we expect Mark Carney and the BOE to remain on hold with interest rates and the asset purchase target, built on improving UK fundamentals, which should encourage the British Pound higher (etf FXB).
  • Draghi’s Back Pocket: we were surprised (and off-sides) with the ECB’s decision to cut the interest rate 25bps on 11/7. The cross has since corrected and we like the set-up on the long side. Twisting an expression, we don’t think it pays to ‘Fight the ECB’: Draghi has balance sheet flexibility with LTRO repayments to unlock additional sovereign and banking bailouts, if needed (etf FXE).
  • Island Insulation: the UK was the first country to issue austerity in Europe -- we’re seeing the threw-put of that decision with fundamentals improving ahead of its European peers. We maintain a bullish bias on UK equities (etf EWU).
  • German Leadership: Chancellor Merkel is formalizing coalition talks with the SPD; alongside her Finance Minister Schaeuble we see strong continuity of policy vis-à-vis the EU with the new coalition. We’re seeing strong domestic economic health from Eurozone’s largest economy and we expect the country to benefit as the region recovers off a low base. We’re buyers of Germany’s stability (etf EWG).

Just Charts - Below we show the data we’re seeing that is supportive of our #EuroBulls call:

  • GDP Taking the Turn: before we highlight the economies of Germany and the UK, we’ll note that we’re seeing a broader improvement from the Eurozone region. In the next charts, the turn (to the positive) is underway!

Just Charts - #EuroBulls  - zz. eurozone imports and exports

 

Just Charts - #EuroBulls  - zz. eurozone IP and REtail

  • Confidence Ramping: From economic to business and consumer, the improvement in confidence readings is hard to ignore.

Just Charts - #EuroBulls  - zzz. .eurozone business conf

  • Even Autos are getting a bounce: Any increase in big ticket items is a signal of confidence to us.

Just Charts - #EuroBulls  - zz. EU clunkers

  • PMIs Popping: the improvement in confidence is backed by stronger Services and Manufacturing PMIs.  Despite underperformance from France, we expect the Eurozone aggregate to cruise about the 50 line (expansionary), and the UK and Germany to outperform.

Just Charts - #EuroBulls  - zz. pmis

  • Risks Abates: an additional positive signal comes from tightening credit spreads, approaching levels last seen when Europe’s sovereign ‘crisis’ began.  While risk is not completely off the table, either on the sovereign or banking sides, we’re seeing compelling improvements. All European sovereign CDS are down on the month and, on average, European Financials have tightened by 46 bps or roughly 21% on the month. 

 Just Charts - #EuroBulls  - zzz. credit spreads

  • Deflating the Inflation: we view deflation of the inflation as a lower consumption tax that will boost real inflation adjusted growth. Clearly the ECB has failed to meet its mandate of CPI at or below 2%, however CPI at its current 0.9% is not a “threat” of deflation in our opinion.  Despite the ECB’s surprise cut to the interest rate on 11/7, we see no need for the central bank to cut further as fundamentals are showing improvements.       

Just Charts - #EuroBulls  - zz. Eurozone inflation

  • Draghi’s Back Pocket: Our new mantra is don’t ‘Fight the ECB’ because 1). Time and time again it has not paid to, and 2). Draghi has even more balance sheet flexibility now with LTRO repayments coming in. Don’t forget our central position has been that Eurocrats want to keep the Eurozone experiment alive – this includes at all costs, be it for additional sovereign and/or banking support. 

Just Charts - #EuroBulls  - zz. ECB and LTRO

  • Credit Thin: This chart remains a thorn in Draghi’s side. Getting credit to flow into the system to households and non-financial corporations has been a great challenge. We don’t expect the ECB to issue another round of LTRO, given its shortcomings in this respect, but we could foresee an alternative to the LTRO with more outlined lending requirements. 

 Just Charts - #EuroBulls  - zz. ecb loans to households

  • The TREND is Your Friend: our quantitative lines in the sand on the EUR/USD have not moved much in Q4. The currency crashed on Draghi’s unexpected rate cut on 11/7. It has since rebalanced and we like it on the long side as fundamentals improve and the EUR marginally wins out versus the USD in the #CurrencyWars (etf FXE). 

Just Charts - #EuroBulls  - zzz. eur usd levels

  • UK GDP: we expect outperformance versus most of its European peers, built largely on it choking down austerity first during the great recession.  The European Commission in its autumn report recently 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%. We’re buyers of UK equities (etf EWU).

Just Charts - #EuroBulls  - zzz. uk gdp

  • UK CPI Eases: Inflation has moderated to 2.2%. We think this is an added benefit to consumers and expect a #StrongCurrency to increase purchasing power by deflating imported inflation.

Just Charts - #EuroBulls  - zz. uk cpi

  • UK Confidence Confirms the Data, or visa-versa: We see confidence rising alongside high frequency data: Manufacturing PMI for November was the best in in Europe (58.4 versus 56 in October). And Construction PMI shot up to 62.6 vs 59.3 in October.

Just Charts - #EuroBulls  - zz. uk confidence

  • UK 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. Household spending accounts for 62% of GDP in the UK. 

Just Charts - #EuroBulls  - zz. uk IP vs RETAIL

  • UK Housing May Ease: After taking off like a rocket ship for the balance of the year, the BOE announced on November 28th that it would curtail mortgage lending in its “funding for lending” scheme. 

 Just Charts - #EuroBulls  - zz. uk housing

  • GBP/USD: the cross is trading comfortably above over our intermediate term TREND level of support of $1.59 and long term TAIL line of $1.57 (etf FXB).

Just Charts - #EuroBulls  - zzz. gbp usd

  • Strong Germany: we continue to like the DAX, on a positive correlation to the EUR/USD. Fundamentals remain grounded with a low unemployment rate (6.9% vs 12.1% in the Eurozone), CPI at 1.6% Y/Y, expanding exports, strong PMIs and consumer and business confidence, and an inflection in factory orders to the upside (etf EWG). 

Just Charts - #EuroBulls  - zz. germany factory orders

 

Just Charts - #EuroBulls  - zz. germany ifo

 

Just Charts - #EuroBulls  - zz. germany zew

 

Just Charts - #EuroBulls  - zzz. dax vs eur

 

 

Matthew Hedrick

Associate

 

 

 


KKD: DÉJÀ VU (BUY THE DIP)

Takeaway: DÉJÀ VU - This is a great opportunity to buy the dip. The company's fundamentals are as strong as ever and the growth story is intact.

 

 

Krispy Kreme posted very solid 3QF14 results after the close yesterday and today’s dip offers a nice buying opportunity for those looking to be long the name.  Despite softer than expected top-line growth, the fundamentals of our bullish thesis remain intact.  In our opinion, today’s selloff was largely due to “disappointing” domestic company comps of +3.7%, which missed consensus metrix estimates of +6.7%.  However, domestic franchise comps (+10.7 vs. +6.8% estimate) and international franchise comps (-3.1% vs. -7.9% estimate) both significantly surprised to the upside.  Domestic company and franchise comps continue to grow and international comps are accelerating at a rate much faster than anticipated.  There is a chance that international comps could turn positive next year, which would be far sooner than the street currently expects.

 

While KKD appears to have failed to live up to lofty expectations, the fact of the matter is the company is in great shape.  All four business segments posted higher operating margins than a year ago, traffic was up +1.1% despite lapping a difficult comp of +7.1%, beverage sales were up +4.2%, the growth story is predominantly on track, and the balance sheet is as strong as ever.  Essentially, the growth drivers that made us bullish on the company back in early September are still in place.  Krispy Kreme has tremendous opportunities to drive long-term growth by continuing to refine its freestanding small factory shops, driving higher margin beverage sales, growing its capital light model, and expanding its domestic and international footprint.

 

As an aside, management did acknowledge that its original goal of 400 domestic shops by January 2017 may aggressive.  This is marginally negative, but isn’t a huge deal.  In fact, management would not completely rule it out and the overall growth story is largely on pace to play out.  Another point of contention is the gap between domestic company (+3.7%) and domestic franchise (+10.7%) comps.  To most, this signals that the company is doing something wrong.  But, to us, this resembles an impressive franchise base and an opportunity to refine company operations.  Seven domestic franchisees grew same-store sales by +20% or greater, while the remaining franchisees grew same-store sales by +7% or greater.  This type of operational execution and performance is what makes us excited about the growth prospects of this company.  KKD announced a development agreement with Dulce Restaurants, LLC, to develop 10 new shops in Houston over the next five years and management indicated that more announcements are likely to follow in the coming weeks and months.

 

The market’s reaction today is emblematic of what we saw last quarter after KKD reported “disappointing” 2QF14 results.  KKD is currently trading at a PE of 27.5x and 17.8x EV/EBITDA on a NTM basis, well below prior valuation levels.  This downward multiple revision represents a strong buying opportunity.

 

What we liked in 3QF14 results:

  • Revenues rose +6.7%, comparable sales rose +3.7%, and operating income rose +27.2%.
  • Domestic franchise and international comps blew away expectations.
  • Operating margins improved across all four business segments.
  • Traffic was up +1.1%, despite lapping a very difficult +7.1% comp.
  • International same-store sales could turn positive next year.
  • Beverage sales grew +4.2%, led by the coffee category which was up +15%.
  • The wholesale channel is growing.  Average weekly sales per door rose in both the grocery and mass merchant and convenient store channels.
  • Long-term opportunity to drive incremental sales and extend the Krispy Kreme brand through packaged ground coffee.
  • The majority of domestic unit growth over the next three years will be franchise.
  • Continue to develop and improve the freestanding small factory shop models.
  • Total franchise commitment for additional international development now stands at roughly 350 shops and the goal of 900 international shops by January 2017 remains achievable.
  • Recently announced two franchise agreements (Alaska and Houston) and plan to announce more in the coming weeks and months.
  • The growth story is intact.  Anticipate opening 10 to 15 domestic company stores, 20 to 25 domestic franchise stores and about 85 international franchise stores in FY15.
  • KKD is now much more attractive from a valuation standpoint.

What we didn’t like in 3QF14 results:

  • Total revenues came in light, driven by disappointing domestic company comps (+3.7% vs. +6.7% estimate).
  • Management sounded unsure that they would be able to hit the original goal of 400 domestic stores by 2017, calling it a “stretch” goal.
  • Facing difficult domestic company and franchise same-store sales comparisons in 1HF15.
  • Preliminary FY15 EPS guidance of $0.71-0.76 came in below expectations of $0.77.

 

KKD: DÉJÀ VU (BUY THE DIP) - KKD company

KKD: DÉJÀ VU (BUY THE DIP) - KKD franchise

KKD: DÉJÀ VU (BUY THE DIP) - kkd international

 

 

Howard Penney

Managing Director

 


$FXB: Don't Mess With The Pound

Takeaway: We remain bullish on the British Pound (via FXB).

After another blockbuster economic data point out of the UK this morning (November Construction PMI 62.6! vs 59.3 in October), the Pound continues to pound the Burning Buck at $1.64 versus the US Dollar.

 

$FXB: Don't Mess With The Pound - uk99

 

Guess what? It can go a lot higher from here.

 

Especially if the Fed engages in open-market storytelling about why the ISM growth data (best in 3 years) isn’t enough to taper.

 

Yes - we remain bullish on the British Pound (via FXB).

 

Incidentally, all of those Keynesian college professors who said austerity would kill the UK (Danny Blanchflower at Dartmouth)?

 

They are eating crow.

 

$FXB: Don't Mess With The Pound - UK Construction PMI


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Everything Is 'Smooth'?

Client Talking Points

POUND

After another blockbuster economic data point out of the UK this morning (November Construction PMI 62.6! vs 59.3 in October), the Pound continues to pound the Burning Buck at $1.64 versus the US Dollar. Guess what? It can go a lot higher from here. Especially if the Fed engages in open-market storytelling about why the ISM growth data (best in 3 years) isn’t enough to taper. Unbelievable. 

GOLD

Rates down means Gold up this morning (following rates up and Gold getting slammed yesterday). ‘Tis the season and the end of a fantastic year of being long growth and short the anti-christ of it (Gold). Capitulation in Gold should happen as US growth expectations lock in 1-year highs. Thursday’s US GDP print for Q313 should be the top in growth, sequentially.

RUSSIA

Mother Russia remains in a body bag this morning. She's leading the European Equity decline (as it has all year). The RTSI is down -1.9% to -6.1% year-to-date. Now all we need is for Brent Oil to snap its TAIL risk line of $108.69 again. If that happens, Vladimir Putin will have more issues than the Ukraine. That's saying something.

Asset Allocation

CASH 58% US EQUITIES 4%
INTL EQUITIES 4% COMMODITIES 4%
FIXED INCOME 4% INTL CURRENCIES 26%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

The "January Effect" gets priced in in December with 9 of the 13 Decembers since 2000 being +1% for the S&P @hedgeyeJC

QUOTE OF THE DAY

"It's hard to beat a person who never gives up." -Babe Ruth

STAT OF THE DAY

Sony's PlayStation 4 may be turning into the hit the company needs. Global sales of the game console topped 2.1 million as of Dec.1, just two weeks after it was launched in the U.S. and Canada and three days after it was made available in other markets.


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