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The markets have been melting down over the past 5 day with the S&P 500 down 5.5%, while COSI is up 11.8%.  I would argue that the stock is not reflecting the bunker mentality that management and the board has adopted, but the realization that there is a real plan in the market place that suggests COSI has a bright future.   


Yesterday, the WSJ revealed that there was a war of word between the management of COSI and Brad Blum.  It appears that management hurled the first diatribe in a memo to employee’s and Franchisees.  Which begs my first question; why did management leave out shareholders in communications about the issues its has with Mr. Blum?


What I’m asking is really a rhetorical question, because its unlikely that management has many shareholders on their side and, more importantly, their shareholder base is not naive enough to believe the rhetoric implied by the WSJ article. 


Management may be able to rally the troops internally but doing so externally is a different proposition.  I believe that COSI shareholders hold management to a high standard of accountability.  Finding the right solution will hinge on the financial performance of the company and, on that score, management gets a failing grade.  


Given current trends and management’s lack of a cohesive plan, COSI seems somewhat like Greece at this juncture: one cannot rule out the possibility of outright failure of the company.  Should the company meet that fate, it will not be entirely due to the poor economic environment; some of Cosi’s peers are managing through, and even thriving in, the current malaise.  In my view, the most significant threat to Cosi going forward is management neglecting to recognize the real issues facing the company: the need for leadership and additional capital.


The company continues to make progress on several fronts, including the new catering menu, online ordering, and a remodeling initiative but, as yet, sales have not rebounded as strongly as many had hoped. 


COSI IS LIKE GREECE - cosi comps



What is management doing to enhance shareholder value?


The Board of Directors recently engaged The Elliott Group to work with the search committee towards the goal of finding a new CEO.  I would question the wisdom of this decision.  Alice Elliot, founder and Chief Executive Officer of The Elliot Group, has extensive experience in the restaurant industry and is surely aware of the credentials of one person – Brad Blum – that is actively seeking the job and willing to work for $1.  Maybe that low salary is somewhat of a disincentive for the search firm, but irrespective of that, the company will find it very difficult to find a candidate as well-suited for the CEO position as Mr. Blum.


I would doubt that the Elliot Group can find another candidate that has done as much research on the company, has as comprehensive a plan to reinvigorate the business, will work for free and – as a bonus – has access to capital that the company desperately needs.  Additionally, Blum is a major shareholder of the company.  As things stand, the company is not facing a bright future.  This is despite the tremendous potential of the brand; I would think that a solution as offered by Blum would be a blessing for the interim CEO and the board.


Instead of this obvious solution, the company is going to pay money that it doesn’t have to a search firm to find a CEO when a highly qualified, major shareholder of the firm is willing to do the job for free.  Blum owns 6.75% of the shares out while the board (collectively) owns less than half of that percentage.  What shareholder would not want a CEO with Blum’s credentials and strong financial interest in ensuring the firm’s future success?


Time is ticking for the current management team.  If decisive actions are not taken immediately, by June 2012 the market will have determined the future of the company and it will not look good for the current management team.  Based on the assumption shown in the chart below, the company’s cash cushion will be worn thin in early 2013 unless some capital is injected into the company.  If sales soften, the process could be shortened.  Additionally, our assumption does not factor in the company’s need of $5-7mm of additional to remodel the company's restaurant base. 





Even if a quality CEO not named Bradley Blum is found in the near-term, it seems likely that the first order of business for that individual will be raising capital.  Unless the person in question has similar access to capital that Blum has, it is likely that the capital raising process will be time-consuming and costly, and perhaps extremely dilutive to current shareholders.


Yet, another conversation that management does not want to have with its shareholders!


Like Greece, Cosi needs capital fast.  The $8mm of cash on the balance sheet looks like a net positive but the company needs a significant level of reinvestment; the asset base has been starved of capital for the last three years.


COSI IS LIKE GREECE - cosi capex



If I were to the strip out the $0.16 of cash on the balance sheet, the stock price is currently valuing the company at $30.2 million.  Given that the company has no assets on the balance sheet, has not made money in years and is on schedule to lose money again in 2011, the $30.0 million would appear to represent a fair value for the goodwill in the COSI brand name. 


The company’s contention that Blum is making a low-ball offer for the company may not be entirely accurate when considering the scenario described above.  


There is no guarantee that Mr. Blum will be successful but he has a better shot than most, in my view.


One really has to wonder what the discussions are like in the COSI boardroom today.  While not an ideal scenario for management and the Board, Mr. Blum has offered multi-pronged solution to fix the company.  Any objective outside observer of this situation is surely wondering if management and the board is putting their interests ahead of employees, franchisees and shareholders.



Howard Penney

Managing Director




The Dexia Domino & The Run On Morgan Stanley

Positions: We are currently short Citigroup (Ticker: C) in the Virtual Portfolio.


In times like these, we obviously want to be careful that we are not fear mongering, but we also want to accurately flag critical risk signals, even if portending worse news.  This morning two important events are occurring in the global banking system.  First, credit default swaps on the major U.S. brokerages are blowing out big time.  In particular, Morgan Stanley credit default swaps are now at 800/875 basis points per Zerohedge.  Second, Dexia, a Belgian bank that is two times the size of Washington Mutual appears to be on the precipice of some form of a government bailout.


Last night after the close, Morgan Stanley President and CEO James Gorman sent a memo to his firm suggesting that the rumors around the company's solvency were overdone. In the memo he wrote:


"To help you wade through the maze of numbers and information, it might be worth reading two analyst reports that were published this morning. One is from Howard Chen at Credit Suisse that examines Capital, Funding and Liquidity at Morgan Stanley and Goldman Sachs and, in some detail, highlights the dramatic improvement to our financial strength over the last three years.”


Unfortunately, this is the same Howard Chen who upgraded Morgan Stanley at north of $30 per share in early January 2010.  The point is not to denigrate Chen, as we are sure he is a great analyst, but rather to highlight that the Morgan Stanley memo reeks of desperation, which is exactly what the market is telling us this morning.


Currently, the stock price of Morgan Stanley is below $12, which, as we outline in the chart below, the lowest price for the stock since December 2008.  Even more disconcerting are the credit default swap markets on Morgan Stanley debt, which are now trading beyond 800 basis points on the one-year tenor (per Zerohedge).  As the second chart below highlights, this is well above the close of yesterday at 529 basis points on the five-year tenor. Simply, Morgan Stanley CDS at this level are not sustainable. 


The Dexia Domino & The Run On Morgan Stanley - 1 


The Dexia Domino & The Run On Morgan Stanley - 2 


Meanwhile the rest of the brokerage sector in the U.S. is showing similar stress.  Goldman 1yr CDS are now just shy of 400 basis points, Bank of America 1yr CDS are just over 500 basis points, and Citigroup’s 1yr CDS are just below 400 basis points.  Certainly the rest of the brokerage sector does not appear to be under the duress of Morgan Stanley, but swaps being prices back at levels reminiscent of 2008 are noteworthy.


As it relates to Dexia, our Financials team wrote a note this morning, which we’ve excerpted below:


"It's been a tense week at Dexia.  On Monday it was reported that the board was conducting emergency meetings.  This morning the company is facing criticism over their sovereign debt accounting, which doesn't mark Greek debt to market.  Anonymous sources told Bloomberg and other news outlets that a breakup of the company could be imminent.  Dexia could sell the healthy business units, which include asset management and a Turkish unit, in order to offset the capital hit from the sovereign debt portfolio.  


Throughout the crisis, European lenders have insisted that their capitalization levels are adequate.  Subsequent events have shown that this is transparently not the case.   


The problem with using regulatory capital ratios is a simple one.  Tier 1 Common and other regulatory ratios use as their denominator risk-weighted assets.  Under Basel II (the relevant standard for European banks), the risk-weighting for sovereign debt rated above AA-/AA3 is 0%.  That is, from a regulatory perspective, sovereign debt bears no chance of default and requires no capital.  In the current environment, looking at a capital ratio that ignores the asset class under scrutiny is quixotic.   


Thus, we revert to examining capital on the basis of tangible equity / tangible assets.  This metric removes the distortion caused by the regulatory paradigm and is less easily gamed.  We first published these charts on September 22nd in conjunction with a conference call.   


Dexia jumps out in the tables below as the least-well-capitalized of the major European lenders.  At the top of the table, for comparison, we show the US banking system in 2Q08.  European banks today look comparable to the American banks just before the crisis bore down in full force. 


These charts should be read in conjunction with the tables below showing the relative exposure to sovereign debt.  To take the Greek banks as an example, they look relatively better capitalized on a TE/TA basis.  However, their exposure to Greek and other PIIGS debt is correspondingly higher, and taking a realistic mark on the sovereign holdings would wipe out the bulk of this apparent advantage.   


On a TE/TA basis, Dexia is the weakest link.  It comes as no surprise to us to see the company wobble."


The Dexia Domino & The Run On Morgan Stanley - 3


The Dexia Domino & The Run On Morgan Stanley - 4


The Dexia Domino & The Run On Morgan Stanley - 5


The Dexia Domino & The Run On Morgan Stanley - 6


Daryl G. Jones

Director of Research


Short Covering Opportunity: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU)


This is the 3rd Short Covering Opportunity note I have written in the last 2 months (August 8th and September 12th were the other two).


I mention these time stamps not to take a victory lap, but to reiterate the confidence we have in our risk management process. It’s not always right. But it’s right a lot more than it’s wrong – and it’s repeatable.


Across durations, here are the lines that matter now: 

  1. TREND resistance = 1237
  2. TRADE resistance = 1137
  3. TRADE support = 1079 

I’ve covered our short position in the Consumer Staples ETF (XLP) and have bought back the only Sector ETF we like (Utilities – XLU), moving our asset allocation in the Hedgeye Asset Allocation Model back up to 6% from 0%.



Keith R. McCullough
Chief Executive Officer


Short Covering Opportunity: SP500 Levels, Refreshed  - SPX

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.








Cattle futures rose to a record as demand for U.S. beef is increasing as shrinking domestic herds signal tighter supplies and higher costs for restaurant companies like TXRH with exposure to beef.


The decline in gasoline prices is good for casual dining traffic but, if like in 2008 it is due to a fall in demand as economic conditions deteriorate, the benefit of cheaper gas may be offset.  The price action in casual dining stocks certainly suggests that lower gas prices are not bolstering sales significantly.


THE HBM: TXRH, SONC, YUM, CMG, SBUX, CAKE - gasoline prices



The ICSC chain store sales index rose 0.1% last week; the second week of little change. Year-over-year growth jumped to 3.7%, the fastest growth in nine weeks as sales fell in the comparable week last year.





Yesterday was a tough day for all of the food, beverage and restaurants stocks.  Casual dining got beaten up again, declining -4.9% on average.


THE HBM: TXRH, SONC, YUM, CMG, SBUX, CAKE - subsector fbr





SONC: Sonic Corp. reported sales trends of 0.4% for the fourth quarter of its fiscal year ended September.  This represents a significant slowdown in trends for the drive-in chain.  The company expects positive same-store sales in FY12 and flat restaurant level margins.





YUM:  Yum! Brands reports after the close today and we will be listening carefully for commentary around trends in China in light of softening economic data.  We like YUM on the long side, believing that the company will deliver double-digit EPS growth for 2011.  Furthermore, in the past, concerns on China have provided favorable entry points for buyers of YUM’s stock.


CMG: Chipotle Mexican Grill was initiated Outperform at Credit Suisse. 


SBUX: Starbucks is offering any breakfast sandwich for $2 when customers buy any beverage from October 4-10that participating stores.


THE HBM: TXRH, SONC, YUM, CMG, SBUX, CAKE - sbux breakfast





CAKE:  The Cheesecake Factory was rated consumers’ favorite casual-dining restaurant for the second year in succession, according to Market Force Information’s rankings of casual dining restaurants.  Texas Roadhouse and Olive Garden took silver and bronze, respectively.





Howard Penney

Managing Director


Rory Green



TODAY’S S&P 500 SET-UP - October 4, 2011


This Correlation Crash is now readily evident to anyone who didn’t think it could happen.  As we look at today’s set up for the S&P 500, the range is 50 points or -1.75% downside to 1080 and 2.80% upside to 1130Good news is that yesterday, US stocks finally moved into immediate-term TRADE oversold territory – so today Keith is makeing the 3rd major Short Covering Opportunity call he’s made since the 1st one on August the 8th.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -2498 (-662) 
  • VOLUME: NYSE 1403.71 (+6.08%)
  • VIX:  45.45 +5.80% YTD PERFORMANCE: +156.06%
  • SPX PUT/CALL RATIO: 2.29 from 1.49 (+53.14%)




YIELD SPREAD – it will be fascinating to hear Bernanke testify today that this is working; the TWIST is compressing the Yield Spread to a fresh YTD low this morning (153bps wide) and only perpetuating the pain on the front lines of this fear that the banks cash earnings are under siege – in this case, the fear is well placed. I remain long the US Treasury Flattener (FLAT)

  • TED SPREAD: 37.25
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 1.80 from 1.92     
  • YIELD CURVE: 1.56 from 1.67


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45 a.m./8:55 a.m.: ICSC/Redbook weekly retail sales
  • 9 a.m.: Fed Gov. Raskin speaks on foreclosures
  • 10 a.m.: Fed Chairman Bernanke to testify on economic outlook before Joint Economic committee of Congress
  • 10 a.m.: Factory orders, est. 0.0%, prior 2.4%
  • 11 a.m.: U.S. Fed to purchase $4.25b-$5b notes/bonds
  • 11:30 a.m.: U.S. to sell $30b 4-wk bills
  • 4:30 p.m.: API inventories
  • President Obama speaks on American Jobs Act in Mesquite, Texas, before heading to campaign event in St. Louis
  • 10 a.m.: House meets to consider Senate amended continuing resolution, which provides FY12 funding through Nov. 18


  • Apple’s next iPhone may be showcase for improved voice controls, hinting at improved speech technology. Event at 1 p.m.
  • Belgium, France say they will act to prop up Dexia if necessary
  • Europe faces rising risk of double-dip recession, S&P says
  • Fed Chairman Bernanke testifies on economic outlook before Joint Economic Committee of Congress, 10 a.m.
  • U.S. regulators said to consider if as many as 4.5m foreclosure cases will be examined to determine if compensation is due: WSJ
  • General Maritime (GMR) is in talks with lenders, creditors on potential restructuring
  • Kinetic Concepts (KCI) unnamed bidder withdrew offer; co. expects to be taken private by Apax Partners for $68.50/shr
  • McGraw Hill (MHP) sells nine-station broadcasting group to E.W. Scripps (SSP) for $212m in cash


COMMODITY/GROWTH EXPECTATION                                                                    


COMMODITIES: crash in copper and oil continue; both immediate-term TRADE oversold (finally) at $2.95/lb and $76.09/barrel respectively


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Goldman Cuts GDP Estimates; Sees German, French Recessions
  • Mordashov Expands Steel Output as Mittal Retrenches: Commodities
  • Commodities to Rally 20% on Emerging Markets, Goldman Says
  • Ivanhoe, Rio Reject Mongolian Bid to Change Oyu Tolgoi Deal
  • Oil Drops a Third Day as Goldman Cuts Forecast for Brent Crude
  • Gold Rallies for Fourth Day as Europe Crisis Spurs Haven Demand
  • BHP, Rio Bond Risk Soars to 2-Year High on Slowdown Concerns
  • Copper Falls for Fifth Day as European Crisis May Curb Demand
  • Record U.S. Gasoline Cargoes Drive 17% Gain in Tankers: Freight
  • Commodities to Extend Decline, Says Sarin: Technical Analysis
  • Oil Falls to Eight-Week Low on U.S. Supplies, Libyan Production
  • Copper Drops in London Before U.S. Factory Orders: LME Preview
  • Platinum-Gold Ratio Drops to Lowest Level Since at Least 1987
  • Sugar Production in India Delayed by Cane-Pricing Dispute
  • CME Group Increases Margins on Copper, Platinum Futures
  • Oil Speculation Rules Probed by Levin Panel as CFTC Nears Vote
  • Palm Oil Drops for Second Day on European Debt Crisis Concern
  • Gold Gains for Fourth Day as Europe Debt Concern Spurs Demand
  • Uranium Prices Rise as Fukushima Volatility Persists, Ux Saysd




THE HEDGEYE DAILY OUTLOOK - daily currency view





EUROPE: crash continues after DAX broke the line we signaled as critical support yesterday (5439); Italy (which we're short) = -38% since Feb.


DAX: the only line left (Germany’s TRADE line of support at 5439) is now gone and Ackerman (Deutsche Bank) is telling the world what we all know (the money-center banks of the world are going to miss badly and be forced to guide down)


THE HEDGEYE DAILY OUTLOOK - euro performance





ASIA – crashing equities and currencies continue to be led by Hong Kong (down another -3.4% overnight; down -33% since

US Equities peaked in April!); KOSPI crash continued at down -3.6% (down -23% since May); Singapore -3%; Thailand -2.7%, etc.


THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Leading From The Front

This note was originally published at 8am on September 29, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We will all sleep as I do, in the open.”



At the end of chapter 22 of “Gates of Fire”, King Leonidas gives an epic speech to his officers about leadership.


“I am telling the Spartans what I tell you now. You are the commanders; your men will look to you and act as you do. Let no officer keep to himself or his brother officers, but circulate day long among his men. Let them see you and see you unafraid.”


Compare and contrast that sense of responsibility and selflessness versus the putrid lack of accountability we have to wake up to as modern day capitalism comes under left-leaning Keynesian assault:


“Monetary policy is not a panacea. There are certainly some areas where other policy makers could contribute.”

-Ben Bernanke (in a speech yesterday)


There is no legitimate leadership in this country’s economic policy making inasmuch as there is none in France or Italy this morning. Losers are pointing fingers and making excuses rather than bellying up to the bar like Red Sox GM Theo Epstein did last night:


You can’t sugarcoat this. This is awful. We did it to ourselves and put ourselves in a position like this to end our season.”


The winners in this country who bleed red, white, and blue get accountability. Our academic and political policy makers, who have never had to meet a payroll in their life, do not.


Back to the Global Macro Grind


In Monday’s Early Look I outlined this week’s calendar of Global Macro catalysts. The last 2 catalysts left for the Big Government Intervention “is the best path to long-term economic prosperity” club, were a vote for the Euro-TARP bailout in the Bundestag and month-end markups.


If the German vote was your catalyst to be long anything European or US Equities, that catalyst is now gone. What do you do now? Hope for another left-leaning central plan to suspend economic gravity? Or just say hey – this whole Keynesian thing “is not a panacea?”


Rather than lean on the losing side of this year’s Global Macro trade, it’s time to get back to winning again here this morning. From New Haven, Connecticut to St. Louis, Missouri, we’re issuing a friendly challenge to all of the winners of the 2011 game of Globally Interconnected Risk to unite.


First, let’s stick with this week’s game plan:

  1. Monday, I cut our asset allocation to US Equities to 0% again (sold Utilities, XLU)
  2. Monday, I cut our asset allocation to Commodities to 0% again (sold Gold, GLD)
  3. Tuesday, I moved the Hedgeye Portfolio back to net short (more shorts than longs)

This isn’t being “over-confident”, “uber bearish”, or whatever the losers and the haters out there want to call us. This is simply a reminder that we have a repeatable risk management process at this firm that has saved our clients and their clients a lot of money in both 2008 and 2011.


"Winning takes talent, to repeat takes character."

-John Wooden


Winning doesn’t require bailing out losers. It doesn’t require extending the short-selling ban like the French are doing again this morning either. Winning requires accountability, confidence, and trust. If people don’t trust you or your economic policy making process, you should be fired.


The SP500 is down -26.5% from the October 2007 high. It’s down -15.6% from the April 2011 lower-long-term high. This is called losing. And the best way to start winning again is to end whatever it is that these people keep doing to our markets, over and over and over, again.


No more whispers, rumors, and squirreling around in the shadows of this fiat system. No more bailout money printing as the elixir of short-term political life. Stop.


I want to see shields flashing like mirrors, for this sight strikes terror into the enemy” (Leonidas in Gates of Fire, page 226). Give me transparency, or give me a place of American mediocrity where I can sleep in.


My support and resistance ranges for Gold, Oil, the German DAX, and the SP500 are now $1567-1667, $77.91-83.69, 5449-5741, and 1113-1171, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Leading From The Front - Chart of the Day


Leading From The Front - Virtual Portfolio

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