TODAY’S S&P 500 SET-UP – September 5, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 1.03% downside to 1977 and 0.42% upside to 2006.                                                   













  • YIELD CURVE: 1.91 from 1.92
  • VIX closed at 12.64 1 day percent change of 2.27%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in Nonfarm Payrolls, Aug., est. 230k (pr 209k)
  • Unemployment Rate, Aug., est. 6.1% (prior 6.2%)
  • 1pm: Baker Hughes rig count
  • 3:45pm: Fed’s Rosengren speaks in Boston



    • Senate, House out on final week of summer recess
    • President Obama views fly-over ceremony, attends NATO summit in Wales, holds press conference, returns to Washington
    • 10am: Nebraska Supreme Court hears constitutionality arguments on Keystone XL pipeline route through state
    • U.S. ELECTION WRAP: Kansas Senate Race; Koch-Backed Ads



  • Jobs-Day guide: U.S. payrolls, participation, wages and hours
  • Barclays, Citigroup accused in suit of manipulating ISDAfix
  • Apple plans new security features after hack of celebrity photos
  • Ukraine ready for truce as NATO cautions on Russian peace offer
  • Gap falls as August same-store sales trail analysts’ estimates
  • Keryx has 82% chance of winning FDA Zerenex approval: analysts
  • Nvidia sues Samsung, Qualcomm after patent deal talks fail
  • German industrial production expands in sign of eco. rebound
  • Eurozone GDP stagnates in 2Q; flash reading unchanged q/q
  • Median incomes fell for all but richest in 2010-13, Fed says
  • Swaps rule requires $644b in collateral, regulator says
  • Autonomy CFO told Lynch of "imaginary deals’’ before HP sale
  • Dollar General’s Family Dollar bid may not be enough: Reuters
  • Bain Capital’s Atento may start U.S. IPO next week: Reuters
  • Apple files reality navigation patents: AppleInsider



  • Long-Term Oil Demand to Slow Even With Higher China Consumption
  • Copper Rises in London Before U.S. Jobs as Surplus Seen Elusive
  • Chemical Boom at Risk as U.S. Ethane Heads Abroad: Commodities
  • WTI Heads for Weekly Drop as Refiners Slow Rates; Brent Steady
  • Raw Sugar Extends Drop to 7-Month Low While Arabica Coffee Falls
  • Gold Is Little Changed Near 12-Week Low Before U.S. Jobs Data
  • Sugar Output in India’s Biggest Producer Seen at Three-Year High
  • Corn Rebounds as Cooler U.S. Temperatures Raise Frost Concern
  • Russia Reports Outbreak of Classical Swine Fever in Southwest
  • Rebar Posts Biggest Weekly Loss in 15 Months as Demand Wanes
  • Palm Trims Biggest Weekly Gain Since November as Reserves Climb
  • Pears Rot in Europe as Putin’s Retaliation Pushes Price Down 70%
  • Copper Traders Most Bearish in Month as Demand Seen Stalling
  • One Putin Ally Sells Stake in Chemical Maker to Son of Another

























The Hedgeye Macro Team
















MCD: Why We Are Short

Although our short thesis is complicated, it can effectively be boiled down to one chart.


MCD plans to release August sales numbers on September 9th and we have a sneaking suspicion it will be a negative event.  In all likelihood, it will lead the street to revise down its full-year sales and earnings estimates.


Recall that McDonald's global same-store sales declined -2.5% in July and we'd expect August to yield similar results. 


In July, performance by segment was:

  • U.S. -3.2%
  • Europe +0.5%
  • APMEA -7.3%


Currently, 3Q14 consensus estimates by segment are:

  • U.S. -2.0%
  • Europe -0.7%
  • APMEA -5.8%


EPS Estimates are too Aggressive

Consensus currently expects MCD to report flat sales and earnings growth in 3Q14.  This looks aggressive, however, considering system-wide sales declined -0.5% in July and are likely to be down again in August.  Flat sales growth is too optimistic and, given the negative leverage inherent in the business model, reporting a flat EPS number is also unlikely.


The street expects MCD to post $1.52 in earnings in 3Q14 after posting the same number last year.  It also expects MCD to post 1.4% EPS growth in 4Q14.  Both of these numbers are, in our view, aggressive.


With a recovery, albeit minor, built into 4Q14 estimates, the trend line is expected to accelerate to 8% EPS growth by 1Q15 and stay at that run-rate for the remainder of 2015.  We often hear the bulls cite easy comparisons to defend their optimism, but the reality is we've been hearing that for several years.  2014 was a time of easy comparisons for the company and it isn't close to hitting estimates published at the beginning of the year.


From our perspective, management isn't willing to take the necessary steps to fix the business and, until this happens, we expect MCD to consistently underperform expectations.


MCD: Why We Are Short - 1


Risk/Reward Setup Suggests the Stock Is a Short

MCD is currently trading at 15.9x the NTM EPS of $5.87, but looks substantially more expensive when assuming that $5.87 is far too aggressive.  Barring some unexpected event, the odds that MCD delivers 8% EPS growth in FY15 are slim-to-none.


We believe that in 2014 MCD could report its first down year in EPS growth since 2002, as we expect full-year EPS to come in between $5.40-5.45 or 2-3% below the current consensus estimate.  More importantly, we suspect McDonald's will even struggle to grow EPS off of this lower $5.40-5.45 base.  As a result, our 2015 EPS estimate of $5.45 is nearly 10% below the current consensus estimate of $6.02.


MCD: Why We Are Short - 2


Looking out over the next six months, assuming a constant multiple of 15.9x on our NTM EPS estimate of $5.40 gives us an $85 stock representing approximately 9-10% downside from current levels.  We understand this is not a "major blow-up," but if the stock saw a little multiple compression (down to the 14-15x range) we're talking about 15-20% downside or about a $12-20 billion decline in market cap.


MCD: Why We Are Short - 3


Feel free to email or call with questions.


Howard Penney

Managing Director


Fred Masotta


Cartoon of the Day: Burn, Baby Burn!

Takeaway: Now that they've all cut to 0%, what happens when we go into the next global recession?

Cartoon of the Day: Burn, Baby Burn! - Draghi 09.04.2014

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Takeaway: Positive catalysts could continue recent share price momentum

Wall Street is on the way to digesting the Prestige acquisition. Where do we go from here?



Similar to many in the investment community, we believe the Prestige deal makes a lot of sense and this week’s stock price surge was warranted.  We had already highlighted a positive pivot for NCLH cruise pricing as a result of our survey two weeks to go.  As a result, consensus Q3 earnings of $1.08 looks beatable.  While the Q4 outlook is a little tenuous for the Caribbean, Prestige’s contribution will be evident.  Our synergy forecast is higher than guidance, making current 2015 EPS estimates look conservative.  We’re at $2.85 versus the Street at $2.62.


In this note, we focus on the important go forward issues related to the Prestige acquisition:




Strong yield growth


Prestige Cruise International has seen outstanding results the past 4 years due to strong yield growth stemming from an incredibly resilient luxury/premium consumer and the addition of a couple of new Oceania ships.  1H 2014 is off to a good start and we think 2H will be just as good or better; one catalyst is the end of the Insignia 2-yr charter this past April.  2015 should be a solid year as well.  The stability of their bookings due to a long lead time (up to 20 months in advance) bodes well for the brands, Regent and Oceania.


Expansion into Asia Pacific


With the acquisition of Prestige, NCL will have a presence in the emerging markets such as China.  Based on our analysis from proprietary sources, we believe Prestige’s Asia-Pacific exposure is about 15%, as calculated by estimated capacity days; if Australia itineraries are included, Prestige’s Asia-Pacific capacity of a % of total capacity would be in the 20%s.


While success is highly uncertain in such a market as China, NCL cannot afford to be left behind by RCL and CCL if their gambles pay off in 2015 and beyond.  Emerging markets’ cruise business has been growing faster than that in North America and a partnership with Prestige may help alleviate some concerns when NCL do decide to dip their toes in the nascent Asia-Pacific market.




Is the $25m considered too conservative?  With $25m in synergies, the NCL-Prestige combo would generate 7% EPS accretion in 2015.  We think this is low-hanging fruit and synergies of $40m in 2015 would not be an aggressive target with an additional $20m of synergies in 2016.  




We believe most of the cost synergies will lie in corporate overhead efficiencies and better port contracts.  As outlined in their presentation, other cost synergy opportunities include customer acquisition costs, purchasing/distribution, fuel, and payroll.  Furthermore, according to Norwegian, Prestige has much room to improve on fuel costs.


Some revenue synergies could include:   1) Norwegian should be able to cross market Prestige’s established customer base to help grow The Haven concept.  2) Affluent couples who cruise on Oceania and Regent may consider Norwegian when thinking of a family vacation with kids.  3) Pride of America’s Hawaiian business may become stronger due to changes in marketing tactics.




Genting HK can still sell their shares at any time.  It appears that Genting was fine with the deal - not expressing overwhelming support for the addition of Prestige or discontent at the dilution that comes from the new equity offering (20.3m shares).  Pro-forma ownership is as follows:  Genting HK (25%), Apollo (25%), TPG: 7%, Public shareholders (43%).  Only the 20.3m new shares are locked up until end of 2015.  The Genting overhang is real but probably mostly priced in.


We applaud management for structuring this deal with Prestige.  It sets Norwegian on a different trajectory of growth and more importantly, gives it influence in competing in two areas where it has been largely absent—the premium/luxury consumer and the emerging markets.  Accretion is always nice too.


This acquisition does not eliminate the concerns currently surrounding NCLH, which include the prevailing weakness and new competition in the Caribbean, volatile new ship premiums and the risk of Genting/other private equity owners selling shares.


Nevertheless, we believe this deal is a good one and is an example of Norwegian’s long-term commitment to fast growth.  On a valuation basis, NCLH is the cheapest in the industry at 13x 2015 P/E (RCL: 14x, CCL: 16x), even after the recent move higher.


Takeaway: The sequential directional change in NFP is the same as ADP 64% of the time. We (still) don't pretend to have an edge on the monthly NFP #.

CAN I GET YOUR NUMBER?  We’re frequently asked  “what’s your number?” as it relates to the monthly NFP release. 


The short answer is that we don’t pretend to have an edge on the BLS employment figures. 


The regional Fed and PMI surveys offer some insight as does the ADP release and, with NFP being a net number, the trend in initial claims tells us something about the separations side of the Net Hires = job findings + job separations side of the equation, but we haven’t been able to generate a predictive model to forecast the NFP number with conviction on a month-to-month basis… we don’t.    


'Ya Get What You Get (& Don't Get Upset):  The current price/quant signals and our TREND view on domestic fundamentals generally drives our positioning into the number and we simply take what BLS gives us on jobs day and respond accordingly. 


In truth, we find the myopia and manic speculation surrounding the 1st Friday release pretty amusing.  The trend in the employment data is obviously important, but we’re paid to take high probability macro swings.  Making a convicted, precision “call” on an estimate subject to significant seasonal impacts, revisions and a standard error of +/- 50K doesn’t seem like a high probability swing.


ADP vs. NFP vs CLAIMS:  That said, below we show the directional change in the ADP and Initial Claims series vs the directional change in the NFP data.  Over the 2001-Present period (n = 160 months),  the sequential, directional change in NFP is the same as that of the ADP series 64% of the time.  The directional change in NFP vs Initial claims is correct 42% of the time (note: here we are using the claims level during the week that corresponds to the week the BLS conducts its monthly establishment survey).


So, for the NFP tea-leafers….the ADP series has been the better predictor of the NFP figure, being directionally correct ~2/3 of the time.  The ADP report for August released this morning showed the sequential change in net payroll adds declined a modest -8K to +204K from a downwardly revised July total of +212K (revised down from +218k).


The current Bloomberg estimate for August Nonfarm payrolls is +230K, up sequentially from the +209K reported in July.  By the numbers, the sequential decline in net payroll gains reported by ADP this morning suggests taking the other side of consensus and the 2:1 asymmetry into the print tomorrow


(HEDG)EYE-CANDY:  ADP vs. NFP vs. CLAIMS - NFP vs ADP   Initial Claims



Joshua Steiner, CFA


Christian B. Drake

Draghi Surprises With A Rate Cut! QE Ahead?

EUR/USD falls on the announcement of rate cuts and credit easing programs. However, it’s not clear to us that this will necessarily be a catalyst to ignite European economic activity.  


Investment Recommendations:  short EUR/USD (FXE); Long GBP/USD (FXB)


Key Take-Aways from today’s ECB Meeting:

  • ECB Head Mario Draghi surprised the market with rate cuts and the EUR/USD is trading sub $1.30 intraday. We remain short the cross via the etf FXE - quantit. broken TREND ($1.33) and TAIL ($1.34)
  • Draghi’s policy outlook remains dovish and accommodative
  • The market’s QE expectations remain elevated, however Draghi’s focus in today’s meeting (and perhaps to reset accelerated QE timing expectations following Jackson Hole) included announcing the ECB’s intention to purchase ABS (no formal size mentioned) and issuing a covered bond purchasing program (details on this program will be announced after the ECB’s next meeting on October 2nd)
  • Draghi signaled he wants to return the ECB balance sheet to 2012 -  the package to “lever up” now includes today’s policy program announcements, the previously announced TLTROs (scheduled for issuance in late September and December), and eventually QE?
  • ECB staff macroeconomic projections for September show downward revisions to the GDP and inflation outlook for the Eurozone (and in-line with our expectations and building on  downward revision in the June outlook)
  • Despite cutting main rates to near zero and deposit rates to negative first in June, the policy move has not lead to increased lending to businesses that are willing to invest in and grow the European economy. This will remain Europe’s great challenge over at least the medium term

Draghi Surprises With A Rate Cut!  QE Ahead? - T. EUR USD

Draghi Surprises With A Rate Cut!  QE Ahead? - t. BALANCE SHEET

What was delivered in cuts? The cuts to the main interest rate were largely unexpected by the market. In the Q&A Draghi attempted to anchor expectations that there would be no further cuts over the medium term (also not a big surprise since we’re already at or below the zero bound) to encourage participation in upcoming bond purchasing programs.

  • Benchmark Rate: cut from 0.15% to 0.05% (0.15% est.)
  • Marginal Lending Facility: cut from 0.40% to 0.30% (0.40% est.)
  • Deposit Facility: cut from -0.10% to -0.20% (-0.10% est.)

Draghi Surprises With A Rate Cut!  QE Ahead? - t. RATES


The updated [SEPT] ECB Staff Macroeconomic Projections show further slowing to the outlook (vs JUN):


Growth Projections:  +0.9% in 2014 vs +1.0% in June; +1.6% in 2015 vs +1.5% prior; +1.9% in 2016 vs +1.8% prior


Inflation Projections:  +0.6% in 2014 vs +0.7% June; +1.1% in 2015 (in-line); +1.4% in 2016 (in-line)



Other Press Conference Mentions

  • QE was discussed – some council members in favor of doing more, others doing less
  • BlackRock has been hired by the ECB to help structure an ABS purchase program. No size was mentioned, and Draghi did not substantiate a leaked report earlier in the week that called for a program worth up to €500B
  • Draghi underlined the drag from Unemployment across the region  (currently at 11.5%) and highlighted the slack in the economy as a drag on ECB staff projections
  • He stressed the importance of fiscal consolidation at the state level


Hedgeye’s Bearish Bias Remains

  • Weeks and months of declining data across the region continue to fuel our bearish outlook on the Euro area
  • While QE has proven to put a floor in equities in the past, QE is far from the elixir to inflect weak and declining fundamentals across the region.  Witness Japan’s failed efforts with QE!
  • While on the margin Draghi’s credit easing programs should help to encourage lending and therefore growth to the real economy, the failure of past LTROs to improve lending conditions are fresh in memory. This time may in fact not be different
  • We reiterate that inflation (via currency debasement) is not growth, even if Draghi showers us with QE
  • From here our propriety GIP model (growth, inflation and policy) for assessing economies suggests the Eurozone economy will land in the ugly quads #3 and #4 in 2H, representing growth slowing as inflation decelerates/accelerates.

Draghi Surprises With A Rate Cut!  QE Ahead? - T. loans

Draghi Surprises With A Rate Cut!  QE Ahead? - EUROZONE


Matthew Hedrick


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20 Proprietary Risk Ranges

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