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MONDAY MORNING RISK MONITOR: GARY GNU

Takeaway: No Gnus is Good Gnus. - Gary Gnu

Key Callouts:

Overall there remains more good news than bad when looking across a host of global Financial risk metrics. Last week we flagged a similar setup and the XLF managed a modest gain of +0.3% on the week. Some of the main callouts from this week's risk monitor are:

 

* European Financial CDS - Swaps tightened sharply across the European Financials complex last week. The biggest movers were in Greece, Italy, Germany and Spain. The Greek banks have posted impressive M/M moves, dropping by an average of 238 bps in just the last four weeks. Outside of Greece, the only EU banks that are still trading above our so-called "Lehman line" (+300 bps) are Sberbank of Russia.

 

* 2-10 Spread – Last week the 2-10 spread widened to 231 bps, 4 bps wider than a week ago.  

 

* CRB Commodity Price Index – The CRB index rose 1.2%, ending the week at 305 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -0.9% 

 

* TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 20.5 bps this week versus last week’s print of 19.54 bps.

 

* High Yield (YTM) Monitor – High Yield rates fell 6.4 bps last week, ending the week at 5.63% versus 5.70% the prior week.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Negative / 4 of 13 improved / 4 out of 13 worsened / 5 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 0 out of 13 worsened / 8 of 13 unchanged

 

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1. U.S. Financial CDS -  MBIA was the sole US Financial to widen on the week, rising 15 bps to 343 bps. JPMorgan was the sole large cap US Financial not to tighten (it was flat w/w at 57 bps). While not as impressive as the move in EU Financials, this past week's tightening across the US FIG complex was decidedly one-way. Overall, swaps tightened for 24 out of 27 domestic financial institutions.

 

Tightened the most WoW: GNW, MET, PRU

Widened the most/ tightened the least WoW: MBI, JPM, JPM

Tightened the most WoW: GNW, MET, UNM

Widened the most MoM: MBI, AGO, TRV

 

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2. European Financial CDS - Swaps tightened sharply across the European Financials complex last week. The biggest movers were in Greece, Italy, Germany and Spain. The Greek banks have posted impressive M/M moves, dropping by an average of 238 bps in just the last four weeks. Outside of Greece, the only EU banks that are still trading above our so-called "Lehman line" (+300 bps) are Sberbank of Russia.

 

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3. Asian Financial CDS - Asian Financials were a mixed bag. India's banks widened across the board by an average of 10 bps. Meanwhile, Chinese and Japanese financials were narrowly changed. 

 

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4. Sovereign CDS – Sovereign swaps were tighter around the world last week. Italy, Spain and Portugal lead the charge lower, dropping by 24, 19 and 26 bps, respectively. 

 

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5. High Yield (YTM) Monitor – High Yield rates fell 6.4 bps last week, ending the week at 5.63% versus 5.70% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1857.

 

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7. TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 20.5 bps this week versus last week’s print of 19.54 bps.

 

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8. CRB Commodity Price Index – The CRB index rose 1.2%, ending the week at 305 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -0.9% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 13 bps.

 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 20 basis points last week, ending the week at 2.95% versus last week’s print of 2.75%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

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11. Markit MCDX Index Monitor – Last week spreads tightened -5 bps, ending the week at 61 bps versus 66 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

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12. Chinese Steel – Steel prices in China rose 0.5% last week, or 18 yuan/ton, to 3,293 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

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13. 2-10 Spread – Last week the 2-10 spread widened to 231 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.7% upside to TRADE resistance and 0.9% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Score One for $LULU on See-Through Yoga Pants Flap

Takeaway: LULU has managed to avoid a major potential negative.

Score One for $LULU on See-Through Yoga Pants Flap - lululemon breathe

 

Lululemon prevails in two lawsuits over yoga pants recall

  • "A lawsuit accusing Lululemon Athletica Inc of defrauding shareholders by hiding defects in its yoga pants should be dismissed, a U.S. judge has concluded…"
     
  • "In a draft decision released on Friday, U.S. District Judge Katharine Forrest in Manhattan rejected claims the Canadian company cost investors roughly $2 billion by having concealed problems in manufacturing and marketing its yoga pants."
     
  • "Forrest on Friday also issued a draft decision that dismissed a separate lawsuit seeking to hold 13 current and former Lululemon executives and directors liable for mismanagement. The judge is expected to hold a hearing to review whether she should make the decisions final."  

Takeaway From Hedgeye’s Brian McGough:

Lululemon just hurdled a major potential negative. Sure, lawsuits around product happen all the time, but the magnitude of this one was particularly huge. There's an important difference between having a poor process and weak internal controls versus deliberately burying information around product defects to defraud investors. If the decision had gone the other way, this would have been a massive headache for Lululemon. Score one for LULU.

 

Editor's Note: This is a complimentary research excerpt from Hedgeye Retail Sector Head Brian McGough. Follow Brian on Twitter @HedgeyeRetail

Subscribe to Hedgeye.

 


Just Charts: Secular Headwinds Remain

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail around any material changes.

 

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Consumer Staples marginally outperformed the broader market last week, rising +0.5% versus the S&P500 at +0.4%. The XLP is up +1.2% year-to-date vs the SPX at +1.5%.

 

For a fifth straight week, the XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.

 

Just Charts: Secular Headwinds Remain - 1

 

However, the Hedgeye U.S. Consumption Model shows a worsening outlook, with only 5 of the 12 metrics flashing green, versus 7 two weeks ago. 

 

Just Charts: Secular Headwinds Remain - 2

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.4x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, and rose to -30.0 versus -31.5 in the prior week

Just Charts: Secular Headwinds Remain - 3

Just Charts: Secular Headwinds Remain - 4

Just Charts: Secular Headwinds Remain - 5

 

 

Top 5 Week-over-Week Divergent Performances:


Positive Divergence:  DF 6.9%; RCO.FP 6.2%; AVP 4.9%; TAP 2.9%; HLF 2.7%

Negative Divergence:  BNNY -6.4%; TSN -4.5%; MNST -4.1%; SAM -2.8%; THS -2.2%

 

 

Last Week’s Research Notes

 

Newsy News Flow

 

LO - Tobacco stocks took a slight hit last week on news that the British government may be moving toward instituting a tobacco plain packaging law by 2015. The UK would join Australia, the only other country that mandates plain packaging.

 

Lorillard does not have exposure in the UK, so we think the pullback in the stock creates a buying opportunity.  Broadly, we believe that despite best efforts of a government to reduce smoking rates through plain packaging, studies have shown that such measures can have harmful consequences by boosting illicit trade.

 

For reference, Imperial has the largest market share (42%), followed by Japan Tobacco (38%), PM (9%); BAT (8%), per Euromonitor.

 

We continue to believe LO will grind higher on advantaged menthol fundamentals, limited regulatory risk, and a growth engine in blu e-cigarettes. 

 

RCO.FP – Last week there were whispers that Remy Cointreau is a potential takeover target for Brown-Forman (BF/B), which sent the otherwise depressed stock soaring. We think a deal is unlikely given the high concentration of family ownership of Remy.

 

 

Quantitative Setup


In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

BUD – impressive bearish to bullish TREND reversal here in the last few weeks as the sector style and slow-growth-yield-chasing comes back into vogue; TREND resistance now support at $103.65

Just Charts: Secular Headwinds Remain - 6

 

DEO – still bearish intermediate-term TREND signal here with TREND resistance intact up at $125.97

Just Charts: Secular Headwinds Remain - 7

 

KO – looks nothing like BUD – bearish TREND remains, despite the market paying up for everything that Coke has (cap, yield, etc.); TREND resistance overhead at $39.05

Just Charts: Secular Headwinds Remain - 8

 

PEP – much healthier setup thank KO’s now that it has recovered TREND support of $81.85

Just Charts: Secular Headwinds Remain - 9

 

GIS – still one of the best looking names on this list; bullish TREND confirmed with TREND support = $49.99

Just Charts: Secular Headwinds Remain - 10

 

MDLZ – bullish intermediate-term TREND confirmed here as well provided that $33.89 TREND support holds

Just Charts: Secular Headwinds Remain - 11

 

KMB – still the best looking name on this list – bullish intermediate-term TREND with $107.06 being support

Just Charts: Secular Headwinds Remain - 12

 

PG – making a run for its TREND resistance line of $80.63 – can it pull off what BUD did, or will they have to report the quarter before that? Style factors being bid up by the market right now play into PG’s hand

Just Charts: Secular Headwinds Remain - 13

 

MO – bearish to bullish intermediate-term TREND reversal confirmed as $36.69 TREND resistance is now support

Just Charts: Secular Headwinds Remain - 14

 

PM – making a run for the style-factor roses here too! PM just closed above its $81.68 TREND resistance level for the 1st time in almost 3 months

Just Charts: Secular Headwinds Remain - PMM

 

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst

 


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MONDAY MASHUP: BWLD, PNRA AND MORE

MONDAY MASHUP: BWLD, PNRA AND MORE - 1 

RECENT NOTES

03/31/14  Monday Mashup: PNRA, BLMN and More

04/01/14  DRI: Management Exposed 

EVENTS THIS WEEK

Wednesday, April 9

  • RT earnings call at 5:00pm

CHART OF THE DAY

Gasoline prices recently reached an eight-month high.

 

MONDAY MASHUP: BWLD, PNRA AND MORE - 2

RECENT NEWS FLOW

Monday, March 31

  • FRGI pushes its expansion west of the Mississippi, opening its first Texas location in the Dallas-area.
  • PNRA upgraded to outperform at Wedbush Securities with a PT of $215
  • CMG announced the lineup for its 2014 Cultivate Festival with events planned in San Francisco, CA, Minneapolis, MN and Dallas-Ft Worth, TX.

Tuesday, April 1

  • DRI Starboard Value released an investor presentation, detailing its analysis of Darden management and the proposed Red Lobster spin-off.  Starboard believes Darden’s real estate portfolio is worth approximately $4 billion and that separating Red Lobster and its real estate from Darden’s portfolio would destroy approximately $850 million in value.  The presentation was deservedly critical of Darden’s current management team and is a must-read for interested parties. We highlighted what we believe are the key takeaways from the 100+ page deck in a note to subscribers and an exclusive HedgeyeTV video.
  • DRI Darden responded to the public scrutiny by releasing a statement reiterating their confidence in the initiatives they have in place and once again urging shareholders to vote against a Special Meeting.
  • SBUX announced it plans to bring back a number of its old breakfast favorites as La Boulange products have been generating some pushback from customers for their smaller portions.

Wednesday, April 2

  • BWLD held its annual analyst day, reiterating FY14 guidance of 20% EPS growth and outlining its longer-term plans to sustain high earnings growth.  The company continues to invest in smaller, emerging concepts with the hope that one or two will become a vehicle for significant future growth.  BWLD’s goal is to be a growth enterprise, with more than 3,000 total restaurants.

Thursday, April 3

  • No material news

Friday, April 4

  • SONC cut to neutral at Buckingham
  • DIN rated new neutral at Longbow
  • BBRG Barron’s came out with a positive note on Bravo Brio Restaurant Group, citing an attractive valuation and an anticipated increase in same-store sales driven by better weather and menu-enhancing initiatives.
  • DNKN Barron’s came out with a cautious note on Dunkin’ Brands, citing a hefty valuation and decelerating same-store sales trends.

U.S. MACRO CONSUMPTION

Last week was a bit of a bounce back one for consumer stocks, with the XLY +0.6% outpacing the SPX +0.4%.  However, both casual dining and quick-service stocks, in aggregate, underperformed the broader XLY benchmark.  The Hedgeye U.S. Consumption Model reverted back to bearish formation, from neutral, and is now flashing red on 7 out of 12 metrics.  We continue to believe the current environment is more conducive to select fast casual and quick service restaurants than casual dining restaurants.

 

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XLY QUANTITATIVE SETUP

From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.

 

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CASUAL DINING RESTAURANTS

Top 5 Week-Over-Week Divergent Performances

 

Positive Divergence: BBRG +4.7%, RT +4.5%, RRGB +1.5%, BJRI +1.1%, DRI +0.8%

Negative Divergence: BWLD -3.5%, BAGL -3.1%, DFRG -2.8%, KONA -1.9%, CBRL -1.7%

 

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Positive Revision: RUTH +2.8%, DIN +0.2%

Negative Revision: DRI -1.3%, BLMN -0.9%, EAT -0.2%, CBRL -0.1%

 

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QUICK SERVICE RESTAURANTS

Top 5 Week-Over-Week Divergent Performances

 

Positive Divergence: PLKI +4.9%, YUM +1.3%, THI +0.9%, MCD +0.2%

Negative Divergence: KKD -6.2%, GMCR -5.2%, PNRA -3.3%, SBUX -3.3%, PZZA -2.9%

 

MONDAY MASHUP: BWLD, PNRA AND MORE - 7

 

Notable 1-Month Earnings Revisions

 

Positive Revision: SONC +0.9%, PZZA +0.8%, JACK +0.7%, GMCR +0.3%, CMG +0.1%

Negative Revision: KKD -3.3%, PNRA -0.4%, DPZ-0.2%, SBUX -0.2%, MCD -0.2%

 

MONDAY MASHUP: BWLD, PNRA AND MORE - 88

 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


NEW TIME: Q2 2014 Macro Themes Call at 11:00am on Tuesday

NEW TIME: Q2 2014 Macro Themes Call at 11:00am on Tuesday - HE MT 2Q14

 

***Please note new time: 11:00am EDT on Tuesday.

Hedgeye's Macro Team will be hosting our highly-anticipated Quarterly Macro Themes conference call on Tuesday, April 8th at 11:00am EDT. Led by CEO Keith McCullough, the presentation will detail the three most important macro trends we have identified for the quarter and related investment opportunities.

 

Q2 2014 MACRO THEMES OVERVIEW

  • #ConsumerSlowing: The cyclical increase in consumer spending growth from the 2009 lows is under pressure. Rising food prices and a stagnating USD continue to squeeze average Americans on the margin. Given the potential for further USD depreciation and a continuation of global commodity inflation as a real macro risk, we think U.S. consumption growth will slow as it bumps up against difficult compares heading into 2Q and beyond.
  • #StructuralInflation: Following up on our cyclical #InflationAccelerating theme, we are focusing now on structural inflationary pressures embedded in the U.S. economy. Much like in Japan, zero percent interest rate policy has fueled a broad-based portfolio re-balancing away from financing economic growth to reach for additional yield in slow-growth assets. This is fueling systemic underinvestment in both human and physical capital. However (unlike in Japan), the USD's long-term downward trend adds an additional layer of inflationary pressure due to an increased reliance on imported goods and services amid capacity constraints abroad.
  • #HousingsSlowdown:  We have been big housing bulls over the last 18 months. But the party is ending. Asymmetry in being long has flattened.   Price follows demand on a lag and demand is slowing as affordability declines, regulatory changes drag on liquidity, and institutional interest ebbs.  We will walk through our updated view on the Supply/Demand/Price dynamics prevailing in the housing market and our forward outlook for prices. 

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 212497#
  • Materials: CLICK HERE (the slides will be available approximately one hour prior to the start call)

 

Ping  for more information.

 


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