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Debating Growth

This note was originally published at 8am on June 04, 2013 for Hedgeye subscribers.

“All growth depends upon activity.  There is not development physically or intellectually without effort, and effort means work.”

-Calvin Coolidge


Former United States President Calvin Coolidge knew a thing or two about growth.  From a personal perspective, his life embodied steady growth of achievement.  His first foray into politics began in the Massachusetts House of Representatives in 1907.  He followed this up as Mayor of Northhampton, then became a member of the Massachusetts Senate, and after a couple of more stops became Governor of Massachusetts.


“Silent Cal”, as he was called due to his quiet demeanor, was then added to the Republican ticket as Vice President in 1920 and he and his running mate, Senator Harding of Ohio, went on to win in a landslide.   On August 2nd, 1923, President Harding died while on a speaking tour and Coolidge became President.  Coolidge then stood for election as President in 1924 and won his first official term as President.


From an economic perspective, largely based on a series of broad tax cuts, Coolidge oversaw a very economically prosperous time in U.S. economic history known as the “roaring 20s”. Interestingly, as well, as the top tax rates were cut from 58% in 1922 to 25% in 1929, the economy grew and the share of the tax burden of the wealthiest Americans, those making more than $100,000 per year, also grew from 35% to 63%.


In addition to the economic growth he oversaw, Coolidge also eventually outgrew his introverted personality.  In one his most outspoken moments, he said of his eventual successor Herbert Hoover, "for six years that man has given me unsolicited advice—all of it bad.”  Needless to say, the United States was not as economically fortunate under the stewardship of his successor President Hoover.


Back to the global macro grind . . .


Yesterday was a classic one for the ongoing debate over whether economic growth in the U.S. is accelerating or stagnating.  The Purchasing Managers Index (PMI) reading from Institute for Supply Chain Management (ISM) came in at a contraction indicating 49.0.  The internals of the report were negative across the board, as well, with new orders coming in at 48.8 and production coming in at 48.6.  The employment component of the index was still in expansion mode, albeit only marginally at 50.1.


The key read through from this reading is that as it relates to growth in the industrial sector in the U.S., headwinds remain.  On a relative basis, the United States is still faring better than the Eurozone where a 48.3 was reported in its latest PMI report, the latest in almost two straight years of factory output contraction in Europe.  The Chinese economy is also struggling on the industrial front as the HSBC PMI came in at 49.2 most recently.


Another data point that came out yesterday that supported the slowing growth case was government spending on construction.  Public construction spending dropped 1.2% in April to the lowest level since 2006 and down 5.7% from October.  This decline is obviously due to sequestration that is being implemented at the federal level.  In the short term, this may be an economic headwind, though the offset is that the deficit is declining much faster than expected.  In its most recent update the non-partisan Congressional Budget Office (CBO) projected that the deficit for fiscal year 2013 will fall to $624 billion, or about 4% of GDP, and almost $200 billion less than the CBOs estimate from three months before.


Our view of economic growth in the U.S. continues to be underscored by the consumer side of the economy.  On this front, the economic data released yesterday was positive as auto sales for May came in at an annualized rate of 15.3 million.  This was the fourth straight month of sales over 15.0 million and continues to show strong growth over the 14.5 million in auto sales from last year.  Certainly, auto sales are being driven by compelling financing programs, but as a proxy for consumer demand, they remain a positive indicator.


A key emerging American growth industry that will be a key tailwind for strong car production numbers is the U.S. energy industry.  In the Chart of the Day, we highlight this in a chart of U.S. oil production going back twenty years.  As the chart shows, largely thanks to technology advances, U.S. daily oil production is hitting 20-year highs.  This of course follows decades of production declines starting in the 1970s.


The International Energy Administration recently published a report that projected the North American oil supplies will grow by 3.9 million barrels by 2018.  This is almost 2/3rds of the non-OPEC production growth projected over that period.   If accurate, this will also reduce American imports by almost 40% over that period.  If the IEA is correct and this growth in production leads to a global “supply shock”, in coming years, the upside to global growth may be dramatic with declining oil prices.


Turning back to the shorter term and the U.S. stock market, another key positive we see relating to growth is expectations.  Currently, consensus aggregate SP500 revenue growth for the next three quarters is 0.5%, 3.4% and 2.3% respectively.  This is an expected revenue growth rate of  just over 2.0% in the projected period and less than half the average reported year-over-year growth rate of north of 4% in the prior three quarters.  For U.S. stock market bulls, these low expectations are very supportive.  For U.S. stock market bears, these expectations may well be, as Shakespeare said, “the root of all heart ache.”


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1351-1424, $100.27-103.29, $82.48-83.74, 99.98-103.24, 2.07-2.23%, 14.63-16.59, and 1630-1651, respectively.


Daryl G. Jones

Director of Research


Debating Growth - Chart of the Day


Debating Growth - Virtual Portfolio


TODAY’S S&P 500 SET-UP – June 18, 2013

As we look at today's setup for the S&P 500, the range is 47 points or 2.08% downside to 1605 and 0.79% upside to 1652.           










  • YIELD CURVE: 1.92 from 1.92
  • VIX closed at 16.8 1 day percent change of -2.04%

MACRO DATA POINTS (Bloomberg Estimates):

  • FOMC starts two-day meeting
  • 7:45am: ICSC weekly sales
  • 8:30am: Consumer Price Index, May, est. 0.2% (prior -0.4%)
  • 8:30am: CPI Core Index, May, est. 233.255 (prior 232.879)
  • 8:30am: Housing Starts, May, est. 950k (prior 853k)
  • 8:30am: Building Permits, May, est. 975k (prior 1.005m)
  • 8:55am: Johnson/Redbook weekly sales
  • 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 4:30pm: API weekly inventory data


    • President Barack Obama leaves G8 summit in Northern Ireland to travel to Berlin on official visit
    • Swiss lawmakers in lower house of parliament to discuss “black box” agreement to allow banks to cooperate with U.S., end a tax evasion dispute
    • 8:45am: Senate Energy and Natural Resources ranking member Sen. Lisa Murkowski, R-Alaska, delivers opening keynote address at U.S. EIA Energy Conf.
    • 10am: Senate Finance Cmte holds hearing on health care costs, issues of transparency
    • 11am: Rep. Steve Daines, R-Mont., leads group of lawmakers in news conf. on opposition to the Marketplace Fairness Act
    • 1pm: Vice President Joe Biden speaks on administration plan for improving gun safety


  • Obama says Bernanke staying at Fed “longer than he wanted”
  • Liberty Global bids for Kabel Deutschland to rival Vodafone
  • Johnson Controls said to mull auto-electronics unit breakup
  • Third Point boosts stake in Sony as Daniel Loeb seeks talks
  • ECB has “open mind” on non-standard monetary policy: Draghi
  • Sprint sues Dish in Delaware seeking to block Clearwire buyout
  • Verizon said to have interest in buying Canada’s Wind Mobile
  • Boeing unveils 787-10 Dreamliner, has 102 commitments
  • Yahoo received up to 13k data requests from U.S. authorities
  • Mengniu to buy 75.3% stake in Yashili from Zhang, Carlyle
  • EasyJet orders Airbus jets, risking clash with founder
  • GM Holden says labor costs need cuts to save Australian plants
  • Housing starts probably rose in May as expansion gets boost
  • EU car sales reach 20-yr low as recession hurts GM demand
  • U.S. video-game retail sales fell 25% in May, NPD says
  • Microsoft’s Xbox tops U.S. retail game console sales in May
  • Ex-UBS trader Hayes said to face U.K. Libor charge this week
  • Tissue Regenix licenses dCell technology to U.S. tissue bank


    • John Wiley & Sons (JW/A) 7am, $0.84
    • FactSet Research (FDS) 7am, $1.26
    • Adobe Systems (ADBE) 4:02pm, $0.34 - Preview
    • La-Z-Boy (LZB) 4:05pm, $0.28


  • Palm Exports From Indonesia Rising for First Time Since January
  • Rubber Poised for Record Glut as Shippers End Curbs: Commodities
  • WTI Trades Near Four-Month High as U.S. Stockpiles Seen Falling
  • Wheat Prices Seen Extending Decline as Global Production Surges
  • Copper Falls a Second Day as Investors Await Fed Stimulus Signs
  • Gold Retreats a Second Day in London Before Fed Policy Meeting
  • Coffee Resumes Decline on Vietnam, Bearish Bets; Sugar Retreats
  • Americans Exporting Oil First Time Since ’70s Seen on Production
  • Keystone Seen Failing to Sop Up Canada Oil Glut: Energy Markets
  • India Plans to Sell 17.5 Million Tons of Grain From Stockpiles
  • Keystone XL Pipeline Shuns High-Tech Oil Spill Detectors: Energy
  • Marubeni, Partners to Set Up Floating Wind Turbine Off Fukushima
  • Mongolia Taps North Korea Oil Potential to Ease Russian Grip
  • Wheat Advances on Indications Rain Is Delaying Harvest in U.S.






















The Hedgeye Macro Team















Galaxy opened a new high limits area on the casino floor of Galaxy Macau, “in response to increasing demand from the premium mass segment market”, the company said.  The Pavilion Club High Limits area follows the openings at Galaxy Macau of two other high limits zones, for tables and slots, respectively.


The Pavilion Club High Limits area comprises a main hall of around 370 square metres and two private gaming rooms.

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Trade of the Day: FCX

Takeaway: We covered Freeport (FCX) at 3:43 PM at $29.65.

Freeport is flat in an up tape (alpha). We'll go ahead and book our 13th consecutive gain on the short side for a tidy 3.86% gain. We are batting 100% all-time on this one.


Trade of the Day: FCX - FCX

Walk the $LINE

Takeaway: We remain bearish on Linn Energy (LINE).

As many of you know, we’re hosting a conference call tomorrow morning outlining Hedgeye’s bearish case on Linn Energy (LINE).  


Walk the $LINE - line


Incidentally, there was a second story in Barron’s over the weekend highlighting the work of Hedgeye Energy Analyst Kevin Kaiser about what’s going on in LINE. As many of you also know, CNBC Mad Money host Jim Cramer owns LINE in his charitable trust and has been recommending the stock in Action Alerts PLUS.


Here’s what he had to say in response to a viewer question this past Friday evening. The video begins at the 3:12 mark. A transcript follows below.


“Jim, please respond. What do you see for LINE—that’s Linn Energy—AAP, that means Action Alerts PLUS  recommended but it’s down every day. Help!


Okay, now. There’s a firm that is very helpful to, in this particular case, a short story, a short case, against LINN. That firm has been right about the stock. There’s no doubt about it. Action Alerts PLUS has been wrong about the stock. There’s no doubt about it. I never say that I’m doing well on something when I’m not. Okay?


That said, I like Linn from when the show began. So I’m not going to change my view on it just because the stock went down. Allright? Do I wish that the stock would go up? Yes. Because I like to make money for charity in my charitable trust.


Have the shorts been right about the stock? Yes. Will they stay right? They’re going to have a conference call apparently next week. And remember, after that the shorts are going to have to start paying the distribution, it’s gong to come monthly. And hopefully, there’s a deal for Berry Petroleum. Mark Ellis is the CEO—I trust Mark Ellis.


Does that make me a chump? Does that make me an idiot? That’s your call.


I know I did my work on it. I've done more work on it than almost anybody because I’ve liked it for many, many years. I like the accounting, you may not. I put it all out there.


The shorts have been right. Action alerts has been wrong. But, I take a longer term view as I have since the show began." 


Darden remains one of our top ideas on the long side.


Expectations Unlikely To Be Met


We expect that 4QFY13 results and forward guidance for FY14 are likely to fall short of the investment community’s expectations. Despite this, equity holders should not panic, as we view the stock setup as a win-win for investors.


The “win-win” set-up, to us, looks like this:

  1. Management continues to demonstrate that it cannot effectively manage the business as it exists today, rolling out the red carpet for an activist or group of activists
  2. Sequential improvement in industry trends should help Darden in 4QFY13



Looking to FY14


DRI is scheduled to report this Friday on 6/21.  While we believe there will be some improvement in sequential sales trends during the quarter, it likely will not be nearly impactful enough to allow management to claim victory.  The biggest news during the quarter was the appearance of Olive Garden’s President Dave George on Jimmy Fallon’s “Late Night” show, on which Mr. George retired the weary Olive Garden slogan, “When you’re here, you’re family.”  We expect President Dave George to take on a larger role on the upcoming quarterly earnings call in order to outline his vision and the future prospects for the Olive Garden.


While management will likely point to the slight recovery in sequential sales trends, we don’t believe they will raise the current guidance of 0-2% EPS growth for FY14.  Highlighted by the same-store sales charts below for Olive Garden, Red Lobster, and LongHorn, street expectations are low for an improvement over the current trends.  Furthermore, the lack of a cohesive turnaround plan suggests that management cannot manage the business as it currently exists.  We continue to believe that major structural changes are necessary in order to fix DRI’s broken business model.


In the event that we are wrong, and sales trends deteriorated during the quarter, shareholders will likely be quick to demand more, potentially spelling the end of the current management team.  While none of the existing shareholders will likely surface as a voice of reason, an activist could emerge to apply pressure for the necessary changes.  Our analysis suggests that at current levels, the breakup value of the stock exceeds the current share price.


DRI REMAINS A “WIN-WIN” - olive garden SRS consensus


DRI REMAINS A “WIN-WIN” - red lobster SRS consensus


DRI REMAINS A “WIN-WIN” - longhorn SRS consensus



Howard Penney

Managing Director


Rory Green

Senior Analyst