This grand central planning experiment? It's failing where it matters most, in economic growth terms.
Editor’s note: This is a brief excerpt from CEO Keith McCullough’s morning research. Click here for more information on how you can subscribe.
The UST 10YR Yield is down hard on the October jobs report, and down again to 2.29% this morning after trading 10-12 basis points higher into jobs day on misbegotten hopes that the U.S. isn’t slowing like the rest of the world is.
Newsflash: It is.
We’re staying long the Long Bond (via TLT) and bond proxies. That’s where the fundamental performance is and has been all year.
MCD reported same-store sales for the month of October this morning. Despite weak numbers across the board, they were admittedly better than feared:
- MCD Global SSS -0.5% vs -2.2% estimate
- MCD US SSS -1.0% vs -1.9% estimate
- MCD Europe SSS -0.7% vs -2% estimate
- MCD APMEA SSS -4.2% vs -6.1% estimate
Our take on October sales numbers were (1) estimates for the month were quite low after a disastrous September and (2) even after a small upside surprise this month there is no light at the end of the tunnel for a true recovery.
Global, US, Europe and APMEA comps all accelerated meaningfully in October. Comps in all four regions, however, remain negative on a two-year basis, suggesting there is still much work to be done; particularly when considering the strength we’ve seen in the industry over the past few months. MCD continues to lose market share to BKW, JACK, SONC, WEN and others.
Rhetoric showed no sign of direction, as CEO Don Thompson merely emphasized the need for change without much of a plan to get there. Some initiatives to stem the company’s multi-year decline are underway, particularly in the US where the team is changing its marketing approach, simplifying its menu and creating a new organizational structure. We expect these efforts, however, to fall short.
Despite positive results, on the margin, it is important to recognize that McDonald’s continues to face significant challenges across the globe. The US struggled during the month due to “strong competitive activity;” Europe was hampered by “very weak” results in Russia; and APMEA continued to suffer from the ongoing impact of the supplier issue.
As we’ve previously mentioned, it will be a long road to recovery for MCD and we're not convinced it is even underway. It has yet to be proven that management’s initiatives will succeed and, at 17.5x NTM P/E, is difficult for us to support this stock. We continue to stay on the sidelines here, with a bearish bias.
Feel free to call, or email, with questions.
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Quick Takeaway from Hedgeye's Brian McGough:
This new Nike Flash campaign is a bigger deal than the financial press will give it credit for. It's geared largely toward running, and as shown in the pictures below, the product literally glows when under a light (most notably -- a car's headlights for people who run early morning and at night). The jacket shown below retails for just under $500, and the shoes between $100-$150.
Most notable here is that the old way of doing things at Nike is that the company would come out with a shoe, or a shirt, and they would literally have nothing to do with one another -- and that's because the footwear and apparel organizations did not come out of their silos. But now the product is integrated in design, manufacturing, logistics, and presentation at retail.
This collection will only be available at Nike online and Nike retail stores. Sorry, Foot Locker.
Takeaway: Nike ‘Flash’ = great example of growing around traditional retail. Sears REIT = Bad Idea. Banks vs retailers on Cyber attack liability.
EVENTS TO WATCH
SHLD - Potential REIT Formation
Takeaway: Let's not forget that Dillard's attempted to structure a public REIT in 2011, but never got it done. The market's appetite for anything other than primo mall properties is simply not there. Sears talks about 200-300 locations, but Sears only has 130 'A' Mall locations. The property location is critical here -- more so than with other transactions. Dillard's at least will likely remain a viable entity for a fairly long time. Sears, however, has a 95% likelihood of being wiped clean from the retail landscape within five years -- and 60% chance within 3-years, in our opinion. We can come up with a list of retailers/restaurants who would want a piece of the 'A' Mall properties Sears owns when it goes away, but at best we can identify a home for a third of the real estate SHLD owns. Overall, this transaction seems unlikely to us -- unless financial terms are egregiously skewed in favor of investors.
NKE - Flash Collection
Takeaway: This new Nike Flash campaign is a bigger deal than the financial press will give it credit for. It's geared largely toward running and as shown in the pictures below, the product literally glows when under a light (most notably -- a car's headlights for people who run early morning and at night). The jacket shown below retails for just under $500, and the shoes between $100-$150. Most notable here is that the old way of doing things at Nike is that the company would come out with a shoe, or a shirt, and they would literally have nothing to do with one another -- and that's because the footwear and apparel organizations did not come out of their silos. But now the product is integrated in design, manufacturing, logistics, and presentation at retail. This collection will only be available at Nike online and Nike retail stores. Sorry, Foot Locker.
TGT, HD, TJX - Banks take on retailers over who foots cyber attacks bill
- "In a rare show of unity, industry bodies that represent banks are banding together to urge lawmakers to introduce legislation that would force retailers to pay for the clean-up themselves during the new session of Congress next year."
- "The data breach at the retailer, which the company reported in September, cost community banks and credit unions at least $160m to reissue cards and pay for other services related to the attack. Home Depot estimated that the breach cost the company at least $62m."
Takeaway: This isn't applicable to the breaches at TGT and HD, but it's the driving force behind banks pushing for a change in legislation. The biggest breach in history at TJX in 2007 compromised nearly 100mm cards and cost the retailer $256mm. TGT's stats look like this - 40mm cards compromised at an estimated cost of $129mm. We have to assume that banks are eating 2 to 3 times that amount. It makes sense to us that Retailers could and probably should be left holding the bag when their internal systems fail.
WMT - Wal-Mart Feels Pinch From China Austerity Campaign
- "The Bentonville, Ark., retailer’s same-store sales in China declined 1.6% from a year earlier for the quarter through July."
- "Wal-Mart isn’t concerned about slowing growth in the world’s second-largest economy, Mr. Price said. He said he was sticking by a plan to have around 480 Wal-Mart stores in China by the end of 2016."
NKE - Nike & Adrian Peterson: No More
- "The football player is the fourth athlete in 2014 — after Ray Rice, Oscar Pistorius and Jon Jones — to lose a contract with Nike."
AdiBok - Reebok to Launch Wearble Tech in '15
- "The athletic brand told Footwear News last week it plans to enter the wearable tech business in 2015."
M - First Persian Gulf Macy’s to Anchor $1 Billion Mall
- "The Persian Gulf’s first Macy’s Inc. department store will be part of a $1 billion Abu Dhabi mall planned by Gulf Capital and Stephen Ross’s Related Cos."
- "The Al Maryah Central mall will connect with an existing luxury shopping center called the Galleria on Al Maryah Island. The mall will have 2.3 million square feet of space and the project includes a tower containing a 200-room hotel and another with about 300 serviced apartments…"
Gilt Groupe - Gilt Turns Eye Toward Asia
Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.
1. CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.
The SILVER, WHEAT, AND SOYBEANS markets experienced the most BULLISH relative positioning change in the CRB week-over-week
The SUGAR, GOLD, AND COPPER markets experienced the most BEARISH relative positioning change in the CRB week-over-week
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
- The CORN, SUGAR, AND COFFEE markets are positioned for HIGHER PRICES near-term
- The COTTON, RBOB GASOLINE, AND HEATING OIL markets are positioned for LOWER PRICES near-term
3. Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
- The CORN, SUGAR, AND ORANGE JUICE markets are positioned for HIGHER PRICES in 1-year
- The LEAN HOGS, NATURAL GAS, AND LIVE CATTLE markets are positioned for LOWER PRICES in 1-year
4. Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.
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