“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:
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
THE HEDGEYE DAILY OUTLOOK
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?
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.
SECTOR AND GLOBAL PERFORMANCE
We are on day 3 of perfect with 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.
CREDIT/ECONOMIC MARKET LOOK:
Treasury 10-year yields approached 4-week high, extending jump of 6 bps yesterday after release of Fed’s March 15 minutes
MACRO DATA POINTS:
WHAT TO WATCH:
COMMODITY HEADLINES FROM BLOOMBERG:
ASIA PACIFIC MARKTES:
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.
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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:
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.
CURRENT SALES TRENDS
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%.
FROM PLAYING DEFENSE TO PLAYING OFFENSE
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%.
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.