“The punishment process is as important as the reward system.”
As I quote one of my favorite post-2008-crash books, The Financial Crisis and The Free Market Cure (pg 177), I’m thinking more about the full body ache I have from our old-man hockey semi-final yesterday than what’s going on in the market. That’s not good.
Neither was the US stock market’s reaction to Friday’s US jobs report that “beat” expectations (must have been the weather). Stocks raged to all-time highs on the open, then got pancaked by midday. Newsflash: the monthly jobs report is a lagging indicator.
I didn’t have a good week, but it could have been worse. With the CRB Commodities Index +9.6% YTD (vs. the Dow -0.7%), this year’s Burning Buck rally in some asset prices has a lot more to do with #InflationAccelerating than anything else.
Back to the Global Macro Grind…
While I am certain that if they had @CNBC Kiev, Ukraine would look just fine (Ukrainian currency crash has its stock market +29.8% YTD in Burning Currency terms); it’s not. Especially when a country’s currency is in free fall, her stock market is not the economy.
In Russian terms, Putin’s Ruble is crashing (-10% YTD) and so is his stock market (-24% since OCT and -19.7% YTD). Meanwhile the Chinese just printed a -18.1% year-over-year export disaster for FEB. The Shanghai Composite dropped -2.9% on that to -5.5% YTD.
Argentina’s Burning Currency is -17.1% YTD, but there’s probably nothing to worry about there either. Unless you are an Argentine, that is… Oh, and after trying the whole debt-levered-currency-devaluation thing, Venezuela is about to default on its debt.
In other news last week…
- US Dollar Index remained on its YTD lows (below @Hedgeye TAIL risk line of $81.14)
- US 10yr Yield popped +14bps to 2.80%, but failed to overcome @Hedgeye TREND resistance of 2.81%
- Coffee Prices ripped another +9.2% on the week to +74.3% YTD
No that’s not a typo – up +74.3% is the number, so whatever you do – don’t call that #InflationAccelerating.
With the CRB Foodstuffs Index +14.9% YTD, it’s not just coffee prices that are inflating:
- Corn was up another +5.5% last week to +13.7% YTD
- Soy was up another +3.1% last week to +14.2% YTD
- Lean Hogs were up another +5.8% last week to +24.6% YTD
Yes, basically you’re going to have to back everything out of your breakfast and call eating anything with pig in it “non-core” as the Fed tells you to consume a gluten-free Whatsapp for a buck a day instead.
Have you ever asked yourself why neither the Fed nor Bush/Obama ever talk about America’s currency?
As John Allison points out plainly on page 187 of the aforementioned book, “The fundamental issue underlying the boom-and-bust cycle in the financial industry is the lack of sound money. Unfortunately, the Fed is constantly manipulating the value of the dollar.”
And our profession gets that – or at least the machines do. It’s called Correlation Risk – and this is how it works:
- Down Dollar starts to trend as the Fed abandons anything that remotely resembles a two-way policy
- “Bad” economic news becomes good for asset price inflation, as the market front-runs the Fed easing
- Correlation Risk (asset price inflation trading inversely with US Dollars) starts to dominate
On that last point, here are the 30-day inverse correlations between US Dollar and the big stuff:
- Gold -0.88
- SPX -0.87
- CRB Index -0.75
In other words, the market calls what the Fed is signaling a Policy To Inflate (humans call it a tax). And yes, #InflationAccelerating will slow growth. That’s why you saw me buy bonds on Friday (and anything that looked like a bond, including Utilities, XLU).
Punishing The People with food, energy, rent, etc. inflation can only last for so long. Unless you think America has it in her to become Argentina, she has a tendency to rise up against these types of un-constitutional taxes. So stay tuned on that. History repeats.
“The Unites States has already had two failed central banks. Between 1870 and 1913, the US experienced the greatest economic boom in history without a central bank.” –John Allison, pg 187
UST 10yr Yield 2.59-2.81%
Shanghai Comp 1
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
daily macro intelligence
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TODAY’S S&P 500 SET-UP – March 10, 2014
As we look at today's setup for the S&P 500, the range is 29 points or 0.96% downside to 1860 and 0.58% upside to 1889.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.42 from 2.42
- VIX closed at 14.11 1 day percent change of -0.70%
MACRO DATA POINTS (Bloomberg Estimates):
- 6:15am: Fed’s Plosser speaks on panel in Paris
- 12:40pm: Fed’s Evans to speak in Columbus, Ga.
- U.S. Rates Weekly Agenda
- FX Weekly Agenda
- U.S. hold fourth round of trade negotiations for a Trans-Atlantic Trade and Investment Partnership
- U.S. Election Wrap
WHAT TO WATCH:
- SEC said to probe whether forex rigging distorted options, ETFs
- Chiquita Brands to merge with Fyffes to create banana leader
- Malaysia jet investigators struggle for clues to air mystery
- China reports falling exports, drop in producer prices
- Japan economy expands less than initially estimated in 4Q
- IBM CEO Rometty says company didn’t meet expectations last yr
- Cars.com’s owners said to work with Moelis on sale of website
- Russell Investments said to lure BX, Bain for $3b sale
- United Rentals to buy National Pump, Gulfco for ~$780m
- SoftBank said to ready broadband pitch on merger resistance
- Fed’s Plosser sees high bar for change in pace of tapering
- Tesla, Dell supplier Amtek to seek out more acquisitions
- Ranbaxy falls after second recall of generic Lipitor in U.S.
- Casey’s General Stores (CASY) 4pm, $0.49
- Ferrellgas Partners (FGP) 7am, $0.85
- FuelCell Energy (FCEL) 5:50pm, $(0.04)
- Globalstar (GSAT) 4:05pm, $(0.05)
- Novavax (NVAX) 4:10pm, $(0.08)
- Perfect World (PWRD) 4:35pm, $2.98
- Resolute Energy (REN) 6am, $0.05
- United Natural Foods (UNFI) 4:01pm, $0.56
- Urban Outfitters (URBN) 4pm, $0.55
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Coutts Adds Gold as Demand in China Climbs With Ukraine Risk
- Gold Most Bullish Since 2012 as Goldman Sees Slump: Commodities
- Palm Reserves in Malaysia Shrink Most Since 2009 as Output Drops
- Ukrainian Impasse Propels Bullish Corn Trades to Record: Options
- Sugar Rallying With Cooking Oil for Merchant Fund on Less Supply
- Copper Tumbles to 8-Month Low in London on China Demand Concern
- Gold Extends Decline as U.S. Jobs Data Back Stimulus Reduction
- WTI, Brent Crude Fall as China Export Drop Signals Slower Growth
- Polar Vortex Emboldens Industry to Push Old Coal Plants: Energy
- Rubber in Tokyo Drops Most in Two Weeks; Shanghai at Five-Yr Low
- China Gold Demand Seen Falling 17% This Quarter Amid Price Rally
- Thai Sugar Premium Steady Before Result of State Tender Tomorrow
- Libya Vows to Block Tanker Attempt to Lift Oil in Rebel Port
- Corn Extends Drop From Six-Month High as Ukraine Concern Eases
The Hedgeye Macro Team
03/04/14 DRI: Things Are Heating Up
03/06/14 Frosty February Stifles Sales
03/07/14 The Battle For Darden
Monday, March 10
- MCD February 2014 Sales & Revenue Release
Tuesday, March 11
- ARCO earnings call at 10:00am
- Bank of America Merrill Lynch Consumer & Retail Conference: MCD, CAKE, DPZ, THI, EAT, BKW, SBUX, BOBE, NDLS, PBPB, WEN
- ROTH Capital Partners Conference: PZZI, JMBA
Wednesday, March 12
- Bank of America Merrill Lynch Consumer & Retail Conference: JACK, SONC, CBRL
- ROTH Capital Partners Conference: BJRI
- RBC Capital Markets Consumer & Retail Conference: EAT, PBPB, WEN, NDLS
- J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum: DNKN
Thursday, March 13
- RBC Capital Markets Consumer & Retail Conference: THI, YUM
- UBS Global Consumer Conference: JACK, BWLD
- J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum: EAT, BJRI
Friday, March 14
- COSI earnings release
Recent News Flow
Monday, March 3
- DRI preannounced 3Q14 results yesterday and, as we expected, they fell far short of consensus estimates. Management guided 3Q EPS to $0.82 vs prior estimates of $0.93. Darden expects same-restaurant sales in the quarter to decline 5.4% at Olive Garden, decline 8.8% at Red Lobster, increase 0.3% at LongHorn and decline 0.7% at SRG. Despite this, they maintained their prior fiscal year 2014 guidance. The company also held a business call update Monday morning to discuss their strategic initiatives to unlock shareholder value. We certainly weren’t impressed and published a couple of notes during the week explaining why. The activist case is growing stronger by the day.
- EAT was downgraded to hold at Miller Tabak on valuation concerns.
- IRG announced new brand leadership for two of its brand. John Gilbert, the former CEO of DAVE (Famous Dave’s), was appointed President of Romano’s Macaroni Grill. David Catalano, the former President of Macaroni Grill, was appointed President of Brick House Tavern.
Tuesday, March 4
- BLMN announced a secondary public offering of approximately 18 million shares of stock.
- DRI Starboard Value announced in a 13D filing this that it has retained former Brinker International CFO and EVP Charles Sonsteby to serve as an advisor in its battle against Darden Restaurants. Starboard will pay $50,000 in cash to Mr. Sonsteby who will, in turn, use the proceeds to purchase Darden stock.
- CMG signed a three-year sponsorship deal with Major League Soccer to be the official sponsor for twelve teams. The financial terms of the deal were not disclosed.
Wednesday, March 5
- DRI announced that it has cancelled its annual analyst day. Representatives for the firm said the company plans to meet with analysts individually.
- BLMN announced the secondary offering price of $24.50 per share. The offering is expected to close on Monday, March 10th.
- DNKN extended the employment contract of Chairman and CEO Nigel Travis to run through 2018. His prior deal was expected to expire at the end of 2016.
- BJRI Piper Jaffray downgraded BJRI to a neutral rating, reducing the PT to $27 from $30.
- BLMN Carrabba’s Italian Grill unveiled its new menu “Carrabba’s Italian Ventures.” The menu includes 15 new items priced at $15 or less.
- BAGL introduced the new Honey Smoked Salmon sandwich to its menu.
Thursday, March 6
- EAT CFO Guy Constant announced his resignation from the company. Marie Perry, current Controller, will serve as the interim CFO while the company looks for a successor.
- BWLD announced its intention to rollout tabletop tablets to all North America locations by the end of 2015. The tablets will allow guests to order food, play music, watch television and pay the bill.
- BJRI reported in a Form 8-K that PW Partners Atlas Fund II LP, in conjunction with Luxor Capital Partners, LP nominated five members to the company’s Board of Directors. Combined, the group owns 12.4% of the company’s outstanding shares. The group is being led by Patrick Walsh who has previously gotten himself a seat on the board of DAVE and successfully placed one of his group members on the board of RRGB. The company plans to review the candidates.
- BJRI was upgraded to buy at Buckingham.
- BOBE was upgraded to buy at Miller Tabak.
- YUM was upgraded to outperform at RW Baird.
- TAST filed a $100M mixed shelf.
Friday, March 7
- BOBE Activist Sandell Asset Management increased its stake in BOBE from 5.1% to 8.1%.
Recent Knapp Data
- This past week, Malcolm Knapp released sales results for February, estimating that same-restaurant sales and guest counts declined -1.5% and -4%, respectively, versus February 2013. On a two-year basis, same-restaurant sales and guest counts declined -3.5% and -5.2%, respectively.
XLY Quantitative Setup
From a quantitative set-up, the sector remains bullish on an intermediate-term TREND duration.
Casual Dining Restaurants
Top 5 Week-Over-Week Divergent Performances:
Positive Divergence: BJRI +18.4%, BAGL +10.8%, BWLD +3.9%, RUTH +1.7%, CAKE +1.4%
Negative Divergence: RRGB -6.3%, BOBE -5.7%, KONA -4.5%, EAT -4.0%, DFRG -3.6%
Positive Revision: RRGB +1.3%
Negative Revision: BOBE -26.0%, BJRI -25.4%, KONA -11.8%, BBRG -6.9%, DIN -4.9%
Quick Service Restaurants
Top 5 Week-Over-Week Divergent Performances:
Positive Divergence: TAST +5.9%, PZZA +4.3%, CMG +4.2%, PLKI +4.0%, YUM +3.3%
Negative Divergence: GMCR -4.3%, KKD -2.8%, WEN -1.9%, DPZ -0.5%, MCD -0.5%
Notable 1-Month Earnings Revisions:
Positive Revision: JACK +3.6%, DPZ +1.2%, BKW +0.4%
Negative Revision: TAST -8.1%, BAGL -5.9%, PNRA -4.7%, PLKI -4.6%, PZZA -3.5%