Notable price action and news items from the restaurant space.






Corn and wheat fell over the last day as investors speculated that a slowing U.S. economy may cut into demand. Beef prices are likely to be supported by the abandonment of corn crops in Texas as 99% of the Lone Star State is in one level of drought or another by the last week of July.  With farmers turning off water and abandoning parts, or whole fields, of corn, we see this only as supportive of extended elevated prices in beef.




  • DNKN is hosting its earnings call for 2Q earnings at the time of writing.  2Q earnings were released earlier this morning with net income down 60 bps year-over-year.  Comps were up 3.2% in the U.S.   Dunkin’ Donuts derives 97% of its revenue from the U.S.  We see the revenue, operating income, and net income growth as being far below those of SBUX despite the massive differential in the stocks’ respective valuations.  We are not convinced by the DNKN growth story, particularly at this price.
  • PEET reported strong EPS for 2Q, beating expectations solidly with $0.38 versus consensus EPS of $0.32.  The company raised full-year revenue guidance as revenues also beat convincingly in the quarter.  EPS should be towards the higher end of the previous guidance range of $1.43 to $1.50, according to management.
  • PZZA missed consensus expectations in the second quarter with EPS of $0.47 versus $0.48.  The company reaffirmed EPS of $2.02 to $2.12 for the year versus consensus of $2.12 but stated that it expects the current competitive pricing and promotional environment in the pizza category and the unfavorable impact of projected commodity cost increases, most notably cheese, to continue throughout the rest of the year.



  • DIN reported disappointing 2Q earnings, posting $0.90 ex-items versus consensus of $1.02.  The stock sold off over 18% yesterday.
  • DIN was upgraded by Morgan Keegan this morning to “Outperform”.
  • PFCB was downgraded to "Sell" from "Buy" at Argus Research.




Howard Penney

Managing Director


Rory Green



The Congressional Comb-over

This note was originally published at 8am on July 29, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Every man's life ends the same way. It is only the details of how he lived and how he died that distinguish one man from another.

-Ernest Hemingway


Keith was on CNBC this morning, so as I was mulling over topics for the Early Look last night and this morning and my initial thought was to completely avoid discussion of the debt ceiling debate.  It has become the one of the most overhyped factors in global markets and it is a little depressing to analyze the political shenanigans going on in Washington.   Nonetheless, I’m at my keyboard in the Taft Mansion on Yale’s Campus this morning (more commonly known as the global headquarters of Hedgeye Risk Management) and I feel compelled to comment.


As many of you are now discovering, Speaker Boehner is having serious issues garnering votes for his debt and deficit plan.  The vote was scheduled yesterday and is now postponed.  It seems the Tea Party is not on his political side, despite fear mongering from the White House that Christmas will be ruined if a long term debt deal is not passed in short order.   I can’t say I agree with the Tea Party on everything, but I will give them credit for a conviction of their beliefs.


The debt limit deadline is August 2nd, which is now four days away.  Between now and then, how this plays out is really anyone’s guess.  It seems likely the Tea Party will acquiesce and a deal gets passed in the House, although as we saw yesterday evening, even that is uncertain.  If that does occur, Senate Majority Leader Reid and President Obama have been adamant that they will not support any bill that has a two-step process and that doesn’t extend the debt ceiling past the 2012 election.


Regardless of the two-step process in the Boehner bill, the Boehner and Reid bills have dramatic differences regardless.  At face value they are talking about similar numbers, the Boehner plan, in total, is looking for more than $2.7 trillion in cuts, while the Reid plan is proposing almost $2.2 trillion in deficit cuts.  While those numbers are in the same area code, the methodology for getting to the cuts is dramatically different. 


The Reid plan only has $710BN in real budget cuts, the remainder of the deficit reduction plan comes from the winding down of the wars in Iraq and Afghanistan.  Setting aside the differences in process, that leaves us with a $2 trillion difference in the nature of deficit cuts between the parties.  That’s one mother of a compromise for four days.


Stepping back to the longer term, we need to keep in mind that both of the current bills proposed are really nothing more than Congressional Comb-overs.  As a refresher, Merriam Webster describes a comb-over as follows:


“An arrangement of hair on a balding man in which hair from the side of the head is combed over the bald spot.”


As a man who sports a comb-over, I can vouch that is an apt description.  The sneaky thing about a comb-over is that while you can comb your hair over, the rest of the world can usually tell that there is a bald spot lingering beneath.


In the chart of the day, I’ve shown what I mean graphically by comparing proposed Reid plan discretionary spending cuts as a percentage of the estimated deficit.  Similar to many a bad business plan, the Reid plan is very back end loaded (by the way, so is the Boehner plan).  In fiscal 2012, the discretionary spending cuts as proposed by Reid ramp from 2.2% of the CBO’s projected deficit to 14.0% of the CBO’s projected deficit by 2020.


The other key assumption to keep in context when considering the currently proposed Congressional Comb-overs are the GDP growth assumptions proposed by CBO.  In the projection period used in my analysis in the attached chart, the federal government budget years from 2012 to 2020 at an average real GDP growth rate of 2.9% per year.  This compares to the actual real GDP growth rate over the last ten years of 1.7%.  Obviously, future deficits will be much higher if growth in the next decades tracks similar to the last decade.


While the political drama in Washington has been entertaining over the last few months, we need to keep in mind that even when the compromise is reached, the current bills proposed are merely covering up long term budget deficit issues that will again need to be addressed in the next 12 – 18 months.  Therefore any short term positive stock market reaction should be taken with a grain of salt in the context of continued long term issues.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


The Congressional Comb-over - Chart of the Day


The Congressional Comb-over - Virtual Portfolio

Hedgeye Statistics

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

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.68%

Winning Trinity

“Repetition, confidence, and passion. The trinity of Lombardi’s football success…”

-David Maraniss (“When Pride Still Mattered”, page 225)


You didn’t have to look too far to find some losers on Wall Street or in Washington yesterday. In many respects those two compromised and conflicted constituencies are now, sadly, one and the same. US GDP Growth is slower than Wall Street’s “smartest” thought, and Big Government Intervention continues to amplify market volatility.


At Hedgeye, we’re focused on winning. Instead of angling for incremental “edge” on when the next round of Quantitative Guessing is going to be unleashed; instead of taking on some orange jumpsuit risk for a super secret piece of information; instead of not evolving the risk management process – that’s it – we’re just focused on winning.


Winning’s Trinity here in New Haven, CT is no different than Vince Lombardi’s process: Repetition, Confidence, and Passion. What’s increasingly fascinated me about this profession is that the older I get, the less I find myself needing to explain these principles to a larger community of people. The said “leaders” out there who don’t get these things yet probably never will.


Back to the Global Macro Grind


First, let’s focus on the good news.

  1. US Equities we’re finally immediate-term TRADE oversold yesterday
  2. Chinese stocks only closed down 3 basis points overnight (0.03%)
  3. Congress is going on vacation

As for the bad news – well, this globally interconnected market had already signaled for you to get out of US and European Equities before yesterday’s capitulation, so today’s risk management signals in those markets are basically just a reminder of the same:

  1. SP500 intermediate-term TREND line = 1319 (broken)
  2. Russell2000 intermediate-term TREND line = 825 (broken)
  3. UK’s FTSE TREND line = 5955 (broken)
  4. German DAX TREND line = 7123 (broken)
  5. Italy’s MIB TREND line = 20655 (broken)
  6. Spain’s IBEX TREND line = 10269 (broken)

Why are all of these stock markets “broken”? I can assure you it’s not because my pre-schooler pulled up a 1-factor point-and-click chart of 200-day Moving Monkey averages. The answer is multi-factor and multi-duration. And everyone in this business who didn’t blow up in 2008 knows exactly what I mean by that.


In any multi-factor model, GROWTH should carry a heavy weighting. Economic Growth is either Accelerating, Slowing, or Unchanged. The biggest calls I’ve ever made in my young career of making “Macro” calls haven’t been on the long or the short side – they have been on the margin. And I don’t mean by levering myself up with margin – I mean calling the turns.


In my model, there are 3 STAGES in calling the turns:

  1. Identifying when the acceleration slows
  2. Asserting when the slowdown is accelerating
  3. Recognizing the deceleration of the slowdown

As of this morning, I am going to call these 3 STAGES Hedgeye’s Winning Trinity of global macro risk management.


This is a cool model because all of the tired Keynesians can try it at home. You know, whip some top-line assumptions around. Try some fractal math. And generally, just stop whatever it is that they were doing to completely botch calling both the 2008 and 2011 turns in global economic growth.


Now, Timmy Geithner, we know you are interviewing at an investment bank right now, so don’t spend too much time on this model until you are done making excuses for the last 47% of your born life in US government perpetuating America’s debt and deficit problems. We want you as a client, so we’ll save you some time here and tell you we are currently in STAGE 2.


In Japan, Europe, and the US, I don’t see a catalyst for moving to STAGE 3 (a deceleration of the slowdown) until at least Q4/Q1. In China we see this coming in Q3/Q4. That’s why we’re long Chinese Equities before we buy American.


Ours is a process that requires Repetition, Confidence, and Passion. Most of you wouldn’t be where you are today if you didn’t get the focus, discipline, and repetition part. In terms of the confidence and passion part, don’t be shy – if you find it, live it out loud.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $93.15-96.29, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Winning Trinity - Chart of the Day


Winning Trinity - Virtual Portfolio


TODAY’S S&P 500 SET-UP - August 3, 2011


Fear sells!


And while I don’t think anyone who really understands what we do thinks we sell fear, I can tell you yesterday was the busiest day of what we call “new subscriber demand” – probably a contrarian indicator.  As we look at today’s set up for the S&P 500, the range is 4 points or -0.16% downside to 1252 and 0.16% upside to 1256.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance





“on a day like yesterday, I usually start hearing some of the most qualitative things I hear all year – “this guy blowing up… volume/OIS doing that… look at this” – yesterday, was nothing like the usual storytelling – more like oh my god” - KM


  • ADVANCE/DECLINE LINE: -1750 (-1945)  
  • VOLUME: NYSE 1252.18 (+12.77%)
  • VIX:  24.79 +4.78% YTD PERFORMANCE: +39.66put%
  • SPX PUT/CALL RATIO: 2.10 from 2.41 (-12.97%)


  • TED SPREAD: 21.87
  • 3-MONTH T-BILL YIELD: 0.06% -0.04%
  • 10-Year: 2.66 from 2.77    
  • YIELD CURVE: 2.33 from 2.39


  • 7 a.m.: MBA Mortgage Applications, prior (-5.0%)
  • 7:30 a.m.: Challenger Job Cuts, prior 5.3%
  • 8:15 a.m.: ADP Employment Change, est. 100k, prior 157k
  • 10 a.m.: ISM Non-Manf. Composite, est. 53.5, prior 53.3
  • 10 a.m.: Factory Orders, est. (-0.8%), prior 0.8%
  • 10:30 a.m.: DoE inventories


  • Moody’s, Fitch affirm U.S. AAA ratings while warning of potential downgrades
  • Swiss central bank unexpectedly cut interest rates in effort to stem surge in its “massively overvalued” currency
  • Italian PM Berlusconi will address country, Senate in attempt to shore up confidence as bond yields hit euro-era records
  • HEDGEYE LEVELS – away from Venezuela and Russia, there is not 1 global equity market that scores bullish on both TRADE and TREND on the COUNTRY style factor in the Hedgeye global macro model; that means you need to tighten up your net exposure on rallies



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Commodities Fall for a Sixth Day on Concerns Economy May Slow
  • Corn, Wheat Fall as Slowing U.S. Rebound May Cut Into Demand
  • Coffee Rises for Fourth Day on Delayed Exports; Raw Sugar Gains
  • China Soy Demand to Gain on Higher Hog Numbers, Boosting Imports
  • Copper Declines 0.6% to $9,620 a Ton on London Metal Exchange
  • Paulson, BlackRock, UBS Lead London Mining Analyst Hiring Spree
  • Rubber Rallies as Much as 2% as Rain in Thailand May Cut Supply
  • Egypt Seeks to Broaden Wheat Imports as Russian Prices Climb
  • Iron Ore Swaps, Aided by Deutsche Bank, Surge Fourfold to Record
  • Anchor Ship May Double Fleet to 50 on China’s Iron-Ore Demand
  • Guangxi Steelmakers Halt Output on Power Shortage, Xinhua Says
  • Diamond Jewelry Demand in India May Slow After Gem Prices Surge
  • Global Gold Hedges Increased 4.1% in First Quarter, GFMS Says
  • FAO Pares Record Rice Production Forecast for 2011 on U.S.n



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: learn most on "recovery" days in a bear market; today’s shows the squeeze tapes up (Italy) and the pseudo quality (Germany) down = bad
  • July final Services PMI - France 54.2 vs prelim 54.2; Germany 52.9 vs prelim 52.9; Eurozone 51.6 vs prelim 51.4; UK Jul Services PMI 55.4 vs consensus 53.2, prior 53.9
  • UK Retail prices rose 2.8% YoY following a 2.9% in June according to BRC and Nielsen Co.  On the month, prices fell 0.2% after increasing 0.5% in June.

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: CHINA – closed down a whole 3 basis points in the face of a sea of global equity selling; this is interesting not only because it registers as a positive divergence, but doesn’t tell you the world’s entire demand construct is imploding – at least not today
  • Australian retail sales unexpectedly declined in June for a second straight month  by 0.1%


 THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director


The Macau Metro Monitor, August 3, 2011




According to Macau's Executive Council, the MOP 19 ferry departure tax charged to passengers will be removed to help attract visitors to the city.  The council’s spokesperson Leong Heng Teng said the change will come into effect 30 days after the administrative regulation is promulgated.



Local residents and companies working in mainland China will have to pay the new social security contribution that is expected to come into effect in early 2012.  Moreover, there is no sign the MSAR Government is seeking a deal with mainland China to give exemption to local residents and companies.  The draft Social Insurance law is currently waiting for State Council approval.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.