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Recent Notes

03/10/14  MCD: The Anatomy Of A Monthly Sales Press Release!

03/12/14  Stocks Remain Elevated As Sales Estimates Drop

03/12/14  DRI: Are We Being Mushroomed?

03/14/14  Beneficial Environment For QSRs


Events This Week

Monday, March 17

  • Sidoti & Company Emerging Growth Institutional Investor Forum: BOBE

Tuesday, March 18

  • Sidoti & Company Emerging Growth Institutional Investor Forum: DENN

Wednesday, March 19

  • SBUX Annual General Meeting
  • Janney Capital Markets Consumer Executive Summit: WEN

Thursday, March 20

  • Janney Capital Markets Consumer Executive Summit: BOBE
  • Stephens West Coast Conference: RRGB

Friday, March 21

  • DRI earnings call 8:45 AM EST

Chart Of The Day

Commodity prices have been surging in Q1 and the CRB Foodstuff Index is up approximately +400 bps YoY.  If this index remains at or above these levels throughout the year, we'd expect notable pressure to build on the cost of sales line for many operators as they lap easy YoY comparisons.  We've heard expectations of flat-to-slight commodity inflation in 2014, but this chart tells a different story.    



Recent News Flow

Monday, March 10

  • MCD reported February global comp store sales down -0.3%, primarily driven by a -1.4% comp in the U.S. and offset slightly by a +0.6% comp in Europe.
  • WEN introduced two new salads to its menu: the Asian Cashew Chicken Salad and the BBQ Ranch Chicken Salad.
  • GMCR changed its name to Keurig Green Mountain, Inc. after shareholders signed off on the name change at its annual meeting the prior week.
  • DRI filed a Form 10 in connection with its plan to spin-off Red Lobster.

Tuesday, March 11

  • JMBA revealed its new Kale Orange Power Fresh Juice Blend, reinforcing the company’s commitment to health.
  • COSI reported disappointing Q4 numbers, including -$0.23 EPS on a -5.7% company comp.
  • MCD hinted at some sort of future financial engineering event during its presentation at the Bank of America Consumer & Retail Conference as it continues to look at ways to optimize their capital structure.
  • FRSH Papa Murphy’s, the take and bake pizza franchisor, filed a $70mm IPO.
  • COSI Antonio Tomasello disclosed a 5.1% stake in the company and advised the board to remove the poison pill and further explore selling company stores to franchisees.
  • YUM declared a $0.37 dividend, in-line with expectations.

Wednesday, March 12

  • KKD reported mixed results, missing on the bottom line by a penny, but upped guidance and announced a higher share repurchase authorization which likely supported the stock.

Thursday, March 13

  • THI was upgraded to buy at KeyBanc with a $75 PT.
  • DRI Olive Garden launched a new LTO, the three-course Italian dinner starting at $9.99 in what appears to be a last ditch effort to drive incremental traffic.
  • MCD News hit the tape that employees are suing McDonald’s for alleged wage theft.  The 27 plaintiffs claim to represent thousands of employees and are looking for back pay and damages.
  • ZOES Zoe’s Kitchen, a Mediterranean fast casual chain, filed for an $80.5mm IPO.  More than half the money will be used to pay off debt, with the remaining being used to fuel future growth.  The company grew comps at a healthy clip (+6.9%) in 2013 and currently has AUVs approaching $1.5mm.
  • WEN Senior VP of North America operation, John Peters, has left the company to partner with current Wendy’s franchisee Rick Holland.  The two have signed an agreement to acquire 40 company-owned restaurants in the PHX area and Peters will run other restaurants that Holland already owns in the AZ, CO, MI, SD and OH markets.  Robert Wright has been named COO.

Friday, March 14

  • GMCR, SBUX amended their agreement to give Starbucks better business terms and a more extensive offering of SBUX K-Cup packs and types.
  • GMCR will replace WPX in the S&P 500, effective AMC on Friday, March 21.
  • THI appointed Managing Director of Google Canada, Christopher O’Neil, to serve as Director effective immediately. 
  • QUIZNOS filed for bankruptcy in a move to reduce its debt load by approximately $400mm and increase the company’s flexibility to execute on its planned operational enhancements.  The chain has struggled amid due to emergence of strong competition (Potbelly, Jersey Mike’s, Jimmy John’s, Firehouse Subs, etc.), an excessive debt load and years of store closures.

U.S. Macro Consumption

Last week was a forgettable week for consumer stocks in general, with the XLY down -2.3% vs the SPX -2.0%.  With that being said, restaurant stocks largely outperformed this broader index.  The Hedgeye U.S. Consumption Model is mixed this week, with 6 of the 12 metrics we track flashing green.  We believe the current environment is more conducive to select fast casual and quick-service restaurants than casual dining restaurants. 




XLY Quantitative Setup

From a quantitative setup, the sector remains bullish on an intermediate-term TREND duration.




Below we look at the performance of restaurant companies relative to the XLY and recent trends in earnings revisions estimates.


Casual Dining Restaurants

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: KONA +14.9%, DFRG +9.4%, CBRL +3.0%, CAKE +2.7%, BJRI +2.7%

Negative Divergence: RT -6.3%, DIN -1.4%, BWLD -0.1%


Notable 1-Month Earnings Revisions:

Positive Revision: RRGB +0.7%, BWLD +0.2%

Negative Revision: BOBE -25.4%, BJRI -25.4%, BBRG -7.8%, DIN -5.7%, KONA -5.4%





Quick-Service Restaurants

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: KKD +10.8%, GMCR +9.1%, SONC +7.1%, MCD +4.5%, TAST +4.4%

Negative Divergence: JMBA -0.8%, CMG -0.7%, YUM -0.4%, WEN -0.2%


Notable 1-Month Earnings Revisions

Positive Revision: JACK +3.9%, DPZ +1.2%, YUM +0.2%, BKW +0.1%

Negative Revision: TAST -8.1%, BAGL -5.9%, PNRA -4.6%, PLKI -4.6%, THI -2.5%






Howard Penney

Managing Director


Fred Masotta


ICI Fund Flow Survey, Refreshed

Takeaway: Although equity inflow was stronger than fixed income inflow during the week, the positive rate of change is stronger in bonds.

Editor's Note: This research note was originally published March 13, 2014 at 08:28 in Financials. For more information on you can subscribe to Hedgeye, please click here

Investment Company Institute Mutual Fund Data and ETF Money Flow


In the most recent week, equity mutual funds had another solid inflow albeit just inline with the year-to-date averages with bonds funds showing improving subscriptions, well above the year-to-date mean.


ICI Fund Flow Survey, Refreshed - wallstreet 


Total equity mutual funds produced another strong week of inflow with $5.3 billion of net subscriptions, a slight acceleration from the $4.9 billion inflow the week prior. The $5.3 billion inflow had an international fund bias during the most recent 5 day period, with $3.4 billion flowing into international equity funds and $1.9 billion flowing into domestic stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.9 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 


Fixed income mutual funds also had net inflows during the 5 day period ending March 5th with $3.7 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $2.9 billion into taxable products and a $756 million inflow into tax-free or municipal products, the 8th consecutive week of inflow into munis after 33 consecutive weeks of outflow. The 2014 weekly average for fixed income mutual funds now stands at a $1.0 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).


ETFs had mixed trends during the week, with a strong week of subscriptions in stock ETFs with $8.8 billion in net inflow with bond ETFs experiencing a sharp $7.2 billion outflow, the biggest bond ETF withdrawal in our 18 month data set. The 2014 weekly averages are now a $978 million weekly outflow for equity ETFs and a $1.0 billion weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $17.7 billion spread for the week ($14.2 billion of total equity inflow versus the $3.5 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.4 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 


Continued positive equity mutual fund inflow currently supports our long recommendation on T Rowe Price (TROW) which benefits from this trend with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the nascent trends on the institutional side of the industry, which is seeing a shift in asset allocation into fixed income and alternatives as pensions de-risk away from equities  (see our Legg report here).


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   



ICI Fund Flow Survey, Refreshed - ICI chart 1

ICI Fund Flow Survey, Refreshed - ICI chart 2



Most Recent 12 Week Flow in Millions by Mutual Fund Product:



ICI Fund Flow Survey, Refreshed - ICI chart 3


ICI Fund Flow Survey, Refreshed - ICI chart 4


ICI Fund Flow Survey, Refreshed - ICI chart 5


ICI Fund Flow Survey, Refreshed - ICI chart 6


ICI Fund Flow Survey, Refreshed - ICI chart 7



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:



ICI Fund Flow Survey, Refreshed - ICI chart 8


ICI Fund Flow Survey, Refreshed - ICI chart 9



Net Results:



The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $17.7 billion spread for the week ($14.2 billion of total equity inflow versus the $3.5 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.4 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 



ICI Fund Flow Survey, Refreshed - ICI chart 11 



Continued positive equity mutual fund inflow currently supports our long recommendation on T Rowe Price (TROW) which benefits from this trend with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the nascent trends on the institutional side of the industry, which is seeing a shift in asset allocation into fixed income and alternatives as pensions de-risk away from equities  (see our Legg report here).




In another sign of the increasing influence of activist investors, the pace of activist campaigns resulting in board seats is running at a five-year high.  


According to FACTSET, in the first two months of 2014, activist investors were granted one or more board seats at 16 U.S. companies, the most since 2009 when 22 campaigns at 21 distinct companies resulted in board seats. 


These trends are supportive of our bullish bias toward Darden.  We contend that buying DRI today represents a generational opportunity in the restaurant space, as the stock is currently trading at a significant discount to its underlying asset value.  In our view, there remains the potential for tremendous upside if we see Starboard successfully stop the spin-off of Red Lobster and we see a forward-thinking, seasoned restaurant operator running the company. 


The FACTSET study cited several factors which may be contributing to this recent concessionary approach of U.S. companies.  Perhaps the most important one is the widespread support activists are getting from mainstream institutional investors – a factor which we believe is being lost on Darden’s current management team.  The study showed that 60% of the proxy fights for board seats that went to an actual vote in 2013 resulted in a partial or outright victory for the activist. That's the highest win rate in the 13 years we have been tracking this data. By comparison, in 2003 the activist win rate was only 39%.


Darden’s current CEO has done nothing but destroy shareholder value over the past five years.  The company finds itself in an eerily similar position as MCD, SBUX, and EAT, not too long ago, when these companies tried appealing to the masses and began growing units too fast.  Not surprisingly, the road to recovery for each company was essentially the same, barring some obvious nuances.


Change is in the air at Darden. 





Howard Penney

Managing Director


Fred Masotta


Sell Some Gold?

Client Talking Points


It took a few weeks for overbought bubbles to deflate, but the S&P 500 dropping from its year-to-date high of 1881 to 1841 left its mark with immediate-term TRADE oversold. The SPX risk range is now 1828-1867.Trade it. 


Oil broke Hedgeye TREND support of $108.57 (Brent) last week and is down another -0.7% this morning. Seems that Saint Patty himself knows that with #InflationAccelerating, U.S. consumers need a Tax Cut at the pump. This could be it. Consensus is way long on crude.


Gold’s immediate-term TRADE overbought line is $1,385 within a big league breakout ($1,328 is now TRADE support). Up a whopping +15% year-to-date (versus the Dow, which is down -3.1%), it’s easy to sell some Gold up here and buy best ideas in U.S. stocks. At this price, my top three are Lorillard (LO), Owens Corning (OC), and T. Rowe Price Group (TROW). 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization. 


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.


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


RUSSIA: +1% for the Russian Trading System, but still crashing YTD -25.7% @KeithMcCullough


"We learn by doing." – Aristotle


More than 78,600 clean energy jobs were created in 2013, according to research group Environmental Entrepreneurs. Though impressive, clean energy job creation is actually down about 30% since 2012, the group says, due to economic headwinds and policy shifts. (Fox)


Takeaway: More money laundering issues in Macau






  • SNOW 5 p.m. earnings call            

Tuesday, March 18

  • Hedgeye Expert Call with Gaming REIT Attorney Ed Glazer at 11am please contact sales@hedgeye.com

Wednesday, March 19

  • Galaxy Entertainment:  FY 2013 annual results
  • iGaming North America 2014 thru Friday, Planet Hollywood Las Vegas

Thursday, March 20

  • None       

Friday, March 21

  • None       



SJM – The Tycoon Club high-limit gaming salon has opened in SJM Holdings Ltd’s Grand Lisboa.  The Tycoon Club, on the upper first floor of the casino, has 740 square metres of space, around 10 gaming tables and 30 slot machines.

Takeaway: Capacity constrained SJM eking out growth.


Sand China Ltd – The company announced non-executive director William Lau Wong will retire after its annual general meeting, scheduled for May 30, due to other business commitments.  Also, the Company said non-executive director Jeffrey Howard Schwartz will resign at the same time also because he has other business commitments. Previously, SCL announced non-executive director Irwin Siegel would retire following the May 30th meeting.


MGM – The newly remodeled New York-New York Brooklyn Bridge Plaza Experience has opened to the public  


GLPI – William J. Clifford unloaded 100,000 shares of the company’s stock on the open market in a transaction dated Tuesday, March 11th. The shares were sold at an average price of $37.42, for a total value of $3,742,000.00. Following the sale, the chief financial officer now directly owns 187,204 shares in the company, valued at approximately $7,005,174.

Takeaway:  It is interesting to see such a large insider stock sale this early in the life of this new company.  Apparently, no acquisitions are imminent.  Maybe the stock is fairly valued...




Macau – The junket business was rocked by further negative headlines when it was announced a Neptune Group shareholder was detained by Hong Kong authorities for suspicion of money laundering when he was found to have HKD 200 million in cash in his Hong Kong apartment. - (Macau Daily Times)

Takeaway:  The 3rd related story in a week along with last week’s Dept of State request as well as the Union Pay Card story. 


Macau – Joseph Lau, the billionaire chairman of real estate developer Chinese Estates Holdings of Hong Kong, was found guilty by a Macau court on Friday of corruption and money laundering in connection with the payment of a HK$20 million, or $2.6 million, to former Macau public works chief Ao Man-long in a money-for-land deal.

Takeaway:  Guilty verdict was expected


Revel – 75-80 Casino employees delivered a petition to the property’s management office, announcing their desire to form a union. 

Takeaway: Not sure the property can handle a higher cost structure



Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Detached From Reality

This note was originally published at 8am on March 03, 2014 for Hedgeye subscribers.

“They have a detached-from-reality, academic, floating abstraction form of intelligence.”

-John Allison


While I was flying to LA last night (during the Oscars, because that’s how I roll), that is not a quote about Hollywood. That’s what the former CEO of one of the best banks in American #history said about the Fed’s finest.


That free markets would make better price decisions than elitist central planners (members of the Federal Reserve) should not be a surprise. Ludwig von Mises proved the futility of central planning in his numerous books, including The Theory of Money and Credit (1913), Socialism (1922), and Human Action (1940).” (The Financial Crisis And The Free Market Cure, pg 34)


If you haven’t objectively studied any of those four books, no worries. Bush, Obama, Bernanke, and Yellen haven’t either.


But you can watch the real-world economics of currencies burning the purchasing power of their peoples this morning in Crimea. I’m hearing that with the Ukrainian currency crashing (-21% YTD), the Ukraine’s stock market being up +43.9% YTD (in burning FX terms) is bullish.


Detached From Reality - yellow


Back to the Global Macro Grind


In Burning Bucks, the US Stock market was “up for 2014” too – for like 1.5 days. But, after US GDP almost getting cut in half sequentially, and some geopolitical risk pin-action in equity futures today, that will change. Life that is detached from reality generally does, in a hurry.


My inbox is jammed. I can’t count how many emails I received on Friday saying that the “market is up on a GDP slowdown – your research call feels right, but the market doesn’t care”, or something like that…


To be clear, I don’t go with the how markets and GDP “feel” thing. You can overpay to get that from someone else. While the SP500 was up a whopping +0.6% for 2014 YTD (it’s March fyi), it's mainly the inflation and #GrowthSlowing parts of the market leading that:

  1. Healthcare (XLV) = +7.2%
  2. Utilities (XLU) = +6.5%
  3. Basic Materials = +1.9%

The most meaningful parts of the economic cycle (the consumption economy) are actually down YTD:

  1. Consumer Staples (XLP) = -1.5%
  2. Financials (XLF) = -0.7%
  3. Industrials (XLI) = -0.4%

But no worries, as long as you aren’t long anything like Kinder Morgan (KMI, KMP, KMR) in Bernanke’s overvalued Yield Chasing space – or short anything that loves US #Stagflation (like Gold +11.4% YTD), you’re killing it with the whole “market is up” thing.


In other non-Crimean news, US GDP #GrowthSlowing sequentially (from 4.12% in Q313 to 2.37% in Q413) is only the beginning of the Down Dollar (USD down another -0.7% last wk, and down 3 of the last 4 weeks), Down Rates (UST 10yr Yield -38bps YTD) thing.


And, looking at the components of the US GDP report:

  1. The Deflator (made-up inflation rate) bounce, big time, off its almost 50 yr low
  2. Government Spending dropped -1.05% sequentially from a GDP contribution perspective

So, the key vectors in the P (Policy) piece of the Hedgeye GIP (Growth, inflation, Policy) model are going to require the US government to:

  1. MONETARY vector – have the Fed start telling you we need a Policy To Inflate in order to amplify “inequality”
  2. FISCAL vector – have Obama ramp up deficit spending again in order to pretend to slow the “inequality”

I know, both US monetary and fiscal policy going dovish on the margin is just fantastic. Because, without going to sub 2% US GDP growth and plus 2% made-up-reported-inflation growth, how the heck else could the Keynesians blame Russia?


I’m actually hearing from my contacts in Miami that the Mexicans are going to blame the Russians too. Instead of ripping on US GDP #GrowthSlowing on Friday, Mexico’s stock market dropped to -2.4% on the wk to -9.2% YTD.


Yep, life in Latin America is starting to suck. With the whole deficit-spending-debt-ramp thing, Venezuela and Argentina are reminding people that Latin American stock markets can go down on stagflation too (MSCI LATAM Index -0.1% last wk to -8.1% YTD).


So cheer up – the “market is up.” Away from food and energy prices ripping humanity another new one last week:

  1. CRB Foodstuffs Index +3.2% to +10.5% YTD
  2. Oats (I’m probably just a rich guy eating the stuff) +7.1% to +42.2% YTD
  3. Coffee up another +6.4% w/w to + 59.6% YTD

There’s not a lot to worry about re: the whole #InflationAccelerating thing either… Unless you aren’t detached from reality, of course.


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


SPX 1825-1861

VIX 13.28-16.99

USD 79.59-80.31

EUR/USD 1.36-1.38


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Detached From Reality - G7 VIX


Detached From Reality - virt55

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