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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 17, 2014


As we look at today's setup for the S&P 500, the range is 35 points or 1.12% downside to 1916 and 0.68% upside to 1951.                                                       

                                                                        

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

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EQUITY SENTIMENT:

 

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CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.13 from 2.13
  • VIX closed at 12.65 1 day percent change of 3.86%

 

MACRO DATA POINTS (Bloomberg Estimates)             

  • Fed opens two-day policy meeting
  • 7:45am: ICSC weekly sales
  • 8:30am: CPI y/y, May, est. 2% (prior 2%)
  • CPI ex-food and energy y/y, May, est. 1.8% (prior 1.8%)
  • 8:30am: Housing Starts, May, est. 1.03m (prior 1.072m)
  • Building Permits, May, est. 1.050m (prior 1.080m, revised 1.059m)
  • 8:55am: Redbook weekly sales
  • 4:30pm: API weekly oil inventories

 

GOVERNMENT:

    • House, Senate in session
    • Obama travels to Pittsburgh to speak on economy, then to NYC for DNC-LGBT gala, second DNC event
    • WHR CEO Fettig, WMT’s Gloeckler at Select USA forum
    • 8am: Senate Finance Cmte Chairman Ron Wyden
    • WSJ CFO conference in Washington, see program
    • 9am: Natl Assn of Manufacturers President Jay Timmons, Sr VP Aric Newhouse speaks at Bloomberg Government breakfast
    • 9:30am: Senate Permanent Subcmte on Investigations holds hearing on high-frequency trading
    • 1pm: Rep. Patrick McHenry, R-NC, head of House Financial Services’ Oversight panel
    • 10am: Senate Banking Cmte considers nominees: Julian Castro for HUD secretary, Laura Wertheimer for inspector general of Federal Housing Finance Agency
    • 11am: Sifma gives mid-year outlook for monetary policy, economic growth, employment
    • U.S. ELECTION WRAP: Members Vie to Replace McCarthy as GOP Whip

               

WHAT TO WATCH:

  • Fed will raise rates faster than investors expect: survey
  • GE to add commitment to protect French jobs to Alstom bid: FT
  • Boing, Lockheed JV starts work on new rocket engine: Reuters
  • Apple reaches settlement with U.S. states over e-book pricing
  • Hackers seen using complicit YouTube to sell stolen cards
  • N.Y. retailers agree to list unit prices on website
  • Sony May console sales beat Microsoft fifth straight month
  • Truckers fight federal rest rules after Morgan crash: NYT
  • Retail gasoline seen rising to 6-yr seasonal high
  • U.K. inflation falls more than forecast
  • Chinese holdings of U.S. Treasuries falls to 14-month low
  • ISIL militants attack north of Baghdad as Obama mulls options

 

EARNINGS:

    • Adobe Systems (ADBE) 4:05pm, $0.30   
    • Bob Evans Farms (BOBE) 4:02pm, $0.41 
    • FactSet Research Systems (FDS) 7am, $1.25        
    • John Wiley & Sons (JW/A) 8am , $0.68   
    • La-Z-Boy (LZB) 4:10pm, $0.32     
    • Yingli Green (YGE) 6am, ($0.23)

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Brent Crude Drops for Second Day as Iraqi Oil Secured; WTI Falls
  • Gold Extends Drop From Three-Week High Before Fed Policy Meeting
  • Beef Reaches U.S. Record as Rancher Sees More Gains: Commodities
  • China’s Port Probe May Curb Iron Ore Financing, Demand: ABN Amro
  • Copper Climbs as Higher Auto Sales Bolster Outlook for Demand
  • Kurdish Region Oil Exports At 200K-250K B/D in July: Hawrami
  • Kurds Grab Fourth-Largest Iraq Oilfield as Islamists Advance
  • Iron Ore Futures in Singapore Slump to Lowest Since April ’13
  • Russia’s $8.2 Trillion Oil Trove Locked Without U.S. Know-How
  • Corn Trades Near Four-Month Low as U.S. Crop Conditions Improve
  • Europe’s Swollen Gas Reserves Guard Against Repeat of ’06
  • RasGas Said to Shut LNG Plant in October for Three Weeks
  • BP to Sign $20 Billion LNG Supply Deal With China’s Cnooc Today
  • El Nino Seen Delayed by Australia as Pacific Ocean Warming Eases

 

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CURRENCIES


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GLOBAL PERFORMANCE

 

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EUROPEAN MARKETS

 

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ASIAN MARKETS

 

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MIDDLE EAST

 

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The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


Poll of the Day Recap: 60% Believe We Are Entering A New Phase of Market Turbulence

Takeaway: 60% voted YES; 40% voted NO.

Should we fear what lies ahead?

 

As the Wall Street Journal reported this morning, “a raft of unsettling events have shattered the relative calm of the U.S. stock market and put investors on edge.” Concerns over Iraq and rising oil prices, Fed Policy jitters and other worries helped trigger a 12% jump in the VIX fear gauge and sent the S&P 500 down 0.7% last week, its worst performance in two months.

 

We wanted to know what you thought: Are we entering a new phase of market turbulence?

 

Poll of the Day Recap: 60% Believe We Are Entering A New Phase of Market Turbulence - turbulence 

 

At the time of this post, 60% voted YES; 40% voted NO.

 

Those who voted YES had this to say:

  • Mass murder, religious warfare, ethnic cleansing, civil war.  but who cares?  The S&P is at an all time high!!!  Complacency in the face of serious global turmoil, plus strengthening economic fundamentals in the US/EU - which means the markets may soon run out of positive expectations to build on
  • ... but tops are a process. Markets are a few months away from a significant top
  • Bull markets cannot last forever, especially with the slow growth

 

Those who voted NO reasoned:

  • It doesn't appear stocks are being bought for economic reasons. It's buybacks and large players like sov wealth funds, those bailing from bonds, etc.

 


RETURN OF THE RE-LEVERING? CHART OF THE DAY

In Friday’s Early Look (Giddy Up) we highlighted the Fed G.19 Data from April which showed US revolving consumer credit balances rose at a month-over-month annualized rate of +12.3%, the fastest rate of growth since 2001.

 

While the (potential) inflection was certainly notable, historically, the series has been volatile and subject to significant revision, so the preliminary data is to be taken with some caution. 

 

In short, it was interesting but, in isolation, hard to build any specific conviction around.

 

This morning, we received some confirmatory data from Capital One (COF) who reported domestic card loans grew 1.7% MoM in May – a continuation of the strength observed in April.   

 

There are a few primary takeaways:

  • For COF, the increase in May was well ahead of typical May changes observed over the last decade and a second consecutive month of strength.
  • For consumer credit more broadly, the positive inflection in credit card loan growth is coming after more than 2.5 years of consistent, stagnant 0-1% growth. 
  • Consumption: Despite the acceleration in revolving credit, Household Spending in April was very soft and the collective Retail Sales data for April/May was very much middling

Whether or not rising auto and card balances is reflective of a confident, resurgent consumer or simply an attempt by households to maintain current levels of consumption in the face of rising food and commodity inflation remains open to debate. 

 

At present, we continue to think the data sides more with the later than the former. 

 

RETURN OF THE RE-LEVERING? CHART OF THE DAY - COF Card loans May

 

RETURN OF THE RE-LEVERING? CHART OF THE DAY - Revolving Credit

 

Christian B. Drake

@HedgeyeUSA


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.32%
  • SHORT SIGNALS 78.48%

Cartoon of the Day: Paying Rent

Takeaway: It's not cheap being an American consumer these days.

Cartoon of the Day: Paying Rent - Rent cartoon 6.16.2014


DFRG: Running Through Our Thesis

We added DFRG to our Best Ideas list as a SHORT on 06/05/2014 at $27.27/share.

 

Last week, we released a 67 page Black Book detailing why we believe DFRG is a short.  The following note is a very brief summary of our presentation.  If you would like more information or a copy of the deck, please email us.

 

Our short thesis centers on three critical themes:

  1. Slowing Trends, Declining Margins – Company-owned two-year same-store sales and traffic have been decelerating steadily since 3Q11.  Meanwhile, restaurant level margins (LTM) and operating margins (LTM) have been declining since 2Q12.
  2. A Portfolio In Flux – Del Frisco’s Double Eagle Steakhouse is a robust concept, but two-year same-store sales and traffic are decelerating.  The Sullivan’s concept is broken.  Grille is, at this point, nothing more than an unproven growth concept.
  3. Materially Mispriced – At 28.22x P/E (FY14) and 13.39x EV/EBITA (FY14), we believe DFRG is materially mispriced and fails to discount slowing trends, declining margins, rising commodity costs and other issues we’ve identified. Our SOTP analysis suggests significant downside.

 

As always, we like to put duration into context with all our longs and shorts.

 

DFRG: Running Through Our Thesis - c2

 

Over the past two years, DFRG has outperformed the SPX and its Peers by 70% and 62%, respectively.

 

DFRG: Running Through Our Thesis - c3

 

The financial performance of DFRG revolves around the performance of Del Frisco’s concept, with the brand generating 48.9% and 62.3% of revenues and restaurant level EBITDA, respectively.

 

DFRG: Running Through Our Thesis - c4

 

What are the bulls saying?

 

DFRG: Running Through Our Thesis - c5

 

Same-store sales are decelerating and remodels are not the panacea for Sullivan’s.

 

DFRG: Running Through Our Thesis - c6

 

DFRG: Running Through Our Thesis - c7

 

DFRG’s premium valuation is driven by the potential growth of the Grille concept.  With only 11 units, it is premature to call Grille a viable growth vehicle.  In addition, sister concepts traditionally have a poor track record.

 

DFRG: Running Through Our Thesis - c8

 

Management is still trying to understand its target market for the Grille and appears unsure of what locations to select.

 

DFRG: Running Through Our Thesis - c9

 

At 17.6%, Grille’s restaurant level margins are 1100 bps below that of Del Frisco’s.  This will continue to pressure the margin structure of the company, particularly with management’s current growth plans.

 

DFRG: Running Through Our Thesis - c10

 

The Street loves the company.

 

DFRG: Running Through Our Thesis - c11

 

But management has struggled to deliver on sales and earnings expectations.

 

DFRG: Running Through Our Thesis - c12

 

DFRG is trading near its all-time peak on several valuation fronts.

 

DFRG: Running Through Our Thesis - c13

 

DFRG: Running Through Our Thesis - c14

 

Using a generous sum-of-the-parts valuation analysis, we find that the stock is grossly overvalued.

 

DFRG: Running Through Our Thesis - c15

 

Call with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


Penney: $DFRG "Egregiously Overvalued"

Restaurant analyst Howard Penney details the three key reasons why he’s short the stock of Del Frisco’s, a high-end casual dining steak chain.


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