As we wrote on 12/17, we would be more constructive on the stock closer to $250.  We think the bottoming process will take time for CMG.


CMG preannounced preliminary 4Q EPS miss of $1.92-1.97 vs. consensus of $2.09, ahead of its presentation at the ICR XChange Conference on Thursday.  SRS were essentially in line at 3.8% versus 3.2% consensus and total revenues were slightly better that estimates.


The company missing EPS was due to lower-than-expected margins

  • Food costs are expected to come in at 33.5% of sales versus consensus of 32.8%
  • Other operating costs increased sequentially due to increased marketing and promotional related costs (driving traffic becoming more expensive)
  • Restaurant level margins of 24.6% missed analyst expectations of 25.7%


We wrote on 12/17 that the CMG bottoming process could take time and that restaurant-level margins were the wild-card for 2013.  The company purchases its commodities on the spot market, which means that its restaurant level margins are vulnerable to swings in commodity prices.  This is especially true with LSD comps.  Inflation is currently running at low-single-digit levels, driven by higher dairy and protein prices.   The company claims to be confident of food inflation leveling off in 2013, with avocado costs flat versus 2012, but, as recent years have shown, weather can have a significant impact on protein and produce costs and we believe that there are likely more surprises – good or bad – in store for commodity prices this year.


We continue to believe that there is further downside risk to EBITDA and EPS estimates, even after today’s announcement.  Bottoms are processes, not points.


A press release with final, fourth quarter and full year 2012 financial results will be issued at approximately 4:00 PM Eastern time on February 5th


Howard Penney

Managing Director


Rory Green

Senior Analyst


Consensus War

“The time had come for the Anglo-Americans to fight; to not fight was to lose the war…”

-William Manchester, The Last Lion


In the summer of 1942, Hitler “finally moved fourteen divisions against Sevastopol… and took the city in twenty-three days.” Since Sevastopol was the “largest Soviet naval fortress on the Black Sea” (The Last Lion, pg 546), this mattered to the Americans, big time.


Big is as big does, and the world’s Currency War (Rickards) is getting big. While I am not trying to equate the human devastation of WWII with what’s being driven by economic central planners today, I think it’s fair to use historical metaphors that draw on global conflict. In today’s case, every country’s politicians are fighting for themselves.


Whether these academic bureaucrats want to admit the scope of their experimentation or not, Keynesian Policies To Inflate via sovereign Currency Debauchery are both causal in their intentions and correlated in their impacts on real-time market prices.


Back to the Global Macro Grind


This morning I woke up to one of those aha moments where the German enemy was on the ground (snow in CT) and the Russians were coming. Well, sort of. I actually love all types of snow, other than the yellow kind.


What the Italians and Russians don’t like is their currency going straight up into the right. South Koreans don’t like it either. Maybe the only country that loves it is Canada – maybe that’s because they are one of the few that recognizes it as winning.


Russian Central Bank First Deputy Chairman (fancy titles over there), Alexei Ulyukayev, explicitly called this a “Currency War” today in Moscow and went on to add that “Japan is weakening the Yen and other countries may follow.”


Ya think?


This isn’t new. It’s going to be a new global consensus however. And I think that’s what makes 2013 as exciting (and trade-able) a year as I can remember. If you don’t have a multi-factor process that incorporates countries, currencies, policies, etc. built into your process however, you might think I am right out to lunch.


Well, if you trade currencies and bonds like you trade stocks, your lunch might get eaten too. These markets are much more glacial than the high-frequency insider trading networks that have developed in small cap equities. Maybe that’s why some of the largest macro hedge fund gurus have retired. The Global Macro game of risk doesn’t really have the inside trade anymore.


When it comes to leveling the playing field and democratizing access to market edge that is legal, I am all in. What is your edge today isn’t what it was 5, 10, and 30 years ago. I think today’s market edges live and breathe at the intersection of Behavioral Economics and Chaos Theory (math).


How do we risk manage this?

  1. The process starts and ends with Embracing Uncertainty – anything can happen, literally, any hour of the day
  2. We let the signal (market price/volume/volatility) tell us where to swing at high probability pitches
  3. We then either confirm or disconfirm the quantitative signal amidst #OldWall’s qualitative research noise

Any hour of the day? Yes, of course. If you have half of America begging for centrally-planned markets, what kind of market do you expect? So don’t whine about it – understand it, and play the game that’s in front of you.


Yesterday’s intraday signal (on the selloff to the lowest intraday price we have seen in a week) was to cover shorts and buy Best Ideas on the long side. So this is what we did on the cover/buy front:

  1. We bought Apple (AAPL) at immediate-term TRADE oversold
  2. We covered Metals (XME) at immediate-term TRADE oversold
  3. We covered Phillip Morris (PM) at immediate-term TRADE oversold
  4. We bought Singapore (EWS) at immediate-term TRADE oversold

That doesn’t mean we love Apple (AAPL) long-term here (see chart). It just means what it means – we are at war with consensus and our quantitative process was signaling immediate-term exhaustion on the sell side of a stock that we risk manage like an ETF.


Before I get AAPL geniuses in a heat about that, here are the last 3 big signals our process has delivered:

  1. June 1, 2012 at $571.86 = BUY  
  2. September 28, 2012 at $677.74 = SELL
  3. December 17,2012 at $502.50 = BUY

No research. Just math, and some behavioral context.


How many people in our profession thought/think that it’s their own unique, non-inside info, qualitative research edge that made them “smart” being long AAPL? I don’t know. All I know is that a lot of hedge funds have gone away for doing the inside info thing, and a lot more research-only funds that don’t have a quantitative risk management overlay get mad at me.


That’s progress.


So is fighting for something you believe in. I believe in evolving this profession. I believe in playing by the rules. I believe in transparency, accountability, and trust.


Keep fighting the good fight.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1 (Gold fails at TRADE resistance), $109.33-111.48 (Oil broke its TAIL line again), $79.29-80.08 (USD holds TAIL support again), 1.31-1.34, $88.06-89.88 (Yen oversold), 1.81-1.85% (Treasuries overbought), and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Consensus War - Chart of the Day


Consensus War - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.68%

What Keith's Reading

Our Struggle

This note was originally published at 8am on January 02, 2013 for Hedgeye subscribers.

“Our support goes to those who struggle to gain those rights or keep them.”

-Franklin D. Roosevelt


Our struggle in 2013 will be no different than the struggle we’ve endured for the last 5 years. Our struggle for economic freedom is intensely personal. Both parties have violated us. That’s why it feels as real as gaining or keeping our natural rights has ever felt.


In his State of the Union Address of 1941, Franklin D. Roosevelt united America and those fighting socialism/fascism in his “Four Freedoms” speech. On page 258 of The Last Lion, Paul Reid reminded me of this epic moment in American leadership:


“We Americans are vitally concerned in your defense of freedom… This is our purpose and our pledge… We look forward to a world founded upon essential human freedoms:


  1. “The first is our freedom of speech and expression…”
  2. “The second is freedom of every person to worship God in his own way…”
  3. “The third is the freedom from want…”
  4. “The fourth is freedom from fear…”


Obviously this is not WWII. But it isn’t the time to abandon our struggle for our freedoms and liberties either. Living in fear of a cliff that politicians create and perpetuate is no way to live. With America’s balance sheet under ideological attack, I submit these principles to you for your deliberation and debate. On this #KeynesianCliff of deficits and debt, you are the last line of defense.


Back to the Global Macro Grind


To kick-off 2013, I need to do a better job communicating our process. For those of you new to it, there are two big parts: fundamental RESEARCH and quantitative RISK MANAGEMENT. Over the years, I’ve made enough mistakes to learn that I need to respect both. They aren’t always signaling the same thing. When they are, I have more conviction.


Quantitatively speaking, our read-through on the US stock market is bullish provided that the SP500 is trading above our intermediate-term TREND line of 1419. Our call on bonds (provided that 1.70% TREND support on the 10yr holds), is now bearish. That’s why I am starting 2013 with a 0% asset allocation to Fixed Income.


From a fundamental research perspective, for over a month now our Globally Interconnected Macro Model has been signaling an important shift from global growth slowing to #GrowthStabilizing. On the margin, that matters.


So does rising volatility associated with the US government being the market’s daily catalyst. The VIX went from up +22.4% last week to down -20.7% in a day (Monday)! If you nailed both sides of those moves, congrats. No one said our daily struggle was easy.


As a reminder, our long-term thesis on Big Government Intervention is that:


  1. It amplifies market volatility
  2. It shortens economic cycles


Point #1 is trivial. Point #2 less so. On that score, I think I confuse some people when I say growth, globally, has gone from slowing to stabilizing. The point in and of itself isn’t confusing as much as how I risk manage the market on that is.


Remember, the economy is not the stock market. So you can easily see a market rip as growth slows inasmuch as you can see it collapse as growth stabilizes. There’s no rule in markets that states they have to make sense. So keep moving out there.


#GrowthStabilizing RESEARCH and RISK MANAGEMENT signals of the day:


  1. British Manufacturing PMI for DEC shot back above the expansion line (50) to 51.4 vs 49.1 in NOV
  2. India’s Manufacturing PMI hit a 6-month high of 54.7 in DEC vs 53.7 NOV
  3. Italy’s PMI finally stopped collapsing, sequentially, registering an uptick to 46.7 DEC vs 45.1 NOV
  4. Indonesian inflation (CPI) joined that of South Korea’s, slowing in DEC to 4.3%
  5. South Korea’s KOSPI shot to higher-highs overnight (vs SEP highs), +1.7% to 2031 (bullish TREND)
  6. Hong Kong’s Hang Seng Index ripped another higher-high (vs SEP), up +2.9%
  7. Germany’s DAX is taking out its recent highs, +1.7% this morning (bullish TREND)
  8. Both Brazilian and Canadian stocks markets closed at bullish TRADE and TREND levels at yr end
  9. CRB Commodities Index remains bearish TAIL (306 resistance) – good for consumption growth
  10. UST 10yr Treasury Yields are flying higher this morn to 1.82% after holding 1.70% TREND support


Of course, there’s always bearish growth data somewhere (German Manufacturing PMI slowed sequentially to 46.0 DEC vs 46.8 in NOV and Brent Oil is inflating back above its TAIL resistance of $111.58/barrel). But that’s not enough to knock me off this #GrowthStabilizing puck.


From these implied multiple expectations, the most bearish fundamental research factor affecting US Equity and Bond markets (on both a relative and absolute basis) compared to China and Germany is crystal clear: Congress.


And unless Our Struggle ends in victory versus these Keynesian quacks who get paid to lever your country up with debt and deficit spending, this short-term economic growth pop will be as short-lived as every one that’s come before it since 2008.


Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1637-1689, $109.99-111.89, $79.21-79.98, $1.31-1.33, 1.73-1.85%, and 1419-1453, respectively.


Best of luck out there in 2013,



Keith R. McCullough
Chief Executive Officer


Our Struggle - Chart of the Day


Our Struggle - Virtual Portfolio

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