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Two transient factors have been positively impacting restaurants’ top-line numbers recently.  A distortion in initial jobless claims and – for certain companies – a favorable weather impact have been boosting revenues year-to-date.


The Hedgeye Financials team conducted an interesting analysis on initial jobless claims recently and, specifically, the implications therein of the Lehman bankruptcy-related shock to the labor economy in late 2008 and early 2009.  We have been attempting to process what the read through of this analysis is for our space.  Our conclusion is that the impact of a recently-favorable distortion to the headline seasonally adjusted initial claims data, coupled with the impact of favorable weather versus 2011, may have boosted top line numbers for many restaurant companies year-to-date.


The phrase given to the aforementioned initial claims issue by the Hedgeye Financials team is “The Ghost of Lehman”.  They explained the impact of Lehman’s demise on the Labor Department’s construction of the seasonal adjustment factor.  They write:


 “Lehman's Ghost is a distortion in the seasonal adjustment factors that the Department of Labor is using to treat jobless claims arising from the shock in the series in late 2008 - early 2009.  The Labor Department uses a five-year lookback in constructing its seasonal adjustment factor, which means that the '08-'09 shock continues to skew the data.  Essentially, the seasonal adjustment sees the increase in claims in September 2008 - February 2009 and reads it as a seasonal factor rather than as a bona fide shock.”


To estimate the extent of the distortion from the seasonal factor on this week's data, we examined the YoY increase in NSA claims in February 2009 (+88%) and then backed out the average YoY growth from September 2008 to February 2009 (+60%).  So the February 2009 growth is 28% above trend, YoY.  This should be a rough approximation of the contribution of the seasonal factor from that year.  Since the overall seasonal adjustment takes a five-year average, we divide this number by five to get a 5.6% increase.  The conclusion is that this week's claims data is 5.6% understated.  Instead of being 351k, it should really be 372k.”


If the analysis is correct, and we have passed the maximum benefit to restaurant stocks by way of the seasonal adjustment distortion, restaurant stocks’ outperformance could begin to reverse in the coming months.  The Financials team contends that “from now through May, the understatement disappears…by July, the distortion reappears, this time as an overstatement, pushing claims higher still.  From July through year-end, the distortion disappears, and the underlying trend will be reflected in the weekly data.”


There are clearly a lot of moving parts under the hood where the labor statistics are concerned and, while we are not stating that the jobs market is not showing some improvement, we would caution clients against over-exuberance.  The claims data, distorted or not, are important drivers of restaurant stocks (albeit more so for casual dining) and to the extent that the claims data becomes marginally less positive as the seasonal adjustment becomes a headwind, we would expect to see a marginal slowdown in restaurant stocks’ performance (again, more so in the casual dining space). 


THE HAUNTED HOUSE OF RESTAURANTS - inverted claims vs casual dining


THE HAUNTED HOUSE OF RESTAURANTS - inverted claims vs qsr



The quick service and casual dining spaces have, year-to-date, outperformed the S&P 500 by 320bps and 718bps, respectively.  Many names are up on a rope at these levels and, given the Ghost of Winter 2011 – the favorable year-to-date weather impact – combined with the possibility of the Ghost of Lehman distortion going away, we see a likely inflection to the negative side in sentiment around the top line over the next 3-4 months.  We are cautious on the broader space at this point.  The weather impact, which we discussed in our recent post “WINTER WONDERLAND”, is a wildcard currently given that the impact on different companies within our space will largely depend on their respective store bases’ geographic dispersions and disclosure from management as to the magnitude of any weather impact is not likely (until it is being lapped next year!).  The Ghost of Lehman, however, will be far more visible if the analysis is correct, in the jobs data going forward.


While a more benign cost inflation outlook, improving sales trends, and increased pricing have fueled the space’s outperformance year-to-date, it is clear that investors could become spooked if favorable factors turn negative or, even, less positive.  Given how lofty expectations have become, we believe that heading through 2Q we could see the top line begin to disappoint.  We believe that the casual dining space is most at risk given its leverage to jobless claims and the outsized performance of that category year-to-date.


Howard Penney

Managing Director


Rory Green





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"I can take pot or leave it. I got busted in Japan for it. I was nine days without it and there wasn't a hint of withdrawal, nothing."
 -Paul McCartney 


If the quote above from Paul McCartney is accurate, he cured his dependence on an illicit substance after a visit to Japan. The question as it relates to the Japanese in 2012 is whether the Japanese government can cure their dependence on debt to sustain their economy.


On Friday, March 2nd, 2012 at 11am EDT, the Hedgeye Macro Team, led by CEO Keith McCullough, Director of Research Daryl Jones, and Senior Analyst Darius Dale will be hosting a conference call to update our investment view on Japan with a 75+ page presentation. Please contact if you do not currently subscribe to our Macro vertical and would like to trial our product and receive the materials.


Topics will include:

  • Accelerating debt maturities - In the context of credit default swaps on Japanese government debt doubling since we introduced our Japan's Jugular thesis on October 5, 2010, a cascade of maturities in 2012 - specifically March - increase the probability that Japan's sovereign debt market comes under pressure over the intermediate term.
  • Long term demographic headwinds - Japan has the oldest population in the G-7 and by some estimates, based on current demographic trends, the Japanese population will decline by more than 30% over the next 40-years. The headwind of demographics has specific implications for government entitlement spending and GDP growth, both over the short and long term.
  • Government policies gone awry - Decades of Keynesian economic policies have left Japan with a structural deficit of 8-9% of GDP and a revolving door of political leadership. Current policy proposals on the horizon actually appear poised to push Japan closer to the abyss of debt and deficits by structurally impairing economic growth incrementally.



Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.


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Comments from CEO Keith McCullough


Higher-Highs are predicated on higher oil prices now – we’ve seen this setup before:

  1. RUSSIA – the most popular man w/ Putin right now has to be The Bernank. Putin gets paid in Petro-Dollars, and with the Petro straight up, Dollar straight down, what more could our comrade want heading into this weekend’s election? Russia +25.2% YTD. That’s probably a depression or deflation signal, or something.
  2. OIL – down 1% this morning but the lines that matter most continue to hold as the US Dollar’s bid remains fleeting. If Iran doesn’t send a missile somewhere soon, we’re going to need another line of storytelling out of Washington, fast. Immediate-term supports for Brent and WTI = $123.29 and 106.12, respectively.
  3. YEN – this is easily the most recognizable downward dog pattern that consensus still isn’t talking about. Straight down again (-0.46%) vs the USD this morning, the Japanese are about to engage in selling more sov debt than even the Americans and Europeans could. We have a 100 slide deck and conf call on Japan at 11AM EST today if you want to get up to speed on it.


ISM slowed (growth) from 54.1 to 52.4 and Prices Paid (inflation) ripped to 61.5 in FEB vs 55.5 JAN. Markets will do what they do until they don’t, but our Fundamental Global Macro Research Model has not changed. Growth Slows As Inflation Accelerates.







THE HBM: WEN, MCD, DIN - subsector





WEN: Wendy’s shareholder, Trian Fund Management LP, sold nearly a fifth of its H.J. Heinz Co. holdings, cashing out $11.2 million.  Nelson Peltz, who founded Trian, has been paring his holdings of HNZ since fall 2011. 


WEN: Wendy’s management hosted an earnings call yesterday and stated that prices have been raised on certain sandwiches to “better drive sales”.  The “W” sandwich is now priced at $3.19 versus $2.99 beforehand and the combo price was increased by 29 cents.  Management highlighted a need to achieve better “drag along” sales of fries and Coca-Cola.  Wendy’s is also shifting in its TV advertising approach to take on the Big Mac head on.  We are unsure of how successful that will be; time will tell.  The company is ramping up its capex for 2012 to $225mm versus $147mm in 2011. 


MCD: McDonald’s reports February sales next Thursday and, according to Barron’s a good strategy is to buy March $100 calls on McDonald’s sometime soon.  The publication notes that for the past seven years, buying calls ahead of McDonald’s sales reports has been profitable.





JACK: Jack in the Box took a step back, declining -2.1% on accelerating volume after posting a +11% gain for the month of February.


JMBA: Jamba also posted a strong February, gaining 36%, but declined -4.2% yesterday on accelerating volume.


PEET: Peet’s Coffee gained on strong volume. Declining coffee costs are good for Peet’s.





DIN: Dine Equity reported 4Q EPS of $0.91 versus consensus $0.87.  DIN said that food inflation and labor costs hurt 2011 margins but management stated that raising prices is one strategy that they can take to match inflation.  Debt reduction is an important goal for the company and free cash flow will continue to be dedicated to that end.





DIN: Dine Equity gained on accelerating volume following earnings.


TXRH: Texas Roadhouse declined on accelerating volume as beef prices continue to soar.  The supply side of beef is expected to remain constrained for a couple of years.  For now, demand for US beef remains strong.


THE HBM: WEN, MCD, DIN - stocks



Howard Penney

Managing Director


Rory Green



Early Look

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The Healthcare Fix

This note was originally published at 8am on February 17, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not seek to fix the blame for the past. Let us accept our own responsibility for the future.”

-John F. Kennedy


Keynesian dogmas are often criticized at Hedgeye.  While fiscal and monetary policy is often the target for critics, health spending is often ignored.   Perhaps it is easier to comment on growth and inflation metrics in the broader economy than it is in the healthcare sector.  But the similarities are apparent.  Over the last 50 years government health spending has coincided with rising medical inflation and slower growth.  Maybe it is time to try something different.


The health reform debate has a long history, but one that has generally ended with rising demands on public financing.  As of today, government payments account for over half of the total medical spending today in the United States.  Medical spending finds itself again as central issue in the current political debate.  


For all of the public support for the health sector, or because of it, affordability and access continue to be the chronic platforms of the debate.   Since 1999, family insurance premiums have risen at over 8% per year and 3X the rate of wage growth, rising from $5,791 in 1999 to $15,073 in 2011 (Kaiser Family Foundation).  At this rate of increase, a family policy will cost $22,000 in 2016 and $32,000 by 2021.  Meanwhile, the employee share of insurance premiums has risen while wage growth has been stagnant. But worst of all, access is shrinking.  Out of pocket expenses and deductibles make it unaffordable for many to seek care, while of those insured by Medicare and Medicaid, physicians refuse these new patients 13.7% and 28.2% of the time, respectively.


We are hopeful that President Obama’s Affordable Care Act will produce all that has been promised by the President and the Congressional Budget Office, namely improvement in access, lower costs, and reduced federal deficit.   For reasons we won’t elaborate on here, we believe The Affordable Care Act, while different in the details, will have the similar outcome as past expansions of government health spending.  We expect the legislation will reduce access, drive medical costs higher, and worsen the deficit. 



It is cliché at to say health spending rises faster than broad measures of inflation such as the Consumer Price Index.  Despite the widespread belief that this is driven by an aging population, the surprise finding far less spoken about is the miniscule contribution an aging population makes to annual medical inflation.  According to a 2006 study of hospital care, the annual contribution to hospital spending from an aging population is 0.74% (Banker et al, Health Affairs 2006).  In other studies of total medical spending, the aging contributes only 0.50%.  Removing the demographic fallacy, the conclusion should be to focus on prices. 


Putting this in the populist context of Apple and its $108B in fiscal 2011 revenue, an annual price increase on the $2.6T Health Economy adds $130B in additional revenue, or cost, to the system, with a corresponding “value” that is impossible to compare.



We find it a shame that the healthcare sector is entering its second decade of decelerating growth and lower multiples yet enjoy more government support, more regulation, while Americans have a profound need than ever before.  We’d love nothing more than see routine 5% annual price increases and $130B in new spending turn itself into a new industry to analyze.  Unfortunately prices are going up, and the system remains broken and ineffectual.



My bookshelf is cluttered with too many books on how to fix healthcare that I have spent too much time reading.  Many offer intelligent alternatives.  Many are diligently researched.  But all of them lack a simple and practical solution.  Here’s my simple solution: create a National Health Score, or a credit score for your health. 



A National Health Score would convert well known patterns of per capita medical spending and creates a national underwriting table.  With a Health Score, creating a price for a health insurance policy for an individual is turned into a function of age and a few simple risk factors.   Additionally, remove the risk of catastrophic event by insuring and caring for those rare events separately.


On an individual basis, the Health Score would focus an individual on factors they can control.  A  42 year old father of 2, who is overweight, has high cholesterol, and is a tobacco user should pay more than a healthier 42 year old.   However, if by his own effort he slims down, quits smoking, and improves his Health Score, he should pay less.  By consolidating the risk factors into a Health Score and using it to set the monthly premium, an individual has the “skin in game” that consumer directed healthcare advocates so desire, but its centered on things the individual has control over. Over time, the system benefits from lower long term costs.



The fact that the existence of a three tier system is accepted so calmly in the United States (private insurance, government, none) while we lead the globe in per capita health spending at close to $8,000 per capita, should be alarming.   With a Health Score in hand, legislators and policy will be allowed to turn to how much support an individual receives and how to improve the aggregate Health Score of the population. 



The reality for the vast majority of people is that a serious episode of care is a rare event.  For a hospitalization, the percentage of people are admitted to a hospital in a given year is in the single digits.  For those between the ages of 18 and 44, the rate is 5.9%.  For those between the ages of 45 and 64, the rate is 6.9%.   The downside of course is when you find yourself in the group that goes to the hospital.  The high cost of the care, which carries a mean expense of $11,433 and $20,252 for these two age groups, can harm many, and bankrupt others, and make health insurance prohibitively expensive after an individual does get sick.   By treating people who find themselves unlucky enough to have a major episode, they should be considered a separate group and insured and cared for that way. 


The prognosis for the Health Sector is not good.  Decades of expanding government spending appears set to continue.   Growth will continue to decelerate, multiples will move lower, while government expenditure rises to new highs.  Consumer trends will continue to rise in importance, and pricing leverage will continue to wane.  I’ll continue to play the game in front of me, but I am hoping for something different.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1714-1744, $117.81-120.28, $79.06-79.67, and 1348-1360, respectively.


Thomas Tobin

Managing Director


The Healthcare Fix - The Healthcare Dollar 2 EL


The Healthcare Fix - Virtual Portfolio

Growth Crisis

“Europe does not just face a debt crisis, Europe also faces a growth crisis.”

-David Cameron


Growth Slows As Inflation Accelerates. I wrote that in every other Early Look note between February-April of 2008 and 2011 and, unless the US Dollar doesn’t catch a credibility bid soon, I’ll write it again from February-April of 2012.


Why is it that people in our profession didn’t believe me then? Why is it that they don’t believe me now? Do less people believe me less? I really have no idea on what the answers to these questions are. The only thing I am certain of is that my process for intermediate-term economic forecasting using the US Dollar as my lead indicator for Growth and Inflation has not changed.


Sadly, neither has the broken processes of those who had both the 2008 and 2011 Growth Slowdowns wrong.


Back to the Global Macro Grind


Britain’s Prime Minister David Cameron gets this. The Chinese, Indians, and Brazilians get this. So why is it that the Crack Keynesian economists, who got the USA, Japan, and Italy into this mess to begin with, don’t?


That’s pretty simple. It would mean they’d have to hold themselves accountable for structurally impairing the long-term economic growth prospects of Global GDP via Keynesian/Fiat Policies to Inflate.


Got data to support these attacks on the aristocracy of our academic elite?


Let’s look at yesterday’s American Institute of Supply Management Report (ISM) for February (see Chart of The Day):

  1. GROWTH: Slowed -3.1% sequentially (month-over-month) to 52.4 from 54.1
  2. INFLATION: Accelerated +10.9% (month-over-month) to 61.5 from 55.5 (Prices Paid)
  3. POLICY: Dollar Debauchery began January 25th after Ben Bernanke push his Policy to Inflate to 2014

So why didn’t markets go straight down on that yesterday?


I have no idea – they didn’t until May of last year either. Markets will do what they do, until they don’t. The German hyper-inflation of the 1920s saw its stock and commodity markets rise as real (inflation adjusted) German Growth Slowed to all-time lows too.


No worries. According to the Chairman of The US Federal Reserve’s CYA Career Risk Management campaign:

  1. GROWTH: Qe2 (ended Q2 of 2011) was supposed to get us a US Growth acceleration to 3.5-4% (it was 0.36% in Q1 2011)
  2. INFLATION: never – at all-time highs in food and energy prices, you’ll never see it, ever (it ramped to 4-6% in 2011)
  3. POLICY RESULTS? Bernanke said this yesterday and I almost fell out of my chair:

“We’ve had about 2.5 million jobs added … and we’ve seen big gains in stock prices…”


Oh. Ok. Now that the stock market is up, we need to do more of what we did from an inflation policy perspective last year – because, uh, it actually worked? This is the kind of groupthink, dogma, and confirmation bias that almost every behavioral psychologist of the modern Millennium shuns. Enough of the Great Depression fear-mongering thing already.


It’s ok to admit it.


We have a pending Growth Crisis in Japan, Western Europe, and the United States of America. Like an AA meeting, we might have to all say it together: “we are addicted to easy money, inflation, and debt – they structurally impair growth.”


Got math to support these plainly visible claims? Let’s look at how US Growth (GDP) did as the US Dollar Strengthened in Q4 of 2011:

  1. US Dollar Index and American Purchasing Power rose +6.7% from mid October to the end of December 2011
  2. US GDP Growth Accelerated from +1.34% in Q2 2011 (highest inflation quarter of 2011) to +2.98% Q4 2011
  3. US Consumption Growth Accelerated from +0.38% in Q2 2011 (lowest since Q1 of 2009) to +1.17% Q4 2011

The math is so trivial that only an un-elected Central Planner can obfuscate it to the Muppets in Congress at this point.


Facts about US Economic Growth:

  1. US Consumption represents 71% of US GDP – get that right, you’ll get mostly everything else right
  2. Export Manufacturing won’t move anything but the political dial – debauching the Dollar for “export” growth has not worked
  3. Strong Dollar Deflates The Inflation = Higher Real-Inflation Adjusted Consumption = Higher US Growth

Setting aside the accounting irregularities of the US Government on silly things like birth/death adjustments to the US Employment report and using a GDP “Deflator” that’s usually understating US inflation anywhere between 50-1000% (GDP Deflator for Q4 was 0.86%, when CPI and PPI blended averages for Q4 were approximately 500% higher), you should feel better now.


You shouldn’t feel better about America’s long-term Growth Crisis. You should just feel better because I am telling you the truth.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $123.29-126.41, $78.11-79.22, and 1, respectively.


We’ll be hosting our Sovereign Debt and Demographic Reckoning Conference Call on Japan at 11AM EST. Please email if you are interested in participating.


Best of luck out there today and Happy Birthday to my beautiful little girl, Callie.




Keith R. McCullough
Chief Executive Officer


Growth Crisis - Chart of the Day


Growth Crisis - Virtual Portfolio

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