Wet Kleenex Europe

European Positions: Long Germany (EWG); Short Spain (EWP)


To borrow a phrase from Keith, Europe’s latest high-frequency data feels like a Wet Kleenex, which is to say not great and leaving an uneasy feeling. In particular, our conviction in Germany (in the Hedgeye Virtual Portfolio via the etf EWG) has recently waned.  PMI (Services and Manufacturing) and confidence surveys have declined in recent months as inflation accelerates and broadly sovereign debt contagion risk remains in the forefront.  From a quantitative setup the equity markets of Germany to Sweden to the PIIGS are all broken on the intermediate term TREND: this often is an indication to short a market, or get out of the way. Therefore we will be managing our long position in Germany accordingly as the DAX is trading right at its TREND line of 7,100 (see below).


Wet Kleenex Europe - mh1


PMI Services data out today for May confirmed the Manufacturing readings released on Wednesday—declines month-over-month for the major economies and the Eurozone average (see charts below). On the PMI survey, 50 is the line in the sand, with figures above 50 indicating expansion, and below indicating contraction. Spain is firmly in the latter camp, with Manufacturing at 48.2 and Services dancing on the line at 50.9. Equally Italy’s Services is flirting with the line (50.1) as is Ireland Services (50.5).  While Greece is taking the spotlight, we remain decidedly bearish on all the PIIGS (we’re currently short Spain via EWP), as we expect them to underperform their target debt and deficit reduction targets.


Wet Kleenex Europe - mh2


Wet Kleenex Europe - mh3


On the EUR-USD, we’re bearish as the pair reaches the top side of our trading range at $1.44, and believe it will bounce around in a range to $1.40 alongside headline risk, but ultimately find support as the EU continues to socialize the periphery’s fiscal imbalances at every step.


Matthew Hedrick



DRI continues to be view as the “safety trade” in casual dining due to the stability of its core brands, strong financial characteristics and seasoned management team.    


Being one of the companies in the restaurant industry that has some of the most “mature” brands, DRI incremental sales drivers are very sensitive to the performance of the quarterly promotions and limited-time offers.  In addition, we are in a very value-sensitive environment and the consumer has many choices from which to choose. 


DRI has a demonstrated over time that management has proven to be able to build their brands using LTO’s effectively, but they are not perfect.   Last quarter, the Olive Garden top line performance suffered from the shrimp and ravioli promotion falling afoul of guest preferences; this led to a negative menu mix in February.  According to management, the shrimp dish was a little too “culinary-forward” and didn't drive the same level of incremental guests as did the ravioli promotion with the $10.95 price point in 3Q10.  In 4Q10, The Olive Garden kept with a “culinary-forward” feel promoting the Culinary Institute of Tuscany (CIT) Soffatellis followed by Pastachettis. 


With expectations for Olive Garden performance lowered due to 400 underperforming stores that are awaiting a fresh look, Red Lobster (and Long Horn) must pick up some of the slack if management is going to hit its stated goal of 1.5% to 2% same-store sales in FY11; with the lower end being more likely.  Management’s bullish view of the top line is based partly on a continued improvement in the broader economic climate, especially in terms of employment, which has certainly not materialized.


In 4Q11, Red Lobster will benefit from the timing of Lobster Fest and the Create Your Own Shrimp promotion.  This brings me to Red Lobster and the current LTO, which appears to have an extremely compelling price point.  The “$15 Seafood Feast” includes soup, salad, entrée, dessert and unlimited Cheddar Bay Biscuits and runs from May 31st through July 25th.  In 3Q11, same-store sales increased 0.1% at Red Lobster (despite the adverse impact of 120bps related to the timing of Lent and their signature Lobster Fest promotion, and another 50bps of winter weather issues).  It would appear that the current promotion is accomplishing one of management’s stated goals of “price certainty” for the Red Lobster guest.


The $15 price point compares to the $19.75 average check, which includes lunch. This implies that the average check at dinner is likely closer to $25.  The issue Red lobster faces with this promotion will be the level of customer preference for the highly compelling $15 price target at a time when inflation is impacting the company’s margins, particularly in sea food.  There is clearly potential for a significant decline in average check.









Howard Penney

Managing Director



Employment data less positive for QSR, on the margin.


The overall jobs picture is causing concern here at the market open but, looking into the details that are most pertinent for QSR, it is the decline in the absolute growth level of employment in the 20-24 YOA cohort that caught our attention.  January through April brought 3%+ growth in the employment level among 20-24 year olds.  May’s number indicated a mere 1.1% in employment growth for that age bracket, which is a glaring red flag for QSR.  As a reminder, much of the positive sentiment from management teams over the past number of quarters has anchored on an improving employment landscape.  This view certainly doesn’t corroborate with Hedgeye’s macroeconomic view and, today’s news being the most recent instance, the data is also calling into question the idea of a sustained recovery in employment. 


As the second chart below shows, employment growth in the food service industry continued its upward trajectory in April.  Clearly, restaurant management teams can only react to the economic reality they are faced with, and the data is lagging one month behind the data in the first chart.


RESTAURANT INDUSTRY EMPLOYMENT DATA UPDATE - national employment growth by age





Howard Penney

Managing Directory


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TODAY’S S&P 500 SET-UP - June 3, 2011


The US futures are trading lower following the disappointing jobs numbers, while Europe is slightly higher and Asia traded lower.  Last month’s jobs report benefited from a very favorable Birth-death fudge factor which was +175,000 of the 224,000 reported.  All the MACRO data points for the past two weeks suggested that the today jobs picture would be bleak, no matter how made up the jobs number always is.  As we look at today’s set up for the S&P 500, the range is 20 points or -0.68% downside to 1304 and 0.84% upside to 1324.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -180 (+1763)  
  • VOLUME: NYSE 1008.32 (-15.26%)
  • VIX:  18.09 -1.15% YTD PERFORMANCE: +1.92%
  • SPX PUT/CALL RATIO: 1.61 from 1.19 (-26.59%)



  • TED SPREAD: 21.64
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 3.04 from 2.96
  • YIELD CURVE: 2.59 from 2.52 



  •  8:30 a.m.: Payrolls report: Change in nonfarm payrolls: est. 165k, prior 244k; Change in private payrolls: est. 173k, prior 268k
  • Unemployment rate: est. 8.9%, prior 9.0%
  • 8:30 a.m.: Net export sales: Soybeans, soy meal, soy oil, wheat *10 a.m.: ISM non-manufacturing: est. 54.0, prior 52.8
  • 12:30 p.m.: Fed’s Tarullo speaks on regulation in Washington
  • 1 p.m.: Baker Hughes Rig Count
  • 3:30 p.m.: Fed’s Rosengren speaks at Stanford


  • S&P says a Greek default is "far from certain
  • Groupon could raise up to $3B, valuing company at $30B - NYT,
  • Apple paying major reecord labels $25-50M each in advance - NY Post
  • Fox gets 10% price increase for primetime ads sold in upfront, takes in $2B - NY Post
  • Foster's unaware of unannounced information explaining today's jump in price
  • Coca-Cola CEO says will raise prices in H2 more than expected - FT
  • Fed reports balance sheet assets of $2.79T on Wednesday, +$13.7B w/w and +$453.1B y/y





THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Gold Declines a Second Day in London as Near-Record Prices Spur Selling
  • Feed Makers in South Korea May Favor Wheat Over Corn as Premium Narrows
  • Lead Smelters in China May Cut Output as Demand Slows, Regulation Tightens
  • Japan’s Tea Industry Facing Shortage as Nuclear Radiation Taints Shipments
  • Copper Climbs in London Trading on Speculation Two-Day Drop Was Overdone
  • Oil Falls Below $100 Before U.S. Jobs Report, OPEC; Crude Supplies Climb
  • Copper May Fall Next Week on Speculation of Slowing Demand, Survey Shows
  • Wheat Futures Climb for Second Day on Weather Concerns in U.S., EU, Canada
  • Highest-Quality Crude Shortage Cutting Refinery Profits: Energy Markets
  • Rubber Advances as Oil’s Rally Boosts Appeal, Car Output Recovers in Japan
  • Harmony Gold Digging World’s Third-Richest Mine Emerges as Takeover Target
  • Ukrainian Coal Production Rose 9.9% in 5 Months, Agriculture Ministry Says
  • Copper Stockpiles in Shanghai Rose 3,854 Tons to 86,163 Tons in Past Week
  • Europe Commodity Day Ahead: Wheat Futures Gain on U.S. Weather Concerns




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • Europe trading slightly higher ahead of the US open
  • Eurozone May Services PMI 56.0 vs consensus 55.4 and prior 55.4
  • Eurozone May Composite PMI 55.8 vs consensus 55.4 and prior 55.4
  • Germany May Services PMI 56.1 vs consensus 54.9 and prior 54.9
  • France May Services PMI 62.5 vs consensus 62.8 and prior 62.8

THE HEDGEYE DAILY OUTLOOK - euro performance




  • Australia’s May AiG Performance of Service index 49.9 vs 51.5 seq.
  • Asia traded lower, with the exception being China op 0.8%

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Mega Dogma

“The century of megacities has already begun.”

-Lawrence C. Smith (“The World In 2050”)


I’m writing the Early Look from Los Angeles, California this morning. According to Lawrence Smith’s research in an excellent book I just finished reading, “The World In 2050”, Los Angeles-Long Beach-Santa Ana is the world’s 11th largest Mega City (a city with more than 10M people). Next to New York-Newark, which I’ll be on a plane to later this afternoon, that makes LA the only US city in the global top 19.


Most of you probably knew that.


What I didn’t know (from Lawrence’s data compilation in his chapter titled “A Tale of Teeming Cities”):

  1. The world had 2 megacities in 1950
  2. The world has 19 megacities now
  3. The world will have at least 27 megacities by 2025

“Of the eight new megacities anticipated over the next fifteen years, six are in Asia, two in Africa, and just one in Europe. Zero new megacities are anticipated for the Americas. Instead this massive urbanization is happening in some of our most populous countries: Bangladesh, China, India, Indonesia, Nigeria, and Pakistan.” (Smith, page 34)


Now there are obviously plenty long-term investment implications associated with a world that continues to move East. And I assume most of you probably know that too – but what we don’t know is what this balance of population-power is going to do to our Western Dogma of ZERO percent interest rates - and the associated pillaging of our savings (Asians and Muckers like to save).


Being on the road, I get into a lot of fascinating debates with some of the world’s sharpest investing minds. This has been the most intellectually fulfilling aspects of building Hedgeye. Meeting with people who run the buy-side is infinitely more interesting than having a sell-sider beg me for a bonus, bailout, or an II vote.


One of the current debates I have been getting into with buy-siders centers on how long America can sustain Japanese and Western European monetary policies?


Good question - with answers that continue to be tattooed with partisan politics (yes, being a Keynesian is partisan):

  1. US Monetary Policy – we have two views; what Le Bernank should have done (raised rates 6 months ago) and what he will do (nothing – he hasn’t raised rates since 2006 and he won’t start now). Our Q2 Macro Theme remains that the Fed will remain “Indefinitely Dovish” (no QG3 and no rate hikes), which is why we are long a UST Flattener (FLAT) and the long-bond (TLT).
  2. Western European Monetary Policy – we have one view; Les Eurocrats will remain socialist in their leanings even though they are pretending to be chicken hawks post their most recent rate hike (ECB raised rates before the Fed for the 1st time ever). Le Trichet will be gone by year-end and replaced by a left-leaning Italian (Mario Draghi). We think he could cut rates within his first 3-6 months.
  3. Eastern European and Asian Monetary Policy – they have one view; fight inflation with the weaponry allocated to the Fiat Fools. Russia shocked me early this week with another interest rate hike and obviously the Chinese and Australians have raised interest rates 6 times respectively since this short-cycle global “recovery” began.

More objective policy makers who use the blunt fiat instrument of interest rate decisions both ways (like yesteryear’s Bundesbank or today’s Reserve Bank of Australia), have learned over the years that there is one unique advantage to having the stones to raise interest rates – THEN YOU CAN CUT THEM!


Le Bernank et Les Japanonais… not so much. They have chosen to put their countries in de penalty box for many, many, time – deh will ultimately sit dere now… and feel shame…


Or maybe they won’t feel shame. Your run of the mill central planning groupthinker from the Keynesian Kingdom tends to think they’ve saved us from all of the problems that they’ve created with ZIRPS (ZERO interest rate policies). Have you ever seen an academic “economist” win his or her Nobel prize and have a change of heart?


Not so much…


“We are now on a trajectory to add nearly 40% more population by the year 2050, raising our number to around 9.2 billion. Who will we be in 2050? In that year, for every one hundred of our future children and grandchildren born, fifty-seven will open their eyes in Asia and twenty-two in Africa, and mostly in cities.” (Smith, page 35)


A few important words in Smith’s depiction of the Global Macro Markets in which interconnected factors will continue to collide: “our number”, “our future”, and “open their eyes”…


Do we really think that conflicted, compromised, and constrained monetary policies that serve 5-10% of Western populations’ compensation desires (never mind 1% of our world’s) are going to hold their dogmatic line?


That’s a mega question that I’d love to see Le Bernank host a Global Presser Conference on and answer in Chinese and Rusky, with a straight face. Particularly after this morning’s Jobless Stagflation report, which will continue to remind the world that the Greenspan-Bernanke era of cutting savers account returns to ZERO percent has equated to a decade of ZERO net jobs created in America.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.11-102.29, and 1, respectively.


Best of luck out there today and enjoy the weekend,



Keith R. McCullough
Chief Executive Officer


Mega Dogma - Chart of the Day


Mega Dogma - Virtual Portfolio

Daily Trading Ranges

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