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MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES

Takeaway: Reminder: We will be hosting our Q3 2015 Financials Outlook & Themes call today, Monday, July 13th at 1:00pm EDT.

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - Financials Beach cartoon2015

 

Q3 2015 FINANCIALS THEMES OVERVIEW:

 

#Exchanges&Volatility - Volatility looks poised to break substantially higher on European angst and summer's seasonality and the exchange group will be a beneficiary of this dynamic. That said, there is collateral damage from the energy patch bust. We see a great opportunity in being long CME on the underappreciated upside to its earnings trajectory, and being short Intercontinental Exchange (ICE).

 

#Canada'sBankBubble - Canada's property market is poised for a generational correction while the Banking system has its head in the sand. De minimis reserves, thin capital/high leverage and Energy/CRE exposure paint a very asymmetric picture of vulnerability, especially when juxtaposed against the mythology of Canadian banking strength.    

 

#FinancialEngines & #Och Ziff - Two of our favorite SMID cap ideas on the long side. FNGN is a battleground small cap name that we think is misunderstood and undervalued. OZM has a secular tailwind from the rotational forces of pension assets into alternatives and is trading at its cheapest valuation in a decade.

 

  • Relevant Companies/Tickers:
  • Royal Bank of Canada (RY) (Market Cap $113 billion)
  • Toronto-Dominion Bank (TD) (Market Cap $100 billion)
  • CIBC (CM) (Market Cap $37 billion
  • Home Capital Group (HCG) (Market Cap $3 billion)
  • Genworth MI Canada (MIC) (Market Cap $3 billion)
  • CME Group (CME) (Market Cap $32 billion)
  • Intercontinental Exchange (Market Cap $26 billion)
  • T. Rowe Price (Market Cap $22 billion)
  • Och Ziff Capital Management (Market Cap $7 billion)
  • Virtu Financial (Market Cap $3 billion)
  • Financial Engines (Market Cap $2 billion) 

 

CALL DETAILS:

US Toll Free:

Toll Free:

Confirmation Number: 13613076

Materials: HERE

Outlook Calendar Reminder: HERE

 

 

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Key Takeaway:

Last week's Greek woes remained contained to Greece as the broader EU complex appears de-coupled from what's happening within Greece. Not that it matters much in the short/intermediate term as the Eurozone has just agreed to a new €86 billion bailout package for Greece this morning.

 

Meanwhile, China's steel prices continue to plumb new lows, shedding another 2.5% on the week. We use Chinese steel prices as our proxy for the real economy. 

 

Current Ideas:

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM19

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 6 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM15

 

1. U.S. Financial CDS -  Swaps tightened for 17 out of 27 domestic financial institutions. Concluding a volatile week, the median week-over-week change in spreads ended at -1 bps.

 

Tightened the most WoW: HIG, AGO, AIG

Widened the most WoW: UNM, AON, MMC

Widened the least/ tightened the most WoW: CB, HIG, SLM

Widened the most MoM: MMC, MBI, ACE

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM1

 

2. European Financial CDS - Greek banks took it on the chin again last week as prospects for survival waned further. Outside of Greece, however, the broader European banking complex saw swaps tighten for the most part, indicating that contagion fears are nominal to non-existent at this point.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM2

 

3. Asian Financial CDS - Two of three Chinese Bank saw CDS improve last week. Additionally, all Indian Bank CDS improved. However, Japanese Bank swaps widened.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Italian sovereign swaps tightened the most, by -11 bps to 123.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM18

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM3

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM4

 

5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Turkish and Indian swaps tightened the most, by -5 bps to 214 and -5 bps to 165 respectively.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM16

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM20

 

6. High Yield (YTM) Monitor – High Yield rates rose 6 bps last week, ending the week at 6.68% versus 6.62% the prior week.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM5

 

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 1.0 points last week, ending at 1890.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM6

 

8. TED Spread Monitor – The TED spread was unchanged last week at 28 bps.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM7

 

9. CRB Commodity Price Index – The CRB index fell -2.6%, ending the week at 218 versus 224 the prior week. As compared with the prior month, commodity prices have decreased -2.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM8

 

10. 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 was unchanged at 11 bps.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 5 basis points last week, ending the week at 1.21% versus last week’s print of 1.16%. 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 | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM10

 

12. Chinese Steel – Steel prices in China fell 2.5% last week, or 55 yuan/ton, to 2110 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 | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 176 bps, 1 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 2.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | GREECE GETS ANOTHER BAND-AID WHILE CHINA HEMORRHAGES - RM14 3

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


The Macro Show Replay | July 13, 2015

 

 


July 13, 2015

July 13, 2015 - Slide1

 

BULLISH TRENDS

July 13, 2015 - Slide2

July 13, 2015 - Slide3

July 13, 2015 - Slide4

 

 

BEARISH TRENDS

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July 13, 2015 - Slide13


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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.

JUST CHARTS | YUM

COMPANY OVERVIEW

YUM is on the Hedgeye Best Idea list as a LONG.  We continue to believe that there is tremendous intrinsic value in YUM.  There are a number of levers the company can pull to create shareholders value!   

JUST CHARTS | YUM - YUM CHART 1 

 

PRICE PERFORMANCE

YUM is up 23% year-to-date, but down about 2% in the past month.  The volatility in the Chinese market has not been good for YUM of late. On the margin, the market is going to need to digest an ugly quarter from YUM.  Barring any big financial engineering event, making progress on the turnaround in China will be the focus of the current quarter.  While things are getting better in China, the improvement will not be enough to convert bears into bulls.  The wild card on this earnings call will be to see what if any impact the two activists are having on how management communicates with the street.    

JUST CHARTS | YUM - YUM CHART 2

 

SAME STORE SALES

This is the last quarter of difficult comparisons for the China division.  Current estimates have YUM China same-store sales at -8.1% for 2Q15E.  This puts two-year same-store sale for china at +3.5%, a sequential improvement of 500bps quarter to quarter.  If China’s current pace of recovery continues and investors’ fears of structural issues in the region subside, YUM will realize significant operating profit and earnings growth driving a further re-rating of the stock higher.

 

Taco Bell is on track to have another great quarter with same-store sales of 3.4%.  The sequential slowdown in the two year trend is consistent with industry dynamics.  KFC is also on track to have another strong quarter, while Pizza Hut is a disaster and should be sold! 

JUST CHARTS | YUM - YUM CHART 3    

JUST CHARTS | YUM - YUM CHART 4 

JUST CHARTS | YUM - YUM CHART 5 

JUST CHARTS | YUM - YUM CHART 6 

 

RESTAURANT LEVEL MARGINS

Given the poor sales performance in China, restaurant level margins will decline 335bps in 2Q15.  This is only slightly better than the 451bps decline in 1Q15.

JUST CHARTS | YUM - YUM CHART 7 

JUST CHARTS | YUM - YUM CHART 8 

 

OPERATING MARGINS

China’s operating margins performance will show a 370bps decline versus 554bps in 1Q15.  Consistent with 1Q15, the management team in China continues to do a great job managing costs in a difficult environment. 

JUST CHARTS | YUM - YUM CHART 9 

 

Despite improving operating margin performance from Taco Bell and KFC, the gravitational pull from the China segment will bring consolidated margins down 177bps vs 187bps in 1Q15

JUST CHARTS | YUM - YUM CHART 10 

 

VALUATION

Valuation is off the recent peak, but still at near all-time highs.

JUST CHARTS | YUM - YUM CHART 11 

 

SHORT INTEREST

Short interest is approaching the highs seen during the peak of the last supplier scandal in China.

JUST CHARTS | YUM - YUM CHART 12 

 

SELL-SIDE SENTIMENT

Sentiment still has the company as a show-me name with 65% as a hold or sell

JUST CHARTS | YUM - YUM CHART 13 replace 

 

Hedgeye Restaurants Best Ideas List

JUST CHARTS | YUM - YUM CHART 14 replace


The Week Ahead

The Economic Data calendar for the week of the 13th of July through the 17th of July is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

 

Click image to enlarge.

The Week Ahead - z 07.10.15 Week Ahead


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: DE, VIRT, KATE, PENN, GIS, VNQ, EDV & TLT

Investing Ideas Newsletter       - Fed lady cartoon 06.25.2016

 

Below are Hedgeye analysts’ latest updates on our EIGHT current high-conviction long and short investing ideas as well as CEO Keith McCullough’s updated levels for each.  

 

Please note we removed Gold from the long side this week.

LEVELS

Investing Ideas Newsletter       - z x

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

IDEAS UPDATES

PENN

Gaming, Lodging and Leisure Sector Head Todd Jordan reiterates his team's bullish high-conviction thesis on Penn National Gaming. The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming.

 

Jordan further notes that with more states releasing their June gaming revenues this past week, we feel more confident in our higher than consensus Revenue, EBITDA, and EPS estimates.

KATE

We held a "Flash Call" on Kate Spade recently to address the concerns we’ve been fielding about the brand and company from institutional investors in light of the selloff since the company reported earnings in early May.

 

Here were our conclusions from the call:

 

  1. Some concerns are valid, some are not.  We’ve had more questions and concerns from investors on KATE over the past two weeks than we’ve had all year. Given the weakness in the stock, we wanted to address these issues.
  2. The business is absolutely on track. Comp trends, ecommerce, and margins look fine from where we sit. The company actually managed to get estimates for the quarter and the year to very achievable levels.
  3. Why no one cares is the bigger question. But new investors largely don’t care, as they perceive “The Space” to be broken, and KATE to be expensive, volatile, and unmodelable. In the end it’s too small for them to ‘have to care’.
  4. In the end, execution wins. We think that “The Space is Broken” argument is laughable. The softer concerns like disclosure and management stock ownership are more valid. But when all is said and done, watch what they do, not what they say. This stock is flat-out cheap and growing at 50%.

GIS

General Mills remains on the Hedgeye Consumer Staples Best Ideas list as a LONG. Closing out the year, many people are looking at the sales miss and as a result are bearish on the stock. But those people appear to be sheep, listening to and following whatever the media tells them.  If you look at the full story GIS has a lot of things going for it and they are going to show it in the top and bottom line this year.

 

Over the last couple of months, the company has announced the removal of artificial colors and flavors from their cereals. More recently, they have committed to using only cage-free eggs.  Many of these small actions that management is taking are going to have a snowball effect as they go throughout FY16.

 

FY16 Hedgeye Guidance ―

Looking into FY16 we are excited about the possibilities. Management is working hard on their “Consumer First” initiative and making great changes to current product while also introducing new products.  Below is not a comprehensive list but some of the biggest things that we are looking forward to this year:

  1. Yoplait in China
  2. Gluten-Free Cheerios
  3. No artificial colors or flavors in the cereal
  4. Granola innovation / Muesli
  5. Greek Plenti / Whips
  6. Original yogurt sugar reduction
  7. Renovation on Grain Snacks
  8. Strong push on Natural & Organic products
  9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
  10. Bringing U.S. innovation International

 

Bottom line is they are still struggling; we don’t want to shy away from that. But the core of the portfolio is growing and management seems to be working tirelessly on implementing changes to grow the rest of the portfolio, especially cereal.  We also still believe that to have continued growth into the future a sizeable acquisition or divestiture would be beneficial to the business. 

DE

Flooding in key farming areas has helped to reduce expected crop yields, pushing grain prices higher in recent weeks.  Higher grain prices are a key short-term risk for our bearish view of Deere

 

While we have used this wet weather and DE’s 2Q beat as an entry point, sustained higher prices would likely delay the downward normalization of farm equipment sales. 

 

While we cannot accurately forecast the weather, we can look at normalized fleet dynamics.  On that basis, we continue to view DE’s results as cyclically inflated and at risk of a sharper than expected decline.

VIRT

Financials Sector Co-Head Jonathan Casteleyn reiterates his view that shares of Virtu Financial are very richly valued. Despite principal risk in their daily trading operations, the stock is being priced in-line with the exchanges.

 

He adds that VIRT has no tangible equity capital to absorb a potential trading loss. It would have to draw down credit lines should their historical track record in trading break down. He estimates shares are worth $18 per share or the mid point of our scenario analysis.

TLT | VNQ | EDV 

It looks like more deflation on our screens.

 

We’re removing GLD from Investing Ideas as a result. As we’ve attempted to communicate through all of the central planning hoopla, we like gold most when both the USD and rates are declining.

  • The USD broke out to the upside this week and is now BULLISH on an intermediate-term trend duration (3 Months or more)
  • With the correlation risk to commodities flashing red, we now have a BEARISH bias towards commodities as an asset class over the intermediate-term

Earlier this week, we presented our Q3 2015 macro themes deck to our institutional customers. In it, we outlined the case for #LowerForLonger on interest rates highlighting our work on #SECULARSTAGNATION and our view on the #CONSUMERCYCLE (hint: It’s autumn).

 

The third component of the deck was devoted to #EUROPESLOWING. On Europe slowing, we expect the relative central planning monetary policy from Draghi in reaction to Europe’s woes to weaken the Euro (EURO down, USD up, COMMODITIES come under pressure).

 

We have no doubt the economy will cycle as it always has; additionally, the empirical evidence for #SECULARSTAGNATION is hard to refute. If the up cycle has officially run-out of steam, and the facts supporting the secular stagnation thesis come to fruition, we’re more confident than ever in #LowerforLonger.

 

Long-term Treasury rates remain the best proxy for forward-looking growth expectations.

 

We outline three components of secular stagnation below to explain the SAVINGS/INVESTMENT GLUT that is at the heart of the academic argument for current policy measures:

 

  1. Negative demographic trends globally (decline in population growth and aging population)
  2. Reduced capital intensity in leading industries (think of the capital and labor required to start Facebook over U.S. Steel)
  3. Falling relative prices of capital goods


Please see the three charts below supporting our thesis:

 

Investing Ideas Newsletter       - z savings glut

 

Investing Ideas Newsletter       - z demo 1

 

Investing Ideas Newsletter       - z demo 2

 

Finally, as you may have read, Ben Bernanke and Larry Summers have been going back and forth with one another on the secular stagnation debate. While one agrees and the other disagrees that the savings to investing glut has perpetuated secular stagnation, and is a real structural hindrance to growth, they’re both in agreement on the most highly debated topic in macro right now:

 

We’re nowhere near ready policy normalization (rate hikes) 

 

Investing Ideas Newsletter       - z Bernanke vs. Summers

 

 

 


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