Bill Gross Is Way Late Getting Bullish on US Growth

Takeaway: What’s really impressive about the inflation-slows-growth trade is how obvious it is at this point.

Editor’s note: This is an excerpt from CEO Keith McCullough’s Morning Newsletter today. Incidentally, this is the third time Hedgeye has made a big directional call that #InflationAccelerating will slow US consumption growth—the other two being in Q1 of 2008 and Q1 of 2011.

Bill Gross Is Way Late Getting Bullish on US Growth - bg


…Meanwhile everyone and their brother from the #OldWall in NYC to Washington and now California (PIMCO calling for “high 2% US Growth”) continue to confuse nominal growth (inflation) with real (inflation adjusted) growth.


On Wednesday the US will release GDP for the 1st quarter, and it will likely:

  1. Have a 1% handle on it (down hard from the sequential peak of +4.1% in Q413)
  2. See the Deflator (yes, you have to subtract it from nominal GDP) continue to rise from its sequential Q213 low

Bill Gross Is Way Late Getting Bullish on US Growth - Chart of the Day


In other words, on the 2 core factors that matter in our GIP (Growth, inflation, Policy) model:

  1. INFLATION = will be accelerating
  2. GROWTH = will be slowing

More commonly called stagflation, the common man’s wallet gets squeezed when this starts to happen. That’s not my opinion, that’s US economic history in the post Greenspan era (Bernanke and Yellen).


… What’s really impressive about the inflation-slows-growth trade is how obvious it is at this point. With the biotech and #SocialBubble stocks (FB, TWTR, YELP, etc.) getting pounded again on Friday (Nasdaq down -0.5% on the wk to -2.4% YTD), Utilities (XLU) closed the week up another +1.9%!


Sure, if you’re long Gold (up +0.5% last week to +8.1% YTD), Bonds, or any stock that looks like a bond, you’re having a great year. As you should be.


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Monday Mashup: Adding ZOES, BOBE to the Watch List

Investment Ideas

The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.


Monday Mashup: Adding ZOES, BOBE to the Watch List - invest


DNKN We’re pulling DNKN from the Watch List as a potential long after the company delivered disappointing 1Q14 results.  We like Dunkin’s asset-light business model, but its exposure to the Northeast concerned us and, ultimately, stopped us from recommending it as a long.  Looking ahead, DNKN faces increasingly difficult comps for the next two quarters, which makes us cautious on the name.  


BOBE – We’re adding Bob Evans to our Watch List as a potential long.  Activist Sandell Asset Management has identified significant opportunities for value creation at the company and has presented a compelling case to shakeup the board and spark change.  If the proposed actions are implemented, Sandell values the company at approximately $90/share.  We believe the stock could be worth more than that.


ZOES – We’re adding Zoe’s Kitchen to our Watch List as a potential long.  Zoe’s is a unique concept that we believe is well positioned for growth in the fast casual industry as its aggressive expansion and same-store sales momentum persists.


Look for more to come on these two new names in the coming weeks.

Recent Notes

04/21/14  Monday Mashup: CMG, WEN and More

04/22/14  MCD: Staying on the Sidelines

04/23/14  DRI: The Hour Between Dog and Wolf

04/23/14  YUM: China Leads the Way

04/24/14  CAKE: Still Short

Earnings Call This Week

04/28/14  RUTH earnings call 4:30pm EST

04/28/14  DENN earnings call 4:30pm EST

04/28/14  BWLD earnings call 5:00pm EST

04/29/14  DFRG earnings call 8:30am EST

04/29/14  NDLS earnings call 4:30pm EST

04/29/14  BBRG earnings call 5:00pm EST

04/30/14  PNRA earnings call 8:30am EST

04/30/14  IRG earnings call 5:00pm EST

04/30/14  KONA earnings call 5:00pm EST

05/01/14  DPZ earnings call 10:00am EST

05/01/14  DIN earnings call 11:00am EST

05/01/14  BJRI earnings call 5:00pm EST

05/01/14  BAGL earnings call 5:00pm EST

Chart Of The Day

Putting the coffee surge in perspective – prices are now up 75.7% YTD.


Monday Mashup: Adding ZOES, BOBE to the Watch List - chart2

Recent News Flow

Monday, April 21

  • FRGI Taco Cabana opened its first Cabana Grill restaurant in Snellville, GA as Fiesta Restaurant Group continues its east-west expansion for all of its fast casual brands.
  • MCD The WSJ published an article that shows franchisees were largely critical of management’s efforts to protect market share in the breakfast daypart by offering free coffee amid increased competition.

Tuesday, April 22

  • DRI Starboard Value LP announced it secured enough votes to call a Special Meeting with the intention of stopping the proposed Red Lobster spinoff.  Starboard Managing Member, Chief Executive Officer and Chief Investing Officer, Jeffrey C. Smith, publicly criticized Clarence Otis, saying the Darden Chairman and CEO is in a hot seat.  Darden will have 60 days to call the meeting.
  • BJRI came to an agreement with PW Partners and Luxor Capital, agreeing to nominate three new independent directors at the 2014 Shareholder Meeting.  Mark McEachen has been appointed to the board, effective immediately, while Patrick Walsh and Noah Elbogen will be up for election at the Annual Meeting.  BJ’s also implemented a $50mm buyback program.
  • FRGI upgraded to strong buy at Raymond James with a $48 PT.
  • RUTH upgraded to outperform at Raymond James with a $13.50 PT.
  • DFRG downgraded to market perform at Raymond James.

Wednesday, April 23

  • CBRL Preliminary results reveal that shareholders “overwhelmingly reject” both non-binding proposals put forth by Biglari Capital Corp.  This is now the fourth time shareholders have shot down Sardar Biglari’s activist efforts.

Thursday, April 24

  • DNKN announced a second quarter cash dividend of $0.23 per share, payable on June 4, 2014.
  • SONC promoted James O’Reilly from Chief Marketing Officer to Chief Brand Officer and Todd Smith from VP of Marketing to Chief Marketing Officer.
  • BOBE acknowledged the receipt of notice of nominations put forth by activist Sandell Asset Management and largely rejected Sandell’s recommended steps to increase shareholder value.

U.S. Macro Consumption

The XLY (-0.5%) underperformed the SPX (-0.1%%) last week, as both casual dining and quick service stocks, in aggregate, underperformed the broader XLY benchmark.  The Hedgeye U.S. Consumption Model continues to be a bearish signal, currently flashing red on 7 out of 12 metrics.  We continue to believe the current environment is more conducive to select fast casual and quick service restaurants than casual dining restaurants.


Monday Mashup: Adding ZOES, BOBE to the Watch List - chart3

XLY Quantitative Setup

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


Monday Mashup: Adding ZOES, BOBE to the Watch List - 4

Casual Dining Restaurants

Monday Mashup: Adding ZOES, BOBE to the Watch List - 5


Monday Mashup: Adding ZOES, BOBE to the Watch List - 6

Quick Service Restaurants

Monday Mashup: Adding ZOES, BOBE to the Watch List - 7


Monday Mashup: Adding ZOES, BOBE to the Watch List - 8




Howard Penney

Managing Director


Fred Masotta



We’re now projecting full month YoY GGR growth of +7-9% for April, slower than our original projection of +14%, probably due in part to low hold %.  This past week's daily table revenues averaged HK$904 million, only 2% above the comp from last year.


Seemingly becoming a trend, SJM is once again gaining share as we approach the end of the month.  Share of 25.2% is above the company’s recent trend.  MPEL is the only other company meaningfully above trend.  Galaxy improved its share this past week but April has not been kind to that company’s properties.  LVS is also now tracking below its 3 month moving average.


We still expect a nice rebound in May revenues in Macau which could approach +20% YoY growth.





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Marijuana Legalization: Facts & Figures

Last week we hosted a special call Marijuana Legalization: The Debate Begins, featuring Dr. Beau Kilmer, Codirector of RAND Corporation’s Drug Policy Research Center, to kick off a series of speakers on the topic. 


Dr. Kilmer co-authored the book Marijuana Legalization: What Everyone Needs To Know. Below we’ve summarized the first half of the book in which the authors provide a number of facts & figures on marijuana legalization. With increasingly more Americans supporting marijuana legalization, in fact a slight majority (54%) based on a recent Pew Research survey, we believe the data and studies provided in the book (while some are rough estimates and contested) offer a starting point for sizing up marijuana and the potential road to its legalization in the U.S.


Marijuana Legalization: Facts & Figures - Pew marijuana chart


Chapter 1: What is Marijuana?

  • The marijuana plant contains concentrated amounts of mind-altering chemicals known as cannabinoids.
  • Marijuana (or cannabis) is neither a stimulant nor a depressant.
  • THC (delta-9-tetrahydrocannabinol) is the main psychoactive ingredient in marijuana, and can vary based on the wide genetic diversity of marijuana.
  • When marijuana is consumed as a joint, less than half of the THC is inhaled and absorbed by the lungs (the rest is burned up by the smoke).
  • THC enters the bloodstream and begins to reach the brain within seconds.
  • Ingesting marijuana orally (e.g. eating marijuana brownies) is less efficient, with smaller fraction entering the user’s bloodstream.
  • Marijuana can be detected in a user’s system well after the high, therefore complicating testing in determining usage.

Chapter 2: Who Uses Marijuana?

  • Globally, 125-200 million people use marijuana in the course of a year, or ~ 3-4% of the world’s population age 15-64, making cannabis by far the most widely used illicit substance.
  • The prevalence of marijuana use in the U.S. is about three times the global average.
  • In the U.S., 44% of 12th graders have tried the drug at least once, 6% are daily users.
  • Marijuana use is highest among 18-25 year olds, with first use around the same time of alcohol use, ~ age 16.
  • While marijuana did not achieve mass-market status in the U.S. until the mid-1960s, historically it is one of the oldest of the psychoactives
  • Hemp cord dates back 10,000 years and the first recorded use of medical was in China around 2700 BC.
  • By the late 19th Century, marijuana was a common ingredient in many medicines and was widely available, however not consumed as an intoxicant until the early 1900s.
  • By 1931, 29 states had criminalized marijuana (such movies as Reefer Madness propagated strong anti-marijuana government propaganda).
  • Usage did not pick up until the 1960s. A 1967 Gallop poll of college students reported a 5% lifetime prevalence of use. In 1969 the same poll totaled 22%, and by 1971 51%.
  • President Nixon signed the Comprehensive Drug Abuse Prevention and Control Act of 1970, which along with the Controlled Substances Act (CSA), created a scheduling system that place psychoactive substance such as heroin, LSD, and marijuana as Schedule I drugs.
  • The Reagan administration in the 1980s increased anti-marijuana rhetoric with the “Just Say No” campaign and marijuana use dropped.
  • However in the 1990s usage bounced back, yet below the levels reached in 1979-80.
  • 40-50% of the people who have ever tried marijuana report a lifetime total of fewer than 12 day of use.
  • Regular users are in the minority, but they dominate market demand. 6 million Americans aged 12 and over use marijuana on a daily basis, according to National Survey on Drug Use and Health, in 2009.
  • There’s a clear trend since the 1960s of more potent marijuana offerings, and while marijuana use tended to be “upscale” demographically in the 1960s, the bulk of marijuana consumed today is smoked by people both poorer and less educated.
  • Estimates suggest the total market value of marijuana (medical and illicit) at $15 to $30 billion annually (versus estimates of $23 billion for corn and $17 billion for soybeans)

Chapter 3: How is Marijuana Produced and Distributed Today?

  • Today in the U.S. marijuana is mostly grown on a small scale, and can be grown outdoors or indoors, with or without soil; the cannabis plant is hardy.
  • Unlike cocaine and heroin, marijuana need not be extracted or refined; the dried plant material is the drug.
  • With reasonable confidence it is estimated that the majority of marijuana consumed in the U.S. is imported from Mexico (1/2 to 2/3rds); domestic production is the next largest source (1/5th to 2/5th), with smaller amounts imported from Canada, Jamaica, and a few other countries.
  • California dominates for outdoor plants (74% of the 9.8 million plants in 2009) and to a lesser extend indoor plants (41% of the 300,000 plants), followed by Washington (indoor and outdoor), Tennessee (outdoor), and Florida (indoor).[Note: we’d suspect that Colorado (indoor) growth may be entering this list if more current data was available].
  • Most marijuana entering the U.S. from Mexico is smuggled in by violent drug trafficking organizations.
  • The price of marijuana goes up markedly as it moves down the distribution chain from grower to user.
  • Commercial-grade marijuana produced in bulk in Mexico (4-6% THC) sells for about $35-$50/pound in Mexico and $200-500/pound just inside the U.S. border, increasing at a wholesale price of ~ $400/pound for every thousand miles away from the Mexican border, reaching $1,000 - $1,400/pound in the East and Northeast.
  • Marijuana is so expense primarily because production and distribution are illegal.

Chapter 4: How Stringent Is Marijuana Enforcement in the U.S.?

  • In 2010 there were more that 1.6MM state and local arrests for drug violations
  • > half of arrests were for marijuana offenses; 46% for possession and 6% for sale/manufacturing.
  • With an estimated 30MM Americans users of marijuana per year, only 2.5% of users got arrested.
  • Not all marijuana arrests lead to prosecution. Even if convicted, what happens depends on age, number of prior arrests, amount of marijuana possession, and the jurisdiction.
  • Alaska has the most lenient statutory sanctions for possession of small quantities: Possession of 1 ounce in private residence is not considered a criminal act and carries no penalty.
  • In California, Maine, Massachusetts, and Nebraska possession of up to one ounce is consider a civil infraction, or petty act, with no jail time, but fines may range from $100 to $600.
  • Reasonable estimates put total incarceration costs at $1.2B (about 40,000 inmates at $30k per year).
  • Seven states, referred to as the M7, account for about 90% of marijuana cultivated: California, Hawaii, Kentucky, Oregon, Tennessee, Washington, and West Virginia.

Chapter 5: What Are The Risks Of Using Marijuana?

  • There is no clear evidence on what type of person is the most typical user.
  • Epidemiological study by James Anthony and colleagues found that 9% of those that had used marijuana wound up being clinically dependent on marijuana at some point in their lives, males are at a much greater risk than females. Comparable rate for alcohol = 15%; cocaine = 16%.
  • Heavy marijuana users can experience withdrawals, but physical discomfort generally pales in comparison to that experience by those with serious addictions to alcohol or heroin.
  • Robin Room and colleagues found that marijuana posed less addictive risk than tobacco, alcohol, cocaine, stimulants, or heroin.
  • In 2009 marijuana accounted for more than 350,000 drug treatment admissions in the U.S.
  • The Center for Disease Control’s WONDER database reports only 26 deaths between 1997 and 2007 due to the use of cannabinoids.
  • Marijuana smoke contains carcinogens.  What is not clear is whether exposure is great enough to cause cancer.
  • Marijuana users generally inhale more deeply than cigarette smokers, but consumer far less marijuana than regular cigarette smokers consume tobacco.
  • Kids who use marijuana, particularly those who start marijuana use at a young age, are statistically more likely to go on to use other drugs than their peers who do not use marijuana.
  • Being stoned impairs driving performance, but driving stoned isn’t as dangerous as driving drunk, however determining toxicity is a challenged because marijuana can stay in the system for a number of days.
  • The two major research projects that follow expectant mothers and their children after birth both found an association between prenatal marijuana exposure and poorer cognitive development, attention and executive functioning.

Chapter 6: What Is Known About The Nonmedical Benefits Of Using Marijuana?

  • Astoundingly little, claim the authors.
  • Serious scholarship in the U.S. is hamstrung by administrative rules. Only one facility is allowed to grow cannabis for use in research, and that supplier is only allowed to provide it to the government.
  • Scientists can’t get legal supplies of research material without applying for a grant from the National Institute on Drug Abuse; that agency has not proven especially responsive to requests from researchers interested in studying either the benefits or harms of marijuana.
  • So while heroin, cocaine, methamphetamine, or LSD are available to researchers, marijuana remains an exception.

Chapter 7: What Are The Medicinal Benefits Of Using Marijuana?

  • It depends on who you ask.
  • U.S. Federal government unwaveringly argues that marijuana has no medicinal value, the states’ positions are mixed.
  • Polls conduction In 2010 by ABC News/Washington Post and Pew showed that 8 in 10 respondents supported medicinal marijuana.
  • Proponents point to marijuana as having therapeutic value in treating a range of symptoms; among the most common are appetite loss, nausea, chronic pain, anxiety, sleeping disorders, muscle spasms, and intraocular pressure.
  • The Federal government has placed marijuana in Schedule I, the category of substances with no accepted medicinal use.

We will not be making any investment recommendations on any marijuana stocks at this time, but we hope that speakers like Dr. Kilmer can help elucidate such topics as policy and legal frameworks, economics of marijuana, and social implications around marijuana legalization and help lay the groundwork for an emerging investment thesis.  We hope you can join us for future calls.


Matt Hedrick



Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.








  • What was the decision making behind sailing Eastern Caribbean year round for Escape?
  • Will cost cutting be the driver to meeting guidance this year?
  • How should we think about the Caribbean pricing pressure?  Is it mainly an aggressive promotional environment from MSC and Carnival or is demand faltering?
  • Is NCLH responding to the fierce marketing tactics by Carnival i.e. will marketing expenses go higher this year?
  • Getaway/Breakaway premiums have remained relatively steady.  But is that due to plummeting prices from its peers in their respective markets?
  • Is Europe strong overall or are some stronger regions offsetting others?
  • How do you feel about the Quantum competition in Q4?





  • Solid quarter.  Will be more on the ticket side in terms of improvement as opposed to load

Bookings outlook:

  • Thinks they lost a little bit of ground but not anything to be concerned.  Is comfortable with each of the quarters.


  • Breakaway is going to have another very good year, and the pricing is in the zone of where it was last year


  • We've been having a consistent performance in the Miami market


  • Environment has remained in a promotional state


  • Some softness in Alaska where the introduction of a third ship for the first time since 2009 was coupled with a unique itinerary
  • Feel pretty good about Alaska


  • There's a lot of capacity in Miami, but it's no different than anything else
  • More focused today on Bermuda and optimizing that opportunity in that premium itinerary.


  • Feel pretty good about Europe

Fuel efficiency: 

  • Expect consumption savings to increase as further energy saving initiatives are implemented and NCLH take delivery of newer more fuel-efficient ships.
  • Have received exemptions from the appropriate regulatory agencies to burn high-filter bunker fuel until installed. These scrubbers carry a very attractive return on investment and reduce our sulfur emissions to comply with the upcoming eco fuel Standards.


  • Expect adjusted net cruise cost, excluding fuel per capacity day, to decrease around 3% in 2Q

Cost cuts:

  • Leveraging SG&A, with bringing on these additional ships and their being roughly double the size of NCLH's existing fleet.

Organic pricing/ comp fleet:

  • Very positive

Capital allocation:

  • Shorter-term solution or answer would be to do some stock acquisition.  If the selling shareholders are still in the puzzle,could marry with that at the appropriate discounts or whatever. And then, at some point, start a dividend (probably would be at least a year later than the first step with the share repurchase).


  • Haven't changed pricing

European Banking Monitor: Greek CDS Continues Tightening

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - It was a mixed bag for European swaps this past week. 25 swaps widened and 13 swaps tightened. The Greek banks continue to tighten notably, dropping an average of 33 bps in the past week and 185 bps in the past month. Belgian banks also tightened considerably, dropping an average of 9 bps w/w. Russia’s Sberbank, Germany's IKB, and France's Societe Generale all widened w/w, by 25, 15, and 11 bps, respectively. 


European Banking Monitor: Greek CDS Continues Tightening - chart 1 euro financial cds


Sovereign CDS – European Sovereign Swaps mostly tightened over last week. French sovereign swaps tightened by -3.9% (-2 bps to 46 ) and Portuguese sovereign swaps widened by 1.8% (3 bps to 173).


European Banking Monitor: Greek CDS Continues Tightening - chart 2 sovereign cds


European Banking Monitor: Greek CDS Continues Tightening - chart 3 sovereign cds


European Banking Monitor: Greek CDS Continues Tightening - chart 4 sovereign cds


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread did not change from the previous week, remaining at 15 bps.


European Banking Monitor: Greek CDS Continues Tightening - chart 5 euribor ois spread


Matthew Hedrick



Ben Ryan




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