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EARLY LOOK: Get Dupe(d)

This note was originally published on June 29, 2010.  INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK in real-time, published by 8am every trading day.




“The US government has a technology, called a printing press, which allows it to produce as many US dollars as it wishes at essentially no cost.”
-Ben Bernanke

One of the most poignant Hedgeye sayings is “austerity equals civil unrest” and it has become increasingly clear that Obama wants nothing to do with austerity.   It’s also clear, judging by developments at the G-20 weekend, that the US is going to try to go it alone with big fiscal imbalances; our submission is that the USA balance sheet can’t sustain the current trend and one of the biggest losers will be the American consumer.  As the Bernanke & Co printing press continues to roll on and on, piling debt upon debt upon debt, this can only end badly.
As of the close yesterday, Consumer Discretionary was one of only three sectors up year-to-date (XLY up 2.7%).  The other two are Industrials (XLI up 3.3%) and Financials (XLF up 0.7%).   While easy comparisons and “corporate” fiscal austerity have helped the performance of consumer stocks, the best days of this cycle are behind them.
I know everyone has a view on the consumer, but there are some changes on the margin that should be considered as we look toward 2H10.  One of our 1Q09 Macro Themes was “MEGA” – calling for a MEGA squeeze in consumer stocks with Mortgage Rates going down, the Employment picture turning around, Gas prices declining sharply year-over-year, and Asset prices re-flating.  Looking at the data as we emerge from 2Q10, it is clear that the American consumer is now going to get DUPE (d) and is not going to be happy.
Double-Dip:  The housing market and the broader economy are on the precipice of a double dip; housing prices have already started to decline and the economy has slowed significantly quarter-to-quarter in 1Q10.  The Hedgeye Risk Management Financials team recently presented a very strong case for why the housing market is in trouble.  We have high conviction that a double-dip in housing is underway and this will have a serious impact on consumer behavior.  Following a decade of out of control spending, the state of the USA’s balance sheet inhibits the country’s ability to navigate the structural issues still present in the economy.   A few points to keep in mind include:
(1)    The benefits from the current Obama stimulus peaked in the 1Q10 - Slowing GDP growth.
(2)    In 2011, taxes are going up and that will hamper economic growth  - Slowing GDP growth.
(3)    Real estate prices are estimated to decline 20% in the next twelve months - Slowing consumer spending.
Unemployment:  Weekly Jobless Claims have not shown any material improvement over the past six months.  Private sector job creation remains a concern; private-sector job creation in May decreased sequentially from April.   While private sector job creation had been growing for four straight months, it has now come to an impasse as businesses have become nervous about the state of the economy.   Unemployment is at an elevated level and indicates a continuing softness in the underlying economy.  As census workers are laid off, the rate could jump higher unless other sources of employment pick up hiring drastically.  Uncle Sam is running out of crutches (or the political will to supply them):
(1)    The Administration failed to get Congress to pony up an extra $50B for unemployment claims - our leveraged balance sheet inhibits the government’s ability to provide stimulus.
(2)    A strong dollar policy has proven to help job creation – Bill Clinton and Ronald Reagan were the last two presidents to oversee true job creation and both pursued strong dollar policies - to be sure Obama is debauching the US currency.
(3)    As the Double-dip scenario pays out, unemployment will remain elevated and may even go higher.
Prices Paid by the Consumer:  While reported inflation by the government looks to be under control, the Hedgeye Inflation Index tells a different story.  The Hedgeye Inflation Index focuses on the part of the economy showing inflation that impacts the consumer, specifically the spread between the prices of things they buy and what they earn.  Looking out over the next 6-12 months (and even longer) consumers will be paying more to drive their cars, or “bring home the bacon” and to make sure they have health insurance for their family.  The issues that arise from the disaster in the Gulf of Mexico will not be solved by the cash flow from BP.  The government has been sponsoring cheap gas prices in the US for years and that will come to an end.  Once again, the government cannot afford to manage through the issues the country faces due to the leveraged balance sheet.     
(1)    The Hedgeye Inflation Index turned ugly last week.
(2)    The disaster in the Gulf is inflationary and will be a drag on growth.
(3)    The prices paid by the US consumer for gas is far below the rest of the world and there is a possibility that the gap could close significantly under pending energy legislation – this would be a massive headwind for the consumer.  Some commentators are speculating that prices could rise to meet those paid at the pump in Western Europe – some 50% higher than where they are currently.
Equity and Real Estate deflation:  We believe that the debasing of any currency (even the Almighty Dollar) ends badly.  A lack of austerity in government policies and an aversion to facing facts among our professional politicians is not helping the long-term outlook for equities.  The VIX’s 19% up-move week-over-week, along with the move in the equity market, indicates that political summits are doing little to ease fears.  On Thursday the Macro Team is going through our Hedgeye Risk Management Q3 Themes.  If you would like access to that conference call, please email sales@hedgeye.com.
(1)    U.S. equity markets have lost $1.78 trillion since April 23 on concern the European debt crisis will spread.
(2)    China declined 4.2% last night and is now down 26% year-to-date.
(3)    The S&P 500 is down 3.6% year-to-date.
Last week, the University of Michigan consumer confidence index improved for the month of May and yesterday, the government reported that the consumer is spending less than he/she earns.  In both cases the market ignored the data and has moved lower.  We don’t trust what the government is telling us nor the direction in which the country is headed.  The consumer is not stupid and Washington does not get it.
Function in disaster; finish in style
Howard Penney



EARLY LOOK: Get Dupe(d) - chart1

MACRO: The Daily Outlook

This insight (THE DAILY OUTLOOK) was published on August 11, 2010.  The Daily Outlook is published every trading morning.  RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.




As we look at today’s set up for the S&P 500, the range is 39 points or 2.0% (1,099) downside and 1.5% (1,138) upside. Equity futures are trading below fair value - disappointing data out of China and Japan has set the early tone and Europe is broadly lower. Today's focus will be trade and budget data for July.


  • ADVANCE/DECLINE LINE: -1400 (-2766)
  • VOLUME: NYSE - 980.83 (+24.14%)
  • SECTOR PERFORMANCE: 3 sectors positive - XLU, XLV and XLP - flight to safety
  • MARKET LEADING/LOOSING STOCKS: Akami +4.86, XL Group +2.68 and ADV Micro (7.95%) and Western Digital (6.12%)



  • VIX - 22.37 1.04% - The VIX now up for 2 days and bearish for equities.
  • SPX PUT/CALL RATIO - 2.49 up from 2.01 trending up (not seen since March) (low on 07/15/10 of 0.87)



  • TED SPREAD - 24.87 -0.913 (-3.541%)
  • 3-MONTH T-BILL YIELD .15% Unchanged
  • YIELD CURVE - 2.2974 to 2.2359



  • CRB: 272.28 -0.84% (down for the last 4 days)
  • Oil: 79.35 1.51%
  • COPPER: 331.25 -1.24% (currently trading at 327.25 below 332 - BEARISH for growth expectations
  • GOLD: 1,196 -0.32% (trading down for 3 days)




  • EURO: 1.3117 -0.84%  - (trading down for 3 days)
  • DOLLAR: 80.799 +0.11%) - (trading up for 3 days)




  • ASIA - Asian markets fell after the Fed disappointed saying it would reinvest money from maturing mortgage bonds in government debt.  Japan fell (2.58%) broadly - The strong yen is hurting exporters and a slowdown in the US; worries about the domestic economy also dampened sentiment as core machinery orders came in below forecasts
  • EUROPE - European are trading sharply lower following weakness across Asian and in reaction to the Fed's comments that the US economy is slowing and took new step to aid the economy.
  • EASTERN EUROPE - Trading lower - Russia down another 1.23% and Hungary down 0.84%.
  • LATIN AMERICA - Lower but Peru trading higher for the 2nd day - Argentina down 1%
  • MIDDLE EAST/AFRICA - Mostly lower with Saudi Arabia down 1.46%


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Howard Penney
Managing Director


Here is a look at guidance and key focus points ahead of earnings on Thursday.


Following RRGB’s last earnings call on May 20th, I wrote a post titled, “RRGB – A LESSON ON HOW NOT TO RUN A RESTAURANT”.  As the title suggests, I was less-than-impressed by the extraordinary dependence on LTOs and advertising for transaction counts that RRGB had developed.   Below I have re-posted a chart that illustrates this point.  Whether the new menus they introduced in May have driven comps successfully or not remains to be seen.  To me it seems that they have trained the customer to only return with a coupon in hand.


RRGB: GLANCE AT THE 2Q10 MENU - rrgb sss1



  • To maintain or sequentially improve two-year average blended same-store sales, Red Robin will need to post +1.1% or better for 2Q10.
  • Per StreetAccount, the Street is expecting a company same-store sales number of 0%, which would imply a 55 bp sequential deceleration in quarterly top line trends. 



  •  Comparable restaurant sales of flat to +1%
  • Expecting revenue of $872 million to $880 million and EPS of $1.10 to $1.30.  1% change in comparable restaurant sales is approximately $0.21 in earnings per diluted share.  
  • Expecting deflation in our commodities for a large portion of basket: between -0.5% and -1% for 2010
  • Expecting some offset due to G&A savings.  Expecting 16.5 to $17 million per quarter for the remainder of the year
  • RRGB expects the average cash investment for new company restaurant development in 2010 to be ~$1.9 million per restaurant (less than the ~$2.5 million per restaurant of three years ago)
  • Four new company-owned restaurants are currently under construction.  12 to 13 openings expected during 2010 – remaining 8 to 9 scheduled for 2H10
  • Franchisees are expected to open between 3 and 4 restaurants this year
  • Continuing to expand our third party gift cards placement during the first quarter growing to about 8,000 retail locations, up from 7,400 at the end of 2009
  • Goal is to achieve 10,000 third party retailer locations for gift cards by the end of 2010.
  • 2010 effective tax rate is expected to be ~17%
  • 2010 CapEx is expected to be ~35 million to $40 million, which will be funded entirely out of operating cash flow
  • Debt payments of $18.7 million required by the term loan portion of the existing credit facility will be made from free cash flow after CapEx in 2010
  • Remaining free cash flow will be used to make payments on revolving credit facility


Howard Penney

Managing Director

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The NPD Group has reported that America’s twentysomethings are “more likely to say their food choices at main meals are motivated by cravings, cost control and minimal preparation time.” 


This means that they are more likely than other age cohorts to use frozen entrees or other food items that are portable and do not require preparation.  The research, released by NPD, suggests that young adults were once the heaviest restaurant users but have retrenched drastically over the past couple of years. 


Cost concern is driving this; unemployment is significantly higher among those under thirty than it is among the general population.  Unemployment among younger cohorts is an issue that has been mentioned by a number of quick-service companies over the past few quarters and clearly research indicates that the problem is not abating. 


Maybe PFCBs timing for frozen entrée’s in the supermarket is perfect!



Bear Market Macro: SP500 Levels, Refreshed...

“It happened just as I figured.  The traders hammered the stocks in which they figured would uncover the most stops, and sure enough, prices slid off.”
-Jesse Livermore, Reminiscences of a Stock Operator

No matter where the bulls go now, here we are. The Pain Trade is finally to the downside as a lot of players in this game are caught off-sides. This morning’s release of the II Bull/Bear Survey tells you most of what you need to know from a sentiment perspective. Bears dropped from 33% last week to 27.5% this week and that, my risk management friends, is not Bearish Enough.

In the US stock market, the inverse correlation to watch most closely here is SPY/VIX. We have been talking about this 22-23 support zone for the VIX and our Bear Market Macro line of resistance for the SP500 (1144) in meetings from Boston to Chicago and back again through NYC yesterday. As of 130PM EST, both have once again confirmed our bearish intermediate term stance on US Equities.
All that said, the SP500 is immediate term oversold anywhere south of the 1093 line and we’d be covering some shorts and buying some longs here for the immediate term snap back TRADE to 1111. This isn’t a time to freak out and sell everything. Do that when the VIX is at 23 again.


Bear Market Macro: SP500 Levels, Refreshed...  - image001


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