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Crash! Boom! Bang! (The Currency War Heats Up)

Takeaway: Central planners are stepping up in an attempt to arrest economic gravity. Don't bet on their success.

Crash! Boom! Bang! (The Currency War Heats Up) - currency wars

 

Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"With most US beta chasers talking “SP500” today, let’s stay focused on the bigger macro picture which is highly correlated to what USD is doing in the FX War. UK 10yr Yield dives to 0.71% this morning and the Pound’s crash are to lower-lows -0.7% at $1.28."

 

Crash! Boom! Bang! (The Currency War Heats Up) - gbp usd 7 11

 

Meanwhile in Japan...

 

The yen weakened as Japanese Prime Minister Shinzo Abe "ordered a new round of fiscal stimulus spending after a crushing election victory over the weekend," Reuters reports. Abe was light on specifics but Reuters sources say that before the election "the government was ready to spend more than 10 trillion yen ($100 billion)." Here's analysis from McCullough:

 

"Yen slammed -1.6% vs. USD (our Yen SELL signal went out late last week – let’s see if its more than a trade) and this gets interesting now with USD UP year-over-year and everyone racing the British to the bottom; EUR/USD was a big focus of my Q3 Macro Themes Call and looks as precarious as it has in a year at $1.10."

 

We'll see if Abe's jawboning translates into action and if that breaks the clear cut trend ... Yen strength.

 

Crash! Boom! Bang! (The Currency War Heats Up) - usd jpy 7 11

 

One thing is clear, central planners are just getting started.

Stay tuned.


The Greatest Fall From Grace The Restaurant Industry Has Ever Seen

Editor's Note: Below is an institutional research note written by Hedgeye Restaurants analyst Howard Penney.

 

The Greatest Fall From Grace The Restaurant Industry Has Ever Seen - chipotle sunset

 

I hope Mark Crumpacker can get his life back in order. 

 

That being said, Chipotle desperately needs NEW LEADERSHIP and, importantly, a new direction. 

 

The story of the rise and fall of Chipotle has become a dark one and now borderline pathetic. The company’s foundation for its food was built on the word “integrity,” ironically; the foundation of its leadership team has demonstrated time and again that there is a complete lack of integrity.  We are witnessing the greatest fall from grace the restaurant industry has ever seen, and many people have suffered as a result. 

 

How much more damage will be done before changes are made at the top?

 

Here is what we think Chipotle needs ASAP:

  • A CEO with strong core values and integrity who can inspire others to be their best.
  • Hire a new leadership team with strong values, who demonstrate the courage and ability to cultivate a culture of high integrity, and to do what's right for the business.
  • Honor and support the supply chain and its vendor partners, and not disparage them.
  • Reinvent the business; it will be a process to rebuild this iconic brand that once enjoyed great success.
  • Earn customers trust through transparency, honesty, humility, authenticity, active engagement, collaboration and hard work.
  • Develop and move forward confidently with a well thought out, comprehensive three-year plan that has an ongoing cadence, not a desperate and tactical one based on giving away free food. 
  • Embrace speed - "Be quick, but don't hurry."

 

As the truth rises to the surface, it’s becoming clear that the current Chipotle management team is not capable of managing the company. The company has served up multiple cases of foodborne illnesses causing pain and suffering for people across the country, all due to Chipotle’s negligence and lack of appropriate controls. The Chipotle problem is so devastating; it makes the entire food service industry look bad. 

 

Management’s response to the disaster has been late, incomplete and woefully inadequate to actually overcome the flood of consumer complaints and customers' mass exodus away from visiting Chipotle restaurants. Now, one of the top executives, with the responsibility of regaining the trust of the American public, is indicted on major drug charges in New York City.

 

Financially, the profitability of the company has declined by -70% over the past year (represents FY16E versus FY15).  The market value of the company has decreased by $11.9 billion since October 13, 2015, and we believe there is an additional ~$140 per share of downside from current levels to $250 per share.  Lastly, there is a strong possibility the company will report its second straight quarter of operational losses, currently consensus estimates are projecting a gain of $0.95 per share. 

The Greatest Fall From Grace The Restaurant Industry Has Ever Seen - chipotle same store

The Greatest Fall From Grace The Restaurant Industry Has Ever Seen - CHART 2

 

OTHER CHANGES THE COMPANY NEEDS TO MAKE 

The Board needs to eliminate the co-CEO structure and immediately begin a search for a new CEO, one who can instill integrity and high standards into this company, and dramatically turn around its performance.  

 

The Board needs to look outside the company and hire a seasoned restaurant executive with the following experience and results:

  • A leader who has led difficult turnarounds of large brands in the restaurant industry with a proven track record.
  • A leader who understands the subtleties and the enormous importance of branding, consistency, and consumer trust.
  • A leader who has demonstrated the credibility of leading hundreds of thousands of employees to efficiently and profitably run operations, starting first and foremost with ensuring the safety of its quality ingredients sourced throughout the supply chain.

 

A COMPANY’S CULTURE BEGINS WITH ITS VALUES

Values inherent in the best run companies are developed by the leaders of the company with the thorough involvement of and ownership by its vast and diverse team of employees, and vendors. These values ultimately become the fabric of the organization modeled by the daily behavior and actions of its leaders, starting with its CEO.

 

We are now seeing what the culture of Chipotle is like.  Over the past year, the behavior of this management team has revealed that the culture is rotten at the core.  From the very beginning the culture is based on arrogance; a lack of transparency; a lack of required skill sets to run a big company; a lack of good judgment; a disturbing complacency; a sense of entitlement and now even more apparently, a recklessness that has further endangered the organization.

 

When the true values are not present, responsibilities are not met, accountabilities not taken seriously, and results with integrity not achieved, then there should be swift and strong consequences.  It’s time for the Board and the management team of Chipotle to take responsibility and be accountable for what has transpired over the past year.

 

It’s time to clean house! 

SHAREHOLDERS NEED TO BEGIN TO FORCE CHANGES AT THE COMPANY

It is just unacceptable for two co-CEO’s to be paid what they’re being paid collectively in light of all the problems currently being experienced at Chipotle while on their watch. And now, their close colleague and Chief Marketing Officer, claims that a summer loyalty program and the introduction of chorizo are the answers to Chipotle’s current problems, and will be enough to turn around their hemorrhaging business, while he’s 'pre-occupied' with allegedly doing drugs.

 

How long are shareholders going to allow this to go on? Is the Board in Founder Steve Ells' back pocket?

 

Shareholders MUST demand a complete and thorough overhaul of its leadership team if Chipotle has any hope of regaining the trust of the American public.

 

It is evident to me, that this leadership team does not understand the magnitude of the problem. It is so far reaching and so very deep. As a result, they have no idea what to do. This homegrown group of executives is floundering in uncharted waters, and potentially taking a lot of people down with the ship.

 

TRANSFORMATIVE CHANGE

Transformative change is needed to consistently ensure a quality experience for customers to overcome an egregious and highly damaging breach of public trust.

 

Transformative change is necessary to provide a proper working environment for all employees that is based on holding people to high standards and treating them with genuine respect.

 

And ultimately, transformative change is needed to ensure the ability to create significant value for its shareholders after one of the most embarrassing examples of negligence, arrogance and recklessness in the restaurant industry.

 

The Shareholders and the Board of Chipotle need to take action, and they need to do it now.

 

The company desperately needs new leadership at the top.

 

The troubles this company faces is of epic proportions. Chipotle is quickly running out of time.


Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, and key currency crosses. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 7 11

 

Daily Market Data Dump: Monday - sector performance 7 11

 

Daily Market Data Dump: Monday - volume 7 11

 

Daily Market Data Dump: Monday - rates and spreads 7 11

 

Daily Market Data Dump: Monday - currencies 7 11


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.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT

Takeaway: Domestic markets were encouraged by jobs last week, but Europe is still feeling Brexit pain, and the Chinese NPL ratio just hit 2.15%.

 

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM11

 

 

Key Takeaway:

While domestic markets reacted positively to Friday's NFP figure, worry over Brexit effects is still rising in Europe. In the U.S., financials CDS tightened by -6 bps to 85, and the high yield YTM fell by -15 bps to 6.66%. Meanwhile, in Europe financials CDS widened by 8 bps to 146. Additionally, sovereign CDS widened by 5 bps to 114.

Aside from the problems in Europe, we remind investors of the growing risk in China's loan market. Last week, MNI reported that its measure of bank NPLs in China now exceeds 2 trillion CNY, and the NPL ratio has risen to 2.15% as of May, up from 1.85% at the end of 1Q16.

 

Our heatmap below is positive on all durations.

 

Current Ideas:


MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 6 of 13 improved / 4 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM15


1. U.S. Financial CDS
– Swaps tightened for 12 out of 13 domestic financial institutions as investors were encouraged by Friday's NFP report.

Tightened the most WoW: BAC, C, MS
Widened the most WoW: MET, RDN, GNW
Tightened the most WoW: WFC, JPM, BAC
Widened the most MoM: MET, PRU, HIG

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM1

 

2. European Financial CDS – Financials swaps mostly widened in Europe last week as investors in the region continue to worry over Brexit effects.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM2

 

3. Asian Financial CDS – Financials swaps in Asia mostly widened last week with the median rising from 125 to 126.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week. Portuguese sovereign swaps led the move, widening by 24 bps to 314.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM18

 

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Turkish swaps tightened the most, by -11 bps to 229.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM16

6. High Yield (YTM) Monitor – High Yield rates fell 15 bps last week, ending the week at 6.66% versus 6.81% the prior week.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 6.0 points last week, ending at 1910.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM6

8. TED Spread Monitor  – The TED spread fell 1 bps last week, ending the week at 39 bps this week versus last week’s print of 40 bps.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM7

9. CRB Commodity Price Index – The CRB index fell -3.8%, ending the week at 187 versus 195 the prior week. As compared with the prior month, commodity prices have decreased -3.0%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - 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 7 bps.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 3 basis points last week, ending the week at 2.00% versus last week’s print of 2.03%. 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 | BREXIT AND CHINESE DEBT - RM10

12. Chinese Steel – Steel prices in China rose 3.3% last week, or 81 yuan/ton, to 2515 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 | BREXIT AND CHINESE DEBT - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 149.5 trillion RMB as of May 31, 2016 (data released 6/15/2016), which is up +15.5 trillion RMB or +11.5% year over year. Month-over-month, credit is up +553 billion RMB or +0.4%. Note: this data is only updated monthly.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM20

15. 2-10 Spread – Last week the 2-10 spread tightened to 75 bps, -10 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM13

16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 40 bps.

MONDAY MORNING RISK MONITOR | BREXIT AND CHINESE DEBT - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT

  

Patrick Staudt, CFA 


 

 

 

 

 


All-time highs in SPY (almost) with all-time highs in the Long Bond (TLT

Client Talking Points

UK

With most US beta chasers talking “SP500” today, let’s stay focused on the bigger macro picture which is highly correlated to what USD is doing in the FX War; UK 10yr Yield dives to 0.71% this am and the Pound’s crash are to lower-lows -0.7% at $1.28.

FX

Yen slammed -1.6% vs. USD (our Yen SELL signal went out late last week – let’s see if its more than a trade) and this gets interesting now with USD UP year-over-year and everyone racing the British to the bottom; EUR/USD was a big focus of my Q3 Macro Themes Call and looks as precarious as it has in a year at $1.10.

Oil

They say #StrongDollar wouldn’t matter for Oil or Reflation – we say that’s poppycock – USD Index +3% now in the last month and WTI is down -14% (inclusive of this morning’s decline) with the CRB Index -5% in the same period. Oil’s @Hedgeye TREND = $47.53/barrel, so that’s broken (for now); still much prefer long Gold

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/10/16 58% 0% 0% 10% 27% 5%
7/11/16 56% 0% 0% 12% 25% 7%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/10/16 58% 0% 0% 30% 82% 15%
7/11/16 56% 0% 0% 36% 76% 21%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
TLT

On Thursday, we introduced our Q3 Macro Themes: #ProfitCycle, #ConsumerCredit, #EuropeImploding. The gist of themes #1 and #2 emphasize that the economic cycle continues to roll over as evidenced by declining corporate profitability and the pending deceleration in consumer credit growth which is more of a “when” rather than an “if” scenario. 

 

Consumer credit growth has a direct effect on consumption. Employment and consumption peaked on a Y/Y rate of change basis in Q1 2015 right after corporate profits peaked in the second half of 2014.

GLD

We want to be long of continued growth decelerating and inflation picking up from a GIP modeling perspective into the back half of 2016. TIPS are a great way to play both of these views along with our GLD (reflation) and TLT (growth slowing) positions.

TIP

See update on TLT/GLD.

Three for the Road

TWEET OF THE DAY

This week in @Hedgeye cartoons. Get our daily cartoon emailed for free: hedgeye.com/cartoon/email cc @KeithMcCullough pic.twitter.com/ECIYNZVmjJ

@Hedgeye

QUOTE OF THE DAY

“Ability is what you’re capable of doing.  Motivation determines what you do.  Attitude determines how well you do it.”

-Lou Holtz

STAT OF THE DAY

Andy Murray won his second Wimbeldon title over the weekend.


CHART OF THE DAY: Here's Why You Shouldn't Chase All-Time Highs In US Equity Beta

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... What’s next?

 

The #1 reason why you won’t see me chase US Equity Beta this week is that our #1 Q3 Macro Theme is the #ProfitCycle slowing faster than Consensus Macro thinks. That starts Thursday when JP Morgan (JPM) reports Earnings."

 

CHART OF THE DAY: Here's Why You Shouldn't Chase All-Time Highs In US Equity Beta - 07.11.16 EL Chart


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