Central banker credibility is slowly waning.
Hedgeye Restaurants analyst Howard Penney highlights three key points from Starbucks’ lackluster earnings report. Earlier this month, Penney advised our subscribers to short the stock.
We added long NSC to our firms Best Ideas list for many of the same reasons that CP wanted to acquire it. Principally, NSC has underperformed relative to the potential of its assets. Either Squires and company will fix it – and we do not doubt their ability to do so – or they can expect activism on their doorstep. Certain headwinds, like the impact of net fuel and the rightsizing of costs, should simply fade with the benefit of time. We continue to see upside potential for NSC share into the triple digits, all else equal.
As an ‘early cycle’ group that is already down, we would expect rails to be a reasonably defensive cyclical long (outperform relative) should there be a recession later this year. The bear story for rails typically involves pricing pressure amid lower bulk commodity prices. Fortunately, the disconfirming evidence on pricing should be overwhelming at this point, with tight-lipped NSC noting on the call that “pricing is above the levels that we were seeing at this time last year.”
We will let other summarize the quarter, but provide updates on some key charts from our early September Black Book below. For the full suite of charts on NSC, please ping us for our Rail/NSC EQM dataset and Black Book.
Net Fuel Impact Sequentially Much Better At ~+1, Hard To Forecast
Coal Has Been In Secular Decline, But Decline Rate Should Improve From Here
Network Looking Better, Costs Follow On Lag
Despite the recent rally, we're holding the line on our short Junk Bonds (JNK) call. Here's analysis and a chart via our Macro team from a note sent to subscribers earlier this morning:
"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."
Click on the chart below to enlarge. Note: We think we're headed for a nice, big red dot (a.k.a. a blowout in high-yield credit spreads).
According to Standard & Poor's, there were 5 more corporate defaults this week, bringing the grand total to 51 year-to-date. FYI, that's the most since 2009.
There you have it...
With the U.K. divided over whether to stay or leave the European Union, Hedgeye Senior Macro analyst Darius Dale discussed the potential impact on the pound, equities and consumer/business confidence on The Macro Show this morning.
Dish Network, a strong opponent of the proposed Charter-Time Warner Cable merger has recommended approval conditions to the FCC, seeking a requirement that post-merger Charter offer a standalone broadband service that will ensure online video services (like Dish Network's Sling TV) are competitive against Charter's legacy subscription video packages.
The condition has already been discussed with FCC staff. Dish Network's filing suggests the specific components of the condition were proposed, at least in part, as a response to FCC input. Dish Network's filing was made this week, suggesting that the company recognizes the deal will likely be approved and that final requests for conditions must be proposed and vetted immediately.
The Commission's informal shot-clock for reviewing the merger expired in late March. Because California regulators are not scheduled to finalize their review of the transaction until May 12, the additional time taken by the FCC and the Justice Department to complete their evaluation is not preventing the closing of the deal. But we believe the Commission should be ready to vote on a circulated proposed order in the days ahead.
Dish Network recognizes that a simple mandate for a standalone broadband service will not protect its OTT (over-the-top) video market opportunity unless additional restrictions prevent discriminatory bundling and pricing practices. Accordingly, Dish wants the Commission to adopt a requirement that the standalone broadband offering (of 60 Mbps downstream) be comparable to what Charter offers in its bundled service offerings and be offered at a competitive price independent of the bundle. Dish is concerned that Charter will offer a discounted broadband-video bundle that diminishes or forecloses the market opportunity for OTT linear video alternatives offered by Dish and other emerging providers.
The anticipated FCC approval order will likely impose conditions addressing a range of issues, including net neutrality enforcement (despite the outcome of the upcoming court decision), access to regional sports networks, upgrades and expansion of broadband network capabilities, and affordable options for low-income subscribers. The duration of conditions (Charter has offered an initial three-year commitment) is another issue and the final order will likely add a few more years to the respective mandates.
As we've noted before, the preservation of independent OTT video growth and innovation remains the Commission's primary policy objective in the merger review. We expect, for example, conditions that would guard against unreasonable agreements or practices that discourage the migration of video to unaffiliated OTT platforms. Dish Network's proposed standalone broadband condition is consistent with the FCC's broader agenda.
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