“I like them more than all of the top-notchers.”

-Harry Truman  


I smiled last night as I was reading that passage on page 808 of what my son calls the “heavy book” – David McCullough’s “Truman”:


“He liked the Secret Service agents who watched over him, most of whom came from small towns or backgrounds much like his own and none of whom ever asked anything of him. “I like them more than all of the top-notchers,” he once told Margaret.”


Harry Truman, like all of us, had his issues – but, ultimately, he was victorious in what most of us want to accomplish in life. He achieved above and beyond what anyone ever expected of him.


Markets, too, are like that. They are all about expectations. I think that’s why they resonate with so many of us. They can make you laugh. They can make you cry. And, every once in a while, they can put a sparkle in your eye.


Apple did that last night. The proverbial love-affair Americans have had with this stock extends itself from the product all the way back to the man who bet on himself to create it. Steve Jobs is another great American success story who has travelled the broken road of expectations to infinity and beyond.


With a Debt-Ceiling Compromise finally appearing in the rear-view mirror, Americans have a great opportunity to move forward today. No matter what you think about Steve Jobs or the Global Market – I can assure you of this on both - they are looking forward. And they will both leave those who are caught up in yesterday behind.


Back to the Global Macro Grind


1.   ASIA - surprisingly Asian stocks had a mixed reaction to Debt Ceiling Compromise and the Apple news. Both China and India closed down overnight (-0.1% and -0.8%, respectively), while Korea, Australia, and Japan all closed up over +1%. China and India in particular did not like the food and energy inflation that was marked-to-market yesterday. So keep your eye on that.


2.   EUROPE - wet Kleenex reaction to American earnings and Italian Equities in particular look very vulnerable if the MIB Index fails to overcome the 19,559 line in the very immediate-term. We don’t think that there is any irony in the timing of $12.4B in Italian CDS that traded last wk (2x that of the next country in terms of notional size - France). Sovereign Debt maturities for both Italy and Spain are going to be huge in August and September - and the EUR/USD remains bearish/broken below my $1.43 TREND line.


3.   USA – S&P futures look as good as they should look with Apple taking over from the Bankers of America and changing the tone of the earning season to something the winners in this world can believe in. The idea is to think, re-think, and evolve; not suck compensation from a Europig’s nipple of a socialized banking system. That’s all I have to say about that.


In terms of risk management levels in the US, as usual, I think you need to take the Apple out of your eye and focus on being multi-factor and multi-duration. That means Stock, Bond, and Currency market moves altogether:


1.   STOCKS – what was our intermediate-term TREND line resistance in the SP500 at 1319 is now support. For the immediate-term TRADE (different duration) that’s bullish and should support a new Risk Ranger range for the SP500 of 1. From a long-term TAIL perspective, my topside target for the SP500 in 2011 remains 1377.


2.   BONDS – on our Q3 Macro Themes conference call last week, and really since April, we’ve been saying that A) a Debt-Ceiling Compromise will get done and B) that’s very bullish for US Treasuries. Why? It takes out some of the shorts that are either trading on lagging indicators (Moodys and S&P ratings fears) or short UST bonds on US credit risk. We are long both long-term Treasuries (TLT) and a US Treasury Flattener (FLAT) as we think the long-end of the bond market will continue to see yields fall.


3.   CURRENCY – in a strong US Dollar can Americans trust? I guess that depends on which constituency of Americans you ask. I think well over 90% of us say yes (lower gas prices, Deflating The Inflation, and higher employment correlate with a strong US currency). The other 5-10% of you who want to Debauch The Dollar can’t possibly want that for your country in the long-run – you probably want it for yourself.


Whether it’s some Top-Notcher in Washington or a lobbyist trying to convince a professional politician of another policy to inflate, Americans have had enough. They get it. They are America’s “Secret Service.” From small towns to big ideas and sweat capital to big hiring, they are The People who make this country work.


My immediate-term support and resistance ranges for Gold (we’re long), Oil (we covered our short on Monday), and the SP500 are now $1, $95.51-99.20, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Top-Notchers - Chart of the Day


Top-Notchers - Virtual Portfolio


TODAY’S S&P 500 SET-UP - July 20, 2011


Yesterday, volume and Volatility (2 of our 3 core risk management factors) didn't confirm the PRICE move today, but 2 or 3 more days of follow through on this PRICE strength should do it and could easily carry this market towards 1352 SPX. If today's Tech move (+2.3% XLK) was a head-fake (doubtful given AAPL at the close), it would need to be confirmed by a TREND line breakdown of SPX 1319.


As we look at today’s set up for the S&P 500, the range is 33 points or -0.58% downside to 1319 and 1.90% upside to 1352.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: +1749 (+3888)  
  • VOLUME: NYSE 870.65 (-0.41%)
  • VIX:  19.21 -8.31% YTD PERFORMANCE: +11.5%
  • SPX PUT/CALL RATIO: 1.63 from 1.99 (-18.19%)



  • TED SPREAD: 23.68
  • 3-MONTH T-BILL YIELD: 0.03% +0.01%
  • 10-Year: 2.91 from 2.94
  • YIELD CURVE: 2.57 from 2.57



  • 7 a.m.: MBA Mortgage Applications, prior (-5.1%)
  • 9 a.m.: Moody’s U.S. commercial property prices
  • 10 a.m. Existing home sales, est. 1.9% to 4.9m, prior (- 3.8%)
  • 10:30 a.m.: DoE inventories
  • 6:15 p.m.: Fed’s Sack to speak to money marketers in NY


  • President Obama will renew talks at the White House this week, praised bipartisan Senate proposal for a $3.7t debt- cutting plan that emerged yesterday; House Republicans passed their own version yesterday
  • Greek Prime Minister George Papandreou to meet with EU leaders in Brussels tomorrow as officials struggle to agree on measures to restore confidence in region’s creditworthiness
  • WSJ is cautious on Cheerios (GIS), Frosted Flakes (K), Grape-Nuts (RAH)



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Oil Climbs for Second Day on Shrinking Crude Stockpiles, Stronger Economy
  • Copper Declines for First Day in Four as Three-Month High Spurs Selling
  • Corn Gains for a Second Day as Hot Weather in U.S. Midwest May Hurt Yields
  • Gold May Decline on Optimism Solution Is Nearer for Sovereign-Finance Woes
  • Coffee Falls as Supplies May Be Adequate to Meet Demand; Sugar Advances
  • Gold Price at Record Fails to Deter Purchasing in India as Demand Advances
  • Milk Powder Slumps to Eight-Month Low After Fonterra’s Call Proves Correct
  • Japan Won't Rule Out Possibility Radioactive Fukushima Beef Was Exported
  • Zinc Trades Near the Highest Price Since April as Supplies May Be Limited
  • Rice Exports From India at $400 a Ton May Lower Global Prices, Group Says
  • Rubber Supply Tightness Lasting Until 2018 May Raise Costs for Tiremakers
  • Ethanol Rebounds on Tax Credit, Price Discount to Gasoline: Energy Markets
  • Russia Arctic Route to Rival Suez May Aid Sovcomflot IPO: Freight Markets



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: ominous bounce to lower-highs; Italy fading here and Greece about to go negative on day; Sold my Germany yesterday; shorting Italy with impunity
  • Germany Jun PPI +5.6% vs consensus +5.5% and prior +6.1%
  • BOE MPC Committee minutes say recent developments had reduced the likelihood that a tightening in policy would be warranted in the near term

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: surprisingly mixed give the Apple of everyone's American eye - India down -0.8%; China down -0.1% w/ Korea/Japan/Aus all up over 1%

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

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Chipotle misses EPS expectations but with strong top line numbers it is not cut and dried.


The EPS miss definitely spooked the street with the stock trading down as low as $313 post-market from the $333 close.  Looking at the overall picture, Chipotle’s top line metrics are very healthy but the margin side of the story is less stellar with restaurant-level margins now declining for the second consecutive quarter.  This is primarily as a result of high levels of food cost inflation.  The reaction of the Chipotle customer to the price increase being taken by the company to protect margins in the face of these costs is going to dictate the overall direction of the stock. 



Top Line


Same-restaurant sales for CMG came in at 10%, well in excess of already-high expectations of 8.6% according to StreetAccount.  Two-year average trends for 2Q11 came in at 9.4%, a 100 basis-point sequential acceleration from 1Q.  Management attributed this strong performance to awareness being raised around the company’s Food With Integrity mantra as well as continuing loyalty to Chipotle.  Initiatives such as the new affinity program that is being rolled out currently, and will anchor off social media from a participation perspective, are designed to retain and grow customer loyalty going forward. 


New unit volume was another driver of revenue growth during the quarter, increasing by 20% year-over-year versus 16% year-over-year growth in 1Q.  A-models are also a medium through which the company is looking to grow; during today’s earnings call the company, for the first time, indicated that the A-model is now proven enough to develop in developing (rather than solely established) markets. 


From here, the company is implementing a price increase, the customer’s reaction to which will be crucial for comps as we transition through the second half of the year.  During the second quarter, Chipotle took 1.5% which mostly pertained to the Pacific region.  The broader price increase, across the system, will be fully rolled out during August and will affect all markets.  The average magnitude of the hike will be 4.5%.  This is the first price increase Chipotle has taken in three years and management will be hoping that traffic doesn’t react as severely to this price increase as it did in 2008.


CMG: MISS AND RAISE - cmg pod1





Restaurant level margins were down again, year-over-year, for the second consecutive quarter.  As a percentage of sales, Food, Beverage, and Packaging costs increased 250 basis points year-over-year.  Management expects the impact of the price increase being taken in the current quarter to offset most if not all of the inflation impact on margins.  Labor as a percentage of sales decreased 50 basis year-over-year despite an increase in worker’s comp claims and an increase in employee turnover.  The company stressed several times that there is more fat to be trimmed on the labor line.  Occupancy costs were down approximately 50 basis points from last year due to sales leverage.  Marketing as a percentage of sales was 1.7% versus 2.1% a year ago which accounted for the 40 basis point decrease in other operating costs. 


Protecting margin is critical for Chipotle, particularly given their practice of not locking in commodity costs.


CMG: MISS AND RAISE - cmg pod2


CMG: MISS AND RAISE - cmg quadrant





The current (third) quarter is highly significant for Chipotle and there are several factors that we will be monitoring closely. 

  1. The last time Chipotle took price was in 2008 and the consumer did not react well at all.  One would hope that management will have learned from that experience and will have completed all of the necessary research to ascertain the optimal magnitude of the price increase for profitability.  Ultimately, the result won’t be known by us until the next quarterly earnings report is released.
  2. The increase in employee turnover that management highlighted is an interesting data point.  Rising from an average of 100% to 120% during 2Q hardly constitutes a crisis for a company in an industry where the norm is closer to 160%, but if the trend continues it will certainly catch our attention.  Training new people increases labor costs, newer employees are generally slower which impacts throughput, and if manager turnover is increasing, it may signal deeper issues than just low job satisfaction.  The situation is clearly not there yet, but we will be watching this closely.
  3. Any new information about the ICE investigation into CMG’s hiring practices will obviously be important to the extent that it may impact labor costs or EPS via a one-time charge.  However, to be frank, hiring 12,000 people since March must surely have improved CMG’s image in the eyes of the government!


Howard Penney

Managing Director


Rory Green



Below Josh Steiner and Allison Kaptur of our Financials Team quantify the 40 most exposed European banks (among the 91 tested) to the PIIGS based on the results of the EBA’s EU Stress Test. While the team notes that this data is “stale”, with the data and risk assumptions based on year-end 2010 figures, the exposures are nevertheless valuable reference points as European sovereign debt contagion risks persist:



Moving Beyond EBA Conclusions That All is Well

Our view of the European bank stress tests released last Friday is rather dim.  We criticized the leniency of the "adverse scenario" assumptions, noting in particular that the actual deterioration since year-end 2010 is already worse than the "adverse" assumptions in some cases.  (Contact us if you want to see our full note.)


While we consider the loss assumptions to be balderdash, the stress tests were valuable in that they disclose a wealth of bank-specific data around sovereign and commercial exposures by country.  Clearly, the greatest default risk is currently in Greece, Portugal and Ireland. Italy and Spain, while on slightly more stable ground, are rapidly deteriorating as well.   


In the tables below, we show the exposure to sovereign debt and commercial loans by bank to each PIIGS country. Specifically, we show the top 40 most exposed European banks (among the 91 stress-tested), ranked by gross loans and sovereign debt holdings as a percentage of their Core Tier 1 Capital. Bear in mind that this data is as of December 31, 2010. In addition to showing which banks hold the greatest exposure on a country by country basis, we also show which banks hold the greatest exposure to Greece, Portugal and Ireland collectively, as we view those countries as being at greatest risk for default. Further, we show total exposure to all five PIIGS countries.


We highlight in red those banks with 100% or more of their Core Tier 1 Capital in the form of sovereign debt holdings and/or commercial loans to a given country or group of countries. The total exposure groups (all PIIGS) are presented two ways. First, we show exposure sorted by RWA. In other words we show the PIIGS exposure by bank for the 40 largest European banks. Second, we show exposure sorted by % of Core Tier 1 Capital at risk regardless of the size of RWA.


Summary Conclusions: 14 of the Top 40 EU Banks Hold Over 200% of their Capital in PIIGS Exposure

We find that there are numerous European banks with over 100% of their Core Tier 1 Capital committed to either PIIGS commercial loans or PIIGS sovereign debt holdings. For example, we found that 18 of the 40 largest European banks held 100% or more of their Core Tier 1 Capital in PIIGS sovereign debt or commercial loans. In 14 of these cases, the banks held more than 200% of their Core Tier 1 Capital in PIIGS sovereign debt or commercial loans. 


As a general rule we found that the Nordic banks are the least exposed to PIIGS debt, typically holding less than 20% of their Core Tier 1 Capital, putting them at considerably less risk than the group as a whole.  


















Joshua Steiner, CFA


Allison Kaptur




A recap of commentary from the last earnings call and our thoughts heading into 4QFY11 earnings on Thursday.


The biggest event for RT this quarter was that Steven Becker and Matthew Drapkin have been appointed to the board of directors at Ruby Tuesday shortly after Becker, Drapkin and Carlson Capital began agitating the company.  Sandy said "Steve, Matt and I recently met in person, and have subsequently worked quickly and cordially to reach a win/win scenario which we believe is in the best interests of our shareholders.”


HEDGEYE - Why did Sandy cave so quickly?  My guess is that the fundamental performance of the company did not offer him the opportunity to fight.  Yes, it’s going to be another bad quarter.  That being said, look for changes in the strategic direction of the company (i.e. new ways to create shareholder value).  The stock has been outperforming of late.





SALES TRENDS - “Absent the snow-related impact during the quarter, which we estimate at 1.5-2.0% on top of last year's negative weather impact, we would have had our fourth quarter in a row of positive same restaurant sales.” The weather dilution impact estimated at $0.03 to $0.04 per share in the third quarter


“We have seen sales in bar grill lag casual dining overall and have recently seen some non-weather related issues in some of our markets, more so in the south, which is most likely due to the gas prices being significantly higher year-over-year and tracking a bit like we saw in 2008.  We are actively responding with sales building programs to drive traffic in these markets, which we hope will offset this behavior over time.”


HEDGEYE – Actually, we have learned that sales in the bar & grill category have not been disappointing.  The two largest players Chili’s and Applebee’s are showing accelerating trends: yet another indication of a bad 4Q from RT.



INVESTMENTS FOR THE FUTURE - “We will have invested approximately $9 million of loan in our fresh bread program and our new marketing/brand research initiatives by the end of fiscal year '11 and with some offsetting costs, but basically a big investment year.  Just need to translate into sales. “We've recently strengthened our real-estate and development team as we get back into trying to move into the investment of this excess capital and start growing a bit again.”


HEDGEYE - Defensive move or competitive advantage.  Not sure giving away bread is a big deal to anyone.



THREE YEAR STRATEGIC PLAN - “First and foremost, we continue to stay focused on getting more out of Ruby Tuesday, continue to enhance the sales, margins, and overall strength of that great brand. We need to maintain that cash flow and create even more cash flow from Ruby Tuesday, the cash cow, so that we can reinvest it in other areas, and if we can't, return it to shareholders in whichever way is appropriate.”


“Our second strategy is focused on increasing shareholder returns through new concept conversions. We believe that converting our low volume Ruby Tuesday restaurants that are in good site locations to other high-quality casual dining concepts.”


“Whatever is best suited for that local marketplace is what we're focused on. Actually, we're trying to run our entire company in almost in every respect on what's right for that market instead of being a national brand is more of a roll-up or collection of communities in our company.”


“Our third strategy is to create value by increasing revenue and EBITDA through franchise partner acquisitions. We pretty well have this complete. We'll have it complete by the end of the year”


HEDGEYE - First, it was two years ago that a national advertising campaign was going to save the day and drive traffic.  Since that failed, they are now going in the opposite direction “roll-up or collection of communities in our company”.  Second, they want to convert Ruby’s Tuesdays in to other concepts and at the same time increase exposure to the brand by buying franchise partners.  I’m not sure that’s likely to produce an outcome in line with the company’s ultimate goal.



COMMODITY EXPOSURE - While we currently could have some food cost exposure in the back half of fiscal 2012, we also have plans for savings, which on a net basis we currently estimate to approximate a 20 to 30 basis point increase in food costs for fiscal 2012.


HEDGEYE – The final impact of food inflation will likely be higher than 20-30 basis points, in our view.



PROMOTIONS - “We hope to continue shifting our promotional dollars away from coupons and incentives and towards LTO product offerings and frequency-building programs”


“From a promotional and advertising perspective, we continue to have success with our RT Athletics program, which is a part of our So Connected e-mail club The investments we've made in the bar program to create a more sophisticated sports viewing experience where guests can come and have fun with friends, watch great sporting events, and enjoy handcrafted beverages and unique bar fare have resulted in improved bar sales and are helping to support our goal of moving alcohol sales from 9% to our goal of 12%.”


“We're investing approximately $4 million in order to better understand consumer and guest behavior this year, and anticipate these investments will continue to positively impact sales and brand strategy throughout fiscal 2012”


HEDGEYE - Coupons are a big driver of consumer behavior.  The transition could cause a hiccup in sales trends. 



DEVELOPMENT - “We are still researching and negotiating potential sites for restaurant development and are on track to open our first Lime Restaurant in the first quarter of fiscal 2012 and should have six to eight open by the end of the calendar year. We're targeting three regions for development including Washington, D.C., the Midwest and Ohio Valley area, and the core South East.”


“Our next planned conversion will be a Marlin and Ray's slated for the northern Virginia area early this summer. Now our site selections for our planned conversions over the next 12 to 15 months are largely complete and over the next nine to 12 months we should have a better of idea of which brands represent the best conversion growth opportunity in each individual market.”




  • Same-restaurant sales for company-owned restaurants to be in the range of flat to positive 1% for the year
  • We do not expect to open any inline restaurants in fiscal '11, anticipate closing eight to 10 company-owned restaurants, these closures obviously exclude our conversions, and converting four to six lower performing company-owned restaurants to other high-end casual dining concepts. Our franchisees expect to open between six to eight restaurants in the year, up to three of which will be international.
  • We plan to buy back the remaining 13 franchise partnership restaurants during the fourth quarter.
  • We expect restaurant operating margins to be relatively flat, primarily reflecting the impact of our continued investment in higher-quality menu items and new product offerings, such as our complimentary bread program, as well as investments in service to enhance our guest experience and drive sales, all offset by lower promotional levels.
  • Our core food costs are expected to remain relatively stable compared to the prior year. 
  • Depreciation and amortization is estimated to be $62 million to $64 million.
  • SG&A is targeted to be up approximately 18% to 20% year-to-year, primarily reflecting a shift in spending from promotional initiatives to advertising expense, higher marketing brand research, higher training expense, and the loss of fee income from acquired franchise partnerships which has historically offset our selling, general, and administrative expenses.
  • Interest expense is estimated to be in the $12 million to $13 million range. The tax rate is estimated to be 10% to 15% as we continue to benefit from FICA Tip and other employment-related tax credits.
  • Diluted earnings per share in fiscal 2011 are estimated to be in the range of $0.74 to $0.82.




Howard Penney

Managing Director


Rory Green




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