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October 22, 2014

October 22, 2014 - 1

 

BULLISH TRENDS

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BEARISH TRENDS

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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 22, 2014


As we look at today's setup for the S&P 500, the range is 117 points or 5.73% downside to 1830 and 0.29% upside to 1947.                                              

                                                                                 

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.85 from 1.86
  • VIX closed at 16.08 1 day percent change of -13.41%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Oct. 17 (prior 5.6%)
  • 8:30am: CPI m/m, Sept., est. 0.0% (prior -0.2%)
  • 10:30am: DOE Energy Inventories
  • 5pm: Reserve Bank of Australia’s Stevens speaks in Sydney

 

GOVERNMENT:

    • Sec. of State John Kerry visits Berlin
    • Senate, House out of session
    • 10am: SEC holds open meeting on rules relating to credit risk retention by securitizers of asset-backed securities
    • 3:30pm: Fed board holds open meeting to discuss final rulemaking requiring sponsors of securitization transactions to retain risk in those transactions
    • U.S. ELECTION WRAP: Paul’s Prediction; Terror Ads; PAC Showdown

 

WHAT TO WATCH:

  • Yahoo Pushes Back Against Activist Starboard as Sales Gain
  • Daimler Sells Stake in Tesla as Powertrain Supply Deal Continues
  • Dimon Says ‘Terrifying’ Cancer Hasn’t Changed His JPMorgan Plans
  • J&J Sees 250,000 Ebola Vaccine Doses Ready for Trials in May
  • Target CEO Eyes Holiday Turnaround With Free Shipping, Faux Fur
  • Icahn Says EBay Should Pursue PayPal Sale Now in Spin Dual Track
  • GT Advanced Allowed to Wind Down After Deal With Apple
  • Apollo to Raise $2b-$3b From New Natural Resources Fund: Reuters
  • Michigan Governor Signs Bill Securing Tesla Direct Sales Ban
  • BOE Split on Key Rate as Majority Sees Heightened Euro-Area Risk
  • Total CEO Will Contend With Production Slump as Pouyanne Tipped
  • Heineken Revenue Misses Analyst Estimates as Europe Wanes

 

AM EARNS:

    • Abbott Labs (ABT) 7:44am, $0.60 - Preview
    • Amphenol (APH) 8am, $0.57
    • Biogen Idec (BIIB) 6:45am, $3.49 - Preview
    • Boeing (BA) 7:30am, $1.97 - Preview
    • Boston Scientific (BSX) 7am, $0.20 - Preview
    • Dow Chemical (DOW) 7am, $0.67 - Preview
    • EMC (EMC) 6:53am, $0.46 - Preview
    • FNB (FNB) 8:30am, $0.21
    • General Dynamics (GD) 7am, $1.91 - Preview
    • Gentex (GNTX) 8am, $0.47
    • Hudson City Bancorp (HCBK) 8am, $0.06
    • Ingersoll-Rand (IR) 7am, $1.03
    • Interpublic Group (IPG) 7am, $0.21
    • Lumber Liquidators (LL) 7am, $0.67
    • New York Community Bancorp (NYCB) 7am, $0.26
    • Norfolk Southern (NSC) 8am, $1.83 - Preview
    • Northern Trust (NTRS) 7:30am, $0.87
    • Northrop Grumman (NOC) 7am, $2.13 - Preview
    • Owens Corning (OC) 7:28am, $0.48
    • Polaris (PII) 6am, $2.02
    • Popular (BPOP) 8am, $0.67
    • Ryder System (R) 7:55am, $1.63
    • SEI Investments (SEIC) 8:30am, $0.47
    • Simon Property (SPG) 7am, $0.84 - Preview
    • Stanley Black & Decker (SWK) 6am, $1.44
    • Thermo Fisher Scientific (TMO) 6am, $1.69 - Preview
    • Tupperware Brands (TUP) 7am, $0.91
    • UniFirst (UNF) 8am, $1.31
    • US Bancorp (USB) 7:15am, $0.78
    • Xerox (XRX) 7am, $0.26

 

PM EARNS:

    • A Schulman (SHLM) 4:10pm, $0.64
    • Albemarle (ALB) 4:03pm, $1.02
    • Angie’s List (ANGI) 4:02pm, ($0.07)
    • AT&T (T) 4:01pm, $0.64 - Preview
    • Brandywine Realty (BDN) 4:15pm, $0.02
    • CA (CA) 4:05pm, $0.62
    • Cheesecake Factory (CAKE) 4:15pm, $0.57
    • Citrix Systems (CTXS) 4:05pm, $0.73
    • Core Laboratories (CLB) 4:06pm, $1.52
    • CoreLogic (CLGX) 4:10pm, $0.39
    • Covanta Holding (CVA) 4:01pm, $0.21
    • CR Bard (BCR) 4:05pm, $2.10
    • Equifax (EFX) 4:15pm, $0.98
    • Everest Re (RE) 4:05pm, $4.99
    • Fortinet (FTNT) 4:15pm, $0.11
    • Graco (GGG) 4:15pm, $0.95
    • Lam Research (LRCX) 4:05pm, $0.93
    • Leggett & Platt (LEG) 4:05pm, $0.49
    • NXP Semiconductor (NXPI) 8pm, $1.31
    • O’Reilly Automotive (ORLY) 6:30pm, $1.95
    • Plexus (PLXS) 4pm, $0.78
    • Polycom (PLCM) 4:05pm, $0.20
    • Select Comfort (SCSS) 4:01pm, $0.40
    • ServiceNow (NOW) 4:05pm, $0.01
    • SLM (SLM) 5:15pm, $0.17
    • Susquehanna (SUSQ) 4:30pm, $0.20
    • Teradyne (TER) 5:01pm, $0.40
    • Torchmark (TMK) 4:01pm, $1.02
    • Tractor Supply (TSCO) 4:01pm, $0.50
    • Varian Medical (VAR) 4:05pm, $1.21
    • Weatherford (WFT) Aft-mkt, $0.33
    • Yelp (YELP) 4:05pm, $0.03

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Retreats From Six-Week High on Demand Outlook to Dollar
  • Tin’s New Frontier Myanmar Threatens Indonesia: Southeast Asia
  • Zinc Rises as Inventories at Two-Month Low Support Shortage Call
  • India Eschewing Raw Sugar Output After Export Aid Withdrawn
  • WTI Oil Climbs as U.S. Fuel Supply Seen Lower; Brent Advances
  • China Sept. Nickel Ore Imports From Philippines 4.52 Mln Tons
  • Steel Rebar Falls to 2-Week Low as China Supply Exceeds Demand
  • European Gas Traders Boost Near-Term Buying to Cut Russian Need
  • UD Group Plans to Apply for Membership on London Metal Exchange
  • Cocoa Arrivals in Brazil’s Bahia Advance 3.5%, Hartmann Reports
  • Rubber Rises to 6-Week High as Thai Efforts Offset China Concern
  • Zinc Rises From 3-Month Low Before China PMI Data: LME Preview
  • Truffle Boom Brings La Dolce Vita Amid Italy’s Economic Slump
  • Nickel Surplus Was 4.7Kt in August in Second Month of Oversupply

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING

Takeaway: China’s 3Q/SEP economic data confirms our view that global growth is slowing and will likely continue to slow through at least year-end.

Contextualizing China’s 3Q GDP Print

This we know: Chinese economic data is, at best, massaged and, at worst, fabricated (as confirmed by Chinese Premier Li Keqiang years ago). In fact, we’d argue Chinese economic data is probably about as massaged as any pre-election Jobs Report is likely to be in the US!

 

Still, in the context of our process of focusing primarily on slopes, inflections and deltas when analyzing economic data, we are more than happy to compare any data point to the previous data point(s), so long as the data series itself is methodologically consistent.

 

In that light, it doesn’t matter to us if China’s “actual” real GDP growth is +7.3% YoY (NBS for 3Q14) or the +3.9% forecasted by the Conference Board’s 2020-2025 Chinese growth outlook. All we care about is any directional deviation from trend – which is what actually matters to investors, per the preponderance of Dr. Daniel Kahneman’s work in the field of behavioral economics (e.g. anchoring, prospect theory, etc.).

 

From that perspective, China’s 3Q14 real GDP growth rate of +7.3% is:

 

  • The slowest rate of change since 1Q09;
  • Is -1.1 standard deviations from its trailing 3Y average; and
  • Is in the 5th percentile of readings on a trailing 10Y basis.

 

4Q Looks Dour as Well

From a forward-looking perspective, a marginally difficult base effect, slowing sequential momentum and seasonality are all supportive of continued trend-based slowing in the preponderance of China’s reported growth data here in 4Q – whatever underlying unit demand may be.

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - CHINA

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - China GDP Seasonality

 

Diving deeper into the aforementioned point regarding slowing sequential momentum, our analysis of the data shows a Chinese economy continuing to lose steam without a meaningful enough change in either monetary or fiscal policy to support any semblance of a sustained inflection (i.e. 2-3 months or more).

 

For example:

 

  • As of mid-OCT, the 2M moving average of the arithmetic mean of the YoY % change in monthly average iron ore, rebar and coal prices – our favorite real-time indicator for the slope of Chinese growth – continues to crash on a YoY basis and is decelerating versus its trailing 3M, 6M and 12M trends.
  • As of SEP, China’s headline PMI data and each of its 10 sub-indices are decelerating versus their respective trailing 3M trends. China’s trade balance tells a similar tale; it too is decelerating both sequentially and versus its trailing 3M and 6M trends.
  • As of SEP, various measures of “hot money” capital flows are decelerating both sequentially and versus their respective trailing 3M, 6M and 12M trends.
  • The NBS’s Business Cycle Signal Index, Coincident Economic Indicator, Consumer Confidence Index and Leading Economic Indicator each decelerated sequentially in SEP.
  • As of SEP, growth in retail sales has decelerated both sequentially and versus its trailing 3M, 6M and 12M trends. This is especially troubling considering the fact that household consumption has overtaken investment amid structural rebalancing efforts (“C” = 48.5% of GDP in the YTD vs. 41.5% for “I”).
  • In the YTD through SEP, growth in fixed assets investment decelerated both sequentially and versus its trailing 3M, 6M and 12M trends.
  • On the positive side of the ledger, growth in exports, FDI, imports, industrial production and total social financing has accelerated both sequentially (in SEP) and versus their respective trailing 3M trends.

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - China Iron Ore  Rebar and Coal YoY vs. GDP

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - CHINA High Frequency GIP Data Monitor

 

Looking to the Chinese property market – which accounts for ~15% of Chinese GDP directly and materially affects some 40 industries – our analysis shows continues weakness there as well:

 

  • As of SEP, growth in the availability of funding in the real estate sector decelerated both sequentially and versus its trailing 3M, 6M and 12M trends.
  • As of SEP, growth in both the nominal value and square footage of property purchases decelerated sequentially and versus their respective trailing 3M, 6M and 12M trends.
  • Contrast this with growth in both starts and completions having accelerated sequentially in SEP and versus their respective trailing 3M and 6M trends, and it’s easy to assume a dour outlook for Chinese property prices.
  • Speaking of, growth in Chinese property prices across all tiers of cites decelerated both sequentially in AUG and versus their respective trailing  3M, 6M and 12M trends. Data from the China Real Estate Index System confirms a continued slowdown in SEP where average home prices across the 100 largest cities decelerated to +1.2% YoY from a gain of +3.2% in AUG. The -0.9% MoM decline recorded in SEP ‘14 is the steepest drop since the survey began back in 2010.
  • All of this rhymes with the latest Real Estate Climate Index reading of 94.8 in AUG, which represented a deceleration from both a sequential perspective and versus its trailing 3M, 6M and 12M trends.

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - CHINA Property Market Monitor

 

Again, it’s important to note that our daily analysis of official rhetoric via mainland press continues to suggest that no major stimulus initiatives are coming down the pike. Mortgage policy continues to ease, at the margins, but not in a material enough way to inflect the broader growth outlook; oversupply, rather than a lack of demand, is actually the key issue facing China’s housing market going forward.

 

For an even deeper dive into China’s Growth/Inflation/Policy outlook, please review our 9/30 note titled, “DEFCON 2.5: THE “CHINA OVERHANG” IS LIKELY TO CONTINUE”.

 

Parting Thoughts

All told, the inclusion of today’s growth data and its associated policy rhetoric (the NBS actually talked up the 3Q GDP figure, saying it fell within their so-called “reasonable range”) is just more of the same as Chinese policymakers attempt to gradually walk the mainland economy “down the ledge” of overcapacity and systemic indebtedness, as opposed to allowing it to “fall off a cliff”.

 

It’s worth noting that our views on the Chinese economy and the policy that drives it haven’t changed all that much since we correctly forecasted the aforementioned approach over three years ago. As such, we continue to think that estimates of marginal Chinese demand should continue to decline for the foreseeable future.

 

With #ChinaSlowing (15% of marginal global demand in 2013), #JapanSlowing (5% of marginal global demand in 2013), #EuropeSlowing (18% of marginal global demand in 2013), and #USSlowing (17% of marginal global demand in 2013) all at once, what could possibly go wrong?

 

DD

 

Darius Dale

Associate: Macro Team


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EAT: Earnings Recap

Brief Analysis: We removed EAT from our Investment Ideas list as a short on October 9th, 2014.  We thought this was a prudent move given the current sales momentum we are seeing across the restaurant industry.  To be clear, we wanted to get the 1QF15 release out of the way, and were mistaken in doing so.  Brinker's comp sales outpaced both Knapp and Black Box by notable margins and surpassed consensus expectations, but weren't strong enough to drive enough leverage through the P&L.  In addition, two-year average comps and traffic declined sequentially, suggesting that management is not doing enough to move the needle.

 

Brinker has prided itself over the past four years on methodically driving operating leverage in their business model, but we believe these days are abruptly coming to an end, even despite management's decision to maintain guidance for a 25-50 bps improvement in restaurant operating margin in FY15.  We believe this will be difficult to achieve and think management is (almost solely) relying on cost of sales to moderate for this to happen.

 

Despite covering our short a couple of weeks ago, our short thesis has not changed.  In fact, if anything, our conviction in it has strengthened.  Unfortunately, we missed today's move, but we'd be looking to short the name once again into any strength.  We think the margin story is played out here and management will be hard pressed to drive leverage moving forward.  The street is banking on the FY16 free cash flow story to come through for them as capex begins to wind down.  We suspect, however, that this will disappoint as management is forced to allocate additional dollars to reinvest in the business.

 

Comps: Brinker delivered system-wide comp growth of +2.4%.  Chili's company-owned comps grew +2.6%, comprised of +1.8% of pricing, +0.7% of mix-shift and +0.1% of traffic.  Traffic, while positive for the first time in the past seven quarters, saw its two-year average decline 30 bps sequentially to -1.7%.  Total revenues of $711.018 million (+3.84% y/y) beat consensus estimates by 25 bps.

 

EAT: Earnings Recap   - 1

 

EAT: Earnings Recap   - 2

 

EAT: Earnings Recap   - 3

 

Margins: Cost of sales declined 28 bps y/y driven by favorable menu pricing, menu item changes, efficiency gains from new fryers and improved waste control.  However, significant pressure from beef, cheese, avocados, and seafood resulted in significantly lower leverage than management had anticipated.  Labor costs increased 18 bps y/y driven by higher bonuses and increased wage and payroll taxes, partially offset by lower health insurance expenses.  Restaurant expenses increased 30 bps y/y driven by equipment charges associated with tabletop tablets and higher credit card fees.  As a result, restaurant margins declined approximately 30 bps in the quarter.  Management reaffirmed its guidance for a 25-50 bps improvement in this line in FY15.

 

Earnings: Adjusted EPS of $0.50 (+16.3% y/y) fell in-line with expectations.

 

What We Liked:

  • Respectable system-wide comp growth of +2.4%
  • Chili's comps outpaced Knapp and Black Box by 210 bps and 100 bps, respectively
  • Reimage program is about 90% complete
  • Installation of Kiosk tablets in all franchise restaurants will be completed next month
  • Repurchased 1.1 million shares for $53.3 million in the quarter; repurchased another 712,000 shares for $37 million since then, bringing the outstanding share authorization down to $576 million
  • Announced a 17% increase in quarterly dividend from $0.24 to $0.28

What We Didn't Like

  • Two-year average traffic declined 30 bps sequentially to -1.7% at Chili's
  • International franchise comps were down -0.5% driven by soft sales in Puerto Rico
  • Menu innovation hasn't really moved the needle on traffic
  • Restaurant level margins down despite a fairly strong comp
  • Food costs will likely continue to present a challenge for management given their unpredictable nature
  • Seemingly little to no leverage left on labor cost and other restaurant expenses lines

 

Call or email with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Cartoon of the Day: Absolute Zero

Cartoon of the Day: Absolute Zero - 0  cartoon 10.21.2014

 

You can thank your unelected central planners for zero interest rate policy for the foreseeable future.

 

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Selling Opportunity: SP500 Levels, Refreshed

Takeaway: There have been some fantastic selling opportunities in 2014. This looks like one of them.

I’m on the road today seeing investors in NYC and I am trying to explain what just happened in the last month in the most simple terms I can. “So” here’s the summary:

 

  1. Consensus chased the all-time #bubble high in SEP to > 2011 SPX
  2. Then freaked out and sold low (130-150 handles lower) last week
  3. And is now chasing a no-volume bounce to lower-highs, saying last week was the “bottom”

 

I for one have a harder time getting from its “it’s not a bubble”, to the fetal position, to “we’ve bottomed” (in 3 weeks) but that’s just me!

 

In terms of levels, here are the lines that matter to me most:

 

  1. Intermediate-term TREND resistance = 1967
  2. Immediate-term TRADE resistance = 1943
  3. Immediate-term TRADE support = 1830

 

Oh, and that’s with an immediate-term risk range for the VIX of 15-29! In other words, if the SPX were to drop over 100 points, in a day (from here), I’d consider that within the band of probable outcomes at Hedgeye.

 

There have been some fantastic selling opportunities in 2014. This looks like one of them.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Selling Opportunity: SP500 Levels, Refreshed  - SPX


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