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LIZ: Black Book Available


Our LIZ Black Book is now available...


We think that LIZ has more positive asymmetric factors than nearly any other story we can find in retail today. Yes, we know it’s a small, ugly, financially and operationally-levered story with a horrific track record in hitting expectations and in corporate governance. But trust us, that’s the consensus call.


This is not simply a call on improved operational performance or a simple divestiture. But rather the culmination of changes that have greatly reduced the asset intensity of the model at the same time we see sales and EBIT margins turn up meaningfully on the margin.


We can talk about our $16 sum-of-parts model until we’re blue in the face, but stocks don’t trade on break-up values…we get it. But they do trade on cash flow, and the delta here for changes in cash flow and RNOA will be unmistakable over the next 12-months, and should lead to price appreciation that will be embarrassing to have missed.



If you have not received a copy of our report, contact to request access.


LIZ: Black Book Available - LIZ BB Cover


Casey Flavin






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






While coffee prices have declined -3.3% over the last week, prices have increased 24% since August 8thand near peak YTD levels.


THE HBM: PNRA, YUM, SBUX, CBRL, DIN - coffee 913





Full service restaurants outperformed peer food, beverage and restaurant subsectors as DIN and CBRL traded strongly.  CBRL reported a poor quarter this morning and is set to decline on the open, trading down -5% premarket.


THE HBM: PNRA, YUM, SBUX, CBRL, DIN - subsectors fbr




  • PNRA has been reiterated Overweight by Piper Jaffray with a price target of $148
  • YUM expects its Indian operations to be around $1 billion by 2015.
  • SBUX short interest has increased by 61% as of the August 31stdata versus the data as of two weeks prior.



  • CBRL reported $1.00 in EPS for 4QFY11 versus expectations of $0.91.  The board has authorized $65mm for share repurchases.  Restaurant comps came in at -1.4% versus consensus of -0.7%.  Retail comps came in at -0.7% versus consensus of +1.2%.  Traffic declined 4.2% during the quarter while average check gained 2.8%.  Operating margins, at 6.2%, were 60 basis points below consensus. 
  • DIN’s Applebee’s Neighborhood Grill & Bar has teamed with sports channel ESPN for a fall Monday night football “Check In and Win” promotion.


THE HBM: PNRA, YUM, SBUX, CBRL, DIN - stocks 913


Howard Penney

Managing Director


Rory Green



Half The World

This note was originally published at 8am on September 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.

“Half the world hates, what half the world does every day…Half the world lies, half the world learns…Half the world talks, with half the mind on what they say.”

 – Neal Peart


To suggest that these lyrics by Canada’s son Neal Peart apply to Wall Street would be all too appropriate.


There’s the buy side half, and there’s the sell side half.


But even within those groups, there are the big guys – with a big sense of entitlement – such as the Morgan Stanleys, Citigroups and BofAs of the world who use the Fed as their piggybank at our expense.  No, Hedgeye did not accept any TARP money and we won’t in 2012, either.


Similarly on the buy side there are the PMs and Analysts who have exclusive access to management teams to get inside info during ‘double secret one-on-ones’ at broker conferences.


And then there are the others who have to fight harder and rely on a tried and true investment process that will consistently generate positive returns across all durations without what we call “orange jumpsuit risk”.  We’re proud to call many of them our clients.


But as for the big guys, especially on the sell-side-half, it’s pretty amazing that despite all the resources, access and clout, there’s still such absence of any rigorous quantitative modeling of earnings and cash flow.


This translates into what we’ll call ‘entitlement to grow’. It’s what the sell side seems to bestow ad nausea to virtually every company in (and out) of the S&P.  


Sit next to any analyst – even someone considered halfway decent – while they’re building out a model. When plugging in a growth rate for a certain product, business line, or region, and ask them to build a bearish revenue case.  The chances are that they’ll take revenue growth closer to zero.


Then what about gross margins? Maybe they’ll take them down a few basis points . . . let’s say 50bps.


As for SG&A, here’s the real kicker.  Companies in retail give SG&A guidance – for the most part – as a percent of sales. That means, of course, that the sell side models it that way as well. But the guided SG&A ratios are simply the product of the company’s sales results from a largely predetermined SG&A plan. That sell-side “bear” will end up with margin deleveraging of around 50bps.


In reality (which is where we live) what happens if sales targets come in light – or heaven forbid – are actually down year on year?


SG&A is planned predominantly on a fixed basis. Roughly 60-70% of SG&A costs are headcount-related for the average retailer or brand.  Then there’s another 10-15% that’s marketing and R&D. The remainder is largely corporate (i.e. fixed). Are these expenses pliable? Yes, in part. Some can be flat-out cut, even if they shouldn’t be. But those that are certainly take more time than the cadence of revenue recognition.


So what’s the REAL bear-case?

  • Unemployment is still in the dog house, and there’s no near-term tax stimulus;
  • Consumer spending – which is 72% of our economy – is down 1-2%;
  • Zero percent 4Q GDP growth;
  • ‘Essential Spending’ which includes housing, food, energy, etc… +2-4%; and
  • Discretionary spending -5-7%.

If this is the scenario, can the Wal-Marts of the world do, ok?  Yes they can, which is why WMT is one of our top long ideas.  Nike, which has a structural advantage and is gaining share in a global duopoly in a GDP+ category?  Definitely.  Liz Claiborne, which has more asymmetric factors to outperform in a bad economy than almost anyone in retail?  Yes.


How about JC Penney, which is…well…it’s JC Penney? Absolutely not. The other key losers are those that are posting unsustainably high growth rates today, like Hanesbrands and UnderArmour (even though the latter is a great longer-term story).


Whether a company wins or loses is one thing, but being fully represented in expectations is another. If JC Penney’s sales square footage is -1%, comps are down 3-4%, gross margins are down 100bps+, and SG&A is growing by 3%, does anyone want to guess what that does to EPS growth? Do the math, it gets you to something like -125% -- or some other meaningless number when EBIT is wiped out entirely.


Is that dude whose shoulder you’re watching over running any of these numbers? My sense is that he’s probably not. Actually, my opinion is meaningless when the flat-out fact is that the consensus is looking for EBIT to grow for JC Penney in the high single digits over the next year.


So Mr. Ackman, do you believe +8% or -125%. Not exactly a delta I want to be looking at in this tape.


There’s this little thing called leverage. It’s a wonderful thing on the upside (circa 2003). But unfortunately, today it’s looking like 2008 all over again.


If you’re not part of the right half, get there… fast…


Keith’s immediate-term ranges for Gold, Oil, and the SP500 are now $1779-1897, $87.51-90.73, and 1148-1207, respectively.


Brian P. McGough
Managing Director


Half The World - Chart of the Day


Half The World - Virtual Portfolio

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TODAY’S S&P 500 SET-UP - September 13, 2011


As we look at today’s set up for the S&P 500, the range is 33 points or -1.83% downside to 1141 and 1.01% upside to 1174.




On our intermediate-term TREND duration, 8 of 9 Sectors remain broken/bearish. TREND trumps TRADE.  The only sector of 9 that’s bullish TRADE and TREND = Utilities (XLU). We’re long Utilities and Healthcare (XLV) which is 1 of 3 Sectors that is bullish on our immediate-term TRADE duration (Consumer Staples, XLP, is the 3rd).




THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -219 (+1907)  
  • VOLUME: NYSE 1087.88 (-10.98%)
  • VIX:  38.52 +12.14% YTD PERFORMANCE: +117.01%
  • SPX PUT/CALL RATIO: 2.20 from 1.80 +22.48%



FIXED INCOME: 10yr UST yields held the 1.86% support line yesterday; bouncing big this morning

  • TED SPREAD: 33.78
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.94 from 1.93    
  • YIELD CURVE: 1.73 from 1.76

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30 a.m.: NFIB Aug. small business optimism
  • 8:30 a.m.: Aug. import price index, est. M/m (-0.8%), prior (0.3%)
  • 10 a.m.: IBD/TIPP Sept. economic optimism, est. 38.0, prior 35.8
  • 11:30 a.m.: U.S. to sell $27b 4-week bills 
  • 1 p.m.: U.S. to sell $13b 30-year bonds reopening
  • 2 p.m.: Aug. budget statement, est. (-$132.0b)
  • 4:30 p.m.: API inventories


  • World oil demand forecast cut by IEA on concerns about health of global economy
  • Merkel rejects Greek default, defends euro-area integrity
  • President Obama gives jobs speech in Columbus, Ohio, 2:15 p.m.



OIL – alongside Copper and 10yr UST yields arresting their declines this morning, WTIC oil holding an important TRADE line of support ($86.03) is an important growth stabilizer in Global Macro this morning. This tells me we aren’t going to the dark ages of depression, yet.  Global Macro remains as interconnected across asset classes as ever


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Thailand May Cede No. 1 Rice Ranking to Raise Rural Incomes
  • Gold May Fall a Third Day on Sales to Cover Losses in Equities
  • Oil Gains a Second Day on Signs U.S. Crude Stockpiles May Drop
  • Australia Seen Shipping Record Wheat Cargoes on Bumper Harvest
  • China Builds Lead in Afghan Commodities, Adds Oil to Copper
  • Steel Dynamics Cuts Forecast as Flat-Rolled Margins Get Squeezed
  • Copper Climbs First Day in Three on Easing European Debt Concern
  • Corn Falls as U.S. Cuts Demand Outlook, Crop Conditions Improve
  • Wheat to Stay Near Parity With Corn as Soy Climbs, Goldman Says
  • Oil Trades Near Four-Day Low as IEA Reduces Demand Estimates



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • GERMANY – with the DAX having moved into full crash/capitulation mode in the last 3 days of trading, it shouldn’t surprise anyone to see German stocks move 2% in 20 minutes to go green on the day. With political career risk dominating the craws of every Eurocrat, expect plenty more rumors than the “China buys Italy” thing we saw yesterday. Most of the rumors are lies, but deal with them.


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: mixed on light volume as volatility in Asian Equities is calming (bullish); Australia/Japan/Malaysia = up; China/Thai/Singapore down

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

CHART OF THE DAY: Great Misunderstandings


CHART OF THE DAY: Great Misunderstandings - Chart of the Day

Great Misunderstandings

“To be great is to be misunderstood.”

-Ralph Waldo Emerson


Great short sellers in this game have one thing in common – they know when to cover.


I was taught how to sell short by doing. That’s not to say I’m the greatest short seller since the Count of Monte Cristo either. That’s simply to say that since 1999 I have had a lot of reps.


Like in any other profession, the more you do of something the more you have an opportunity to make mistakes. It’s your mistakes that make you evolve as a Risk Manager – that’s if you choose to let them teach you.


There have been plenty of opportunities for people in this game to evolve since 2008. Evidently, some have chosen not to. According to S&P data, only 167 of over 19,000 “recommendations” by Old Wall Street’s analysts this year have been “sell.” Professionally embarrassing.


We don’t want to embarrass the competition inasmuch as we want to challenge them. We wake up early every morning with fire in our bellies and a passion to be the change we want to see in this business.


Obviously on Washington’s Wall Street there hasn’t been a lot of that going on for the last 9 months – that’s why we do what we do. We want America to start winning again. Every losing streak ends with a win. It’s time to embrace winners.


Back to Short Covering


I’ve written 2 intraday notes in Q3 of 2011 titled “Short Covering Opportunity” (one on August 8th and one yesterday). Yesterday’s call to cover shorts generated as much questioning and feedback as any time I think I have ever made a call to cover shorts since the thralls of early 2009. This is an important sentiment indicator.


Sentiment is one of the hardest things in this game to quantify. I was on multiple client calls yesterday where, ultimately, what very astute investors wanted to know was what I was “hearing” from other clients. My answer to that question is that there is no answer that is of quantifiable relevance. What any of us are “feeling” or “hearing” about markets subjects our performance to Great Misunderstandings.


As I wrote in yesterday’s Early Look, stock market fund “outflows” and “sentiment” will be the final stage for the 2011 Equities bears to navigate. What I meant by that is those who have been too bullish in 2011 will have redemptions (outflows) and forced to sell at immediate-term bottoms. All the while, quantifiable sentiment indicators will show signals of immediate-term TRADE capitulation.


Here are 3 of those:

  1. II Sentiment Survey Spread (Bulls Minus Bears) = dropped to almost a dead heat in the last week (39% Bulls, 38% Bears) and could easily move to the bearish side (more institutional investors admitting they are bearish at the bottom than bullish – it’s called career risk management into year-end) this week and next.
  2. Volatility (VIX) = immediate-term TRADE overbought yesterday at 43 and is now making a lower-high versus the August 8th Short Covering Opportunity high of VIX 48. Unless you think 2008 starts happening this week (it could!), lower-highs are what they are (bearish on the margin for volatility) and I shorted fear yesterday via a short position in the  VXX.
  3. US Stocks vs US Treasury Bonds = flagged one of their widest performance chasing divergences of the year yesterday (stocks down, bonds up) and, critically, both the UST 10-year yield hit my immediate-term downside target of 1.87% intraday at the same time that the US stock market (SP500) tested lower-lows (then stocks recovered to close at a significantly higher-low).

“Significant” is as significant does. If you are using the wrong models and/or sources to help you navigate this beast of Keynesian Economics gone bad, we’d agree that most bulge bracket sell-side desks aren’t going to be helpful at this stage of the game (unless they are making calls to fade their economist/strategist calls as they “cut estimates” at the bottom).


Remember, bottoms are processes, not points. So you need a rigorous and repeatable Global Macro risk management model that has worked in both 2008 and 2011 to know when to cover. Making the turns “off the lows” matters.


Lastly, after you take advantage of Short Covering Opportunities, you need to quickly, but patiently, get yourself back into position on defense. There are no rules against re-shorting things that you covered lower. Neither are there any Keynesian laws (yet) that prevent you from thinking quickly as you patiently pick your spots.


In Steven Pressfield’s “Gates Of FireAn Epic Novel of The Battle of Thermopylae” (I read it on the beach last week to get me fired up for Q4’s Global Macro battle), Pressfield explains the “role of an officer” in Spartan war as follows:


“He was just a man doing his job. A job whose primary attribute was self-restraint and self-composure, not for his own sake, but for those whom he led by his example.” (“Gates Of Fire, page 112)


To be great in this globally interconnected game takes passion, patience, and time. The greatest of misunderstandings is how quickly we need to evolve the risk management process before it becomes our Waterloo.


My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1, $86.03-90.51, 4, and 1141-1174, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Great Misunderstandings - Chart of the Day


Great Misunderstandings - Virtual Portfolio