Initial jobless claims came in at 402k versus Bloomberg survey 401k.  The jobs picture remains poor and consumer confidence is reflecting that.  Later this morning the Bloomberg Consumer Comfort Index will be released and tomorrow morning the University of Michigan Confidence print will hit the tape.  It will be interesting to see if these two data points corroborate with the sharp drop in the Conference Board consumer confidence metric earlier this week.  There has been some debate as to why retail sales and confidence data has been diverging recently.  As our retail team pointed out during the week, at some point, the spread between these two trends is likely to come in.


THE HBM: PNRA, PFCB - initial claims 1027





THE HBM: PNRA, PFCB - subsector fbr





PNRA: Panera Bread was downgraded to Neutral from Buy at SunTrust.


PNRA: Panera Break was reiterated Equal Weight at Barclays.


PNRA: Panera Bread was downgraded to Hold from Buy at Miller Tabek.  The twelve-month price target is $133 per share.





PFCB:  P.F. Chang’s reported earnings this morning.  EPS came in at $0.29 cents ($0.27 adjusted) versus expectations of $0.32.  Comps were -3.7% at the Bistro which was in line with expectations.  Pei Wei’s top-line trends were below expectations, coming in at -3.6% versus -2.2%.  Consolidated restaurant margins came in at 16% versus 16.4% consensus.  The call is going on and management has stated that the company is not for sale, despite rumors of PE interest.


THE HBM: PNRA, PFCB - bistro pod 1


THE HBM: PNRA, PFCB - pei wei pod 1



EAT:  Brinker International was downgraded to Underperform from Neutral at Stern Agee.


THE HBM: PNRA, PFCB - stocks 1027



Howard Penney

Managing Director


Rory Green



The Macau Metro Monitor, October 27, 2011




SJM may soon raise worker salaries.  The move comes after Grand Lisboa’s cage cashiers held two demonstrations complaining that their wages only went up by MOP500 (US$62.5) since the property opened in February 2007, far below the increases enjoyed by their fellow croupiers.  Asked about the future ferry terminal, SJM CEO Ambrose So said, “Building one more terminal is necessary, but it should only be there to help divert the flow of visitors, and not replace the [peninsula] terminal.”  3Q earnings will be released Nov 7.



Unemployment rate for July-September 2011 held stable at 2.6%, same as the previous period (June-August 2011).  In comparison with July-September 2010, the unemployment rate dropped by 0.3% points.  Total labor force was 344,000 in July-September 2011 and the labor force participation rate stood at 72.5%, with the employed population increasing by about 300 over the previous period to 335,000.



On December 3, RWS's Universal Studios Singapore (USS) will launch the world's first theme park attraction based on Hasbro's iconic Transformers brand.



Inflation is likely to remain elevated until mid-2012 before easing as the economy slows, the Monetary Authority of Singapore (MAS) said.  The central bank said inflation will average above 5% for rest of this year.  It may fall to around 4% in the first half of 2012, before easing to close to 2% in the second half of next year. 



According to MAS, Singapore's economic growth will stall over the next few quarters before seeing a modest recovery late into 2012.  Continued uncertainty in economic activity as well as financial volatility will be a drag on growth, affecting both the domestic electronics sector and financial and tourism-related services, the central bank said in its twice-yearly macroeconomic review.


These factors have raised the possibility that Singapore could only grow below its potential growth rate of between 3% and 5% the MAS said.  It added: 'The Singapore economy is expected to grow at below potential in 2012, due in part to the near-term weakness of our key trading partners. However, the downturn is unlikely to match the severity of the global financial crisis (in 2009).'  The slowdown means that the labor market is expected to ease going forward, as demand for workers falls. This will also bring down wage growth from around 5 to 6% in 2011, to 2 to 4%, said the MAS.

Deceiving Themselves

This note was originally published at 8am on October 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.

We should not deceive ourselves into thinking that when we die we shall be remembered intensively for more than a limited number of days.”

-Siegmund Warburg, 1974


Last week I started reading Niall Ferguson’s “High FinancierThe Lives and Time of Siegmund Warburg.” Interestingly, but not surprisingly, Ferguson chooses to preface the 19th century history of the Rothschild and Warburg families by giving you a hint about how it all ended for central bankers in the 1970s (it didn’t end well).


If you re-read the aforementioned quote and think about it within the context of what is going on in the world of banking today (either central banking or bailout banking, or both), this is the root of the problem. These people don’t appreciate the lessons of history. They live in the now and react to whatever fire they need to put out next. There is no such thing as being proactively prepared for the long-term.


In the long-run, Keynes excused himself (and the responsibility in the recommendation of his policies) by reminding politicians that “we are all dead.” That’s a sad and pathetic way to think about leadership and legacy. It’s also one that the Western World had enough of come 1978.


Back to the Global Macro Grind


Regardless of how I continue to think the biggest man-made money printing bazooka in world history is going to end (structurally impaired long-term growth), our risk management task this morning also needs to consider dealing with the right here and now.


In the last 3 weeks I have dropped my Cash position in the Hedgeye Asset Allocation Model from 73% to 58%, and here’s how I’m thinking of positioning into and out of what should be a disappointing European Summit “catalyst” on Wednesday:


  1. Cash = 58% (down from 61% last week)
  2. International Currency = 18% (US Dollar – UUP)
  3. Fixed Income = 18% (US Treasury Flattener, Long-term Treasuries, and Corporate Bonds – FLAT, TLT, and LQD)
  4. US Equities = 6% (Consumer Discretionary – XLY)
  5. International Equities = 0%
  6. Commodities = 0%


Looking at these positions in the order that they appear:


1.   US Dollar – the US Dollar Index was down -0.3% last week, closing down for the 2nd consecutive week, but remains up +4.7% since Ben Bernanke’s beginning of the end of QE2. Despite Obama and his politicized Fed whispering everything they can about stimulus and housing bailouts last week, I think the political inertia remains at the US Dollar’s back.


2.   Fixed Income – the Growth Slowing TREND we’ve been calling for throughout all of 2011 has manifested in the US Treasury Curve flattening. While the market is telling me that growth is slowing at a slower pace (bullish for the immediate-term TRADE in stocks and bearish for bonds), the intermediate-term TREND levels for both the Flattener and long-term Bonds remain bullish.


3.   US Equities – my two favorite S&P Sectors (Utilities and Consumer Discretionary) are now up +11.3% and +5.1% for 2011 YTD, respectively. With Utilities finally achieving immediate-term TRADE overbought last week, I sold our XLU and stayed with the Strong Dollar = Strong America trade (US Consumption). Most of the domestic consumption stocks we like fit this same theme (MAR, TGT, etc…).


4.   International Equities – not being long most things Asian Equities last week was a good call. Asian equity markets closed down another -1.2% wk/wk. Losses were led by China (-4.7%) and Thailand (-4.1%), as both struggled with heightening domestic risks associated with Growth Slowing. I’m not touching anything European Equities at these lower-highs with a 1,000 foot Keynesian pole.


5.   Commodities – not here, not now. The US Dollar’s 2 weeks of weakness does not a TREND make. Inclusive of this morning’s +3.2% mean reversion bounce in the price of Copper, the Doctor remains in what we call a Bearish Formation (bearish TRADE, TREND, and TAIL). The CRB Commodities Index and Gold were both down another -1.9% and -2.8% last week. That’s good for consumers, not commodity long positions – which just saw their long “bets” (CFTC options contracts) rise +12% last week with hedge funds chasing.


On weakness (earlier in the week), I covered our short positions in US Housing (ITB), Oil (OIL), and the Financials (MS and C), so we actually had a pretty good week. No one ever went to the poor-house booking gains on the short side.


Where could I be wrong from here?


That answer obviously resides where it has for all of 2011 – led by the direction of the US Dollar Index versus the Euro.


Get the US Dollar right and you’ll get a lot of other things right. This is something our political and academic elite should think long and hard about as they try to fix their long-term policy mistakes with more short-term policies.


Sadly, in the short-term, I have no reason to believe that these people won’t continue to Deceive Themselves into thinking whatever it is that they think as the rest of us commoners are thinking about meeting payrolls.


In the short and long-run, I am fairly certain that if I do not succeed, both my family and firm will remember my mistakes intensively for plenty more than “a limited number of days.”


My immediate-term support and resistance ranges for Gold, Oil, the German DAX, and the SP500 are now $1622-1659, $86.34-88.98, 5761-6116, and 1220-1239, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Deceiving Themselves - Chart of the Day


Deceiving Themselves - Virtual Portfolio


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“The emotions aren't always immediately subject to reason, but they are always immediately subject to action."

-William James


If you gave me the written press release with what imprecisely this European band-aid actually says, I would have stayed short the SP500 (SPY) yesterday. That would have made me really wrong.


Rather than talking about what I would have, could have, and should have done, here’s what I did yesterday – and therefore where I stand for this morning’s emotional market open (Time Stamped):



10/26/11 11:33AM EDT

Booking It: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY), Short Consumer Staples (XLP)

After a 30 handle drop in the SP500, I’m booking it.


That doesn’t mean I’m bullish. It doesn’t mean I’m bearish. It doesn’t mean I can’t re-short it either. It just means that we’re holding my most immediate-term TRADE line of support at 1217.


Across our 3 risk management durations, here are the lines that matter most: 

  1. TAIL = 1266
  2. TREND = 1254
  3. TRADE = 1217 

So the intermediate-to-long-term picture still supports selling all rallies that extend themselves toward 1. And, until the immediate-term TRADE is no longer bullish (1217 support), I’ll respect whatever it is that the market sees coming next. As the Keynesian central planners have proven in the last 3 weeks, anything can happen.



And then… here’s what the Europeans did:


“The world’s attention was on these talks… We Europeans showed tonight that we reached the right conclusions.”

-German Chancellor Angela Merkel


And then… here’s what Global Macro markets started doing (which is what led Merkel to stating she has this right, for another day?):

  1. China was up small (+0.34%) and up for the 4thconsecutive day but, like the Hang Seng, remains bearish TREND and TAIL
  2. Japan was up +2% and the Nikkei remains below its intermediate-term TREND line of 9219 resistance
  3. Indonesia, Singapore, and Thailand were all up +2-3% on the squeeze, but all 3 failed to traverse their respective TREND lines
  4. Germany’s DAX is having the most impressive move, scaling slightly above its 6221 TREND line resistance (bullish if it holds)
  5. France’s CAC is up big but failing to eclipse its TREND line of resistance = 3411 (TAIL resistance for the CAC = 3889)
  6. Greece’s ATG Index is up over +3% and actually moved above its immediate-term TRADE line (784) for the 1sttime in 6 months
  7. CRB Commodities Index remains bearish TREND (327) resistance and bearish TAIL
  8. WTIC Oil has recovered its TREND line of $88.57 support, but remains a bearish TAIL (resistance = $93.87) after failing there
  9. Copper has recovered TRADE line support of $3.36/lb but remains bearish TREND ($3.90/lb) and TAIL
  10. Gold is back to bullish TRADE ($1671) and TREND ($1701), which makes sense post the biggest fiat bailout in world history
  11. 10-year US Treasury Yields have rallied from TRADE line support (2.04%) but failed to recover TREND line resistance (2.40%)
  12. Yield Spread (10s minus 2s) is +8 basis points wider day-over-day to 197 bps wide, well off the all-time high of 293bps wide in FEB
  13. US Dollar Index is holding TREND and TAIL lines of support of $75.37 and $75.77, respectively
  14. Euro is ripping the shorts right back up to the TAIL and TREND lines of resistance at $1.40 and $1.42, respectively
  15. My inbox and twitter streams are jammed with, “shouldn’t I cover… we could go a lot higher”

So, what do you do with all of this? If you are me, today you probably do a lot of nothing. When I worked for other people, that would not be a tolerable answer – we “smart” hedge fund people always have to do something…


Or do we?


In the land of chasing short-term returns, emotion is not often subject to reason. But very often it is “subject to action.” That’s mostly what I see going on here this morning and, effectively, why I have turned down offers to run Global Macro books for other people for the last couple of years. Been there, done that – and I don’t need to do things in life that I don’t think make sense.


In the end (and, in the end, this will not end well), I don’t think this concept of Bazooka Light will make a lot of sense to anyone who takes a deep breath and actually reads what it implies.


The timing and size obviously matter – but the timing (end of November? is subject to a hefty political debate) and the size is basically whatever the Europeans want the media to buy into the headline being.


It’s all theoretical multiples of leverage on the agreed upon EFSF baseline number. Obviously that’s the best way to threaten the shorts – remind them that you may not have any money, but that you can have lots of money if you print other people’s money and lever it up!


Mechanically, since the ECB and IMF have not formally engaged in backstopping any of these concepts of theoretical leverage, this is what happens next (in this order):

  1. Insolvent European banks have to try to raise capital in the public markets (good luck)
  2. If that doesn’t work, then they have to tap their national government (most of whom are tapped out)
  3. If that doesn’t work, tapping the EFSF is considered “last resort”

In other words, this keg of Bazooka Light will be tapped, then kicked… then the 2008 post TARP (October-November 2008) price volatilities begin.


My support and resistance ranges for Gold, Oil, German DAX, and SP500 are now $1, $88.57-93.87, 5, and 1, respectively. Emotional decision making today will be epic.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bazooka-Light - 1. chart


Bazooka-Light - Virtual Portfolio


BYI delivers a high quality Q in the face of many hurdles. Outlook is even better.  



As we wrote about in our 10/06/11 note “BYI: WE'VE GOT THAT GOOD FEELING”, we thought BYI would finally beat the Street.  While EPS was in-line with our estimate, it exceeded consensus and the quality was even better than we expected.  BYI printed a high quality beat despite the lack of a replacement cycle pick up and new openings/expansions.  There were a few cents of negative FX impact but BYI was still able to beat the street – and meet our expectations.   With the toughest quarter of the year out of the way, the path to better results is becoming more visible indeed.


BYI’s $195MM of revenue exceeded our estimate by 2% and EPS was spot in-line.  The biggest upside to our revenue came from gaming equipment sales.  Gross margin of $124MM was also 2% ahead of our estimate with the most upside coming from systems and some downside coming from gaming operations margins.  Read on for more detail.




Gaming equipment sales of $64MM was 5% higher than we estimated due to more units sold in NA and a higher ASP

  • New units sold came in 149 ahead of our estimate – with all the upside in NA.  Almost all of the 2,345 units sold were replacement units.  It does appear that BYI gained share although we won’t know the extent until the other suppliers report their results.
  • Margins were light but that was well telegraphed by the company

Systems sales came in 1% above our estimate and margins were almost 4% better which isn’t entirely surprising.  Given the lack of new openings, most of what is being sold is software driven which provides much higher margins.  As revenues pick up in Systems for the balance of the year, we would expect margins in the low 70s.

  • We estimate that every unit hooked up to a BYI system is earnings of almost 48 cents of recurring revenue per day.  Once the DM’s in their backlog start getting installed, there should be decent upside to that number.

Gaming operations revenue was 1% better than we estimated but margins were 3% lower.  Lower margins are at least partly attributable to a higher mix of WAPs which carry lower margins.  Most of the new WAPs are licensed titles and also have jackpot funding expenses.  Not that they should apologize since the absolute dollar contribution from these units is still very high.


Other stuff:

  • SG&A, R&D,  D&A, and net interest expense were all in-line with our estimate
  • SG&A should tick up next Q with the inclusion of G2E which usually adds a few million dollars of expense

Early Look

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