TODAY’S S&P 500 SET-UP - August 10, 2011


USA stocks aren’t expensive; they aren’t cheap - they are perfectly priced for storytelling.  We are hosting a conference call at 11AM today key topics we will be addressing: 

  • Does the S&P500 off over 15% from its YTD highs present a short covering opportunity?
  • Given our outlook for the global economy, what are the key drivers over the intermediate term?
  • Sovereign debt issues and the likelihood of resolution, both in the United States and Europe.
  • Update of Hedgeye's quantitative and fundamental view of key assets classes - e.g. U.S. dollar, oil, gold, treasuries and copper.
  • Hedgeye's top macro and asset allocation ideas. 

As we look at today’s set up for the S&P 500, the range is 117 points or -4.99% downside to 1114 and 4.99% upside to 1231.






THE HEDGEYE DAILY OUTLOOK - global performance


THE HEDGEYE DAILY OUTLOOK - daily sector view




  • ADVANCE/DECLINE LINE: +2651 (+5719)  
  • VOLUME: NYSE 2409.64 (-5.28%)
  • VIX:  35.06 -26.96% YTD PERFORMANCE: +97.52%
  • SPX PUT/CALL RATIO: 2.64 from 2.04 (+28.96%)



TREASURY YIELDS – obviously some big league career risk management buttons were pushed (BUY) at S&P500’s 1,100 intraday test yesterday (a sub 1,100 move puts S&P500 in crash mode), and immediately after the rally you had everyone and their brother say “because Bernanke wants you to chase yield.” The 10yr yields heading toward 2008 all-time lows are NOT a bullish economic signal!

  • TED SPREAD: 25.30
  • 3-MONTH T-BILL YIELD: 0.03% -0.02%
  • 10-Year: 2.20 from 2.40    
  • YIELD CURVE: 2.01 from 2.13


  • 7 a.m.: MBA Mortgage Applications, prior 7.1%
  • 10 a.m.: JOLTs Job openings, prior 2974
  • 10 a.m.: Wholesale Inventories, est. 1.0%, prior 1.8%
  • 10:30 a.m.: DoE inventories
  • 1 p.m.: U.S. to sell $24b 10-yr notes
  • 2 p.m.: Monthly budget statement, est. (-$135b, prior $165b)


  • BofA CEO speaks on conference call hosted by Fairholme Capital. Moynihan said yesterday he has no plans to step down.
  • China’s stocks rebounded from a more than one-year low on speculation the government may delay interest-rate increases
  • Goldman sued by U.S. over credit-union losses: WSJ
  • FCC to tie review of AT&T bids for T-Mobile, Qualcomm assets
  • Walgreen to sell health insurance: CNN



COMMODITIES – not crashing on the 19 component CRB Index, yet (CRB down -15% since May). But this one is in motion. Oil has crashed and that’s not an inconsequential global demand signal. As a reminder, both Copper and Oil have snapped my TAIL lines of $92 and 4.10, respectively. When my TAILs snap; tail risk becomes probable.


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Being Like Soros in Buying Farm Land Reaps Annual Gains of 16%
  • Brent Drop Below $100 Risks OPEC Cuts on Price: Energy Markets
  • Oil Rises From 10-Month Low on Fed Comments; IEA Sees 2012 Risks
  • Bets on Iron-Ore Swaps Show Vale, Rio ‘Cheap’: Chart of the Day
  • Gold Advances After Federal Reserve Pledges to Keep Rates Low
  • China Copper Imports Rise to Six-Month High on Restocking
  • Commodities Rebound From Eight-Month Low on Fed’s Rate Pledge
  • South Africa Drives Trade Away With Port Costs: Freight Markets
  • Copper Climbs for First Day in Six After Fed’s Low-Rates Pledge
  • Palm Oil Stockpiles in Malaysia Decline on Record Exports
  • Gold Surges to Record for Second Day as Fed to Keep Rates Low
  • U.S. Mint’s Gold Coin Sales Up to 39,000 Ounces So Far in August
  • China’s Soy Imports at Highest This Year as Hog Herds Expand
  • Gold Futures Advance 0.9% in New York; Silver Reverses Decline
  • Palm Oil Gains as Commodities Rally on Fed’s Pledge to Low Rates
  • China Won’t Sell Pork Reserves to Push Down Prices, Radio Says
  • Oil Falls to 10-Month Low as Fed Rules Out Immediate Stimulus



 THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: nasty wet Kleenex market remains; Italy follows up on USAs ragger with a down day! (crash continues); Russia was the leader, today lags

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA – really disappointing level of “follow through” across Asian Equities last night after Singapore CUT their export growth forecast to 6-7% vs. 8-10% prior (Singapore closed down -1.9% and this matters as they are China’s trusted economic advisor – sorry Timmy G.)

THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director


Red Robin is setting up to beat consensus on the top and bottom line in our model.


Red Robin appointed a new Chief Executive Officer in Steve Carley in late 2010 and, since his arrival, we have become incrementally move constructive on the name.  Management recently unveiled a new strategy, called Project RED, which focuses on Revenue Growth, Expense Management and Deployment of Capital.   While revenue growth is a constant goal of all restaurant teams and a sound bite in every earnings call, the extent of the expense cuts management is proposing is impressive.  Below I discuss the revenue and expenses outlook in more detail.





Same-restaurant sales are trending more positively over the last few quarters and, we believe, the company’s Project RED will enable it to take share going forward.  Our estimate for same-restaurant sales is 2% for the second quarter.  This implies an acceleration in two-year average trends of 60 basis points from the first quarter. 





The company’s growth profile is also attractive from an investment standpoint.  New unit growth is accelerating by 25% to 10 new openings in 2011 and average weekly sales for the non-comparable store base continually exceeds those of the comparable store base.  The company opened only two stores in the first half of 2011.


During the last earnings call, management highlighted the new loyalty program, Red Loyalty, as a key component of the top-line strategy going forward.  The loyalty card program not only allows the company to retain customers but also enables management to learn more about the customer base and target future sales strategies more effectively.


The company took a 1.5% price increase in April which will help margins as beef costs remain elevated. 





Management is targeting 200 different cost savings through the end of 2012 which, it is hoped, will yield $16-18 million in annualized cost savings.  We find the meticulous manner in which management is pursuing savings, big and small, to be encouraging given our preference for expense-cutting (EAT) turnarounds rather than spending to turn around a company (PFCB).  Everything from lowering food waste to renegotiating trash contracts is being focused on.


Commodity costs remain a concern for the company given its exposure to beef.  In May management said, “Ground beef could be higher by as much as 20% year-over-year, which has a meaningful negative impact to our margins”.  Looking at the price of beef since that earnings call on May 19th, it is up 4% but prices have been volatile as weather impacts, changing global consumption patterns and slower economic growth impact commodity prices.  Commodity guidance given in May was for 5-6% inflation over the remainder of the year and we believe that it’s unlikely any downside revision will be made to that range.


In terms of expectations going forward, management is guiding to 80-100 basis points of margin expansion due to labor efficiencies. 


As the quadrant chart below illustrates, RRGB’s operating performance has improved markedly over the past couple of quarters and, given easy compares for the next few quarters and the company’s focus on costs savings, we expect the next quarter to be strong.


RRGB: UPSIDE SURPRISE - rrgb quadrant





Sentiment has improved in this name and estimates have risen but we still think that the 2Q11 consensus EPS number of $0.36 is $0.05 or $0.06 too low.  Given that 17% of ratings on the stock are “Sell”, there could be still additional sentiment shifts to the positive side coming soon.


Short interest, at 15.7%, is a bullish data point in that any upside surprise in EPS could prompt short covering and a nice pop in the stock price.  With the Knapp Track casual dining sales index having trended positively through the quarter and the company doing all it can to target controllable costs, we see a strong quarter from RRGB as a distinct possibility.


RRGB: UPSIDE SURPRISE - rrgb sell side rating


RRGB: UPSIDE SURPRISE - rrgb short interest



Howard Penney

Managing Director


Rory Green




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