Conclusion: SONC is not yet out of the woods from a top-line perspective, but margins are stabilizing and the company could emerge from the “deep hole” as early as 2QFY11


SONC posted a sequential improvement in comparable restaurant sales yesterday.  System-wide same-store sales declined 2.4% during the first quarter versus a 6.5% decline in the same quarter a year prior.  StreetAccount consensus was calling for a comparable restaurant sales number of -3.2%. 


Turning to our quadrant chart, it is clear to see how poorly SONC has been performing over the past 5 quarters.  From a sales perspective, partner-drive in comparable restaurant sales have declined for 11 consecutive quarters.  We anticipate the company moving out of the “Deep Hole” quadrant by next quarter and remaining safely out in 3QFY11.  The company is seeing stabilization in margins and faces easier comparisons in 2QFY11 than last quarter.  From my model, I see restaurant level margins being approximately flat to up slightly next quarter and positive in 3Q.  While this is largely due to exceedingly sharp restaurant level margin declines in the year prior, results in this range would be a significant improvement from the last 5 quarters of significant margin erosion.


From a sales perspective, things continue to trend in a positive direction.  While the company’s guidance for sequentially improving same-store sales throughout the year seems like a stretch on a one-year basis after fiscal 2QFY11 (partner drive-ins are lapping an easy -14.9% comp during 2QFY11 and a -13.2% comp on a system basis) , two-year trends should continue to improve.  Given my view that MCD’s comps will slow as the company’s beverage business will fail to maintain the same level of trial, Sonic should have less of a headwind to face in the back half of the year from a market share perspective. 


SONC: LESS BAD IS GOOD - sonc quadrant


From a sentiment perspective, Sonic is not particularly well-liked by the buy-side or sell-side.  The average short interest in the QSR space, excluding the outliers GMCR and PEET, is 4%.  Sonic’s short interest is currently at 6% which is one of the highest in the space.  While that hardly makes it the runt of the consumer discretionary litter, it is noteworthy that Sonic is one of the few stocks that have seen an uptick in short interest over the past couple of months.  


SONC: LESS BAD IS GOOD - qsr short interest


The sell-side also has a negative view of SONC.  Given an improving top line and margin trends that should improve significantly this fiscal year, I think there is a strong possibility that this chart will change markedly over the course of the next 6-9 months (especially if my view on MCD is correct).   We are nearing a turn in sell-side love, or at the very least, a decline in sell-side bearishness.


SONC: LESS BAD IS GOOD - sonic sell side ratings


Howard Penney

Managing Director


The general decline in short interest over the past couple of months in the restaurant space notwithstanding, price performance seems to be slowing.


Some notable price moves and news items from the restaurant space:

  • COSI continues to outperform, albeit on slower volume yesterday.  Over the past month, the stock price has risen 11% to yesterday’s close of $1.28.  I have long been writing about the turnaround at COSI and the process seems to be intact.
  • SONC reported after the close yesterday and while the results were not astounding, there were reasons for optimism.  The top line beat expectations but EPS was in line excluding a settlement on a tax position.  More details to come in a post this morning.
  • SONC was upgraded to “hold” from “sell” at Stifel Nicolaus
  • MCD declined 3% during yesterday’s trading on strong volume (up 440% vs trailing 30-day average)
  • MCD McDonald's Holdings Co (Japan) December comps +11.6% y/y
  • JACK initiated “neutral” at RW Baird
  • RRGB provides update to shareholders - Red Robin released a letter to shareholders discussing its "Project RED" for 2011, which included nothing relevant
  • CAKE up on good volume - insider buying yesterday
  • PEET down on strong volume; no news and a decline in coffee prices yesterday
  • RT reporting today, declined on high volume yesterday after a +10% gain on Monday.
  • ABC Consumer Confidence Index (45) in 2-Jan week vs (44) in prior week



Howard Penney

Managing Director

Agonizing Pain

“He who will not economize will have to agonize.”



Sitting at my desk in New Haven this morning, what I do know is my own pain. What I don’t know, is what someone else’s feels like. We’ll see how the levered-long US stock market bulls feel on the first tweak today. This isn’t a snap, yet – this is a tweak.


The agony of defeat isn’t new to global macro markets as of this morning. It’s been new to US Treasury and Emerging Debt Markets since November. It was new to the Gold market yesterday during a $40/oz swoon (we’re short GLD). What goes around in terms of mean reversion risk, eventually comes around. You can learn this lesson in a variety of ways in life. In markets, the best way to learn this lesson is the hard way.


If you didn’t raise your Cash position in the last week, it wasn’t because we didn’t tell you to. We started the year with a 61% US Cash position in the Hedgeye Asset Allocation Model and the US Dollar Index has been up every day for the year-to-date (including this morning).


Yesterday, on commodity market weakness we invested 6% of our cold hard cash into oil and corn. Now we have 55% of our hard earned capital in cash. Being in Cash means you can invest it lower.


To be sure, there is absolutely no doubt that you can ride Hi-ho, Silver and call yourself Captain Cowboy on the ride to everything making higher-highs, until they don’t. So you better have a risk management plan when the music stops.


In addition to Gold selling off hard yesterday, US small cap and housing stocks got creamed, trading down -1.8% and -1.5% respectively (XBH and IWM). This morning, European stock markets and US Futures are getting hit hard after Portugal raised 6-month paper at a yield of 3.68% (vs 2.04% last!) and Asia closed down across the board.


This interconnected game of risk has always been “on” – it’s just when everyone stops paying attention to the moving parts that it starts to be a lot more fun. On balance, our intermediate-term TREND view on the global economy remains intact:


1.       Global Growth Slowing

2.       Global Inflation Accelerating

3.       Globally Interconnected Risk Compounding


Now, before a US centric stock market bull gets his/her shirt in a knot about this, allow me to kick off this morning’s Global Macro Grind with a remedial reminder that all of the aforementioned points start with the word Global. That’s right, say it just like Paul Newman had the owner of the Charlestown Chiefs say “H-owned”… G-lo-bal… G-lo-bal…


In terms of the global macro data points that are in my notebook for 2011 to-date, here’s the grind:

  1. South Korean inflation (CPI) jumps to +3.5% in DEC vs +3.3% in NOV and the Korean government declared “war on inflation”
  2. South Korean exports slow, sequentially, from their NOV highs of +25% to +23.1% in DEC
  3. Polish Inflation (CPI) jumps to +3.1% in DEC vs +2.7% in NOV and 2-year bond yields in Poland are pushing to +4.9% this morning (highest in a year)
  4. Chinese manufacturing (PMI) drops for the 1st time in 5 months (53.9 DEC vs 55.2 NOV) as growth continues to slow
  5. German manufacturing (PMI) accelerates again sequentially to a new high of 60.7 DEC vs 58.1 NOV
  6. German unemployment stays unchanged m/m at 7.5% for DEC vs NOV
  7. Brazil’s newly elected President, Dilma Rousseff, kicks off the New Year calling inflation trends pushing to +6% y/y “the plague”
  8. Pakistan’s PM loses his majority and a key Governor is murdered overnight as Pakistan now has to face the Taliban and +15.48% inflation
  9. UK manufacturing (PMI) remained flat, sequentially, in DEC vs NOV at 58.3
  10. Indonesia’s inflation (CPI) accelerates, sequentially, to +6.96% DEC vs +6.33% NOV
  11. European Union inflation (CPI) accelerates to a 2-yr high of +2.2% in DEC vs +1.9% in NOV
  12. Australian manufacturing index slows for the 4th consecutive month (pre JAN floods) at 46.3 DEC vs 47.6 NOV
  13. Thailand inflation (CPI) ramps, sequentially, to +3.0% DEC vs +2.8% NOV

I’ll go Lone Ranger (sans le hi-ho, Gold) and stop at point #13 just to push my own book and summarize that if Captain American Stock Picker (he’s back!) wants to tell me that “growth is back!”… and that the rest of the world’s growth and inflation risks cease to exist… that he/she may want to, at a bare minimum, economize that bullishness and wait for lower prices.


Back to the USA, where consensus is running rampant that the US consumer is Just Lovin’ It (except the collapse of MCD’s stock), this morning’s ABC Consumer Confidence reading (it’s weekly) dropped for the 2nd consecutive week (i.e. dropping both weeks post Christmas shopping) back down to minus -45. That’s only a few points away from its all-time low and even a Thunder Bay Bear on some things US Equities would call that agonizingly cold!


My immediate term support and resistance lines for the SP500 are now 1261 and 1270, respectively. A close below 1261 puts 1237 in play.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Agonizing Pain - 1

CHART OF THE DAY: The Next Mean Reversion



CHART OF THE DAY: The Next Mean Reversion -  chart of the day

Hedgeye names Bob Brooke as Managing Director of New Business Development


NEW HAVEN, Conn., Jan. 4, 2011 -- Hedgeye Risk Management, a leading independent provider of real-time investment research and ideas, today announced that financial services veteran Bob Brooke will join the firm as Managing Director of New Business Development.


Brooke has more than 20 years of experience in financial markets and investments, in institutional equity sales and trading both domestically and internationally, private wealth management, and proprietary fund management in alternative assets.


Brooke has helped grow client rosters and revenues at firms such as Bear Stearns, CS First Boston, RBC Capital Markets, and Bernstein. His reach extended to the international markets of London, Geneva, and Paris as well as domestic territories from the upper Midwest to New York, Philadelphia and Boston. He has experience in analyzing different asset classes, alternative investment vehicles, long/short strategies, hedge funds, large and small-cap disciplines, as well as research into individual companies, their competitors, industries, and market valuations.


"Hedgeye is fortunate to have Bob Brooke join our team at this point in our growth," said Keith McCullough, CEO of Hedgeye. "He has a track record of success that extends from the highest level of professional sports to the highest levels of the corporate boardroom.  As the research and brokerage landscape continues to evolve in the coming years, we look forward to having Bob lead our vast new business initiatives."


Brooke has a degree in economics from Yale, and an MBA from Harvard Business School. Prior to his career in financial services, Brooke was a member of the US Olympic hockey team and competed in the National Hockey League for the New York Rangers, Minnesota North Stars, and New Jersey Devils.


TODAY’S S&P 500 SET-UP - January 5, 2011

As we look at today’s set up for the S&P 500, the range is 10 points or -0.72% downside to 1261 and 0.06% upside to 1271.   Equity futures are trading below fair value, tracking losses across Europe equities and a lower close among major Asian indices.



  • 7 a.m.: MBA mortgage applications, Dec. 31
  • 7:30 a.m.: Challenger job cuts, Dec.
  • 8:15 a.m.: ADP employment, Dec., est. 100k vs prev. 93k
  • 10 a.m.: ISM non-manufacturing index, Dec., est. 55.7 vs prev. 55
  • 10:30 a.m.: DOE inventories
  • 11 a.m.: U.S. Fed to purchase $1.5b-$2.5b notes/bonds
  • 11:30 a.m.: U.S. sells 56-day cash management bills
  • 1 p.m.: Kansas City Fed President Thomas Hoenig speaks at Central Exchange in Kansas City


  • Qualcomm may offer $3.5b to purchase Atheros, the NYT reported yesterday
  • New Jersey Supreme Court will hear arguments today on whether the governor unlawfully cut $1b in school aid during a budget crisis
  • Portugal sells EU500m of 6-month bills; avg. yield 3.686%; bid to cover ratio 2.6 vs prev. 2.4
  • Republicans take control of the House today for the first time in four years, with plans to vote on a repeal of the health-care overhaul and to approve $100 billion in spending cuts
  • Concho Resources (CXO) rated new buy at SunTrust Robinson Humphrey
  • Danaher (DHR) rated new outperform at Oppenheimer
  • Fluor (FLR) rated new outperform at Oppenheimer
  • FTI Consulting (FCN) will take 4Q non-cash charge 36c to reflect retirement, write off of certain brand names
  • Hatteras Financial Corp. (HTS) reported offering of 9m shrs
  • MedAssets (MDAS) named Chuck Garner CFO, Neill Hunn unit president
  • Mosaic (MOS) 2Q adj EPS, rev beat estimates
  • Sonic (SONC) 1Q EPS ex-items 10c vs est. 10c.


  • One day: Dow +0.18%, S&P (0.13%), Nasdaq (0.38%), Russell 2000 (1.59%)
  • Last Week: Dow +0.03%, S&P +0.07%, Nasdaq (-0.48%), Russell (-0.67%)
  • Month/Quarter/Year-to-date: Dow +0.98%, S&P +1.00%, Nasdaq +1.07%, Russell +0.28%
  • Sector Performance - BEARISH (Only 3 sectors positive) - Energy (0.86%), Consumer Disc (0.55%), Materials (0.67%), Consumer Spls (0.27%), Financials (0.15%), Industrials (0.14%), Tech +0.39%, Healthcare +0.32%, Utilities +0.45  


  • ADVANCE/DECLINE LINE: -787 (-2556)  
  • VOLUME: NYSE 1090.34 (+2.84%)
  • VIX:  17.38 -2.08% YTD PERFORMANCE: -2.08%
  • SPX PUT/CALL RATIO: 1.50 from 1.41 (-6.40%)  


Treasuries were mixed with the belly of the curve outperforming. Some support was said to come from the pricing of corporate deals.

  • TED SPREAD: 17.10 -0.203 (-1.173%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%   
  • YIELD CURVE: 2.73 from 2.75


  • CRB: 327.73 -1.59%
  • Oil: 89.38 -2.37% - trading -0.95% in the AM
  • Oil  extended its biggest drop in seven weeks on signs that snowstorms in the U.S. curbed gasoline demand  
  • COPPER: 436.90 -1.99% - trading -1.01% in the AM
  • Copper fell the most in 2 weeks - stockpiles are swelling
  • GOLD: 1,376.65 -3.06% - trading +0.35% in the AM
  • Gold tumbled the most in six months on speculation that an economic recovery will curb demand


  • Gold Imports by India May Increase This Year on Rising Investment Demand
  • At Least 40% of LME Copper Shorts in March Held by One Company, Data Show
  • World Food Prices Surge to Record, Passing Levels That Sparked 2008 Riots
  • Rubber Futures Climb to Record on Thai Supply Concerns Amid Strong Demand
  • Palm Oil Slumps After Rising Above Soybean Oil First The Time Since 2007
  • Oil Extends Biggest Drop in Seven Weeks as U.S. Gasoline Demand Slackens
  • Copper Futures in London Decline for a Second Day as Record Deters Buyers
  • Whole Milk Powder Auction Prices Climb to Three-Month High, Fonterra Says
  • China Inflation Concern May Delay Coke, Lead Futures Launch, Analysts Say
  • Oil Price Advance May Put Recovery at Risk, FT Cites IEA's Birol as Saying
  • Steelmaking Coal Price May Exceed $300 on Australian Floods, Daiwa Says
  • Gold Fluctuates After Slump Amid Signs of Economic Recovery, Rising Dollar
  • La Nina Rains May Stretch Into March, Cause Further Flooding in Australia
  • Europe Commodity Day Ahead: Gold Imports by India May Increase This Year


  • EURO: 1.3243 -0.45% - trading -0.54% in the AM
  • DOLLAR: 79.444 +0.40% - trading +0.25% in the AM


  • European Markets: FTSE 100: (0.55%); DAX (1.40%); CAC 40: (1.20%)
  • European indices started the day mixed with a bias to the downside as an uptick in the US dollar hit commodity plays and profit taking.
  • Financial stocks were also weighing on sentiment ahead of Portugal's €500M 6-month T-Bill auction.
  • Investors were also looking to see what sort of market appetite there was for core European paper with the German Finance Ministry set to auction EUR5B of the on the run 10yr Bund.
  • Some decent retail numbers from Next helped London to outperform.
  • News that China was willing to buy more Spanish debt had little impact on the Spanish IBEX which was off (1.4%) while mixed Final Services PMI data for Dec offered only modest support.
  • Continuing thin markets were blamed for some of the early volatility
  • Domino's Pizza reports 13-week system sales +17.8% y/y to £132.5M
  • German car manufacturers report US Dec sales, see double digit gains in US during 2010
  • Eurozone Dec Final Services PMI 54.2 vs Prelim 53.7 and prev 55.4
  • Eurozone Nov PPI +4.5% y/y vs cons +4.4% and prior +4.4%
  • Eurozone Oct Industrial orders +14.8% y/y vs cons +17% and prior +13.5%
  • Germany Dec Final Services PMI 59.2 vs Prelim 58.3 and prev 59.2
  • France Dec Final Services PMI 54.9 vs Prelim 54.1 and prev 55.0
  • UK Dec Construction PMI 49.1 vs Prelim 50.9 and prev 51.8


  • Asian Markets: Nikkei (0.17%); Hang Seng +0.38%; Shanghai Composite (0.49%)
  • Asian markets were mixed today, with resource stocks down on lower commodity prices.
  • Taiwan the biggest looser down 1.68%, with Acer falling 4% after saying snowstorms in Europe will cause it to miss Q4 guidance.
  • Hong Kong recouped early losses as some banks rebounded from a report that China might tighten some reserve requirements.
  • China Eastern Airlines jumped early, but then lost almost all of its gain; saying it expects its 2010 net profit to be ten times that of 2009.
  • Commodity stocks fell, but coking coal producers outperformed again on worries about the floods in Australia.
  • Property stocks rallied on expectations the market will support higher prices.
  • South Korea was -0.12%, with Tech and Financials down on profit-taking.
  • Japan fell -0.17% - Steelmakers were hurt by an expected rise in coal prices due to floods in Australia. Megabanks fell on profit-taking.
  • Mining stocks took Australia to a loss of 0.58%. Qantas lost early gains and finished 1% lower despite confirming it plans to resume A380 flights to Los Angeles by January 17th.
  • Japan December monetary base +7% y/y to ¥104.02T. 


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.