Cartoon of the Day: The Italian Job

Cartoon of the Day: The Italian Job - Italian bank cartoon


Deutsche Bank’s chief economist said Europe's banks need a major recapitalization to the tune of €150 billion, as worries about Italian banks continue to make headlines. "And so Old Wall's begging for another bailout begins," Hedgeye CEO Keith McCullough wrote today.

Penney: The 2 Most Important Things In The Restaurant Space

In this brief excerpt from The Macro Show earlier today, Hedgeye Restaurants analyst Howard Penney explains how slowing restaurant sales and traffic points to a slowing economy.


Subscribe to The Macro Show today for access to this and all other episodes. 


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The BS Filter: Begging For Bailouts, #EmploymentSlowing, The NIRP Effect

Takeaway: "Fragility is the quality of things that are vulnerable to volatility." -Nassim Taleb

The BS Filter: Begging For Bailouts, #EmploymentSlowing, The NIRP Effect - earth


Hedgeye's Take On Today's Financial News


Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses last Friday's Jobs Report, Deutsche Bank's chief economist begs for a bailout, central planning nonsense, and the latest country to fall prey to negative interest rate.


"Over the past year, job growth is up 1.7%, which is a touch below the average expansion of 1.8% witnessed over the past four years," WSJ economics correspondent Nick Timiraos wrote following Friday's jobs report. Timiraos tacitly admitted the jobs report slowdown in a tweet showing "hiring, change from year ago" that has slowed from 2.14% in June 2015 to 1.72% this June. 


OUR TAKE: As we've noted many times before (most recently in "Don't Believe the June Jobs Report Hype"), the peak in year-over-year non-farm payroll growth was February 2015. Take a look at the chart below. We reiterate our call... #EmploymentSlowing.


The BS Filter: Begging For Bailouts, #EmploymentSlowing, The NIRP Effect - nfp 7 8

"Begging For Bailouts"

"Deutsche Bank's chief economist urged the European Union to set up a 150 billion euro ($165.39 billion) rescue fund to recapitalize European banks," German newspaper Die Welt reported on Monday.


OUR TAKE: "Old Wall is begging for another round of bailouts," Hedgeye CEO Keith McCullough wrote this morning. Just sad.

Central Planning 101

"Japanese Prime Minister Shinzo Abe ordered a new round of fiscal stimulus spending after a crushing election victory over the weekend as evidence mounted the corporate sector is floundering due to weak demand," Reuters reported over the weekend. Before the election, "ruling party sources" told Reuters, the government was ready to spend more than 10 trillion yen ($100 billion).


OUR TAKE: Central planners are stepping up efforts to prop up equity markets and their slowing economies. And while the currency war continues to heat up, don't bet on the whims of bureaucrats.

More nonsense...

"The Bank of England mulls property fund shake up to stop panic sales," the Sunday Telegraph newspaper said late on Saturday. The BoE is apparently considering curbs on property investment fund withdrawals.


OUR TAKE: "Central-market planning remains the socialist rage," Hedgeye CEO Keith McCullough wrote today. Question: Can central bankers fix the underlying reality that caused the outflows to begin with? No. The central planning #BeliefSystem is breaking down.

The NIRP Effect: dutch 10-Yr Goes NEgative

"The Netherlands has joined a select group of countries able to boast of negative borrowing rates on 10-year debt. For the first time, yields on benchmark Dutch government bonds dipped below zero – hitting minus 0.0001 per cent on Friday afternoon," the Financial Times reports. The Netherlands joins the likes of Germany, Switzerland, Japan, and Denmark in global negative-yielding debt (which now amounts to $13 trillion).


OUR TAKE: As #GrowthSlowing continues to ravage economies across the globe, bond yields will continue to fall. 

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About Everything | Driverless Cars: Unsafe at Any Speed?

Why fully autonomous vehicles are still a long way off.


Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses the future of driverless cars, assessing potential pitfalls that could ultimately delay the adoption of fully-autonomous vehicles.


"Yes, the 'low-hanging fruit' of semiautonomous driving has already been plucked," Howe writes. "But full autonomy requires infallible higher-order thinking, a golden apple which will prove difficult—if not impossible—to grasp anytime soon."


About Everything | Driverless Cars: Unsafe at Any Speed? - driverless car


On May 7th, a man died after his Tesla crashed into a tractor-trailer while in autopilot mode. According to witnesses, the driver was watching a movie and never applied his brakes. While the crash wasn’t publicized until June 30, it has come out that Tesla CEO Elon Musk knew about the accident shortly after it happened.


Given the breathless excitement surrounding driverless cars, it’s no wonder Musk didn’t want investors learning about this tragic accident.


Autonomous vehicles, along with various autopilot add-ons for ordinary vehicles, have been under development for well over a decade. But in the past few months, the race to bring them into commercial production has accelerated. In March, General Motors (GM) bought self-driving startup Cruise Automation for $1 billion. In May, Toyota (TM) and Uber joined forces, Apple (AAPL) invested $1 billion into Chinese ride-sharing company Didi Chuxing, and Google (GOOG) partnered with Fiat Chrysler (FCAU).


About Everything | Driverless Cars: Unsafe at Any Speed? - driverless 1


The fate of self-driving cars impacts both the big automakers that have invested heavily in the space—from Ford (F) to Honda (HMC) to Tesla (TSLA)—as well as the tech companies working with these giants. Those with the most at stake, however, are the small firms specializing in driverless car technology. Nearly all are private, though Mobileye (MBLY) is a notable exception.


If you believe these companies, we’re getting close to the consumer-ready driverless car. Tesla says that it will have one commercially available by 2018, while BMW is planning for 2021.


About Everything | Driverless Cars: Unsafe at Any Speed? - driverless 2


At first blush, this timeline seems plausible. Semiautonomous add-ons like lane departure warnings and automatic parking are already in widespread use, after all.


My take on all this buzz? Check your long exposure. I don’t see a fully autonomous vehicle coming to the general marketplace for two decades at a minimum.


Yes, in the long run, programmers and carmakers will certainly achieve their goal of producing an affordable driverless vehicle fit for widespread use. But it’s not going to happen on anything close to the timetable that these companies and the industry media are now touting.


Why? Some of the likely causes of delay are already well understood. These cars are still too expensive. (Today’s Google car, fully rigged with LiDAR, costs six figures to build.) They will require a whole new legal and insurance infrastructure. (After an accident with these cars, you sue the car company, not the other driver.) And they are unnervingly vulnerable to hacking (or mass hacking, which could make this a national security issue).


The most intractable obstacle, however, is the extreme difficulty of moving from semiautonomous to fully autonomous. Most of today’s semiautonomous features take over the most routine driving tasks. All higher-order thinking remains with the driver.


What will it take to replicate that higher-order thinking? Ah, there’s the rub.


About Everything | Driverless Cars: Unsafe at Any Speed? - callout neil


Here are some critical difficulties that will challenge any version of driverless car likely to be available in the near future.


Staying on the road or lane in all circumstances. Driverless AI cannot cope with road edges or lane markings obscured by water, snow, gravel, or dirt. Same story with lane markings weathered by age or incorrectly veering off the road—as well as construction zones and detours where roads change.


Yes, driverless cars have GPS, but plus-or-minus 3.5 meters just isn’t good enough for the oak tree that’s only a couple feet from the curb. No car will dare to abandon its LiDAR or camera for an accurate read of the immediate environment. Bad weather only makes things worse: In rain or snow, current autonomous cars are programmed to stop. Yes, that’s right, they just stop.


About Everything | Driverless Cars: Unsafe at Any Speed? - driverless 3


Making sense out of confusing and ambiguous situations. Think of parking lots, frontage roads, strip malls, and toll plazas where lines disappear and judgement takes over. Think of obscured or ambiguous signage. Or a police officer signaling traffic. Humans can figure out what to do when the rules are unclear, provisional, or absent. It’s hard for a driverless car to understand that it’s sometimes acceptable to drive in the opposite lane.


Interpreting disorienting changes in light. Today’s sensors can’t recognize the color of the traffic light through the sun’s glare, ignore a stop sign reflected in another car’s window, or determine whether the approaching dark spot on the road is a shadow or a shallow puddle or a deep pothole. Case in point: In the recent Tesla accident, the autopilot sensors couldn’t distinguish between the white side of the tractor-trailer and the brightly lit sky.


Engaging in higher-order object recognition. Humans know that it’s safe to drive through crumpled paper or plastic bags. Or slow down when hitting some low-hanging leaves. Or swerve entirely around tire debris and pieces of fender. How is a computer supposed know the difference and act accordingly? Humans are also able to figure out which signal in a complicated string of traffic lights belongs to their lane. GPS-plus-sensors are nowhere near smart enough to intuit this.


Comprehending human intentionality. Only a human can easily assess the intentions of other humans, whether it’s dealing with road-rage drivers or dodging cars taking evasive maneuvers from emergency vehicles. It takes a human to “read” the directions of a police officer, the gestures of a driver in distress, or the hesitation of a deer in the road. When a ball rolls into the road, only a human can sense when a child is likely to be following.


Many techno-enthusiasts will argue back: Wait, the driverless car doesn’t have to be perfect—it only has to be better than the human driver. Wrong. People have vastly less tolerance for a system or machine that arbitrarily kills people than they do for deaths that occur as the accidental result of personal human intentionality. That may defy cost-benefit analysis. But it is a fundamental truth about how people make moral judgments. The very fact that we would need to refashion the body of law governing car accidents (from personal injury tort law to product liability law) should give enthusiasts pause.


Analogy: While playing hockey, players often get hurt by flying pucks. Everyone accepts this is part of the game. Now imagine an otherwise “safe” puck which, from time to time, spontaneously jumps out and hurts people at random. Now we have a much more serious problem—public outrage and a product liability suit that will quickly put that puck-making company out of business.


Watch out for a backlash against semiautonomous automakers. The race to fully autonomous vehicles is an all-or-nothing bet: Either people can take their attention away from the road or they can’t. Anything short of 100 percent autonomy is a big problem—which already poses an awkward tension in the marketing for current semiautonomous features. The company tells you that this cool feature enables you not to pay attention. But then they tell you always to pay attention.


Don’t believe any hype about “cars without steering wheels.” Google is determined to create a car that does not require a steering wheel or pedals. This concept is fine for specialized commercial purposes (like in mining and forestry)—but will never fly for everyday consumers. To accommodate such vehicles, the United States would need a total infrastructure remake. At the very least, the car would need to have an override in case of emergency.


About Everything | Driverless Cars: Unsafe at Any Speed? - driverless 4


Don’t expect onboard technology alone to create the 100 percent driverless car. Sure, better integration of satellite and LiDAR and better AI would be an improvement. But perfecting the driverless car requires much more. We will certainly need a new and improved highway system designed for a driverless society. We will probably also need a wireless communications infrastructure that allows all cars (even those with drivers) to signal to each other. Such a system would require massive public investment over at least a decade, the prospect of which isn’t even on the horizon yet.


The slower-than-expected rollout of driverless cars may be a good thing. While Boomers and Xers have spent a lifetime wedded to the concept of a car as a projection of their personal autonomy, Millennials are more comfortable ceding personal control to an intelligent system and are less attracted to ownership. A future devoid of drivers may only be possible when most of society is younger than Millennials, not older.


  • Detroit and Silicon Valley make it sound like fully autonomous cars are imminent. Investment cash is flowing. Tesla and BMW promise a consumer-ready product within five years.
  • This promise is mistaken. It will take at least two decades before driverless cars are ready for widespread adoption. Yes, the “low-hanging fruit” of semiautonomous driving has already been plucked. But full autonomy requires infallible higher-order thinking, a golden apple which will prove difficult—if not impossible—to grasp anytime soon.

Crash! Boom! Bang! (The Currency War Heats Up)

Takeaway: Central planners are stepping up in an attempt to arrest economic gravity. Don't bet on their success.

Crash! Boom! Bang! (The Currency War Heats Up) - currency wars


Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:


"With most US beta chasers talking “SP500” today, let’s stay focused on the bigger macro picture which is highly correlated to what USD is doing in the FX War. UK 10yr Yield dives to 0.71% this morning and the Pound’s crash are to lower-lows -0.7% at $1.28."


Crash! Boom! Bang! (The Currency War Heats Up) - gbp usd 7 11


Meanwhile in Japan...


The yen weakened as Japanese Prime Minister Shinzo Abe "ordered a new round of fiscal stimulus spending after a crushing election victory over the weekend," Reuters reports. Abe was light on specifics but Reuters sources say that before the election "the government was ready to spend more than 10 trillion yen ($100 billion)." Here's analysis from McCullough:


"Yen slammed -1.6% vs. USD (our Yen SELL signal went out late last week – let’s see if its more than a trade) and this gets interesting now with USD UP year-over-year and everyone racing the British to the bottom; EUR/USD was a big focus of my Q3 Macro Themes Call and looks as precarious as it has in a year at $1.10."


We'll see if Abe's jawboning translates into action and if that breaks the clear cut trend ... Yen strength.


Crash! Boom! Bang! (The Currency War Heats Up) - usd jpy 7 11


One thing is clear, central planners are just getting started.

Stay tuned.

The Greatest Fall From Grace The Restaurant Industry Has Ever Seen

Editor's Note: Below is an institutional research note written by Hedgeye Restaurants analyst Howard Penney.


The Greatest Fall From Grace The Restaurant Industry Has Ever Seen - chipotle sunset


I hope Mark Crumpacker can get his life back in order. 


That being said, Chipotle desperately needs NEW LEADERSHIP and, importantly, a new direction. 


The story of the rise and fall of Chipotle has become a dark one and now borderline pathetic. The company’s foundation for its food was built on the word “integrity,” ironically; the foundation of its leadership team has demonstrated time and again that there is a complete lack of integrity.  We are witnessing the greatest fall from grace the restaurant industry has ever seen, and many people have suffered as a result. 


How much more damage will be done before changes are made at the top?


Here is what we think Chipotle needs ASAP:

  • A CEO with strong core values and integrity who can inspire others to be their best.
  • Hire a new leadership team with strong values, who demonstrate the courage and ability to cultivate a culture of high integrity, and to do what's right for the business.
  • Honor and support the supply chain and its vendor partners, and not disparage them.
  • Reinvent the business; it will be a process to rebuild this iconic brand that once enjoyed great success.
  • Earn customers trust through transparency, honesty, humility, authenticity, active engagement, collaboration and hard work.
  • Develop and move forward confidently with a well thought out, comprehensive three-year plan that has an ongoing cadence, not a desperate and tactical one based on giving away free food. 
  • Embrace speed - "Be quick, but don't hurry."


As the truth rises to the surface, it’s becoming clear that the current Chipotle management team is not capable of managing the company. The company has served up multiple cases of foodborne illnesses causing pain and suffering for people across the country, all due to Chipotle’s negligence and lack of appropriate controls. The Chipotle problem is so devastating; it makes the entire food service industry look bad. 


Management’s response to the disaster has been late, incomplete and woefully inadequate to actually overcome the flood of consumer complaints and customers' mass exodus away from visiting Chipotle restaurants. Now, one of the top executives, with the responsibility of regaining the trust of the American public, is indicted on major drug charges in New York City.


Financially, the profitability of the company has declined by -70% over the past year (represents FY16E versus FY15).  The market value of the company has decreased by $11.9 billion since October 13, 2015, and we believe there is an additional ~$140 per share of downside from current levels to $250 per share.  Lastly, there is a strong possibility the company will report its second straight quarter of operational losses, currently consensus estimates are projecting a gain of $0.95 per share. 

The Greatest Fall From Grace The Restaurant Industry Has Ever Seen - chipotle same store

The Greatest Fall From Grace The Restaurant Industry Has Ever Seen - CHART 2



The Board needs to eliminate the co-CEO structure and immediately begin a search for a new CEO, one who can instill integrity and high standards into this company, and dramatically turn around its performance.  


The Board needs to look outside the company and hire a seasoned restaurant executive with the following experience and results:

  • A leader who has led difficult turnarounds of large brands in the restaurant industry with a proven track record.
  • A leader who understands the subtleties and the enormous importance of branding, consistency, and consumer trust.
  • A leader who has demonstrated the credibility of leading hundreds of thousands of employees to efficiently and profitably run operations, starting first and foremost with ensuring the safety of its quality ingredients sourced throughout the supply chain.



Values inherent in the best run companies are developed by the leaders of the company with the thorough involvement of and ownership by its vast and diverse team of employees, and vendors. These values ultimately become the fabric of the organization modeled by the daily behavior and actions of its leaders, starting with its CEO.


We are now seeing what the culture of Chipotle is like.  Over the past year, the behavior of this management team has revealed that the culture is rotten at the core.  From the very beginning the culture is based on arrogance; a lack of transparency; a lack of required skill sets to run a big company; a lack of good judgment; a disturbing complacency; a sense of entitlement and now even more apparently, a recklessness that has further endangered the organization.


When the true values are not present, responsibilities are not met, accountabilities not taken seriously, and results with integrity not achieved, then there should be swift and strong consequences.  It’s time for the Board and the management team of Chipotle to take responsibility and be accountable for what has transpired over the past year.


It’s time to clean house! 


It is just unacceptable for two co-CEO’s to be paid what they’re being paid collectively in light of all the problems currently being experienced at Chipotle while on their watch. And now, their close colleague and Chief Marketing Officer, claims that a summer loyalty program and the introduction of chorizo are the answers to Chipotle’s current problems, and will be enough to turn around their hemorrhaging business, while he’s 'pre-occupied' with allegedly doing drugs.


How long are shareholders going to allow this to go on? Is the Board in Founder Steve Ells' back pocket?


Shareholders MUST demand a complete and thorough overhaul of its leadership team if Chipotle has any hope of regaining the trust of the American public.


It is evident to me, that this leadership team does not understand the magnitude of the problem. It is so far reaching and so very deep. As a result, they have no idea what to do. This homegrown group of executives is floundering in uncharted waters, and potentially taking a lot of people down with the ship.



Transformative change is needed to consistently ensure a quality experience for customers to overcome an egregious and highly damaging breach of public trust.


Transformative change is necessary to provide a proper working environment for all employees that is based on holding people to high standards and treating them with genuine respect.


And ultimately, transformative change is needed to ensure the ability to create significant value for its shareholders after one of the most embarrassing examples of negligence, arrogance and recklessness in the restaurant industry.


The Shareholders and the Board of Chipotle need to take action, and they need to do it now.


The company desperately needs new leadership at the top.


The troubles this company faces is of epic proportions. Chipotle is quickly running out of time.

Early Look

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