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Yen, Europe and UST 10YR

Client Talking Points

YEN

The Yen was up small +0.2% vs USD, which was enough to keep the Nikkei from bouncing overnight. The Nikkei 225 closed down another -0.3% taking its crash from the July 2015 high to -22.8% and -15.4% year-to-date (China and Hong Kong closed today).

EUROPE

Post a dreadful producer price report of -4.2% year-over-year for the Eurozone this morning the ECB’s Peter Praet is saying they’ll “continue to act forcefully” (to try to tone down Euro Up vs Yellen’s Dollar Down move) so let’s see how European stocks react to this as they were down (again) last week with Italy’s MIB Index -2.1% week-over-week to -17.0% year-to-date.

UST 10YR

With the SPY back in the black for the year-to-date (QQQ and Russell still down), we don’t see many stories about how well the Long Bond and Utilities (+15.1% year-to-date) are doing (absolute). The UST 10YR Yield is 1.76% this morning and the Yield Spread remains a big headwind for bank earnings as U.S. Cycle #GrowthSlowing continues (hosting our Q2 Macro Themes Call on Thursday 11AM).

 

*Tune into The Macro Show with Ben Ryan and Financials analyst Jonathan Casteleyn at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 23% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
CME

CME Group (CME) stock is among the small cohort of financial companies that benefit from volatile markets. With the exchange's open interest continuing to expand, which will drag trading volume higher, CME Group is one of the few lower beta longs that will hold up relatively better in the current environment.

 

The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts. Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.

GIS

Joining McDonald's, General Mills (GIS) also hit an all-time high last week. We continue to like GIS as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without some noise around the numbers. Just look at the Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising to name a few things that muddied the waters.

 

But after filtering out the noise, this is a business that is truly turning a corner. When fiscal year 2016 began last June, we knew this was not going to be an easy ship to turn towards success.

 

Now, many key product platforms are turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success and expect GIS to realize sustained top line growth in the low single digit range.

TLT

Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% year-over-year on Friday. We’re most concerned with "better" or "worse" from a rate of change perspective. The non-farm payroll number is "less good" (i.e. "worse") from a year-over-year rate-of-change perspective. Growth in non-farm payrolls peaked in February 2015 at +2.3% year-over-year and the trend since then has been one of decline (+2.0% Y/Y for March 2016). And private sector salary and wage growth peaked on a year-over-year percent change basis in December of 2014.

 

We remain bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.

 

Here's the Q1 2016 Scorecard (data through 3/31):

  • TLT +8.3%
  • XLU +14.7%
  • JNK +1.0%
  • versus S&P 500 +0.7%

Three for the Road

TWEET OF THE DAY

$WYNN All ears on Investor Day Wednesday. Will $wynn print a preliminary 1Q # high enough?

@GLLStrategist

QUOTE OF THE DAY

Remember no one can make you feel inferior without your consent.

Eleanor Roosevelt

STAT OF THE DAY

The record for the highest jump cleared by horse and rider according to the official Fédération Equestre Internationale is 2.47 m (8 ft 1.25 in) by Huaso ex-Faithful, ridden by Capt. Alberto Larraguibel Morales (Chile) at Viña del Mar, Santiago, Chile on 5 February 1949. The committee stated that in order for it to be beaten, 2.49 m must be cleared.



POSITION MONITOR (SBUX, EAT, SONC)

POSITION MONITOR (SBUX, EAT, SONC) - CHART 1 replace

 

BEST IDEAS LIST ADJUSTMENTS / UPDATES

SBUX — Last week we elevated SBUX to our core Best Ideas list as a SHORT. We will be presenting our thesis in a live Black Book presentation tomorrow, April 5th at 11:00AM ET.

 

Our SBUX SHORT thesis is not an indication that Starbucks is a broken company or that they are in need of a major overhaul. The simple fact is that much of the tailwinds (unit growth, mobile order & pay, daypart expansion) supporting the company right now are already built into the current stock price. So we are left asking, what’s next?

 

Going forward the increased complexity of the store due to the amplified focus on food sales will hamper growth, and could potentially tarnish the premium brand equity that Starbucks currently possesses.  Additionally, the competition in the morning day-part is getting stronger.  While beverage sales remain strong, a significant part of future same-store sales is dependent on selling more food.  Food is not a core competency of the company and the company’s product offering is less compelling than others in the space.  Additionally, the more they broaden the menu to less healthier items the challenges the company faces will intensify.    

 

CALL DETAILS

Toll Free:

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Confirmation Number: 13633080

Materials: CLICK HERE (materials to be provided approximately 1 hour before the call)

 

EAT — Last week we also elevated EAT from our SHORT bench to our Best Ideas list as a SHORT. We see EAT as a company in transition and believe that FY2017 could become a year where management makes some incremental investments in the Chili’s brand.  While EAT is one of the strongest companies in the Casual Dining space, the Chili’s brand needs to return traffic trends to positive territory again.  What is unclear is how the investment will unfold in FY2017, but we will learn more at the upcoming analyst meeting on June 9th in NYC.  

 

As a result of these investments, we see the Street’s estimates for 2017 as aggressive.  Currently, FY2017 Street consensus is for Brinker to post EPS of $3.95.  We see FY2017 estimates coming in closer to $3.40-$3.45, flat with FY2016 or even lower. 

 

In the intermediate term, EPS for 2H FY2016 are also aggressive.  For 3Q16 and 4Q16 estimates are for $1.00 and $1.25, respectively.  Our model has estimates closer to $0.95 and $1.10, respectively.

 

Currently, EAT EV/NTM EBITDA multiple is 7.3x, significantly below its three year average and the Casual Dining group of 8.4x.  If we are right about the current trend in EPS, the discounted multiple might not be enough of a discount.

 

SONC — Lastly, we moved SONC from our SHORT bench to our LONG bench. Please see our brief note HERE. In the coming weeks we will lay out our more detailed LONG thesis.

 

RECENT NOTES

4/3/16 SONC | ADDING TO THE LONG BENCH

3/31/16 SHAK | SUPPLY CHAIN ISSUES IN THE 10-K

3/30/16 PLAY | THE LAST STAND

3/29/16 EAT | AGGRESSIVE ESTIMATES

3/24/16 PLAY | SHORT| EXPECT VOLATILITY

3/15/16 CMG | DELUSIONAL

3/10/16 KNAPP-TRACK FEBRUARY RESULTS/ISPOT AD ANALYSIS

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow outperformed the XLY last week. The XLY was up +2.4%, top performers on a relative basis from casual dining were KONA and TXRH posting performance of +4.8% and +4.5% respectively, while SHAK and SONC led the quick service group this week up +9.6% and +9.3%, respectively.

POSITION MONITOR (SBUX, EAT, SONC) - CHART 2 replace

POSITION MONITOR (SBUX, EAT, SONC) - CHART 3 replace

 

CASUAL DINING RESTAURANTS

POSITION MONITOR (SBUX, EAT, SONC) - CHART 4

POSITION MONITOR (SBUX, EAT, SONC) - CHART 5

 

QUICK SERVICE RESTAURANTS

POSITION MONITOR (SBUX, EAT, SONC) - CHART 6

POSITION MONITOR (SBUX, EAT, SONC) - CHART 7

 

COMMODITIES

POSITION MONITOR (SBUX, EAT, SONC) - CHART 8 replace

POSITION MONITOR (SBUX, EAT, SONC) - CHART 9 replace

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Investing Ideas - Levels

Takeaway: Current Investing Ideas: HBI, LAZ, MDRX, FL, NUS, JNK, TIF, WAB, ZBH, CME, ZROZ, XLU, MCD, GIS, TLT

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.

 

Enjoy the rest of the weekend.

LEVELS

Investing Ideas - Levels - levels 4 1

 

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

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

1. McCullough: Is The Fed Dumb Enough To Hike On Today’s Jobs Report? (4/1/2016)

 

 

In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough discussed how the Fed will interpret today’s late cycle non-farm payroll numbers and its implications for investors.

 

2. McCullough: Shame On You Mark Zandi (3/31/2016)

 

 

In this animated excerpt from The Macro Show, Hedgeye CEO Keith McCullough pulls no punches on establishment economist Mark Zandi and establishment financial media which is failing America. 

 

3. McCullough: S&P Earnings Confront ‘Toughest Comps In U.S. History’ (3/31/2016)

 

 

Hedgeye CEO Keith McCullough crystalizes an enormous risk facing the U.S. stock market right now in this brief excerpt from The Macro Show today. 

 

4. One Of Our Best Calls YTD (3/30/2016)

 

 

In this brief excerpt from The Macro Show today, Hedgeye Senior Macro analyst Darius Dale discusses our macro team’s call to remove the Industrials and Energy sector as top short ideas while adding short Financials. 

 

5. Millennials Gone Mild: The Investing Implications (3/30/2016)

 

 

In this complimentary edition of “About Everything,” Hedgeye Demography Sector Head Neil Howe discusses the sweeping behavioral changes of Millennials (“Generation Yawn”) compared to prior generations, and spells out what it all means for investors and companies around the globe.

 

6. The Airbnb Impact On Hotels & Timeshare (3/30/2016)

 

 

Hedgeye’s Gaming, Lodging, and Leisure team hosted a presentation recently to introduce our proprietary Airbnb listings/price tracker and discuss the Airbnb impact on the lodging and timeshare space.

 

7. McCullough: Short Rich People? (3/28/2016)

 

 

In this recent clip from The Macro Show, Hedgeye Demography Sector Neil Howe and CEO Keith McCullough discuss the income gulf between America’s “haves” and “have-nots” and why that gap may narrow in the years to come.


This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)

 

Enjoy!

 

1. Happy April Fools' Day (4/1/2016)

This Week In Hedgeye Cartoons - April foo cartoon 04.01.2016

 

See today's supposedly "bullish" non-farm payroll numbers? Nothing to celebrate. "Remember, whatever the bulls want to characterize as "good" news now = #Fed rate hike," says Hedgeye CEO Keith McCullough. 

 

On a related note, we've got big news.

 

2. Dysfunction (3/31/2016)

This Week In Hedgeye Cartoons - Yellen cartoon 03.31.2016

 

"The Fed is S&P 500 dependent, not data dependent," Hedgeye CEO Keith McCullough wrote recently. 

 

3. Reality Check (3/30/2016)

This Week In Hedgeye Cartoons - Math   Myth cartoon 03.30.2016

 

"Since Q4 ended on December 31st (they haven’t been able to centrally plan a change in the calendar dates yet), has anyone considered why we just saw the worst 6 week start to a stock market year ever? Yep, it’s the Profit vs. Credit Cycle (within the Economic Cycle), stupid," Hedgeye CEO Keith McCullough wrote in a recent Early Look.

 

4. Whack! (3/29/2016)

This Week In Hedgeye Cartoons - oil cartoon 03.29.2016

 

Oil is getting knocked around again today, down another -2.4%, despite Fed head Janet Yellen reiterating that declining crude prices are "transitory."

 

5. Corporate Contraction (3/28/2016)

This Week In Hedgeye Cartoons - corp profits cartoon 03.28.2016

 

While U.S. 4Q GDP was revised up to +1.4%, the corporate profit component showed a -10.5% Y/Y contraction. That marks the second consecutive quarter in which corporate profit growth was down Y/Y. Over the past 30 years, two consecutive quarters of shrinking corporate profits have always preceded a material stock market crash.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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