“Too close for missiles, I’m switching to guns.”
As a Thunder Bay boy with a lot of testosterone growing up in the 80’s, there weren’t many movies that beat Top Gun. Admittedly, I’m a little competitive, so pardon my passion this morning – “Goose, it’s time to buzz the tower.”
“The son of a bitch cut me off!” in telling the world my call on the Long Bond (TLT) is wrong yesterday. I don’t know the guy, so it’s not personal. I just flat out disagree. That guy, you know – the New Jersey Consensus TV folks love him. His name is Tepper.
Tweeters say that David Tepper A) has a lot more money than me and B) has killed it on the levered long side since 2009. He also flamed out in 2008 (down -29.61%), so on his rising rates call, I think he’s beatable. “I think I’ll go embarrass myself with Goose now.”
Back to the Global Macro Grind…
What we need in this game is more head to head debate. Pro to pro. When someone flips me off with the other side of my position, I want to crush him. I don’t care how much he’s worth or what he’s wearing. I wear a $29.99 watch from WalMart, and I like it.
While I’d love to debate Tepper live on interest rate risk (which I still think is to the downside), the reality is that probably won’t happen. (if you know him and he’s game however, I have a nice little 2.0 studio in Stamford called @HedgeyeTV).
Debating big macro topics isn’t personal. It’s what those of us who want to be the Top Gun wake up thirsting for at the top of every risk management morning. Last year I was making the call that rates would rise alongside both US growth expectations and the Fed being forced to taper. This year I reversed the call saying that rates would fall as y/y #inflationAccelerating slowed real US growth.
Yeah, sweet call Mucker. “Take me to bed or lose me forever.”
God didn’t call me with the rates call. My team and I made this call the old fashioned way, using our own models and process. When it comes to what other players out there think, we respect their airspace, but when we get in tight in a dog fight like this, we aren’t going to back down.
Here are 10 things to think about in terms of why rates are going lower (bonds higher) from here:
The biggest differentiator in our models versus those who were bearish on rates in 2013 (and bullish on them in 2014) is our rate of change forecasts on both growth and inflation.
I have stopped calling it our Growth, Inflation, Policy Model and renamed it our PIG model (same factors, in reverse). Why? Because un-elected central planners are pigs when it comes to devaluing the purchasing power of The People in exchange for asset inflation.
To review how all 3 (Fed, ECB, BOJ) of these central planning committees think:
Top 2 headlines on Bloomberg (Economy Go!):
Aso, as in the one who tore the Japanese people a new one via the Abenomics Policy To Inflate that took Japanese Real Wages to -4-5% year-over-year. Then they blamed the weather. #Nice
If the USA shows as much as a sniffle in this morning’s jobs report, what do you think Yellen’s response is going to be? Tighter or easier? We’re one or two bad labor headlines away from the US doing exactly what Draghi just did.
Unlike Tepper, I fly commercial. But I can still change my position whenever I want. For now, if I am right on growth slowing and the Fed’s proactively predictable reaction to it, Janet is going to be my Japanese wing-woman on bonds.
Out immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.32-2.46%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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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.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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:
Currently, 3Q14 consensus estimates by segment are:
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 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.
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.
Feel free to email or call with questions.
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