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Positive earnings results over the past couple of days helped keep restaurant stocks above break even in yesterday’s down tape for the broader market


Some notable news items and price action in the restaurant space:

  • COSI continues to outperform on accelerating volume.  I still like this stock, and have written extensively about management’s turnaround plans for the concept since early 2010.
  • CMG shares gained on accelerating volume
  • RT gained on accelerating volume following positive earnings released on Wednesday after the close
  • RT’s positive report bolstered many of its peers; RRGB, DIN, EAT, DRI and PFCB all gained on increased volume versus the thirty-day average (to greater and lesser extents, as you can see in table below)
  • MCD declined slightly on accelerating volume.  I maintain a bearish outlook for MCD’s business in 2011 and will hold a conference call with clients to that effect on Friday, the 14th of January.  Email for details.
  • WEN share prices gained on accelerating volume.
  • SBUX declined on accelerating volume as its new logo continues to generate voluminous attention on the web.  As the old maxim goes, there is no such thing as bad publicity.
  • SBUX maintaining its share of the newspaper this morning, commenting on the ongoing dispute with Kraft over its distribution agreement. In legal filings on Thursday, the coffee chain asked a U.S. District Court Judge to deny Kraft’s request to stop Starbucks from ending their agreement.  The filing also alleged that Kraft is making efforts to interfere with an orderly transition of the CPG business and is causing significant harm to SBUX in doing so.  The company also stated that it has given Kraft ample notice of their decision and that it does not impact Kraft, as a whole, significantly.
  • DPZ downgraded to neutral from outperform at Credit Suisse
  • Cowen names BJRI, SONC, and DRI as its Top-3 ideas in the Restaurant space for 2011



Howard Penney

Managing Director


The Macau Metro Monitor, January 7, 2011



MGM CEO Murren said in an interview, “We think that the prospects for us to be in Cotai are bright. We know that we are moving down the path and we hope that we will be fortunate enough to be there.  However, it is very important that we do not think of this as the only opportunity to grow in Macau. There are more opportunities on the peninsula and throughout the SAR in general. We are keeping our eyes open.”  Talking about the recent inclusion of new junket operators at MGM Macau, Mr Murren noted, “the market is becoming more competitive, the [VIP] operators are becoming more discerning and they are more selective in terms of where they would like to set up the ‘shop’."


Murren didn't specify the target IPO listing of 20 to 25% of MGM’s Macau joint venture, but he said that “part of the proceeds, when we do it, will be allocated to developing more in Macau, hopefully in Cotai.”

CHART OF THE DAY: Asian Growth Slowing as Inflation Accelerates



CHART OF THE DAY: Asian Growth Slowing as Inflation Accelerates -  Chart of the day

Transitory Expectations

“Man’s life is brief and transitory, literature endures forever.”

-Persian poet


I’m in the middle of reading Rory Stewart’s The Places In Between where he tells the risk management story of walking alone across Afghanistan. He ends one of his  chapters with that quote. It got my attention.


It should have. Every morning, day, and night, we market people walk alone with our P&L. We can’t drop our track record on someone else’s lap. We can’t pretend it’s not there either. No matter where we go, there it is…


That’s not life, but it’s certainly a big part of mine. Within that part, there certainly are a lot of places in between. All the while, I suppose I’m challenged with building bridges in a lot of those places between market prices and Transitory Expectations.


From a US-centric stock market investor’s perspective, expectations for this morning’s US Employment Report are extremely elevated. From a Global Macro investor’s perspective, from Indonesia getting tagged for a -2.8% loss overnight on inflation concerns to Gold testing 5-week lows, there’s a lot more going on.


That’s not to say that a Transitory Expectation for a US-centric economic data point doesn’t matter to Global Macro Risk Managers. It does this morning. Big time. But what exactly are those expectations and how can we proactively prepare to profit from them?


In an intraday note yesterday titled “Government Whispering”, this is how we framed it up:

  1. A Whisper of 580,000 US payroll adds has been going around all week
  2. Every market rally (from Wednesday’s pre-market futures lows) has been followed up with people reminding me of the whisper
  3. Government Whispering is turning into the casino that Big Government Intervention built into our markets – get used to it 

Where are we at on estimates versus expectations: 

  1. First, always remember that governments, to a degree, manipulates these numbers
  2. In our most bullish scenario, the payroll number could be at least 3x consensus (it started the wk at 125,000 which is a bit of a joke)
  3. The question now is can it be 2x that (or better than the whisper of 580,000)? 

In terms of what an improving (in the very short term) US jobs picture actually means for the interconnected macro markets: 

  1. BONDS: are definitely baking this in (collapsing UST’s have been since NOV and UST yields are bullish TRADE, TREND, and TAIL in our model)
  2. CURRENCY: definitely (maybe overly) baking this in (USD had a monster week, up +2.3% for the week-to-date ahead of the print)
  3. STOCKS: are trying their best to bake this in, but I think they’re going to look late – too late because they usually are

That’s the thing about Transitory Expectations in markets – by the time consensus realizes what they are, they’ve moved onto the next.


The key, in both Global Macro risk management and in life, may very well be to live in the moment. I’m not Buddhist, but I do respect the thought process behind the principle of playing the game that’s in front of you. After this morning’s US Employment Report is printed, that game is gone.


Post the 830AM EST report, I think US-centric investors will be forced to face the fiddle on the Expectations Mismatch between what they think the US Consumer is doing now versus what the US Consumer did in November to early December.


While everybody was pumping up Transitory Expectations of tax cuts and QG2 into their year-end Consumer Discretionary portfolios, evidently there was this little critter called reality toiling in the night.


At first, the Consumer Discretionary bulls said Best Buy’s (BBY) collapse was “secular” to their business. Then they said that McDonald’s (MCD) breaking down was due to some hedgies rotating into Best Buy because, I guess, Ackman was going to charge 2 and 20 to buy that one low. Now they’re saying that a broad based selloff in the Consumer Discretionary sector yesterday was due to the snow?


Here’s what some major US-centric Consumer Discretionary names (I mean names with market cap) did yesterday:

  1. Target (TGT) = -7.4%
  2. Gap (GPS) = -6.9%
  3. Macy’s (M) = -4.0%

I guess, with the Consumer Discretionary sector being the top US Sector performer in 2010 at +25.7%, bullish Transitory Expectations were a little off…


Back to the Global Macro risk management picture of Global Growth Slowing as Global Inflation Accelerates, most Asian and European stock markets have been sufficiently adjusting their bullish expectations to the downside all week. Last night, in addition to Indonesia trading down a ton, India was down -2.4%, Thailand lost -1.4%, and Taiwan was down -1.1%. After closing down -17.4% in 2010, Spain is already down -2.7% for 2011 to-date.


If the US stock market perma-bulls want to tell me that all of Asia and parts of Europe are slowing because US growth is strengthening, they can go do that. But they may very well have to adjust their Transitory Expectations after the last lagging bullish economic data point from Q4 is out of the way.


My immediate term support and resistance levels for the SP500 are now 1264 and 1280, respectively. Yesterday, I raised 3% cash, taking our allocation to US Cash back up to 52% in the Hedgeye Asset Allocation Model by selling our 3% position in Healthcare (XLV) on strength. We remain long the US Dollar via the UUP and short Gold (GLD).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Transitory Expectations - ja


TODAY’S S&P 500 SET-UP - January 7, 2011

As we look at today’s set up for the S&P 500, the range is 16 points or -0.77% downside to 1264 and 0.48% upside to 1280. Equity futures are trading below fair value in a continuation of Thursday's retreat prompted by disappointing Dec retail sales data and ahead of today's employment data and Bernanke testimony to the Senate Budget Committee.



  • 8.30am, Payroll figures: Change in nonfarm payrolls, est. 150k, prior 39k  Change in private payrolls, est. 175k, prior 50k  Change in manufacturing payrolls, est. 5k, prior (-13k)
  • Unemployment rate, est. 9.7%, prior 9.8%
  • 9.15am, NY Fed’s Tracy to speak in Hartford, Conn.
  • 9.30am, Fed’s Bernanke to Testify Before Senate Budget Panel
  • 11am, Fed to purchase $6b-$8b notes/bonds
  • 3pm, Consumer Credit, Nov., est. $0.5b
  • 4.30pm, Fed’s Evans Speaks on Monetary Policy in Denver
  • 4.30pm, NY Fed’s McAndrews Speaks on Panel in Denver


  • Best Buy will offer its take on the holiday season with a sales release pre-mkt
  • Blackstone in exclusive talks to buy London’s Chiswick Park office complex for ~$740m including debt, the Financial Times reports, without saying where it got the information
  • Obama names William Daley as his White House chief of staff as part of a series of moves to keep the administration’s focus on the economy, improve relations with business and deal with a divided government.
  • Today Obama will name Gene Sperling to lead National Economic Council.
  • KB Home will provide a window into the housing market as it reports 4Q results.
  • Amgen (AMGN) and Xencor will collaborate to develop an
  • autoimmune disease antibody
  • Borders Group (BGP) US in talks with Jefferies on restructuring, CNBC says, citing WSJ
  • Immucor (BLUD) 2Q profit, rev. beat ests
  • Liz Claiborne (LIZ) preliminary 2H profit missed goal
  • Schnitzer Steel Industries Inc. (SCHN) 1Q rev. missed est.
  • Shaw Group (SHAW) 1Q rev. missed est.
  • Volcano (VOLC) rated new outperform at William Blair
  • Volterra Semiconductor (VLTR) preliminary 4Q EPS below ests., forecast, est. -131


  • One day: Dow (0.22%), S&P (0.21%), Nasdaq +0.28%, Russell 2000 (0.46%)
  • Last Week: Dow +0.03%, S&P +0.07%, Nasdaq (-0.48%), Russell (-0.67%)
  • Month/Quarter/Year-to-date: Dow +1.03%, S&P +1.29%, Nasdaq +2.15%, Russell +0.99%
  • Sector Performance - BEARISH (Only 3 sectors positive) - Energy (0.95%), Cons. Disc (0.61%), Financials (0.66%), Materials (0.52%), Cons. Spls (0.34%), Industrials (0.17%), Utilities +0.10%, Healthcare +0.41%, Tech +0.58%        


  • ADVANCE/DECLINE LINE: -657 (-1283)  
  • VOLUME: NYSE 1093.30 (+4.83%)
  • VIX:  17.40 +2.23% YTD PERFORMANCE: -1.97%
  • SPX PUT/CALL RATIO: 0.86 from 1.81 (-52.57%)  


Treasuries were stronger yesterday

  • TED SPREAD: 16.62 0.304 (1.866%)
  • 3-MONTH T-BILL YIELD: 0.15% +.01%    
  • YIELD CURVE: 2.76 from 2.79


  • CRB: 325.07 -1.25%
  • Oil: 88.38 -2.13% - trading +0.37% in the AM
  • In early trading crude oil rebounds from lowest in three weeks
  • COPPER: 432.95 -1.78% - trading -1.49% in the AM
  • copper falls in London on speculation of more tightening
  • GOLD: 1,373.15 -0.22% - trading -1.1% in the AM
  • Gold is right down to our intermediate term TREND line of support this morning


  • India to Boost Oil-Palm Plantation Area to Reduce $8.4 Billion Import Bill
  • Gold in Euros to Outperform Gold in Dollars, ABN Says: Technical Analysis
  • Queensland Towns Watch Rivers Rise as Waters Threaten Livestock, Property
  • Wheat Heads for Weekly Drop on Speculation USDA May Lower Exports Estimate
  • Germany Blocks Farms' Meat, Egg Sales After Finding Dioxin in Animal Feed
  • Hainan Rubber Doubles in Shanghai Debut on Strong Demand, Growth Outlook
  • Palm Oil Declines as Rally to 34-Month High Increases Soybean Oil Appeal
  • Japan Minister Urges Lower Rice Tariff, Free Trade, Talks With North Korea
  • Cotton Output in Australia May Be Cut 500,000 Bales on Flood, FCStone Says
  • Copper Stockpiles in Shanghai Advance to Six-Month High; Zinc at Record
  • Sugar May Rise Next Week on Speculation Demand Will Increase, Survey Shows


  • EURO: 1.3028 -1.18% - trading -0.38% in the AM
  • DOLLAR: 80.847 +0.73% - trading +0.17% in the AM


  • European Markets: FTSE 100: (0.29%); DAX: 0.17%; CAC 40: (0.43%)
  • European markets mainly trade lower with major indices reversing modest opening gains as investors focus on US Dec nonfarm payrolls data due later in the session.
  • Peripheral European debt worries persist and weighed on bond spreads and the euro.   Spain and Portugal down 1.30% and 1.14%, respectively
  • Declining sectors lead advancers 16-2 with oil & gas and banks leading fallers down close to (1%) and auto's up +0.3%, leading gainers.
  • Germany Nov preliminary retail sales +2.0% y/y vs consensus +3.2%, (2.4%) m/m vs consensus +0.1%
  • UK SMMT Dec new car registrations (18.0%) y/y, to 123,817 units, forecasts market to decline by (5%) in 2011 to 1.93M units
  • Eurozone Q3 GDP 1.9% y/y vs consensus 1.9% and prior 1.9% Eurozone Q3 GDP 0.3% q/q vs consensus 0.4% and prior 0.4%
  • Germany Nov Industrial Output (0.7%) m/m vs consensus (0.2%) and prior revised +3.0%
  • Eurozone Nov Unemployment 10.1% vs consensus 10.1% and prior 10.1%


  • Asian Markets: Nikkei +0.1%; Hang Seng (0.4%); Shanghai Composite +0.52%
  • More Asian markets fell than rose today as investors awaited US non-farms payrolls data coming later.
  • Banks led China up 0.52%, though it finished well of its intraday high. But metals stocks fell late in the day on renewed tightening fears.
  • South Korea rose 0.41%, but Samsung Electronics lost 1% on saying its Q4 profit probably fell.
  • Japan +0.11 traded in a very tight range all day. Carmakers rose on recovering sales in the US and a weaker yen.
  • Australia declined -0.42%, with miners and banks going down, partially offset by higher industrial and consumer issues.
  • Hong Kong traded -0.42%. 
  • Indonesia’s stocks fell 2.81%, driving the benchmark index to its biggest two-day loss in more than seven months.  Concerns the central bank has fallen behind regional neighbors in taking action to curb inflation.
  • India down 2.44%



Ho Ho, No

There’s no question expectations were high headed into today’s December sales day and results ended up largely disappointing.  Overall, we observed a near 50/50 split of beats to misses with far fewer earnings “guide-ups” than most expected.  So where did all the whispers, MasterCard SpendingPulse studies, WikiLeaks go wrong?  First, the cadence of the month was hardly linear, with most retailers reporting strength in the earlier half of December vs. the latter.  Nothing new here as sales have been volatile on a weekly basis throughout much of 2010, even in the standout periods of March, May, and November.  Second, the environment was promotional and perhaps a bit more so than we thought.  Third, the weather did have some impact, but this was actually one of the more muted months for making excuses.  Only a few retailers even mentioned weather as the culprit, let alone quantify its impact. 


The bottom line here is absent expectations and sentiment that reached fever pitch levels, the actual overall comp growth for the entire 25 company reporting base was 3.4%, exactly in line with the run-rate we observed since June.  The only caveat being November (+6.6%), which set the bar abnormally high heading into the more important month of December.  Either way we look at it, without a reason (i.e holiday) to spend in the near to intermediate term it’s becoming increasingly difficult to paint a picture of accelerating demand.


Ho Ho, No - Dec SSS


As always there were several unique callouts from today’s monthly results:


  • High-end clearly outperformed with SKS and JWN reporting strong results both on an absolute and relative-to-expectations basis.  In the case of SKS, this number may have been even higher had the blizzard not had an impact on the company’s flagship NYC store (about 19% of the company’s annual sales).
  • Off-price was another standout, with both ROST and TJX reporting better than expected and positive comps against very difficult comparisons.  Both companies raised guidance.  However, the more telling data point was ROST’s statement that their “merchants have been able to take advantage recently of a large amount of compelling close-out opportunities in the marketplace.”  Recall that disruption in the marketplace is hugely beneficial to the off-price model and this one of the more bullish comments we’ve seen on the topic of inventory availability in over a year.  On the flip side, to take advantage of such buys ROST saw pack-away rise to 47% from 39% for an increase in inventory of 19%!
  • If there’s any hope for a recovery in consumer electronics, it will have to come from CES and not from COST.  The club operator noted that December sales of consumer electronics were down  high single digits, driven by a slightly negative comp in TV’s compounded by weakness in cameras, navigation, and hardware.  Computers were positive. 
  • COST continues to confirm Hedgeye’s view on inflation, with the company noting that fresh food costs were up mid single digits while overall food and sundries saw inflation on the magnitude of 100 to 200 bps.  This marks an acceleration in the monthly trends they’ve been consistently noting.
  • TGT’s disappointing 0.9% comp store increase leads to many more questions than answers, even in the context of overall weakness for most retailers during the month.  The slight increase calls into question the effectiveness of the company’s recent nationwide rollout of the 5% reward program as well as continued push via “P-Fresh” into more consumables.  Yes, it’s still early to know if the program’s nationwide adoption rate has been below plan, but there’s no question that this incremental sale driver is not an immediate solution to accelerate sales growth.
  • While PIR and CPWM are not the best proxies for overall demand in the home category, they do stand out as substantial sales outperformers during the key holiday season.  This is also consistent with robust, pre-holiday results from BBBY.  If anything, the category remains less promotional than the fashion apparel landscape.
  • There were no shortage of positive e-commerce callouts with KSS reporting a 66% increase in sales, URBN +28%, M +28.4%, AEO +LDD, ANF +59%, and bn.com +78%.
  • Sometimes comparisons are overrated.  Nordstrom reported its 16th month in a row of increased traffic trends.

Eric Levine


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