For the past year, we have been harping on our “Espresso-Based Conspiracy Theory” as one of the reasons why McDonald’s is struggling to grow its top line.  The evidence supporting this assertion continues to pile up.

In short, we believe the McCafe strategy creates additional complexity in the back of the house and diverts resources away from the core food business.  We’ve always viewed McDonald’s as a food first destination and whenever management shifts their focus away from food and to beverages, the core business suffers.  To that extent, we contend that the early success of the beverage strategy (cold beverages) masked a decline in the core business (selling burgers and fries).


At the most recent analyst meeting and earnings call, management finally began to “come clean” with some of the issues that are impacting sales trends.  None of the issues the company addressed, however, included McCafe.  In fact, part of their 2014 strategy includes increased marketing resources to “go after the coffee consumer in 2014.”


On the 4Q13 earnings call, Chief Operating Officer Tim Fenton admitted that the never-ending LTOs and menu changes in 2013 overcomplicated operations.  The menu changes in 2013 included:

  1. Mighty Wings
  2. Premium McWraps
  3. Steak & Egg Burrito
  4. Fish McBites
  5. Steak Breakfast Sandwiches
  6. New Quarter Pounders
  7. Grilled Onion Cheddar Burger
  8. Hot’n Spicy McChicken
  9. The Dollar Menu & More (with five new burgers)

During the analyst meeting a couple of months ago, Don Thompson said: “We stumbled a bit last year with too many new products, too fast and we created a lot of complexity.”  This may be true, but we contend that the issues McDonald’s faces did not start in 2013.  These issues really date back to 2009/2010, when we saw the national launch of McCafe and an accelerating number of menu introductions.


Later in the note, we use a chart from Burger Business, along with management’s comments from the 4Q13 earnings call, to put our thesis in perspective.


By way of background, part of the 2003/2004 “Plan to Win” strategy included a Time & Motion analysis of the restaurants’ back of house operations.  With this study, management had determined that employees’ movement in the kitchen had become inefficient.  Management’s desire to fix this was a key driver in simplifying the menu and streamlining operations.


In 2014, management is now once again talking about the Time & Motion of employees in the back of the house.  However, this time management does not appear to be a taking a holistic approach to fixing these issues.  Rather, these moves strike us as more geared to specific menu items.  To illustrate our point, we have reproduced a chart from Burger Business looking at the evolution (bloating) of the McDonald’s menu since 2004.


As you can see in the chart below, the total number of items on McDonald’s menu increased by 75% from 2004 to 2014.  This means an incremental 51 items have been added to the menu over that period, making the current day menu very difficult for crews to execute.


More importantly, there are two sections that account for the bulk of the menu proliferation.  Not only are the number of Burgers, Sandwiches, Wraps up by 60%, but McDonald’s also created a whole new beverage category called McCafe (espresso drinks added in 2009; smoothies and frappes added in 2010).


MCD: TIME & MOTION - 1 30 2014 10 10 14 AM



Knowing how important Time & Motion is to the performance of McDonald’s restaurants, we continue to believe that McCafe has played a critical role in the slowing sales trends at their restaurants.  This is an issue that management continues to ignore and could very well exacerbate!


To their credit, management has addressed part of the menu proliferation with the roll out of its high density kitchen tables.  As management said on the 4Q13 earnings call, “These new high density kitchen prep tables are designed to deliver enhance service capabilities and menu choice to our customers.”  We believe these high density tables should address Time & Motion issues associated with burgers, sandwiches, and wraps – to an extent.  Management also supported this thought: “On the capacity, any time during our peak hours, if I can keep place in place and not have their feet moving to restock or to get something else or have crossover,” they, theoretically, will be able to improve the performance of their stores.


While this may be a step in the right direction in an attempt to better execute the current menu, this will also allow for additional customization.  While they may need this additional customization to remain competitive in the market place, it could mitigate some of the benefits of the high density tables.


In addition, management has failed to address the proliferation of beverages and the impact of the McCafe strategy.  Is it possible to add two new pieces of equipment (needed to make McCafe beverages) and not create additional Time & Motion inefficiencies?  We don’t think so, but management appears unwilling—at least at this point—to acknowledge this.


So how does this end?


The high density kitchens will be rolled out to the entire system by the end of 2Q14.  Therefore, McDonald’s should begin to see better sales trends by July 2014.  If, however, this doesn’t happen and weakness persists into 2H14 (meaning high density kitchen tables are not the panacea for sluggish sales trends), the focus of analysts and investors will shift to other issues the company could be facing.  If and when this time comes, we’d expect management to be more upfront about the issues surrounding the McCafe strategy. 


Only time will tell.


If management’s denials persist, we believe the stock will continue to underperform and may prompt Bill Ackman to dust off the old McDonald’s slide deck and step in to push for more changes at the company.



Howard Penney

Managing Director


[video] Keith's Macro Notebook 1/30: VIX COMMODITIES UST 10YR

FLASHBACK: That Bullish $1 $FB Report

Takeaway: We nailed FB.

A little trip down Memory Lane …

FLASHBACK: That Bullish $1 $FB Report  - fb2 

Here's that Bullish Facebook Initiation Report we wrote back on May 17, 2012. It's the one we sold to you for $1 the day before Facebook’s epic IPO. Yes, one dollar. (If we start pricing stock research reports at a buck, #OldWall is going to have major margin pressure.)


CLICK HERE for access to the full report.

FLASHBACK: That Bullish $1 $FB Report  - fb yo

Our loathers love to call us out when we make mistakes, but they morph into crickets when we nail it. As we did with FB.


We know it sounds “hokey” to some people, but we believe in this concept called transparency here at Hedgeye. Accountability too. Call us "old-fashioned.” We're cool with that. 


We own our calls - good and bad. Imagine that! Fortunately our winners far outnumber our losers.


What are you waiting for again?

Join the Hedgeye Revolution today.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

January 30, 2014

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Beware of Green Arrows

Client Talking Points


Never mind those “green arrows” in the futures this morning. Buying them in any of the last 3-4 days was a costly mistake. Instead, focus on the VIX TREND which is 14.91 and S&P 500 TREND which is 1779. Both remain very credible and sizable threats to the Old Wall Street consensus that’s still way too long.


Our #InflationAccelerating call here at Hedgeye (Macro Theme #1 for Q1) is performing well. The CRB Index was up another +0.8% yesterday in a very red tape to up +1.8% year-to-date. Look, very few people came into the year long commodities. Guess what? That’s why they’re working right now.


The 10-year yield failed rather hard at our Hedgeye TREND resistance of 2.80% yesterday (2.69% this morning), and this sucks for the Financials (XLF) as the yield spread gets smushed. The XLF joined the Consumer stocks as bearish TREND in our model yesterday

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.


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.


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.

Three for the Road


COMMODITIES: best bullish call of 2014 to-date is being long. CRB Index (19 Commodities) = +0.8% in a very red tape yesterday to +1.8% YTD vs $SPY -4% @KeithMcCullough


The higher a monkey climbs, the more you see of its behind. -Joseph Stilwell


19%: Facebook's growth might be slowing somewhat, but it keeps finding new ways to make money off of its users. The social network reported sales and profits that beat Wall Street's expectations, sending the social network's stock soaring. FB shares are up over 19% in premarket trading Thursday.


TODAY’S S&P 500 SET-UP – January 30, 2014

As we look at today's setup for the S&P 500, the range is 27 points or 0.97% downside to 1757 and 0.55% upside to 1784.                          










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.34 from 2.33
  • VIX  closed at 17.35 1 day percent change of 9.81%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init Jobless Claims, Jan. 25, est. 330k (prior 326k)
  • 8:30am: GDP Annualized q/q, 4Q Advance, est. 3.2% (pr 4.1%)
  • 9:45am: Bloomberg Consumer Comfort, Jan. 26 (prior -31.0)
  • 10am: Pending Home Sales m/m, Dec., est. -0.3% (prior 0.2%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change


    • 9:30am: Senate Energy and Natural Resources Cmte meets on whether to end ban on U.S. crude oil exports
    • 12:20pm: Obama delivers remarks at GE’s Waukesha Gas Engines plant in Wis.
    • 4:15pm: Sen. John McCain, R-Ariz.; Sen. Chris Murphy, D-Conn., speak at CSIS on trans-Atlantic ties
    • 4:50pm: Obama in Tenn. for economic opportunity speech


  • 4Q U.S. growth probably boosted by stronger spending
  • Facebook mobile push fuels bulk of sales to top ests.
  • Lenovo to buy Google’s Motorola Mobility for $2.91b
  • Google Motorola sale shows limits of Microsoft-Nokia strategy
  • Google’s Motorola sale underscores primacy of patent portfolio
  • Dassault Systemes offers $750m to acquire Accelrys
  • Starbucks CEO Schultz hands daily operations to CFO Alstead
  • China’s manufacturing shows first contraction in 6 months
  • German joblessness falls more than forecast as economy grows
  • Euro-area eco. confidence rises for 9th month on services
  • Qualcomm’s profit tops analysts’ ests. on smartphone demand
  • Ericsson CEO plans to stay amid interest from Microsoft
  • Shell CEO pledges spending cuts, asset sales to restore profit
  • Samsung sanctioned by U.S. judge in Apple patent lawsuit
  • J&J becomes first drugmaker to open clinical data to academics
  • Soros-backed OneWest said to seek buyers as prepares for IPO
  • Deutsche Bank suspends NY head of emerging FX trading: Reuters


    • 3M Co (MMM) 7:30am, $1.62 - Preview
    • ADT (ADT) 6am, $0.49
    • Airgas (ARG) 7:30am, $1.18
    • Alexion Pharmaceuticals (ALXN) 6:30am, $0.84
    • Altria Group (MO) 6:58am, $0.58 - Preview
    • AutoNation (AN) 6:15am, $0.76
    • Ball (BLL) 6am, $0.73
    • Bemis Co (BMS) 7am, $0.54
    • Blackstone Group LP (BX) 7am, $0.83
    • Brunswick (BC) 7:39am, $0.13
    • Cameron International (CAM) 7:30am, $0.96 - Preview
    • Cardinal Health (CAH) 7am, $0.84 - Preview
    • Celgene (CELG) 7:30am, $1.51 - Preview
    • CMS Energy (CMS) 7:30am, $0.37
    • Colgate-Palmolive Co (CL) 7am, $0.74 - Preview
    • ConocoPhillips (COP) 7am, $1.32 - Preview
    • Dover (DOV) 7am, $1.27
    • Eli Lilly & Co (LLY) 6:30am, $0.73 - Preview
    • Enterprise Products Partners L (EPD) 6am, $0.71
    • Exxon Mobil (XOM) 8am, $1.91 - Preview
    • Franklin Resources (BEN) 8:30am, $0.93
    • Harley-Davidson (HOG) 7am, $0.33
    • Harman International Industrie (HAR) 7am, $0.94
    • Helmerich & Payne (HP) 6am, $1.46 - Preview
    • Hershey (HSY) 6:58am, $0.86
    • Hillshire Brands Co (HSH) 7:30am, $0.50 - Preview
    • Imperial Oil (IMO CN) 7:55am, $0.93 - Preview
    • Invesco (IVZ) 7:30am, $0.57
    • L-3 Communications Holdings In (LLL) 7am, $1.98
    • Manpowergroup (MAN) 7:30am, $1.25
    • Northrop Grumman (NOC) 7am, $1.94 - Preview
    • Occidental Petroleum (OXY) 7:30am, $1.67 - Preview
    • Peabody Energy (BTU) 8am, ($0.10)
    • Pitney Bowes (PBI) 6:30am, $0.45
    • Potash of Saskatchewan (POT CN) 6am, $0.32 - Preview
    • PulteGroup (PHM) 6:30am, $0.45 - Preview
    • Quest Diagnostics (DGX) 7am, $0.93 - Preview
    • Raytheon Co (RTN) 7am, $1.35 - Preview
    • Royal Gold (RGLD) 8am, $0.23
    • Sherwin-Williams (SHW) 7am, $1.29
    • TECO Energy (TE) 7:30am, $0.20
    • Thermo Fisher Scientific (TMO) 6am, $1.38 - Preview
    • Time Warner Cable (TWC) 6am, $1.73 - Preview
    • Timken Co (TKR) 7:30am, $0.73
    • Under Armour (UA) 7am, $0.53 - Preview
    • United Parcel Service (UPS) 7:45am, $1.25
    • Valley National Bancorp (VLY) 7am, $0.14
    • Viacom (VIAB) 6:45am, $1.16 - Preview
    • Visa (V) 7:30am, $2.16 - Preview
    • Whirlpool (WHR) 6am, $3.03
    • Xcel Energy (XEL) 6am, $0.29
    • Zimmer Holdings (ZMH) 7am, $1.62 - Preview


    • Align Technology (ALGN) 4pm, $0.43
    • (AMZN) 4pm, $0.69 - Preview
    • Broadcom (BRCM) 4:05pm, $0.58
    • Canadian National Railway Co (CNR CN) 4:01pm, $0.77 -Preview
    • Canadian Oil Sands (COS CN) 5:01pm, $0.48 - Preview
    • Celestica (CLS CN) 4pm, $0.23
    • Chipotle Mexican Grill (CMG) 4:01pm, $2.52
    • Chubb (CB) 4:03pm, $2.04
    • CNH Industrial NV (CNHI) 4:44pm, $0.24
    • Computer Sciences (CSC) 4:15pm, $0.83
    • CR Bard (BCR) 4:05pm, $1.39
    • Eastman Chemical Co (EMN) 4:36pm  , $1.24
    • Google (GOOG) 4:01pm, $12.26 - Preview
    • JDS Uniphase (JDSU) 4:05pm, $0.14
    • Manitowoc (MTW) 4:25pm, $0.33
    • McKesson (MCK) 4:10pm, $1.84 - Preview
    • Microchip Technology (MCHP) 4:15pm, $0.61
    • NetSuite (N) 4:05pm, $0.07
    • PerkinElmer (PKI) 4:05pm, $0.70
    • PMC - Sierra (PMCS) 4:05pm, $0.08
    • Riverbed Technology (RVBD) 4:05pm, $0.31
    • Robert Half International (RHI) 4pm, $0.48
    • Validus Holdings (VR) 4:15pm, $1.56
    • Wynn Resorts (WYNN) 4:05pm, $1.75


  • Aluminum Touches Four-Year Low as China Manufacturing Contracts
  • Barclays’s Asia-Pacific Markets Business Said to Lose Eight MDs
  • Goldman Sees Gold to Corn Losses After Bear Markets: Commodities
  • Gold Horses Lead Chinese Retailers to Profit on Bullion’s Slump
  • WTI Rises to Four-Week High as U.S. Chill Boosts Fuel Demand
  • Gold Falls on Stimulus, Demand Outlook as Monthly Gain Narrows
  • Wheat Recovers From 42-Month Low on Speculation Demand to Build
  • Sugar Rebounds as India Fails to Discuss Subsidies; Coffee Gains
  • Rubber Near 16-Month Low as Yen Gains After Fed Cuts Bond Buying
  • Rebar Caps Worst Monthly Drop in Four on Iron Ore, China Holiday
  • Bird Flu Seen by Zhongda Futures Curbing Soybean Demand in China
  • Oil, Mining Stocks Face Emerging-Currency Risk: Chart of the Day
  • Capital May Shift Toward Gas as Prices Top $5 on Polar Vortexes
  • Natural Gas Poised for Biggest Monthly Gain Since 2009


























The Hedgeye Macro Team














Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.