prev

Textbook Bounce: SP500 Levels, Refreshed

Takeaway: In other words, this market can easily bounce to 1867. But the bigger question is what does it do from there?

POSITION: 10 LONGS, 3 SHORTS @Hedgeye

 

After tagging last week’s immediate-term TRADE overbought bubble highs (1881 SPX on Tuesday), the SP500 had a brisk -2.1% correction to immediate-term TRADE oversold as both Gold and VIX signaled overbought. #TextbookBounce

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1867
  2. Immediate-term TRADE support = 1845
  3. Intermediate-term TREND support = 1815

 

In other words, this market can easily bounce to 1867. But the bigger question is what does it do from there? A close above that TRADE line would be bullish inasmuch as a close below it would be bearish.

 

With #InflationAccelerating (should be > 2% by Q3) and US #GrowthSlowing (might drop < 2% in 1H14), there’s no reason to chase the +1% up days, but there’s no need to sell on oversold days either.

 

Stick to the process. Buy/cover on oversold signals. Sell/short on overbought ones. Don’t chase.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Textbook Bounce: SP500 Levels, Refreshed - SPX



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.

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE

Takeaway: Domestically-focused US Financials are outperforming their globally-focused peers, while Russian banking's risk profile continues to rise.

Relative Differences

The Russia/Ukraine/Crimea situation continues driving relative performance differences within the US Financials sector. Note the first callout below. The US global banks are underperforming while the domestically-focused institutions are outperforming, which is essentially the opposite of our preferred positioning. Meanwhile, Sberbank of Russia, which is essentially the Russian banking system, is seeing its CDS rise dramatically. Separately, the yield spread is compressed markedly last week.

 

If there is one silver lining domestically it is that commodity prices finally stopped going up, posting a 1% decline for the week. It's also worth mentioning that the US and EU interbank markets remain benign. 

 

 

Key Points

* U.S. Financial CDS -  Swaps widened for 21 out of 27 domestic financial institutions. It's interesting to note the divergence between the US global banks (+7 bps on average) relative to Wells Fargo (+2 bps). The unrest overseas is favoring domestically-focused institutions. 

 

* European Financial CDS - Swaps mostly widened in Europe last week. Sberbank of Russia widened significantly, increasing 54 bps to 340 bps and finds itself now squarely in the red zone of +300 bps. Sberbank swaps are now wider by 103 bps month-over-month. Consider that Sberbank is to Russian banking what JPMorgan, BofA, Citi and Wells Fargo combined are to the US from a market share standpoint. Sberbank's credit default swaps are a helpful proxy for the Crimea situation.  

 

* 2-10 Spread – Last week the 2-10 spread tightened to 231 bps, -11 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* CRB Commodity Price Index – The CRB index fell -1.0%, ending the week at 303 versus 306 the prior week. As compared with the prior month, commodity prices have increased 3.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

* High Yield (YTM) – High Yield rates rose 9.0 bps last week, ending the week at 5.80% versus 5.71% the prior week.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 13 improved / 8 out of 13 worsened / 4 of 13 unchanged

 • Intermediate-term(WoW): Positive / 7 of 13 improved / 5 out of 13 worsened / 1 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 2 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 15

 

1. U.S. Financial CDS -  Swaps widened for 21 out of 27 domestic financial institutions. It's interesting to note the divergence between the US global banks (+7 bps on average) relative to Wells Fargo (+2 bps). The unrest overseas is favoring domestically-focused institutions. 

 

Widened the least/ tightened the most WoW: UNM, TRV, AON

Widened the most WoW: BAC, AIG, MS

Tightened the most WoW: UNM, COF, MET

Widened the most MoM: MS, GS, ACE

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 1

 

2. European Financial CDS - Swaps mostly widened in Europe last week. Sberbank of Russia widened significantly, increasing 54 bps to 340 bps and finds itself now squarely in the red zone of +300 bps. Sberbank swaps are now wider by 103 bps month-over-month. Consider that Sberbank is to Russian banking what JPMorgan, BofA, Citi and Wells Fargo combined are to the US from a market share standpoint. Sberbank's credit default swaps are a helpful proxy for the Crimea situation.  

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 2

 

3. Asian Financial CDS - Asian Financials swaps were wider across the board with the sole exception of Mizuho in Japan, which tightened 1 bp. 

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week. The two exceptions included the US, which tightened 1 bp and Spain, which tightened 5 bps. 

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 18

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 3

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 9.0 bps last week, ending the week at 5.80% versus 5.71% the prior week.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1853.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 6

 

7. TED Spread Monitor – The TED spread fell 0.1 basis points last week, ending the week at 18.7 bps this week versus last week’s print of 18.77 bps.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.0%, ending the week at 303 versus 306 the prior week. As compared with the prior month, commodity prices have increased 3.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 14 bps.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 4 basis points last week, ending the week at 1.96% versus last week’s print of 2.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 75 bps versus 73 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 11

 

12. Chinese Steel – Steel prices in China fell 1.7% last week, or 56 yuan/ton, to 3,247 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 231 bps, -11 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and 1.7% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


MACAU: SLOW 2ND WEEK OF MARCH

Weakness probably concentrated in VIP

 

 

Macau average daily table revenues fell 7% YoY to HK$886 this past week and 17% from the rate during the first 9 days of the month.  We don't want to overreact to one week of data but we do see tougher comparisons in March and April.  We are projecting full month YoY growth in GGR of +9-13%, down from Jan/Feb growth of 24%.  While the Mass floor traffic appears decent, VIP volume and hold was likely a little substandard.

 

MACAU: SLOW 2ND WEEK OF MARCH - macau ave daily table rev

 

In terms of market share, WYNN is above trend although off from last week, as is Galaxy.  SJM is the only operator significantly below recent results.  With the stocks up so much, decelerating monthly trends at least through April, and all the recent money laundering chatter, we believe there could be near term downside risk to the Macau stocks.

 

 

MACAU: SLOW 2ND WEEK OF MARCH - macau march table market share

 


MONDAY MASHUP: MCD, KKD AND MORE

MONDAY MASHUP: MCD, KKD AND MORE - chart1

 

Recent Notes

03/10/14  MCD: The Anatomy Of A Monthly Sales Press Release!

03/12/14  Stocks Remain Elevated As Sales Estimates Drop

03/12/14  DRI: Are We Being Mushroomed?

03/14/14  Beneficial Environment For QSRs

 

Events This Week

Monday, March 17

  • Sidoti & Company Emerging Growth Institutional Investor Forum: BOBE

Tuesday, March 18

  • Sidoti & Company Emerging Growth Institutional Investor Forum: DENN

Wednesday, March 19

  • SBUX Annual General Meeting
  • Janney Capital Markets Consumer Executive Summit: WEN

Thursday, March 20

  • Janney Capital Markets Consumer Executive Summit: BOBE
  • Stephens West Coast Conference: RRGB

Friday, March 21

  • DRI earnings call 8:45 AM EST

Chart Of The Day

Commodity prices have been surging in Q1 and the CRB Foodstuff Index is up approximately +400 bps YoY.  If this index remains at or above these levels throughout the year, we'd expect notable pressure to build on the cost of sales line for many operators as they lap easy YoY comparisons.  We've heard expectations of flat-to-slight commodity inflation in 2014, but this chart tells a different story.    


MONDAY MASHUP: MCD, KKD AND MORE - chart2

 

Recent News Flow

Monday, March 10

  • MCD reported February global comp store sales down -0.3%, primarily driven by a -1.4% comp in the U.S. and offset slightly by a +0.6% comp in Europe.
  • WEN introduced two new salads to its menu: the Asian Cashew Chicken Salad and the BBQ Ranch Chicken Salad.
  • GMCR changed its name to Keurig Green Mountain, Inc. after shareholders signed off on the name change at its annual meeting the prior week.
  • DRI filed a Form 10 in connection with its plan to spin-off Red Lobster.

Tuesday, March 11

  • JMBA revealed its new Kale Orange Power Fresh Juice Blend, reinforcing the company’s commitment to health.
  • COSI reported disappointing Q4 numbers, including -$0.23 EPS on a -5.7% company comp.
  • MCD hinted at some sort of future financial engineering event during its presentation at the Bank of America Consumer & Retail Conference as it continues to look at ways to optimize their capital structure.
  • FRSH Papa Murphy’s, the take and bake pizza franchisor, filed a $70mm IPO.
  • COSI Antonio Tomasello disclosed a 5.1% stake in the company and advised the board to remove the poison pill and further explore selling company stores to franchisees.
  • YUM declared a $0.37 dividend, in-line with expectations.

Wednesday, March 12

  • KKD reported mixed results, missing on the bottom line by a penny, but upped guidance and announced a higher share repurchase authorization which likely supported the stock.

Thursday, March 13

  • THI was upgraded to buy at KeyBanc with a $75 PT.
  • DRI Olive Garden launched a new LTO, the three-course Italian dinner starting at $9.99 in what appears to be a last ditch effort to drive incremental traffic.
  • MCD News hit the tape that employees are suing McDonald’s for alleged wage theft.  The 27 plaintiffs claim to represent thousands of employees and are looking for back pay and damages.
  • ZOES Zoe’s Kitchen, a Mediterranean fast casual chain, filed for an $80.5mm IPO.  More than half the money will be used to pay off debt, with the remaining being used to fuel future growth.  The company grew comps at a healthy clip (+6.9%) in 2013 and currently has AUVs approaching $1.5mm.
  • WEN Senior VP of North America operation, John Peters, has left the company to partner with current Wendy’s franchisee Rick Holland.  The two have signed an agreement to acquire 40 company-owned restaurants in the PHX area and Peters will run other restaurants that Holland already owns in the AZ, CO, MI, SD and OH markets.  Robert Wright has been named COO.

Friday, March 14

  • GMCR, SBUX amended their agreement to give Starbucks better business terms and a more extensive offering of SBUX K-Cup packs and types.
  • GMCR will replace WPX in the S&P 500, effective AMC on Friday, March 21.
  • THI appointed Managing Director of Google Canada, Christopher O’Neil, to serve as Director effective immediately. 
  • QUIZNOS filed for bankruptcy in a move to reduce its debt load by approximately $400mm and increase the company’s flexibility to execute on its planned operational enhancements.  The chain has struggled amid due to emergence of strong competition (Potbelly, Jersey Mike’s, Jimmy John’s, Firehouse Subs, etc.), an excessive debt load and years of store closures.

U.S. Macro Consumption

Last week was a forgettable week for consumer stocks in general, with the XLY down -2.3% vs the SPX -2.0%.  With that being said, restaurant stocks largely outperformed this broader index.  The Hedgeye U.S. Consumption Model is mixed this week, with 6 of the 12 metrics we track flashing green.  We believe the current environment is more conducive to select fast casual and quick-service restaurants than casual dining restaurants. 

 

MONDAY MASHUP: MCD, KKD AND MORE - chart4

 

XLY Quantitative Setup

From a quantitative setup, the sector remains bullish on an intermediate-term TREND duration.

 

MONDAY MASHUP: MCD, KKD AND MORE - chart3

 

Below we look at the performance of restaurant companies relative to the XLY and recent trends in earnings revisions estimates.

 

Casual Dining Restaurants

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: KONA +14.9%, DFRG +9.4%, CBRL +3.0%, CAKE +2.7%, BJRI +2.7%

Negative Divergence: RT -6.3%, DIN -1.4%, BWLD -0.1%

 

Notable 1-Month Earnings Revisions:

Positive Revision: RRGB +0.7%, BWLD +0.2%

Negative Revision: BOBE -25.4%, BJRI -25.4%, BBRG -7.8%, DIN -5.7%, KONA -5.4%

 

MONDAY MASHUP: MCD, KKD AND MORE - chart5

MONDAY MASHUP: MCD, KKD AND MORE - chart6

 

Quick-Service Restaurants

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: KKD +10.8%, GMCR +9.1%, SONC +7.1%, MCD +4.5%, TAST +4.4%

Negative Divergence: JMBA -0.8%, CMG -0.7%, YUM -0.4%, WEN -0.2%

 

Notable 1-Month Earnings Revisions

Positive Revision: JACK +3.9%, DPZ +1.2%, YUM +0.2%, BKW +0.1%

Negative Revision: TAST -8.1%, BAGL -5.9%, PNRA -4.6%, PLKI -4.6%, THI -2.5%

 

MONDAY MASHUP: MCD, KKD AND MORE - chart7

MONDAY MASHUP: MCD, KKD AND MORE - chart8

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next