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BOOK REVIEW: IKE'S BLUFF

Takeaway: A great rewind of uniquely American-style Presidential leadership. Buy the book.

Hedgeye CEO Keith McCullough shares his thoughts on Ike’s BluffPresident Eisenhower’s Secret Battle To Save The World, by Evan Thomas (2012). The book is a startling account of how the underrated Dwight Eisenhower saved the world from nuclear holocaust.

 

Summary Thoughts

  1. Inspirational book on judgment and accountability in decision making
  2. Sharp contrast to the broken #PoliticalClass concepts of leadership in America today
  3. His greatest victories were the wars he did not fight” –Evan Thomas #indeed

BOOK REVIEW: IKE'S BLUFF - ike

 

Content Highlights

  1. “Eisenhower was the first President to use TV as a bully pulpit, but he was not particularly good at it” (pg 16) #authenticity
  2. “The people, judging from Eisenshower’s high poll ratings, believed that he had sound judgment” (pg 16)
  3. “too many cups of coffee, smoked too many cigarettes, slept badly, and worried far too much.” (pg 18) #accountability
  4. “He knew that he had a gift: the power to make people – indeed, whole peoples – trust him” (pg 28) #trust
  5. “His firstborn child… “Icky”, died of scarlet fever in 1921… and he never really recovered from the loss” (pg 30) like #Jefferson
  6. “Eisenhower had grown up poor in Abilene, Kansas” (pg 33) #perspective
  7. “President Eisenhower’s day usually proceeded with the precision of a military band.” (pg 43) very #process/routine oriented
  8. “Let’s not make our mistakes in a hurry” was one of his standard sayings.” (pg 45) very #patient, risk manager of a man
  9. “Never get in a pissing match with the skunk” (pg 57) to his brother Milton about #McCarthy
  10. “What we found was the result of seven years of yapping was exactly zero. We have no plan.” (pg 59) Ike on #Stalin’s death
  11. “Miss America contestants were asked to state their opinion of Karl Marx” (pg 69) #1950 zeitgeist in America during Korean War 
  12. “More significant was the death of Stalin, the leader most responsible for the conflict” (pg 81) good chapter contextualizing Korea
  13. “The war is over and I hope my son is coming home soon” (pg 81) wars different vs recent US Presidents; #personal responsibility
  14. “Learning To Love The Bomb” (pg 101) Chapter 7, illustrates how politicians in America marketed/sold #fear
  15. “we live by emotion, prejudice, and pride” (pg 105) Ike in an excellent leadership note to #Churchill
  16. “Eisenhower, himself a heavy editor, fiddled with his speeches until the last possible moment” (pg 111) #accountability
  17. “You’ve got to stick your butt out more, Mr President” (pg 115) loved #golf, this was advice from Sam Snead at Augusta
  18. “Eisenhower was astonished at the foolishness of the French” (pg 120) annoyed w/ France at Dien Bien Phu #Vietnam
  19. “You have a row of dominos set up, and you knock the first one over” (pg 127) why he kept USA out of Vietnam #1954
  20. “Eisenhower was an expert in finding reasons for not doing things” (pg 130) –Andy Goodpaster, his Staff Secretary
  21. “Scientists and industrialists must be given the greatest possible freedom to carry out their research” (pg 146) #evolve
  22. “Don’t Worry, I’ll Confuse Them” (Chapter 10) fascinating #strategy chapter on how he’s play the Chinese
  23. “Chiang might have dragged out the crisis had the Red Chinese not backed down. But they did.” (pg 164)
  24.  “Eisenhower had read Clausewitz’s On War – three times” (page 203) #study
  25. “This fellow’s licked and what’s more he knows it” (pg 209) Ike on Adlai Stevenson’s challenge for the Presidency #1956
  26. “icy with anger, warm with satisfaction, sharp with concern” (pg 215) when Ike learned of the #U2 intelligence on Russia
  27. “A crisis in leadership” (pg 255) that’s what Time Magazine said about Ike in #1957, #embarrassing editorial times
  28. “The President must be in some kind of partial retirement” –Walter Lippmann (pg 255) #1957, not knowing what Ike knew
  29. “You can understand that there are many things that I don’t care to allude to publicly” –Eisenhower (pg 260)
  30. “Patience and privacy were virtues of leadership, vices of politics… he was the lonely keeper of the nation’s secrets” (pg 260)
  31. “Psychologically, he could handle the pressure. But physically, he could not” (pg 260) I get it
  32. “The Roman Empire controlled the world… Now the communists have established a foothold in outer space” –#LBJ! (pg 276)
  33. “Ike, who regarded LBJ as a phony” (pg 277) Life Magazine put Lyndon Johnson on the cover, Russian space #FearMongering
  34. “Alsop did what newsmen do: he found other sources. One was Johnson, who cultivated Alsop” (pg 310) gotta love #NYTimes
  35. “Eisenhower was, in effect, his own secretary of defense” (pg 314) #experienced practitioner, not political parrot
  36. “honesty of purpose, calmness, and inexhaustible patience” (pg 331) Ike, on himself, and virtues of #leadership
  37. “Khruschev was surprised and overjoyed to be invited to America by Eisenhower” (pg 335), keep your #enemies close
  38.  “He found her and crawled in beside her” (pg 352) Eisenhower’s best friend, his wife #Mamie
  39. “I’m Just Fed Up!” Chapter 25, classic – U2 crisis blows up with Russia/Khruschev; Eisenhower diffuses the risk, again
  40. “Ike was more comfortable as a soldier, yet his greatest victories were the wars he did not fight” (pg 404) #conclusion

REMOVING FXY SHORT FROM OUR BEST IDEAS LIST

Takeaway: A monetary policy vacuum in Japan coupled with a monetary policy reversal in the US spoils the risk/reward of staying short the yen here.

SUMMARY BULLETS:

 

  • The two most important things we think investors should glean from today’s BoJ monetary policy statement are:
    • A) there will be no preemptive easing measures to cushion the economic blow stemming from the sales tax increase; and
    • B) the likelihood of additional monetary stimulus post the tax hike is now much lower than what has been baked into market expectations.
  • On the margin, this is a fairly meaningful shift in the direction of marginally hawkish.
  • As such, we now feel comfortable booking the gain on our yen short. The FXY ETF is down -5.5% since we began risk managing it as part of our firm-wide Best Ideas list on FEB 27. Moreover, the USD has appreciated +25.6% vs. the JPY since we introduced the our bearish bias on the yen to the Street from a research perspective back in SEP ’12.
  • Additionally, the Nikkei 225 Index has appreciated +60.1% since we began explicitly calling for commensurate Japanese equity reflation back in NOV ’12. It’s also important to note that the Nikkei experienced a peak-to-trough decline of -20.4% in the three weeks following its MAY 22 YTD high on the very same thing we said would eventually trigger a broad-based fading of Japanese equity beta back in NOV ’12 (i.e. JGB volatility).
  • At the conclusion of this note, you’ll find a compendium of our research on this idea for your review.

 

Today’s BoJ monetary policy update provided us with a meaningful amount of clarity on what to expect out of the BoJ over the next 3-6M:

 

Nothing.

 

Specifically, the BoJ is opting to stand pat on its current policies for the foreseeable future, which have remained unchanged since they introduced their “shock and awe” package back in early-APR of this year.

 

REMOVING FXY SHORT FROM OUR BEST IDEAS LIST - BOJ Balance Sheet Projections APR  13

 

When asked whether or not the government’s ¥5T stimulus package will reduce the likelihood of the BoJ having to implement additional easing measures in the wake of the FY14 sales tax increase, Governor Haruhiko Kuroda responded, “I think so”. He stressed that the aforementioned stimulus will be a “significant plus” for the growth rate of the Japanese economy.

 

The two most important things we think investors should glean from this information are: A) there will be no preemptive easing measures to cushion the economic blow stemming from the sales tax increase; and B) the likelihood of additional monetary stimulus post the tax hike is now much lower than what has been baked into market expectations.

 

On the margin, this is a fairly meaningful shift in the direction of marginally hawkish.

 

What is increasingly looking like a 3-6M (and potentially 9M) monetary policy vacuum in Japan does not bode well for further appreciation in the USD/JPY cross over the intermediate term – especially in the context of the Federal Reserve’s recent decision not to taper.

 

As we highlighted in an intraday research note yesterday, the Fed’s latest easy-money policy may create a reflexive cycle of slower growth (via #DownDollar and reduced growth signals/expectations in the marketplace) and more easy money in the process. From here, tapering seems like as much of a slam dunk as the 0-4 New York Giants winning Super Bowl XLVII.

 

REMOVING FXY SHORT FROM OUR BEST IDEAS LIST - DXY

 

As such, we now feel comfortable booking the gain on our yen short. The FXY ETF is down -5.5% since we began risk managing it as part of our firm-wide Best Ideas list on FEB 27. Moreover, the USD has appreciated +25.6% vs. the JPY since we introduced the our bearish bias on the yen to the Street from a research perspective back in SEP ’12.

 

REMOVING FXY SHORT FROM OUR BEST IDEAS LIST - USDJPY

 

Additionally, the Nikkei 225 Index has appreciated +60.1% since we began explicitly calling for commensurate Japanese equity reflation back in NOV ’12. It’s also important to note that the Nikkei experienced a peak-to-trough decline of -20.4% in the three weeks following its MAY 22 YTD high on the very same thing we said would eventually trigger a broad-based fading of Japanese equity beta back in NOV ’12 (i.e. JGB volatility).

 

REMOVING FXY SHORT FROM OUR BEST IDEAS LIST - Nikkei 225

 

We hope you enjoyed this idea while it lasted and we’ll of course be back with more macro investment ideas in the near future. Please join us on our Q4 Macro Themes call next Friday at 11am for clues as to what those ideas may be.

 

Have a great weekend,

 

Darius Dale

Senior Analyst

 

REVIEWING THIS IDEA

9/27/12: IDEA ALERT: SHORTING THE YEN AS SINO-JAPANESE TENSIONS ESCALATE

Takeaway: We're shorting the Japanese yen here as risk heightens across the Japanese economy and Japanese capital markets.

 

10/26/12: IDEA ALERT: RE-SHORTING THE YEN, OUR FAVORITE CURRENCY SHORT ACROSS ASIA

Takeaway: We remain bearish on the JPY relative to the USD across our TRADE, TREND and TAIL durations.

 

11/9/12: THINKING THROUGH A POTENTIAL CURRENCY CRISIS IN JAPAN

Takeaway: We are once again short the yen and remain bearish on the JPY in light of Japan’s deteriorating cyclical and structural GIP outlooks.

 

11/15: HEDGEYE BEST IDEAS CALL

Replay Podcast

Slides

 

12/17/12: BEST IDEAS UPDATE: IS THE USD/JPY CROSS GOING TO ¥100?

Takeaway: We continue to see risk that Japan experiences a currency crisis (peak-to-trough decline > 20%) over the intermediate term.

 

12/26/12: JAPAN TO LOOSEN FISCAL POLICY AS WELL

Takeaway: Japan’s fiscal POLICY outlook augurs bearishly for the yen over the intermediate term.

 

1/9: CONTEXT AROUND RECENT POLICY DEVELOPMENTS IN JAPAN

Takeaway: Japanese policymakers continue to attack the yen, both rhetorically and with incremental POLICY maneuvers.

 

1/10: EARLY LOOK: JAPAN'S BATTLE OF DIU

Takeaway: And while we continue to view incremental monetary Policies To Inflate and expansionary fiscal POLICY as reflationary for Japanese equities and supportive of regional sentiment in the near term, we continue to flag material risk of Japanese currency and sovereign debt crises borne out of those same policies with respect to the long-term TAIL.

 

1/16: BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE

Takeaway: Just managing immediate-term risk within the construct of our intermediate-to-long-term theme.

 

1/22: #QUADRILL-YEN: NOT YET, AT LEAST

Takeaway: While the BOJ disappointed short-term market expectations, we still think the outlook for Japanese monetary POLICY is decidedly dovish.

 

2/4: #QUADRILL-YEN: IS THIS WHAT TARO ASO REALLY WANTS?

Takeaway: Japanese policymakers’ gross misinterpretation of economic history portends negatively for the ailing yen.

 

2/12: CURRENCY WAR UPDATE: THE G7 BOWS TO JAPAN

Takeaway: The path towards a lower yen is once again clear with the recent mollification of int’l criticism of Japan’s “beggar thy neighbor” policies.

 

2/14: STAY SHORT THE YEN

Takeaway: Japan’s bleak cyclical data remains the perfect handoff to the structural policy changes outlined in our bearish thesis on the yen.

 

2/25: #QUADRILL-YEN: WHO IS HARUHIKO KURODA?

Takeaway: A confirmation of Haruhiko Kuroda as the next BOJ governor is explicitly bearish for the Japanese yen over the intermediate-to-long term.

 

2/27: HEDGEYE BEST IDEAS CALL

Replay Podcast

Slides

 

3/11: BEST IDEAS UPDATE: LONG CHINA; SHORT YEN

Takeaway: On balance, this weekend’s data is unsupportive of our bullish bias on Chinese equities and very supportive of our bearish bias on the yen.

 

3/15: JAPAN'S "INVERSE VOLCKER MOMENT IS UPON US

Takeaway: The confirmation of H. Kuroda, H. Nakaso and K. Iwata as governor and deputy governors of the BOJ is structurally bearish for the yen.

 

4/1: BEST IDEAS UPDATED (LONG CHINA; SHORT YEN)

Takeaway: The latest econ data releases are very much in support of our theses. No change to either fundamental view for now.

 

4/4: "KURODA'S CASINO" IS NOW OPEN FOR BUSINESS

Takeaway: Stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”.

 

4/19: BEST IDEAS UPDATE: LONG CHINA (NOT); SHORT YEN

Takeaway: it is our view that investors would be remiss to allow the overt hypocrisy of the US government scare them out of the short yen/long Nikkei trade, which we still think has legs with respect to the intermediate term.

 

4/30: IS GOOD DATA BAD FOR THE YEN?

Takeaway: If improving economic data helps get the LDP elected to an Upper House majority come July, it’s ultimately structurally bearish for the yen.

 

5/10: TRADING ABENOMICS FROM HERE

Takeaway: Post the Diet Upper House elections in JUL, the core driver of the USD/JPY cross will increasingly become the state of the US economy.

 

5/15: IS JAPAN SIGNALING AN END TO THE “END OF THE WORLD” TRADE?

Takeaway: If the crashing yen and tumbling JGB market are signaling anything to us, it’s that the end-of-the-world trade appears to be ending.

 

5/22: JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?”

Takeaway: Our fundamental research & quantitative risk management signals are suggesting that global duration risk is rising at an accelerating rate.

 

6/5: SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE?

Takeaway: If you’re bearish on US growth, get long the yen and short the Nikkei with impunity. Do the opposite if you’re constructive on US growth.

 

6/7: YEN CAPITULATION?

Takeaway: If you weren’t long the dollar-yen rate prior to yesterday’s bloodbath, you’re getting an excellent buying opportunity here.

 

6/13: JAPAN STRATEGY UPDATE: IS THE ABENOMICS TRADE OVER?

Takeaway: Trading Abenomics from here depends primarily on your specific investment duration.

 

6/19: REMEMBER, WE’RE IN THE VERY EARLY INNINGS OF ABENOMICS

Takeaway: We reiterate our long-term research conclusions for Japanese policy and its expected impact(s) upon various financial markets.

 

7/22: RISK MANAGING “ABENOMICS” AND “XI-LI-NOMICS”

Takeaway: We remain bearish on the Japanese yen and Chinese financials stocks with respect to the intermediate-term TREND and long-term TAIL.

 

7/29: LOWER HIGHS: IS IT TIME TO BOOK GAINS IN THE ABENOMICS TRADE?

Takeaway: The Abenomics trade is now squarely underwater with an increasingly convoluted immediate-to-intermediate-term outlook.

 

8/12: EARLY LOOK: Missing Something

Takeaway: In spite of what we’ve outlined as arguably the most credible and well-articulated bull case for both the USD/JPY cross and Japanese equities, both are broken from an immediate-term TRADE perspective and flirting with breakdowns on our intermediate-term TREND duration as well

 

8/12: JAPAN’S WEAK ECONOMY + CONSUMPTION TAX HIKE = BOJ EASING… OR ELSE

Takeaway: The case for incremental monetary easing amid fiscal tightening (via the consumption tax hike) grows louder in Japan.

 

10/2: GET TIGHT AND TRADE THE RANGES IN JAPAN

Takeaway: Investors would do well to reduce their gross exposure and/or tighten their net exposure to the Abenomics Trade for at least the next 2-3M. 


Who's Uglier? J.C. Penney or RadioShack?

Takeaway: J.C. Penney may be bad. But RadioShack is worse.

Here's an interesting chart: Short interest as a percentage of float for the two most hated retailers -- RadioShack and J.C. Penney.

 

Who's Uglier? J.C. Penney or RadioShack? - mcg1

 

Yes - we know that JCP is a bad business. We get it. But guess what? RadioShack is even worse. But as the chart above shows, right now the equity market apparently does not agree.

 

While definitely not for the faint of heart, we're comfortable taking the other side of the current JCP sentiment. Its main problems are fixable. We think it has $1.30 in EPS power.

 

Editor's note: The brief excerpt above is from Hedgeye Retail Sector Head Brian McGough. To learn how you can subscribe to McGough's "Hedgeye Retail Pro" research click here.


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POTBELLY'S IPO: SHOULD YOU BITE?

Takeaway: While we believe PBPB will be the beneficiary of a recently hot IPO market, we suspect the stock will be on a short leash.

Editor's note: This is a brief excerpt from a report released yesterday by Hedgeye Restaurants Sector Head Howard Penney. For more information about how you can subscribe to Hedgeye research click here.

 

POTBELLY'S IPO: SHOULD YOU BITE? - potb

 

Potbelly is on deck for an IPO tomorrow.  The company plans to sell 7.5 million shares and recently raised the expected price of its IPO to $12 to $13 per share. 

 

In this note, we offer up our take on the latest IPO in the restaurant space.  It is important to note, however, that we did not have the opportunity to meet with management nor did we attend any of the company’s road show presentations.

 

With that said, we believe Potbelly will be the beneficiary of a recently hot market for growth related restaurant stocks.  The offering size is rather small at slightly over $95 million and demand should be high.  A number of veteran restaurant analysts will be comfortable with the CEO, Alwin Lewis, who is a familiar name in the industry.  Lewis spent 13 years at YUM, including a stint as COO, before leaving in 2004 to become the CEO of Sears. 

 

Potbelly should do fine initially, but it could be on a short leash.  It is a premium player in a very crowded, highly competitive sandwich (sub) market.  Regarding the latter point, all of the company’s direct competitors, including, but not limited to, Subway, Jimmy John’s, Firehouse Subs and Jersey Mike’s, are private companies, which makes direct comparisons difficult to come by. 

 

Its important to note that IPOs, particularly those from companies with strong growth stories, have fared extremely well lately.  NDLS, for example, gained +104% on its first day of trading.  But, investors expecting another Noodles-like performance should heed caution, as we believe this was more of an aberration than the norm.  In fact, despite their similarities as fast casual operators, the two have stark contrasts.  Potbelly competes in a crowded segment of the industry as opposed to Noodles, which brought more of an innovative, fresh concept to the table.  In addition to competing in a less-crowded Asian segment, we would argue that NDLS is also perceived to be healthier than PBPB.

 

All told, Potbelly does have compelling unit economics and plenty of room to grow.  The company currently has a domestic base of 286 locations in 18 states and the District of Columbia.  However, the units are incredibly concentrated, as over 50% of its units are located in Illinois, Texas and the District of Columbia.  Furthermore, the company has little presence outside the Midwest and Northeast.  Recent expansion efforts have been strong, as management opened 21 and 31 company-operated shops in 2011 and 2012, respectively, and plan to open an additional 32-35 company-operated shops in 2013.  At this time, the company does very little franchising.

 

The unit growth story will have to save the day, as the trajectory of same-store sales is below average for a chain this size.  The company’s same-store sales grew +1.5% in 1H13, but traffic declined by -1.1%.  It appears the segment is having a difficult time amid increased competition from peers and convenience stores.  Subway recently saw sales decline -2% this past summer – its first decline in recent memory.

 

POTBELLY'S IPO: SHOULD YOU BITE? - penn1

 


CAG - Removing From Our Best Ideas List

Today we’re removing LONG ConAgra (CAG) from our Best Ideas List, with the stock working against us for a single digit loss since we added it on 2/11/13.

 

Here’s our updated thinking:

  • We continue to like the synergies with the Ralcorp acquisition but believe the company may have a couple more quarters of growing pains through the re-org
  •  Last quarter’s results (Q1 2014) disappointed (EPS down 16% to $0.37) – we’ll look to next quarter to better gauge a turn-around
  • The loss of the Lamb Weston potato business in the Commercial Food segment was a significant hit to the quarter, and should weigh on Q2 results, as Consumer Foods was hit by competitor promotional activity, weakness in frozen, and the timing of slotting and promotion activity around the launch of new products
  • We like the price point and portfolio advantage of Ralcorp’s cereals, especially for a mid to lower end income earner still impacted by the macro environment; however we expect cereal consumption trends to weaken alongside increased yogurt consumption and more QSR breakfast options
  • As we look ahead, the company reaffirmed its FY EPS guidance of $2.34-2.38, has begun additional SG&A cost management initiatives, has revised merchandizing to push volumes, and the Lamb Weston loss looks to mitigate into its fiscal full year
  • We’ll revisit the name in the coming quarters, and cut the loss today

Matthew Hedrick

Senior Analyst



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