“Economics is too important to leave to the economists.”
– Steve Keen
I graduated with a degree in Economics from Princeton University; looking back at old textbooks and syllabi, and listening to former professors debate current economic issues, I can’t help but feel like I “dropped a hundred and fifty grand on an education [I] could’ve gotten for a dollar fifty in late charges from the public library,” to quote one of my favorite movies, Good Will Hunting. [I fully expect an angry call from my parents today.]
But it seems that I’m not alone. Last month, seventy freshmen at Harvard walked out of Gregory Mankiw’s introductory Economics 10 lecture; they wrote to the well-known economist that his course “espouses a specific – and limited – view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.” And that, “As your class does not include primary sources and rarely features articles from academic journals, we have very little access to alternative approaches to economics.”
The quote that prologues this note is from Post-Keynesian economist Steve Keen’s book Debunking Economics. If you’ve never heard of him it’s because he doesn’t write for the New York Times or dine in Davos, though in 2010 he did win the Revere Award for Economics for being “the economist who first and most cogently warned the world of the coming Global Financial Crisis.”
He is a harsh critic of mainstream economists; while Keen warned as early as 2001 that “economic theory has been complicit in encouraging America’s investing public to once again delude itself into a crisis,” neoclassicists like Greenspan, Bernanke, and Geithner were our economic leaders that empowered the private sector to lever up to an unsustainable level (private sector debt to GDP of 300%), gave no warning of imminent danger, and today fail to apply appropriate policies to lift us out of the recession because they don’t understand what caused it.
Like those Harvard freshman, Keen isn’t afraid to say that today’s Emperors of Economics aren’t wearing any clothes. Hedgeye says it every day.
The economists that make the world’s crucial monetary policy decisions are the same economists that I listened to in lecture halls and authored my textbooks. While superficially appealing, their theories lack empirical evidence, are riddled with internal inconsistencies, and are based upon tenuous assumptions. Specifically, their models are built on downward sloping demand curves, upward sloping supply curves, perfect competition, rational consumers, benevolent dictators, and general equilibrium; there is no dynamic analysis, no consideration of disequilibrium, and no role of private sector debt.
What real-world, market economy adheres to the principles defined by our leading economists?
There isn’t one. That’s why Milton Friedman argued that a theory cannot be judged by its assumptions, but only by the accuracy of its predictions. But that defense doesn’t hold up so well after every neoclassical economist failed to predict the financial crisis and ensuing recession. In fact, in August 2008, Olivier Blanchard, professor at MIT and now chief economist at the IMF plainly stated that, “The state of macro is good.” Somehow, even when groupthink’s policy resulted in turmoil the world over, economic leaders failed to judge modes of economic thought by the accuracy of their predictions. As a result, the same actors – Geithner, Bernanke et al. – remain in systemically-important roles even after being proved wrong pre and post 2008.
As Keen puts it, neoclassical economists are “wedded to the belief that capitalism is inherently stable. They cannot bring themselves to consider the alternative perspective that capitalism is inherently unstable, and that the financial sector causes its most severe breakdowns.”
Rather than expanding the range of phenomena that economics can explain, the leading edge of neoclassical theory focuses on defending the core beliefs from the attacks of ancillary views. It is truly a Degenerative Science, if economics can be considered a science at all. True sciences expand and evolve: genetics, psychology, quantum mechanics, astronomy; economics defends itself – it is an ideology.
On scientific progress, German physicist Max Planck said that, “Science advances one funeral at a time,” and Keen concurs: “You cannot persuade people who believe a mythical vision of reality and their whole lives are dedicated to believing that way.”
As it pertains to the leadership of our globally-interconnected economy, we’re more optimistic. The American people’s frustration demands a faster rate of change than “one funeral at a time.” Whereas academic economists move at a glacial pace (if they are moving at all), the people are unafraid of change – they will fold a losing hand. Public opinion polls have shown for some time the dissatisfaction of the American people with Bernanke’s performance, for instance.
Americans want to stop playing with perennial losers, while potential winners are left on the bench.
Including concepts from complexity theory, evolutionary economics, Austrian economics, Post-Keynesian economics, and other alternative economic schools – all shunned by today’s monetary and fiscal policy leaders – would be a positive change on the margin. What we need is an economic theory that is more relevant to a modern capitalist economy – one that embraces uncertainty and disequilibrium, is grounded upon realistic assumptions, is judged by the accuracy of its predictions, and where debt and money are implicit, important factors.
Like Wall Street 1.0, Economics 1.0 is broken and has to evolve. Keen aptly states, “If economics is to become less of a religion and more of a science, then the foundations of economics should be torn down and replaced.” We are on the way.
Our immediate-term support and resistance ranges for Gold (bought it on 12/14), Brent Oil (Bearish Formation), and the SP500 are now $1, $103.23-107.91, and 1, respectively.
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:
- 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.
- 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.
- 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:
- 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.
- 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.
- 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!
- 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.
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.
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.
THE HEDGEYE BREAKFAST MONITOR
Initial jobless claims came in at 366k versus 390k consensus and 385k (revised) the week prior.
Comments from CEO Keith McCullough
And these are the days of our Global Macro lives…
- 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.
- 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.
- 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.
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.
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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.
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.
Joshua Steiner, CFA
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