Hedgeye CEO Keith McCullough weighs in on Chinese PMI and U.S. inflation on Fox Business' Opening Bell, hosted by Maria Bartiromo.
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Takeaway: Investors seem to be taking the Russia/Ukraine dynamic in stride now as several risk measures are showing signs of stabilizing.
Russian fears continue moving toward the back burner as Europe and US bank default risk measures wane. Additional good news is coming from commodity prices, where for the second week in a row they're showing signs of cooling off. The only area of material deterioration week over week was in China's interbank systemic risk, where the Shifon index widened by 113 bps to 3.01%.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Negative / 5 of 13 improved / 5 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged
1. U.S. Financial CDS - Swaps tightened for 24 out of 27 domestic financial institutions. The global banks showed significant week-over-week improvement with the most change coming from BAC, C and MS - all better by 7 bps. The results of DFAST and expectations around CCAR were clearly quite low considering the modest response to a near across-the-boards disappointing result.
Tightened the most WoW: MBI, MET, BAC
Widened the most WoW: MTG, RDN, MMC
Tightened the most WoW: MBI, AGO, UNM
Widened the most/ tightened the least MoM: GS, AXP, ACE
2. European Financial CDS - Swaps mostly tightened in Europe last week, as the banks took their cues from the sovereigns. Clearly the concerns over energy supply disruptions from Russia/Ukraine are shifting toward the back burner. Even Russia's Sberbank cooled off, rising just 1 bp week-over-week.
3. Asian Financial CDS - Most of Asia widened last week as concerns around a general slowdown continue. All but two of the Asian banks we track were wider.
4. Sovereign CDS – Sovereign swaps were generally tighter last week. Portugal, Italy and Spain were the big winners, tightening 21, 14 and 9 bps, respectively. Countries going the wrong way included Japan and France, both 1 bp higher.
5. High Yield (YTM) Monitor – High Yield rates fell 6.2 bps last week, ending the week at 5.74% versus 5.80% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1,854.
7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 18.5 bps this week versus last week’s print of 18.69 bps.
8. CRB Commodity Price Index – The CRB index fell -1.2%, ending the week at 299 versus 303 the prior week. As compared with the prior month, commodity prices have decreased -0.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
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 tightened by 1 bps to 13 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 113 basis points last week, ending the week at 3.01% versus last week’s print of 1.88%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Markit MCDX Index Monitor – Last week spreads tightened -8 bps, ending the week at 67 bps versus 75 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.
12. Chinese Steel – Steel prices in China rose 0.3% last week, or 11 yuan/ton, to 3,265 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread was unchanged at 232 bps. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.1% upside to TRADE resistance and 1.4% downside to TRADE support.
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Daily table revenues averaged HK$996 million this past week in Macau, up 13% over the comparable period last week. That brings month to date ADTR down to HK$1,045 million, up 8% over last year's. Our full month GGR growth projection remains at +9-12%. It seems as if hold is fairly normal thus far in March. We would caution investors that YoY growth in April will likely fall in the low double digit range as well, assuming normal hold.
Market shares were fairly in line with recent trend except for Galaxy well above, and MPEL below.
Consumer Staples underperformed the broader market last week, falling -0.2% versus the S&P500 at +1.4%. XLP is down -1.1% year-to-date vs the SPX at +1.8%.
For a third straight week, the XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.
The Hedgeye U.S. Consumption Model is also showing improvement, with 7 of the 12 metrics flashing green.
Despite an improved outlook for the sector, we continue to believe that the group is facing numerous headwinds, including:
- U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating
- The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
- The sector is loaded with a premium valuation (P/E of 19.3x)
- Less sector Yield Chasing as Fed continues its tapering program
- The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, and fell to -29.0 versus -27.6 in the prior week
Top 5 Week-over-Week Divergent Performances:
Positive Divergence: FLO 7.3%; NUS 4.3%; POST 3.5%; ENR 3.3%; BF/B 3.0%
Negative Divergence: HLF -14.6%; MNST -1.8%; PG -1.4%; EL -1.3%; HSY -1.3%
Last Week’s Research Notes
Recent News Flow
HLF – Herbalife announced it is adding 3 additional Carl Icahn designees, totaling 5 on their board (trading +7% intraday). This comes on the heel of Ackman’s presentation on 3/11 claiming that HLF’s China business is a pyramid scheme and the FTC announcing on the following day that they’ll take a look at the company. As a side note, Nu Skin China was fined $524,000 over the weekend for the sale of certain products by individual direct sellers (trading +27% intraday).
We continue to assert that while a government agency may require HLF to alter its language and some of its business processes, its U.S. business is not going away.
CAG – ConAgra reported Q3 earnings on 3/20, beating consensus estimates of $0.60 by 2 cents, and top-line missed consensus of $4.43B at $4.39B.
GIS – General Mills reported Q3 earnings on 3/19, missing consensus estimates of $0.64 by 2 cents, and top-line missed consensus of $4.41B at $4.38B.
LO – Goldman Sachs upgraded LO to buy from neutral on 3/16. We presented LO as a Best Idea Long on March 4th. Please email me at if you’d like a copy of the deck and replay of the call.
Events This Week (in EST):
Tuesday (3/25): MKC 8am
Thursday, 11am (3/27): Hedgeye’s Electronic Cigarette Speaker Series with Logic President Miguel Martin. Logic has #2 national brand in unit and dollar share for C-Stores in the United States, according to Nielsen data.
Food, Beverage, Tobacco, and Alcohol
In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one. As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).
BUD – up weeks for the stock market still aren’t getting BUD back above its TREND resistance line of $103.28
DEO – still bearish TREND for Diageo with TREND resistance firmly intact up at $124.81
KO – trying real hard to become market beta, but not convincing our signal which remains bearish TREND resistance of $39.66
PEP – barely recovering TREND support of $81.91 this wk – which is better than what we can say about KO; let’s see if it holds
GIS – 3 weeks of confirmation on the bearish to bullish TREND reversal; TREND support is now $49.91
MDLZ – still holding on to TREND support of 33.84; 3 straight weeks of bullish TREND, after head-faking bearish in JAN
KMB – still the best looking setup on this screen of stocks; bullish TREND support of $106.17 firmly intact
PG – bearish TREND for all of 2014, so nothing new here seeing the stock go down in an up tape last wk; TREND resistance = 80.18
MO – second straight week of holding onto its reversal from bearish to bullish TREND (support = $35.89)
PM – still the ugliest stock on the list; TREND resistance = $83.97
03/17/14 Monday Mashup: MCD, KKD and More
03/17/14 DRI: Change Is Inevitable
03/20/14 Commodity Chartbook
03/20/14 Just Charts: CPI Data
Events This Week
Monday, March 24
- SONC earnings call 5:00pm EST
Tuesday, March 25
- PNRA Investor Day 10:30am EST
Wednesday, March 26
- CIBC Retail and Consumer Conference: THI
- TAG Spring Consumer Conference: BBRG
Thursday, March 27
- No Events
Chart Of The Day
Recent News Flow
Monday, March 17
- DNKN continues to expand into non-traditional locations, announcing the recent opening of a Dunkin’ Donuts/Baskin-Robbins restaurant at The Embassy Suites in downtown San Diego. DNKN now has more than 600 non-traditional locations in the U.S. and plans to continue to grow in the hotel and lodging sector.
Tuesday, March 18
- COSI named R.J. Dourney, Cosi’s largest franchisee, as President and CEO of the company. Former President and CEO, Stephen Edwards, will continue to serve on the company’s board.
- RRGB is adding a new wine milkshake, the Mango Moscato Wine Shake, to its menu for the spring season. The company plans to keep the offering on the menu through September 1st.
Wednesday, March 19
- JMBA announced its third annual National Hiring Day initiative in its commitment to improve youth job creation.
- BWLD is extending its three year partnership with the Boys & Girls Club of America. BWLD has committed a $1mm annual donation to the club.
Thursday, March 20
- DNKN announced plans to open six new restaurants throughout East Texas by 2018 with franchise group BG&A Investments.
- WEN launched a national marketing campaign, teaming up with actress and model Molly Sims to promote Wendy’s new salad offerings.
- MCD COO Tim Fenton announced his retirement from the company, effective October 1st. Fenton will then serve as a special advisor to CEO Don Thompson. Pete Bensen, EVP and CFO, and Steve Easterbrook, EVP and GCBO, will have broadened responsibilities as the company does not plan to replace the COO role.
- DFRG Two Del Frisco’s Grilles in Houston and Fort Worth were named to OpenTable’s Top 100 list, which recognizes the most popular restaurants in the country.
- JACK successfully completed its refinancing of bank debt, announcing a new five-year $800mm senior credit facility which includes a $600mm revolving credit facility and a $200mm term loan.
Friday, March 21
- DRI reported a weak, albeit expected, 3QF14. Management kept the Q&A session brief and ended the call abruptly after 45 minutes.
- PNRA reiterated underweight at Piper Jaffray with a PT of $137.
- CBRL mailed a definitive proxy for Special Meeting to shareholders, urging them to reject activist Biglari’s proposal. The company will hold a Special Meeting to give shareholders an opportunity to vote on the matter.
US Macro Consumption
Last week was another weak one for consumer stocks, with the XLY down -0.3% vs the SPX up +1.4%. Both casual dining and quick service stocks largely underperformed the XLY index. Despite this, the Hedgeye U.S. Consumption Model turned bullish from neutral and is now flashing green on 7 out of 12 metrics. We continue to believe the current environment is more conducive to select fast casual and quick service restaurants than casual dining restaurants.
XLY Quantitative Setup
From a quantitative setup, the sector remains bullish on an intermediate-term TREND duration.
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: BWLD +5.7%, DFRG +4.1%, BJRI +4.1%, BOBE +3.6%, DRI +3.2%
Negative Divergence: CBRL-2.4%, RUTH -2.2%, EAT -1.0%, RT -0.6%, CAKE -0.6%
Notable 1-Month Earnings Revisions
Positive Revision: BJRI +0.3%, BWLD +0.2%
Negative Revision: BOBE -25.4%, DIN -5.7%, KONA -5.4%, BBRG -4.7%, BLMN -4.2%
Quick Service Restaurants
Top 5 Week-Over-Week Divergent Performances:
Positive Divergence: CMG +6.4%, PNRA +4.0%, SBUX +3.5%, TAST +1.6%, YUM +0.5%
Negative Divergence: KKD -7.4%, BKW -2.6%, DPZ -2.3%, SONC -2.2%, MCD -1.9%
Notable 1-Month Earnings Revisions
Positive Revision: DPZ +1.2%, JACK +0.6%, WEN +0.6%, GMCR +0.4%, YUM +0.3%
Negative Revision: TAST -8.1%, BAGL -5.9%, PLKI -4.4%, PZZA -2.1%, SONC -0.8%
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