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The Macau Metro Monitor, November 4th, 2010


Secretary Tam said that the Human Resources Office is still processing the application for Sites 5 & 6.  He said it is hard to estimate when a result will be ready as the office is also dealing with “a lot of applications [from other enterprises]” at the same time.  Regarding the number of non-local workers, Tam said, “The number isn’t important... but should be around a few thousands... the most important is how many of them will be approved." On the Jacobs lawsuit, Tam stressed that “any person who wants to use improper means to achieve the goal of getting more gaming tables or imported workers must not be able to succeed”.

Bernanke's Brush Fires

"It does not require a majority to prevail, but rather an irate, tireless minority keen to set brush fires in people's minds."
-Samuel Adams


While I don’t expect any professional politician in Washington or the manic media that gets paid advertising dollars for stock market cheerleading to call this out for what it is until this stock market is a lot lower, I will. The US Federal Reserve is officially and unequivocally politicized.


Yes, Ben Bernanke himself has admitted that Quantitative Guessing (QG) is “unconventional.” But now he is so politicized that he is compelled to write an Op-Ed for the Washington Post on “What The Fed Did And Why: Supporting The Recovery And Sustaining Price Stability.” The Chinese, Hedgeye, and anyone with real-time market quotes, are sitting here staring at their screens this morning with shock and awe.


The US Dollar is making new lows this morning (down -15% since June!). The modern day Roman Empire’s credibility is burning at the global stake.


Notwithstanding unprecedented timing of the Op-ed (on the day of the Fed’s decision – do you think anyone leaked its contents?), or the fact that the words “US DOLLAR” were not mentioned ONCE in his allegedly objective and politically unbiased analysis, allow me to break down Bernanke’s view for you versus reality:


1.  STORYTELLING PREFACE: “Two years have passed since the worst financial crisis since the 1930s…”


KM: That’s always the 1st sentence of the fear-mongering message campaign that will lead you to believe no one notices Wall Street’s 2010 bonus pool.


2.  OUTCOME: “These steps helped end the economic free fall and set the stage for a resumption of economic growth in mid-2009…”


KM: Of course, the professional politicians saved us from the crisis they helped create and now we should pay homage to the banks, never earning a rate of return on our hard earned savings again. Fiscal sobriety and conservatism be damned. Get out there and chase some yield folks.


3.  MANDATE: “Notwithstanding the progress that has been made…” (we saved you)… “the Federal Reserve’s objectives – its dual mandate, set by Congress – are to promote a high level of employment and low, stable inflation…”


KM: Right, you saved us from the evil-doers and completely screwed up the employment picture by fear-mongering employers to stop hiring. Ok. And now we’re seeing the credibility of the US Dollar collapse and, as a result, global commodity prices hit new YTD highs, DAILY. The CRB Commodities index is up +16.4% since Bernanke’s decision to Burn the Buck on August 27th in Jackson Hole.


4.  INFLATION: “Although inflation is generally good, inflation that is too low… can morph into deflation…”


KM: Right, right. China, India, and Australia have raised interest rates in the last few weeks specifically because they (like anyone with real-time quotes) see the inflation implied in expectations. The US Treasury Inflation Protection (TIP) auction yielded -0.55% (lowest EVER) in October (implying outright fear of inflation), but Bernanke keeps Burning the Brush Fire of Fear-Mongering about a great depression that no one in finance has remotely experienced.


5.  ECONOMIC STAGNATION: “falling prices and wages, which can contributed to long periods of economic stagnation.”


KM: How about JOBLESS STAGFLATION (sorry PIMCO, we called it first) = US Government sponsored fear-mongering towards employers + inflation. In the 1970s, Jimmy Carter and the Fed’s panderer, Arthur Burns, didn’t get it. This time around, I don’t expect Obama and Bernanke to either. It’s Keynesian theory versus real-time market realities. The problem here isn’t US Consumer reaction to government policy. It’s government policy itself.


6.  QE2: “so far looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action… lower mortgages will make housing more affordable … and higher stock prices will boost consumer wealth …”


KM: This is the central narrative fallacy of the Bernanke Brush Fire that really lights up the anxieties of anyone observing growth and inflation data on a globally interconnected basis. Re-read what he’s implying here and your jaw should drop:


A)     US Dollar Debauchery – Let’s ignore that chart.

B)     Inflation – I’m willfully blind to that chart too and/or whatever any other major country is currently saying on the matter.

C)     Stock Market – I fundamentally believe that manipulating its price via investor expectation is what drives this economy.

D)     Mortgages – I’m not going to mention that 30-year yields have gone straight UP +65% (from 3.55% to 4.09%) since I moved to QE2 in August.


7.  CONFIDENCE: “we are confident that we have the tools to unwind these policies at the appropriate time…”


KM: What a joke. While virtually every central banker in the world (ex the Fiat Fools in Japan and the EU) have hiked interest rates multiple times since the mid-2009 recovery that Bernanke pats himself on the back for, I can assure you that if he couldn’t raise rates with 6% US GDP growth, he’ll likely never be able to “unwind these policies” at any time. Sadly, the global markets may very well do that for him. And that will be it for this QG experiment going bad.


Don’t take my word for it on all of this. I’m just a man who is selling everything and going to cash. Get some real quotes and study the history of countries who attempted to debauch the currency of their citizenry. Then read some Asian newspapers - or something other than the Washington Post.


Overnight, China’s central bank adviser, Xia Bin, said the Fed’s Quantitative Guessing “amounts to uncontrolled money printing.” Even Japan’s bureaucrat PM, Naoto Kan, said this was “the US pursuing weak-dollar policy.” At least those Op-Eds were short and to the point. They also sound just about right.


My immediate term support and resistance levels for the SP500 are now 1186 and 1201, respectively. My SP500 short position (SPY) is -0.96% against me in the Hedgeye Portfolio, and I intend on shorting the market again today on strength. Being early on the short side here is also called being wrong. I get that. I was early in October/November of 2007 too. Remember, market tops are processes, not points.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Brush Fires - bern


Conclusion: CMG’s move into the Asian food segment is interesting but certainly not a guarantee of accretion to shareholder value.  Many good operators have lost focus in the past by “diversifying” and ultimately ended up failing.  PF Chang’s is unlikely to take the challenge lying down!


If I were to guess, I would say that the street will be overwhelmingly bullish about the prospects of CMG repeating the Chipotle business model with an Asian flair.  I hate to be so cynical all the time but I’m blaming that on being a restaurant analyst for so many years.  I know they said it will only be one restaurant in 2011, but there is so much more behind the move into Asian segment.  Just ask any management tried to take share in a new category; there are plenty of them.


The key reasons usually are:

  1. More capital than they know what to do with
  2. Need another growth vehicle
  3. Both reasons lead to management being distracted and lower returns for shareholders - never a good combination.

Then there is the list of failed attempts at multi-branded restaurant companies:

  1. McDonald’s - Fazoli’s and Donato’s (of course they were early on the Chipotle band wagon)
  2. YUM - I forget the name of the company but it was part of the dual-branding strategy
  3. Wendy’s - You can’t forget the Baja Fresh debacle and now, once again, with Arby’s!
  4. JACK tried to get into casual dining
  5. Carl’s Jr and Hardees’s
  6. Darden with China Coast, Smokey Bones and Bahama Breeze
  7. Brinker with Macaroni Grill and On The Border
  8. Outback steakhouse and too many brands to name
  9. Cheesecake tried to expand with Grand Lux
  10. PF Chang’s has been struggling with Pei Wei for years
  11. Cracker Barrel changed the name of the company to CBRL group in a failed attempt to diversify
  12. O’Charley’s buying 99 Restaurant group
  13. Applebee’s tried get into Mexican food


I don’t know Steve Ells personally and he has certainly put together an enviable restaurant business with Chipotle.  The chances of his potential Asian restaurant concept that follows the Chipotle model being successful are slim, in my view.  Mr. Ells is a restaurant entrepreneur and that will never change.  The Chipotle concept is bigger than he is now, which is why he is probably bored and looking to conquer another segment of the restaurant industry with his “food with integrity” mantra.


If he does goes after the Asian segment with the same flair by insulting the quality of other Asian concepts, who will stand up to the challenge?  Will the senior management team at PFCB let him get away with the rhetoric?  The implication that Ells’ restaurant’s food is better than the competition will be more difficult to make in this category than it was with Chipotle.  PF Changs, with Pei Wei and the PF Chang’s frozen food options in particular, are not likely to sit back and allow their market share to be eroded without a fight.


Howard Penney

Managing Director

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Footwear & Apparel Sales Meet November Comp Tailwinds

Solid week for both footwear and apparel sales. Nike continues to crush it while regional performance out West is starting to outperform. In looking forward to November, comps are extremely favorable across the athletic industry. It’s important to note, however, that at the same time apparel comps get increasingly more favorable over the next 4-weeks, footwear comps are getting less so on the margin. Below are this week’s key callouts:


Sports Apparel:

  • After facing the toughest comps of the next 12-months, driven by UA’s launch of fitted product and an unseasonably cold October (-2%-3% below average), Sports Apparel sales now faces its most favorable through the first week of December.
  • Sport Retailers continue to outperform both Family Retailers and Mass/Discount channels with underlying trends up mid-to-high single digits – good for DKS, HIBB, FL, FINL, etc.
  • As we look towards November, temps were 3%-4% higher than average throughout the month last year. Based on our limited sample here in New England, we can attest to a rapid turn in temps with the season’s first frost coming on the 1st of the month.
  • We may be starting to see a modest pickup in discounting in the Athletic Specialty channel – though still early make a bigger callout. The ~1% decline in ASP is consistent with pricing throughout October, however, the increase in weekly unit sales suggests promotional activity may be underway particularly with prices firming in other channels.
  • Sales improved across all regions with relative outperformance in the Pacific region over the last 2-weeks a key callout. This comes on the heels of positive commentary out of BGFV on traffic and comp trends throughout Q3 and in the first weeks of Q4.


Athletic Footwear:

  • With comps starting to get progressively less favorable, new product will be the key to sustaining positive momentum.
  • Over the last two weeks, Nike (Air Max LeBron 8), Under Armour (Micro G Inception) and Adidas (TS Beast & adiZero) have blitzed the market with key launches. Given that basketball accounts for ~25% of the athletic footwear sales, we expect sales to reflect the acceleration of new product into the channel.
  • Not only is Nike continuing to post robust sales at both Nike Brand and Brand Jordan, but Converse is also starting to improve on the margin over the past month as well.

Footwear & Apparel Sales Meet November Comp Tailwinds - FW APP New 1Yr 11 3 10


Footwear & Apparel Sales Meet November Comp Tailwinds - FW APP New 2Yr 11 3 10


Footwear & Apparel Sales Meet November Comp Tailwinds - Temp Nov09 11 3 10


Footwear & Apparel Sales Meet November Comp Tailwinds - Fw App APP Table 11 3 10


Footwear & Apparel Sales Meet November Comp Tailwinds - FW App FW Table 1 11 3 10


Casey Flavin



Conclusion:  We are short CMG in the Hedgeye Virtual Portfolio.


CMG is now the sixth largest publically traded restaurant company having just come public in 2006.  It has the captivation of the growth crowd, as there are few other alternatives in which to invest as part of a growth-oriented strategy.  For the past three quarters, the company has crushed it, beyond my expectations.  I don’t like to “chase” stocks so I have missed the doubling in the stock this year.


With just two short months left in the calendar year, if you own CMG you probably want to hang on for the balance of the year in order to show everybody how you have done and so as to not incur the significant tax liability that comes with selling it.


Certainly the financial performance has been nothing short of amazing in FY10 with restaurant-level margins that are about 1200 bps above comparable companies on average (please refer to the charts below for more details).  The company’s new A-model sites are pushing the envelope on growth, allowing growth investors to become even more captivated by the company’s potential.  Ah yes, and there is the potential to take over the world…I get it - comps, margins and the unit growth potential are mesmerizing. 


CMG – HOW GOOD IS GOOD? - CMG margin analysis


CMG – HOW GOOD IS GOOD? - CMG margin gap


We all know nothing happens in a straight line, but CMG’s current market capitalization values each store at nearly $7 million.


How can we forget Howard Schultz telling the investment community that SBUX was going to have 40,000 stores when that stock was trading at $40 and 40x EPS?  Or the potential for PFCB’s Bistro when the stock was at $65 and trading at 40x EPS.  We can’t forget CAKE and its smaller unit, which was going to accelerate the potential number of units (not to mention the potential for Grand Lux) when that stock was at $39 and 35x EPS.  As the following chart shows, however, the multiples of SBUX, CAKE and PFCB have all come down over time.




Yes, history is repeating itself and the “food with integrity” mantra produced an unprecedented 27.7% restaurant-level margin last quarter.


So what is the market discounting?  Perhaps, perfection for the next five years.  In 2016, based on my preliminary estimates, I have the company operating 1,916 stores and generating about $615 million in EBITDA or a 17% EBITDA margin; down slightly from my 19.4% EBITDA margin estimate for 2010.   


While the growth in stores and EBITDA could possibly be some of the best in the industry, what you can’t fight is the ultimate multiple assigned to a more mature business in 2016.  If we assume the stock trades at 10x our 2016 EBITDA estimate (which is a strong multiple given the potential issues outlined below), we get a market capitalization that is down about 7.5% from where we are today. 




All of this assumes the company can maintain the same “integrity” across a nearly 2000-unit store base as it has with a 1000-unit store base.   Below is a list of issues that the company will likely face over the next 5 years: 


(1)    Increased competition

(2)    Increased labor

(3)    Increased food costs

(4)    A challenging consumer environment

(5)    An aging store base

(6)    A compromised site selection strategy

(7)    Slowing same-store sales

(8)    Declining margins


Lastly, the biggest issue CMG will likely face relates to the company’s announcement after the close today that it is working on an Asian restaurant concept that will follow the Chipotle model.  The company plans to open one Asian inspired restaurant in 2011.  Unfortunately, I have seen this movie before and it does not typically end well as the company will begin to throw shareholder capital at a concept that will earn less of a return than CMG’s current business model.



Howard Penney

Managing Director


Professional Politicians Beware

This note was originally published at 8am this morning, November 03, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"We must all strive to find common ground to support the middle class, create jobs, reduce the deficit and move our nation forward."

-Nancy Pelosi, November 2nd, 2010


While it will take many days for the final tallies to come in, it looks like our prediction will hold and that massive Republican turnout has driven a net gain in House seats of 65+ for Republicans.  According to Nate Silver over at the FiveThirtyEight blog (one of the more accurate electoral statisticians we follow):


“Our current projection is that Republicans will finish with a total of 243 house seats: this would reflect a net gain of 65 from Democrats. The range of plausible outcomes is fairly small: our model thinks there is roughly a 90 percent chance that the G.O.P.’s total will eventually be somewhere between 64 seats and 66.”


As it relates to our prediction in the Senate, we were off slightly as a number of major Democratic candidates did marginally better than expected, in particular Harry Reid in Nevada.  Currently, Alaska, Colorado, and Washington are still too close to call, but even if these States all go Republican the Democrats will still retain at least 51 seats in the Senate.  Nonetheless, the Democrats should lose a net 7 seats.


Since it seemed statistically unlikely that the Republicans could take the Senate, the story of the night is really the massive seat losses in the House.  To put it in historical context, this will likely be the largest seat loss in a midterm election for any party since 1938 under President Roosevelt, when the Democrats lost 72 House seats and 7 seats in the Senate.  Clearly, the electoral results today are indicative of a strong statement being made by the American people.


The obvious conclusion from these results is that this is a repudiation of the Obama agenda.  While we would be naïve to not agree at least partially with that, more broadly this looks to be a referendum on politicians themselves.   To wit, given a historical incumbency advantage of almost 90%, the last three congressional elections of 2006, 2008 and 2010 have shown accelerated volatility of incumbent losses.  Specifically, in 2006 the Democrats gained 30 seats in the House, in 2008 the Democrats gained 22 seats, and in 2010 the Republicans will likely gain back 65 seats.  In a span of four years, we have seen massive volatility between the parties and the relative support from the electorate.


The chart of the day, which is posted below, underscores the key reason why this occurring.  This chart highlights broad congressional approval.  Currently, 73.8% of voters disapprove of Congress!   If you were a professional politician yesterday and didn’t understand the implications of that yesterday, today you do in spades. 


We’ve used a quote from Nancy Pelosi at the top of the note today to further emphasize our point regarding the popularity of professional politicians.  While Pelosi retained her seat, her approval rating across the country as Speaker of the House was 29% heading into yesterday’s election.  Her brief statement last night, assuming it is not just rhetoric, is actually what politicians collectively need to work towards for this nation.  More broadly, the message this morning is clear from Americans, they are tired of rhetoric. 


While the Republicans will take a few victory laps over the next few days, the gauntlet is now thrown to them.  They have been given at least a nominal agenda and the next two years will be a test as to whether they can work with the President to move the country forward.  The questions we would ask are: what is next for monetary policy, what can be done about the burgeoning budget deficit, and how can we address the escalating sovereign debt situation of the federal government?  As Paul Rand stated in his victory speech last night:


“When I arrive in Washington, I will ask them, respectfully, to deliberate upon this. We are in the midst of a debt crisis and the people want to know why we have to balance our budget - and they don't.”


To take a deeper dive on some of these questions and to test the mettle of the rhetoric we will be hearing over the coming weeks, Keith and I will be hosting a call next Wednesday November 10th at 1PM with Peter Orszag, former Director of the Office of the Management and Budget.  This call will be a similar format to the one we held with our friend Karl Rove in September.  Peter will present for 20 – 25 minutes and he will then take questions for the duration of the call. 


If there is anyone in the nation who understands what can and cannot be done to reduce the budget deficit, it is Peter Orszag.  If you would like to join this call and are an institutional subscriber, or would like to trial our institutional service for the call, please email Jen Kane at sales@hedgeye.com.  The budget deficit is one of the most pressing economic issues facing the United States; therefore we think this call will be a valuable use of your time.


To Rand’s point in his victory speech last night, the people of America are asking a lot of questions.  The next two years will be a test as to whether the professional politicians are finally ready to answer the people with more than rhetoric. Needless to say, our Hedgeyes will be watching.


Yours in risk management,


Daryl G. Jones

Managing Director


Professional Politicians Beware - DJ EL

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