Investment Recommendations: short EUR/USD (FXE) and Eurozone equities (EZU); Long GBP/USD (FXB)
As is customary, Jackson Hole affords central bankers the stage to make a “splash”, and the ECB’s Mario Draghi did just that, on Friday (8/22) solidifying the title of “über” dove, even beyond our expectations.
What are the tea leaves indicating? Accelerated QE expectations! Draghi said “we stand ready to adjust our policy stance further.” An acceleration in the “adjustment” towards QE is what we foresee out of the meeting and given the backdrop of deteriorating Eurozone fundamentals and in our estimation little prospect for medium term inflections from the TLTROs and QE-lite (ABS buying) programs. What initial indicators may begin to turn the tide?
- We expect in aggregate that Eurozone Confidence figures for August (out this Thursday) to show sequential decline
- We foresee the Bank to be unable to arrest the decline in inflation. CPI stands at 0.4% and the preliminary August reading (out this Friday) should show further contraction, likely by 10bps. Draghi is both way off base from the 2.0% LT target and showing a material inflection over the medium term
- Sticky and high unemployment currently at 11.5% (the July reading comes out this Friday) should persist over the medium term
- We expect the ECB’s staff projections for growth and inflation to be revise down in its next meeting on September 4th
Taken together, we’re not calling for the announcement of QE next month, however we do think QE expectations will heighten as fundamentals continue to go against the Bank’s price stability mandate.
What cards has Draghi already seen that may influence his use of policy “tools”?
- Q2 GDP showed the EU region stalling to 0.0% sequentially and +0.7% Y/Y (For more see: Ouch! Eurozone, Germany and France GDP Fall in Q2)
- Recent PMI data confirms a similar “slowing” picture:
Eurozone Manufacturing PMI 50.8 AUG Prelim. (51.3 est.) vs. 51.8 prior
Eurozone Services PMI 53.5 AUG Prelim. (53.7 est.) vs. 54.2 prior
Eurozone Composite PMI 52.8 AUG Prelim. (53.8 est.) vs. 53.8 prior
- German data remains lousy. Today’s release of the German IFO Business survey showed a material slide, and is in-line with German Q2 GDP that slid to negative (for the first time in two years at -0.2% Q/Q); as well as weakness from Factory Orders, Industrial Production, and Economic expectations seen over recent weeks. For more see: Germany Under Pressure: ZEW Tanks
Germany IFO Business Climate 106.3 AUG (107.0 est.) vs. 108.0 prior
Germany IFO Current Assessment 111.1 AUG (112.0 est.) vs. 112.9 prior
Germany IFO Expectations 101.7 AUG (102.1 est.) vs. 103.4 prior
- Bond yields are front-running the slowdown in economic growth, with the German 10YR bund yield trading below 1%!
We’re sticking with the Hedgeye investment playbook we had going into the meeting, which includes:
-- Short EUR/USD (FXE). Net short position in the EUR/USD (CFTC futures + options) hits a big year-to-date high of -142,758 contracts.
--Short European equities (EZU) which, despite the recent bounce, remain below our TREND levels of resistance. If the equities overcome their TREND levels, we’ll change our positioning:
Equity TREND lines remain broken:
Europe’s Stoxx50 = 3,158
Germany’s DAX = 9,643
Italy’s MIB = 21,311
France’s CAC = 4,364
-- Long GBP/USD (FXB) - BOE Minutes released last week showed for the first time in more than three years that there were 2 votes to increase interest rates (by 25bps). Taken together with the dovish policy from the Fed’s Yellen and ECB’s Draghi, and relatively stronger economic data from the UK, we expect the GBP/USD to appreciate in value.
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Takeaway: New Home sales declined for a 2nd month in July. Rising inventory, middling demand & decelerating prices are not a bullish factor cocktail
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: July New Home Sales
New Home Sales declined for a second straight month in July as the new Home market continues to spin its wheels, averaging ~425K +/- 25K each month for the last year. The sales data continues to accord with the middling SF starts and permits figures while remaining at odds with the optimism fueled rise in builder confidence.
* Total: On the heels of the largest sequential decline of the year in June, New Home Sales dropped -10K ( -2.4%) sequentially in July to 412K SAAR. New Home sales represented just 7.4% of total home sales in the latest month, the lowest share percentage since September of last year (see 1st chart below). Existing Home Sales, while lackluster in its own right, continues to dominate the sales recovery as New Home Sales share of total remains depressed vs historic averages.
* Regional: With the exception of the South, all regions saw a sequential decline in sales with growth continuing to run negative on a YoY basis. Notably, the Northeast and South saw a stark divergence in sales trends with MoM and YoY sales growth declining -31% and -44%, respectively in the Northeast and +8% and +33%, respectively, in the South.
* Inventory: The total inventory of new homes breached the 200K level for the first time since September 2010, rising +4.6% MoM to 205K. Supply continues to trend higher on both a 1Y and 2Y basis.
* Sales vs Sentiment: Rising builder confidence reported in the August NAHB HMI catalyzed the strength in housing stocks to start last week. We’ve highlighted the decoupling of builder confidence, fueled in large part by rising “optimism, from the reality of actual new construction sales the last few months. Absent an inflection in sales trends, it remains more likely than not that builder confidence corrects in favor of the data in the coming month(s).
Rising inventory, middling demand and decelerating prices is not a bullish factor cocktail. Comps get easier from here on the demand side of housing but price comps get progressively steeper. We’re considering the stock price implications of an (largely optical) increase in reported volume against easy compares but, as it stands, we’re inclined to maintain our bearish bias until we see the next inflection in the second derivative price trends.
About New Home Sales:
Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.
Joshua Steiner, CFA
Christian B. Drake
The table below lists our Investment Ideas as well as our Watch List -- a list of potential ideas that we are watching closely. We intend to update this table regularly and will provide detail on any material changes.
We are bumping up SBUX and EAT to our Short List. More details to follow.
Events This Week
Tuesday, August 26th
- COSI Annual General Meeting
Wednesday, August 27th
- BOBE Earnings Call 10am EST
Thursday, August 28th
- ZOES Earnings Call 5pm EST
Chart of the Day
Coffee prices are up 55.5% YTD and 46% YoY.
Recent News Flow
- BKW is in talks to acquire THI for tax inversion purposes. The merged companies would be headquartered in Canada.
- TXRH was upgraded to overweight at Stephens with a $32 PT.
- BWLD takes a majority stake in Rusty Taco, a taco chain that currently has nine locations across Dallas, Denver and Minnesota.
Monday, August 18th
- DIN Applebee's introduced crosscut ribs in 3 different sauces: Sweet Asian Chile, Smoky Chipotle and Classic BBQ.
- BWLD is offering Fantasy Football draft parties, which include an exclusive Pepsi Fantasy Football Draft Party Kit that provides guests with a draft board, player stickers, a brag flag and other items.
- RRGB appointed Jeff Melnick as Senior VP of Operations. Melnick has served as regional VP of Operations for Red Robin since 2006 and will now oversee the operations of over 380 domestic company owned restaurants.
Tuesday, August 19th
- EAT was upgraded to buy at Wunderlich Securities with a $55 PT.
- THI announced the return of "Pumpkin Pie Goodness." Tim Hortons' restaurants are now offering the Pumpkin Pie Iced Capp and Pumpkin Pie Latte in all U.S. restaurants.
Wednesday, August 20th
- IRG appointed Shauna King to its board of directors. Ms. King currently serves as VP, Finance and Business Operations for Yale University, where she has worked since 2006. Ms. King has already held various leadership roles at PepsiCo and Frito-Lay.
- BOBE Activist Sandell Asset Management announced it had won at least five seats on the Board of Bob Evans.
- BOBE declared a $0.31 quarterly dividend and increased its current share repurchase authorization to $150 million.
Thursday, August 21st
- CAKE was downgraded to underperform at Bank of America Merrill Lynch with a $42 PT.
- PLKI named William Matt its new CFO. Mr. Matt most recently served as COO of La Senza Global and has held prior positions at Victoria Secret Direct and PepsiCo/KFC.
- BWLD announced the opening of its second PizzaRev franchise restaurant in Edina, MN.
- WEN announced its latest premium offering, the new Smoked Gouda Chicken on Brioche.
- EAT increased its quarterly dividend $0.04 to $0.28 and its board authorized another $350 million in share repurchases.
Friday, August 22nd
- TXRH announced a $0.15 quarterly dividend which will be paid on October 3, 2014.
- TAST Carrols Restaurant Group agreed to purchase 64 Burger King restaurants from Heartland Food LLC for approximately $18.0 million.
The XLY (+2.3%) outperformed the SPX (+1.7%). In aggregate, both casual dining and quick service stocks underperformed the narrower XLY Index.
XLY Quantitative Setup
From a quantitative perspective, the sector is bullish on an intermediate-term TREND duration.
Casual Dining Restaurants
Quick Service Restaurants
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