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EARLY LOOK: Loving The Process

 

“Perhaps love is the process of my leading you gently back to yourself.”

-Antoine de Saint-Exupery

 

 

 

I do what I do every day because I love what I do. I love the morning’s silence. I love the research grind. And I love keeping score.

 

My vision for this firm isn’t to impose what I love upon you. My mission is to democratize the research process so that a real-time risk management conversation can be had. If we help you re-think any aspect of your risk management process, we’ve all won.

 

If a piece of research data or a point in principle leads you back to yourself, you’ve won. We can’t decide your risk tolerance. We can’t decide your investment duration either. What we can do is accept that markets are grounded in uncertainty and they do not discriminate in favor of anyone.

 

For me, Loving The Process means living it out loud. That’s why I’m trying my best to give you 100% transparency and accountability in every move we make each and every day. Sometimes this can be confusing – there’s a lot going on in Global Macro, so I get that. But complexity is no excuse for not delivering on the simplicity that is how I am positioned every day. So, going forward, we’re going to include the Hedgeye Portfolio at the bottom of every Early Look.

 

The Hedgeye Portfolio is not our Hedgeye Asset Allocation Model. These are two separate products that share many interconnected investment thoughts. The Hedgeye Portfolio is our best book of long and short ideas. They aren’t paired off. They aren’t weighted. They all have their own individual top down and bottom up thesis. They are intended to drive alpha on their own individual merits.

 

This is not to say that they are all driving alpha every minute of each and every day. This is not to say that we get everything right either. This is simply to say that I am going to be accountable to anything that comes out of these arthritic hockey knuckles, real-time. In the end, I think other firms will be forced by the marketplace to do the same. Opacity is dying on the vine of every industry – and there is no way to bail it out.

 

Enough about the process and its principles, let’s get at it and address how I am positioned (or thinking about being positioned) in the Hedgeye Portfolio after going through this morning’s grind:

 

 

1.  Asia – We continue to see Asian Growth Slowing as Global Inflation Accelerates.

 

The Chinese and Indian governments are going to perpetuate this investment theme as they do not get paid to be willfully blind to the effects of inflation on their common people over the long term. China is raising interest rates this morning by another +25 basis points, taking its benchmark rate 300 basis points over Fed Funds, in order to address what Bernanke refuses to.

 

In the short-run, this is the pain that Asian central bankers are willing to impose on their stock markets. Over the long-run, seeing inflation destroy their sovereign bond markets, corporate margins, and their citizenry’s buying power is a really bad idea.

 

India’s stock market closed down another -1.6% overnight, taking the BSE Sensex Index down -13.4% for 2011 YTD. Bangladesh crashed yesterday, losing -10.3% of its stock market value in one day. Next to China and India at #1 and #2, Bangladesh has the world’s 8th largest population by the way. We remain short Thailand, which continues to see civil unrest on the border with Cambodia. These populations are hungry.

 

 

2.  Europe – We’re not leaning bullish or bearish on Europe right now, but British Stagflation is starting to rear its ugly head.

 

We’ve been bullish on Germany for the last 18 months but recently sold out of that long position (EWG) as we see any price north of 7,300 on the German DAX as immediate-term TRADE overbought. Like it did in 2010, the DAX continues to outperform the SP500 and we think that Germany’s fiscal policy is amongst the most stable in all of the Western world.

 

We like countries with strong currencies that stand behind sober fiscal and monetary policy and Sweden fits that bill. When we say strong currencies, we don’t mean countries that say they want one – we mean countries that have one. Sweden doesn’t have Ben Bernanke. Sweden has the oldest central bank in the world and the Swedish Kroner is  hitting a 10-year high this morning against the Euro. We’re long Sweden (EWD).

 

Despite the mean reversion rally in everything Pig Paper for 2011 YTD, we’re not preparing to buy Spanish or Greek stocks and bonds. We’re short Italy (EWI) and, as you can see in the Hedgeye Portfolio, that position is -3.82% against us. The next time someone tells you that inflating a stock market to a lower-long-term-high is bullish for a country’s long-term economic health, remind them Greece is the world’s best performer YTD.

 

 

3.  USA and Latin America – We threw in the short-term towel covering our SP500 short position at 1276 on January 28th. Thank God for that.

 

That doesn’t mean I’m not bearish on US Equities on my long-term TAIL duration. That certainly doesn’t mean I won’t be re-shorting the SP500 again on its way up to my intermediate-term target of 1340. I’m actually as long as I have been US Equities since November and I’m downright scared about it. In the Hedgeye Portfolio, we continue to short the US Consumer stocks, trading around the positions profitably.

 

Whenever someone asks me about whether I am bearish or bullish on the US, I immediately have to answer them with a question – currency, stocks, or bonds? It’s a simple question, but it’s still a huge investment point when you think about generating uncorrelated returns. We remain bearish on US bonds and the US Dollar. These are major problems for the other HALF of Americans that don’t own The Ber-nank’s stock market inflation.

 

Latin America looks a lot like Asia – willing to accept that a debauchery of the world’s reserve currency is affecting global inflation and their citizenry. Two of the most important economies in Latin America, Brazil and Chile, are seeing their stock markets down -5.7% and -6.4% for 2011 respectively. We aren’t long of anything south of a Starbucks (SBUX) on the Mexican border.

 

Keep doing what you do out there, and I’ll keep doing what I do, re-thinking and re-learning how to manage Global Macro risk so that I can keep Loving The Process of being humbled by Mr. Macro Market.

 

My immediate term support and resistance levels for the SP500 are now 1300 and 1325, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

EARLY LOOK: Loving The Process - VP



Loving The Process

“Perhaps love is the process of my leading you gently back to yourself.”

-Antoine de Saint-Exupery

 

I do what I do every day because I love what I do. I love the morning’s silence. I love the research grind. And I love keeping score.

 

My vision for this firm isn’t to impose what I love upon you. My mission is to democratize the research process so that a real-time risk management conversation can be had. If we help you re-think any aspect of your risk management process, we’ve all won.

 

If a piece of research data or a point in principle leads you back to yourself, you’ve won. We can’t decide your risk tolerance. We can’t decide your investment duration either. What we can do is accept that markets are grounded in uncertainty and they do not discriminate in favor of anyone.

 

For me, Loving The Process means living it out loud. That’s why I’m trying my best to give you 100% transparency and accountability in every move we make each and every day. Sometimes this can be confusing – there’s a lot going on in Global Macro, so I get that. But complexity is no excuse for not delivering on the simplicity that is how I am positioned every day. So, going forward, we’re going to include the Hedgeye Portfolio at the bottom of every Early Look.

 

The Hedgeye Portfolio is not our Hedgeye Asset Allocation Model. These are two separate products that share many interconnected investment thoughts. The Hedgeye Portfolio is our best book of long and short ideas. They aren’t paired off. They aren’t weighted. They all have their own individual top down and bottom up thesis. They are intended to drive alpha on their own individual merits.

 

This is not to say that they are all driving alpha every minute of each and every day. This is not to say that we get everything right either. This is simply to say that I am going to be accountable to anything that comes out of these arthritic hockey knuckles, real-time. In the end, I think other firms will be forced by the marketplace to do the same. Opacity is dying on the vine of every industry – and there is no way to bail it out.

 

Enough about the process and its principles, let’s get at it and address how I am positioned (or thinking about being positioned) in the Hedgeye Portfolio after going through this morning’s grind:

 

 

1.  Asia – We continue to see Asian Growth Slowing as Global Inflation Accelerates.

 

The Chinese and Indian governments are going to perpetuate this investment theme as they do not get paid to be willfully blind to the effects of inflation on their common people over the long term. China is raising interest rates this morning by another +25 basis points, taking its benchmark rate 300 basis points over Fed Funds, in order to address what Bernanke refuses to.

 

In the short-run, this is the pain that Asian central bankers are willing to impose on their stock markets. Over the long-run, seeing inflation destroy their sovereign bond markets, corporate margins, and their citizenry’s buying power is a really bad idea.

 

India’s stock market closed down another -1.6% overnight, taking the BSE Sensex Index down -13.4% for 2011 YTD. Bangladesh crashed yesterday, losing -10.3% of its stock market value in one day. Next to China and India at #1 and #2, Bangladesh has the world’s 8th largest population by the way. We remain short Thailand, which continues to see civil unrest on the border with Cambodia. These populations are hungry.

 

 

2.  Europe – We’re not leaning bullish or bearish on Europe right now, but British Stagflation is starting to rear its ugly head.

 

We’ve been bullish on Germany for the last 18 months but recently sold out of that long position (EWG) as we see any price north of 7,300 on the German DAX as immediate-term TRADE overbought. Like it did in 2010, the DAX continues to outperform the SP500 and we think that Germany’s fiscal policy is amongst the most stable in all of the Western world.

 

We like countries with strong currencies that stand behind sober fiscal and monetary policy and Sweden fits that bill. When we say strong currencies, we don’t mean countries that say they want one – we mean countries that have one. Sweden doesn’t have Ben Bernanke. Sweden has the oldest central bank in the world and the Swedish Kroner is  hitting a 10-year high this morning against the Euro. We’re long Sweden (EWD).

 

Despite the mean reversion rally in everything Pig Paper for 2011 YTD, we’re not preparing to buy Spanish or Greek stocks and bonds. We’re short Italy (EWI) and, as you can see in the Hedgeye Portfolio, that position is -3.82% against us. The next time someone tells you that inflating a stock market to a lower-long-term-high is bullish for a country’s long-term economic health, remind them Greece is the world’s best performer YTD.

 

 

3.  USA and Latin America – We threw in the short-term towel covering our SP500 short position at 1276 on January 28th. Thank God for that.

 

That doesn’t mean I’m not bearish on US Equities on my long-term TAIL duration. That certainly doesn’t mean I won’t be re-shorting the SP500 again on its way up to my intermediate-term target of 1340. I’m actually as long as I have been US Equities since November and I’m downright scared about it. In the Hedgeye Portfolio, we continue to short the US Consumer stocks, trading around the positions profitably.

 

Whenever someone asks me about whether I am bearish or bullish on the US, I immediately have to answer them with a question – currency, stocks, or bonds? It’s a simple question, but it’s still a huge investment point when you think about generating uncorrelated returns. We remain bearish on US bonds and the US Dollar. These are major problems for the other HALF of Americans that don’t own The Ber-nank’s stock market inflation.

 

Latin America looks a lot like Asia – willing to accept that a debauchery of the world’s reserve currency is affecting global inflation and their citizenry. Two of the most important economies in Latin America, Brazil and Chile, are seeing their stock markets down -5.7% and -6.4% for 2011 respectively. We aren’t long of anything south of a Starbucks (SBUX) on the Mexican border.

 

Keep doing what you do out there, and I’ll keep doing what I do, re-thinking and re-learning how to manage Global Macro risk so that I can keep Loving The Process of being humbled by Mr. Macro Market.

 

My immediate term support and resistance levels for the SP500 are now 1300 and 1325, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Loving The Process - VP


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ASCA YOUTUBE

In preparation for the ASCA Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from ASCA’s Q3 earnings release/call.

 

 

YOUTUBE

  • [East Chicago] “We’ll lap the bridge closure this month; it was about November 14 last year that the bridge was shutdown. We’re continuing our attempts to strengthen the property by proceeding with the renovation of the hotel rooms and working with the state and the city in planning various road improvements that should enhance access to our property to some extent.”
  • “We think the second quarter was an outlier and the third quarter of 2010 pretty well reflects what East Chicago can generate, now that the competitive environment has normalized.”
  • “At this point, 42% of the debt is fixed and 58% is now floating net of variable rate.”
  • “Our Q4 2010 estimate for non-cash stock based compensation expense is $3.2 million to $3.7 million. For the year, we are anticipating 13.8 million or 14.3 million. Our blended federal and state tax rate is projected to be between 46.5% and 47.5% for the fourth quarter and between 43.5% and 44.5% for the year.”
  • “Capital spending for the remainder of 2010 is expected to wrap up slightly and be in the range of 26 million to 31 million, which is about double what we have been spending for the first three quarters of 2010. This will all be in the maintenance cap area. Net interest expense in Q4 is expected to be approximately $26.5 million.”
  • “Non-cash interest expense is expected to be between 2.6 million and 3 million for Q4. Assuming LIBOR remains steady, which we believe it will, interest expense should decrease year-over-year in Q4 by about $7.5 MM due to the swap agreements expiring in July. And on the dividend front, assuming Board approval, we currently expect a fourth quarter dividend payment.”
  • “So we’re spending a little bit of money to renovate the hotel rooms in East Chicago to maintain the competitiveness of that property, and we’ll be adding on 106 rooms at our Kansas City property to enhance its competitiveness, particularly with the new competitor opening in Wyandotte County, Kansas.”
  • “Part of the goal from the debt reduction perspective is to position our credit situation for refinancing in another year or so. Once we get to the end of ‘11, the beginning of ‘12 we’re going to have to restructure the revolver, and we want to have debt levels such that we’ll be able to restructure the debt at attractive rates.”
  • “CapEx is roughly going to be in the same range next year as it will be for this year--give or take $5 million. We have indicated that we would probably start the additional rooms in Kansas City this year, obviously it won’t be finished in 2011. So, you won’t see a return on that in ‘11. We expect to get  areturn on what we spend in the slot area. So, there is something there, but most of the money that we will be spending next year, will start with the hotel in Kansas City and then room rehab in East Chicago.”
  • “I think one of the areas that has been hampered more than any other in the economic downturn has been some of the transient play. So I’d like to see some of that come back. That’s a pretty profitable line of business for us.”

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - February 8, 2011


Equity futures are trading above fair value as investors continue to see upside potential for equities buoyed by the FED.  US equities finished higher Monday on a very quiet day.  Without any large negative geopolitical or economic headlines market participants focused on company specific M&A and earnings for direction.  As we look at today’s set up for the S&P 500, the range is 25 points or -1.44% downside to 1300 and +0.45% upside to 1325.

 

 MACRO DATA POINTS:

  • 7:30 a.m.: NFIB Small Business Optimism, Jan, est. 94
  • 7:45 a.m.: ICSC Weekly Sales, Feb., est. 50.3
  • 8:45 a.m.: Fed’s Lacker speaks on economy in Newark, Delaware
  • 8:55 a.m.: Redbook Weekly Sales
  • 10 a.m.: JOLTs job openings, Dec., prev. 3,248
  • 11:30 a.m.: U.S. to sell $22b in 52-wk bills, $35b in 4-wk bills
  • Noon: DoE short-term energy outlook
  • 1 p.m.: Fed’s Lockhart to speak in Alabama
  • 1 p.m.: U.S. to sell $32b in 3-yr notes
  • 1:30 p.m.: Fed’s Fisher to speak in Dallas
  • 4:30 p.m.: API inventories
  • 5 p.m.: ABC Consumer Confidence, Feb. 6, est. -40

EARNINGS/WHAT TO WATCH:

  • Confidence among U.S. small companies rose in January to the highest level in three years, as the outlook for sales and profits improved, a private survey found. The National Federation of Independent Business optimism index increased to 94.1, the highest since the recession began in December 2007, the Washington-based group said today. The reading was lower than the average 100.7 during the last expansion that started in November 2001.
  • Microsoft CEO Steve Ballmer plans to extend a management reshuffling aimed at adding senior product executives with an engineering background, two people with knowledge of the decision told Bloomberg. Changes may be announced this month. 
  • Big Lots is exploring strategic options, including a possible sale, and is working with Goldman Sachs, a person with knowledge of the situation told Bloomberg
  • President Obama is considering seeking aid for state unemployment insurance programs burdened by debt because of high unemployment rates, according to a person familiar with the discussions. Obama will seek delay of state tax increases, suspension of interest payments on state debt, person said on condition of anonymity before 2012 budget is released Feb. 14.
  • Advent Software (ADVS) sees 1Q rev. $74m-$76m vs est. $74.4m
  • Becton, Dickinson (BDX) 1Q rev. misses est.
  • Exide Technologies (XIDE) Sees 4Q adj. Ebitda up Y/y
  • Gartner (IT US)4Q adj. EPS, rev. beat ests.
  • Healthcare Services (HCSG) 4Q EPS missed est. by 1c after record close
  • LPL Investment Holdings (LPLA) 4Q adj. EPS, rev. beat ests.
  • NYSE Euronext (NYX) 4Q EPS beat est., oper. rev. Fell Y/y
  • Principal Financial (PFG) 4Q oper. EPS missed est. 
  • Veeco Instruments (VECO) 1Q adj. EPS, rev. outlook below est.

PERFORMANCE:


The more defensive sectors – Consumer and healthcare – underperformed, while sectors more leveraged to the recovery – financials and industrials – lead the way higher. Perfect = 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.57%, S&P +0.62%, Nasdaq +0.53%, Russell +1.03%
  • Month-to-date: Month-to-date: Dow +2.27%, S&P +2.56%, Nasdaq +3.11%, Russell +3.46%
  • Quarter/Year-to-date: Dow +5.05%, S&P +4.88%, Nasdaq +4.94%, Russell +3.15%
  • Sector Performance - (8 sectors down and 1 up): - Financials +1.46%, Industrials +0.94%, Utilities +0.64%, Energy +0.58%, Tech +0.50%, Consumer Discretionary +0.53%, Materials +0.54%, Consumer Staples +0.14%, Healthcare (0.15%)

  EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1173 (+1180)  
  • VOLUME: NYSE 879.63 (-4.43%)
  • VIX:  16.28 +2.20% YTD PERFORMANCE: -8.28%
  • SPX PUT/CALL RATIO: 1.85 from 1.85 (-0.21%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries: were weaker except for the long bond, which saw its yield decrease by ~2bps

  • TED SPREAD: 17.30 +0.304 (1.788%)
  • 3-MONTH T-BILL YIELD: 0.16%
  • YIELD CURVE: 2.90 from 2.91

COMMODITY/GROWTH EXPECTATION:

  • CRB: 337.46 -0.43%  
  • Oil: 87.48 -1.74% - trading -0.82% in the AM
  • COPPER: 457.50 -0.10% - trading -0.61% in the AM  
  • GOLD: 1,349.15 +0.11% - trading +0.31% in the AM  

COMMODITY HEADLINES:

  • Oil fell to the lowest level in a week as talks between the government and opposition politicians helped ease tensions in Egypt, reducing concern that supplies will be disrupted. 
  • Natural gas dropped 4.8%, the biggest decline in three months, as forecasts showed milder weather next week, reducing demand for the heating fuel. 
  • After the worst January for precious metals in two decades, investors still have a $102 billion bet on higher prices, hoarding more gold than all but four central banks and more silver than the U.S. can mine in almost 12 years.
  • Copper backed away from a fresh record high on Monday, its sixth in as many sessions, as prices fell under the weight of a firmer U.S. dollar and began to show some signs of fatigue from the latest bull-run
  • Corn closed lower after a choppy session, rising to a new long-term high in early moves on talk that China would boost imports this year, pressuring dwindling U.S. grain stocks. 
  • Wheat prices rose to fresh highs as news that top buyer Egypt had entered the market after nearly a month-long absence boosted dealers' confidence after weeks of unrest. 
  • Barley output in Germany, Scandinavia and Eastern Europe has been hit due to heavy rainfall, while Russian growers experienced a heatwave. A study from Grocer magazine recently predicted that brewers will be forced to raise the average cost of a pint by 30 pence, due to the rising cost of commodities.

CURRENCIES:

  • EURO: 1.35.44 -0.27% - trading +0.65% in the AM
  • DOLLAR: 77.720 -0.02% - trading -0.40% in the AM 

EUROPEAN MARKETS:

  • FTSE 100: (0.11%); DAX: +0.31%; CAC 40: +0.16%; IBEX: +0.28% (as of 06:15 EST)
  • European markets trade mixed having fluctuated either side of unchanged for much of the session.
  • The euro-region rescue fund should be empowered to bail out banks and buy bonds on the market even though it’s “highly unlikely” that the debt crisis will spread to either Spain or Italy, according to Bank of Italy Director General Fabrizio Saccomanni.
  • With minimal regional economic news, earnings dominated the market, with BMW Group January unit sales and Toyota raising guidance aiding autos +2.3% and basic resources +2.0% buoyed by Xstrata and ArcelorMittal. Travel & leisure up +0.7% was the third best performing sector.
  • Germany Dec Industrial Output (1.5%) m/m vs consensus +0.3% and prior revised (0.6%).  Economy ministry says decline is due to cold weather.  Economy ministry says outlook is still positive. Manufacturing output -0.1%; Basic goods output -3.1%; Investment goods output +3.3%; Consumer goods output -1.3%; Energy output +0.3%; Construction output -24.1%
  • Egypt’s Central Bank Intervenes to Support Currency.  Egypt’s credit risk falling to lowest level since anti-govt. protests began two weeks ago, international borrowing costs dropping as the nation’s biggest political crisis in three decades eases.
  • Danish banks may face wave of consolidation after country’s latest lender insolvency left some bondholders in the lurch, straining efforts to raise funds just over four months after state withdrew its guarantee.
  • Irish Finance Minister Brian Lenihan said govt. pressing for “substantial discount” on EU20b ($27.2b) of unsecured senior bank bonds, push resisted by ECB, in debate on RTE television last night.
  • ECB President Jean-Claude Trichet said yesterday that Ireland needs to press ahead with fiscal austerity measures, imposing “haircuts” on investors isn’t part of the plan

ASIAN MARKTES:

  • Nikkei +0.41%; Hang Seng (0.29%); Shanghai Composite (closed)
  • Asian stocks fluctuate as gains by financial companies on earnings are tempered by losses among Taiwanese technology.
  • Australia up 0.45% - positive results from National Australia Bank, which rose 2% on the day.  On the flip side Macquarie Group edged down after forecasting earnings will decline in H2.
  • Hong Kong slipped -0.29% - property developers fell on a report that the government will make more residential land available next FY.
  • Taiwan fell -0.37%, but HTC rose 1% on announcing $87M of acquisitions.
  • South Korea fell -0.58% on worries about policy tightening in the region.
  • China will reopen tomorrow after its Lunar New Year break.
  • China raised key interest rates for the third time since mid-October after growth accelerated and inflation stayed above 4%.  The benchmark one-year lending rate will increase to 6.06% from 5.81% effective tomorrow
  • Japan December current account surplus +30.5% y/y to jpy1.195T vs cons jpy1.159T. January M3 +1.8% y/y..

Howard Penney

Managing Director

 

THE HEDGEYE DAILY OUTLOOK - setup


MCD: JANUARY SALES PREVIEW

MCD is scheduled to report its January sales results before the market open tomorrow, the 8th of January.  Compared to January 2010, January 2011 had one less Friday and one additional Monday. 

 

Below I go through my view on what sales results the Street will receive as “GOOD”, “BAD”, and “NEUTRAL” for each region.  To recall, December’s results constituted a significant sequential slowdown from October in the U.S.  As I detailed in my recent Black Book on MCD and the company’s prospects for 2011, specifically in the U.S., I believe that this year will see a significant slowdown in sales.  While this may not spell disaster for January (there is plenty of time in 2011 for my scenario to play out), I am below the street’s estimates. 

 

Before digging into the ranges for MCD comps, I think it important to address the key macro factors that are likely to impact results.  Firstly, gas prices on a national basis were up 13.7% year-over-year in January, and up 3.3% versus December 2010.  Secondly, given the importance of McDonald’s drive thru to their sales, the stormy weather that caused so much disruption may turn out to have been a factor.  It is important to note, however, that Eric Levine, Hedgeye Director of Retail, wrote last week in his roundup of January’s retail same-store sales results that “the weather was barely mentioned as an excuse.  Only a handful of retailers including Costco, BJ’s, JCP, and HOTT cited the impact of stormy weather on the month and actually quantified it.”  There is historical precedent, however, within the restaurant space for snow storms having negatively impacted restaurant sales.  The snow storms of December 1998 and January 1999 had negatively impacted the results of many QSR operators in the Midwest.

 

Below I go through my take on what numbers will be received by the street as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts.  On a calendar-adjusted basis, consensus estimates are calling for two-year average trends trending roughly level with December in the U.S., down in Europe, and up in APMEA.

 

 

U.S.- Facing an easy -0.7% compare (including a calendar shift which impacted results by -0.4% to +1.0%, varying by area of the world):

 

GOOD: A print of roughly 4.5% or higher would be perceived as a good result, implying that the company has improved two-year average trends from December.  Consensus is at 4.4% for MCD U.S. comps in January.  I believe that merely meeting these expectations would be well-received by investors.   I believe a print somewhere in the NEUTRAL range detailed below is most likely, but I expect a greater proportion of the slowing that I have projected for the U.S. in 2011 to take place after compares step up in difficulty from March onward.  At that stage, I expect a starker divergence to emerge between my projections and those of the sell-side.

 

NEUTRAL: Roughly 3.5% to 4.5% implies a two-year trend approximately level with the calendar-adjusted two-year average trend in December.   A print in this range may convince some investors that MCD’s top line trends are robust versus the 2.6% print in December.  I would caution, however, that the compare is significantly easier in January than it was in December. 

 

BAD: Below 3.5% would imply two-year average trends that had slowed from the calendar-adjusted two-year average trends in December which had, in turn, sharply declined from November’s results.   A result this far south of expectations, obviously, would be negatively received by investors.

 

MCD: JANUARY SALES PREVIEW - mcd us preview

 

 

Europe - facing a +4.3% compare, (including a calendar shift which impacted results by -0.4% to +1.0%, varying by area of the world):

 

GOOD: A print of approximately 3% or higher would imply two-year average trends significantly higher than those seen in December.  While two-year average trends would remain significantly below the 2010 average in the event of a +3% print, at the very least this would imply a significant bounce back from December’s disappointing result.  Consensus is for a Europe comp of +3.7%.

 

NEUTRAL: Between roughly 2% and 3% implies a sequential increase from calendar-adjusted two-year average trends in December but would be significantly below Street expectations.   Additionally, two-year average trends would be markedly lower than those seen in for the majority of 2010.

 

BAD: Below 2% would imply trends, at best, slightly higher than those seen in December and, of course, a one-year number far, far below Street expectations.

 

 

APMEA – facing a 4.3% compare (including a calendar shift which impacted results by -0.4% to +1.0%, varying by area of the world):

 

GOOD:  A result of roughly 4.5% or higher would imply two-year average trends roughly in line with or better than results seen in December.  Additionally, such a result would likely reassure investors that the bounce back in December from November’s result was not a head fake. 

 

NEUTRAL: Between roughly 3.5% and 4.5% would imply two-year average trends roughly in line with, or slightly below, the strong results in December. 

 

BAD: Below 3.5% would imply a significant slowdown from December’s result.

 

 

Howard Penney

Managing Director


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