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Expect Euro Doves Tomorrow

The ECB meets tomorrow to announce interest rate policy. While we expect that the rate cuts are behind us for the year, expect dovish commentary from ECB President Mario Draghi around the release of the bank's definition of the ABS purchase program as he tip toes around questioning on a (sovereign) QE program.

 

The data since last month’s meeting has only gotten worse:  Eurozone Manufacturing PMI was down in today's final reading at 50.3 (to a 14 month low) versus expectations of 50.5 and the initial reading of 50.5.  Additionally, yesterday’s release of initial September Eurozone CPI showed a 10bp decline to 0.3% Y/Y, suggesting to us that Draghi’s timetable of action may continue to be shortened as he battles to inflect disinflation.

Expect Euro Doves Tomorrow - zzz. eurozone pmi manu

 

On positioning, the EUR/USD has hit our immediate term TRADE oversold level of $1.26. From here we’ll be watching to see what Draghi delivers tomorrow, however the cross is squarely signaling bearish with its intermediate term TREND ($1.32) and long term TAIL ($1.34) duration levels broken.

Expect Euro Doves Tomorrow - vvv. EURusd

 

We encourage you to join our Q4 Macro Themes call tomorrow at 1pm EST. One of our themes includes #EuropeSlowing, which we sum up as:

  • Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth. 

Matthew Hedrick
Associate


PBPB: Closing Best Idea Short

We added Potbelly Corporation (PBPB) to our Best Ideas list on 11/19/2013 at $28.15/share.  Since this time, FY14 EPS estimates have been revised down from $0.39 to $0.19 and the share price has acted accordingly (down ~60%).  With this note we are removing short PBPB from our Best Ideas list.

 

PBPB still has issues that give us cause for concern, but we feel our short thesis is largely played out.  At 9.6x EV/EBITDA (NTM), the stock screens rather attractively relative to other restaurant companies and will begin rolling over some fairly easy comps following 3Q14.  We believe FY14 and FY15 EPS estimates of $0.19 and $0.25, respectively, are reasonable despite the fact that we are yet to see management deliver tangible same-store sales drivers.

 

Considering a more reasonable valuation, reset expectations, and high short interest (~34% of float), we believe the short setup is no longer favorable from a risk/reward perspective.   Our move to the sidelines, however, does not make us fans of the stock.  Declining same-store sales, traffic, margins and AUV's continue to be red flags.  Our biggest issue with the company, however, is its decision to relentlessly pursue a questionable growth strategy (12-15% unit growth in FY14) when the fundamentals suggest it shouldn't be growing at all.  The one scenario under which we'd expect to see notable downside from here is if management were to significantly slash projected new unit growth, and we've seen no signs of this happening.

 

We continue to believe 2016 EPS estimates of $0.60 are too aggressive, but that is much further out.  Staying short today at these levels is no longer compelling.

 

Research Recap:

PBPB: Staying Short (07/10/2014)

Investment Ideas: Shorts (04/16/2014)

PBPB Lays an Egg (02/19/2014)

PBPB: Not Worthy of the Multiple (11/19/2013)

Potbelly (PBPB): The Latest Restaurant IPO (09/19/2013)

 

PBPB: Closing Best Idea Short - 10 1 2014 10 26 35 AM

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


3Q Demand Goes Out With A Whimper

Takeaway: Purchase activity in 3Q14 fell -6.2% QoQ with demand, as measured by the MBA, retreating to its lowest level since 2Q95

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. 

 

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.

 

3Q Demand Goes Out With A Whimper - Compendium

 

Today's Focus: MBA Mortgage Applications & August Construction Spending

 

MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended September 26th. 

  • Mortgage Applications fell -0.2% as Purchase demand was flat sequentially and refi activity declined -0.29% despite the dip in rates. 
  • Purchase Applications:  Purchase volume was unchanged WoW as the index held below the 170-level for a 12th consecutive week.   Purchase Activity declined -6.2% QoQ as demand declined to its lowest level since 2q of 1995.   On a year-over-year basis, purchase applications improved to -10.9% from -15.9% prior as we lapped the last hard compare of the year.  From here, the YoY comps remain negative and get progressively easier through the balance of 2H.
  • Refinance activity declined -0.2% as rates on the 30Y FRM contract dropped -6bps to 4.33%.  On a year-over-year basis Refi volume worsened for a second week to -33.6% YoY despite increasingly easy compares.

3Q Demand Goes Out With A Whimper - Purchase   Refi YoY

 

3Q Demand Goes Out With A Whimper - Purchase Qtrly

 

3Q Demand Goes Out With A Whimper - Purchase LT w Summary stats

 

3Q Demand Goes Out With A Whimper - Composite LT w Summary stats

 

 

CONSTRUCTION SPENDING (AUG)

 Total Construction spending slowed -0.8% MoM in August with July revised down -60bps to +1.2%.   

 

The first estimate for private residential construction showed spending slowed -0.1% MoM while decelerating on both a 1Y and 2Y basis.   Expenditure growth slowed across each of Single-family, Multi-family and Home Improvement categories with the 4th consecutive month of (accelerating) negative growth in home improvement the most notable.      

 

On the nonresidential side, construction spending on commercial, office and manufacturing structures remained strong in August although each slowed modestly sequentially.  The nonresidential construction numbers extend the solid growth in private investment in structures reported in 2Q GDP and continue to accord with both the strong C&I/CRE loan growth figures in the Feds’ H8 data and the positive senior loan officer commentary. 

 

3Q Demand Goes Out With A Whimper - Construction Spending Table

 

3Q Demand Goes Out With A Whimper - Resi Construction   of GDP

 

3Q Demand Goes Out With A Whimper - NonResi Construction   of GDP

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

  

Joshua Steiner, CFA

 

Christian B. Drake

 



the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Join Tomorrow: Q4 2014 Macro Themes Conference Call at 1pm EDT

Join Tomorrow: Q4 2014 Macro Themes Conference Call at 1pm EDT  - vv. q4 themes pic

 

We will be hosting our highly-anticipated Quarterly Macro Themes conference call tomorrow, October 2nd at 1:00pm EDT. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.

 

Q4 2014 MACRO THEMES OVERVIEW:

  • #Quad4: Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.
  • #EuropeSlowing: Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth. 
  • #Bubbles: The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes.  The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.
      

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 141367#
  • Materials: CLICK HERE (slides will download approximately one hour prior to the call)

Ping for more information.


Keith's Macro Notebook 10/1: Volume | Russell 2000 | UST 10YR


Retail Callouts (10/1): AdiBok, NKE, UA, Mobile Sales

Takeaway: Adidas is in denial. UA joins recent athlete endorsement incidents with Phelps arrest. AMZN and AAPL lead mobile.

COMPANY HIGHLIGHTS

 

ADIDAS IS IN DENIAL ABOUT WHY IT'S LOSING SHARE

AdiBok, NKE, UA - Adidas fights to draw top talent to headquarters in sleepy Bavarian town

(http://uk.reuters.com/article/2014/09/29/uk-adidas-germany-insight-idUKKCN0HN0B720140929)

 

  • "Adidas needs world-class designers, brand experts and technical whizz kids to improve its image against U.S. rival Nike, but persuading them to move to its headquarters in rural Germany is difficult. Adidas acknowledges it is hard to recruit at its headquarters near the Bavarian town of Herzogenaurach, particularly for design, marketing and digital roles, and admits it missed trends in the U.S. market, where Under Armour has just overtaken it as No. 2 behind Nike. Nike's better than expected earnings on Sept. 25 underscored its ascendancy."

 

Takeaway: Let's be clear about something, Adidas is not losing share because its headquarters is in a sleepy town. If anything we'd argue that its town is sleepy because the company is failing to drive the culture of the company. Nike is crushing it, and it's based in Beaverton, OR -- not exactly a cultural mecca. Yes, it's 20 min from Portland and a short drive to Seattle. But Adidas is a short drive from several major towns (as Adi CEO points out in this article), and it also has an office in Portland with 1,000 employees -- a good deal of them poached from Nike.   Our point here is that Adidas' problem goes far beyond where people hang their hat.  First it should look really close at its processes and ideals. Then it can worry about where the people that execute on them are physically located.

 

UA - Michael Phelps Arrested for DUI

(http://bleacherreport.com/tb/df3RQ?utm_source=newsletter&utm_medium=newsletter&utm_campaign=daily-radar)

 

  • "Michael Phelps was arrested for driving under the influence in Baltimore, Maryland"

 

Takeaway: We hate to call out something like this, but the fact of the matter is that with the string of bad behavior in professional sports over the past month, this event will garner special attention. Nike dropped both Adrian Peterson and Ray Rice after their 'incidents', though we'd be surprised to see UnderArmour take much action against Michael Phelps. He'll make a public apology, and say he'll never do it again -- just like when he caught his first DUI at 19 in 2004, and when he was caught smoking pot in 2009. He'll get a fourth chance.

 

Mobile Commerce Callouts

 

This ranking of the top mobile commerce players is interesting to us on many levels.  1) Amazon and Apple combined equal the next eight companies on the list in total sales volume. 2) Apple and Google Play make sense as having a high conversion rate (high traffic and low ticket), but Amazon's 7% is extremely impressive -- especially for a company with an $82 average ticket.  Average for the other retailers on the list is about 2%. 3) Sears is actually on the list of top 10, with an impressive 100% growth over last year. 4) Chinese mobile retailers have far superior ASPs than we have the US.

 

Retail Callouts (10/1): AdiBok, NKE, UA, Mobile Sales - 10 1 chart1

 Source: Internet Retailer

 

OTHER NEWS

 

AdiBok- ADIDAS AG TO INITIATE A MULTI-YEAR SHAREHOLDER RETURN PROGRAMME

(http://www.adidas-group.com/en/media/news-archive/press-releases/2014/adidas-ag-initiate-multi-year-shareholder-return-programme/)

 

  • "With approval of the Supervisory Board, the Executive Board of adidas AG resolved today to return up to € 1.5 billion in total to adidas AG shareholders over the next three years, primarily in the form of share buybacks. In addition, adidas AG confirms its stated commitment to pay an annual dividend to shareholders in the range of 20% to 40% of net income attributable to shareholders."

 

HIBB - Jared Briskin Promoted to Chief Merchant at Hibbett

(http://www.wwd.com/business-news/human-resources/jared-briskin-promoted-to-chief-merchant-at-hibbett-7961334?module=Retail-latest)

 

  • "Jared Briskin has been promoted to senior vice president and chief merchant of Hibbett Sports Inc., the Birmingham, Ala.-based sporting goods retailer."
  • "Briskin was most recently vice president and divisional merchandise manager of footwear and equipment and has been with the company for 16 years."

 

DLIA - Teen Retailer Delia's Seeks Buyer

(http://www.wwd.com/business-news/mergers-acquisitions/delias-inc-is-exploring-a-possible-sale-of-the-company-7960006?module=hp-topstories)

 

  • "With a stalled turnaround effort and moves to recapitalize the company failing to reverse its fortunes, Delia’s Inc. is looking for a buyer."

 

Boot Barn Files for IPO

(http://www.wwd.com/footwear-news/business/boot-barn-files-for-ipo-7961228?module=Footwear%20News-Business-main)

 

  • "The Irvine, Calif.-based retailer has filed with the Securities and Exchange Commission for an initial public offering."
  • "While no terms were given for the offering, the move could potentially raise up to $86.25 million. The company plans to list on the New York Stock Exchange under the symbol BOOT."

 

SHOO - Madden Acquires Mexico Business

(http://www.wwd.com/footwear-news/business/madden-acquires-mexico-business-7961047?module=Footwear%20News-Business-second)

 

  • "Steve Madden is buying up its Mexico-based licensee."
  • "Executives expect that the $15 million acquisition of SM Mexico, which distributes and markets Steve Madden product in wholesale and retail stores, will boost efforts to grow the brand's presence throughout the Mexican market."

 

SPLS - Staples launches nationwide tour to boost employee productivity

(http://www.retailingtoday.com/article/staples-launches-nationwide-tour-boost-employee-productivity)

 

  • "Staples has kicked off a nationwide tour called "Refresh. Recharge. Refuel." The tour aims to encourage office workers across the country to take a break from the daily grind by visiting a large-scale, popup break room stocked with free snacks, coffee and other beverages."

 

SPLS - Staples closes 15 stores in Canada

(http://www.theglobeandmail.com/report-on-business/staples-closes-15-stores-in-canada/article20867209/)

 

  • "Staples Canada has closed 15 of its 331 stores in this country as the office supplies retailer feels the brunt of more business shifting online."
  • "The closings are part of a broader move by U.S. parent Staples Inc. to shut as much as 12 per cent of roughly 1,800 North American stores and downsize others as it struggles to improve its bottom line in a fast-changing market."

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