[video] Macro Notebook 10/15: DAX, US10YR, GOLD

Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories trending on our radar screen.

Daryl Jones - Macro

All Is Fair in Love and Twitter (via New York Times)


Morning Reads on Our Radar Screen - twit5


Keith McCullough - CEO

German consumer confidence up as economy brightens (via AP)

Russell 2000 hits all-time high (via CNBC)

UK eases rules for Chinese trading (via BBC)

Look at this 1932 editorial from the NY Times backing fascism > May 22, 1932: Fascism for America (via NY Times)


Brian McGough – Retail

Walmart shelves in Springhill, Mansfield, cleared in EBT glitch (via KSLA)

Apple Hires Burberry CEO as Retail Chief (via WSJ)

Keds Debuts Retail Shop (via WWD)


Jay Van Sciver - Industrials

FedEx Announces 32 Million Share Repurchase Program (via BusinessWeek)


Josh Steiner – Financials

2 'ghost' banks run credit card scam (via SunSentinel)

Corzine makes moves to lift $30M defense-fund cap (via NY Post)


Tom Tobin – Healthcare

Johnson & Johnson Profits Rise on Drug Sales; Beats Estimates (JNJ) (via


Jonathan Casteleyn  - Financials

European M&A news is good for $LAZ$GHL - European M&A operating at just 4.0% of GDP, well below the 8.0% mean > Telefonica in Talks to Sell Czech Stake to Kellner’s PPF (via Bloomberg)

Citi Profit Misses Estimates on Bond Trading, Mortgages (via Bloomberg)


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End of World Bluster

Client Talking Points


European stocks nailed this move on the upside inasmuch as Gold did on the downside. Take a look at Germany and Italy. Both the DAX and Italy’s MIB index are hitting new highs this morning. We are long Germany via the EWG with our Q413 #EuroBulls Theme. See our Macro deck from this past Friday for details. Ping if you need assistance.


Both the U.S. Dollar holding its long-term TAIL risk line of $79.21 support and the 10-year U.S. Treasury TREND line of 2.58% holding are critical in terms of the quant signals in my model that matter. Don’t forget. The sovereign debt bubble is as glaring as Gold’s was.


We have had $1271 as our mean reversion downside target since December 2012. It's good to be lucky, but we didn’t lick the finger on that – it was all math. Gold and Silver? Yup, they're down again this morning. Fear fades @ VIX TREND line of 18.98. Thankfully.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


TREASURIES: so much for the Bond Bulls crushing it - 10yr holds @hedgeye TREND support of 2.58% like a champ @KeithMcCullough


There is a strong tendency to get used to and accept very bad things that would be shocking if seen with fresh eyes. -Ray Dalio 


U.S. national debt is now more than 23 times larger than it was when Jimmy Carter became president.

DRI: A Generational Opportunity

Takeaway: We continue to believe there is significant upside in DRI. The main question is: Who will unlock the potential?

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 the core company can improve its operational execution.


We understand that DRI is different from the companies below, but the point we are trying to make is that they have all been in similar situations, and have once felt the pressure, that DRI is feeling today.  We believe part of the upside in DRI is significant, but unquantifiable and could be realized if management is ousted (or they adopt our operating beliefs), and the company returns to a more streamlined operating structure.


In our opinion, Darden needs a forward-thinking, seasoned restaurant operator, with public company experience, to deliver an effective turnaround plan that is focuses on restoring Olive Garden profitability.  In this regard, the current Chairman and CEO, Clarence Otis, has proven his incompetence.  His lack of restaurant operating experience is a major reason the current management team has been decidedly unsuccessful.


The plan of action for DRI should be comprehensive, clear, and must offer a compelling solution that would help Darden, and specifically the Olive Garden, regain its stature as one of the premier casual dining chains in the business.


The most important pillar for the new Darden, is the formation of a closely aligned and well-functioning team of qualified, talented, experienced, and motivated personnel, that would come together to execute on the following business philosophy:

  • Superior financial results come from inspired, principled leadership
  • A clear, focused vision
  • A consumer-driven culture
  • Innovation
  • Measurable operational excellence
  • Distinctive brand consistency
  • Appropriate cost controls

Darden’s current business plan has done nothing but destroy shareholder value over the past five years.  Our recent Black Book, “Dismantling Darden”, describes, in detail, why DRI is having such a difficult time. 


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.


McDonald’s (2002-2007): MCD formulated the “Plan to Win” in 2002, which later became a template for success at Brinker.

  • MCD cut capital spending from $2.0 billion in FY02 to $1.3 billion in FY03
  • EBITDA bottomed at $3.2 billion in 2002 and increased 117% over the next five years
  • The stock bottomed in March 2003 at $12 and rose to $57 by the end of 2007

DRI: A Generational Opportunity - MCD CAPPER CAPPYcapex

DRI: A Generational Opportunity - EBITDA MCD



Starbucks (2007-2012): With Schultz back at the helm, SBUX focused on attacking the middle of the P&L and improving the guest experience.

  • SBUX cut capital spending from $985 million in FY08 to $446 million in FY09
  • EBITDA bottomed at $1.3 billion in 2008 and increased 88% over the next four years
  • By 2QFY09 (June) the fundamentals had improved; the stock was traded at $14 and rose to $78 five years later

DRI: A Generational Opportunity - sbux capex

DRI: A Generational Opportunity - sbux ebitda



Brinker (2008-2013): Facing an industry in the midst of a secular decline, senior management formulated a “Plan to Win”, which entailed attacking the middle of the P&L and driving traffic.

  • EAT cut capital spending from $431 million in FY07 to $273 million in FY08; the company further reduced capital spending to $88 million in FY09
  • EBITDA bottomed at $248 million in 2009 and increased 64% over the next four years
  • By 2QFY09 (January) the fundamentals had improved; the stock traded at $10 and rose to $40 five years later

DRI: A Generational Opportunity - eat capex

DRI: A Generational Opportunity - eat abitda



We don’t know exactly where DRI will shake out in the process, but we do know the company finds itself in a hole that MCD, SBUX, and EAT all managed to climb their way out of.




Howard Penney

Managing Director


Early Look

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