To summarize our current thesis on CAKE, we believe the company’s three year run of improving margins is coming to an end.  Specifically, we believe the decline in food costs, labor costs, and other costs have run their course.


To what extent has the decline in these expense lines since fiscal 2010 contributed to the recent traffic declines?  That question is difficult to answer and even more difficult to pin on one factor.  But, we do know that, collectively, all three can have an impact.  We point to DRI and PNRA as other current examples of companies needing to reverse course.


The declining traffic trend suggests that we could see an increase in food, labor and other costs as the company reinvests in store operations.  Below are a series of CAKE operational observations from a consultant within the Hedgeye restaurant industry network.


From these observations, there is a lot the company can do to improve traffic, but it will take some time and incremental investment which could pressure operating margins over the near-term.




  • Food menu hasn’t really changed in 10 years so the restaurants are unlike others who adjust seasonally and can offset certain food cost increases with new less costly items.
  • Also no limited time only items that can be used to move people to less costly food items.
  • Beverage is not promoted and the drink menu is too confusing.


  • Labor is high because meals and drinks require too many steps to complete.
  • No call ahead seating (different than reservations) allowed – costing them potential customers.
  • Trouble seating large parties because of too many booths.


  • No marketing at all!
  • No focus groups.
  • No loyalty programs.
  • They don’t market their “to go” menu.
  • They are not engaged at all at the local level.


  • Mall locations mean they are very dependent on mall traffic.


  • Overton is a tyrant who doesn’t listen to anyone and makes all the decisions.
  • Potential health concerns and close to 70.
  • Struggles to travel.

The last point about management is certainly not lost on us.  David Overton, Chairman, President and CEO, controls and owns 6.6% of the company.  As a result, he could decide to sell the company at any given time.  But with the stock currently trading at 9.0x EV/EBITDA, we view that possibility as highly unlikely.





Howard Penney

Managing Director



TODAY’S S&P 500 SET-UP – January 21, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 0.75% downside to 1825 and 0.83% upside to 1854.                                             










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.47 from 2.45
  • VIX closed at 12.44 1 day percent change of -0.72%

MACRO DATA POINTS (Bloomberg Estimates):

  • No economic data expected
  • Bank of Japan sets 2014 monetary base target
  • 11am: Fed to purchase $1b-$1.5b in 2036-2043 sector
  • 11:30am: U.S. to sell $28b 3M bills, $25b 6M bills


    • 9:30am: IMF updates World Economic Outlook
    • 10am: CFTC advisory panel holds public mtg on swap data reporting, automated trading environments, SEFs
    • 1:30pm: NASA announces new data on global temperatures


  • Lenovo said to be in talks to buy IBM server business
  • Snow storm threatens commuter disruption on East Coast
  • Washington D.C. federal offices closed today on weather
  • AB InBev to pay $5.8b for Korea’s Oriental Brewery
  • JPMorgan said to quit Tianhe Chemicals IPO amid hiring probe
  • Expro sale said to draw Schlumberger, Halliburton, GE interest
  • China money rate slides most in 4 wks as PBOC injects cash
  • China’s economy grew 7.7% in 4Q, est. 7.6%
  • China workforce slide takes growth engine away from Xi
  • India’s Jet Air may buy 50 Boeing 737s for $2.5b: BTVI
  • Wells Fargo bars employees from P2P lending: FT
  • EU wants lawsuit safeguard in U.S. trade deal: Sueddeutsche
  • Comet-chasing Rosetta sends first signal after 31-month sleep
  • Shell exits Wheatstone LNG after $1.1b sale to Kuwait
  • GE to buy Cameron’s reciprocating compression unit for $550m
  • Talisman gains after GDF takeover approach rebuffed: Reuters
  • Deutsche Bank sees challenging 2014 after surprise 4Q loss
  • German ZEW investor confidence unexpectedly fell in Jan.
  • Bernanke may join Brookings Institution after leaving Fed: WSJ
  • Investors most upbeat in 5 yrs with record 59% bullish in poll
  • Cnooc sets 2014 output growth estimate lower than 5-yr goal
  • World Economic Forum gets under way in Davos, Switzerland


    • Baker Hughes (BHI) 6am, $0.61 - Preview
    • Delta Air Lines (DAL) 7:30am, $0.63 - Preview
    • Forest Laboratories (FRX) 7am, $0.03
    • Halliburton (HAL) 7am, $0.89 - Preview
    • Ironwood Pharmaceuticals (IRWD) 7:05am, $(0.50)
    • Johnson & Johnson (JNJ) 7:45am, $1.20 - Preview
    • Regions Financial (RF) 7am, $0.20
    • Rockwell Collins (COL) 7:21am, $0.94 - Preview
    • Synovus Financial (SNV) 7am, $0.05
    • TD Ameritrade (AMTD) 7:30am, $0.33
    • Travelers (TRV) 6:57am, $2.16
    • Verizon Communications (VZ) 7:30am, $0.65 - Preview


    • Advanced Micro Devices (AMD) 4:15pm, $0.06
    • CA (CA) 4:05pm, $0.71
    • Cree (CREE) 4:01pm, $0.39
    • FNB (FNB) 4:15pm, $0.21
    • Fulton Financial (FULT) 4:30pm, $0.20
    • Interactive Brokers (IBKR) 4:01pm, $0.25
    • Intl Business Machines (IBM) 4:05pm, $6 - Preview
    • Pinnacle Financial Partners (PNFP) 5:18pm, $0.43
    • Texas Instruments (TXN) 4:30pm, $0.46
    • Wintrust Financial (WTFC) 4:01pm, $0.70
    • Woodward (WWD) 4pm, $0.40
    • Xilinx (XLNX) 4:20pm, $0.54


  • Century-Old London Gold Fix Said to Face Overhaul Amid Scrutiny
  • Brent Crude Rises for First Time in Four Days on Stronger Demand
  • Gold Drops From Six-Week High as Investors Weigh Demand Outlook
  • Africa Corn Buyers Miss Out on Cheaper World Grain: Commodities
  • Copper Falls a Second Day as Chinese Imports Cloud Demand View
  • China Rebar Drops to 16-Month Low as Iron Ore, Coke Prices Slump
  • Soybeans and Corn Drop as Rain in Argentina Seen Aiding Harvest
  • Chocolate Has New Latin America King as Ecuador Outstrips Brazil
  • China Billionaire’s Steel Bond Fall Flags Industry Smog Woes
  • Rubber Declines to Five-Month Low as Chinese Demand May Slow
  • Snow Closes Washington Offices as East Coast Flights Disrupted
  • Gold Seen Averaging $1,219 in LBMA Survey After 2013’s Decline
  • Greenland Explorers Abstain From Drilling on High Risks and Cost
  • Nickel Seen Extending Rally by Goldman on Indonesia Exports Ban


























The Hedgeye Macro Team














Don't Lie To Me

This note was originally published at 8am on January 07, 2014 for Hedgeye subscribers.

“I just lied to someone else, but you can trust me because I’d never lie to you.”

-John Hamm


That was an excellent quote John Hamm used to discuss “implied distrust” in a solid chapter in Unusually Excellent titled “Being Trustworthy.” We are who we are – and, as a new Wall Street evolves, our goal is to be a 2.0 research source you can trust.


Be honest… Be vulnerable… Be Fair… “ (Unusually Excellent, pg 36) – these are some of the simplest rules of relationship building, yet some of the most difficult to rinse and repeat each and every market day.


Trust isn’t allocated in this profession. It’s earned, daily.


Back to the Global Macro Grind


With a polar vortex rolling through the USA and Florida State coming back from 21-10 at the half to win the championship (with 13 seconds left) last night, does anyone really care that the US stock market closed down 25 basis points yesterday?


Is this going to be another 1-2% correction in US stocks, or the beginning of yet another #EOW (end of the world)? I need to make some real-time asset allocation decisions around the answer to that question. So I’m not going to lie to you – I bought-the-damn-bubble #BTDB on red again yesterday.


I’ll go through the why on that in a minute, but first, here’s how I’ve re-positioned in the 1st three days of 2014:


1. Dropped CASH in the Hedgeye Asset Allocation Model from 50% to 30%

2. Raised my allocation to International FX from 27% to 30%

3. Raised my allocation to International Equities from 10% to 18%

4. Raised my allocation to US Equities from 10% to 16%

5. Raised my allocation to Commodities from 3% to 6%

6. Moved to 10 LONGS, 5 SHORTS in #RealTimeAlerts (vs 5 LONGS, 5 SHORTS on January 1)


Nope. I’m not going all wild and crazy, investing all the cash at the all-time highs in US Equities. That’s not how I roll. I’m a gradualist, of sorts. I like to work my way into a situation that appears to be developing. If it stops developing, I stop.


To be clear, buying into some spotty US #GrowthSlowing data doesn’t exactly fire me up. But buying at the low end of my SP500 risk range does. And I’ll do more of that, every time the process tells me to.


Unlike the ISM Manufacturing report for DEC (which was solid and did not slow), yesterday’s ISM Services (non-manufacturing) print was what it was, slowing on the margin versus its 2013 peak. Let’s break that down a little further:


1. ISM Services headline slowed to 53.0 in DEC vs 53.9 NOV (I know, the horror of it all)

2. New Orders in the ISM Services report slowed faster to 49.4 DEC vs 56.4 NOV (not good)

3. Business Employment in the report ACCELERATED to 55.8 DEC vs 52.5 NOV (good)


So… with the stock market red on the headline slowing (marginally – but that’s the point about what happens on the margin, it matters) I didn’t just start buying blindly. Instead, this is how I thought about it:


1. LEVELS: SP500 tested the low end of my immediate-term TRADE range (1822-1848) – that’s a buy/cover signal

2. TIMING: the next calendar catalyst is the US Employment Report on Friday

3. DATA: Friday’s employment data could easily rhyme with strength in the ISM (services and manufacturing) reports


Since I don’t just do US stocks, I also thought through how this could play out across multiple-factors:


1. BONDS: US 10yr Treasury Yield weakened on the ISM Services headline but held all lines of @Hedgeye support

2. GOLD: strengthened on weaker data + rates falling; that’s how Gold is trading now (but failed @Hedgeye resistance)

3. DIVERGENCES: Financials (XLF) made new highs (+0.23% for JAN) vs Utilities (XLU) down -1.69% JAN


That last point is a sneaky one. Stocks that look like bonds (slow-growth, high dividend yield) continue to act like dog breath (the smell of that doesn’t lie either!).


And while our model will score Friday’s employment for what it is (a lagging economic indicator), if it’s bullish I think it will be bearish for Gold, Bonds, Utilities, etc. relative to both growth and inflation expectations.


If I didn’t think that, I wouldn’t be re-positioning this way in real-time. That’s the beauty of the #timestamp. Whether it ultimately proves to be right or wrong, my positioning doesn’t lie to me.


UST 10yr Yield 2.96-3.05%

SPX 1822-1848

VIX 11.84-14.56

USD 80.54-81.12

Gold 1185-1243

*all 12 macro ranges are in our Daily Trading Ranges product


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Don't Lie To Me - Chart of the Day


Don't Lie To Me - Virtual Portfolio


Following another week in Macau, we are leaving our full month January projection at +19-25%



Average daily table revenues (ADTR) increased 29% YoY bringing the month to date ADTR to up 15%.  We continue to expect full month ADTR to grow 19-25% over January 2013.


Market shares are very volatile this month.  Wynn Macau is a full 200bps below recent trend due to a low hold percentage.  MGM and Galaxy are the big winners thus far in January.  However, assuming normal hold, we continue to expect WYNN and LVS to be the market share gainers over the coming months.






Thank you to those who joined us yesterday during the call.  For those who didn't, you can access a replay of the call as well as the materials below.  Also, please see our most recent note, "CAKE: RISK PROFILE RISING."



Materials: CLICK HERE



Feel free to call with questions.



Howard Penney

Managing Director

What's Going On?

This note was originally published at 8am on January 06, 2014 for Hedgeye subscribers.

“If you really don’t know what’s going on, you don’t even have to know what’s going on to know what’s going on.”

-George Goodman


Sadly, one of my favorite authors and financial writers, George Goodman, passed away this weekend. He was 83 years old. After graduating magna cum laude from Harvard and winning a Rhodes Scholarship, Goodman published his first novel, The Bubble Makers – then went onto to join the “US Army Special Forces in 1954 in the intelligence group known as Psywar.” (Wikipedia)


“Goodman’s first non-fiction book, The Money Game (1968), was a number one bestseller for over a year. In the book he memorably introduced the catchphrase “assume a can opener” to mock the tendency of economists to make unjustified assumptions.” (Wikipedia)


Over the years, I’ve cited The Money Game many times. Today’s quote comes from that book and my Early Look is dedicated to Goodman who taught me a great deal while he wasn’t watching. Taped on the insert of one of my notebooks is that “a man is really at his best, his most fulfilled, when he’s on his way to becoming what he is going to become…” I’m grateful for that opportunity, every day.


Back to the Global Macro Grind


If you really don’t know what’s going on in markets for 2014 YTD, now you know. It’s sitting right there in front of you on your screen. That is the score. That is Mr. Macro Market’s Game. And we’re all tasked with playing the game that’s in front of us.


On the heels of Asian Equity markets getting banged up last week, Japan opened 2014 for stock market trading overnight and got smoked for a -2.4% drop in the face of a barely up Japanese Yen. Get the Yen right, and you’ll get the Nikkei right – for now.


China reported yet another #GrowthSlowing data point last night as well. Its Services PMI print for DEC slowed to 50.9 versus 52.5 in NOV and Chinese stocks dropped another -1.8% on that. For 2014 YTD, the Shanghai Composite is already down -3.3%.


With Japan and China -2.4% and -3.3%, respectively, what other big Equity indices are down so far for the YTD?

  1. SP500 -0.9%
  2. MSCI World Index -0.9%
  3. MSCI Emerging Latin American Index -2.1%
  4. MSCI Emerging Market Index -2.3%
  5. MSCI Asia ex-Japan Index -2.4%

This shouldn’t be a huge conceptual surprise given that the US Dollar is +0.9% YTD. Emerging Markets in particular do not like #StrongDollar. But those of you who embraced that reality into the USD’s 2013 highs (July) know what’s going on there too.


Can the US Dollar continue higher? With Janet Yellen being confirmed tonight, I doubt it. But my doubts are often wrong, so we’ll deal with whatever Mr. Macro Market decides on this front. Is there any other way to accept what’s really going on?


From a long-term @Hedgeye TAIL risk perspective, where the US Dollar Index is at is significant in that it’s a principal and directional driver for other massively interconnected global macro risks. Check out the last price of the following Big 3 Macro levels vs. our TAIL lines:

  1. US Dollar Index long-term TAIL line = $81.12
  2. Copper’s long-term TAIL line = $3.33/lb
  3. WTIC and Brent Oil long-term TAIL lines =  $98.26 and $108.89, respectively

While Dollar UP, Oil DOWN doesn’t yet have the correlation risk in our model that we’d jump up and down about (30 day and 180 day USD/Brent Oil correlations are +0.21 and -0.45, respectively), that doesn’t mean the Mr. Macro Market won’t change that.


On last week’s +0.5% move in the US Dollar Index:

  1. WTIC Oil was down -6.3%
  2. Brent Oil was down -4.7%
  3. Oil Volatility (VIX) was +30.9%! to 20.60

As I am sure Goodman would agree, volatility in an “asset class” that everyone and their brother is net long of breeds contempt. A breakout towards 30-40 Oil VIX would most certainly wake up consensus – because consensus is big time long of oil.


Looking at last week’s closing CFTC Futures/Options consensus positioning, here’s what I mean by that:

  1. BULLS: Crude Oil is the biggest net long position in Global Macro right now at +381,392 contracts
  2. BEARS: Japanese Yen is the biggest net short position in Global Macro at -143,384 contracts

In other words, if you are long Oil and the Nikkei on Down Yen expectations, join the club.


I don’t feel like we need to make a call for the sake of making a call right here and now on things like Oil and Yen. Going into last week we weren’t short Oil, so I missed that – but won’t miss shorting it on the bounce if it fails at TAIL resistance again. If Brent or WTI crude oil recapture TAIL supports, so be it.


That’s what’s going on in macro. The game is constantly changing. And it’s our job to change alongside it.


Our immediate-term TRADE Risk Ranges are now:


SPX 1817-1852
USD 80.52-81.12

Brent 106.99-109.40


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


What's Going On? - Chart of the Day


What's Going On? - Virtual Portfolio

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