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P.F. Chang’s is a company with two brands under fire.  PF Chang’s China Bistro and Pei Wei have been underperforming and the investment community has not been forgiving; the stock is down almost 40% year-to-date.  Since I walked away from the PFCB investor meeting last month feeling like I was missing something, I needed to spend more time in the store to understand the issues and contrast that to the direction the company is going. 


Given the current sentiment and valuation, and our fundamental view of the company, we would hold a bullish bias on PFCB but feel that we are 6-9 months away from some initial metrics that can provide some direction.  We need a little more clarity on how the company’s initiatives are faring to gain confidence and visibility that the turn happening.  I’m positive on the long term TAIL (three years or less), but remain cautious from a TRADE (three weeks or less) and TREND perspective (three months or more).  


A successful turnaround of the PF Chang’s Bistro brand must incorporate the following characteristics:

  1. Price points: reengineering the lunch menu to a lower price point, while preserving margins (very tough call here), I imagine they need to give up some margin at lunch.
  2. Marketing/Product: P.F. Chang’s Bistro needs to start communicating more effectively with its customers and enticing people back.  The Irvine project is ground zero for these initiatives.
  3. Look and Feel: upgrading the asset base to a new look and feel is in the works with some early success, but this will take time.

Yesterday, in conversation with Brad Kaemmer, Regional Vice President at P.F. Chang’s China Bistro, we gained a lot of perspective on the depth of the issues at the concept and where Wall Street may be right and wrong on the name. 


The main takeaways are as follows: 

  1. The brand needs to reposition itself on the price-value spectrum, particularly at lunch.  Lower price points at lunch are necessary to provide compelling value to increase traffic.
  2. The concept has a marketing problem.  Part of it is solvable, part of it is not.  What the company can address is the need for improved communication around the product and food preparation.  What consumer doesn’t know (because they are not told) is that the concept ingredients used in P.F. Chang’s restaurants are fresh and carefully prepared as what we witnessed at the West New York location.  That is solvable but will require management to do a much better job of communicating with the customer.  What is not solvable, at least not in the near term, is the fact that the sparse geographic nature of the store base makes it difficult for management to improve its communication via traditional advertising media.
  3. The company fell behind in menu innovation.  For years the company had no real competition and became lazy.  The malaise that the company is feeling now is galvanizing management to make the necessary adjustments to win back customers.  Ground zero for menu innovation is in the renovated Irvine, CA store.  The key to binging traffic back into the store is to provide customers with an incentive.  I know it a restaurant cliché, but the P.F. Chang’s concept needs some “new product news” – give consumers a reason to come back!
  4. The outlook is perhaps not as dour as some fear, but the solution is not around the corner.  While a pricing adjustment may be a large part of what is needed, winning back customers that have been lost is not possible over the immediate term, especially for a company with such a geographically sparse store base.  However, some markets and aspects of the business model are performing well and we believe that the company will regain traction. 

Yesterday our visit was to a P.F. Chang’s China Bistro restaurant and, as such, our takeaways from the visit pertain primarily to that business.  The Bistro is the most important component given that the concept represents roughly 75% of total revenues. 


I hear from so many people that P.F. Chang’s is a dead brand and is uncompetitive.  The fact that the price points are not resonating at lunch is a problem.  The fact that other concepts rolling out Asian dishes in their menus makes them more likely to appeal to larger groups (where the veto vote can be a decider of where to eat) is a problem.  There are a number of different brands, however, that have encountered similar problems in the past twenty years but found a way to address the issues and thrive.


The next six months are critical to see how management addresses these problems.  The stock has been trading sideways for some time at a historically low valuation.  As we like to say at Hedgeye, valuation is not a catalyst – we’ll have to wait for evidence of that to emerge.



Howard Penney

Managing Director


Rory Green




Keith sold EAT in the Hedgeye Virtual Portfolio this morning as the setup in his quantitative model was flashing oversold from an immediate term perspective.  


From our fundamental view, the stock looks good on the long side. 


From a fundamental perspective, as we wrote in our note titled “EAT – CAN THEY EXECUTE?” on 10/27, we believe that the company is operating well and will continue to improve going forward.  At Chili’s, the remodeling program, kitchen retrofits and other initiatives are going to boost sales and customer satisfaction.  As our note following earnings (10/27) highlighted, we believe that the skepticism among the sell-side community is misguided and would not interpret this negative sentiment as being anything other than a positive for a buyer of the stock.  Having met with the company in November (note titled “EAT MEETING”, dated 11/15), we are further convinced that Brinker is out-innovating the competition and, as a result, will outperform over the longer term TAIL duration. 


Malcolm Knapp’s Knapp Track Casual Dining Index registered a sequential deterioration in November but, and the price action has supported our view, we believe that EAT is taking share.


EAT: TRADE UPDATE - eat vs din



Below is a chart illustrating Keith’s fundamental view of EAT.  The stock is overbought from an immediate-term perspective but the trend remains positive.


EAT: TRADE UPDATE - eat levels



Howard Penney

Managing Director


Rory Green







Initial Claims


Initial jobless claims came in at 366k versus 390k consensus and 385k (revised) the week prior.


THE HBM: DNKN, GMCR, SBUX, CMG - initial claims 1215




Comments from CEO Keith McCullough


And these are the days of our Global Macro lives…

  1. CHINA – new to whoever hasn’t been paying attention; not new to you – China is crashing alongside Commodities – it’s all part of the same Global Macro trade we call the Correlation Crash. Shanghai Comp down another -2.1% last night (6 straight days) to -22.4% YTD. Getting interesting on the long side as we Deflate the Inflation. Have not pulled the trigger yet.
  2. RUSSIA – this story of risk is what Asia’s slowdown was 6-8 weeks ago – not a focus of the financial media, but it will be as the Russian stock market continues to crash (leads European decliners again this morning, down -1.2% and down -36.3% from its Bernanke PetroDollar peak of Qe2 hopes (Q211). Putin not happy.
  3. GOLD – get the USD right, you’ll get plenty of other things right; with the USD/Gold inverse correlation (on our immediate-term TRADE duration) going bezerk yesterday (went to -0.93%), I bought it – long-term TAIL support for Gold = $1568/oz. I’ll keep this on a tight leash w/ immediate-term TRADE resistance = $1624.


Global Growth continues to slow and King Dollar reigns. Keep moving out there.






THE HBM: DNKN, GMCR, SBUX, CMG - subsector fbr




DNKN: Dunkin’ Brands CEO Nigel Travis did the media circuit this morning, speaking on CNBC and Bloomberg.  Neither interview we watched gave us any reason to doubt our short thesis; the all-important backlog for new unit openings still remains one of life’s mysteries.


GMCR: Green Mountain Coffee Roasters’ stock has been trading horribly.  Keybanc has refuted Stifel’s Keurig machine shipment data, saying that the numbers are not comparable month-to-month because of changes to the shipping papers.  Stifel has issued a mea culpa.


GMCR: Janney has also defended the stock, saying that Green Mountain asked data service to stop disclosing customer data in October, which caused the shipments to be undercounted.  Janney’s price target is $125.  The stock is trading up +2.7% premarket. 


SBUX: Starbucks has added Clara Shih to the Board of Directors.  Shih is a 29 year old social media entrepreneur that will bring expertise in that field to the Starbucks boardroom.


CMG: Chipotle Mexican Grill CEO Steve Ells called for an end to the overuse of antibiotics in American meats in a Congressional briefing on Capitol Hill yesterday.


THE HBM: DNKN, GMCR, SBUX, CMG - stocks 1215



Howard Penney

Managing Director


Rory Green



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


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Initial Claims Drop 15k 

The headline initial claims number fell 15k WoW to 366k, the lowest level seen since early 2008 (down 19k after a 4k upward revision to last week’s data).  Rolling claims fell 6.5k to 388k. On a non-seasonally-adjusted basis, reported claims fell 96k WoW to 433k.  


On its face, this is a very strong print.  No seasonal factors were noted by the Labor Department.  However, year-end volatility is not unusual, which leaves us modestly cautious.  See the third chart below for the non-seasonally-adjusted series by year. 


We’ve previously identified 375k – 400k as the claims range where unemployment can begin to improve. Initial claims printed below the bottom end of our range this this week, and has been printing near or below the 400k level for almost a month. This begins to create a tailwind behind unemployment improvement. 












2-10 Spread

The 2-10 spread tightened 12 bps versus last week to 167 bps as of yesterday.  The ten-year bond yield fell 13 bps to 190 bps.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 


INITIAL CLAIMS: STRONG PRINT - subsector performance


Joshua Steiner, CFA


Allison Kaptur


Robert Belsky


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TODAY’S S&P 500 SET-UP – December 15, 2011


Global Growth continues to slow and King Dollar reigns.  As we look at today’s set up for the S&P 500, the range is 25 points or -0.56% downside to 1205 and 1.50% upside to 1230. 






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE:  -1359 (+18) 
  • VOLUME: NYSE 926.06 (-0.05%)
  • VIX:  26.04 -2.48% YTD PERFORMANCE: +46.70%
  • SPX PUT/CALL RATIO: 1.74 from 1.57 (+2.48%)



  • TED SPREAD: 54.12
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.92 from 1.96   
  • YIELD CURVE: 1.67 from 1.72


GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am, Producer Price, M/m, Nov., est. 0.2% (prior -0.3%)
  • 8:30am, Current Account, 3Q, est. -$108.4b (prior -$118b)
  • 8:30am, Empire Manufacturing, Dec., est. 3 from 0.61
  • 8:30am, Initial Jobless Claims, week of Dec. 10, est. 390k, (prior 381k)
  • 9am, Net Long-term TIC Flows, Oct., est. $62.5b (prior $68.6b)
  • 9:15am, Industrial Production, Nov., est. 0.1% (prior 0.7%)
  • 9:15am, Capacity Utilization, Nov., est. 77.8% (prior 77.8%)
  • 9:45am, Bloomberg Consumer Comfort, week of Dec. 11 (prior -50.3)
  • 10am, Philadelphia Fed., Dec., est. 5 (prior 3.6)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas storage
  • 1pm, U.S. to sell $12b 5-yr TIPS (reopening)
  • 3:20pm, Fed’s Lockhart to give commencement speech in Atlanta
  • Eurozone December preliminary manufacturing PMI +46.9 vs consensus +46.0 prior +46.4
  • Germany December preliminary manufacturing PMI +48.1 vs consensus +47.5 prior +47.9
  • France December preliminary manufacturing PMI +48.7 vs consensus +47.0 prior +47.3
  • Japan Q4 large manufacturer tankan (4) vs cons (2) and 2 seq.
  • China HSBC December flash PMI 49.0 vs 47.7 seq.



  • NFL to generate ~60% more rev. through 2022 from 9-year contract extensions with CBS, News Corp.’s Fox unit and Comcast’s NB
  • 12:15pm: U.S. Transportation Secretary Ray LaHood will make “major announcement” on transportation funding
  • 1pm: Jon Corzine returns for third round of testimony before Congress on collapse of MF Global
  • 9pm: Republican presidential candidates debate in Iowa




GOLD – get the USD right, you’ll get plenty of other things right; with the USD/Gold inverse correlation (on our immediate-term TRADE duration) going bezerk yesterday (went to -0.93%), KM bought it – long-term TAIL support for Gold = $1568/oz. I’ll keep this on a tight leash w/ immediate-term TRADE resistance = $1624.

  • Paulson’s Bright Spot May Fade as Gold Plunges to Five-Month Low
  • Victoria’s Secret Revealed in Child Picking Burkina Faso Cotton
  • Sino-Forest’s Biggest Holder Asks for Bond Default Rethink
  • Gold May Gain in London as Dollar Advance Pauses; Platinum Drops
  • Coffee Market Braces for Record Espresso-Bean Jolt: Commodities
  • China’s Manufacturing May Contract a Second Month, PMI Shows
  • Saudis Triumph as Recession Concern Unifies OPEC: Energy Markets
  • Record Big Vessel Deliveries to Hit Asian Lines: Freight
  • Oil Rebounds After Biggest Decline Since September Spurs Buying
  • ArcelorMittal, Anglo Win Case Overturning Sishen Right Award
  • Credit Agricole Says Closing Equity Derivatives and Commodities
  • Joy Global Falls on ‘Sluggish’ Near-Term Commodity Demand
  • Wheat Gains in Chicago as Egypt’s Purchase May Mean More Demand
  • Copper May Decline as China’s Manufacturing Data Dim Outlook
  • UBS Lists Top 10 Miners, Commodities; Sees ‘Pain Before Gain’
  • Oil Tumbles Most Since September as OPEC Raises Output Ceiling
  • Commodities Fall Most in 11 Weeks in ‘Panic Selling’ on Europe
  • Indonesian Exchange Delays Physical Tin Contract to January

THE HEDGEYE DAILY OUTLOOK - daily commodity view





THE HEDGEYE DAILY OUTLOOK - daily currency view





RUSSIA – this story of risk is what Asia’s slowdown was 6-8 weeks ago – not a focus of the financial media, but it will be as the Russian stock market continues to crash (leads European decliners again this morning, down -1.2% and down -36.3% from its Bernanke PetroDollar peak of Qe2 hopes (Q211). Putin not happy.


THE HEDGEYE DAILY OUTLOOK - euro performance





CHINA – new to whoever hasn’t been paying attention; not new to you – China is crashing alongside Commodities – its all part of the same Global Macro trade we call the Correlation Crash. Shanghai Comp down another -2.1% last night (6 straight days) to -22.4% YTD. Getting interesting on the long side as we Deflate the Inflation. Have not pulled the trigger yet.


THE HEDGEYE DAILY OUTLOOK - asia performance




  • Saudis Triumph as Recession Concern Unifies OPEC: Energy Markets
  • Aldar Converts Mubadala-Held Bonds at Low End of Price Range
  • U.A.E., Qatar Fail to Secure Upgrade to Emerging by MSCI
  • Dubai Stocks Drop Most in 6 Weeks as MSCI Extends U.A.E. Review
  • Iraqis Who Helped U.S. War Effort Must Not Be Left Behind: View
  • Saudi Bank Lending Rates Rise After Cabinet Changes: Arab Credit
  • OPEC Agrees to Higher Oil Target to Accommodate Libya, Iraq
  • PLUS Sukuk May Lure Insurers as Yields Top 5%: Islamic Finance
  • Iran Says Saudis Won’t Make Up For Its Oil If Sanctions Tighten
  • Iraq Draws U.S. Hotel Operators Banking on Business Travelers
  • Casino in Hypermarket Accord With Groupe Al Meera of Qatar
  • European Banks Trim Loans to MENA Firms, Standard Chartered Says
  • First Gulf Bank Drops Most in Four Months After MSCI Decision
  • S&P Applies New Criteria to 25 Gulf Banks and Two Subsidiaries
  • Obama Calls End of Iraq War ‘an Extraordinary Achievement’
  • U.S. Net Oil Imports to Slump 60% in Nine Years, Citigroup Says
  • Six Themes for Oil & Gas Equities in 2012: Citigroup




The Hedgeye Macro Team

Howard Penney

Managing Director

No Surer Means

This note was originally published at 8am on December 12, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

-John Maynard Keynes


If you study the history of John Maynard Keynes and his economic ideas, experiments, and failures, you’ll come to a very simple conclusion – he was a world class storyteller, not a Risk Manager.


Before he became politically conflicted and compromised (in his early 40s), Keynes had it absolutely right on what debauching a currency functionally does to a society. After World War I, the policies to inflate across Eastern Europe made that crystal clear.


Ironically enough, explaining this in the 1stbook to make him world famous – The Economic Consequences of Peace (1919) – is what made Keynes popular with the Austrian, German, and Russian people:


“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency”, wrote Keynes. “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” (Wapshott’s Keynes Hayek, page 22).


Tomorrow at the FOMC meeting, someone should ask Ben Bernanke what he thinks about that.


Back to the Global Macro Grind


I call out this linkage between currency and inflation this morning because last week’s stabilization of the US Dollar continues to improve not only my outlook on the US economy but the Consumer Confidence within it. US Consumption, don’t forget, represents 71% of US GDP.


Closing flat week-over-week at $78.63, the US Dollar Index has gained +7.6% since Ben Bernanke signaled the end of Quantitative Guessing II. We’ve called it guessing, because that’s what it was – a guess that a second stock and commodity market inflation could magically boost the US economy into what Bernanke calls “escape velocity.”


On the two mandates that he is scored on – full employment and price stability – guessing didn’t work out for him.


What has actually worked quite well for Bernanke is getting out of the way. Since the elixir of QE3 hope has been temporarily removed from the almighty table of letting losers win, 3 big things have materialized:

  1. Strong Dollar
  2. Deflating The Inflation
  3. Rising Consumer Confidence

Last week’s preliminary December reading on US Consumer Confidence from the University of Michigan improved again, sequentially, to 67.7 (versus 64.1 in November). It’s not a great reading. But it’s certainly better than bad.


Last week’s Deflating The Inflation (Hedgeye Macro Theme from Q311) was also additive to US Consumer Purchasing Power:

  1. CRB Commodities Index (basket of 19 commodities) = -2.2% week-over-week
  2. Oil Prices (Brent and WTIC blended avg) = -1.2% week-over-week
  3. Gold and Copper = -2.0% and -0.8% week-over-week, respectively

Just as an fyi, most Americans don’t have enough money to buy an ounce of Gold, nor should they if their outlook is in line with Hedgeye’s for a potential US Dollar appreciation of another +5-10% higher from here.


That’s not to say we don’t want you to own some gold. That’s just a friendly reminder that the idea is to buy low, not high. Gold’s intermediate-term TREND line of resistance remains overhead at $1743/oz and there is no long-term TAIL support to $1568/oz.


Back to what Strong Dollar means for America…

  1. Stronger Employment
  2. Stronger Consumption
  3. Stronger Society

If you can have a Keynesian refute Keynes’ view of the same to me, just tweet me @KeithMcCullough.


My immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1683-1732, $107.11-109.55, and 1233-1270, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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No Surer Means - Virtual Portfolio

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