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Monday Mashup: PBPB, TAST and More

Investment Ideas

The table below lists our Investment Ideas as well as our Idea Bench -- 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: PBPB, TAST and More - chart1


Notable Callouts

We are removing short PBPB from both our Best Ideas and Investment Ideas list.  Note to follow shortly.


Recent Notes

09/15/14 Monday Mashup: SBUX, LOCO and More

09/18/14 Short SBUX Call Today @11AM

09/18/14 Short SBUX Call Replay

Events This Week

Tuesday, September 23rd

  • JMBA Wedbush California Dreamin Consumer Conference 1:20 pm EST
  • DENN Wedbush California Dreamin Consumer Conference 2:30pm EST
  • KONA Wedbush California Dreamin Consumer Conference 2:30pm EST


Chart of the Day

Monday Mashup: PBPB, TAST and More - chart2


Recent News Flow

Monday, September 15th

  • DRI upgraded to outperform at CLSA with a $51 PT.
  • THI announced preliminary 3Q14 quarter-to-date same-store sales of +3.6% in Canada and +7.0% in the U.S.
  • RRGB announced it is two weeks away from opening its newest restaurant in Illinois.
  • DRI filed an investor presentation regarding operating initiatives underway at Olive Garden and other restaurants.

Tuesday, September 16th

  • JMBA introduced made-to-order Energy Bowls in stores nationwide. "Jamba's new Energy Bowls are a nutritious blend of real, whole fruit and soymilk or fresh Greek yogurt, topped with an assortment of dry toppings and fresh fruits."
  • DNKN announced its commitment to 100% sustainable palm oil for all Dunkin' Donuts U.S. restaurants by 2016.
  • SONC announced its FY15 outlook which includes EPS growth guidance at the high end of its 14-20% long-term target, positive same-store sales in the low single digit range, drive-in-level margin improvement of between 50 to 100 bps and more.

Thursday, September 18th

  • DRI sent a letter to shareholders urging them to vote the BLUE proxy card "FOR ALL" of Darden's nominees.  In the letter, Darden fired shots at two of its former employees - former Olive Garden President Brad Blum and former Olive Garden executive Bob Mock - who are currently working in advisor roles to activist Starboard Value.
  • MCD increased its quarterly dividend by 4.9% to $0.85 from $0.81.
  • TAST exercised its right of first refusal to purchase 30 Burger King restaurants in eastern North Carolina for a total purchase price of $20 million payable in cash.  Carrols plans to sell these properties and lease them back for net proceeds of $13 to $14 million.  Assuming the low end of that range implies that TAST is buying 30 locations for $7 million or approximately $233,333 per unit.


Sector Performance

The SPX (+1.3%) outperformed the XLY (+0.2%) as both casual dining and quick service stocks, in aggregate, outperformed the XLY.


Monday Mashup: PBPB, TAST and More - chart3


Monday Mashup: PBPB, TAST and More - chart4


XLY Quantitative Setup

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


Monday Mashup: PBPB, TAST and More - chart5


Casual Dining Restaurants

Monday Mashup: PBPB, TAST and More - chart6

Monday Mashup: PBPB, TAST and More - chart7


Quick Service Restaurants

Monday Mashup: PBPB, TAST and More - chart8

Monday Mashup: PBPB, TAST and More - chart9


Howard Penney

Managing Director


Fred Masotta


Small Caps Struggling

Client Talking Points


The Russell 2000 sadly, closed down -1.4% on BABA day and is down that much for the year-to-date. The bubble in illiquid/small cap stocks (over 50x trailing earnings) will only be clear in hindsight, but we remain bearish of it in the meantime vs. big cap liquidity on the long side.


The biggest ramp in USD since 1997 has embedded some serious correlation risk into macro markets – on a 30-day correlation basis (which the machines chase), USD and SPX have a positive correlation of +0.68, whereas Brent Oil and Gold have negative correlations of -0.86 and -0.95, respectively. USD big time overbought signal too.


Correlation to USD remains as obvious as the round trip move the CRB Index has had during 2014 – on a 90 and 120 day basis the USD correlations to the CRB Index are -0.81-0.83. In our GIP model, this is called a Quad 4 move (when both growth and inflation are slowing, at the same time = #deflation).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


EUROPE: stoxx start the wk red w/ Greece -1.2% and Russia -1.2% leading losers



The purpose of learning is growth, and our minds, unlike our bodies, can continue growing as long as we live.

-Mortimer Adler


U.S. Healthcare Stocks (XLV) are up +1.7% on the week to +17% year-to-date.


The Velveteen Bear

This note was originally published at 8am on September 08, 2014 for Hedgeye subscribers.

“You become. It takes a long time.”

-Margery Williams


That’s a quote from one of the best children’s books I have ever read to my kids, The Velveteen Rabbit. It was also cited in Brene Brown’s recent #behavioral book, Daring Greatly (pages 110).


“Real isn’t how you are made… it’s a thing that happens to you.”

“Does it hurt?” asked the Rabbit. “Does it happen all at once, like being wound up – or bit by bit?”

“It doesn’t happen all at once,”  said the Skin Horse. “You become. It takes a long time.”


While that resonates with me as a husband, Dad, hockey coach, etc., it really hits the nail on the head in becoming a Velveteen Bear on the US stock market. I haven’t been this bearish since the fall of 2007. Getting really bearish is a process. It takes time.

The Velveteen Bear - v7


Back to the Global Macro Grind


After Europe moved back into crisis mode (easing, printing, praying) and we received the worst US jobs report in 7 months, you just have to buy the all-time-bubble high in SPY on that, right? Right. Maybe with other people’s money.


After almost (I reiterate, almost!) having its first-four-down-days in a row of 2014 on Friday, the SP500 rallied from down to up on the day, to close up a whopping +0.2% on the week. That’s 5 consecutive “up” weeks. #hooray


In other news, the Russell 2000 (which derives 80% of its revenues from the US) flashed yet another bearish divergence, closing down -0.4% on the week to pretty much flat for 2014 YTD.


To give US equity bulls credit, this is what I liked about last week:


  1. After the ECB torched the Euro, the US Dollar (vs. the Euro) was up another +1.4% on the week
  2. The US 10yr Treasury Yield rose +12 basis points on the week to 2.46%
  3. The Yield Spread (10yr minus 2yr) widened +10bps on the week to +195bps


Not only was that something to like last week, it was something I loved all of last year. Dollar Up, Rates Up – that’s what should drive a US growth bear insane.


Other than the Russell 2000, what I don’t like in 2014 is that a key component of the Dollar Up, Rates Up storyline is missing - rates are down, hard, in 2014:


  1. Inclusive of last week’s bounce to lower-highs, the 10yr yield is -19% (or -57bps) YTD
  2. For 2014 YTD the Yield Spread (10yr minus 2yr) is still crashing (-26%) or down -70bps


In conjunction with these classic early cycle slow-down macro signals (which most European growth bulls said weren’t growth slowing signals until the ECB reminded them how fast things were slowing), you’ve seen:


  1. Early Cycle Stocks (Housing, Consumer Cyclicals, Regional Banks, the Russell, etc.) underperform
  2. Slow-growth #YieldChasing Stocks (Utilities, REITS, Big Cap Dividend Stocks, etc.) outperform


In case you aren’t long something like Argentina (stock market up another +6.1% last week to +93.2% YTD) whose economy still sucks, and you’ve stayed with the long #YieldChasing thing:


  1. Utilities (XLU) were up another +0.8% last week to +14.9% YTD
  2. REITS (MSCI index) were up another +1.0% last week to +19.6% YTD


Seriously. Who needs to be long the spoos when you can be long the good stuff!


While Ocham’s Razor (boil it down, simplify) is a really sexy concept, you can’t over-simplify. While a stronger Dollar (burning Euro) has toned down some of the commodity #InflationAccelerating that we saw in the first half of 2014, at some point you have to ask yourself if it’s going to be incremental enough to stop an early cycle US slowdown that’s already in motion?


To contextualize that key risk management question, don’t forget that the US is 63 months into this economic expansion. And the jobs market (both ADP slowing for 2 consecutive months and last week’s jobs report), which is a classic late-cycle indicator that strengthened, well, at the end of the cycle… is starting to hint that the bond market has #Q3Slowing nailed.


If US jobs and housing data slows, at the same time, what do you think Janet is going to do next? That’s right. She’ll do A) what Draghi just did and B) the Japanese are going to keep trying – moarrr incremental easing… That’s bullish for bonds and anything stocks that looks like a bond. And that’s all your cuddly Velveteen US Growth Bear has to say about that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.32-2.46%

SPX 1994-2009

RUT 1151-1181

VIX 11.34-12.92

EUR/USD 1.29-1.32

Gold 1257-1298


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Velveteen Bear - Chart of the Day

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CHART OF THE DAY: Behold the IPO Bubble $BABA

Takeaway: Friday's Ali-Bubble IPO was "one of the most epic US stock market days I’ve witnessed in my career" said Hedgeye CEO Keith McCullough.

CHART OF THE DAY: Behold the IPO Bubble  $BABA - Chart of the Day

Friday's Frenzy

“Where  is the lightning to lick you with its tongue?”



That’s another great quote from the latest #behavioral book I have been cranking through – The Rise of Superman, by Stephen Kotler. It’s also the perfect aphorism for one of the most epic US stock market days I’ve witnessed in my career.


Did the thunder and lightning of the Ali-Bubble lick you on Friday? Rising like a phoenix to market caps greater than General Electric (GE) and WalMart (WMT), the BABA licked someone, big time, at $99.70 (top tick of the day).


But what’s dropping $25 billion dollars or so in a few hours of trading amongst friends? Never mind it dropping to $90 intraday. As long as you owned it at $68, you crushed it. “Behold” the IPO bubble. “He is the lightning; he is the frenzy.” –Nietzsche


Friday's Frenzy - 79


Back to the Global Macro Grind


All the while, amidst Friday’s frenzy, the rest of the global macro market did not cease to exist. After the SP500 had herself an epic outside reversal, the Long Bond (TLT) rallied and the Russell 2000 got licked for a -1.4% drop on the day.


In one of the more peculiar “secular bull” markets (or whatever they’ve been calling a market that’s gone up for 5 years), the Russell 2000 is now down for 3 consecutive weeks and -1.4% for 2014 YTD (vs. the slow-growth Long Bond TLT = +12.9% YTD).


“So”, now the question is, has the licking in illiquidity already begun?


Illiquidity, as in small caps that trade by appointment – but usually on big volume, on down days (when everyone has to get out at the same time)… if you have been long 1 of the 41% (stocks in the Russell that have had greater than 20% declines), you get what I mean.


Perhaps this is Mr. Macro Market’s message: if you’re going to get long of the frenzy, you should just buck up and go big cap like the BABA and the Facebook (FB). If you’re going to pay 18-28x revenues for something, you might as well be able to get out!


We call this small cap vs. large cap performance gap a Style Factor Divergence. When I worked at Magnetar Capital, our “book” would be characterized this way. If you were long “size” as a style factor, you’d be long big caps. I would definitely have that on right now.


In terms of protecting my personal net wealth, the biggest “size” bets I tend to gravitate to are:


  1. Cash
  2. Long-Term Treasuries
  3. Equity Short Sales


Not everyone rolls that way. Call me conservative, but when I hear the thunder rolling in, I don’t wait around for the performance-chasing lightning!


Here’s another big cap “size” bet that was working last week:


  1. US Healthcare Stocks (XLV) +1.7% on the week to +17% YTD
  2. Vs. MSCI REITS Index -0.3% on the week to +12.9% YTD


As many a big cap Portfolio Manager has reminded us this year, they love our Long Bond (TLT, EDV, etc.) call but can’t get really long of stocks-that-look-like-slow-growth bonds (Utilities and REITS) because they aren’t big cap stocks in their benchmark.


As a Global Macro Risk Manager, my benchmark is not losing money. You can dial up plenty a broker/banker to tell you what to chase on the long side. I’m the one you pay while they are sleeping. I’m the one who surveys the land before dawn.


Another interesting macro divergence last week was:


  1. European Stocks (EuroStoxx 600) +1.2% on the week to +6.2% YTD
  2. Emerging Market Stocks (MSCI Index) -0.5% on the week to +5.4% YTD


I call it interesting because I think you fade the fear on that trade too. In other words, you buy EM on the dip and sell European Equities on the bounce. My research team and I will explain why on our Q4 Macro Themes call, which we’ll host on October 2nd.


The upshot of our current call has mostly to do with phase transitions in both growth and inflation. We think that both the Russell 2000 and the 10yr bond yield (down 3bps last week and -45bps for 2014 YTD) look a lot like Europe and US inflation – slowing.


And while you may have never experienced thunder and lightning when everyone is tilted to the levered long side of a performance chasing boat, you have seen both growth and inflation slowing (at the same time) before. It was Q3 of 2008. Now that was a frenzy!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.62%


RUT 1140-1158

VIX 11.66-14.12

Pound 1.62-1.64


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Friday's Frenzy - Chart of the Day

September 22, 2014

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