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Hedgeye's Morning Macro Call with CEO Keith McCullough

We are pleased to present this complimentary peek behind-the-macro-scenes of Hedgeye's daily Morning Macro Call for institutional subscribers.


Monday Mashup: YUM, BLMN and More

Reminder: We are hosting a call tomorrow, December 2nd, at 10am EST to run through our long thesis on YUM.  We will send out materials and dial-in information tomorrow morning.

 

Monday Mashup: YUM, BLMN and More - 1

 

Recent Notes

11/24/14 Monday Mashup: YUM, RUTH and More

11/25/14 Best Idea Call Invite: Long YUM

 

Events This Week

Tuesday, December 2nd

  • YUM Hedgeye Best Idea Call at 10am EST

Wednesday, December 3rd

  • BOBE earnings call 10am EST

Thursday, December 4th

  • SBUX Investor Day at 11am EST

 

Chart of the Day

The Restaurant Value Spread, which turned positive in May for the first time in the prior 25 months, continues to widen sequentially.

 

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Recent News Flow

Monday, October 24th

  • RRGB announced the opening of its newest restaurant in South Florida. 
  • PNRA announced the resignation of EVP and CMO, Michael Simon.  Mr. Simon accepted a new senior leadership position with Bai Brands.  Chris Hollander, VP of Marketing at Panera, will fill Mr. Simon's vacancy while the company conducts an internal and external search for a replacement.
  • PZZA announced the acquisition of Pizza Corner stores in South India.  Papa John's will convert these stores to Papa John's branded restaurants through 1Q15.

Tuesday, October 25th

  • TXRH COO, Steve Ortiz, announced his retirement, effective January 12, 2015.  Mr. Ortiz has been with the company for 18 years and served as COO since 2004.  The company is currently working on an agreement with Mr. Ortiz to become a franchisee in the San Diego area.  In order to fill this vacancy, Doug Thompson has been promoted to VP of Operations and will report directly to CEO Kent Taylor.

Wednesday, October 26th

  • BWLD elected Cindy L. Davis to its expanded Board of Directors.  This addition expands the board to eight members.  Ms. Davis most recently served as VP of Nike and President of Nike Golf from 2008 to 2014.

Friday, October 28th

  • BLMN signed a purchase agreement to sell Roy's Restaurants to United Ohana, LLC.  The transaction is expected to close in the next 30-60 days.

 

Sector Performance

The XLY (+2.7%) outperformed the SPX (+0.7%) last week, as both casual dining and quick service stocks, in aggregate, outperformed the SPX Index.

 

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XLY Quantitative Setup

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

 

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Casual Dining Restaurants

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Quick Service Restaurants
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Howard Penney

Managing Director

 

Fred Masotta

Analyst


Retail Callouts (12/1): Hedgeye Retail Idea List, Black Friday Data Points, KSS, TGT, M, FL, DKS, DG

Takeaway: Two changes to Hedgeye Retail Ideas List: HIBB, BBY. Initial Black Friday/Thanksgiving read throughs = not positive.

HEDGEYE RETAIL IDEA LIST

Retail Callouts (12/1): Hedgeye Retail Idea List, Black Friday Data Points, KSS, TGT, M, FL, DKS, DG - 12 1 chart1

 

This Week's Changes Hedgeye Retail Idea List

  1. Moved HIBB higher on the Short Bench -- as close as we can get without it being a core short. We're convinced that HIBB's capital intensity is heading higher while margins are likely to head lower.
  2. Took Best Buy off our Long Bench. This was a TRADE idea for us. The stock's 33% run since we started evaluating it in October doesn't leave much left for us -- at least not without outsized risk.

 

EVENTS TO WATCH

Retail Callouts (12/1): Hedgeye Retail Idea List, Black Friday Data Points, KSS, TGT, M, FL, DKS, DG - 12 1 chart2

 

 

COMPANY HIGHLIGHTS

Retail Callouts (12/1): Hedgeye Retail Idea List, Black Friday Data Points, KSS, TGT, M, FL, DKS, DG - 12 1 chart3

The initial data points from Black Friday weekend are not good. Actually, they're flat-out bad. That's really no surprise. The 'sales hype' engine that is fueled by the retailers in advance of Thanksgiving every year ran unusually hot this year.  Couple that with a 16% run in the XRT from the October lows, and a 21x p/e for retail, and it's really not a good combination.

 

Yes, Cyber Monday could help save the day as consumers shift to online channels. But keep in mind that IBM's Online Sales index for Thursday and Friday was +11.3%, which is an 800bp deceleration from the 19.3% level was saw over the same period last year. Cyber Monday will definitely be positive, but perhaps not as positive as last year. Overall, we're hard pressed to think we'll see Retail Sales(ex. Food, Auto, & Gas) above the 3.3% rate we saw last year.

 

One concern we have with the shift to online is 1) e-commerce is lower margin for department store and multi-line retailers -- full stop. It's higher margin for brands like Nike and Ralph Lauren. But not for any retailer with a basket size under $150.  2) Retailers don't know where sales will show up -- in store or on-line. As such, they need to keep stores fully-staffed (at 2-3x pay on Thanksgiving) in order to satisfy demand that might or might not be there.  Our point is that it is dilutive both ways.

 

We still think shorting KSS is the best way move here. We'd also short TGT, M, FL, DKS, and DG.

 

 

OTHER NEWS

 

UA - Person of the Year: Kevin Plank

(http://www.wwd.com/footwear-news/business/person-of-the-year-kevin-plank-8049557?module=Footwear%20News-Business-third)

 

Zell Confirms Bid for Grocery Stores to Be Shed by Albertsons

(http://www.bloomberg.com/news/2014-11-30/zell-confirms-bid-for-grocery-stores-to-be-shed-by-albertsons.html)

 

"Billionaire investor Sam Zell confirmed he’s interested in snapping up about 140 stores to be divested as Cerberus Capital Management LP acquires Safeway Inc. and merges it with the Albertsons LLC grocery chain."
 

JWN, AMZN, URBN, ZU, AEO - Survey: Nordstrom, Amazon most engaged brands on Pinterest

(http://www.chainstoreage.com/article/survey-nordstrom-amazon-most-engaged-brands-pinterest-0)

 


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MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA

Takeaway: Russia looks increasingly unstable as Sberbank moves into dangerous CDS territory.

Current Ideas:

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 19.2

 

Key Takeaway:

Russia remains a major area of global risk exposure. Russia's largest bank, Sberbank, which holds roughly half of all retail deposits for the country, is now trading at over 400 bps on its credit default swaps. The "danger zone" is generally regarded as anything north of 300 bps. With oil continuing to plunge following OPEC's move to drive marginal shale producers out of business, the embedded risk in Russia's banking system is growing quickly. Consider this simple example. Energy still accounts for 20-25% of Russia's GDP, and energy prices have fallen ~30% in the last two months. Multiplying those two weightings would imply that Russia's economy is at risk of suffering a decline of 6-7.5%. Compare that with the 8.2% decline experienced by the US Economy in 4Q08 during the height of the US Great Recession.

 

The XLF rose 0.78% last week, as stocks rose globally, outperforming the S&P 500, which rose 0.2%.  The Global Dow rose 0.07%.  Financials are performing well in 2014 at +11.6%, right in the middle of sector performance with Healthcare the highest (+25.6%) and Energy the lowest (-9.8%).

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 12 improved / 1 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Positive / 5 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Positive / 2 of 12 improved / 0 out of 12 worsened / 10 of 12 unchanged

 

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1. U.S. Financial CDS -  Swaps showed broad tightening last week with CDS for 25 out of 27 domestic financial institutions tightening.    

 

Tightened the most WoW: CB, MMC, AIG

Widened the most/ tightened the least WoW: UNM, GS, WFC

Tightened the most MoW: MMC, ACE, AIG

Widened the most MoM: GNW, TRV, UNM

 

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 1 2

 

2. European Financial CDS - Swaps also were mostly tighter in Europe last week. At the median, European swaps tightened by -8.5%.  Only Greek and Russian bank CDS widened modestly: Greece by about 3.1% and Russia by 2.5%. We would call out Russia's Sberbank, which is now north of 400 bps, reflecting the rising risk in the Russian economy. 

 

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 2

 

3. Asian Financial CDS, similar to other global markets, tightened last week. The Chinese stock market had its best week in four years, and the Bank of China showed the second biggest tightening in the Asian market.

 

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4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Spanish sovereign swaps tightened by -12.5% (-13 bps to 91 ) and American sovereign swaps widened by 8.9% (1 bps to 18).

 

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5. High Yield (YTM) Monitor – High Yield rates rose 3.4 bps last week, ending the week at 6.14% versus 6.10% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1882.

 

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7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 22.1 bps this week versus last week’s print of 22.49 bps.

 

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 7

 

8. CRB Commodity Price Index – The CRB index fell -4.5%, ending the week at 254 versus 266 the prior week. As compared with the prior month, commodity prices have decreased -6.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 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 2 bps to 8 bps.

 

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell less than 1 basis point last week, ending the week at 2.58%. 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: KEEP YOUR EYES ON RUSSIA - 10

 

11. Chinese Steel – Steel prices in China fell 0.6% last week, or 17 yuan/ton, to 2948 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: KEEP YOUR EYES ON RUSSIA - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 170 bps, -11 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 0.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


December 1, 2014

December 1, 2014 - Slide1

 

BULLISH TRENDS

December 1, 2014 - Slide2

December 1, 2014 - Slide3

December 1, 2014 - Slide4

December 1, 2014 - Slide5

 

BEARISH TRENDS

 

December 1, 2014 - Slide7 

December 1, 2014 - Slide8

December 1, 2014 - Slide9

December 1, 2014 - Slide10

December 1, 2014 - Slide11

December 1, 2014 - Slide12
December 1, 2014 - Slide13

 


Oil, Russia and Italy

Client Talking Points

OIIL

If consensus didn’t have inflation expectations (instead of #quad4 deflation), oil wouldn’t be moving like this; with the refreshed risk range of $63.86-71.12, realize that a lot of bad things happen to levered equities (MLPs) and high yield debt, even if this crash in oil “bounces” back to the top-end of my range.

RUSSIA

Ruble down 6% since Friday (-40% year-to-date) making this the biggest FX crash since 1998 (global macro market #Intereconnectedness mattered then, and it should now) – Russian stocks -3.4% to -32.1% year-to-date.

ITALY

Amidst a broad base of slowing global economic data this morning (Japanese Auto Sales -13.5% year-over-year for NOV!), Italy reminds ECB President Mario Draghi that he has not been able to ban recessions; Italy Q3 GDP -0.5% year-over-year and the Italian stock market -1.3% remains bearish TREND despite huge QE expectations going into ECB on Thursday.

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

XLP

The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

Bulls will point to Cyber Monday as saving grace to poor brick&mortar sales. They'd better be right. No room for error at these valuations.

@HedgeyeRetail

QUOTE OF THE DAY

Only those who dare to fail greatly can ever achieve greatly.

-Robert. F. Kennedy

STAT OF THE DAY

CRB Commodities Index had a -5.5% weekly loss to -9.2% year-to-date and Silver moved into crash mode, dropping -5.5% on the week to -20.4% year-to-date.


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