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MONTHLY STRATEGY CALL: BEARISH ENOUGH ON SPAIN?

MONTHLY STRATEGY CALL: BEARISH ENOUGH ON SPAIN?

One of Hedgeye's Q2 Themes, Sovereign Debt Dichotomy is a call for an accelerating divergence between the countries with strong, liquid balance sheets and those with the largest debt issues. Furthermore, we called for and have seen a widening performance spread between the equities, bond yields, currencies and CDS of these countries.

On this month's Hedgeye Strategy call, we focused on one of the weaker countries, and the 9th largest global economy, Spain. We have gone into detail on why we see the market as not bearish enough on Spain, and more importantly, why you should be.

In addition, we updated you on our other two Q2 Themes:

  • April Flowers/May Showers - We expected and have seen U.S. equities lock in intermediate term highs as bonds break down to lower-highs. We have a very healthy degree of skepticism of Government, Politicians and the market's current levels and we are managing risk accordingly. As we think about the setup for the S&P 500 over the next three months, we observe 15 major headwinds for the market, the economy, interest rates, commodities, and the American consumer. Bearish on U.S. equities.
  • Inflation's V-Bottom - We are currently at generational lows of global inflation. As such, we continue to expect the global median inflation rate to accelerate meaningfully. Domestically, we believe CPI will accelerate sequentially throughout Q2, peaking at +3% Y/Y. We expect that and an impending rate hike to continue to be priced in the bond, currency, and commodities markets. We expect it to be priced into the equities markets last. Bearish on 1-3 year U.S. Treasuries.

To hear the podcast for yesterday’s call, click here. The link to the accompanying presentation is here as well: http://docs.hedgeye.com/Hedgeye Q2 Themes and SPAIN May 18 2010.pdf.

 

Enjoy,

 

The Hedgeye Macro Team


ANOTHER POSITIVE DATA POINT FOR YUM

The double down is here to stay, but I think I might get ill if I took a bite of this beast….

 

KFC has elected to keep the Double Down on the menu “indefinitely”, according to media reports.  The product has attracted a surprising level of attention and Javier Benito, executive vice president of marketing and food innovation for KFC said, “our plans were to feature the product only through May 23, but millions of Double Down fans have spoken and we won’t disappoint them.” 

 

YUM has already been making headlines this week with the rollout of Taco Bell’s new $2 combo meal promotion.  I view the continuation of the Double Down and the $2 combo meal as positive data points for YUM from a sales perspective.

 

ANOTHER POSITIVE DATA POINT FOR YUM - dd kfc

 

Howard Penney

Managing Director

 


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


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CONSUMER SENTIMENT - SETTING UP FOR A FALL

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

 

CONSUMER SENTIMENT - SETTING UP FOR A FALL - shiller confidence

 

CONSUMER SENTIMENT - SETTING UP FOR A FALL - sector


CASUAL DINING – APRIL TRENDS

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


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

Analyst

 

SP500 Risk Management Levels, Refreshed - S P


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