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DPZ – NOT THE NEXT MCD

Yesterday, government data showed that real spending slipped in January as rising prices and bad weather discouraged spending on nondurable goods. 

 

In aggregate, spending on durable goods increased more slowly and “real spending” was reduced across the major types of discretionary services. Importantly, real expenditures on “food served at restaurants and hotel accommodations” declined by 0.6%, which was the sharpest drop among all categories of service.

 

The consumer is better off today than in January 2010, but as the January data showed, spending remains sluggish.  Also, increasing food and energy prices create further risk, particularly on discretionary items.    In 2010, DPZ did an amazing job transforming the business in the USA, but the suggestion that DPZ is going to go on a 4-5 year run like MCD is very unlikely.  In fact, DPZ is likely to report negative same-store sales growth in 1Q11.

 

DPZ – NOT THE NEXT MCD - DPZ FY11 comps

 

Howard Penney

Managing Director


TALES OF THE TAPE: DPZ, WEN, PZZA, MCD, COSI

Notable news items/price action over the last twenty-four hours.

  • DPZ reported EPS ex-items of $0.40 cents versus the street at $0.40.   Domestic, company-operated comparable restaurant sales came in at 5.4%, implying a sequential slowdown in two-year average quarterly trends of 175 basis points.
  • WEN’s for-sale concept, Arby’s, has introduced an Angus beef sandwich, the first in what the chain expects to be in a line of premium offerings.  I maintain my positive outlook on WEN, and view the sale of Arby’s as a positive move for the company.
  • PZZA announced that David Flanery is retiring as CEO and Lance Tucker will take over following a transitional period.  The stock traded up 60 basis points on strong volume yesterday.
  • An article on CNNmoney.com published yesterday discussed the increase in weatlhy consumers frequenting low-cost, fast food restaurants.
  • An article on the New York Times’ online “opinionator” blog shed some light on MCD’s oatmeal and the ingredients therein.  According to the article, “Incredibly, the McDonald’s product contains more sugar than a Snickers bar and only 10 fewer calories than a McDonald’s cheeseburger or Egg McMuffin.”
  • COSI outperformed the space yesterday, gaining 2.1% on the day.  I believe this stock price will gain further in the coming months.
  • In general, yesterday, restaurant stocks traded very thinly with volume down across the board.

TALES OF THE TAPE: DPZ, WEN, PZZA, MCD, COSI - stocks 31

 

Howard Penney

Managing Director


THE M3: LVS SUBPOENA; AMAX; GGR; S'PORE CASINO LEVY; CHINA PROPERTY PRICES

The Macau Metro Monitor, March 1, 2011

 

LVS FCPA SUBPOENA LVS 10-K

On 2/9/2011, LVS received a subpoena from the SEC "requesting that the Company produce documents relating to its compliance with the FCPA (Foreign Corrupt Practices Act). The Company has also been advised by the Department of Justice that it is conducting a similar investigation.  It is the Company’s belief that the subpoena emanated from allegations contained in the lawsuit filed by Steven C. Jacobs described above." 

 

The FCPA "generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business."  LVS said any FCPA violation would have a material adverse effect on their financial condition.


AMAX TO REVAMP CASINO TARGETING VIP BUSINESS Macau Daily News

Greek Mythology Casino in Taipa may complete a revamp by end of the year and will prioritize the development of VIP business to drive high‐end players.  The company expects monthly turnover will grow to MOP70 billion from the current
MOP15 billion.


MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DICJ

February GGR came in at 19.28BN HKD (19.863BN MOP, 2.48BN USD).  This represents 47.7% YoY growth.

 

CALL FOR TRIPLING CASINO LEVY Strait Times, TodayOnline

A Singapore Parliament member, Denise Phua, argued that over-reliance on gaming revenue would hurt Singapore over time.  She suggested that the casino entry levy (S$100) be tripled, the S$2,000 annual levy be abolished, and that a permanent a cap of 2 be placed on the on IRs.

 

CHINA FEBRUARY RESIDENTIAL PROPERTY PRICES UP 0.48% VS JANUARY WSJ

According to the China Real Estate Index System, residential property prices in 100 major Chinese cities rose 0.48% MoM in February, slowing from January's 0.95% MoM growth data provider.


SINGAPORE PROPERTY PRICES CONTINUE TO FIRM DESPITE COOLING MEASURES Channel News Asia

Flash estimates compiled by the National University of Singapore Institute of Real Estate Studies show the overall Singapore Residential Price Index rising by 2.6% MoM.  This is more than double the 1% MoM increase in December.


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Mr. Money Man

This note was originally published at 8am on February 24, 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 history is any guide, this scenario will develop not gradually but abruptly.”

-Barry Eichengreen, (“Exorbitant Privilege” page 165)

 

Evidently a lot of investors didn’t prepare their portfolios for The Inflation. Some reconciled this mother of all inflation shocks in food prices as “supply and demand” imbalances. Some said everything was going to be fine because The Ber-nank said so. Some even said $4-5 at the pump is fine.

 

We’ve said that as Global inflation Accelerates, Global Growth Decelerates. This might be a little easier to see when you have a $100 handle on the price of oil per barrel. Inflation is both a policy and a consumption tax. Global inflation is also priced in US Dollars.

 

Sadly, with stock markets around the world getting rocked this week, the US Dollar continues to be debauched. There was a time when America’s independent price stabilizer (Paul Volcker) treated the US Dollar with respect. Today, our Almighty Central Planners are willing to watch the Buck Burn.

 

The math doesn’t lie here folks; professional US politicians do. For the week-to-date, here’s your US Dollar/Commodity Inflation score:

  1. US Dollar Index DOWN -0.33% for the week-to-date (down for 7 out of the last 9 weeks)
  2. CRB Commodities Index UP +1.7% to 347 (making a series of fresh weekly closing highs all the while)

Sure, there’s a nut-job out there in Libya, but there’s also a very blunt instrument that can take his grandstanding on “fighting to the last drop of blood” away – a STRONG US DOLLAR policy.

 

Most American stock market fans definitely don’t want the short-term tough love associated with that. If anything, the perma-bulls are already cheering The Ber-nank on to implement Quantitative Guessing III (QG3) as a weapon against Gaddafi’s self-destruction.

 

The reality is that if The Ber-nank and Timmy Geithner woke up this morning and unilaterally raised interest rates and took a whack out of this Disaster Deficit, the US Dollar would strengthen and the price of oil would drop in a straight line.

 

This, of course, isn’t going to happen. Instead we are fostering a finger pointing and unaccountable political leadership class that continues to frustrate Americans to the core.

 

While Timmy Geithner was self-aggrandizing himself yesterday with his banking cronies from Dollar Destruction Inc., someone asked him what he thought about the price of oil’s impact on the US economy – and I couldn’t make this up if I tried, but he said that the economy that he helped put into crisis (before he helped saved us all from it) “can handle it.”

 

The Twitter-sphere lit up like a Christmas tree after Timmy said that – and The Rest of The World erupted in laughter. He must have been joking, but Bloomberg reporter Rich Miller didn’t seem to think so - and I couldn’t make this one up if I tried either – as Miller recapped the Geithner Groupthink session yesterday with this morning’s Bloomberg headline:

 

“GEITHNER BUTT OF JOKES NO MORE AS OBAMA’S MONEY MAN NOW ON TOP”

 

On top of what? The Disaster Deficit, The Burning Buck, or the resume pile to go join the Pandit Bandit at Citigroup? The manic media pandering to the political winds of Washington, DC access is both frightening and sad. Arianna Huffington, nice sale!

 

Don’t worry, I can answer the Wall Street question on, “how do you make money on this”? I laid this out in Friday morning’s Early Look note titled “Hawkish Winds” and my Global Macro positioning in being bullish on The Inflation remains the same:

  1. LONG - Dollar denominated food and energy Inflation
  2. LONG - Currencies of countries with hawkish central banks
  3. LONG - Financials in socialized countries that have made banks too big to fail
  4. SHORT - Sovereign Bonds of countries with deficit and currency devaluation central planners
  5. SHORT - Currencies of countries with dovish central banks
  6. SHORT - Emerging Markets

As for managing around the implied mean-reversion risks associated with the institutional investment community in America chasing the “flows” rather than the Global Macro fundamentals, my strategy on US Equities is this – trade them like the Price Volatility Casino that your central bankers sponsor.

 

After all, as Timmy reminded his fans at the “Bloomberg Breakfast” in Washington, DC yesterday, “central bankers have a lot of experience in managing these things”!

 

Indeed they do Mr. “Money Man”, indeed.

 

My immediate term support and resistance levels for the SP500 are 1306 and 1330, respectively. If 1306 in the SP500 doesn’t hold on a closing basis, I think this -3% correction in US stocks starts to resemble a February 2008 like crack. That wasn’t a good crack.

 

Best of luck out there,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Mr. Money Man - oo1

 

Mr. Money Man - oo2


CHART OF THE DAY: The "Flowwwzzz" Work Both Ways (see: 2008)

 

 

CHART OF THE DAY: The "Flowwwzzz" Work Both Ways (see: 2008) -  chart


The Flows

“The quality of the imagination is to flow and not to freeze.”

-Ralph Waldo Emerson

 

For those of you who dial into the Hedgeye Morning Macro Call every morning at 830AM EST, you know that the title and topic of this Early Look note is dear to my Canadian heart – The Flows.

 

In institutional investor speak, The Flows are where the fees are. For bulls, they foster the imagination. For bears, they focus the mind. The Flows represent your moneys. In a world “awash with liquidity” and sovereign debt, we don’t think you should trust. Bernanke Bubbles beware.

 

Last year, they flowed you into US Treasury Bonds and Emerging Markets. This year, outflow-you-go into the “safe havens” of US and Japanese stocks. Like the promise of Bernanke “buying bonds” in 2010, the promise of not “fighting the Fed” bears US stock market fruits from the heavens. Do not freeze men and women of the risk management gridiron. The chase for the last Dollar Debauched drop of equity returns is on.

 

The problem, of course, arises when The Flows run into these little critters called The Fundamentals. Understanding full well that our view of The Fundamentals is often 3-6 months ahead of Wall Street/Washington consensus (yes, sadly, they are now one and the same) is what it is – since October, our Global Macro view of the fundamentals remains Global Growth Slowing as Global Inflation Accelerates.

 

Thankfully, not every institutional investor understood the repercussions of Quantitative Guessing II (QG2) on Global Inflation Accelerating back then. Now those who bought US Treasury Bonds and Emerging Markets are being reminded that what flows into a said haven, flows out…

 

From EPFR Global, here’s the latest on The Flows (per their February 18th report):

  1. USA/Japan/Europe (Equities)  - “Investors pumped $47 billion into equity funds in the U.S., Europe and Japan this year after pulling $17 billion in 2010 and $28 billion in 2009.”
  2. Bonds Funds - “Investors added $2.44 billion to bond funds globally this year as of Feb. 16, down from $11.1 billion during the same period in 2010.”
  3. Emerging Markets - “Investors pulled $1.9 billion from developing nation stock mutual funds in the week to Feb. 23, the fifth week of outflows.”

Now, as we like to say at Hedgeye, what happens on the margin in Global Macro matters most. And on the margin, The Flows into the stock markets of Developed Economies have been huge. The most important risk management part of that last sentence is “have been.”

 

How long can The Flows trump The Fundamentals? How much risk gets entrenched into an asset class when the storytelling starts to follow the natural confirmation bias of positive price momentum? How many times do we need to see this movie before we learn the lesson?

 

These are all questions that have a much clearer answer now versus then. Whether you look at the opportunities to short US and Emerging Market Equities into the peaks of fund flows of 2007 or shorting the mountain tops of a bond market bubble in 2010, history writes itself as of last price.

 

As a risk manager who is shorting things almost every day, I need to be really sharp on timing and price. While many institutional marketing messages preface their buy-and-hold strategy with “you can’t time markets”, we should all be very thankful for that – many of them can’t. What we’re doing is preserving capital and making probability-weighted decisions, daily, with a fundamental Global Macro research overlay.

 

On the scoring of Growth and Inflation, this morning’s Global Macro Grind has some positives, but more negatives:

 

POSITIVES

  1. Germany – unemployment fell to another new low of 7.4% and German Equities continued higher to +6% YTD (we’re long EWG)
  2. Canada – unlike US growth which was revised down again last week, Q4 GDP growth surprised to the upside (we’re long FXC)
  3. India – the government cut taxes and sent the stock market up +3.5% (we covered our short position in IFN at last week’s low)

NEGATIVES

  1. China – Producer Manufacturing Index (PMI) hit a new 6-month low of 52 last night (we’re long CYB as China continues to tighten)
  2. Mexico – Unemployment continued higher sequentially to +5.4% versus 4.9% last month (we’re short EWZ on Latin American inflation)
  3. Iran – Consumer price inflation (CPI) was up to +15.8% in JAN vs 12.8% in DEC (that’s before this massive oil spike and is instigating tensions)
  4. Japan – Industrial Production slowed again sequentially in JAN to +2.4% y/y vs 3.3% DEC (we covered our short position in EWJ last week)
  5. Spain – Consumer price inflation (CPI) was up again sequentially in FEB to +3.4% versus +3.0% in JAN (we have no position in Spain)
  6. USA – US Consumption in JAN, adjusted for inflation, was negative for the 1st month in a year (we’re short MCD, TGT, and XHB)

But there is no but in The Flows. They are what they are until they stop. All the while, I’m most certainly not going to freeze with a strategy to short-and-hold. For the last decade, that hasn’t worked inasmuch as buy-and-hold hasn’t . Not in a market where professional politicians are sponsoring a Burning Buck, The Inflation, and Price Volatility… We have America’s sad State of political leadership to thank for that.

 

My immediate-term lines of support and resistance for the SP500 are now 1311 and 1343, respectively. The US stock market should make another lower-high today – one that you should outflow from, provided that US Dollar Debauchery continues to sponsor Global Inflation.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Flows - flo1

 

The Flows - flo2


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.30%
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