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General Mobama

This note was originally published at 8am this morning, November 18, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is, in a competitive society, nobody who can exercise even a fraction of the power which a socialist planning board would possess.”

-Friedrich Hayek


Hayek is to the Keynesians of Big Government Intervention what capitalism is to socialism. Watching some Americans beg for the scraps of a short-term socialist experiment this morning is apparently the kind of groupthink that President Obama supports:


“Through the IPO, the government will cut its stake in GM by nearly half, continuing our disciplined commitment to exit this investment while protecting the American taxpayer" –Barack Obama




Hearing our used-car salesmen of professional American politicking talk about “disciplined” investing for the American people must be some sadistic form of a joke. I, for one, will go on the record today calling this GM deal out for what it really is – socialism. General Mobama, nice trade.


Co-founder of investment banking outfit Evercore Partners, Roger Altman, loves this short-term trading of American capitalism for privileged socialist handouts. His firm was paid upwards of $46 MILLION in pre-GM bankruptcy fees and allegedly wants another $17-18 MILLION in what bankers call “success fees” for this GM deal going off with a bang this morning. Roger, nice trade.


I couldn’t make this up if I tried, but Roger met with General Mobama earlier this week to talk about his post GM deal day job. Roger likes to trade the banking-fee-cycle with time moonlighting in DC. And apparently the President of the United States liked doing this GM deal so much that he is considering Altman as Larry Summers replacement at the White House.


Wait, is Altman a banker or a politician? Sadly, when getting in tight on these socialist handout jobs, one is a prerequisite for the other. Roger Altman has an impeccable resume in old-boy network banking and politics:

  1. 1974 he became Partner at Lehman (banker)
  2. 1977-1981 he served as Assistant Secretary of the Treasury (politician)
  3. 1981- 1987 he went back to Lehman and became co-head of investment banking (banker)

Oh yeah baby, that’s the change General Mobama is talking about. Let’s bring back someone who really understood Jimmy Carter and Arthur Burns style economics and let’s get this Jobless Stagflation party started.


Don’t worry, you won’t be disappointed in this storytelling. The deeper you dig into a pile of dogma the more it smells. Altman loves working at places that lever and lather themselves up with cheap moneys. After Lehman, he did LBOs at Blackstone (banker). Then, in 1993, he went back to Washington as Deputy Treasury Secretary (politician) for the only 2 years that resembled 1970’s style US Jobless Stagflation until… well… today!


No matter where you go in America this morning, this is where we are. I, for one, won’t let my son and daughter YouTube me on this day of November 18th, 2010 as one of the pretending patriots who supports socialist bailouts.


Back to the market…


Today’s pump and dump government rally should provide a fantastic opportunity to put some of our short positions back on (in the Hedgeye Portfolio we currently have 15 LONGS and 10 SHORTS). The US stock market has only had 1 UP day in the last 8. In the last 2 days the SP500 became what our Hedgeyes call immediate term TRADE oversold.


Yes, like your US government, we trade…


In terms of the Hedgeye Asset Allocation Model, in the last week, on weakness, we’ve scaled back up to 6% positions across the board (from ZERO percent at the market top on November 8th) in US Equities, International Equities and Commodities. We are long US Healthcare (XLV), Germany (EWG), Corn (CORN), and Gold (GLD). All of these positions are candidates to be sold. Our current asset allocation to Cash = 58%.


Yes, like any free market capitalist, we reserve the unalienable right to see this government sponsored casino for what it has become…


In terms of levels on the SP500, going into today’s open, from the 1178 level, we measure 2:1 upside with a significant level of immediate term TRADE resistance up at 1191. If the SP500 closes above 1191, that’s bullish. If it breaks, that’s bearish.


In the face of 1. Global Growth Slowing 2. Global Inflation Accelerating, and 3. Interconnected Risk Compounding, I don’t want a banker or a politician telling me how to manage risk. I need a transparent and accountable General who I can trust gets this game – and I guess, for now, that will have to be me.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


General Mobama - JC



November 18, 2010





  • ROST noted that the recent buying environment has been slightly more favorable as a result of Asian supply chain disruptions and erratic sales patterns at retail.  This favorable buying has resulted in a year over year increase of 500bps in the company’s packaway levels. 
  • Momentum continues in the dollar store space with DLTR reporting its strongest comp of the year up 8.7% against tough compares.  This is the second highest comp in over 7 years!
  • According to our weekly trend data, Skechers officially broke its positive sales momentum posting the first decline in year-over-year sales since June 2009 with toning trends (sales and ASPs) continuing to deteriorate.



Lopez/Anthony Embark on Fashion Line at KSS - Jenny from the Block is back in fashion. Jennifer Lopez, along with her husband, Marc Anthony, will today unveil a new lifestyle fashion venture with Kohl’s, multiple sources told WWD. The superstar couple is slated to be front and center at a press conference on the rooftop of the London Hotel in Los Angeles this morning, where they will join Kohl’s Corp. executives to publicize the partnership, which includes Hong Kong-based sourcing giant Li & Fung on the production side. The deal, which likely extends beyond men’s and women’s apparel to other categories, such as home, could eventually generate up to $3 billion in sales, added sources. The Kohl’s deal marks a return to the fashion business for Lopez since she shuttered her Sweetface contemporary sportswear brand in 2009. This new deal marries Lopez and Anthony with the Menomonee Falls, Wis.-based department store retailer that operates 1,089 stores in 49 states. The duo will join Kohl’s stable of exclusive brands that include Simply Vera Vera Wang, Candie’s, Daisy Fuentes, Tony Hawk, LC Lauren Conrad and Avril Lavigne’s Abbey Dawn. <WWD>

Hedgeye Retail’s Take: Despite closing down her Sweetface sportswear brand last year, JLo has had success at retail. While a $3Bn opportunity may sound optimistic, recall that Lopez has generated more than $1Bn in sales from her 16 fragrances since 2002. With Marc onboard for a men’s apparel line, KSS has locked up one of the more dynamic high-profile couples in fashion.


Gap Enters South America - Gap Inc., though still struggling in the U.S., keeps advancing its overseas expansion.  In September, the $14.5 billion retailer will open its first store in South America, in the Parque Arauco mall in Santiago, Chile. A franchise agreement has been signed with Komax, which has the exclusive rights to operate Gap brand stores in Chile. Komax purchases the merchandise from Gap and must adhere to Gap standards. Komax has franchise agreements with other well-known retailers, including The North Face, Brooks Brothers and Ralph Lauren. Gap did not state how many stores it expects to see in South America. Gap said, with Chile, it will have stores in 25 countries on six continents. “We are looking forward to offering Gap’s modern, cool American designs to customers in a retail sector that is strong, and has an exceptional demand for fashion,” said Stephen Sunnucks, president, Gap Inc., Europe and strategic alliances. “Komax has impressed us with their local expertise in the market and proven track record of launching international brands to customers in Chile.” Gap has 165 franchise stores in Eastern Europe, Latin America, the Middle East and Australia. By 2015, the company expects to have 400 franchise stores. <WWD>

Hedgeye Retail’s Take: International expansion continues to be a sizeable opportunity for the brand, however, doing so through franchise agreements not only limit risk, but upside on the P&L as well. 


Stride Rite Enters China - Parent firm Collective Brands Inc. announced a licensing and development deal with Li & Fung Retailing to launch the children's footwear brand in Greater China and Southeast Asia. Under the deal, a newly formed subsidiary, LiFung Children Holdings Ltd., will market the brand through standalone retail stores, shop-in-shops and e-commerce in Hong Kong, mainland China, Singapore, Taiwan, Macau, Malaysia and Brunei. The move marks the first time Topeka, Kan.-based Collective has brought any of its retail concepts or brands to mainland China. Initial plans call for the opening of retail outlets in Hong Kong, Singapore and Malaysia next month, followed by stores in China in 2011. "We are excited to partner with LiFung Children Holdings to bring Stride Rite to Asia," Sharon John, president of Stride Rite Children's Group, said in a statement. "We look forward to bringing shoppers across the region our range of products for children, as well as a store format dedicated to properly fitting the child and servicing parents and grandparents.” <WWD>

Hedgeye Retail’s Take: While the company’s recent Middle East franchise is a substantially larger deal initially, entry into China is notable nonetheless. Our sense is that after initial tests, Li & Fung will be properly incentivized to ramp store growth depending on brands reception.


Black Friday Discounts to Expect at KSS & TRU - In anticipation of Black Friday, Kohl's and Toys"R"Us have revealed their savings and doorbuster deals for the day after Thanksgiving. Kohl's will roll out its holiday sales at 3 a.m. on Nov. 26. Fifty percent off will be offered on toys from Fisher-Price, Playskool, Littlest Pet Shop, Hot Wheels, Matchbox, Tonka, Little Tikes, Crayola and Play-Doh. In addition, the retailer's exclusive brands will also see discounts, including on Simply Vera Vera Wang, LC Lauren Conrad, Food Network, Elle Contemporary Collection, Elle Décor, Dana Buchman, Candie's, Tony Hawk, Apt. 9, Chaps, Jumping Beans and Sonoma Life + Style. Meanwhile, TRU will open its doors at 10 p.m. on Thanksgiving night with more than 150 deals on toy, games and electronics. The savings will be available until 1 p.m. on Nov. 26. An additional 50 doorbuster deals will kick off at 5 a.m. on Nov. 26. Limited-edition items, such as Justin Bieber figures, as well as free Crayola 64-packs and coloring books with any purchase, will also be featured. Finally, 60 unadvertised deals will be announced on Toysrus.com and Facebook.com/Toysrus beginning at 12:01 a.m. on Nov. 23, which will be available in stores only between 10 p.m. on Thanksgiving and 1 p.m. on Nov. 26. <licensemag>

Hedgeye Retail’s Take: Here come the door-buster deals we have all come to expect. The incremental .com offerings at TRU exhibit the company’s competitive leg up on the technology front. 


AMZN Dips a Foot into Film - Amazon.com Inc. today introduced Amazon Studios for filmmakers hoping to wow the world with their movies. The world’s largest online retailer says it has set aside $2.7 million in monthly and annual prizes, which Amazon plans to award by Dec. 31, 2011. The efforts focus more on commercial potential than artistic merit, with Amazon listing making money first among traits it will look for in submitted materials.  “Winning screenplays and full-length test movies will be selected on the basis of commercial viability, which will include consideration of premise, story, character, dialogue, emotion and other elements of great movies,” Amazon says. Amazon has struck a deal with Warner Bros. Pictures that calls for Amazon Studios to produce the best projects, which will then go to Warner Bros. for a first look. Amazon can produce the movie with another studio if Warner Bros. passes. If Amazon Studios releases a film to theaters, the filmmaker or screenwriter receives $200,000 for the rights and a $400,000 bonus if the film earns at least $60 million in the United States. <internetretailer>

Hedgeye Retail’s Take: Historically a boom/bust type business, the internet giant finds yet another avenue for growth. In today's youtube-happy and tech savvy youth, Amazon's widely cast net will likely result in some success. One of the questions will be whether the studio is staffed  appropriately to handle the level of response it's likely to receive.


M&A Overseas - Selfridges Group Ltd. is adding to its stable of retail brands. The group, parent of the British department store, said this week it plans to acquire the Dutch luxury retail chain de Bijenkorf from the Maxeda Retail Group for an undisclosed sum. De Bijenkorf, Holland’s leading fashion and luxury goods retailer, has been in operation since 1870, and has a chain of 12 stores. Selfridges Group is expected to complete the deal and take ownership in early 2011. “De Bijenkorf is an excellent addition to our portfolio of international stores,” said W. Galen Weston, chairman of Selfridges Group. “This is an exciting opportunity for us to expand in Europe. Our long-term view and strong financial position will further enhance de Bijenkorf and offer a world-class experience to all parts of the Netherlands,” he said. The company said Paul Kelly has been named managing director of Selfridges Group Ltd., and will oversee the new business. Kelly was formerly chief executive officer of Selfridges and retailer Brown Thomas in Ireland. <WWD>  

Hedgeye Retail’s Take: Perhaps better known for their architecture than shopping, makes sense for the UK department store to diversify away from the British economy.


Consumer Brand Preference Study - Kohl’s, Neiman Marcus and H&M were among the category leaders in consumer preference in a study conducted by L.E.K. Consulting. The Retailer Preference Index helps retailers gauge who their nearest competitors are, based on consumer preferences. Criteria studied included product variety, perceived value for the money, service quality, ease of navigation in the store and fit. About 3,000 individuals were interviewed for the semiannual survey during the third week of October. Kohl’s came in as the top department store, followed by J.C. Penney and Macy’s, with Dillard’s and Sears rounding out the top five. Shoppers at premium department stores ranked Neiman Marcus first, followed by Nordstrom, Saks Fifth Avenue and Bloomingdale’s. Charlotte Russe was the leader among teen specialty chains, followed by Forever 21, Hollister, American Eagle Outfitters and Aéropostale. In women’s specialty retailing, H&M and Victoria’s Secret were a very close one and two, according to survey respondents. Old Navy, Ann Taylor Loft and Limited rounded out the top five. Ann Taylor ranked 16 out of 19 in the women’s specialty category, with New York & Co. in sixth place, Gap in seventh, J. Crew in 10th and Urban Outfitters in the 15th slot. <WWD>

Hedgeye Retail’s Take: A few noteworthy parings including New York & Co. still besting the likes of JCG and URBN in consumers eyes.


M&A in MMA - Authentic Brands Group, which recently acquired the Tapout brand, has purchased Sinister, an apparel and accessories company with origins in the mixed martial arts space.  Known for its early relationships with UFC champions like Chuck Liddell and Rampage Jackson, the Sinister brand has grown up along side the fastest growing sport in the world. "This acquisition completes our mixed martial arts stable of brands that will now reach all tiers of distribution," said Jamie Salter, chief executive of Authentic Brands Group. "Not only is Sinister's distribution at Kmart and Sears highly appealing but they have a world-class partnership with Hybrid, one of the best-in-class apparel licensees in the business." In addition to Sinister, Authentic Brands Group's MMA holdings consist of TapouT, TapouT Pro, TapouT MPS, TapouT Vintage, Silver Star Casting Company, Iron Star and Hitman Fight Gear. Sinister has been involved in mixed martial arts and the UFC since 1998, and became an official partner of the UFC in 2008. Its long-term relationships both with the UFC and its roster of athletes have been integral to the brand's growth and its introduction to new consumers. <SportsOneSource>

Hedgeye Retail’s Take: Mixed Martial Arts (MMA) is quickly becoming one of the most consolidated industries with a flurry of deals over the last few months leaving Authentic Brands with one of the most attractive portfolios in the space.  


China Leather Shoe Exports Grow - China’s leather shoes exports in September recorded a growth of 22.8% in volume and 40% hiking in value, while the total amount of exports for the first nine months reached 770 million pairs that are worth US$7.92 billion, up 14.6% and 25% respectively, according to the China Leather Industry Association. For the same period of last year, leather shoe exports reported a 23.8% decline in pairs and a 15.7% drop in value. In terms of imports, the value saw a growth of 25.1% year on year to US$420 million, and pairs up 11.1% to 11.22 million. The average value for per pair of imported and exported leather shoes maintain steady growth, with an increase of 9.1% on exports to US$ 10.28 for per pair and 12.6% growth on imports to US$36.99 for per pair. <FashionNetAsia>

Hedgeye Retail’s Take: Our sense if that the 9% increase in value per pair likely reflects the embedded cost escalation realized over the past year rather than an improved level of quality.


India Luxury Market The Indian luxury market has grown 13% over the past 3 years and is currently estimated to be $4.76 billion and is set to grow by 3 times by 2015 and apparel brands form a significant part of this growth especially in the category of menswear, according to Sanjay Kapoor, Chairman, CII Luxury Goods Forum, & MD of Genesis Luxury Fashion. "Informing about the current consumer preferences and spending traits, he said, "Jewelry, watches and accessories are the current largest categories and a new trend in apparel is the emergence of the 'menswear' luxury brands. Men too are becoming appearance and brand conscious and classic menswear brands such as Canali are finding favour with Indian men in the 35-44 age bracket, while younger men in the age bracket of 21-35 are dressing up in brands such as Paul Smith, Kenzo and Etro." Elaborating on the various factors, driving this market trend, he noted, "The economy is clearly on a recovery mode and men are beginning to spend on themselves too. They are well-traveled, and while earlier they shopped for their favourite brands overseas, now they can find the same brands in India too, hence it is far more convenient to buy here, the prices being almost the same, along with which, brands have their latest season collections in the boutiques here.” <FashionNetAsia>

Hedgeye Retail’s Take: There’s little question about the potential opportunity, what limits most retailers from stepping up plans to enter India continues to be the government controlled FDI restrictions.


Europe’s Band-Aid Rollercoaster

Position: Short Euro via FXE; Long Germany (EWG)


We want to make the quick point that although European equity indices look to be pricing in some form of bailout for Ireland today—most indices closed up +1.5% today across western and eastern Europe and Greece's ATHEX gained +2.6%—Europe’s sovereign debt crisis is far from over.


While this is an obvious point given the media’s attention on Europe’s debt and deficit ails, it’s worth restating our position that we believe there is a fundamental economic flaw in the Union of unequal states (the Eurozone), whereby states are effectively handcuffed from using monetary policy measures, such as inflating away debts or increasing trade competitiveness through currency debasement, to better maneuver economic developments.


While Greece got its €110 billion band-aid in May of this year and Ireland will soon get its own, the underlying “issues” afflicting the region cannot be solved with one-off bailout packages. On the contrary, we think that piling more debt upon debt is only going to compound the interconnected risk associated with the long-term issue.


While it could be argued that the Union of different parts proved beneficial to the whole in “good” economic times, the downturn from the world’s great recession is demonstrating a far different outcome and outlook for the Eurozone’s bound states.  


In particular, we’d expect that bond yields for Europe’s fiscally imbalanced countries to maintain a wide spread over credit-worthy German paper as sovereign debt concerns persist into 2011.


As the chart below shows, despite the performance of today’s equity market across Europe and a slight decline in government bond yields from the PIIGS since an immediate term high on 11/11, we’d expect government yields across Europe’s periphery to continue to rise.


As yields push up so too does the cost of capital which further strains a country’s ability to refinance and raise debt, which in turn snowballs the perceived sovereign default risk. And so the cycle of credit risk, short of bold austerity measures to cut debt and deficit levels, persists gravely…  


Matthew Hedrick



Europe’s Band-Aid Rollercoaster - mh1

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Bear/Bull Battle: SP500 Levels, Refreshed...

POSITION: no position in the SPY here


I’m doing a lot of waiting and watching today when it comes to my index and macro short ideas. I’ve started selling immediate term TRADE longs that are overbought (SU, FL, etc), but feel like I need to be much more surgical about my re-entry point on the short side of positions like the SPY.


In the chart below I have outlined 4 important immediate term levels for the SP500: 

  1.        Intermediate term TREND resistance = 1225 (the YTD closing high, which is red because now we are making lower-highs)
  2.        Immediate term TRADE resistance = 1203
  3.        Immediate term TRADE support = 1191
  4.        Immediate term TRADE support = 1171 

The reason why I have 2 immediate term TRADE lines of support is that I don’t yet know if today’s market confirms (closes at or above) 1191. If it doesn’t, that’s immediate term bearish and there is no support to 1171. If it does, its immediate term bullish and carries risk that the SP500 can melt-up to 1203. Beyond 1203, there’s no resistance to 1225.


Aggressive selling/shorting was a better strategy a week ago. Tactical and timely selling/shorting is what I think you should be doing today.


Yours in risk management,



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - 1

Are We Kookoo for Shorting Cocoa?

Positions: Short cocoa via the etf NIB; Long corn via the etf CORN

Conclusion: While there is currently an imbalance in supply and demand for cocoa that appears bullish for its price, we believe supply and demand will come back to more normal levels and the price of cocoa will correct.


Yesterday in the Virtual Portfolio, we added a short position in cocoa via the etn NIB.  Our position in the soft commodities also currently includes a long position in corn. 


The core fundamental thesis for shorting cocoa is related to the potential for an improving political situation in the Ivory Coast – the world’s largest producer of Cocoa – and the potential for slowing demand as global growth slows sequentially.


From a consumption perspective, both the U.S. and Europe are the large consumers of cocoa.  In fact, 16 of the 20 world’s top consumers (on a per capital basis) are European countries; by some estimates Europe consumes more than 40% of the world’s cocoa.  In aggregate, developed countries consume more than 65% of the world’s cocoa, with North America being the second largest consuming region after Europe.  In total, the world will consume somewhere on the order of 3.6 million tons in 2010.  Interestingly, while developing countries are growing demand at a slightly higher rate than developed countries, it is only marginal, as developing demand is expected to grow at under 2% this year. (This is in comparison to higher demand growth for more essential commodities such as oil, copper, etc.)


From a demand perspective, since chocolate is considered a specialty item and not a necessity, we would expect demand for it to wane in slower economic growth periods.  As we’ve noted many times, we expect both U.S. growth and global growth to slow sequentially going into 2011, which will curb consumption patterns, particularly for nonessentials such as cocoa.  As a case study of what can happen to cocoa demand in slower economic times we can look to Germany.   The demand for cocoa in Germany grew at an annual rate of -2.8% from 1990 to 2000 and then accelerated to annual growth of 0.9% for the ensuing decade.  As the economic growth patterns of German improved, so too did its demand for cocoa.


But the real story in cocoa is production.  Almost 70% of global cocoa production occurs in Africa – the top five producers globally are the Ivory Coast, Ghana, Indonesia, Nigeria, and Brazil.  The Ivory Coast, though, dominates production with approximately 45% of the world’s production occurring within her borders.   So, as the Ivory Coast goes, so too goes the price of cocoa.


Currently, things are not going well in the Ivory Coast.  As of November 14th, according to statistics from the Ivory Coast government, arrivals of cocoa crops at ports in the Ivory Coast slated for overseas transports are down almost 15% y-o-y.   This negative news, though, we believe is priced into the commodity, as it was expected that production was lagging due to new quality standards.


Prospectively, the recent Ivory Coast elections are likely a key driver of future supply growth.  The elections, which had been on hold due to political turmoil since 2005, were certified by the United Nations.  According to the UN:


“Despite some minor incidents and anomalies, it was peaceful and in line with international standards.”


In fact, more than 83% of eligible voters went to the polls.  The result of the Presidential election was that no candidate received more than 50% of the popular vote, but a runoff is scheduled for November 28th between Incumbent President Laurent Gbagbo and rival Alassane Ouattara.  It seems likely that peaceful and democratic transition of government will occur.  The implication of this is that government can begin to function at a normal level again and start to mandate, and support, a much needed modernization of the cocoa industry.  In time, this should lead to a cocoa production boom in the region.


So, are we kookoo for shorting cocoa? We don’t think so, but only time and price will tell.


Our levels on the cocoa etn, NIB, are outlined below.


Daryl G. Jones

Managing Director


Are We Kookoo for Shorting Cocoa? - nov 18 cocoa


Conclusion: Yum has seen strong sales performance lately in its China division.  The downturn in consumer confidence in the People’s Republic is worth monitoring for a view to how 4Q is trending.


Chinese consumer confidence fell for the first time in six quarters in the third quarter.  The drop is believed to be largely attributable to inflation expectations.  Pan Jiancheng, deputy-general of the National Bureau of Statistics’ monitoring center, said, “Inflation has been triggered mainly by increases in food prices which has pushed up inflation expectations, especially among low-income workers”. 


Specific to YUM, management has consistently called out consumer confidence in China as a key driver of sales.  On October 6th, from the 3Q10 earnings call transcript: “we continue to benefit from the improvement of the Chinese consumer where consumer confidence has now been positive year-over-year in the last nine months”.  During the 2Q09 earnings call, in discussing the top  line trends of -4% in China, management said, “when you look at consumer confidence, actually it’s kind of bumping along the bottom.  So that may be a reasonably good indicator of the consumer side of the equation”.  Later, during the 4Q09 earnings call, management again called out the bottoming of consumer confidence in China in the early part of 2009 and same-store sales subsequently posted strong gains in 1Q10.   Just as the inflection in consumer confidence proved to be an indicator of Yum China sales in 2009, the recent sharp downturn should also be taken into account when thinking about future quarters. 


While 4Q09 was a difficult quarter from a  top line perspective, and therefore may be easily comped by Yum in the upcoming quarter, 1Q11 will present a difficult challenge for Yum China if consumer confidence does not rebound in the interim.  Additionally, MCD announced yesterday that it has increased prices in China by between 0.5 yuan and 1 yuan to offset higher raw material costs.  YUM management stated on the most recent earnings call that it expects inflation to be a headwind in 4Q10 and 2011.  Should margins compress under rising costs, that would obviously present an additional challenge for the company.  Alternatively, following MCD’s lead and raising prices could negatively impact sales trends, particularly if consumer confidence does not rebound.


YUM – WATCH CHINA CONFIDENCE - china consumer confidence


YUM – WATCH CHINA CONFIDENCE - yum china sales


Howard Penney

Managing Director

Early Look

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