Takeaway: Demographic and macroeconomic factors dictate that being better, not bigger, generates greater returns: long $EAT, short $DRI, short $BWLD

Within the casual dining category, we have been heavily focused on three names this year: EAT, BWLD, and – more recently – DRI.  We are positive on Brinker and bearish on Buffalo Wild Wings and Darden.  Our view on these stocks is based on the companies’ respective earnings potential versus expectations as dictated by current trends and sentiment in the investment community.


Below, we offer a quick recap of our thoughts on each name:


EAT (LONG):  Brinker’s strategy over the last couple of years has been focused on “better not bigger” and this mantra has led to Chili’s transitioning from an industry-laggard to an industry-leader (versus industry benchmark Knapp Track Casual Dining Index.  This has led to strong earnings growth and, we believe that FY13 has the potential to be another 20+% EPS growth year for the company as Chili’s leverages its superior kitchen technology to roll out additional platforms with far greater efficiency than the competition.  Despite having outperformed from a price perspective, the street is still valuing EAT below its casual dining peers on an EV/EBITDA basis.







BWLD (SHORT):  Buffalo Wild Wings is a company that we have been bearish on since early 2012.  We were concerned by the possibility of a short-term pop in the stock price on 2Q EPS as Wingstop, whose comp-store sales had correlated tightly with BWLD’s (0.96), had posted strong numbers for the quarter.  All in all, our FY12 EPS estimate for $3.07 is well below the Street at $3.19 (low estimate is $3.13).  The bullish case in April, on the post-earnings sell-off, was that the conversation was set to turn from higher wing prices to lower wing prices.  At the time, we said such a stance was premature and that our view of the food processor industry and USDA data was indicative of a persistence of elevated wing costs that would pressure EPS growth in FY12.  Given our view that EPS expectations remain overly positive, we are bearish on this stock.  While the EV/EBITDA multiple has come in considerably, we believe that consensus EBITDA remains too high.


CASUAL DINING TRIFECTA - bwld eps expectations vs wing prices



DRI (SHORT)Darden is the inverse of Brinker in that it is attempting to become bigger first and better second.  Rarely, in this industry, do companies become bigger and better at the same time when running multiple chains in one portfolio.  Darden’s stock price has diverged dramatically from EPS expectations and, not expecting a reversal in revision trends any time soon (given fundamental trends at Olive Garden and Red Lobster), we would posit that the risk profile of the stock is skewed to the downside.   Our continuing concerns about Darden’s long-term outlook are centered on the company’s accelerating capital spending and declining traffic trends at its core concepts.  Email Howard for a copy of our recent Black Book on Darden which outlines out thoughts in detail.  Unless you think FY13 EPS estimates are heading dramatically higher, you should consider joining the Darden bear-camp.






General Casual Dining Thoughts


When thinking about the casual dining group and the restaurant industry more broadly, we are trying to keep two things in mind for the longer-term: demographics and consumer spending.   Given that casual dining is among the most discretionary components of the consumer economy, tracking the population growth of the demographic with the highest propensity to spend (55-65), is instructive for generating an informed view of the group over the longer term.  This age cohort's population growth, shown in the chart below, is important for casual dining because of this base of consumers' high frequency use of casual dining chains.  The quote below (from Brinker’s CFO no less) provides an insight into how exogenous tailwinds made the industry fat and happy in good times while also conditioning many industry operatives to focus too much on growth.


“It all gets back to this realization or admission of maturity in the space. What got you to win historically in casual dining was demographics in trade area and real estate. That's how you won. We all built many, many restaurants over many, many years and that's how you won. And in many ways we open the doors and they came because there were a lot of macroeconomic tailwinds who were contributing to that. I think when you realize that your space gets more mature, it puts a whole different filter on how you manage your business because you have to do it so much better.


You can't just rely on organic growth to drive improvements in your business. Now you are looking at your existing box and you're saying, how am I going to make this more profitable. And you start to get much, much closer to the consumers. I think that's the biggest realization we came to that the more mature you get, the closer you get to consumers, the more you understand how they use your brand, what really matters to them.”

– Guy Constant, Brinker CFO, 6/4/12


CASUAL DINING TRIFECTA - pop growth 55 65


Howard Penney

Managing Director


Rory Green



Takeaway: IGT a participation market share gainer among the Big 3?

IGT defying gravity 



  • A big knock on the IGT story was an unsustainably high share of participation revenue.  However, IGT's share has been consistent for 10 quarters among the Big 3.
  • Surprisingly, WMS has been a share loser recently. This would've been a shocking prediction a year ago
  • BYI's consistent gains in revenue share and unit share continue - your father's WMS?





European Banking Monitor: SMP Remains on Hold

Takeaway: Sovereign yields come in but remain elevated as Draghi elects not to reactivate the SMP last week.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


* European financials acted a lot like European sovereigns, both tightening week-over-week. The Draghi rally continues for now. As the SMP chart below shows, Draghi elected for yet another week to refrain from buying sovereign peripheral paper. We expect this to change in the coming weeks.



If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





Security Market Program – For the 22nd straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 8/10, to take the total program to €211.5 Billion.


Following President Draghi’s conference call remarks on 8/2 in which he addressed rising yields in the periphery and said that the ECB “may undertake” non-standard  measures, we continue to expect that the ECB will reactivate the SMP to buy Spanish and Italian bonds, in particular, in the coming weeks.


European Banking Monitor: SMP Remains on Hold - aaa. SMP


European Financials CDS Monitor French and Italian banks tightened, alongside the sovereigns. Spanish banks were mixed, with a few of them posting sizable widening. Overall, however, swaps throughout Europe's financial system were notably tighter. 


European Banking Monitor: SMP Remains on Hold - aaa. Banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 3 bps to 28 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.


European Banking Monitor: SMP Remains on Hold - aaa. Euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: SMP Remains on Hold - aaa. ECB facility

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Moral Markets

Takeaway: Yep, today it’s a race to the bottom. Who can implement the more left-leaning 2-stroke combo of Monetary and Fiscal Policy?

This note was originally published August 13, 2012 at 07:41 in Early Look

“Moral purpose characterized the march in an age of increasing amorality and political duplicity.”

-Victor Davis Hanson (The Soul of Battle)


Markets don’t have morals; people do. People and politicians plan; markets rise and fall. All the while our society changes. Contrary to many economically partisan beliefs, the stock market’s price doesn’t always reflect that either.


Some say that market prices reflect the health of a country. We say a country’s currency does. Some say that market volumes “don’t matter.” We say they reflect The People’s trust in the market’s price.


Newly minted Republican VP candidate Paul Ryan says fiscal and monetary policy have causal effects on jobs, growth, and inflation expectations. President Obama says Ryan is an ideologue. Both are probably right. If there ever was a pervasive economic ideology of both the Bush and Obama Administrations, Keynesian Economics swallows the cake.


Back to the Global Macro Grind


Everything that really matters in Macro Markets happens on the margin. We think that, on the margin, Paul Ryan is going to be US Dollar bullish over the intermediate-term TREND (3 months or more). He will, at a bare minimum, change the economic debate.


To contextualize that, across our core risk management durations (TRADE/TREND/TAIL), here’s how the US Dollar looks:

  1. TRADE = bearish (resistance = $83.06)
  2. TREND = bullish (support = $81.69)
  3. TAIL = bullish (support = $78.62) 

In other words, like it did in the early 1980s, our math thinks the intermediate (TREND) to long-term (TAIL) resuscitation of a decade of political Dollar Debauchery is coming to an end. With the inverse of what Dollar Down has meant to Global Consumers for the last 10 years now in play (Brent Oil prices up +337.5% since August 13th, 2002), that’s a very good thing.


Back to this whole ideologue vs. demagogue thing…


As a reminder, our ideological framework on what inflates/deflates currencies (i.e. the only risk management process that’s really worked across the last 99 years of economic history post the Federal Reserve Act of 1913) has 2 key components:

  1. Monetary Policy
  2. Fiscal Policy 

If short-termism (politics) is driving both of these policies the wrong way (printing money and deficit/debt spending as far as the eye can see in order to prop up stock market prices), you ultimately get a nasty employment, growth, and stagflation situation in store for your people. Sound familiar?



  1. Britain 1960s
  2. USA 1970s
  3. Europe/USA today

Yep, today it’s a race to the bottom. Who can implement the more left-leaning 2-stroke combo of Monetary and Fiscal Policy?


Thankfully, I’m not a Bush Republican or an Obama Democrat so I don’t have to shape my storytelling to a partisan conclusion. Economically speaking, I’m center-right. I don’t lever my family or firm up with debt. I’d rather die than beg for a bailout.


Both Bush and Obama were center-left. Krugman vs Bernanke is hard left versus center-left (Bush and Obama had Geithner and Bernanke).


Ideologically speaking:

  1. Keynesian Economics = center-left
  2. Hayekian Economics = center-right

Paul Ryan is a professional politician, but not unlike many successful politicians who have come before him he has effectively borrowed what Margaret Thatcher did in the late 1970s, slamming it down at the Tory Convention, saying “this is what we believe!”


Hayekian Economics.


What do you believe? It’s hard for me to believe that more than 1 out of 100,000 Americans can explain the difference between Keynesian and Hayekian Economics, never mind which one they believe. That will change. Unless this time is different, of course.


Do you believe piling more debt-upon-debt, taxing, and spending, is going to give you the elixir of promised economic growth? Do you believe that easy monetary and fiscal policy debauches your currency and gives you inflation in food/energy, perpetuating a slow growth, no jobs, economy?


Do you believe in partisan fairy tales? Moral Markets don’t. Because they aren’t moral. This election is now going to be all about something that’s at least a little closer to what’s been driving us all apart.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1611-1628, $110.89-115.35, $81.79-83.03, $1.21-1.23, 790-803, and 1390-1407, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moral Markets - 1111. el


Moral Markets - Virtual Portfolio


Average daily table revenues accelerated from last week’s slow start


Average daily table revenues accelerated from last week’s slow start, HK$664 up to HK$757 million.  We had anticipated acceleration on par with historical seasonality.  Note that the corresponding week from last year in August benefited from high hold and had an ADTR of HK$793 million.  Our full month August projection remains unchanged at HK$24.5-26.0 billion which would represent YoY growth of +2-8%, up from July’s 1.5% growth. 


For market share, LVS continues to maintain 20% plus market share.  We are hearing the Mass floors at the company’s properties have been extremely busy.  The company’s initial marketing efforts appear to be finally paying off at SCC.  We believe market share will take another big jump in September when the Sheraton rooms open at SCC.  LVS continues to look like a nice long trade into that opening.  Wynn’s share jumped up in the past week while MPEL and MGM remain below trend. 


MACAU BACK ON TRACK - 8 13 2012 11 43 31 AM


MACAU BACK ON TRACK - 8 13 2012 11 50 13 AM


Takeaway: The fundamental and quantitative analysis suggest an attractive entry point on the short side.

Keith shorted MGM in the Virtual Portfolio at $9.76.



MGM management was surprisingly upbeat on ‘improving consumer trends’ in Q3.  However, we are skeptical since companies such as Priceline and Orbitz have warned of worse than expected leisure bookings.  Meanwhile, slot volumes, which are the ultimate barometer of the health of Vegas, have fallen in three straight months and we forecast July volume declines to accelerate.


MGM still has a long way to go to get back to acceptable leverage ratios.  De-levering will have to occur in the face of bad demographics and a structurally much different economy than the housing fueled environment of the past 15 years that allowed MGM to thrive.  We are negative on the long-term fundamental outlook of domestic casinos.


Keith sees the TRADE line at $10.07 and TREND at $10.84 so the current entry point is below both lines.  There is no support to below $9.

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