prev

Hilsy's Got Some Info?

Client Talking Points

US DOLLAR

With the Wall Street Journal's Jon Hilsenrath passing along the "super duper" secret information that the Fed isn’t one and done on the whole #taper thing, the US Dollar and Rates are up this morning (versus down Friday, which meant stocks down). You already know that I like the Fed tapering. It's long overdue. Yes - it's bearish for bonds and bullish for stocks (see our #FlowShows Macro Theme for Q114).

UST 10YR

The 10-Year Treasury yield is up 3 basis points this morning to 2.85% after testing and holding our Hedgeye TREND support of 2.76%. Higher-lows are bearish form bonds, but the broader breakout to higher-highs in yields over 3.05%? It isn’t in the cards. Yet.

GOLD

Well, Gold certainly loved the down bond yield move last week (and year-to-date for that matter) and does not like bond yields up this morning. This is how Gold is trading... with rates. The risk range is now $1220-1267 with the 10-year yield range of 2.76-2.89%, immediate-term.

Asset Allocation

CASH 27% US EQUITIES 18%
INTL EQUITIES 20% COMMODITIES 8%
FIXED INCOME 0% INTL CURRENCIES 27%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

GHL

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.

FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

Three for the Road

TWEET OF THE DAY

Goldman making the call we did on $SBUX, 2.5 months ago @HedgeyeHWP #OldWallDelay @KeithMcCullough

QUOTE OF THE DAY

"Confidence comes not from always being right but from not fearing to be wrong." - Peter T. McIntyre

STAT OF THE DAY

The poorest half of the world’s population—3.5 billion people—control as much wealth as the richest 85 individuals. (Businessweek)


January 21, 2014

January 21, 2014 - Slide1

 

BULLISH TRENDS

January 21, 2014 - Slide2

January 21, 2014 - Slide3

January 21, 2014 - Slide4

January 21, 2014 - Slide5

January 21, 2014 - Slide6

January 21, 2014 - Slide7

January 21, 2014 - Slide8

January 21, 2014 - Slide9

 

BEARISH TRENDS

January 21, 2014 - Slide10

January 21, 2014 - Slide11
January 21, 2014 - Slide12

January 21, 2014 - Slide13

 



the macro show

what smart investors watch to win

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.

Exhilarating Start To 2014

“Conquering of fear produces exhilaration.”

-J.T. MacCurdy

 

I don’t know about yours, but in my life the aforementioned statement definitely holds true. My fellow Canuck, Malcolm Gladwell, cited MacCurdy’s psychological work in David and Goliath (pg 148) to explain the resilience of the British during the London Blitz.

 

Do you need a psychiatrist? How many days after 2008 did it take you to conquer your fear about growth? The earlier in 2009 (or 2013) the better, obviously. But some of the savants sipping on Champagne in Davos this week are just starting to get bullish now. #Exhilarating

 

While Gladwell’s latest book is a little too thick on sociology for me, I loved a few of his stories simply because they spoke to me personally. Unfortunately, Mr. Macro Market couldn’t care less about me as a person. Whatever speaks to me this morning has very little place in my risk management process. The easiest way for me to conquer my market fears is to grind through the process and get on with my day.

 

Back to the Global Macro Grind

 

With a day off here in the US, it’s a good time to take a step back and review what the score is for 2014. From a performance divergence perspective, it’s been an exhilarating start to the year!

 

In the land of Global Equities, here are the world’s Top 3:

  1. Greece +9.2%
  2. Argentina +8.7%
  3. Portugal +8.5%

In other words, the markets that some of the fear-based advertising blogs talked most about for the last 3 years are your portfolio’s top money-makers. After all, who in Davos didn’t tell you to buy Greece?

 

And here are the world’s 3 dogs (YTD):

  1. China -5.3%
  2. Brazil -4.5%
  3. Japan -3.4%

Yep, remember the ole “BRICs” long-term investment theme from Davos before they had Davos? #Mint, that was. Brazil in particular has been just sad to watch – and who isn’t long Japan, after it being one of the world’s best performers in 2013 btw?

 

To summarize what we think will be a glaringly different year for asset allocation in 2014, we called one of our Top 3 Global Macro Themes for Q114 #GrowthDivergences. This theme should not only make for winners and losers in what we call Country Picking, but sector and stock picking within those countries too.

 

Speaking of #GrowthDivergences, check out the Sector Divergences in the US Equity market for both last week and 2014 YTD:

  1. Consumer Discretionary (XLY) -1.9% w/w to -2.60% YTD
  2. Healthcare (XLV) +0.5% w/w to +2.85% YTD

Yep, that’s a +545 basis point performance spread between two of the most widely held US stock market sectors. So much for Sector Variance (see our Q413 Macro Themes deck and Chart of The Day) hitting all-time lows. Mean reversion is #exhilarating, indeed.

 

And what’s driving that? In our GIP (Growth, Inflation Policy) model, the traverse from:

 

A)     Quadrant #1 in our GIP Model (Growth Accelerating as Inflation Decelerates), to

B)      Quadrant #2 in the same model (Inflation Accelerating alongside Growth Accelerating),

 

… shows you that Consumer Sectors are two of the worst sectors you can be in (makes sense because, on the margin, #InflationAccelerating (another Q114 Macro Theme),  slows real consumption growth), while Healthcare and Tech are two of the best.

 

Technology (XLK) and the Nasdaq (QQQ) are up +0.03% and +0.5%, respectively, for 2014 YTD (versus the Dow and SP500 -0.7% and -0.5%, respectively).

 

Looking beyond US Equities, you can see the same performance divergence taking hold in Global Equities that you are already seeing in the world’s top and bottom 3:

  1. EuroStoxx600 = +1.8% last week to +2.3% YTD
  2. MSCI Latin American Index = -1.5% last week to -4.6% YTD

So, maybe this year at Davos they put Captain Pie-Chart on “global emerging market equity diversification” in one of the breakout rooms. He’ll have plenty of time and space to hear himself talk. Maybe his government will pay for his psychiatrist and post meeting masseuse too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.79-2.89%

SPX 1

DAX 9

VIX 11.84-13.44

USD 80.76-81.45

EUR/USD 1.35-1.37

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Exhilarating Start To 2014 - Chart of the Day

 

Exhilarating Start To 2014 - Virtual Portfolio


CAKE: OPERATIONAL OBSERVATIONS

CAKE: OPERATIONAL OBSERVATIONS - chart2

 

To summarize our current thesis on CAKE, we believe the company’s three year run of improving margins is coming to an end.  Specifically, we believe the decline in food costs, labor costs, and other costs have run their course.

 

To what extent has the decline in these expense lines since fiscal 2010 contributed to the recent traffic declines?  That question is difficult to answer and even more difficult to pin on one factor.  But, we do know that, collectively, all three can have an impact.  We point to DRI and PNRA as other current examples of companies needing to reverse course.

 

The declining traffic trend suggests that we could see an increase in food, labor and other costs as the company reinvests in store operations.  Below are a series of CAKE operational observations from a consultant within the Hedgeye restaurant industry network.

 

From these observations, there is a lot the company can do to improve traffic, but it will take some time and incremental investment which could pressure operating margins over the near-term.

 

 

FOOD AND BEVERAGE

  • Food menu hasn’t really changed in 10 years so the restaurants are unlike others who adjust seasonally and can offset certain food cost increases with new less costly items.
  • Also no limited time only items that can be used to move people to less costly food items.
  • Beverage is not promoted and the drink menu is too confusing.

LABOR

  • Labor is high because meals and drinks require too many steps to complete.
  • No call ahead seating (different than reservations) allowed – costing them potential customers.
  • Trouble seating large parties because of too many booths.

MARKETING AND LOYALITY

  • No marketing at all!
  • No focus groups.
  • No loyalty programs.
  • They don’t market their “to go” menu.
  • They are not engaged at all at the local level.

OTHER

  • Mall locations mean they are very dependent on mall traffic.

MANAGEMENT

  • Overton is a tyrant who doesn’t listen to anyone and makes all the decisions.
  • Potential health concerns and close to 70.
  • Struggles to travel.

The last point about management is certainly not lost on us.  David Overton, Chairman, President and CEO, controls and owns 6.6% of the company.  As a result, he could decide to sell the company at any given time.  But with the stock currently trading at 9.0x EV/EBITDA, we view that possibility as highly unlikely.

 

CAKE: OPERATIONAL OBSERVATIONS - 1 20 2014 12 16 45 PM

 

 

Howard Penney

Managing Director

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 21, 2014


As we look at today's setup for the S&P 500, the range is 29 points or 0.75% downside to 1825 and 0.83% upside to 1854.                                             

                                                                                  

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.47 from 2.45
  • VIX closed at 12.44 1 day percent change of -0.72%

MACRO DATA POINTS (Bloomberg Estimates):

  • No economic data expected
  • Bank of Japan sets 2014 monetary base target
  • 11am: Fed to purchase $1b-$1.5b in 2036-2043 sector
  • 11:30am: U.S. to sell $28b 3M bills, $25b 6M bills

GOVERNMENT:

    • 9:30am: IMF updates World Economic Outlook
    • 10am: CFTC advisory panel holds public mtg on swap data reporting, automated trading environments, SEFs
    • 1:30pm: NASA announces new data on global temperatures

WHAT TO WATCH:

  • Lenovo said to be in talks to buy IBM server business
  • Snow storm threatens commuter disruption on East Coast
  • Washington D.C. federal offices closed today on weather
  • AB InBev to pay $5.8b for Korea’s Oriental Brewery
  • JPMorgan said to quit Tianhe Chemicals IPO amid hiring probe
  • Expro sale said to draw Schlumberger, Halliburton, GE interest
  • China money rate slides most in 4 wks as PBOC injects cash
  • China’s economy grew 7.7% in 4Q, est. 7.6%
  • China workforce slide takes growth engine away from Xi
  • India’s Jet Air may buy 50 Boeing 737s for $2.5b: BTVI
  • Wells Fargo bars employees from P2P lending: FT
  • EU wants lawsuit safeguard in U.S. trade deal: Sueddeutsche
  • Comet-chasing Rosetta sends first signal after 31-month sleep
  • Shell exits Wheatstone LNG after $1.1b sale to Kuwait
  • GE to buy Cameron’s reciprocating compression unit for $550m
  • Talisman gains after GDF takeover approach rebuffed: Reuters
  • Deutsche Bank sees challenging 2014 after surprise 4Q loss
  • German ZEW investor confidence unexpectedly fell in Jan.
  • Bernanke may join Brookings Institution after leaving Fed: WSJ
  • Investors most upbeat in 5 yrs with record 59% bullish in poll
  • Cnooc sets 2014 output growth estimate lower than 5-yr goal
  • World Economic Forum gets under way in Davos, Switzerland

AM EARNS:

    • Baker Hughes (BHI) 6am, $0.61 - Preview
    • Delta Air Lines (DAL) 7:30am, $0.63 - Preview
    • Forest Laboratories (FRX) 7am, $0.03
    • Halliburton (HAL) 7am, $0.89 - Preview
    • Ironwood Pharmaceuticals (IRWD) 7:05am, $(0.50)
    • Johnson & Johnson (JNJ) 7:45am, $1.20 - Preview
    • Regions Financial (RF) 7am, $0.20
    • Rockwell Collins (COL) 7:21am, $0.94 - Preview
    • Synovus Financial (SNV) 7am, $0.05
    • TD Ameritrade (AMTD) 7:30am, $0.33
    • Travelers (TRV) 6:57am, $2.16
    • Verizon Communications (VZ) 7:30am, $0.65 - Preview

PM EARNS:

    • Advanced Micro Devices (AMD) 4:15pm, $0.06
    • CA (CA) 4:05pm, $0.71
    • Cree (CREE) 4:01pm, $0.39
    • FNB (FNB) 4:15pm, $0.21
    • Fulton Financial (FULT) 4:30pm, $0.20
    • Interactive Brokers (IBKR) 4:01pm, $0.25
    • Intl Business Machines (IBM) 4:05pm, $6 - Preview
    • Pinnacle Financial Partners (PNFP) 5:18pm, $0.43
    • Texas Instruments (TXN) 4:30pm, $0.46
    • Wintrust Financial (WTFC) 4:01pm, $0.70
    • Woodward (WWD) 4pm, $0.40
    • Xilinx (XLNX) 4:20pm, $0.54

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Century-Old London Gold Fix Said to Face Overhaul Amid Scrutiny
  • Brent Crude Rises for First Time in Four Days on Stronger Demand
  • Gold Drops From Six-Week High as Investors Weigh Demand Outlook
  • Africa Corn Buyers Miss Out on Cheaper World Grain: Commodities
  • Copper Falls a Second Day as Chinese Imports Cloud Demand View
  • China Rebar Drops to 16-Month Low as Iron Ore, Coke Prices Slump
  • Soybeans and Corn Drop as Rain in Argentina Seen Aiding Harvest
  • Chocolate Has New Latin America King as Ecuador Outstrips Brazil
  • China Billionaire’s Steel Bond Fall Flags Industry Smog Woes
  • Rubber Declines to Five-Month Low as Chinese Demand May Slow
  • Snow Closes Washington Offices as East Coast Flights Disrupted
  • Gold Seen Averaging $1,219 in LBMA Survey After 2013’s Decline
  • Greenland Explorers Abstain From Drilling on High Risks and Cost
  • Nickel Seen Extending Rally by Goldman on Indonesia Exports Ban

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next