YUM reported December comps for its China Division yesterday after the close. KFC comps (+5%), Pizza Hut comps (-3%), and total China comps (+2%) all missed expectations. Needless to say, it was a disappointing month. KFC, although missing expectations by 100 bps, was actually quite strong. Surprisingly, the majority of weakness came from Pizza Hut which missed expectations by 870 bps. There has been wide speculation that these two chains are seeing increased competition from local dining chains.
For the quarter, 4Q China Division (includes Sept., Oct., Nov., Dec.) comps (-4%) missed consensus estimates by 100 bps. All told, it was a disappointing end to the quarter. However, as we mentioned in our note last week, December sales numbers will not make or break our bullish thesis on YUM. The company has a substantial long-term growth opportunity in China as well as in other emerging markets.
Barring a material setback in China, we continue to expect outperformance throughout 2014. In our opinion, easy same-store sales comparisons, notable margin expansion, and positive earnings momentum will lead to multiple expansion over the next several quarters. The magnitude of this outperformance will depend heavily upon the trajectory of the recovery in China.
Client Talking Points
What made the most sense to me yesterday was USD Down = Rates Down = Stocks Down. That’s called the #GrowthSlowing trade. You will have to risk manage it in the coming quarters with #InflationAccelerating (which slows consumption growth). Meanwhile, the US Dollar failed our long-term TAIL resistance of $81.19 again. The Euro and Pound are both looking stronger. We stand behind our #Eurobulls macro theme!
The Nikkei no likey that whole Down Dollar, Up Yen move, eh? Japan down -3.1% as the Yen signaled immediate-term TRADE overbought versus the US Dollar in our model yesterday. Yen down -0.6% now on the day should mean Nikkei up tonight. So that gives me confidence being long the S&P 500 for the first time here in 2014. (I bought it on the bell in #RealTimeAlerts).
Another reason why I bought the S&P 500 and covered shorts into the close yesterday was VIX is under 14.91 resistance. That’s my TREND resistance line and SPX immediate-term TRADE oversold at 1817. So I'm simply sticking with the process, even though today’s Retail Sales print in the USA is likely another sequential #GrowthSlowing data point.
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Top Long Ideas
Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Three for the Road
QUOTE OF THE DAY
"There is real magic in enthusiasm. It spells the difference between mediocrity and accomplishment." -Norman Vincent Peale
STAT OF THE DAY
Is cable television’s heyday over? Subscribers have been declining since 2004. Roughly 54.8 million households currently pay for cable TV, down 3.3% from 2012 and down 17.6% from a decade prior, according to research firm IHS. Cable companies are expected to shed roughly 1.3 million subscribers in 2014.
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“A vigilant and well-informed press, setting forth the truth…”
-Doris Kearns Goodwin, The Bully Pulpit
But what, precisely, is the truth? The truth is that Ray Dalio asks the same question in order to explain his investment process (minus the words ‘but’ and ‘precisely’). It’s the same question you need to be asking yourself every market day.
The 20th President of the United States, James A. Garfield, wasn’t talking about markets when he said that “the truth will set you free, but first it will make you miserable.” But for this morning, let’s lie to ourselves and pretend he did. For me at least, it’s the truth!
The truth is that for the 1st day of 2014, US stocks down (yesterday) has captured the top (most read) headline on Bloomberg.com: “SP500 Falls Most Since November Amid Valuation Concern.” Only one part of that headline story is true. The “valuation” part is just an #OldMedia editorial. Well-informed market practitioners can do better than that.
Back to the Global Macro Grind…
Fresh off a feeding of our new born baby Lucy Taylor McCullough yesterday (she’s a beauty!), I walked upstairs to my post and bought-the-damn-bubble #BTDB into the US stock market close. Whether I was right or wrong in doing so isn’t the point. #Timestamps are truth.
Before I get into the why, I’ll just rehash the step by step process in terms of what I actually did:
1. After coming into the open with my first net neutral position of 2014 (8 LONGS, 8 SHORTS), I covered shorts
2. I didn’t cover any of these shorts on “valuation” (RRGB, MCD, LINE, F); I covered them because they were oversold
3. Then I waited, watched, and finally bought SPY on my signal at 3:38PM EST at $181.60
Having made every single mistake you can make in this game in buying things too early (which is typically followed up with excuses like, “but it’s cheap”), this time I actually took my time. Getting net longer on red should be a process, not an emotional episode in your life.
At Hedgeye there are 3 big parts to how we try to probability weight where Mr. Macro Market might move next:
On the #history front, contextualizing the emotion of yesterday’s final selling moments is easy – that was only the 3rd one-day decline of over 1% for the SP500 in the last 3 months:
1. November 7th, 2013 = -1.32%
2. January 14th, 2014 = -1.26%
3. December 11th, 2013 = -1.13%
In other words, that’s why the first part of this morning’s Bloomberg headline is true. It was the biggest US stock market down day since November 7th, 2013 when the SP500 closed at 1747. If you bought SPY there, you could have sold it 101 handles higher (+6%) at the US stock market’s all-time closing high of 1848 on December 31, 2012. #truth
#History reminds us that past performance doesn’t predict future results. I have no illusions about that. Neither should you. So let’s dig into some of the math (levels, correlations, etc.) that got me to hit that SPY buy button yesterday:
1. PRICE: the SP500’s immediate-term TRADE oversold line of support = 1817 with TREND support well below that at 1771
2. VOLUME: my composite volume signal was in line with my TREND based average yesterday; nothing to freak out about
3. VOLATILITY: front-month VIX was obviously up on the day, but still well below @Hedgeye TREND resistance of 14.91
So that’s that. The #history and #math parts had nothing to do with “valuation” obviously.
How about the #behavioral side of the decision to buy SPY? I think about that in 2-big parts, levels and catalysts:
1. LEVELS: for a year now, performance chasers have been selling red and buying green; fade that consensus on the signal
2. CATALYSTS: A) Japanese Yen was signaling overbought and B) JPM was signaling immediate-term TRADE oversold
These are, of course, very immediate-term catalysts. But when making buy or sell decisions, what else would you use? Whether people admit it or not, without a tested and tried, real-time, decision making process, they’ll use emotion instead of high probability signal levels and catalysts - or at least I used to.
on A) and B):
A) The Global Macro Correlation Risk that is the YEN vs Nikkei relationship is crystal clear (Yen Down = Nikkei Up)
B) JP Morgan (JPM) beating earnings in this environment (fat Yield Spread) is research edge you either had or did not
On A) the Yen is -0.6% vs USD this morning and on B), thankfully I have a great Financials analyst in Josh Steiner (who has been The Bear on NSM as of late). But even if I didn’t have Steiner, I’d have had that JPM oversold signal alongside the Yen’s overbought one. Now the manic media can run headlines that “JPM Beat, Alleviating Valuation Concerns.”
You either have research and risk management signals that you trust, or you do not. They help keep me well informed.
Our immediate-term Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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