Relief From Responsibility

This note was originally published at 8am on June 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A movement whose main promise is the relief from responsibility cannot but be antimoral.”

-F.A. Hayek


It was a long, hard, weekend for the central planners of wanna-be Keynesian Kingdoms. In the US, “blue chip economists” advising President Obama were busy obfuscating the simple fact that QG2 has equated to Jobless Stagflation. In Europe, the socialists were voted off another proverbial island of responsibility – Portugal.


Where do we go from here? What broken promises does Academic Dogma have in store for us next? Fortunately, plenty of these outcomes have been proactively predictable. And those of us responsible for being responsible are well on our way to seizing the opportunity of cleaning up another mess.


The aforementioned quote comes from Hayek’s chapter titled “Material Conditions And Ideal Ends” in The Road To Serfdom (page 217). And, while it’s always dicey to talk like a Coach would about virtue and morality on Wall Street, I think the way that Hayek thought about this in 1944 is no less relevant than it is this morning:


“It is true that the virtues which are less esteemed and practiced now – independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntary cooperation with one’s neighbors – are essentially those on which the  working of an individualist rests. Collectivism has nothing to put in their place.”

-F.A. Hayek (The Road to Serfdom, page 217)


It’s time for leadership. It’s time for change.


Last week, I didn’t make many changes to the Hedgeye Asset Allocation Model (our proxy risk management product for gross invested exposure). After starting the week net-short in the Hedgeye Portfolio (our proxy for expressing net exposure), I didn’t change a whole heck of a lot either (I covered a few shorts to end the week with 11 LONGS and 11 SHORTS).


The Hedgeye Asset Allocation Model’s complexion at the close last week was:

  1. Cash = 49% (no change week-over-week)
  2. International Currencies = 24% (Chinese Yuan and US Dollar – CYB and UUP)
  3. Fixed Income = 15% (Long-term US Treasuries and US Treasury Flattener – TLT and FLAT)
  4. US Equities = 6% (US Healthcare – XLV)
  5. International Equities = 3% (Germany – EWG)
  6. Commodities = 3% (Gold – GLD)

With Growth Slowing, Long-term Treasury Bonds (TLT) are putting on an impressive move to the upside. Growth Slowing is also instigating compression in the yield curve (long-term minus short-term interest rates) and we’ve also expressed our conviction in Growth Slowing with long positions in a US Treasury Flattener (FLAT) and Gold (GLD).


Did I say Growth Slowing?


“The readiness to back one’s own conviction against a majority…”




You see, without explicitly seeking Relief From Responsibility, this is how Wall Street works – seeking relief in building a consensus. The best way to perpetuate mediocrity, is to socialize responsibility.


Or at least they’ll try. Because the true art of Old Wall Street Research compensation lies not in the risk management of being right or wrong – it lies in the storytelling of collectivism.


In the Hedgeye Asset Allocation Model, where was I wrong last week?

  1. Long US Dollar (UUP) = down -1.0% week-over-week
  2. Long US Healthcare (XLV) = down -1.4% week-over-week

It doesn’t particularly matter why I was wrong with these positions. The scoreboard doesn’t care. I was wrong – and there needs to be absolute responsibility in recommendation.


“Independence, self-reliance, and the willingness to bear risks…”


That’s what we need to champion in this business. Re-think, re-learn, and re-invent. With “the willingness to voluntary cooperation with one’s neighbors”, may the best teams who are collaborating best risk management practices win.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1530-1549, $98.32-102.34, and 1296-1320, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Relief From Responsibility - Chart of the Day


Relief From Responsibility - Virtual Portfolio


"The definition of insanity is doing the same thing over and over and expecting a different result.”

-Albert Einstein


Year-to-date, CBRL has underperformed the S&P 500 by 21% and is now trading at 6.2x EV/EBITDA.  Value or value trap?  I think the latter.  I really think CBRL’s management is unwilling to face reality.  I listened to CBRL management team speak at the Goldman conference and I could almost not believe what I was hearing.  I’m convicened this concept is in a secular decline and the only way out will be very painful for shareholders.  Although anything’s possible; Trian might take another run at the company! 


The first step in a 12 step recovery program is admitting you have a problem and I don’t hear that from management.  The Cracker Barrel concept has a traffic problem - the concept is constantly trying to replace lost customers.  This point is made clear in the chart below.  No matter how many times they change the menu or increase the marketing dollars to bring in new consumers, the concept loses customers every quarter.  One of the biggest issues is that the company is consistently raises prices in an attempt to protect margins and driving the core customer away in the process.  The core Cracker Barrel customer skews older with little disposable income and has suffered from the economic malaise of the past few years.


Management is clearly in a state of denial, maintaining that changes are not needed to the core business model.  Really?  At the conference, management stated that one important fact about the company’s “growth and store model is that the concept has been around since 1969 and closed, in that entire period, fewer than 20 stores.”  A very impressive statistic indeed!  But they feel that because they are overwhelmingly located on the interstate system, where the trade areas don't change, they don’t need to face or deal with changing demographics as much as the concepts that are not on the interstate.


Specifically, I found management’s commentary on the need to invest capital and refresh stores particularly disconcerting.  Distinct from casual dining peers, management stated, “we have a very powerful brand that stood the test of time. We have timeless appeal, which is more than just a sentiment. It means that our business model does not require update capital.”   This is highly confusing to me.  A customer that feels like they are in a store from 1969 is going to have a very different experience than a customer that feels like they are in a store that has not been renovated since 1969.





Howard Penney

Managing Director


Indiana was a little disappointing but there were mitigating factors. We expect MO and IA to be better.



Indiana recently reported a 5.4% decline in May gaming revenues, with casinos operated by PNK, PENN, ASCA, and CZR all taking a big hit.   However, we would like to highlight several points regarding the data.

  • Horseshoe Southern Indiana casino was closed for two days in May due to the Ohio River flooding. 
  • Belterra (PNK) reported negative table win of 260k.  Even though many players lined up during the Kentucky Derby, the casino had very bad hold.  Belterra reported May revenues declining 14% YoY; if table and slot hold was normal, Belterra revenues would have gained about 7% YoY.  Belterra represents 9% of PNK’s total property EBITDA
  • May 2011 had one less Sunday than May 2010 which cost the market about 2% of YoY growth.
  • Ameristar East Chicago’s gaming revenue declined 7% but was up 15% in April.  ASCA EC represents only 11% of ASCA’s property EBITDA, and the property is still on track to make our $13 million Q2 estimate. 

While Indiana’s sequential revenues based on the prior 3 months, seasonally adjusted, slowed in May as shown in the chart below, we expect seasonally adjusted, sequential revenues to rebound in June.  Our favorite names continue to be ASCA and PNK, which even with the lower May revenues factored in, are still on pace to beat Q2 EPS estimates quite handily.



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Yesterday, EAT announced their intention to deliver on the goal they laid out over a year ago and Michael Woodhouse, CEO of CBRL, made some very revealing comments about the current sales trends as measured by the Knapp Track.


In response to a question about why Cracker Barrel trends are so poor he said “when we look at us versus the average Knapp-Track, when we look at where we are in our ranking within Knapp-Track, which we have available to us, we haven't dropped substantially in terms of where we rank.  It's simply that the average in Knapp-Track is being impacted by, we believe, at least two very large chains that are on a big rebound. So, the weighted average is skewed higher than it otherwise would be.”


I assume Mr. Woodhouse is confirming something we already know; Chilis’s sales are recovering.  Additionally, while Knapp Track trends going forward will be important to watch, at this juncture I have no reason to believe that the current improvement in one and two year trends at Chili’s won’t persist.


My bullish case for EAT has been primarily based on significant operational improvements being implemented by the management team but there is a certain amount of “financial engineering” that will also provide support for the stock price.  The company is aggressively using its significant free cash flow stream to shrink its share base. 


Here are the recent announcements from the company regarding share repurchases.

  1. In November 2010, the Board of Directors authorized a $325 million increase to our existing share repurchase program.  As of March 30, 2011, approximately $258 million available under the current program.
  2. Yesterday, EAT the Board of Directors authorized another $250 million in share repurchases.


My take away is that the company has been very active in buying back stock in the current quarter.   I believe that this should continue, as the chart below illustrates and – as a result - the risk of EAT missing numbers in the coming quarters seems very low.  In fact, if the Knapp Track numbers continue to show improvement Brinker should continue to trade very well.


EAT - LITTLE RISK IN THE NUMBERS - eat stock buyback



Howard Penney

Managing Director


Obama’s Internals

Conclusion: While the recent ABC News / Washington Post poll showing Romney ahead of Obama is noteworthy, we are sticking with our view that President Obama’s re-election seems more likely than not, though will be watching the data and poll internals closely.      


We’ve been of the view that an Obama re-election is likely.   Aside from the natural advantage that a Presidential incumbent has, which is estimated to be more than 2% by many statistical studies, the fact that the Republican field has been late to the race and has no meaningful front runner (the leading contender, Romney, only has 20% support amongst Republicans in most polls) also supports Obama likelihood of re-election.  As well, while the economy is clearly sputtering, unless GDP growth goes negative, it will likely not have a negative impact on Obama’s re-election efforts.


In fact, we utilized Professor Ray Fair’s, from the Yale Economics Department, model to try and quantify the outcome of the election. Based on Fair’s formula, if President Obama had no more good news quarters of 3.2%+ growth and even if real GDP growth was flat lined at zero through the 2012 election, he would still have a legitimate shot at the Presidency.  In fact, according to the Fair Model, in that scenario, President Obama would win 50.4% of the two party vote. (The Fair formula is here:


The news yesterday in political circles was the ABC News / Washington Post poll, which showed Romney beating Obama by +3 points amongst registered voters for the first time in any major poll.  While one poll is not a trend, this is a poll worth noting.  In the same poll, Romney gained about 4 points amongst all potential voters from the April 17th, 2011 poll.


As it relates to the internals of the polls, President Obama fares very poorly on his handling of the economy.  According to the poll, “among the nearly six in 10 American who think economic recovery has not yet begun, a vast 69 percent disapprove of the president’s job performance overall and 64 percent say they won’t even consider voting for him in 2012.”  This is also reflected in the ABC News Frustration Index, which is currently at an elevated 68.  It was 67 last Fall when the Republicans regained the House, 73 when the first President Bush lost re-election, and peaked at 80 in 2008.


Obama’s Internals - dj22


So, while the Fair model suggests we need a double dip economy for Obama not to get re-elected, we also need to be cognizant that Obama’s re-election prospects are getting more tenuous.  The much heralded bin Laden bounce was not sustainable, as we predicted, and President Obama’s approval rating on the Real Clear Politics aggregate is rolling over.  Over the last two weeks, the spread between approval and disapproval has narrowed 4.4 points, which is statistically relevant.


The potential risk to our view that Obama could be re-elected is unemployment.  No President since World War2 has been re-elected with an unemployment rate above 7.2%.  Despite the Obama administration’s continued defense of their ability to create jobs in aggregate, the current unemployment rate of 9.1% is a barrier facing Obama in his re-election efforts.   So far, though, it seems this barrier may still be overcome by the incumbency advantage and the lack of a true front runner from the Republican Party.


As stock market operators, we obviously are advocates of the predictive ability of markets.  As such, we would point to the current contract on Intrade, which prices the odds on an Obama re-election.  Currently, the contract is trading at 60.5, while Mitt Romney is trading at 30.0.  Interestingly, neither of these contracts has seen a meaningful move, other than a brief Obama bounce after the killing of bin Laden, and have been close to those prices since the start of 2011.


The political contract on Intrade that we find most compelling is the one that represents the odds that Representative Weiner will resign by September 30th, 2011.  Currently, it is trading at 67%.  Regardless of political affiliation, it is likely most Americans would like to see an expedited move to 100% on that contract.


Daryl G. Jones

Managing Director

R3: AMZN, WMT, OXM, SG Store Expansion




June 8, 2011






  • In a move counter to most its peers, OXM not only increased its full-year EPS outlook, but also expects gross margin expansion. It’s important to note several company specific drivers behind a decidedly more bullish outlook – namely lower interest expense due to the repurchase of senior notes and shift in product mix since the company sold its apparel group to Li & Fung and acquired Lilly Pulitzer all within the past six months. While the company continues to increase its direct-to-consumer business, wholesale accounts for less than half of total sales, but is where most of the cost pressure is realized with the company noting that passing price increases through has been more challenging.
  • Sport Chalet’s noted in its annual report that it doesn’t plan to open any stores during fiscal 2012 for the third consecutive year. With 55 stores located primarily located in California, the retailer is losing share as east-coast based SG retailers continue to expand into both CA and neighboring states. Meanwhile, DKS just announced that they’ve opened their second store in CA in the past month alone bringing their count to 18 in the state. With both TSA and now Academy backed by private equity and DKS clearly focused on geographic expansion, demand for limited retail space is increasing on the margin suggesting that favorable rent rates may be nearing an end in this sub-segment of the market for boxes of this size (~50k sq. ft.).



Lucky Brand Looks to Get Back on Track - Steering away from a lifestyle-centric image, Lucky Brand is moving toward a more real and relevant look with the introduction of new denim fits and an advertising campaign shot by Carter Smith. Seventeen months after chief executive officer David DeMattei joined the Liz Claiborne Inc.-owned unit, Lucky is tweaking what it realizes works best for the brand — and for sales. “It’s about returning us to a best-in-denim company,” DeMattei said. “We focused [in the past] on the lifestyle aspects of the brand, starting with the bottom. Now we’re really focusing on denim.” In other words, Michael Griffin, executive vice president and product director at Lucky, said, “We’re a denim brand that sells amazing fashion, not a fashion brand that sells amazing denim. The denim sells the fashion.” <WWD>

Hedgeye Retail’s Take: Commonsensical, but valid in every way. We’re not sold on Lucky’s plan yet, but Demattei definitely gets it.


Amazon adds to its List of Specialty E-retail Sites - Quidsi Inc., the operator of, and, will add, an e-retail site for pet products, to its portfolio of e-commerce sites that focus on packaged goods. Quidsi co-founder Marc Lore sent an e-mail to customers Monday announcing the venture, noting that will debut in a few weeks., the No. 1 e-retailer according to the Internet Retailer Top 500 Guide, completed its acquisition of Quidsi in a deal valued at $500 million April 1. is No. 72 in latest edition of the Top 500 Guide. According to Lore’s message, the site will carry thousands of products for dogs, cats, birds, fish, reptiles and small animals, including food and toys. The site will share Quidsi’s universal shopping cart, which allows consumers to shop across, and properties, and check out once. will offer free two-day shipping on orders of $49 or more. <InternetRetailer>

Hedgeye Retail’s Take: With the exception of,, and, there’s virtually no limit to the categories this applies to. AMZN can literally grow into a blue sky opportunity.


Walmart Expanding Test Of In-Store Wireless Shops - Walmart is planning to expand its test of in-store mobile specialty shops to a total of 350 supercenters this year.  The in-house pilot was launched in 200 stores last fall and will be extended to an additional 150 locations this year.  Located at the front of the discounter’s big-box flagships, the Walmart Wireless stores are about 2,000 square feet in size and offer a select assortment of smartphones, cellphones and pre-, post-paid and hybrid service plans, including Walmart’s exclusive Common Cents and Family Mobile pay-as-you-go products. Tablet computers are not yet part of the mix. Gary Severson, home entertainment senior VP for Walmart U.S., said the specialty stores provide customers with greater plan and product assistance, more privacy, and a better overall shopping experience. He said initial results have been “very positive.”  Severson noted that unlike other freestanding mobile spin-offs in the marketplace, the Walmart Wireless shops are located within the parent chain, alongside eyeglass, banking and other front-of-the-store services, due to the high volume of traffic that its supercenters draw, Severson said. “The reason that some companies have created standalone stores is a lack of traffic,” he noted. “We have a lot of good traffic. So this is our version of a standalone store – within our own stores.” <Twice>

Hedgeye Retail’s Take: WMT is doing this because it has to. Not necessarily because it wants to. Wireless in not a high margin business – especially as it increasingly becomes a commodity. 


Wool Price Surge to Hit Suit Buyers - Suits, jumpers and socks are set to become more expensive after a surge in the price of wool driven by Australian floods and demand from emerging markets. The cost of fine wool on the Sydney Futures Exchange has risen 74% to 15,500 US dollars (£9,400) a tonne in the past year, according to commodity analysts at Mintec. This could cause the price of a suit to rise by as much as 10% as tailors and retailers pass on the hikes to customers, reports said. A wide variety of other clothing, such as cardigans and coats made from wool, may also be affected. The price of wool has been driven higher after global output hit an 85 year low, exacerbated by flooding and drought which disrupted farming in Australia, the world's biggest wool producer. Many farmers have moved away from rearing sheep for wool because low prices have made it hard to make a profit in recent years, said Stephen Oldfield, a partner specialising in agribusiness at accountancy firm PricewaterhouseCoopers. <TheIndependent>

Hedgeye Retail’s Take:  “…rise 10% as tailors and retailers pass on the hikes to consumers.” Isnt it funny how the common theory is that the consumer will pay more?


Chinese Apparel Brands Target Fashion Conscious Consumers - Amid the blond wood, the softly draped fabrics and the dramatic display racks, not even the name of the JNBY clothing store – aimed at China’s upwardly mobile middle class – gives away its homegrown origins. The retailer says the initials stand for Just Naturally Be Yourself, though more likely they’re drawn from the parent company’s original name, Jiangnan Buyi Garment Co.  The women’s fashion chain is one of a small but growing number of brands that are not only made in China but designed here as well, in an attempt to take on the Western labels that are popular with China’s up-and-coming teens and twentysomethings. “There’s certainly some [Chinese fashion retailers] having a go at it. That sector of the market is among the fastest growing,” noted Paul French, chief China analyst at retail consultancy Access Asia. “We’re just waiting to see who emerges as China’s Zara,” he added, referring to the Spanish-based global fashion giant. Last month alone, China’s retail sales grew 17.1 per cent from the previous year, to 1.36 trillion yuan ($209-billion). <TheGlobeAndMail>

Hedgeye Retail’s Take:  We still think that China exporting its content to the US is one of the bigger risk for US retailers – though moreso on the footwear side. European apparel brands – who have structurally higher turn times – are a perennial threat to US fashion as well.


Organized Retail Crime on the Rise - The number of retailers victimized by organized retail crime rose 6 percent in the past year, as merchants cut back on staffing levels and online avenues trafficking the stolen merchandise continued to expand, a National Retail Federation survey said. The top five cities targeted by criminal gangs were Los Angeles, Miami, New York, Chicago and Houston, according to Joe LaRocca, senior asset protection adviser at the NRF. The survey also noted that the current economic environment, which is “ripe with consumers looking for low prices,” contributed to the increase.  “Highly targeted items” included denim jeans, notably Levi’s brand products; North Face jackets; Victoria’s Secret “Pink” lingerie; Oil of Olay and Cover Girl cosmetics, and a broad range of pharmaceuticals and electronics. <WWD>

Hedgeye Retail’s Take:  Stealing product ahead of price increases? Perhaps organized crime is smarter than some management teams in forecasting supply/demand on this business.


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