Takeaway: Following the May pause, June has resumed the sequential softening trend of the last 15 months


We are forced to lower our June forecast yet again. Bad luck in the VIP segment may be partly responsible, but volumes also appear softer. Following a few hints of stability in May, June has resumed the softening sequential trend. 2015 and 2016 Street EBITDA estimates are very much in doubt – we’re not even confident with our below consensus projections – not just from a potentially lower top line. We also think the Street has the mix wrong – base mass is worse than expected, with significant margin and EBITDA implications.


Please see our detailed note:

Transporting Narratives

This note was originally published at 8am on June 09, 2015 for Hedgeye subscribers.

“Great is exactly what it isn’t.”

-Wallace Stegner


For some reason Willie Nelson is ringing in my head this morning. I’m on the road again.


And going West is where that quote from Stegner comes from. My Angle of Repose for the next 3 days will be across the sunny State of California, where I’m looking forward to debating Institutional Investors on what is really going on out there.


US and Global #GrowthAccelerating is exactly what isn’t right now. A #LateCycle US Labor report only reiterates that.

Transporting Narratives - It s different cartoon 06.08.2015


Back to the Global Macro Grind


For we strategist types, Transporting Narratives is fun. Meeting to meeting, that is what we do. So let’s start this morning’s narrative with the Transportation stocks.


In macro strategy there are some leading indicators that even the most creative storyteller can’t convince you that “it’s different this time.” When we went bullish on US #GrowthAccelerating in 2013, the Dow Transports (IYT) index was breaking out to the upside.


Now, after 73 months of a US economic expansion, it’s breaking down:


  1. Transports (IYT) led losers yesterday, down -2.1% vs. SPY -0.65%
  2. Transports (IYT) have been leading losers for the last month, -4.9%
  3. Transports (IYT) are now -8.7% for 2015 YTD


So what say you Mr. Global Growth Is Back man?


For those of us who have been on both the buy and sell side of the game, what we say with our #Timestamped positions speaks louder than our slide decks. On last week’s bounce, we signaled short the Transports (IYT) in Real-Time Alerts.


Here are my Top 3 ways to get out of the way on both US and Global #GrowthSlowing:


  1. Short Industrials (XLI) which continue to suck wind -2% YTD
  2. Short Financials (XLF) which failed (again) yesterday and remain in the red -0.4% YTD
  3. Short Transports (IYT) -8.7% YTD


Did I mention the Transports?


Actually there is a 4th way to express the Fed being more dovish (again) at the June 17th meeting, which is to take weakness in the US Dollar as a correlated tax on a #LateCycle and slowing US consumer (XRT).


Don’t forget that the US Retail Sales Growth cycle peaked in Q4 of 2014 at +4.5-4.7% year-over-year growth and has since slowed in its most recent reading (April) to +0.9% due to the sunny East coast weather. Did it rain enough in May?


Nah, let’s not talk about that data point or a 46.2 Chicago PMI reading for the month of May, when we can actually go back to a Durable Goods reading of -2.3% year-over-year in April and hope that the Fed didn’t see that one either.


Instead, let’s look away from the US data and see what Global Equities have been signaling for the last month:


  1. Russia -12%
  2. Portugal -9%
  3. Greece -8%
  4. Brazil -7%
  5. Turkey -7%
  6. Germany -7%
  7. Indonesia -6%
  8. Taiwan -5%


To be fair, I guess the Dow Transports are “outperforming” Taiwanese Stocks by 30 basis points in the last month. That must be the all-systems go on global growth signal, eh?


Oh, then there’s the narrative that “bond yields are rising because growth and inflation are back.”


On that data front this morning:


  1. Swiss consumer prices (CPI) deflated -1.2% year-over-year in May
  2. Chinese producer prices (PPI) deflated -4.6% year-over-year in May
  3. Chinese CPI slowed from +1.5% y/y in April to +1.2% in May


There’s definitely a narrative out there (perpetuated by Mario Draghi which I think was a huge mistake) that both the European and US economies are accelerating. We hear it in investor meetings every day (I think our competition is on the road too).


Unfortunately for the bullish growth narrative, both the economic data and market moves discounting future growth expectations are reminding you that #accelerating is exactly what it isn’t.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.03-2.41%

SPX 2067-2104
VIX 13.75-15.90
USD 94.64-96.41
EUR/USD 1.08-1.13
Oil (WTI) 56.99-61.50

Gold 1170-1200


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Transporting Narratives - Z 06.09.15 chart

Extend, Pretend and Devalue

Client Talking Points


The Euro is down hard this morning (-1% vs USD) after tapping the top-end of our 1.11-1.14 risk range and the Greeks having 48 hours to put on their best dress – the Euro is worth less as the Eurozone continues to socialize leverage and bad behavior.



Another day, another big rip in Global Yields as Italian and Spanish Yields come off last week’s freak-out highs. The German 10YR is up +13 basis points from 0.78% to 0.91% pressuring both U.S. and JGB yields to the upside again.


The ole “buy everything” call worked, somehow – but this one wasn’t that hard to get right if you had A) a more dovish Fed and B) another Greek bailout right. It’s sad, but front-running predictable central planning behavior works; VIX still range bound 12.29-15.46.


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Macro Analyst Darius Dale and Macro & Housing Analyst Christian Drake.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Shares of Penn National Gaming are up approximately 9% since it was added to Investing Ideas on May 26. Our Gaming, Lodging & Leisure team reiterates their high conviction on the stock and notes that Ohio and Kansas have both been super-strong revenue generators in the month of May. This positive development has has led our analysts to raise their estimates even higher (and we're already the highest on the street...).


It was a busy week across the housing space with a host of fundamental releases, builder earnings and notable regulatory updates.   Net-net-net....the past week offered another positive update on the state of the residential real estate market with housing turned in a second week of strong, positive absolute and relative performance. The NAHB HMI (Builder Confidence Index) for June surged across all categories and in all regions, posting its best reading in almost 10 years. Total Starts declined -11% MoM to +1.036 MM units with SF and MF starts declining -5.4% and -20.2% month-over-month, respectively.  Permits, meanwhile, rose to an 8-year high advancing +11.8% sequentially and +25% year-over-year.   The strength in permits augurs forward strength in Starts and suggest residential construction spending will be (increasingly) supportive of GDP growth over the next couple quarters.


Bottom line right now remains that Lower-For-Longer is firmly intact as long as US #GrowthSlowing is. As Keith pointed out on Friday, Consensus Macro is still stubbornly sticking to the tired idea that rates have to go higher - they just have to... because, they haven't? All told, it was a great week sticking with the process on the long side of bonds. Here we feature an in-depth discussion from Senior Macro Analyst Darius Dale which does a thorough job outlining where our macro team currently stands with respect to the Fed, interest rates, markets and economy. The prescient discussion occured just hours before release of the FOMC statement.

Three for the Road


We reiterate our bullish bias on Japanese equities. Nikkei 225 up +19.2% YTD vs. a measly +3.1% return for the SPX. 



Great is the human who has not lost his childlike heart.

Mencius, 4th century BCE


Jordan Spieth won the U.S. Open, his victory marks the first time a player has won the first two majors of the year since Tiger in 2002 and the youngest to win the US Open since Bobby Jones 1923.



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The Macro Show Replay | June 23, 2015



June 23, 2015

June 23, 2015 - HE DTR 6 23 15


BOJA | Getting Deep Fried

BOJA | Getting Deep Fried - Chart 1 replace


Back on 6/4/15 we added Bojangles’ (BOJA) to our Hedgeye Restaurants Short Bench. Since then we have begun to refine our thinking and wanted to share our updates as we work out the final details.  As a result we are upgrading it to the Restaurant Best Short Ideas.


Currently BOJA shares are trading at approximately 16.5x 2016E EBITDA, or an approximately 15% premium to the mean of the three other regional chicken companies (LOCO, FRGI, and PLKI).  That being said, it’s also not hard to make the case that LOCO and FRGI are overvalued too, making BOJA even more ridiculously overvalued.     




Bull Case is Unlikely – The bull case for BOJA is grounded on BOJA’s strong fundamental momentum continuing for years. My read on the fundamentals suggest that there is little leverage in the business model or upside to the current estimates.


New Unit Economics Don’t Add up – Each new BOJA restaurant costs slightly more than $2.1 million. The average unit volume is between $1.7 million and $1.5 million for new units in non-core markets. This puts the concept sales to investment ratio at .68, one of the lowest in the industry and suggests you should be allocating your capital elsewhere.


Same-Store Sales – In the recent past BOJA has used price as a primary driver of same-store sales growth. Going forward, guidance is for low-single digit same-store sales primarily driven by 2%-3% pricing and flattish traffic. All this pricing is due to rising commodity costs specifically on chicken, which leads into our next point.


Commodity Costs – Chicken represents 38% of COGS, and will likely drive a majority of the mid-single digit commodity basket inflation expected in 2015.


Low and Declining Margins – Due to the higher cost of sales, restaurant level margins will contract in 2015, as price increases will not fully offset rising costs.


Valuation – The market is putting insanely high multiples on average restaurant businesses.


Downside – Our bear case has 30% downside in the name.


We will be making our point more clear later this week with more robust details.


BOJA | Getting Deep Fried - CHaRT 2 

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