Patriot Pigs

“Lincoln’s ability to retain his emotional balance in such difficult situations was rooted in an acute self awareness.”

-Doris Kearns Goodwin, Team Of Rivals


I’m still grinding through this American classic, “Team of Rivals – The Political Genius of Abraham Lincoln.” The aforementioned quote from Kearns Goodwin comes from Chapter 23 which is titled, “There’s a Man In It”, which dissects the subtleties of leadership qualities that were uniquely possessed by both Lincoln and Ulysses S. Grant.


It’s an outstanding chapter in American history to reflect upon not only because of its constitutional gravity – “give me liberty or give me death” – but because it reminds us that this country is built on the backs of American character and resolve. What you are seeing from the said-leaders of US Government today looks nothing like it. These pretending patriots remind me more of pigs at a trough than Leaders At The Front.


If Timmy Geithner wants to go moral-compass on me for writing that, bring it. My definition of leadership on the ice, at my firm, and in the community is a heck of a lot different than his, and I’ll stand up and say that to his face. YouTube the man. Watch him mimic the hand gestures of Larry Summers. Geithner doesn’t have a sense of self awareness. He is a bureaucrat - not the leader America needs on the front lines of this US Debt-Ceiling Debate.


As we predicted, the US Government Shutdown and Debt-Ceiling Debate has replaced Japan and the Middle East as top headline news. This “news” is real-time – and the entire world is watching. If we think that we can call Europeans “pigs”, point fingers at other countries for The Bernank’s inflation, and come out of this generational debate about deficits and debts smelling like a rose, think again.


So let’s rethink…


One of Bloomberg’s top headlines this morning = “Geithner Says Failure To Raise Debt Limit Would Trigger a Financial Crisis.” And, expanding upon his leadership thoughts, this is what our squirrel hunting bureaucrat had to add to the global risk management conversation:


“You will shake the basic foundations of the entire global financial system… I’m totally confident that Congress will act to avoid that… It will be inconceivable that lawmakers will not act in time…”


Well Mr. Unaware, conceive reality – this government could (and should) shutdown. During both Bush and Obama’s administrations (you advised both), you worked tirelessly at putting America’s balance sheet in this position. Shame on you for reverting to your go-to move of fear-mongering so that we can do more of what got us into this colossal disaster of fiscal sense. Shame on you Geithner. Shame on you.


I’m neither a Republican nor a Democrat. So instead of looking for an angle on me Timmy, why don’t you take a good and hard long look at what Mr. Macro Market is telling you about your Patriot Pig commentary:

  1. Dollar DOWN: Trading down for the 11th out of the last 15 weeks (and down -15% since Geithner became the head of the US Government office that is supposed to be protecting it) the US Dollar Debauchery continues to stoke The Inflation to new economic-cycle and YTD highs (CRB Commodities Index, Food, and Oil both hitting fresh highs this morning).
  2. Euro UP: After registering its best quarterly performance versus the US Dollar since the Euro’s inception in 1999, it’s hitting new YTD highs at $1.43 this morning and smoking all Patriotic Pig name callers in the US out of their holes – reminding Americans that our fiscal issues are worse than Europe’s. And that’s saying something…
  3. Short Term US Treasuries DOWN: Not that the Secretary of the US Treasury should hold himself accountable to massive percentage moves in the prices of US Treasuries, but into and out of Geithner’s fear-mongering comments, 2-year UST yields are ripping higher (up +39% since March 21st, 2011) as  US government shutdown default premiums rise alongside inflation expectations.

Of course it takes two to tango in Burning The Buck  - both a fiscal and a monetary policy central planner. Tag, Bernank and Timmy, you’re it – and either your boss (who has read Lincoln quite closely from what I hear) has “an acute self awareness” of what the American people think about finding fiscal “change we can believe in”, or he doesn’t.


As for the rest of us, Yes We Can.


The most obvious way to make money on this in 2011 has been to be long of The Inflation Policy of the US Government (short the US Dollar, and short US Treasury Bonds). But, Dear Americans and Canadians alike, please don’t confuse our profits with patriotism. There are 44,000,000 Americans on food stamps (all-time high). While a small some of us are getting paid, most of us are getting plugged.


But be careful out there levered-long traders of the risk management gridiron - being long The Inflation Policy isn’t a new idea. Hedge Fund net long exposure to commodities recently backed off its YTD high, but that was an all-time high (which is saying something given how much our industry was chasing commodity inflation in 2007-2008 as The Bernank’s “shock and awe” interest rate cuts delivered us $150/oil). All-time, is a long time…


Interestingly, but not surprisingly, that inflationary period of 2007-2008 also gave birth to the first time that US Import Prices from China were UP on a year-over-year basis. That is, the first time until now – and Americans are going to take this in more places than the pump.


For these reasons, fully loaded with the long-term causality associated with creating them (burning our currency and credibility at the stake), Mr. Geithner it’s you who may very well “trigger a financial crisis.” And, perversely, most modern day politicians of the 112th Congress are longing for more of that.


My immediate-term support and resistance lines for oil are now $106.22 and $109.78, respectively. My immediate-term support and resistance lines for the SP500 are now 1322 and 1341, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Patriot Pigs - Chart of the Day


Patriot Pigs - Virtual Portfolio



TODAY’S S&P 500 SET-UP - April 6, 2011


The US Government Shutdown has overtaken Japan and the Middle East as #1 headline news what does it mean for market pricing?

  • Dollar DOWN = stoking inflation to new cycle and YTD highs (CRB and Oil both this morning)
  • Euro UP = new highs, smoking all patriotic pig name callers in the US out of their holes – reminding Americans our fiscal issues are worse
  • Short Term Treasuries UP = ripping higher with both government shutdown default premiums rising (debt ceiling) and inflation being perpetuated

As we look at today’s set up for the S&P 500, the range is 19 points or -0.80% downside to 1322 and 0.63% upside to 1341.




We are on day 3 of perfect with 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.    


THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: 325 (+70)  
  • VOLUME: NYSE 830.64 (+7.78%)
  • VIX:  17.25 -0.86% YTD PERFORMANCE: -2.82%
  • SPX PUT/CALL RATIO: 1.69 from 2.15 (-21.10%)



Treasury 10-year yields approached 4-week high, extending jump of 6 bps yesterday after release of Fed’s March 15 minutes

  • TED SPREAD: 22.78
  • 3-MONTH T-BILL YIELD: 0.07% +0.01%
  • 10-Year: 3.50 from 3.45
  • YIELD CURVE: 2.66 from 2.68


  • 7 a.m.: Fed’s Lockhart to meet with media at Stone Mountain, Ga.
  • 7 a.m.: MBA Mortgage Applications
  • 10:30 a.m.: DoE inventories


  • Alberta government proposes rules that would revoke some oil sands leases - Globe and Mail
  • Bullish sentiment increases to 57.3% from 51.6% in the latest US Investor's Intelligence poll
  • FOMC Minutes indicate that the Fed felt it was important to pay attention to the evolution of inflation expectations
  • NYSE Euronext reportedly may bid for Nasdaq to disrupt hostile counteroffer for NYX from Nasdaq, ICE
  • Taiwan Semiconductor Manufacturing cuts forecast for 2011 global chip industry sales excluding memory products to 4% growth from prev. forecast 7% growth; says Japan earthquake hurt expected demand.
  • Portugal plans to sell up to EU1b in bills due October.




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Wheat Seen Extending Rally as Corn Surge Spurs Swap in Feed for Livestock
  • Gold Climbs to Record in ‘Flight to Safety’ as Silver Reaches 31-Year Peak
  • Wheat Crop Conditions in China Seen Improving, Curbing Import Requirements
  • Fishing Halted in Japan’s Ibaraki Prefecture as Nuclear Plant Taints Sea
  • Copper Reaches One-Week High on Speculation Demand Will Maintain Its Pace
  • Crude Oil Trades Near 30-Month High Before ECB Meeting, U.S. Supply Report
  • Cocoa Advances on Ivory Coast Export Speculation; Coffee Prices Decline
  • Corn Declines as Investors Lock-in Gains After Four-Day Rally; Wheat Gains
  • Citigroup Boosts Commodity Investment Team to Tap Demand as Prices Surge
  • China, India Consumers to Lead Surge in Global Dairy Demand, Fonterra Says
  • Palm Oil Gains as Widening Soybean Oil Margin, Crude Advance Boost Demand
  • Rubber in Tokyo Little Changed as China Rate Hike Offsets Thai Flooding
  • Ivernia Says No Timetable Set to Restart Lead Mine in Western Australia


  • Canadian Dollar Strengthens to Highest Since November 2007
  • Yen weakened to 6-month low against dollar, tumbled against euro amid speculation BoJ will trail Fed, ECB in ending stimulus

THE HEDGEYE DAILY OUTLOOK - daily currency view



  • Eastern European markets trade higher lower with the periphery again in focus and particularly Ireland and Portugal; Hungry and Turkey are the two best performing markets globally. 
  • Honda to Cut UK Output by 50%, Cites Japanese Parts Shortage
  • UK Halifax Mar House Price Index +0.1% m/m vs consensus +0.2%
  • Germany Mar construction PMI 61.8 vs prior 60.7
  • UK Feb Industrial Production +2.4% y/y vs consensus +4.3%, prior revised +4.2% from +4.4%; UK Manufacturing Production +4.9% y/y vs consensus +5.8%, prior revised +6.6% from +6.8%
  • German Feb. Factory Orders Rise 5x More Than Expected  - Germany Feb industrial orders +2.4% m/m vs consensus +0.6% and prior revised +3.1% vs from +2.9%
  • EuroZone Q4 GDP final +2.0% y/y vs preliminary +2.0%








The Asian markets turned in a positive performance except India, Thailand and South Korea.  Thailand was closed for King Rama I Memorial and Chakri Day.  China rose 1.14% despite yesterday’s surprise interest-rate increase and speculation that March inflation will be higher than expected.














Howard Penney

Managing Director


Texas Roadhouse is not a vehicle we would recommend to play the long side of the steak category. 


TXRH is currently trading at a premium multiple on a cash flow basis.  8.2x EV/EBITDA NTM is the third highest multiple in casual dining, trailing only BJRI and DIN.  I hold a negative view of the stock from here. 


The primary negative factors for the stock are as follows:

  • 65% of the company’s commodity costs are locked for the year (80% of beef needs) but significant exposure remains in diary costs in particular.  While dairy costs came down significantly over the past week, the commodity markets remain volatile and there is significant risk that the company’s guidance of 3% food inflation for the year 2011 will prove conservative.
  • TXRH has been performing well from a top-line perspective.  However, traffic compares get increasingly difficult over the next three quarters and, while optimists may point to top-line outperformance as evidence of some room to add price to the menu, a combination of a step up in price and tough traffic compares could spell trouble for the TXRH top-line.
  • As mentioned earlier, the stock is trading at a lofty multiple which, I believe, is too high given the alternative plays on the space (RUTH at 5x cash flow) and the stock’s less-than-certain outlook.  While there is a strong divergence between the valuation of RUTH and TXRH, the respective sell-side ratings around the stocks (as the second chart below indicates) are much the same.
  • I am also unsure of the effectiveness of the Leader of the Door strategy being implemented at TXRH restaurants to improve wait times.  While management maintained their enthusiasm around this initiative at the most recent Analyst Day in New York, how exactly this will play out remains to be seen.
  • The TXRH core customer is sensitive to gas prices and it seems that Texas Roadhouse could feel some top-line pain from the current level of prices at the pump.  Commentary from DRI CEO Clarence Otis on the most recent Darden earnings call regarding the impact of gasoline prices on casual dining revenues highlighted how acute of a concern gas prices are.



TXRH – PRICEY WITH A TOUGH OUTLOOK - ruth comp ratings


Howard Penney

Managing Director

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It’s not surprising that RUTH was one of best performing restaurant stocks next to MSSR yesterday.  As luck would have it, I have been spending some time on the RUTH story and the risk-reward from here is favorable.


Trading at ~ 5.0x EV/EBITDA, there is nothing but skepticism in the stock.  Given the company’s exposure to higher prices for red meat this is understandable, but negative expectations appear to be priced in.


Yesterday, Tilman’s bid for MSSR was a telling sign.  For the right operator everything has its price, no matter what the fundamentals look like.  As a public company, MSSR has been a disastrous stock.  As a private company, the new owners can potentially implement the changes necessary to drive incremental profitability and not worry about quarterly earnings.  While no all companies are susceptible to these same issues to a greater or lesser degree, I believe RUTH is more resilient in the current climate given the franchise store base the company maintains.


Beyond the obvious industry related issues, one negative (but could also be a positive) is that the stock is closely held.  Management has skin in the game owning 22.7% (including the 19.7% owned by Bruckmann, Rosser, Sherrill & Co).  Another 17% is owned by the three largest shareholders.  While this can create some liquidity issues it is also creating inefficiencies in valuation.





As of RUTH’s 2/18/11 conference call, January's same store sales were up mid-single digits at Ruth Chris according to management.  I estimate that Ruth Chris comps increased by between 4 and 5% in January and trended roughly level throughout the quarter.  In 4Q10, Ruth Chris’ two largest markets, California and Florida, were up 9.3% and 7.8% respectively.  Nearly every company-operated restaurant is producing positive comps (nearly all traffic) as the company has not raised prices recently.  Management said that Mitchell’s remained negative, in the mid-single digit range – which I estimate to be -2% to -3% - in January.  The weakness at Mitchell’s was driven by the soft Florida market, where sales were down 10.6%, while all other markets improved for the brand.


Within the Rut's Chris’ franchise system, domestic comparable franchise-owned same-store sales increased 8%, while international same-store sales increased 15.5%.





Up until 2011, RUTH’s senior management has had to play defense, burdened by a leveraged balance sheet into the teeth of a major recession that brought a violent snap-back in consumption levels.  For the past 18 months there has not been any unit growth, management has cut G&A and taken much-needed steps to deleverage the balance sheet.  In February 2010, Bruckmann, Rosser, and Sherrill made a $25 million investment in preferred stock and concurrently followed that with a $25 million rights offering, issuing 10.2 million shares.  In aggregate, those two transactions allowed the Company to pay down $44 million on its credit facility.


With the balance sheet issues now in the past, the focus can turn to more efficient operations and unit growth.  One of the potential catalysts for the stock over the next six months is the reacceleration of unit growth.  Once growth stops, it generally takes a chain like Ruth Chris approximately 18 months to recommence the expansion of their restaurant base.  Currently management is working on filling the Ruth's Chris unit pipeline for 2012 and beyond.  The company is less focused on standalone units, but instead cited growth with an emphasis on the gaming and hotel industries as key for the 2012 and 2013 growth pipeline.  Currently, the company does not have not have any formal development agreements in place.  In 2011, RUTH can expect up to three potential franchise openings in 2H11.





The biggest risk to the RUTH story is the uncertainty surrounding margins on a go forward basis.  As of the end of January, RUTH has not locked in pricing for their 2011 beef needs.  During fiscal 2010, RUTH purchased more than 60% of the beef it used from one vendor, New City Packing Company, Inc.  I suspect that New City Packing does not want to take the other side of the RUTH trade and lock in a price.   This could be an instance of the Bernanke-sponsored price volatility that our Macro team highlights with such frequency.


In 4Q10, beef prices were up 12%, which caused a 140pbs decline in food cost margins.  While the company is very cautious about raising prices, they are planning to take a price increase of approximately 0.50 bps in March.  Management intends to “evaluate further pricing opportunities as we go through the year.”


The company does not give annual guidance but does outline the following guidelines; Food and beverage costs of 30.5% to 31.5% of restaurant sales, marketing spend 3% to 3.5% of total revenues, G&A expenses of $23 million to $25 million and an effective tax rate of 25% to 30%.








RUTH – VALUE WITH CATALYSTS - ruth comp ratings


RUTH – VALUE WITH CATALYSTS - ruth short interest



Howard Penney

Managing Director

TGT: Virtual Portfolio Update


Keith shorted TGT in the Hedgeye virtual portfolio on low-volume strength and a strong move higher for the majority of the sector.


With near-to-intermediate top-line trend results critical to this show-me story and March sales results on the horizon, we maintain our bearish outlook on Target. Not only has the company fallen short of Street expectations three months in a row, but is also has one of the more pronounced Easter shifts, with same store sales planned down mid-to-high single-digits in March followed by a mid-teens increase in April. Moreover, guidance for incremental comps of +200-400bps driven by growth in P-Fresh remodels and 5% reward penetration continues to appear aggressive.


TGT: Virtual Portfolio Update - TGT MoGrid 4 11


TGT: Virtual Portfolio Update - TGT VP 4 4 11




Keith bought Brinker in the Hedgeye Virtual Portfolio yesterday at $24.92. 


Brinker remains one of my favorite intermediate-term ideas in the restaurant space.  I began getting vocal about the name in April 2010, stating that the name had some volatile quarters ahead, but that FY11 would bring improved performance.  That scenario is largely playing out as top-line trends stabilize and margin gains are achieved by management.  I would expect continued improvement in margins in 2H11 and, as I wrote on 3/24, earnings has the potential to reach $1.90-$2.00 per share in fiscal 2012. 


Given current sales trends, I also believe that the current consensus estimates for 3Q11 and 4Q11 are low by $0.02 per quarter.


Besides the improving fundamentals, the steep drop in the company’s share count is also going to support EPS growth over the next few quarters.




Howard Penney

Managing Director

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