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CMG | MOVING IT TO THE SHORT BENCH

We are becoming increasingly concerned about Chipotle (CMG) and the headwinds that it will face in the coming quarters.

 

We took CMG off the Hedgeye Restaurants Best Ideas list as a LONG and moved it to the LONG bench on 9/30/15 see our note HERE.

 

In the note we suggested that CMG is getting long in the tooth and that it will experience some growing pains in the near future.

  1. Quality real estate is getting harder and more expensive to get
  2. Are the 2015 supply chain issues a one off experience?
  3. Slowing sales trends might not end in 3Q15

 

Ahead of the earnings announcement on this Tuesday, October 20th after market close, we are adding it to the short bench.  The table below summarizes what the street is looking for:

CMG | MOVING IT TO THE SHORT BENCH - CHART 1 

 

In addition to our original concerns, we believe the company may post below trend same store sales due to a number of macroeconomic factors.

 

1) The consumer is rolling over

 

A) Jobs

CMG | MOVING IT TO THE SHORT BENCH - CHART 2

CMG | MOVING IT TO THE SHORT BENCH - CHART 3

 

B) Consumption

CMG | MOVING IT TO THE SHORT BENCH - CHART 4

 

C) Consumer Confidence

CMG | MOVING IT TO THE SHORT BENCH - CHART 4a

 

D) Industry Sales Slowing

CMG | MOVING IT TO THE SHORT BENCH - CHART 5

CMG | MOVING IT TO THE SHORT BENCH - CHART 6

 

2) Deflation is bad for Restaurants in general and CMG is not immune.

 

A) Beef, Chicken and Pork prices are all trending lower, taking away Chipotle’s ability to price effectively.

 

B) An added problem is significant labor inflation that we are starting to see in major metropolitan areas. This will begin to trickle through the nation and really begin to affect margins.

 

C) CMG same-store sales versus CPI Pork YoY % change.

CMG | MOVING IT TO THE SHORT BENCH - CHART 7

 

3) Street estimates call for a recovery in sales – this looks to be aggressive. Additionally the company is running up against very difficult YoY comparisons.

 

Hedgeye estimates are below street estimates

CMG | MOVING IT TO THE SHORT BENCH - CHART 8

 

4) CMG needs 3% same-store sales to leverage labor costs.  With slowing same-store sales and accelerating labor inflation, current margin estimates look to be aggressive.

CMG | MOVING IT TO THE SHORT BENCH - CHART 9

 

5) A multiple contraction is likely, given the current macro environment.  And could get worse if sales miss current expectations.

CMG | MOVING IT TO THE SHORT BENCH - CHART 10

 

Hedgeye Restaurants Best Ideas List

CMG | MOVING IT TO THE SHORT BENCH - CHART 11

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


CHART OF THE DAY: Long Stocks? Which Ones? (It Matters)

Editor's Note: Below is a chart and brief excerpt from this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information about how you can subscribe.

CHART OF THE DAY: Long Stocks? Which Ones? (It Matters) - 10.19.15 chart

 

What did “stocks” do?

  1. Utilities (XLU) +2.3% week-over-week were the BEST sub-sector exposure to be long (+2.3% in the last 3 months)
  2. REITS (MSCI Index) +1.2% week-over-week and +1.4% in the last 3 months (vs. SP500 down -4.3% in the last 3 months)
  3. Industrials (XLI) deflated another -1.6% last week and have lost -4.4% in the last 3 months

 


Look Out, Bulls!

“The enemy, of course, is the resistance of the water.”

-George Yeoman Pocock

 

For me, of course, the resistance isn’t that of a swimmer or a rower. Hockey players play above the water. Our resistance is the wall.

 

Without the Old Wall (and its legacy print + NJ cable media) how would we save or make any money? The Cover Story in the oldest of wallpapers this weekend pitched Bears against Bulls on a tightrope. The header of the article read:

 

“Look Out, Bears”

 

And it cited Barron’s latest “money manager survey” that found that “55% of managers are bullish and 16% bearish.” I was a little offended by the whole thing. After all, I’m sensitive. And I’m the bull of all bulls this year, in #GrowthSlowing and Long Bond terms!

Look Out, Bulls! - Bull and bear extra cartoon

 

Back to the Global Macro Grind

 

No offense to Barron’s and their Old Wall boys, but having not called for a slow-down and/or a down stock market (and down bond yields) 9-10 months ago, they have no credibility in calling for an end to what they didn’t realize was starting.

 

That said, while consensus macro has been many times wrong, it rarely seems in doubt. So what is it that is driving the “stocks can never go down” mentality, all over again?

  1. Is it that they were so wrong on growth that bad news about being wrong is obviously good?
  2. Is it that bad/good news of Down Dollar is the best path to US inequality and asset reflation?
  3. Or is it that no matter what happens, Treasuries are always too “expensive” and stocks are “cheap”?

You can waste your time answering those questions this morning. I’m getting back to work.

 

Let’s start with what contextualizing last week’s moves within the 3 month @Hedgeye TREND:

  1. US Dollar Index down for the 3rd straight week, taking Down Dollar to -3.2% in the last 3 months
  2. Japanese Yen was up another +0.7% last week, and is +3.9% vs. Down Dollar in the last 3 months
  3. Russian Rubles were +0.9% last week taking their 1-month gain to +6.9% vs. -7.1% in the last 3 months
  4. Russell 2000 was DOWN -0.3% last week, taking it back to -8.7% in the last 3 months
  5. Nikkei 225 (Japanese Stocks) dropped another -0.7% last week, taking its 3 month loss to -11.2%
  6. Spanish Stocks (IBEX) deflated another -0.8% last week, taking their 3 month loss to -11.1%

Oh no you didn’t.

 

You didn’t call both the broadest measure of the US domestic revenue outlook (80% of Russell 2000 revs are USA) and the other joints that did the devaluation thing (it didn’t work in Japan or Spain) as being down in a week that the Old Wall called “up”?

 

Yes I did.

 

And you can do this too. Just get up an hour earlier each day and watch what happens to your brain. This is not your brain on consensus. This is your brain, thinking for itself – crushing consensus:

  1. US 10yr Treasury Yield down another 5 basis points last week to 2.05% = down 32 basis points in the last 3 months
  2. UST 5yr Breakevens (inflation expectations) down another -5bps last wk (-41bps in the last 3 months) to 1.16%

Oh boy. I better stop there. Barron’s doesn’t do cross-asset class or bond market read-throughs!

 

Back to “stocks”, Mucker. What did “stocks” do?

  1. Utilities (XLU) +2.3% week-over-week were the BEST sub-sector exposure to be long (+2.3% in the last 3 months)
  2. REITS (MSCI Index) +1.2% week-over-week and +1.4% in the last 3 months (vs. SP500 down -4.3% in the last 3 months)
  3. Industrials (XLI) deflated another -1.6% last week and have lost -4.4% in the last 3 months

Yep. In an “up” market for US stocks, both the Russell 2000 (IWM) and Industrials (XLI) were down on the week. As long as your Old Wall broadcaster doesn’t have to explain those details, they’ll never have Draft Kings for billionaire “stock pickers.” #TooMuchDetail

 

Finally, for the “folks” who still think “stocks” tell you about a globally interconnected macro marketplace, here are some hard-core US Equity Style Factors:

  1. SP500 High Beta Stocks were -1.1% last week vs. their Low-Beta brethren +0.7%
  2. SP500 Smaller Caps (bottom 25% cap) were -1.3% last week vs. their Big Cap brethren +1.0%

In other words. Size matters. And so does beta chasing.

 

Just think about it – little Hedgeye continues to be long Treasuries, Utilities, Gold, Low-Beta and Big Cap Liquidity… and the US growth/beta bulls continue to be underweight what we like. Look out, consensus bulls!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.07%

SPX 1
RUT 1130-1178
EUR/USD 1.11-1.14

Gold 1145-1195

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Look Out, Bulls! - 10.19.15 chart


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.

The Macro Show Replay | October 19, 2015

 


October 19, 2015

October 19, 2015 - Slide1

 

BULLISH TRENDS

October 19, 2015 - Slide2

October 19, 2015 - Slide3

October 19, 2015 - Slide4

 

 

BEARISH TRENDS

October 19, 2015 - Slide5

October 19, 2015 - Slide6

October 19, 2015 - Slide7

October 19, 2015 - Slide8

October 19, 2015 - Slide9

October 19, 2015 - Slide10

 


USD, Nikkei and China

Client Talking Points

USD

The USD was down for the 3rd straight week (post that terrible U.S. jobs report) giving the SPX short squeeze what it needed (up, on decelerating volume, to lower-highs) but the USD appears to be stabilizing this morning = Oil (-1.1%), Gold (-0.4%), and the “reflation” trade no likey.

NIKKEi

Japanese stocks no likey either…Down Dollar = Up Yen. After closing -0.8% last week, Japan didn’t believe the China “news” and sold off -0.9% into the close, taking the Nikkei -12% in the last 3 months (with USD -3.2% in the last 3 months).

CHINA

Look on the bright side of their storytelling, they didn’t stick a 7.0 this time and made-up “6.9%” GDP instead. LOL. Even the locals (who are paid to think a certain way) didn’t buy Chinese stocks on that – Shanghai Composite closes -0.14%.

 

**Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 31% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald’s reports 3Q15 earnings Thursday, October 22nd before the market opens, with a conference call at 11:00am ET. We are expecting strong sequential improvement in performance globally. We look forward to giving you an update on the company’s performance next week, but this week we wanted to focus on the ‘Looming Crash in Beef.'

RH

Restoration Hardware opened its new Full Line Design Gallery at the Cherry Creek Shopping Center in Denver this week.  This is another anchor property -- using 53,000 feet of the 90,000 left vacant by Saks at Cherry Creek.

 

RH is taking up the size of its stores from an average of 8,000 square feet to about 40,000+ for its new stores – and productivity rates on these new assets are headed higher. In the old stores, RH could only show 10% of its assortment, while in the newer format stores, the company is showcasing better than 75%. Consumers can’t (and don’t) buy what they don’t see.

TLT

The #SlowerForLonger theme from Hedgeye Macro has been consistent and straightforward. Our pivot in advance of the most recent jobs report to get long of gold and stay out of the way short-side on commodities turned out to be a good position.

 

Growth expectations have been correctly revised, but there’s still a good amount of room between Hedgeye estimates and consensus. We are expecting GDP in a range of 0.1%-1.5% for Q3 and another 1-handle in Q4. If that proves accurate, flatter goes the Treasury curve (TLT, EDV), wider goes high yield spreads (bad for JNK), and down goes the USD (GLD).

Three for the Road

TWEET OF THE DAY

*NEW*

The Big Fear: Jay Pelosky on the Key Market Risks Right Now https://app.hedgeye.com/insights/46957-the-big-fear-jay-pelosky-on-the-key-market-risks-right-now… via @jaypelosky @HedgeyeDJ

#markets #Fed

@Hedgeye

QUOTE OF THE DAY

Life is something like a trumpet. If you don't put anything in you don't get anything out.

W. C. Handy

STAT OF THE DAY

A record 20 hurricanes or typhoons have reached Category 4 or 5 strength in the Northern Hemisphere this year. The record was broken on Saturday when Koppu became the nineteenth storm to reach this intensity prior to slamming into the Philippines as a super typhoon.


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