Enabling Success

“He is able who thinks he is able.”



When I started this firm, I had a simple goal – to democratize the risk management process of a hedge fund. What does that mean? That means showing the world exactly what it is we do, real-time, in a transparent and accountable way.


What does a hedge fund do? You’ll get a lot of different answers to that question – and as industry supply of hedge funds continues to expand, you’ll get more hedge funds who really don’t do what I do – hedge. Some strategies are simply levered-long versions of mutual funds that charge higher fees. Those hedge funds tend to blow up when markets stop going up.


Enabling Success in a hedge fund model is best achieved by having short positions that don’t hurt you when the market goes up. It’s a trivial exercise to buy something when everything is going up – that’s called beta. Managing losses is the key to this game – not chasing relative returns.


I don’t run money anymore, and a lot of people still ask me why. Three years ago, I thought I might eventually go back to doing it again – not anymore. I’m having too much fun building a real company with real cash flows. I absolutely love reading and researching so that I can put myself out there every morning. The challenge for me isn’t how much money I make, it’s how big of an arena I can play this game in.


I’m certainly not walking through these thoughts for any other reason than this is what I am thinking right now. I only have 45 minutes to write you these missives every morning – so I have to roll with what’s in my head. That requires a risk management process in and of itself – editors!


Enabling clients to look inside our risk management process seems to be the most empowering part of what we do. In order to Enable Success in this business, I think you need to let independent minds explain their research perspectives so that you can weigh them against your own. Whether our research is top-down, bottom-up, or quantitative – it seems to elicit plenty of feedback. Constant feedback enables success too.


How have we enabled this research platform to deliver an 81.6% batting average on the short ideas since inception in 2008? It certainly hasn’t been by sitting on my positions. Short-And-Hold isn’t a repeatable strategy across market cycles inasmuch as Buy-And-Hold isn’t. If you want to compound positive absolute returns on the short side over time, you have to keep moving.


Enabling Success on the short side of your portfolio is also driven by finding asymmetric opportunities. Since I attach the Hedgeye Portfolio at the bottom of this note every morning, you can monitor this real-time. But the upshot of it all is that you can witness a raging bull-run in US stocks and, at the same time, find ways to make money on the short side. If you broaden your scope, there’s always a short selling opportunity somewhere.


When I was younger, I was pigeon-holed into following US Retail and Restaurant stocks – so automatically, I was handcuffed to fishing in the creek that was in my area code. I was in the right place at the right time however, because 2000-2002 were bearish US stock market tapes, so there were plenty of names that were going down. Timing, like gravity, matters.


As I get older, I’ve simply broadened my horizons to fishing in oceans around the world across asset classes. At the same time, I’ve expanded my research team to 40 people (the largest team I managed at a hedge fund was 6).  


Enough about that. I just felt like writing about it this morning. I think it’s important to be transparent about what it is we do.


Since I only have 15 minutes left, here’s what I’ve been doing this week in the Hedgeye Asset Allocation Model:

  1. Reduced my cash position from 58% to 49%, taking advantage of some lower prices earlier in the week
  2. Expanded my invested position in International Currencies (Chinese Yuan and Canadian Dollars) as the Buck Burns
  3. Expanded my invested position in German Equities (EWG) where we remain bullish
  4. Bought back Gold on yesterday’s correction (GLD)
  5. Stayed long Oil and Grains (OIL and JJG)
  6. Stayed long US Healthcare (XLV) – my favorite US Sector alongside Energy

On the long/short side of the Hedgeye Portfolio, the main investment theme remains being long of The Inflation:

  1. Long Stocks with top line leverage to The Inflation (bought Petrobras (PBR) this week)
  2. Short stocks without pricing power whose margins get jammed with The Inflation (McDonalds (MCD), Target (TGT), etc.)
  3. Short Bonds and Emerging Markets – The Inflation is bad for them

Yes, there are some names in the Hedgeye Portfolio that aren’t working – there always are. There are also names that don’t always fit the top down and quantitative themes we’re focused on like a glove. These are names that my analysts like on either a turnaround or operating basis (SBUX, WEN, IGT, etc.).


Altogether, Enabling Success in terms of asset allocation, security selection, or net exposure is really best achieved managing your mistakes so that they don’t suppress your ability to generate repeatable absolute returns across market cycles.


My sincerest thank you to all of you who have enabled this platform to thrive. We don’t have to wake up every morning looking for some central planner in government to help us employ people. In an industry that is in dire need of evolution, you’ve enabled us to be the change we want to see in the world.


My immediate term support and resistance levels for the SP500 are now 1318 and 1342, respectively.


Happy birthday to my baby girl, Callie.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Enabling Success - yy1


Enabling Success - yy2

CHART OF THE DAY: Hedgeye Asset Allocation Model



CHART OF THE DAY: Hedgeye Asset Allocation Model -  chart

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 80.43%
  • SHORT SIGNALS 78.34%


The Macau Metro Monitor, March 4, 2011



Mitsubishi Heavy Industries (MHI) and the Macau government yesterday signed the contract for MHI to supply the system for the 1st phase of Macau's light rail transit.  MHI must be able to deliver within just 47 months, plus two months for trials.  The LRT project will create 4,000 jobs.



According to Senior Minister of State for Trade and Industry S. Iswaran, Singapore is on track to receive S$2.7BN annually from each Integrated Resort.  However, Iswaran cautioned that the government should expect the novelty of the integrated resorts to "diminish even as the IRs continue to roll out new attractions."

Meanwhile, the government said it expects 12-13MM visitor arrivals this year with tourism receipts hitting between S$22 BN and S$24 BN.




TODAY’S S&P 500 SET-UP - March 4, 2011

Equity futures are trading above fair value in a follow-through from yesterday, which saw the Dow post its largest one-day gain since December 2010. Today's non-farm payroll number is the key catalyst, with consensus at +190K for February.  April crude futures climbed back above $102 a barrel overnight as tension in the Middle East remains heightened and hopes fade for negotiated peace deal in Libya.  As we look at today’s set up for the S&P 500, the range is 24 points or -0.97% downside to 1318 and 0.83% upside to 1342.



  • 8:30 a.m.: Nonfarm payrolls: est. +196k, prior 36k
  • 8:30 a.m.: Unemployment rate: est. 9.1%, prior 9.0%
  • 10 a.m.: Fed’s Yellen speaks on international system in Paris
  • 10 a.m.: Fed’s Nelson testifies on TALF liquidity facility
  • 10 a.m.: Factory orders, est. +2.0%, prior +0.2%
  • 1 p.m.: Baker Hughes Rig Count


  • Goldman Sachs CEO Blankfein said to agree to testify at Raj Rajaratnam’s trial, set to begin next week
  • NFL, union labor deadline extended by 24 hours to midnight
  • BP Pipelines North America may restart the Tri-States natural gas liquids pipeline
  • The U.S. DoJ is probing online video patent owner MPEG LA over antitrust concerns regarding claims against Google’s VP8: WSJ


We have 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.  XLF is the only sector broken on TRADE.

  • One day: Dow +1.59%, S&P +1.72%, Nasdaq +1.84%, Russell 2000 +2.22%
  • Month-to-date: Dow +0.26, S&P +0.28%, Nasdaq +0.59%, Russell +0.84%
  • Quarter/Year-to-date: Dow +5.88%, S&P +5.83%, Nasdaq +5.50%, Russell +5.77%
  • Sector Performance: - Industrials +2.4%, Financials +2.2%, Healthcare +2%, Materials +2%, Tech +1.7%, Consumer Disc +1.7%., Energy +1.5%, Consumer Spls. +1.1%, Utilities +1%


  • ADVANCE/DECLINE LINE: 1914 (+1111)  
  • VOLUME: NYSE 1074.11 (+4.79%)
  • VIX:  18.60 -10.14% YTD PERFORMANCE: +4.79%
  • SPX PUT/CALL RATIO: 1.60 from 2.02 (20.75%)


Treasuries were weaker with the better global risk backdrop, upbeat economic data, rally in stocks and lingering inflation concerns.

  • TED SPREAD: 19.08 +0.203 (1.075%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • 10-Year: 3.58 from 3.46
  • YIELD CURVE: 2.79 from 2.77


  • CRB: 360.56 +0.40%; YTD: +8.34%  
  • Oil: 101.91 -0.31%; YTD: +10.40% (trading +0.67% in the AM)
  • COPPER: 449.00 -0.18%; YTD: +2.25% (trading +1.04% in the AM)  
  • GOLD: 1,417.69 -1.43%; YTD: -0.08% (trading +0.10% in the AM)  


  • Commodities Rise to Two-Year High as Cotton Jumps to Record, Cocoa Gains
  • Deere Courts Indian Farmers, South Korea Scouts Chicago Amid Price Rally
  • Bearish Bets on Soybeans, Cattle Surge to Two-Year High in Options Market
  • Cotton Gains to Record, Heads for Biggest Weekly Advance in Three Months
  • Coffee Rises on Speculation About Short Supply; Cocoa Reaches 32-Year High
  • Wheat Advances as Dry Weather Fans Concern About Possible U.S. Crop Damage
  • Copper Heads for First Weekly Climb in Four Before U.S. Employment Report
  • Gold May Extend Best Run of Weekly Gains Since October on Mideast Turmoil
  • Saudi Arabia May Raise Light Crude Oil Premium to Highest Since July 2008
  • Gillard Weighs Impact of Currency's Gains, Says Commodity Boom Will Endure
  • Container Shipping Shares Boom as Dry Bulk Carriers Wane: Freight Markets
  • High Food Prices May Persist as Economic Growth Boosts Demand, IMF Says
  • Ferrous Resources Said to Seek Funding for $4 Billion Iron Ore Expansion
  • Copper May Fall Next Week on Concern About Rising Inflation, Survey Shows 


  • EURO: 1.3935 +0.48% (trading +0.24% in the AM)
  • DOLLAR: 76.483 -0.25% (trading +0.01% in the AM) 


  • FTSE 100: +0.59%; DAX: +0.80%; CAC 40: +0.52% 
  • European markets advanced following strong markets in Asia and a constructive close on Wall Street on growing economic optimism and expectations for a favorable US payroll report after yesterday's better than expected jobless data.
  • Bonds continued to be pressured following ECB's Trichet hawkish comments yesterday and a growing expectation of a rate increase in the EuroZone as early as next month.
  • Hermes Reports 44% Jump in Earnings as Margins Exceed Increased Forecast
  • Daimler's Steel Headwind Saps Profit as Continental AG's Rubber Costs Soar
  • Salgado Favors Easing Greek Bailout Terms as EU Wrangles on Crisis Accord
  • Crude Heads for Fifth Weekly Gain In London on Libya Violence, U.S. Demand
  • Jet Fuel, Diesel Past $1,000 on Libya Fan Growth Concern: Energy Markets
  • Ferrous Resources Said to Seek Funding for $4 Billion Iron-Ore Expansion
  • U.K. House Prices Dropped Last Month, Erasing January Gain, Halifax Says


  • Nikkei +1.0%; Hang Seng +1.2%; Shanghai Composite +1.4%
  • Asian markets rose today in response to lower oil prices and lower-than-expected jobless claims in the US.
  • Gillard's Concern at Australia Dollar's Impact Shows 'Dutch Disease' Risk
  • Asian Stocks Advance for Fourth Day This Week on U.S. Employment Data, Oil
  • Dollar Yield Gap at 21-Month High as Prices May Spur Unrest: China Credit
  • China Forestry Ex-CEO Should Face Hong Kong Lawsuit, City's Watchdog Says
  • Korea Express Shareholders Said to Seek up to $1.8 Billion From Stake Sale
  • Record Food Prices May Persist as Economic Growth Boosts Demand, IMF Says
  • Singapore Court Rejects Former Standard Chartered Clients' Bid to Sue Bank
  • Singapore Exchange's ASX Takeover Offer Gets a Boost From Chi-X Approval
  • Chinese IPO Risk on U.S. Markets Tops American Corporations, Options Show

Howard Penney

Managing Director




Wendy’s is following the template for restaurant company turnaround success.


Following the Wendy’s Investor Day on January 27th, my view on this stock changed and I became more convinced of the long term prospects of the company’s stock.  The primary reason for that was the assurance management gave me during the Q&A session that Arby’s would be sold and the company would remain focused on one brand, Wendy’s.  Another crucial reason was the company’s renewed focus on revitalizing, not complicating, the menu in 2011.  The company’s focus on selling burgers and cokes will, in my view, yield significant results in terms of sales, labor efficiency, and – ultimately – earnings.


WEN 4Q10 earnings came in at $0.01 ex-items, in line with expectations and guidance.  Comparable restaurant sales at Wendy’s were slightly disappointing given that comparisons were easy due to the terrible performance in 4Q09.  Going forward, comparisons become more difficult, particularly in 1Q11.  While weather is not a factor to which we allot too much importance, management commented that company-operated same-store sales in January were negative but estimates that weather negatively impacted North America comps by between 1.5% and 2%.  Additionally, management did reveal that comps were positive at Wendy’s in February and guided to “flat-to-positive same-store sales for the first quarter.” 


Specifically, the company highlighted that if it can just maintain trends seen in February in the March timeframe, then this 1Q11 comp guidance is achievable.  For the year, management guided to comparable restaurant sales of 1-3% at Wendy’s, complemented by an improvement of 30 to 60 basis points in company-operated restaurant margin. 


In terms of EBITDA guidance, the company anticipates pro-forma EBITDA between $345 million and $355 million, inclusive of a G&A reduction that occurred as of the beginning of fiscal 2011 (related to the assumed sale of Arby’s).  The EBITDA guidance is also inclusive of the sales guidance described above.   In terms of stock repurchasing, the company stated that it intends on buying back shares pending market conditions and the current authorization stands at $250 million.  


Management struck a careful but confident tone on the earnings call when discussing its outlook for 2011, describing it as a “transitional year”.  Management, as previously announced, is exploring a potential sale of Arby’s and describes the benefits of this sale as being accretive to both Net Income and Free Cash Flow.   Of the company’s current $1.1 billion in net debt, roughly $200 million is attributable to Arby’s.  The company’s healthy cash balance, of $512.5 million, will be used to fund ongoing initiatives including the remodeling program and technology enhancements.  The national rollout of Wendy’s new burger in 2H11 will require incremental capital spending of approximately $13,000 to $23,000 per store.  Without the burden that Arby’s represented for the company, there is more dry powder to be spent on the Wendy’s brand and management has a clear, formulaic plan for Wendy’s going forward.


The seven initiatives the company is outlining for the Wendy’s brand for 2011 are as follows:

  1. Continuing to enforce “Real” brand positioning as new products are rolled out
  2. Launching new cheeseburgers this fall after positive testing
  3. Continuing to promote “my 99” value menu
  4. Expanding breakfast into new markets
  5. Focusing on operational excellence to improve the customer experience
  6. Continuing the remodeling program
  7. Preparing for new restaurant growth in North America and Internationally

The company’s focus on improving their core products is anathema to the issues I see in MCD’s current business in North America.  While MCD’s overly-complicated menu is overwhelming for staff and customers alike, WEN is focusing on improving their core offerings with select, non-disruptive, new menu items being rolled out this year.  Among the new items being rolled out include a “fish and chips” offering coming in March and a new seasonal salad in the second quarter.   


In terms of remodels, the company is also intent on pursuing an aggressive path and will reveal its new restaurant design on a future call.  Unit expansion is the final major focus for WEN.  Management envisions 1,000 stores in North America and plans to add more than 60 new restaurants to its system in 2011 and to increase the pace of development in 2012.  In terms of international expansion, development agreements have been signed in Singapore, the Middle East, Russia, the Caribbean and Argentina over the past couple of years.   Over the long term, management sees 8,000 stores as being possible in international markets with China, Russia and Japan representing 40% of that number.




Commodity exposure is, of course, a key headwind for the company and management provided frank commentary around this issue both in terms of Wendy’s and the broader industry.   Regarding beef costs at Wendy’s, management stated that “Wendy’s food costs will reach a higher level in Q2 and Q3 because of the timing of when we will recognize those increases.  Arby’s will also be facing very high beef prices…15% or more increase year-over-year.”


There was some skepticism on the earnings call this morning that margins would actually grow at Wendy’s but management confidently responded to questions on this subject, pointing out that a combination of same-stores sales increases, driven by mix and traffic gains, will help make the margin growth possible.   Despite this, Steven Hare did concede that, “like everyone else, we are nervous about the pressures we are seeing on commodity costs”.


The growing sales mix of Wendy’s value menu since the launch of its My 99 everyday value menu will put increased pressure on the company’s margins, but during this turnaround, investors will likely be more focused on the concept’s ability to gain market share.  To that end, management noted that this new value menu has helped to drive transaction trends and enabled Wendy’s to outperform its competitors in November, when it launched My 99, on a share of value traffic basis.  Nevertheless, in terms of factors within management’s control, it is clear that the Wendy’s brand is gaining traction and management has the plan and the capital to execute through 2011 and into 2012.



Howard Penney

Managing Director

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