The Macau Metro Monitor, February 14, 2011


LVS COO, Michael Leven was aware that former Sands CEO, Steve Jacobs, was negotiating a partnership with Harrah’s Entertainment (now Caesars Entertainment) in Macau, according to an e-mail allegedly exchanged by the two men.  Leven said to Jacobs in the email, "If you want to get it, let Gary Loveman [Caesars’ CEO] to suggest it in [a] one-on-one mtg [meeting] with SGA [Sheldon G. Adelson]. ... That's how billionaires think, we are just executors. They are strategic genii in their own minds."

The e-mail was included in a recent court filing by Mr Jacobs in a case against Las Vegas Sands in which he alleges he was wrongfully fired.


Sands Macao opened a family-centered, Japanese style game center called "Adores Macau" last week.  The 330 square meter venue contains around 30 Japanese games machines.


Residential property prices in China increased 0.95% in January from a month earlier, according to private data provider China Real Estate Index System which is believed to reflect real estate trends better than official government figures since it tracks only residential property, while the government data includes non-residential prices.  CREIS said home prices stood at an average 8,645 yuan ($1,677) per square meter in the 100 cities it covers in its survey.  

CHART OF THE DAY: Cupid's Burning Bone Getting Some Love?



CHART OF THE DAY: Cupid's Burning Bone Getting Some Love? -  chart

Fooling The People

This note was originally published at 8am on February 09, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If you once forfeit the confidence of your fellow citizens, you can never regain their respect and esteem.”

-Abraham Lincoln


In the same quote Lincoln went on to point out that while “it is true that you may fool all of the people some of the time… and “you can even fool some of the people all of the time”… “but you can’t fool all of the people all of the time.”


So how is The Ber-nank doing in Fooling The People of the United States of America that the inflation of the US stock market is good?

  1. Confidence – in the week that The Inflation he is playing for in US stocks was booming (SP500 +2.7% last week), the weekly ABC US Consumer Confidence reading got hammered down to -46 versus -41 in the week prior (those are minuses).
  2. Trust – in the latest poll, when asked “who do you think the Federal Reserve Chairman Ben Bernanke cares about more, Wall Street or Main Street?”, only 20% replied Main Street (even Geithner had a higher trust reading than Bernanke on that score).
  3. Invested Position – “91% of all equity holdings in the United States held by the top 20% income group in the country. The top 1% own 38% of all the equity valuation.” (from David Rosenberg and Zero Hedge yesterday).

Now if The People of America were as stupid about what’s in their wallets as the Fed must think they are, they’d be plowing through their snow covered driveways and barging through the doors at The Lehman Brother to open a brokerage account. Oh, wait – The Lehman Brother is gone – maybe that’s why Americans aren’t investing their confidence and trust in The Ber-nank’s inflation. Maybe it’s the snow and closed for business thing?


Whatever your opinion of the Incumbent 23rd Chairman of the Federal Reserve, odds are that if you are in the business of being long the inflation (stocks), after a +93.8% rally from the March 2009 low, you’ve got to be happy. I am.


But, to be crystal clear on this, you and I are not America  - and neither is a humble looking central planner who thinks he knows exactly how this is all going to play out. Some Americans were fooled by that when the perma-bulls were cheering Bernanke on to provide the “shock and awe” of interest rate cuts in late 2007 and early 2008. But you can’t fool all of America again on this Mr. Bernanke – not this time.


Sadly, at the end of the day this is all about storytelling and the worst part about the marketing message behind the Austrian versus Keynesian economic views right now is probably that Ron Paul is the one delivering the commercials. He’s much better in print than he is on TV. What Americans really need is Robert Rubin to massage this concept of how debauching the US Dollar perpetuates American unemployment.


Unfortunately, Robert Rubin isn’t for hire anymore. Last I heard he is living large and licking his Doritos fingers, forgetting that he didn’t foresee another sovereign debt default cycle pending.


Back to Fooling The People


In a recent survey from Selzer and Co., 7 out of 10 respondents said “the US is deliberately keeping the dollar low against other currencies, while only 1 in 4 think it’s letting the market decide the value of the greenback.”


I get it. The world’s largest bond fund manager gets it (see Bill Gross’ latest monthly letter). The American People get it. The Chinese get it. And now, even 2 of The Ber-nank’s Federal Reserve Presidents came out yesterday to remind the land of the living that they get it!


Yesterday, Federal Reserve Bank of Richmond President Jeffrey Lacker and Federal Reserve Bank of Dallas President Richard Fisher came out explicitly acknowledging both The Inflation trends in the global economic system and the need for the independent Federal Reserve to address it.


“I will be at the forefront of the effort to trim back our Treasury holdings and tighten monetary policy at the earliest sign of inflationary pressures are moving beyond the commodity markets and into the general price stream.”


Well done, Mr. Fisher.


What’s most important about these dissenting Fed Head comments is the timing. Today, The Ber-nank is going to testify in front of the Congress that what is scaring the living daylights out of the US bond market (inflation) is wrong and that he, our Almighty Central Planner, is right.


This isn’t a centrally planned Russia folks. This is America  - and the next person who tells you our red, white, and blue free-market is what it used to be needs to go back and re-read the Constitution. As Steve Hanke states most succinctly, “the Constitution was designed to govern the government, not the people.”


Before you listen to Bernanke’s politicized view this morning, let me leave you with three Austrian economic thoughts (paraphrasing von Mises), because Ron Paul is going to have two thought leaders from this school lay down the opposite side of the Keynesian case today at the sub-committee meeting on Domestic Monetary Policy (that Bernanke won’t attend) in Washington, DC:

  1. Controlling Prices - “The metaphorical expression “price level” must never be used… with prices there is no such thing as a “level”… prices do not change at to the same extent at the same time” … as a central planner promises.
  2. Inflation’s Social Stratification - “When inflation starts, different groups within the population are affected by this inflation in different ways. Those groups who get the money first gain a temporary benefit.”
  3. Devaluation of a Currency - “If one devalues the currency and the workers are not clever enough to realize it, they will not offer resistance against a drop in real wages, as long as nominal wage rates remain the same.”

Sorry, Mr. Bernanke. Apparently America’s Main Street workers are clever enough. America’s small business owners aren’t hiring because they get this too. Best of luck out there in the Twitter-sphere and YouTube channels of modern day transparency in continuing to fool some of the people from here on in – the 60 Minutes gig isn’t working.


My immediate-term support and resistance lines for the SP500 are now 1303 and 1332, respectively. God Bless America.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fooling The People - d1


Fooling The People - d2

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TODAY’S S&P 500 SET-UP - February 14, 2011

Equity futures are trading slightly below fair value ahead of this week's key data releases which are likely to set the tone for further short-term risk appetite.  As we look at today’s set up for the S&P 500, the range is 16 points or -0.99% downside to 1316 and +0.21% upside to 1332.



  • 8:30 a.m.: NOPA monthly oil, soybean capacity, Jan.
  • 10 a.m.: New York Fed briefing on regional economy. President William Dudley speaks
  • 11 a.m.: Weekly export inspections (corn, soybeans, wheat)
  • 11:30 a.m.: U.S. to sell $32b 3-mo. bills, $30b 6-mo. bills


  • Biogen Idex (BIIB): May buy back 20m shrs
  • Devon Energy (DVN): May rise to $100-shr: Barron’s
  • KLA-Tencor (KLAC): Plans to buy back 10m shrs
  • Intercontinental Hotels (IHG): may rise on economic recovery: Barron’s; may boost div. ~10%: Sunday Times
  • International Paper (IP): May raise div., buy back shares: Barron’s
  • Silicon Graphics International (SGI): May be profitable for the full year: Barron’s
  • Tootsie Roll Industries (TR): 4Q EPS in line with est., sales beat (1 est.)
  • Transocean (RIG): Richard George is resigning from board, and Chairman Robert E. Rose and director Victor E. Grijalva won’t stand for re-election; seeking board approval for a $1b div.


Strength was seen from Financials and Discretionary; weakness in Energy and Tech. We have day 5 of perfect = 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.36%, S&P +0.55%, Nasdaq +0.68%, Russell +1.16%
  • Month-to-date: Dow +3.21%, S&P +3.35%, Nasdaq +4.05%, Russell +5.23%
  • Quarter/Year-to-date: Dow +6.01%, S&P +5.69%, Nasdaq +5.9%, Russell +4.91%
  • Sector Performance: - Financials +1.37%, Consumer Discretionary +1.02%, Industrials +0.75%, Consumer Staples +0.54%, Materials +0.56%, Tech +0.53%, Healthcare +0.22%, Energy (0.01%), and Utilities (0.19%)


  • ADVANCE/DECLINE LINE: 1453 (+1360)  
  • VOLUME: NYSE 972.00 (-5.34%)
  • VIX:  15.69 -2.49% YTD PERFORMANCE: -11.61%
  • SPX PUT/CALL RATIO: 1.84 from 1.66 (+11.17%)


Treasuries were stronger on the session, but not without a pullback following the Egypt news flow. The 10yr yield fell to 3.61% in early trading, before pulling back to 3.64%.  

  • TED SPREAD: 20.04 -0.101 (-0.503%)
  • 3-MONTH T-BILL YIELD: 0.12%
  • 10-Year: 3.64 from 3.70
  • YIELD CURVE: 2.79 from 2.85


  • CRB: 337.78 -0.64%; YTD: +1.50%  
  • Oil: 85.58 -1.33%; YTD: -7.15% (trading +0.06% in the AM)
  • COPPER: 453.60 -0.17%; YTD: +3.41% (trading +1.49% in the AM)  
  • GOLD: 1,357.30 -0.35%; YTD: -4.26% ( trading +0.09% in the AM)  


  • Oil fell to a 10-week low in New York after Egyptian President Hosni Mubarak stepped down and handed power to the military, reducing concern that crude shipments from the Middle East will be disrupted.
  • Gold erased some of early gains in directionless trade on Friday, under pressure from a
    drop in ETF holdings to their lowest since late January, a firm U.S. dollar and a lacklustre physical market. 
  • The tightest physical silver supplies in four years have tipped the U.S. silver futures market into backwardation this week, making near-term prices more expensive than more distant months. 
  • Corn traded near a 30-month high in Chicago, heading for a second weekly advance, on increased demand amid tight supply. Wheat and soybeans climbed.


  • EURO: 1.36554 -0.53% (trading -0.63% in the AM)
  • DOLLAR: 78.46 +0.27% (trading +0.29% in the AM) 


  • FTSE 100: (-0.20%); DAX: +0.23%; CAC 40: (-0.18%) (as of 07:00 AM EST)
  • European markets mostly trade higher following firmer markets across Asia, with European M&A activity and generally constructive corporate results also helping sentiment.
  • Credit Suisse rallied after raising capital from Middle Eastern investors.
  • The pound and the euro are trading at $1.6017 and $1.3460 respectively
  • euro was pressured by reports that WestLB failed to agree on a restructuring over the weekend and BaFin becoming increasingly involved in how the bank will be rescued


  • Nikkei +1.13%; Hang Seng +1.28%; Shanghai Composite +2.54%
  •  Asian markets rose this morning on optimism that an Egyptian crisis has been largely averted, getting a boost when Japan’s GDP shrinkage was less than expected.
  • Japan rose on the economic data and a weaker yen.
  • South Korea +1.89, Samsung Engineering rallied on announcing a $600M contract with Saudi Arabian Oil Co.
  • Widespread gains by banks and miners powered Australia higher +1.12. BHP Billiton gained 2% after China January copper imports beat expectations.
  • Taiwan up 0.88% - Asustek jumped 7% on results.
  • Japan Oct-Dec GDP real GDP (1.1%) y/y. China January trade surplus $6.45B vs consensus $10.7B.

Howard Penney

Managing Director


THE HEDGEYE DAILY OUTLOOK - 2 14 2011 7 29 10 AM


News out this weekend on Sysco confirms what we’ve been saying.  Inflation is not coming tomorrow or the next day; it's here.


Sysco has raised prices, sending out an alert announcing an “Act of God” to address their contracted supply issues.  The cold snap that has impacted temperatures in North America of late is having a profound impact on produce crops.  “The last time there was a freeze of this severity was 1957”, according to Jerry Wagner, director of sales and marketing for Nogales, AZ-based Farmer’s Best.  The bottom line is this: prices for produce all over North America will be lifted by these events over the next few months.  Whether or not the wheat crop in the U.S. was damaged remains to be seen.  What we do know is that supplies of tomato, peppers, and cucumbers from Mexico have been disrupted and Florida’s produce crops have been impacted by severe freeze damage in December and January.  Restaurant management teams have been eager to wait for competitors, be it among grocers or fellow restaurant companies, to raise prices first.  Sysco is taking the plunge and others – grocers and restaurants alike – are sure to follow soon.


Here is a small sample of quotes from management teams referring to inflation during recent earnings calls that we found using AlphaSense.


Chipotle Mexican Grill, Inc.

“Commodity inflation has continued to push our food costs higher in 2011 already, and we expect continued inflationary pressure on many of our ingredients, especially chicken, beef and avocados during the year.”


“Using the fourth quarter food costs of 31% as a starting point, we anticipate additional overall food cost inflation will likely climb to the mid-single digits during the year.”


“We're in the process of sorting through the impact of recent freezes in Mexico and Florida where our tomatoes, green peppers and tomatillos are currently grown. The cost of these items has surged three-fold as a result of severe crop loss, which if we remain fully supplied would increase our food costs by over 200 basis points.”


“While we continue to believe we have as much if not more pricing power than other restaurants, we plan to hold off on any menu-pricing decisions until later in the year, which will allow us to see how inflation plays out on a sustained basis and allow us to see how consumers react to price increases from other restaurants and grocers.”


“So it's obvious that food inflation is real, and it appears it will get worse before it gets better.”


“And inflation means that at some point we're going to have to pass on those higher costs to our consumers.”



Kraft Foods, Inc.


“Looking forward, in the face of substantial input cost inflation, we're in the process of implementing another round of price increases in our North American portfolio. While this will pressure margins in the near term, we'll use a combination of pricing, productivity and overhead savings to improve margins for the full year.”



Cheesecake Factory, Inc.


“Based on our forecast for the entire year, taking into account non-contracted items and contracted items with estimating and forecasting the non-contracted items, we would expect food cost inflation currently to be about 3% for us for the year, with that falling a lot heavier, as we said, in the first half of the year, with 4% in the first half of the year and around 2% in the second half of the year. So you would see more food cost inflation, in addition to being in the first quarter, you will see some more food cost inflation in the second quarter.”



Pepsico, Inc.


“Like every other CPG company, we expect to see very high levels of inflation in 2011. We are driving productivity to offset as much of the inflation as possible, and in normal circumstances we'd have addressed the remainder of the inflation with pricing. But the consumer landscape, particularly in developed markets, is shaky. And for that reason, we're going to be very judicious in our pricing actions, because we don't want to shock the consumer with high levels of pricing and dampen demand for our products and categories.”


"The expected economic and consumer-led recovery that had been predicted earlier in the year never really materialized in developed markets and, due to a variety of factors, inflation has dramatically increased across both developed and emerging markets."



Yum! Brands, Inc.


“In terms of headwinds, commodity inflation will be a challenge across all divisions. We plan for 5% food and paper inflation in China, along with 4% in the U.S. and 3% in YRI.”


“Our philosophy in general is we like to go with smaller, earlier price increases than waiting until you have to take it and then having a large increase. We think that, generally, the consumer handles that better.”



McDonalds, Inc.


“When we factor all of those things together, including inflation, we do have the opportunity to pass some of those costs along in price increases, but as Pete said in his comments, not all of those in every market.”



Safe Bulkers, Inc.


“Given the large increases in food prices recently and the effect – the effect that inflation has had in Tunis and Egypt we have seen some stockpiling of grain.”



Philp Morris International, Inc.


“In addition, inflation, particularly as it relates to basic food commodities, remains a concern relative to consumer discretionary income levels in numerous markets.”



Sysco Corp.


“And so in the press release, just to read from it, it said inflation I think caused – significant food cost inflation negatively impacted our customers' purchasing budgets.”



Howard Penney

Managing Director


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

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