Fragile Markets

“I’d rather be dumb and antifragile than extremely smart and fragile”

-Nassim Taleb


The hyperbole of that quote is that Taleb thinks he’s extremely smart. I’m definitely dumber than he is. So I guess he’d agree that I should never hire him to do what I can do better myself – manage real-time market risk. It’s a great job for a dumb hockey player.


Back to the Global Macro Grind


The reason why I thought of Taleb this morning is that I was thinking about volatility. To his credit, he was one of the first to write about risk managing volatility from a market practitioner’s perspective. That doesn’t mean I agree with everything he wrote.


In terms of how we measure market entropy in real-time (multi-factor, multi-duration), yesterday was a one of the few critically bearish signal days for the US stock market.


To boil that down to 3 basic factors in our model (Price, Volume, and Volatility):


1. PRICE – SP500 A) failed to make a higher-high versus the 1808 all-time closing high and B) broke 1785 TRADE support

2. VOLUME – was +13% versus my immediate-term TRADE duration average (1st mini-volume spike on a down price move)

3. VOLATILITY – front-month VIX broke out above @Hedgeye intermediate-term TREND resistance of 14.91


This has never happened before (because the SP500 has never been at this all-time closing high before). But historically, countries, currencies, companies (anything with a ticker) do this frequently. And when they do, I respect Mr. Macro Market’s signal.


What is a bearish immediate-term signal @Hedgeye?


1. PRICE = down

2. VOLUME = up





1. PRICE = up

2. VOLUME = up

3. VOLATILITY = down


… is a bullish immediate-term signal @Hedgeye (especially when it’s happening within a bullish intermediate-term TREND).


Sure, I have been buying-the-damn-bubble #BTDB pretty much all year – but while I covered a couple of oversold shorts like CAT yesterday, I didn’t buyem on the long side. An intermediate-term TREND breakout in volatility is the #1 reason for that.


Are there tangible risk factors that could perpetuate an intermediate-term TREND move in US Equity Volatility back towards 20 on the VIX? Big time. Here are some behavioral ones that I discussed with clients in NYC yesterday:


1. VIX has been making a series of higher-lows since AUG as the Fed started to confuse with Taper-on/Taper-off in SEP

2. The average “net long” positioning of the hedge fund community is testing its all-time high zone of +60% again

3. The II Bull/Bear Spread just blew out to fresh 5 year highs of +4390 basis points to the BULL side


That last point is one of the more fascinating migrations I have seen in my career. To put a 44% spread between bulls and bears in context, that II Bull/Bear Spread was only +1710 basis points wide in the 1st week of September 2013.


Early September – that’s when people may have claimed to be “bullish” but they certainly weren’t positioned Bullish Enough. All this market needed to scare the hell out of the pretend bulls was a VIX rip to 17 in late August.


If the VIX goes to 17-18 tomorrow, people who are buying-the-damn-bubble #BTDB will get killed. So, if you have been in the habit of doing the buy on red, sell on green #GetActive thing, you want to be more careful buying now than you were last week.


How about fundamental research factors that could turn bearish in the next 1-3 months?


1. US Dollar being devalued and debauched (no-taper) towards its YTD lows

2. US GDP #GrowthSlowing from its cycle high of +3.6%

3. Down Dollar = Up Yen = Down Nikkei (another thing people didn’t enjoy in late AUG)


Rather than making up my own academic sounding word like antifragile, I’ll call managing real-time market risk this way what it is – being mentally flexible. If you can Embrace Uncertainty every market day, you might feel less dumb every once in a while too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.76-2.91%


VIX 14.31-15.67

USD 79.67-80.38

Pound 1.62-1.64

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fragile Markets - Chart of the Day


Fragile Markets - Virtual Portfolio

December 12, 2013

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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.




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


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