GMCR’s valuation bubble has been deflating since we made the “coffee bubble” call in our DNKN Black Book in July.  Is DNKN next?  We estimate that the company needs to sell just under two boxes of K-Cups per day per store (point of distribution) to add 1% to the comp.  We stopped by a store on 6thavenue yesterday and were disappointed to see no K-Cups on sale!  CMG is the other obvious candidate for correction from a valuation perspective.  The company’s unit economics have remained strong with unit and comp growth offsetting commodity and labor headwinds.  The new concept, as it grows, could become a distraction, however.








Coffee is falling for the second straight day in New York after the top cooperative in Brazil predicted a “great” crop quality in the country.  Brazil is the world’s largest coffee grower. 












GMCR: Green Mountain Coffee Roasters traded down yesterday after Greenlight Capital’s David Einhorn made negative comments about the business at a conference.  Einhorn took issue with the “looming” patent issue on K-Cups (expiration of the patent) and the resulting loss of the “monopoly price”.  All in all, we saw nothing new in Einhorn’s comments but the impact on the stock was obviously severe.


DPZ: Domino’s Pizza reported 3Q Adjusted EPS of $0.35 versus the street at $0.33.  Domestic same-store sales were +3% versus StreetAccount consensus of +2.7%.  Company same-store sales were 4.2% versus 2.2% expectations.





PFCB: P.F. Chang’s Bistro was downgraded to “Underweight” from “Neutral” at Piper Jaffray.


PFCB: P.F. Chang’s Bistro announced that it has signed an exclusive development and licensing agreement with Alsea, S.A.B de C.V., the leading quick service restaurant restaurant, coffee shop and casual dining operator in Latin America, to develop Pei Wei Asian Diner throughout Mexico.


CAKE: Cheesecake Factory was upgraded to “Overweight” from “Neutral” at Piper Jaffray.





Howard Penney

Managing Director


Rory Green


FW: Growth in Tact

Trends remain positive in the Athletic Footwear space. Sequentially better price points in all channels driving growth. UA share hits the 1% mark – a psychologically important mark – as opposed to a financial one. ADIbok breaches 10% share. Hi-end shoes are still where it’s at.


Here is some additional color on FW trends:


  • All three channels’ sales growth improved over August trends with positive growth in ASPs across the board. The department & National Chain store channel’s ASP growth accelerated above the pricing growth in the shoe chain channel which last occurred in January (which was the last time the dept. store channel posted positive growth in pricing).
  • The gap between market share by channel continued to tighten further in September on both an absolute and a trailing 3 month basis. The spread between Athletic Specialty and department store tightened from ~3 full points to ~2.3%.  This is potentially meaningful.
  • Sales in ASPs greater than $130 remain positive in every channel except shoe chain where growth is driven by footwear priced at $70 or less (which accounts for 91% of the shoe chain channel’s sales). At an industry level, despite the fact that sales in ASPs greater than $130 only account for 9% of sales, had this price band run flat in September, the top line run rate would have been down slightly; the 17% growth in the more expensive footwear was a positive contributor on the month and continues to fuel the Athletic Specialty/SG & Department store channels as well.
  • Under Armour’s newest running shoes layered on 22% of growth in September and were a key drivers in the 11 bps share gain. While the new UA Reign, Stealth & Split are certainly gaining momentum in the early stages of the product launch, UA is going to need A LOT more of this to prove that it’s on its way to a $500mm business, but positive progress nonetheless that we’ll be watching closely. As sales volumes increase in FW, so will the category’s margin profile, but for now a product with margins close to 30% growing as a % of sales will add further pressure to aggregate margins. Moreover, with 74% of inventory growth at the end of Q2, UA will be pressed to clear inventories whether or not it comes at the expense of full priced sell through.
  •  After posting several months of meaningful sales growth, Reebok’s sales decelerated dramatically on a yy decline in pricing; Adidas growth accelerated on the month. We’ll keep our eyes out for the Reebok trends next month. But netting them both out, we’re still looking at better than 10% share.


FW: Growth in Tact - monthly FW chart 1


FW: Growth in Tact - monthly FW chart 2


FW: Growth in Tact - monthly fw chart 3


FW: Growth in Tact - monthly fw chart 4


FW: Growth in Tact - monthly fw chart 5


FW: Growth in Tact - monthly fw chart 6


FW: Growth in Tact - monthly fw chart 7


FW: Growth in Tact - UA new running MONTHLY



The Macau Metro Monitor, October 18, 2011




Kenny Leong, CEO of AERL, dismissed concerns of Chinese entrepreneurs going into hiding to avoid repaying loans.  Leong said large junkets mainly dealt with super-rich clients with sound creditworthiness.  "Right now big firms do not have such problems. This may be related to the smaller operations," Leong said, adding that smaller junkets were affected because of their more informal funding channels and less rigorous checks on customers.  Leong remarked that AERL extended HK $5BN in credit to VIPs in the first five days of October alone.  "People are saying Macau suffers from trouble in China, this is not the case," he said.


Meanwhile, Galaxy's CFO Robert Drake said, "This year's Golden Week has again proven to be a huge boost to business. The growth of revenue in Macau -- both VIP and mass market -- has been strong and we have seen no signs of any recent slowdown."




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Time to Fail

This note was originally published at 8am on October 13, 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 credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming …”

-Theodore Roosevelt


I’ll admit that my peak athletic days are behind me.  At my best, I was a middling college hockey defenseman with a propensity for extended stays in the penalty box.  My worst probably came last night in a beer league hockey game in Hamden, CT.  Nonetheless, my hometown of Bassano, Alberta has invited me back to speak at the annual Sportsmen of the Year Dinner, so my athleticism is, apparently, still appreciated somewhere.


In a shift of athletic gears, this summer I joined the New Haven Lawn Club and officially began my tennis career.  Certainly I’ve played tennis before, but not on clay courts attired completely in whites.  As many of you know, tennis clubs are typically populated by people that have spent a good chunk of their lives, well, populating tennis clubs.  Needless to say, this Alberta farm boy was a little overmatched this summer.   In fact, my summer was spent failing and, often, miserably so.


Personally, I’ve never believed failure to be a bad thing.  Now sure, losing or failing doesn’t give you the warm fuzzies inside, but failing and adapting ultimately sets you up for greater success.  In a 2008 commencement address to Harvard, author J.K. Rowling, who made a billion dollars for her Harry Potter series, adroitly summed up the benefits of failing when she said:


“So why do I talk about the benefits of failure? Simply because failure meant a stripping away of the inessential. I stopped pretending to myself that I was anything other than what I was, and began to direct all my energy into finishing the only work that mattered to me.”


As it relates to Europe sovereign debt, the one solution that has not been seriously considered is failure.   Instead, the key solution from almost every Eurocrat and talking head, is to continue to support and promote a broken banking system and failed monetary union.  There are other possibilities: let Greece fail, let other sovereigns fail if they can’t get their house in order, and let heavily exposed banks fail. 


The validation of the failure strategy at least partially comes in comparing the credit default swaps of Italy, Portugal and Ireland from July 1st, 2011 to today.  Respectively, Italian swaps are up 140%, Portuguese up 38.2%, and Irish down -3.2%.  Now to be fair, Ireland hasn’t failed, but three of largest banks, Allied Irish, Irish Life & Permanent, and Bank of Ireland have experienced “credit events” and, as a result, Ireland’s credit worthiness has improved, on the margin.


A more pressing question facing stock market operators is: will this current stock market rally fail?  In the near term, the key driver of the stock market will likely be corporate earnings reports.  To sustain positive price momentum, companies will need to both hit their estimates and also maintain future guidance.  Currently, according to Bloomberg consensus estimates, 2012 consensus expectations for EPS for the SP500 is $106.15, which implies 16% year-over-year growth in earnings.


Certainly, that type of earnings growth is possible for the SP500, but it is highly contingent on underlying economic growth.  Currently, our view is the economic growth will be in the sub-1.0% range in 2012.  In the last thirty years, there have been five years of 1%, or less, GDP growth in the U.S.  On average, in those years, SP500 earnings declined -18.3% y-o-y.  Thus, unless economic activity accelerates in the U.S., it is highly unlikely that 16% y-o-y growth in earnings is met.  Assuming the Hedgeye view of economic growth is correct, there is substantial downside to current 2012 consensus earnings estimates.  History would suggest, as outlined above, that 2012 earnings could be too high by at least one-third.


Alongside earnings growth, there is of course the quality of earnings.  J.P. Morgan kicked off the earnings debate this morning with an EPS number of $1.02 that, at first blush, seems solidly above consensus of $0.92.  The questions as always, though, relates to the quality of earnings, and $0.29 of EPS was a “benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads.”  So, if we back out the benefit to JPM’s earnings from widening of their credit spreads, EPS declined -27% year-over-year.  Yikes !


The more pressing failure in global macro land this morning is the failure of the Chinese to maintain high exports to Europe. To be fair, in aggregate Chinese exports overall were up 17.1% in September, which is a formidable number.  Unfortunately, exports to Europe, Chinese largest trading partner, declined substantially, sequentially from 22% year-over-year in August to 9.8% in September.  As the Chart of the Day below shows, this is the second slowest year-over-year growth rate of Chinese exports to Europe in 18+ months.


Chinese economic activity is clearly slowing, but in our purview it is still too early to call for massive Chinese easing.  As my colleague Darius Dale wrote yesterday:


“All things considered, it could be a while before China pulls the trigger on the monetary easing front. Merely using 2008 as a semi-comparable reference, we saw that China waited a full six months for confirmation of flat-to-down sequential CPI growth and a -380bps reduction in YoY CPI before cutting interest rates in early September of that year.”


Certainly though, growth doesn’t slow forever and whether by monetary stimulus or organic means, the positive catalyst we will be looking for is growth accelerating, on the margin.  So far though, it is too early to bet on that. 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Time to Fail - DJ time to fail


Time to Fail - VVP dj

Romney Risk

“Risk means more things can happen than will happen.”

-Elroy Dimson (quote from “The Most Important Thing”)


I received a tremendous amount of feedback on my Yale Economics Department note from yesterday. Your diverse and critical thoughts have provided my team a tremendous opportunity to see plenty of perspectives. For that, we thank you.


Yale didn’t write me back, yet.


Maybe tonight in Las Vegas the dogma that is academia’s Keynesian Economics will hear some louder drums. I am probably the least connected person in American and European politics (and I’d like to keep it that way), but there is heightening probability that Mitt Romney talks more explicitly about firing Ben Bernanke at tonight’s Republican debate. That would be very bullish for the US Dollar.


Strong Dollar = Strong America. Period.


That’s my long-term call and I’m sticking to it. Like you saw yesterday, when the US Dollar strengthens, we Deflate The Inflation. That’s good for the American Consumer. This happened in September, and the Michigan Consumer Confidence reading rose.


With the US Dollar down for the 1stweek in the last 5 last week, inflation expectations at the pump rose, and that same American Consumer Confidence reading fell (57.5 OCT vs 59.4 SEP).


This may sound like a perverse relationship (stocks and commodities down make the country more confident), but the US stock market isn’t the electorate anymore. You can only plunder your people so many times.


I’m not a Republican, but this is what the Republicans are going to say about this for the next year:


Bernanke has overinflated the amount of currency that he’s created… QE2 did not work… it did not get Americans back to work.” –Mitt Romney


Whether the Keynesians want to admit this or not, monetary and fiscal policy drive the value of a country’s currency. If I’m too “young” to be “trusted” on that, ask the biggest hedge fund manager in the world who has made money for his clients during both the 2008 and 2011 Growth Slowing draw-downs. That was not Steve Cohen – it was Ray Dalio.


If you don’t want to ask any of us who have had this right what is going wrong, fine. But don’t expect The People to trust you. They aren’t as willfully blind to the academic dogma that has driven both Bush and Obama to devalue the currency in exchange for short-term asset price inflations. They may not be able to communicate it concisely yet – but I would not bet against them.


Back to the Global Macro Grind


China doesn’t trust Japanese, American, or European monetary policy. They seem keen on proving that they have better ideas to lead the next generation of global capitalists. Can communists be capitalists? If “capitalists” leading America can behave like socialists, why not? It’s all name calling anyway.


At the same time that our markets are begging the Europeans for bazookas to socialize bank losses, I hear a lot of whining in this country. It’s not the kind of whining that the Chinese in particular are used to seeing from us. It’s time to stop. Reset. And Reload. It’s time to start winning again.


Despite a lot of people in the hedge fund community fear-mongering about China falling off a cliff like Europe has, here’s how China’s Q3 GDP report looked last night:

  • Real GDP growth slowed in 3Q: 9.1% y/y vs. 9.5% prior;
  • YTD Real GDP growth slowed in 3Q: 9.4% y/y vs. 9.6% prior;
  • Industrial Production growth accelerated in September: 13.8% y/y vs. 13.5% prior;
  • Retail Sales growth accelerated in September: 17.7% y/y vs. 17% prior; consistent with our call for a shift on the margin towards consumption-led growth; and
  • YTD Fixed Assets Investment growth slowed in September: 24.9% y/y vs. 25% prior.

Not great. But not bad.


On the margin, these are still sequential decelerations so we are waiting on the sidelines to buy Chinese stocks again. Everything that really matters in Global Macro happens on the margin.


If you look at the data coming out of the rest of Asia in the last 24 hours, it’s actually quite bad:

  1. Singapore Exports for SEP down -4.5% y/y vs +3.9% AUG
  2. Australian Vehicle Sales for SEP down -1.3% y/y vs +4.6% AUG
  3. Japanese Department Store Sales for SEP -2.4% y/y vs -1.7% AUG

So, with Global Growth Slowing and the US Dollar strengthening (two of our key Macro Themes), there is a generational amount of Correlation Risk that remains in Global Macro markets.


While our American-made definition of Real-time Risk Management most certainly considers many more things that can happen than will happen, we are not trying to be alarmist. Neither are we holing up on campus with dogmas. We are standing here on the front lines of the fight trying to get to the right answers for this country before the wrong assumptions driving policy make that too late.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $84.11-89.12, and 1187-1229, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Romney Risk - Chart of the Day


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