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Initial jobless claims came in at 395k versus expectations at 405k consensus for the week ended August 6th.  For the week ended July 28th, the number was revised to 402k versus 400k.


THE HBM: WEN & EAT EARNINGS, JACK, CHUX, CAKE - initial claims 811





Gasoline prices are coming down on an absolute basis and this is providing relief to consumers.  On a year-over-year basis, however, prices at the pump remain elevated (as the chart below illustrates).


THE HBM: WEN & EAT EARNINGS, JACK, CHUX, CAKE - gasoline prices time series





QSR stocks underperformed yesterday along with Food Retail.  The broader market dragged all categories lower.






  • WEN reported 2Q EPS of $0.05 versus consensus $0.05 this morning.  Comps exceeded expectations at +2.3% for company-owned restaurants versus consensus at 1.5%.  Margins were heavily impacted by commodity costs (180 basis points) and incremental advertising to support the new Wendy’s breakfast in additional markets (60 basis points).
  • JACK reported results for Q3FY11 last night.  Margins dragged down EPS to $0.25 ex-items versus $0.40 expectations.  Comps continue to trend higher (Jack company comps +4.7% versus +3.3% consensus and Qdoba system +5.1% versus consensus 5.0%) and the company raised the low end of FY11 comp guidance for Jack and Qdoba.



  • EAT reported a strong quarter this morning, beating consensus EPS by a penny with $0.48 in Q4FY11.  Comps came in at +2.8% blended versus 1% consensus and Chili’s comps were +2.6% versus 3.3% expectations.  Restaurant margins were 18.3% versus 17.1% expectations.  Tellingly, management raised FY12 EPS guidance to $1.80 to $1.95 versus current expectations of $1.76.  EAT remains one of our favorite names in the space and has been for some time.
  • CHUX reported 2Q EPS of ($0.08) versus consensus ($0.05) and O’Charley’s comps of +2.9% versus consensus 1.1%.  O’Charley’s management says that beef, dairy, and seafood costs are up during 3Q.  This is bearish for CAKE, given what we believe is the government’s overly conservative commodity guidance for 4Q.
  • CAKE raised to “Buy” from “Neutral” at Lazard Capital.






Howard Penney

Managing Director


Rory Green



JCP: Life Before Johnson


JCP’s Q2 earnings out Friday are going to come in well shy of the company’s guidance, no surprise there. The bigger issue at hand is the duration mismatch between the timing of investments needed to execute on Ron Johnson’s master plan and current earnings expectations, which are too high. We firmly believe both numbers and the stock are headed lower from here.


July same-store-sales came in up 3.3% last week capping off an unimpressive quarter in which comps are likely to come in at +1.5% compared to guidance of 3-4%. This shortfall is due in part to a materially underperforming e-commerce business, which is up only LSD and running well below full-year double-digit growth expectations. With limited room for upside in gross margins as a result of the company’s competitive pricing position and limited product differentiation, SG&A will be the key lever to manage for the balance of the year. We’re shaking out at $0.07 for the quarter vs. the Street at $0.10 and management’s initial Q2 guidance of $0.20-$0.24. Given our expectation for meaningfully lower earnings, we expect JCP to take down full-year guidance for revenue, gross margins, and EPS Friday. To be clear, our thesis goes far beyond this quarter’s results.   


As we outlined in our recent JCP Black Book, here’s the setup heading into the quarter:

  1. Over the near-term (Trade = 3-weeks or less), JC Penney is one of the most poorly positioned companies in the industry as it relates to the margin compression we see ahead. We’re at $1.82 vs. the Street at $1.94 in F11.
  2. In the intermediate term (Trend = 3-months or more), we’re looking at much of the same. Numbers as the company looks today are too high in F12. Again, we’re at $1.33 vs. the Street at $2.40. 
  3. Over what we consider long-term (Tail = 3-years or less) we’ll be seeing meaningful investment back into the model, as Ullman exits either by choice or force. Then we’ll see SG&A and CapEx both go up meaningfully. Mind you, Apple lost money in retail for the first 2+ years, and fell short of its publicly stated profit goals for 2 years because Johnson opted for the benefit of long-term shareholder value, not the inability to perform. We think that this is what will take earnings down – potentially below zero based on our analysis. In F13, we’re at $1.22.
  4. Then, and only then, can JCP rise from the ashes and emerge into whatever it is that Johnson is envisioning. Heck, it might prove to be the best stock in the S&P. But that might not be until years 5-7. Johnson’s warrants get him paid – keeping in mind that he probably doesn’t need the money to feed his family in the interim.
  5. In the interim, investors have to cope with 1) the real earnings power of this company, estimates for which are too high, while keeping the Ackman’s of the world spinning their tales of value creation.

See our recently released JCP Black Book for more detail on this and other factors that have us squarely in the bear camp on JC Penney. If you are interested in receiving a copy, please contact .


JCP: Life Before Johnson - JCP S 8 11


JCP: Life Before Johnson - JCP Sent 8 11



Casey Flavin







TODAY’S S&P 500 SET-UP - August 11, 2011


The French governments (and their bankers) now, allegedly, have an edge on what independent rating agencies are going to do with their sovereign ratings. Nice!   The most important thing central planners have missed in 2011 are growth estimates – that won’t change gravity.  As we look at today’s set up for the S&P 500, the range is 50 points or -3.01% downside to 1087 and 1.45% upside to 1137.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1500 (-4151)  
  • VOLUME: NYSE 2147.22 (-10.89%)
  • VIX:  42.99 +22.62% YTD PERFORMANCE: +142.20%
  • SPX PUT/CALL RATIO: 1.74 from 2.64 (-34.11%)


  • TED SPREAD: 27.09
  • 3-MONTH T-BILL YIELD: 0.02% -0.01%
  • 10-Year: 2.17 from 2.20    
  • YIELD CURVE: 1.98 from 2.01


  • 8:30 a.m.: Trade Balance, est. (-$48.0b), prior (-$50.2b)
  • 8:30 a.m.: Initial jobless claims, est. 405k, prior 400k
  • 8:30 a.m.: WASDE (corn, soybean, cotton, wheat)
  • 8:30 a.m.: Net export sales (commodities)
  • 9:45 a.m.: Bloomberg consumer comfort: est. (-48.7), prior (-47.6)
  • 10 a.m.: Freddie Mac mortgage rates
  • 10:30 a.m.: EIA Natural Gas
  • 1 p.m.: U.S. to sell $16b 30-yr bonds


  • U.S. trade deficit probably narrowed in June from the highest level in almost 3 years, helped by cheaper imported crude oil, economists said before a report today
  • Fed officials are drawing up rules for the largest U.S. banks that won’t be more stringent than global capital standards agreed to in Basel, people familiar said



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Gold Falls From Record as Rising Equities Curb Investor Demand
  • CME Increases Gold Margins as Investors Drive Record Rally
  • Rice Is Next Japan Food Risk From Fukushima Nuclear Meltdown
  • Power Trading Set for Record on Europe Sun, Wind: Energy Markets
  • Copper Climbs Most in Two Months on Chinese Demand Speculation
  • Standard Chartered Recommends Buying Brent Oil Below $100
  • Aussie, Kiwi Rise as U.S. Stock Futures, Commodities Advance
  • Palm Oil Climbs as Malaysian Stockpiles Drop on Record Exports
  • Metals Lead Commodity Gains as Yuan Strength Buoys China Demand
  • Copper Climbs Most in Four Months, Lifted by Chinese Purchases
  • Commodities Rise for Second Day, Led by Metals on China’s Demand
  • Spot Gold Falls 0.6% After Rallying to Record Above $1,800
  • Palm Oil Imports by India Seen at Record May Halt Price Decline
  • Nestle Pakistan to Fend Off Engro by Doubling Dairy Output
  • Being Like Soros in Buying Farmland Reaps Annual Gains of 16%
  • Gold May Extend Record Rally Above $1,800 as Global Stocks Drop
  • Thai Sugar Exports May Increase to Record, Cane Board Forecasts
  • Oil Gains Most in Three Months as Supplies Fall, Demand Rises



EUR/USD – remains the most critical FX pair in all of global macro and this is really where the rubber meets the road on which European politician is telling you the truth; TREND line is now 1.44 and its bearish/broken - no bid this morn


THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: another low quality short squeeze to lower-highs in the lowest quality country markets (Italy/Spain); not good
  • FRANCE – important to acknowledge what real-time prices have been signaling in French Equities since February of 2011 when they put in another lower-long-term high – including this morning’s rally, the CAC40 has crashed (down -27% since FEB2011)


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: not as bad as I thought it would act = constructive; China leads gainers (we're long) up +1.3%; Singapore day2 of neg divergence $CAF

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Questionable Mathematics

This note was originally published at 8am on August 08, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Common sense is not so common.”

-Voltaire (quote used at the end of David Einhorn’s Q2 2011 letter)


This morning has nothing to do with legitimate credit risk in America’s sovereign debt. US Treasuries would be collapsing if it did. Instead, stocks are as Treasuries are making new 2011 highs!


This morning has everything to do with analytical incompetence. If watching the analytically incompetent chastise the analytically incompetent yesterday didn’t remind you that both S&P and the US Government have issues, you need to replay the tapes. The People don’t trust either ratings agencies or governments’ risk management processes anymore. And they shouldn’t.


As outgoing Chairperson of President Obama’s “Council of Economic Advisers”, Austan Goolsbee, told Meet The Press yesterday that S&P had “Questionable Mathematics”, I literally started laughing out loud. This is AFTER the US government revised their Q1 2011 GDP estimate for the US by 81% to the downside to 0.36%!


With all due respect to my fellow Yalie (Goolsbee was Yale 1991), there is nothing to respect about the accuracy of either the US government’s economic forecasts in 2011 or what US Growth Slowing implies for any rating agency that has to impute a massive top line slowdown into its rating. AFTER the top line (revenues) slows, both the sell-side and ratings agencies downgrade – not before. They are THE lagging indicators.


Bloomberg Consensus (78 buy-side and sell-side institutions) forecasts for US GDP Growth in Q3 and Q4 of 2011 are still at +3.2% respectively. Our models continue to point to rates of U.S. economic growth that are HALF, or less, of those consensus estimates.


There is nothing questionable about this math: the US stock market has lost -12% of its value since the end of April for a lot of reasons – but one of the most obvious has been Growth Slowing.


Back to the Global Macro Grind


Why are US Treasuries bid to new all-time highs (all-time is a long time) on the “news” of a rating agency downgrade this morning? That’s simple. This is old news to the analysts who provide Wall Street with leading indicators.


To review the time stamps:

  1. March 5, 2010: Jim Grant issued an effective downgrade of USA’s long-term bonds
  2. May 14, 2010: Hedgeye cites Grant’s work and reiterates the conclusion using Reinhart & Rogoff data to compliment our own
  3. August 3, 2010: Hedgeye holds a conference call titled “Should US Debt Be Rated Junk?”

As recently as July 7th, 2011 in his quarterly client letter, Greenlight Capital’s David Einhorn wrote (on page 3): “Earth to S&P, if you can foresee a near-term default scenario that is plausible enough for you to warn about it, AAA cannot be the correct current rating.”


Einhorn, like Jim Grant, is one of the world’s most competent financial analysts. He has been profiting from the incompetence of ratings agencies and the governments who pay them for years. Einhorn and his clients won’t be freaking out this morning or looking for Bill Miller and Timmy Geithner to throw them some completely conflicted and compromised view of S&P’s work. They’ll be profiting from it.


Tomorrow starts today – so what’s next? Well, let’s start with what AAA not being AAA means for everyone else’s ratings.

  1. It’s now politically palatable to downgrade other AAA rated Sovereigns (France)
  2. Big Bank Ratings that rode USA’s AAA Rating Uplift need to be downgraded

After we moved to ZERO percent US Equity exposure in the Hedgeye Asset Allocation Model last Monday, our Financials guru, Josh Steiner, wrote an important note titled “New Risks For Financials” where he dug into this obvious problem of Big Bank Rating Uplifts:


“There are 8 banks that benefit directly from the United States AAA credit rating through ratings uplifts. They include: BK, STT, BAC, C, WFC, JPM, GS and MS. If the US isn’t AAA, then the implicitly backed Too Big To Fail banks can’t rely on the US’s ratings to get AAA debt themselves.”


Now Steiner has been The Bear on the moneycenter banks and US Housing since this time last year (sorry Meredith Whitney). Hedgeye has shorted Banker of America (BAC) 10x since 2010 in the face of “smart” money buying it on “valuation.”


Well, sorry “smart” money, valuation is not a catalyst.


Neither is a pending downgrade of a bank’s credit rating. Citigroup (our top short idea above and beyond BAC right now, which is saying something!) could see a 2-notch downgrade with the end of these “ratings uplifts”. This will add notably to already existing NIM pressure on Citi’s earnings (NIM = Net Interest Margin).


And when S&P or Moody’s “downgrades” Citigroup, we’ll cover the short position on that “news” too. Timing matters.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1638-1711, $84.02-92.03, and 1165-1219, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Questionable Mathematics - Chart of the Day


Questionable Mathematics - Virtual Portfolio

Forecasting Dark

“Weather forecast for tonight: dark.”

-George Carlin


When 2011 is all said and done, we’ll separate the winners in this Globally Interconnected Game from the whiners. Whoever had their growth estimates right will have had a lot of other things right.


In the meantime, we’ll have to deal with politicians, journalists, and bankers obfuscating this very simple fact – Global Growth Has Been Slowing Since The End of 2010.


That’s it. That’s what Wall Street, Washington, SocGen, and the Government of France all have in common this morning – their top-line estimates for GDP Growth are still way wrong. And, as a result, being long any of their conflicted promises that are associated with using the wrong GDP assumptions will continue to be wrong. Markets don’t lie; politicians do – and the market has this right.


Markets don’t trade on politicians, journalists, and bankers using the wrong sources – they trade on expectations. To amplify this point about Growth Expectations, let’s take a step back and review where these “blue chip” forecasters were on these matters in Q1 of 2011:


Forecasts for 2011 US GDP Growth:

  1. Bank of America = 3.2%
  2. Barclays = 3.1%
  3. Citigroup = 3.1%

*Disclaimer: these estimates must have all been based on the exact same Keynesian model for garden variety “recovery”


Forecasts for 2011 SP500 Returns:

  1. Bank of America (David Bianco) = 1400 (up +11.4%)
  2. Barclays (Barry Knapp) = 1420 (up +13.0%)
  3. Citigroup (Tobias Levkovich) = 1400 (up +11.4%)

*Disclaimer: two of these forecasting czars opted for round numbers on the absolute; one opted for the rounded off % return


2011 Reported Numbers (Year-To-Date):

  1. US GDP Growth Q1 2011 = 0.36%
  2. US GDP Growth Q2 2011 = 1.29%
  3. SP500 YTD Return = DOWN -10.9%

3 investment banks with conflicted analysis + 3 train wrecks versus expectations = priceless.


Actually, that’s not fair – there is a price to pay for Wall Street/Washington groupthink. It’s being marked-to-market in every American’s 301k each and every day. While I’ll be the first to admit that this is not 2008 (it’s 2011), all it took to remind me how bad Wall Street’s forecasting models remain at calling growth slowdowns was another growth slowdown!


There isn’t really a trickle-down effect associated with getting growth estimates this wrong – it’s more like a waterfall. To borrow a frightening quote from Bank of America’s CEO, Brian Moynihan, on yesterday’s conference call, “think about it this way and you’ll have to trust us”:

  1. COUNTRIES – when they are wrong on GDP assumptions, they are wrong on their DEFICIT/GDP assumptions.
  2. RATINGS AGENCIES – when they see countries with DEFICIT/GDP assumptions rising, their ratings start falling (on a lag)
  3. BANKS – when their GDP assumptions are wrong, their assumptions for their net interest margins and cash flows are wrong

That last point is less clear to your average journalist attempting to “trust” Brian Moynihan on the numbers. What does it mean?

  1. Banks make money on a spread (the Yield Spread – that’s why La Bernank wants to keep rates of return on your savings low)
  2. When growth slows, the Yield Spread compresses (the 10s/2s spread has compressed by 28% in the last 6 months)
  3. When the Yield Spread compresses, Bank of America, Barclays, and Citigroups NIM (net interest margin) and cash flow declines

So… if you get that… and you’re still using Hedgeye’s GDP estimates for 2011 instead of a conflicted and compromised Street’s… you would have immediately recognized anything coming out of SocGen, the Government of France, or Bank of America’s mouths yesterday as irrelevant and/or wrong.


I continue to forecast that the sun will rise in the East today.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $77.20-88.29, and 1087-1137, respectively. We bought Goldman Sachs yesterday in the Hedgeye Portfolio and we remain short Citigroup.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Forecasting Dark - Chart of the Day


Forecasting Dark - Virtual Portfolio

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