Notable macro data points, news items, and price action pertaining to the restaurant space.






Food Retail is has outperformed over the last day, week, and two weeks as Food Processors continue to lag peer food, beverage, and restaurant spaces.


THE HBM: MCD, SONC, CMG, DRI - subsectors fbr




  • MCD Canada is to spend $1 billion to renovate all of its locations in Canada in effort to take market share.  Testing has already proven a success with traffic in reimaged restaurants growing close to double-digits.
  • SONC was cut to “Market Perform” at William Blair. 
  • CMG’s second London location is now open on Baker Street in the Marylebone district.



  • DRI preannounced 1QFY12 EPS at $0.78 versus $0.87 consensus but reaffirmed FY12 EPS guidance of 12-15% EPS growth.  Sales trends were disappointing at Olive Garden in June, July and August (prelim. August number).  See our post from this morning for more details.
  • DRI was cut to “Outperform” from Raymond James versus “Strong Buy”.  The price target was cut to $52 from $62.

THE HBM: MCD, SONC, CMG, DRI - stocks 97



Howard Penney

Managing Director


Rory Green



TODAY’S S&P 500 SET-UP - September 7, 2011


As we look at today’s set up for the S&P 500, the range is 42 points or -1.65% downside to 1146 and 1.95% upside to 1188.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1402 (-2155)
  • VOLUME: NYSE 1124.29 (+15.3%)
  • VIX:  37.00 +9.08% YTD PERFORMANCE: +108.45%
  • SPX PUT/CALL RATIO: 1.85 from 2.02



  • TED SPREAD: 32.54
  • 3-MONTH T-BILL YIELD: 0.0254%
  • 10-Year: 2.01 from 1.98    
  • YIELD CURVE: 1.81 from 1.79


MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage
  • 7:45 a.m./8:55 a.m.: ICSC/Redbook weekly sales
  • 10 a.m.: Jolt Job openings
  • 11:15 a.m.: Fed’s Evans speaks in London
  • 11:30 a.m.: U.S. to sell $30b 4-wk bills
  • Noon: DoE short-term energy outlook
  • 2 p.m.: Fed Beige Book
  • 4 p.m.: Fed’s Williams to speak to Seattle Rotary Club
  • 4:30 p.m.: API inventories


  • Yahoo! fired Carol Bartz as CEO, replaced her with CFO Tim Morse on interim basis, starts strategic review
  •  Bank of America shook up its top ranks, ousting wealth-mgmt head Sallie Krawcheck, consumer-banking head Joe Price
  • Constitutional challenges to Germany’s participation in the euro rescue funds were rejected by country’s top court today
  • Anglo American said to decide against takeover offer for MacArthur Coal
  • NY prosecutors said to issue subpoenas to Morgan Stanley as probe of Goldman sale of mortgage-backed products widens: WSJ
  • SEC said to probe effect of ETFs on Aug. market swings: WSJ
  • S&P said to have met with some bond investors before U.S. debt downgrade: WSJ
  • Trial on patent lawsuit by Teva Pharmaceutical over multiple-sclerosis drug Copaxone set to begin today
  • FDA briefing docs due for 9/9 panel on use of bisphosphonates in light of possible link to osteonecrosis of the jaw; makers include MRK, WCRX, Roche, Novartis
  • Saab Automobile applied for protection from creditors today in bid to raise money to restart ops; reorganization process will last at least 3 months, can be extended up to a year
  • AT&T can lower the price it pays for T-Mobile USA if remedies requested by regulators too expensive, people familiar said
  • Google’s Seoul office said to be raided by South Korea’s antitrust regulator as part of probe into whether company unfairly blocked competitors in mobile-search market
  • United Technologies said to receive potential buyer interest for unit Pratt & Whitney Rocketdyne, considering sale: Reuters
  • Archstone said to get acquisition offers from four suitors including Blackstone and Brookfield Asset Management: WSJ
  • Hurricane Katia, now a category 1 storm, continued to move between East Coast and Bermuda; second system advanced west across Atlantic Ocean, may reach Puerto Rico by this weekend
  • No IPOs expected to price today




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Commodities Rebound as Low Interest Rates May Help Boost Demand
  • Corn, Soybeans, Wheat Advance as Dry Weather May Damage Crops
  • Sugar Rises in New York During Lull Before Crops; Coffee Rises
  • Pawnbrokers Thrive as Rising Gold Price Entices Hard-Up Britons
  • India May Ship Raw Sugar First Time in Four Years on Supply
  • Libya Oil Resumption May Take at Least 18 Months, BofA Says
  • PhosAgro to Renegotiate Indian Accord to Match Prices of Rivals
  • Afghan Hajigak Iron Ore Gets Bids From India, Iran, Canada
  • Aluminum Will Stay in Surplus for Fifth Year, Sumitomo Says
  • Vale Says Sale of World’s Largest Ore Ships ‘Won’t Carry Loss’
  • Whole-Milk Powder Slips to 13-Month Low on Supply Boost
  • Gold Price Retreat May Prolong Bull Run, Top U.K. Investor Says
  • Oil Supply Falls in Survey on Storm, Imports: Energy Markets
  • Coffee Demand Rises on Single-Cup Sales, StudyLogic Data Shows





THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Scoundrels of Consensus

“Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled.”

-Michael Crichton


In financial markets, consensus is typically what astute stock market operators invest against.  That is, if the crowd has a similar view of an asset or asset class, that asset or asset class will typically be priced to perfection.   Therefore, savvy analysts and portfolio managers strive to find the nugget of non-insider information that will prove that consensus is wrong, which inevitably leads to a re-pricing of the asset and profits for those that appropriately determined where consensus views were wrong.


Obviously, the key variant macroeconomic view that Hedgeye held coming into 2011 versus consensus was that growth was slowing and would continue to slow.   We won’t rehash the thesis, but our view was for sub 1.5% growth in the first two quarters of 2011, while sell side consensus GDP estimates were, based on Bloomberg data, at +3.4% as of early February. 


As always, though, the job is to play the game in front of us and while rehashing old victories can be fun, we’ll save those opportunities after the inevitable victories of Yale over Harvard at the Yale / Harvard hockey and football games this year.  So two questions to ask into the remainder of the trading year are:


1)      What is consensus?


2)      What are your best variant views versus consensus?


Yesterday, I noticed a nugget of information that at first suggested to me that market consensus was leaning too far to the negative.  Specifically, negative bets on the SP500, as measured by a net outstanding 107,913 futures contract in the week August 30th, were at their highest level since September 2007.  My knee jerk reaction, as it relates to determining consensus, was to look at this statistic as a contrarian indicator. History, of course, suggests a different byline.


In fact, as noted above, the last time negative options bets were at this level was September 2007.  The next month, October 2007, marked the all time high in the SP500.  There are number of studies that provide an explanation as to why this seemingly contrarian indicator is actually not one, but the primary reason is that short sellers, in aggregate, typically invest with better information than market participants broadly.  One recent study by Morningstar CMPS on Canadian stocks from 2003 to 2011 showed the following:


“CPMS looked back to 2003 (when it started to record short interest data) and found that a portfolio of the most heavily shorted stocks indeed did poorly and underperformed the S&P/TSX composite total return index by about six percentage points annually, assuming an equal weighting of each of the 15 names and reselecting new names each month.”


Thus, while consensus views are important to determine when contemplating the risk / reward of positions, always be aware of The Scoundrels of Consensus.  These critters come in many forms, such as in the form of those who practice the dark art of short selling or even, gasp, in the form of statements from senior executives or government officials.


Typically, of course, I would give little credence to the idea that either government officials or senior company executives have much insight into the global macro environment, or that they would truthfully share their views.  At times, though, I do recommend taking the words of The Scoundrels of Consensus at fair value.  Some recent statements from European “leaders”, which I’ve outlined below, exemplify this point.  To wit:


1.   “Under the current structure and with the current membership, the euro does not work.  Either the current structure will have to change, or the current membership will have to change.”

-          Stephanie Deo, Paul Donovan, and Jacek Rostowski of UBS Bank


2.   “The Euro has never had the infrastructure it requires.”

-          Herman Van Rompuy, EU President


3.   “I regard the huge buy-up of bonds of individual states of the ECB as legally and politically questionable.”

-          Christian Wulff, German President


4.   “All this reminds one of the autumn of 2008.”

-          Josef Ackerman, Deutsche Bank CEO


5.   “Dealing with a banking crisis was difficult enough, but at least there were public sector balance sheets on to which the problems could be moved.  Once you move into sovereign debt, there is no answer; there’s no backstop.”

-          Mervyn King, Governor of the Bank of England


6.   “The euro is in danger . . . if we can’t deal with this danger, then the consequences for us in Europe are incalculable.”

-          Angela Merkel, Chancellor of Germany


The intention this morning is not to fear monger our subscribers into getting overly negative in the short term.  In fact, our most recent moves in the Virtual Portfolio yesterday morning were to cover two shorts : United Kingdom Equities (EWU) and Capital One Financial (COF).


Instead the advice this morning is simply this: be aware and wary of The Scoundrels of Consensus.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Scoundrels of Consensus - Chart of the Day


The Scoundrels of Consensus - Virtual Portfolio

Contemplating Inevitabilities

This note was originally published at 8am on September 02, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Old age is a shipwreck.”

-Charles de Gaulle


In life, there are certain inevitabilities, with aging at the top of the list.  No amount of money, fame, or religion prevents the reality that we will all grow old, at least physically, one day.  While in his quote above de Gaulle could easily have been talking about the fiscal discipline of Greece, he was, in fact, appropriately describing the reality of our bodies naturally aging and eventually deteriorating.


Now that I’ve started your morning off on a completely somber note, I’ll offer another reality, which is that aging and longevity research suggests that all of our life spans will be extended versus prior generations.  Not only that, we will age more gracefully and comfortably as well.  In her new book, “100+ : How The Coming Age of Longevity Will Change Everything, From Careers And Relationships To Family and Faith”, Sonia Arrison, a fellow Canadian and senior researcher at the Pacific Research Institute, provides an insightful overview of the technology of longevity.


In fact, as Arrison notes, human life has generally been extending since human life began.  During the Cro-Magnon era, humans could have expected to live just long enough to graduate from high school, or to the ripe old age of eighteen.  By the time of the European Renaissance life expectancy had almost doubled to thirty.   By 1850, just as the U.S. population hit 23.1 million, the average age reached forty-three.   Today, with the acceleration of medical breakthroughs, the average person in the Western world can expect to celebrate his, or her, eightieth birthday.  In the future, according to Arrison:


“The first person to live to 150 years has probably already been born.”


The pursuit of longevity has been ongoing since the beginning of recorded history.  One of the first contemplations of death actually occurs in Genesis, the first book of the bible.  After willfully disobeying God by eating the forbidden from the Tree of Knowledge of good and evil, Adam and Eve were kicked out of the Garden of Eden, a place of immortality, into the real world where they faced sickness, death, and the threat of crazy New York taxi cab drivers.


I don’t need to restate the entire history of human aging to assure you that it is a topic that has been and likely always will be front and center for mankind.  As a result, a vibrant growth industry has risen around areas of extending lives and more gracefully aging.  In her book, Arrison discuss some of the key areas of development and investment, which we’ve borrowed and outlined in the table below:


Contemplating Inevitabilities - 1. DJ


The key question that arises of any discussion of the extension of human life is whether the earth has the physical resources to support a growing population.  Obviously, an important question given that human population has grown from 900 million in 1800 to just under 7 billion people today.  The most famous critic of the earth’s ability to sustain population growth is Thomas Malthus, who in 1798 wrote in his “Essay on the Principle of Population”:


“Population, when unchecked, goes on doubling itself every 25 years, or increases in a geometrical ratio.”


Interestingly, Malthus’ thesis ended up being spot on for the growth of the earth’s population.  Where Malthus ultimately failed was in his belief that subsistence could only grow arithmetically, which, according to his theories, would create a major issue in the future as there wouldn’t be enough resources to support the population.


Long term commodities bulls are obviously major advocates of Malthusian theories, as they describe a natural tightening of supply and demand for food, energy, and building materials. Ultimately this supply and demand will lead, according to commodity bulls, to long term favorable real price performance for commodities and impending disaster for those humans who can’t afford the accelerating price of commodities.


This is an interesting theory, but it hasn’t really played out in practice.  The most prominent modern advocate of Malthusian theories is Stanford professor Paul Ehrlich, author of “The Population Bomb”.  In the 1970s, he predicted that the world would run out of food (it didn’t) and in 1980 bet Julian Simon that over the next ten years, five specific metals would increase in price. So, what was the outcome?  As Arrrison writes:


“During the decade from 1980 to 1990, world population grew more than 800 million – a huge increase that, according to Ehrlich, should have spelled disaster . . .  Without fail, every single metal decreased in price, and Ehrlich was forced to admit defeat.”


The moral of the story is that even as the population has grown geometrically, humans have continued to innovate, live longer and healthier, and decreased their dependence on finite resources.  (Incidentally, as shown in the Chart of the Day, the decade from 1980 to 1990 was also a period in which the U.S. dollar was flat (albeit with huge strengthening in between), versus trending down thereafter, which likely served to keep commodity inflation in check.)


So, as you head into the long weekend contemplating your longevity, I’ll offer a few tips.  To start with, there does appear to be some credence to the health benefits of red wine, especially for those who are a little overweight, but the single and simplest tip to living a long and healthy life . . . . caloric restriction. Not sexy, but eating less works.


Enjoy the long weekend with your friends and families.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Contemplating Inevitabilities - Chart of the Day


Contemplating Inevitabilities - Virtual Portfolio


The story that MCD is currently conveying to the investment community is one of BIGGER, BETTER and FASTER; this is a very different tale from the story just a few years ago. 


It’s nice to get away from the office, especially given the pain being felt in the financial markets.  The opportunity that MCD and YUM have in China is a far cry from the euro zone debt crisis that appears to be spiraling out of control.  Given the issues that the Financial sector faces (and maybe Energy too) three stocks that look like “safe havens” over the longer term in the restaurant space are YUM, MCD and SBUX.


I would note that the leading story in the Shanghai Daily today was “China’s Local Lending Under Scrutiny.” While China’s debt/GDP is only 50% as compared to 100% for the US and 200% for Japan, the factors most likely to derail the growth story in China are primarily outside of the country's control.  Also in today’s paper was a story that according to the chief economist at the State Administration of Foreign Exchange, China’s GDP growth could be below 9% in 2012 for the first time in 10 years.  The article stated that “the weakening global demand for Chinese exports will be a challenge”.          


Forgetting the negative MACRO environment, the MCD presentation to the investment community today in Shanghai was about as bullish a presentation as any company could give.  Importantly, the numbers they are posting support the bullish story.  Clearly, the future is bright for MCD in China and throughout the rest of APMEA.


One of the stores we visited was in a more upscale neighborhood and right next to a Starbucks.  The McDonald’s was recently upgraded to a look that has a “European edge” to it.  McDonald’s term for the store is LIM - less is more.   The remodeled store has a McCafé in it selling its coffee/pastry products that are priced at roughly half of what Starbucks is charging for equivalent food and beverage items right next door.  The sales of McCafé products currently represent about 8% of sales.  It was pointed out to me that over the next three years that MCD will have 500 McCafé stores as compared to the current 470 Starbucks in China. 


I guess it comes as no surprise that SBUX announced yesterday that over the next four years the company plans to step up its expansion plans to triple the number of units in China.  SBUX now plans to operate 1,500 stores in China by 2015.  It would have been nice to hear from the Starbucks team on this trip to China.  Maybe over the next year or two the company will be in a better position to address the investment community in a more formal fashion.       





MCD is well down the road of accelerating unit growth in China and hitting the target of having 2,000 units in the country by 2013.  As of June 30th, 2011, there were 1,349 units in China.  The unit growth strategy is based on the following principles:


  1. Accelerate the opening base - open more stores in the core markets (esp. the 5 most important cities) and helping to further make the core TV markets more efficient. 
  2. Portfolio mix - MCD will be looking to open 40% of the stores with a drive-thru and increase the number of stores in transportation hubs.  The increase in drive thru stores will help the company continue to drive same-store sales growth given the how the Chinese take to using drive-thru. 
  3. Customer experiences - modernize the store base and build more McCafe’s.      




McDonald’s average unit volumes in China have improved from $1.3 million in 2005 to $2.0 million over the last 12 months.  On an annual basis, the average store in China will serve 470,000 customers, and produce $200,000 in cash flow.  The average check right now is about $3 versus a little over $5 for the USA.


So far this year, same-store sales in China have been 10.5%, while traffic is up 8.7%.  The growth is being driven by (1) value, (2) breakfast and (3) opening more drive-thru stores.  I also learned that SSS in Shanghai have softened quarter-to-date, as they are now lapping strong sales from last year’s World Expo.


Over the next 2-3 years, MCD will be able to generate positive same-store sales as they open more drive-thru’s and they begin to gain scale on their remodel program.  A current store remodel is seeing a 6-10% lift in sales and when they include a McCafe in the remodel the sales lift approaches the low teens.





The tough lessons of the past have taught the McDonald’s management to have in place a disciplined and efficient operating structure in China.  Over the last few years, MCD has optimized its asset base that now allows the company to accelerate unit growth in the coming years.  Importantly, the significant increase in average unit volumes now puts the concept on par with KFC when developers are looking to add one concept or the other to any given site.


On the margin, as MCD takes its real estate professionals from about 120 individuals today to 300 over the next few years, it will create a little more competition for YUM. 



Howard Penney

Managing Director


Rory Green


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