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ECB and BOE on HOLD; UK Economic Outlook Raised

Draghi Backstop In Place, EUR/USD grinds higher


After a very surprising 25bps cut to the main interest rate at its last meeting on 11/7, the ECB kept rates on hold today, as expected by consensus forecasts. We actually saw no need to use the monetary “powder” last month given the improving economic data across the region supporting our Q4 macro theme call of #EuroBulls. (For more see our note titled “Just Charts - #EuroBulls”).

 

We expect the ECB’s accommodative stance to continue to support both equities and the common currency. Our preference is German equities (via the eft EWG); we also like the EUR/USD (etf FXE), which got a lift following today’s announcement. Our quantitative levels are included in the chart below.

 

ECB and BOE on HOLD; UK Economic Outlook Raised - yyy euro

 

Press Conference Details

  • No material change to the economic and inflation assessment or outlook (Dec. Projections below). Mario Draghi says fiscal consolidation measures at the country level should be “growth friendly” and to expect a prolonged period of low inflation, followed by inflation rates close but below 2%
  • Continued mantra that monetary policy will remain accommodative for as long as necessary and to expect key ECB interests rates at present or lower levels for an extended period of time
  • On non-standard measures, Draghi noted that a negative deposit rate was briefly discussed
  • On the use of non-standard measures Draghi said the Bank is “ready and willing to act within the forward guidance framework” and is considering numerous options, if needed
  • On the issuance of another LTRO, Draghi made a point to note that first LTROs were successful given the level of uncertainty around when they were issued two years ago. However, he said if a similar operation were to be issued, the framework must assure it’s being used to extend credit to the real economy, and not used to subsidize capital formation (carry trade operations) by the institutions. 

 

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

 

ECB’s December Macroeconomic Projections


GDP:  -0.4% in 2013 (unch vs Sept.); +1.1% in 2014 (revised up 10bps); +1.5% in 2015 (unch)

CPI:  +1.4% in 2013 (revised down -10bps vs Sept.); +1.1% in 2014 ( revised down -20bps); and +1.3% in 2015 (unch)

 

 

 

UK Fiscally Strong; Growth Projections Push Higher:


As we expected, the BOE kept the main interest unchanged at 0.5% and the asset purchase program (QE) target unchanged at £375B. We continue to be bullish on the UK economy, the GBP/USD, and UK equity market (via the etfs FXB and EWU, respectively). For more see our note titled “Just Charts - #EuroBulls”).

 

Additionally, today Chancellor of the Exchequer George Osborne presented his Autumn Statement. In it, he revised many economic forecasts (versus a prior March forecast) that point to an improved outlook, and supportive of our bullish outlook on the GBP/USD (via the etf FXB) and UK equities (etf EWU).

 

GBP/USD Levels


ECB and BOE on HOLD; UK Economic Outlook Raised - yy. pound

 

 

Forecast Updates:


2013 

  • GDP +1.4% vs prior +0.6%
  • CPI +2.6% vs prior +2.8%

2014 

  • GDP +2.4% vs prior +1.8%
  • CPI +2.3% vs prior +2.4%

2015 

  • GDP +2.2% vs prior +2.3%
  • CPI +2.1% vs prior +2.1%
  • 2015 unemployment rate at 7.0% in 2015 declining to 5.6% in 2018
  • Budget deficit forecasts as % GDP lower and will run a small surplus in 2018/19
  • Pension age raised to 68 in the 2030s and 69 in the late 2040s
  • Bank levy raised to 0.156% from 0.13% from Jan-14; raises £2.7B and £2.9B in next two years
  • Will introduce a new tax allowance for investment in shale gas
  • Foreigners who sell second homes in the UK will have to pay capital gains tax

To read a copy of Osborne’s Autumn Statement 2013 speech click here.   

 

Matthew Hedrick

Associate


INITIAL CLAIMS: GOBBLE GOBBLE

Takeaway: The Fed needs to bury its head further into the sand to reconcile its policy on purchases with the realities of the labor market.

Rising Rates Love Falling Claims

It's getting harder to ignore the improvement in the labor market, unless, of course, you're the Fed. Increasingly, however, it seems as though the bond market is taking fewer cues from the Fed and more from the labor market. True, seasonally-adjusted initial claims have a 2-handle on them principally because of the Thanksgiving mismatch this week vs last year (a week later this year), but adjusting for that and all the other recent turbulence in the data reveals one unmistakable fact. The data continues to strengthen and the bond market is taking notice. 

 

Aside from the obvious, which is that this is more good news for credit quality, the upward pressure being exerted on rates is ferreting out clear winners and losers, i.e. good for banks and online brokers, and bad for homebuilders and mortgage REITs. For more details, see our note from 11/22 "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials", a link to which can be found here.

 

Next week should be the first week in a long time where we get a clean print on the labor market, so stay tuned.

 

Nuts & Bolts

Prior to revision, initial jobless claims fell 18k to 298k from 316k WoW, as the prior week's number was revised up by 5k to 321k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -10.75k WoW to 322.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -21.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.3%

 

INITIAL CLAIMS: GOBBLE GOBBLE - 1

 

INITIAL CLAIMS: GOBBLE GOBBLE - 2

 

INITIAL CLAIMS: GOBBLE GOBBLE - 3

 

INITIAL CLAIMS: GOBBLE GOBBLE - 4

 

INITIAL CLAIMS: GOBBLE GOBBLE - 5

 

INITIAL CLAIMS: GOBBLE GOBBLE - 6

 

INITIAL CLAIMS: GOBBLE GOBBLE - 7

 

INITIAL CLAIMS: GOBBLE GOBBLE - 8

 

INITIAL CLAIMS: GOBBLE GOBBLE - 9

 

INITIAL CLAIMS: GOBBLE GOBBLE - 10

 

INITIAL CLAIMS: GOBBLE GOBBLE - 11

 

INITIAL CLAIMS: GOBBLE GOBBLE - 12

 

INITIAL CLAIMS: GOBBLE GOBBLE - 13

 

INITIAL CLAIMS: GOBBLE GOBBLE - 19

 

INITIAL CLAIMS: GOBBLE GOBBLE - 14 2

 

Yield Spreads

The 2-10 spread rose 9 basis points WoW to 255 bps. 4Q13TD, the 2-10 spread is averaging 235 bps, which is higher by 1 bp relative to 3Q13.

 

INITIAL CLAIMS: GOBBLE GOBBLE - 15

 

INITIAL CLAIMS: GOBBLE GOBBLE - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


CASUAL DINING ANOMALY

Despite the S&P 500 rising approximately 27.1% over the past year, casual dining stocks have meaningfully outperformed this index.  Around a month ago, we published a note titled “The Casual Dining Bubble.”  In this note we highlighted the rich valuations across the casual dining sector and questioned the quality of these multiples.  Since then, casual dining companies in aggregate have begun to underperform the S&P 500 and same-store sales estimates for 4Q have come down.  Needless to say, valuations are still at very high levels which we cannot support or explain within the context of a legitimate fundamental backdrop.  We are convinced casual dining stocks are in a bubble, but we do not know when this bubble will pop.

 

CASUAL DINING ANOMALY - CD Perform

 

CASUAL DINING ANOMALY - casual dining ebitda

 

CASUAL DINING ANOMALY - casual dining pe

 

CASUAL DINING ANOMALY - price to cf

 

 

Highlighted in the two charts below, casual dining sales and traffic trends have been anemic for over a year and a half.  Industry traffic has not had a positive month since February 2012.  These statistics suggest that such strong outpeformance of casual dining stocks over the last year is unwarranted.

 

CASUAL DINING ANOMALY - Black Box Sales

 

CASUAL DINING ANOMALY - Black Box Traffic

 

 

In the following chart, we compare the aggregate price performance and short interest of the stocks in our casual dining index.  Despite very weak fundamentals, short interest has been falling since late 2011.  The continuation of this trend suggests that investors don’t want to get in the way of the sectors positive momentum.  Being on the wrong side of a bubble can be costly, to say the least.

 

CASUAL DINING ANOMALY - Short Interest

 

 

Although 4Q same-store sales estimates have been revised down over the past month or so, we still believe they are too high.  4Q was supposed to be the bounceback quarter for the industry.  While it will be a stronger quarter sequentially, compared to 3Q, it will still be relatively weak on a historical basis.

 

CASUAL DINING ANOMALY - Casual Dining SSS

 

 

Despite the consensus expected recovery in 4Q, casual dining stocks have underperformed the S&P 500 over the past month and have meaningfully underperformed the index over the past week.  This could signal that investors are coming to their senses.  The majority of valuations across the sector are excessively high and unwarranted.  That being said, we expect to see significant downward multiple revisions in the space but, alas, we don’t know when this will happen.  Perhaps the last month has signalled the beginning. 

 

CASUAL DINING ANOMALY - outperformance changing

 

 

 

Howard Penney

Managing Director

 


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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.

JCP: Round 2 -- JCP/Dept Store Consumer Survey

Takeaway: Please join Hedgeye Retail Monday Dec. 9th at 1:00pm EST for the 2nd installment of our Consumer Survey on JCP and the department stores.

As a reminder, the first iteration of this 1,000 consumer survey was a critical component of our call to be long JCP over the past three months, and to be short KSS into 3Q earnings (which it missed). We already know JCP's 10% November comp, but the purpose of this survey is to go much deeper in order to flush out key fundamental issues around the JCP story and store experience.  

 

JCP: Round 2 -- JCP/Dept Store Consumer Survey - Screen Shot 2013 12 05 at 6.06.23 PM

 *dial-in info and materials link will be available before the end of the week

 

EXPECT TO HEAR UPDATES ON THE FOLLOWING TOPICS:

  1. First off, better than half of the questions will be identical to what we asked just three months ago, so not only will we see what consumers are thinking, but we'll be comparing to what they said last time to gauge incremental change.
  2. We'll provide an update on market share. We already think we know where it went (per our last survey), but now we'll verify (or challenge) our prior findings by re-polling Consumers.
  3. More importantly we'll now have a sense as to where JCP is stealing back market share from KSS, M, TJX, TGT, SHLD, others?
  4. We'll look at Private brands, which we think are critical to 600bp Gross Margin rebound, and the extent to which JCP is having success reintroducing these brands to consumers. Do people want them as much now as they did pre RonJon?
  5. In this survey, we placed a greater emphasis on JCP's online business. The company's results already show that it's rebounding, but we dive into what and who the specific drivers are.
  6. The company has introduced several new brands over the past three months. Do people care? Are they attracting incremental shoppers?

 

 

CONTACT

For question please email 

        


Keith on Forbes: U.S. Remains Hostage

Takeaway: We remain hostage to a bunch of un-elected NYC banking group-thinkers.

“In my career, the Fed has a 100% error rate in predicting and reacting to important economic turns… because it is trying to arbitrarily set the single most important price of the economy – the price of money… setting wage and price controls from the time of Diocletian to Nixon, has proven in every case a disaster for economies and the people entrapped by them.” 

-John Allison

 

Keith on Forbes: U.S. Remains Hostage - benmoney

 

Former BB&T CEO John Allison retired from finance in 2010 after building, brick-by-brick, one of the best run banks in American history. As author George Gilder observes in his excellent book, “Knowledge and Power,” Allison steered BB&T through the entire sub-prime crisis without suffering a single quarterly loss. Not one penny. During his almost two-decades at the helm, BB&T blossomed from a small, relatively inconsequential local bank to a $152 billion regional powerhouse successfully operating in 11 southern states and the District of Columbia. Simply put, John Allison knows how to lead.

 

“[BB&T] had really strong presidents,” according to Allison, redirecting credit to his underlings. “They had a much higher level of authority than our competitors… they were held responsible – they owned the process.”

 

Now shift your focus from John Allison, visionary business leader, to the Fed Crony Boys over in the “Land of Mediocrity.”

 

Click here to continue reading Hedgeye CEO Keith McCullough's latest op-ed on Forbes.


Short BWP – Report and Dial-In

We added SHORT Boardwalk Pipeline Partners (BWP) to our Best Ideas list on 12/2/2013.

 

Click the link for our FULL REPORT ON BWP: http://docs.hedgeye.com/BestIdeaBWP_DEC2013.pdf

 

We will host a quick call TODAY at 11am EST to hit the key points of the thesis and field questions.  If you have any questions, send them over to .

 

Dial-in Info:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 855488# 

 

Kevin Kaiser

Managing Director

Twitter: @HedgeyeEnergy

 


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