Unconscious Anchoring

This note was originally published at 8am on September 19, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The anchoring-and-adjustment heuristic, as it is called, is unconscious.”

-Dan Gardner


I sold into the end of Friday’s 3-day rally, taking the Hedgeye Portfolio to 11 LONGS and 8 SHORTS. Last Tuesday, I held my longest net long (longs minus shorts) position of Q3 2011. Short Covering Opportunities are fun when you get them right.


Do not confuse a Short Covering Opportunity with a change in the intermediate-to-long-term fundamental reality that Global Growth Slowing is here to stay as long as the market keeps begging for Keynesian policy to bail us out. Remember, Big Government Intervention does two things to your markets and your lives: 1. Shortens Economic Cycles and 2. Amplifies Market Volatility.


Put another way (in Hedgeye speak), do not confuse a TRADE (immediate-term) with a TREND (intermediate-term) or TAIL (long-term). Since there is neither responsibility in Old Wall Street recommendations or an ability to be what we call Duration Agnostic when considering risk, you need to capitalize on the Sell-Side’s propensity to anchor on intermediate-term TRENDs, after they have occurred.


In “Future BabbleWhy Expert Predictions Fail and Why We Believe Them Anyway” (2010), Dan Gardner does a nice job simplifying this behavioral economics  concept of “anchoring” by citing The Wheel of Fortune Experiment by Daniel Kahneman and the late Amos Tversky. 


“Kahneman and Tversky showed that when people try to come up with a number, they simply do not look at the facts available and rationally calculate the number. Instead, they grab onto the nearest available number – dubbed “the anchor” – and they adjust in whichever direction seems reasonable. Thus, a high anchor skews the final estimate high; a low anchor skews it low.” (Future Babble, pg 100)


That’s Old Wall Street.


Using the #1 risk factor that we’ve been hammering on for all of 2011 (Growth Slowing), here’s how this looks from a Wall Street/Washington Strategist or “Economist” perspective: 

  1. Nearest Available Numbers: Q1 2010 US GDP = 3.94% and Q2 2010 US GDP = 3.79%
  2. Old Wall Street’s Adjusted 2011 US GDP Estimates (in Q1 of 2011) = up +3-4% GDP Growth for 2011-2012
  3. Actual Q1 and Q2 2011 US GDP numbers (subject to 30-81% downside revisions) = 0.36% and 0.98%, respectively 

And, kaboom.


But, but, but… this year’s -18% peak-to-trough drawdown in US Equities from the April 2011 peak was all about a tsunami in Japan and Europigs not getting their fiscal houses in order, right?


Right. Right.


So now Old Wall Street is cutting both their Global and US GDP Growth forecasts to the NEAREST AVAILABLE NUMBERS and we’re, as our friends in the media like to say, “off the lows”, with a nice +5.4% Short Covering Opportunity in the SP500 last week.


Nice. Really nice.


What else happened week-over-week that caught my craws attention: 

  1. US Dollar TRADE and TREND breakout holds support (this is new)
  2. CRB Commodity Inflation continues to break down (at the beginning of Q2 we called this Deflating The Inflation)
  3. As US Treasury Yields finally make higher-lows, Gold continues to make lower-highs (they are inversely correlated) 

So what did I do with that? 

  1. I made the US Dollar Index a 6% position in the Hedgeye Asset Allocation Model (UUP)
  2. I sold my long Silver position and remain very cautious on all commodity long positions other than Corn (CORN)
  3. I traded a proactively predictable range in the SP500 as its bullish on one duration (TRADE) and bearish on the other (TREND) 

If I have said this 10x in the last week in meetings and on the phones with clients, I have said it a 1000x in the last 3 years. The best path forward for American prosperity is via a strong US Dollar.


Strong Dollar Deflates The Inflation. Period. That’s why the US Consumer stocks act a lot better than the Financials and Industrial stocks. Some stocks might, but this country is not going to recover on “cheap exports.” The 71% of the economy that matters = US Consumption. Strengthen the US Dollar and rates of “risk-free” returns on savings accounts and we solidify American income and consumption.


If you’re holed up in some Old Wall Street Sell-Side office on Park Avenue and don’t get that trade, take a walk outside and ask an American retiree how he or she feels about The Mucker Plan – a strong US Dollar in the hand is better than a snaky Geithner and a Keynesian Europig in the bush. Anchor on that.


My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $$1781-1819, $86.26-90.11, 4891-5652, and 1183-1224, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Having visited Asia and Latin America over the past two weeks, I have been spending more time on the emerging markets stories associates with some of the bigger restaurant names.  In particular, YUM, MCD, ARCO, SBUX and DPZ are all benefiting from the current growth trends.  For the time being, it’s an insignificant part of the DNKN story.


The above-trend growth in emerging markets is driven by strong fundamentals including favorable demographics, including a growing middle class, and well-positioned western brands are poised to reap benefits.  In many markets (particularly Brazil and China) the improvement in transactions being seen in the restaurant industry is driven by accelerating wage rates and a burgeoning middle-class.


McDonald’s recently indicated that in China the government wants to double wages by 2015 to help sustain the growth of the middle class.  In Brazil, based on an oft-used formula (GDP from 2 years ago + last year’s inflation), Brazil wage rate inflation should rise about 7% in 2011 and about 14% in 2012.


One of the best ways to play the emerging markets story is by being long ARCO.   ARCO has the exclusive right to own, operate and franchise McDonald's stores in 19 Latin American & Caribbean countries.


The long-term story is supported by management’s extensive operational experience in the region coupled with a strong – perhaps the strongest – brand.  The company also enjoys the benefit of operating within a vast geographic area.  ARCO operates in 19 countries/territories representing a market of approximately 575 million people: bigger than the US, UK, France Germany & Italy combined.  In addition, favorable demographics in the regions will allow for significant unit and same-store sales growth.


Over the next five years, the business model for ARCO looks like 9-10% same-store sales growth, 6-7% unit growth and continued margin expansion.  This should lead to 18-20% sales growth and 25-30% EPS growth.  Importantly, all of this can be accomplished from internally generated cash flow. 


There are some concerns that offset my bullish stance on the stock.  Brazil represents about two-thirds of ARCO’s EBITDA and the four next largest markets (top five comprise 90% of EBITDA) are Argentina, Mexico, Venezuela and Puerto Rico.  Inflation in both food and labor are a concern, but for the time being, increased transactions, pricing and internal efficiencies are some mitigating factors. 


From a MACRO standpoint, ARCO also represents a commodity play insofar as the company’s core markets are sensitive to economic swings, up or down, caused by commodity price moves.  The recent commodity boom has brought significant wealth to Latin American commodity-rich countries.  Our MACRO team is somewhat cautious on Brazil as inflation should trend down and growth should continue to slow through 4Q11 and into 1Q12.  The quantitative set up for the Bovespa is mixed with bullish TRADE; bearish TREND. 


Lastly, while the 180 day lockup period ends on October 12th, there definitely is some potential for selling by the sponsors of the IPO. .


At 10.7x NTM EV/EBITDA, ARCO is priced for growth but sells at a discount to some of the more US-centric restaurant companies which trade between 15-22x NTM EV/EBITDA.  While the company has the ability to double the unit count it’s is still “a franchisee” which historically have traded a significant discounts to the “franchisor.”  ARCO is trading a slight premium to MCD at 10.2 EV/EBITDA.


My take away from meeting management is Buenos Aires was very favorable and I continue to believe that business trends remain robust in all the key markets, while Mexico is still a problem child.  I also believe that a big upside surprise could be the potential geographic expansion outside the core nineteen markets the company currently operates in. 


If you need any specific details please feel free to contact me.


Howard Penney

Managing Director








US comments




  • Market is recovering; FIT is stronger; group is stronger; ADR should be up in 2012 and they are reinvesting in their property to make sure things stay fresh
  • Expect some increase in visitation in 2012 and there will be some increase in airlift into the market
  • 7 months of positive occupancy trend data
  • Since 2007, there were 14,000 new high-end room openings; good news is that there are no new room developments for about 4 years
  • Focused on driving rate
  • This summer's ADR and occupancy trends are very encouraging
  • Group room nights are projected to be 800k compared to 700k in 2008.
  • In 2009, they had 31% comp rooms; 27% comped rooms in 2010 and 7% YTD through July.  Will increase to 9% in 2012 which should help slot play.
  • A $10 increase in ADR will increase hotel revenue by $23MM and EBITDA by $19MM
  • Venetian:  Remodeling sports book by Nov 11, Premuim Suites by 1Q12, clock tower entrance and retail space by 2Q12, casino renovation by 3Q12, and sands expo renovation by end of 2013



  • Opened 302 room hotel in May 2011
  • Only 80 miles from Midtown Manhattan
  • Future expansions include: 150k SF retail outlet mall and 50k SF event center
  • Opening 8 stores in Nov 11 and additional 16 stores at Feb 12 Grand Opening; next competing outlet center is 1 hour away
  • Event center opening in May 12 - Livenation will be promoting their facility
  • Leveraging their database to be selectively promotional with their new hotel capacity
  • Baccarat represents 45% of total drop in August
  • They were up 21% YoY in August Table win



  • They are neutral on online gaming. They believe that i-gaming will negatively impact land based casinos and that it will encourage underage gambling.


Singapore comments



MBS (CEO George Tanasijevich)

  • Thinks that they can maintain their mid 50s margins that were achieved last quarter
  • Margins by segment: Mass: 60+%; Slots: 60+%; VIP: 30+%; Hotel: 80+%; Retail: 80+%
  • Last quarter, 77% of the revenue was casino driven
  • Seeing consistent monthly growth in non-rolling win and slot win by month since opening. Combined non-rolling win per day is about $4.2MM
  • Monthly RC volume is approaching the high of $4.7BN.  In April, they were at $4.3BN and $4.5BN in June
  • RevPAR hit $292 in June
  • Average Gross Rents are > $300/SFT; they are 98% leased
  • Net leasing revenue of $33MM in 2Q11 with operating profit of $26MM - targeting a quarterly run rate of $55MM in leasing revenue and $50MM of GP at full ramp when all 575k SQFT are open... vs. 438,000 SQFT at 2Q11
  • Only issue in MICE is that they don't have enough space for all the business that is coming their way. Trade show average duration of 3-4 days with attendance of 3-50k; local events and weddings average 1-2 days duration with attendance of ; MICE has averaged 4-5 day duration with in attendance
  • MRT Metro station will open directly in front of their property which will enhance property access for customers and staff
  • S$500MM Deep Water Cruise Terminal, which will allow the largest cruise ships to dock there, is projected by the Singapore Tourism Board to bring in 1.6MM cruise passengers by 2015
  • Gardens of the Bay, a S$1BN development across from their property opening June 2012, is funded by the STB.  It expects to bring in 5MM visitors per year
  • Singapore Sports Hub has a S$1.3BN opening in 2014 adjacent to Marina Bay area
  • Continuing to optimize the gaming floor. Have the highest table limits in the world and an airline fleet for the high rollers.  Subject to government approval, they are looking to convert the suites at the top of Tower 3 to super high end Paiza suites
  • South of Tower 1, there is space for an expansion subject to government approval



  • Before last Q, RWS was apparently doing a lot of junket volume, comping as high as 1.6%. Over the last Q, there has been a lot of 'paying attention' of who does business with who - particularly at RWS. So that's why their volumes got smacked. Don't believe that there will be a sea-saw of market share - but that MBS will be the clear market leader on the Mass side. On the high end they are very pleased on their collection ability. Losses are very minimal.  There also won't be a sea-saw; they are up and will stay up. 
  • Genting also has less experience in granting direct credit but they are experienced at it.
  • Doesn't expect that market to be volatile; it's growing
  • Mass is the most compelling part of the market - making $4.2mm/day with no credit risk.
  • Macau style junkets won't get approved in Singapore because the government doesn't want that. Singapore has very strict lending laws in Singapore and doesn't want the junkets breaking them.  The ones that do get approved will be wealthy people making good loans. 
  • Customers coming to Singapore are more affluent than the Macau or Vegas gambler
  • Given their location in Singapore, they benefit from all the other hotel rooms in Singapore
  • They are very room constrained right now. Looking to get more land to build more hotel rooms, ballrooms, and meeting space.

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