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The Most Important Thing I Learned In California Last Week

 

“It’s ongoing performance anxiety, or as I like to call it HPAD (Hedgie Performance Anxiety Disorder) that really was apparent from San Francisco to Los Angeles,” explained Hedgeye CEO Keith McCullough in response to a subscriber’s question on The Macro Show this morning on the most important thing he learned in meetings with investors last week.


MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY

Takeaway: It was a quiet week outside of earnings, but the risk/reward remains skewed negatively.

 

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - Soft spot of data cartoon 10.16.2015

 

 

Key Takeaway:

Last week was a relatively quiet one on the global macro risk front. That said, the intermediate term setup remains tilted toward the negative with a 3 to 1 ratio of red to green. Bigger picture, the overarching reality is that the environment is decidedly late cycle, and more and more data points are emerging in support of that conclusion.

 

Current Ideas: 


MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 1 of 12 improved / 0 out of 12 worsened / 11 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM15

1. U.S. Financial CDS – Movement in swaps was mild last week with the median change at -1 bps. Swaps tightened for 15 out of 27 domestic financial institutions. 

Tightened the most WoW: TRV, ALL, MMC
Widened the most WoW: GNW, RDN, MBI
Tightened the most WoW: ALL, CB, ACE
Widened the most MoM: GNW, LNC, C

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM1 2

 

2. European Financial CDS – Swaps mostly tightened in Europe last week although change was mild with a median -1 bps change. CDS for Portuguese Banco Espirito Santo, however, widened by +168 bps to 679, as the country's political negotiations between leftist parties and the ruling center-right coalition remain deadlocked. The widening is interesting because it conflicts with the movement on sovereign Portuguese CDS. The key takeaway for Portugal is that the situation translates to volatility.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM2

 

3. Asian Financial CDS – The median change was zero in Asian financials CDS last week. However, Mizuho & Sumitomo financial swaps widened by +16-17 bps.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM17

 

4. Sovereign CDS – Sovereign swaps were mixed last week with mostly minor movement. However, Portuguese sovereign swaps tightened significantly, by -25 bps to 146, as the market interpreted the political situation in the country as a net positive; last week, leftist parties in Portugal signaled their willingness to work with the ruling center-right coalition on the formation of a government, although negotiations remain deadlocked. 

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM18

 

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM3

 

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian swaps tightened the most, by -31 bps to 289. Brazilian sovereign swaps, however, widened by +30 bps to 441 as Fitch downgraded the country's sovereign credit rating to one notch above junk.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM16

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 3 bps last week, ending the week at 7.54% versus 7.51% the prior week.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 2.0 points last week, ending at 1846.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 31 bps.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM7

9. CRB Commodity Price Index – The CRB index fell -0.1%, ending the week at 199 versus 200 the prior week. As compared with the prior month, commodity prices have increased 2.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - 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 10 bps.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 1 basis point last week, ending the week at 1.90% versus last week’s print of 1.91%. 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 | INTERMEDIATE ASYMMETRY - RM10

12. Chinese Steel – Steel prices in China fell 0.9% last week, or 19 yuan/ton, to 2157 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 | INTERMEDIATE ASYMMETRY - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 142 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TRADE resistance and 3.4% downside to TRADE support.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Retail Callouts (10/19): Retail Idea List, UPS Raising Rates, DLTR, PIR

Takeaway: Idea List Changes - DLTR, PIR. UPS raising shipping rates again -- And retail margin expectations are STILL too high.

Hedgeye Retail Idea List

Retail Callouts (10/19): Retail Idea List, UPS Raising Rates, DLTR, PIR - 10 19 2015 chart1 B

 

This Week's Changes

DLTR: Graduated to the top spot on our Long Bench. Seemingly not the kind of name we'd like at this point of the economic cycle. But we think there's an asymmetric setup here in the wake of the Family Dollar acquisition that works even in a slowing economy.  Stay tuned for more on this as our vetting continues.

 

PIR: We turned the TRADE indicator from negative to positive -- now positive on all three durations.  We had been concerned heading into the latest quarter, but think that expectations for the next quarter and FY are very much in check.

 

UPS raising shipping rates again -- And retail margin expectations are STILL too high.

(http://www.wsj.com/articles/ups-targets-discount-sharing-with-new-fee-on-retailers-1445035798)

 

There is a lot going on with UPS and Fed Ex pricing with fuel surcharges (going into effect in Nov), ground rate hikes (December), and 3rd party fulfillment surcharges -- the squeeze is on for retailers as free shipping thresholds come down to $0. Both UPS, FedEx, and even USPS have been vocal about the dilutive impact from growing e-commerce sales which are more expensive to fulfill because of neighborhood deliveries. But unlike retailers who we think will more and more use free shipping (and returns) as an offensive weapon to try to hold onto market share, the shipping duopoly has the clout to pass on increasing costs to its retail partners.

 

If this were a different part of the economic cycle, we wouldn't make much noise about this. But the fact of the matter is that without higher freight costs, retail EPS growth is decelerating from a mid-teens rate earlier this year to zero in 4Q/1Q.  The problem is that the consensus has EPS growth reaccelerating from a lsd rate to 10%. The consensus is wrong.

Retail Callouts (10/19): Retail Idea List, UPS Raising Rates, DLTR, PIR - 10 19 2015 chart2

Retail Callouts (10/19): Retail Idea List, UPS Raising Rates, DLTR, PIR - 10 19 2015 chart3

Image Source: E-commerce Bytes

 

WMT - Federal probe into Wal-Mart operations in Mexico has found minimal offenses. The case and fines are likely to be much smaller than initially expected.

(http://www.wsj.com/articles/wal-mart-bribery-probe-finds-little-misconduct-in-mexico-1445215737)

 

TFM - The Fresh Market is working with Apollo Global Management to explore a buyout.

(http://www.bloomberg.com/news/articles/2015-10-16/fresh-market-founder-said-to-work-with-apollo-on-buyout)

 

KATE - EJ Victor to launch Kate Spade New York furniture collection

(http://www.furnituretoday.com/article/524851-ej-victor-launch-kate-spade-new-york-collection)

 

RetailNext forecasts Holiday sales at +2.8%

(http://www.retailingtoday.com/article/retailnext-holiday-sales-expected-climb-only-)

 

AMZN - Amazon looking to buy stake in India on demand home services company Housejoy 

(http://economictimes.indiatimes.com/small-biz/startups/amazon-in-advanced-talks-to-buy-stake-in-home-services-company-housejoy/articleshow/49397892.cms)

 

H&M Opens First Store in South Africa

(http://wwd.com/retail-news/mass-off-price/hm-opens-first-store-in-south-africa-10264590/)


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Earnings Season: So Far, No Good

Earnings Season: So Far, No Good - earnings cartoon 01.27.2015

 

"EPS ex-Energy" is a joke - Industrials and Cyclicals are already in a profit recession - Financials & Banks next.

Click image to enlarge. 

Earnings Season: So Far, No Good - 10 19 2015 Earnings

 

EPS growth slowing, combined with US consumer confidence falling (from cycle peak) are 2 of the Top 3 leading indicators for a US recession.

 

Earnings Season: So Far, No Good - 10 19 2015 eps inflecting


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

10/19/15 CMG | MOVING IT TO THE SHORT BENCH

10/16/15 YUM | THE LEAVES ARE CHANGING AND SO IS YUM

10/16/15 REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF

10/14/15 DFRG | WHEN UGLY TURNS BEAUTIFUL

10/7/15 YUM | HOLDING ONTO THE PAST

 

UPCOMING EVENTS

Monday Mashup - CHART 2

 

RECENT NEWS FLOW

Friday, October 16

Beef | A 50% decline in beef prices back to historical averages is well within the realm of possibilities. (HEDGEYE NOTE)

 

Thursday, October 15

YUM | Appointed Corvex’s Keith Meister to the Board of Directors, additionally, YUM announced that they are near the conclusion of a strategic review (ARTICLE HERE)

MCD | Per an interview conducted by The Wall Street Journal with board member Miles White, Mr. White spoke about the review of the possibility of a REIT were going on but that no definitive decision has been made (ARTICLE HERE)

 

Tuesday, October 13

DFRG | Reported 3Q16 earnings that were not good, but the worst is now behind us (HEDGEYE NOTE)

SBUX | Introduced delivery service inside the Empire State Building (ARTICLE HERE)

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow widely underperformed the XLY last week. The XLY was up +0.7%, top performers on a relative basis from casual dining were BLMN and BBRG posting an increase of +3.2% and +0.9%, respectively, while HABT and ARCO led the quick service group this week up +6.8% and +3.4%, respectively.

Monday Mashup - CHART 3

Monday Mashup - CHART 4

 

XLY VERSUS THE MARKET

The XLY has fared better than most other sectors in the YTD time period but as of late has been lagging slightly. In the last five trading days the SPX was up +0.9% and the XLY was up just +0.7%.

Monday Mashup - CHART 5

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks BULLISH from a TRADE and TREND perspective, TREND support is 76.01.

Monday Mashup - CHART 6

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 7

Monday Mashup - CHART 8

Monday Mashup - CHART 9

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 10

Monday Mashup - CHART 11

Monday Mashup - CHART 12

 

Keith’s Three Morning Bullets

So far, no good = 58/500 S&P names have reported = Revs -2.7%, EPS -7.9% - bull market, in storytelling (and Long-Term Bonds):

 

  1. USD – down for the 3rd straight week (post that terrible US jobs report) gave the SPX short squeeze what it needed (up, on decelerating volume, to lower-highs) but USD appears to be stabilizing this morning = Oil (-1.1%), Gold (-0.4%), and the “reflation” trade no likey
  2. NIKKEI – Japanese stocks no likey Down Dollar = Up Yen either; after closing -0.8% last week, Japan didn’t believe the China “news” and sold off -0.9% into the close, taking Nikkei -12% in the last 3 months (with USD -3.2% in the last 3 months)
  3. CHINA – look on the bright side of their storytelling, they didn’t stick a 7.0 this time and made-up “6.9%” GDP instead. Lol. Even the locals (who are paid to think a certain way) didn’t buy Chinese stocks on that – Shanghai Comp closes -0.14%

 

SPX immediate-term risk range = 1; UST 10yr 1.98-2.07%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


CMG | MOVING IT TO THE SHORT BENCH

We are becoming increasingly concerned about Chipotle (CMG) and the headwinds that it will face in the coming quarters.

 

We took CMG off the Hedgeye Restaurants Best Ideas list as a LONG and moved it to the LONG bench on 9/30/15 see our note HERE.

 

In the note we suggested that CMG is getting long in the tooth and that it will experience some growing pains in the near future.

  1. Quality real estate is getting harder and more expensive to get
  2. Are the 2015 supply chain issues a one off experience?
  3. Slowing sales trends might not end in 3Q15

 

Ahead of the earnings announcement on this Tuesday, October 20th after market close, we are adding it to the short bench.  The table below summarizes what the street is looking for:

CMG | MOVING IT TO THE SHORT BENCH - CHART 1 

 

In addition to our original concerns, we believe the company may post below trend same store sales due to a number of macroeconomic factors.

 

1) The consumer is rolling over

 

A) Jobs

CMG | MOVING IT TO THE SHORT BENCH - CHART 2

CMG | MOVING IT TO THE SHORT BENCH - CHART 3

 

B) Consumption

CMG | MOVING IT TO THE SHORT BENCH - CHART 4

 

C) Consumer Confidence

CMG | MOVING IT TO THE SHORT BENCH - CHART 4a

 

D) Industry Sales Slowing

CMG | MOVING IT TO THE SHORT BENCH - CHART 5

CMG | MOVING IT TO THE SHORT BENCH - CHART 6

 

2) Deflation is bad for Restaurants in general and CMG is not immune.

 

A) Beef, Chicken and Pork prices are all trending lower, taking away Chipotle’s ability to price effectively.

 

B) An added problem is significant labor inflation that we are starting to see in major metropolitan areas. This will begin to trickle through the nation and really begin to affect margins.

 

C) CMG same-store sales versus CPI Pork YoY % change.

CMG | MOVING IT TO THE SHORT BENCH - CHART 7

 

3) Street estimates call for a recovery in sales – this looks to be aggressive. Additionally the company is running up against very difficult YoY comparisons.

 

Hedgeye estimates are below street estimates

CMG | MOVING IT TO THE SHORT BENCH - CHART 8

 

4) CMG needs 3% same-store sales to leverage labor costs.  With slowing same-store sales and accelerating labor inflation, current margin estimates look to be aggressive.

CMG | MOVING IT TO THE SHORT BENCH - CHART 9

 

5) A multiple contraction is likely, given the current macro environment.  And could get worse if sales miss current expectations.

CMG | MOVING IT TO THE SHORT BENCH - CHART 10

 

Hedgeye Restaurants Best Ideas List

CMG | MOVING IT TO THE SHORT BENCH - CHART 11

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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