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New Ideas

This note was originally published at 8am on November 26, 2013 for Hedgeye subscribers.

“Should we care about how new ideas begin?”

-Jon Gertner

 

That’s a very basic question Jon Gertner asks at the beginning of a book I’ve been grinding through as of late – The Idea Factory: Bell Labs and the Great Age of American Innovation.

 

The story of innovation at Bell Labs is better than the book. It’s a uniquely American story that most entrepreneurs, innovators, and patriots can associate with. It’s all about the struggle, the wins, and the losses. The boys at Bell Labs (yes, they were all boys) shared a culture of learning and evolution. They weren’t afraid to make mistakes.

 

There was a little bit of everyone in their ranks. “Kelly, Fisk, Shockley, Shannon, Pierce, and Baker. Some of these names are notorious – Shockley won the Nobel Prize in Physics in 1956… in Shannon’s case, it was mathematics and artificial intelligence, while remaining largely unknown by the public…” (Gertner). A multi-factor approach perpetuated their growth.

 

Back to the Global Macro Grind

 

We’re trying to build that culture of learning both internally (working as a team) and externally (collaborating with clients). We don’t have any Nobel laureates on staff, but we do allow the lowest level IQs (hockey players like me) to contribute.

 

Do we care how new ideas begin? Nope. Not at all. Mr. Macro Market decides that for us. Our research process is grounded in the uncertainty of it all. That’s what makes it so exciting. We are humble observers of time and space.

 

This, as I pointed out earlier, isn’t a new style of thinking. Per Gertner, to a degree Thomas Edison made it cool at Bell Labs too. On ideas, “…how they worked was to Edison less important… he read compulsively… he scorned talk about scientific theory…” (pg 12). Imagine Edison had to deal with Keynesian “economists”!

 

Moving along…

 

A few weeks ago (November 14th) I wrote an Early Look titled “A New Idea”, so I’m going to go back to milking that cow this morning (plural title) with my “everyone’s a winner” position at Mr. Macro Market’s centrally-infected casino.

 

To review, I have my market bets spread across the macro table:

 

1. CASH = 44% (need lots of cash in case this sucker implodes)

2. FX = 24% (lots of alpha to be generated on the other side of the USA Burning The Buck)

3. INTERNATIONAL EQUITIES = 8% (some of these markets love Down Dollar)

4. US EQUITIES = 8% (the variance of US Sector Returns is testing all-time lows)

5. COMMODITIES = 8% (we’re still rolling the bones on Gold)

6. FIXED INCOME = 8% (no-taper in DEC is a big Bond Bull Lobby @PIMCO wants)

 

Crazy Eights!

 

And, again… to be clear, I realize that in some cases I am buying-the-damn-bubble #BTDB (both former ones like Gold and Bonds, and news ones like US stocks) here. But what do I care about the “why” on these new ideas anyway?

 

The #OldWall idea of trying to call tops has rendered itself useless. They are processes, not points.

 

Looking at the all-time-bubble-highs in US stocks, what is signaling caution?

 

1. VOLUME – vs its TREND, US Equity volumes have tracked down -11% and -14%, respectively, at the last 2 closing highs

2. VOLATILITY - front month VIX has been making higher-lows as SPX tracks higher-highs on falling volume

3. BREADTH – at the closing high (Russell2000 = 1124) yesterday’s breadth was negative (more decliners than gainers)

 

Does that mean we can all jump up and down @Hedgeye headquarters today and call “the top”? Nope. It means what it means. With “it” usually meaning something new.

 

On the other side of the caution signs, there are plenty green lights:

 

1. EQUITY FLOWS – US Equity fund INFLOWS are trending at fresh YTD highs

2. BOND FLOWS – US Bond Fund OUTFLOWS are trending at fresh YTD highs

3. TRADE and TREND SIGNALS – for SPX, RUT and NASDAQ remain bullish

 

So what matters more, internal market signals or external flows? I don’t know, yet. But I am certain that Mr. Macro Market will decide, and not me. That’s not a new idea either.

 

Neither is buying on red and selling on green. So in between now and whenever whatever this is ends, within our immediate-term risk ranges for stocks, bonds, commodities, and currencies, we’ll just keep doing more of that. Keep moving out there.

 

Our immediate-term Global Macro Risk Ranges are now as follows:

 

UST 10yr Yield 2.69-2.81%

SPX 1792-1809

VIX 11.85-13.62

USD 80.61-81.29

Brent 108.81-111.63

Gold 1226-1288

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

New Ideas - Chart of the Day

 

New Ideas - Virtual Portfolio


$MCD: Nope, We're Not Lovin' It

Takeaway: Our bearish thesis on MCD remains in play.

Editor's note: Hedgeye analyst Howard Penney has basically been the sole bear on McDonald's this whole year. And he's been dead right. Some interesting stats: MCD is down -5.5% since Penney made his short call earlier this year on April 25th. For comparison's sake, the XLY (Consumer Discretionary) has risen almost +20% since then. The S&P 500 is up over +14%. It's hard to beat being right on the short side in a red-hot bull market.

 

$MCD: Nope, We're Not Lovin' It - mcd1

 

Here's a snippet from a report he sent out earlier this afternoon.

 

“Looking ahead to 2014, the U.S. is intent on rebuilding its underlying business momentum by strengthening key elements of customer service and leveraging the breadth of menu choices across all dayparts and value tiers.”

- McDonald’s November Press Release

 

We found the above quote to be quite interesting.  In October, McDonald’s spoke of strengthening its underlying business momentum in 2014.  In November, however, the talk has shifted to rebuilding its underlying business momentum in 2014.  As we have been calling out for the greater part of 2013, MCD has issues in its underlying core business that management must address.  The fact that management finally acknowledged it needs to rebuild its U.S. business momentum is a positive; but it is not a solution...

 

...Overall, November marked another disappointing month for MCD, as the company missed muted global same-store sales estimates.  The U.S. was once again a major source of disappointment, as the company attributed the weak comparable sales to the competitive environment and flat industry traffic trends.  To be clear, this suggests that MCD is losing market share in the U.S. and, we contend, they have been for a while.

 

Despite the temporary uptick in two-year trends, our bearish thesis remains in play.  With the street looking for 7% EPS growth in 2014, we continue to believe there is disconnect between investor’s expectations and the company’s fundamentals.  Until we see a legitimate change in company operations or strategy, we fail to see how MCD will be able to hit the street's current 2014 EPS target. 

 

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MCD: REBUILDING NOT STRENGTHENING

Takeaway: How much will it cost to rebuild?

“Looking ahead to 2014, the U.S. is intent on rebuilding its underlying business momentum by strengthening key elements of customer service and leveraging the breadth of menu choices across all dayparts and value tiers.”


- McDonald’s November Press Release

 

We found the above quote to be quite interesting.  In October, McDonald’s spoke of strengthening its underlying business momentum in 2014.  In November, however, the talk has shifted to rebuilding its underlying business momentum in 2014.  As we have been calling out for the greater part of 2013, MCD has issues in its underlying core business that management must address.  The fact that management finally acknowledged it needs to rebuild its U.S. business momentum is a positive; but it is not a solution.

 

MCD reported November global same-store sales growth of +0.5% vs. +2.4% in 2012 and missed consensus expectations by 10 bps.  The two-year trend ticked up 210 bps sequentially. 

 

The U.S. and APMEA regions showed same-store sales declines of -0.8% and -2.3%, respectively.  The U.S. missed consensus expectations by 110 bps, while APMEA missed by 160 bps.  The two-year trend in the U.S. and APMEA improved sequentially to +0.9% and -0.9%, respectively.

 

Europe was the sole bright spot in November with +1.9% same-store sales growth, beating consensus expectations by 110 bps.  Positive performance in the U.K., France and Russia was slightly offset by poor results in Germany.  The two-year trend accelerated sequentially to +1.7%.

 

Overall, November marked another disappointing month for MCD, as the company missed muted global same-store sales estimates.  The U.S. was once again a major source of disappointment, as the company attributed the weak comparable sales to the competitive environment and flat industry traffic trends.  To be clear, this suggests that MCD is losing market share in the U.S. and, we contend, they have been for a while.

 

Despite the temporary uptick in two-year trends, our bearish thesis remains in play.  With the street looking for 7% EPS growth in 2014, we continue to believe there is disconnect between investor’s expectations and the company’s fundamentals.  Until we see a legitimate change in company operations or strategy, we fail to see how MCD will be able to hit the street's current 2014 EPS target. 

 

MCD: REBUILDING NOT STRENGTHENING - twoyear avg

MCD: REBUILDING NOT STRENGTHENING - TTM

MCD: REBUILDING NOT STRENGTHENING - table

 

 

 

Howard Penney

Managing Director

 


Don’t Bet On December Taper

Takeaway: Market signals matter a lot more than consensus "economists."

The 10-Year Treasury yield is down a couple beeps to 2.84% today (and making a lower-high versus the year-to-date high in September, when Bernanke went no-taper).

Don’t Bet On December Taper - benfed

 

If I handicap what the bond market thinks, versus consensus “economists” (Bloomberg survey just doubled from 17% on December-taper to 34%), it’s still no-taper. Incidentally, there’s a -133,201 net short position in CFTC futures/options on the 10-year.

 

Don’t Bet On December Taper - dra1

As far as the US Dollar is concerned, it’s down four straight weeks as Fed Overlords continue devaluing America’s currency. The Euro continues to breakout versus USD. So on the margin, the currency market thinks no December-taper too, despite there currently being a bigger net long position in USD than EUR.

 

This is a brief excerpt from Hedgeye research this morning. For more information on how you can become a subscriber click here.


CASUAL DINING CONDITIONS MARGINALLY IMPROVING

Takeaway: Casual dining trends, although weak, are improving on the margin.

We have been bearish on the casual dining sector since early June and this morning Black Box gave us a look at November sales trends, which are, on the margin, positive for the industry.  Same-restaurant sales trends, although positive, were down sequentially from October while traffic trends, although negative, were up sequentially from October.  Before we delve further into the details of the release, we thought it would be useful to point out which casual dining companies have seen same-restaurant sales estimates adjusted since November 2nd.


The following companies have seen 4Q13 same-restaurant sales estimates revised upward since November 2nd: BBRG, BLMN, BOBE, BWLD, CBRL, CEC, IRG, RRGB


The following companies have seen 4Q13 same-restaurant sales hold steady since November 2nd: CAKE, CHUY, DFRG, DIN, EAT, KONA, TXRH


The following companies have seen 4Q13 same-restaurant sales estimates revised down since November 2nd: BJRI, DRI, RUTH


Moving back to the release, Black Box reported that November 2013 same-restaurant sales increased +0.8%, a 20 bps sequential decline from October.  Comparable traffic trends were down -0.9%, a 50 bps sequential improvement from October.  These same-restaurant sales and traffic estimates come against results of +1.0% and -1.4%, respectively, in October.

 

Same-restaurant sales and traffic estimates on a 3-month basis improved +30bps and +30bps, respectively, on a sequential basis.  In aggregate, same-restaurant sales and traffic trends have been improving on a 3-month basis since August 2013.

 

CASUAL DINING CONDITIONS MARGINALLY IMPROVING - SALES

 

CASUAL DINING CONDITIONS MARGINALLY IMPROVING - traffic

 

 

In addition, consumer willingness to spend in November signals a recovery from a dismal September and October. 

 

CASUAL DINING CONDITIONS MARGINALLY IMPROVING - willingness

 

 

Although same-restaurant sales were down sequentially and traffic is still negative on a year-over-year basis, the 50 bps sequential improvement in traffic and the overall slope of the lines are encouraging signs for the casual dining industry.  If this trend persists, we expect to see a steady recovery from the doldrums of 2013.

 

Currently, consensus metrix estimates for the 25 casual dining chains we track in the space are for 4Q13 same-restaurant sales growth of +1.2% (excluding DRI brands) versus +0.4% in 3Q13.  This would imply a 23 bps sequential deceleration in same-restaurant sales on a trailing twelve month basis over the prior quarter.

 

CASUAL DINING CONDITIONS MARGINALLY IMPROVING - SSS final chart

 

 

 

Howard Penney

Managing Director

 


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