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On January 4th, I wrote a note titled “SBUX FUTURE - BRIGHT BUT NO GREEN MOUNTAIN” and in that note I said the following: 


“The best analogy I can use to describe what will happen in the single serve market is that Starbucks will do to the single serve coffee maker what Apple did to the portable market for mp3 players.  By the end of FY2011, I believe we will be hearing that Starbucks is testing a Starbucks branded single serve coffee with new technology that is far superior that what is currently available.  The machine will likely be manufactured by a third party and sold in Starbucks stores, supermarkets and club stores.  For example, the company is working closely with Nuova Simonelli on a number of different types of machines.


I see Starbucks as posing a threat to Keurig’s 71% market share, not a benefit.  There is no doubt that growth of the single serve segment has cut into Starbucks’ grocery sales, but buying Green Mountain or aligning themselves to the Keurig brewer is not going to happen.  Starbucks has already made the mistake once of leaving control of the brand in the hands of Kraft, there are not going to make that same mistake with Keurig or Green Mountain.”


According to the Chicago Tribune, Starbucks "is planning a big splash" into the single-serve market, with the company confirming to the newspaper that it is working on a new product for single-serve coffee machines.  A Starbucks spokeswoman said the company will either make its own machines or partner with a coffee machine maker, and will sell the machines in its cafes.


SBUX’s battle with Kraft to gain control of the distribution of its packaged goods is an important milestone for the company as it can gain control of a very important sales channel, which will provide new avenues for growth.  The single serve segment is a critical element of that strategy.


Importantly, Starbucks is not getting out of the Kraft agreement so it can sell Starbucks coffee in a in the Keurig machine.   Gaining control over distribution is, as I described above, part of an overall strategy of gaining control of the brand at every stage of production and distribution. 


With the pieces of the puzzle starting to come together, I believe that the last element will be SBUX acquiring PEET.  SBUX’s move to own its supply chain validates the PEET business model.  In addition, when SBUX gains control of its distribution business one way to show continued growth will be to introduce more brands and PEET’s is certainly a great brand.  Importantly, there is a rich history between these two companies going back to the early 70's when Starbucks was founded.


My “coffee” strategy remains to be long SBUX and PEET and short GMCR.




Howard Penney

Managing Director


In preparation for MGM’s Q4 earnings release on Monday, we’ve put together the pertinent forward looking commentary from MGM’s Q3 earnings call.



  • "You’ll see a very significant increase in convention business and mix in the first quarter of 2011."
  • “For the fourth quarter, we expect our stock compensation expense to be approximately 9 to 10 million in the quarter. Our depreciation expense in the quarter, fourth quarter is estimated to be in the range of 155 to 160 million. Our gross interest expense in the third quarter was 285 million, of which 261 million was cash interest. And we had no capitalized interest in the third quarter. Our estimated gross interest expense for the fourth quarter is estimated to be in a range of 270 to 280 million, and we don’t anticipate any capitalized interest in the fourth quarter.”
  • “On the CapEx front, we’re projected to spend just inside of about 200 million in 2010”
  • “We’re spending on various maintenance and capital projects throughout the company, including the purchase of new slot machines, some suite and villa remodels at the Mirage, and in the early stages, some room remodel programs that will get fully underway next year.”
  • “For 2011, Aria has more than 136,000 convention room nights on the books, which is 74% of our estimated total convention room nights for all of 2011. In the first quarter alone, ARIA has 50,000 room nights booked for 2011, compared to 30,000 room nights in the first quarter of this year.”
  • “We recently remodeled our rooms at Mirage and Mandalay, and now we plan on refreshing the rooms here at Bellagio, and at MGM Grand starting next year.”
  • [M Life] “We’re going to roll this out in all of our Las Vegas properties at the very beginning of this coming year, starting in January.”
  • "Bellagio and the Mandalay not only had RevPAR increases in the third quarter, they are up again in the fourth quarter and they’ve been joined by our other luxury properties so far in October. We saw a very strong overall RevPAR number for Bellagio."
  • “We’re seeing booking pace up still in the high-teens year-over-year. We see the entire Strip looking like it will benefit from higher convention activity. The LVCVA, for example, talked about a 10% increase in convention attendance next year versus this year. We’ll do better than that. MGM has picked up market share in that segment. We’re getting much better rate and overall our mix is going to be improved. And of course, as the mix improves we expect to see ancillary revenue increases in catering and F&B and all the way up in terms of covers and our revenue per cover; we see productivity improving.”
  • “In 1Q, on our wholly-owned properties, our room nights on the books right now are up over 30% versus last year, and our room rates are up, meaning our convention revenue is going to be up very significantly, probably over 40% in the first quarter.”
  • “October, led by Golden Week, was a record month for MGM Macau in terms of everything, in terms of revenue, in terms of EBITDA, and yes, in terms of margins. And that property is continuing to improve. We’re making, we believe, very smart business decisions there, which is increasing our cash flows and our profitability.”
  • [CityCenter] “You might have had a base of 15 maybe 20 million in EBITDA. That should improve in each quarter going forward.”
  • [Aria occupancy] “It was 88 in October, selling out on the weekends.”
  • [CC residential] “The closings of course are slowing down. We have our final 30 closings in the fourth quarter, and so the first group of closings, 438 units, that leaves us with about 600 units remaining, 200 of which are in the lease program, and we have a variety of things that are under consideration by the joint venture board as it relates to the other 400, but even in a very, very quiet residential market, particularly high-rise residential market in Las Vegas, we have in the last 12 months sold 23 units in spite of that.”
  • [CC occupancy] ”Mid-80s next year.

The Week Ahead

The Economic Data calendar for the week of the 14th of February through the 18th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - lacc1

The Week Ahead - lacc2

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The Starvation Trade Is Consuming Emerging Markets

Conclusion: While  we certainly don't intend to make light of a serious global issue (food inflation), we'll use today's media focus as a platform to cook up some emerging market “food for thought” for you to digest over the weekend.


It has taken riots in Egypt, Tunisia, India, Bolivia and other countries worldwide for consensus to notice the price action in many emerging markets equities and bonds since the announcement of Quantitative Guessing Part II. Since November 3rd, the MSCI Emerging Market Index, a collection of over 2,600 EM equities spanning 21 countries, has dropped (-3.8%) on the product of a very simple equation which we introduced back in early November:


QG2 = accelerating inflation globally = policy tightening globally = slower growth globally


Needless to say, we’ve been bearish on emerging market equities and bonds ever since.


Putting aside “smaller” countries like Egypt and Tunisia and focusing on the major “engines” of developing nation growth, emerging markets have largely fallen victim to the Starvation Trade since 11/3: 

  • Brazil’s Bovespa down (-8.6%)
  • China’s Shanghai Composite down (-6.7%)
  • India’s SENSEX down (-13.4%)
  • Hong Kong’s Heng Seng down (-5.4%)
  • Turkey’ ISE National 100 Index down (-5.6%)
  • Indonesia’s Jakarta Composite down (-5.9%)
  • Singapore’s FTSE Straits Times down (-4.6%) 

Meanwhile (since QG2’s official announcement): 

  • Corn up +19.3%
  • Oats up +11.8%
  • Rice up +7.2%
  • Wheat up +18.8%
  • Lean Hogs up +20.1%
  • CRB  Foodstuff Index up +18.9%
  • UN Food and Agriculture Organization World Food Price Index reached an all-time high in each of the following two months; closed out January up +28.4% YoY. 

For reference, the Starvation Trade is going long foodstuffs and agricultural commodities and shorting the large populations that need to tighten monetary policy in order to eat and maintain price stability in basic goods. As tactless as it may be to make light of something that’s actually not funny at all, we too have been guilty of gambling in The Ber-nank’s Casino. On January 14th, we offered up a few ideas in a collection of our best inflation plays in a note titled “Ten Ways to Play the Spike in Global Inflation” (email us if you need a copy): 

  • COMMODITIES: FOOD – As we last saw in summer of ’08, deadly riots are breaking out globally in protest of rising food prices, currently at all-time highs. Perpetuated by global supply shortages, we anticipate a meaningful increase in import demand for many food products throughout the course of the year as developing nations look to rebuild domestic stockpiles. Long Sugar; Long Corn.
  • COMMODITIES: OTHER – Severe weather is adversely affecting many key agricultural-producing regions globally (flooding in Australia, mudslides in Brazil, etc.). Getting ahead of growing supply/demand imbalances is key, as agencies like the USDA tend to be rather hopeful with their production estimates, leading to downward revisions to their forecasts in subsequent reporting. Long Cotton.
  • CURRENCIES – As monetary policy tightens globally, several countries will see their currencies move as a result of: a) slowing global growth; b) the direction of global interest rates and rate differentials; and c) key moves in their basket of counterparts. Long Chinese Yuan.
  • EQUITIES – As we have seen many times in financial market history, inflation can erode returns on equities by reducing company earnings via margin squeezes or by investors discounting slowdowns in growth as central banks tighten monetary policy. Despite this, there are ways to play this on the long and short side depending on the type of tightening measures implemented. Short Indian Equities. 

Now that consensus’ best idea is the “short EVERYTHING emerging markets and get long the Dow,” we’ll use their sentiment and combine it with price action to form more actionable investment ideas. The “flows” don’t produce alpha; last week’s $7B outflow from emerging market equity funds was the largest since January 2008 – NOT a bullish data point for global growth right; we don’t buy the “US decoupling from the rest of the world” argument.


Given, we’ve assembled a collection of seven emerging markets we’ve done some work on recently that we think you need to consider as it relates to your exposure to growth and inflation trends – both domestically and globally. We’ll keep these updates short; email us if you’d like to see copies of the relevant reports and/or if you have any follow up questions:


China – The news flow regarding China eerily quiet of late; it seems perma-bulls only mention the world’s second-largest economy when they need to engage in storytelling around accelerating global growth. With the S&P at the top of a +96.5 rally from the March ’09 lows, it appears the bulls no longer need what they dubbed: “the engine of the world’s growth”. Chinese growth is slowing. How much Chinese growth overshoots the bottom of consensus estimates over the next two quarters remains to be seen.


The Starvation Trade Is Consuming Emerging Markets - 1


India – India has been far and away our favorite short idea since early November. Nothing has changed but price (down -15.3% since we turned bearish on November 9th). Even to a value investor (which we are far from), India still looks iffy: SENSEX shares trade at 16.8x NTM P/E vs. 13.2x in China, 10.4x in Brazil, and 7.2x in Russia. Broken on all of our core durations (TRADE, TREND, and TAIL), we see more downside here.


The Starvation Trade Is Consuming Emerging Markets - 2


Korea – Korea has certainly gotten the benefit of the US growth story. An inflated Q4 US GDP number has certainly given this export economy a nice boost until today’s (-1.6%) decline – yes, the GDP deflator is being understated and downward revisions to NTM S&P 500 earnings will create a massive divergence between the US government’s reported growth numbers and corporate profits in the coming quarters. If the commentary provided on CSCO’s earning call is any indicator, it’s decidedly bearish for Korea (and Japan) in the coming quarters. That’s on top of slowing growth and accelerating inflation at home on the peninsula. The market didn’t like the Bank of Korea’s decision to keep rates on hold today (down -1.6%).


The Starvation Trade Is Consuming Emerging Markets - 3


Thailand – Thailand has been an interesting story in and of itself. While we recently covered our short position in the THD for a +5.28% realized return, we still remain bearish on the economy that is setup to slow from growth perspective and heat up from an inflation perspective. Serious compression (both margin and multiples) a’cometh for Thai equities. Mean reversion alone should keep this trade working over the intermediate term (up +36.5% in the past year).


The Starvation Trade Is Consuming Emerging Markets - 4


Brazil – Today’s +1.8% move in the Bovespa reminds us all that there are pockets of value out there. The consumer and infrastructure stories in Brazil are the kind of long term bull theses that keep a smile on Mark Mobius’ face. Unfortunately, pockets of value can easily turn into Value Traps, as investors get sucked into buying good IDEAS not good INVESTMENTS. If you’re bullish on Brazil, patience will allow you to buy exposure at a discount to today’s price. The fight with inflation is far from over for the rookie president and central bank president duo. Growth will continue its deceleration in 1H11 as well.


The Starvation Trade Is Consuming Emerging Markets - 5


Mexico – Much like Korea, Mexico is getting the benefit of the doubt from the US growth story (in addition to positive exposure to crude oil prices). Even if US growth was, in fact, robust in 4Q10, that’s in the rear view. Of the leading indicators we track, none are signaling an acceleration of growth for this US’s 70% household consumption-based economy. WTI’s lackluster performance over the past few weeks of heightened geopolitical risk is an explicitly negative US demand signal.


We need to see much better employment data than the last two payrolls misses to get us constructive on US growth. And one can make a very compelling argument that the COGS inflation being felt by companies like KO, PEP, SYY, CSCO, NKE, F, and GT is definitely NOT bullish for CFO’s increasing their labor expense in 2011. Add in the impact of rising interest rates on the bottom line and companies will be forced to take up price on a weak US consumer. Margin compression will come from slower traffic or sitting on rising input costs. Either way, Mexico loses from a lack of pricing power here (80% of its exports go to the US).


The Starvation Trade Is Consuming Emerging Markets - 6


Argentina – Alongside Zimbabwe, Argentina wrote the book on modern-day emerging market inflation. Just over 20 years later, President Fernandez and company have taken the liberty to sue private economists who report inflation – many of which are 250% of the government’s official reading of +10.9% YoY. No country in the world has a more suspect CPI calculation – not even the US. The Merval Index is up +7.7% since QG2 was announced on the strength of the parabolic moves in soybeans, corn and wheat prices (Argentina’s main exports). Apparently Argentineans themselves don’t have to eat. Social stability or stock market performance – something’s going to give here.


The Starvation Trade Is Consuming Emerging Markets - 7


Don’t be swindled by the statements of our Fed Chairman Ben Bernanke:


"Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies..."

- The Ber-Nank, Feb. 3, 2011


From our purview, the slope of demand growth in emerging markets is falling like a “BRIC”.


Keep your head on a swivel and have a great weekend.


Darius Dale



Recent Hedgeye Macro research notes on CHINA (email us for copies):

  • 10/21: China Sets the World up for a CRASH
  • 11/11: Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth
  • 11/24: Tales of the Global Inflation Tape: China, Brazil & India
  • 12/14: China by the Numbers
  • 1/6: Pondering Chinese Growth
  • 1/6: Tales of the Global Inflation Tape Part II: China, Brazil & India
  • 1/11: Extrapolating Asia… The Warning Signs Continue To Mount
  • 1/21: Is Consensus Getting Chinese (or Global) Growth Right? 

Recent Hedgeye Macro research notes on INDIA (email us for copies):

  • 11/9: India’s Two Big Problems
  • 11/24: Tales of the Global Inflation Tape: China, Brazil & India
  • 1/6: India’s Two-Factor Squeeze
  • 1/6: Tales of the Global Inflation Tape Part II: China, Brazil & India
  • 1/11: Extrapolating Asia… The Warning Signs Continue to Mount
  • 1/26: Top Emerging Market Short Ideas: Indian Equities
  • 2/3: Falling Like a BRICk: Is India the Next Egypt? 

Recent Hedgeye Macro research notes on KOREA (email us for copies):

  • 11/17: Trouble Brewing in Korea (trouble for Korean growth; not regarding geopolitical risk) 

Recent Hedgeye Macro research notes on THAILAND (email us for copies):

  • 11/22: Slowdown in SE Asia : A Leading Indicator for Global Growth
  • 1/21: Asian Trade Data Exposes Façade of US Growth
  • 1/27: Shorting Thai? 

Recent Hedgeye Macro research notes on BRAZIL (email us for copies):

  • 11/9: Outlook for Brazilian Interest Rates: Read the Fine Print
  • 11/24: Tales of the Global Inflation Tape: China, Brazil & India
  • 12/17: Brazil: A Leading Indicator for the Global Economy
  • 1/6: Tales of the Global Inflation Tape Part II: China, Brazil & India
  • 1/21: Navigating the Brazilian Terrain
  • 1/26: Bullish on Brazil (and Other Emerging Markets)?
  • 1/31: Time to Buy Brazil? 

Recent Hedgeye Macro research notes on MEXICO (email us for copies):

  • 7/15: Shorting Mexico… Aye Carumba!
  • 7/30: Mexican Headwinds
  • 8/13: Latin America CDS… Risk is Always On

Recent Hedgeye Macro research notes on ARGENTINA (email us for copies):

  • 8/13: Latin America CDS… Risk is Always On
  • 10/6: Eye On Latin America: Callouts from Brazil and Argentina
  • 11/4: Is Argentina Signaling a Cyclical Peak in Emerging Market Asset Values?

Swissy Gets Boost on Weaker CHF

Position: Long Sweden (EWD); Short Italy (EWI), and Euro (FXE)


We’re seeing a meaningful inflection in the CHF-EUR, down -5.0% year-to-date, an added benefit for a country whose exports represent 55% of GDP.  With an expedient gain of +19.3% in the CHF versus the EUR in 2010 -- and considering that the Eurozone is Switzerland’s main export partner -- the weakening in the currency comes as a great relief to exporters, but also the Swiss National Bank (SNB) that attempted to weaken the CHF last year, but ran into snags with 1.) the inability to cut below its main benchmark interest rate of 0.25%, and 2.) sovereign debt fears in the Eurozone that buoyed safe haven currency plays like the CHF.


Although the inverse correlation between the CHF-EUR and Swiss Market Index (equity) is not extremely high (-0.34) since 12/31/09, the trend line suggests a positive bias in the equity market to a weaker CHF.


Swissy Gets Boost on Weaker CHF - swi1


[Of the major currencies versus the EUR, only South Africa’s Rand is down more than the CHF year-to-date, at -10.2%.]


Yesterday, Swiss CPI declined sequentially to +0.3% in January Y/Y versus +0.5% in December, bucking the trend of rising inflation we’re seeing across Europe. From a comps perspective, CPI should remain benign in 1H2011.


4Q10 GDP has yet to be released, however average Bloomberg forecasts suggest +2.6% Q/Q, a sequential slowing from +3.1% in Q3. We’re cautious on the country’s growth profile given that its main trading partners in Europe are working through austerity programs that are cutting spending, increasing taxes, and dampening confidence, whereas an important export market like Germany is showing fundamental signs of rolling over. Comps get increasingly more difficult beginning in Q1, and Bloomberg consensus forecasts +1.7% annual GDP growth in 2011.


Swissy Gets Boost on Weaker CHF - swi2


We’re not currently invested in Switzerland and remain cautious on Europe’s underlying debt and deficit imbalances. This week showed a reversal in European equity market performance, with the PIIGS underperforming their European peers after an exuberant start to the new year, whereas the credit markets continue to reflect a heavy risk premium to own Europe's periphery.


The European Summit on March 24-25 remains a main catalyst that we're managing risk around in Europe. Stay tuned.


Matthew Hedrick


Higher Highs: SP500 Levels, Refreshed

POSITION: No position in SPY


No matter where you go, here we are again – testing higher-highs for both the intermediate-term cycle and the YTD.  With the prior closing high of 1324 established on Tuesday, February 8th, it looks like The Mu-barak wants to be the latest huckleberry for the bulls.


I’ve been talking about the probability if seeing either my 2.5 or 3.0 standard deviation lines of 1330 and 1340 (or both) tested to the upside in the immediate-term. That’s why I’m not short the SPY and have been leaning long with 2 of the 9 S&P Sector ETFs (XLV and XLU) all week.


That doesn’t mean I won’t start selling longs on the way up to my immediate-term TRADE lines of resistance (1331) and then start re-populating my short exposures however. The inverse relationship between the VIX and the SPY remains a very dominant one and we are approaching a big level of support for the VIX that held in both mid-April 2010 (before the 15% correction we called for in our May Showers call) and mid-January 2011.


My immediate-term TRADE line of downside support at 1315 has held like a champ all week. If they break that, there’s no support down to my intermediate-term TREND line of 1233. And I don’t think many people are positioned for that kind of drawdown in price.


Trade this market tight – the rest of the ride won’t be for the faint of heart,



Keith R. McCullough
Chief Executive Officer


Higher Highs: SP500 Levels, Refreshed - 1