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The Fed's Crisis Is Finally Here

“If there is any period one would desire to be born in, is it not in the age of Revolution?”

-Ralph Waldo Emerson


Emerson was a 19th century essayist and poet from Boston, MA best known for leading what they called the “Transcendentalist” movement. It was a New Englander thing that probably resonates with many Americans (and other humans who think for themselves) today.


Transcendalists believed that “institutions ultimately corrupted the purity of the individual.” They believed people were at their best when they were “self-reliant” and able to think independently of government and its propaganda.


That’s why the aforementioned passage from Emerson is such a progressive one. On revolution against the Establishment, it’s a time “when the old and the new stand side by side… when the glories of the old can be compensated by the rich possibilities of the new era.”


Back to the Global Macro Grind


At this stage of the Fed’s forecasting game, I don’t hope that you see the mediocrity in this un-elected institution that decides the fate of what used to be free-market moneys every day. Instead, I pray that you understand the risks associated with their market moving forecasts.


The Fed's Crisis Is Finally Here - rate hike cartoon 10.28.2015


As you can see in today’s Chart of The Day, “Serial Over-Optimism”, the US Federal Reserve has overestimated US GDP growth by approximately 100 basis points every year since Ben Bernanke had the courage to act on economic models that don’t work.


What’s 100 basis points?


  1. Uh, the difference between 1% and 2% GDP growth
  2. The Difference between a 10yr Bond Yield of 2.0% and 3.0%


I know. I know. Let’s not get caught up in the details.


Instead, after the almighty Fed changed their forecast, albeit subtly, yesterday – let’s analyze where the Fed could be wrong (again):


  1. In the side by side statement (OCT vs SEP), the Fed removed the bearish concerns about the Global Economy and…
  2. Added the latest concerns (#LateCycle US Employment) embedded in the most recent US jobs reports slowing


This, of course, comes:


A)     After the US Dollar stopped going up AFTER the slowing US jobs report (that they didn’t forecast) and…

B)      Countries, Currencies, and Commodities took a break from crashing, for 3 weeks


So, after dynamically adjusting their latest forecast for everything they missed calling for to begin with:


  1. The US Dollar and interest rates went straight back UP again yesterday
  2. And everything Global #Deflation is falling in Country, Currency, and Commodity land this morning


Yep. Look at the overnight reaction to a more “hawkish” Fed:


  1. Australian Stocks (levered to Commodity #Deflation) down -1.3%
  2. Indonesian Stocks (levered to EM and FX risk) down -3.0%
  3. Russian Stocks (levered to Oil #Deflation) down -2.1%

*hint: the world’s leverage bubble (including inflation expectations) is denominated in Dollars


Oh, and after, “rates ripped” (5 basis points on the 10yr) on the Fed’s latest proclamation of lagging indicator faith, Bond Yields, globally, are falling (again) this morning ahead of another slowing US GDP report.


So, what if the Fed’s US domestic admission of #GrowthSlowing continues to be “data” driven like it has this week (New Home Sales, Durable Goods, and Consumer Confidence reports all slowed, again, sequentially) and the US Dollar rises as rates fall?


Oh, boy. That is the mother of all #Deflation Risk signals. So stand ready, side by side. Because the biggest risk of this entire “600 rate cuts globally” experiment is already here. It’s the Fed’s forecast that could very well perpetuate the next market crisis.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.99-2.11%

SPX 2004-2099
RUT 1136--1182
USD 96.02-98.63
EUR/USD 1.08-1.11
Oil (WTI) 42.97-47.32


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Fed's Crisis Is Finally Here - 10.29.15 EL chart

October 29, 2015

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QSR is on the Hedgeye Restaurants bench as a SHORT. 


Trading at 12.3x EV / NTM EBITDA the stock is fully valued.  The company’s robust development momentum is a clear positive; the shift in the development strategy at Tim Hortons is still an unproven business model.  BK USA will have a very challenging time growing same-store sales as MCD recuperates.  It will be critical to watch how MCDs new value platform rollout unfolds.  As MCD reclaims a portion of the value focused customer base, BK will relinquish the biggest market share in the industry. 



  • QSR reported adjusted EBITDA of $441 million (up 23% YoY excluding the impact of FX) and adjusted diluted EPS of $0.34 per share
  • The company reported net restaurant growth of 210 units or 5.2% growth on a trailing 12-month basis.




  • Tim Hortons same-store sales grew by 5.3%
  • For 3Q15, TH system-wide sales growth was 8.2%
  • Same-store sales performance was primarily driven by the launch of breakfast and lunch wraps and continued strength in beverages - dark roast
  • Same-store sales in Canada were 5.4% and 4.3% in the U.S.
  • Lapping of last year's Dark Roast coffee launch
  • Other product introductions - grilled breakfast; lunch wraps and the Creamy Chocolate Chill



  • Net restaurant growth of 69 at Tim Hortons
  • Development was primarily driven by restaurant openings in Canada
  • QSR announced the aggressive franchise-led development strategy for Tim Hortons USA.  Under the terms of the agreement, franchise partners will look to develop more than 150 Tim Hortons restaurants over the next 10 years in the Cincinnati area
  • The deal underscores two key points: 1. Commitment to expand Tim's presence in the U.S.; and 2. Highlights the franchisee-led expansion model we intend to use in the U.S. to increase our pace of development
  • The goal is to grow our market share in Canada while meaningfully accelerating the pace of expansion in the U.S. and around the world
  • Trying to increase restaurant penetration in urban markets, primarily through non-traditional formats




  • In 3Q15 Burger King same-store sales grew by 6.2%
  • In 3Q15, system-wide sales growth was 11.2%
  • Burger King same-store sales growth was strong across all markets with US&C, EMEA, APAC and LAC reporting comparable sales growth of more than 5%
  • The U.S. was strong despite lapping last year's re-launch of Chicken Fries with same-store sales growth of 5.1%
  • Comparable sales were also up by 7.3% in EMEA this quarter - attributable to strength in Turkey, Russia and Spain
  • In APAC, the outperformance was primarily driven by top line strength in China
  • LAC comparable sales growth increased by 11.4% with good results in both Brazil and Mexico
  • The focus is on the four-pillar strategy menu, marketing, image, and operations in the United States and Canada.
  • Value, the 2 For $5 platform, including the Extra Long Jalapeño Cheeseburger and chicken fries all contributed to our positive same-store sales
  • LTO of Fiery Chicken Fries



  • Burger King achieved net restaurant growth of 141 this quarter
  • As of September 30, there were over 14,600 Burger King restaurants in approximately 100 countries and territories
  • Opened 2,000 restaurants since 2011 - 325 restaurants in China, 300 restaurants in Russia, 275 in Turkey and over 350 restaurants in Brazil



  • Burger King re-entered France in 2013 through a master franchise joint venture agreement forming Burger King France. As of September 30, 2015, there were 30 restaurants in France with a total of 50 restaurants by year-end
  • AUVs of approximately €5 million, some of the highest in the world
  • Partnering with Groupe Bertrand to further accelerate the expansion of the BK brand
  • Over time, BKF plans to convert restaurants in France to the Burger King brand under a similar economic model used in other markets around the world



  • Adjusted net income for the third quarter was $163 million or adjusted diluted EPS of $0.34
  • Year-to-date free cash flow is $831 million and ended the quarter with $976 million in cash
  • As of September 30, 2015 pro forma LTM adjusted EBITDA basis net leverage of 4.9x was down 0.6x year-to-date
  • The reduction in net leverage highlights the commitment to reduce debt load over time
  • QSR Board of Directors declared a dividend of $0.13 per share


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




Early Look

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Snyder’s-Lance (LNCE) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.


Today, LNCE pre-released earnings in conjunction with the announcement that they have signed a definitive agreement to acquire Diamond Foods (DMND) for $1.91bn or $40.46 per share in a stock and cash deal, more details provided below.



The consumer is slowing as consumption and confidence are past their peaks. That doesn’t mean that the LNCE success story is finished. The branded business grew top-line by 4.7% this quarter with the core brands up 6.1% and volume up 5.1%, but in the end these were below internal and external expectations. There is speculation around whether the underperformance was one-time in nature, as evidenced by management commentary and analyst questions, which we will discuss further below. We are reiterating our LONG call on LNCE, as we remain bullish on the long term success of this company.



The company reported net revenue of $417mm, coming in well short of consensus estimates of $435mm. As they work to improve margins with their “Drive for 10” initiative, operating margins rose to 9.6% in the quarter with operating income of $40mm which was in line with consensus estimates. On the bottom-line LNCE reported comparable EPS of $0.26 versus consensus estimates of $0.34.


LNCE was caught in the Bermuda triangle of retail, at one point they are experiencing pressure from a major player in the mass merchandiser channel, additionally, they ran into some Clean Store policies during back-to-school which is a very important time, especially for multi-packs, and lastly, there were some additional challenges with retailer consolidation. Management was clear in that they see these revenue challenges as short-term in nature, as they have been addressing them already. Frankly, we partially agree with them, pricing pressures are still going to persists, but LNCE seems to have managed through it better than others. In spite of the revenue shortfall, management also commented that all core brands gained share in the quarter.



We view the acquisition as a smart move, and depending on how much revenue synergy they can capture it could be a home run. Acquiring ~$900mm in sales bolsters their portfolio and affords them greater leverage when working with suppliers and retailers alike.




Management took guidance down slightly; revenue for the full year is expected to be in the range of $1.68bn to $1.70bn versus previous range of $1.69bn to $1.72bn. EPS came down a little more severely, now expecting $1.07 to $1.12 versus previous $1.11 to $1.19.


For 2016, net revenue growth is estimated to be between 3% and 5%. EPS is estimated to be in the range of $1.35 to $1.42, resulting from increased top-line and margin improvement initiatives. Capital expenditures are projected to be approximately $50-$55 million for the full year.



At the time of writing this note, the stock was trading down roughly 8%. This creates a great buying opportunity if you are a long term investor. LNCE is a company of great brands led by top tier management. With its eye towards smart acquisitions, focusing on top-line organic growth, and the constant possibility of them being acquired by a larger competitor, this company/stock has room to run for years to come.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw





Cartoon of the Day: Redcoats And Rate Hikes

Cartoon of the Day: Redcoats And Rate Hikes - rate hike cartoon 10.28.2015


In case you missed it... Hedgeye CEO Keith McCullough and macro analyst Darius Dale hosted a LIVE + INTERACTIVE online event offering market commentary following the latest FOMC statement. McCullough also distilled the biggest global economic risks and explained how to position your portfolio going forward. Click here to watch the replay.


Panera Bread (PNRA) is on our Hedgeye Restaurants Best Ideas list as a LONG.


Yesterday after the market close PNRA reported 3Q15 numbers followed up by a conference call this morning at 8:30am ET.



Although PNRA missed on the top-line, in our eyes it was a solid performance overall, especially relative to some other companies that have already reported. PNRA represents one of our top ideas in the restaurant space and as you will see in the valuation section below, we see roughly 30% upside in the name, up to $240 per share.



PNRA reported revenue of $664.7mm versus consensus estimates of $667.6mm. Broken out by segment; sales for Bakery-cafés were $584.1mm versus consensus estimates of $585.6mm, Fresh Dough to Franchisees $46.3mm versus consensus estimates of $47.0mm, Royalties and Fees $33.7mm versus consensus estimates of $33.7mm.


System-wide same-store sales (SSS) were 2.8% versus consensus estimates of 3.0%, Company-owned SSS were 3.8% versus consensus estimates of 3.5% and lastly Franchise SSS came in well short of expectations, at 1.8% versus consensus of 2.5%. Breaking down the company-owned comp, PNRA saw 1.0% traffic growth and 2.8% check growth in the quarter. Transaction growth was up in every day part, pre-11am day part was up 1.7%, while the post-11am day part was up 0.7%. Traffic, although positive and well ahead of the industry average, was still short of consensus expectations, which were calling for a 1.6% traffic number. Notably, the company commented that in the first 27 days of Q4 comps at company owned restaurants were 3.4%


Moving to the bottom-line, PNRA reported EPS of $1.32 ex-items beating street expectations of $1.31 by $0.01.










  • As of 3Q15, the company had completed the conversion of 291 bakery-cafes to Panera 2.0, with 108 conversions completed during Q3, which is more than one per day
  • Catering grew by 12% in the quarter, evidence that the Hub investments are paying huge dividends for the company, management believes this will be a $1bn business over time
  • Consumer products is expected to grow to a $175mm business by the end of 2015, has grown at a 60% rate for the last four years
  • The widening divergence in the company-owned versus franchisee comp is evidence of the positive impact of initiatives such as Panera 2.0
  • Delivery is still in tests, big decisions to be made about whether it should be handled internally or through an outside party
  • Structural wage inflation and the affordable care act continue to be pressures, accounting for 110bps of deleverage in this quarter
  • Breakfast continues to grow faster than lunch and dinner, salad sales also increasing
  • Core G&A declined 4% in the quarter
  • 100% of artificial ingredients to be removed by the end of 2016, currently at 90%



Management reaffirmed full year 2015 guidance, of company-owned comparable SSS growth for FY2015 to be in the range 2.0 to 3.5%. Management is still targeting the conversion of approximately 300 company-owned bakery-cafes to Panera 2.0. Operating margins are still expected to be down 100 to 175 basis points. The company is still targeting 105 to 115 system-wide new bakery-café openings in fiscal 2015. In addition, the company reiterated EPS growth of flat to down mid- to high-single digits for the full year.



We believe that management has the company headed in the right direction and are executing well on key initiatives. With that, and our belief that they will continue to outperform their competition we reiterate our positive outlook for the company and its stock performance. We expect PNRA’s multiple to expand over time as investors and analysts see the viability of Panera 2.0, as it will greatly improve sales potential and profitability over time.



Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



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