Takeaway: It remains unlikely that we see anything resembling meaningful monetary stimulus in China over the intermediate term.

We came across a number of articles today that discussed the possibility of China implementing western-style quantitative easing to counter its current disinflationary economic slowdown. In short, we summarily dismissed these rumors and will continue to do so until we see them confirmed by an official source (i.e. the PBoC, State Council, CSRC, MoF, etc.).


The powers that be in Beijing are akin to a management team that says what it does and does what it says. More importantly, their official guidance for ~2 years now  has been and continues to be one in favor of avoiding meaningful stimulus – either fiscal or monetary (see: commentary out of the PBoC’s Ji Zhihong on the targeted RRR cut).


We would view QE in China as a meaningful deviation from their “prudent monetary policy” guidance and should be interpreted as a signal that China’s intermediate-term growth outlook is actually more dour than current, already-subdued expectations.






Chinese policymakers definitely have room to ease with respect to existing inflation and consumer confidence trends, but any easing should immediately filter through to rising inflation expectations given the annualized FX weakness we will see as we progress through this year  – which is in addition to annualized dollar depreciation (the DXY is down -3.3% YoY), as the CNY is still semi-pegged to the USD.










All told, it remains unlikely that we see anything resembling meaningful monetary stimulus in China over the intermediate term. Credit growth remains particularly robust and early indicators such as the MAY Manufacturing PMI data suggest Chinese growth is stabilizing here in 2Q (although ahead of what we see as incremental weakness in 2H).


CHINA TO IMPLEMENT QE? - China High Frequency GIP Data Monitor


Conversely, China’s property market remains an unmitigated disaster, but it’s unclear to what degree Chinese policymakers are incentivized to rush to shore up an industry they’ve previously identified as suffering from overcapacity anyway.


CHINA TO IMPLEMENT QE? - China Property Market Monitor


In conclusion, it’s pretty clear that China’s current turbulent growth trajectory is a function of very deliberate policy tightening that continues to be unwound, at the margins, via piecemeal fiscal and monetary easing (i.e. increased public expenditures on infrastructure, PBoC OMO and targeted RRR cuts).


The more piecemeal China gets with its easing measures, the less likely it is to shift to a policy of broad-based, meaningful fiscal or monetary stimulus – such as the QE package now being bandied about in the press.


Perhaps some form of QE is implemented, but is very small in both size and scope (i.e. confined to certain sectors) – which would effectively render it not that meaningful after all. The cost of capital in China is both artificially low and well shy of recent peaks, so it’s unclear – at least to us – what QE would effectively accomplish.




If anything, implementing something as radical as QE would likely be perceived by market participants could backfire by sending a signal to the market that they are afraid to use traditional tools to arrest the economic slowdown. We underlined the phrase “afraid to use” because Chinese authorities continue to have ample fiscal and monetary scope to ease policy meaningfully; they just would prefer not to, given that the 2009-10 stimulus package is largely responsible for getting them into this mess.


A sharp leg down in growth is indeed something that would obviously walk our expectations towards meaningful stimulus out of Beijing, but that's hard for us to get there without relying on doomsday storytelling and a heavy dose of the availability heuristic (specifically the 2008-09 GFC). 


For our latest deep-dive thoughts on China and how investors should (or shouldn't) be allocated to this economy, please refer to our 5/13 note titled, "BOOKING RESEARCH ALPHA IN CHINA; TURNING NEGATIVE". 


Enjoy the rest of your day,




Darius Dale

Associate: Macro Team

Poll of the Day Recap: 62% Say Next Stop for 10-Year is 2.25%

Takeaway: 62% said 2.25%; 38% said 2.75%.

From Reuters: U.S. Treasuries yields rose on Monday [to 2.51%], after falling to one-year lows last week, as investors were reluctant to buy bonds that offer low returns on expectations that yields will rise if the economy continues to gain momentum.

But, we wanted to know what you thought. Today’s poll question was: What’s the next stop for the 10-year?

Poll of the Day Recap: 62% Say Next Stop for 10-Year is 2.25% - fedreserve1

At the time of this post, 62% said 2.25%; 38% said 2.75%.

Those who believe it will drop to 2.25% said, “inflation is not coming; it’s already here.” Additionally these voters said:

  • "Greater probability 10yr yield falls than rises.  Some factors that point to US Slow Growth: 1. Recent quarter of decreased business spending, 2. Increasing costs drag on US consumer, 3. Lack of US equities volume, 4. Significant draw down in growth stocks, 5. Diminishing impact of foreign buyers of US Treasuries means further monetizing of US spending and, 6.  Possibility of euro strengthening based on overall tighter monetary policy and in response to what the ECB does this week. Simply, US economic outlook is less positive now than Q313 or Q413, so Fed intervention will continue to try to induce consumer spending when most consumers financial situation doesn’t allow greater discretionary spending."
  • "US growth is slowing. The Fed will predictably move toward lower rates for even longer. The Fed playbook has one play - easier policy no matter what."
  • "European central bank looks like going negative on rates on fears of deflation - can US be far behind?"
  • "The Fed will keep printing $$$."

Hedgeye CEO Keith McCullough agreed that the next stop for the 10-year would be 2.25%: "The Fed's Policy To Inflate = #InflationAccelerating, and inflation slows growth (bad for bond yields)."


Conversely, of those who voted 2.75%, one person explained, "Look at price of wheat, corn etc. since May highs, straight down. That’s deflating your inflation."



Hedgeye Retail: Wary of Skechers' (Mis)Direction | $SKX

Takeaway: Margins collapse and the company must refocus on its core initiatives.

Hedgeye Retail: Wary of Skechers' (Mis)Direction | $SKX - chart1 6 2 large


 Skechers Sponsors California Chrome

  • "Skechers USA Inc...announced today it will sponsor California Chrome’s run at Belmont Stakes in New York on June 7."
  • "As part of the sponsorship, Skechers’ logo will appear on California Chrome’s blanket, barn and racing gear, while owners Perry Martin and Steve Coburn, and trainer Art Sherman will wear team jackets, caps and apparel from the athletic brand."
  • “'We just watched Meb Keflezighi win the Boston Marathon wearing Skechers Performance shoes in April,' said Coburn, 'so we know Skechers has a good track record when it comes to picking winners in high-profile races.'”  


We've never seen a brand go in so many directions at once. Performance, toys, horse racing, and NBA ownership. Whenever this happens, there's tremendous operating leverage until the company realizes it has underinvested. Then margins collapse and the company must refocus on its core initiatives.


*     *     *     *     *     *


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



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TIP: Adding iShares TIPS Bond ETF to Investing Ideas

Takeaway: We are adding TIP to Investing Ideas.

Hedgeye's Macro team is adding iShares TIPS Bond ETF (TIP) to Investing Ideas.


The iShares TIPS Bond ETF seeks to track the investment results of an index composed of inflation-protected U.S. Treasury bonds. 


*We will send out a full report later this week detailing our bullish case.

TIP: Adding iShares TIPS Bond ETF to Investing Ideas - Inflation.AvgAmerian5.22.2014

Monday Mashup: PLKI, BNNY and More



The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.


Monday Mashup: PLKI, BNNY and More - chart1

Recent Notes

05/27/14  Post-Memorial Day Mashup

05/27/14  BOBE: M&A Activity Heating Up In The Food Business

05/27/14  DRI: Fighting The Good Fight

05/28/14  MCD: All The Hype For This?

05/29/14  PLKI: Delivering The Goods

05/30/14  BNNY: Still A Short, But On A Leash

Events This Week

06/02/14  KKD Earnings Call 4:30pm EST

06/03/14  BJRI Annual General Meeting

06/05/14  PNRA Annual General Meeting 8:30am EST

06/05/14  ZOES Earnings Call 5:00pm EST

Chart of the Day

Popeye’s Louisiana Kitchen (PLKI) increased its market share in the domestic chicken-QSR segment to 22.3% from 20.2% a year ago.  We believe an industry wide increase in promotional focus featuring chicken products benefited the chain by bringing attention to its superior product.  PLKI’s success moving forward will depend largely on its ability to continue driving top line sales which we believe they will achieve through a combination of new units, remodels and resonant promotional efforts.  


Monday Mashup: PLKI, BNNY and More - chart2

Recent News Flow

Monday, May 26th

  • PLKI announced the return of its most successful LTO, Chicken Waffle Tenders, which will be served with fries and a biscuit for $4.99.  The offer will be available at participating locations until June 29th.

Tuesday, May 27th

  • NDLS announced an agreement to acquire 16 franchised Noodles & Company restaurants from Sagamore Dining Partners, LLC, for $13.4 million.  The 16 restaurants are located primarily in the Indianapolis region.  Sagamore now plans to develop new restaurants in the greater Louisville, KY area.
  • MCD announced its 3-year total cash return target.  With this, management revealed several new initiatives they will undertake to enhance shareholder value including optimizing the capital structure, optimizing the ownership structure and scrutinizing G&A. The company also expects to return $18 to $20 billion to shareholders between 2014 and 2016 through a combination of dividends and share repurchases.
  • PZZA Papa John’s introduced a Mediterranean-style, New Greek Pizza.
  • CBRL WSJ’s Ahead of the Tape column wrote positively about Cracker Barrel, citing the company’s success in fending off activist Biglari and achievable guidance.

Wednesday, May 28th

  • BAGL announced a new line-up of seasonal menu items for the summer, including “new gourmet Panini sandwiches, better deli favorite sandwiches and refreshingly sweet Strawberry Drinks.”
  • BAGL announced the resignation of COO Emanuel Hilario.  The Board will not fill the vacancy until it has named a new President and CEO.

Thursday, May 29th

  • DIN announced its Board declared a second quarter cash dividend of $0.75 per share, payable on June 27, 2014 to shareholders of record on June 18, 2014.
  • EAT  announced its Board declared a quarterly dividend of $0.24 per share, payable on June 26, 2014 to shareholders of record on June 13, 2014.

Friday, May 30th

  • WEN shareholders elected each of the ten nominees at its Annual Meeting on May 28th and rejected a stockholder proposal regarding an independent Board chairman.
  • SBUX senior unsecured debt rating was upgraded by Moody’s to A3 and its short-term commercial paper rating was reaffirmed at P-2.

US Macro Consumption

The XLY (+1.7%) slightly outperformed the SPX (+1.6%) last week, but both casual dining and quick service stocks underperformed the broader XLY index.


Monday Mashup: PLKI, BNNY and More - 3


Monday Mashup: PLKI, BNNY and More - 4


The Hedgeye U.S. Consumption Model continues to signal bearish flashing red on 7 out of 12 metrics.


Monday Mashup: PLKI, BNNY and More - 5

XLY Quantitative Setup

From a quantitative perspective, the XLY is bullish on an intermediate-term TREND duration.


Monday Mashup: PLKI, BNNY and More - chart6

Casual Dining Restaurants

Monday Mashup: PLKI, BNNY and More - chart7


Monday Mashup: PLKI, BNNY and More - chart8

Quick Service Restaurants

Monday Mashup: PLKI, BNNY and More - chart9


Monday Mashup: PLKI, BNNY and More - chart10


Howard Penney

Managing Director


Fred Masotta



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.