News/price action callouts from restaurant space yesterday:

  • CAKE down on big volume in reaction to its pre-announcement of 4Q10 System wide comps of +0.9% the company noted 4Q10 comps would have been +2.1% ex weather/calendar-shift.
  • CMG reiterated unit growth guidance for 2011 of 135-145 units and no comments on current trends.
  • JACK noted Jack-in-the-Box and Qdoba F1Q11 comps were above 1% and 6%, respectively, and the high-end of the guidance range.  Management also affirmed its expected completion of reimaging program by year-end 2011 and refranchising by 2013.
  • YUM continues to focus on its Emerging Markets strategy reiterated its 2011 EPS growth targets.
  • The CAKE news took BWLD, PFCB and CPKI down on accelerating volume.
  • SBUX, PEET and CMG also struggled yesterday on accelerating volume.
  • SBUX price target raised from $33 to $37 at UBS.
  • MCD: Interesting story in the Wall Street Journal this morning on MCD Japan adding calorie-laden menu items to its menu.




Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - January 12, 2011


As we look at today’s set up for the S&P 500, the range is 25 points or -0.39% downside to 1269 and +0.62% upside to 1282.  Equity futures are trading above fair value in a continuation of Tuesday's modest gains with early focus centered on Portugal's bond auction.  In focus today, Treasury Secretary Geithner will speak about China ahead of President Hu's visit to the US.



  • 8:30 a.m.: Treasury’s Geithner speaks on China
  • 8:30 a.m.: Import price index
  • 8:30 a.m.: WASDE grains, commodities
  • 8:30 a.m.: USDA quarterly grains
  • 10:30 a.m.: DoE inventories
  • 1 p.m.: Fed’s Richard Fisher speaks on monetary policy in New York
  • 1 p.m.: U.S. sells $21b 10-yr notes reopening
  • 2 p.m.: Fed releases beige book economic survey
  • 2 p.m: Monthly Budget Statement
  • USDA broiler eggs set, Jan. 12


  • Big 5 Sporting Goods (BGFV) prelim 4Q adj. EPS, rev. miss ests.
  • Evergreen Solar (ESLRD) sees $340m charge to close Devens mfg plant, affecting 800 workers
  • Lululemon Athletica (LULU) sees 4Q rev. $237m-$239m, up from $210m-$215m forecast in Dec. vs est. $221.6m
  • Synnex (SNX) high end of 1Q adj. EPS forecast above est.
  • Zale (ZLC) same-store holiday sales rose 8.5%  


  • One day: Dow +0.30%, S&P +0.37%, Nasdaq +0.33%, Russell 2000 +0.40%
  • Last Week: Dow +0.84%, S&P +1.10%, Nasdaq 1.90%, Russell +0.53%
  • Month-to-date: Dow +0.82%, S&P +1.34%, Nasdaq +2.41%, Russell +1.42%
  • Sector Performance - (6 sectors positive) - Energy +1.66%, Materials +0.81%, Healthcare +0.50%, Financials +0.40%, Industrials +0.37%, Utilities +0.14%, Consumer Disc (0.03%), Consumer Spls (0.08%), Tech (0.16%)  


  • ADVANCE/DECLINE LINE: 552 (+476)  
  • VOLUME: NYSE 943.92 (-1.20%)
  • VIX:  16.89 +3.71% YTD PERFORMANCE: -4.8%
  • SPX PUT/CALL RATIO: 1.90 from 1.59 (+19.55%)  



Treasuries snapped a three-day winning streak with the modest bounce in stocks and supply impact.

  • TED SPREAD: 16.22 +0.406 (2.568%)
  • 3-MONTH T-BILL YIELD: 0.15%    
  • YIELD CURVE: 2.77 from 2.73


  • CRB: 331.46 +1.41%
  • Oil: 91.11 +2.08% - trading -0.19% in the AM
  • Oil Trades Near One-Week High as Alaska Pipeline Outage May Last Five Days
  • COPPER: 434.90 +1.98% - trading +0.67% in the AM
  • Copper Rises for a Second Day on Efforts to Contain European Debt Crisis
  • GOLD: 1,382.25 +0.79% - trading +0.02% in the AM
  • Gold Imports by India Surge to Record as Price Is `Not a Factor,' WGC Says


  • Soybeans Gain Before USDA Report Forecast to Show Lower Stocks; Corn Rises
  • Coffee Climbs for Third Day as Indonesia, Vietnam Rains May Tighten Supply
  • Gold May Rise as European Sovereign-Debt Crisis Spurs Demand for a Haven
  • Latex to Plummet as Weather Improves, World's Biggest Glove Maker Predicts
  • German Tainted-Food Scandal Widens as China Halts Imports of Pork Products
  • Incitec Moranbah Plant May Be Delayed by Queensland Floods, Citigroup Says
  • Rice Growers in the U.S. May Switch Some Area to Soybeans, Federation Says
  • Cotton Advances to Three-Week High as Deadly Floods Damage Australian Crop
  • China Freeze Hurts Sugar Cane, May Cut Production in Guangxi, Top Grower
  • Aluminum Stockpiles in Japan Advance 6.5%, First Increase in Four Months
  • Grain Exports From Brisbane Are Halted After Port Closes, GrainCorp Says


  • EURO: 1.2969 +0.22% - trading +0.02% in the AM
  • DOLLAR: 80.846 -0.04%% - trading -0.10% in the AM


  • European Markets: FTSE 100: +0.59%; DAX: +1.46%; CAC 40: +1.59%
  • European markets opened higher and have modestly extended gains after the Portuguese debt auction.
  • Peripheral equity markets led the regions advance, Greece up +3.86%, Spain +3.84 and Italy up 2.72% - Portugal is up +0.98%
  • Peripheral debt spreads have stabilized.
  • All 18 sectors trade higher led by banks +4.9% and basic resources +2.3%, whilst personal & household product and autos +0.2% lead laggards.
  • Germany 2010 GDP +3.6% vs consensus +3.6% and prior (4.7%)


  • Asian Markets: Nikkei +0.02%; Hang Seng +1.54%; Shanghai Composite +0.62%
  • Asian markets rose today as concerns ease about European debt and a buoyant US market.
  • Local property stocks and Chinese resource issues led Hong Kong’s rise. rose 4% on speculation that its parent and Baidu will invest $100M in Sina’s microblog product.
  • China rose, with property shares going up on news that pending proposed property taxes will not apply to all transactions.
  • Taiwan went up 0.38%.
  • Miners lifted Australia to a small rise on predictions of higher commodity prices, though companies directly hurt by the floods fell.
  • Japan finished almost literally flat. Financials went up on foreign buying and short-covering and trading houses gained on higher commodities prices. Exporters went up on a weaker yen.
  • Japan December M3 +1.8% y/y. December M2 +2.3% y/y. November trade surplus ¥259.7B, (46.6%) y/y. November current account surplus ¥926.2B vs consensus ¥977.7B.


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“The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew.”

-Abraham Lincoln


I recently pulled off the shelf Doris Kearns Goodwin’s book "Team of Rivals" which looks at the political genius of Abraham Lincoln.  It’s an amazing account of how Lincoln, as president, was able to bring his “disgruntled opponents” together to complete the task of saving the Union.  As Lincoln did, Barack Obama must pull together a team of rivals and win the respect of his competitors to help us navigate the stormy seas ahead. 


If the United States’ economy were a vessel, it could be said that she has held up quite well over the past couple of years.  Through the Great Recession, government bailouts, flash crashes, and the most contentious political climate in some time, the United States keeps cruising. 


How much secular damage was sustained in the “economic storm” or was simply deferred by the Fed grabbing its cavernous bucket and bailing water from inside the ship back overboard is unknown. 


Consumers don’t know, politicians don’t know, CEO’s don’t know, and you can bet a dollar, I don’t know.  What I can tell you with certainty is that at some point the structural problems with the U.S. economy need to be addressed sooner rather than later.  Fans of Big Government enjoy preaching the folly of applying long term solutions to short term problems. 


While not ideal, clearly long term solutions that ensure economic progress in the long term, notwithstanding short term pain, are preferable to short term solutions that never address the long term, leaving us and our posterity to forever bail buckets of water over the side of the ship while we hope and pray for a miracle. 


All the while, the long term problem grows larger, but politicians and policymakers keep their jobs.  The mounting of debt upon debt by governments around the globe is leading to inflation on a global basis. 


I would be remiss to ignore the various supply-side shocks that have occurred around the world related to weather and other factors.  However, simply stated, the inverse correlation between the dollar and commodities denominated in dollars remains high and the U.S. consumer is feeling the effect of that.  U.S. consumers are not alone; India, Brazil, China and many other countries around the world have seen inflation break out to the upside recently. 


Food inflation, in particular, is causing significant social unrest in some countries which is drawing political attention.  India’s government has adjourned to address the problem of rising food costs there and Algeria saw riots yesterday over food costs.  For now, consumers’ wallets in the U.S. have been relatively shielded from the impact of food costs increasing over the past 6 months.  However, if and when these costs are passed along in addition to the backdrop of high gas prices, it could greatly impair the “recovery” that is now consensus.


Today, Thailand joined the party and raised its benchmark raised interest rates for the fourth time in seven months and signaled it will boost borrowing costs further to contain inflation.  And this morning, officials from Mozambique to China are signaling their belief that rates in their respective countries will be raised in the near-term. 


On a more granular note, one company that will begin to feel the pain of higher food inflation in 2011 is McDonald’s and I don’t believe the bullish consensus has fully accounted for this.  Last year McDonald’s saw its basket of commodities decline by 5-6% and, accordingly, restaurant level margin rose by over 200bps from lower food costs alone.  I have other concerns which are more structural in nature and those will be addressed, in detail, on a conference call with clients on Friday. For qualified prospective institutional subscribers, please email for more details.     


Also on Friday, the Hedgeye Macro team will be discussing its three themes for the first quarter of 2011 and they are:


(1)    American Sacrifice - We are bullish on the USD and we will focus on how the Q1 macro calendar of events (Ron Paul auditing Bernanke, midterm election spending cut promises, the debt ceiling debate and debt/deficit commission decisions) are supportive of a strong USD as the country begins to address its long-term fiscal problems.

(2)    Trashing Treasuries – We are bearish on US Treasuries.  The breakout in global inflation, sovereign, State, and municipal risk and rising global interest rates are a problem for treasuries.

(3)    Housing Headwinds Phase II – We remain bearish on housing and continue to believe that a decline in home prices will be a governor on consumer consumption in 2011.  We will update our view on how much further home prices have to fall over the next 12-months according to the supply and demand issues facing the industry.


It’s now just under two hours before the market opens and equity futures are trading higher in a continuation of yesterday’s modest gains with the early focus centered on Portugal's bond auction which went better than expected.  Also overnight, bullish sentiment increased to 57.3% from 54.5% in the latest Investor's Intelligence poll, while the ABC consumer comfort index improved to -40 from -45; it is now at its highest level since 2008. 


While all of this is good news for equity markets, it’s an ominous sign that all of the early dogs of the S&P 500 so far this year (YTD price changes below) are predominately consumer names that have been impacted by either weaker-than-expected consumer spending or inflation pressuring margins or a combination of both.  I expect this list to grow as debt mounts, sovereign debt concerns accumulate, and inflation is passed through to the consumer.



MACY'S: -8.14%

TARGET: -8.22%

GAP: -8.22%



GAMESTOP: -11.76%





I’m not the only one using a “stormy” metaphor today as the snowstorm continues outside and CNBC started Squawk Box today with the Doors classic song “Riders on the Storm.” 


“Into this house we're born
Into this world we're thrown
Like a dog without a bone
An actor out alone
Riders on the storm”


Function in disaster; finish in style

Howard Penney    


STORMY SAILING - EL chart of day 1.12.11


Well, not quite Wynn Encore but MPEL should put up its second straight estimate beating quarter.



The stock has been on a tear and justifiably so.  Macau is booming and MPEL has held its own in terms of market share.  The Galaxy Cotai is a big overhang and MPEL is at risk.  However, Q1 estimates also look low.  For Q4, we are expecting MPEL to deliver another strong quarter, beating Street expectations.  We project revenues of $776MM and EBITDA of $143MM, 8% and 22% ahead of consensus, respectively.


We estimate that City of Dreams (CoD) will report net revenues of $504MM and EBITDA of $111MM, ahead of consensus by 18% and 14%, respectively.  Below are some of the details behind our estimates:

  • VIP net table win of $328MM
    • Assuming 15% direct play, we estimate that CoD’s Rolling Chip (RC) grew 58% YoY reaching $14.7BN.
    • Hold was above normal at 3.1% - much higher than last year’s low 2.4% hold
  • Mass table win of $127MM, up 70% YoY and 14% sequentially
  • Slot win of $36MM
  • Non-gaming revenues of $43MM and promotional expense of $29MM
    • Non-gaming expenses of $17MM
  • Variable expenses of $316MM, consisting of taxes, gaming premiums, junket commissions and doubtful accounts
  • Fixed expenses of $60MM compared to $55MM in 3Q2010 – we’re assuming some ramp for the Dragone show

For Altira, we estimate net revenue of $243MM and EBITDA of $40MM,--20% and 30% above consensus, respectively.

  • VIP net table win of $324MM
    • We estimate that Altira’s RC volume grew 31% YoY reaching $11.65BN - the best quarter since pre-CoD opening
    • Hold was normal at 2.8% but much higher than last year’s low 2.3% hold
  • Mass table win of $23MM, more than double last year’s number.  We understand that Altira has introduced an SJM-like model on its floor for Mass – offering large rebates to players.
  • Variable expenses of $180MM, consisting of taxes, gaming premiums, junket commissions and doubtful accounts
  • Fixed expenses of $21MM

Other Stuff:

  • Mocha slots: $29MM revenues and $8MM Of EBITDA
  • Depreciation: $63MM
  • Amortization: $19MM
  • Interest expense: $28MM

Extrapolating Asia… The Warning Signs Continue to Mount

Conclusion: Recent trends and data points out of Asia lend support to our generally negative outlook for equities globally.


As a quick refresher, we are generally bearish on equities as an asset class over the intermediate-term TREND for these three reasons: 

  1. Growth is slowing globally;
  2. Inflation is accelerating globally; and
  3. Interconnected Risk is compounding (Sovereign Debt Dichotomy, Housing Headwinds, and US State & Local Government Budget Headwinds). 

The bulk of the latest data out of Asia supports this three-pronged investment thesis. Below we’ll go through each prong individually in an attempt to extrapolate data points in the context of key themes and trends.


Slowing Growth: 

  • Chinese Export and Import growth slowed sequentially in December to +17.9% YoY and +25.6% YoY, respectively. While high-teens and mid-twenties growth rates is nothing to scoff it, they do represent meaningful slowdowns on the margin, falling (-1700bps) and (-1210bps), respectively.
  • Chinese New Loan growth came in at +480.7B yuan in December; while a sequential slowdown, the December number confirms that Chinese loan growth exceeded the government’s full-year target of $7.5T yuan in 2010 by 426.9B yuan. The key takeaway as it relates to slowing growth is that Chinese monetary authorities will be more inclined to step up efforts to limit broad loan growth and monetary expansion going forward. We’re starting to see this implemented via Chinese regulators imposing bank-specific lending quotas w/ potential reserve requirement hikes for non-compliant institutions.
  • Alcoa Inc. said yesterday that Chinese aluminum demand growth will fall (-600bps) to +15% YoY in 2011. This is a meaningful company-specific data point in that aluminum is widely used in property development and automobile manufacturing – two sectors that have helped buoy the Chinese economy since the end of the global recession. 

Extrapolating Asia… The Warning Signs Continue to Mount - 1


Accelerating Inflation: 

  • A proxy for Asian COGS, South Korean PPI accelerated in December to +5.3% YoY vs. +4.9% YoY in November.
  • Indian Prime Minister Manmohan Singh convened a meeting with his cabinet today to brainstorm ways to corral accelerating food inflation that’s severely impacting roughly 66% of his citizenry (828 million Indians live on less than $2 per day). In the past 15 years, Indians have voted out two national governments primarily as a result of uncontained inflation. India holds elections in nine states over the next 18 months and the latest polls have Singh’s coalition losing 42 seats the upcoming general elections. This essentially translates to rising political pressure on the central bank to raise interest rates and rein in its liquidity expansion policies – the both of which would be headwinds to Indian growth over the intermediate term.
  • The floods in Australia continue to worsen, adding supply-side inflationary pressure to the prices of coal, cotton and sugar globally. 

Extrapolating Asia… The Warning Signs Continue to Mount - 2


Compounding Interconnected Risk: 

  • Yesterday, China came out in support of distressed Euro-area economies and debt issuers. Vice Premier Li Keqiang pledged accelerated purchases of Spanish debt to go alongside the blanket statement of support. This morning, Japan came out with a similar message, pledging to purchase upwards of 20-25% of the European Financial Stability Facility’s (EFSF) debt issuance that is to be auctioned this month. China and Japan’s affirmations of support are in line with the broader trend we are seeing across Asia of late; the region’s buyers accounted for 21.5% of the 5Y debt issued by the EFSF on January 5th, up from the ~4% average since December 2008. In spite of the positive market reaction, we caution that you avoid the media hoopla and realize this for what it is – rising bond yields are enticing marginal buyers. Everything has a price. As we have seen many of times before with “positive developments”, the PIIGS’s collective risk premium has not gone away. We recommend shorting any strength in the euro and in Spanish and Italian equity markets on this news. 

Extrapolating Asia… The Warning Signs Continue to Mount - neu


All told, we’re seeing no signs of abatement from Asia regarding our three-pronged global macro outlook. At a point, the overwhelming complacency and suspension of disbelief that has driven US equity markets to cyclical highs will be replaced by actual fundamentals – the bulk of which we believe are deteriorating sequentially.


Darius Dale


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