This note was originally published at 8am on April 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Sometimes we stare so long at a door that is closing that we see too late the one that is open.

-Alexander Graham Bell


Finally, we’re here. This week we’re finally going to see US Professional Politicians face the door that’s closing on their conflicted and compromised careers of debt-financed-deficit-spending. This isn’t the time to give into their fear-mongering. This is going to open he door for a generational opportunity in America. This is great news.


On Friday, the stop-gap bill to keep the US Government open for business expires. With $14,272,778,776,442 in US Debt + another $55,800,000,000,000 in unfunded Medicare and Medicaid liabilities, I say shut these politicians down. The biggest risk to America today isn’t what’s happening in the Middle East or Japan – it’s the 112th Congress.


And no, Mr. Jaime Dmon, we don’t measure America’s risk solely in terms of the price of its stocks and bonds. America is bigger than that. America is a place that puts a higher multiple on liberty than it does the sustainability of your earnings. America is a place where The People who stand up for the truth will be heard.


From a fiscal and monetary policy perspective, the sad truth about last week in Global Macro markets was more of the same. The US Dollar Debauchey continued – and, as a result, The Inflation that’s priced in US Dollars pushed higher.


With the US Dollar Index closing down for the 10th week out of the last 14, here’s what else happened to prices week-over-week:

  1. Euro = +1.4% to $1.42 versus the USD closed out the best quarter that it’s had since it started trading in 1999
  2. Canadian Dollar = +2% to $0.96 versus the USD and continues to ake higher-highs
  3. CRB Commodities Index (19 commodities) = +0.3% to 360, testing its highest weekly closing highs since The Inflation of 2008
  4. West Texas Crude Oil = +2.4% to $107.94, making a fresh 30-month high just in time for your weekend at the pump
  5. Gold = +0.10% to $1428, closing just a hair inside its highest weekly closing price ever – ever is a long time
  6. Copper = -3.6% to $4.25/lb as the world comes to realize that Global Growth Slows As Inflation Accelerates
  7. Volatility (VIX) = -2.7% to 17.41 as month and quarter-end trading volumes slowed to a pay-day halt
  8. 2-year US Treasury Yields = +9.5% to 0.80% as the politicization in the short end of the curve comes under global pressures
  9. Yield Spread (10-yr yields, minus 2-yrs) = -7 basis points on the week, upsetting the piggy banker’s net interest margin spread

US Equities ralliedto another long-term lower-high because, well… as Gordon Gekko might say, debt-financed-deficit spending “is good”…


Until it isn’t.


Interestingly, but not surprisingly. It was all good for Greek Equities too … until the Free-Moneys-Forever monetary policy of the European Central Bank (ECB) stopped playing the music.


With the ECB set to raise interest rates on Thursday, Euroe’s currency and interest rates continue to strengthen. This is great news for the conservative Euro dweller who has cash in that old tickle trunk that we old fashioned folks call a savings account. It’s really bad news for the Greek Gekkos out there who are laden with deficits and debts.


Greece’s stock market is down another -2.1% this morning, taking its cumulative swoon to -12.9% since what Wall Street called the “reflation” trade sarted to morph into The Inflation problem on February the 18th. Interestingly, but not ironically, that was the same day that the SP500 peaked for 2011. This should remind us all that what goes up with Big Government’s help, can come down – and quickly.


If you want to look at The Inflation being priced into Global Market prices for the YTD, it’s pretty straight forward: TOP Global Stock Market YTD = Russia +17.2% versusBOTTOM Global Stock Market YTD = Egypt -23.0%.


I know - which one of the affluent American Senators of the Fiat Republic really cares about starving young people in the Middle East or the 44,000,000 Americans (new all-time high) on food stamps anyway? Social revolutions be damned. Obama’s got the guns.


In the US stock market, The Inflation trade continues to be the only one that’s really getting people paid: S&am;P Sector Performance YTD: Energy (XLE) = +17.2% versus Consumer Staples (XLP) = +2.6%.


Of course, everyone on Wall Street and in Washington knows this – we just don’t like to talk about it so plainly. The Inflation is a policy to get the stock market “going” – The Bernank has all but told you that. Now it’s time for us to start dealing with its unintended societal consequences.


In the edgeye Asset Allocation Model, I drew down my Cash position week-over-week. Here are the allocations ahead of this week’s trading:

  1. Cash 46% (down from 52% last week)
  2. International Currencies = 27% (Chinese Yuan, Canadian Dollar, British Pounds – CYB, FXC, and FXB)
  3. Fixed Income = 12% (Long-term Treasuries and US Treasury Flattener – TLT and FLAT)
  4. Commodities = 9% (Oil and Gold – OIL and GLD)
  5. International Equitie = 6% (China – CAF)
  6. US Equities = 0%

That’s right. At this stage of the game, I have the same policy as The Bernank in trusting the 112th Congress with The Inflation – ZERO. That’s marked-to-market with a zero percent allocation to US Equities until the US Dollar stops being debased. If it takes a Shutdown of these professional politicians and the storytelling they employ – so be it. In the long-run, wersquo;ll all be better off with them just stopping what they’ve been doing anyway.


My immediate-term support and resistance levels for the SP500 are now 1314 and 1339, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Ruby Tuesday has many issues, this quarter is just the most recent, but none is more exigent than the reality that for the past year the company has done so much to de-emphasize the company’s core business.  The predominant mode of thought has been for Ruby Tuesday to diversify from its traditional offerings into a trendier “fast casual” concept.  The implications of this strategy are obvious and this quarter shows it. 


RT also is highlighting the risks for companies that are operating in the quadrant of the Hedgeye Restaurant Quadrant chart called NIRVANA.  In order to maintain NIRVANA, and the premium multiple that typically goes with it, the company in question must be operating with positive same-store sales and improving margins; a feat that requires flawless execution and strong business model.


Management attributed the disappointing quarter to bad weather in December and January, compounded by weak trends in the Bar and Grill space.  And added that they recently experienced some non-weather related issues in the south, which is most likely due to gas prices being significantly higher year-over-year and tracking like 2008.  If I can rephrase management’s commentary, what they really meant to say was that a national competitor (Chili’s) in the Bar and Grill space has woken up from a deep slumber! 


Ruby Tuesday posted a disappointing quarter for 3QFY11.  Adjusted EPS of $0.24 was more than 23% below the consensus number of $0.31 (although management said that the weather dilution impact was estimated at $0.03-$0.04 per share in the quarter, putting them flat with last year).  Revenues were roughly in line, surprisingly, as new unit growth was negligible and comps came in at -1.2% versus consensus at +1.9%.   Restaurant operating margin came in at 16.5% versus StreetAccount consensus at 19.3% and 19.5% last year.  The 250 bps decline year-over-year prior year due to the challenge of managing food and labor and brand investments with disappointing same-store sales.


Weather had an impact on the quarter but, it is important to remember, was also a factor last year.  Then, the brand simply performed better and the company managed through weather-related issues.  Management kicked off its commentary on the 3QFY10 by stating that the quarter was the “best sales quarter in the last three years even with the paralyzing winter storms in many of the markets in each month of the quarter and despite lapping the start of our improving trends in last year’s” third quarter. 


For many restaurant companies, not just this one, weather is an excuse only when you need it!  There is a risk of overstating the importance of the storms and missing other important factors.


Firstly, even adjusting for management’s estimation of the weather impact, two-year average trends sequentially slowed for the first time since summer ’09 (20 basis-point slowdown from 4QFY10 to 1QFY10).   That management failed to answer a question regarding the traffic and check components of the -1.2% comp was a little unnerving.   


Secondly, Ruby Tuesday’s business is being heavily impacted by exogenous factors.  During the call there was repeated emphasis by management of the impact from higher gasoline prices and competitor initiatives (Chili’s $6 lunch, Olive Garden’s $6 lunch) as evidence that RT is suffering from a meaningful loss in market share decline.  Specifically, management said, “where lunch is a little bit softer is actually Chili's $6 lunch, Olive Garden's been pounding $6 lunches also, and so that always affects a little bit when everybody's on the compelling value rampage.”  To combat this pressure, management intends to roll out small plates (i.e. a form a discounting) to improve traffic trends.  Almost without exception, it leads to an average check problem (à la CAKE ) and I believe this is also the case for RT. 


Lastly, RT’s margins were very disappointing and management expects margins to recover from here.  I am not as confident as they sound.  Incidentally, during the call when pressed on margin guidance, they didn’t really seem too confident at all!  Coming in at 17% (excluding the franchise acquisition gains and losses and guarantee charges), restaurant operating margins declined 250 basis points year-over-year. 


Going forward, management is anticipating restaurant operating margins to be flat which implies a sequential improvement in ROP margins of ~250 basis points following the sequential decline, this quarter, of the same magnitude.  Additionally, it is worth noting that this quarter’s decline in ROP Margin was exacerbated by a more difficult compare that will be more difficult in 4Q.  Therefore, I believe that management’s guidance of flat ROP margins appears to be aggressive. 


RT did lower guidance significantly in several areas, however.  EPS guidance for FY11 is now $0.74 to $0.82 from $0.76 to $0.86 and same-store sales are projected to come in at flat-to-+1% whereas previous guidance was for “flat-to-+2%”. 


The core Ruby’s Tuesday business is a third-tier casual dining brand that will always have a difficult time competing against the two national brands of Chili’s and Applebee’s.  We remain bullish on what Chili’s is doing to revitalize it business.  As such, it important to realize that Chili’s and other casual dining concepts are taking share from RT and there is no reason to believe that this effect was isolated to this past quarter.  Gasoline prices are high, likely to be even higher come summer, and the customer is being more selective in spending discretionary dollars.  The market share gainers are concepts like Chili’s and I see Ruby Tuesday as a brand that will continue to lose ground.   Look for sentiment to shift in this direction also.  EAT has plenty of room to run in the sentiment stakes.  Names like RT and TXRH are bound to attract some skeptics over the next few quarters.


RT – SNOWED UNDER? BY COMPETITORS ON THE "RAMPAGE"?? - casual dining ratings comp









Howard Penney

Managing Director

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NKE: We Need A Redistribution

Keith shorted Nike today in the Hedgeye portfolio as he did not believe that the positive call one pundit made last night was worth its salt. We’re seeing all the right moves by the company to lead in both market share and profitability in this space, which should accelerate growth 2-3 quarters out.  Unfortunately, Nike’s latest miss might not prove to be a one-off event. The absolute growth, and rationale behind it, is fine with us, but we have a mismatch between Nike’s communication and the Street’s expectations.


Let’s look at the modeling trajectory for the next five quarters. Nike uncharacteristically left its guidance wide open for interpretation. Don Blair (CFO) is not one to use words loosely. But saying ‘next year sales up hsd or better, GM% down, and leverage SG&A, but not enough to offset weaker GM’ might be fine for annual guidance – but to give virtually zero color on the timing by quarter given all the moving parts is tough (especially after having just spanked the Street with a 300bp 4Q GM hit). Am I faulting the company for its guidance practice? No. I’m not a big fan of the quarterly guidance game. But a ‘no guidance’ policy also has its consequences. It allows the Street’s models to fall out of synch with financial reality. That’s what we’re got today.




NKE: We Need A Redistribution - tBLW


Nike’s stock works when it is beating earnings. Period. I’m at $4.85 vs. the Street at $4.76 next year. That $0.11 delta is great, but the reality is that I’m $0.24 ahead in 4Q. For the four quarters leading up to May12  I’m below.


So…something’s gotta change. Either my model – which I have no reason to do today – or wait for the Street to ‘fine tune’ its expectations.


Our concern, of course, is that this redistribution comes alongside F4Q11 earnings in June.

More importantly, it is that this is a market that will give Consumer Discretionary stocks zero benefit of the doubt – especially while lesser companies are on the tape printing more respectable numbers.


The key here is that our thesis for the retail space overall calls for a severe breakdown in earnings by the end of June. Nike’s trajectory should accelerate when the rest of the pack lags.


But it’s a long time til the end of QE2 in June.

If you can be nimble, the be nimble. Lighten up, or protect yourself on the downside.


There'll be a time to buy this stock this year. But this simply is not it.


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