Capital Brief: Dems Battle Dumpster Fires In Philly

Takeaway: Bridges Over Troubled Waters; From Russia With Love; Barnberner

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email


Capital Brief: Dems Battle Dumpster Fires In Philly - JT   Potomac under 1 mb


“He who knows best knows how little he knows.”

-Thomas Jefferson


Despite the “united together” theme, day one at the Democratic National Convention got off to a very rough start, but ended on high note as Democrats moved swiftly to head off dissention in their ranks before it subsumed their four-day brotherly lovefest. After much gloating and finger wagging at Republican disarray last week, Democrats began their convention with the news of a Trump bump in the polls, a Russian email scandal and the DNC Chair’s subsequent resignation.


Though the protests that have ushered in the week are larger and more vocal than those in Cleveland, they were more than offset by powerful speeches by First Lady Michelle Obama, Senator Cory Booker, progressive icon Elizabeth Warren - and Bernie Sanders doubling down on his endorsement of Hillary Clinton. We expect the healing process to continue with speeches by President Bill Clinton tonight and President Obama on Wednesday evening.


Emails have been a recurring nightmare for Democrats all year long - this time with DNC Chair Debbie Wasserman Schultz in a starring role resigning under pressure after thousands of internal emails revealing a coordinated effort to stop Bernie Sanders were uncovered and released by suspected Russian hackers, creating an uproar within the party and initiating an FBI probe to boot.


She’s been a scapegoat for Democrats on a number of fronts, even though her supporters point to the good she’s accomplished for the party – including raising record sums of money and working tirelessly in FL and across the country on behalf of Obama’s re-elect. Team Clinton has been swift and authoritative in trying to turn the page, but the outrage felt by Sander’s most fervent supporters won’t go away overnight and our friends in the media likely won’t let it.


Fissures in the Democratic ranks continued to show as Sanders supporters were welcomed to Philly by a new dumpster fire with the DNC email expose and revelations of manipulation by party officials, the selection of Senator Tim Kaine and residual unease with Clinton. Proving he’s no Ted Cruz, Sanders energized the delegates by delivering a barnburner of a speech on behalf of his ideals and Hillary Clinton.


But we think there’s more work to be done and expect Sanders to make more appearances this week and throughout the campaign this fall. Featuring progressive speakers like Sanders, Warren, and Michelle Obama was a prescient kickoff strategy and we think that it will quell most - but not all - of the anger that still burns on the far left.  

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.”


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


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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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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.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.71%