• run with the bulls

    get your first month

    of hedgeye free



Takeaway: The Restaurant Value Spread is signaling a year-over-year headwind for the restaurant industry, particularly casual dining ($TXRH), in 2H12.

Internally, and within regular posts, we have been discussing the spread between the year-over-year growth rates of the Bureau of Labor Statistics’ CPI for Food at Home and CPI for Food Away from Home metrics for some time.  Initially, our analysis focused on the spread as being relevant for companies’ pricing strategies but we also believe that the spread, which we call the Restaurant Value Spread, is a driver of traffic for the restaurant industry.   The Restaurant Value Spread goes some way to explaining the resilience in restaurant industry sales trends in 2011.  The spread effectively represents the relative rate of inflation between grocers and restaurants.  In 2011, rampant food inflation was passed on to consumers by supermarket chains but not, to the same extent, by restaurants.  We believe this buoyed traffic trends within the restaurant industry, particularly casual dining.  Empirical data suggests that the spread turning negative may not bode well for casual dining trends from here.  Additionally, the Street is expecting a positive turn in casual dining trends that we believe is looking less and less likely. 


Below is a chart of a Casual Dining Same-Restaurant Sales Index, comprised of a simple average of the comps of twenty-one casual dining concepts, versus the Restaurant Value Spread.  The dotted line represents what consensus expectations imply for the Index over the next four quarters.  We believe that many factors are working against casual dining from here: over-supply, food inflation, energy inflation, negative traffic, employment trends, and anemic real earnings growth are several of the key headwinds we are concerned about.  Relative value is another metric that we are watching closely.  The chart below implies that, if relative value impacts “share of stomach” within the food industry, casual dining same-restaurant sales growth expectations from here could be overly bullish.





The Restaurant Value Spread also tracks quite closely with the Knapp Track Casual Dining Same-Restaurant Traffic Index over time.  Additionally, the same-restaurant sales trends of several companies within casual dining track closely with the Restaurant Value Spread.  Below, we discuss two stocks that we think are topical at the moment, within casual dining, and offer commentary on our current thoughts and what meaning, if any, we take away from charts of their respective sales trends versus the Restaurant Value Spread.



Brinker has been one of our favorite names in the restaurant space over the past 2.5 years.  The stock has provided some handsome returns to shareholders over that period as investor sentiment, while investor sentiment has been dramatically improved.  That sell-side bearishness peaked in April ’12, well into the stock’s rally, tells us how entrenched the negative view of Brinker was on Wall Street.  That said, there are still several factors that we believe are working in the company’s favor.  We like EAT on the long side versus its peers, especially TXRH, DRI, DIN, and BWLD.  Some additional factors worth bearing in mind:

  • The Restaurant Value Spread chart (below) indicated that same-restaurant sales expectations may be overly bullish for Chili’s.  The correlation, historically, is not consistent and we believe Chili’s is taking share via its new sales layers (pizza) and strong-performing remodels (~5% comps).  That said, it is likely that an erosion of the value proposition Chili's represents versus supermarkets and/or its peers will impact its same-restaurant sales numbers.
  • Chili’s has invested in its kitchen technology and, in our view, should reap significant rewards relative to the competition over the coming quarters and, possibly, years.  Applebee’s has been turning to non-scalable sales initiatives like 24 hour opening and “Club Applebee’s”; we are confident that Chili’s investing in technology and service initiatives has generated, and will continue to generate, strong sales versus the industry. 




Texas Roadhouse is a stock that we are negative on given its position within a highly-competitive segment at a time when we expect tough top-line compares to impact the stock in the coming quarters.  Additionally, aggressive discounting by a newly-public competitor is likely pressuring same-restaurant sales.  We believe that earnings revisions are unlikely to rise from here, as we wrote in our 9/19 note, “TXRH: WHERE TO FROM HERE?”  Sales growth lagging capex growth and beef inflation pressuring margins should, in our view, depress returns going forward.  As CFO Price Cooper said on the 2Q call, “While our newer restaurants continue to open strong, as they move through the honeymoon period and their sales normalize, their base is slightly less than existing restaurants.”  We believe that there is risk to the stock’s multiple if returns decline.

  • We view Texas Roadhouse as being one concept that the Restaurant Value Spread is especially relevant for.  To the extent that the Restaurant Value Spread being north of 300 bps wide last year may have driven consumers from Kroger to Texas Roadhouse for steak dinners, we expect the collapse in that spread to negative territory to have an adverse impact this year. 




Darden is a stock that we have been negative on for some time.  Please email us for a copy of our recent Blackbook detailing our thesis.   The company’s recent $0.02 beat was supported by an unusually low tax rate ($0.02-0.03) as well as expanded marketing and promotional initiatives. Operating profit missed consensus expectations.  Given the low quality nature of the 1QFY13 beat, our continued conviction in our thesis, and consensus continuing to show unwarranted faith in Olive Garden sales rebounding, we retain a negative view of Darden’s stock at these levels. 

  • Casual Dining same-restaurant sales trends were strong in 2011, benefitting in part from the relative value that the category represented for consumers versus the grocery aisle where inflation was running at 6% year-over-year.  That Olive Garden was left behind by this upward surge in casual dining trends is telling.  We are not in agreement with consensus that Olive Garden comps will turn sharply higher from here.  As the second chart (below) indicates, traffic trends have not been moving in a positive direction. 

RELATIVE VALUE MATTERS FOR CASUAL DINING - olive garden vs restaurant value spread


RELATIVE VALUE MATTERS FOR CASUAL DINING - Olive Garden Traffic vs Restaurant Value Spread


Howard Penney

Managing Director


Rory Green






In preparation for MAR's 3Q earnings release tomorrow night, we’ve put together the recent pertinent forward looking company commentary.





  • “We expect to share our 2013 earnings outlook with you in February after we complete our budget process. So, we will not be providing earnings guidance for 2013 this coming October.”
  • “Are you seeing a slowdown in North America and the answer is no”
  • “In North America, year-to-date the Marriott brand's special corporate revenue has been strong, up over 8%; group revenue rose 7% year-to-date and group bookings for the second half are even stronger.”
  • “Our strong book of business in 2012 allowed us to drive REVPAR aggressively in the first quarter, but in the second quarter strong seasonal demand combined with a continuing recovery yielded an uptick in sellout nights.  Looking ahead, as occupancies build, further run rate improvement should follow.”
  • “In Asia and the Middle East, REVPAR growth rates for a few luxury hotels are expected to moderate in the second half, largely associated with individual market issues. In Europe, third quarter REVPAR will be helped by the Olympics in London and the Euro Cup championship. At the same time, the weak European economy will likely create headwinds. 
  • “We've also reduced our room opening expectations a bit for 2012. In the first quarter, we noted slippage in opening dates from 2012 to 2013 for some new hotels in Asia and the Middle East. In the second quarter, the slippage continued in these markets as well as with a few projects in Mexico. We continue to see a lot of conversion opportunities around the world but they too are taking a bit longer as some projects require more extensive renovation before flagging. As a result, today we expect to open 20,000 to 25,000 rooms in 2012. Since this reduction is largely timing, we continue to expect to add 90,000 to 105,000 rooms from 2012 through 2014. 
  • “DC is so meaningful that it's weak REVPAR in the quarter reduced our company-operated North American REVPAR by a point. But even here there is good news; interest in the upcoming election is starting to drive political business to the city. Group revenue bookings in DC for the Marriott brand are up 10% for the second half of 2012 and 16% for 2013. 2013 should be a good year overall in this market but we'll have to see how government demand shakes out. Next year's government per diems will be set this August and we will be watching this carefully.”
  • “Looking ahead for the second half of the year, group booking pace is up 10% and 2013 booking pace is up 8%.  We are very bullish about pricing in North America in 2013. For group business on the books for next year, room rates are running up 4%. On the transient side, we are targeting price increases for special corporate business at a high single-digit rate on average.”
  • “For the full year, our guidance assumes approximately $9 million year-over-year lower fees due to foreign exchange.”
  • [Courtyard transaction] “With this transaction, Marriot expects to recognize about $5 million in fee revenue for deferred base fees and approximately $40 million gain in the third quarter. We've already received $90 million in cash proceeds from the transaction, demonstrating once again our success in recycling capital.” 
  • [Drivers around of $20MM guide down ]  “FX and re-licensing fees by and large are driven by the sale of existing franchised hotels and that volume has been down a bit lower than we expected, a little bit softer REVPAR with some fine-tuning around individual assets. And the sale of the ExecuStay business and with it the elimination of that is a mid single-digit number of millions of dollars on a full year basis”
  • “I think we still expect in full-year 2012 that our incentive fees will be growing about 20%.”
  • FY2012 WW RevPAR guidance: “Well, I think 6 to 7 is more likely than the high end of 7 to 8, but…business is good.”
  • “We would think Europe will continue to tick along around of that 3% sort of number. Q3 maybe a bit better because of the Olympics and Q4 maybe a bit worse because we don't have anything like the Olympics, which is likely to help Q4, but still kind of the same rates that we've seen.”
  • “China, we've been…10 or above year-to-date, I suspect the right set of expectations would be as high single-digit as opposed to a double-digit growth rate for the balance of the year reflecting a somewhat more modest growth rate there.”
  • “Middle East, I think is going to be very interesting. Our team has got some optimism in places like Egypt that we could be pleased to see business coming back a little bit faster than we're planning.  On the other hand, we're really wary about building in expectations from a place like Egypt, which are too bullish. Dubai, by contrast is very strong. It's a safe haven in many respects in the Middle East, and notwithstanding substantial supply growth, it is continuing to post good numbers on the books. The rest of the Middle East varies dramatically market-to-market. You've got political environments which vary from place to place and the economic environments which vary from place to place, but I think generally the Middle East ought to be performing reasonably well as the year goes along.”
  • [In the Q for the Q bookings] “They're a little lower than in the first quarter, because we have a lot of full hotels, because of the booking pace we've been talking about for the last two quarters, being up so high. But for the full year, we would expect the in the quarter for the quarter, to still represent about 30% with the other two-thirds booked the previous year.”
  • “We will continue to manage our leverage to 3 to 3.25 times debt-to-EBITDA. So that's what we are targeting for.”
  • Q: “Are you seeing as healthy a recovery in secondary markets as you are in gateway cities”
    • A: “Generally, yes”
  • Q: “Hotels that's in existence today versus I guess sort of peak staffing levels in 2007, how far off are you?”
    • A: “Typical hotel would be fairly close. I think the permanent reduction in head count would probably mostly be around management staff and how heavy that is and how much we've been able to do above property and do it a little bit more efficiently than used to be done on property. But that is likely to affect a relatively small number of people in a hotel, the restaurant staff and the housekeeping staff and the other key members of the team that are focused on serving our guests as occupancy has gotten back to and now beyond peak levels. So we're performing at occupancy levels which are in excess of the 2007 and 2008 levels. I suspect we have seen staffing come most of the way back to where it was before.”

The Keynesian Trifecta . . . Taxes, Spending Cliff and Debt Ceiling

Takeaway: The fiscal cliff and debt ceiling loom large in 2013. Even Romer is worried about growth!

Tax changes have very large effects: an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent."

                -National Bureau of Economic Research

We have been at times criticized for using Keynesianism in a derogatory sense as it relates to economic policy.  Critics of this use suggest that current policy makers are not really true Keynesians and are misusing and misinterpreting, the tenets of Keynesian economic policy.  This may well be true and we will fully admit that Keynes has become a bit of a straw man of sorts for us. 


Nonetheless, there is no denying that government deficit spending has led to unsustainable debt loads globally.  In the United States, the outcome of a decade of unfettered deficit spending is coming to a head in the next quarter with what we are calling the Keynesian Trifecta – increased taxes, lower government spending, and another debt ceiling.


On the first point of taxes, based on current policy we are set to undergo perhaps the most meaningful tax increases in a generation effective 2013.  The quote above comes from a paper co-written by Christina Romer, formerly President Obama’s chief economic advisor entitled, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.”  The key takeaway is that tax increases in the short run negatively impact growth.


The key areas in which the tax increases are coming in 2013, which the Washington Post has aptly named Taxmageddon, include:

  • 34% of the tax increases come from the expiration of the 2001 and 2003 Bush tax cuts (includes capital gains and dividend increases);
  • 25% of the tax increase comes from an expiration of the temporary payroll tax cut (including on Social Security deductions); and
  • The remainder largely comes from new taxes under the Affordable Care Act (or Obamacare).

Below, we’ve attached a graphic that looks at the scale of the coming tax increases.  There are many estimates for the actual annual scale, but the range is $380 - $450 billion.  On a GDP base of just north of $15 trillion, this accounts to an aggregate GDP tax of 2 – 3%.  


The Keynesian Trifecta . . . Taxes, Spending Cliff and Debt Ceiling - 1


In the current form, the tax increases look to impact a wide portion of the tax base.  The key exception is the purported middle class, so those unmarried filers making less than $35K per year or married joint filers making less than $70K per year.  In the table below, prepared by our Financials Sector Head Josh Steiner, we look at tax increases by both income level and also by line item.  The key takeaway is that the upcoming tax increase will be broad based and comprehensive.


In fact, a report released today from the Tax Policy Center finds that 90 percent of Americans will see their taxes go up starting January 1st. The average tax increase will be $3,500 and the typical middle-income taxpayer will see his or her tax bill go up by $2,500.  


The Keynesian Trifecta . . . Taxes, Spending Cliff and Debt Ceiling - 2


In conjunction with these tax increases is the automatic cut in government spending that is going to occur under the Budget Control Act of 2011.  Since the Joint Select Committee on Deficit Reduction failed to implement a $1.5 trillion deficit reduction plan, the sequestration process is triggered.   Sequestration cuts are not new in the United States (three under the Gramm-Rudman-Hollings deficit targets and two under the statutory discretionary spending caps), but this round will be the largest in terms of scale.


One interesting note is that while the federal fiscal year ends in September, the first year of sequestration doesn’t begin until January 2013.  As a result, a year of cuts will be squeezed into nine months.  As American Progress wrote:


“On a percentage basis the cuts would have to be about a third larger than the 8.5 percent to 10 percent required for the year as a whole. Such programs would face cuts of between 11.3 percent and 13.3 percent during that nine-month period.”


Therefore at a time when we are set to see tax increases that are as large as the U.S. economy has experienced in a generation, the cuts in government spending will also be magnified.  


The Budget Control Act spells out the steps that the Office of Management and Budget must take due to the lack of agreement by the Joint Committee.  In 2013, sequestration cuts will be equally split between defense and non-defense for a total of $109.3 billion in total cuts.  In terms of the non-defense cuts, it is expected that $16.7 billion come from mandatory programs with the bulk coming from Medicare.


In the long run, we are firm believers that taking capital away from the government and giving it back to the people to more efficiently allocate is a great thing.  In the short run, though, we do need to be aware that deep cuts in government spending will be a headwind to growth.  On the basis of $109.3 billion in spending cuts, this will be an incremental -0.5% detractor from GDP in 2013.


Finally, as if the cliff weren’t enough, the debt ceiling is about to be breeched again.   The statutory debt limit is $16.4 trillion.  As of September 28th, the total debt outstanding of the U.S. government was $16.0 trillion. The estimated required debt issuance for Q4 2012 is $316 billion.  This would mean that the implied capacity going into 2013 is $50.1 billion.  Therefore the debt ceiling is likely to be breached in January 2013.  In reality, the ceiling can likely be extended a quarter or two based on a number of one-time items, but will most definitely be hit in the first half of 2013.


The Keynesian Trifecta . . . Taxes, Spending Cliff and Debt Ceiling - 3


 If you recall to the summer of 2011, the debt ceiling was a major catalyst for the market.  In the last chart we highlight the impact to equity markets in the summer of 2011 as uncertainty around the debt ceiling accelerated.  From July 1st the S&P 500 went from 1,315 to its summer trough of 1,127 on August 22nd - for an aggregate decline of some 14%. 


The Keynesian Trifecta . . . Taxes, Spending Cliff and Debt Ceiling - SP500


As if Taxmagedon weren’t enough . . . the Keynesian Trifecta is looming on the horizon and will slow growth and potentially be a negative catalyst for the equity markets.


Daryl G. Jones

Director of Research





get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.


Housing is improving but still not good enough


  • We’ve shown that housing prices have historically been the most statistically significant macro variable in explaining gaming revenue growth
  • While better, home prices were still down YoY in Q2.  The good news is that price change might be on the positive side in Q3.
  • The mortgage delinquency rate continues to slope downward which is a decent economic barometer.  However, that could also mean that more people are paying their mortgage or have moved out and are now paying rent.  Either way, it likely means less monthly discretionary spending which could be impacting gaming spend.  This phenomenon could continue to suppress locals gaming revenue.



Takeaway: Latin America is reminding US policymakers of the unpleasant direction in which they're steering the US economy.



  • From excessive froth in Mexican capital markets to a serial CPI under-reporter (Argentina) calling out the US for being guilty of the same to Latin America’s resident socialist (Hugo Chavez) giving Obama a hyper-supportive thumbs up, recent occurrences and quotes from Latin American companies and policymakers have shed an unflattering light on the direction of US monetary and fiscal policy.
  • As it relates to specific investment ideas and themes across Latin America, we maintain our TAIL-duration bearish thesis on Argentinean peso-denominated assets as the continued popping of Bernanke’s Bubbles perpetuates both currency devaluation and sovereign default risk. Refer to the following two notes for more details: “ARGENTINA, IMPLODING” (APR 18) and “POPPING BERNANKE’S BUBBLES: READING THE WRITINGS ON THE WALL” (SEP 4).
  • Additionally, we maintain our bullish intermediate-term bias on Brazilian equities – though certainly on a short leash amid the backdrop of potential global economic contraction. Our view on Brazil is supported by our quant levels on the Bovespa, our country-specific economic models and our analysis of historic cycles (OCT ’08 bottom in the Bovespa Index). For more details here, refer to our SEP 25 note titled, “IDEA ALERT: BUYING BRAZILIAN EQUITIES (EWZ)”.



Mexican auto parts maker Sanluis Rassini SA in planning to market $250 million of B-rated 10yr bonds to international investors – just two years after the holding company in charge of the unit defaulted and 10yrs since its parent company stopped servicing its debt! While we are certainly not surprised to see the issuance pipeline filled with complete junk at/near all-time highs across a bevy of liquid asset markets globally, we would be surprised if this did not ultimately turn out to be yet another signal of the Topping Process underway across international capital markets.


Pause for a second and read the following sentence slowly: A company that has defaulted twice in the last 10yrs is marketing a quarter-billion dollars of 10yr, B-rated debt to yield-starved international investors – at/near the top of the global economic cycle.


We maintain that the academically-partisan Policies To Inflate out of the Fed, ECB and BOJ continue to fuel a broad-based mispricing of credit risk across international capital markets – a phenomenon that is directly born out of the Dare To Chase Yield and perpetuated via gross capital misallocation and malinvestments. From our purview, this is precisely why global economic growth and the domestic labor market continues to remain sluggish, as both continue to reel from allowing bad actors and bad investments to remain liquid.


Moreover, we believe that recessions and cyclical growth slowdowns are healthy insomuch that they promote an effective transition away from outdated growth strategies that no longer work. It’s highly unlikely that the global economy will ever be able to achieve any semblance of sufficient and sustainable economic growth if policymakers continue to incessantly manage their own career risk by attempting to reflate asset price bubbles, rather than promoting new organic growth opportunities. Refer to our AUG 10 note titled, “THINKING OUT LOUD RE: GLOBAL GROWTH” for more of our thoughts on this topic. But don’t just take our word for it; the Dallas Fed agrees wholeheartedly: http://dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf.



In a response to IMF managing director Christine Lagarde’s plan to censure the Argentine economy (i.e. blacklisted from the bailout bonus pool) for not allowing the Washington D.C.-based organization to conduct its Article IV consultation of the country’s official economic statistics, Argentine President Cristina Fernandez recently said she would not accept any threats from the institution and followed up by saying:


What were the statistics of Portugal, of England, of this country? Do you really believe them? Do you really believe the cost of living in the United States is rising just 2 percent?”

–Cristina Fernandez at Georgetown University in Washington D.C.


For a bit of background here, this is the embodiment of the pot calling the kettle black, as Argentina has been serially underreporting CPI since her late husband Nestor cleaned house at the country’s national statistics agency INDEC back in 2007. Last year, the government fined more than a dozen researchers as much as 500,000 pesos ($106,000) each for reporting inflation rates that were in the range of 10-15 percentage points higher than official rates – which are already elevated to begin with (+10% YoY in AUG). By artificially suppressing the reporting of inflation, the Fernandez’s have been able to A) record higher rates of real GDP growth than otherwise possible and B) limit interest payments on inflation-protected debt securities, which, at $37.6 billion outstanding, account for ~21% of Argentine sovereign debt. It’s worth noting that the securities are down -13.7% in the YTD.




In calling out the US, which continues to pursue a brand of ultra-easy monetary policy not seen domestically since the 1970s, Fernandez shed light on what policymakers like former presidential hopeful Ron Paul have alluded to in recent years: US CPI is also being systematically underreported, likely to help the powers that be achieve the aforementioned goals Argentina is pursuing, as well as to hold down the pace cost-of-living (COLA) adjustments to government benefits. But don’t just take our word for it; shadowstats.com, an increasingly respected research provider and scrutinizer of faulty US government statistics, agrees wholeheartedly:




But maybe we’re just a bunch of grumpy conspiracy-theorists-turned-macro-analysts. Perhaps there’s a chance that Obama isn’t having Bernanke debauch the USD in pursuit of his politicized goal to promote US manufacturing and exports (GM bailout?), all the while having the BLS report that there’s little-to-no inflation to speak of. Perhaps the bond market has it completely wrong by pricing the 10yr breakeven at 2.46%, which is a mere 20-25bps shy of all-time highs. Markets do tend to get things wrong from time-to-time; the S&P 500 peaked in OCT ’07 – just months ahead of the largest financial crisis and economic recession since the Great Depression!



Just in time for the Venezuelan presidential election (OCT 7) and the US presidential election (NOV 6), current Venezuelan president and presidential hopeful Hugo Chavez just dropped what may be the defining quote of the Obama presidency:


“If I was American, I would vote for Obama. And I think if Obama had been born in a Caracas slum, he would be voting for Chavez. I’m sure of it.”

–Hugo Chavez


It’s only fitting that North America’s most-socialist head of state is getting the official back-slap from South America’s resident socialist – especially given that both the Bush and Obama administrations have incessantly sought to make the US more like Venezuela over the last 12 years (i.e. perpetuating stock market inflation via currency devaluation and big government spending initiatives).




All told, the present-day Venezuelan economy – with its persistent 20-plus percent annual CPI readings and university graduates working as mere street vendors – may be a startling glimpse into the US’s future if we continue down the path of Big Government Intervention in the US economy and global financial markets.




Enough said; enjoy the rest of your respective afternoons.


Darius Dale

Senior Analyst

The Golden Age

Takeaway: Gold ($GLD) will likely continue its meteoric rise as central planners devalue the dollar and perpetuate quantitative easing.

Hedge funds and mom and pop retail investors are big fans of gold and particularly the SPDR Gold Trust ETF (GLD). Since the beginning of September, the US dollar has been devalued by Ben Bernanke and the Federal Reserve's policy of easing and market intervention. As a result, gold has enjoyed an extensive climb over the same time period and has really taken off since August. The question remains: when will Americans demand a stronger US dollar?


The Golden Age - GLDversusDOLLAR

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.