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McCullough: Wall Street’s Fed Rate Hike Nonsense

 

Two weeks ago, Wall Street seriously doubted the Fed would raise rates at its March meeting. The skepticism is a matter of public record (see for yourself). The market expects that line of thinking will prove wrong, as Hedgeye CEO Keith McCullough noted today on The Macro Show:

 

“A lot of people said ‘Well, the Fed’s not going to raise rates.’ Two weeks ago, the market implied a 34% probability that the Fed raises rates. You know what that probability is this morning? 96%.”

 

Why the sudden change?

 

For starters, the regional Fed heads made the rounds with TV talking heads last week, which was later interpreted as lobbying for hawkish monetary policy.

 

Here’s a round-up of some of the comments:

 

  • "The case for monetary policy tightening has become a lot more compelling," New York Fed President William Dudley told CNN last week. "After the election we've seen very large increases in household and business confidence, we've seen very buoyant financial markets."
  • "In my view, a rate increase is very much on the table for serious consideration at our March meeting," San Francisco Fed President John Williams said in a speech last week. “The aim is to keep the economic expansion on sound footing — not too hot, not too cold — that can be sustained for as long as possible.”
  • "I see three hikes as appropriate for 2017, assuming things stay on track," Philadelphia Fed President Patrick Harker said in prepared remarks at Temple University last week.

 

Chief Fed head Janet Yellen joined the party last Friday saying, “Indeed, at our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate." (emphasis added)

 

The 10-year Treasury yield went from 2.35% to 2.51% on the rate hike speculation. We’ve been advising investors to sell Long-Term Bonds (TLT) for some time now, since the U.S. economy is heating up (click here for more).

 

What could push long-term bond yields even higher? A strong jobs report, McCullough says. Last month was the first year-over-year jobs growth in 23-months.

 

“If we were to see another acceleration in nonfarm payroll growth I think you could see the 10-year tap 2.55% or higher.”


Cartoon of the Day: Poo Bear

Cartoon of the Day: Poo Bear - 03.07  X

 

Even with this week's modest "correction," stock market bears are really stepping in it so far in 2017.

 

 

Click here to receive our daily cartoon for free.


Poll Of The Day: If You Could Short One Item Below Which Would It Be?

Poll Of The Day: If You Could Short One Item Below Which Would It Be? - z poll

 


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Global Growth: A Shocking Number of Investors Are Missing the Story

Takeaway: Many active managers are simply not long enough in the context of how good the fundamentals have been.

Global Growth: A Shocking Number of Investors Are Missing the Story - globe image

 

The OECD expects a "modest pick-up" in global growth, but warns of risks like "rising protectionism, financial vulnerabilities [and] potential volatility" that could "derail recovery." Meanwhile, the BIS' monetary and economics head, Claudio Borio writes, "Politics tightened its grip over financial markets in the past quarter, reasserting its supremacy over economics." The BIS too cautioned of a global growth slowdown.

 

The warnings have been heeded by investors. "Hedge funds are bracing for a market selloff," Bloomberg writes today. 

 

The sheer number of investors and pundits missing out on such an obvious recovery in global growth data is shocking to say the least. Our analysis suggests that global growth is unequivocally accelerating on a trending basis. This is the underlying factor perpetuating the broad-based recovery in both domestic and global corporate profit growth.

 

Global Growth: A Shocking Number of Investors Are Missing the Story - World Nominal Retail Sales

 

We’ve calculated the weighted average growth rate of Nominal Retail Sales and Industrial Production for the world’s 10 largest economies, which in total represent just shy of 80% of global Nominal GDP. The punchline is that each of the aforementioned indicators is accelerating on a trending basis.

 

Global Growth: A Shocking Number of Investors Are Missing the Story - World Industrial Production

 

All told, when analyzing the data from either a top-down or bottom-up perspective, it’s easy to see that global growth momentum is currently as strong as it’s been at any point in the last ~2.5 years.

 

Global Growth: A Shocking Number of Investors Are Missing the Story - World Exports


RRGB: A New Hedgeye Best Idea Long - Conference Call

RRGB: A New Hedgeye Best Idea Long - Conference Call - z rrgb

 

Hedgeye Restaurants analyst Howard Penney is hosting an institutional Black Book presentation to discuss the addition of Red Robin Gourmet Burgers (RRGB) to his team's Best Ideas List as a LONG. The call will be held Wednesday March 8th at 1pm ET.

 

Send an email to sales@hedgeye.com for more information.

KEY DISCUSSION POINTS

 

REVAMPED MANAGEMENT TEAM

Where the head goes, the body follows, and this analogy can be used when describing the RRGB management team. The recent promotion of Red Robin veteran Denny Marie Post and the recent hire of industry past master Guy J. Constant signals a commitment to a new game plan, one that includes slowing unit growth in order to focus on 4-wall profitability, maximizing technological capabilities to foster an improved guest experience, and streamlining SG&A expenses. Industry veterans, Ms. Post and Mr. Constant bring more than 30 and 20 years of leadership experience, respectively, and are a duo to be reckoned with in the restaurants space, as RRGB works to realign the business for long-term success.

 

TECHNOLOGY & DELIVERY TO FUEL TOPLINE GROWTH

Technology is not necessarily a new endeavor for Red Robin, but the company's approach has undergone a facelift. Red2 was the Company's initial technology initiative, introduced in January 2016, and it spoke of doubling EBITDA by 2020. The initiative included Revenue Growth, Expense management, and efficient capital Deployment. However, by 3Q16 the Company pivoted from their initial Red2 initiative in favor of an abbreviated version (we are calling it Skinny RED) that would move the brand forward. Additionally, as stated on their 4Q16 earnings call, the Company's biggest opportunity lies with off-premise operations. At the end of FY15, RRGB had fallen far behind its competitors in the delivery, to-go, and catering space, with carry-out sitting below 4%, however, the company is now full steam ahead on partnering with DoorDash and Amazon Prime Now to roll-out delivery. With delivery only available at ~84 units, there is still a tremendous amount of white space for RRGB to move forward aggressively.

 

SHEDDING ASSETS, SLOWING UNIT GROWTH WILL HELP SLOWING CAPEX TREND

Given the Company's aggressive brand transformation remodels and technology initiatives, CAPEX had hamstrung the business, with capital expenditures growing by ~55% from 2014 to 2015 and reaching ~$189M at the end of FY16. With only a small number of remodels to be completed in 2017, unit growth slowed significantly (8 net new Company restaurants in 2017), and the decision to close 9 Burger Works locations that were underperforming relative to company expectations, in 2018 we expect the company to eliminate nearly all growth CAPEX, allowing for significant FCF generation going forward.

 

CALL DETAILS

Ping sales@hedgeye.com for more information. If you are not a current subscriber to our Restaurants research there will be a fee associated with this call. 

ABOUT HEDGEYE

Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. 

 

The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.


Sector Spotlight Replay | Q&A with Housing Analyst Josh Steiner

missed the live show? catch the replay below

 

Hedgeye Housing analyst Josh Steiner appeared on HedgeyeTV today at 2:30PM ET. He will shared some updated thoughts and research on the U.S. housing market and what investors can expect. 

 

CLICK HERE to access the associated slides.

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%
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