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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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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.




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: http://fairmodel.econ.yale.edu/cgi/computv5.pl)


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