TODAY’S S&P 500 SET-UP – December 19, 2013
As we look at today's setup for the S&P 500, the range is 29 points or 1.09% downside to 1791 and 0.52% upside to 1820.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
“The way I feel about music is that there is no right and wrong. Only true and false.”
I was dead wrong on the no-taper call yesterday, and (after covering my US Dollar short position within minutes of the decision) was somehow positioned right (8 LONGS, 0 SHORTS). Where I was brought up, being right for the wrong reasons is called luck.
True or False: Ben Bernanke did the right thing in tapering yesterday? True. Whether or not his obeying the US 2013 #GrowthAccelerating data on a lag (he’s 3 months late in making a decision he should have made in September) proves to be right is up to history.
I think that if most people were intellectually honest about it, they wouldn’t have told you that A) Bernanke was going to taper yesterday AND B) US stocks would rip to all-time highs on that. But they did. That is the only truth that matters this morning.
Back to the Global Macro Grind…
So what do we do now? Sticking with the process, that’s actually the easiest call to make. We simply go right back to where we were positioned from December 2012-September 2013:
That’s why my 1st three moves in #RealTimeAlerts after the taper decision yesterday were:
It’s one thing to make mistakes in this game. It’s entirely another to make mistake-upon-mistake after making that first mistake. In hockey terms, give away the puck once – feel shame. Give it away again – feel sitting on cold Canadian bench for rest of game.
I could have easily given away the puck post taper yesterday buying something like Gold because it was down. It’s down a lot more this morning (Silver -3.9%, Gold -1.1%) and testing its June 27th YTD closing low of $1200/oz.
True or false: Gold hates #RatesRising?
Another puck I could have given away would have been trying the long Yen “because everyone is short the Yen.”
True or false: Nikkei loves Burning Yen?
In other words, as soon as you saw the word “taper” yesterday, you got the Dollar right (up) and that helped you get a lot of other things Global Macro right.
True or false: Dollar Up = Emerging Markets Down?
Oh, and despite the epic US Equity market rip to all-time highs (SP = +26.9% YTD), Emerging Equity markets in Asia were down overnight (India -0.72%, Philippines -0.64%). Turkeys’ stock market is -0.7% this morning too.
On the taper news yesterday, Argentina, Chile, and Peru all saw their stock markets close down on the day. “Emerging” commodity countries = #EmergingOutflows.
So is it the marketing messages of asset management firms that are perma long Gold, Bonds, and Emerging Markets that are right or wrong in a Dollar Up + #RatesRising environment? Or are the perceptions of their investors simply false?
The truth is always in the balance of your account. It’s there, each and every market day, whether you played lucky or not.
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
We added Panera to the Best Ideas list as a short on 4/5/13 and continue to believe it is positioned as one of the best shorts in the QSR space heading into 2014. Until the street realizes the near-term severity of the situation, we will maintain our bearish bias.
The current EPS estimate for 4Q13 is $1.94, well above the $1.86 we are modeling. We expect to see sales deleverage in the quarter and believe general & administrative costs and occupancy costs will come in higher than the street anticipates. The street is looking for $666 million in sales in 4Q13. Considering PNRA’s current operational and secular issues, we expect sales to come in closer to $655 million. Looking out to 1H14, EPS estimates appear overly aggressive and will likely be revised down in the coming months.
In the 3Q13 earnings call, management acknowledged the bevy of operational issues that the company faces today. These are largely self-inflicted and range from a lack of kitchen equipment to a lack of seating space in their cafes. According to CEO Ron Shaich during the 3Q13 earnings call:
“We analyzed every café to assess its physical capacity levels. What we found is that approximately 10% of our cafes are capacity constrained and approximately a third of our cafes would be constrained should we have a meaningful lift in transactions.”
These capacity constraints, coupled with a lack of adequate labor, have stymied PNRA’s same-store sales growth in recent quarters. Slower speed of service and throughput issues, particularly during peak hours, have led to a less favorable customer experience and, subsequently, declining traffic. The two charts below illustrate why PNRA is having these issues today.
In an effort to improve throughput, capacity, and service, PNRA is now allocating additional capital to labor and equipment. We expect these increases on the labor and G&A lines will squeeze margins more than the street is anticipating in the coming quarters, particularly given the company’s soft sales trends. The fact of the matter is, these are not issues that will be solved in one quarter. It is a process that will take time.
There are several secular forces working against Panera that didn’t exist a couple of years ago. Perhaps the most notable is increased competition. For one, there are now more fast casual options available than ever before. But it doesn’t end there. Panera is also seeing increased competition from QSR chains that have been upgrading there menus to include healthier items. These QSR chains heavily market their products and offer them at a cheaper price point than Panera’s core offerings, making them attractive to consumers.
All told, Panera’s value equation is out of sync. With cheaper prices offered at quick-service restaurants and aggressive discounting at casual dining chains, PNRA has no pricing power. With an average check in the $9 to $10 range, PNRA has created a pricing umbrella for non-traditional competitors to take advantage of. We have seen this play out over the course of the year, as many casual dining restaurants are currently offering meals in the $6-$7 range. Management is aware of this value issue and is working to fix it, but, once again, this will take time.
These operational and secular issues have manifested in the form of declining comparable sales and traffic trends. This is always bad, but particularly bad when coupled with an increase in spending. Margins will inevitably contract and earnings growth will decelerate. Considering the street’s aggressive expectations, we believe PNRA is well positioned to post a couple of subpar quarters.
What we like most about Panera’s current situation is that management is aware of the company’s issues and is working to fix them. Chairman and CEO Ron Shaich is a great leader that we believe will eventually be able to get the company on the right track again. That being said, the team has several initiatives planned for 2014 to right the ship.
These include investing to improve its café operating experience, reconfiguring product lines, adding labor to cafes, improving speed of service and the customer experience, streamlining its menu offerings, testing lower priced items to improve its value perception, improving product consistency, and ramping up advertising spend to drive incremental traffic.
To be fair, the vast majority of PNRA’s initiatives address our concerns. But, to believe the effect of these will be immediate is, in our view, misguided. We can’t help but wonder if the system can handle all of these changes at once.
We understand the bull case. Panera is a beloved company, management is promptly addressing the issues, and trends will begin to accelerate. In fact, we don’t completely disagree with this view in the long-term. However, the bulls are underestimating the length of this turnaround, or regrouping, process. Increasing expenses, which they must do, while traffic is declining and the secular backdrop is discouraging will undoubtedly negatively affect margins. We just happen to think it will negatively affect margins more and for a longer time than the street currently expects.
PNRA is a good company that has many factors currently working against it in 4Q13 and through 1H14. That being said, if management is able to quickly address operational issues and successfully implement the planned demand drivers, we believe trends will accelerate through 2H14 and into 2015. As it stands, Panera is well positioned for the back half of 2014 – but there will be some near term pain.
10/23/13 – PNRA: The Pace of Change?
10/21/13 – PNRA: Stage 1 Denial
9/26/13 – PNRA: No Quick-Fix Recipe
4/05/13 – PNRA Hype Makes It Shortable
2/15/13 – PNRA Mix Tapped Out?
1/30/13 – PNRA Bread Not Quite Baked
Let us know if you have any questions or would like to discuss any of our current ideas in more detail.
THE MACAU METRO MONITOR, DECEMBER 19, 2013
MGM CHINA BOSS CALLS FOR BALANCE ON SMOKING ISSUE Macau Business
MGM China CEO Grant Bowie has called for a balanced agreement on smoking in casinos. “Clearly a number of our customers want to smoke. I think the education of the smokers and the ability for the smokers to be part of the solution is important.” The six casino operators have petitioned the government to scrap casino smoking zones and replace them with smoking rooms without slot machines or gaming tables. Bowie added that MGM China was considering investment opportunities on Hengqin Island, but had yet to decide whether to take any.
MACAU CPI DSEC
Consumer Price Index for November 2013 increased 5.78% YoY and 0.52% MoM.
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