The Macro Show Replay | October 29, 2015





“Rate Hike” Back on the Table?

Client Talking Points


The side by side statement (OCT vs. SEP) removed the Global Macro Risk that is #Deflation and, in doing so, perpetuated that risk via a hawkish move in the USD. The Fed also added the domestic risk that is labor #Slowing, so now rate hawks are going to get completely whipped around if we’re right on a GDP bomb this morning.


U.S. stocks rally on rates up, Financials up? Great. Australia and Indonesia (levered the wrong way to #Strong Dollar Deflation) closed down -1.3% and -3.0% overnight; Russia leads losers in Europe -2%, and Oil failed @TREND resistance backing off -1.2% to $45.


If we’re still right on #LateCycle GDP Slowing, easiest move to make this morning is to short the Financials (XLF, KRE, JPM) and buy Utilities and Treasuries (XLU, TLT, etc.) – this is the 8th or 9th time in 2015 they’ve “rallied” the 2yr to 0.75% and failed, FYI.


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Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

What week it was for MCD shareholders! Shares finished the week up 7.3%. We have been saying all along that the third quarter of 2015 would be the inflection point for the McDonald’s (MCD) turnaround. After this print, it appears that the heartache is finally over at McDonald’s, as this quarter marks the first good quarter the company has had in two years.


From here, the upside in the stock price lies with the growth of All Day Breakfast, additional G&A cuts, national value offering implementation, reimaging of restaurants, commodity deflation, especially in beef and increased operational efficiencies, among others. In addition, the REIT is a potential driver of incremental value but not crucial to the long-term success of this call. With Steve Easterbrook at the helm we are confident this company will be better managed than it has been in a long time.


RH unveiled a full floor of Modern product in their New York Flatiron store this week. The new concept sits on the first floor of the 21k sq. ft. store and marks the 3rd property in RH’s fleet (along with Denver and Atlanta) to carry the new product line.


Fundamentally and financially, we’re about to see growth at RH go on a multi-year tear. We think this stock is headed to $300 over the next 2-3 years. We’ve been patient for the catalyst calendar to begin, and the waiting is finally over.


As devaluation and global currency war jockeying from central bankers around the world continues, the acknowledgement of growth slowing continues to push yields lower. The long-bond was up on Thursday, after the ECB meeting, despite an easing-fueled rip in equities. The bond market doesn’t believe in the growth storytelling and we expect it to continue.


Remember that Down Euro Devaluation is a global TIGHTENING event because the world’s biggest asset price #deflation risk is that the world’s inflation expectations (commodities, debt, etc.) are DENOMINATED IN DOLLARS. That has implications for gold (risk to being long), but we want to get through the Fed meeting and GDP data next week before we pivot on a gold view. Stay tuned.

Three for the Road


REPLAY: "Fed Day Live" with Keith McCullough… via @hedgeye



The happiness of your life depends upon the quality of your thoughts; therefore guard accordingly.

Marcus Aurelius


U.S. venture capital firms raised $4.4 billion for 53 funds during the third quarter of 2015, a decrease of 34% compared to the number of funds raised during the second quarter of 2015, and a 59% decrease by dollar commitments, according to the Fundraising Report by Thomson Reuters and the National Venture Capital Association (NVCA).  

CHART OF THE DAY: How the #Fed (Consistently) Overestimates #GDP


CHART OF THE DAY: How the #Fed (Consistently) Overestimates #GDP - 10.29.15 EL chart


Editor's Note: Below is a brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here if you'd like to subscribe and get ahead of the consensus.


"... 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%" 

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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

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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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