The behavior of all objects can be described by saying that objects tend to "keep on doing what they're doing."  Yesterday proved that Darden will continue to be Darden until acted upon by an unbalanced force!


There is a foot of snow on the ground, but I can see a long heated battle this summer for control over the future of this company. 


The irony of yesterday’s new flow on Darden was that the Chairman of the Board/CEO, Clarence Otis, thinks he has the best plan to create value for shareholders.  On what track record does he base his credibility on? As the CEO of DRI, he has burned billions of shareholders’ cash flow without any accountability.  Alas, I’d be remiss not to point out that Mr. Otis’ only operational job at Darden, before becoming CEO, was the $500 million disaster called Smokey Bones.


Here are a few key statistics on Clarence’s track record as CEO of DRI:

  • In FY07, DRI generated $5.5 billion in revenues versus and estimated $8.9 in FY14 – CAGR of 7.12% (including acquisitions).
  • In FY07, DRI generated $773 million in EBITDA versus an estimated $979 in FY14 – CAGR of 3.43% (including acquisitions).
  • Between FY07 and FY14, DRI will have spent an estimated $4.204 billion in capital spending to generate an incremental $206 million in EBITDA.  Is this considered creating shareholder value?
  • In FY07, DRI reported $2.53 in EPS.  In FY14, we expect them to report $2.40 in EPS.
  • Between FY07 and FY14, DRI will have reduced its share count by an estimated 11%.

As CEO of Darden Mr. Otis could not grow the earnings of this company over a seven year period! 


What is shocking is not simply that he still has a job, but rather that he has a plan to create shareholder value.  Oh, the irony in this thought!   If you are a current shareholder of DRI, do you have the confidence that the current management team can and will make the right decisions?


We must question, given these facts, why the Board of Darden has not taken more decisive action.


The challenge for the Board members of Darden (or any Board) is to recognize the appropriate time to step up and implement change.  It is their challenge, their job, and their responsibility not to maintain the status quo.  Newton’s first law of motion is often stated as: “An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.”  Well, it is time for the Board of Darden to be the unbalanced force and to keep the company moving forward – in the right direction.


When a Board works closely with a CEO for a number of years, the best interest of shareholders’ can become blurred.  As an outsider, it appears that this is the case with the current Board and Chairman/CEO Clarence Otis.  The operational performance of DRI has stagnated and it is time for a change.  Within this context, we urge the current Board members to consider the last paragraph of the Starboard letter very carefully:


“Based on our research and discussions with you to date, we do not believe that these initiatives have been fully and objectively explored. Further, given the negative reaction to the announcement of the proposed Red Lobster separation, shareholders are also clearly dissatisfied with the current proposal. In light of the foregoing concerns, as well as those raised by other large shareholders, we urge you not to continue down the current, potentially value destructive path. Instead, we believe it is incumbent upon management and the Board to commit to a full exploration of all alternatives, including those discussed in this letter, with an open mind. We believe that a failure to do so may violate the Board’s fiduciary duties.”


I couldn’t agree more with the Starboard letter and it appears that the DRI activists are close to agreeing on what we believe the new Darden should look like.  If I could put myself in the position as the third activist, we’d all be in agreement that a different operating structure is critical to future of the company.  Where I differ from the two shareholders, other than the fact that I don’t own a share, is they want to work with management and come to some sort of agreement.  The problem is that the management of DRI doesn’t want to work with them.


This company has the potential to become the true leader in the casual dining industry, but it needs an unbalanced (unbiased) force to make the changes necessary.



Howard Penney

Managing Director

WTW: Initiating Short

Takeaway: This could be WTW’s worst winter selling season in the last 7 years. Issues could be secular.


  1. 2014 Consensus Estimates are a Stretch: Our Google Trackers suggest that membership trends are deteriorating sharply on a y/y basis in 1Q14, which is concerning since the first quarter sets the tone for the year.  If 1Q14 is off to a weak start, WTW isn't likely to recover from it.
  2. Heads They Lose, Tails They Lose: WTW has considerably scaled back its marketing expenses, which is what we believe explains the muted 1Q14 demand trends.  We suspect the company’s hands were tied since it is dangerously close to breaching certain escalators in its Credit Agreement.  WTW needs to invest to get out of its hole, but lacks the ability to do without triggering its escalators.
  3. Is this Secular?  WTW remains a recognized leader in the weight-loss industry, but is facing heightened competition from free apps and online services.  We suspect it will tougher for WTW to to gain/preserve membership moving forward.   WTW’s B2B opportunity seems more like wishful thinking than a viable growth objective in post-Obamacare world.  The end-user is facing pressured profits, and is more likely to scale back, than add on.  
  4. $23 Stock?: We were early to cover, but now believe it can go lower than we originally expected.  We estimate that the stock could trade as low as $22-$23 based on our updated EPS and EBITDA estimates  While short interest has crept up in the name, our proprietary SFP analysis suggests the shorts usually get this one right.



We recently covered our short in WTW following its 3Q13 earnings release; after both 2014 consensus estimates collapsed and our WTW Google Tracker improved in 4Q13.  The latter suggested that 2013 ending membership (i.e. 2014 starting membership) may be better than the recent trend suggested.  However, we were too quick to cover. 


Our WTW Google Trackers have inflected, and are showing a sharp deceleration into the critical 1Q14 selling season, which is concerning since WTW membership seasonally declines every quarter after the first.  So if 1Q14 is off to a weak start, WTW isn't likely to recover from it.


WTW: Initiating Short - WTW   Tracker vs. Attendence 1Q14

WTW: Initiating Short - WTW   2014 EPS Scenario Analysis   1 21 14 




WTW has been cutting back on expenses; most notably its dividend (suspended) and marketing expenditures; the latter of which we believe is driving the muted 1Q14 demand we highlighted above.


We suspect the company’s cost cutting initiative may be driven by the terms of its new Credit Agreement.  WTW has certain escalators in Credit agreement, which will increase the “applicable rate” in its term loans based on the company’s consolidated leverage ratio (schedule below).



WTW: Initiating Short - WTW   Credit Agreement Esclators


Additionally, there in another escalator based on its credit ratings; WTW already breached the S&P rating, and if Moody’s downgrades the company, which seems likely given its outlook (here), the escalator would be triggered. 


Collectively, we expect annual incremental interest from these escalators could  be as high as ~$12mm, or $0.14 hit to 2014 EPS (depending on when they are triggered). 


More importantly, we believe WTW needs to invest (particularly in Marketing) to get out of its hole, but lacks the freedom to so without triggering its escalators.  However, by choosing to manage to cost structure instead of driving the top-line, the company’s EBITDA is at risk, and it will likely trigger its escalators regardless.




WTW remains a recognized leader in the weight-loss industry with a clinically-proven program, but is facing heighted competition from free apps and online services.  We suspect the company will have to work much harder to gain/preserve membership moving forward, which can mean anything from a redesigned product /price concessions to heightened marketing expenses/member acquisition costs.  What’s clear is that WTW’s current business model isn’t suited to drive/sustain membership in this evolving operating environment.  


WTW: Initiating Short - WTW   Marketing Campaign HRM est 1Q14


WTW’s B2B opportunity seems more like wishful thinking than a viable growth objective in post-Obamacare world.  The end-user (MCOs and Employers) is facing series of new regulations that will pressure profitability starting in 2014, and these pressures will only escalate in 2015 as the Managed Care Industry Tax increases and employer mandate to provide health insurance resumes.  We believe that both MCOs and employers collectively are more likely to scale back on incremental healthcare expenses, than tack on new ones. 



$23 STOCK? 

We were early to cover, but now believe it can go lower than we originally expected.  We estimate that 2014 earnings will be in the $2.45-$2.65 range. Assuming multiples compress 1x, we believe the could trade as low as $23 at the midpoint of our range.  Our EBITDA estimate of $377-$390 implies a $22 stock at its current EV/EBITDA multiple at the midpoint of our range.  While short interest has crept up in the name, our proprietary SFP analysis suggests the shorts usually get this one right.



Let us know if you have any questions, or would like to discuss further.



Hesham Shaaban, CFA




Thomas W. Tobin





Beijing Goes Bernanke?

Client Talking Points


After a horrendous run of economic data, the People's Bank of China jacks 255 billion Yuans of liquidity into the system and starts discussing price fixing on money market rates. That's very "Bernank" of them. Lovely. It's also good enough to move China off the world’s worst stock performer list year-to-date with a big +2.2% move in the Shanghai Composite (-3% year-to-date).


The #StrongPound (up +0.4% versus the US Dollar to $1.65 this morning) continues to perpetuate a purchasing power recovery in the UK. UK unemployment? It just dropped to 7.1% from 7.4%. And yet all you’ll hear from the anti-austerity Keynesian crowd in Davos are crickets. Got #GrowthDivergences yet? The FTSE is up +1.4% year-to-date versus the S&P 500 which is down -0.3%.


Small caps just closed at another fresh all-time high of 1175 yesterday as small cap Tech and Healthcare continue to lead the way. This shouldn't come as a real surprise from a sector divergence perspective with #InflationAccelerating. See our GIP quadrant model for details on those style factors; they were in our most recent Global Macro Slide Deck. Ping if you'd like more info.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.


Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

Three for the Road


Anyone have a count or word cloud of how many times da Bernank mentioned "the dollar" in a policy speech? I'll bet <10 during entire term @HedgeyeUSA


"Change your thoughts and you change your world." -Norman Vincent Peale


A record 20% of American households, one in five, were on food stamps in 2013, according to data from the U.S. Department of Agriculture (USDA). The USDA says that there were 23,052,388 households on food stamps in the average month of fiscal 2013.

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Lots of Tweeting

“You have to earn your followers at the outset of your company… and you must value them every day.”

-John Hamm (in Unusually Excellent)


So I was tweeting yesterday and one of my followers tweeted that I’d just tweeted my 100,000th tweet. Fully loaded, with using the word tweet 6x in this opening paragraph of today’s rant, that’s a lot of tweeting.


One of the main reasons why I have so many bloody tweets is that I do this thing called The #TweetShow. For those of you who have a day job, you probably don’t have time to watch it – but I’ll fire it up every day that I can at 3PM EST and tweet the US market close. I tweet once every 1-1.5 minutes. *Full Disclosure: Twitter has shut down my account, multiple times, for excessive throttling.


Throttling? Not to be confused with trading, high-frequency-tweeting the close is a new idea. From a positioning perspective, it’s my way of telling you what I think and when during the most important decision making hour of my day. It’s not for everyone (that’s why I do it). And I can’t say why so many people follow it, but I can say thank you to whoever tunes in.


Back to the Global Macro Grind


From a financial media perspective, the alternative to listening to some tunes and watching my team and I of 30 analysts grind through tickers is listening to people who have never played the game tell you everything they know about it on TV.


As a disruptor in a profession in dire need of evolution, I definitely come up with my fair share of dumb ideas. But #TweetShow is not one of them. It’s turned into a much better feedback loop than anything I ever had running my hedge fund. You’d be amazed what crowd-sourcing a real-time stream of comments about all your positions does. I value the crowd’s feedback, every day.


Three years ago I called Twitter “The New Tape.” And the point I was trying to make there was that 10-15 years ago (when I was learning this game), I’d watch the tape (tickers, news, bid/ask, etc.) as I was making decisions. Now I watch my custom tweet-stream. From a #behavioral perspective, the contra-indicators (tweeters) I follow are as critical as the news-flow itself.


One of my contra-indicators for the last 3-4 years has been Nouriel Roubini. While I’m sure he is a rock-star and all, I can’t for the life of me understand why he is tweeting me pics of himself with his shirt undone to mid-chest with a bunch of failed economists from #Davos this morning.


I have an academic channel on Twitter (it’s a contra-stream) than includes:

  1. Nouriel Roubini
  2. Mohamed El-Erian
  3. David Blanchflower

… and many more.


But instead of journos drooling over the idea of having them endow us with their non-market-practitioner intellect, let’s just look at these 3 characters for who they have become since the “great depression” freak-out thing, or whatever they are calling it now.

  1. Roubini just went bullish on growth (after growth shocked he and mostly every economist @Davos to the upside last year)
  2. El-Erian just left working with Gross (after he got the “new normal” thing of 1-1.5% growth and long bonds forever = #wrong)
  3. Blanchflower just tweeted something else that I don’t understand

Blanch is a beauty. He fits my contra-stream profile perfectly. He’s the professor of Keynesian economics @Dartmouth who swore (2-3 yrs ago) that austerity (read, fiscal conservatism and a stronger currency) would spell the end of economies and life itself in the UK.


In other news…

  1. UK unemployment drops to a 4.5 yr low (biggest drop since 1997) of 7.1% versus 7.4% last
  2. UK Services and Manufacturing PMI readings are tracking at 15-18 year highs
  3. UK’s currency (British Pound) is up another +0.4% to $1.65 vs USD this morning

Now, maybe our economic model is for dummies, but it’s better than theirs. As a refresher, here’s how our GIP (Growth, Inflation, Policy) model works:

  1. POLICY: on the margin, fiscal conservatism and less monetary stimuli strengthen a country’s currency
  2. INFLATION: it’s local (priced in local currency) and it falls when purchasing power (currency) strengthens
  3. GROWTH: real (inflation adjusted) consumption growth (and confidence) are perpetuated by #StrongCurrency

In other words, instead of an elegant sounding linear academic theory, our process is more like Mucker’s PIG than anything else. We start with POLICY, then move onto making INFLATION and GROWTH calls from there.


The other big thing about respect being earned on Twitter (instead of allocated to guys who made a bear market call we made 6 years ago, and haven’t made the right call since), is that there is an obviousness to consensus.


Last year our call was the #DeflatingTheInflation via #StrongDollar = US #GrowthAccelerating. Now our call is for US #InflationAccelerating and consumption #GrowthSlowing. And I’m smiling because no one on my contra-stream tweeted that yet.


Our immediate-term Risk Ranges are now as follows (our top 12 macro ranges are in our Daily Trading Ranges product):



Shanghai Comp 1

Pound 1.63-1.65

Natural Gas 4.28-4.55

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Lots of Tweeting - Chart of the Day


Lots of Tweeting - Virtual Portfolio

January 22, 2014

January 22, 2014 - Slide1



January 22, 2014 - 2

January 22, 2014 - 3

January 22, 2014 - 4

January 22, 2014 - DXY

January 22, 2014 - 6

January 22, 2014 - 7

January 22, 2014 - 8

January 22, 2014 - 9


January 22, 2014 - 10

January 22, 2014 - vix
January 22, 2014 - 12

January 22, 2014 - gold

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