Beast Mode

“I’m just about that action, boss.”

-Marshawn Lynch


Admittedly, being from Canada, I didn’t grow up a huge football fan.  But like most of the world, I am drawn to the Super Bowl.  This year was set up to be a dandy with the best offense facing the best defense.  As we now know, the game was not even close with Seattle beating Denver like a rented mule.


Despite the lopsided game, there were a number of characters off the field that garnered a fair amount of attention.  In my view, the most interesting character to emerge was Seattle running back Marshawn Lynch, who is better known as Beast Mode.


Beast Mode - marshawn


Lynch is notorious for avoiding the media, so much so that the NFL fined him $50,000 earlier in the season for not going to press conferences (which Seattle fans subsequently repaid for him!).  At the Super Bowl he spent about seven minutes in a media scrum and also did a brief interview with Deion Sanders.  During these brief appearances, it became clear that Lynch wasn’t media shy per se, but wanted his actions to speak for him.  As he told Sanders:


Deion Sanders: What is your thing?


Marshawn Lynch: Laying back, kick back. (Yeah) Mind my business, stay in my own lane.


Deion Sanders: Yeah. So you’re just going to sit in the cut and just chill. That’s what you do.


Marshawn Lynch: Just kick back. Game time, though I’ll be there.”


True to his limited words, at game time Lynch was there and was all about the action, rather than the words beforehand.  In theory, this is probably good advice for a lot of us, even those of us who don’t play in the NFL.


Back to the global macro grind . . .


Speaking of action, many of the key global markets we monitor every day are increasingly about that price action.  Currently, the SP500, Dax and Nikkei are all broken on the TREND duration (three months or more) in our quantitative model.  Conversely, equity market volatility via the VIX and U.S. Treasury bonds are breaking out to the upside.


Clearly, the market is signaling that growth is poised to continue to disappoint.  In the year-to-date, the score on that front is really crystal clear.   In the Chart of the Day, we show a summary of the 34 U.S. economic indicators that we focus on.  As the table shows, 23 of those indicators slowed from December to January.  Not even the best portfolio defense is going to stop an equity market that is going down because of that kind of economic deceleration.


In my mind, the most disturbing recent data point was the ISM Manufacturing New Orders reading for January.  On a month-over-month basis, new orders were down -13.2, which is the largest single month decline since December 1980, or more than 30 years ago.  The economy slowed from December to January and if forward looking orders are any indicator, it is not out of the woods yet.


Yesterday, the weekly initial jobless claims data was released and they were largely a non-event, though even there we are seeing incremental slowing.  We key off the year-over-year rate of change in rolling NSA (non-seasonally adjusted) initial jobless claims. This week the data was better by 5.5% vs the same period last year. However, if you compare that with the preceding three weeks of data, it reflects a modest deceleration. The last four prints have been: -8.5%, -7.9%, -7.2% and -5.5%. So, yes, the strength of the labor market has cooled off modestly.


On the labor and employment front, the January Employment Report at 8:30am will be the main event this morning.  Currently, consensus estimates are for 180,000 jobs to be added in January.  It is also widely expected that last month’s big miss will be revised significantly higher due to weather.  So, the expectations table has been set but, as always, expectations are likely to be the root of all heartache.


Since the r-squared between the ADP number and non-farm payrolls on a rolling 3-month basis is 0.71, it does seem likely that we get a print of close to 180,000. This disappointment may come on the expectation of a meaningful revision upwards from December.  In fact, we did a study last month on the trend in revisions and in general over the last four years, the magnitude (and direction) of revisions hasn’t correlated particularly well with deviations from trend.  Historically, according to Bloomberg data, months in which big weather was a factor have been revised higher only ~60% of the time.


So, perhaps today’s employment report is highly positive and gets the market back into bullish beast mode, though the probability seems higher that today is a non-event with the potential for a mild disappointment.  But, as always, by 8:31 a.m. it is definitely going to be all about that action.


Speaking of action, we finally got some validation on our short thesis on Twitter yesterday as the company reported its first quarterly results as a public company.  Admittedly, revenue did beat our number (although that was obviously priced in), but Twitter showed a real deceleration in user growth and user engagement.  On that last point, user engagement, as measured by time line views, was down -3% year-over-year . . . not good for a growth company.


After winning the Super Bowl, Marshawn Lynch answered when asked about his touchdown run that he had:


“Kicked it all off, boss.”


Given the dramatic price decline and acceleration in volume, it will be interesting to see what Twitter kicked off yesterday. $TWTR remains on our Best Ideas list as a short.  Email us at if you want to review our 50+ page short report on the company.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.59-2.80% (bearish)

SPX 1 (bearish)

Nikkei 139 (bearish)

VIX 14.91-20.41 (bullish)

Gold 1 (neutral)


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Beast Mode - Beast Mode 020614


Beast Mode - rta1


DNKN reported a strong 4Q13 yesterday in which revenues ($183.177m) and EPS ($0.43) beat by 274 and 824 bps, respectively.  The Dunkin’ Donuts U.S. business posted 3.5% comp growth despite an underwhelming sales environment.  For the year, the company grew revenues, operating income and EPS by 8%, 11%, and 20%, respectively, and managed net new unit development greater than 5%. 

Comp growth in the U.S. business was driven by both traffic and ticket across multiple dayparts, as the number of units sold per transaction and the price per unit sold increased.  Beverages, breakfast sandwiches and bakery sandwiches provided the majority of growth in the quarter, while card sales (activations, reloads, redemptions) were all up significantly over the prior year.  Management acknowledged the 4Q online shopping trend, but noted they weren’t negatively affected by this.  Loyalty continues to be a primary catalyst for growth in the U.S. and, ultimately, abroad.  For the full year, 43% of domestic net development was in emerging and Western markets as the brand continues its expansion outside of the Northeast.  The West continues to have very strong cash-on-cash returns north of 25%.  The potential for domestic expansion is still broad, as management believes they still have a 3,000 store opportunity east of the Mississippi River. 


The Dunkin’ Donuts international business was slightly underwhelming (-0.3% comp), primarily due to poor Korean operations which make up 45% of international sales.  The company also expects to close about 100 small kiosk locations in the Philippines in 2014.  New openings in Germany and the U.K. were encouraging, reporting similar AWS as new openings in the U.S.  2014 will mark a slowdown in development (targeting 300-400 net new units across both brands) as management becomes more selective over the quality of openings and the aforementioned closures impact the net number.  Management spoke briefly about their recently announced partnership with Liverpool.  They believe the partnership will be beneficial in the U.S., particularly among Millennials and Hispanics, and internationally, where soccer is the number one sport.  This is a tremendous opportunity for the brand to gain widespread international exposure (both on TV and on the pitch) that we view favorably.


Overall, it was another solid quarter from DNKN as it continues to build sales momentum through global expansion, an all-encompassing menu, and loyalty.  This name strikes us as one of the better growth opportunities in the restaurant space. 






Howard Penney

Managing Director


February 7, 2014

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TODAY’S S&P 500 SET-UP – February 7, 2014

As we look at today's setup for the S&P 500, the range is 61 points or 2.05% downside to 1737 and 1.39% upside to 1798.                          










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.39 from 2.38
  • VIX  closed at 17.23 1 day percent change of -13.63%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Nonfarm Payrolls, Jan., est. 180k (prior 74k)
  • 1pm: Baker Hughes rig count
  • 3pm: Consumer Credit, Dec., est. $12b (prior $12.318b)
  • 3:30pm: CFTC Commitments of Traders report


    • U.S. Treasury Sec. Jack Lew may consider taking ‘‘extraordinary measures’’ to avoid reaching borrowing limit after Congress failed to agree on debt ceiling boost


  • Payrolls in U.S. probably expanded at a faster pace in January
  • Baytex Energy to buy Aurora Oil to add shale production
  • LinkedIn drops after sales forecast trails analyst estimates
  • News Corp. profit tops estimates even as ad revenue declines
  • IBM considering sale of semiconductor business: FT
  • Bank of England staff said to have condoned FX trader conduct
  • U.K. industry output rises less than forecast as momentum eases
  • ArcelorMittal sees 2014 profit rising as steel demand rebounds
  • German top court sends suit against ECB’s OMT to EU top court
  • Ukraine imposes capital control as president heads for Sochi
  • Time’s $1.3b debt to “keep private equity away": N.Y. Post
  • Yellen Testifies, U.S. Retail Sales, BOE: Week Ahead Feb. 8-15


    • American Axle & Manufacturing (AXL) 8am, $0.49
    • Cameco (CCO CN), C$0.53, post-mkt
    • CBOE Holdings (CBOE) 7:30am, $0.48
    • Cigna (CI) 6am, $1.49
    • Domtar (UFS) 7:30am, $1.53
    • FLIR Systems (FLIR) 7:30am, $0.37
    • Laboratory of America (LH) 6:45am, $1.66
    • Madison Square Garden (MSG) 7:30am, $0.65
    • Moody’s (MCO) 7am, $0.76
    • Sirona Dental Systems (SIRO) 6:30am, $0.92
    • Wyndham Worldwide (WYN) 6:29am, $0.73 - Preview


  • Copper Advances for a Second Day Before U.S. Employment Report
  • Cocoa Harvest in Indonesia May Drop to Lowest in Decade on Rain
  • Natural Gas Falls for Third Day as Weaker Winter Storms Forecast
  • Brazil Raw-Sugar Discount Spurs White Output as Refiners Profit
  • Gold Poised for Weekly Advance Before U.S. Data as China Returns
  • Wheat Heads for Best Week Since September After U.S. Freeze
  • Coffee Tumbles Amid Potential Rain for Brazil; Sugar Declines
  • Solar Water Pumps Wean Indian Farmers From Archaic Grid: Energy
  • AMCI Seeks Coal, Iron Ore Assets as ‘Super-Cycle’ Seen Intact
  • Rebar Extends Drop to Two-Week Low as China Returns From Holiday
  • Mitsubishi UFJ Securities to Withdraw From Commodities Business
  • Sugar Traders Most Bullish Since March Amid Brazil Dry Weather
  • New Supply Additions, China Drive Iron Ore, Coal: 2014 Outlook
  • WTI Drops for First Time in Four Days on U.S. Jobs Report, China


























The Hedgeye Macro Team



















Data thru February 6, 2014






Genting Singapore said it has entered into a joint venture agreement with Landing International Development Ltd (LIDL) , a Chinese property developer, to own, manage and operate a US$ 2.2 bn integrated resort when it opens in 2017 in South Korea.  Construction will begin in June this year, the chairman said. The resort will have a total of 800 gaming tables and a casino floor of 27,000 square meters, he said.  The integrated resort will include luxury hotels, a shopping mall, a theme park as well as gaming and entertainment facilities.



SJM says it will break ground for its first casino-resort in Cotai next Thursday.  SJM CEO Ambrose So said last week his company intended to open the casino-resort within three years.



SJM plans to spend US$50 million (HK$390 million) to buy lottery operations in five countries through a joint venture.  The firm said yesterday it will set up a joint venture with eGame Solutions Operation Ltd, a global lottery provider.  Together, they will control a number of country-specific firms that run lottery operations.  SJM will own 75% of the joint venture, with eGame Solutions taking the rest.

Life Inside the Box

This note was originally published at 8am on January 24, 2014 for Hedgeye subscribers.

“If we lack emotional intelligence, whenever stress rises the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.  This, more often than not, is precisely the wrong approach in today’s world.” 

- Robert K. Cooper PhD


Robert Cooper is a neuroscientist and strategic advisor to CEOs and many Fortune 500 companies.  Taking on the work that Dr. Cooper requires is certainly not easy.  According to Cooper, your brain is organized to reflect everything you know in your life.  Or, in other words, your brain is a record and an artifact of your past. 


Consistent with this line of thought, Cooper poses the following question: Does your environment control your thinking or does your thinking control your environment?


To help you ponder, we ask the following questions:

  • What does your daily routine look like? 
  • Did you wake up today and hop out of bed on the same side? 
  • Did you shut your alarm off with the same hand? 
  • Did you go to the bathroom like you always do? 
  • Did you shower and follow the same grooming routine? 
  • Did you dress the way your coworkers expect you to dress? 
  • Did you follow the same breakfast routine and do you get angry when the morning commute to work is just slightly off the normal pace?

I’m sure many of you will find that you often revert back to a routine in life you are comfortable with or, in Layman’s terms, the same-old, same-old life.  This is considered living life inside your box and it is much more prevalent among us and our colleagues than we’d like to acknowledge.


Admittedly, this may be too much philosophical thinking for a Friday morning.  But, the metaphor of switching to autopilot during rising levels of stress could be the norm for a CEO whose company you have invested hundreds of millions of dollars in and whose stock is underperforming.  Isn’t this a scary thought?  What if this routine keeps him/her in survival mode and prevents him/her from making the right decisions for the company he/she is running?


Back to the Global Macro Grind


I often refer to this decision making process in the restaurant space as the “6 Stages of Grief.”  This is a cycle that some companies tend to go through before they can see life outside the box.  As I see it, today’s activist investors provide a version of neurological therapy for this grief.


Unfortunately, the news of an activist investor can actually provoke a series of decisions based on past experiences that might be inconsistent with what is appropriate for today’s environment.  When an activist investor arrives on the scene, it’s only natural that “as stress rises, the human brain switches to autopilot and has an inherent tendency to do more of the same, only harder.”


Whether it’s a letter from Dan Loeb saying you’re an idiot or a letter that says “we look forward to maintaining an open dialogue and working with you to ensure that value is created for all shareholders,” either one could put management on the defensive and get them to react in ways that could potentially destroy shareholder value.


Sadly, this is precisely the path of destruction that the CEO of Darden Restaurants is headed down.  


As I said earlier this week, the challenge for the Board members of Darden (or any Board) is to recognize the appropriate time to step up, break out of their box, and implement meaningful change.  It is their challenge, their job, and their responsibility not to be more of the same. 


When a Board works closely with a CEO for a number of years, the best interest of shareholders’ can become fuzzy.  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, without question, time for a significant change.


As Keith said in yesterday’s Early Look, we are short a significant number of restaurant names.  On yesterday’s earnings call, the CEO of Starbucks, Howard Schultz, went out of his way to emphasize the decline in bricks and mortar retailing.  Starbucks was wisely in a position to win in this environment.  Mr. Schultz is a great example of a CEO, at least in my space, that is willing to take on the difficult task of recognizing when and where he can strengthen his company.


To be honest, I welcome the commentary about bricks and mortar retailing as it relates to my short call on CAKE.  My original thesis was shorter term, but his comments could make our bearish call on CAKE more secular in nature.  In the short run, however, we believe the price spikes in the dairy complex are unaccounted for and suggest that EPS estimates are too aggressive for the company in 2014.


Moving on to a broader concept, the biggest risk to the consumer and restaurant space in 2014 is our MACRO theme of #InflationAccelerating.  The CRB Index, milk, cheese, natural gas, cattle, hogs and coffee are all up more than the S&P 500, as gold continues to signal higher lows.  With the Bloomberg Consumer Confidence Index flat week over week at -31, sluggish Per Capita Disposable Income, and a stagnant job market, it could be challenging for most companies to take price in order to offset inflation.


The irony of all this is that one of the few names I like on the long side is Darden Restaurants.  The CEO’s tendency is to do more of the same, only harder.  While I’m typically not a proponent of this line of action, it has indeed created a significant opportunity for a lot of money to be made.


It has also provided me with the material for a scathing attack on what has arguably been the largest case of value destruction in Casual Dining history.  For the record, if you’re reading this Mr. Loeb, I have everything you could possibly need to write your best letter yet.


Function in disaster, finish in style.


Howard Penney

Managing Director


Life Inside the Box - chartofday


Life Inside the Box - rta1

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