Eurozone Growth is Down, But Not Out

Eurozone equities closed squarely in the red today following the release of weak preliminary June  figures for the Purchase Manager Index for the Eurozone, Germany, and France.  


Eurozone Services slipped to 51.9 (52.2 est.) and Eurozone Manufacturing dropped to 52.8 (53.3 est.) vs. 53.2 prior. Similar results were recorded for Germany and France:

  • Germany - Manufacturing PMI 52.4 JUN prelim. (52.5 est.) vs. 52.3 prior
  • Germany - Services PMI 54.8 JUN prelim. (55.8 est.) vs. 56.0 prior
  • France - Manufacturing PMI 47.8 JUN prelim. (49.5 est.) vs. 49.6 prior
  • France - Services PMI 48.2 JUN prelim. (49.4 est.) vs. 49.1 prior

June marks the second consecutive monthly decline in PMIs, however on the margin we continue to like European equities over U.S. Equities. In fact, today Keith issued a buy signal in Austrian equities (etf: EWO) on the pullback in the Real-Time Alerts.  


We expect interest rate policy from the ECB to remain “accommodative” and for ECB President Mario Draghi to keep the prospect of QE in his back pocket (forward expectations of its use should propel equities) and issue it only should a deterioration in fundamentals warrant its use.  Over the weekend Draghi said interest rates “will” remain low until the end of 2016. CPI for May printed at +0.5% annualized which was the lowest level in four years. The full-year forecasts are now +0.7%, +1.1%, and +1.4% for 2014, 2015, and 2016 respectively.    


Our quantitative outlook remains bullish:

  • the Stoxx50 and Stoxx600 remain bullish TRADE (immediate term) and bullish TREND (intermediate term)
  • the EUR/USD is holding our long-term TAIL support line of $1.35 versus an “ugly” U.S. Dollar in a bearish formation

Eurozone Growth is Down, But Not Out - z. PMIs

Eurozone Growth is Down, But Not Out - z. euro50

Eurozone Growth is Down, But Not Out - z.m euro


Matthew Hedrick


ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher?

With the interest in protein in the food space (TSN-HSH) heating up, we thought a recent note from the Hedgeye Macro team on livestock and poultry prices is particularly applicable to the Consumer Staples sector. A copy of the work is included directly below.




We continue to field arguments against the inflationary read-through on the commodity squeeze. Sharp increases in livestock and poultry prices over the last ten years in the face of stagnant wage growth, a decline in savings rates, and a declining U.S. dollar illustrate this reality in staggering fashion.


If Janet Yellen’s commentary yesterday is any indication, the fed will continue to promote yield-chasing from financial intermediaries and those lucky enough to hold equities and fixed assets. The PCE survey from the BLS reports the top quintile of income earners takes 66% of the aggregate income in the basket from interest, dividends, and investment related income. Needless to say, a majority of Americans consume meat.


2013 Meat Consumption Per Capita (KG/Person):

  • United States: 106.9
  • China: 53.5
  • World Average: 34.9

The average consumer we have continuously highlighted is reaching insolvency. Median net income margins have consistently compressed over the last five years to about 1.38% with savings rates decreasing over the same period.


Last Ten Years:

  • USD Index: -9.8%
  • Trailing 1-year U.S. Personal Savings Rate: -9%
  •  S&P GSCI Livestock Index: +69%
  • U.S. Private Sector Avg. Hourly Earnings (Real): -43% 

 ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 1


survey from both the USDA and the University of Oklahoma’s Department of Agricultural Economics this week provide evidence that people are eating the higher price tags (adding to the pain, they drove to the store --> WTI and Brent hovering at 9-month highs).

  • “This month’s survey shows consumers are willing to pay 11-35% more for steak, pork chops, and chicken wings"

-       Food Demand Survey from the University of Oklahoma’s  Department of Agricultural Economics


  • The USDA’s Weekly Retail Beef Feature Activity Report highlighted a sharp decline in the number of food retail outlets featuring beef

ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 2


Last Ten Years:

  • Live Cattle: +71%
  • Lean Hogs: +65%
  • Chicken Breast: +40%

ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 3


Disease or not contributing to the advances YTD, this kind of headline inflation is tangibly relevant on the wallet. Unfortunately most people were not granted the opportunity to add to their inflation hedges out of the FOMC statement yesterday where the Fed provided a downward revision to its 2014 GDP estimate for the SEVENTH year in a row:

  • Headline CPI printed at +0.4% Tuesday vs. +0.2% expected (Inflation surprises)
  • Full-year growth estimates cut to 2.1-2.3% from 3% at the Fed (coincident response as growth misses)
  • 16 of 19 commodities in the CRB in positive territory on the year (prospect for future dollar devaluation increases; dollar down, cost of living up)

ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 4


Ben Ryan



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.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

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



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. 




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 



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. 











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.



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

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 .


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


Ben Ryan