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Cartoon of the Day: Super and Stupor

Takeaway: Hedgeye reiterates its long bond call (in $TLT terms), and to stay away from small caps.

Cartoon of the Day: Super and Stupor - Super TLT 10.1.14


Expect Euro Doves Tomorrow

This note was originally published October 01, 2014 at 11:13 in Macro

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

 

One of our fourth quarter Macro Tthemes 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, Macro team


10-Second Takeaway: Adidas is in Denial About Why It's Losing Share

Takeaway: Adidas is failing to drive the culture of the company.

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

  • "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."
  • Read more at Reuters (http://uk.reuters.com/article/2014/09/29/uk-adidas-germany-insight-idUKKCN0HN0B720140929).

 10-Second Takeaway: Adidas is in Denial About Why It's Losing Share - adidas

10 SECOND HEDGEYE RETAIL 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.  

 

Bottom Line: 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.

 

10-Second Takeaway: Adidas is in Denial About Why It's Losing Share - rita ora


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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

 



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