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The Tea Party Cometh

Conclusion: Signs of the of anti-incumbency theme continue to flash, which should ultimately benefit Republicans in the midterms.  In addition, it should also be a positive for the healthcare sector.


With Rand Paul’s victory last night, the Tea Party has in a certain sense become main stream.   We were hashing through the primaries in our morning research meeting, and someone posed the question: What exactly does the Tea Party stand for?


Obviously a good question and their website, teapartypatriots.org, is fairly direct in its message.  According to the Tea Party’s mission statement:


“The impetus for the Tea Party movement is excessive government spending and taxation. Our mission is to attract, educate, organize, and mobilize our fellow citizens to secure public policy consistent with our three core values of Fiscal Responsibility, Constitutionally Limited Government and Free Markets.”


In his victory speech last night, Rand Paul galvanized the mainstream nature of the Tea Party as he referenced them directly in his speech.  He said:


“I have a message, a message from the tea party, a message that is loud and clear and does not mince words: We have come to take our government back.”


Rand’s victory appears to be a continuation of the Run Against Washington incumbency theme that we have been discussing.  Whether anecdotal or not, it is becoming clear that not being an incumbent has a real advantage in politics these days.  In the past month, this theme has been underscored by the following: 

  • Arlen Specter lost in Pennsylvania even though he was being backed by the sitting President;
  • As mentioned, Rand Paul beat the established Republican candidate for the primary in Kentucky;
  • Senator Bob Bennet lost his party’s nomination earlier in the month in Utah at the State Republican Convention; 
  • Two-term Democratic Senator Blanche Lincoln of Arkansas is being forced into a runoff for her party’s nomination; and
  • John McCain, the most recent Republican candidate for President, currently only has 50% of support in his primary battle in Arizona.

Typically one major incumbency challenge is noteworthy, but when every race becomes a challenge against incumbency that is a sign of an emerging sea of change.  As many studies note, incumbents typically win re-election 90% of the time.  These early data points are noteworthy and mark the beginning of perhaps a serious shift by voters away from incumbency.


This idea is also supported in recent polls.  Specifically, a recent ABC News-Washington Post poll indicated that nearly six in 10 respondents they’re not likely to vote for their current representatives to Congress.  This poll, and the evidence above, does not bode well for Democrats in the upcoming midterms – particularly as President Obama’s approval rating is mired near the lowest of his Presidency, with a 48.0 approval rating on the Real Clear Political Poll aggregate.


As the party in power, the Democrats are in effect the incumbent political party.  And with support for incumbents at generational lows, this could lead to a shift comparable to the one experienced under President Clinton in 1994, the last time incumbency support was this low.


In 1994, the Democrats went from a 57 Senators in the majority to the Republicans reclaiming the majority with 52 Senators.  On the same token, the Democrats went from a majority in the house with 258 members to the Republican’s reclaiming a majority with 230 members.


As it relates to your portfolios, the sector that will benefit most from Republicans regaining both houses is Health Care (XLV).  As our Healthcare Sector Head Tom Tobin wrote last week:


“A Republican return to the majority in the US House of Representatives this fall may be considered a big positive for Healthcare.  But as the Europeans are showing us now, budget cuts are coming to the US.  With Healthcare spending running 22% of Federal spending, it is likely that cuts will be targeted at Healthcare and other entitlement spending.   On the margin, Republicans are likely better for Healthcare private industry, but Deficit Reduction, tinged with a permanent Tea Party taste, could be an equivalent threat as the Democrat/Progressive world view.”


A shift is to the right is likely a positive for healthcare investors, but if the Tea Party movement increases then other healthcare risks increase.


Daryl G. Jones
Managing Director


Home prices down, the market down, the European debacle, a massive natural disaster and the no confidence vote for incumbents is in the books.  Are you feeling any better about the world?


After the close last night the ABC consumer confidence index rose to -44 in the week ending May 16, up 3 points from last week; this came as a surprise given the increase volatility in the markets. 


According to the consumer survey firm BigResearch, 55.8% of Americans are somewhat/very concerned that the financial problems in Greece and the instability with the Euro will trigger more financial fallout for America.  Only 16.8% aren’t very concerned or not at all concerned (27.4% are neutral).


As we witnessed in yesterday’s primaries, anxiety over global markets and their effect on the U.S. market can’t be good for candidates seeking re-election, as most Americans appear to have little-to-no confidence in the current government’s economic policies.


According to the Mortgage Bankers Association, a record share of U.S. mortgages was in foreclosure in 1Q10.  The inventory of homes in foreclosure rose to 4.63% from 4.58% in 4Q09.  The combined share of foreclosures and mortgage delinquencies was 14%, or about one in every seven U.S. mortgages.    


Next week we will get the Conference Board’s latest Consumer Confidence Index.  It will be the first time we have heard from the Conference Board since the attempted Times Square bombing, which may have shaken consumer sentiment, and the recent downturn in the markets.  The decline in financial markets has been confirming the “April Flowers/May Showers” Hedgeye Q2 Theme.  The latest Bloomberg survey has the conference board number at 58.5 vs. 57.9 last month.  I would not be surprised to a see print below 57.9.


Lastly, we are starting to see a big divergence between home prices and consumer confidence.  The Case/Shiller (non-seasonally adjusted) home price data has declined for the past 5 months (at an accelerating rate).  This trend has been contrary to the most recent readings on consumer confidence, which has been to the upside. 


In the US Strategy note today I said that “from a fundamental stand point the Consumer Discretionary (XLY) looks to be most vulnerable.”  A declining trend in consumer confidence will play into how the consumer spends his/her discretionary income.  Coming into today the XLY is the second best performing sector up 9.6%.  If you are looking for other shorts as the markets break down, the XLI and XLP could see a reversion to the mean. 


Howard Penney

Managing Director






Industry same-store sales and traffic trends are out for April.


Malcolm Knapp reported April same-store sales and traffic results of -2.1% and -4.0%, respectively.  For same-store sales, this constitutes a two-year average number of -3.8%, which is down sequentially from the -3.0% (revised) two-year average decline in March.  The traffic number represents a two-year average of -5.4%, a sequential decline of 140 bps from March’s two-year average traffic number.   This sequential slowdown in comparable sales contrasts with the majority of insights into April sales provided by management teams recently.  While the weather impact dragged comps for much of the quarter, overall management teams struck a positive note on improvement in top line trends seen in the back half of the quarter continuing into April.  Refer to our 5/6 post “RESTAURANTS COMMENTARY ON 2Q TRENDS TO-DATE” for additional details.


In terms of the general consumer environment, Knapp signals the ongoing financial crisis as the primary cause of weakness in sales.  This is reflected, according to Knapp, by increasing mortgage defaults and continuing high levels of unemployment and underemployment.   Value propositions, wrote Knapp, “continue to be very important.  It is important to note that it is not just the quality of the value prosition (sic) but also the efficacy of the messaging”. 


As the second chart (below) shows, the level of discounting seen for a large part of 2009 is well and truly in the rear-view for casual dining with comparable sales exceeding comparable guest counts by 1.9% in April.  However, as Knapp points out, value is still a key driver of traffic.  For the months May through November of 2009, comparable guest counts exceeded comparable sales.  This is unusual and the past five months have brought a return to the traditional positive spread between comparable sales and comparable guest counts.  


CASUAL DINING – APRIL TRENDS - discounting spread


Howard Penney

Managing Director

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SP500 Risk Management Levels, Refreshed

Today’s intraday decline in the S&P 500 is more evidence that market participants don’t get paid to trust what Fiat Fools say and try to do. Anyone with real-time quotes can just look at romp going on in the Americas and in Europe today as proof that Germany’s decision to ban naked shorts for ten German banks and insurers, as well as naked CDS on Euro area government bonds may not provide the solution it’s intended to provide.


In a quick and by no means encompassing roundup, the following equity indices are flashing red on my screens today at the time of writing (Asian markets reflect closing prices): 

  1. S&P 500 (-1.7%)
  2. NASDAQ Composite (-1.9%)
  3. DJ Industrial Average (-1.1%)
  4. Russell 2000 (-2%)
  5. Canada’s TSX (-1.8%)
  6. Brazil Bovespa (-2.2%)
  7. Mexico INMEX (-1.1%)
  8. Fracnce CAC (-2.9%)
  9. Germany DAX (-2.8%)
  10. Spain IBEX (-2.6%)
  11. Switzerland SMI (-1.5%)
  12. Italy FTSE MIB (-3.6%)
  13. Ireland ISEQ (-3.9%)
  14. Portugal PSI 20 (-2.1%)
  15. Iceland OMX (-4.8%)
  16. Japan’s Nikkei 225 (-0.5%)
  17. Shanghai Composite (-0.3%)
  18. Heng Seng (-1.8%) 

That’s a lot of red. Apparently investors around the world don’t like when you take away their ability to hedge.


At its current price of 1102, the S&P has 0.5% of further downside risk to our immediate term TRADE line of support at 1097 and 3.4% of upside to our immediate term TRADE level of resistance at 1140. Although today’s global selloff is likely a overreaction to last night’s news out of Germany, we do believe that there are more negative fundamentals to be uncovered that that Germany is trying to protect her banks from. Perhaps more exposure to Greece and Spain that what has been revealed so far? Time will tell.


Darius Dale



SP500 Risk Management Levels, Refreshed - S P


As a point of reference, MCD’s McRib was a complete failure.


If I’m wrong about this, I will eat BKC’s ribs every day for lunch for a week.  Nation’s Restaurant News reported that BKC is rolling out its new Fire-Grilled Ribs to major markets this week.  BKC management said on its most recent earnings call that the ribs would be introduced as an LTO and would help to strengthen the company’s premium offerings as an offset to the recent pressure on average check as a result of the $1 double cheeseburger.  Specifically, average check is down 5% since the introduction of the $1 double cheeseburger as value menu sales mix has moved to 20%, up from about 12%.  Although I understand the need to support average check, I do not think this high-ticket item that rivals casual-dining prices will prove successful.    


According to the article, the new bone-in ribs, which have been tested in various markets and use the chain’s new batch broilers are now in nearly all domestic Burger King units, and are priced at $7.99 as a six-piece combo meal in Dallas and $7.49 in Chicago. An eight-piece ribs meal is available in both markets for $8.99. The meals include French fries and a drink.


Many QSR chains are pursuing barbell pricing strategies, like BKC, by offering both value items priced at $1, as well as more profitable, higher-ticket sandwiches.  In 2008/09, we saw some consumers trading down to QSR from FSR, but that secular trend is over as casual-dining chains have responded by dropping prices to drive consumer traffic.  BKC’s batch broiling system may give it the ability to sell products like wings, but that does not mean the consumer is going to buy them. 


In the most recent quarter, Burger King’s same-store sales in U.S. and Canada worsened sequentially, which the company attributed to severe winter weather, a weak labor market and lower levels of guest spending due to value promotions, like the $1 double cheeseburger.  Comparable sales trends improved significantly in March and traffic turned positive, largely due to the $1 double cheeseburger promotion.  Those same consumers are not likely to come back and spend $8-$9 for ribs. 


Management commented that its average check improved sequentially through its fiscal third quarter following the February 22 nationwide launch of its premium Steakhouse XT burger line, which it said “continues to receive favorable consumer response.”  This premium burger line ranges in price of $3.99 to $4.49.  Its recent success does not leave me convinced that Burger King will also be able to sell products that are priced about $4 higher.


Only increasing my conviction that this higher ticket item will not drive traffic is Malcolm Knapp’s comment about recent casual dining trends:


“The 71.5% of households below an income of $70,000 are still not thawed yet which is why value is so critical and we are seeing pull backs in spending after an increase in purchases such as occurred in March.  The consumers are still reducing credit card debt outstanding and are trying to live on their monthly incomes.”




Howard Penney

Managing Director

R3: RL: Crickets


May 19, 2010





Every quarter when RL reports, my inbox gets flooded with emails from bulls and bears alike looking for validation on their view. This morning after RL printed $1.13 vs the Street at $0.63, I had a couple of long-term bulls who reached out with the closest thing to a smile on their face that can come through electronically. On the bear side…crickets. With such a massive beat and short interest near 10% of the float on a quality global growth company, there’s not much for them to say.


One factor might be guidance. Back of the envelope math suggests – as usual – a hint of caution. But let’s face a couple facts. 1) Caution is warranted. Has anyone looked at Europe recently? Fortunately, RL’s growth focus for this year is in integrating its China business, layering on dot.com functionality to markets beyond the US, and in driving US wholesale AND retail – which have been in a tough spot for two years. Remember when Nike got to a point in about 2000 when two parts of the model compensated when one part of the model came under pressure?


Well…that’s RL today.


Taking a big step back, there are those who have REALLY believed the story all along as opposed to those who looked at pieces of this business in a vacuum, the irony here is that the factor that has not changed throughout all the global economic turmoil is the earnings power of this company. I said it before and I’ll say it again… by the end of this year, people will be eyeing $7 in earnings in earnings power.


Oh, and by the way, I still come up with numbers for the upcoming year that are at least 15% ahead of where RL’s guidance is initially coming out.


We’ll be back with details on our numbers after the call.


R3: RL: Crickets - RL SIGMA





- Despite a modest increase in average ticket at Home Depot, the turn in big ticket items (defined as $900 and above) has yet to occur. While broader results indicate an improvement in consumer spending, lagging sales at the high-end is a telling sign that reservation among consumers persists.


- At a time when Target stores are rolling out a new open layout with 30% more space for its electronics and video games department, WMT highlighted on yesterday’s call that video games and gaming hardware were below expectations across all gaming brands due to fewer new releases and lack on innovation in gaming systems.


- After opening its first stores in new west coast markets just this past fall, DKS CEO Ed Stack commented that the sporting goods retailer would face what he expects to be an increasingly competitive environment in the coming year both in terms of store growth and pricing by targeting 40% of new store openings in new markets.


- In what appears to be a win-win, Quicksilver completed the purchase of stock options back from non-executive employees with an exercise price greater than $7.71 (50%+ above yesterday’s close) and that were issued prior to October 19, 2008 for fewer new options at a $5.08 exercise price - yesterday’s close. With more than 91% of eligible options tendered, employees appeared to agree that ‘one in the hand’ is truly better than 2 in the bush.





UK Retail Sales Fall in April - UK retail sales values fell 2.3% on a like-for-like basis from April 2009, when sales had picked up 4.6%, boosted then by Easter falling in April 2009 but March 2008. Retail footfall in April fell below its year-earlier level, hit by Easter timing and the volcanic ash cloud which prevented tourists from travel. Sterling's weakness continued to attract overseas visitors, especially from western Europe, China and the Middle East. Chinese visitors in particular were much more numerous than a year ago. Food sales fell back, largely reflecting Easter timing. Non-food was also affected by the earlier Easter, but also by pre-election uncertainty and consumer caution, which favoured essentials and replacements over discretionary items. Clothing and footwear slowed and homewares fell back below year-earlier levels, despite some further discounts and promotions.  <brc.org.uk>


Pakistan Textile Mills on 2 Day Strike - The All Pakistan Textile Mills Association went on a two-day strike Tuesday to protest the imposition on May 13 of a 15 percent export tariff on locally produced yarn for 60 days. The government stressed the duty was helping improve the availability and cool the price of yarn in the domestic market for the benefit of knitting mills. Yarn and products of blended yarn that have been imported is exempt from this duty. With less than 90 days left until the new cotton crop comes in, and with India banning its cotton exports on April 19, Pakistani yarn mills are left scrambling to fulfill orders. Yarn mills had been doing a robust business exporting yarn to Chinese mills after China had a shortfall in cotton production last year. This created shortages in the domestic yarn market and caused the price of yarn to double in a year. <wwd.com/business-news>


SKX Launches Backpacks and Bags - Skechers will launch a branded line of backpacks and bags for fall ’10. The Manhattan Beach, Calif.-based company signed a licensing agreement with Global Design Concepts to design, produce and distribute Skechers-branded backpacks, messenger and tote bags for men, women and children. Skechers bags will be available in department, specialty, sporting goods and general athletic footwear stores throughout the U.S. and Canada. The footwear company also has partnered with licensees to produce children’s apparel, sunglasses, legwear, medical scrubs and leather accessories. <wwd.com/footwear-news>


Best Buy Co. Launches CinemaNow - BBY will start its planned online service selling movies and television shows this month, jumping into a market that includes Apple Inc.’s iTunes and Amazon.com Inc. The service, called CinemaNow, allows BBY to tie Web-delivered entertainment to electronic devices sold in its stores as demand for physical DVDs declines. The service will start with a la carte, on-demand purchases and may later become a subscription service like Netflix Inc. Movie rentals will cost $2.99 to $3.99 as part of the service and videos will cost $9.99 to $19.99 for digital purchase.  <bloomberg.com/news>


Anthropologie Eliminates European Managing Director - James Bidwell, managing director Anthropologie Europe, has left the company as part of an international restructuring. The company said it is undergoing a global restructuring “to better leverage internal resources in order to be closer to the customer, achieve greater efficiencies and to prepare for future international expansion.” The announcement comes on the heels of record first-quarter earnings for parent company Urban Outfitters Inc., which operates the Anthropologie, Free People, Leifsdottir, Terrain and Urban Outfitters brands. Glen Senk, chief executive officer of Urban Outfitters Inc., said he was bullish about international expansion. “I used to think international sales could be 25% of our business,” he said. “We could find out over time that it’s 50% . We no longer view ourselves as a North American retailer. The European business is becoming increasingly important to the company.”  <wwd.com/retail-news>


Ski Season Occupancy Up 1.4% - Year-over-year occupancy for the ski season was up 1.4% and the average nightly rate down 5.8% for the 2009-10 snowsports season at more than a dozen western mountain resort destinations, according to the Mountain Travel Research Program. <sportsonesource.com>


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.