• run with the bulls

    get your first month

    of hedgeye free


December 12, 2013

December 12, 2013 - Slide1



December 12, 2013 - Slide2

December 12, 2013 - Slide3

December 12, 2013 - Slide4

December 12, 2013 - Slide5

December 12, 2013 - Slide6

December 12, 2013 - Slide7

December 12, 2013 - Slide8

December 12, 2013 - Slide9

December 12, 2013 - Slide10



December 12, 2013 - Slide11
December 12, 2013 - Slide12


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

As we look at today's setup for the S&P 500, the range is 36 points or 0.18% downside to 1779 and 1.84% upside to 1815.                                                   










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.53 from 2.55
  • VIX  closed at 15.42 1 day percent change of 10.86%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Retail Sales Advance, Nov., est. 0.6% (prior 0.4%)
  • 8:30am: Init. Jobless Claims, Dec. 7, est. 320k (pr 298k)
  • 8:30am: Import Price Index m/m, Nov., est. -0.7% (pr -0.7%)
  • 9:45am: Bloomberg Consumer Comfort, Dec. 8 (prior -31.3)
  • 10am: Business Inventories, Oct., est. 0.3% (prior 0.6%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change


    • 10am: Senate Finance Cmte votes on freezing Medicare physician-reimbursement rates, repealing growth-rate mechanism originally set up to control costs
    • 10am: House Financial Services Cmte holds hearing on Fed’s mandates
    • 10:30am: Senate Commerce panel hearing on weather forecasting
    • 11am: Sen. Kirsten Gillibrand, D-N.Y., and Rep. Rosa DeLauro, D-Conn., to introduce Family and Medical Insurance Leave Act
    • 1:30pm: House Oversight and Government Reform Cmte hearing on pharmaceutical development
    • 2:30pm: FCC meets, will hear updates on wireless device unlocking, rules on passengers mobile-phone use on airplanes, improving 911 networks
    • 5pm: ITC to announce next steps in Nokia’s patent-infringement case against HTC


  • GM, Peugeot cut synergies forecast to $1.2b by 2018; saw $2b
  • JPMorgan said near $2b settlement from Madoff case: NYTimes
  • Facebook to join S&P 500 next week with ADS, Mohawk
  • Samsung said to near antitrust settlement with EU regulators
  • Apple says no link between Pegatron deaths, work conditions
  • Korea court rules Apple didn’t violate Samsung patents
  • Yahoo apologizes for prolonged e-mail outage
  • Hellman & Friedman, JMI may sell Kronos HR software: Reuters
  • Air Canada picks Boeing 737 MAX in $6.5b narrow-body order
  • Fortis’s $2.5b deal for UNS continues co.’s U.S. expansion
  • Loehmann’s said to fire staff, cancel orders: NYPost
  • Japan passes U.S. as top spender on mobile apps: App Annie
  • Computer Sciences Corp. receives Wells notice from SEC
  • Harbinger says Philip Falcone to sell majority stake
  • Budget deal moves to passage by limiting cope to easing cuts
  • Farm bill delay risks milk price jump already at 4-yr high
  • NTSB probe of Asiana crash finds pilot error on throttle


    • Adobe Systems (ADBE) 4:05pm, $0.32
    • BRP (DOO CN) 6am, C$0.42
    • Ciena (CIEN) 7am, $0.24
    • Empire (EMP/A CN) 6:59am, C$1.09
    • Hovnanian Enterprises (HOV) 9:15am, $0.17
    • Lululemon Athletica (LULU) 7:15am, $0.41 - Preview
    • Quiksilver (ZQK) 4:01pm, $0.04
    • Restoration Hardware (RH) 4:02pm, $0.28


  • China Seen by FCStone to Hermes Canceling U.S. Soybean Purchases
  • Record U.S. Bacon Prices Poised to Drop on Fat Pigs: Commodities
  • U.S. Farmers Seen Switching From Corn on Price: Morgan Stanley
  • Gold Declines on Fed Stimulus Outlook Before U.S. Retail Sales
  • Nickel Reaches a Five-Week High on Indonesia Export-Ban Concern
  • WTI Swings After Biggest Drop in Two Weeks on U.S. Fuel Supplies
  • Indonesian Ore Ban Seen by Macquarie Hitting Nickel With a Delay
  • Cocoa Rebounds in London Before Futures Delivery; Robusta Gains
  • Chavez’s 6-Cent-a-Gallon Gasoline Binge Threatened: Andes Credit
  • Rebar Falls From 11-Week High on Slower China Investment Growth
  • Where Will All the Natural Gas Go? Expected Glut May Sap Price
  • Cocoa Seen Falling on 40-Day Moving Average: Technical Analysis
  • Corn Retreats Amid Concerns China May Reject More U.S. Cargoes


























The Hedgeye Macro Team















Big question for management.



Following up on our Hilton IPO presentation and call yesterday, we pose another question for management.  How low would you go?


On July 3rd Blackstone announced that it would acquire Hilton Hotels for $26BN, writing an equity check for $6BN to seal the deal.  Despite paying over 14x 2007E EBITDA for Hilton at the top of the market, Blackstone will still make a pretty penny on the IPO which was priced at $20. 


While the IPO will provide Blackstone with a vehicle through which it can slowly sell its stock, BX will still be the majority shareholder of Hilton for several years to come.  Post IPO, Blackstone and other insiders will own close to 80% of the stock.  Blackstone’s lock-up expires in 1/3rd chunks over 6, 12 and 18 months, after which they will be subject to Rule 144A.  While a large insider holder can sometimes be an overhang on the stock, we believe it also has a major benefit.  BX is incentivized to keep something in the kitty to set the stage of several beat and raise quarters and potentially some assets sales.


At some point, Blackstone needs to return the $6BN+ of equity plus a preferred return they used to buy Hilton for their investors.  Only after investors get their preferred return does BX’s promote become in the money.  The questions HLT minority shareholders need to ask is this: If BX needs to return money to investors, at what price would they be willing to dump their shares in Hilton? 


To answer this question we make several assumptions:

  • BX’s total equity investment in HLT
    • $6BN was in the initial investment but during the 2010 restructuring, another ~$900MM was used to retire debt at a deep discount.  We are unsure if that additional cash came from Hilton’s balance sheet or from an additional infusion of equity from the sponsor.
      • Preferred return that BX investors are entitled to - we assume 8-9%

Assuming a $6.9BN of total equity and a 9% threshold, our analysis suggests that once BX’s lock up expires 18 months post IPO, its promote would be in the money as long as HLT’s stock price is above $14.60.  The question is would Blackstone sell their stake above $15 bucks or do they have the ability to hold on to share longer to get a better price. Alternatively, can they spin shares out to their investors as a dividend?  This is a very important question for management.



get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.


Takeaway: “Good morning, Mr. Otis. Your mission, should you choose to accept it, involves the recovery of lost customers from your core business"

This note was originally published December 11, 2013 at 08:21 in Restaurants

“Turning around a failing restaurant is a daunting challenge under the best of circumstances.”

- Robert Irvine, Restaurant Impossible on the Food Network


To steal the structure of the opening line from Mission Impossible: “Good morning, Mr. Otis.  Your mission, should you choose to accept it, involves the recovery of lost customers from your core business Olive Garden.”




Needless to say, fixing Olive Garden is going to be a daunting challenge.  Will the introduction of a burger and fries to the menu make the challenge more or less daunting?  In our opinion, it may very well be the final straw that breaks the camel’s back and drives shareholders to the tipping point.


In March 2013, our call was that an activist investor would get involved to make the necessary changes at Darden; many of which we’ve been chronicling.  Since Barington filed on the company, nearly every research report written about Darden has focused on a breakup/real estate analysis and valuation.


None of these notes, however, focus on fixing the core business – Olive Garden.  We believe the biggest upside in the stock today would come from the successful turnaround of Darden’s most important franchise in the portfolio.  Yet, management has not even begun to outline a cohesive strategy to fix Olive Garden.


DRI will report 2QFY14 results on December 20th.  This call will be the most important call of CEO Clarence Otis’ career.  His choice of direction will determine if a dramatic shift in strategy is pursued at Darden to provide the necessary focus in order to achieve significant increases in shareholder value, or if the company will continue with the status quo.  As we see it, the company could push forward in one of three different directions:

  1. Adopt the Hedgeye or Barington model of breaking up the company. 
    • This strategy is intended to significantly increase shareholder value.
    • It would not be unlike what McDonald’s successfully accomplished over a decade ago by focusing on its flagship brand to build enormous value, and spinning off Chipotle, Pret a Manager and Boston Market, each of which also achieved significant increases in value due to a newfound focus.
    • Brinker has also recently achieved strong success with Chili’s in the casual dining sector by focusing on this flagship brand, and spinning off several of its smaller brands.
  2. Throw shareholders a bone by making another small cut to its growth capital expenditures.
  3. Do nothing and push forward with the current flawed strategy.

On some level, we believe the case for significant change at Darden could be strengthened when the company reports 2QFY14 results.  An earnings miss is very likely.  The street currently expects EPS to come in around $0.22, but we are modeling somewhere between $0.12-$0.15.  Despite the string of recent disappointments, we could see management digging their heels in and sticking with the “change nothing” philosophy.




Their overall strategy is uncertain.  What appears certain, however, is that we may not hear a comprehensive nor compelling plan to fix Olive Garden on this earnings call.


Olive Garden is a brand with tremendous future value if it were in the right hands.  Olive Garden is no longer the “Italian” brand that made it so successful.  If you recall, the brand was on the brink of extinction back in 1994, before it experienced an Italian Renaissance.  This revival led to 57 consecutive quarters of same-restaurant sales increases and consistent margin improvement, leading to accretive value creation and substantial incremental value for all Darden shareholders.


Unfortunately, the brand has gone so inexplicably and destructively off course since this "industry leading performance."  Once again, Olive  Garden has moved so far away from its core vision of “Genuine Italian Dining,” to the point where it now feels more like an “Italian Applebee’s.”  And this was before Olive Garden introduced a burger and fries to the menu!


Olive Garden is out of touch with the consumer base in aggregate, but has particularly lost its relevance as it pertains to Millennials.  Where is the vision for this brand?  Is it reasonable to believe that Millennials want 1990’s style Americanized food that is fried, overly stuffed with cheeses, covered in cream sauce and served with overcooked pasta?    


And now on the heels of a “Buy One, Get One Free to Take Home” promotional offer, the recent roll-out of hamburgers will most likely turn out to be an act of desperation, and ultimately yet another mistake in a series of ill-advised decisions.  The idea that this will lead to incremental customers is nothing short of facile, a futile hope that a burger and fries will recoup the lost authenticity of the concept’s roots, and a hope that the shine of a hamburger will blind the customer to the fact that there is a lack of progressive thinking anywhere in the company.  There is an overall sense of fear and confusion that has led to a significant decline in consumer acceptance.


Olive Garden needs a talented team that can bring innovation back to the company.  It needs “fresh eyes” that are forward looking to create positive change.  It needs improved, more authentically Italian food.  It needs leadership that will ensure consistency of execution to deliver the required financial results on an on-going basis.   


Olive Garden is still a large and well-known brand.  It once had a crystal clear and compelling vision that was executed flawlessly to achieve the largest turnaround in casual dining history.  This performance can be realized again with the right team in charge.  Shareholders deserve better.


Restaurant impossible will be possible with the right vision, the right leadership, and a management team that can look ahead of the legacy issues plaguing the company!


Howard Penney

Hedgeye Managing Director/Restaurants Sector Head


Like what you see here? Be a part of the revolution. Click here to learn how you can subscribe to Hedgeye research.

Inflation: It's Back!

Takeaway: Monetary policy has consequences.

Inflation is essentially antidemocratic

-Ludwig von Mises


It's back!


After bottoming in mid-November, one proxy for global inflation (CRB Commodities Index) has put in a big +3% move off the year-to-date lows (the CRB Index was down -8% year-to-date on the lows, fueling real-consumption growth).


Inflation: It's Back! - inflation 500


Almost every major economic region (other than Europe because they have #StrongCurrency) will see inflation pickup sequentially in Q1 verses Q4.


Yes – monetary policy has consequences. More to be revealed.


Inflation: It's Back! - Venezuela


Join the Hedgeye Revolution! From CEO Keith McCullough's "Morning Newsletter" to our all-star analysts' "Investing Ideas," we've got you covered. Click here to learn more.

Budget Deal: Pigs Fly In Washington?

Takeaway: There is some (potentially) positive and negative news for the ailing U.S. Dollar as flying pigs descend upon Washington.

This note was originally published December 11, 2013 at 11:30 in Macro

Budget Deal: Pigs Fly In Washington? - pig


For the 99% of Americans who fail to find the vagaries of federal budget accounting and the interminable tragicomedy that is bipartisan budget negotiations scintillating, the following link provides a summary review of sequestration and the key provisions/budget impacts  >>    SEQUESTRATION 2014: WHAT'S THE IMPACT AGAIN?


Below we provide a quick update on how the emergent accord between Representative Ryan and Senator Murray impacts the numbers.


Late yesterday we got the latest (prospective) chapter in the budget debate and ongoing evolution of the Budget Control Act – the 2011 legislation which defined discretionary spending levels over the balance of the decade.   The crux of the budget deal – ‘sequester relief’ via higher spending - is highlighted in the following table. 


Summarily, the agreement proposes to raise spending levels by a combined $63B over FY2014 and FY2015.  It would also provide for a net deficit reduction of $22.5B over ten years, stemming primarily from higher user fees (airlines), increased pension and benefit expenses for federal workers, and a 2Y extension of Medicare payment cuts.  


Budget Deal: Pigs Fly In Washington? - drakepiece1

Dollar Bearish (kinda), Consumption Bullish (maybe):

In isolation, a budget agreement calling for higher spending is dollar bearish on the margin.  However, to the extent that increased fiscal policy clarity pulls forward the tapering timeline, a multi-year accord could be viewed as a positive for the currency. 


On balance, and if the Fed is, indeed, data dependent, the investment conclusion is somewhat equivocal.  We’ll continue to let the market act as arbiter, using price as our signal.  Investors have been net sellers of dollars for 5 consecutive weeks and, as it stands currently, the dollar remains broken on both TREND and TAIL durations with the next level of TRADE support at $79.67 on the DXY.   


In the intermediate term, higher federal spending offers some potential upside to consumption growth.  As we’ve highlighted (HERE), government sourced income has been a discrete drag on aggregate personal and disposable income growth as sequestration/furloughs and ongoing federal employment loss have driven negative income growth for ~17% of the national workforce. 


If the decline in federal employment bases and government salary and wage growth goes positive (against easy compares) in 2014, consumption growth could see some moderate upside. 


Budget Deal: Pigs Fly In Washington? - Government Drag


Christian B. Drake



Want to join the Hedgeye Revolution? Click here to subscribe today.

Budget Deal: Pigs Fly In Washington? - cartoon


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.