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Examining short interest in the restaurant space yields some interesting observations.


The data referred to in this post and shown in the chart below is reflective of short interest as a percentage of shares out as of the most recent release date of August 24th.  The settlement date of this data is August 13th, which was after the bulk of restaurants calendar 2Q earnings had been reported.  I have some thoughts and observations to share.

  • QSR has been pressed by the shorts with the past six weeks showing upticks in short interest data.  Casual Dining shows a diametrically different trend; shorts have been easing off.
  • Coffee retailers have been pressured recently by rising coffee prices and this is reflected in the heavy and sustained shorting of PEET and GMCR over the past two months. 
  • SBUX has remained largely immune to this trade, having reaffirmed guidance and demonstrated strong top line trends of late.
  • Along with the coffee retailers, CMG, JACK, and DPZ round out the top five gainers in terms of short interest in the most recent two weeks of data.  CMG, PEET and GMCR are the three most highly valued QSR stocks on an EV/EBITDA NTM basis (according to Factset estimates).
  • CMG can only maintain its recent high level of outperformance for so long and an upswing in commodity costs could impact the stock significantly.
  • DPZ’s top line performance will be difficult to sustain and dairy prices have been rising of late (as have foodstuffs in general).
  • JACK continues to be inundated by bad news.  Unemployment and California’s continuing woes are the main pain centers for the stock and investors are continuing to short that stock despite the low valuation.
  • BWLD, which has seen the shorts ease most recently (though short interest is still up sharply over the last two months), has been benefitting from the lower commodity outlook despite the unsustainable nature of their unit growth remaining a strucutral problem for the company
  • PFCB stands out purely because of the elevated level of short interest (highest absolute level among the casual dining names) and it ticked up in the latest release.
  • Back in July, writing on short interest, I wrote that for RRGB “pressing the short here is not a good bet here from a risk reward perspective” in light of news that an “activist investor” was pressuring the company.
  • Knapp track figures for the casual dining restaurants improved in July on a two-year average basis after declining for the three prior months, which might help explain the recent decline in short interest on average for the group.

SHORTS PRESSING QSR - short interest 826


Howard Penney

Managing Director


The first revision to 2Q 2010 annualized real GDP is due out on Friday.  According to Bloomberg estimates, there is an expectation for a large downward revision to 1.4% from an original 2.4%.


With the S&P down 4.2% this month and 3.7% year-to-date, the down shift in GDP growth is being reflected in the equity markets ahead of the print.  Tomorrow we could be setting up for manic media to make the last Friday in August to a “the-economy-is-not-as-bad-as-consensus-thinks” day.   Away from the media spin, the data shows that the economy is decelerating and revisions are bringing growth to lower and lower levels. That said, it appears that the downside impact of the weaker June trade data and expectation of lowered inventory levels may be overdone on an immediate term basis.


The Hedgeye estimate is for a revised GDP growth figure of 1.7% for 2Q.  Our view is that positive adjustments to the consumption figures will offset the negative trade data.  As always, it is in Washington’s best interest to dress up the numbers as much as possible. 


As Keith has been hinting to our clients on the daily Hedgeye Morning Macro call, our 3Q GDP estimate of 1.7% (consensus is at 2.5%) is headed lower.  Consensus estimates are even more out of line when looking at GDP growth in 4Q 2010 at +2.6%.  We will be adjusting the models accordingly over the weekend, but suffice to say that we see the chances that the economy contracts in 4Q10 growing by the day.


To be sure, the street is very bearish on the GDP print.  Today GS pushed up its second quarter real GDP growth to 1.2% from 1.1%.  We are bearish, but not quite bearish enough to short the S&P coming into the last Friday in August.


Howard Penney

Managing Director



The Brazilian Consumer – Getting Hotter

Conclusion: More bullish data points affirm our bullish stance on domestic consumption within Brazil.


Position: Long Brazilian Equities (EWZ)


As a result of favorable employment, inflation, and credit conditions, the Brazilian consumer is strengthening. Unemployment came in today at just 10bps off all-time lows (6.9% in July vs. 7% in June); inflation has improved on the margin for the past three months (down to 4.6% in July vs. 4.84% in June); and, as a result of benign inflation, interest rate hikes have come to a halt (recent reports suggest the central bank expects 3Q inflation to come in below forecast, further reducing the risk of a Selic Rate increase).


The Brazilian Consumer – Getting Hotter - 1


The favorable interest rate environment has led to an expansion in consumer and business credit that has reduced Brazilian bank holdings of government debt to record lows (22.7% of assets), according to Austin Rating, a Brazilian financial research firm. Moreover, recent central bank data show lending within Brazil has jumped to 36.3% of assets from 30% five years ago and outstanding loans rose for the 17th straight month in July.


The expansion in consumer and business credit is a national trend that is expected to continue, at least according to Rogerio Calderon, Director of Investor Relations at Itau, which expects its loan portfolio to grow as much as 23% in 2010. This is in stark contrast to the U.S. banking industry, which has seen commercial and industrial loans by banks fall 24% from the 2008 peak, according to the latest data from the Federal Reserve.


Long story short, consumers and businesses in Brazil want credit and banks have been more than willing to lend to them as a result of excellent labor market conditions. Brazil has added jobs ever month this year helping to push the unemployment rate to a near record-low in July. Wages have also been headed in the right direction: the average real income of workers grew 2.2% M/M in July and 5.1% Y/Y to R$ 1,452.50.


The confluence of these positive factors has been quite bullish for Brazilian consumer confidence, which rose 0.7% M/M in August (+9.2% Y/Y), according to Fundacao Getulio Vargas. The component index which measures the percentage of Brazilian families who are happy about their current financial situation grew 170bps M/M to 25.8% in August. Even more bullish for the outlook for Brazilian consumption is the August reading for the component index that measures the percentage of Brazilian consumers who intend to make major purchases in the coming six months rose 260bps M/M to 16.6% in August.


The uptrend in Brazilian consumer confidence, employment, and consumer credit is in stark contrast to what is happening domestically, and that is one of the key tenets of our bullish stance on Brazilian equities. We have conviction that capital will continue to seek yield globally and that will accelerate once U.S.-centric investors come to grips with slowing growth domestically. U.S. housing prices are setup to decline 15-50% (based on our proprietary Hedgeye supply, demand and inventory models). This will likely restrain consumer spending (~70% of the U.S. economy). Furthermore, we hold conviction that the cash sitting on U.S. corporate balance sheets will either continue sitting there or leave this country in search of higher yield. CFO’s are pro-cyclical and seldom invest during slowing business cycles. If they invest at all, it will likely be abroad as their capital seeks yield either through growth or higher rates of return. The Brazilian consumer has both. Perhaps that’s why one-third of the 77 foreign acquisitions of Brazilian companies in 1H10 were by American firms. Expect that trend to continue as long as the jobless, deleveraging and disheartened U.S. consumer stunts growth domestically.


The Brazilian Consumer – Getting Hotter - 2


Managing Risk: Petrobras and Election Update


Regarding the Petrobras saga, unnamed sources claim that the talks between the company and the government are advancing and the agreed-upon prices for the reserves will be $8 per barrel. The source affirms that the talks are being mediated by President Lula and he plans to announce the final price by the beginning of next week.


Regarding the election, Dilma Rousseff (Lula’s endorsee) has taken a commanding 20-point lead over her opposition in the latest Datafolha poll take on August 23-24 (10,848 voters). Her 49% of voter support is a mere 1 percentage point away from winning the election outright on October 3rd (a candidate must secure 50% of the vote to ensure a first round victory). Investors have been rightfully worried that her reputation for big government will keep a floor under the Selic rate as inflation looks to accelerate during her tenure. In a response to such fears, an unnamed source recently reported via Folha de S. Paulo that she agrees with the need to cut government spending in order to keep a lid on the Selic rate and that she and current President Lula have been discussing austerity measures. Keep in mind that this report was released just days before the government revised down its Jan-Aug. budget surplus target due to excessive spending. If, however, these reports are in the area code of true, expect big things from Brazilian equities as we roll forward into 2011.


Darius Dale



Moshe Silver

Chief Compliance Officer

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EARLY LOOK: Channeling Hammy

This note was originally published at 8am this morning, August 26, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK in real-time, published by 8am every trading day.




“Those who stand for nothing fall for anything.”
-Alexander Hamilton



EARLY LOOK: Channeling Hammy - Alex Hamilton



Keith is out this morning teaching a Risk Management class to MBA students at New York University’s Stern School, so I’ve been handed the quill on the Early Look.  I was fortunate to enjoy a week off last week, which afforded me some time to clear my head and do a little pleasure reading.  The first book I knocked off the list was Ron Chernow 856 page tomb, “Alexander Hamilton: A Biography”.
The story of Alexander Hamilton’s, or Hammy as his close friends affectionately called him, rapid rise from a dysfunctional family in the West Indies to becoming a confidant of General Washington during the Revolutionary War, to publishing the Federalist Papers, to finally becoming the first Secretary of the Treasury, is as rapid an ascension to influence that will likely ever be recorded in the annals of American history.
Hammy certainly had his faults, as we all do, but he was a learning machine that devoured books.  He also had a strong sense for right and wrong.  That is, he knew what he stood for.  In fact, he was so convicted in some of his beliefs that he ultimately died prematurely in a dual defending his honor against Aaron Burr.
Anyone that reads the missives coming out of the Hedgeye Research Juggernaut certainly understands very quickly that we know where we stand on our processes and our investment positions.   The goal in the investment business, though, is to be right, not obstinate.  The equivalent in our business of losing a dual is bad performance and client loss, so having conviction is fine if you are alive to trade another day.
While we have strong opinions, we aren't wedded to them and I think our track record speaks for itself on this intellectual flexibility. Since inception we've recommended 978 stock and ETF positions, 499 longs and 479 shorts, and have been right 85.6% on the longs and 83.9% on the shorts. But, I digress. Back to Hammy.
As Secretary of Treasury, Alexander Hamilton’s first objective was to pay back the heavy debt incurred to win the Revolutionary War.  As Hammy said, “The debt of the United States . . . was the price of liberty.” So, while this debt had its purpose, Hamilton also quickly realized that paying the debt back was critical in establishing confidence among other nations in the economic future of the United States.  This confidence would lead to support of the new American currency and a willingness of other nations to become trading partners.
We have been quite vociferous as to our thoughts on some important metrics relating to the national debt of a nation, specifically debt as percentage of GDP and deficit as a percentage of GDP. Another metric we would like to introduce today is debt as percentage of revenue. On a go-forward basis we will call this the National Coverage Ratio. That is, what is the ability, based on revenues generated, of a nation to both pay down its debt and cover its interest and principal payments, or cover these financial commitments.
In the chart below, we've highlighted the National Coverage Ratio for some relevant global economies.  While the United States screens negatively on the other debt ratios, especially on a projected basis, on this ratio it is actually an extreme outlier to the negative.  This tells a few things about the economic future of the United States from a policy perspective.  First, given current debt balances and revenue projections of the United States, it will be very difficult for the nation to support higher interest rates.  Second, and while we don't necessarily support this from an economic growth perspective, it seems likely that government revenues, i.e. taxes, will have to go higher. Neither of these points are very encouraging.
There is of course another option, an aggressive cut in future entitlements.  This is  perhaps what former Senator Alan Simpson, who is the co-chair of President Obama's Bi-partisan Debt Commission, meant when he described Social Security as a "milk cow with 310 million tits!" in an email.  Indeed.
As it relates to the shorter term though, over the past couple of days we have been covering our shorts and adding long exposure to the Hedgeye Virtual Portfolio.  This is not because we have become overly bullish on equities, but rather the market has sold off dramatically over the past seven weeks and our key economic catalyst is now behind us, which was the abysmal housing numbers of the past couple days.
While we aren't wedded to our bearish views, both the fundamentals and quantitative set up continue to support this stance. So, perhaps the best way to think of it is that we've gone from being Growling Loud Equity Bears to Cuddly Bears.  As a result, we currently have 14 longs and 8 shorts in the virtual portfolio, which is great positioning for a Cuddly Bear.
If you are looking for an equity Bull to support your investment positioning through year end, look no further than Lazlo Birinyi.  This morning he is out with the call that the S&P500 will rally 16% into year-end to the level of 1,225.  Interestingly, that is below his March target of 1,325. Since this morning we are being Cuddly Bears, we aren't going to challenge Lazlo to a Hamiltonian Macro Economic Dual. Albeit we do question any process that produces a round target for an equity index through an arbitrary time frame, but perhaps that is just us.
As we look forward though, we are not sure how cuddly we will remain.  The combination of initial jobless claims this morning at 830 a.m., Chairman Bernanke speaking at Jackson Hole tomorrow, and the second release of GDP for Q2 tomorrow will all combine to set the stage heading into September.  While we are not convinced these events will have a negative impact on the market in the short term, they will provide incremental data to inform our view through year-end.
And who knows, if the data is bad enough, perhaps we will drop our SP500 target by EXACTLY 100 points, just like Lazlo.   That is unlikely, however, given our macro models don't have a factor which incorporates licking your finger and holding it up to see which way the wind is blowing.
In the chart of the day, we have inserted a cute picture that shows President Obama inadvertently giving Treasury Secretary Timmy Geithner the middle finger.  This is not what President Obama really thinks of Timmy, but the President would probably like to Channel Hammy.




EARLY LOOK: Channeling Hammy - chart1


Yours in risk management,
Daryl G. Jones









August 26, 2010


M&A still rolling along with the proliferation of shopping apps.  This morning we get a deal from Kellwood and an app from Limited.




  • In a statement contrary to much of the industry with both sourcing and freight cost pressures key topics of discussion, American Eagle highlighted that costs were actually going down for them in the back half of the year. Explained as a better balance between ocean versus air freight internally, one has to question just how much the company relied on air freight for fulfillment last year.


  • Confirming that boots are again in high demand for fall of 2010, BWS suggested that retailer backlogs are likely to be overstated as retailers move up typical ordering schedules due to disruptions in the supply chain in the Far East. This goes to show that despite the importance of discount footwear retailers given their high volumes of light freight cargo, even ‘preferred’ customers are having to adjust.


  • In a sign that commercial real estate development may be on the rise, half of Shoe Carnival’s 2011 store growth plans for 20 locations are expected to come from new rather than redeveloped existing locations. With the company’s forecast based on current activity of new strip centers rather than simply development forecasts, this is encouraging for retailers whose growth has been stunted by a lack of new space – especially those largely based in strip center like Hibbetts.




UK Retailers Optimistic as High Street Sales Lift in August - High street retail sales increased in August, and most retailers expect that to continue through September, according to the latest CBI Distributive Trades Survey. According to the report, 53% of the retailers polled said sales had increased compared to the same month last year and 18% reported a decline, resulting in a positive balance of 35%. This was similar to the pace of sales growth in July 33%, and is the fastest since April 2007. Clothing and footwear was one of the strongest performing sectors in August with a positive balance of 76% fashion retailers reporting an increase in sales volumes. The CBI said this uplift was likely to be a result of better weather at the beginning of August, strong summer Sales and increased spend during the school summer holidays. Looking to September, a positive balance of 39% of retailers said they expected sales volumes to be higher than a year ago. In wholesaling, sales volumes rose in August compared with a year ago, despite expectations that they would fall. Of those wholesalers polled, 41% said the volume of trade was up, while 18% said it was down, giving a positive balance of 23%. <drapersonline.com>

Hedgeye Retail’s Take: Regardless of what factors drove August sales higher in the UK, the disparity between 76% of retailers reporting net sales increases and a 39% prospective forecast from retailers for further increases in September suggest confidence remains tepid at best.


Consumers Pullback  on Home Renovations - Spending on home renovation for the 12 months ending Sept. 30 will fall 25 percent to $107.7 billion compared with the same period in 2007, according to Harvard University’s Joint Center for Housing Studies. The pullback is hurting companies large and small -- from Home Depot Inc. and Lowe’s Cos. to building contractors and interior design shops. “There are still consumers putting in new kitchens,” Robert Niblock, the chairman and chief executive officer of Lowe’s, said in a telephone interview. “But they’re doing it because they’re going to be in their homes longer. That’s the change from the go-go days.” Many homeowners are painting, caulking and re-carpeting, he said, and many are doing it themselves.  The two home-improvement chains LOW and HD are trying to counter a drop in big-ticket transactions, such as kitchen cabinets, that is depressing how much shoppers spend each visit. Home Depot is holding more DIY classes for customers online and in its stores. The retailer said attendance at “do-it- herself” classes for women climbed 20% in June, a sign homeowners are tackling projects they once paid others to do. <bloomberg.com>

Hedgeye Retail’s Take: As we highlighted in our Housing Headwinds call in July, consumers have become increasingly empowered over the last several years while household maintenance services have declined, a trend we don’t expect to change anytime soon.


Express Locates Customers With an App - The apparel retailer steps into m-commerce with a geolocation app that serves up special promotions when customers are nearby. The marketing tool ties together the new mobile channel with bricks-and-mortar stores. <internetretailer.com>

Hedgeye Retail’s Take: Yet another example of ‘smart’ apps in retail. While the technology is certainly impressive, we wonder just how long it will take before consumers start pushing back on privacy matters as retailers literally track their every move.


Fossil Tops the List of Paid Search Rankings For Accessories - Fossil held the top position in the paid search rankings among Accessories merchants in Internet Retailer’s new 2011 Search Marketing Guide, garnering 102 total points. Zappos.com Inc. came in second with 97 points, with The Neiman Marcus Group (87) and Oakley Inc. and Ashford.com (50 each) rounding out the top five. Fossil topped the list by outbidding other retailers for the keywords: Belts, Wallets and Watches. Those keywords were among 16 in the Accessories category that were tested over nine weeks from late 2009 to early 2010. When those terms were searched again this week, Fossil came up within the top three paid positions for the three terms.


Hedgeye Retail’s Take: Paid search doesn’t come cheap, but the results don’t lie. With direct sales up +26% and +44% in Q1 and Q2 respectively, FOSL is among the leaders in dot.com growth within retail, a spot we would expect the company to maintain given its level of spend.


Kellwood To Acquire Contemporary Sportswear Brand - Kellwood Co. has inked a deal to acquire Adam, the six-year-old contemporary sportswear brand for men and women. Adam founder Adam Lippes will stay on at the brand. In comparison to earlier deals such as Vince in October 2006 and Isis in January, Michael Kramer, chief executive officer and president of Kellwood, said Adam’s volume falls between the two. “When we acquired Vince, it had annual wholesale volume of $30 million to $35 million. It will do $110 million to $115 million this year. We’re looking for more Vinces — firms in the upper and moderate price points that have room for growth as a brand. You can control your brand better in a wholesale environment, and you can complement your wholesale with other distribution channels in e-commerce and retail,” Kramer said, adding that Adam’s annual wholesale volume is around $20 million. <wwd.com/business-news>

Hedgeye Retail’s Take: Another bolt-on, but notably not a premium denim brand, which Kellwood has been coveting for years now.


Saks Opens Flagship - The designer Elie Tahari was greeted like a star when he arrived at the flagship for the ribbon cutting of his new 2,250-square-foot shop, the biggest on the fourth floor. Many of the guests, which included Saks and Tahari employees, wore “I [heart] Tahari” T-shirts, and some had accessorized with special “I [heart] ET” pins. Sadove referred to the Tahari space as the “cornerstone” of the new Wear department, which aims to provide customers with trend-right clothes at a more accessible price point. The Wear department offers European brands such as M Missoni, Red Valentino and Rivamonti. It’s still primarily geared to a woman who has a career, but it’s not mother career clothes. <wwd.com/retail-news>

Hedgeye Retail’s Take: Consistent with similar moves from other high-end retailers, increasing investments in a more concentrated portfolio of designers/labels continues to be a common theme as retailers look to reduce risk by placing bigger bets on better known entities.


Target Taps Designer Gaby Basora for Fashion Line - Designer Gaby Basora, known for her silk-printed blouses and dresses, will create Target's next limited-edition fashion line. The Go International collection, called Tucker for Target, will hit U.S. stores on Sept. 12. The women's apparel line will include tops, bottoms, dresses, outerwear and knitwear. The collection, retailing from $19.99 to $79.99, will be available until Oct. 17.  <licensemag.com>

Hedgeye Retail’s Take: Other launches this month at Target include Mulberry’s handbag line and John Derian’s housewares.  Expect to see marketing pick up around all three collections.


Read Through From Trade Shows - Economic uncertainty cast a shadow across men’s vendors and retailers at the trade shows last week. Retail buyers sought to navigate price increases and lackluster fashion trends for spring. In addition to a stumbling recovery, key challenges for vendors in the back half of this year and in 2011 involve issues related to raw materials shortages, rising production costs in China and increased expenses for shipping internationally. Buyer traffic was uneven, appearing strong during some periods of the shows but sparse at other times. And attendees sent mixed messages about the outlook for spring, with some reporting an uptick in business but others less optimistic.  <wwd.com/retail-news>

Hedgeye Retail’s Take: In summary, uncertainty appears to be the only consistent message across retail heading in the 2H, this we already know.



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 80.51%
  • SHORT SIGNALS 78.32%