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MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE

Takeaway: Investors seem to be taking the Russia/Ukraine dynamic in stride now as several risk measures are showing signs of stabilizing.

Russia 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

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 15

 

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

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 1

 

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.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 2

 

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.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 17

 

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. 

 

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MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 3

 

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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.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1,854.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 6

 

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.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 7

 

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.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 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 tightened by 1 bps to 13 bps.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 9

 

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.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 10

 

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.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 11

 

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.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 12

 

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.

 

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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.

 

MONDAY MORNING RISK MONITOR: RUSSIA MOVING TO THE BACK OF THE STOVE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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MACAU ON TRACK FOR 10% GROWTH

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.

 

MACAU ON TRACK FOR 10% GROWTH - m1

 

MACAU ON TRACK FOR 10% GROWTH - m2


Just Charts: Icahn & HLF Bounce

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.

 

Just Charts: Icahn & HLF Bounce - 1

 

The Hedgeye U.S. Consumption Model is also showing improvement, with 7 of the 12 metrics flashing green.

 

Just Charts: Icahn & HLF Bounce - 2

 

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

Just Charts: Icahn & HLF Bounce - 3

Just Charts: Icahn & HLF Bounce - 4

Just Charts: Icahn & HLF Bounce - 5

 

 

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.

 

 

Matt Hedrick

Food, Beverage, Tobacco, and Alcohol

 

Howard Penney

Household Products

 

(o)

 

 

Quantitative Setup

 

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

Just Charts: Icahn & HLF Bounce - 6

 

DEO – still bearish TREND for Diageo with TREND resistance firmly intact up at $124.81

Just Charts: Icahn & HLF Bounce - 7

 

KO – trying real hard to become market beta, but not convincing our signal which remains bearish TREND resistance of $39.66

Just Charts: Icahn & HLF Bounce - 8

 

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

Just Charts: Icahn & HLF Bounce - 9

 

GIS – 3 weeks of confirmation on the bearish to bullish TREND reversal; TREND support is now $49.91

Just Charts: Icahn & HLF Bounce - 10

 

MDLZ – still holding on to TREND support of 33.84; 3 straight weeks of bullish TREND, after head-faking bearish in JAN

Just Charts: Icahn & HLF Bounce - 11

 

KMB – still the best looking setup on this screen of stocks; bullish TREND support of $106.17 firmly intact

Just Charts: Icahn & HLF Bounce - 12

 

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

Just Charts: Icahn & HLF Bounce - 13

 

MO – second straight week of holding onto its reversal from bearish to bullish TREND (support = $35.89)

Just Charts: Icahn & HLF Bounce - 14

 

PM – still the ugliest stock on the list; TREND resistance = $83.97

Just Charts: Icahn & HLF Bounce - 15


MONDAY MASHUP: DNKN, WEN AND MORE

MONDAY MASHUP: DNKN, WEN AND MORE - 11

 

Recent Notes

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

MONDAY MASHUP: DNKN, WEN AND MORE - 22

 

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.

MONDAY MASHUP: DNKN, WEN AND MORE - 33

 

XLY Quantitative Setup

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

MONDAY MASHUP: DNKN, WEN AND MORE - 44

 

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%

MONDAY MASHUP: DNKN, WEN AND MORE - 55

 

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%

MONDAY MASHUP: DNKN, WEN AND MORE - 66

 

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%

MONDAY MASHUP: DNKN, WEN AND MORE - 77

 

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%

MONDAY MASHUP: DNKN, WEN AND MORE - 88

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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