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Independent Minds

“Blows must decide whether they are to be subject to this country or independent.”

-King George III


And they did… the British lost and the Americans won their independence. “Jefferson threw himself into whatever came his way. He was hardheaded, not rhetorical. He believed the hour called for action, not rhetoric.” (John Meacham’s Thomas Jefferson, pg 79)


The founding principles of this country aren’t romantic. They are real. And it started with a fight. People used to stand up for something and really argue for it. Passion and pride wasn’t always politically correct.


As our enemies have found we can reason like men, so now let us show them we can fight like men also.” –Jefferson, 1775


Back to the Global Macro Grind


After 5 long years of war versus the #OldWall, independent minds are winning. This isn’t about being bullish or bearish. It’s about being transparent as opposed to opaque; it’s about being accountable as opposed to arcane.


As Patrick Henry said, “give me liberty, or give me death.” Economic freedom versus hereditary right is an old war. We’re just fighting it on a new front. Revolutions are rarely pretty. This one is no exception.


So upward and onward we go. Today isn’t unlike any other day where, God willing, we all put our feet on the floor at the top of the risk management morning - one shoe on a time - and decide where we think we can be less wrong than right.


This morning’s Global Macro Research and Risk Signals are decidedly mixed – let’s look at Asia first:


A)     China’s flash PMI for MAR accelerates to 51.7 (vs 50.4 FEB); Shanghai Comp holds bullish TRADE/TREND

B)      South Korea is (allegedly) cyber attacked by China, and the KOSPI closes -0.4% (bearish TRADE/TREND)


How about Europe?


A)     German Manufacturing PMI for MAR slows to 48.9 (vs 50.3 FEB); but German DAX holds TRADE/TREND support

B)      France’s Services PMI tanks to 41.9 in MAR (vs 43.7 FEB); French CAC snaps TRADE support (again) of 3864




A)     US Housing Starts ripped another +3% sequentially in FEB, but what will this morning’s Existing Homes print bring?

B)      Housing stocks (ITB) led gainers +2.9% yesterday, making a fresh YTD high as the SP500 closed -0.3% inside of hers


All the while, on the interconnected risk front:

  1. US Dollar Index is having its 6th up week in the last 7
  2. CRB Commodities Index is having its 6th down week in the last 7
  3. Correlation Risk between USD/CRB and USD/SPY continue to diverge, big time

Immediate-term TRADE (inverse correlations) between USD and CRB (Commodities):

  1. USD vs Brent Oil = -0.98
  2. USD vs Copper = -0.95
  3. USD vs Gold = -0.69

Immediate-term TRADE (positive correlations) between USD and Stocks:

  1. USD vs MSCI Asia = +0.71
  2. USD vs SP500 = +0.63
  3. USD vs EuroStoxx600 = -0.16

Oops. That last one wasn’t a positive correlation – a month ago European stocks had a barely positive correlation to the US Dollar; now that’s melting away. Other than how bad it is for a socialized economic zone having its currency debauched by money launderers in Cyprus (and Italian criminals holding other parts of the money bags), I can’t think of any fundamental reason why Europe sucks economically.


And why is the correlation between the US Dollar and Emerging Market (MSCI EM Index) not positive? It’s actually going really negative (-0.70 vs USD on a 60 day correlation basis). Does that make sense? Sure does. That’s why we aren’t long EM. If #StrongDollar continues to crush Commodities, guess who loses? “Emerging Markets” (like Brazil, whose stock market is basically a commodity-linked index).


What about Gold? On a 60-day basis, the inverse correlation to the USD was like it is for Copper and Oil right now (wacky high). But this morning it’s less so. Is that interesting? Sure. What do I do with that? Well, I’ll tell you what I won’t do today – and that’s short Gold. I’d much rather short Oil - not only from a correlation perspective, but because the net long position in Oil (CFTC data) remains much larger.


There are so many things to consider - so many signals and pieces of data to incorporate into our decision making process; so many new technologies and mathematical concepts to apply to our analysis. Embracing The Uncertainty of it all is what makes us different. It allows for freedom of thought – and the humility to change our minds. Long live the independent research revolution.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $107.23-109.26, $3.38-3.51, $82.61-83.31, 94.19-97.02, 1.89-1.97%, 10.73-14.51, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Independent Minds - Chart of the Day


Independent Minds - Virtual Portfolio


The Macau Metro Monitor, March 21, 2013




Secretary Tam said that the local gaming industry was developing into an international leisure tourism centre, adding that the industry had already built a solid foundation and created competitive advantages in the leisure-tourism segment so that he was confident that it would not fall behind its rivals elsewhere.  When asked by reporters for his comments on the possible impact on the local gaming industry after it was reported that a newly opened mega-casino in Manila would be paying higher commissions than its local counterparts to attract local junket operators, Tam said it was to be expected that the local gaming industry would have more and more competition from rivals in neighbouring countries and regions.



MGM China’s CEO Grand Bowie says the firm is “unlikely” to invest in the Philippines “at this time” and prefers to stay focused on the construction of its Cotai project.  Referring to the Philippines reportedly wanting to take over as the world’s gaming capital by 2017, Bowie said that more competition is actually good for Macau, but it was more important for the city’s operators to focus on quality service, easier access and catering to the needs of consumers.


Melco Crown (Philippines) Resorts Corp, the Philippines unit of MPEL, plans to raise up to US$400 million (MOP3.2 billion) from a fresh equity offering to fund part of the operator’s investment in its Manila casino.  In a disclosure to the Philippine Stock Exchange, Melco Crown said it planned to raise funds from the sale of up to a billion common shares of the company with an option to upsize by up to 20%, Philippine Daily Inquirer reports.

According to Willy Ocier, vice chairman of Belle Corp., the facility would be operating by "probably June or July, mid-2014," UPI news agency reported, quoting the Philippine Star newspaper.  The report also described the scheme as costing US$1.3 billion, instead of the previously reported US$1 billion.



Impact of Lunar New Year pushed up Macua CPI for February 2013 6.16% YoY or 1.04% MoM.




TODAY’S S&P 500 SET-UP – March 21, 2013

As we look at today's setup for the S&P 500, the range is 19 points or 0.82% downside to 1546 and 0.40% upside to 1565.     














  • YIELD CURVE: 1.70 from 1.71
  • VIX  closed at 14.39 1 day percent change of 7.71%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init Jobless Claims, March 17, est. 340k (pr. 332k)
  • 8:30am: Cont. Claims, March 9, est. 3.05m (prior 3.024m)
  • 8:58am: Markit US PMI Prelim, March, est. 54.8 (prior 54.3)
  • 9am: House Price Index M/m, Jan., est. 0.7% (prior 0.6%)
  • 9:45am: Bloomberg Economic Expectations, March (prior -7)
  • 9:45am: Bloomberg Consumer Comfort, March 17 (prior -31.6)
  • 10am: Freddie Mac mortgage rates
  • 10am: Philadelphia Fed, March, est. -2.5 (prior -12.5)
  • 10am: Existing Home Sales, Feb., est. 5.0m (prior 4.92m)
  • 10am: Existing Home Sales M/m, Feb., est. 1.6% (prior 0.4%)
  • 10am: Leading Indicators, Feb., est. 0.4% (prior 0.2%)
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 1pm: U.S. Treasury to sell $13b 10Y TIPS in re-opening


    • Obama meets w/ Palestinian Authority President Mahmoud Abbas during 3-day visit to Middle East
    • 8am: House of Representatives Steel Caucus briefing w/ Nucor CEO John Ferriola, US Steel CEO John Surma
    • 10am: Federal Transit Admin. Peter Rogoff testifies on effects of sequestration, grants made to local transit systems
    • 11am: NOAA delivers 90-day temperature, precipitation outlook


  • Blackstone said to approach Hurd about running Dell
  • HP directors rebuked in re-election by slim holder majority
  • Intuitive Surgical announces $1b share buyback program
  • Bernanke says he’s dispensable, suggests tenure winding down
  • Sales of existing U.S. homes probably climbed to 3-yr high
  • Cypriot president seeks new finance plan; banks still closed
  • Delta said to weigh order for $4.3b of wide-body jets
  • EU to curb banker bonuses after deal on Basel III law
  • GM turnaround plan for Opel to be tested by union vote
  • General Moly suspends loan work after China detention report
  • GE Capital to buy Allianz’s commercial lending unit in Australia


    • KB Home (KBH) 5:30am, $(0.22) - Preview
    • IHS (IHS) 6am, $0.85
    • Athabasca Oil (ATH CN) 6am, C$(0.03)
    • Lululemon (LULU) 7:15am, $0.74
    • ConAgra (CAG) 7:30am, $0.56
    • Worthington Industries (WOR) 8:20am, $0.49
    • Ross Stores (ROST) 8:30am, $1.07
    • Micron Technology (MU) 4pm, $(0.20)
    • Tibco Software (TIBX) 4:05pm, $0.18
    • Nike (NKE) 4:15pm, $0.67
    • Silver Wheaton (SLW CN) After-mkt, $0.49


  • WTI Crude Drops as German Data, Cyprus Plan Spur Europe Concern
  • Gold Giants Shrink to Fit as Paulson Pushes Breakup: Commodities
  • Cotton Harvest Worldwide Seen Slumping as Farmers Shift to Grain
  • Gold Trades Near 3-Week High as Investors Weigh Europe Debt Woes
  • Lead and Zinc Gain as Chinese Manufacturing Expansion Speeds Up
  • Soybeans Advance to One-Week High on Shipment Delays in Brazil
  • Palm Oil Gains to One-Month High as Inventories Seen Declining
  • Gold Demand in India Climbing May Weaken Attempt to Curb Deficit
  • Commodity Catch-Up With Stocks Seen as Elusive: Chart of the Day
  • Cotton Rally Encouraging Farmers to Sow More Than USDA Forecast
  • Rebar Advances for Third Day as Chinese Manufacturing Expands
  • Biggest Solar Collapse in China Imperils $1.28 Billion: Energy
  • Feud Threatens Russia Port Profits as CEO Is Suspended: Freight
  • China Cotton Imports Seen Exceeding USDA Estimate as Prices Rise
















The Hedgeye Macro Team









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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

DRI Earnings Preview

Darden Restaurants reports 3QFY12 EPS on Friday.  We are not expecting management to reverse course on its bearish view of FY13 and FY14 and, as we outlined during a conference call with clients on 3/14, we believe the stock is in a “win-win” scenario.  Here is a copy of our recent presentation materials and the accompanying audio link, titled, “DRI: The Unthinkable Long Case”. 


While we would not object to a shakeup of the management team or the emergence of an activist investor to bring about a change in strategy, there have been some positive signs that the company is considering fresh approaches to how it is allocating capital. 


Two marginal positives in a sea of negatives over the past couple of months include:

  • During the Analyst Meeting, Dave George, the new President of Olive Garden, acknowledged the deteriorated value proposition of the concept, as well as the need to slow unit expansion and focus more narrowly on execution
  • Red Lobster is testing a new “pay at the counter” version of its concept.  Customers place their orders at a counter and a server delivers the food when it’s ready.  It’s difficult to know if this concept will prove effective in attracting customers but we take the company thinking differently about its strategy, and capital allocation, as a marginal positive.  For too long, as we detailed in our Black Book, “DRI: The Unthinkable Short Case”, in July, the company had been slow to react to decelerating trends and made poor capital allocation decisions.  With seafood commodity prices, particularly Lobster, being so volatile, a move to a higher margin concept makes sense to us at first blush.




As preannounced, sales continued to be soft at Darden’s core brands during the third fiscal quarter.  With Knapp Track comparable restaurant sales decelerating to -5.4% in February, we would anticipate that trends deteriorated intra-quarter at most, if not all, of Darden’s concepts.  The chart below shows what the sequential acceleration in the Gap-to-Knapp that is implied by Darden’s preannouncement late last month. 


DRI Earnings Preview - knapp dri gap to





Given the dividend, which it seems management is intent on preserving, and the fact that Knapp alluded to improving casual dining trends in March, we do not see significant downside to the stock from here.  We believe, that after years of underperformance, any significant deterioration in guidance is likely to prompt intervention by an activist investor.  Even at current levels, we believe the breakup value of the stock is exceeds the current share price.  See the slide deck of our recent call for more details.


DRI Earnings Preview - dri win win



Howard Penney

Managing Director


Rory Green

Senior Analyst



GES: No Process, No Multiple

Takeaway: Newsflash: Fashion companies that blame misses on the economy don’t get big multiples. Even w the after-hours sell-off, this is a value-trap

Conclusion: We’re not at all surprised by the big guide-down at GES, as it’s been on our short list for the better part of a year. We knew this one was overearning, and guidance around margins was like a balloon being held underwater while interim management manufactured earnings sufficient to keep the stock afloat. That said, we wish we’d been louder about this potentially being the quarter where the balloon bursts. The good news is that management has not yet capitulated with its guidance. Earning the lower end of the $1.70-$1.90 guidance is optimistic at best, and if it gets there it will be through cutting costs that arguably should be reallocated to other areas of the business. Our point is that even with the stock trading down, we still like it on the short side. We think GES has 2 to 1 downside/upside.


The way we look at it, the Guess? brand is stalling in all but a few markets, the executive suite has a revolving door (losing 3 key executives in 5 months – two on the same day), and the only real bull case revolves around this being cheap on a more ‘normal’ earnings base of $3+ that it earned over each of the past two years. At $26, we might concur with the ‘cheap’ part, but unfortunately, the premise that GES can ever earn $3 again without significant capital investment (i.e. taking earnings down first) is wishful thinking. Carlos Alberini – the best thing that ever happened to GES -- left for greener pastures (Restoration Hardware) knowing that he was leaving peak earnings power in the dust.


We think that $3 will prove about elusive as Bigfoot, and until then you’re left with an annuity earnings stream of something closer to $1.50-$1.60. What’s a zero-growth earnings stream worth? Whether we use a no-growth retail multiple of 10-12x, or capitalize by a 10% cost of equity (we hate arbitrarily picking cost of equity, but 10% is probably close). Either way a mid-teens stock is not out of the question.


Not only would we argue that it is currently expensive on the real earnings power of the company (16-17x the $1.50 we think GES should earn), but there is literally nothing in place to get the brand momentum moving upward again.


One thing that’s important to consider is that it's 2/3 of GES’ business that is causing the problem – and that’s North America Retail, and Europe. Unfortunately, the company is blaming the economy – again. GES needs to understand – as we do – that investors absolutely have zero tolerance for a management team that does not have a process to drive its business in the face of a downturn in the economy.  Is Ralph Lauren complaining about the economy? No. It’s growing its top and bottom line by driving its brand across product, channel and customer categories in a synchronized way. Guess, on the flip side, is really good at making excuses.   


In the end, we think we’ll need to see new blood in the executive rank at GES who will then need to fight for – and win – the right to reinvest capital into the business to better stratify the brand and build an omnichannel strategy accordingly. We’d definitely put GES in the bottom quartile with its abilities in those areas. Until then, it’s a value-trap in the mid-$20s. We think best case upside is $30 on manufactured earnings upside through misplaced cost cuts. On the downside we think you've got $15 based on math above.  



GES: No Process, No Multiple - gessinga

GIS - No Need to Chase

What we liked in the quarter:

  • Obviously, beating consensus on both revenue and EPS is better than the alternative
  • EBIT margin did improve slightly in the quarter, even if we aren’t fans of what drove it (see below)
  • Continued sequential improvement in constant currency organic sales growth - +2.6% (versus +5.2% in the lapping quarter).  Last quarter, +1.9% versus +5.4% comparable
  • Strong FCF generation, $2.61 per share in FCF for the nine months of fiscal 2013
  • Share losses in cereal moderated (-0.7 pts in 1H, -0.5 pts in Q3)
  • Yoplait’s growth in the Greek yogurt segment outpaced the category (+137% vs. +49%), against a very low base, of course
  • Progresso growth outpaced the soup category (+7% YTD vs. +5%)

What we didn’t like:

  • Beat consensus by $0.07 in the quarter and took up full year guidance (one quarter remaining) by $0.01 at the low and high end
  • Guided Q4 below consensus – implied guidance of $0.51 for the quarter versus consensus of $0.59 (“EPS expected to be below year-ago - $0.60”)
  • Tax rate ($0.01 per share) and lower interest expense ($0.01 per share) flattered the quarter
  • “Advertising and media expense was 6 percent below strong year-ago levels” – drove some of the decline in SG&A which was the offset to…
  • …lower gross margins in the quarter (53 bps)
  • Yoplait sales growth in the quarter was still negative, despite easy year over year comparisons
  • Big G sales growth was still negative in the quarter

Our inclination here is not to chase this name up, and to be prepared to fade today’s move.  Even if the company is being conservative with its Q4 guidance ($0.54 internally?), consensus still needs to come down by 10% for the quarter.  Valuation isn’t heroic, with GIS trading at 16.9x calendar ’13 versus the group at 20.9x (large cap multiple is 17.0x), but despite the sequential improvement in constant currency organic sales trends mentioned above, GIS is still facing challenges across cereal and yogurt, two key drivers of top line and EBIT.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst