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




There is a great article by Jonathan Maze on Private Equity's Mixed Track Record in the Restaurant Finance Monitor - “The buyout boom years of 2005 to 2007 haven't been good to private equity buyers of restaurant chains. In that period, those investors, buoyed by cheap debt, bought up numerous chains around the country. Yet of the 35 restaurants they bought in those years, 11 have gone bankrupt, and two others are in distress”.




The employment situation in October was largely unchanged with the unemployment rate dropping slightly to 9.0% from 9.1% prior and the Labor Force Participation Rate was unchanged at 64.2%.  Private Payrolls came in below expectations at 104k versus 125k expectations.  September’s number was revised from 137k to 191k.


We will be following up with a post this morning on important employment trends that pertain to the restaurant space in particular.





THE HBM: SBUX, WEN - subsector fbr





SBUX: As we wrote this morning, Starbucks posted strong 4QFY11 earnings last night and mentioned that business has been strong in Canada.  Tim Horton’s must be feeling the heat.  Tim Horton’s has announced the launch of its new specialty coffees, which will soon be available at more than 2,500 locations across Canada. The company said it's the biggest specialty coffee roll out ever in the country. Starting at $2, the lineup includes lattes, mocha lattes and cappuccinos made with premium espresso.


WEN: Wendy’s continues to trade well.  We believe that sales at the concept are strengthening.


THE HBM: SBUX, WEN - stocks 114



Howard Penney

Managing Director



Rory Green






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


Get the US Dollar right, you’ll get a lot of other things (beta) right!   As we look at today’s set up for the S&P 500, the range is 16 points or -0.80% downside to 1251 and 0.46% upside to 1267. 




THE HEDGEYE DAILY OUTLOOK - levels and trends 114


THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: +1303 (-695) 
  • VOLUME: NYSE 1002.25 (+4.69%)
  • VIX:  30.50 -6.84% YTD PERFORMANCE: +71.83%
  • SPX PUT/CALL RATIO: 1.55 from 2.29 (-32.07%)




TREASURIES: long end of the US treasury yield curve has been yelling that this unemployment report is going to be bad again; stay tuned

  • TED SPREAD: 43.50
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.09 from 2.03    
  • YIELD CURVE: 1.85 from 1.80


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Change in non-farm payrolls, est. 95k, prior 103k
  • 8:30 a.m.: Unemployment rate, est. 9.1%, prior 9.1%
  • 1 p.m.: Fed’s Tarullo speaks in Washington on regulation
  • 1 p.m.: Baker Hughes rig count
  • 4:05 p.m.: Fed’s Williams speaks in Santa Clara, Calif.


  • Greek PM George Papandreou’s government faces confidence vote in parliament; referendum canceled
  • G-20 chiefs meeting in Cannes, France, are pushing European authorities to flesh out, enact a week-old rescue plan that has already shown signs of unraveling
  • Basel Committee on Banking Supervision scheduled to release list of so-called global systemically important institutions following G-20 meeting
  • MF Global’s Asian units may be sold as soon as this weekend after liquidators received between 30 and 40 “credible” purchase offers: WSJ




THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • Ex-Credit Suisse Oil Head McKenna Starts Mastic Hedge Fund
  • Gartman Sees Euro Slump Pushing Gold to Record: Chart of the Day
  • RBA Cuts Growth, CPI Forecasts as Europe’s Turmoil Deepens
  • Yingluck Banks on $26 Billion Plan After Flood ‘Stumble’
  • Wheat Plunging as Stockpiles Climb to 10-Year High: Commodities
  • India Economy Faces ‘Critical’ Coal Shortage: Chart of the Day
  • Oil Trades Near Three-Month High as Greece Cancels Referendum
  • Gold Traders More Bullish as Hedge Funds Increase Bets on Gains
  • Stocks, Oil Rise, Treasuries Drop as Greece Moves Toward Bailout
  • Heating Fuel at Record as European Diesel Surges: Energy Markets
  • Chinese Iron Ore Miners Losing Money at Current Prices, UBS Says
  • Copper Gains for Third Day as Greece Near Bailout, ECB Cuts Rate
  • Malaysia’s Export Growth Quickens on Higher Sales of Commodities
  • Thai Rice Exports Seen Plunging on State Buying, Flooding
  • Gold Pares Second Weekly Increase as Investors Lock in Gains
  • Credit Suisse Brazil Unit Said to Shut Agriculture Trading Desk
  • Starbucks Fourth-Quarter Profit Rises 29% as U.S. Sales Gain
  • Abramovich Says He Feared Russia’s Murderous Aluminum Trade
  • Vale Marketing Head Gutemberg Leaves Amid China Price Talks




EURO – we covered at TRADE line support (and sold the USD) on Tuesday at Euro 1.36. Now we can re-short it on the mini-squeeze back up to 1.39-1.40 (and buy the USD back). Just managing risk around a proactively predictable FX range.

Eurozone Producer Prices +5.8% y/y in SEP and set to rip higher again in OCT/NOV as policies to inflate continue


THE HEDGEYE DAILY OUTLOOK - daily currency view




FRANCE – there’s nothing stealth about what either the French stock or bond market continues to tell us – its explicit - France is entering a period of intermediate-term stagflation; this morning’s failure to capture TREND line resistance (3403) combined with a nasty Services PMI print of 44.6 for OCT (vs 46 in SEP) tells us all we need to know to be shorting French stocks on green.


THE HEDGEYE DAILY OUTLOOK - euro performance




CHINA – stealth move higher in Chinese stocks continued overnight as the Shanghai Comp closed up for the 9th day out of the last 10. Heard from large constituencies in the hedge fund community that China (as in the country) was going off a cliff in early October. Hearing crickets now. Our predictive tracking algorithms have Chinese GDP growth bottoming (sequential slowdown) in Q1 of 2012.



THE HEDGEYE DAILY OUTLOOK - asia performance






The Hedgeye Macro Team

Howard Penney

Managing Director


Golden Handcuffs

This note was originally published at 8am on November 01, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You know what it is? It is a golden handcuff, with the keys thrown away.”

-O. Henry


Keith and I are in San Francisco with our colleague, and one of the top young institutional salesmen in the business, Bill LeClerc, visiting some of our current and prospective subscribers. (We may also stop by the Googleplex for a quick game of roller hockey if Sergey and Larry accept the Hedgeye challenge.)  Having covered technology in the late 1990s and early 2000s, I know full well that there is something special about San Francisco, and I’m reminded of that on every visit.


Coincident with this visit, I’ve also been reading “Steve Jobs” by Walter Isaacson.  The story of Steve Jobs, and the creation of Apple Computer, is, in many ways, emblematic of the last thirty some years of business history in Silicon Valley.  Plenty of time has been spent rehashing Jobs’ incredible career and personal quirks, but I wanted to highlight one interesting quote from the book, which is as follows:


“Rod Holt, who had built the power supply, was getting a lot options and tried to turn Jobs around.  “We have to do something for your buddy Daniel, he said, and he suggested they each give him some their own options. “Whatever you give him, I will match it,” said Holt.  Replied Jobs, “I will give him zero.”


Now, I’m not about to psychoanalyze Steve Jobs, but I did find this excerpt interesting.  The Daniel in question, was Daniel Kottke, who was a college friend of Jobs and one of the first employees of Apple.  Unfortunately, Kottke wasn’t a high-enough level employee to be cut in on the option pool pre-IPO and Jobs, in a very dispassionate manner, wasn’t willing to make a “charitable” exception.  To Jobs, it seems, there were no free lunches.


Like global macro markets, Steve Jobs waited for no one.  At times Job’s personal drive was seen as extreme and insensitive, yet his success in innovation is difficult to compare.  As is widely known, Jobs was Buddhist, a long time vegetarian, and for much of his early career only showered once a week.  Despite these somewhat “liberal” tendencies, he created all of his businesses without the Golden Handcuffs of government intervention.


This morning we are seeing the downside of reliance on the Golden Handcuffs of government intervention.  Currently, major European equity markets are down across the board from -2.5% to -4.0%.  Leading the charge are Italian and Greek stock markets, down -5% and -6%, respectively. In terms of sectors, the European banking sector is at the forefront to the downside, with the major French banks down close to -10% across the board.


Certainly, this is crazy equity price action given that it seems like just yesterday that Europe was bailed out and saved from the sovereign debt contagion.  Well, actually it literally was yesterday, or at least late last week.  From the outset, we were suspicious of the Bazooka press release.  As Keith wrote last Thursday:


“In the end (and, in the end, this will not end well), I don’t think this concept of Bazooka Light will make a lot of sense to anyone who takes a deep breath and actually reads what it implies.


The timing and size obviously matter – but the timing (end of November? is subject to a hefty political debate) and the size is basically whatever the Europeans want the media to buy into the headline being.”


This morning the key question seems to relate to timing as there is news out that the Greeks will hold a referendum on the EU debt deal, most likely in the December / January time frame – along with a confidence vote on the government in the coming days.  It seems the Greek people, who according to reports yesterday have more Porsche Cayenne’s registered than tax payers making over $50,000 per year, want to take their time and think about the bailout.  Personally, I would probably want to think about the Golden Handcuffs before I put them on as well.  But as I noted above, global macro markets wait for no one.


In the Chart of the Day below, we’ve also flagged the widening spreads between Italian government bonds and similar duration German Bunds.  As of this morning, this spread is literally as wide as it has ever been.  Certainly, Greece is one thing, but Italy is the eighth largest economy in the world with debt-to-GDP at north of 120%.  Unfortunately, for those looking for good news, this widening of Italian yields is signaling that things are going to get worse before they get better in Italy.


To add insult to injury, we are receiving PMI measures this morning that are foreshadowing a further deceleration of growth in Europe. Specifically, Chinese PMI for October came in at 50.4 versus the estimate of 51.8 and U.K. PMI came in at 47.4 versus the estimate of 50.0.  Tomorrow morning, the rest of European PMIs are released. Stay tuned.


Mr. Draghi, welcome to the ECB!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Golden Handcuffs - Chart of the Day


Golden Handcuffs - Virtual Portfolio

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Great Inflations

“The fear of another great inflation remained with him all his life.”

-Niall Ferguson


Inflation is a centrally planned policy. Period.


History is littered with examples of governments devaluing their fiat currencies for short-term political resolve. Keynesians can call their goals “price stability” and “full employment” all they want. The People are starting to call that a joke. In the long-term, banning both gravitational forces and the truth about long-term prices will be difficult.


The aforementioned quote comes from an excellent book that I am in the middle of studying – Niall Ferguson’s High Financier – The Lives and Times of Siegmund Warburg. In the Post 1913 Federal Reserve Act Period (Chart of The Day), there are very few merchant bankers (not to be confused with central or too-big-to-perform bankers) who rival Warburg’s legacy.


What’s most interesting to me about Warburg (like it is with most revolutionary capitalists), is where he came from. Context and experience are some of the things I personally thank God for every day of my life. For Siegmund Warburg, context and experience are what made him the change that the British and American banking systems needed to see.


“I brought something to England which was a little bit different because I was a damn foreigner, a German Jew.”

-Siegmund Warburg (High Financier, page 233)


You don’t have to take my word for it on any of this. I’m just a Canadian who came to the American Financial Empire in 1995 and studied the source code of Keynesian economic dogma at Yale in my cutoff jean shorts.


Take Harvard’s word for it – Ferguson’s book has 104 pages of footnotes.


You don’t have to take Warburg’s word for it either – few in the Establishment of the British economic elite did after he became a British citizen in 1939. But when a post WWII debt-laden England resorted to debauching the British Pound, Warburg called them out on it, big time.


Great Inflations?


Warburg lived through Germany’s hyperinflation of the 1920s and the politicized central banking that perpetuated it. Today’s good ole boy network money printing is not a new strategy. We don’t have that hyperinflation (yet) either. But the manic financial media seems hell bent on cheering on its catalysts.


WTIC and Brent Crude oil prices are trading at $95 and $112/barrel this morning. Deflation? Pull up any long-term chart that doesn’t use 2008’s $150/barrel oil price as its anchoring point in the analysis (all-time high), and you’ll conclude what every man, woman, and child from Kenya to Vietnam already has – Keynesian monetary policies are exporting generationally high levels of food and energy inflation.


Warburg didn’t believe in trading prop, levering up his client deposits, or front-running client capital. His strategy was to simply keep his bank’s balance sheet liquid and conservatively positioned throughout the British and French currency devaluations of the 1950s and 1960s. He also avoided getting train wrecked by the US Dollar Devaluation that ensued under Nixon and Carter in the 1970s.


Warburg fundamentally believed that “inflation was primarily a political phenomenon caused by governments who do not have the courage to either reduce their expenditure or to cover it by taxation.” (High Financier, page 36). Sound familiar?


The sad and pathetic reality about Western Economic Leadership in the 21stcentury (read case studies of both Bush/Obama US Administrations, the 8 or 9 Japanese PM’s they’ve had in the last decade, or … uh, Europe!), is that this is all very familiar.


“To sin by silence when they should protest makes cowards of men.”

-Abraham Lincoln


The metaphor that Ferguson and I make between the British Empire’s peak (then) and America’s (potentially now) is a very important debate that needs to be had. If we repeat history’s mistakes, our children have no business forgiving the elephantine intellects endowed upon us from our Ivy League institutions.


In the late 1940’s and early 1950’s Warburg was at least as critical of British policy as Hedgeye and many others are of US fiscal and monetary policy today.




“By the September 1949 devaluation, which saw the Pound’s dollar value reduced by 30% from $4.03 to $2.80, his Wartime enthusiasm for Labour had waned significantly… he argued in a highly critical memorandum written in August of that year … The country was spending too much on defence. Profits and pay were on a much too high level… the employers indulge frequently in illusions as to the profits …” (High Financier, page 131)




But, but, but … if you don’t adjust them for inflation, ‘corporate profits are great’… and we continue to beg for The Bernank and/or the Italian Job from Super Mario, to cut, print, cut… beg, cut, print… print, bail, cut…


If you’ve been awake since 2006 and watched Big Government Interventions A) shorten economic cycles and B) amplify market volatilities, you get it. Great expectations for Great Inflations have become the root of the common man’s heartache.


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1, $92.66-94.86, 6105-6413, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Great Inflations - Chart of the Day


Great Inflations - Virtual Portfolio


EPS guidance was back-loaded for 2012 as coffee costs are expected to depress margins in the near term.  The top-line remains as impressive as ever.


Starbucks posted EPS of $0.37 for the fiscal fourth quarter of 2011 versus consensus expectations of $0.36.  U.S. comps came in at +10% versus expectations of 7%.  International comps gained +6% during the quarter versus the Street at +4.5%.   CPG revenues came slightly below the Street at $242.2mm but operating margin was 31.4% versus 28.4% expectations.


Starbucks remains one of our favorite long names and we continue to be long the stock in the Hedgeye Virtual Portfolio. 


Below are out top ten takeaways for the quarter: 

  1. EPS guidance was lowered for the first half of 2012 but full-year EPS was maintained.  Management emphasized that this was due solely to coffee cost pressures.  We view this as a slight negative but expect the company to achieve FY12 EPS guidance.
  2. Starbucks’ top-line remains strong and we would expect that to continue in FY12 as management diligently identifies and attacks new media of growth.  The My Starbucks Rewards program is gaining more and more traction.  There are now over 3.6 million active members, nearly 2 million of whom are gold level members.  In FY11, over $1.1 billion in purchases was paid for using the Starbucks card.  The mobile apps (iPhone and Android) are also gaining users.  At the end of September almost 1 million smartphones had registered Starbucks cards associated with them.  We believe that the mobile apps and other initiatives that add to the customer experience will continue to differentiate Starbucks and help boost sales.
  3. The U.S. business remains strong despite the soft economy, as the results show.  The fall promotions featuring Pumpkin Spice Latte and Salted Caramel Mocha and Taizo Chai tea beverage platforms helped drive 4Q sales.  Sales of the Pumpkin Spice Latte grew 44% year-over-year.
  4. In FY12 the company will open 200 locations and remodel 1,700 stores in the U.S.  This is the largest number of remodels ever carried out in one year. 
  5. The international business continues to present the company with growth opportunity as the company operates over 6,200 stores in 55 international markets.  Last week the 500thStarbucks was opened in China and the company still aims to have 1,500 stores open in China by 2015.  The pace of new unit opening will accelerate in 2012.  Margins in China are expected to continue to be in the near-30% range.
  6. The company is bullish on the prospects of its new bagged coffee offering, Starbucks Blonde Roast.  The company believes there is demand from roughly 54 million (40% of U.S. Coffee drinkers) domestic coffee drinkers who want Starbucks quality in a lighter, super premium roast coffee.
  7. The company is equally bullish on the prospects of its K-Cup business, which is expected to launch next week.  Management acknowledged that some cannibalization of the CPG business is likely but sees any impact as small and expects both businesses to growth over time.  Particular to single serve, the company noted that about 8% of households in the U.S. have a single serve brewer in their homes.  Their expectation is that that number will grow over the next five years, perhaps even triple. Starbucks anticipates that K-Cups will represent a greater-than-$1 billion business over time.
  8. Business in Canada had been soft earlier in the year but the fourth fiscal quarter brought a strong uptick for the company’s roughly 800 locations north of the border. 
  9. Business in Europe continues to be “a bit soft”.  “Over-time”, however, management expects the EMEA locations to progress toward mid-teen margins.
  10. Management’s projection for global store growth remains unchanged at 800 net new stores.  Roughly 400 of those will be in the Americas regions with licensed stores comprising roughly half of the new additions.  300 will be in China and Asia-Pacific (licensed will be 1/3 to 1/2 of new additions) and 100 will be in EMEA (licensed will be 2/3 of new additions).







Howard Penney

Managing Director


Rory Green




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