Comments from CEO Keith McCullough


Contrast the Top 2 US Headlines this morn: 1. "Apple Profit More Than Doubles" vs. 2. "Fair Share" – I don’t get it – markets don’t either:

  1. US DOLLAR – I #SOTU Word Scored the entire speech last night and the US Dollar was not mentioned once. #FairShare had 5 mentions and #Capitalism = 0. Just words, but they matter – Even the NYT and BBC ran #FairShare in their headline this morning. It’s just not good for my Strong Dollar case. Clinton and Regan both rolled w/ Strong Dollar, Strong Consumption (ie 71% of US GDP)
  2. TREASURIES – stocks lost all of their Pre-#SOTU speech Apple momentum and have gone red this morning as UST Bond Yields fall a few beeps and the Yield Curve compresses by 3 basis points d/d. If you had to score the speech on Growth, it didn’t score well either. 10yr UST Yields of 2.03% is the most important Global Macro line in my model right now. If we snap it, I’ll get more defensively positioned.
  3. GLOBAL EQUITIES – at about 6PM last night I thought the futures had it right and Apple was going to bust a move taking the SP500 to a fresh YTD high – no dice. Instead we are looking at what’s called an Outside Reversal from Monday (testing new highs intraday of 1322, failing, and closing at/below prior closing high). Asian, European, and Latin American stocks at risk of doing the same.


My bullish Strong Dollar, Strong America tone is changing this morn, because globally interconnected prices have.




THE HBM: MCD, CMG, EAT - subsector fbr





MCD: A McDonald's restaurant in Dickinson, N.D., is offering $300 signing bonuses for prospective employees. The move comes as North Dakota's unemployment rate hovers around 3.4 percent, the lowest in the nation (


CMG: Chipotle is running a promotion on Super Bowl Sunday offering half-off burrito boxes.  The promotion is generating publicity for the company because of the ad itself.


THE HBM: MCD, CMG, EAT - cmg promo





TAST: Working diligently on the separation of the two companies


DPZ:  On a relative basis it was a good day for DPZ





EAT: Brinker was raised to Buy from Hold at KeyBanc Capital.


Other Casual Dining News


Del Frisco Restaurant Group LLC filed registration papers for an IPO.


Howard Penney

Managing Director


Rory Green




We remain positive on Brinker on all three durations (TRADE, TREND, TAIL). We view yesterday’s sell-off as offering a buying opportunity as current trends suggest that the company may comparable store sales targets for the full year.  From a tail perspective, the long-term improvement to the operating platform at Chili’s, and the benefits that generates remains intact.  From here, we see $5 of upside and $2 of downside.


We understand the stocks reaction to yesterday’s disappointing and decelerating sales trends at Chili’s.  The 240% spike in volume versus the thirty-day average is significant.  The Chili’s and/or Bar & Grill naysayers certainly enjoyed yesterday.  The ride to $27 was painful for them and even with the stock at $25.66 many remain aggrieved.  The Chili’s/ bar and grill naysayers are having a field day.  Prior to that the run to $27 was a painful ride and with the stock settling in at $25 is still inflicts a certain about of pain.


Knowing we get marked to market every day, what do we do with the stock right here and now.  Is it over or not? EAT’s balance sheet, free cash flow and margins are some of the strongest in the industry, so the investment case boils down to an income statement issue.  More specifically, have the changes the company has made to the way Chili’s operates going to allow the positive momentum on traffic to continue for the balance of the fiscal year?


I’m not going to raise the white flag yet.  We are staying positive on all three durations.  Our thinking is focuses on four key points:

  1. The core competitors have responded to the Chili’s $6 lunch promotion but traffic trends early in the current quarter are remaining strong
  2. EPS revisions following the quarter just reported continue to be revised up.  A trend that has been in place for the past 6 months
  3. Sentiment is overly negative
  4. Internally they continue to see positive momentum and the improvement in the macro environment is a net positive


Yes the easy money in EAT has been made, but there is still more to come.  The next quarter is where the rubber meets the road.  I can see a plan that can get Chili’s same-store sales to 3-4% for the quarter (2% price, 1% mix and positive traffic), which will get the company back on track to the 2% guidance for the year.  The wild card is what happens to traffic?


BRINKER:  WHERE TO FROM HERE? - eat price mix traffic


BRINKER:  WHERE TO FROM HERE? - eat vs eps consensus



Traffic trends are helped by the fact that the macro trend is more positive on the margin, with the employment outlook and confidence improving.  In addition, industry hiring trends continue to suggest that the demand picture in improving. 


BRINKER:  WHERE TO FROM HERE? - rest employment



If you are bearish on the Bar & Grill space in general and don’t believe that the internal changes that management has made to the Chili’s concept are real you will not see our side of the story.  Since announcing their version of the “plan to win” in 2010, management has delivered on what was laid out.  The changes that have been made to the kitchen and the restaurant itself will boost the top line over time.


At 7.1x, we view the EV/EBITDA valuation as favorable based on current trends.  From here, we see $5 of upside and $2 of downside.


Howard Penney

Managing Director


Rory Green




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“The only thing I’m addicted to is winning.  This bootleg cult, arrogantly referred to as Alcoholics Anonymous, reports a 5 percent success rate.  My success rate is 100 percent.”

-Charlie Sheen


I’m not sure Keith realized that today was my birthday when he asked me to write the Early Look, rather he was likely focused on the fact that I’m Hedgeye’s resident political analyst and last night was President Obama’s fourth state of the union address.  This was also Obama’s last state of the union address ahead of the 2012 elections.


For those of you who aren’t active on the Twitter-sphere (my handle is @HedgeyeDJ if you are), the expression “#winning” was popularized by actor Charlie Sheen early last year when he started a one man campaign against the traditional world of entertainment. In effect, he was saying he wasn’t going to conform to Hollywood 1.0 any longer.  He also announced on twitter that he would continue to win and, amongst other things, the term #winning started trending in dramatic fashion.


Watching the state of the union address last night on Twitter was fascinating to say the least.  Keith has called twitter the new tape many times, and I think it’s also the new political pundit.  In terms of markets for opinion, at least in 140 characters, twitter is about as efficient as it gets.  If you make comments of interest and insight, your followers will increase and so will your influence via your Klout score. 


Last night as people were watching President Obama’s address, the key term that was trending on twitter was #fairshare and it is still trending this morning.  This morning I searched #fairshare on Twitter to get a sense for the consensus view of the speech and the general concept of #fairshare.  Here are the top tweets that came up:


@ewmonster: The defining issue of our time, is how to keep the American Dream alive.  THAT is a paraphrase worth making! #fairshare #sotu


@EconBrothers : Obama is right.  Everyone should pay their “fair share” of taxes, even those who currently pay no federal income taxes.  #FairShare #SOTU


@MonicaCrowley : And here we go again w/ the Warren Buffett warfare tax BS. #FairShare


@IAmSoSmart : I am thoroughly convinced that if democrats understood how hard I worked for my money, it would blow their tiny mind. #FairShare


@KeithMcCullough : #SOTU Word Score: #FairShare = 5, #Capitalism = 0


And my personal favorite:


@EricComedy : If Obama uses the phrase #FairShare one more time, I’m going to stomp on a live gerbil. #SOTU


In all seriousness, Obama clearly used this address to launch the key theme of his campaign, which is that he wants to, at least rhetorically, level the playing field for all Americans.  Whether that practically, or economically, makes sense is somewhat beside the point.  Certainly, in his speech last night President Obama didn’t offer much beyond platitudes.  If you don’t believe me on that last point, here is the New York Times’ interpretation:


“Mr.Obama presented a somewhat modest list of initiatives he could enact through executive authority coupled with more ambitious proposals unlikely to advance in Congress.”


In effect, there was nothing in his speech that would practically move the needle from an economic perspective.  Nonetheless, President Obama appears to be #winning.


According to InTrade this morning, President Obama’s chances of re-election have increased to 56%.  For the last eight months, this probability has been mired below or just above 50%, but in the last two weeks the election markets at InTrade are pricing in an increasing likelihood of an Obama re-election. This is in part due to the increasingly heated rhetoric and dysfunction emanating from the Republican primary.  That said, the economy has started to improve on the margin which benefits the incumbent and the President’s messages are broadly appealing.  #FairShare in 2012 is the #Hope and #Change of 2008.


One of our key criticisms of both the Obama and the George W. Bush Presidencies were their carte blanche backing of Keynesian economic policies.  In the Chart of the Day, we show the notional expansion of U.S. federal government debt under President Obama.  Under President Obama, the United States experienced the largest one year federal debt increase ever and in his first term, when complete, the United States will likely have added more than $6 trillion in debt to the national balance sheet.  This is more than both of George W. Bush’s terms combined.


The key risk of an Obama second term and a Fair Share agenda is that the growth of the federal government and its obligations continue to accelerate.  Already, the U.S. is beyond the 90% debt-to-GDP line in which long term economic growth becomes structurally impaired accorded to more than 200 years of data from Reinhart and Rogoff. In the shorter term, a view by the markets that the federal government is less focused on fiscal prudence is negative for the dollar and detrimental to our thesis that a strong dollar will increase the 70% of GDP that is consumption.


In the chart of the day, I’ve actually included a picture of the Bassano Dam, which is a large irrigation dam south of my hometown of Bassano, Alberta.  When it was constructed in 1915, the Bassano Dam was the largest man made irrigation dam in the world and a game changer for the agricultural community of southern Alberta.  It was a project that was funded by the government.  The point being that not all government funded projects are negative for the economy.  On the other hand, government spending for the sake of ambiguous goals that lack an ROI, like #FairShare, is only likely to add to our debt balance and constrain future consumption and growth.


Since both parties like to channel Ronald Reagan these days, I’ll end with a quote from the Gipper:


“We must not look to government to solve our problems. Government is the problem.”




Our immediate-term TRADE ranges of support and resistance for Gold, Oil (Brent), EUR/USD, US Dollar Index, German DAX, and the SP500 are now $1, $109.44-110.85, $1.28-1.31, $79.41-80.43, 6, and 1, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


#Winning - Chart of the Day


#Winning - Virtual Portfolio


Despite concerns about the core lunch business, we believe that – for now – the company continues to execute so well in other day parts that we remain positive on all three durations (TRADE, TREND, TAIL).  Yesterday’s results were impressive but the stock’s reaction tells us how high expectations are for MCD.


There is so much to admire about McDonald’s top line performance, but there is just one issue that keeps nagging me and I keep thinking when it will become a bigger focus of the street attention.


I have been thinking about the core lunch business declining for a year now.  But the growth in breakfast, snacks and nontraditional day parts has overshadowed this issue.  At the company’s analyst meeting last November the issues around lunch were obvious but did not seem to cause much concern for analysts and investors.


On yesterday’s earnings call there were two questions that were asked that got at the issue and the company side-stepped the topics on both occasions.  The first question was on “building capacity” in the restaurants and the second was on traffic trends.  Don Thompson answer was telling on this issue, as he talked about the growth in nearly every day part but lunch.


In response to a questions on consumer movement Don Thompson said that there were a couple of things that the company focuses on.  “…One of which is day part analyses. So as we look at day parts like evenings and breakfast, do we see – are we seeing more momentum in some of those day parts, which typically starts to, if you correlate that with some of the unemployment numbers and some of the hired numbers, the new job numbers, it tends to help us a little bit. We see a little bit of movement. I mean, our evening day parts were pretty strong comp and breakfast has been a pretty strong comp for us.”


What about lunch?  After all, that is the core business.  To figure out the bear case on when MCD sales trends are going to slow, it’s important to keep in mind capacity constraints at breakfast and the afternoon and evenings.  Knowing that lunch is an issue, a breakdown of MCD comp performance is telling of how much the company is reliant on the non-traditional day part.


FY11 Comp = +4.8%

Price = +3.0%

Guest Count = +3.3%

Implied mix = -1.5%


Today’s traffic drivers are causing the decline in the mix of business, but that is more than offset by the growth in incremental traffic.  For the time being none of this matters, but it will.  The question is when?


Turning to yesterday’s results, when a company beats on EPS, margins, and prints global comps of 9.6% for December, the stock only goes down if expectations were very high.  For the time being, though, we remain positive on MCD.


The phrase, “expectations are the root of all heartache” comes to mind.  McDonald’s traded down yesterday despite producing a stellar 4Q.  EPS came in at $1.33 versus consensus $1.29, McOpCo restaurant margins came in at 18.7% versus 18.6%, and same-store sales easily exceeded expectations in December.  Please see below for the same-store sales and quadrant charts updated for today’s results.








MCD: WHEN WILL LUNCH MATTER? - mcd apmea dec



In terms of the top line in the U.S., which remains the company’s most important market, we believe that the company will continue to take market share from competitors.  The company is growing internationally and China, one focus of expansion, saw 4Q comps come in at +15.6% with double-digit traffic.  From an investment standpoint, the company’s 12 month yield of 2.57% and global diversification attracts the “flight-to-quality” investor.  That said, we do not believe that the fundamental story is over for McDonald’s.  


While it is impossible to know exactly what brought the stock down today, there are concerns around G&A, FX headwinds, and interest expense.  We believe that these factors are transient.  The increase in G&A is related largely to items particular to 2012, some of which will in fact help sales in during the year and beyond, and we expect strong top-line momentum to continue in early 2012.  Until we gain more clarity on real fundamental issues coming to the fore, we remain positive on MCD.



Howard Penney

Managing Director


Rory Green




Re-Shape The Debate

This note was originally published at 8am on January 20, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I am trying to re-shape and improve my central position.”

-John Maynard Keynes


After getting publically steam-rolled for his failed government “stimulus” experiments of the late 1920s, that’s what Keynes finally admitted to Hayek in 1932. Keynes went on to tell Hayek that changing his views is “probably a better way to spend one’s time than in controversy.”


Classic. Can you imagine if Ben Bernanke and Larry Summers had it in them to change their central planning strategies as the facts have? Sadly, you probably can’t. That’s the anchor of Academic Dogma in our Ivy League towers that will take time to creatively destruct.


Keynes, of course, used willful blindness to alternative economic strategies like Hayek’s just as well as Bernanke and Geithner do: “Keynes admitted in a Treatise on Money that ‘in German, I can only clearly understand what I already know – so that new ideas are apt to be veiled from me by the difficulties of the language.” (Keynes Hayek, page 139).


It’s a good thing Albert Einstein was able to Re-Shape The Debate of his time in English…


Back to the Global Macro Grind


Solution - the 3 core factors our team focuses on from a Fundamental Macro Modeling perspective when we look at countries are:


Since our models have actually worked in calling the big Growth and Inflation turns for the last 4 years, we think it’s high-time to Re-Shape The Debate on how leaders (running countries, companies, or trading P&Ls) consider these 3 factors.


Rather than compounding Keynesian mistakes in forecasting Growth and Inflation by slapping random multiples on the economic growth that countries do or do note generate (with a 30-80% tracking error in their forecasts), this is what we do:

  1. Measure the Slope (accelerating or decelerating) of Growth and Inflation
  2. Apply Predictive Tracking Algorithms to all Growth and Inflation data we can find to generate an estimated range of outcomes
  3. Hammer out the reps each and every morning across all of Global Macro to adjust our models for any new Growth/Inflation data

Then, on a risk adjusted basis, we decide if there is:


A)     An acceleration in the existing slope (going from good to great is the same thing as going from bad to toxic)

B)      A deceleration in the existing slope (going from great to good is the same thing as going from toxic to bad)

C)      A centrally planned policy to attempt to arrest the gravitational force of the slope


Hopefully I didn’t lose you yet (I didn’t write it in German, but it’s math – which, seemingly, Bernanke and Summers should understand even if I wrote this in Mandarin-Canadian).


If I did lose you, here’s what it means in term of what’s changed from a Fundamental Macro Modeling perspective since we’ve made an explicit change in our call on Global Macro markets in December (we’re long Growth (Equities) and out of Fixed Income):

  1. GROWTH: US, Chinese, and German Growth (our Big Mac-cro 3) have all decelerated at a slower rate = bullish
  2. INFLATION: Globally, we’ve seen a Deflation of the Inflation (US CPI dropped from 3.4% NOV to 3.0% in DEC) = bullish
  3. POLICY: Bernanke/Geithner haven’t been able to debauch the US Dollar and Germany is being fiscally/monetarily conservative

What would make our models change back to the bearish side (i.e. Growth Slowing re-accelerates on the downside and Inflation re-accelerates on the upside)?

  1. Ben Bernanke goes to Qe3
  2. Obama and Geithner go way left on fiscal spending
  3. Germany folds to French demands for Euro bonds (money printing) and bank bailouts

After 4 long years of Jobless Stagflation, look at what getting Bernanke, Geithner, and Sarkozy out of the way is doing – yesterday’s US jobless claims print of 352,000 was the best jobs number we’ve seen since March of 2008!


Strong Dollar = Stronger Consumption (inflation deflates), Stronger Confidence, and Stronger Employment. Period.


Whoever is begging Bernanke for policies to inflate (Qe3) is effectively begging for my model to break down (begging for Inflation to accelerate and slow real (inflation adjusted) US, Chinese, Brazilian, etc. Consumption Growth).


If you’re an exporter in Michigan, you don’t like this. If you’re making BMW’s in Germany, or putting gas in yours in New Jersey, you love it. The only people that want weak currencies are the people who need them to get paid.


Rather than having CNN focus a US Presidential Debate on “open marriages”, it’s time to get real in this country. It’s time to get serious about the evolution in our economic thinking. It’s time to Inspire, Re-work, and Re-Shape the Real-Time Economic Debate.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, German DAX, and the SP500 are now $1640-1672, $109.85-112.11, $1.26-1.30, $80.19-80.97, 2263-2353, 6260-6467, and 1293-1315, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Re-Shape The Debate - Chart of the Day


Re-Shape The Debate - Virtual Portfolio

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