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The Macro Show Replay | September 29, 2015

 


September 29, 2015

September 29, 2015 - Slide1

 

BULLISH TRENDS

September 29, 2015 - Slide2

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BEARISH TRENDS

September 29, 2015 - Slide5

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Is Mobile Order & Pay the Holy Grail for Starbucks? | $SBUX

In this Hedgeye TV special presentation, veteran restaurants analyst Howard Penney puts the new Starbucks Mobile Order & Pay app through its paces. His findings, coupled with the results of a consumer survey rating user experience, support his current long-term view on the company.

 

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SBUX | THE APP IS WORKING | HOW BIG IS BIG?

Starbucks has been a tricky one for us, we tried shorting it back in January of 2015, betting on the food being the demise of the brand, but admittedly the timing was off. Looking ahead, although the food is not driving traffic, we don’t believe that it is tarnishing the brand at this point. The overriding theme driving the SBUX bull case is Mobile Order & Pay.  So with the next big initiative being Mobile Order & Pay, we wanted to test out its impact on traffic, customer throughput and general customer/partner experience.

view our experience with Mobile Order & Pay at Starbucks below

 

The company has specifically set expectation high for the impact of Mobile Order & Pay.  On the 3Q15 earnings call SBUX CEO, Howard Schultz, said “By enabling our customers to order ahead and avoid waiting in line, Mobile Order & Pay is enabling us to capture more on-the-go customer occasions, and the data is clear. In those stores where Mobile Order & Pay has been deployed, lines are shorter, service is faster, and in-store operations are more efficient. The net result is increased traffic, incrementally, that is exceeding expectations, improved throughput, and an elevated Starbucks experience for our customers.”

 

With that statement Mobile Order & Pay appears to be the Holy Grail for SBUX!

 

Our initial indications are that in its early days Mobile Order & Pay is going well for the company.  The following is a survey we conducted, asking 200 Starbucks customers; “How would you rate your experience using the Starbucks Mobile Order & Pay App?” The results were largely positive, with an average rating of 3.5 stars. In addition to the survey we also tested the system with Hedgeye employees, and it probably balanced out to the same rating. Once the app was downloaded and credit card information inserted everyone had a positive experience. When asked whether they would use it again, some people prefer the in-store ordering experience, but the majority said they would use it again.

 

SBUX | THE APP IS WORKING | HOW BIG IS BIG? - CHART 1

 

We asked the store employees (partners) about the app and how it works for them. They had overwhelmingly great reviews on the app giving them more time to produce orders at an even pace. With the more even pace of incoming orders the partners are able to more efficiently produce the drinks and get them out in an orderly fashion.

 

In addition to increasing throughput and efficiency of the store, this app is meant to help drive incremental traffic. In the chart below assuming flat 2-years trends, estimates for Americas traffic,  would accelerate to 5% in 4Q15.  This would be a significant positive for the company and likely make the consolidated traffic number look conservative.  We believe with the new app launched nationwide, consensus estimates may turn out to be slightly conservative.

 

SBUX | THE APP IS WORKING | HOW BIG IS BIG? - CHART 2 replace

SBUX | THE APP IS WORKING | HOW BIG IS BIG? - CHART 3

 

This new app sets up a TREND duration bullish thesis on Starbucks. Long-term (1-3 years) we remain skeptical on the current food being a driver of growth, but at this point it is not tarnishing the Starbucks brand in any way. After our test/survey we are bullish on the company and the stock for the next 2-3 quarter timeframe.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Cartoon of the Day: Shaken (and) Stirred

Cartoon of the Day: Shaken (and) Stirred - denial cartoon 09.28.2015

"While the SP500 tried having a rate hike party on last Friday’s open, neither the Russell 2000 nor the Nasdaq were buying into the hype/hope, at all. They looked a lot more like Chinese, German, and Emerging Market stocks – not good. Rate hike or no rate hike? Who cares – stocks are now going down on both," wrote Hedgeye CEO Keith McCullough in today's Early Look.

 

 

 


MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT

Takeaway: Global markets focused on the risk of a slowing Chinese economy last week. Our risk heatmap shows few positive signals.

Key Takeaway:

Even with the third reading on second quarter U.S. GDP coming in at 3.9%, higher than the 3.7% expected, domestic CDS spreads widened. Moreover, CDS spreads widened globally, especially in emerging markets, on further evidence of slowing growth in the Chinese economy, which has become the number one global risk factor for investors; a preliminary reading on Chinese manufacturing activity showed factory output at its lowest level since the financial crisis. Finally, the high yield YTM in the U.S. continues to rise, increasing by 35 bps last week.

 

Our heatmap below is showing mostly red warning signals on the short, intermediate, and long term.

Current Ideas:


MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 0 of 12 improved / 8 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM15

 

1. U.S. Financial CDS – Swaps widened for 23 out of 27 domestic financial institutions. Even with positive economic data showing that 2Q15 GDP grew at a higher than expected 3.9%, perceived default risk for financial institutions rose; CDS spreads widened by 5 bps at the median.

Widened the least/ tightened the most WoW: CB, SLM, SLM
Widened the most WoW: GNW, TRV, BAC
Tightened the most WoW: CB, AGO, MBI
Widened the most MoM: GNW, MMC, MET

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week. The median change was a 7 bps widening as investors focused on the risk from China.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM2

 

3. Asian Financial CDS – In Asia, a preliminary reading on Chinese manufacturing activity showed factory output at its lowest level since the financial crisis, causing swaps for Chinese banks to widen between 16 and 17 bps. Additionally, Indian banks' CDS widened between 12 bps and 17 bps.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Italian, Spanish, and Portuguese swaps widened the most, by 12, 12, and 19 bps respectively.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM18

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM3

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps widened last week, largely on worries of effects from slowing Chinese growth and a future interest rate hike by the U.S. Federal Reserve. Brazilian sovereign swaps blew out by 98 bps to 488 as data showed rising unemployment in the country and the country's central bank forecast a deeper recession.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM16

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 35 bps last week, ending the week at 7.65% versus 7.30% the prior week.

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM5

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 10.0 points last week, ending at 1857.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM6

 

8. TED Spread Monitor – The TED spread rose 1 basis point last week, ending the week at 34 bps this week versus last week’s print of 33 bps.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM7

 

9. CRB Commodity Price Index – The CRB index fell -1.6%, ending the week at 196 versus 199 the prior week. As compared with the prior month, commodity prices have decreased -0.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - 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 | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 1 basis point last week, ending the week at 1.91% versus last week’s print of 1.90%. 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 | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM10

 

12. Chinese Steel – Steel prices in China fell 0.5% last week, or 10 yuan/ton, to 2197 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 | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 147 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.7% upside to TRADE resistance and 2.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | SLOWING CHINESE GROWTH AT THE FOREFRONT - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


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