On today's edition of The Macro Show, Hedgeye Macro Analysts Darius Dale and Matt Hedrick had a lengthy discussion about the ongoing turmoil in Greece, exploring how the remaining Eurozone countries would be affected if the Greeks leave.
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Client Talking Points
Finally the collapse in Chinese shares spills over into the rest of the region. The Shanghai Composite ended down -5.9% after opening down -7% despite frantic efforts from policymakers to stem the tide including mass trading halts with ~50% of mainland stocks not trading. Bloomberg estimated that the 1,301 companies locked up $2.6T in shares, or ~40% of mainland public equity market cap. The Hang Seng plunged -5.8% – the most in seven years – led lower by a sharp decline in H-shares. The concerns sparked a flight to safety, which pushed up the yen nearly ~1% vs the USD and perpetuated a -3.1% decline in the Nikkei. Taiwan finished down -3% while both Australia and India finished down nearly -2%. We don’t have a view on when and how the contagion will be contained, but we’re not inclined to rush in given that the Chinese equity bubble was perpetuated by unprecedented levels of margin finance.
Perhaps its peri-holiday related noise in the data, maybe it’s resurgent 1st-time buyer demand or simply interest rate catalyzed demand pull-forward, probably its some combination ….but, in any case, mortgage purchase demand in the latest week finally eclipsed the post-crisis highs recorded in 2013. Purchase Activity rose +6.6% sequentially with year-over-year growth accelerating to +16.9% to start 3Q. There are some emerging headwinds to performance in 3Q but, for now, the momo in the high-frequency housing data remains in tact.
Spillover effects from Grexit Fears and drawdowns in the Shanghai Stock Exchange have supported the USD and hammered commodity prices this week with the base metals taking the brunt of the beating. Big volumes took both silver and nickel limit down on the Shanghai Futures Exchange overnight as traders and investors rush to raise cash and cover margin calls. With the USD back in a BULLISH TREND set-up, and the cyclical and secular trends gripping the U.S. economy, we continue to like early cycle materials on the short-side at a the right time.
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Top Long Ideas
We’re all-in on Kate Spade at current levels. The Hedgeye Retail team believes that comps are accelerating into the double digits in 2H, and we think that KATE’s margin guidance for this year will prove conservative. Ultimately, we think that numbers this year are 10% too low – a delta that widens to 20%+ next year, and to 50%+ by 2018 when we think KATE has $2.50 to $3.00 in earnings power. Using decelerating multiples as growth accelerates and the P&L matures gets us 50%+ upside in a year and a 2-3-bagger by 2018.
Our Gaming, Lodging and Leisure team reiterates its high-conviction thesis on Penn National Gaming. PENN remains one of our favorite names on the long side. It maintains the best new unit growth story in domestic gaming. PENN's property in Massachusetts has had an excellent start. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.
The Hedgeye Growth, Inflation, Policy (GIP) model is signaling a move into QUAD 3 for the second half of 2015. This is a set-up for the domestic economy where growth is slowing and inflation is accelerating. We reiterate our intermediate to long-term bullish bias on long-duration Fixed Income and gold. Our back-testing results cast a favorable outlook for Long-Term Treasuries, REITs, and Gold with a favorable set-up as seen in the first three charts below. When growth is slowing (QUAD 3 and QUAD 4), long term rates tend to move lower. The logic is simple:
Three for the Road
TWEET OF THE DAY
If you didn't know #SecularStagnation was going to be a big theme for investors and policymakers in 2H15 (and beyond), now you know.
QUOTE OF THE DAY
Mountaintops inspire leaders but valleys mature them."
STAT OF THE DAY
Currently in the U.S. nearly one out of every five dollars spent on cookies is spent on an Oreo, in 2014 Oreo had sales of $3.28 billion globally.
Editor's Note: This is an excerpt from Hedgeye CEO Keith McCullough's remarks on The Macro Show yesterday morning. If you'd like to learn more about how you can ramp up your investing and trading game before the market opens every day click here.
Get the euro right, you’re going to get the dollar right. And then you get the reflation or the deflation trade right. I can’t say that enough. Again, we called this back in September. We are going to call it again now. You can see it with the dollar breaking out which of course is a derivative of the euro breaking down.
Do you have a catalyst to get the euro back above 1.13? I don’t. All the catalysts are lined up to devalue the euro. Whether it is the…
- ECB response
- Greek response
- ‘No soup for you!’ response
… I don’t care what the response is. But it is going to be a devaluation of the European currency. So again, 1.09 this morning, which is down -0.7%.
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Takeaway: We'll be holding a Black Book Call on McDonald's, today July 8th at 11:00am ET.
We are adding MCD to the Hedgeye Best Ideas list as a LONG.
Watch the REPLAY below.
Confirmation Number: 13613786
Materials: CLICK HERE
After nearly four years of being bearish on MCD, it’s now time to reverse course. We are confident that MCD is not a structurally broken company. Importantly, there are a number of initiatives in place that will ultimately reverse the fortunes of the company.
Yes, fixing McDonald’s operationally will take time, but the seeds have been planted. From the work I have done, by 2016 it will be clear that MCD is well on its way to reasserting itself as the dominate company that it is.
McDonald’s CEO, Steve Easterbrook, is reshaping the company from the inside out and the financial impact of these actions are about to be clear. Returning MCD to sustainable growth is centered on structural changes to the operating model and a recommitment to regaining the trust and loyalty of customers.
These changes are taking place in Oak Brook and at the local level. Within McDonald’s local management and franchisees working together to improve the McDonald’s experience. The new experience is consistent with what made the company great in the first place.
While financial engineering is part of the new foundation, its limitations are obvious so understanding how an operationally led turnaround will unfold is critical to make a longer-term commitment to being LONG MCD.
The LONG MCD BLACK BOOK will focus on:
- How the new operating structure of the company is breathing new ENERGY into the company including improved profitability
- The primary cause for the market share losses in the USA over the past three years and how the company is fixing it
- The timeline for the turn in sentiment and performance
- Updated financials
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