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Blank Cartridges

“The West was not built with blank cartridges.”

-Wallace Stegner

 

That’s another beauty of an American one-liner from 1972 Pulitzer Prize winner, Angle of Repose. I’m in the old West this morning (Denver) where the homeless population is booming.

 

Overseas, the Chinese have manufactured a 3-day rally out of 1,045 halts and the Greeks have saved themselves from themselves again. It looks like we’re going to have one more centrally planned stock market rally to sell into as a result.

 

With Global Equity Volatility breaking out to the upside and Global #GrowthSlowing, it will be fascinating to watch how the mainstream media reads Down Euro = Down Oil this morning. Storytelling sucks when supply is up and demand is falling.

Blank Cartridges - Oil cartoon 04.17.2015

 

Back to the Global Macro Grind

 

Apologies for sounding a little moody this morning. Denver is two hours behind my risk management clock and I had a pot-smoking room service lady deliver my coffee 40 minutes late. Wow was that weird.

 

To review where Global Macro markets are vs. where they came from last week:

 

  1. The Euro was actually up +0.4% on the week to $1.12, and has back off hard this morning to $1.10 (bearish TREND)
  2. #StrongDollar held flat last week at $96.01 on the US Dollar Index =+6.4% YTD (bullish TREND @Hedgeye)
  3. Japanese Yen was flat wk-over-wk and weakened today, driving our bullish TREND Nikkei +1.6% overnight
  4. Commodities (CRB Index) deflated another -2.8% last week and are down again this morning (bearish TREND)
  5. Oil (WTI) got smoked -7.4% last week and is down another -1.5% on #StrongDollar deflation today (bearish TREND)
  6. Gold deflated another -0.5% last week, is down -0.6% this morning, and is now back to bearish TREND @Hedgeye

 

Yep, I’ll go all macro on you without hitting on stocks and bonds first. Imagine that – our government PIG (Policy, Inflation, Growth) model is the tail wagging the Global Macro dog. I’m cutting our net asset allocation to Commodities back to 0%.

 

While inverse correlations continue to drive #Deflation in the CRB Index, Oil, and Gold, most of you already know that. The 180-day correlation between USD and Commodities (CRB) is -0.94. The 15-day correlation between USD and Gold is -0.92!

 

What you might not know (because its new) is that shorter-term inverse correlations (meaning that when the USD goes up, these things go down) between #StrongDollar and US Equities are picking up again. Here’s what I mean by that:

 

  1. SP500 correlation to USD on a 15-day basis = -0.56
  2. SP500 correlation to USD on a 30-day basis = -0.43

 

That matters because, for a long-time, the US stock market told you that it was ok with #StrongDollar, Down Oil Tax Cut, etc. (the 180-day correlation between SP500 and USD = +0.49). What’s changing on the margin always matters.

 

Put another way, if you’re like me, betting on:

 

  1. #EuropeSlowing driving more Greek-type gong shows (they just wanted vaca, this will be back in the Fall)
  2. And Down Euro due to more bailouts, Draghi cowbell, etc…

 

You should be betting on #StrongDollar Deflation. For the last month, Global Macro market risk has.

 

Putting things in perspective (multi-factor, multi-duration analysis) is always critical when the central planners are celebrating their latest market plan. Using last week’s closing prices, this is what markets have priced in using 1-month as a duration:

 

  1. US Dollar Index +1.5% month-over-month
  2. Euro -1.4% month-over-month
  3. Commodities (CRB Index) -4.4% month-over-month
  4. Copper -7.8% month-over-month
  5. Oil (WTI) -14.7% month-over-month
  6. Canadian Dollar -3.2% month-over-month
  7. Russian Stocks -5.6% month-over-month
  8. Emerging Market Stocks (MSCI Index) -4.6% month-over-month
  9. European Stocks (EuroStoxx600) +0.5% month-over-month
  10. US 10yr Bond Yield -9 basis points, month-over-month

 

Taking a step back to a month ago, Mr. Macro Market was pretty efficient in pricing in:

 

  1. Down Euro and relative bailout (reflation) of European Equities
  2. #StrongDollar Deflation’s return to everything linked to inflation expectations
  3. Less volatility in a range bound US Treasury market

 

Since you might be asking yourself what to do with Treasuries when yields trade toward the top-end of the 2.20-2.47% risk range, you buy. Because the non-emotional risk manager in you sold some bonds at the low-end of the yield range last week.

 

Lower your stress. Lower your beta. Rinse & Repeat. Without growth accelerating, the central planners in China and Europe will not win this war. The battle of your every market day is to keep in perspective that they are firing on blank cartridges.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.20-2.47%

SPX 2043-2090
VIX 14.90-20.34
USD 95.58-97.66
EUR/USD 1.09-1.12
Oil (WTI) 49.42-53.83

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Blank Cartridges - z 07.13.15 Chart


Monday Mashup

Monday Mashup - CHART 1 

 

Coincident to our MCD Black Book, please note that we have added SONC to our main short list and WEN / JACK to our short bench as potential market share losers due to MCD’s resurgence.

 

RECENT NOTES

7/12/15 JUST CHARTS | YUM

7/10/15 DFRG | COVERING THE SHORT

7/9/15 JUST CHARTS | CMG

7/9/15 REPLAY | LONG MCD BLACK BOOK PRESENTATION

6/29/15 BOJA – ADDING TO THE BEST IDEAS AS A SHORT

 

RECENT NEWS FLOW


Friday, June 10

DFRG COO resigns (click here for article)

 

Black Box same-store sales show an increase of 2.1% for the month of June (click here for article)

 

Thursday, June 9

FDA delays menu-labeling requirements until December 2016, previous deadline was December 2015 (click here for article)

 

DRI names Jeffrey Davis Chief Financial Officer (click here for article)

 

PNRA upgraded to neutral from sell at Goldman Sachs

 

Wednesday, June 8

MCD initiated neutral at Cleveland Research

 

WEN announced final results of tender offer (click here for article)


Tuesday, June 7

BOJA has signed a new multi-unit development agreement for units in West Virginia and Kentucky (click here for article)


Monday June 6

FRGI subsidiary Pollo Tropical to open two new locations in Tennessee (click here for article)

 

SECTOR PERFORMANCE

Casual dining and quick service stocks, in aggregate, outperformed the XLY last week.

 

Monday Mashup - CHART 2

 

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

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

 

Monday Mashup - CHART 4

 

CASUAL DINING RESTAURANTS


Monday Mashup - CHART 5

 

Monday Mashup - CHART 6

 

QUICK SERVICE RESTAURANTS


Monday Mashup - CHART 7

 

Monday Mashup - CHART 8


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

 

 

********************************* 

 

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

 


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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

July 13, 2015 - Slide5

July 13, 2015 - Slide6 

July 13, 2015 - Slide7

July 13, 2015 - Slide8

July 13, 2015 - Slide9

July 13, 2015 - Slide10

July 13, 2015 - Slide11
July 13, 2015 - Slide12

July 13, 2015 - Slide13


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


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