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





For the first time in six months, the National Restaurant Association’s restaurant performance index sunk last month to a level deemed unhealthy. The National Restaurant Association spent $613,000 (up 24%) in 1Q11, lobbying the federal government on issues including food safety and granting temporary visas to hire workers from outside of the U.S. The size of this year's corn crop will be 92.3 million acres (the U.S. Agriculture Department) 9% larger than the average annual corn crop over the past decade. The only crop bigger in the past 67 years was planted in 2007.





On Friday, July 8, Chick-fil-A restaurants nationwide will celebrate the annual Cow Appreciation Day event by offering a free meal to any customer who visits one of the chain’s mall or stand-alone restaurants fully dressed as a cow. TAST, CBOU and THI were all up on accelerating volume AFCE - By July 1, Popeye’s Lousiana Kitchen, known for its fried chicken and Southern fare, will complete the rollout of Coke and Dr Pepper products to all its roughly 1,500 restaurants, as part of a five-year deal for Coke and Dr Pepper products, signed in December.





DRI up on accelerating volume ahead of earnings


DRI Top 10 4Q11 EPS Takeaway:

  1. It’s nearly impossible to get all cylinders firing at the same time (just ask YUM)
  2. The after hours stock performance confirms our thesis that “top line” will be the key driver to the upcoming earnings season.
  3. The Olive Garden SSS disappoint, with the balance of the concepts outperforming consensus.
  4. 2-year trends slowed for all three concepts, with Red Lobster and Olive Garden down on a 2-year basis. (Red Lobster 2-year -0.4%; Olive Garden 2-year -0.8%). Long Horn’s 2-year number is +3.9%
  5. The Olive Garden is the biggest, most profitable concept the company operates. Part of the top line issues are structural, with the remedy (remodels) coming in late FY12.
  6. Red Lobster top line is strong, but the current trends in 1Q12 are being driven by a significant value promotion.
  7. FY4Q EPS met consensus, with FY12 guidance slightly ahead of consensus on sales and earnings.
  8. The cynic in me says the out-sized boost in the dividend is compensation (sending a positive financial message) for a slightly disappointing Olive Garden performance.
  9. Management did not take the annual 4Q price increase at the Olive Garden.
  10. The Specialty restaurant group is a drag on consolidated margins


CBRL - A woman got her order of fries with a side of human blood at a Cracker Barrel in Texas this week, prompting the restaurant to apologize and send the woman a $100 gift car.












Howard Penney

Managing Director



Rory Green


Pax Canadiana

Me debunk

An American myth?
And take my life
In my hands?
Where the great plains begin
At the hundredth meridian.”

- The Tragically Hip


There is no doubting American global dominance in both military and economic affairs. The United States is the world’s reigning superpower and has been really since before the end of the Cold War. While the Soviet Union was considered a rival to the United States for many years, this was primarily due to the nuclear arms race and MAD, or mutually assured destruction. In reality, the Soviet Union was never really on par with the United States from an economic perspective.


The term Pax Americana is used to describe the relative peace enjoyed by the Western World due to the preponderance of power held by the United States over the last century. Since World War II, the idea of Pax Americana has manifested itself in the many international institutions backed by American influence and finance. Initially, this began with the Marshall Plan and the rebuilding of Japan, and eventually transitioned to the UN, NATO, the IMF, and the World Bank.


Immediately following World War II, the United States was responsible for roughly half of the world’s industrial output, held 80% of the globe’s gold reserves, and was the sole nuclear power. Even if America has lost share over time, she remains the world’s dominant economic power at 25% of the world’s output, so it is with some jest that I use the term Pax Canadiana to characterize the growing role of Canada in the global economy. But today is July 1st, or Canada Day.


In his book, "The World in 2050: Four Forces Shaping Civilization's Northern Future", the UCLA Geographer Laurence C. Smith highlights some of the key forces driving economic share gains of the Northern Rim Countries, or as he calls them NORCs. Ironically, global warming will potentially be a major positive for the NORCs. Some of the key points that Smith highlights, which I’ve excerpted from the Globe and Mail, include:

  • New shipping lanes will open during the summer in the Arctic, allowing Europe to realize its 500-year-old dream of direct trade between the Atlantic and the Far East, and resulting in new access to and economic development in the north;
  • Oil resources in Canada will be second only to those in Saudi Arabia, and the country's population will swell by more than 30 percent, a growth rate rivalling India's and six times faster than China's;
  • NORCs will be among the few place on Earth where crop production will likely increase due to climate change; NORCs collectively will constitute the fourth largest economy in the world, behind the BRIC countries (Brazil, Russia, India and China), the European Union and the United States; and
  • NORCs will become the envy of the world for their reserves of fresh water, which may be sold and transported to other regions.

Keith has previously mentioned Smith’s work and the NORC theme is one you will likely see us revisiting in the coming years.


Interestingly, Canada is actually starting to show some subtle shifts in its economy versus the United States. Coming out of the depression of 2008 / 2009, Canada has had much more stable and even economic growth. A primary driver of this is the relative health of Canadian banks, which didn’t underwrite as many bad loans during the housing boom of the late 2000s and therefore still have the ability to broadly extend credit to consumers.


From a fiscal health perspective, Canada is in very strong shape versus its southern neighbor, and really much of the Western World. Canadian debt-to-GDP is estimated at 42%, which is roughly half of that of the United States. Further, Canada’s current budget, which was passed by the Conservatives in the fall of 2010, projects a balanced budget by 2015. Currently, not even in its long term projections, through 2035, does the Congressional Budget Office anticipate a balanced budget in the United States.


Finally, from a longer term perspective, the United States has literally always had a lower unemployment rate than Canada, or at least going back as far as World War II. In the chart of the day, attached below, we’ve charted relative unemployment rates comparing the United States and Canada. Currently, Canada’s unemployment rate is 7.4%, while the United States’ is 9.1%.


Much like the excerpt from the iconic Canadian band, The Tragically Hip, I’m not going to take “my life in my hands” and “debunk an American myth”, but I would advise keeping Canada and the rest of the NORCs front and center in the coming years as you and your colleagues scour the globe for investment ideas.


While Canadians are certainly excited about the economic prospects of their nation, all Canadians respect the long standing special relationship shared with the United States. President John F. Kennedy perhaps summarized this relationship up best when he said in an address to Canadian parliament in 1961:


“Geography has made us neighbors. History has made us friends. Economics has made us partners. And necessity has made us allies. Those whom nature hath so joined together, let no man put asunder. What unites us is far greater than what divides us.”


Both Canadian and Americans should be proud of this special relationship and the good it does in the world.

Happy Canada Day! Happy July 4th! And happy 100th birthday Bassano, Alberta!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Pax Canadiana - Chart of the Day


Pax Canadiana - Virtual Portfolio

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Long Run

This note was originally published at 8am on June 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Avoiding danger is no safer in the long run than outright exposure.  The fearful are caught as often as the bold.”

Helen Keller


It is difficult to invest for the long term.  In order to do so, the key characteristic an investor must have is permanent capital.  The best example of permanent capital is Berkshire Hathaway, Warren Buffett’s investment vehicle.  Since Berkshire recently hit a 52-week low, in the short run, it has been a bad investment.  In the long run, of course, Berkshire has been a fabulous investment.


From December 31st, 1987 to the close yesterday, Berkshire “A” shares have returned ~3,770%+.   Over the same period, the SP500 has returned ~415%+.  In the long run, it is obviously difficult to debate Buffett’s success as an investor.  Unfortunately, very few investors can operate for the long run because of a lack of permanent capital and an unwillingness of those that provide the capital (limited partners) to suffer volatility. 


Naively many investors attempt to emulate Buffett’s performance by purchasing stocks that emulate his criteria.  In aggregate, studies show that cheap stocks with clean balance sheets will outperform over time if bought well.  Obviously, the challenge when emulating Buffett, though, is to assess the moats of a company and barriers to entry of an industry.


As Buffett wrote in his 1992 letter to Berkshire Shareholders:


“An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis-management.  Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage.”


The challenge of finding a long term economic franchise is that very few exist, or are sustainable.  At one point, the newspaper industry was a prime example of an economic franchise.  The newspaper was needed, in many markets had limited competition (think the Buffalo News), and pricing of newspapers was not regulated by the government.  While arguably the newspaper industry did represent franchise-like investments during periods, those investors that held these franchises in perpetuity are likely not happy today. 


The key way to “avoid danger in the long run” is to remain flexible, not duration specific.  I appeared on the Kudlow Report a few months back and one of the other guests was extolling on the virtues of being a long term investor and indicated that his firm has an average holding period of four years.  In theory, that’s fine if you have the process and team to execute on a long term holding period.  If you are investing for the long term, which for this discussion we’ll just consider beyond three years, it requires just as much work, if not more, than if you are an intraday trader.


The primary reason investing for the long term requires more work is because in the short term, assets will get mispriced.  Much of this can be attributed to behavioral finance and fear.  When assets get mispriced, such as in the market dislocation during the subprime debacle, it requires strong conviction in the research process to believe the fundamental story and to continue to buy, or even hold, as an investment is dramatically underwater.  While many fund managers claims to be adept at buying while there is “blood in the streets”, very few actually can effectively time purchases.  The world is replete with studies that show both professional and individual investors classically sell at the bottom and buy at the top.


Given the challenges with true long term investing and the reality that most cannot do it, we emphasize three investment durations in our research: TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less).  In theory, at least based on how we analyze timing and risk, they are all related, so a TRADE idea can become a TREND idea and so on. Thus, a rigorous daily research process is critical to our success (hence the early mornings).


Shifting to the short term, there are a number of data points from the last 24 hours that I wanted to flag as fundamental to some of Hedgeye’s key investment views:


First, the European sovereign bond markets continue to signal that the worst is yet to come for sovereign debt on the continent.  Even as equity markets seem to be lightly cheering positive developments yesterday, bond yields have barely budged.  In fact, Greek 10-year yields are at 16.5%, Irish are at 12.1%, Portugese are at 12.1%, Spanish are at 5.7%, and finally Italian 10-year yields are at 5.0%.  Specific to Greece, civil unrest continues to accelerate as Greek trade unions are planning a 48-hour strike to protest austerity measures that will be voted on Thursday.  We remain long German equities via the etf EWG and short Spanish equities via the etf EWP.


Second, Premier Wen Jiabao provided us an early view on Chinese inflation for the full year yesterday.  He indicated on Hong Kong-based Cable TV that while he sees difficulties in reaching a full year inflation target of 4 percent, inflation “can still be kept below 5 percent”. This supports our view that the proactive monetary tightening that China has implemented will lead to steadily decelerating inflation in the back half of 2011 and marginal dovishness out of the People’s Bank of China.  We are long Chinese equities via CAF.


Finally, New Jersey officials are purportedly in negotiations to secure a temporary $2.3BN bank loan to cover a state cash shortfall.  New Jersey needs the cash to pay various bills between the start of its fiscal year on July 1st and the mid-summer bond offering.  We’ve been consistently negative on State and Local level finances and this provides incremental support to the view.  While many States are constitutionally obligated to balance budgets, it will be challenging and will likely require additional municipal bond issues as federal government support will be largely non-existent in fiscal 2012.  Further, State and Local level austerity will be a drag on economic growth more broadly.  We currently have no position in the municipal bond market.


Good luck “avoiding danger” out there today,


Daryl G. Jones

Director of Research


The Long Run - Chart of the Day


The Long Run - Virtual Portfolio



The Macau Metro Monitor, July 1, 2011



June GGR came in at MOP 20.792BN (HK$ 20.186BN, US$ 2.593 BN), up 52% YoY.



Insiders claim Caesars Entertainment is hot for Kinmen and reportedly interested in building a comprehensive recreation and entertainment facility on one of the county’s islands.  MPEL CEO Lawrence Ho also made a recent trip to Kinmen.  Casino rules may be finalized by the MOTC (Ministry of Transportation and Communications) in late 2011.  A local referendum will follow.


According to Soufun Holdings, China home prices growth in June slowed to +0.4%, from +0.5% growth in May.  This is the 10th straight month of gains. Shanghai home prices rose 0.1% MoM (+0.3% MoM in May), while those in Beijing dropped 0.1% MoM (+0.2% MoM in May).

Chicago PMI? A Golf Clap at Best

Conclusion:  Our interpretation of the Chicago PMI is that it is a golf clap at best.  We are adding to our short position in U.S. equities (via SPY) and long position in U.S. Treasuries based on better prices created by today’s PMI story telling.


There is no disputing that the headline Chicago PMI number reported today was better than expectations.    The median forecast of analysts was for 54.0, and the number came in at 61.1.  This was also a sequential improvement from May, which was a 56.6 reading.  So, is this positive on the margin? Sure, but if we look at the longer term, even a 61.1 PMI isn’t overly exciting.


While not exactly the long term, we have attached below a chart of PMI going back twelve months.  The key take away from this chart should be the dramatic decline of both May and June from the first four months of 2011.  The PMI reading for January to April of 2011 ranged between 66.8 and 71.2.  So, the Chicago area economy continues to trend well below economic levels from earlier in the year.


There are a number of details within the report that are worth flagging:

  • Order backlog in June dropped to 49.1, which was a sequential decline from May’s reading of 51.7 and the first drop below neutral since September 2010;
  • Inventories saw a “precipitous decline” from May and came in at a reading of 46.9 in June versus 61.6 in May;
  • Prices paid are still expanding, albeit at a slower rate and declined to 70.5 in June from 78.6 in May (Deflation of the Inflation). 

A number of comments from the survey are also worth highlighting:

  • “Incoming orders have definitely slowed down. Several orders we expected to see are currently on hold. Hopefully something will break or the 4th quarter is going to look sad”;
  • “It looks as if manufacturing is showing signs of slowing down”; and
  • “There may be a little softening coming but it’s too early to tell.” 

While the headline number is better than expected, which is getting equities going today along with quarter end window dressing, the key perceived positive is a drawdown in inventories.  This suggests that there could be some inventory building in the coming months, which would drive overall economic activity.  That said, the last time we saw the inventory reading drop precipitously was June 2010 when the reading dropped from 54.2 in May 2010 to 47.2 in June 2010.  In the ensuing months, not only did we not see economic activity pick up, more broadly Chicago PMI actually began to decline into August 2010.


Suffice it to say, we don’t find today’s Chicago PMI all that exciting.  In fact, we actually find the drop in orders to below 50 outright concerning, along with the selected commentary.  As a result, we are using the over reaction of both the equity and bond markets today to add to our short positions in the SP500 and long position in U.S. Treasuries.  Short high, buy low.


Daryl G. Jones

Managing Director 


Chicago PMI? A Golf Clap at Best - 1

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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%