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Our outlook for the restaurant space at this point remains negative.  The combination of a bleak jobs picture and sticky commodity prices (gasoline and foodstuffs) spells a scenario where we see several names within the restaurant space seeing a decline in the fundamental state of their business.


From a top-line perspective, the jobs picture continues to depress expectations for comparable-store sales growth in the restaurant space.  As the chart below shows, the inverse correlation between initial jobless claims and the S&P 500 is quite tight.  Unless the high level of weekly jobless claims declines, we wouldn’t expect significant gains in stocks, particularly restaurant stocks, whose top line growth anchors so heavily on employment.





The two charts below show the inverted initial claims again, this time versus a quick service restaurants index and a casual dining index.  The casual dining index seems to track closely which makes sense to us given that it is the more discretionary of the two categories.







Consumer confidence is also a key metric for us to monitor as we attempt to decipher how restaurant revenues will look in the back half of the year.  Casual dining trends, on a two-year basis, closely track the Conference Board Consumer Confidence Index, as the chart below shows.  Gas prices, which are a key driver of negative consumer sentiment, remain at an elevated level despite having come down from peak May levels.  The inelastic demand for gasoline in the U.S. as well as the asymmetric pass-through of changes in the price of crude oil to wholesales gasoline prices is largely to blame for this; gas prices, as discussed in a recent report by the Federal Trade Commission, tend to go up like rockets and down like feathers.







Foodstuffs, also, have remained sticky to the upside and we believe that the combination of softening top-line trends and continuing commodity headwinds will hamper earnings growth for many companies in 2H11.  BWLD and TXRH are two of the names that are on the top of our list in this regard but we will be doing more granular work on both of those names in the coming days.



Howard Penney

Managing Director


Rory Green


Retail: Pray

With all eyes on the consumer, there’s definitely a disconnect between weak consumer confidence and strong same store sales. Here are some stats showing that we need a BIG sequential comp ramp to offset recent Confidence numbers – just as yy compares are getting tough.


As a backdrop, let’s keep in mind the size of the major data points in question -- PCE vs. retail sales vs. chain store sales (SSS)


PCE = $11 trillion – about 72% of our economy

Retail Sales = $3.1 trillion. In other words, only 28% of consumers’ total expenditures take place in a retail store or online.

Chain Store Sales = about $300 billion per year. (That’s Billion – with a ‘B’). These are the data points that come out the first Thursday of each month. They account for only 10% of Retail Sales, and only 2.7% of what actually comes out of consumers’ wallets. And yes, they become less meaningful by the day as the major retailers opt out of reporting numbers.


We’d argue that Consumer Confidence should most closely track Retail Sales – which is 10x the size of the data points we get on SSS day and includes far more relevant categories. PCE is tougher to use as a benchmark, as it also includes housing, medical, and other expenditures that happen regardless of the consumer’s confidence level. 


Even though Retail Sales SHOULD be the key number to watch, the fact of the matter is that it’s reported on a 2-month lag. The most real-time measure is consumer confidence, and (albeit incrementally not meaningful to the consumer) chain store sales.


As for some analysis…

1) Over the past year, chain store sales growth has only been about 30% correlated with consumer confidence; 2-year chain store sales have been ~60% correlated with consumer confidence over the past 12-months.

2) BUT, if we lag consumer confidence by a month – which makes mathematical and logical sense, and then compare that to an underlying run-rate for comps (2-year SSS) we get to a correlation closer to 88%.

3) On that lag, if we look at the sales numbers we’d need to see in order to maintain a) the underlying 2-yr sales growth rate and b) the .88 correlation, it would suggest a -8.5% comp decline (i.e. what we should be looking at this month, all else equal). If anything, there are more reasons for the industry to come in on the lower side of ‘all else equal’(storms, power outages on east coast and CA, etc…).


Retail: Pray - PCE Retail Sales Comps Cons Cong 2 yr chart


Retail: Pray - 2 yr comp   cons conf


Retail: Pray - 2 yr comp   cons conf 1 mo lag

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Bears Bounce: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Industrials (XLI)


The beauty of bounces, particularly Bear Bounces, is that you get to re-short your shorts and sell some longs. When I was on CNBC yesterday (210PM EST), the SP500 was at 1137. Now, 23 hours later, it’s 34 points (+3%) higher. That’s a big move.


Across our risk management durations, here are the 3 lines that matter to me right now: 

  1. 1265 = long-term TAIL resistance
  2. 1174 = immediate-term TRADE resistance
  3. 1138 = immediate-term TRADE support

In terms of S&P positions, I only had longs going into yesterday’s close. That’s the best I can do to express what was a Short Covering Opportunity. This morning, I sold our Healthcare (XLV) long and re-shorted Industrials (XLI) as 1174 was not violated on the upside.


I started the day with 14 LONGS and 6 SHORTS. Now I have 12 LONGS and 8 SHORTS.


Managing your risk around proactively predictable ranges remains critical.


Let the market tell you what to do,



Keith R. McCullough
Chief Executive Officer


Bears Bounce: SP500 Levels, Refreshed - SPX


Please disregard previous email.



Today, Keith shorted PENN in the Hedgeye Virtual Portfolio at $36.40.  According to his model, PENN currently has TRADE resistance at $37.54 and TREND resistance at $40.03.  


As we mentioned in our notes last week (REGIONALS ROLLING [OVER], (9/8/11); REGIONALS: SHOW ME THE GROWTH, MO (9/13/11)) the regional gaming market revenues for August slowed down in some markets and declined in others.  We saw a similar bearish trend in July.  A sluggish domestic environment characterized by weak housing and high unemployment has certainly affected the US consumer in those two months and it should continue into September.


PENN is our top short in the regionals space given its exposure to many of the underperforming markets (IL, IN, PA) and relatively more downside to its trough valuation in March 2009.  We certainly don't see the quarterly upside for Q2 that the investors have grown accustomed to and estimates may actually need to come down.  While PENN is a fine company with solid management, the sell side is overly bullish on the name in our opinion.



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