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Lower Highs: SP500 Levels, Refreshed

POSITIONS: Short Small Caps (IWM)


The storytelling out there on why the market isn’t going straight down is fascinating. It was in mid-March too. Growth is slowing, globally, at an accelerating rate (inflation policies do that) and the only big part of the bull case that’s left is bailouts.


All the while, like it did in March-April, the broader market continues to make lower-highs on lower and lower volumes. Imagine they took APPL out of the SP500; then the storytelling would get really good.



Lower Highs: SP500 Levels, Refreshed  - spx levels



Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1407
  2. Immediate-term TRADE support = 1401
  3. Intermediate-term TREND support = 1367


In other words, provided that 1401 holds, the market’s range can easily remain tight (1401-1418). That 17 point range is less probable on a close below 1407; and a close below 1401 puts 1367 in play, faster.


Central planning is so exciting!


Keith McCullough

Chief Executive Officer

DG: This Dollar is Not General

Takeaway: $DG’s stock should not be up on this poor quality beat. Underlying trends are getting gnarly.

Here’s the key trend that we think came out of the DG release. Consumables as a percent of sales grew, but at a decelerating rate. In fact, it declined sequentially (on a ttm basis) for the second quarter in a row. Common logic says that this is not that bad given that consumabales tends to be a lower Gross Margin business. That’s true. But it’s also a very big traffic driver. Fewer people coming in the door to buy higher margin items leaves us with slower growth and ‘hope’ that the company can appropriately manage inventory on seasonal items (it’s easier to manage inventory on milk and frozen broccoli than it is socks, backpacks, and Nerf Uzi Waterguns). This gives us less confidence that the company can sustain comps in the 4-5% range – which the Street has pretty much straightlined into eternity.

Oh, and by the way, Food Stamp stats came out yesterday, and participation growth continues to decelerate. Even though the numbers remain high – i.e. seemingly good for dollar stores – keep in mind that the increase in the participation rate from 9% to 15% over the last 5-years has also been a driver of traffic and comp for the dollar stores and other deep discounters. If the rate of participation continues as it is trending today, then it should be negative by year end.


Lastly, our Retail Sentiment monitor, which is a quantitative index of both Sell Side ratings, Buy side ownership/short interest, and insider buying/selling is near peak levels for DG. From a signaling standpoint, you almost never want to be building a position when a company has a sentiment score nearing 90%. In fact, you want to start selling or building short positions. We’d back that up from a fundamental perspective.


DG: This Dollar is Not General - DG ConsMix 2TTM


DG: This Dollar is Not General - SNAP


DG: This Dollar is Not General - DG Sent



President Obama’s Reelection Chances

As the Democratic National Convention moves into full swing, President Obama's multi-week winning streak comes to a close. While President Obama’s chances of being reelected fell only 10 basis points week-over-week to 59.9% (down from 60% on August 28), it may be a sign that Mitt Romney is making a comeback after last week’s Republican National Convention.


It appears President Obama is on the fast track to another four years in the White House according to the latest results from the Hedgeye Election Indicator (HEI). President Obama’s reelection chances jumped 80 basis points (0.8%) to 59.8% and is fast approaching his peak of 62.3% that occurred back in March. No one knows what the catalyst is, but several weeks of consecutive gains indicate Mitt Romney has his work cut out for him going into September.


Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.



President Obama’s Reelection Chances  - HEI

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Takeaway: $BLMN is facing some difficult headwinds to achieve its goal of expanding EBITDA margin by 300 bps

When Outback Steakhouse went private in 2006, then-Chief Executive Bill Allen extolled the virtues of a private structure, saying, “as a private company, OSI will have greater flexibility to focus on our long-term business improvement initiatives”.  If Don Corleone was being pitched Bloomin’ Brands’ stock, he might say “what have I done to deserve such generosity?” Vito’s reservations, by our speculation, would be rooted in the 300 basis points of margin upside that Bain Capital and Catterton seemingly left on the table when bringing the company public again. 


The prior incarnation of Outback Steakhouse, OSI, in the public markets, was a typical case of a restaurant management team attempting to maintain a growth multiple by overpaying for smaller brands.  The difficulty involved in managing a portfolio of multiple brands as one company ultimately became too great (this may remind you of our thoughts on another casual dining name we are bearish on).


So, is the BLMN proposition analogous to Sollozzo’s solicitation to Don Corleone? Is there a Tattaglia family in the picture? 


While the time the company spent as a private company clearly did not bring around the kind of changes that Mr. Allen suggested it would, the company is under new executive leadership that we believe has credibility with the investor community.  This time around, the players are different and it will be critical that the company’s second stint as a public company does not end in a similar manner to the first.  Still, as things stand, BLMN is a highly-leveraged multi-concept casual dining company that is stating its intention to be a more efficient and focused organization. There is definitely potential for this to turn out poorly.


We will be publishing more on BLMN going forward but for now, we would like to expound on three earnings drivers for the company.



1) 300 bps Adjusted EBITDA margin improvement from cost cutting and sales leverage by end FY14?


Management assured us on the earnings call that the margin improvement would be obtained primarily through Food & Labor efficiencies as well as sales leverage.  Comparing BLMN to major casual dining peers it seems that the margin opportunity is sizeable.  When contemplating how the gap will be narrowed, how attainable the opportunity is becomes less clear.  If it were easy, surely the private operators would have taken that money off the table. The following are our two primary concerns from here:

  • The industry’s outlook, along with BLMN’s mature store base, suggests to us that sustained acceleration in same-store sales is unlikely.  Guidance for 2012 blended same-restaurant sales is 3%.
  • Consumers are likely to face 3-4% food inflation in 2013, according to the USDA.  With labor inflation running at roughly 1-2%, and Food & Labor being the primary source of margin expansion for BLMN, it seems that this goal will be difficult to achieve.

 BLMN: AN OFFER YOU CAN’T REFUSE? - casual dining ebitda margins


2) Unit Growth from Bonefish, Carrabba’s and the International division will drive top line


We are skeptical about aggressive unit growth within the casual dining space, particularly among mature chains, given the macro environment and the demographic outlook for key age cohorts such as those within 55-65 years of age.  Our conversations with industry insiders corroborate this view; it is becoming more apparent that oversupply, stemming from years of restaurant executives being compensated to grow, has become a major issue in casual dining. With this in mind, we will be paying attention to incremental returns as an indicator of the investment worthiness of the smaller chains. Rarely, in casual dining, do multi-brand companies become bigger and better at the same time. 


BLMN: AN OFFER YOU CAN’T REFUSE? - pop growth 55 65



3) Lunch being introduced at Outback will spur same-restaurant sales growth


The company claims to have analytical support to back up its claim that lunch at Outback makes good business sense.  On the surface, it seems to make sense, particularly during weekends but this day part is more competitive and performance during the day-part can often play a key role in shaping consumer perception of the brand.


The argument for attacking lunch seems to hinge on two factors: it’s better than leaving the store dark and it’s accretive to margins on an enterprise level.  However, from the perspective of the Outback brand it’s dilutive to margins as lunch carries lower margin than dinner.   This sales-building initiative, that lowers the margins of the overall business, may not be as beneficial for shareholders as it may first seem. 



There has clearly not been much progress in fixing this company since it was taken private in 2006 and casual dining faces stiff headwinds from a demographic and economic perspective.  It seems to us that the company is dependent on strong sales and an opportunity to implement efficiencies in the P&L.  The macro environment, via a poor jobs market and accelerating food inflation, may make these goals difficult to achieve.  We’re staying away from this name for now.



Howard Penney 

Managing Director


Rory Green











Takeaway: Higher margin slots and Mass significantly outpacing VIP

  • While August VIP improved on July, it was still slightly down
  • Mass continues to crank despite China’s economic difficulties
  • Slots becoming a real contributor to profits




Takeaway: Global growth is slowing at an accelerating rate.



  • With the inclusion of this morning’s swath of global PMI data, we continue to receive confirmation that our call for global growth to slow is proving accurate.
  • Looking ahead, we see the confluence of downside risks to growth as being both more probable and more impactful over the intermediate term.
  • Those risks include, but are not limited to: Fed policy-sponsored commodity price inflation; a renewed debt ceiling debacle in the US and a potential government shutdown in Japan – the world’s third largest single-nation economy; inadequate Fiscal Cliff resolution; and a continued deceleration in global industrial production as Chinese policymakers surprise consensus expectations for economic stimulus to the downside. Further austerity measures and/or financial market contagion is likely to continue weighing on the slope of European growth as well.
  • From our purview, the key question to debate from here is not whether policymakers are poised to deliver more [failed] stimulus policies, but rather if the reflexive and interconnected nature of the global economy starts to perpetuate an acceleration to the downside with respect to real GDP growth over the intermediate term.  


Each month as a small part of our rigorous Global Macro research process, we amalgamate a broad sample of global PMI readings to get a data-driven sense of how global growth is trending on a sequential basis. The analysis includes 23 readings from 14 countries and/or economic blocs and we measure the absolute level of the indices and the sequential deltas on a median basis to produce a top-down look upon trends across the global economy.


As we allude to above, global growth continues to slow and the median reading of 48.6 (from 49.3 in JUL) implies that global growth broadly slowed at an accelerating rate in AUG. Only the US’s ISM Non-Manufacturing Index isn’t included in the current sample (to be released tomorrow at 10AM); there is a fair amount of risk that it surprises consensus expectations of a -0.1 point decline to the downside, especially in the context of an +8.7% rip in the average national retail price for gasoline during the month.




Looking to the future, weakness across several key New Orders indices implies to a degree that there is additional contraction to come in the coming months, absent a rebound in end demand over the immediate-to-intermediate term – something our team does not view as a probable event. The respective New Orders Index has been sub-50 for three consecutive months in the US, for four consecutive months in China and in back-to-back months in Singapore. Furthermore, each country posted the lowest reading in AUG in its respective cycle (US’s lowest since APR ‘09, China’s lowest since NOV ’11 and Singapore’s lowest since JAN ’12).




All told, the evidence supports our bearish thesis on global growth and we continue to warn of downside risks to global economic growth with respect to the intermediate-term TREND. Moreover, we don’t view the widely-held “it’s contrarian to be bullish” stance as anything more than a broad-based attempt to reckon with the cognitive dissonance that is a result of investors being bullishly positioned on US equities in the face of consistently-bad economic data.


For a refresher on our TREND and TAIL thoughts on global growth, please refer to the following notes:


  • DEBUNKING THE STRUCTURAL BULL CASE (8/15): We see downside risk in the US equity market over the intermediate term as the structural bull thesis is riddled with shortcomings.
  • THINKING OUT LOUD RE: GLOBAL GROWTH (8/10): New data points, including negative revisions to the official growth forecasts out of Singapore and Hong Kong, affirm our bearish conviction on the slope of global growth with respect the intermediate-term TREND duration. Applying a longer-term lens, would argue that the incessant policy responses out of the global central planning cartel over the last ~5yrs have set us up for broadly weak economic fundamentals for the foreseeable future.
  • ARE US EQUITIES SUFFERING FROM COGNITIVE DISSONANCE? (8/8): We see a similar see a similar pattern in consensus storytelling and a similarly-asymmetric price setup as we did in the previous occurrences of our being bearish at cyclical tops in the US equity market and “risky assets” broadly (1Q08, 1Q10, 1Q11, 1Q12).
  • GLOBAL G/I/P UPDATE: THREE QUICK HITS FOR THE ROAD (8/3): Global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.
  • CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY (7/25): We continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations. Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently.
  • HAVE US CORPORATE EARNINGS GONE TOO FAR? (7/20): When analyzed outside the vacuum of short-termism associated with quarterly reporting, US corporate profit margins appear particularly overstretched – from both an operational and a social perspective. This has potentially dire implications for corporate earnings growth over the long term.


Darius Dale

Senior Analyst

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