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Illuminating The Past

This note was originally published at 8am on May 29, 2013 for Hedgeye subscribers.

“This story illuminates, as only great history can, not only the past but also the present.”

-Richard Holbrooke


That’s how the late Richard Holbrooke (1941-2010) ended his foreword to the latest macro strategy book I started reading this weekend – Paris 1919: Six Months That Changed The World, by Margaret Macmillan (winner of the Samuel Johnson Prize).


With the US launching its first drone attack on Pakistan since the US election, I am certain that the likes of Holbrooke (former United States Special Envoy to Afghanistan and Pakistan) could illuminate the history of this US engagement for us. Maybe his sons will tell his stories. Maybe they won’t. Someone always knows something in this world. History teaches us that the herd tends to get the truth on delay.


Markets teach us different versions of the truth. They also reflect upon history. Market prices build upon stories told. Whether those stories are fact or fiction is of less concern to me than what people will expect happens next. Holbrooke said his only regret about the 1919 Peace Conference story was that “it was not available a decade ago.” The book was published in 2003. The truth was now 86 years old.


Back to the Global Macro Grind


“What is the truth?” That’s the most important question to one of the best macro risk managers of our generation (Ray Dalio), so it’s definitely one of the most important ones to me. From a behavior economics perspective, I really care about the truth of expectations.


Is it true that rising US Treasury bond yields are a pro-growth signal? Is it true that rising yields (combined with a #StrongDollar) predicted the truth about both the 1982 and 1993 US economic growth recoveries? How do you know the truth if you haven’t studied history?


I started on Wall Street during an internship in 1997. The people have changed. But the game of expectations hasn’t. Some people try to game the game by front-running inside information. Apart from potentially going to jail and having history write about you as a cheater, what’s the downside in that? Inside information is, after all, the truth.


Then there’s the knucklehead hockey player approach to mapping expectations about the truth (I don’t like orange jump suit risk):

  1. First, have a quantitative process that signals what the truth about expectations are, across multiple-durations
  2. Then, overlay a multi-factor model of research that helps contextualize those market expectations (correlation and/or causality)
  3. And finally, either move – or choose to do nothing

With a multi-duration, multi-factor model contextualized by history in hand each morning, you can:

  1. Do nothing
  2. Do more of what you have been doing
  3. Unwind everything you were doing and do the opposite of that

Contextualizing yesterday’s newsy “breakout” in bond yields is a good working example of how people get whipped around:

  1. US Treasury yields have been breaking out on our TREND duration for almost 3 weeks (1.82% breakout signal)
  2. The causal factor in driving Treasury yields higher, faster, continues to be economic data (jobs, housing, confidence)
  3. Most who are clinging to getting inside info from Bernanke on when the Yield Chasing thing is over, are getting run-over

Again, as I wrote 3 weeks ago, Front-running The Fed is a legal and profitable business. All you have to do is have an accurate process that signals how wrong Bernanke’s forecasts on growth are going to be and then act accordingly. By the time he tells his boys and/or his boys tell their Washington “consultants” that he’s going to “taper”, Mr. Market will have already moved.

So, if you still think both Old Wall and Bernanke are too bearish on growth, how do you front-run the herd’s expectations changing?

  1. You don’t do nothing (especially if you are long Yield Chasing securities like Utilities, Treasuries, MLPs, etc.)
  2. You do more of what’s working – buy growth, which includes US Dollars, Consumer, Healthcare, and Financials

At a capitulation point (like yesterday) people who are still bearish on #GrowthSlowing (like we were until late November 2012) have to go with option #3 (unwind everything they were doing and do the opposite of that). That’s when you really get paid. #Flows!


When people said “sell in May and go away”, they must have meant selling the end of the world #GrowthSlowing trades and buying the living daylights out of #GrowthAccelerating. That’s not me pushing a progressive agenda; this is just the score May 2013 will record:

  1. Utilities (XLU) down -7.4% for May 2013 to-date
  2. Financials (XLF) up +6.6% for May 2013 to-date

That’s about as eye opening an equity sector level divergence (one the key risk factors in our multi-factor risk management model) as you will ever see on a 1-month duration. So is a +31% one-month rip (+52 basis points) in 10yr US Treasury yields in Bernanke’s face.


Unfortunately (for Bernanke’s legacy), I can’t tell you what history will tell you about all the unintended consequences associated with the US Federal Reserve and Bank of Japan seeing rates rip off of the zero-bound.


All I can tell you is that the present is already reflecting asymmetrically on the past – and May 2013 has been illuminating.


Our immediate-term Risk Range for Gold, Oil (Brent), Corn, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1351-1404, $101.74-105.28, $6.36-6.71, $83.92-84.58, 101.23-103.67, 1.98-2.18%, 12.29-14.82, and 1644-1674, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Illuminating The Past - yy. the breakout


Illuminating The Past - Virtual Portfolio

Being Good

“I am not remotely interested in just being good.”

-Vince Lombardi


If you can’t tell I like winning, you probably haven’t met me yet. I think I hate losing more than I love winning. The only way not to be average in this game is to play on a great team. I am not remotely interested in just playing on a good one.


What makes a good analyst? What makes a bad one? What makes an average PM? What makes a great one? After playing on 3 big buy-side teams, then building my own here while we collaborate with client teams, I can tell you that greatness in this profession comes down to one very basic thing – having a repeatable, but flexible, process.


Once you have that – you have to do what Lombardi did. You have to find it within you to lead your teammates to believe in both the process and themselves. I’ve had the privilege of playing on a championship team on the ice. When individuals find a way to put the collective goal above themselves, you have an opportunity to drink from the cup.


Back to the Global Macro Grind


It’s not cocky, arrogant, or whatever else someone who just wants to be good thinks you are when you get up every morning and tell them you are going to beat them. For some of us, that’s just the goal. Expecting to win is a culture – don’t apologize for it.


I was on the New York CFA Society’s Big Data panel for a 2 hour debate last night in NYC. The panel was a typical mix between academia, industry, and market practitioners. One academic guy was from Morgan Stanley. One industry guy was from IBM.


Harry Blount (CEO of Discern) was moderating the panel. He’s a former sell-side analyst building an independent research firm and he gets the game. He asked us to A) define Big Data and B) explain how we use it.


For me, this was a relatively easy exercise. Building, evolving, and explaining my multi-factor, multi-duration approach to real-time risk management is what I do. For some of the academic guys in the room, it was very difficult to understand what I was saying – primarily because they don’t do what I do.


What is it that you do?


That’s how I ended the book Rich Blake and I wrote about the early stages of my hedge fund career. For those of you who have read the book, you know that I have a lot of issues. Most humans do. It’s just hard to put those flaws on paper.


My career has been good, not great. And I don’t want it to end that way. That’s why I ended the book with what I go to bed with and wake up to every morning of my market life – questions...


And, oh do I have a lot of big ones in my notebook this morning:

  1. What if the US Dollar snaps my intermediate-term TREND line of $81.21?
  2. What if the USD/YEN cross breaks down through 95.85 TREND support?
  3. What if the SP500 continues to signal a series of lower-highs versus her all-time high of 1669?
  4. What if the VIX continues to signal a series of intermediate-term higher-lows?
  5. What if Tim Tebow wins a Championship with Belichick?

That last question found its way into my notebook after I saw the headline in the New York Daily News this morning “God Help Us!” Losers question champions. That’s fine. That is what they do. And what we want to do is answer the bell come game time.


I am not interested in being labeled a perma bull or perma bear. I am not interested in what the tired aristocracy of the Old Wall thinks about my style either. To win championships as a Global Macro Strategy team, we need to focus on results.


Being right requires being flexible. When the quantitative TREND signals change, we need to start questioning our positions. When the signals are head-fakes, we need to remove all confirmation bias from the research and make a call on that and timestamp it too.


This will change, but for now, if you want to get Global Equities right, you have to get the US Dollar right:

  1. Intermediate-term TREND correlation between USD and SPY on a 6 month duration = +0.84
  2. Intermediate-term TREND correlation between USD and EuroStoxx600 (6mths) = +0.81
  3. Intermediate-term TREND correlation between USD and Emerging Markets (6mths) = -0.54

Fortunately, this has been the upshot of our Global Macro Themes for the last 6 months. As the US Dollar A) stabilized then strengthened from its 40 year low and then B) broke out across longer-term durations = good for US and European stocks = bad for Emerging Market stocks (the aforementioned inverse correlation is to the MSCI EM Index).


So, what if the US Dollar starts to break-down from a TREND perspective? What happens if Bernanke doesn’t “taper” as the bond market now expects him to in September? What happens if the Japanese completely screw this up faster, instead of slower?


Anything can happen out there. That’s why I think Belichick likes Tebow inasmuch as I like hiring players who have the intangibles that I cannot teach. To be the change in strategy, I need players who are disciplined but flexible – and who expect to win.


What am I going to do with this leadership rant and all these questions today?

  1. Let Mr Market answer them for me
  2. If he answers the questions faster, I’ll move faster
  3. If he answers the questions slowly, I’ll take my time

Managing risk, slow and fast – that’s what great players in this game do. If you just want to be good at this, don’t be flexible. It’s a lot less work and your day will be a heck of a lot less introspective. I am not remotely interested in promising you certainty.


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, Nikkei, and the SP500 are now $1, $100.28-105.09, 80.79-82.36, 95.85-99.53, 2.14-2.23%, 14.84-17.98, 12,603-13,815, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Being Good - DXY


Being Good - vp 12

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 80.48%
  • SHORT SIGNALS 78.35%

June 12, 2013

June 12, 2013 - dtr



June 12, 2013 - 10yr

June 12, 2013 - spx

June 12, 2013 - dax

June 12, 2013 - dxy

June 12, 2013 - euro



June 12, 2013 - VIX

June 12, 2013 - yen

June 12, 2013 - oil

June 12, 2013 - natgas

June 12, 2013 - gold

June 12, 2013 - copper


TODAY’S S&P 500 SET-UP – June 12, 2013

As we look at today's setup for the S&P 500, the range is 51 points or 1.18% downside to 1607 and 1.96% upside to 1658.  










  • YIELD CURVE: 1.87 from 1.86
  • VIX closed at 17.07 1 day percent change of 10.56%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, June 7 (prior -11.5%)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $750k-$1b notes in 2023-2031 sector
  • 1pm: U.S. to sell $21b 10Y notes in reopening
  • 2pm: Monthly Budget Statement, May, est. -$136.5b (prior -$124.6b, May 2012)


    • 10:30am: Senate Budget Cmte hears from Defense Sec. Chuck Hagel, Dempsey on dept’s budget request, effects of spending cuts, sexual assaults in the military
    • 12pm: Agriculture Dept releases supply, demand forecasts for 2013-2014 domestic, global grain and oilseeds seasons
    • 2pm: NSA Director Keith Alexander testifies before Senate Appropriations Cmte about U.S. cyber preparedness
    • 2:30pm: Senate Armed Svcs Cmte begins several days of closed meetings to write measure authorizing defense programs for FY14, beginning Oct. 1. Pentagon seeking $526.6b, not including $79.4b for fighting wars


  • Dish faces June 18 deadline after Sprint deal talks falter
  • Vodafone approaches Kabel Deutschland to discuss takeoverbid
  • Liberty starts $3.5b buyback after Virgin Media purchase
  • ANA scraps 787 Dreamliner flight after engine fails to start
  • Airbus sets A350 flight date as Boeing rivalry intensifies
  • Glencore Xstrata appoints former Morgan Stanley CEO to board
  • Glenview asks Health Management to remove or boost poison pill
  • Traders said to manipulate currency rates to profit
  • Greece first developed market cut to emerging; U.A.E. raised
  • Freeport reschedules concentrate shipments after mine shutdown
  • Time Warner Cable said to offer incentives thwarting online TV
  • Toyota to meet U.S. Prius goal as economy gains, Lentz says
  • Pandora buys South Dakota station to get radio-like rates
  • U.K. unemployment falls as economic recovery gains momentum
  • Massive line of storms across U.S. may hit Iowa to Maryland
  • Flights to France cut, last day of air traffic control strike


    • Dollarama (DOL CN) 7:30am, C$0.67
    • Evertz Technologies (ET CN) 4:01pm, C$0.17
    • Five Below (FIVE) 4:01pm, $0.04
    • H&R Block (HRB) 4:02pm, $2.61
    • PVH Corp  (PVH) 4:02pm, $1.37
    • Men’s Wearhouse (MW) 5:30pm, $0.55


  • Gold Premium in Vietnam Seen Dropping From Record on Bank Sales
  • Smithfield Embodies China’s Record Hunger for Farms: Commodities
  • WTI Crude Halts Two-Day Decline; IEA Trims OPEC Demand Forecast
  • Cotton Planting in India Seen Increasing on Early Monsoon Rains
  • Copper Gains Most in a Week on Supply Concern as Nickel Declines
  • Wheat Declines as Australia Raises Production Outlook on Weather
  • Thailand Sets ‘Ambitious’ 13mt Sugar Production Target: Official
  • Gold Swings Near 2-Week Low as Investors Weigh Stimulus, Dollar
  • IEA Cuts Demand Forecast for OPEC Crude as China Growth Cools
  • Freeport Reschedules Concentrate Shipments After Mine Shutdown
  • Copper MACD Measure Signals Drop to 2010 Low: Technical Analysis
  • Tougher Regulations Seen From Obama Change in Carbon Calculation
  • South Korean Crude Oil-Shipping Rebate Seen Extended by IEA
  • Australian Wheat Crop Increasing Boosts Pressure on Bear Market






















The Hedgeye Macro Team














***CORRECTION: In the original version of this post, the title of the penultimate section was "3Q12 is RRGB's Waterloo". Of course, that should have read "3Q13 is RRGB's Waterloo". This version includes the correction.***



“One of our strategies moving forward is to shift to a balance between our legacy of being family-friendly and adult-focused guest experiences, referencing our legacy. There is no assurance that this shift will be successful or that it will not negatively affect our family guest experience.”

-          RRGB 2012 10-K, Risk Factors section



We are adding Red Robin Gourmet Burger to our Best Ideas on the short side.  The stock has gotten ahead of the company’s fundamentals and future growth prospects.


Company Overview

  • 468 full-service casual dining restaurants – 335 co-op and 133 franchised
  • 5 limited service Red Robin Burger Works concepts
  • Core concept is “family-focused”
  • Seeking to strike balance between family legacy and “adult-focused experiences”
  • FY13 estimated revenue growth of 4% to over $1 billion
  • Operating margins, ROE, ROA, some of the lowest in casual dining
  • 2.99x Debt/EBITDA
  • 22% debt/Total Assets




The stock has outperformed by almost 60% over the past year and its strong performance versus peers has continued as earnings growth estimates have stagnated. 







Current Setup

  • Stock surging on increased expectations for a successful Red Robin “brand transformation”
  • Additional investment will be required to secure brand transformation
  • Capital spending unit growth is being accelerated in 2013
  • Industry is still experiencing a secular declining traffic trends
  • Guidance is for EPS an EPS recovery in 2013 and 2014
  • Traffic negative in 1Q13 and comparisons get difficult for the balance of 2013
  • Restaurant margins have improved 290bps over the last 2 years



Traffic Problem is Biggest Fundamental Red Flag

The company is in desperate need of a “brand transformation” to stem the decline in traffic





Capital Allocation


Capital allocation is one of the most important metrics for casual dining companies. In terms of RRGB’s capital spending, the following bullets and charts offer insight into the effectiveness of the company’s capital allocation decisions.

  • Capex has been growing for three years
  • Expected to increase 17% in 2013
  • ROIIC likely to decelerate in 2013
  • Unit growth accelerating with Red Robin, mid-size, and new Burger Works concepts




CORRECTED: RRGB HAS TOO MANY BALLS IN THE AIR - rrgb ebitda vs capex growth



Repeating Others’ Mistakes


The foot print expansion is leading to declining returns for the company. The question that we, and others, have about the strategy is why so many different initiatives need to be pursued at once. Specifically, the company is growing Red Robin in two different sizes, expanding its Burger Works QSR concept which seems to be producing mixed results, and trying to transform the consumer’s perception of Red Robin as a brand. In our view, this amounts to the company taking on more tasks than it can complete effectively while managing its capital prudently.


Brand transformation is difficult to achieve, for several reasons. Below are some of the concerns we have about RRGB’s particular strategy.

  • Moving away from core customers carries risk
  • Bar remodel had limited impact
  • Guiding to strong returns in “full transformed” units (only?)
  • Red Robin brand perception is entrenched, significant messaging required to adjust
  • Bar Works off to a difficult start as real estate and financial performance refinements ongoing


3Q13 is RRGB's Waterloo

  • Difficult SRS comparisons
  • Lowest revenue quarter of the year as incremental expense continues to build
  • Expenses in 4Q likely to grow significantly thanks to new costs
    • Brand transformation expenses
    • Incremental pre-opening expenses for new units
    • Beef prices post a risk to margins, particularly in 3Q
    • Industry sales benchmarks continue to be sluggish


Valuation and Sentiment


Short interest in RRGB has been coming down since 2008 but remains the fourth highest in casual dining at 10.5%. The valuation that consensus is awarding the stock has risen sharply in recent months. The sell-side is fairly cautious on the name with 37.5% of analysts rating the stock a “buy”, 50% “hold”, and 12.5% “sell”.


CORRECTED: RRGB HAS TOO MANY BALLS IN THE AIR - rrgb valuation over time






Howard Penney

Managing Director


Rory Green

Senior Analyst

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