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Catching a Break?

“We Europeans should remember well that Europe is a continent where nearly everyone has at one time been a refugee. Our common history is marked by millions of Europeans fleeing from religious or political persecution, from war, dictatorship, or oppression.”

-Jean-Claude Juncker


Juncker, President of the European Commission, made this remark in his 2015 State of the Union address titled “Time for Honesty, Unity and Solidarity”, which he delivered at the European Parliament on September 9th, 2015. In recent days Juncker’s Commission has put forward a proposal to resettle 120,000 asylum seekers, which will be evaluated by the EU ministers beginning today.


Clearly Juncker and his Eurocrat colleagues are at a huge crossroads on the region’s next policy move to deal with the mass influx of refugees (and migrants) seeking shelter in Europe.  Data suggests that since the beginning of the year, nearly 500,000 people have made their way to Europe, the majority fleeing war and terror in Syria, Libya and Eritrea, and landing in the highest concentrations in the member states of Greece, Hungary, and Italy. (For perspective Turkey, Jordan and Lebanon are hosting over 4 million Syrian refugees).


One aspect that’s striking about this refugee crisis is its parallels to the concurrent Eurozone debt crisis.  Note the media’s darling word choice, ‘crisis’.  By definition, crisis has a connation of a “short term or sudden event”, yet it has been anything but— Greece’s first crisis started way back in 2010! 


But getting beyond the language choice, I suspect that Europe’s refugee crisis will be far from short term or sudden in nature.  In fact, I think the resettling of refugees stands to have a very long tail, one that could have very disparate outcomes, and financially may pose far greater risk than the Eurozone debt crisis.


Again and again we’ve witnessed the Eurozone and EU’s major challenge as a “union” incapable of effective coordination and implementation of policy given the uneven nature (political, economic, and cultural) of member states. The Czech government has already notified Brussels that it believes compulsory quotas are illegal.  And so even in a best case scenario in which Eurocrats agree to sign on a dotted line on how many refugees they’ll be willing to take on, then what happens with the refugees?


If we take Germany as an example, the longer term prospects may not look so favorable.  There, Chancellor Angela Merkel has been very vocal on her country’s willingness to take on refugees, even boosting the number of asylum seekers to 800,000 (or about 0.9% of the population) this year and 500,0000 a year for a foreseeable future.


Yet if we rewind the clock back to 2010, this is the same Merkel who very adamantly stated that multiculturalism (where Germans live side-by-side with immigrants) is a failed project.  Specifically, she was referencing the inability of Turks to integrate with Germans, and vice-versa.  The Turks were originally recruited as guest workers (Gastarbeiter) in the 1960s and 1970s to help rebuild the country following the war. History shows that many of those Turks didn’t return home and had children in Germany, contributing to Germany’s Muslim population that represents ~ 5.4% of the country today (2009 est.). [For perspective, Muslims make up ~ 0.9% of the U.S. population (2010 est.)].


So multiculturalism is dead?  Well then what’s the plan to integrate these Syrians into Germany, so that they are a benefit and not a tax to the society, to the economy?  If there’s no integration, is there really any hope that these immigrants can support Germany’s generous welfare system – or at least replace Germany’s aging and declining population?


Let’s hope this time is different, that European heads of state take the time to address the longer term solutions for asylum seekers; simply signing on the dotted line will doom the region to repeat past integration failures.  


Back to the Global Macro Grind


Notably tomorrow, ECB President Mario Draghi will stand before the European Economic Affairs Committee in its quarterly monetary meeting to discuss the state of the Eurozone.


While we don’t have a crystal ball, we think it’s well worth pointing out that this presents Mr. Draghi yet another large stage to make a “splash” should he so choose.


We continue to point out that European equities have been bombed out (the German DAX is down over -20% since April = crash), in-line with our 3Q15 Macro Theme of #EuropeSlowing.  At the meeting, we wouldn’t be surprised to see Draghi 1) talk down the euro (in the near past, European equity markets have acted favorably to a weak EUR/USD – Germany in particular with 46.5% of the economy levered to exports – and 2) suggest more QE may be in the pipe (an increase in monthly purchases above the original target of €60B/month).


Catching a Break? - down DAX cartoon 09.21.2015


While the Bundesbank’s recent monthly report highlights a few shoots of positive economic indicators in Germany, we continue to be on the other side, signaling declines in rate of changes terms of our high frequency gauges, with our proprietary GIP (growth, inflation, policy) model signaling that Germany will enter the ugly Quad 3 in 4Q15, equating to growth slowing as reported inflation accelerates (or stagflation).


Can Draghi be the market’s elixir to tone down the European equity market volatility? 


While we’re not throwing the chips in on German equities, on Friday (9/18) we signaled to buy German bonds via the etf BUNL. If Germany has to do what Japan did, QE forever, we like buying bunds on any/all pullbacks!


Our immediate-term Global Macro Risk Ranges are now:


DAX 9611-10107


UST 10yr Yield 2.11-2.21%
EUR/USD 1.10-1.14
YEN 118.78-121.76
Oil (WTI) 43.28-47.93 


Catching a Break? - z cod hed GERMANY 




Watch the replay of this presentation below.



Please join us next week for a conference call and video outlining our investment thesis on the lodging sector.


Call Details:  

Today, September 22nd at 2pm.  Attendance on this call is limited.  Please contact sales@hedgeye.com for details.


Relevant Tickers:



Discussion Points:

  • Results of our comprehensive meeting planner survey
  • Franchise segment study 
    • Who's benefiting from higher franchise rates?
    • Which are the strongest franchise brands?
  • How should we read into the recent RevPAR softness?
  • Q3 earnings preview and 2015/2016 outlook
  • Quarter to date RevPAR tracker for each company
  • Potential for Q4 RevPAR acceleration
  • Our view on the lodging cycle
  • Macro variables driving RevPAR performance
  • Statistical relationship of occupancy, ADR, RevPAR to stock prices:  when do we buy and sell 'em and where are we now?
  • Exposure to energy markets
  • Which companies are best positioned with our near and long term outlook?
  • Does a REIT spin make sense for HLT?

September 22, 2015

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September 22, 2015 - Slide11

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

#EuropeSlowing: Still in Play

Client Talking Points


Euro Down, Stocks Down? Oh boy, that’s not what European Equities are used to – so ECB President Mario Draghi has his work cut out for him tomorrow testifying in front of Euro Parliament. With the DAX and IBEX signaling oversold (both in crash mode, down > 20% vs. April highs) tomorrow = big central-planning event day. Reminder: they can’t CTRL+Print Growth.


The USD was straight up on some kind of hope yesterday that the Fed is going go “raise rates in OCT”… C'mon man! They don’t have a press conference in OCT – and, again, the rate of change in all U.S. data continues to slow here so take these Dollar Up, Rates Up days as buying opportunities in things that have fundamentals, like Housing (ITB).


Shall we call this the head-fake “breakout” chart of the year? Or of the last 4 years? Right back down to 0.68% this morning and there’s plenty of downside left if the “data dependent” Fed calls Q3 GDP for what it is #SLOWING – staying with Long-term Bonds and stocks that look like bonds, because that’s what’s working – still short Financials (XLF).


**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald’s remains one of our Restaurant teams Best Ideas on the LONG side.  We continue to believe that 3Q15 will be the inflection point for the company’s turnaround and that we are going to be looking at a much different company 1-3 years from now.


Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.


Penn National Gaming continues to be our favorite Regional Gaming stock.


Regional numbers for August have come in soft, but we predicted the August weakness. September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels. 


Slower (and Lower) For Longer remains our non-consensus call. It's nice to see that the Fed is finally starting to see what the #GrowthSlowing late-cycle data does.

  1. GROWTH: is #LateCycle and will be slower (again) in Q3 than it was in Q2
  2. INFLATION: misreported, yes – in the area code of the Fed’s 2% “target”, no

Our estimate for Y/Y% GDP for Q3 is a range of 0.1% to 1.5%. Even the Q/Q SAAR # that consensus hangs on will be comping against a 3.7% Q/Q SAAR GDP print (second revision). Good luck positioning for a rate hike. Prepare for the fade…. AGAIN.

Three for the Road


DAX Support Is ‘Gone. Shot. Dead.’ https://app.hedgeye.com/insights/46452-mccullough-dax-support-is-gone-shot-dead… via @hedgeye



The greatest discovery of my generation is that human beings can alter their lives by altering their attitude of mind.

William James


Macy's plans to hire 85,000 employees for this Holiday Season, which is down from 86,000 last year. 12,000 of the employees will be for DTC fulfillment centers.

Cartoon of the Day: #DAX Crash

Cartoon of the Day: #DAX Crash - down DAX cartoon 09.21.2015


Excerpt from note written to subscribers by CEO Keith McCullough this morning:


The Fed’s Dollar Devaluation (EUR/USD +2.5% m/m) thing isn’t appreciated by either the DAX or Draghi (he testifies to European Parliament Wed); DAX down another -0.6% w/ keeping the crash (-20.4% since APR) in play, but signals immediate-term oversold here, for a trade.


This call is likely going to be six months early, but now is the time to go LONG DFRG.


The LONG DFRG thesis is centered on management doing the right thing.  Management needs to right size the company with significant changes to its growth/operating strategy that will significantly improve profitability.  This will take time but it’s a critical step to building a stronger company.


The plan that the DFRG management team needs to execute has been done many times before by some of the industry’s largest and most successful companies.  The following is our theory about the operational cycle that many companies in the restaurant industry tend to go through. Typically, when a concept gets in trouble, the management team’s decision-making process has followed a certain pattern.  A company’s stock becomes a buy when the cycle is complete.


THE SYMPTOM - OVERCONFIDENCE AND IRRATIONAL EXPECTATIONS— A concept loses its operational integrity when unit growth exceeds the company’s capacity to manage that growth.  Also, a concept can lose its value proposition when management raises prices too aggressively or lowers the quality of the food, leading to a decline in customer counts.


Most management teams are unwilling to acknowledge the issues and try to grow through the mistakes, which usually make the issues more difficult and costly to fix.  The grieving process looks something like this:


STAGE 1 – SETTING THE GROUND WORK — In an effort to meet aggressive unit growth targets, management makes bad real estate decisions.  Management knows from the beginning that any given sight is questionable, but opens it regardless.  From the store opening, it takes about 6-12 months (depending on the size of the company) for the street to see it in the numbers.  For more mature companies, that raise prices aggressively, it is a two years process before consumers catch on and begin to frequent the concept less often. Traffic begins to decline and management usually begins to blame the weather or another external event.


At this stage the best SHORT stories are created!


STAGE 2 – THE DENIAL — Depending on the situation, denial can take many forms.  Unfortunately, bad real estate site selection is hard to explain away, but it usually comes in the form of lack of brand awareness.  In an effort to avoid the inevitable and appease the street, management begins to accelerate growth through the form of new unit acceleration in core markets.  More mature companies will look to the acquisition of new brands as a way of maintaining a growth story.  Unfortunately, the core business continues to deteriorate alongside a decline in ROIIC (return on incremental invested capital).


STAGE 3 – THE PANIC — As the numbers become self-evident, the fast money crowd begins to circle, pushing management to disclose more details.  In the beginning, the sell-side takes it easy on management, allowing for any initial strategy to play out.  Depending on how bad things look, management talks about a number of changes to operations and may respond by slowing new unit growth, although often not by enough. The core business continues to decline, as senior management begins to replace the operating team. Simultaneously, management concludes that the advertising agency is not creative enough and the search for a new agency begins.


STAGE 4 – DEPRESSION — Now it really gets ugly.  At this point one of two things can happen.  First, management can reduce labor at underperforming units to improve profitability, or second, management sacrifices margins to increase customer counts by implementing a deep discounting strategy. It then becomes clear that major changes need to be made across the enterprise.


STAGE 5 – THE UPWARD TURN AND HOPE — Management decides to close stores, stop growth and or stops discounting to improve profitability.  The next move is to attack the middle of the P&L to improve profitability.


At this stage the stock becomes washed out and the sell-side has abandoned the company.  It also becomes very hard for the buy-side to pull the trigger and buy the stock.  At this stage I like to go LONG! 


Having acknowledged the need to close stores and slow the growth rate of The Grille, we view DFRG as emerging from depression.  To that end, DFRG has announced the first steps to improving the broken company:


  1. Closing unprofitable stores
  2. Slowing unit growth
  3. Increase focus on existing assets


What we are missing from the DFRG story are the details behind what level of profitability (the improvement in EBITDA) will be coming from the store closings.  Despite management acknowledging the issues, the stock has been beaten to a pulp, down ~30% over the last three months. We are starting to feel that at 6x EV / NTM EBITDA all the bad news has been priced into the name.


Unfortunately, the company’s strongest brand, The Double Eagle, is seeing slowing sales trends due to market volatility and the associated decline in banquet business. As for the changes within their control, this is exactly what we want them to be doing, and we believe that they will get the Grille concept running smoothly.


From a sum-of-the-parts analysis the stock is significantly undervalued (see table below) as it probably should be given the current fundamentals.  That being said, six months from now, hope will turn into optimism and the stock will be a lot higher!







Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw