Darden is an impressive company and the investment community has liked the stock for some time.  Issues highlighted in this morning's press release are important for Darden and other names within the industry.


Since he became CEO of Darden, Clarence Otis has been focused primarily on one thing: maintaining 4-5% unit growth.  Buying LongHorn Steakhouse was one means to this end and, while the concept has proven to be successful, Darden paid a premium and may have incurred other costs indirectly.  Despite the impressive infrastructure the company has built up, managing a large number of brands is difficult.  The acquisition of Eddie V’s Restaurants, Inc. is another step in that direction.  The company now manages seven brands.


As a public company CEO, Mr. Otis only has 80% of his time to manage the business after the basic duties of a public company CEO are fulfilled.  That time is now spread between those brands and it not likely that any one of them has his full attention.  Darden is a large company with many competent executives but the overall resources of the company are being stretched further as more brands are brought in to help sustain unit growth.


This morning’s press release, in our view, constituted an admission of two key issues for Olive Garden that can only occur, at a company like Darden, from management taking its eye off the ball:

  1. "At Olive Garden, we're addressing the erosion in one of the brand's essential attributes, its value leadership in casual dining. In working to re-establish that historical value advantage, Olive Garden more strongly emphasized containing check growth this quarter than in prior periods, and that was reflected in its promotion and in-restaurant merchandising tactics." 
  2. “Our anticipated second quarter results reflect increased investment to rebuild guest counts at Olive Garden, as well as our decision to limit pricing across our portfolio of brands to levels that did not fully cover a meaningful increase in our year-over-year food costs"

How can Olive Garden have lost its value advantage?  We would posit that annual 2-3% menu price increases have been a factor. This is a pattern that is difficult to reverse.  Promotions and in-restaurant merchandising tactics did not succeed in driving guest counts, as the press release says, because promotions as a strategy for driving the top-line are not sustainable.  This unsustainable nature of this promotional strategy can be masked by favorable food costs but, as Olive Garden’s 2Q results show, a “meaningful” increase in year-over-year food costs can rain on the parade.  Going forward, we do not anticipate the strategy mentioned in this morning’s press release as being a “silver bullet” for Olive Garden; the asset base is impaired and the turnaround will be a multi-quarter event, at best.  During 2QFY12, Olive Garden saw trends deteriorating through the quarter. Red Lobster is another concept that is producing comps largely sustained by promotions.


As Darden continues to spread itself thin from a concept management standpoint, we believe it will be difficult to aptly address the issues facing Olive Garden and Red Lobster as they compete in what has become a very competitive industry. 


In terms of the broader industry, we view this press release as having serious implications for BWLD going forward but EAT’s outlook is largely unaffected by the factors outlined by DRI.  We would be a buyer of EAT today on any DRI-related weakness.









Howard Penney

Managing Director


Rory Green








Comments from CEO Keith McCullough


Another low-volume rally to a lower-high in US stocks as the interconnectedness of Asia’s slowdown gets ignored by consensus (so 2008).

  1. ASIA – Chinese stocks down again overnight, taking out their lows from last wk that were established prior to their rate cut (lower-lows) as the rest of Asia continues to print slowing econ data (PMIs) and countries cutting rates (Australia last night) are seeing their markets fall on that news (Australia down -1.3%). Get Growth Slowing right, you’ll ultimately get the stocks right.
  2. EURO – big league failure at my immediate-term TRADE zone of 1.35-1.36 resistance, again, yesterday. We think the EU Summit is a liability now that expectations/hopes are so high – or is it fear? Tough to discern if institutional investors are more afraid of missing a “year-end rally” than understanding what it means if there is no Eurobond (ie money printing backstop to bail out German and French banks).
  3. YIELDS – it’s trivial to realize that European bond yields continue to make a series of higher lows – that now includes German Bund Yields which are trading back up to 2.24% this morn (10s) and +18bps wider than USTs. Spread risk remains our focus. UST yields are actually lower for the week to date with 10s down at 2.06%, signaling US Growth Slowing Sequentially in Q4 vs Q3.


Next catalysts = Chinese economic data for NOV (thur) and an ECB rate cut (thur). Both should perpetuate what you see on your screen this morning (weaker Asian equities and weaker Euro).







THE HBM: SBUX, DNKN, DPZ, DRI, BWLD, KONA - subsector fbr





SBUX: Starbucks has processed more than 26 million mobile payments since January, according to the company. Of the $2.5 billion loaded on to Starbucks cards in fiscal year 2011, $110 million was loaded on to cards via Starbucks mobile apps.


DNKN: Dunkin’ Donuts was reiterated “Equalweight” at Barclays.  The price target is $27.


DPZ: Domino’s Pizza was cut to “Hold” at Feltl.


PZZA: Papa John’s was cut to “Sell” from “Hold” at Feltl.





DRI: Darden Restaurants lowered FY12 EPS growth guidance to 4%-7% from 12%-15%.  Sales growth guidance was cut to 6%-7% from prior 6.5%-7.5%.  Preliminary 2Q EPS came in at $0.41 versus consensus at $0.54.  The company estimates that 2Q same-restaurant sales for 2Q will be approximately +6.8%, +6.0% and -2.5% for Red Lobster, LongHorn Steakhouse and Olive Garden, respectively.  The company also announced the acquisition of certain assets of Eddie V’s Restaurants during the second quarter.  Closing costs associated with the purchase negatively associated EPS by roughly $0.01 and the acquisition is expected to be neutral to EPS for the full fiscal year. The stock is down roughly -9% premarket.


BWLD: Buffalo Wild Wings was downgraded to “Hold” at Feltl.  We have been bearish on this name and believe that 1Q12 will pose some serious issues for the company.


KONA: Kona Grill has appointed Marci Rude to the new position of vice president of development.






Howard Penney

Managing Director


Rory Green




Revisiting An Important Theme: Margin Pressure

We noted a number of stories of late about Bank of America redeeming Trust Preferred Securities in exchange for debt and equity.  This is the follow-through from their November announcement in the Q that they may issue as many as 400 million shares ($2.3B of capital at today's share price).  We noted at the time that this flies in the face of management's repeated insistence that no capital raises are necessary.  As we said then, we think this represents the beginning and not the end of their campaign to raise common equity.


Leaving aside questions of adequacy of capitalization for a moment, what are the NIM implications?  For a number of regional banks, the upcoming retirement of the TruPS will be a significant event.  So what are the numbers for Bank of America?


Not so good.  While it is unclear how much equity the company issued, giving the company the benefit of the doubt and assuming that the full $2.3B was used to pay off TruPS at 8%, the savings to interest expense would be $47M per quarter.  This would push 3Q's $10.701 billion net interest income (FTE basis) to $10.748 billion.  With interest-earning assets of $1.841 trillion, the beneficial NIM impact is exactly 1 bps.  In fairness, we get that the impetus here was not to enhance NIM; rather, the goal was to improve Basel III capital. Towards that end, we estimate that IF the company swapped the full $2.3 billion of common for TruPS, the benefit to Tier 1 common would be 13 bps, assuming RWA of $1.8 trillion (their target).


We have been negative on BAC's NIM since September (for details, please ask for our September 7th, 2011 slide deck and conference call).  In that presentation, we outlined why Bank of America and the other moneycenter banks would face considerable NIM pressure over the coming quarters. The correlation between asset yields and a moving average of the 10-year treasury is very high.  


Our NIM analysis from September showed that the best fit for asset yields was a trailing 4Q average of the 10-yr treasury. This relationship means that NIM pressure from August's rate plummet will be realized ratably over the course of the next three quarters, provided that rates don't fall any farther from here.  


It's worth noting that an increase in interest-earning assets will serve to mitigate the effect of NIM declines on net interest income dollars. For those who believe this offset is sufficient, however, we would venture the following. Over the last twelve months, BAC's NIM fell from 2.69% to 2.31%, a decline of 14%.  At the same time, their net interest income in dollars fell from $12.43B to $10.49B - a decline of -15.6%, or almost exactly the same proportion.  


Ultimately, we expect the current environment to engender ongoing NIM pressure across the moneycenter banks, and Bank of America's small-so-far capital actions don't change that conclusion.


Below we show five charts from our September 7th presentation.  Here's how our predictions shook out in 3Q vs. consensus and reality.

JPM reported 8 bps of NIM decline (vs consensus at -2 bps & Hedgeye estimate of -7 bps);

BAC reported 18 bps of decline (vs consensus at +1 bps & Hedgeye at -8 bps);

WFC reported -17 bps of NIM decline (vs consensus at -1 bps & Hedgeye at -9 bps);

C reported +2 bps of NIM increase (vs consensus at -10 bps & vs Hedgeye at -13 bps).






BAC: $2B IN CAPITAL BUYS YOU 1 BASIS POINT IN NIM - slide   asset yields2








Joshua Steiner, CFA


Allison Kaptur


Trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

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.

Melting Savings

This note was originally published at 8am on December 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.

“He saw his parents’ savings melt away.”

-Nicholas Wapshott


Yesterday was not a good day for me. You couldn’t have had a good day if you were having a good month.


Yesterday was not a good day for American, German, or British people who have savings accounts either. That’s what centrally planned policies to inflate do – they punish the conservative saver. They pay the debtor.


Bernanke gets that and so do The German People who are paying the German Government to lend Germany money this morning (short-term yields on German Bunds have gone negative). I guess the upside to the Bernanke model is that 3-month US Treasuries are yielding 0.00%. That way no one wins or loses. Fair share “free-market” capitalism baby.


The aforementioned quote comes from a book I cracked open this past weekend by Nichalas Wapshott titled “Keynes vs Hayek.” Plenty of people have written on this topic since the debate between the two schools of thought emerged in the 1920s. Wapshott’s is the most recent. So far, it’s a healthy reminder of how history rhymes.


I fundamentally believe it’s very difficult for a human being not to superimpose his or her personal experiences in life into the passions of their opinions. Call it context or perspective – it’s all one and the same thing to me. If you’ve studied enough economic history, you provide yourself an opportunity to walk down life’s path in other people’s shoes.


Keynes was born into a British family of the academic elite who found himself scaling the wall of the Ivory Tower by the time he was in his teens, whereas Hayek was more of a commoner solider “in the Austrian army on the Italian front who returned to find his home city of Vienna devastated and its people’s confidence broken.” (Wapshott)


“The Austrians mostly read English and were conversant if not persuaded by the English tradition; the English on the whole could not read German and largely ignored the works of Austrian and German theorists.” (Wapshott)


Hayek wasn’t an elite student. He actually didn’t start studying the “political economy” (reading Marshalian and Keynesian economics) until he went to war. Eventually, his views came to be shaped by his personal experience (inflation melted his parents savings away). His critique of an inconclusive social science experiment (Keynesian Economics) remains as relevant today was it was in the 1920s.


It’s a good thing Einstein figured out how to communicate in English.


Back to the Global Macro Grind


My introduction this morning isn’t meant to proclaim my mystery of Hayekian faith. I’m not a Republican or a Democrat. I’m not a Keynesian, and I’m not a Hayekian. My name is Keith McCullough and I do my own work.


I do not believe that policies to A) Inflate B) Pile-debt-upon-debt, or C) Bailout losers, is the long-term path to American economic prosperity.


To the contrary, I think debauching the US Dollar does exactly what it did yesterday - it stimulates inflation in asset prices and, as a result, slows Consumption Growth.


US GDP = 71% Consumption Growth.


Last time Brent Oil prices spiked like this, US GDP Growth slowed to 0.36% (Q1 of this year). And while that seems like a long time ago versus yesterday’s no-volume stock market reflation, that is not something I am going to let the Keynesians forget.


It’s the Policy To Inflate, Stupid.


As the US Dollar strengthened throughout Q2 and Q3, we saw some Deflation of The Inflation and, presto! US GDP growth recovered sequentially:

  1. Q111 US GDP Growth = 0.36%
  2. Q211 US GDP Growth = +1.34%
  3. Q311 US GDP Growth = +2.01%

The interconnectedness doesn’t lie; central planners do.


And no, I don’t feel shame in calling out these policies to inflate as stupid. Forrest Gump could tell you that stupid is as stupid does too. And there are a lot of “smart” people in the Ivory Towers of Keynesian economic forecasting that don’t look so smart anymore.


The economy is a globally interconnected ecosystem that could not care less about the short-term “political economy” of a few European bankers yesterday who begged Bernanke for a bailout.


The Global Economy of supply and demand ticks on this morning (in real-time):

  1. China reported their lowest level of manufacturing (PMI) strength since 2009 (47.7 for NOV PMI vs 50.4 OCT)
  2. Britain reported their lowest level of manufacturing (PMI) since June of 2009
  3. South Korea reported a 3-month high in inflation (CPI) of 4.2% NOV vs +3.6% OCT

Growth Slowing and Inflation Rising. Do the Keynesians get it? They will when they see Q4 US GDP Growth Slow, sequentially, again like it did in Q1 as Consumption Growth slows.


In the meantime, while there seems to be a language barrier between Mr. Macro Market’s real-time messaging and the Fed’s central mandate for “full employment and price stability”, the common man’s savings are being melted away as the precious few pander to their banking losses being saved.


My immediate-term support and resistance levels for Gold (back above $1736 TRADE support), Brent Oil (Bullish Formation), France’s CAC40 (Bearish Formation), and the SP500 (bullish TRADE; bearish TAIL) are now $1736-1756, $109.42-111.37, 3074-3208, and 1203-1248, respectively.


Best of luck out there in December,



Keith R. McCullough
Chief Executive Officer


Melting Savings - Chart of the Day


Melting Savings - Virtual Portfolio


The Macau Metro Monitor, December 6, 2011



CHINESE BANKS MAKE CNY550-600BN NEW LOANS IN NOVEMBER China Securities Journal, Market News International

According to China Securities Journal, the Big Four state-owned banks (the Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China) extended CNY90 billion in new loans in the last three working days of November, bringing their total to CNY220 billion for November.  In October, the Big Four lent CNY238 billion.  Citing sources, the newspaper said the lending in the last three days was more than expected.


Overall, Chinese banks lent an estimated CNY550-600 billion in new loans in November.  The People's Bank of China showed that overall new loans reached CNY586.8 billion in October.  The median forecast for November is CNY550 billion in a survey by Market News International.


The PBOC's new loan number has become a less reliable indicator of credit flows through the economy in recent years as a result of the sharp increase in lending via the shadow banking system.  The central bank is expected to announce new loan data for November between December 9 and December 15.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%