European Data Download

Positions in Europe: Long Germany (EWG); Sweden (EWD)


As ash clouds from Iceland’s recent volcano eruption slowly drift into European skies (the UK already ground 250 flights) and discussions fly in every direction on a possible debt default/restructuring strategy in Greece (see yesterday’s European Risk Monitor post for our take), below we provide the most salient data points and charts out today in Europe:


1.   Germany’s second reading of Q1 GDP was unchanged quarter-over-quarter and year-over-year at 1.5% and 5.2%, respectively. As the table below shows, Exports, Capital Investment, and Construction made significant gains. We continue to like Germany’s healthy 2011 growth profile of ~ 3.2% GDP and sober fiscal standing as a defensive play with the backdrop of persistent sovereign debt contagion across the Euro region. We’re also long Sweden (via the etf EWD) in the Hedgeye Virtual Portfolio with a similar thesis to Germany. However, Sweden enjoys an independent central bank (and currency), and has prudently hiked interest rates over the last 10 months to head off inflation.


European Data Download - g1



2.   Germany’s IFO Business Survey confirmed a developing trend of slowing confidence over the last months. [Additionally we’re seeing a similar trend across many western European countries. France’s Production Outlook fell to 15 in May versus 21 in April and Business Confidence slipped to 107 in May versus 109 in April, according to INSEE National Statistics Office of France].


As the chart below shows, the 6-month forward looking German Expectations (which we key off on in particular) declined month-over-month, and again we think is representative of the uncertainty surrounding the fiscal health of the region’s periphery.


European Data Download - g2



3.   UK Net Borrowing (Excluding Financial Interventions) was £10 Billion in April versus £7.3B a year ago.  As Chancellor of the Exchequer Osborne continues to fight to curb spending and generate revenue to reduce the country’s deficit, the April figures show a -0.8% decline in revenue and 5% gain in spending. The revenue figure was affected by a one-off bank payroll tax that brought in £3.5 Billion last April, and the “relatively high bonuses being paid and share options being exercised,” according to the UK Statistical Office.


The deficit is expected to narrow to 122 Billion in the fiscal year that began in April, or 7.9% of GDP. Public Sector net debt at the end of April 2011 was £910.1 Billion (60.1% of GDP) up from £765.5 Billion (53.0% of GDP) at the end of April 2010.


We continue to be very cautious on the UK economy. Persistent inflation (CPI is currently at 4.5% Y/Y) is the most immediate term threat. The BoE has yet to clearly signal any concrete action to curb inflation's rise short of acknowledging it. We expect consumer and business confidence to wane over the intermediate term as growth prospects remain weak and the government sheds more public-sector jobs to reduce the budget deficit.


European Data Download - g3


Matthew Hedrick



Cracker Barrel reported 3QFY11 (April) EPS of $0.58 (excluding a $0.06 gain from the sale of property) that was significantly below consensus of $0.66 and that same-store sales were down -0.3% for the restaurants and up 0.1% for retail, again, missing consensus expectations. 


Yes, it’s true that two-year trends improved sequentially on a monthly basis, as the quarter progressed, but the company raised prices aggressively in April.  While the desire to protect margins is understandable to a point, traffic has been the Achilles Heel of this company for some time. 


We’ve seen CBRL raise prices before in this situation and the outcome seems inevitable: traffic will suffer.  As the saying goes, the definition of insanity is doing the same thing over and over and expecting different results.  The chart below shows the sequential deterioration in comparable restaurant sales at CBRL.





The excuse given by the company and the forever-faithful bulls is to attribute the disappointing results to the economic environment.  While that may be true to some extent - CBRL traffic does track Vehicle Miles Driven quite closely - the company is clearly failing to increase usage.  As you can seen in the chart below, CBRL has only generated positive traffic in 3 of the last 19 quarters. 


Versus comparisons easy and difficult, traffic continues to decline.  Yet management continues to raise menu prices every quarter.  While CBRL core users generate 80% of their revenues, it’s imperative to keep giving them a reason to come back more often.  Unfortunately, raising prices on you core customer is not a long term strategy that will drive increased customer visits.  The data bears this out; two-year traffic trends continue to show no indication of an inflection in traffic trends.  Two-year average traffic trends declined 80 basis points to -2.1% in the third fiscal quarter versus -1.9% in 2QFY11.  This trend has been negative as far back as the eye can see.


CBRL - A CONCEPT IN DECLINE - cbrl traffic versus miles drive



We will see what management has to say on the call later today, but I would be surprised if there are any plans being implemented to increase customer visits that have not already been discussed.  The pressing question of the day is why management believes they can raise prices 3% on a low income customer that is seeing its disposable income decline.



Howard Penney

Managing Director




  • CBRL - Q3 EPS of 58c misses by 8c. Revenue of $582.5m misses.
  • BEEF PRICES - Cash cattle have fallen 13 percent since the spring highs, and the decline represents $150 reduced value in the total price of a market-ready steer.  Demand for both pork and beef was called gloomy last week and lower fed cattle prices helped packers regain some margins on slaughtering and processing. The seasonal expected boost in demand has failed to materialize for beef - CattleNetwork
  • Sandwich giant Subway is testing a more upscale format called Subway Café, which the company hopes will address the needs of franchisees looking to open in office buildings and other more high-end venues - NRN
  • The National Restaurant Association Restaurant, Hotel-Motel Show kicks off Saturday at Chicago's McCormick Place. 
  • RRGB - Strong follow thru from last week performance on accelerating volume
  • GMCR and PEET continue to trade higher on strong volume
  • JACK - continues to struggle to gain traction
  • CHUX - Strong follow thru following a better that expected quarter






Howard Penney

Managing Director

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The Last Stand of the Equity Bulls

“There are not enough Indians in the world to beat the 7th Cavalry.”

-George Armstrong Custer


I’m in the middle reading Nathaniel Philbrick’s book, “The Last Stand”, which is an account of General George Custer’s infamous defeat at the Battle of the Little Bighorn.   Even a novice in American history knows the outcome of June 25th, 1876, a day in which the 7th Cavalry Regiment was soundly defeated by the combined forces of the Lakota, Northern Cheyenne, and Araphao people on the Montana plains.


In total, according to archeologist reports, the 7th Cavalry suffered a 52% casualty rate.  The five companies that were directly under the control of General Custer fared much worse.  Near the end of the battle, Custer, and the troops directly under his control, found themselves in a weak strategic position on a hilltop, which would become known as Last Stand Hill.  According to almost all accounts, the Lakota completely annihilated 100% of Custer’s troops within an hour of initial engagement.   


Ironically, despite the inauspicious ending to his military career, George Armstrong Custer was probably one of America’s most celebrated cavalry commanders of his era.  While he finished last in his class at West Point, Custer had a meteoric rise in the Union army and at the age of 23, three days prior to the Battle of Gettysburg, was promoted to Brigadier General. 


At Gettysburg, Custer was credited with leading a mounted charge of the 1st Michigan Cavalry.  This charge halted the Confederate momentum at the Battle of Gettysburg, which would become known as the turning point of the entire Civil War.  Not only was Custer present at General Robert Lee’s surrender at Appomattox Court House, but the table on which the surrender was signed was given to Custer as a gift for his wife with a note from General Sherdian praising Custer’s bravery and his key role in the Union victory.


Perhaps, though, some of Custer’s early successes gave him some false confidence as it related to future military engagements.   According to reports from The Battle of the Little Bighorn, General Custer reportedly said the following shortly before his death:


“Hurrah boys, we’ve got them! We’ll finish them up and then go home to our station.”


With the history lesson complete, reading the story of Custer and the Battle of the Little Bighorn made me think contextually about the stock market.  In essence, I can’t help but wonder after a +95% move in the SP500 from the lows of March 2009, whether this is The Last Stand of the Equity Bulls.  Certainly, both price action and recent data suggests we are at a critical juncture.  As well, and not dissimilar to Custer, there is likely an over confidence bias pervading the stock market due to the expedited two year move off the bottom. (LinkedIn anyone?)


Just like the cavalry, we’ve been sounding the warning trumpets of our key 2011 investment theme that Accelerating Inflation will lead to Slowing Growth.  No doubt, we’ve been early sounding the trumpet, but the view is now playing out in spades.


A key tell for this theme has been the price of copper, which is down just over -10% on the year.  Dr. Copper is perhaps one of the most predictive markets for gauging future economic growth, especially from China, a nation that consumers 40% of the world’s copper.  In the most recent data from China, refined copper imports into China were down in April by -48% year-over-year and -17% sequentially from March.  On the LME, copper inventories are up +34% from their December 2010 lows.


In other industrial metals, similar trends are in place.  Lead inventories are up +53% this year to the highest level since February 1995, aluminum stocks are at near record highs and up +11% for the year, and zinc inventories are up +21% in 2011 and reached a 16-year high on May 18th.   Other commodities are signaling the same via price action with lumber down -28% in price in the year-to-date, rubber down -7%, and coal down -6%.  In aggregate, the commodity complex is clearly telling us that global growth is slowing.


While the most recent quarter of corporate earnings in the United States was decent, results, broadly, were characterized by margin compression.   This was a call our Retail team, led by Sector Head Brian McGough, was early and right in calling.  The bell weather indicator of cost inflation this quarter was Gap Stores, who cut their full year earnings estimates from a range of $1.88 to $1.93 per share, to a range of $1.40 to $1.50 per share due to “heavy cost pressure”.  Collectively, the “cost issue” was reflected in the number of quarters that “beat” earnings this quarter.  Incidentally, beats were down to the lowest level since Q4 2008 at 59.5%.  


With a couple more quarters of FIFO accounting and tough commodity input compares ahead for the stock market, the valuation / earnings growth story becomes less compelling for equities, especially in the context of a slowing top line.  Globally, slowing growth is being driven by the emerging world fighting inflation, with the most recent evidence being Chinese PMI coming in at a 10-month low.  In Europe, slowing growth is and will continue to come from massive austerity measures that are being implemented to, hopefully, head off massive debt restructuring.  While in the U.S., the consumer is facing a serious retrenching with U.S. average weekly earnings on a negative trend, unemployment numbers breaking out to the upside, and home prices continuing to be in free fall.


Despite the likelihood that corporate margins continue to compress in the coming quarters, which will continue the trends of slowing earnings momentum, those bullish of U.S. equities argue that yields on fixed income are so low that equities still offer a compelling risk / reward.  On some level we agree, as we’ve already made the case for the Fed to remain Indefinitely Dovish and James Bullard, the President of the St. Louis Fed, signaled as much when he said in a speech last night, “past behavior of the FOMC indicates that the Committee sometimes puts policy on hold.”


Being on hold is of course one thing, but not extending Quantitative Easing is quite another.  It is the later point that we believe the The Last Stand of the Equity Bulls is predicated upon.  Unfortunately, given the fact that reported inflation in the U.S. is actually set to accelerate, it seems unlikely that the Fed will re-up on Quantitative Easing in the short term.


Hurrah, equity bulls! Hurrah!


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


The Last Stand of the Equity Bulls - Chart of the Day


The Last Stand of the Equity Bulls - Virtual Portfolio


The Macau Metro Monitor, May 24, 2011




Changi Airport handled 3.73MM passengers in April, a 13.7% increase compared to the same month in 2010. 


According to a person familiar with the matter, LVS approached banks for a $3.525 BN loan for its assets in Macau.  The five-year facility will pay interest and fees of 253bps+ LIBOR at the all-in level.  Proceeds will be used for refinancing.  VML U.S. Finance, a unit of the company, will borrow the funds while Venetian Macau Ltd. will guarantee the facility.

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