• run with the bulls

    get your first month

    of hedgeye free



The jobs data released this morning are positive, on the margin, for the restaurant space.


On the surface, the employment data were positive for the restaurant space and it is important to take these data points for what they are.  Nonfarm payrolls came in way ahead of expectations at 103k versus expectations of 60k and an upwardly revised 57k in August.  However, there are some important caveats within the employment report that we think are worth noting for restaurant stocks.

  • The number of people in part-time work for economic reasons ticked up to 9.3 million in September
  • Long-term unemployment ticked up to 6.2 million in September.
  • The unemployment rate is being aided by the fact that the labor force participation rate has not increased meaningfully since the “recovery” began.
  • Manufacturing jobs contracted in August, disappointingly, while construction jobs ticked up from August to September.  Government jobs continued to decline, with local governments shedding jobs heavily, implying that the growth came from the private sector.  We view this as a positive.

More specifically for restaurants, employment growth by age cohort and also by the industry itself provides insight into the state of the industry.  The employment-by-age data is, on the margin, positive for both quick service and casual dining.  For 20-24 year-olds, employment growth in September accelerated to 1.9% versus last year from +0.4% in August.  This is a positive data point for quick service given that this cohort is a frequent customer for the category.  For casual dining, 55-64 year-olds saw employment growth accelerated to +3.4% in September from +2.7% the month prior. 





Hiring within the restaurant industry was less bullish in August (this data series is released on a lag).  Year-over-year growth in limited service hiring picked up in August while hiring in full service was flat.  We will continue to monitor this trend in the coming months.  Within the payroll data, payrolls in “food services and drinking places” increased by 12k in September following a similar sequential increase in August.  Considering the payrolls data, the lagging industry specific data, shown in the chart below, when it is released for August may show an improvement for September.  We remain more positive on casual dining than quick service.





Howard Penney

Managing Director


Rory Green



hiring by limited service restaurants and full service restaurants were

Shorting EUR-USD (FXE)

Positions in Europe: Short EUR-USD (FXE); Short Italy (EWI)

The currency pair EUR-USD remains a volatile trade as every rumor on Europe’s next move to limit its banking and sovereign risk significantly jolts the pair.  Yesterday from a quantitative set-up, the EUR-USD was not able to breakout back above $1.34 which we took as a shorting opportunity. Since early September the EUR-USD has been broken TAIL (long-term duration), and broken TREND (intermediate term), an explicit short-selling signal in our models (see chart below).


Traders may well be betting that concrete action could come from this weekend’s meeting between Merkel and Sarkozy on Sunday to discuss bank finances ahead of the EU summit on OCT 17th (and hence today’s intraday bounce around $1.35), however it’s worth pointing out that any coordinated policy action will need the blessing of the other Eurozone member states, the ECB, and Brussels. While we don’t rule out a possible swift resolution, it probably won’t come this weekend.


It’s worth noting that while we’re not calling for the EUR-USD to hit $1.20 tomorrow, uncertainty on the region’s go-forward policy to contain or limit its banking and sovereign debt risks—either through a multifactor “bazooka” program or some form of Eurobonds and increases in the ECB’s SMP, for example —should incrementally weaken the pair until some form of “clarity” on policy decision is reached.


From a timeline perspective, it’s anyone’s guess on when Europe’s next band-aid will come—however we’re betting that something is in the pipe. A recent quote from European Commission President José Barroso suggest that Eurocrats are coming to terms with the market implications of their policy schedule: "Markets are much faster than our governments and our parliaments. We have to respect the rhythm of democracies, but I think in extraordinary times we must ask for an extraordinary effort.”


We’d expect any policy action to likely come after all member nations vote on the EFSF, which is expected to come by mid-month (Slovakia and Malta must still vote). Below is a calendar of the near-term events around which policy measures could be crafted:


Oct. 13: Euro-zone finance ministers expected to meet, to decide on release of Greece's next aid payment

Oct. 14-15: G-20 finance ministers' meeting. Europe expected to face pressure to act faster on the debt crisis

Oct. 17-18: EU summit to discuss reform of euro-zone economic governance


Matthew Hedrick

Senior Analyst


Shorting EUR-USD (FXE) - mich






The Nonfarm Payrolls print came in at 103k versus 60k estimate and a revised prior number of 57k.  The unemployment rate for September came in at 9.1%, in line with expectations and August’s number.




Casual dining restaurants underperformed yesterday while food retail, beverages, and food retail stocks posted strong gains. 


THE HBM: DNKN, ARCO, COSI, SBUX, KONA - subsector fbr




DNKN: Dunkin’ Brands’ outlook was raised to “B+” by S&P on debt reduction after the IPO.


ARCO: Arcos Dorados Holdings Inc. today announced that preliminary 3Q systemwide comp sales growth was stronger than it was in the first half of the year.  3Q EPS is being guided to at $0.22.  Net income was impacted year-over-year by higher compensation, 2019 notes redemption charge, and the stronger dollar.   The company also announced the filing of a registration statement for a secondary offering of Class A shares. 


COSI: In a letter to Brad Blum dated October 6th, and filed in an 8-K, Cosi’s management informs Blum that the company will refer to the firm if he wants consideration for the Chief Executive Officer role.  The company also expressed concern regarding Blum’s compliance with federal laws regarding alleged solicitation of other stockholders “and their participation with you in certain activities, as well as any agreements or understandings you may have with other stockholders regarding such activities and the voting or disposition of the Company's common stock”.


SBUX: Starbucks tweeted today that the company is now allowing free Wi-Fi access at hundreds of its locations throughout the UK.





KONA: Kona Grill holder William Blair reported a stake of 437k shares or 4.75% of shares out.  This is versus the previously reported stake of over 1.2m shares in March 2010.





Howard Penney

Managing Director


Rory Green



It appears MPEL has no plans anytime soon on issuing new equity so let’s get back to the fundamentals.



MPEL shot up 14% yesterday.  Think you’re too late?  I think not.  Apparently, the company will not be diluting shareholders anytime soon with an equity offering.  With that overhang out of the way, investors can get back to the fundamentals.  The Street is 30-40% too low on EBITDA for Q3 and Macau has shown no signs of a slowdown, even through Golden Week which looks very strong for the market. 


Worried about a China slowdown next year?  Okay, but at 6x EV/EBITDA it appears that the market is even more worried than you.  As a reminder, MPEL traded at 8x EBITDA when the stock was at $4.  What’s the right multiple?  Given that Macau operators pays no income taxes on gaming profits and domestic gaming companies trade at 6-8x, we would argue for a range of 8-12x and maybe higher since valuations are depressed.


As we said on Tuesday (MPEL: COULD THE SHAREHOLDER MEETING BE A CATALYST?), we think it is unlikely MPEL raises equity anywhere close to these levels.  Our view was confirmed today by multiple press reports.  It makes sense to pull the raise – the valuation is ridiculous and the company only has required contributions to the Macau Studio City project of $25 million in September of 2012 and 2013. 


Given the negativity over the last month or so and the ugly prospect of a dilutive equity deal, we suspect there may be a number of short sellers looking to cover.


The Macau Metro Monitor, October 7, 2011




According to IFR, MPEL is considering a HK listing by way of introduction, instead of selling stock and raising capital, because of current market conditions.  MPEL's HK offering was set for 4Q 2011.



Stanley Ho reduced his stake in Melco International Development to 24.28% from 26.78%.  Also, Lawrence Ho acquired a similar amount of shares, pushing up his stake in the company to 60.57% from 59.09%.  



CEO of Sands China, Edward Tracy, said he is not worried about the 3% table growth cap starting in 2013.



The Maritime Administration (CP) said it has revoked the licence of ferry operator Macao Dragon, which suspended services abruptly on September 15.  “From September 15, 2011, Macao Dragon suspended or abandoned operations between the Taipa ferry terminal and Hong Kong, without authorisation. There is no evidence that Macao Dragon has abandoned or suspended operations due to reasons beyond its control,” the CP said.

Theory vs Practice

This note was originally published at 8am on October 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“In theory there’s no difference between theory and practice, but in practice there is.”

-Yogi Berra


In theory, money printing and piling more debt-upon-debt was going to save the world’s biggest banks. In theory, Old Wall Street had Ben Bernanke’s back on +3-4% US GDP Growth for 2011. In theory, the Yankees should have beaten the Detroit Tigers last night too.


Then again, I’m a conflicted, compromised, and constrained Yankee fan – and with that theory, I may as well be a Keynesian this morning. In practice this is called marked-to-market risk management and the question this morning isn’t an ideological one – it’s, what do you do?


When I joined the hedge fund elite 12 years ago, I didn’t have to have a Global Macro view. Today, I do. In practice, this game of Globally Interconnected Risk is A) always on and B) always changing. Today, I have to play the game that’s in front of me.


Back to the Global Macro Grind


Immediate-term TRADE oversold is as oversold does. Today we’ll register the 3rdShort Covering Opportunity we’ll have called for in the last 2 months (the 1st call we made to cover shorts on August the 8th, 2011).


Here are the US Equity, Commodity, Currency, and Fixed Income factors that help me decide what we do now: 

  1. The SP500 is immediate-term TRADE oversold in the 1180-1197 range
  2. The Volatility Index (VIX) is immediate-term TRADE overbought at 47.11
  3. This is the first day in the last 6 trading days in US Equities where there’s more immediate-term upside vs downside
  4. The US Dollar Index is immediate-term TRADE overbought at $79.43
  5. The Euro/USD pair is immediate-term TRADE oversold at $1.31
  6. WTIC Oil is immediate-term TRADE oversold at $76.19
  7. Copper is immediate-term TRADE oversold at $2.95/lb
  8. US Treasury Yield Spread is putting in an oversold YTD low of 153 basis points wide
  9. US Treasury 2-year Yields are holding immediate-term TRADE support of 0.21%
  10. Goldman is cutting their Global Economic estimates across the board 

On top of the price/volume/volatility signals that help construct the 10 aforementioned factors in my model, we have a very newsy event on the tape with Deutsche Bank’s CEO (Ackerman) guiding Q3 down, big time.


In theory, this is all bad. In practice, a lot of what Goldman and Deutsche Bank are saying isn’t in the area code of what Hedgeye clients would consider new. Our Managing Director of Financials research, Josh Steiner, has been bearish on the banks since February.


The US Financials ETF (XLF) is down -29.3% for the YTD. That’s called a crash – and it’s readily apparent in the rear-view mirror. So is the SP500 having collapsed -29.8% and -19.4% from their October 2007 and April 2011 easy-money highs.


Today is a day to notice what no one will be focused on. In theory, your Risk Manager should have a process to impute everything that’s happening in the world as of last price. In practice, most money managers will be freaking out this morning making emotional decisions.


Capitalize on that.


What do I see that’s better than bad that people aren’t talking about this morning? 

  1. South Korean inflation (CPI) dropped sequentially to +4.3% for SEP versus +5.3% in AUG (on the margin that’s not bad)
  2. Chinese non-Manufacturing PMI rose sequentially to 59.3 for SEP versus 57.6 in AUG (China is not collapsing, yet)
  3. USA’s ISM report for SEP rose sequentially (month-over-month) to 51.6 versus 50.3 in AUG (Growth Slowing? not new) 

Again, I’m not calling for a new bull market. Neither am I saying that Growth Slowing has ended. I am simply suggesting that you see this for what it is in most things US Equities (and some things Asian and European Equities) this morning – a Short Covering Opportunity.


My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1554-1672 (Gold is now bearish TRADE and TREND), $76.19-81.09 (Oil remains in a Bearish Formation – bearish on all 3 of our risk management durations), 5091-5439 (that TRADE line break in the DAX yesterday mattered), and 1080-1130, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Theory vs Practice - Chart of the Day


Theory vs Practice - Virtual Portfolio

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.