Employment data a mixed bag for restaurants.

The overall jobs picture this morning was unambiguously awful and the unemployment rate has ticked up to 9.2%.  The level of growth in employment among the 20-24 years of age cohort accelerated in June, which is a positive data point for QSR.  May employment growth among this age cohort came in at a meager +1.1%.  June’s employment level for 20-24 year olds grew 1.5%.

Overall, the jobs report was clearly worse-than-expected.  The other four age cohorts we show in our chart, below, all show sequential deterioration in employment growth. As a reminder, much of the positive sentiment from management teams over the past number of quarters as been based upon an improving employment landscape.  Equally, much of the improvement in consumer confidence surveys that has occurred has been driven by improving expectations, rather than current situation perceptions, and the slide in employment levels will likely weigh on expectations.


As the second chart, below shows, employment growth in the food service industry continues to be robust but there was an interesting slowdown in Full Service employment growth in May.  This data lags the employment by age data by one month.  The May Full Service slowdown may prove to be immaterial but, since late 2010, Full Service employment growth has lagged Limited Service employment growth.  If this divergence were to become more pronounced, we would take it as being suggestive of slowing trends in casual dining versus quick service.  The employment by age data for June, additionally, would corroborate this idea.  The space has been on fire and we would need further confirmation from this and other factors to become more bearish, but these two data points are noteworthy this morning.



Howard Penney

Managing Director


Rory Green





Probably won’t be a surprise that we think that it will be MPEL.


Now that we have the property detail for June, our models have been updated.  The table below shows our EBITDA estimates versus the Street.  The largest divergence is, of course, MPEL.  Our new EBITDA estimate is $180 million, up from $172 million, 18% above the Street.  We wouldn’t be shocked if they managed to beat even our number. 


JPM just raised their MPEL estimate $49 million to $168 million.  That’s a whopping 41% increase and he’s still too low!  Such a monstrous revision must’ve been accompanied by a rating upgrade right?  Wrong.  JPM is a dollar short and a day late on this one.  Or should I say 10 months late on an upgrade (but not too late) and at least $12 million short on the quarter. 


Wynn Macau also had a strong quarter.  We are projecting EBITDA at the property of $317 million, 10% above consensus.  MGM and LVS may only come in-line with consensus.  We don’t have estimates for Galaxy but we are not optimistic about Galaxy Macau to post EBITDA anywhere close to what the Street is expecting.





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


Corn prices have been on a downward trend of late but Morgan Stanley is still advising clients to be long December 2011 corn.  The argument, per Bloomberg, is that inventories are tight and the government’s acreage number will ultimately be revised downward by the USDA.




  • SONC is rated Buy at Lazard Capital, with a PT of $13.
  • PNRA was reiterated overweight at Piper Jaffray, with an upwardly revised price target of $148.
  • SBUX has appointed Greater China Chairman Wang Jinlong as head of its Asia Pacific operations excluding China.
  • SBUX is testing “refreshers” in a can, according to



  • CAKE rated New Neutral at Lazard Capital.
  • BJRI rated New Neutral at Lazard Capital.
  • DRI rated New Buy at Lazard Capital.
  • DRI’s Olive Garden has rolled out a more healthful kid’s menu, dropping milkshakes and fries in favor of fruit smoothies and grapes.
  • PFCB rated New Buy at Capstone.
  • RT rated New Hold at Capstone.
  • EAT’s Chili’s is in hot water again having serves three fruit smoothies with tequila to a trio of young children (as young as 8 years old).



Howard Penney

Managing Director


Rory Green


Early Look

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Being Able To Change

This note was originally published at 8am on July 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“He is able who thinks he is able.”



After taking a much needed week off, I’m back in the saddle this morning and ready to manage some risk. So let’s get at it - here’s where the Hedgeye Asset Allocation Model stands:

  1. Cash = 52% (down 6% week-over-week from 58%)
  2. Fixed Income = 33% (Long-term Treasuries and US Treasury Flattener – TLT and FLAT)
  3. International Equities = 9% (China and Germany – CAF and EWG)
  4. US Equities = 6% (Healthcare – XLV)
  5. International Currencies = 0%
  6. Commodities = 0%

Have we been able to change our exposures in order to reflect our Macro Themes? In some cases, yes. In others, not yet. There is a big difference between Risk Management and Research – it’s called timing.


A lot of people say you can’t time markets. We agree – by the looks of Q2 performance numbers out there, a lot of people can’t. But what if you could? Would you change?


In June we went 21 for 22 on closed positions in the Hedgeye Portfolio. That’s better than a swift kick in the Canadian bacon. That also lends credibility to the concept that timing markets within a band of probabilities is possible.


Did I get crushed on the first day of July? Big time. Do I plan on getting crushed every day this month? You tell me. Being Able To Change is critical to the Risk Management Process. Crush or be crushed.


So let’s get back to positioning…


Growth Slowing and Deflating The Inflation have been 2 big Research calls we’ve made in the last 6 months. In the Hedgeye Asset Allocation Model, that’s why I have such a large allocation to Fixed Income. Slowing growth and slowing inflation is good for bonds – and from some prices… in some countries… bad for stocks.


I’ll get back to stocks in a minute…


Fixed Income

  1. Fixed Income Exposure – on last week’s bond bombings, I took our allocation to its highest for 2011 YTD.
  2. Long-term Treasuries (TLT) – was a really good position to hold on the long side in Q2 2011. It was contrarian and it was right. To a degree, when 2-year US Treasury yields hit 0.34% during the thralls of June (and 10-year yields were trading consistently below 3%), being bullish on bonds because growth was slowing as inflation deflated was being priced in. For now, we’ll stay long TLT provided that our intermediate-term TREND line of support for 10 and 30 year yields don’t breakout above 3.24% and 4.38%, sustainably.
  3. US Treasury Flattener (FLAT) – another rock solid position for us in Q2 and we expect it to continue to be, provided that La Bernank cannot find a way to suspend gravity with another Fiat Fool Experiment to take the short end of the curve beyond the zero-bound. The all-time wide in 10s minus 2s = +293 basis points wide. The Q1 2011 average was +276 basis points wide. And this morning 10-year minus 2-year yields = +270 basis points wide. We’re looking for further compression in the 10s/2s spread over the intermediate-term TREND.

Now back to everyone’s favorite storytelling vehicle – stocks.

  1. Equities Exposure – for Hedgeye, a 15% asset allocation to Global Equities is actually relatively high for 2011! We’ve cut this exposure to a Japanese style ZERO percent more than a few times in 2011, but I doubt we’ll do it again. Why? China.
  2. China (CAF) – in the face of some borderline heated debates with the buy-side on the road for the last 6 weeks of Q2, we bought Chinese Equities on June 16th, 2011. We’re already up +9.86% on that position and while we fundamentally respect that bottoms are processes and not points, we think we may have bottom-ticked this major country market for the intermediate-term. We think Chinese Growth Fears are beyond exaggerated and that Chinese Inflation Slows in Q3/Q4 of 2011.
  3. Germany (EWG) – since the beginning of 2010, we have preferred long DAX versus long the SP500 and that’s been as right as the sun rising in the East. Like it did in 2010, the DAX continues to outperform the money honey loved SP500 (up +7.8% YTD in 2011). As it should - Germany, like most countries, has plenty of political baggage – but it isn’t long US Congress.

In terms of US Equities, people who think in boxes like to try to put Hedgeye in one. But guess what – we’re going to pop out of that box early every morning and annoy those people.

  1. Equities Exposure – having a ZERO percent asset allocation for parts of May and June was good. Why change the process if you don’t have to own something when it goes down for 7 of 8 weeks? Today, we’re at 6% and we can buy more. Yes We Can.
  2. Healthcare (XLV) – on January 3rd, 2011 when we introduced our “call” for the start of the year, we called out Healthcare and Energy as our 2 favorite S&P 500 Sectors. Those sectors are #1 and #2 for the YTD at +14.2% and +11.4%, respectively. So we do have it in us to pick the right ponies every once in a while on the long side – again, no boxes for Big Alberta please. He wears Lulu Lemon.
  3. SP500 (SPY) – obviously being short SPY isn’t an asset allocation call in our model, but people are going to hold me accountable to being short it right here and now – and they should. I was dead wrong with this position last week, and I’ll just thank my lucky Northern Lights that I covered all of our S&P Sector ETF shorts (Basic Materials, Energy, etc) a lot lower. What was intermediate-term TREND resistance in the SP500 (1314) is now support, and I have this short position on a very short leash.

From a Commodities and International Currency exposure perspective, we’ve sold everything (including Gold), so there’s nothing incremental to say about that other than to re-state the why. Our Global Macro Theme of Deflating The Inflation means there is no reason to be long The Commodity Inflation (or the currencies that back Commodity heavy countries) until we see our theme fully priced in.


Being Able To Change isn’t easy. Every day I challenge myself to consider being the change we all want to see in this profession. My immediate-term support and resistance ranges for Oil, the Shanghai Composite Index, and the SP500 are now $90.56-97.05, 2714-2861, and 1314-1341, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Being Able To Change - Chart of the Day


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Home Tweets

"Every strike brings me closer to the next home run."

-Babe Ruth


Someone tweeted that winner’s one-liner from Babe Ruth yesterday while I was scanning my iPad in between meetings in New Jersey and New York. It fired me up. I love a great quote. And I love a great Tweet.


Hitting a Home Tweet out of the park on Twitter is a thing of beauty. Sometimes it’s a tweet that makes you laugh. Sometimes it’s a tweet that makes you cringe. All of the time, tweets are real-time. And that’s where I think Wall Street is going. Real-time, transparency, and accountability. Opacity is dead.


Plenty of people whine about how dysfunctional Wall Street can be. Agreed on the dysfunctional part, but what’s up with the whining? We need to get back to winning in this business. We should embrace the inability of an industry to evolve as a tremendous opportunity for change. And that’s all I have to say about that.


Back to the Global Macro Grind


My notebook is jam packed with data this morning. From China and Copper breaking out on our intermediate-term TREND duration to US Treasury yields sniffing out an immediate-term TRADE breakout of their own, there’s a lot of interconnectedness to consider.

1.   CHINA: Chinese stocks don’t want to go down anymore (they’ve been down for 15 months) and China is going to preemptively print the top-tick in their 2011 inflation (CPI) this weekend. As Johnny-come-latelys on inflation-fear clamor around this, I wanted to be crystal clear that we think Chinese CPI will fall back to 4.5-5% by year-end. Government reported inflation is a lagging indicator.

2.   COPPER: Dr. Copper continues to have my back on the long China position (CAF). If Chinese demand was going to go by the way of Sino Forest’s trees, Copper wouldn’t be breaking out above our intermediate-term TREND line ($4.20/lb) like this. Copper prices are ripping again this morn – up to $4.44/lb and +13% since mid-May. China’s share of the world’s copper consumption = 39%.

3.   BONDS: Finally, the short-end of the bond market (yields) has finally broken out above my immediate-term TRADE line of 0.42% on the 2-year. Can this hold? If the unemployment print is what the market thinks it’s going to be (better), it will. We’ve sold our long-term bond position (TLT) this week and prefer A) being short short-term bonds (SHY) and B) long a US Treasury Flattener (FLAT) provided that the unemployment # is better.


Got real-time synthesis of Global Macro data?

  1. SOUTH KOREA: finally showed a slowdown in the rate of inflation of its PPI (Producer Price Index) at +6.2% year-over-year in June. That inflation growth rate was in-line with May’s report and this is bullish, on the margin, for South Korea’s stock market (EWY).
  2. AUSTRALIA: unemployment remained unchanged month-over-month in June at 4.9% and the Reserve Bank of Australia’s Chief, Glenn Stevens, should be commended for having the spine to raise interest rates for the legions of Australian savers who enjoy a rate-of-return on their fixed income savings accounts and, at the same time, have jobs (La Bernank, take notes).
  3. BRAZIL: Consumer Price Inflation (CPI) for the month of June was up sequentially to +6.71% versus +6.55% in May and this should serve as a stiff reminder that inflation can still slow growth. The Brazilian stock market has been one of the world’s dogs this week and the Bovespa remains at the bottom of the world’s stock market league tables at down -10.2% YTD.

All the while the more newsy headlines about Pig Paper in Europe and the Audacity of Hope (Obama) on the US Employment front remain center stage. This shouldn’t be a conceptual surprise to anyone. Both American and Western European stock markets are effectively whipping people around like any Fiat Fool Bingo machine should. You can either manage risk around these trading ranges, or you can’t.


On the aroma of Le Papier de Pepe La Pew in Europe:

  1. SPAIN: issued another 1.5B Euros in 2016 vintage Eurocrat Bonds this morning at a yield of 4.87% versus 4.54% at the last auction. Higher-bond yields are not a surprise, but that doesn’t mean they aren’t bad.
  2. ITALY: bond yields on Italian 10-year paper are shooting up to 9-year highs this morning (up +10 basis points day-over-day at 5.27%) and one might argue that old Silvio and the boys have a bigger pending problem than hot-tub extra-curriculars revealed. Stay tuned.
  3. GREECE: oh, yes. They still have people there and they are quite bitter about the formation of their sovereign bond market’s chart resembling the back side of a giraffe’s behind – high and stinky.

Stinky paper is as stinky does, and I guess Einstein would agree that being long the stuff with less stench this morning is simply a matter of relativity. Earlier in the week (when stocks were for sale) I moved my asset allocation to Global Equities to a YTD high (27%) and cut my allocation to Fixed Income from 33% to 18%. I’m not sure if I hit any Home Tweets this week; but I didn’t strike out either.


My immediate-term support and resistance ranges for Oil, China’s Shanghai Composite, and the SP500 are now $95.21-100.07, 2, and 1, respectively.


Have a great weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer

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