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HedgeyeTV: This Week's Top Three Videos


Hedgeye internet and media analyst Hesham Shaaban remains bearish on Yelp on a long term TAIL duration for two reasons: the company's flawed business model and major macro headwinds that the firm faces.


Hedgeye's gaming, lodging and leisure team talks about possibly better times for Macau's casinos and potential strength in some global hotel stocks.


bank of america

Hedgeye's financials team Josh Steiner and Jonathan Casteleyn take a deep dive into Bank of America's earnings, and also look at broader trends in the banking industry.

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Hard Core Capitalism

This note was originally published at 8am on April 04, 2014 for Hedgeye subscribers.

“He is striking at everything. I am afraid of this man.”

-Thomas Gibbons, 1822


That’s the opening line to Part One (titled “Captain” – 1794-1847) in the latest brick I’ve cracked open, The First Tycoon The Epic Life of Cornelius Vanderbilt, by T.J. Stiles. If you’re into hard core capitalism, this is where it’s at.


That’s not to say I’m not into Grubhub.com (GRUB) going public this morning (I couldn’t make that up if I tried)… or any company that doesn’t make any money for that matter. If the public is dumb enough to pay 15-20x revenues for companies with no earnings, there is a precedent for that. #1999


Hard Core Capitalism - grubhub


There’s also a longstanding history in America of hard core capitalists making hard core profits. Admittedly, I have a confirmation bias towards them. As William Gibbs McNeil said about Vanderbilt in 1840, “I’d sooner have him with us, than against us.” Amen to that.


Back to the Global Macro Grind


As the European Central Bank (ECB) reduces the size of its balance sheet, Yellen’s Federal Reserve continues to ramp up the size of hers. At $4.2 TRILLION, I was perusing the Fed’s balance sheet last night. It was up another +$9.5B wk-over-wk, and +$1 TRILLION year-over-year. Socialism, baby!


Is that a bad word?


Or should we use statism? What else would you call an un-elected agency (the Federal Reserve), whose mandate is to get tighter as inflation accelerates and the economy expands, getting looser for the sake of the 1%-10% of the population that benefits from asset price inflation?


Economic expansion?


Yes. Newsflash:

  1. The US economic expansion is now going into its 59th month!
  2. Pardon? Yes. Take out all the spew politicians have been whining about since missing the buying opp of a lifetime in 2009.
  3. And focus on what actually happened. In gravity speak, this is called a cycle (see #history table in today’s Chart of The Day)

Oh, and what you’ll note in the historical data is that the average US economic expansion following a recession is also … drum-roll… 59 months!


In other words, during this epic expansion, the Fed:

  1. Didn’t see any inflation, at the all-time-highs in US energy, food, education, rent, etc. inflation – so it didn’t see a need to tighten
  2. Won’t ever see inflation, until we have another inflation crisis
  3. And is now tapering (late) into what will likely be a US consumption growth slowdown

Yep, that last part is the least consensus of everything else I wrote, primarily because my conclusion is embedded in a forecast that isn’t consensus – i.e. that US #InflationAccelerating is finally slowing US consumption growth.


Hard core Keynesianism, this view is not.  And what do you do if you share it? Do more of what you’ve been doing for 3 months:

  1. Buy Inflation (Short US Dollars, and Buy Commodities and/or anything with pricing power)
  2. Buy Bonds (because the Fed has 0% credibility and/or intention to fight inflation)
  3. Buy Foreign Currencies who has monetary policies that are building credibility

That’s why I feel pretty good about selling US Buy-The-Damn-Bubble #BTDB Growth Equities (everything we liked last year), booking those gains and plowing them back into the former Bernanke Bubbles (Food, Gold, Utilities, REITS, Bonds, Emerging Markets, etc.) that blew up in 2013.


The inflation topic drives people who take the Fed’s word for it (that there is no inflation) squirrel. But those are mostly people who are educated with a serious level of Western Academic Groupthink and don’t think for themselves. If you ask objective people, they know the government is lying to them.


We did a poll @Hedgeye.com yesterday (powered by Polstir, here) that asked a very basic question: Do you trust the government’s inflation numbers?


87.5% responded no.


Yes Mr. and Mrs. Big-Government-Made-Up-Data, Hedgeye is 6 years older (with much wider distribution) than when we called you out on the last inflation-slows-growth cycle reality (our US consumer recession call in early 2008). We’ll be striking at everything you say going forward. Be afraid of the common man.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.66-2.82%

SPX 1868-1899

USD 79.83-80.72

EUR/USD 1.36-1.38

Gold 1273-1318


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Hard Core Capitalism - US Recession Cycle


Hard Core Capitalism - Virtual Portfolio

CMG: Building Market Share

Takeaway: We remain bullish on CMG, as it continues to take share in an ultra-competitive environment. Recent comp & traffic numbers are unheard of.

Comps: CMG delivered +13.4% comp growth in the quarter, beating estimates of +8.8%.  Management upped its FY14 comp guidance from low to mid-single digit growth up to high-single digit growth.  Revenues of $904.163mm came in 3.5% higher than consensus estimates.


Margins: Despite accelerating top line trends, margin pressure continues to squeeze profits.  Food costs accounted for 34.5% of revenue, up nearly 150 bps YoY, due to higher beef, steak, avocado and cheese prices.  Restaurant level margins came in at 25.9%, down 40 bps YoY.  G&A expenses accounted for 7.4% of revenue in the quarter, up 130 bps YoY due primarily to higher non-cash compensation exp. and litigation costs.  Operating margins came in at 15%, down nearly 150 bps YoY.

CMG: Building Market Share - 4 17 2014 4 05 37 PM

Earnings: EPS of $2.64 came in light, missing consensus estimates by approximately 8% as the aforementioned margin pressure weighed on profits.


Analysis: While the majority of the restaurant industry continues to blame poor weather for disappointing comps, Chipotle delivered +13.4% comp growth primarily on the back of traffic gains.  Chipotle continues to take market share in an increasingly competitive environment.


Declining margins are a concern, but are not insurmountable.  Food inflation is weighing heavily on the cost of sales line, as beef, steak, avocado and cheese prices continue to surge.  In order to combat this pressure, management announced they will take a mid-single digit price increase in 2H14.  This should help mitigate food costs, which are expected to run above 36% of revenues (excl. any price increase) for the full-year.  Management indicated they have ample pricing power and we tend to agree.  In our view, Chipotle’s loyal and growing customer base will be willing to look past a $0.24-0.40 increase in the price of a burrito.  People are willing to pay for a premium product. 


Even with this margin pressure, Chipotle still operates a best in class business model and the demand for the product appears as strong as ever before.  Faster throughput contributed meaningfully to the quarter, as restaurant saw an average increase of seven transactions at both peak hour lunch and peak hour dinner times.  A unique and differentiated marketing/advertising approach helps keep CMG top of mind and continues to drive incremental traffic.  Catering, though immaterial, continues to be a potential sales driver.  We expect this to pick up steam in 2Q as graduation season commences. 


CMG typically trades up on strong comps post-earnings, even when EPS misses, but an uncertain margin outlook has weighed down the stock.  We believe same-store sales momentum and a price increase will effectively mitigate oncoming pressure, leading CMG to deliver +20% EPS growth over the next two years.  Longer-term, international, ShopHouse and Pizzeria Locale continue to provide CMG with a strong growth runway.



  • CMG continues to poach market share from competitors as same-store sales and same-store traffic momentum persists.
  • Marketing/advertising drives incremental traffic as the “Better Ingredients” campaign rolls out to 30 different markets in 2Q.
  • Catering ramps up.
  • Management accelerates its share buyback program.


  • Increasingly difficult comps for the remainder of the year.
  • Food costs continue to surge.
  • Consumers aren’t as receptive to a price increase as anticipated.
  • Margin pressure erodes earnings.


CMG: Building Market Share - cmg2


CMG: Building Market Share - cmg3 



Howard Penney

Managing Director


Fred Masotta


Podcast | McGough from Lululemon’s Analyst Day ($LULU)

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