Notable news items and price action from the past twenty-four hours along with our fundamental view on key names.

  • DPZ reported impressive earnings, easily beating consensus.  EPS came in at $0.42 versus $0.39, driven by total domestic comps of -1.4% versus consensus -4% and international comps at +8.3% versus consensus +6.5%. 
  • MRT reported after the close yesterday.  1Q11 EPS came in at $0.16 versus $0.13 with comparable restaurant sales up 7.5% versus consensus of 7%.  Food and beverage costs came in at 31% of sales which was slightly higher than expected.  2Q guidance is for EPS of $0.03 to $0.05 versus consensus $0.05 but FY11 guidance was raised by a penny on each end of the range to $0.45 to $0.49 versus consensus $0.45.  The company guided to 2Q and FY11 comps up 6-8%.  Beef gained 10% in the quarter for MRT but rising commodity costs were successfully offset by price increases.
  • CPKI has responded to those affected by the recent Alabama tornado with a two-day fundraiser.
  • BJRI was upgraded to “Overweight” from “Neutral” at Piper Jaffray.
  • MSSR’s board has decided to put the company up for sale.  Tilman Fertitta/Landry’s has responded by withdrawing the proxy seeking to contest a quorum at the 2011 AGM.  Mr. Fertitta said in a statement that his group hopes that the Board is “committed to conducting a process in which all acquisition proposals are fairly evaluated”.
  • DIN, DRI, RUTH, CAKE, EAT, PZZA and CBOU both traded higher on accelerating volume yesterday.
  • COSI, TXRH, and SONC all traded down on accelerating volume.





Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - May 5, 2011

As we look at today’s set up for the S&P 500, the range is 39 points or -1.14% downside to 1332 and 1.76% upside to 1371.



Energy and Financials remain broken on the TRADE duration leaving 7/9 sectors broken on TRADE and 8/9 broken on TREND.    




THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: -1138 (-227)  
  • VOLUME: NYSE 1069.11 (+6.62%)
  • VIX:  17.08 +2.28% YTD PERFORMANCE: -3.77%
  • SPX PUT/CALL RATIO: 2.08 from 1.84 (+12.60%)



  • TED SPREAD: 25.30 -0.200 (-0.784%)
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 3.25 from 3.28
  • YIELD CURVE: 2.65 from 2.67 



  • 8:30 a.m.: Jobless claims, est. 410k, prior 429k
  • 8:30 a.m.: Non-Farm productivity, est. 1.1%, prior 2.6%
  • 8:30 a.m.: Net export sales
  • 9:15 a.m. Fed’s Evans speaks at Chicago conference
  • 9:30 a.m. Fed’s Bernanke speaks at Chicago conference
  • 9:45 a.m. Bloomberg Consumer Comfort Index, est. (-45.0), prior (-45.1)
  • 10 a.m.: Freddie Mac mortgage
  • 10:30 a.m.: EIA natural gas storage change
  • 1:15 p.m. Fed’s Kocherlakota speaks on monetary policy in California


  • Intl Game Technology launches tender offer to buy Swedish gaming company Entraction Holding AB for $115m
  • Ralcorp board unanimously rejects improved $86-shr bid from ConAgra Foods.
  • General Motors reports Q1 EPS $0.95 ex-items vs Reuters $0.91
  • Large Canadian banks look for ways to derail London Stock Exchange's (LSE.LN) takeover of TMX Group - Globe and Mail
  • British government review of solar subsidies proposes a cut in subsidies for large projects - FT
  • Google, Facebook have both held joint venture talks with Skype - Reuters
  • Monster Employment Index rises 9 points m/m in April to 145


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Silver Investors Dump Futures as Comex Boosts Speculator Trading Costs 84%
  • World Food Prices Rise to Near-Record High as Inflation Speeds Up, UN Says
  • Coal’s Two-Year High May Spur Rebound in Chinese Imports: Energy Markets
  • Copper Falls to Seven-Week Low on Concern Policy Tightening May Sap Demand
  • Silver Extends Bear-Market Decline on Margins; Gold Trades Little Changed
  • Grains, Soybeans Drop, Erasing Gains, as Elevated Prices May Erode Demand
  • Wheat in China Unlikely to Get Enough Rain to Avoid Yield Cuts, DTN Says
  • Cocoa Falls on West Africa Mid-Crop Speculation; Sugar and Coffee Retreat





THE HEDGEYE DAILY OUTLOOK - daily currency view




  • king keeps rate, asset plan steady as reports show UK economy is fading
  • European stocks slide for third day; Lloyds, Socgen tumble after earnings
  • Spain’s borrowing costs rise as demand declines at sale of five-year debt
  • Greek yields signal failure in region’s fiscal crisis policy  - euro credit
  • UK Apr services pmi 54.3 vs consensus 55.7 and prior 57.1







  • Asia Stocks Fall on Concern U.S. Economic Recovery Waning; Bharti Slides
  • Philippine Central Bank Raises Key Rate to 4.5% as Inflation Accelerates
  • Hong Kong Banks May Boost Lending to Small Companies on Property Slowdown
  • Indonesia’s Economic Growth Slows, Giving Central Bank Room to Hold Rates
  • Malaysia Raises Key Interest Rate to 3%, Boosts Reserve Ratio on Inflation
  • Australia March retail sales (0.5%) m/m vs consensus +0.5%.
  • Japan was closed for Children’s Day.
  • South Korea was closed for Orininal.
  • Thailand was closed for Coronation Day.












Howard Penney

Managing Director


On the surface, this looks like a decent acquisition: 2x revs, not dilutive, and strengthens IGT's online positioning.



"The addition of Entraction advances IGT's position in legalized Interactive gaming markets.  It strengthens our interactive portfolio by adding poker, bingo, casino, and sports betting. This combination will drive enhanced value for our global customers and partners."

- Patti Hart, President and CEO of IGT


"This transaction represents a fantastic opportunity for our employees, customers, and shareholders alike. Entraction will be able to utilize IGT's global scale and distribution to advance our short and long term objectives in exciting, new ways and we look forward to joining the IGT team."

Peter Astrom, President and CEO of Entraction



  • IGT launched a cash tender to purchase all the outstanding shares of Entraction Holding AB for $11.11/share ($115MM)
  • The Entraction board has recommended the transaction to its shareholders
  • "Established in 2000 and based in Stockholm, Sweden, Entraction operates one of the world's largest, legal online poker networks and has quickly grown into one of the leading suppliers of online gaming products and services."
    • Over 4 million registered players
    • Partnerships with over 60 operators
    • "Provides a comprehensive suite of services needed to operate a successful gaming site such as content management, payment solutions, and fraud protection."
  • "IGT expects to fund the transaction from available cash on its balance sheet. The tender offer is projected to close within IGT's current fiscal year and is subject to conditions customary for Swedish public companies as well as certain regulatory approvals."



  • Their offer for Entraction serves to further IGT's objective of growing their international and online gaming business
  • Entraction has 40 turnkey customers and 20 poker customers that use their technology
  • Premature to estimate impact on IGT's FY11 guidance, but the acquisition will enhance IGT's online business in FY12
  • No change to guidance



  • What is the status of Entraction's remake of their poker product?
    • Too early for IGT to have input on Entraction's platform
    • According to IGT's due diligence, they believe that the platform is good base for online poker
  • This transaction is in support of an ex-US strategy. It's really about participating in existing legal markets.
  • They do generate positive cash from operations and have roughly $54MM of revenue
  • It's really important for them to have the regulatory approvals and they believe that they will be able to take this platform into markets where Entraction didn't have the size and financial ability to pursue. Also complements their existing suit of products that they already have in order package a complete online casino offering. 
  • Entraction has not pursued other takeout opportunities to IGT's knowledge. Have just north of 20% of the shareholders that have already indicated support for the transaction.

Early Look

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Ragingly Bullish Bears

“Forget about style; worry about results.”

-Bobby Orr


Last night, after the Boston Bruins scored 2 goals in the 1st minute of the 1st period against the Philadelphia Flyers in the Stanley Cup Playoffs, I found myself high fiving friends in the Boston Garden amongst 18,000 of the most Ragingly Bullish Bears I have seen in my life.


Bears wearing black and gold jerseys have been pounding Boston’s pavement since the Bruins were born in 1924. While I’m not a long-time Bruins fan, I can assure you that the best risk managed position I could assume last night was to be one for the night.


Bears, Bud Lights, and belting heavy metal music with the Bruins about to go up 3-0 in a playoff series in May is as bullish a 3-factor model as a hockey fan can recognize. It’s been a long time. They haven’t won The Cup since Bobby Orr (1972). These bears are hungry.


How Ragingly Bullish are you?


While sentiment is one of the more difficult risk management factors to quantify, we do have some qualitative data that we overlay with our models. In mid-February, one of the key sentiment signals we called out in calling for a US stock market correction was the Institutional Investor (II) Bullish-to-Bearish survey.


Like most surveys, this one is far from perfect – but if measured relative to itself, you can at least consider little mathematical critters that matter like mean reversion and spread risk.  


So let’s forget about the style of this survey for a second and consider the results:

  1. Bulls up 100 basis points week-over-week to 55%
  2. Bears down 200 basis week-over-week to 16.5%
  3. The Spread (Bulls minus Bears) widened by 150 basis points week-over-week to +38.2% for the Bulls

Again, relative to itself, there are a few critical risk management callouts in this long-dated survey to consider:

  1. Bulls are not ragingly bullish
  2. Bears are not allowed to be bearish
  3. The Spread between Bulls and Bears is only 200-300 basis points from its all-time wides (all-time is a long time)

All-time “wides” is risk management locker-room speak at Hedgeye for something you don’t want to mess with – kind of like being a man dressed in orange last night drinking a smoothie with your i-pod on in the bowl of the Boston Garden – it’s just a bad position to be long of.


Of course, with Correlation Risk to the US Currency Crashing running at all-time highs (see yesterday’s EL note to see how we quantify that), that definitely doesn’t mean you couldn’t try riding that Silver bull to the bitter end. But remember, the last 8-seconds of that ride is where all your risk really lives.


Interestingly, but not surprisingly, all it took to rock the raging inflation bulls’ world for a few days was some deflation.


How do you Deflate The Inflation (one of our Q2 Global Macro Themes)?


You stop the Currency Crash in the US Dollar.


For the week-to-date, after closing down for 14 of the prior 18 weeks, all it took to Deflate The Inflation was an arrest of the US Dollar’s decline. For the week, with the US Dollar Index trading flat, pull up a some of the following charts and you tell me how Ragingly Bullish you are on being long The Correlation Risk:

  1. Gold
  2. Silver
  3. Oil
  4. Cotton
  5. Copper
  6. Energy stocks

I can tell you that I for one am not enthused about being long Gold and Oil this week. When this gargantuan global carry trade of Gaming Policy unwinds, we can all forget about debating risk management styles and see who is left standing. Mr. Market owes the fans nothing.


My immediate-term support and resistance lines for Gold are now 1488 and 1526, respectively. Immediate-term support and resistance lines for oil are now $107.11 and $109.54 and my immediate-term lines of support and resistance for the SP500 are now 1332 and 1371, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Ragingly Bullish Bears - Chart of the Day


Ragingly Bullish Bears - Virtual Portfolio

Dangerous Knowledge

This note was originally published at 8am on May 02, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A little knowledge is dangerous. So is a lot.”

-Albert Einstein


I have a tremendous amount of respect for what Einstein’s independent thinking did for this world, and I love that risk management quote. No matter what you do or do not know this morning, there’s this interconnected Global Macro market’s last price.


US Dollar driven correlation-risk to currency, commodity, and stocks market prices is running at its highest level since Q2 of 2008. While it’s Dangerous Knowledge to have marked-to-market models on your desktop to help you price this real-time risk, it’s doubly dangerous to summarize the uncertainty associated with this risk with partisan politics.


Since neither the Manic Media nor 90% of Washington/Wall Street got what a Crashing Currency meant in Q2 of 2008, we don’t expect consensus to provide any proactive thought leadership on the risk management topic this time. Whether it’s the US Dollar Index’s relationship to the price of Oil, Gold, or even Volatility, the similarities to the second quarter of 2008 are borderline glaring at this point.


The most market relevant mathematical learning since Einstein’s Relativity has been Chaos and Complexity Theory. It, unlike Efficient Market Theory, accepts uncertainty as a grounding principle. The Keynesian Kingdom’s top brass doesn’t do uncertainty. Allegedly, this time they know exactly what’s going on out there in this gargantuan ecosystem of colliding factors that we call the Global Economy.


What’s going on in Global Macro markets may very well be trivial. Market prices and the trailing correlations that impacted them are historical facts. What’s “not clear” (to quote The Bernank’s favorite career risk management qualifier from last week) is what can be quantified as causal over a long period of time. “Not clear” that is, to the professional politicians who are accountable to the US Dollar Debauchery math.


Here’s what the US Dollar did last week:

  1. Down another -1.4% week-over-week to a new YTD low
  2. Down -9.8% from its January, 2011 price and down for the 14th week out of the last 18
  3. Down -17.5% from June 2010

Wait. What does June 2010 have to do with anything other than making Groupthink Geithner’s record as a credible US Dollar stability guy anything short of a national embarrassment? June 2010 is when the US Dollar was high and prices at the US pumps were a lot lower.


38% lower, actually…


Looking ahead at our kids getting out of school and the summer driving season (hearing from my expert network that both still occurs this year), I think most Americans think a -17.5% meltdown in their Crashing Currency and a +38% tax at the gas pump is a bad trade – for them.


Have no fear however, the President is here in his weekly address (Saturday): “When oil companies are making huge profits and you’re struggling at the pump, and we’re scouring the federal budget for spending we can afford to do without, these tax giveaways aren’t right.”


Right. right…


Meanwhile, Brazil’s President had a different take than blaming Petrobras: “Guaranteeing purchasing power means playing tough on inflation. This is one of the fundamentals of our political economy, and one we’ll never let up on.”


At least there’s a healthy political bid/ask spread out there in terms of what left-leaning President knows the least about Complexity Theory. With American central planners leaning more left than even Europe and Brazil at this point – who would have thunk…


Back to the Global Scorecard – here were the big Global Macro currency and commodity moves associated with the US Currency Crashing week-over-week:

  1. The Euro = UP another +2.1% to $1.48
  2. The Chinese Yuan = UP another +0.3% to a new all-time high of $6.49
  3. CRB Commodities Index (19 commodities) = UP another +0.8% to a new 2-year weekly closing high of 370
  4. WTI Crude Oil = UP another +1.5% to a new 2-year weekly closing high of $113.93
  5. Gold = UP another +3.5% to a new all-time high of $1556 (all-time is a long time)
  6. Copper = DOWN -5.4% at $4.17/lb

Oops, one of these things is not like the other. That’s right, Dr. Copper is reminding those of us with some knowledge about real-time market signals that Global Growth Slows As Inflation Accelerates. Maybe that’s why Chinese and Brazilian stocks lost -3.3% and -1.4% last week, respectively. They no likey The Inflation from The Bernank.


US stocks had another great week, rallying like Japanese equities have for decades to lower-long-term-highs on decelerating volume and scary skew signals. But don’t worry – this Currency Crash thing is cool, like it was in Q2 of 2008, until it isn’t…


In the Hedgeye Asset Allocation Model I proved that I still know a little about learning from my many prior mistakes. I ended the week with my highest invested position of 2011, dropping my allocation to Cash to 34% (at the last immediate-term overbought peak in US Equities I had 62% in Cash, so at least this time is different in that I am riding out more of The Inflation trade’s gains).


The Hedgeye Asset Allocation Model’s week-end allocations are now as follows:

  1. Cash = 34% (down from 40% last week and 52% in the last week of March)
  2. International Currencies = 30% (Chinese Yuan, Canadian Dollar, British Pound - CYB, FCX, and FXB)
  3. Commodities = 12% (Gold, Oil, and Corn – GLD, OIL, and CORN)
  4. International Equities = 9% (China – CAF)
  5. Fixed Income = 9% (US Treasury Flattener – FLAT)
  6. US Equities = 6% (Technology – XLK)

A little knowledge of the Bin Laden takedown would have helped me be levered-long everything US Equities into this week’s start. Having Dangerous Knowledge like that though is a lot of knowledge I’ll pray to do without!


My immediate-term support and resistance lines for Gold are now $1515 and $1557, respectively. My immediate-term support and resistance lines for oil are now $111.47 and $115.61. And my immediate-term support and resistance lines for the SP500 are now 1338 and 1377, respectively.


I plan on taking down both my gross (Hedgeye Asset Allocation invested position) and net long positions (Hedgeye Portfolio: 17 LONGS, 11 SHORTS) into this morning’s newsy strength.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Dangerous Knowledge - Chart of the Day


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