Client Talking Points
Sure, Asia bounced across the board... but there are two important caveats. A) the Nikkei's +2.2% bounce (it's still down -11.2% year-to-date) is not seeing any bearish Yen follow through; B) not one single Asian equity market bounced back above our Hedgeye TREND resistance. Careful.
European stocks continue to look better than their U.S. or Japanese counterparts. (Italy up +2.9% and Spain +1.4% year-to-date). But the pre-US-jobs-lottery report bounce isn’t doing anything for the DAX or FTSE; both broke my TREND lines this week.
The bounce in the 10-year yield looks identical to the bounce in the S&P 500 – lower-highs, and still well below what’s developing as TREND resistance up at 2.80%. That’s probably why Gold still looks good this morning. If the jobs report isn’t good enough, you buy Treasuries, Utilities, and Gold and short the Consumer (XLY).
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Top Long Ideas
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.
Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.
JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.
Three for the Road
TWEET OF THE DAY
Expectations are the root of all heart ache . . .Jan US Nonfarm Payrolls +113K vs. StreetAccount consensus +175K @HedgeyeDJ
QUOTE OF THE DAY
"If you think you are too small to be effective, you have never been in the dark with a mosquito." - Betty Reese
STAT OF THE DAY
Apple bought $14 billion of its own shares in the two weeks since reporting financial results that disappointed Wall Street. With the latest purchases, Apple has bought back more than $40 billion of its shares over the past 12 months; a record for any company over a similar span. (WSJ)
Takeaway: On Mon we’ll host a Flash Call on RH to review key issues impacting RH. More importantly, we’ll address puts/takes across 3 key durations.
Please join us on Monday, February 10th at 1:00pm EST for a Flash Call on Restoration Hardware (RH) titled RH: Managing Risk By Duration. On the call we will revisit our bullish thesis on RH and address current challenges in the market - real and perceived.
Given all the noise out there in the market, we want to be clear about delineating risk/reward around each of the following three durations:
- TRADE (3 weeks or less)
- Sentiment - and the key issues we hear from investors
- Risk scenarios based on how RH likely fared operationally and financially in 4Q while retailers were dropping like flies
- Is the Company's guidance at risk, and if so, how much?
- 'Deferred Revenue' has gotten a lot of attention year-to-date. Is the concern justified, or overblown?
- How is e-commerce trending?
TREND (3 months or more)
- Catalyst calendar throughout CY2014
- Store opening cadence
- Category launch
- Catalog drops, or lack thereof
- Management transition - life after Carlos
TAIL (3 years or less)
- Inflection point(s) in square footage model
- Impact of larger format stores on the comp
- Trade-off between in-store vs. direct revenue
- Gross Margin Opportunity, real or perceived
- SG&A leverage - or lack thereof?
- Capital intensity (something no one asks about)
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 367968#
- Materials: CLICK HERE (slides will download one hour prior to the start of the call)
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“I’m just about that action, boss.”
Admittedly, being from Canada, I didn’t grow up a huge football fan. But like most of the world, I am drawn to the Super Bowl. This year was set up to be a dandy with the best offense facing the best defense. As we now know, the game was not even close with Seattle beating Denver like a rented mule.
Despite the lopsided game, there were a number of characters off the field that garnered a fair amount of attention. In my view, the most interesting character to emerge was Seattle running back Marshawn Lynch, who is better known as Beast Mode.
Lynch is notorious for avoiding the media, so much so that the NFL fined him $50,000 earlier in the season for not going to press conferences (which Seattle fans subsequently repaid for him!). At the Super Bowl he spent about seven minutes in a media scrum and also did a brief interview with Deion Sanders. During these brief appearances, it became clear that Lynch wasn’t media shy per se, but wanted his actions to speak for him. As he told Sanders:
Deion Sanders: What is your thing?
Marshawn Lynch: Laying back, kick back. (Yeah) Mind my business, stay in my own lane.
Deion Sanders: Yeah. So you’re just going to sit in the cut and just chill. That’s what you do.
Marshawn Lynch: Just kick back. Game time, though I’ll be there.”
True to his limited words, at game time Lynch was there and was all about the action, rather than the words beforehand. In theory, this is probably good advice for a lot of us, even those of us who don’t play in the NFL.
Back to the global macro grind . . .
Speaking of action, many of the key global markets we monitor every day are increasingly about that price action. Currently, the SP500, Dax and Nikkei are all broken on the TREND duration (three months or more) in our quantitative model. Conversely, equity market volatility via the VIX and U.S. Treasury bonds are breaking out to the upside.
Clearly, the market is signaling that growth is poised to continue to disappoint. In the year-to-date, the score on that front is really crystal clear. In the Chart of the Day, we show a summary of the 34 U.S. economic indicators that we focus on. As the table shows, 23 of those indicators slowed from December to January. Not even the best portfolio defense is going to stop an equity market that is going down because of that kind of economic deceleration.
In my mind, the most disturbing recent data point was the ISM Manufacturing New Orders reading for January. On a month-over-month basis, new orders were down -13.2, which is the largest single month decline since December 1980, or more than 30 years ago. The economy slowed from December to January and if forward looking orders are any indicator, it is not out of the woods yet.
Yesterday, the weekly initial jobless claims data was released and they were largely a non-event, though even there we are seeing incremental slowing. We key off the year-over-year rate of change in rolling NSA (non-seasonally adjusted) initial jobless claims. This week the data was better by 5.5% vs the same period last year. However, if you compare that with the preceding three weeks of data, it reflects a modest deceleration. The last four prints have been: -8.5%, -7.9%, -7.2% and -5.5%. So, yes, the strength of the labor market has cooled off modestly.
On the labor and employment front, the January Employment Report at 8:30am will be the main event this morning. Currently, consensus estimates are for 180,000 jobs to be added in January. It is also widely expected that last month’s big miss will be revised significantly higher due to weather. So, the expectations table has been set but, as always, expectations are likely to be the root of all heartache.
Since the r-squared between the ADP number and non-farm payrolls on a rolling 3-month basis is 0.71, it does seem likely that we get a print of close to 180,000. This disappointment may come on the expectation of a meaningful revision upwards from December. In fact, we did a study last month on the trend in revisions and in general over the last four years, the magnitude (and direction) of revisions hasn’t correlated particularly well with deviations from trend. Historically, according to Bloomberg data, months in which big weather was a factor have been revised higher only ~60% of the time.
So, perhaps today’s employment report is highly positive and gets the market back into bullish beast mode, though the probability seems higher that today is a non-event with the potential for a mild disappointment. But, as always, by 8:31 a.m. it is definitely going to be all about that action.
Speaking of action, we finally got some validation on our short thesis on Twitter yesterday as the company reported its first quarterly results as a public company. Admittedly, revenue did beat our number (although that was obviously priced in), but Twitter showed a real deceleration in user growth and user engagement. On that last point, user engagement, as measured by time line views, was down -3% year-over-year . . . not good for a growth company.
After winning the Super Bowl, Marshawn Lynch answered when asked about his touchdown run that he had:
“Kicked it all off, boss.”
Given the dramatic price decline and acceleration in volume, it will be interesting to see what Twitter kicked off yesterday. $TWTR remains on our Best Ideas list as a short. Email us at if you want to review our 50+ page short report on the company.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.59-2.80% (bearish)
SPX 1 (bearish)
Nikkei 139 (bearish)
VIX 14.91-20.41 (bullish)
Gold 1 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
DNKN reported a strong 4Q13 yesterday in which revenues ($183.177m) and EPS ($0.43) beat by 274 and 824 bps, respectively. The Dunkin’ Donuts U.S. business posted 3.5% comp growth despite an underwhelming sales environment. For the year, the company grew revenues, operating income and EPS by 8%, 11%, and 20%, respectively, and managed net new unit development greater than 5%.
Comp growth in the U.S. business was driven by both traffic and ticket across multiple dayparts, as the number of units sold per transaction and the price per unit sold increased. Beverages, breakfast sandwiches and bakery sandwiches provided the majority of growth in the quarter, while card sales (activations, reloads, redemptions) were all up significantly over the prior year. Management acknowledged the 4Q online shopping trend, but noted they weren’t negatively affected by this. Loyalty continues to be a primary catalyst for growth in the U.S. and, ultimately, abroad. For the full year, 43% of domestic net development was in emerging and Western markets as the brand continues its expansion outside of the Northeast. The West continues to have very strong cash-on-cash returns north of 25%. The potential for domestic expansion is still broad, as management believes they still have a 3,000 store opportunity east of the Mississippi River.
The Dunkin’ Donuts international business was slightly underwhelming (-0.3% comp), primarily due to poor Korean operations which make up 45% of international sales. The company also expects to close about 100 small kiosk locations in the Philippines in 2014. New openings in Germany and the U.K. were encouraging, reporting similar AWS as new openings in the U.S. 2014 will mark a slowdown in development (targeting 300-400 net new units across both brands) as management becomes more selective over the quality of openings and the aforementioned closures impact the net number. Management spoke briefly about their recently announced partnership with Liverpool. They believe the partnership will be beneficial in the U.S., particularly among Millennials and Hispanics, and internationally, where soccer is the number one sport. This is a tremendous opportunity for the brand to gain widespread international exposure (both on TV and on the pitch) that we view favorably.
Overall, it was another solid quarter from DNKN as it continues to build sales momentum through global expansion, an all-encompassing menu, and loyalty. This name strikes us as one of the better growth opportunities in the restaurant space.
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