“Listen to many, speak to few.”
I love to read, write, and rant. But, other than our top institutional customers and my research team, I speak to few during a typical market day. While I love my best friend (my brother Ryan), our phone conversations are usually 140 words or less.
If you read voraciously, you can listen to the #history of many. If you create the right contra-streams on Twitter, you can watch the sentiment of the crowd. If you embrace uncertainty of timing market sentiment, you’ll always be prepared to change your mind.
But macro markets don’t care about what I think about all of that. Markets are non-linear. They are structured to pulverize the largest number of people at the most inconvenient time. So listen to Mr. Macro Market’s signals very closely. He’s a front-runner of risk.
Back to the Global Macro Grind…
With Japanese, Chinese, and American #GrowthSlowing (oh, and Russia crashing to -22.6% YTD), what could possibly go wrong? Rather than have some character tell you “the market is cheap”, you can listen to #history’s lesson on that:
1. When Inflation Accelerates, and
2. Real (inflation adjusted) Growth slows…
A) Multiple compression in Equities
B) Multiple expansion in Bonds
1. #OldWall consensus is still looking for implied multiple expansion (to 17-18x EPS) for the SP500 this yr
2. #OldWall consensus is still looking for implied multiple compression (higher bond yields) for Treasuries this yr
You have yourself basically the opposite consensus to listen to that you had only 1 year ago today. While last year seems like forever ago to a consensus that missed US #GrowthAccelerating, on March 12, 2013:
1. The Dow and SP500 were at 14,450 and 1552, respectively
2. The 10yr US Treasury Yield was at 1.90% (tracking towards its all-time low of 1.7% in April)
Sentiment then wasn’t off by a little bit – it was off by a country mile.
By year-end of 2013:
1. The Dow and SP500 closed at 16,576 and 1848, respectively
2. The 10yr US Treasury Yield has its biggest % move in 50yrs (closing the yr at 3.03%)
Fast-forward to today, with the US Dollar on its YTD lows and #InflationAccelerating, the Dow Jones is actually DOWN -0.6% YTD and US 10yr Treasury Yield is DOWN -28 basis points to 2.75%. But the SP500 is up a whopping +1.0% (plus or minus whatever happens today), so let’s turn on the tube and keep talking up what was supposed to be a US Equity multiple expansion party!
If you’ve studied the #history of debtor nations devaluing their currencies in order to inflate asset prices, you’ll note that the non-government people living in those countries generally develop miserable sentiment. There’s this thing called the Misery Index (inflation + unemployment). This morning, Japan’s Misery Index hit a 33 year high.
So, let’s encourage consensus to keep cheering on a Policy to Inflate but call it by any other name. This is really the only way to envision being really right versus what you read and hear from consensus every day (consensus #OldWall estimates are still looking for both US and Global GDP to accelerate sequentially to new multi-year highs, and for inflation to be benign).
A few other mathematical realities we’ve back-tested as relevant sentiment checks are:
1. Front-month Equity Fear (VIX) versus the term structure of the VIX curve
2. The II Bull/Bear Spread
This morning front-month VIX has A) established yet another higher-low on our TREND duration and B) the term structure of implied volatility is nowhere near as fearful as it was 12-15 months ago.
On the II Bull/Bear Spread, 2013 bears were eviscerated. On today’s reading, Bulls are +3,770 basis points (55.1%) higher than the Bears (17.4%). That’s not the all-time high in terms of the Bull/Bear spread – but December 31st, 2013 was (when the Dow topped).
I’m not saying I’m nailing everything macro this year. I’m simply saying what very few want to listen to when complacency sets in – and that’s that the US stock market “is cheap, multiple expansion” bulls might get nailed in the coming months.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.58-2.80%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – March 12, 2014
As we look at today's setup for the S&P 500, the range is 46 points or 1.27% downside to 1844 and 1.20% upside to 1890.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.39 from 2.40
- VIX closed at 14.8 1 day percent change of 4.23%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, March 7 (est. 9.4%)
- 10:30am: DOE Energy Inventories
- NOTE: Monthly Budget Statement moved to March 13
- Florida Republican David Jolly wins special House election
- 9am: Senate Armed Svcs Cmte holds hearing on Afghanistan
- 10am: House Armed Svcs Cmte hears from Marine Corps Commandant James Amos, Navy Sec. Ray Mabus, Chief of Naval Operations Jonathan Greenert on 2015 defense authorization budget request
- 10am: Senate Health Education and Labor Cmte hears from Labor Sec. Thomas Perez on proposed minimum wage increase
- 10am: House Ways and Means Cmte hears from HHS Sec. Kathleen Sebelius on her agency’s 2015 budget request
- 10:30am: SEC to vote on proposal for new risk-management standards for clearing firms such as Depository Trust Co.
- 10:30am: House Judiciary Cmte holds hearing on the Internet sales tax
WHAT TO WATCH:
- Apple appeals rejection of Samsung smartphone sale-ban bid
- AutoTrader owners Cox, Apax said interested in Cars.com
- GM criminal probe of recalls seen complicating Barra turnaround
- Obama meeting with Ukraine’s Yatsenyuk raises stakes with Putin
- Malaysian air force denies saying plane tracked to Malacca
- Wilbur Ross says Diamond S Shipping IPO pulled on low price
- Gross sells Treasuries as Gundlach says U.S. yields will fall
- Cash abroad from largest U.S. cos. rose 11.8% last yr
- SoftBank challenge to cable won’t avoid T-Mobile deal scrutiny
- Christie appointees ban N.J. direct sales for Musk’s Tesla cars
- Bayer sees 8% growth in drug sales through 2016
- Buffett’s BNSF leads surge to ease railroad cargo jam
- VimpelCom says U.S., Dutch authorities probe Uzbekistan unit
- Intel seeks acquisitions in Europe, Morales tells Handelsblatt
- China’s Xunlei files prospectus for U.S. IPO: Securities Daily
- Abraxas Petroleum (AXAS) 6am, $0.05
- Crescent Point Energy (CPG CN) 8am, C$0.17
- Dresser-Rand (DRC) 4:45pm, $1.28
- Express (EXPR) 7am, $0.59
- Krispy Kreme Doughnuts (KKD) 4:02pm, $0.13
- Matador Resources (MTDR) 4:05pm, $0.26
- North West (NWC CN) 4:30pm, C$0.35
- Orexigen Therapeutics (OREX) 4:01pm, $(0.19)
- Raven Industries (RAVN) 9am, $0.32
- Scientific Games (SGMS) 4:12pm, $0.07
- Semafo (SMF CN) 8:23am, $(0.01)
- Vail Resorts (MTN) 4pm, $1.88
- Williams-Sonoma (WSM) 4:05pm, $1.35 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Copper Slumps to 44-Month Low on Concern China Demand Is Slowing
- WTI Falls as U.S. Crude Stocks Rise, Widening Discount to Brent
- Soy Crop at Record in Brazil Clogging Ports as China Spurs Trade
- Iran Thaw Seen Opening $6 Billion Market for Steel: Commodities
- Palm Imports by India Slumping 30% on Prices Highest Since 2012
- Gold Advances to Six-Month High as Ukraine Spurs Haven Demand
- Soybeans Drop After 14% Rally as China May Cancel More Cargoes
- Sugar Falls Amid Commodities Retreat as Rains Return to Brazil
- Rebar Climbs From Lowest Since Shanghai Contract Started in 2009
- Copper’s China-Driven Tumble Seen Near Bottom, Tiger Says
- China on Course to Exceed 2015 Shale Target With Fuling Find
- Putin Opens Up Europe’s Energy Fault Line Along Oder-Neisse
- WTI Crude Shielded From Ukraine on U.S. Output: Chart of the Day
- Palm Oil Slumps Most This Year as Rally Seen Weakening Demand
The Hedgeye Macro Team
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Takeaway: Despite meaningful downward revisions to same-restaurant sales estimates, casual dining stocks have held up particularly well.
We were recently given a look at February sales trends, which are, on the margin, negative for the casual dining industry. Same-restaurant sales and same-restaurant traffic trends declined during the month and were down sequentially from January. Before we delve further into the details, we thought it would be useful to highlight which casual dining chains had CQ (current quarter) same-restaurant sales estimates adjusted since February 3rd.
None of the casual dining companies we track had CQ same-restaurant sales estimates revised up over the course of February.
The following companies had CQ same-restaurant sales estimates unchanged over the course of February: EAT, KONA
The following companies had CQ same-restaurant sales estimates revised down over the course of February: BBRG, BJRI, BLMN, BWLD, CAKE, CBRL, CHUY, DRI, DFRG, DIN, IRG, RRGB, RT, RUTH, TXRH
Despite these negative revisions, casual dining stocks have outperformed the SPX meaningfully over the past month, which implies, to us, that the street has accepted the fact that 1Q will be a difficult quarter. More importantly, it also implies that expectations are high for the remainder of 2014.
February marks the third consecutive month of decreasing same-restaurant sales and traffic for the industry. As we wrote last week, Knapp estimates same-restaurant sales and traffic declined -1.5% and -4%, respectively, during the month. In addition, Black Box Intelligence, which excludes DRI, estimates same-restaurant sales and traffic declined -0.7% and -3.2%, respectively, during the month. February numbers contracted on a year-over-year basis despite facing some of the easiest comparisons in over three years. According to historical Black Box data, same-restaurant sales and traffic declined -5% and -6.2%, respectively, in February 2013.
After a tumultuous January, New England was surprisingly the best performing region during the February month with Black Box estimating same-restaurant sales and traffic increased +2.2% and 0%, respectively. The West Region, on the other hand, was the weakest performing market with Black Box estimating same-restaurant sales and traffic declined -3.7% and -5.8%, respectively, in February.
Overall, trends in the casual dining industry are unsettling and continue to indicate what we believe is a secular decline in the industry as the rise of fast casual and evolution of traditional quick-service continue to steal share from the industry. Despite this, the market has shrugged off any weakness as weather-related.
To be clear, we believe 1Q14 has been negatively impacted by weather, but to what extent is largely unknown. With that being said, we believe the street has appropriately taken down 1Q14 estimates to a reasonable level. Although January and February were difficult months for the industry, we believe March will provide some back end support to aggregate first quarter numbers.
2Q14 estimates currently appear aggressive to the naked eye, but we will reserve judgment until March numbers are released as we expect it to be a telling month for the industry overall. Will the industry get a boost from all the “pent-up demand” we are hearing about or will the secular decline persist? Unfortunately, we don’t yet have an answer to this, but we will continue to monitor the situation closely and comment upon any indicators that may suggest one or the other.
I'm very happy to announce that David Benz has joined Hedgeye and will work with me on the Gaming, Lodging, and Leisure (GLL) team. David will assist with the core Gaming, Lodging, & Leisure research coverage as well as work to establish new coverage in the near future. For several years, David was a client of Hedge Risk Management and the GLL team, so he is well versed in our style and deep fundamental research process. Hopefully, you will be meeting David soon if you don't already know him.
Here is his Bio:
David has more than 15 years buy-side experience as both a senior equity research analyst and portfolio manager covering a broad cross section of gaming, lodging, REITs, infrastructure and financials. Most recently, David was a research consultant performing gaming market and feasibility studies for government agencies and corporate clients covering such jurisdictions as South Korea, Japan, Russia, New York, Iowa, and Massachusetts. Previously, David was a senior analyst at Waterfront Capital Partners, a Millennium Partners platform company, where he covered global gaming, global lodging, infrastructure, REITs and financials. Prior to Waterfront Capital, he was a Portfolio Manager with Grubb & Ellis AGA - a real estate focused money manager. David began his career with American Express Financial Corporation. During his American Express tenure he was concurrently the Portfolio Manager leading the AXP Real Estate Fund and a Senior Equity Analyst covering REITs, lodging, towers, mortgage related, all insurance, finance companies, trust banks and asset managers. He was a guest speaker at the NYU REIT Symposium. David received a B.A. in Political Science from Marquette University and an M.B.A. from Pepperdine University.
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