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TODAY’S S&P 500 SET-UP – August 27, 2014

As we look at today's setup for the S&P 500, the range is 31 points or 1.00% downside to 1980 and 0.55% upside to 2011.                                                                













  • YIELD CURVE: 1.86 from 1.90
  • VIX closed at 11.63 1 day percent change of -0.60%


MACRO DATA POINTS (Bloomberg Estimates):            

  • 7am: MBA Mortgage Applications, Aug. 22 (prior 1.4%)
  • 10:30am: DOE Energy Inventories
  • 11:30am: U.S. to sell $13b 2Y FRN reopening
  • 1pm: U.S. to sell $35b 5Y notes



    • Senate, House out on August recess
    • 10am: SEC meeting on whether to adopt rules revising disclosure, reporting and offering process for asset-backed securities
    • 10am: CBO to update 10-year budget outlook, followed by 11am news conference with CBO officials
    • U.S. ELECTION WRAP: Hagan and Obama; Parties’ Digital Strategies



  • Apple said to prepare new 12.9-inch iPad for early next year
  • Covidien holder sues to block $42.9b Medtronic deal
  • Repsol said stalled in Talisman energy assets buy talks: WSJ
  • Credit raters to face new conflict restictions under SEC rules
  • Snapchat said near funding with Kleiner at $10b valuation
  • Fyffes, Chiquita target additional cost savings from deal
  • NYSE promotes Arca chief amid broader management changes
  • Apollo’s Momentive gets conditional bankruptcy plan approval
  • Heartbleed hack still threat to big cos. 6 months later
  • FreedomPop gets ‘acquisition interest’ from 2 mobile carriers
  • Weyerhaeuser to move headquarters to Seattle’s Pioneer Square
  • Putin calls Ukraine summit positive as political talks start
  • Dubai World said to agree on $10b deal with creditors



    • Brown Shoe (BWS) 7am, $0.35
    • Brown-Forman (BF/B) 7:30am, $0.72
    • Canadian Western Bank (CWB CN) 8:30am, C$0.70 - Preview
    • Chico’s (CHS) 7:31am, $0.26
    • Donaldson (DCI) 6am, $0.47
    • Express (EXPR) 7am, $0.00
    • Natl Bank of Canada (NA CN) 7:15am, C$1.11 - Preview
    • Tiffany & Co (TIF) 6:59am, $0.85 - Preview
    • Yingli Green Energy (YGE) 6am, $(0.16)



    • Bally Technologies (BYI) 4:01pm, $1.20
    • Greif (GEF) 4:06pm, $0.81
    • Guess (GES) 4:03pm, $0.29
    • Lannett (LCI) 4:04pm, $0.58
    • Williams-Sonoma (WSM) 4:05pm, $0.53
    • Workday (WDAY) 4:02pm, $(0.14)



  • Palm Seen by Mistry at Risk of Decline as Prices Drop to ’09 Low
  • Switzerland Combats Counterfeit Cheese With DNA Fingerprinting
  • Sugar Seen Needing Deeper Shortages to Ensure Recovery in Prices
  • WTI Trades Near Three-Day High Before Supply Data; Brent Steady
  • Philippines May Rerun Rice Tender After Prices in Sale Too High
  • Sugar Reserves in China May Climb to 9.4M Tons by Sept. 30: Liu
  • Cooking Oil Prices May Recover on Biofuel Demand, Oil World Says
  • Rubber in Tokyo Rebounds as Yen Weakens After U.S. Goods Data
  • Iron Ore May Recover Close to $100/T Toward Year-End, ANZ Says
  • Rusal Offering Japan Buyers $460 Aluminum Premium
  • Palm Oil Futures Trade Near Five-Year Low as Ringgit Strengthens
  • Rebar Falls to Record Low as Iron Ore Slumps on Port Inventory
  • Russia Poultry Prices Surge Amid Imported Meat Ban: Vedomosti
  • Steelmakers Hurting Profits by Chasing Sales, Roland Berger Says
  • Coffee Extends Gains on Brazil Dry Weather Concern; Sugar Rises


























The Hedgeye Macro Team
















Retail – dot.com Winners/Losers in One Visual

Takeaway: There’s so much noise from companies around e-commerce trends. Contrary to what they say, they’re not all winning. Here’s the scoreboard.

Retail – dot.com Winners/Losers in One Visual - 8 26 chart 1 ecom

Listening to a full quarter’s worth of conference calls might lead one to think that e-commerce is the savior to everyone’s business. It’s not. Here’s a visual that might help contextualize e-commerce trends by retailer. On the left axis we show e-commerce comp by retailer (columns). There all on there – except those that don’t disclose data (i.e. Macy’s). The right axis shows e-commerce sales as a percent of total for each company (represented as circles). A few takeaways…

1) E-commerce represents about 7% of sales for retailers in aggregate, and the group put up a collective 20% dot.com comp this quarter – or about 140bp in total growth. This accounts for about half of the 2.6% average revenue growth for the group.

2) It’s impossible to miss that 3 of the top 5 growth rates are Athletic brands. Yes, Nike and Adidas have an embarrassingly low e-commerce penetration rate of 3-4%, which is a third of what we see at brands like KATE and RL. But there’s no denying that these brands are stepping up efforts to go direct to consumer. Can’t be bullish for Foot Locker.

3) Who would have thunk that the highest e-commerce penetration rates among the more traditional retailers is GPS and SHLD, which are topping out at 14%. They also have among the lower dot.com growth rates in the quarter. GPS is particularly noteworthy at 11%.

4) Rounding out the bottom with e-commerce penetration – i.e. worst execution but biggest opportunity – are SKX, VFC, WMT and TGT.

EXPERT CALL | Analyzing the BKW/THI Merger

We are hosting an expert call tomorrow, August 27th @ 1pm EST to discuss the recent BKW/THI merger.  Dial-in information will be distributed tomorrow morning.


Our call will feature John Barker, former Senior VP and CCO of Wendy’s, who lived through the merger of Wendy’s and Tim Hortons.

Key Topics Will Include:

  • Why was the merger of Wendy’s and Tim Hortons a failure?
  • Why has Tim Hortons been slow to grow in the U.S.?
  • Can Tim Hortons leverage Burger King's infrastructure to accelerate growth in the U.S.?
  • What are some of the issues Tim Hortons will face in its attempt to grow globally?

About John Barker

John Barker joined Wendy's in 1996 as VP of Investor Relations when the company acquired Tim Hortons.   He worked closely with senior management of Tim Hortons and led IR for the IPO and spinoff of the chain 10 years later.  While at Wendy's through the end of June 2014, Barker was Chief Communications Officer and reported directly to the CEO. He led IR, Marketing PR, Government Relations, Crisis Management, Internal Communications, Corporate Services and other corporate functions.  He is currently at The Ohio State University's Fisher College of Business teaching strategy and marketing.  Previously he led IR at American Greetings and was a financial journalist. 


Howard Penney

Managing Director


Fred Masotta


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

BKW: Flame-Broiled Crawlers

We are adding BKW to our Investment Ideas list as a short.


BKW: Flame-Broiled Crawlers - 8 26 2014 3 00 23 PM


The surge in BKW's stock following the deal to buy THI makes the stock safe to short for many reasons.  Additionally, we see significant risks to the combined company once the deal is completed.  To be fair, Warren Buffett's halo is on the deal, but we have reason to believe this halo will tarnish.


We have several concerns with the deal, including:

  1. Levering up to pay a premium for a slow growth CDA company
  2. The lack of synergies with the transaction; in fact, costs will accelerate to jumpstart unit growth
  3. We doubt the merger will accelerate the growth of THI globally
  4. The two companies have fundamentally different views on franchising
  5. The Burger King franchisee base is weak and getting weaker by the day
  6. BKW is likely to miss 3Q14 estimates, including USA and CDA comp expectations
  7. The social media backlash, on both ends of the spectrum, to this transaction cannot be underestimated
  8. The conference call announcing the deal was far from impressive; in fact, it was rather discouraging
  9. The transaction is dilutive to current shareholders
  10. Current valuation is unwarranted


Our thoughts about the conference call Q&A:

Q: How much overlap is there between these two companies?

  • Planning on managing the two brands independently of one another
  • No plans to mix products or do co-branding
  • The real driver is growth -- the potential to take THI global

Hedgeye -- On the surface this appears to be a positive, but we're not buying it.  It's a matter of time before they try to combine products, especially coffee.  Remember, Seattle's Best has failed to help BKW's breakfast business.  In addition, we fail to see how merging two companies that have distinctly different views on franchising will help accelerate growth.  The fact remains that Tim Hortons hardly has any brand awareness outside Canada and select parts of the U.S.


Q: Tax rate of the effective company?

  • Don't expect the tax rate to change materially

Hedgeye -- Then why do the deal? At best this statement from management is disingenuous.  In Canada, the corporate rate is about 15% compared with 35% in the U.S.  More importantly, Canadian citizenship will allow the new company more opportunities to use various accounting and business “schemes” to shift profits north of the border and out of the reach of the IRS.


Q: What are the synergies between the two companies?  Are they quantifiable?  Timing?

  • Transaction is not about synergies, it is about growth
  • The priority is how quickly they can enter new markets and win in the U.S.
  • They will be able to leverage BKW's infrastructure in the U.S.

Hedgeye -- Again, why do the deal?  What BKW infrastructure are they referring to?  The BKW franchisee base is suffering financially and doesn't quite mesh with THI's "mom and pop" franchise model.


Q: Any immediate feedback from franchisees on either side?

  • Franchisees understand the purpose of the deal

Hedgeye -- The franchisees don't have a say in the deal!


Call or email with questions.


Howard Penney

Managing Director


Fred Masotta


Cartoon of the Day: Going Nowhere

Takeaway: Average Americans' cost of living is running right around the all-time highs.

Cartoon of the Day: Going Nowhere - Middle class 08.26.2014

"[D]espite falling interest rates, not as many Americans are either able or in the mood to lever themselves up on a new home these days," wrote CEO Keith McCullough in today's Morning Newsletter. "With cost of living running right around the all-time highs, many of your median income earning neighbors are broke too."

6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen'

Takeaway: We don't like this Burger King/Tim Horton's deal.

Veteran Hedgeye restaurants analyst Howard Penney is not shy about his opinion on what's going on with Burger King (BKW). He was quoted in today’s Wall Street Journal and says ‘BKW is a disaster waiting to happen thus the need to buy Tim Horton’s (THI)’


Here are 6 tweets which capture Penney's less-than-bullish view. 


6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h2


6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h3


6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h4


6 Tweets: Hedgeye's Howard Penney Thinks Burger King Is 'Disaster Waiting to Happen' - h5


You can follow Howard Penney on Twitter at @HedgeyeHWP.