Monday Mashup: EAT, SONC and More

Monday Mashup: EAT, SONC and More - 1


Recent Notes

01/20/15 Post-MLK Day Mashup: SBUX, MCD on Tap

01/23/15 SBUX: Closing Best Idea Short


Events This Week

Wednesday, January 28th

  • EAT earnings call 10am EST

Thursday, January 29th

  • SONC Annual General Meeting


Chart of the Day

Monday Mashup: EAT, SONC and More - 2


Recent News Flow 

Tuesday, January 20th

  • BJRI upgraded to buy at KeyBanc with a $52 PT.
  • CAKE upgraded to outperform at William Blair.
  • CHUY Vice President of Operations Southeast, Frank Biller, has resigned from his position.  Mr Biller will remain with the company in an advisory role.
  • EAT downgraded to hold at Wunderlich with a $65 PT.
  • PNRA downgraded to hold with a $185 PT.

Wednesday, January 21st

  • MCD FY15 and FY16 estimates reduced at Janney, citing its latest franchisee survey.
  • RUTH completed the previously announced sales of Mitchell's to Landry's.

Thursday, January 22nd

  • COSI CFO Scott Carlock resigned to pursue other opportunities.  Richard Bagge will serve as interim CFO, while the company works with an executive search firm to find a new full-time CFO.
  • JBFCF Philippine's largest food company, Jollibee Foods said it is keen to buy a U.S. quick-service chain worth at least $1 billion and may partner with a PE firm to do so.  We believe KKD, JACK, PLKI, SONC, WEN, LOCO and FRGI are all in play.
  • JMBA announced the expansion of its Whole Food Nutrition and Fruit & Veggie smoothie lines with the introduction of two new flavors: Amazing Greens and Greens 'n Ginger.
  • SBUX announced that current board member Kevin Johnson will assume the vacant position.  Schultz noted that, while Johnson’s responsibilities will mirror Alstead’s, he will be more heavily involved on the digital side of the business than his predecessor.  Johnson formerly served as a President at Microsoft and, more recently, as CEO of Juniper Networks. 

Friday, January 23rd

  • BLMN announced that director, and former Bain managing director, Mark Nunnelly provided the company with notice of his resignation, effective February 15, 2015.
  • CBRL Senior Vice President of Strategic Initiatives, Edward Greene, notified the company that he plans to retire from his position around November 2, 2015.  The firm is conducting a search for a new Senior Vice President, Marketing.


Sector Performance

The XLY (+3.2%) outperformed the SPX (+3.0%) last week.

Monday Mashup: EAT, SONC and More - 3


Monday Mashup: EAT, SONC and More - 4


Quantitative Setup

From a quantitative perspective, the XLY remains bullish on an intermediate-term TREND duration.

Monday Mashup: EAT, SONC and More - 5


Casual Dining Restaurants

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Quick Service Restaurants

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Takeaway: Less bad weekly data (YoY) but on easy comp. Still forecasting January GGR to fall 15-20%.


Nothing really to glean from the latest weekly numbers out of Macau – GGR is set to fall more than anticipated when the month began, but in line with our forecast last week.  YoY revenue deterioration looks better than the rest of the month but that’s due to the easier comparison.  Optically, February should be horrible. By our math, the market could fall 35% and that would represent flat sequential volumes from January, seasonally and calendar adjusted.


We do not as of yet see a basing in the fundamentals while the risk of further deterioration remains high.  Without a basing combined with cheap valuations or a positive catalyst, entry points remain elusive. We will sit it out for now.



Please see our detailed note:

CHART OF THE DAY: Burning Euro (and Central Planning Ramifications)

CHART OF THE DAY: Burning Euro (and Central Planning Ramifications) - 01.26.15 Chart

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Editor's note: This is an excerpt from today's Morning Newsletter by CEO Keith McCullough.


Sure, in Burning Euros, they got European stock markets to rip last wk (EuroStoxx600 +5.1% on the wk) – but what else did they get?


1. Euro burnt to a crisp, -3.1% week-over-week, to -7.4% YTD

2. US Dollar +2.7% on the week to +5.2% YTD

3. Commodity #Deflation (CRB Index) -3.4% on the wk to multi-yr lows

4. Oil continuing its epic crash, -7.2% wk-over-wk to -15.1% YTD

5. Dr. Copper -4.4% on the wk to -11.5% YTD

6. Long-Term Bond Yields (10yr UST Yield) down another -4bps to -37bps YTD (1.80%)


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Important People

“Learn not to be intimidated by important people.”

-Orit Gadiesh


For those of you who don’t know her (I don’t), when it comes to the Private Equity business, Orit Gadiesh (Chairman of Bain & Company) is a very important person.


“Gadiesh is known as the person whose leadership brought Bain out of financial difficulties in the early 1990s… her reputation and mystique are well known in the consulting world. So is her history. She spent two years in the Israeli intelligence unit” learning the aformentioned life lesson in today’s quote. (The Medici Effect, pg 75)


Important People - gadiesh orit


Do “important” people intimidate you? If your house was burning down, my Dad could definitely impress you with a plan. But how about assessing the torching of what used to be your free-markets? Are you just going to stand idle and let these “important” people experiment on the job? Or are you going to let Mr. Macro Market lead you out of the blaze?


Back to the Global Macro Grind…


I won’t be intimidated by people by the name of Draghi, Kuroda, and Yellen. Instead, I’ll do my best to stand here on the front-lines of this foreign currency and market volatility fire and risk manage what’s born out of the expectations they are trying to create.


If I haven’t been, allow me to be crystal clear on how expectations are tracking:


1. Central planners are perpetually trying to create asset inflation expectations…

2. And after they’ve failed to create economic growth, cut to zeros, then tried to redefine “zero”…

3. Global #Deflation of all Policies To Inflate becomes the most paramount to risk manage


Sure, in Burning Euros, they got European stock markets to rip last wk (EuroStoxx600 +5.1% on the wk) – but what else did they get?


1. Euro burnt to a crisp, -3.1% week-over-week, to -7.4% YTD

2. US Dollar +2.7% on the week to +5.2% YTD

3. Commodity #Deflation (CRB Index) -3.4% on the wk to multi-yr lows

4. Oil continuing its epic crash, -7.2% wk-over-wk to -15.1% YTD

5. Dr. Copper -4.4% on the wk to -11.5% YTD

6. Long-Term Bond Yields (10yr UST Yield) down another -4bps to -37bps YTD (1.80%)


Oh, right, and the US stock market had its 1st up week in 4, closing:


1. Dow +0.9% wk-over-wk to -0.8% YTD

2. SP500 +1.6% wk-over-wk to -0.3% YTD

3. Russell 2000 +1% wk-over-wk to -1.3% YTD


Yep, all of the CNBC cheer-leading and storytelling aside, being long a broad measure of the US stock market (2000 stocks in the Russell) for the last year, instead of something that’s low-volatility-high-return like the Long Bond, has sucked.


Back to the 1st paragraph point where I characterized what all of this panic-central-planning has done as a “foreign currency and market volatility fire” (yes, when you’re an unimportant person like me, you can quote yourself!):


1. Last 6 months, European central planners have devalued the Euro by an epic -16.8%

2. Last 6 months, Japanese central planners have devalued the Yen by an epic -13.8%

3. Last 6 months, Canadian central planners have joined, cut, and now devalued by -13.7%


And while it’ll be a national embarrassment to both me and my countrymen if Canada overtakes the Japanese in rate of change terms, the point is that they are trying to smooth the un-smoothable right now – it’s called (drumroll) #volatility:


1. Last 6 months, via FX Burnings > Strong Dollar > Oil Volatility (VIX) is +244%


So I guess managing US equity volatility being +45% in the last 6 months is no problem, right? #Wrong. If you look at most of the performance problems out there in money management land, this time wasn’t different – they all started with volatility breaking out from what Bernanke’s Fed called the new “normal” (10 VIX). In reality, that’s the most asymmetric risk level in US history.


Market #history and positioning doesn’t lie; people do. Here’s the latest look at Consensus Macro in net CFTC non-Commercial futures/options terms:


1. Crude Oil +324,642 net LONG position (vs. +307,819, 6 month avg)

2. Gold +145,742 net LONG position (vs. +82,472, 6 month avg)

3. SP500 (Index + Emini) +71,224 net LONG position (vs. +22,987, 6 month avg)


In other words, when it comes to asset price inflation expectations, the truth is that Wall Street is still betting on the “important” people and their central plans delivering them higher-prices…


In everything other than the Long Bond, that is… where the net SHORT position in the 10yr Treasury is -138,230 (vs. an avg net short position for the last 6 months of -84,336).


“So”, I say cheers to you – for making your independent research thinking vs. a crowded consensus what the legendary Howard Marks would call, “the most important thing.”


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.86%

SPX 2020-2066

RUT 1155-1197

VIX 15.79-19.68

EUR/USD 1.12-1.15

WTI Oil 44.06-46.92


Best of luck out there this week,



Keith R. McCullough

Chief Executive Officer


Important People - 01.26.15 Chart

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Cross-Disciplinary Macro

This note was originally published at 8am on January 12, 2015 for Hedgeye subscribers.

“Disciplinary science has died.”

-Alan Leshner


From a risk management perspective, if something embedded in your #process is dead or dying, you better come up with something better to replace it!


Since 2001, Alan Leshner has been the Executive Publisher of the journal Science. He was cited in a fantastic #behavioral book I just finished reading called The Medici Effect, where he added that “most major advancements involve multiple disciplines.”


George Cowan, from one of the birthplaces of Complexity Theory (the Sante Fe Institute), added that “you need to get scientists to think about things other than their specialty.” (pg 27) This is so obviously true in asset management today. And I think we are so early.

Cross-Disciplinary Macro - 77


Back to the Global Macro Grind


Since many US institutional investors still focus exclusively on the US Equity market, there is a lot of frustration out there when it comes to relative performance compared to their US stock market index bogeys.


While I’m obviously sympathetic to what people are paid to do, that doesn’t mean I have to put my head in my hands and capitulate alongside them. I can only re-explain that broadening one’s horizons beyond what the SPY is doing is going to help them win.


If you’ve evolved your process to Cross-Disciplinary Macro you should be killing it right now. There are major asset classes like Long Duration Sovereign Bonds (think TLT) that are going straight up at the same time that others (like Commodities) are going straight down.


If you’re a US Equity only investor (and you’ve expressed the aforementioned position in what we call Sector Style Factors), you should be crushing it too. Look at last week’s S&P Sector level returns:


  1. Healthcare Stocks (XLV) +2.3% week-over-week to start 2015 +2.7% YTD
  2. Consumer Staples (XLP) +1.6% on the week to start the year +1.3% YTD
  3. Energy Stocks (XLE) down another -4% last week to -3.5% YTD
  4. Industrial Stocks (XLI) -1.9% week-over-week to start 2015 -2.1%
  5. SP500 -0.7% last week to start the year -0.7%


In other words, instead of banging you head against the Old Wall trying to short SPY into a global #GrowthSlowing + #Deflation, all you had to do was be short both of those factors and long the 2 S&P Sectors that literally jump off the page in our Macro Playbook on the long side.


I can recap why Healthcare (XLV) and Consumer Staples (XLP) outperform in what we call #Quad4, but since I have been writing about this since September, there’s no need to be repetitive. Since October, our net asset allocation to Commodities has been 0%.


How about a US equity only “Income Fund”? Here’s the other very basic differential your portfolio should have capitalized on last week:


  1. US REIT Stocks (MSCI Index) +3.5% week-over-week to start the year +5.0% YTD
  2. US MLP Stocks (Alerian Index) down another -3.5% on the wk to start 2015 -2.5%


Again, when A) global growth is slowing, bond yields are falling… so you buy stocks that look like bonds… but B) you don’t buy the ones that have two-rocks tied together (Oil + Energy Leverage) like these widely owned and overvalued upstream E&P MLP stocks.


If you run a diversified macro fund, making lower-volatility (and higher absolute) returns was so easy a Mucker could do it last week:


  1. Long Bond Bulls got paid bank with the UST 10yr Yield down -16 basis points on the wk to -10% already for the YTD!
  2. Commodities (CRB Index) deflated another -1.2% on the week to start 2015 -1.9% YTD
  3. Oil (WTI) got slammed another -8.4% week-over-week to -9.4% already for 2015
  4. US and German 5yr Breakevens (#deflation risk proxies) both dropped to 1.18% and -0.19%, respectively
  5. European Stocks (EuroStoxx600) dropped -1.0% week-over-week to start 2015 -1.3%


No, there’s nowhere in our playbook that says “buy European stocks on valuation.” And thank god for that as country equity indexes like Italy and Spain dropped -5% and -6% (on the week!), respectively.


If you’re a Global Macro hedge fund, you should be slaying the alpha beast right now. Imagine just being Short Euros, European Stocks, Oil, US Energy and Industrials… with the Long Bond and some Healthcare/Staples/REITs action on the long side?


Sadly, Consensus Macro funds can’t. Here’s where they were position from an options perspective going into the end of last week (CFTC Non-Commercial futures/options positioning):


  1. SPX (Index + Emini) net LONG position got +31,658 LONGER last week to +170,240 (vs the 6mth avg of +14,575)
  2. 10yr Treasury Bond net SHORT position got +17,379 smaller last week to -250,163 (vs the 6mth avg of -72,383)


Forget generating alpha, having those levered (options) positions on issued some seriously negative beta. And we’re quite happy you made money on the other side of that, fading the crowd, doing Cross-Disciplinary Macro, Hedgeye-style!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.88-2.07%

SPX 1995-2090

FTSE 6321-6579

VIX 15.69-21.89

EUR/USD 1.17-1.19
Oil (WTI) 46.01-50.99


Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer


Cross-Disciplinary Macro - 01.12.15 chart

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