Month-End: SP500 Levels, Refreshed

POSITION: Short Consumer Staples (XLP)


Long-term investors: from a long-term TAIL perspective, much like Japan’s Nikkei, the SP500 remains in a bear market.


The reason why we make that analogy isn’t because Japan doesn’t have the New York Yankees. Japan simply has had the same Keynesian money printing policy of the Princeton/Keynesian school of economics. Every new centrally-planned policy to inflate has inflated asset prices to lower-long-term highs.


That’s the long-term.


In the immediate-term, we aren’t yet dead.


Tomorrow is the immediate-term. So are the first few weeks of October (potentially, the start of one of the worst earnings seasons we’ll have in the last 2 years). Tomorrow is also month-end.


We made this call when I moved the Hedgeye Portfolio to net short on August 30th and, since I moved back to net short on Tuesday, September 27th, I think it’s worth considering that same call again – the last 6 days of the month vs the first 6 days of the month (see table below):


Month-End: SP500 Levels, Refreshed - 3


It’s just price momentum data with a career risk management overlay.


Immediate-term TRADE support and resistance for the SP500 are now 1117 and 1182, respectively.



Keith R. McCullough
Chief Executive Officer


Month-End: SP500 Levels, Refreshed - SPX

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Earlier this week Brad Blum, CEO of the Blum Growth Fund and 7% owner of COSI, announced that he is doing something unique in the public markets.  He is using the court of public opinion and shareholder (activism) democracy to resurrect the company.  This means he wants the CEO and the board to all step aside and let Mr. Blum run the show.


In his press release, Mr. Blum said “We call upon all shareholders to join us in our efforts to effect positive change at Cosi and participate in a non-legally binding expression of ‘no confidence’ for the current board. This is not a proxy fight or a hostile takeover, but an exercise in shareholder democracy.”


As things stand, I would bet that “shareholder democracy” is going to win.  On a couple different measures, so far, the court of public opinion is winning.  Since putting out the press release the stock is up 15.64% on extremely high volume.  In the six months prior to Mr. Blum’s press release the stock has declined 50%.   


We are also getting questions from shareholders, some of which are “is he for real?”  As an industry analyst for the past 20 years, I have been an eye witness to Brad’s success and also some of his failures.  That being said, the obvious answer to that is yes. Mr. Blum is for real and his track record as a leading industry executive is one of the best there is.  He has extensive restaurant experience and brings to the table a very specific skill set that has created a real economic value for a number of restaurant concepts.


Unfortunately for COSI, the previous chairman, Jim Hyatt resigned recently and has subsequently taken a position at Church’s Chicken in Atlanta.  Mr. Hyatt did an amazing job of getting COSI reorganized and set in the right direction, despite the most difficult macro environment in a generation.  His departure was driven by personal reasons and had nothing to do with Cosi, the company or the brand.  Having spoken to Mr. Hyatt, I know it was a very difficult decision for him to leave after putting in three very long years with the company.


The future for COSI is extremely bright.  There are not many small restaurant concepts today that that have the potential triple in size.  It is a concept that operates in the hottest segment of the industry: fast casual.  The fast casual segment continues to take market share from the more tradition categories of the industry.  Importantly, the heritage of the company is focused on the food (especially the bread), allowing for strong consumer appeal across three day-parts, which is rare in the indutsry and offers the company and shareholders tremendous opportunity.   


It looks like the chances of Mr. Blum succeeding are high.  Since the departure of Mr. Hyatt, the company has been silent about the future of the company besides a few cursory comments.  While I do not know the interim CEO and Chairman of the Board, Mark Demilio, I do not suspect he wants the job and none of the current board members are likely to take the job either, in my opinion. 


Even more telling is that the company is in a degree of turmoil and management has had over 48 hours to respond to Mr. Blum’s overtures yet there has been no press release defending their position.  To be honest, the company position is defenseless, but the lack of a response does not instill confidence to the current shareholder base that the lights are on and management is keeping the momentum that Jim Hyatt established.


Right now, time is critical and not on management’s side.  Management and the board need to act now on the where they are taking the company, the longer they put off the inevitable, the worse the business will get.  Shareholders and the employees deserve leadership from the board; whether it is via new leadership or not, the company’s potential needs to be achieved.  For what it’s worth, I believe Mr. Blum will be successful.



Howard Penney

Managing Director





After one day of meetings, it’s pretty clear that business in Macau remains strong.  Storytelling, mostly in the investment community, has emerged to justify the stock collapses, after the fact.  New visa restrictions, junket credit problems in some of the outlying China provinces, a forthcoming VIP decline, and other fears/rumors continue to surface.  However, we see no evidence to substantiate any of these concerns.  We understand that the stock market is a discounting mechanism and macroeconomic concerns are legitimate.  But as of right now, there seems to be little to be worried about in Macau other than the macro.  In other words, it’s macro time.


Even the table cap issue looks like a non-event.  Aside from the fact it is only a policy statement and not a change in law, concessionaires expect the cap to be quite flexible in terms of new properties.


We’ve got more meetings on Thursday, but the interesting takeaway so far may be the near term prospects for SJM, the stock.  In addition to strong market numbers for September and the coming Golden Week blowout, there appears to be a few company specific catalysts.  SJM management will be at G2E next week and will follow that up with a non-deal road show to New York, Boston, and London.  The meetings should alleviate investor concerns about near term trends.  More important, SJM is quite the free cash flow story.  We expect management will talk up the potential and probability for the company to significantly increase its dividend.  SJM can do this while still maintaining same store growth and unit growth with its project in Cotai.  In fact, given the free cash flow profile, SJM can finance a higher dividend and construction costs internally.  They have HK$14 billion in cash which will likely grow to HK$18 billion by the end of the year.


SJM looks timely and upside potentially huge given the precipitous fall in the stock.

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