Invest In Yourself

“The best investment you’ll likely ever make is in yourself.”

-Cullen Roche


That’s one of the better quotes from the latest book I am reviewing: Pragmatic Capitalism, by Cullen Roche. While the book has underwhelmed me so far, there’s usually something positive to see in people – if you look hard enough.


This week is a big stressor for me in that we are holding tryouts for our Mid Fairfield and CT Junior Rangers hockey programs. The hardest thing to do isn’t reporting who are the best players on the ice; it’s evaluating which ones have the most potential.


That’s not unlike how I think about investing. Anyone on mainstream TV can tell me what’s worked. What I really need to get right is what’s going to start working next.

Invest In Yourself - Central banker cartoon 03.03.2015


Back to the Global Macro Grind


The biggest risk management question I’m thinking about right now is whether or not the phase transition (from late-cycle bullish at this time last year, to bearish now) of Global #Deflation is going to accelerate to the downside.


If you look one screen past the commodity headlines (Oil and Gold), this is what you were looking at yesterday:


  1. Orange Juice -7% on the day to -16.9% YTD
  2. Coffee prices down another -6.6% on the day to -24.2% YTD #crashing
  3. Hogs (as in pigs) -2.4% on the day to -18.7% YTD


Mortimer! Get me some #deflation in my breakfast already!


Will you see that #deflation on your local diner (or SBUX) menu? Of course not. At least not in real-time. Companies that had food cost accelerating to the all-time highs (2012 was the all-time high for corn prices as Bernanke was devaluing USD) are finally seeing some of those cost pressures alleviate. Local dinner guy’s healthcare and other costs, not so much…


But what about the poor bastard who is selling pigs?


Yes, this whole #deflation thing has winners and losers. #Deflation pays the conservative consumer, whereas it punishes the levered-up debtor whose revenues and cash flows are pinned on higher inflation expectations!


Q: What horse does the Wall Street have in this consumer vs. debtor debate?

A: higher inflation expectations + leverage + banking fees generated by both


In other causal Global #Deflation news, don’t forget that the two most important live quotes on your screen continue to tick this morning. Those are, of course, currency quotes:


  1. Burning Euros
  2. Burning Yens


In order to get the rate of change in Global #Deflation right, you need to get the US Dollar right. And… in order to get the US Dollar’s rate of change right, you need to front-run the devaluation policies of its major competing currencies, alright?


  1. Euros (vs. USD) are being blown up to fresh YTD lows this morning (-7.3% for 2015) at $1.11
  2. Yens (vs. USD) can’t find a bid after Japan reported the worst Services PMI in the world overnight


Services PMI? Yep. It’s one of the many monthly macro economic data points we pop into the Hedgeye Predictive Tracking Algorithm (the model we built that helps us front run bond yields, central planners, etc.) … and voila, le rate of change appears!


  1. Japanese Services PMI slowed to 48.5 in FEB vs. 51.3 in JAN
  2. Italian Services PMI slowed to 50.0 in FEB vs. 51.2 in JAN
  3. German Services PMI was 54.7 in FEB vs. 55.5 in JAN


“So”, Italian stocks are up on that (German stocks are down) to +15.8% YTD. #lol


It’s funny, sort of, but sad … all at the same time. The worse the Japanese and Southern European economies (i.e. the most levered debtor countries) get, the better their stock markets get, as the entire world front-runs their central planners burning their respective currencies in response.


The inverse correlation of burning Euros and Yens to their respective country stock markets is surreal (inverse meaning when FX drops, stocks rip higher). And, as you can see in the Chart of The Day (this is slide 8 in our current Global #Deflation deck), we continue to see it as mathematically impossible that either Draghi or Kuroda will achieve their monetary-math “inflation” targets.


That’s a lot to noodle over as you try to invest in your own noodle. But setting aside what we get right and wrong both in markets and on the ice, that’s the best way to invest in yourself in this good life – to educate yourself empowers your progress and potential.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.88-2.17%

SPX 2083-2121
Nikkei 185
VIX 13.03-16.33
USD 94.51-95.94
EUR/USD 1.11-1.13
YEN 118.54-120.36


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Invest In Yourself - 03.04.15 chart

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Spurious Correlations

This note was originally published at 8am on February 18, 2015 for Hedgeye subscribers.

“Shallow men believe in luck or in circumstance.  Strong men believe in cause and effect.” 

-Ralph Waldo Emerson


If you are human, when the global macro market correlations go against your position, you undoubtedly classify them as spurious.  After all, they don’t fit your thesis, so how else can they be classified?


In reality, when we think of spurious correlations, we think of things that have no business or rationale in being correlated.  We’ll give you a few examples:


  • From 1990 to 2009, the inverse correlation between honey producing bee colonies in the U.S. was -0.93 inversely correlated to juvenile arrests for marijuana;
  • From 1990 to 2010, the positive correlation between people who drowned falling out of a fishing boat in the United States with the marriage rate in Kentucky was +0.95;
  • And last but not least . . . from 2000 to 2009, the per capita consumption of mozzarella cheese was +0.96 correlated with civil engineering doctorates awarded in the United States.


Suffice it to say, not all correlations are created equal.


In yesterday’s Early Look, Keith highlighted the fact that some of our macro views that are highly correlated have been going against us for the last week or so – dollar down, oil up, Euro up, Russia up, Greece up, Brazil up . . . and the list goes on.  Versus say mozzarella and engineering degrees, these assets, even if we disagree with their recent price direction, have a lot more business being correlated.


Certainly, almost every asset and asset class has a price, but what we have seen in February remains a counter TREND move.  In our view, the underlying fundamental circumstance of global #deflation and slowing growth remains intact.


Back to the Global Macro Grind...

Spurious Correlations - Hamlet cartoon 02.17.2015

Speaking of spurious, the most interesting central banking comments of the day award has to go to Bank of Japan Governor Kuroda, who indicated he will potentially act if the drop in the price of oil continues to hurt his outlook for inflation and general price levels (read: his inflation statistics).  Since the Bank of Japan has bought almost every other asset available globally, perhaps the next move will be to lever up and buy oil futures!


On the topic of oil and counter trend moves, oil continues to be one of the more hotly contested asset classes globally.  After a decline of epic proportions, WTI is now up about 10% in the last month and this is, admittedly, on contract volume that is up about 61% versus the 3-month average.  Certainly, declining rig count in the U.S. and some level of short covering has helped, but what of production and future supply?  Interestingly, Wood Mackezie in a recent report noted the following per a Bloomberg article:


“. . . that of 2,222 oil fields surveyed worldwide, only 1.6 percent would have negative cash flow at $40 a barrel. That suggests there won't be a lot of chickening out at $40. Keep in mind that the marginal cost for efficient U.S. shale-oil producers is about $10 to $20 a barrel in the Permian Basin in Texas and about the same for oil produced in the Persian Gulf.”


In Chart of the Day, we highlight weekly U.S. oil production in the U.S. going back to 1983 (as long as the data has been kept).  As you can see, weekly oil production in the U.S. hit its highest level in more than 32-years last week.  If Wood Mackenzie is correct, it seems we may not be done with #DrillBabyDrill just yet.


Inasmuch as oil bears want the bottom to be in for WTI, the chart is very telling.  Not only is oil production at a 32+ year high in the U.S., it is growing some 10% year-over-year.  Unfortunately, again for oil bulls, on the demand side, the outlook is not overly robust either, with U.S. oil demand at a more than 12-year low (as a % of GDP).


The nearest term catalyst for oil markets may well be in the April / May time frame in the U.S.  Based on projections of current production, it is expected that Cushing, and other U.S. repositories, may be at full capacity by then.  In theory, this may force producers to dump near term supplies on to the market at seriously discounted prices.  #Contango, anyone?


Switching commodity gears slightly, at 11am ET this morning, we will be hosting a call with Keith Barnett the Head of Fundamental Analysis from Asset Risk Management ( ) on the outlook for natural gas prices (he will also discuss oil).  If you don’t already have it and would like to get the dial in for the call, please email  The key topics Barnett will discuss include:

  • Rapid growth in US production driven primarily by emergence of Marcellus / Utica shale play has created basis price dislocations as infrastructure and demand re-calibrate to new supply / demand regional balances;
  • Demand growth along the US Gulf Coast [industrial, LNG exports, and pipe exports to Mexico] create a “battle zone” for basis differentials to re-balance in 2016-2020, with the Haynesville waiting in the wings;
  • British Columbia / Northern Alberta shale plays will look for a home, especially if BC LNG exports continue to be delayed and lower crude prices dampen oil sands (gas demand) development; and
  • Lower crude prices will affect the supply side through reduced liquid-oriented gas, and the demand side by impacting petchem plant development, global LNG price arb, and Mexico project development.


We hope you can join the call.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.70-2.18%

SPX 2070-2110
Nikkei 17776-18236

VIX 14.35-19.33

EUR/USD 1.12-1.14

Oil (WTI) 48.37-54.02
Gold 1195-1232 



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Spurious Correlations - COD updated 2 18

investing ideas

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Given Panera’s dual-class shareholder structure, the company might not be in the line of sight of an activist.  With that being said, we believe Chairman of the Board and Chief Executive Officer Ron Shaich should take a page or two from our playbook and go activist on his own company!


Two former restaurant CEOs turned activist that we admire are Doug Brooks of EAT and Linda Lang of JACK.  Both stocks are up approximately 201% and 461%, respectively, since these CEOs originally laid out (EAT in 2010; JACK in 2005) fundamental changes to their business models in order to enhance performance and drive shareholder returns.  While these CEOs had to make very difficult decisions at the time, the rewards have been vindicating.  Thanks to their strategic moves, Brinker and Jack in the Box are now two of the best run restaurant companies in the space today.


An Open Letter to the CEO of Panera Bread Company

Dear Mr. Shaich,


I believe that you have a significant opportunity to restructure your company and, in the process, make your shareholders a lot of money.  At the same time, you will solidify your place as being one of the greatest, and most respected, CEOs in the restaurant industry.


Change is inevitable.  In fact, since you first started Panera, consumer tastes, behavior, and technology have all changed drastically – rendering parts of the Panera model outdated.  It’s time to become an activist CEO and reinvent the company.  What I’m going to write probably won’t sit well with you, and you will be inclined to immediately dismiss it, but I ask that you think long and hard about the suggestions forthcoming.  Ultimately, I believe they will make Panera an even stronger company.


Panera is a fantastic company, but it has a distinct opportunity to become greater, bigger, and more profitable than ever before.  To be clear, the best way forward today is vastly different from the ways of the past.  Importantly, my thoughts are in line with your stated belief that Panera’s success is dependent on your ability to create “long-term concept differentiation.”  Consumer behavior and tastes are evolving, and the changes you are currently making to your food policy are just the beginning.


Along those same lines, the company must address the secular decline in per capita consumption of bread.  While Panera’s identity is rooted in handcrafted artisan bread, consumer attitudes about bread have changed since you first started the concept.  I don’t think it’s a stretch to say that you’re not getting credit from the consumer by owning all the assets associated with serving this artisan bread.  Does owning the bakery chain supply chain generate a strong return on assets?  I don’t know, but I doubt it.  This leads me to my first suggestion:


1. Sell off non-core assets

Panera currently produces and distributes fresh dough through a leased fleet of temperature controlled trucks owned and operated by the company.  According to the most recent filing, as of December, 30, 2014, you had 224 trucks leased.  In addition, as of the same date, you had 24 fresh dough facilities, 22 of which were company-owned, including one located in Ontario, Canada.  We suspect this asset may be particularly inefficient considering it only supports 15 bakery-cafes located within that market.


As you’ve previously stated, the “essence” of Panera begins with artisan bread: “Bread is our passion, soul, and expertise, and serves as the platform that makes our other entire food special.”  While this may be important, this line of thinking may not properly reflect pronounced changes in consumer behavior.  Specifically, consumers have been consuming less bread, as per capita consumption of this food has been declining since 2000.  More importantly, absolute sales of bread in your stores only make up five to seven percent of sales.


Panera is the last remaining, vertically integrated public restaurant company that we know of.  Companies have argued for years that vertical integration is a competitive advantage.  Of course, in some cases, this is merely corporate speak.  Every vertically integrated company needs to decide whether they are operating more, or less, efficiently than they could be.  Jack in the Box was the last restaurant company to do so, when it rightfully decided to sell off its non-core distribution business.  The stock is up approximately 265% since this time.


Frankly, I don’t think distributing tuna, cream cheese, and certain produce to substantially all of your company-owned and franchise-operated stores gives Panera any competitive advantage.


Moreover, it seems as though the ownership of your supply chain actually limits the company’s future growth opportunities and creates inefficiencies on the P&L.  You already use other independent distributors to distribute some of your “proprietary sweet goods” and other materials to bakery-cafes.  Why not sell off your non-core assets and use independent distributors to distribute all of your products?  You could than redeploy this excess capital back into the business or return it to shareholders.  This leads me to my second suggestion:


2. Slowdown the rollout of Panera 2.0 and begin molding a concept of the future

I sincerely appreciate the level of detail you provided in the 4Q14 earnings release regarding Panera 2.0.  However, I don’t believe you accomplished what you had intended to, because the inconsistency of the results led to a lot of confusion.  I also appreciate that Panera 2.0 is part of broader set of initiatives designed to make your restaurants more competitive, but there can be much more done to improve the efficiency of the box.  None of the initiatives laid out address improving pain points that exist in the back of house or eliminating menu items that are difficult to prepare and simply don’t have the customer sell through.  In addition, it may be time to rethink the part of the box that is dedicated to selling bread.  Should we be thinking about Panera 3.0?  The structural changes that are needed at the core concept lead me to my third suggestion:


3. Slow unit growth and cut capital spending

It’s not possible to focus the company and its resources on Panera 2.0, or Panera in general, when you are accelerating unit growth.  There are a significant amount of unnecessary “growth” resources in place at Panera at a time when the box is in need of a major transformation.  Is this sending shareholders the wrong message?  Given the size and scale of Panera 2.0, why aren’t all of the firm’s resources going into it?  It’s also difficult to maximize profitability when you are spending G&A on unnecessary resources, which leads to my fourth suggestion:


4. Cut excessive G&A spending

Looking at comparable companies, your G&A seems to be much higher than needed – but this should come as no surprise.  Today, Panera is a vertically integrated restaurant company that is growing units at an inefficient pace.  Both of these can be easily remediated by thinking differently about the business model.  Every major restaurant company that has faced similar issues in the past has decided to streamline its structure and improve the operations of its existing asset base.  Panera has not addressed these issues which, in part, play into my fifth suggestion:


5. Aggressively refranchise stores

Refranchising will immediately help eliminate some unnecessary G&A.  While the majority of players in the restaurant space have transitioned closer toward asset-light models, Panera has taken the opposite approach.  Over the last four years, the percentage of company-owned stores has increased from 42% to 49%.  I understand these acquisitions were accretive to earnings at the time, but you now have a bigger problem on your hands.  As you know, you are the one responsible for investing shareholder capital to fix them.  Currently, your franchisees only operate approximately 51% of Panera’s bakery-cafes.  Given that these franchisees are well-capitalized (35 franchise groups operating approximately 27 bakery-cafes each), selling stores probably won’t be a challenge.  Even if current franchisees are out of the question, Panera is a highly desirable concept which, given the amount of liquidity in the market place, makes it likely that there are a number of potential buyers available.


Lastly we will be publishing our detailed thoughts in the coming weeks.  We believe that changes to your current business model will significantly enhance the margins, returns and overall earnings power of the company.  We put the base line earnings power of the company between $8-10 per share and the implied stock price between $240-$300  


I hope that you will consider some of my suggestions.




Howard Penney

FLASHBACK | The Bear Case on $BABA: What The Street Is Missing

Takeaway: China’s Elite drives BABA’s GMV. BABA's user growth moving forward will come from a much weaker consumer; a double-edged sword for its GMV.

Editor's note: Hedgeye Internet & Media analyst Hesham Shabaan has basically been the only bear on Alibaba and has been highlighting the major risks to the BABA story since 10/21/14. Since then, we've witnessed the validation of his bearish thesis within BABA’s quarterly earnings with the emergence of a new concerning trend that landed BABA on our Best Ideas list as a Short on February 11. We are hosting a special call outlining the bear case on BABA this Thursday March 5th at 1pm. Ping for full access. The note below was originally published on November 26, 2014.


We hosted a call last week laying out our BEAR case on BABA, and the key metric we're tracking to time the short opportunity (contact us for the deck and replay).  We're going to publish a series of short notes detailing the salient points from the call.  This is the first, and maybe the most important.



  1. CHINA’S ELITE DRIVES BABA’S GMV: Both GMV/Active Buyer (average spend) and its cohort commentary suggest China’s upper class drives its GMV.  After comparing these metrics to China consumer demographic data, there is no other plausible explanation.
  2. GROWTH WILL COME AT A PRICENew BABA consumers will have considerably less funds to spend.  In turn, user growth will pressure BABA’s average GMV; turning what was a growth driver into a headwind, and leading to a sharp deceleration in GMV growth through F2017.  Note that ~85% of BABA’s revenues are linked to its GMV.



The average consumer on BABA’s China Retail sites spends roughly ¥6.5K annually (~USD $1.1K).  In the chart below, you can see the distribution of China’s internet users by income (red columns) and what BABA's average GMV would represent as percentage of their incomes (orange columns).  In short, BABA’s GMV would be a prohibitively large amount for most consumers in China; especially since BABA can’t sell’s everything.   


FLASHBACK | The Bear Case on $BABA: What The Street Is Missing - BABA   China s Elite

FLASHBACK | The Bear Case on $BABA: What The Street Is Missing - BABA   Can t Sell Everything


The other thing to consider is BABA’s cohort commentary on its F2Q15 earnings call, which we have pasted below. 


BABA F2Q15 Earnings Call (Maggie Wu): “Let me share with you some color on this average spending per buyer. As I said that the longer customers stay with us, the more they're going to spend annually on our platform. I'll give you an example”

    • “The customer who stayed with us for a year's time, their average annual spending level is somewhere around RMB 1,000
    • “And for the ones who stayed with us for five years' time, their spending level is somewhere around RMB 15,000
    • “And then for the ones who stayed around 10 years, their levels is going to above RMB 30,000


The amounts spent by those on the platform for more than 5 years are just jaw-dropping when you consider the income distribution of China’s internet users.  If we compare these metrics to the first chart above, only 5% to 14% of China's internet population at most could afford to spend ¥15K-¥30K annually; let alone BABA's ¥6.5K average GMV. 



The obvious takeaway is that BABA’s GMV is currently hostage to the whims of its upper class consumers.  What’s more concerning is that GMV growth moving forward will be driven primarily by new consumers with considerably less to spend.  In turn, new user growth will come with disproportionately lower GMV growth since average GMV is facing decline; turning what was a growth driver into a headwind.


We illustrate this dynamic in our China GMV Market Model, which is driven by user growth and e-commerce spending projections (both by income cohort); the former being the more important driver.  As new lower-income consumers join the BABA platform, they will grow in proportion to BABA’s total users; driving down both average income and average spending of its user base. 


FLASHBACK | The Bear Case on $BABA: What The Street Is Missing - BABA   GMV Model Penetration

FLASHBACK | The Bear Case on $BABA: What The Street Is Missing - BABA   GMV Model growth


Note that roughly 85% of BABA’s revenues are linked to its GMV, which our model suggests is heading for sharply decelerating growth through F2017. 


We will be publishing a follow-up note with more detail on the impact of our GMV projections on BABA's business model.  In the interim, see link below for broader summary of our bearish thesis, or let us know if you would like to see our BABA deck.



BABA: Leaning Short, But...

10/21/14 07:02 AM EDT



Hesham Shaaban, CFA




The Macro Show, Live with Keith McCullough


Here is the replay of today's edition of The Macro Show, featuring live and interactive commentary from Hedgeye CEO Keith McCullough. 



the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.