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On track for another big month.


Macau rebounded strongly from a “soft” first week of August.  Table revenue per day increased from HK$646 billion in the first week to HK$792 million in the past week.  We think the full month of August will come in the range of HK$22.0-23.5 billion, up 44-53% YoY.


Market shares have normalized a bit from the first week as one would expect.  MPEL rebounded from a low hold percentage in week 1 and is now at 14.1% for the first half of August.  Still below trend but still above the Street in HK$ terms as far as we can see.  LVS looks weak at 13.5%, down from 15.0% in week one.  Wynn continues to impress with market share in line with the pre Galaxy Macau numbers.


MACAU REBOUNDS IN WEEK 2 - macau 081411


I found this related-party transaction footnote in the DNKN 10Q 10 be of interest:


(14) Related-Party Transactions


(a)    Advertising Funds


At June 25, 2011 and December 25, 2010, the Company had a net payable of $21.3 million and $23.1 million, respectively, to the various advertising funds.”


This bullet is important for understanding a key item in the DNKN P&L. 


DNKN collects a range from 1.0% to 6.0%, of gross retail sales from Dunkin’ Donuts and Baskin-Robbins franchisees to be used for various forms of advertising for each brand.  For fiscal 2010, franchisee contributions to the U.S. advertising funds were $290.0 million. For the six months of 2011, franchisee contributions to the U.S. advertising funds were $147.8 million.


According the 10Q, “the contributions from franchisees in fiscal 2010, are almost exclusively franchisee-funded and cover all expenses related to marketing, advertising and promotion, including market research, production, advertising costs, public relations and sales promotions. We use no more than 20% of the advertising funds to cover the administrative expenses of the advertising funds and for other strategic initiatives designed to increase sales and to enhance the reputation of the brands.”


Several things come to mind:

  1. The Franchisees can’t be happy that the company is holding back some of their Advertising funds!
  2. The $21.3 million represents 14% of the advertising funds collected YTD.  If you include another 20% the company spends on administrative expenses the advertising message is weakened.
  3. The franchisee contributions to the U.S. advertising funds of $147.8 million are below the implied rate of growth in points of distribution of 3.6%.
  4. The $23.1 million at December 2010 represents 86% of the 2010 net income. 
  5. The ad fund expensing looks like a big “reserve fund” for a rainy day!  Is there now an earnings charge/change/manipulation potential in the out quarters or years?
  6. Management is in a quiet period so I can’t get much more color on why this payable is on the company’s balance sheet.
  7. I looked at MCD, DIN, WEN, and YUM, (all companies with significant franchise systems) most recent filings and do not see an equivalent entry.


Howard Penney

Managing Director


Rory Green



European Risk Monitor: Tea for Two

Positions in Europe: Short EUR-USD (FXE); Short UK (EWU)

European capital markets whipped around last week alongside a decision late Thursday by France, Italy, Spain, and Belgium to ban short selling of bank and insurance stocks as the Swiss National Bank announced it would intervene to weaken the CHF.  We continue to believe that Europe’s sovereign debt contagion has a long term TAIL and the uncertainty on the European community’s go-forward program (more below under “Calendar Catalysts”) should support marked downside in the periphery and a drag on the core over the immediate and intermediate terms. For now, investors hope Sarkozy and Merkel can cure ills over tea tomorrow – we’ll take the other side.


Short Selling Ban

To put the short selling ban in context, our Financials Sector head Josh Steiner wrote a note on Friday titled “Banning Short Selling Helps for about 5 Hours” in which he cites the short-lived bounce that US Financials (XLF) received on 9/18/08 on the SEC ban on short selling US financial stocks.


He notes specifically that “the US ban triggered a trough to peak move of 32% that lasted essentially 5 trading hours, all of which was given back over the next seven trading days. For reference, post the short-squeeze highs of $24.50 in the XLF on 9/18/08, the XLF proceeded to lose 76% of its value to its intraday low of $5.88 on March 6, 2009, roughly six months later.”


We use the US Financials short selling ban as a reference point for European bank stocks, especially for the banks of the PIIGS, France, and Germany, that saw heavy selling leading into last week’s short selling ban. To say the least, we don’t see any near term selloff as a clear buying opportunity.


Calendar Catalyst

There are a few calendar catalysts over the near to intermediate term, and the problem remains the political uncertainty on a road map to shore up sovereign debt contagion, especially as the spotlight moves to Italy and Spain. Here’s what’s ahead of us:

  • Merkel and Sarkozy meet tomorrow (8/16) in Paris
  • European banks, through VOLUNTARILY Private Sector Involvement (PSI), are scheduled to reduce Greece’s debt through exchanging existing bonds for new bonds with lower interest rates and longer maturities in late AUG/early SEPT
  • The terms, but not size, of the EFSF will be voted on in mid to late September by EU member states

We continue to warn that we’re likely to see indecision across countries on if not the terms, but eventually the size, of the EFSF, which we see far undercapitalized to handle any bailout needs of Italy or Spain. Remember, the EFSF must be ratified by ALL EU countries, which cannot happen until parliament returns from summer recess. There are no rumors that tomorrow’s meeting between Merkel and Sarkozy will bring any clear decision, besides further stamping out the possibility of issuing a Eurobond (note: different from EFSF bonds), that the Germans are squarely against.


We think the ECB’s decision to re-engage the SMP bond purchasing program on 8/8 is a response to the lack of resolve on the terms and size of the EFSF, including its ability as a facility to shore up sovereign debt fears. To this end, we learned today that the ECB bought a monster €22 Billion in sovereign bonds last week! While sovereign bond yields have come in over the last week, importantly down to around 5% for Italy and Spain, there was no indication that this recent respite will hold. [Note: even in the days following the second bailout of Greece on 7/21 yields remained elevated (see chart below)].


European Risk Monitor: Tea for Two - meme1


European Financials CDS Monitor

Bank swaps in Europe were mostly wider last week.  34 of the 38 swaps were wider and 4 tighter.   With the banks of no country immune to the move last week, the critical call-outs are the banks in Belgium, Germany, Greece, Italy, Portugal and Spain.


European Risk Monitor: Tea for Two - meme2


We remain short the UK due to the country's sticky stagflation and short the EUR-USD.  Our trading range is $1.42 to $1.44, with the intermediate term TREND line at $1.43.


Matthew Hedrick

Senior Analyst

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DNKN was covered this morning in the Hedgeye Virtual Portfolio.


This morning, Keith covered DNKN in the Hedgeye Virtual Portfolio as the stock was oversold on an immediate-term “TRADE” basis.  From a fundamental perspective, we remains negative on the company’s prospects of justifying the still-egregiously high multiple the stock price is implying.  For a comprehensive overview of our analysis on DNKN, please email us or for a copy of the DNKN Black Book and other research notes on the company.


DNKN: TRADE UPDATE  - dunkin levels



Howard Penney

Managing Director


Rory Green


Weekly Latin America Risk Monitor

As usual, we’re keeping it brief. Email us at if you’d like to dialogue further on anything you see below.



Across Latin American equity markets, Venezuela continues to outperform, closing up +7.1% wk/wk and up +52.4% YTD (vs. regional median of -14.2%). Interestingly, Venezuela’s Stock Market Index remains the only country index in the world that remains bullish from a TRADE and TREND perspective in our quantitative models. 


Slowing Growth and Deflating the Inflation are weighing on interest rate expectations across Latin American currency and fixed income markets, with the Brazilian real and Mexican peso declining -2.2% and -2.6% wk/wk, respectively; Brazil’s 2yr sovereign debt yields fell -43bps wk/wk alongside a -16bps decline in Mexican 2yr sovereign debt yields. CDS shot up broadly across the region, but not to levels we’d consider noteworthy from a change in credit quality perspective.


Weekly Latin America Risk Monitor - 1


Weekly Latin America Risk Monitor - 2


Weekly Latin America Risk Monitor - 3


Weekly Latin America Risk Monitor - 4


Weekly Latin America Risk Monitor - 5





-Despite record-low unemployment for the month, retail sales growth slowed in June to +9.5% YoY. Though we remain the bears on Brazilian equities, we were out last week with a detailed report on what we’d like to see to turn constructive – email us for a copy of the presentation.

-Though Brazilian home price growth slowed in July to +2.1% MoM, the absolute level of growth continues be a thorn in the central bank’s side. At only ~1% of GDP, however, it will be tough to meaningfully slow the structural demand for mortgages and homeownership in Brazil over the long-term TAIL.

-According to the latest National Industrial Confederation (CNI) poll, President Rousseff’s approval rating has taken a -600bps hit (to 67%) since March, largely due to the sticky Stagflation continuing to grip the Brazilian economy. In fact, the percentage of respondents disapproving of the government’s efforts to control inflation rose +1,400bps to 56% since the survey last took place.

-Despite growing discontent with the central bank’s relative inaction on addressing what continues to be higher-highs in Brazil’s reported inflation readings, president Alexandre Tombini reaffirmed the government’s commitment to reaching the mid-point of their official CPI target of +4.5% (vs. +6.9% YoY currently) by the end of next year. From an intermediate-term perspective, we think Brazilian inflation peaks in August on a YoY basis. From a longer-term perspective, we do not see them achieving the stated objective absent a material slowdown in Brazilian economic growth.



-CPI accelerated in July on both a YoY and MoM basis to +3.6% YoY and +0.48%, respectively. The Mexican bond market continues to believe in the ability of central bank president Ron Carstens to avoid a serious bout with inflation despite record-low interest rates and Indefinitely Dovish policy, as expectations for an interest rate hike continue to be extended well into next year (Sept. ’12 based on TIIE futures).  We remain the bears on the Mexican peso (MXN).

-Banco de Mexico confirmed our view of the Mexican economy by lowering its forecast for 2011 and 2012 YoY GDP growth to 3.8-4.8% (vs. 4-5% prior) and 3.5-4.5% (vs. 3.8-4.8% prior), respectively.  The bank maintained its 2011 and 2012 YoY CPI forecasts of 4-5% apiece. Expectations of slower growth and flat-to-declining inflation expectations continue to support the bull market in Mexican peso bonds.



-Central bank president Jose De Gregorio confirmed our view that Chilean economic growth is slowing by officially stating that Chilean GDP growth is likely to approach trend-line levels by years-end (~4%).

-Inflation slowed in July to +2.9% YoY, which gives Banco Central de Chile the cover to remain on hold with their benchmark interest rate (currently at 5.25%).



-Accountability you can believe in: finance minister Juan Carlos Echeverry offered to resign if the country’s unemployment rate didn’t fall to single digits by year-end (currently at 10.9%). Though we don’t have a call here on the slope of Colombian unemployment, we continue to admire the courage and leadership out of their policy makers. Both monetary policy and fiscal policy remain key leading indicators for growth and inflation in our model.



-Peru’s central bank, led by the recently reappointed Julio Velarde, kept its benchmark interest rate on hold at 4.25% amid slowing domestic and global economic growth.


Darius Dale





Notable news items, macro data points, and price action pertaining to the restaurant space.






The University of Michigan Consumer Sentiment Index came in at 54.9 versus consensus of 62 for August.  This is the lowest level for the index since the 1980’s.





Recent gyrations in the stock market are impacting consumer preferences, as the chart below shows.


THE HBM: THI, DNKN, BWLD - ground beef steak



Restaurant Employment


Restaurant employment has hit its highest levels since the third quarter of 2007, a surprising trend that suggests operators face a difficult task in attracting and retaining employees.




To end a very volatile week, the full service sector underperformed.  The underperformance can be traced to the severe decline in consumer confidence and RRGB suggesting that consumer my be reacting to the decline in the market over the past three weeks.


THE HBM: THI, DNKN, BWLD - subsector fbr




  • THI raised to “Buy” at Edward Jones.
  • DNKN, according to Bloomberg News, is seeking to replicate its cult-like following in the Northeast in new regions in the U.S., particularly out west.  Hedgeye has been clear in our belief that this will be extremely difficult and costly given the existing brands in the western U.S.


  • BWLD raised to “Buy” at Sterne, Agee, & Leach.




Howard Penney

Managing Director


Rory Green


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