The BS Filter: Socialism, Big Bank Bailouts, & Super Abe To The Rescue

Takeaway: Here's our take on some of today's top financial stories.

The BS Filter: Socialism, Big Bank Bailouts, & Super Abe To The Rescue - Italian bank cartoon

Socialism, Pension Funds & Italian Bank BAILOUTs

According to Reuters, Italian pension funds have agreed to invest in the country's bad bank loans at the insistence of the government. The combined bailout program will be called Atlante 2, a follow up to a previous bailout fund that has already "used more than half of its initial 4.25 billion euro endowment to take over two failing regional banks." Sources familiar with the matter say the government asked for €500 million, as investors have become increasingly concerned about troubled loans totalling €360 billion.


OUR TAKE: "Socializing market risk continues," Hedgeye CEO Keith McCullough wrote earlier today. Italy's stock market crash accelerated this morning, at one point the FTSE MIB was down as much as -1.8% today before ending the day at essentially flat. Still the MIB is down -32% from 2015 top, as the ongoing big bank "rescue" freaks people out.

In other pension fund news...

"Long-term returns for U.S. public pensions are expected to drop to the lowest levels ever recorded, portending deeper pain for states and cities as a $1 trillion funding gap widens," the Wall Street Journal writes. Pension funds are expected to put up twenty-year annualized returns of 7.47%, raising concerns about whether states and cities can continue to afford pension obligations.


OUR TAKE: We've long been concerned about future pension fund returns and the possibility of a coming retirement crisis. Required reading on the subject include Hedgeye Financials analyst Josh Steiner's Early Look, "The Retirement Reality Check," and "Are 10 Million Americans About To Be Screwed Out Of Their Pensions?" by Hedgeye Restaurants analyst Howard Penney.

Freak out & Fire Up The Printing Presses!

"Bank of England policy maker Martin Weale said he’s begun to favor immediate stimulus for the U.K. economy... chang[ing] his mind on the timing of stimulus after purchasing managers’ indexes released July 22 were a lot worse than he had thought," Bloomberg writes.


OUR TAKE: Central Planning Orthodoxy = Print, Print, Print.

Super Abe To the rescue?

"Japan looks to inject 6 trillion yen ($56.7 billion) in direct fiscal outlays into the economy over the next few years, double the amount initially planned," the Nikkei newspaper reports. Meanwhile, the Wall Street Journal writes that Japan's Prime Minister Shinzo Abe is increasingly pressuring BOJ head Haruhiko Kuroda to "coordinate efforts by expanding the central bank’s monetary easing."


OUR TAKE: Even Abe's doubling of fiscal outlays can't stop the economic bleeding in Japan. Investors don't think so either. The Yen strengthened 1.2% today and Nikkei tumbled -1.4%.


Other stories worth mentioning:

  • FT - "Anheuser-Busch InBev has unilaterally raised its offer for rival SABMiller to £79bn to quash an investor rebellion that threatened to disrupt the third-biggest deal in corporate history."
  • Nasdaq - "BP posted its third straight quarterly loss as the British oil giant reels from a two-year crude-price slump and remains haunted by the 2010 Gulf of Mexico spill."
  • MarketWatch - "Royal Bank of Scotland and Natwest could become the first U.K. banks to charge customers to hold their cash if the Bank of England yanks benchmark interest rates below zero in wake of the Brexit vote."

The Long-Term Twitter Story Isn’t Good

In this excerpt from The Macro Show, Hedgeye analyst Hesham Shaaban goes granular on the major headwinds facing Twitter. “Over the last two plus years, management has inflicted so much damage on its model that we really can’t see a way to fix it,” says Shaaban. “If Twitter can figure this out, there’s a ton of upside, given how badly the stock has been dinged throughout its public history. We just can’t see it—not yet at least.”


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What Jobless Claims Say About Recession (And Risk Of Significant Stock Market Selloff)

Takeaway: We're knocking on recession's door according to historical jobless claims data.

In the two charts below, Hedgeye Financials analyst Josh Steiner highlights how jobless claims data sub-330,000 is a harbinger of recession and hence significant stock market selloffs.


The first chart shows the last three cycles and the length of time jobless claims dropped below 330k before recession hit. The numbers are as follows: 24, 45, and 31 months (average: 33 months). With the current cycle in its 29th month below that level, we are


  • 5 months past the minimum
  • 4 months shy of the 33-month average
  • 16 months from the max

Chart #1

What Jobless Claims Say About Recession (And Risk Of Significant Stock Market Selloff) - zgogo



In the last cycle, the bottoming in jobless claims preceded a massive equity selloff.


What Jobless Claims Say About Recession (And Risk Of Significant Stock Market Selloff) - jobless stocks


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TWTR | Thoughts into the Print (2Q16)

Takeaway: Sorry for the delay, struggled with the setup. We're bearish into 4Q and beyond, but see 2Q upside, and the 3Q guide could go either way.


  1. THESIS REFRESH: We covered our TWTR short ahead of the 1Q16 print due to expected 1Q/2Q upside since we underestimated the auto-play mix headwind.  For now, we're keeping TWTR on our Short Bench, but our thesis hasn't changed; we still can’t see a way to fix the model given the damage TWTR has inflicted on it over the past 2+ years.  We believe problem with the TWTR story had been that the pre-Dorsey regime was scared of the street.  Instead of rebasing expectations early on, TWTR chased estimates with rampant increases in ad load, in turn pushing its users away.  We had previously estimated that TWTR had churned through nearly 40% of its US user base (Aug 2015 survey, n=7.5K); in turn shifting the US user story from organic growth to recapture, which may be tougher to achieve.  That said, monetization is now even more challenged since TWTR is struggling to capture the user/engagement growth necessary to drive its longer-term revenue growth.  We also now suspect that the model is in worse shape than we initially believed after segmenting its Ad business.
  2. CORE PRESSURE: The main drivers of the Ad model right now are Auto-play and its Non-Owned & Operated business (non-O&O).  We estimate that auto-play was roughly 60% of its total 1Q16 ad mix, and that it drove roughly 40% of its total 1Q16 Ad revenue growth.  TWTR’s non-O&O business was its second largest source of Ad revenue growth in 1Q16, but it also exhibited a notable seasonally decline in 1Q16; suggesting it’s no longer an unbridled tailwind.  More importantly, we estimate that Ad revenue growth in its Legacy O&O business (ex Auto-Play) was only in the high-single digit range in 1Q16.  So when we look out to 4Q when TWTR has comps of both a full quarter’s worth of auto-play ads and more mature Non-O&O Ad revenues, the core Legacy O&O business would likely need to reaccelerate off of 1Q levels to get to the 20% Ad revenue growth that consensus is assuming; a challenge given what will likely be flattish user growth.  Granted, we’ll see some benefit from its content deals and a potential lift from the election cycle, but we doubt it will enough to fill the void vs. our 4Q estimate of low- to mid-teens growth.
  3. BUT TOUGH SETUP: The 3Q guide will likely be the key barometer for the print given our diverging expectations for 2Q vs. 4Q.  For context, if TWTR handily beats 2Q estimates with the 3Q guide roughly inline, we suspect the stock moves higher.  On the other hand, if TWTR guides to a material deceleration in 3Q revenue growth into the mid- to high-teens, then we suspect 2Q results will not matter.  We suspect mgmt may sandbag the 3Q guide in order to bring down 4Q expectations; largely because it appears mgmt tried to do so with the 2Q guide, which implies either a y/y decline in its core Legacy O&O business or no sequential growth in either its Non-O&O business or Auto-Play product.  But that's just speculation; we're really not sure how mgmt will approach the 3Q guide.  We're going to sit this one out given the growing wave of negative sell-side sentiment and short interest that remains somewhat elevated.  We think we'll get another shot at the short later this year; if not, we can still look forward to 2017 consensus estimates, which are calling for a reacceleration in Ad revenue growth to the mid-20% range, holding steady throughout 2017.


Let us know if you have any questions, or would like to discuss further.


Hesham Shaaban, CFA
Managing Director



TWTR | Thoughts into the Print (2Q16) - TWTR   Non O O 1Q16

TWTR | Thoughts into the Print (2Q16) - TWTR   Incremental Ad Revenue by Source 1Q16

An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD

Editor's Note: Shares of Buffalo Wild Wings were up 5.8% yesterday after it was announced that activist Marcato Capital Management had acquired a 5.1% stake in the company. In the institutional research note below, originally published on 6/13, Hedgeye Restaurants analysts Howard Penney and Shayne Laidlaw wrote that BWLD was "vulnerable to activism" and lay out the problems that have long plagued the company.


An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - bwld2


For the past two years, BWLD has underperformed the S&P 500 by 11% and is down 8% year-to-date.  There is a very strong possibility that FY2016 is going to be a disaster for BWLD when the company posts negative SSS for the first time in 9 years and the second year of disappointing earnings growth.  Although we remain very bearish on the Casual Dining industry overall, BWLD has a unique position within the industry to capitalize on their live TV offering, being a great place for people to gather and watch a game for three to four hours.


The recent decision for CFO, Mary Twinem to retire after a disastrous acquisition in 2015 suggests that the company has other issues to deal with.  From an outsiders perspective, this move could be a sign that the business may have been financially mismanaged over the past few years.  We highlight certain capital allocation concerns that could be improved to create significant shareholder value.  More recently, the company’s track record when it comes to projecting their performance has come into question. BWLD has missed SSS for 4 of the last 5 quarters; and missed EPS for the past 6 quarters.


We are confident that the BWLD brand is not dead, but the company has had some missteps that have led to underperformance in the business.  There is a lot an activist can do with a business like BWLD and in a slowing sales environment the chances of someone taking action could increase. 


An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - bwld


An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - CHART 2


Strategic missteps

  • Acquiring franchise stores increases business risk – BWLD went from 39.3% company-owned restaurants in 1Q12 to 50.7% company-owned in 1Q16.  Why in a slowing sales; lower return environment would the parent company want even greater exposure to the volatility in the business?

An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - CHARt 3


  • BWLD has used price aggressively to drive same-store sales for years, but was increasingly aggressive in FY2015. Closing out 2015 with +4% price is likely to have an impact on performance, and will continue to have an impact throughout 2016. 

An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - CHART 4


Distracted management

  • Management has diversified away from the core Buffalo Wild Wings brand, adding in R Taco and PizzaRev.
  • They have a minority interest in Pie Squared Holdings which is the operator and franchisor of PizzaRev a California based fast-casual pizza restaurant. In addition they own and operate PizzaRev restaurants in Minnesota.
  • In addition, BWLD has majority interest in Rusty Taco, Inc. the operator and franchisor of R Taco.
  • They currently franchise two (2) PizzaRev restaurants and four (4) R Taco, with six (6) franchised R Taco’s.
  • With the total number of Buffalo Wild Wings units standing at 1,190, these peripheral concepts merely serve as a pipe dream for growth, and more likely distract management from their core concept, which has plenty of issues in its own right.


Poor capital allocation

  • Excessive new unit growth - new unit returns (new unit productivity) are slowing as they increase their unit count into a slowing restaurant environment.
  • The company announced its first ever share repurchase authorization in November 2015. 
  • The company currently does not pay a dividend 
  • BWLD’s net debt / LTM EBITDA currently stands at 0.15x which is far below the industry norm, leaving them plenty of room to increase leverage and return some to shareholders.


The activist game plan for BWLD is clear cut and can create meaningful long term value for shareholders:

  • Focus On The Core

    • Remove the distraction of non-core brands.
    • Slow new unit growth 
    • Operations must be 100% focused on improving the performance of the Buffalo Wild Wings concept
  • Return Cash To Shareholders

    • BWLD can drive better shareholder returns through share repurchases and paying dividend.
    • With BWLD’s net debt / LTM EBITDA currently at 0.15x, they have ample room on the balance sheet to increase leverage and return cash to shareholders 
  • Refranchise Restaurants/Cut G&A

    • There is significant value from an operational perspective that can be gained by refranchising underperforming stores, especially from trimming corporate G&A
    • Asset sales will lead to incremental share repurchases
    • Improve the quality of the revenue stream to drive the multiple higher
  • This Board is Ripe For a Change

    • There are three people on the Board that have been there for 17+
    • The average age of the board is 63
    • Given the increasing role of technology in the industry and the company, nobody on the board has the relevant experience

Short Tokyo?

Takeaway: We still don't see signs of a rising sun anytime soon.

Heli-Ben IV ran out of fuel overnight – Yen ramped +1.5% to $104.23 and the Nikkei resumed its crash, closing down -1.4% to -21.6% from the Global Equity #Bubble high of 2015. Reiterating the short on Japanese Equities; fighting the BOJ continues to work as the #BeliefSystem continues to break-down.


Short Tokyo? - nikkei usdjpy


Editor's Note: The snippet above is from a note Hedgeye CEO Keith McCullough wrote for subscribers this morning. Click here to learn more.