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Recent Notes

02/17/15 Post-Presidents’ Day Mashup

02/18/15 NDLS: Going In Short

02/20/15 NDLS: Wet Noodles

Events This Week

Monday, February 23rd

  • QSR at the JP Morgan High Yield & Leveraged Finance Conference 9:00am EST
  • TXRH earnings call 5:00pm EST

Tuesday, February 24th

  • DPZ earnings call 10:00am EST
  • CBRL earnings call 11:00am EST
  • KONA earnings call 4:30pm EST
  • BBRG earnings call 5:00pm EST

Wednesday, February 25th

  • PZZA earnings call 10:00am EST
  • DIN earnings call 11:00am EST

Thursday, February 26th

  • TAST earnings call 8:30am EST
  • PLKI earnings call 9:00am EST

Friday, February 27th

  • DFRG earnings call 8:30am EST





Recent News Flow

This Morning

  • DRI appointed current Interim CEO Gene Lee as permanent Chief Executive Officer, effective immediately.  The company is now turning its attention to finding a replacement for CFO Brad Richmond, who plans to retire at the end of March.  The board will consider both internal and external candidates.

Monday, February 16th

  • RRGB expanded its finest premium burger line with its first seafood option – The Wild Pacific Crab Cake Burger.  It is available while supplies last.

Wednesday, February 18th

  • WEN announced a regular quarterly cash dividend of $0.055 per share available to shareholders of record as of March 2, 2015.

Friday, February 20th

  • PLAY announced the full exercise of the underwriters’ option to purchase 990,000 shares of common stock in connection with the previously announced secondary public offering.  Following the exercise of this option, Oak Hill Capital partners' stake will decrease to 62.1% of the outstanding shares of common stock.


Sector Performance

The XLY (+1.3%) outperformed the SPX (+1.0%) last week.




Quantitative Setup

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



Casual Dining Restaurants




Quick Service Restaurants



European Banking Monitor: Greek Swaps Tighten on Bailout Extension

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




European Financial CDS - Swaps mostly tightened in Europe last week.  Greek banks are once again in the spotlight with swaps tightening between -193 bps and -295 bps on news of a last minute, four-month extension to the country's bailout. Even with ~200 bps of tightening, Greek banks are still trading at 1 bps.


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - chart1


Sovereign CDS – Sovereign swaps mostly tightened over last week with dovish language from the U.S. Fed and an extension to Greece's bailout. Portuguese sovereign swaps tightened by -6.3% (-11 bps to 168 ) and Spanish sovereign swaps widened by 2.9% (3 bps to 107).  


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - chart2 sovereign CDS


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - chart3 sovereign CDS


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 10 bps.


European Banking Monitor: Greek Swaps Tighten on Bailout Extension - chart5 euriobor OIS Spread


Matthew Hedrick



Ben Ryan




Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    



1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.

  • The SOYBEANS, SUGAR, and HEATING OIL markets experienced the most BULLISH relative positioning changes week-over-week
  • The ORANGE JUICE, GOLD, and LEAN HOGS markets experienced the most BEARISH relative positioning changes week-over-week

Commodities Weekly Sentiment Tracker - chart1 sentiment


Commodities Weekly Sentiment Tracker - chart2 sentiment


2.       Spot – Second Month Spread: Measures the market expectation for forward looking prices in the near-term.

  • The LEAN HOGS, RBOB GASOLINE, and WTI CRUDE OIL markets are positioned for HIGHER PRICES near-term
  • The HEATING OIL, LIVE CATTLE, and COCOA markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart3 spot 2nd month spread


3.       Spot – 1 Year Spread: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The WTI CRUDE OIL, BRENT CRUDE OIL, and SUGAR  markets are positioned for HIGHER PRICES in 1-year  
  • The HEATING OIL, LIVE CATTLE, and COCOA markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - Spot 1Yr. Spread


4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.


Commodities Weekly Sentiment Tracker - chart5 open interest


Ben Ryan


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Call Summary and Replay: Outlook for Natural Gas Prices and Basis Differentials

On February 18th we hosted a guest speaker call with Keith Barnett of Asset Risk Management (ARM) on natural gas prices and basis differentials.  It was an excellent call, and we recommend you check out the replay and Keith’s slides, linked below:


Link to Audio Replay


Link to Slide Deck


Key Takeaways from the Call


1.  Near-term Henry Hub expectations……Not expecting a spring price crash similar to March / April 2012.  Expects prompt prices to be range-bound below $3.00 in 2015, with the market tightening in 2H16.  “We will trade lower in the prompt.  We are … prepared to see $2.25 in the prompt month with a lot of trading between $2.40 and $2.60, but ultimately … we think the range for settlement of prompt month contracts this summer will average closer to $2.40 / $2.50 with range between $2.30 and $2.75 on the settle, and $2.25 to $2.90 on the actual day-to-day activity.  We do not have to crash the market to solve for a reasonable ending inventory this year …  [Supply] mitigation due to price and rig activity actually begins to tighten the market in ‘16.  The damage carries over into the first part of ’16, but we’re quite bullish the second half of ’16, ’17, and beyond.”   


2.  Natural gas basis expectations……Marcellus/Utica pipelines going to the Gulf Coast and Midwest will pressure basis soonest; projects to move gas to the Northeast and Southeast are more prospective, and will pressure basis later…  General expectation: “The west will be relatively stable and uninteresting, and all the action will be at Dom South, up in New England and New York, and then back down into the Gulf Coast as gas comes down … through all the reversal projects.”  

  • Marcellus/Utica (Dom South) current weakness driven by local “gas on gas competition” for processing and pipeline capacity.  First LNG export could positively impact Dom South basis.  “Dom South is not the most mispriced, but over term, it will move the most for rational, foreseeable reasons.”  Assume tighter Dom South basis longer-term.
  • Houston Ship Channel (HSC) will most likely have a positive basis, especially in the summer due to high TX power burn.  HSC a very important market, it’s the largest concentrated gas market in the US, maybe in the world.  Exports to Mexico and new Texas industrial projects will be very important to the HSC basis.
  • Chicago will be well-supplied and should trade negative, particularly if there is a mild winter in the Midwest. 
  • Mid-Con will be stable for the next 18 – 24 month; “slight” negative pressure later as Marcellus/Utica gas“boomergangs” to the west and south; will be counteracted by Gulf Coast demand pull.  “We see [Mid-Con basis] being more stable than most places.”
  • Texas “won’t be a premium market, but it will be more insulated than Louisiana.”             
  • California is likely to sustain positive basis because it is the most-isolated, furthest trade point from the Marcellus/Utica. 
  • Opal (Wyoming) should be slightly negative and stable.  The Rockies are well-balanced.  Opal may come under pressure as Rex volumes get backed up …  at which case the supply will rotate west.  Will compete with AECO gas for market share in the west. 
  • AECO basis to be cyclical, mainly depending on short-term contracting on TransCanada’s mainline.  “Expect more of the same rhythmic, cyclical price action.”   Outlook for Canadian heavy NGLs is worse than it is for methane and ethane.  AECO basis is a difficult one to call due to TransCanada contracting and Loonie weakness.      


3.  US LNG outlook and price impact……6.7 Bcf/d of LNG export capacity is currently under construction.  “If the current pricing environment holds, only one of the Canadian projects will get done…  I don’t think that the Cheniere greenfield project gets done at these oil prices…”   At current oil prices an additional 3.5 Bcf/d gets built because the inertia behind some projects is so high.  At $75 oil, an additional 5.5 Bcf/d gets built; at $90-100, an additional 8 – 9 Bcf/d.  However, we won’t see that much gas actually getting exported, as some of the projects just provide optionality / trading vehicles.  Sabine Pass Train 1 is likely to come online early; some “test gas” may come in May or June 2015.  “This will affect the market psychologically …  Once we see that first cargo being made, being loaded, being shipped, I expect to see the back end of the market respond.  It’s not going to go up a dollar, but it’s going to respond.”



4.  Impact of oil price crash on US natural gas demand growth……Less exports to Mexico (weaker economic growth, less incentive to switch away from oil for some of their power plants).  “Exports to Mexico will continue to grow, but maybe not as fast.”  Less industrial demand (low oil prices and strong USD = lower margins and returns for US petchem plants).  Less LNG exports (LNG prices sensitive to oil prices, particularly in north Asia).  Before the recent oil crash ARM thought that “demand would definitively, on an annual basis, outrun production growth by 2017, and on a cumulative basis out run it for sure, by 2018.  [Now] that is still true … where 2018 cumulative demand growth does exceed cumulative production growth, suggesting that we will be tighter again by 2017 or 2018. However, 3 of the 4 “Pillars of Demand” are threatened by lower prices…”



5.  Marcellus/Utica takeaway overbuild?......”There is as close to 100% probability of overbuilding as you can get and actually still call it ‘probability’ …  This is America and that’s what we do, we overbuild …  We have such deep, liquid capital markets …  We arbitrage the heck out of things physically, particularly in the energy business.  It’s going to get overbuilt, we’re confident of that, and that does tighten in the Dom South basis.  It doesn’t tighten it as much as you might initially think, but eventually it does …  I don’t think you go premium to Henry Hub because gas is still going to be coming from Pennsylvania to northern Louisiana to satisfy the LNG and industrial projects, and there has to be a negative Dom basis to pay for that pipe …  The floor typically is fuel and variable cost on these new flow patterns …  at $3.50 Henry Hub … we saw the [Dom South] floor at $0.29 back of Henry, which is the fuel and variable cost on one of the legs that we’re confident that’s going to get done and going to be busy.” 



Ben Ryan


USD, Japan and Europe

Client Talking Points


Good #StrongDollar morning to you! +0.6% USD Index move to +5% year-to-date is good for plenty of commodity based inverse correlation moves (#deflation); WTI Oil -1.2% (after a -5.3% week), Gold -0.7% (after a -1.8% week) – Copper still looks like death. 


Japanese Nikkei all jacked up on weak Yen (vs USD) to 15 year highs at +5.8% year-to-date – and this is after plenty of headline news that Japanese Corporates (70% of them) see “no need for more easing” – we can’t imagine why… it’s only been 18 years.


Forget a +2.5% year-to-date return in SPX, European Equities is where the real fundamental asset price inflation is at! After a +3% week, Italian stocks are up another +0.4% to +15.4% year-to-date. Gotta love that. DAX still looks good, but only +13.1% year-to-date. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

You want to own the Vanguard Extended Duration Treasury (EDV) in this current yield-chasing, growth slowing environment. The trend in domestic growth continues to signal growth slowing, and the counter-TREND moves we’ve seen over the last few weeks (@Hedgeye TREND is our view on a 3-Month or more duration) remain something to fade until we can see more follow-through that growth is trending more positively (second-derivative positive).


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.


Hologic (HOLX), at this stage in their product cycle and in the current stage of the economic cycle, has some very impactful tailwinds emerging to their revenue growth and the implied growth in the future. A stock generally will perform really well when doubt about future growth turns to optimism while the most recent data confirms the optimism. So far, we have a little bit of both; recent positive data like the December 2014 quarter upside and consensus estimates and ratings starting to move off of multi-year lows. A less-worse trend in Pap testing and rising patient volume can combine to get us close to flat for HOX’s Cytology (Pap) business. As the growth in Cytology improves and is less of a drag, the 3D Mammography growth can flow through. We think the outlook is bright, and with a few more data points, we think a lot more investors will agree with us.

Three for the Road


Busy wk for the Bond market w/ Yellen speaking, and both CPI and GDP slowing reports



Much good work is lost for the lack of a little more.

-Edward H. Harriman


U.S. Healthcare Stocks (XLV) were up +2.1% last week to +5.6% year-to-date.

February 23, 2015

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