FLASHBACK: Howard Penney Says Buy McDonald's

Takeaway: More good news for McDonald's investors.

Editor's Note: Lovin' it... Veteran Hedgeye Restaurants analyst Howard Penney's bullish, non-consensus call on McDonald's continues to pay off for those who listened. See WSJ story today, McDonald’s Profit Climbs, Showing Turnaround Is Sustainable. Shares of MCD are up over 21% since his article was published on Fortune. The stock is up 27% since it was added to Investing Ideas on August 11, 2015 versus 0.36% for the S&P 500. 


FLASHBACK: Howard Penney Says Buy McDonald's - z how 


The fast-food chain’s stock will likely pop next year, thanks to its real estate holdings and its ‘All-Day Breakfast’ menu.


Last week, McDonald’s shares jumped 1.5%, amid speculation that the fast-food giant might spin-off its massive real-estate holdings. That looks increasingly likely under the activist-like new CEO, Steve Easterbrook. It’s another welcome development and a broader sign that McDonald’s is finally turning the corner. Our prediction: This year will be the last time McDonald’s stock sees a price below $100.


Let’s be clear. A lot has changed at McDonald’s in the past year. Within the first two months of becoming CEO earlier this year, Easterbrook announced $300 million in cost cutting measures, a move that includes refranchising 3,500 stores of its 36,290 stores globally and shutting down an additional 700. McDonald’s  MCD -0.35%  will soon use technology, such as self-ordering kiosks, to change the customer experience while rejiggering its menu, dropping some, adding others and improving its existing products. In October, for instance, McDonald’s announced that it would take “All-Day Breakfast” nationwide. Meanwhile...


Click here to continue reading on Fortune.

HEDGEYE Exchange Tracker | Fishing Where The Fish Are

Takeaway: Trading volume expanded week-over-week with all 3 categories now showing positive year-over-year growth in 2Q16.

Earnings season for the Financial sector has been a race to the bottom with Financial Service outlets announcing a steady drum beat of year-over-year revenue and earnings declines. From Goldman Sachs' -40% decline in revenue to the across the board slack in Lazard's lowly levered M&A and asset management business, trends indicate both secular shifts and cyclical weakness. The exchange sector however will be one of the few Financial sub groups to post organic growth and we expect both year-over-year volume gains to be met with slight incremental pricing power in both transactions and market data. CME Group (CME) which reports on April 28th still has the opportunity for an earnings beat with the +13% year-over-year volume increase coinciding with a +2% increase in pricing power. We have a 1Q16 estimate at $1.18, +3% ahead of consensus. CME stock has positively reacted on earnings the past 5 announcements, rising between +1.5-3.7%. The earnings scorecard for Financials thus far is that 32 of 90 companies (in the S&P 500) have reported, with mean sales growth (declines) of -4.8% with bottom line earnings down -17.0% on average. The S&P in aggregate has trends of -0.6% on top line and earnings declines of -8.1%.



HEDGEYE Exchange Tracker | Fishing Where The Fish Are - Theme


HEDGEYE Exchange Tracker | Fishing Where The Fish Are - Theme 2  



Weekly Activity Wrap Up

Cash equity volume again came in slightly higher week over week at 7.0 billion shares traded per day. It has held steady around that level for the last few weeks, keeping the 2Q16TD average daily volume (ADV) around 7.0 billion, +10% higher than one year ago in 2Q15. Additionally, volume of futures traded through CME and ICE picked up the pace week over week, rising to 19.0 million contracts traded per day and bringing the 2Q16TD ADV to 18.3 million, +4% higher than the year-ago quarter. Furthermore, CME's open interest currently tallies 110.4 million contracts, +21% higher than the 91.3 million pending at the end of 2015. This compares to ICE's OI growth of just +4% since the beginning of the year.  Lastly, options volume was again stronger week over week, rising to 16.7 million and bringing the 2Q16TD ADV to 15.5 million, which is +1% higher than the year-ago quarter.


HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon16


U.S. Cash Equity Detail

U.S. cash equities trading came in at 7.0 billion shares per day this week, bringing the 2Q16TD ADV to 7.0 billion. That marks +10% Y/Y growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 25% share of second-quarter volume, which is +77 bps higher Y/Y, while NASDAQ is taking a 17% share, -180 bps lower than one year ago.


HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon2


HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon3


U.S. Options Detail

U.S. options activity came in at a 16.7 million ADV this week, bringing the 2Q16TD average to 15.5 million, a +1% Y/Y expansion. In the market share battle amongst venues, NYSE/ICE's share fell week over week, dragging down its 2Q16TD share from 18% to 17%. Although that 17% is +39 bps higher than NYSE's year-ago share, it has been trending downwards and is headed toward negative territory. Additionally, CBOE's 25% market share of 2Q16TD is down -222 bps Y/Y. Meanwhile, NASDAQ is doing well in 2Q16TD, taking a 23% share, +89 bps higher than one year ago.  BATS has also been taking share from the competing exchanges, up to an 11% share from 10% a year ago. Finally, although ISE/Deutsche's share expanded through 1Q16, it has been falling recently; at 15%, its share is -109 bps lower than 2Q15.


HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon4


HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon5


U.S. Futures Detail

14.2 million futures contracts per day traded through CME Group this week, bringing the 2Q16TD ADV to 13.7 million, +3% higher Y/Y. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 110.4 million CME contracts pending, good for +21% growth over the 91.3 million pending at the end of 4Q15, although a contraction from last week's +24%.


Contracts traded through ICE came in at 4.8 million per day this week, bringing the 2Q16TD ADV to 4.5 million, a +6% Y/Y expansion. ICE open interest this week tallied 66.4 million contracts, a +4% expansion versus the 63.7 million contracts open at the end of 4Q15 but a contraction from last week's +5%.


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HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon8


HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon7


HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon9 


Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.


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HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon11


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HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon13


HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon14

HEDGEYE Exchange Tracker | Fishing Where The Fish Are - XMon15



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





Reflation Reversal Risk

Remember when global growth “bottomed”? No, we don’t either. Amid talk of easier USD comps and a massive short squeeze in reflation assets, there has been a fair amount of banter among investors about a bottom in global growth – particularly in the manufacturing and export sectors.


Conversely, we’ve long maintained the opposite view and continue to consider it hazardous to trust “bottoming” calls from models that didn’t predict the slowdown to begin with (or any slowdowns, for that matter). This morning we received our first spate of April economic data in the form of flash Manufacturing PMIs from the Eurozone, Japan and the U.S. and these figures corroborate our view that global growth will slow sharply over the next 3-6 months.


In 2Q16 in particular, our proprietary GIP Model three of the world’s five largest economies mired in #Quad4 (U.S., Eurozone and China), with another in #Quad3 (U.K.) and reported growth in each economy is slowing on a trending basis across most/every key category of high-frequency data. For a deep-dive on our economic outlooks for each of the aforementioned economies, refer to our 4/20 Early Look titled, “Back To Basics”. CLICK HERE do download the associated slide deck.


Going back to the aforementioned April PMI releases, manufacturing activity in the Eurozone ticked down to the lowest since March ’15 on a 3MMA basis and in both the U.S. and Japan, manufacturing activity slowed to the lowest level in recorded history (the Markit PMI series began in April ’13). The 50.8 reading recorded in the U.S. represented a sequential decline of -0.7pts. and was directionally counter to consensus expectations of a +0.5pt. acceleration to 52.


Reflation Reversal Risk - EUROZONE M PMI


Reflation Reversal Risk - U.S. M PMI


Reflation Reversal Risk - JAPAN M PMI


As we penned in a timely research note yesterday afternoon titled, “Important Thoughts On Market Structure and Sentiment”, we continue to think the relief rally across risk assets – reflation in particular – has run its course largely because the short-term stabilization in various domestic economic data has come to an end. Moreover, rates markets have already priced in the Fed’s MAJOR policy pivot from hawkish to dovish guidance and there is actually increasing risk that next Wednesday’s FOMC statement pivots back to hawkish by setting the stage for a June rate hike.


Reflation Reversal Risk - CESI vs. SPX


Reflation Reversal Risk - Implied Yields on Select Fed Funds Futures Contracts


Additionally, the DXY has held our long-term TAIL line of support of 93.07, which puts 100 back in play over the intermediate-term. The inability for Yellen’s dovish pivot to break the back of the DXY is really important in the context of what has clearly morphed into pervasively bearish sentiment on the USD following the February 26-27 G20 summit in Shanghai (see: consensus “Shanghai Accord” speculation). At +13.8k contracts, the net long futures and options position in the DXY is the lowest it’s been since early June of 2014 – when the DXY was trading in the low eighties – and represents a 1Y Z-Score of -2.1x.




Reflation Reversal Risk - 7


A reversal of the recent trend of consolidation in the USD will likely resuscitate the bearish China overhang and perpetuate a reversal of reflation in short order. Why? Because supply & demand fundamentals haven’t materially improved. In fact, they are actually getting worse as indicated by this morning’s data.


Reflation Reversal Risk - 8


Reflation Reversal Risk - 9


Reflation Reversal Risk - 10


Best of luck out there managing the aforementioned “reflation reversal risk”.




Darius Dale


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Slow Global Growth Snails

Takeaway: The latest read through on U.S. and Euro-area economies isn't good and confirms both economies remain mired in this slow growth environment.

Slow Global Growth Snails - Slow growth snails cartoon 07.14.2015


Here's analysis from our Macro team in a note sent to subscribers this morning:


"Eurozone April preliminary PMIs were released this morning... drum roll... both the Manufacturing and Composite (Manufacturing + Services) fell month-over-month, in-line with our theme of #EuropeSlowing. Eurozone Manufacturing recorded 51.3 vs. 51.6 prior and the Composite fell to 53.0 vs. 53.1. Services rose 10bps to 53.2. Meanwhile, coming late to the party, the ECB released the results of the Q2 2016 survey of professional forecasters, which sees the inflation forecast revised down by 0.4% to 0.3% for 2016 and growth at 1.5% in 2016 vs. a prior estimate of 1.7%."


Slow Global Growth Snails - eurozone


Meanwhile, in the U.S., more souring economic data. According to Markit, its survey of U.S. Manufacturing PMI fell to its lowest level in six-and-a-half years:


Slow Global Growth Snails - us pmi


Here's analysis from Markit: 


"US factories reported their worst month for just over six-and-a-half years in April, dashing hopes that first quarter weakness will prove temporary... With prior months’ survey data pointing to annualized GDP growth of just 0.7% in the first quarter, the deteriorating performance of manufacturing suggests that growth could weaken closer towards stagnation in the second quarter."


Then there's China. Earlier this week, we noted that the PBoC would enact more "prudent" monetary policy even as China's economy continues to slow.


Add all of this to the laundry list of dour economic news we've seen of late.

Eurozone, Commodities and Credit Cycles

Client Talking Points


Eurozone April preliminary PMIs were released this morning… drum roll…  both the Manufacturing and Composite (Manufacturing + Services) fell month-over-month, in-line with our theme of #EuropeSlowing. Eurozone Manufacturing recorded 51.3 vs 51.6 prior and the Composite fell to 53.0 vs 53.1.  Services rose 10bps to 53.2. Meanwhile coming late to the party, the ECB released the results of the Q2 2016 survey of professional forecasters, which sees the inflation forecast revised down by 0.4% to 0.3% for 2016 and growth at 1.5% in 2016 vs a prior estimate of 1.7%.


China forever the commodity sponge? Iron ore is up over +60% YTD with rebar +50% YTD on Asian exchanges. With the move in commodities comes the mainstream media stories of Chinese demand and stockpiling. We prefer to stick with the top-down signals. With the CRB up 5.5% over the last month (16/19 on CRB green) on higher trending volume in aggregate (unprecedented in some markets), we’ll soon find out if a re-pricing of QE has been met by incremental buying forcing out shorts, or if the short USD/long commodities trade is a new trend. The fresh non-consensus risk is a hike in June.   


Junk bonds have rallied +3% in the YTD, inclusive of a +6% squeeze over the past 3M alone. Option adjusted spreads continue to narrow dramatically, compressing -30bps in the past week alone to 586bps wide. This is down from a peak of 839bps on February 11th. Is the trough of the domestic credit cycle in the rear-view mirror, leaving us holding the bag on a stale thesis? Not at all. Our work has shown that once the horse leaves the barn on the domestic credit cycle, there is no recovery until HY spreads are north of 1,000bps and corporations have sufficiently delivered their balance sheets – neither of which has occurred.


*REPLAY The Macro Show with Darius Dale and Ben Ryan - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald's (MCD) is reporting 1Q16 results on Friday, and we will have a more thorough update following the release. Current consensus estimates are projecting system-wide same-store sales (SSS) growth to be +4.6%, and +4.6% in the United States. Given another full quarter of All Day Breakfast, and ever evolving value proposition that MCD is providing, we feel confident in their ability to perform at or above expectations.


MCD continues to be a great LONG stock to hold during turbulent times in the market given their attributes of being large-cap, low beta, and aligns with our macro teams view of going LONG lower to middle income food providers.


With the largest Capital Markets operation reporting results last week, JP Morgan's numbers continue to relay the business-to-business (B2B) shift in both bond and equity markets. With capital hamstrung by Financial Crisis era regulation, and fixed income desks running tight as a drum, brokerage activity continues to shift over into the exchange traded derivative markets. JPM's FICC, or fixed income trading, results hit $3.5 billion in revenue in 1Q16, down 13% year-over-year.


Conversely, the daily reporting of CME Group's (CME) bond volumes finished at 8.2 million contracts per day in 1Q, up +9% from last year. On a revenue basis, CME's results are actually a little stronger, with fixed income rate per contract up +2% year-over-year. The shift in equities is more balanced, with JPM's equity trading revenues up +6% y-o-y according to their latest report.


CME's stock volumes, however, still outflank the big brokerage desk with futures and options volume up +9% y-o-y for the forthcoming quarterly report on April 28th. This activity shift is secular in our view and CME Group has a strong upward bias in earnings power which makes its stock one of the few to own in Financial Services.


We remain the bears on the U.S. economy and the corporate profit and credit cycles - we’re long growth slowing via Long Bonds (TLT) and Pimco 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ) and short risky corporate credit via Junk Bonds (JNK) as the profit cycle rolls over.


High yield bonds have experienced meaningful relief in price terms with the move in reflationary assets. Again, we reiterate that once credit spreads move off their cycle lows, they don’t typically revert in the same cycle, which is why we are sticking with our sell recommendation on junk bonds (JNK).


Any time corporate profits decline for two consecutive quarters, the S&P drawdown has had a peak to trough decline of at least 20%. Dissecting the likely direction of earnings in Q1 and Q2 of this year, we could be facing 4 consecutive quarters of declining corporate profits, and we question the market's ability to slap higher earnings multiples on the S&P 500.

Three for the Road


About Everything: The Golden Age of Home Improvement…  @HoweGeneration $LOW $HD  #millennials



It's about discovery.  

Scott Jurek


Apple reported iPhone owners unlock their device, on average, 80 times a day.

Down the Path

“Everyone has their own experience. That's why we are here, to go through our experience, to learn, to go down those paths and eventually you may have gone down so many paths and learned so much that you don't have to come back again.”



The cultural icon Prince Rogers Nelson, more commonly known as Prince, passed away yesterday. Unlike many artists who veer into other worlds, Prince pretty much stuck with music and sticking to that path rewarded him and his listeners. Over the course of his career, he sold over 100 million albums and was inducted into the Rock n’ Roll Hall of Fame in his first eligible year. He also left us with some very memorable lyrics, such as:


“I never meant to cause you any sorrow / I never meant to cause you any pain / I only wanted to one time to see you laughing / I only wanted to see you / Laughing in the purple rain." 


For stock market operators, it has been a year of diverging paths and depending on which path you’ve followed you are either “laughing” or feeling “sorrow” at the moment. On February 11th, the SP500 was down about -10.5% for the year. As of the close yesterday, the SP500 is up about 2.3% for the year. In early February, it seemed the world, or at least the stock market, was going to end. Now, after the 15%+ move off the bottom, there is nary a bear in sight.


We don’t have the daily stresses of managing money like many of you, so it does allow us to take a step back to consider the larger picture. The larger picture from the macro perspective involves continuing to focus on direction of earnings growth, the direction of broad economic activity, the direction of inflation, and contemplating the role of the Fed in all of this. For stock market bears, the question remains: what gets the stock market to go down from here?


Down the Path - bear 2


Back to the Global Macro Grind


Our colleague Darius Dale wrote a note yesterday in which he discussed what would make the stock market go down from here and his answer was on simple level: the data. But, of course there is more to it than just that simple answer. As Darius wrote:


“Since the late-September lows, the S&P 500 has held a reasonably tight positive 0.75 correlation with the Citi U.S. Economic Surprise Index, which itself has rallied hard off its early-February lows as U.S. economic data stabilized in rate-of-change terms and perpetuated a waning of recession fears.


Now, a topping process in the latter index appears to have gotten underway over the past two weeks, as most recently highlighted by big misses in this morning's Philly Fed and Chicago NAI surveys. While our process generally underweights survey data – particularly one-off regional surveys – in lieu of doing the actual rate-of-change calculus on relevant “C” + “I” + “G” + “NX” metrics, we reiterate our view that economic deterioration from here is itself the catalyst for the stock market to reverse course in a meaningful manner.


Simply put, because macro consensus doesn’t have our economic outlook, we believe domestic economic data will start to miss by a wide margin again, as it did in the early part of this year. It’s also worth noting that economist consensus always have a natural upward-sloping bias to their growth estimates, which creates additional downside surprise risk to the extent we're right on where the data is headed over the next couple of quarters."


So to summarize, our view is that key economic statistics will begin to miss consensus estimates as the year progresses. We’ve highlighted our view on GDP growth throughout the course of the year in the Chart of the Day. Specifically, while we were in line with consensus for Q1 2016 GDP growth, we are close to 100 basis points below consensus for the remainder of 2016E. In our views it’s hard to see how disappointing data will buoy the stock market, especially when the growth rates being reported are barely above recessionary levels in the best case scenario.


That said, given the move off the February lows the stock market is clearly considering an alternative scenario than Hedgeye's for the course of 2016. Even more notable in this regard is the high yield bond market. Junk bonds in aggregate are now up almost 6% on the year and energy related junk bonds are leading the way, up about 10% in the year-to-date. Ironically, this comes at a time when the number of companies at risk of a default, according to Standard & Poors, is at 242, the highest level since 2009.


Flipping over to Asia and staying on this idea of debt defaults, we see somewhat similar trends. According to a report out by Reuters, bad debt at Asian banks is now also at the highest level since 2009. Specifically, non-performing loans at 74 major Asian banks (excluding Japan) reached $171 billion at the end of 2015, which was up 28% from 2014.


Despite our dire view on growth, deterioration of corporate balance sheets domestically and abroad, and of course the ongoing decline in corporate earnings, global central bankers may yet "save the day" if the markets sells off and more accurately reflect the deteriorating data. That said, according to Fed futures the next rate hike is now priced in for Q3/Q4 2017 versus October 2016 when we started the year. So absent explicit easing action, there is not much the Fed can do, especially in the light of inflation statistics that seems poised to increase given the recent rally in commodities.


So, how will the rest of the of the stock market year look? Well, we continue to believe it’s prudent to put on your raspberry berets, get in your red corvettes, and be prepared for deteriorating economic data and markets that react accordingly to these fundamentals.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.70-1.88%

SPX 2044-2116

VIX 13.01-18.32
USD 93.77-95.21
YEN 107.51-110.94
Oil (WTI) 39.97-44.25


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Down the Path - 4 22 16 EL

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