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VIDEO | Keith's Macro Notebook 4/24: JAPAN OIL UST10YR

CAKE: Still Short

Takeaway: Estimates have come down, but the stock hasn't yet followed suit.

CAKE remains on the Hedgeye Best Ideas list as a SHORT.


CAKE reported mixed results AMC, beating top line estimates by 61 bps and missing bottom line estimates by 1192 bps.  Labor and, to a lesser extent, food costs pressured the P&L in the quarter as restaurant level margins decreased approximately 70 bps YoY.


System same-store sales increased 0.9% despite management citing a negative 2% impact from severe winter storms and a holiday shift.  This includes a 1.2% increase at The Cheesecake Factory and 2.9% decline at Grand Lux Café.  Chairman and CEO David Overton highlighted notable strength in three of CAKE’s largest markets: California, Florida and Texas.  CAKE’s same-store sales continue to outperform the broader casual dining industry.  However, we estimate that traffic was down 1.0% in the quarter, making it the sixth consecutive quarter of negative traffic.


Management guided down FY14 EPS to $2.24-2.33 from prior $2.29-2.41.  They also reiterated their full-year commodity inflation outlook of 3-4% led by salmon and shrimp.  Although meat and dairy prices are higher than anticipated, they are expected to be offset by the easing of other commodities.  Management did not disclose what these other commodities are.


To be clear, this is by no means a structural short.  CAKE has been and continues to be a very strong operating company.  However, we continue to believe that the company will be negatively impacted by looming margin pressure in 2014. 


With that being said, our 4Q and 1Q catalysts have passed and although earnings estimates have been revised down noticeably, the stock has not followed suit.  We expect price to more properly reflect fundamentals in the near-term.  On the positive side impressive same-store sales momentum, strong brand relevance and shareholder friendly practices continue to support the stock.



What we liked:

  • 1.2% same-store sales at The Cheesecake Factory, despite operating in a difficult environment.
  • Same-store sales booming in its three largest domestic markets (up approximately 3% in 1Q).
  • 70 bps benefit to SSS in 2Q due to timing shift.
  • Food cost inflation outlook for the full-year remains unchanged at 3-4%.
  • Shareholder friendly capital allocation.  Plan to use all FCF in FY14 to fund dividends and share buybacks.
  • International stores are strong performers and the growth potential is promising.

What we didn’t like:

  • FY14 EPS guided down to $2.24-2.33 from prior $2.29-2.41.
  • Labor line was disruptive in 1Q due to higher than anticipated group medical costs and productivity inefficiencies as a result of volatile weather/traffic.
  • Traffic was down 1.0%, making it the sixth consecutive quarter of negative traffic.
  • Commodity inflation remains a risk, although management appears to have this under control.

CAKE: Still Short - 1


CAKE: Still Short - 2




Howard Penney

Managing Director


Fred Masotta


Bonds Don’t Care About Facebook

Client Talking Points


Maybe they should split the Nikkei 7 for 1, because this sick puppy can’t even find a bid on Nasdaq futures ripping. Nikkei is down another -1% overnight as the US Dollar Devaluation versus the Yen remains the FX correlation position to keep on. 


Putin Power, yep. He gets paid in Petro Dollars — don’t forget that. After holding my TREND line of support yesterday, WTI crude is up to $101.70 this morning and has no resistance to $105.03. This is a big time #ConsumerSlowing catalyst for the United States.


The bond market really couldn’t care less about Facebook or the Apple iSplit.  The 10-year yield is DOWN on the week to 2.70% and the Yield Spread continues to compress. More classic US #GrowthSlowing signals.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


Gold $1277 is just too high - can someone #iSplit that for the retail brokers too? @KeithMcCullough


"For every minute you are angry you lose sixty seconds of happiness." - Ralph Waldo Emerson


GE is in discussions to buy French industrial firm Alstom SA, according to Bloomberg. The deal may be worth more than $13 billion, or roughly 25% above Alstom's current market value. The company also makes power plant equipment. A deal could be announced as early as next week. (Bloomberg)

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Join Today's Call: Marijuana Legalization: The Debate Begins. 2pm EST

We look forward to hosting a special call Marijuana Legalization: The Debate Begins, featuring Dr. Beau Kilmer, Codirector of RAND Corporation’s Drug Policy Research Center, today at 2:00pm EDT.




Dr. Kilmer will provide a framework for assessing the marijuana policy landscape, incorporating his studies on drugs as a RAND researcher and specifically his work on marijuana legalization. He’ll discuss such topics as State versus Federal regulation, the key decisions policy makers face, his “8 Ps” framework, and social costs. We look forward to a robust Q&A on this very hot topic.


Join Today's Call: Marijuana Legalization: The Debate Begins. 2pm EST - pic. Smoking Marijuana Hit



Beau Kilmer is a senior policy researcher at the RAND Corporation, where he codirects the RAND Drug Policy Research Center. He is also a professor at the Pardee RAND Graduate School. His research lies at the intersection of public health and public safety, with a special emphasis on substance use, illicit markets, crime, and public policy.


Some of his current projects include estimating the size of illegal drug markets, assessing the consequences of alternative marijuana policies, measuring the effect of South Dakota's 24/7 Sobriety Program on drunk driving and domestic violence outcomes, and evaluating other innovative programs intended to reduce violence.


Dr. Kilmer's research has appeared in leading journals such as AddictionAmerican Journal of Public HealthJournal of Quantitative CriminologyProceedings of the National Academy of Sciences, and his essays have been published by the BBCCNNLos Angeles TimesNew York TimesWall Street Journal, and USA Today.


His book Marijuana Legalization: What Everyone Needs To Know (co-authored with Jonathan Caulkins, Angela Hawken, and Mark Kleiman) was published by Oxford University Press in 2012. Before earning his doctorate at Harvard University, Kilmer received a Judicial Administration Fellowship that supported his work with the San Francisco Drug Court. 




Toll Free Number:

Direct Dial Number:

Conference Code: 547194#

Materials: CLICK HERE (Supplemental materials will be available approximately one hour prior to the start of the call)


Please email  for more information.



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Seeking Revenge

“If you prick us do we not bleed? If you tickle us do we not laugh? If you poison us do we not die? And if you wrong us shall we not revenge?”

-William Shakespeare


For those who called it a bubble, the tech sector is seeking its revenge this morning.   Two of the mighty horsemen of technology, namely Facebook and Apple, exceeded expectations and as a result the Nasdaq is trading 1.5% higher this morning according to the futures market.


Seeking Revenge - fba


One of our top contrarian sources, The Street (known as the street.com in the last tech bubble) actually predicted this rally.  Specifically, two days ago the headline on The Street was, “What Will Cause Tech Stocks to Plunge?”   Funnily enough,  Jim Cramer from The Street (retire already Jimbo!) actually critiqued one of the world’s top hedge funders yesterday for not making enough money on the social media swoon in March. 


But, enough talk of side shows and carnival barkers, we actually had some legitimate questions on yesterday’s Early Look on this idea of bubbles and an insightful subscriber from London emailed us back with the following question:


“I’m also not sure why you’re so convinced that we’re in a Social Media bubble. Some Internet stocks are highly valued sure but for the likes of FB and LNKD these are real businesses with major competitive advantages, why are you so bearish on these too?”


Our Internet Analyst Hesham Shaaban had a thoughtful response, which included the following:


“The reason why valuations are so high is because of elevated growth expectations, which you can see in the table below.  The market sees Social Media as one collective industry, assuming the rising tide will carry all ships, and historical growth is a sign of things to come. 


Social Media is not one industry.  These players have varying business models, revenue sources, and growth prospects.  We see at least 2 big losers in the group (TWTR and YELP), and once growth expectations come in, their multiples will collapse with it.”


In the table directly below, we’ve included a summary of the growth expectations and valuations of $FB, $LNKD, $TWTR, and $YELP.  Certainly if there is a bubble, it is not that all of these companies have broken business models (though we believe some do), but rather, as Shakespeare also said, that expectations are the root of all heartache.  (Email us at if you’d like to be added to an institutional trial of our internet research.)


Seeking Revenge - chart of day


Back to the Global Macro Grind...


One of our other favorite contrarian sources, Peter Tchir from TF Markets, actually made a great contrarian statement on Twitter the other day (you can follow him @tfmkts if you’d like access to the contrarian signal) when he tweeted that he wasn’t a bear on housing. 


Ironically, in many ways, the housing market and the principal supply-demand-price dynamics underneath it are rather straightforward.  Admittedly, in other, sometimes very mechanical ways, understanding the prevailing trends in the housing market can be challenging for the uninitiated or marginally interested.


So, what’s the current state of housing?


Across the 22 primary metrics we track as part of our housing compendium monitor, 15 have worsened sequentially and 18 have worsened from a trend perspective. 


Indeed, the housing data released over the last few days offered further support to our expectation for an intermediate term #HousingSlowdown as current demand metrics (Existing & New Home Sales) continued to wane, while mortgage application data is signaling a further deceleration in forward transaction activity.   


That the deceleration in activity is occurring in the face of both the positive shift in weather and declining interest rates makes it that much more notable.  


To quickly review this week’s data:

  • Mortgage Applications:  The composite MBA mortgage application index declined -3.3% WoW as the Purchase Applications and Refinance sub-indices hit new lows in YoY growth.  As it stands, Purchase Applications are down -19.3% off the May 2013 peak and -18.5% YoY while refinance activity is down -71% YoY!
  • Existing Home Sales:  Existing Home Sales declined -0.2% MoM and -8% YoY.  The March decline marks the 3rd month of  negative year-over-year growth and a third straight month of accelerating decline.  Sales were down across  all geographies with the West region again leading the declines
  • New Home Sales:  New Home sales declined -13% YoY, marking the 1st month of negative year-over-year growth since September of 2011.   The Northeast was the lone region recording a MoM increase in sales while year-over-year sales growth declined across all geographies.

So, the demand deceleration has been both significant, geographically pervasive and has extended through March / April – all of which confute the "it’s the weather" in isolation thesis.  


While weather probably exaggerated some of the underlying weakness to start the year, we continue to think that the collective impact of stagnant income growth, declining affordability, a reversal in institutional interest, and the implementation of QM regulations will serve to pressure housing demand over the intermediate term.  


Home price growth, which follows the slope of demand on ~18mo lag, will follow the demand deceleration.   Given that home prices have a very high correlation to discretionary spending and the U.S. economic output is 70% driven by the consumer, we see the slowdown in housing as a looming headwind for economic growth domestically.  Aye, there’s the rub!


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.59-2.73%


VIX 13.02-14.72

NatGas 4.63-4.80

Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research