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US STRATEGY – HAPPY THANKSGIVING

It’s a quiet week for some. Yesterday the S&P 500 declined 0.1%; the NASDAQ declined 0.3%, while the higher beta Russell 2000 declined 0.4%.  The S&P 500 has now closed down 4 out of the last 5 days and the Dollar Index has been lower for the past three. 

 

The MACRO calendar continues to provide mixed signals as the momentum of the RECOVERY theme stalls.  Our overall take from yesterday’s economic calendar was supportive of our concerns about the trends in the labor market and the implied health of the US consumer.  Not surprisingly, the more defensive-oriented sector out performed yesterday, with the exception of Energy (XLE).  Given the performance of the XLE yesterday, the Research Edge quant models are now flashing PERFECT – all nine sectors are perfect on TRADE and TREND. 

 

Yesterday, Q3 GDP growth was revised to 2.8% vs. the previously reported gain of 3.5%. The biggest adjustments to Q3 GDP were deteriorations in the net exports and in personal consumption expenditure, reflecting a less-robust boost from the cash-for-clunkers program.  In addition, consumer confidence rose to 49.5 in November from an upwardly revised 48.7 in October.  The present conditions index is at a 26-year low and the labor market differential deteriorated.  On the housing front, the S&P Case-Shiller index rose 0.3% month-to-month in September after a 1.1% increase in August. 

 

Today’s MACRO calendar is full with MBA Mortgage applications, Personal income and spending, initial jobless claims, U. of Michigan confidence and new home sales--all to be reported by 10am EST. 

 

On Tuesday, the VIX declined 3.3% and has now declined 8.7% over the past week.  We are long the VXX. 

 

While the S&P 500 was down slightly, four sectors turned in a positive performance.  The best performing sector was Healthcare (XLV +0.8%), followed by Energy (XLE +0.6%), Consumer Staples (XLP +0.2%) and Utilities (XLU 0.2%). Thanks to Medtronic’s positive outlook, the Med-tech names provided the bulk of the upside, and the managed care group continues to outperform.     

 

The worst performing sectors were Technology (XLK), Financials (XLF) and Industrials (XLI).  The drag in the XLK was due to BRCD down 9% and sell-side downgrades on DELL.   The XLF was being dragged down by the banks on the back of capital concerns emanating from Washington and Real Estate related names.

 

From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 35 points or 1% upside and 2% downside.  At the time of writing the major market futures are pointing to a positive open.

 

Crude oil is trading basically unchanged ahead of the U.S. Energy Department inventory report.  The Research Edge Quant models have the following levels for OIL – buy Trade (75.51) and Sell Trade (79.09).

 

Gold rose to a record $1,176.50 an ounce in the morning “fixing” in London.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,143) and Sell Trade (1,189).

 

Copper is higher for the third time in four days as the dollar has declined for three straight days.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.01) and Sell Trade (3.22). 

 

Howard Penney

Managing Director

 

US STRATEGY – HAPPY THANKSGIVING   - sp1

 

US STRATEGY – HAPPY THANKSGIVING   - usdx2

 

US STRATEGY – HAPPY THANKSGIVING   - vix3

 

US STRATEGY – HAPPY THANKSGIVING   - oil4

 

US STRATEGY – HAPPY THANKSGIVING   - gold5

 

US STRATEGY – HAPPY THANKSGIVING   - copper6

 


YUM – YOU TAKE THE GOOD, YOU TAKE THE BAD….

YUM’s investor conference is coming up on December 9th.  This annual meeting in New York typically proves to be helpful to me as management takes the time to provide not only an overview of current business trends but also to give more details around current initiatives at each business segment.  I recently received the agenda for this year’s meeting (included below) and was shocked to see that both a U.S. Overview and China Overview were missing from the agenda.   

 

I understand that YUM management has supplemented this annual meeting in the last couple of years with additional investor days throughout the year so it might be a waste of time to replicate that level of detail at its New York meeting.  Specifically, YUM hosted separate Taco Bell, KFC, Pizza Hut and YRI Investor days throughout this past summer and management should be commended for dedicating that much time to the investor community. 

 

The agenda for the December meeting, however, seems to focus only on YUM’s areas of business, which are currently strongest and fails to address issues in the U.S. and China where sales trends have been the weakest.  I realize that CEO David Novak will likely address both the U.S. and China in his Yum! Overview but judging from the last earnings call when about 70% of analysts’ questions (a good gauge of investor interest in my opinion) were focused on both the U.S. and China, these are the areas of the business about which investors have the most questions and concerns.  And, being that the U.S. and China combined account for about 70% of YUM’s segment operating income, investor concerns are warranted.

 

Regarding the U.S. business, we will only be hearing specifically about Taco Bell, which is arguably the company’s strongest U.S. concept.  Same-store sales turned slightly negative in Q3, but this is not surprising relative to the recent softening and increased discounting we have seen across the board for the QSR industry.  More concerning is the 13% comparable sales decline at Pizza Hut and the 2% decline at KFC which came only one quarter after the Kentucky Grilled Chicken launch.  Yes, we already heard about Pizza Hut and KFC during the summer investor days, but we also heard about Taco Bell.

 

We will also be hearing more about YUM’s initiatives in France and India.  We know management feels good about its growth opportunities in both of these markets because they have highlighted them both in the last two earnings calls.  On its 2Q09 earnings call, management commented, “Yum! Restaurants International’s new growth markets delivered 16% system sales growth this quarter with the benefit from new unit development in high growth markets like France and India. Our KFC France business generates the highest KFC average unit volumes in the world of roughly $4 million per year. With this kind of sales, we believe we have the unit economics to drive scale and can expand KFC rapidly from 79 units and modest profits today to over 300 units and at least $100 million in profits in France.

 

Likewise, India continues to drive impressive growth. We now have nearly 50 KFCs. Same-store sales are up around 25% and we now have double-digit store level margins. We are more confident than ever that we will be able to build significant KFC scale.”

 

I think it is important for management to spend time talking about its biggest growth opportunities as investors need to know where we go from here.  I also think that investors need to understand the current issues and what is being done to address them now in order to feel more comfortable with the company’s future prospects.  We will see what management has to say on December 9th.  Stay tuned.

 

YUM – YOU TAKE THE GOOD, YOU TAKE THE BAD…. - yum

 



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CASUAL DINING – OCTOBER KNAPP TRACK

Trends improved from September on a 1-year basis but continued to decelerate on a 2-year average basis.

 

Malcolm Knapp reported that October casual dining same-store sales declined 4.9% with traffic down 4.4%.  Given what we learned from a handful of casual dining restaurant operators about trends in October, it is not surprising that October trends improved sequentially from September levels on a 1-year basis when comparable sales declined 6.4% and guest counts came in -5.3%.  Specifically, PFCB, TXRH, BWLD and MSSR all stated that they experienced sequentially better sales trends in October. 

 

If you look at 2-year average trends, however, the October numbers do not provide any reason to be optimistic as both same-store sales and traffic trends continued to decelerate from September.  Demand in October was not as bad as last December when trends bottomed, but on a 2-year average basis we not that far from it with the October comparable sales 2-year trend down 5.5% relative to -6.7% in December 2008. 

 

We will have to wait and see how restaurant trends have fared in November and for the remainder of the quarter, but I am not optimistic that we will see a much of a recovery from these levels.  Easy comparisons are meaningless and restaurant demand will not pick up until people stop losing their jobs.  For reference, Malcolm Knapp’s reported November numbers will look extremely weak on a YOY basis as last year’s result was helped by a later Thanksgiving.

 

CASUAL DINING – OCTOBER KNAPP TRACK - knapp


Math Monkeys: SP500 Levels, Refreshed...

In the chart below, we have outlined our TRADE and TREND lines for the SP500.

 

While there is an important immediate term TRADE line of resistance at 1110 (the closing high for the YTD that was established on 11/17), our Hedgeye Math Machine is spitting out a higher-high at 1117 (dotted red line). We Math Monkeys will be managing risk proactively toward 1117 being probable, in the immediate term.

 

Why is it probable? Well, primarily because the US Dollar has yet to breakout above it’s TRADE line at $75.57. The Bombed Out Buck has backed off it’s early morning highs and is currently trading at $75.11, so anything can happen here. For now, the US Dollar remains broken across all 3 of our risk management durations – we call this a Bearish Formation.

 

There is plenty of downside risk to manage toward, particularly if the Buck were to breakout. We have no support for the SP500 until 1083 (dotted green line). The more formidable bullish TREND line for the SP500 is down at 1051. A YTD peak to TREND line correction would be a -5.3% move. That would be tolerable.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Math Monkeys: SP500 Levels, Refreshed...  - setup


THE HOUSING CONUNDRUM

In contrast to last week, the housing data points over the last two days suggest that the housing market is still improving on the margin!

 

The most recent Case-Shiller data for the month of September suggests that home prices in 20 U.S. cities rose for a fourth straight month.   The Case-Shiller home-price index increased 0.27% the prior month on a seasonally adjusted basis, after a 1.1% rise in August.  Year-over-year, the index fell 9.4% from last September 2008, which represents the smallest year-over-year decline since the end of 2007.

 

The strength in the existing home sales reported yesterday, aided by government stimulus programs and a decline in mortgage rates are helping to stem the decline in home prices.

 

So where do we go from here…?  I continue to believe that home buying and consumer spending in general will be hampered by higher unemployment, which is closely correlated to increased foreclosure activity.  This will limit the improvement in sales and thus pricing trends as we head into 1H10.

 

Other issues to consider when thinking about how far prices can improve from here are the current inventory overhang, the level of shadow inventory, continued foreclosures, and tighter credit standards which require more money down...

 

For the second day in a row, from an equity perspective, the MACRO housing data is not confirmed by the performance of the homebuilders.  The Homebuilders finished lower yesterday and the stocks are some of the worst performing stocks in the XLY today. 

 

Howard Penney

Managing Director

 

THE HOUSING CONUNDRUM - caseshiller

 

THE HOUSING CONUNDRUM - nar


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