Watch the replay of our analysis of the FOMC statement below.
Today we live-streamed our recap of the FOMC statement and our outlook for financial markets over the immediate and intermediate terms. The discussion runs just shy of 30 mins and hits on every major risk investors must consider from here. It’s a real must-see in our opinion; we recommend finding the time to review it soon.
Best of luck out there!
-The Hedgeye Macro Team
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
Fed Day Cometh… and the US Dollar Index is trading down around -1% intraday.
TRADE: Today Keith recommended shorting the EUR/USD (via the etf FXE) at $109.13. He wrote: “There are plenty of macro positions pushing to the top/bottom ends of their immediate-term ranges right now. My strategy during these counter-TREND moves is to wait/watch for the bullish/bearish TRADE to tap the top/bottom end of the range - sometimes it takes time.
I've been waiting for the Euro (vs. USD) to do that for a few weeks now, and this is my 1st SELL signal. There's no immediate-term TRADE support in the EUR/USD cross to $1.06.”
Additionally, we believe the US Dollar has been pushed to 2 month lows as investors expect the Federal Reserve’s more moderate assessment of economic conditions/momentum will push the dots (again) on a rate hike. A worse than expected US Q1 GDP and inflation report could drag the USD lower over the immediate term.
TREND/TAIL: Longer-term bearish: we continue to think a whole host of reasons will drag the common currency lower, including:
Bullish German Equities
The German equity market (DAX) had a significant -3.2% pullback today. We continue with the stance that the Eurozone’s equity markets do not like a strong euro.
The DAX is up 20.3% YTD, and we continue to think that over the TREND/TAIL it will pay to obey the commands of the central planners, in particular by being long of German equities.
To reiterate our TREND thesis:
If you missed our call titled “Germany: Still Bullish” on 4/14, CLICK HERE for a 30 minute video replay that walks through 40 slides of supporting material.
While German Equities are not necessarily “trading” on fundamentals, recent data is mixed. A couple notable call-outs include:
From a quantitative perspective, the DAX recently broke its immediate-term TRADE line of support (to become resistance), but remains firmly above its intermediate-term TREND and long-term TAIL levels, a bullish signal.
Takeaway: Strategic alternatives exploration overshadows a strong Q1
Panera delivered a sub-par print after the close yesterday and held a mediocre earnings call this morning. Management commentary wasn’t quite what we were looking for, but that’s okay. If anything, this strengthens the case for further change within the company. We continue to recommend buying the stock on down days.
Soft Headline Numbers
System-wide, company, and franchise same-store sales of +0.7%, +1.5%, and -0.1% fell well short of consensus estimates of +2.4%, +2.6%, and +2.0%, respectively. The lack of flow through was significant, as operating margin declined 180 bps (exclusive of the one-time refranchising charge). Labor was the most significant driver of the decline, as structurally higher wage rates and the investment of additional labor hours associated with the startup of Panera 2.0 across select locations weighed down margins. Food and paper inflation added notable pressure in the quarter as well. As a result, 1Q15 EPS of $1.41 fell short of the $1.43 consensus estimate. Despite the miss, management maintained full-year EPS guidance of flat to down mid-to-high single digits versus the prior year.
Management Could’ve Done More
We believe management could have said more on the call to convince investors that the strategic initiatives they are taking are the right ones. The general tone of the call was rather unconvincing as management delivered a trust us story as opposed to laying out a clear, concise strategic roadmap. While we do believe the investments the company is making will benefit the brand over the longer-term, we question to what extent they are prudently allocating their capital. We also believe there are a number of initiatives that management can undertake in order to create shareholder value. To review, Panera could:
Management offered up very little on these fronts, but we are in the early innings of the story here. So while they could’ve said more on the call, it is plausible to consider that they are just beginning to vet these potential value enhancing initiatives.
Asymmetric Risk/Reward Setup
We continue to believe PNRA represents an asymmetric risk/reward setup, with our conservative base case scenario calling for 18% upside over the next 1-2 years. To contrast, our bear case calls for -8% downside. On a relative basis, the stock is among the cheapest in the quick service/fast casual category trading at 12.2x EV/EBITDA. With only 37% buy ratings, the sell-side is not sold on the name which makes this one of our favorite contrarian plays in the entire restaurant space.
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