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RRGB has moved 15% higher over the last month relative to the casual dining group’s nearly 11% move.  This recent outperformance follows months of underperformance as RRGB has declined 13.1% over the last 3 months relative to the group’s relatively flat performance over the same timeframe.  Year-to-date, RRGB has only improved 8.4% relative to the group’s nearly 90% move higher.  Just last week, a group filed a 13-D on the company, disclosing its 5.7% position after “Representatives of the Reporting Persons met with the Issuer's Chief Executive and Chief Financial Officers on December 15, 2009 to discuss the performance of the Issuer and business strategy.”  This filing along with the stock’s recent outperformance signaled that RRGB was deserving of a closer look. 


The glaringly obvious hole in the story is that RRGB’s same-store sales are in free fall with the company’s gap to Knapp getting increasingly wider in terms of underperformance (shown below).  Comparable sales declined 14.9% in 3Q09 with traffic down 13.8%.  These declines are more similar in magnitude to what we have heard out of the higher end concepts, but with an average check of $11.57 in 3Q09 and with what the company calls its unique brand positioning between casual and fast casual, RRGB is not going after the same discretionary dollars and is therefore, losing share within the casual dining segment. 




On a 2-year average basis, comparable sales trends deteriorated further in 3Q09, down 260 bps sequentially from 2Q09.  On its 3Q09 earnings call management stated that trends improved sequentially during the first four weeks of 4Q09 as they were down 11.6%.  Management attributed the better number to its being on air with TV advertising in 10 markets (covering about one third of RRGB’s company restaurant base) for two of the four weeks.  On a 1-year basis, -11.6% is obviously better than the reported 14.9% decline in 3Q09 but considering the -8% number in the first four weeks of 4Q08, this points to another 125 bp sequential decline in 2-year average trends from 3Q09.  The company is lapping a more difficult comparison for the remainder of the quarter.  Even with the overall casual dining industry as measured by Malcolm Knapp seeing better numbers in November, I am not expecting RRGB’s numbers to improve on a 2-year average basis in 4Q09 as the company will no longer be on television supporting its fall LTOs after those initial two weeks of the quarter (reflected in the -11.6%).


I have criticized RRGB in the past for its reliance on TV advertising to drive traffic as I don’t think the cost of a national campaign makes sense for its 400-plus unit concept.  In the past, the company has only done brand specific advertising and would not quantify the returns of the spending.  Brand-only advertising does not typically work to drive traffic so I was encouraged to see that with the company’s most recent TV advertising that the ads were focused around a specific price point, in this case a $5.99 Chicken Caprese Sandwich and $5.99 Wise Guy Burger.  Additionally, management quantified the impact of the advertising saying that during the three weeks of TV media that same-store sales improved by more than 900 bps sequentially from the four weeks prior in the 10 TV markets (again covering about one third of RRGB’s company restaurant base) when comparable sales were running -12.4%.  This is a substantial improvement and highlights that advertising around a price point is more effective than brand advertising only. 


Since the TV support only impacted one-third of the restaurant base for two weeks, it was not enough to drive materially better comparable sales through the first four weeks of the quarter (as I said already, trends continued to get worse on a 2-year average basis).    The LTO promotion ran through November 8 but was only supported with TV media for 2 weeks of the fourth quarter.  If one third of the restaurant base was running close to -3.4% for half of the first month of the quarter and we assume that level of same-store sales growth for the entire month that would mean that the remainder of the restaurants were down nearly 16%.  I would assume that same-store store sales growth fell off rather significantly after the 2 weeks of media support and that the remainder of the store base came in slightly better than -16%, but this significant outperformance in the markets with TV support demonstrates why advertising can become so addictive to companies.


That being said, RRGB announced earlier this month that based on the results of its fall LTO promotion that it would spend $6.7 million to expand its television media to advertise its new spring 2010 LTO menu promotion beginning in mid-February using national cable television, together with local television in select markets.  If the advertising does prove successful, the next question will be what the cost is to maintain trends.  Although the company said that no decision has been made about whether it will use TV advertising to support the remainder of its 2010 LTOs, I think it is a pretty safe bet that the advertising budget is going higher in 2010.


RRGB is facing its easiest restaurant level and EBIT margin comparisons in 4Q09 on a YOY change basis.  EBIT margins declined more than 300 bps in 4Q08 with restaurant level margins down in excess of 400 bps.  These easy comparisons, however, will not translate into YOY margin growth in 4Q09 and to that end, have not mattered for quite some time (EBIT margins have only increased on a YOY basis during two quarters since 2Q05).  Restaurant level margins should come down about 200 bps YOY in 4Q09 and EBIT margins will be down close to another 300 bps. 


Sustained declines in margins combined with declining returns on incrementally invested capital lead me to believe that despite the fact that RRGB cut its new company unit growth in half in 2009 relative to 2008, it is still growing too fast.   Returns look like they might be less negative in 2010 and a bottoming of returns often leads me to become incrementally more positive on a name, but I think we might still be a little early from a timing standpoint. 


When RRGB reports 4Q09, we will likely learn that the company continues to underperform the industry with 2-year average comparable sales trends coming under increased pressure.  We may hear about trends in early 2010, but if the company continues to only provide numbers around the first four weeks of the quarter, the results will not include the company’s planned spring LTO supported by national cable advertising, which is not scheduled to begin until mid-February.  So I would not expect to learn about any material impact from the advertising until the company reports 1Q10 numbers.  EBIT margins will continue to get worse during the fourth quarter and will likely come in below 3% (a number I do not want to be out ahead of).



Calling 2010

“To go beyond is as wrong as to fall short.”



When I think about making macro calls on 2010, I think about yesterday’s prices. Then I think about this morning’s. Then I think about our intermediate term macro themes. Then I think again. All the while, I think my hockey head had too many undiagnosed concussions.


I keep it simple. Real-time prices are the driving factor in our global macro risk management model. Prices don’t lie. They are leading indicators, telling us where we need to be asking research questions. Without asking the right questions, we usually don’t get the right answers.


When I was on the buy side, the biggest problem I had with Wall Street strategist “calls” on the new year wasn’t so much that they reverted to a mean, but that they all had the exact same duration. From a risk management perspective, it makes no sense to be boxed into a 12-month view.


As is customary with our quarterly Global Macro Theme calls, my team will hold a conference call for clients in the coming weeks to expand upon our 2010 calls. To be clear, these calls are for the 1st quarter of 2010. For now, to go beyond that “is as wrong as to fall short.”


Today we are going to initiate the following three Global Macro Themes for Q1 of 2010 (I’ll also go through these on Bloomberg TV this morning if you’d like to see my smiling fake hockey teeth):


1.      Buck Breakout

2.      Rate Run-up

3.      Chinese Ox In a Box


The first theme is self explanatory. From the authors of Breaking The Buck (Q1 of 2009), we think the buck is primed to breakout to the upside. As a result, in Q1, we also think that Gold is going to struggle.


The second theme is born out the Fed acknowledging that they have plain eyesight. As the data rolls in, a “data dependent” Ben Bernanke is going to watch interest rates continue to run-up. He is way behind the yield curve and now he’s going to be forced to chase it by preemptively raising rates. Both inflation and growth data are going to continue to be higher than Wall Street consensus throughout Q1 of 2010.


The third theme is nowhere in the area code of consensus. We have been writing about this for the better part of December, so our view is probably no surprise here, but we think Chinese economic data is setting up to slow sequentially in the next 3-6 months.  We were bullish on China all year.


On behalf of my teammates, I’d like to take this opportunity to thank all of you for taking the time out of your busy day to read our work this year. When a lot of people were complaining about the end of the world coming, we tripled the size of our firm, hiring as many of the best people as we could. You, as opposed to the Government, supported that. We are forever grateful.


We hope we made you think about risk, smile about this business, and protect your hard-earned capital along the way.


Best of luck and health to you and your respective families in 2010,





VXX - iPath S&P500 Volatility
For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.


EWG - iShares GermanyBuying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

GLD - SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB - WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

RSX – Market Vectors Russia
We shorted Russia on 12/18 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.  

EWJ - iShares JapanWhile a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLI - SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

XLY - SPDR Consumer Discretionary We shorted Howard Penney's view on Consumer Discretionary stocks on 10/30 and 12/2.

SHY - iShares 1-3 Year Treasury BondsIf you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


Optimism about the market is at the highest level since April 1987.  Yesterday, the Investors Intelligence pessimism level fell to 15.6% from 16.7% last week.   Sentiment has improved since October 2008, when the financial crisis drove the figure to a 14-year high of 54.4%.  Volatility is the other extreme. The VIX closed at 19.96 yesterday down 0.25% and is now down 50% in 2009.


The Dollar Index has traded higher for the past two days, but is looking at its biggest decline since December 1st in early trading today.


With the market painfully quiet and volume on the NYSE at the lowest levels of the year, preparing for next week seems like time better spent.  The MACRO calendar is busy next week: ISM manufacturing data on Monday, Pending home sales and domestic vehicle sales on Tuesday, MBA mortgage applications on Wednesday and the December payrolls data on Friday.  On the corporate front, we will be getting the much anticipated holiday sales updates from the retail community. 


Yesterday, the S&P 500 closed flat on the day, with only two sectors positive – Technology and Financials.  On the MACRO calendar there were no significant headlines yesterday, outside of the better-than-expected Chicago Purchasing Managers reading.  The Chicago PM could be a precursor to next week's ISM number.  The Chicago PM increased to 60 from 56 in November and was above the consensus of 55. 


Technology was the best performing sector yesterday as semis and hardware led the way.  NVDA and DELL were the two best performing stocks (following upgrades) while MSFT was the notable underperformer.  The Financials also outperformed, led by Real Estate management companies and the brokers – the two best performing stock were CBG and GS.  The Research Edge MACRO models have the XLF broken on both the TRADE and TREND durations.


The notable underperformer yesterday and for the past week is Energy (XLE).  Crude oil rose for a seventh day as shrinking U.S. crude stockpiles increase confidence that demand is recovering.  Increased geopolitical concerns and the tensions in IRAN are also helping crude trade near the $80 level.  The XLE underperformed the S&P 500 by 0.1% yesterday and 0.8% over the past week.  The Research Edge Quant models have the following levels for OIL – buy Trade (76.49) and Sell Trade (80.76).


The range for the S&P 500 is 22 points or 1.0% upside and 1.0% downside.  At the time of writing, the major market futures are trading flat on the day.  Today on the MACRO calendar Initial jobless claims are due out at 8:30; consensus is for 460,000 versus the prior reading of 452,000  


COPPER is up five of the last six days, trading at the highest price in almost 16 months.  Copper continues to trade higher on speculation that supplies from Chile, the world’s largest producer, may be disrupted by a mine strike.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.17) and Sell Trade (3.38).


In early trading today GOLD is trading up $15.00 to 1,107.50.  Gold is up 24% this year and is now looking at its 9th annual gain in 2009.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,071) and Sell Trade (1,149).


Howard Penney

Managing Director










Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

McCullough Says Dollar to Strengthen Over...

Tight & Trade-able: SP500 Levels, Refreshed...

Tomorrow, the 2009 game ends. The score is on the board. The Crash Callers of 2009 feel shame.


Will yesterday’s close and this morning’s open bring back the Depressionistas? Or did they end up being those who are rightly depressed? Was the 1st down day for the SP500 in the last 7 marking the top, or just another higher-low?


These are questions that will have answers. Our goal is to find the risk adjusted ones to place capital behind.


In the chart below, I have outlined how tight and trade-able the immediate term risk management setup has become:


  1. Immediate term TRADE support = 1115
  2. Immediate term TRADE resistance = 1136


Since we have raised such a large cash position in the Asset Allocation Model, my plan is to buy and cover on the way down to the 1115 line. If that line breaks, the plan is that the plan is going to change.


The intermediate term TREND line of SP500 support is all the way down at 1080.


You don’t have to be a super smart Crash Caller to trade a proactively predictable range. Buy red, sell green.



Tight & Trade-able: SP500 Levels, Refreshed...  - spx


It's a shortened holiday week so volume and newsflow are naturally light. That said, no one seems to be paying attention to the fact that this morning's October home price data from Case-Shiller showed the first outright home price decline in six months.




Why is this a big deal? It was the decline in home prices that triggered the credit and liquidity crisis of 2007-2009, and the stabilization and modest improvement in home prices that played a major role in the rally since March. The following chart demonstrates.


In 1Q09 encumbered US home equity value approached zero. Zero. Since then, the modest advance in home prices coupled with a roughly 2% paydown in residential mortgage debt has pushed equity levels back to the mid-single digits. If we start to see home prices rollover again for a second dip (as the above chart may be an early indicator of), expect to see this razor-thin equity cushion pushed back to zero and the trouble to begin anew. Even though people are now paying off mortgage debt on a net basis, it is only at a 1-2% annualized rate - not enough to move the needle. Rather, it is home prices that drive where equity, and, by extension, credit go.




Josh Steiner



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