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Cartoon of the Day: Summer Driving

Takeaway: We were well ahead of consensus, highlighting #InflationAcclerating risk and warning our subscribers of this development months ago.

Cartoon of the Day: Summer Driving - Gas cartoon 06.23.2014

 

As oil prices rise above $107, and head toward $110, the average price of a gallon of gasoline has topped $4 in California, and is moving rapidly in that direction in other states as well. The run up is rapid enough and high enough that anxiety is growing about how it will affect consumer spending and GDP. Hedgeye’s macro team was well ahead of the consensus curve, highlighting the risk of #InflationAcclerating and warning our subscribers of this development months ago.


Monday Mashup: DRI, SBUX and More

Investment Ideas

The table below lists our 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: DRI, SBUX and More - chart1

Recent Notes

06/16/14  Monday Mashup: Long BOBE, Short DFRG

06/16/14  DFRG: Running Through Our Thesis

06/18/14  Restaurant Sector Valuation

06/19/14  DRI: The Big Miss

Events This Week

06/23/14  SONC earnings call 5:00pm EST

06/24/14  Oppenheimer Consumer Conference: JACK, BJRI, DPZ, FRGI

06/25/14  Oppenheimer Consumer Conference: DENN, RUTH, SONC

Chart Of The Day

Monday Mashup: DRI, SBUX and More - chart2

Recent News Flow

Monday, June 16th

  • DFRG announced the opening of a 7,900 square ft. Del Frisco’s Grille in Burlington, MA.
  • BOBE rescheduled its fourth quarter earnings release and conference call to Tuesday, July 8th, 2014, citing material weakness in internal controls. 
  • RRGB Senior VP and Chief Development Officer, Todd A. Brighton, notified the company he will resign from his position effective July 1, 2014.  Mr. Brighton will assist the company in its transition.
  • PLKI announced the completion of its $43 million recipe purchase and the extension of its supply agreement with Diversified Foods and Seasonings, LLC.
  • EAT announced the departure of Board Member John Mims.  Mr. Mims, who elected to resign, joined Brinker’s Board of Directors in 2007.

Tuesday, June 17th

  • PZZA was rated number one in customer satisfaction among limited-service restaurants by the 2014 American Customer Satisfaction Index (ACSI).
  • CAKE announced the opening of its newest Cheesecake Factory restaurant at Lakeside Shopping Center in Metairie, a suburb of New Orleans, making it the company’s first restaurant in Louisiana.

Wednesday, June 18th

  • WEN is bringing back its Pretzel Bacon Cheeseburger and Pretzel Pub Chicken Sandwich beginning in early July.
  • DAVE Lisa A. Kro and Richard L. Monfort resigned as members of Famous Dave’s Board of Directors and audit committee.

Thursday, June 19th

  • THI launched its TimmyMe App for Windows 8 devices which gives guests the ability to scan-to-pay for their in-store purchases.  Tim Hortons’ customers now have this capability across all four major mobile platforms, including BlackBerry10, iOS and Android.
  • BLMN appointed former Executive VP and Chief Resource Officer, David Pace, as the President of Carrabba’s Italian Grill.

Friday, June 20th

  • SBUX is reportedly prepared to raise prices for packaged coffee and other products following price hikes by competitors.

Sector Performance

The XLY (+0.4%) underperformed the SPX (+1.4%) last week.  Both casual dining and quick-service stocks outperformed the narrower XLY index.

 

Monday Mashup: DRI, SBUX and More - chart3

 

Monday Mashup: DRI, SBUX and More - chart4

U.S. Macro Consumption

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

 

Monday Mashup: DRI, SBUX and More - chart5

XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

 

Monday Mashup: DRI, SBUX and More - chart6

Casual Dining Restaurants

Monday Mashup: DRI, SBUX and More - chart7

 

Monday Mashup: DRI, SBUX and More - chart8

Quick Service Restaurants

Monday Mashup: DRI, SBUX and More - chart9

 

Monday Mashup: DRI, SBUX and More - chart10

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


MODESTLY BETTER SALES VOLUME M/M BUT STILL NEGATIVE Y/Y

Takeaway: May Existing Home Sales rise in-line with Pending numbers released a month ago. Meanwhile, inventory continues to grow.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

MODESTLY BETTER SALES VOLUME M/M BUT STILL NEGATIVE Y/Y   - Compendium 062314

 

Today's Focus: Existing Home Sales

The National Association of Realtors (NAR) released its monthly Existing Home Sales report for May earlier this morning. The sales data is of little value because it's telling you what you what the market already knew. This is because it mirrors the Pending Home Sales index, which comes out a month earlier. To that end, Pending Home Sales rose from 94 to 98 from February to April (+4.3%) which is now being reflected in the May Existing Home Sales Data (+4.9%).

 

The Pending Home Sales index reflects contract signings while the Existing Home Sales report reflects contract closings. There's typically a 1-2 month lag between signings and closings. That being said, there is one extremely valuable piece of data in the Existing Home Sales report that most market participants tend not to focus on, and that's the inventory number. It's the only measure of total housing stock for sale published by any source and it's not a stale number. It's reflecting the number of properties (existing) for sale at the end of the period.

 

Quick Take:

 

* Overall:  Modestly better sequentially.  Sales improved but the gain was somewhat hollow as YoY growth remains negative.  Inventory was mixed with units up & months supply down – modestly positive for price, on balance, following last months inventory surge.    

 

* Sales:  Solid gain sequentially as total sales increase +4.9% MoM (4.89 from 4.66) but….still registering negative YoY growth across all regions in May with total still running -5.0% YoY.  Not overly surprising as April Pending Home Sales were better sequentially.

 

* Inventory:  Higher on a Units basis (2.28 MM May vs 2.23MM in April) while months supply ticks down to 5.60 from 5.74 alongside the rise in sales.

 

* Other:  First time homebuyers remained MIA in May, representing just 27% of transaction volume, which was down sequentially from 29% in April and well below "normal" conditions where ~40% of homes are sold to first time buyers. If you view housing as a ladder then inability for 1st time buyers to purchase = lower turnover & lower total transaction activity (although rising supply may help low end volumes)

  • Distressed = 11% of May Sales down from 15% in April and 18% in May 2013.
  • 1st time buyers = 27% of buyers in May – down from 29% in April and 29% in May of last year
  • All-cash sales = 32% of transactions vs. 32% in April 

 

Context

Taking a step back, our main call here is that we're bearish on the outlook for the rate of change in home prices in 2H14 and 1H15. 

 

 

MODESTLY BETTER SALES VOLUME M/M BUT STILL NEGATIVE Y/Y   - EHS Total SAAR 99 Present

 

MODESTLY BETTER SALES VOLUME M/M BUT STILL NEGATIVE Y/Y   - EHS Regional YoY

 

MODESTLY BETTER SALES VOLUME M/M BUT STILL NEGATIVE Y/Y   - EHS Inventory Units

 

MODESTLY BETTER SALES VOLUME M/M BUT STILL NEGATIVE Y/Y   - EHS Months Supply 

 

About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.

 

Frequency:

The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.

 

Joshua Steiner, CFA

 

Christian B. Drake


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European Banking Monitor: Credit Risk Uptick on the Week

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

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European Financial CDS - Swaps widened almost across the board in Europe last week. Sberbank of Russia was one of the few exceptions, tightening 8 bps w/w. The Greek banks were wider by an average of 36 bps w/w. Overall, swaps widened by a median of 2 bps on the week.

 

European Banking Monitor: Credit Risk Uptick on the Week - chart 1 financials CDS

 

Sovereign CDS – Sovereign swaps widened globally last week with the largest increases coming from Italy (+6 bps) and France (+4 bps). 

 

European Banking Monitor: Credit Risk Uptick on the Week - chart 2 sovereign CDS

 

European Banking Monitor: Credit Risk Uptick on the Week - chart 3 sovereign CDS

 

European Banking Monitor: Credit Risk Uptick on the Week - chart 4 sovereign CDS

 

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 4 bps to 16 bps.

 

European Banking Monitor: Credit Risk Uptick on the Week - chart 5 sovereign CDS

 

 

Matthew Hedrick

Associate

Ben Ryan

Analyst 

 

 


MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS

Takeaway: Ongoing commodity inflation and rising US interbank rates paint a cautionary picture for the growth outlook in the intermediate term.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 19

 

Key Callouts:

The two notable callouts this week are commodity prices and interbank rates. Commodity prices rose a further 2.5% last week, which follows the prior week's 2% increase. Interbank rates in the US, meanwhile, rose noticeably on the week. 

 

* The CRB index rose 2.5%, ending the week at 313 versus 305 the prior week. 

 

The TED spread rose 1.9 basis points last week, ending the week at 21.8 bps this week versus last week’s print of 19.91 bps.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 5 out of 12 worsened / 1 of 12 unchanged

 • Long-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 15

 

1. U.S. Financial CDS -  Assured and MBIA were sharply tighter on the week, -45 bps and -38 bps, respectively. Outside of the guarantors, however, there was relatively little action in the CDS market for US financials last week. Overall, the median change was 0 bps.

 

Tightened the most WoW: AGO, MBI, AIG

Widened the most WoW: XL, UNM, TRV

Tightened the most WoW: AGO, GS, MS

Widened the most/ tightened the least MoM: WFC, XL, RDN

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 1

 

2. European Financial CDS - Swaps widened almost across the board in Europe last week. Sberbank of Russia was one of the few exceptions, tightening 8 bps w/w. The Greek banks were wider by an average of 36 bps w/w. Overall, swaps widened by a median of 2 bps on the week.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 2

 

3. Asian Financial CDS - Indian banks were wider on the week (+6-7 bps), while Japanese and Chinese banks were mixed. 

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 17

 

4. Sovereign CDS – Sovereign swaps widened globally last week with the largest increases coming from Italy (+6 bps) and France (+4 bps). 

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 18

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 3

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 6.1 bps last week, ending the week at 5.30% versus 5.37% the prior week.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1,879.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 6

 

7. TED Spread Monitor – The TED spread rose 1.9 basis points last week, ending the week at 21.8 bps this week versus last week’s print of 19.91 bps.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 7

 

8. CRB Commodity Price Index – The CRB index rose 2.5%, ending the week at 313 versus 305 the prior week. As compared with the prior month, commodity prices have increased 1.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 8

 

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 4 bps to 16 bps.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 10 basis points last week, ending the week at 2.70% versus last week’s print of 2.60%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 10

 

11. Chinese Steel – Steel prices in China fell 1.3% last week, or 40 yuan/ton, to 3,137 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 215 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: RISING COSTS & GROWING RISKS - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


LEISURE LETTER (06/23/2014)

Tickers:

EVENTS

  • Tuesday June 24:  CCL F2Q CC;

COMPANY NEWS

 

MGM – On Friday, the Company announced workers started removing scrap metal and other materials from inside the Harmon tower, the initial steps which began the dismantling of the structurally flawed Harmon tower. 

Takeaway: The clearing of a valuable piece of Las Vegas Boulevard real estate...what will replace the Harmon Tower? 

 

PENN – Argosy Sioux City embarks on a last-ditch effort to save the embattled riverboat casino. Recall, the Iowa Racing and Gaming Commission ordered Argosy Sioux City casino to shut down July 1 because its state gaming license has expired. Argosy parent Penn National Gaming asked the five-member IRGC to suspend its own order and allow the boat to remain open until resolution of Argosy's lawsuit that challenges that decision and a series of other IRGC actions related to the Argosy license. The IRGC will hear arguments and testimony from Argosy attorneys at a special meeting that begins at 8 a.m. Wednesday at Prairie Meadows Racetrack and Casino in Altoona. The commission is scheduled to render a decision upon conclusion of the hearing.  A formal rejection by the IRGC, would exhaust Argosy's administrative appeals, something that must happen before the company can pursue its emergency stay of the IRGC's order in Iowa District Court the following day.  Judge Eliza Ovrom will hear oral arguments on Argosy's request beginning at 8:15 a.m. Thursday in Des Moines.

Takeaway:  The next steps of the Sioux City debacle

 

LVS / 1928:HK – Sands Macao received the first Macau installation of a Bitcoin exchange kiosk on Friday.  

 

WYN – SkyNews reported that WYN made the £6B ($10.21B) preliminary offer for IHG, which IHG's Board of Directors subsequently rejected. 

Takeaway: Could WYN's core growth be slowing and new management is looking for a creative way to financially engineer growth?

 

NCLH - (Travel Agent Central) Guests who book a new Hawaii cruise reservation, from June 22 through June 30, 2014, will receive up to $100 to spend on board, plus guests who book a Hawaii Cruise Tour will receive an additional $200 to spend on board.  

Takeaway: Another Hawaii promotion - no surprise given lower pricing YoY.

 

Property Transaction

Various media outlets are reporting Goldman Sachs sold the 2,941-room LVH (Las Vegas Hilton) to Westgate Resorts for $150 million in a transaction that will be finalized by the end of the month.  Westgate has plans to convert the LVH into a time share property.  Westgate currently owns the Westgate Flamingo Bay resort, which opened in 2001. It sold its interest in the Westgate Planet Hollywood, which opened in 2010, to Resort Finance America LLC, which in turn appointed Hilton Grand Vacations to rebrand the property.

 

Insider Transactions

MTN - CAO Mark L. Schoppet sold 10,000 shares of stock on Thursday, June 19th at an average price of $75.58 and now owns 5,214 share.

INDUSTRY NEWS

Illegal World Cup Ring in Macau Busted (Macau Business) The Macau police have dismantled an illegal betting network suspected of collecting MOP5.1 billion (US$645 million) in wagers during the opening stages of the football World Cup, including a single wager of HKD40 million (US$5.1 million) Police raided a hotel in Macau's ZAPE area on Thursday, arrested 26 people and seized computers, mobile phones and over HK$2 million (US$258,029) in cash.

Takeaway: This was nearly one week's Macau GGR allegedly gambled on the World Cup just through this betting ring! Maybe the VIP biz ain't so bad...

 

Macau Visitation - (DSEC) Overall May Macau visitation rose 8% YoY to 2,525,026.  Mainland visitors increased by 14% YoY to 1,699,778; Mainland visitors traveling under the Individual Visit Scheme rose substantially by 21%, at 727,356.  Visitors from Taiwan, the Republic of Korea and Japan increased by 23%, 20% and 18% YoY, respectively  while those from Hong Kong decreased by 8%.  The average length of stay of visitors was 1.0 day

 

LEISURE LETTER (06/23/2014) - mva

 

Takeaway: Solid visitation numbers despite the decline in HK visitors. Very short-term stays (1 day) still the norm.

  

Changi - (Changi Airport Group) Singapore's Changi Airport passenger traffic rose 2% YoY to 4.369 million. 

 

LEISURE LETTER (06/23/2014) - mva2

 

Takeaway: At least visitation isn't negative.

 

Brisbane Casino Bid (Bloomberg) Hong Kong jewelery shop chain owner Chow Tai Fook Enterprises Ltd, Hong Kong property developer Far East Consortium International Ltd and Australia’s Echo Entertainment Group Ltd will jointly bid to build a casino in the northeastern Australian city of Brisbane. According to Echo Entertainment, each of the Hong Kong companies will own 25% of the joint venture.  Last month, the government of the state of Queensland shortlisted Echo Entertainment and Chow Tai Fook build a casino-resort at Queen’s Wharf in Brisbane. Chow Tai Fook founder Cheng Yu Tung, is a long-standing investor in SJM’s parent company Sociedade de Turismo e Diversões de Macau SA.

Takeaway: A strong and viable contender for the license.

 

Reportable Transactions – A Federal District Court in California has ruled that US Citizens must report offshore gambling accounts over $10,000 for tax purposes.  Companies handling such accounts, PokerStars, PartyPoker and FirePlay, are functioning as banks, and thus fall within the definition for a reportable account, the court ruled

Takeaway: The US tax and off-shore funds crackdown continues.

 

New York Racinos Secure New Operating Rules – New York racinos will get to stay open until 6 a.m. and offer additional free play to slot customers for up to 15% of their play, up from the current limit of 10%.

Takeaway: A modest positive for NY racinos.


Portugal & Online Poker – Portuguese government approved a new bill to regulate online poker, casino games, and sports betting.  The bill, now requiring only the national assembly’s approval to be finalized, paves the way for games to go online in the European country by the end of the calendar year. The Portuguese bill will necessitate the appointing of an authoritative body to review applications and provide licenses to entities wishing to become part of the new online gaming industry.  Such a body will also audit licensed companies going forward to ensure they are operating according to the new regulations.

Takeaway: A small but previously not mentioned market discovers online gaming. 

MACRO

China HSBC June Flash Manufacturing PMI - Chinese HSBC June flash manufacturing PMI came in at 50.8 vs the final reading of 49.4 in May, and market expectations for 49.7.

 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


investing ideas

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