Notable news items and price action from the restaurant space as well as our fundamental view on select names.

  • MCD traded flat yesterday despite weaker than expected May sales results being released yesterday before market open.  Our view is that May’s results offer further evidence that the core business is waning and comps are being driven by beverages.  Europe’s soft performance is a focus for many as the E Coli situation continues on the continent with a potential negative impact for MCD’s June sales causing concern.
  • CPKI and Golden Gate Capital today announced that CPK Merger Sub Inc. has commenced the previously-announced tender offer for all of the outstanding shares of common stock of the Company at a price of $18.50 per share, according to a press release published by the company yesterday.
  • BOBE was raised to Buy from Hold at Miller Tabak.  Bob Evans gained 11.5% on accelerating volume yesterday. 
  • Casual dining traded poorly yesterday.  DRI, BWLD, DIN, TXRH and KONA all traded lower on accelerating volume.



Howard Penney

Managing Director


The Macau Metro Monitor, June 9, 2011




Sunny Yu, MPEL's VP for entertainment and projects, said The House of Dancing Water (HODW) so far has received over 500,000 spectators and that the attendance rate is still above 90%.  Yu confimed HODW's revenue is covering all operating expenses.  "If it continues doing great, within 10 years we will get our investment back," said Yu.


LVS COO Michael Leven said, "We did over a billion dollars in our first year in EBITDA (for MBS). We expect that to grow. I think a four-to-five year payback in that situation, anybody would be happy with that return on investment. We should do that very easily without even selling an asset like our mall (The Shoppes at MBS), which we expect to sell maybe in 2013 or 2014, which can provide as much as US$4 billion back for our $6 billion investment just on the mall alone."


The Shoppes now has more than 250 stores and restaurants.  The Shoppes has been facing complaints of slow traffic from some retailers.


NO GOLDMINE Macau Daily Times

Samuel Tsang, the Century Legend Group chairman, said most investors don’t understand the risks of running a junket.  He stressed the percentage of the bets paid back to VIP gamblers is increasing to an average of 1%.  Meanwhile, the former executive vice president of Sands China, Luís Mesquita de Melo, wants more transparency and supervision of junkets. "The regulations somehow dilute the responsibility between junkets and operators, which allows for a lot of sub-junkets that don’t go through the licensing process...politicians need to discuss and decide if it makes sense to allow junkets to remain a subculture or if they should bring them into the gaming business," he remarked.

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Squirrel Hunting

“Hunting is not a sport.  In sport, both sides should know they’re in the game.”

-Paul Rodriguez


Keith and I played hockey in college with a French Canadian by the name of Yvan Eric Stephane Champagne.  Like most French Canadians, he has a great name, though we appropriately shortened it to Champy.  Our friend Champy has many great attributes, but he is most well known amongst our friends and former teammates for enabling us to create the term Squirrel Hunting.


My junior year I lived in a tired old fraternity house with Champy.  Like many college fraternity houses, this one had some issues related to cleanliness, or lack thereof.  The noteworthy affliction of this house was an infestation of squirrels.  While the squirrels certainly weren’t sanitary, living with squirrels did provide us some level of entertainment, particularly when Champy attempted to hunt them in the house with his hockey stick.


On one legendary Sunday morning, I laid in my bed for a good four hours listening to Champy chase the same squirrel up the front stairs of our three story fraternity house and then down the back stairs of the fraternity house.   For those that have attempted to hunt squirrels with hockey sticks in a massive fraternity house, you know the reality . . . it is a herculean task.  In fact, the little critters are incredibly hard to catch. 


After four hours of chasing the squirrel, while I laid in bed laughing at him, Champy finally succumbed to frustration and lost it on me for not helping him.  Needless to say, he also never caught the squirrel. From that day forward, whenever any of our friends engage in an activity that defied logic or rationality, we deemed it Squirrel Hunting.


On Tuesday, Chairman Bernanke was speaking at the International Monetary Conference in Atlanta and sounded like he just spent four hours in the Zeta Psi house at Yale chasing squirrels up and down the stairs.  To quote the venerable Fed Chairman:


“The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets.  In this context, monetary policy cannot be a panacea."


The irony of that statement, of course, is that Chairman Bernanke has overseen the most stimulative Federal Reserve in, well, the history of the Federal Reserve.  We have quantified this in the Chart of the Day below, which comes courtesy of Grant’s Interest Rate Observer.  In essence, the Federal Reserve has been more than five times more stimulative over the last four years than in any other period, including the Great Depression.  So, for Chairman Bernanke to now suggest that monetary policy cannot be a panacea after these actions, well that is somewhat akin to Champy telling me there were no squirrels after I listened to him chase one for four hours.


On the same day, Chairman Bernanke’s colleague, Atlanta Federal Reserve Bank President Dennis Lockhart, echoed the Chairman’s view when he stated:


“I have to express some frustration with the economy.”


No doubt.  After four years of hunting squirrels with a hockey stick, I’d be frustrated as well.


Later today, we will be doing some squirrel hunting of our own as we host a conference call for clients (email if you need the information for the call and/or want to trial our services) with the title, “What’s Next For The Fed?”  On the call, we will update our view of interest rates, which we have termed Indefinitely Dovish, discuss our thoughts on the possibility of another round of quantitative easing, and then hand it off to Josh Steiner to discuss the implications of our interest rate view on the financials sector.


In a nut shell, our view is simply that the Federal Reserve will remain dovish longer than the market and most participants currently realize, which from our perspective suggests well into 2012, if not beyond.  The key factors supporting this view, which we will get into greater detail today, are as follows:

  1. Housing – We are facing another leg down in housing prices in the U.S. and any increase in interest rates would accelerate this.
  2. Employment – The unemployment issue in the United States is structural in nature and is likely to get worse before it gets better.
  3. Growth – Economic growth in the United States has been illusory at best and set to decelerate well below the long run average.

Inflation, of course, could be the one measure which changes our view and forces the hand of the Fed.  Even though the Fed has been willfully blind to commodity inflation, Dallas Federal Reserve Bank President Richard Fisher alluded to the idea that that quantitative easing may actually be causing inflation.   If that idea becomes pervasive amongst the Squirrel Hunters at the Fed, then our view on interest rates could change dramatically.  As for now, we are sticking with Indefinitely Dovish


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Squirrel Hunting - Chart of the Day


Squirrel Hunting - Virtual Portfolio

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

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