prev

Results From The Dovish Peace Pipe

Client Talking Points

UST 10YR

The UST 10YR Yield getting smoked after Janet Yellen puffs the dovish peace pipe, keeping the “patient” word in and acknowledging what she cannot reverse (#Deflation in all reported inflation metrics); 1.96% this morning is -14 basis points lower than 24 hours ago with slowing CPI and GDP reports (Thursday and Friday) up next.

USD

The USD evidently did not like the dovishness either, but the selloff here is modest compared to bond yields. The USD is only -0.2% vs. Burning Euros and Yens, so that should put a short-term bottom in for Oil, Gold, etc. … and that helps keep the S&P 500 at all-time highs (both rate sensitive and inflation expectation stocks stop going down).

#HOUSING

#Housing is one of our Top 3 Themes in our Global Macro Themes deck, it hit higher-highs yesterday post the Toll Brothers (TOL) quarter/commentary. The ITB (sector ETF)is up +8.9% year-to-date and remains one of our favorite allocations in U.S. Equities, alongside Healthcare (XLV) and Consumer Discretionary (XLY) which are +5.9% and +5.0% year-to-date, respectively (SPX +2.7%).

Asset Allocation

CASH 40% US EQUITIES 9%
INTL EQUITIES 8% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
EDV

#Housing is one of our Top 3 Themes in our Global Macro Themes deck, it hit higher-highs yesterday post the Toll Brothers (TOL) quarter/commentary. The ITB (sector ETF)is up +8.9% year-to-date and remains one of our favorite allocations in U.S. Equities, alongside Healthcare (XLV) and Consumer Discretionary (XLY) which are +5.9% and +5.0% year-to-date, respectively (SPX +2.7%).

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

HOLX

Hologic (HOLX), at this stage in their product cycle and in the current stage of the economic cycle, has some very impactful tailwinds emerging to their revenue growth and the implied growth in the future. A stock generally will perform really well when doubt about future growth turns to optimism while the most recent data confirms the optimism. So far, we have a little bit of both; recent positive data like the December 2014 quarter upside and consensus estimates and ratings starting to move off of multi-year lows. A less-worse trend in Pap testing and rising patient volume can combine to get us close to flat for HOX’s Cytology (Pap) business. As the growth in Cytology improves and is less of a drag, the 3D Mammography growth can flow through. We think the outlook is bright, and with a few more data points, we think a lot more investors will agree with us.

Three for the Road

TWEET OF THE DAY

@KeithMcCullough and I will be streaming the @Hedgeye Morning Macro Call LIVE this morning at 8:30am ET: https://app.hedgeye.com/insights/42542-hedgeye-morning-macro-call-live-with-keith-mccullough

@HedgeyeDDale

QUOTE OF THE DAY

The lion does not turn around when a small dog barks.

-African Proverb

STAT OF THE DAY

Purchase Applications are up +4.6% week-over-week and +9.8% year-over-year, this is the fastest rate of growth since June 2013. Tracking +2.8% year-over-year, +7% quarter-over-quarter.


February 25, 2015

CLICK HERE for a free look at Hedgeye's Morning Macro Call for institutional subscribers. Post your questions for Keith and hear him answer live on the air.

 

February 25, 2015 - Slide1

 

BULLISH TRENDS

February 25, 2015 - Slide2

February 25, 2015 - Slide3

February 25, 2015 - Slide4

February 25, 2015 - Slide5

February 25, 2015 - Slide6

 

BEARISH TRENDS

February 25, 2015 - Slide7

February 25, 2015 - Slide8

February 25, 2015 - Slide9

February 25, 2015 - Slide10

February 25, 2015 - Slide11
February 25, 2015 - Slide12

February 25, 2015 - Slide13


CHART OF THE DAY: Getting the Market Right: Sector Outperformance YTD

CHART OF THE DAY: Getting the Market Right: Sector Outperformance YTD - 02.25.15 chart

*  *  *  *  *  *  *

This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for more information on how you can subscribe.

 

But, for those of us who like to buy both stocks and bonds (I wouldn’t have an Independent Research business if I marketed one asset class over another, sorry), we want to be buying the parts of the US stock market that will go up the most.

 

We call these Sector Style Exposures. In Equities, the 2015 outperformance of the following sectors remains obvious:

 

  1. US Housing Stocks (ITB) were +2.5% yesterday to +8.8% YTD
  2. Healthcare Stocks (XLV) were -0.1% yesterday to +5.9% YTD
  3. Consumer Discretionary (XLY) stocks were +0.5% yesterday to +5.0% YTD

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Fed's Road

“The Road goes ever on and on… down from the door where it began.”

-Tolkien

 

No, that is not from Janet Yellen’s testimony yesterday. It’s from J.R.R. Tolkien’s Lord of The Rings. It’s also the theme for a walking song that my favorite Tolkien character (Bilbo Baggins) cites in Chapter 19 of The Hobbit:

 

“Roads go ever ever on

Under cloud and under star,

Yet feet that wandering have gone

Turn at last to home afar.”

 

While Janet may have been pulled and pushed toward the path of “rate liftoff”, now she’s back to where she, Ben, and their fantasy novel has always been – back to the Shire of money printings and lower-rates-for longer, that is…

The Fed's Road - Deflation cartoon 02.24.2015

 

Back to the Global Macro Grind

 

To be clear, The Fed’s Road doesn’t end with green meadows that rest under shining stars. Policies to Inflate, ultimately end in #deflation. And that gets the Long Bond Bulls paid.

 

Long Bonds? Yes, as in the things that are at all-time highs in Europe and Japan (10yr German Bund and Japanese Government Bond Yields are trading at 0.36% and 0.33%, respectively) as long-term economic expectations there = #deflation.

 

While the USA’s 10yr Yield has dropped -14 basis points to 1.96% in the last 24 hours, it’s still trading at a +160-163 basis point premium to German/Japanese Long-term Bond Yields. Unless you think US inflation is pending, you’re long  the Long Bond (TLT).

 

So, thank you Janet – for pseudo telling the truth yesterday. My world needed that! What did she say?

 

  1. She kept the key-word “patient” in the Fed’s current policy vernacular
  2. She acknowledged inflation expectations being nowhere near the Fed’s “target”
  3. She reminded her fans that she is, allegedly, “data dependent”…

 

Why do these 3 things matter (in the same order)?

 

  1. Plenty of funds were pushing the idea that the “patient” language was going to be dropped
  2. Plenty of funds were trying to pull me into the narrative that the Fed “doesn’t care about inflation”
  3. Plenty of funds now realize that the next “data” points are really going to matter!

On the “data”, you need both a calendar and a forecast – here’s mine:

 

  1. Thursday’s CPI (consumer price inflation) report is going to slow (again) both sequentially and year-over-year
  2. Friday’s GDP report (for Q4 2014) is going to slow (again) both sequentially and year-over-year
  3. Next week’s US Jobs Report (for FEB) is going to do something that I have no edge on

 

While this game of front-running expectations isn’t easy, if I have 3 data points pending and I’m relatively certain about 2/3, I’d much rather see those 2 face cards first! I think both the bond and stock market see them the way I see them too.

 

In that regard, yesterday’s real-time market reaction to the Fed taking you right back down the road that they’ve always been on made complete sense to me:

 

  1. Bond Yields fell, and accelerated to the downside into the close (TLT +1.4% on the day)
  2. The US Dollar stopped going up – Burning Yens and Euros stopped going down
  3. Housing (ITB) and Consumer Discretionary (XLY) stocks led a stock market rally to all-time closing highs

 

Yes, all-time is a long-time – and that’s why I’ve been saying that it was more obvious to buy longer-term Bonds on the recent pullback than it was to buy the SP500. The 10yr US Treasury bond isn’t back to its all-time high yet = more upside!

 

But, for those of us who like to buy both stocks and bonds (I wouldn’t have an Independent Research business if I marketed one asset class over another, sorry), we want to be buying the parts of the US stock market that will go up the most.

 

We call these Sector Style Exposures. In Equities, the 2015 outperformance of the following sectors remains obvious:

 

  1. US Housing Stocks (ITB) were +2.5% yesterday to +8.8% YTD
  2. Healthcare Stocks (XLV) were -0.1% yesterday to +5.9% YTD
  3. Consumer Discretionary (XLY) stocks were +0.5% yesterday to +5.0% YTD

 

Whereas the Sector Styles we’d want to be net short (hedge funds) or underweight (mutual funds) like Energy (XLE) and Financials (XLF) are +1.6% and -0.9% YTD, respectively, are underperforming the SP500 (which is +2.7% YTD).

 

Don’t get me wrong, in a world facing both Global #GrowthSlowing and #Deflation headwinds, a +2.7% YTD gain is nothing to complain about. Being positioned on The Hedgeye Road of Long TLT, ITB, XLV, and XLY has simply been more fruitful.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-2.07%
SPX 2099-2125

ITB (Housing) 27.01-28.36
VIX 13.22-16.98
USD 93.70-95.18

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Fed's Road - 02.25.15 chart


CHART: MACAU PROXY PHONE BETTING

CHART OF THE DAY - MACAU PROXY PHONE BETTING

 

  • Wynn Macau and the Sands China properties discontinued the practice of accepting proxy phone betting in October 2014
  • As can be seen from the chart, it appears that about 2 and 1 points of market share were lost by Wynn and Sands, respectively, since the ban was implemented
  • Sands' share may have already been on the down slope but for Wynn the elimination of phone proxy betting seemed to reverse positive momentum
  • We think Wynn Macau may restart their phone proxy betting, possibly as soon as this month. Along with new junkets, the resumption of phone proxy betting could jump start its VIP business
  • Overall Macau trends are deteriorating further and Wynn cannot overcome the environment. However, on a relative basis Wynn's VIP business could hold up better over the near term.

 

CHART: MACAU PROXY PHONE BETTING - phone proxy betting


DFRG: GOING IN SHORT, REDUX

The short side of our Investment Ideas list is beginning to grow, despite strong industry sales trends.  If there is anything CAKE, PNRA, or NDLS has taught us recently, it is that struggling business models are not participating in what is oft-referred to as the “industry-wide” sales strength.  Alas, a rising tide cannot lift sinking boats. DFRG is a name that we see approximately 27-48% downside in over the next twelve months, given our $10-14 fair value range.


DFRG is a company we referred to last June as “the darling of Wall Street,” when we first tagged it as a short.  Since that time, the stock has had a tremendous amount of difficulty staying afloat, as management’s growth vehicle consistently defied aggressive expectations.  To wit, fiscal year ‘14 earnings estimates have declined more than 20% since January 2014.  Over this same period, fiscal year ’15 earnings estimates have declined more than 23%.  Despite these moves, we believe there are incremental negative revisions on tap.

 

DFRG: GOING IN SHORT, REDUX - 1

 

The Bear Case

While we believe DFRG will miss estimates when they report 4Q14 earnings on 2/27, this is not solely a call on the quarter.  2014 was a year of pain for DFRG holders and we have little reason to believe 2015 will be any different.  The street is looking for 15% and 23% earnings growth, respectively, in 2015 and 2016 after two consecutive years of down-to-flat growth.  The leverage assumed in the operating model will prove more wishful than realistic.

 

DFRG: GOING IN SHORT, REDUX - 2

 

To get at the heart of the matter, we have little confidence in the Grille as the company’s only growth vehicle.  This concept is proving much harder to grow than most anticipated.  The classes of 2012 and 2013 openings have been extremely disappointing; with restaurant level EBITDA in the 10-15% range, well below the 20-25% benchmark.  Only the class of 2011, which was only 2 restaurants, has achieved restaurant level EBITDA in this range.  This leads us to believe that 1) management is having a difficult time selecting quality sites 2) management’s targeted restaurant level EBITDA range is far too aggressive 3) the Grille shouldn’t be growing by 35-45% a year and 4) it is dilutive to the entire portfolio (leading to lower margins and returns).

 

DFRG: GOING IN SHORT, REDUX - chart3

Source: Company Filings

 

DFRG: GOING IN SHORT, REDUX - 6

 

Our lack of confidence in the Grille, based solely on reported results, drives our distaste for the stock.  Management has successfully framed DFRG as a growth company, but the new unit returns are falling well short of estimates and, if this aggressive new unit agenda continues, will lead to more destruction of shareholder value.  The street is currently looking for seven new unit openings in 2015, a number we believe is at risk of being scaled back at some point throughout the year – keep in mind that management guided to 6-8 (one Double Eagle and 6-7 Grille’s).  Sullivan’s will not be growing anytime soon; right now, it’s a dead concept walking.

 

Tough Setup into the 4Q14 Print

  • Consensus is looking for an 80 bps sequential improvement in the two-year average of system-wide comps to +2.6%.
  • Consensus is looking for 13% EPS growth in 4Q14, after -5%, 0%, and -20% growth in 1Q14-3Q14, respectively.
  • Consensus is looking for cost of sales as a percentage of revenues of 30.24% in 4Q14, implying full-year cost of sales of 30.17%. Management guided this line to 30.1-30.4% of sales, suggesting estimates may be too aggressive at the low end of the range.
  • Consensus is looking for 29 bps of labor leverage in 4Q14; management has only levered this line once on the past 12 quarters (20 bps of leverage in 2Q14).
  • Consensus is looking for 29 bps of restaurant level margin leverage in 4Q14; management has only levered this line once in the past 12 quarters (9 bps of leverage in 2Q14).
  • Consensus is looking for 23 bps of operating margin leverage in 4Q14; management has only levered this line twice in the past 12 quarters (301 bps of leverage in 1Q12; 354 bps of leverage in 2Q12).
  • Guidance will likely be unfavorable.

 

DFRG: GOING IN SHORT, REDUX - chart4

 

DFRG: GOING IN SHORT, REDUX - chart5

Source: Company Filings, Consensus Metrix

 

Valuation and Sentiment

DFRG currently trades at 21x an (in our view) inflated next twelve months earnings estimate.  Neither the sell-side, nor the buy-side, shares our sentiment on the stock, which has a 100% buy rating and only 3.26% short interest.

 

DFRG: GOING IN SHORT, REDUX - 7

Source: FactSet


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next