Unequal Outcomes

“Equality of outcome is a form of inequality.”

-Paul Ryan


As I sit here in my hotel room in San Francisco this morning, the elephantine intellects of the Fiat Fool system continue to attempt to centrally plan us towards “equality.” Meanwhile, markets are producing very Unequal Outcomes.


Instead of stability, we have volatility. If the +41.9% rip in the Volatility Index (VIX) in the last 3 days isn’t a reminder of that, I don’t know what is…


My longest of long-term theses about Big Government Intervention and money printing remains. From Japan, to the USA, to Europe, and back again, Fiat Fool policies to inflate A) shorten economic cycles and B) amplify market volatility.


Back to the Global Macro Grind


Get the US Dollar right, and you’ll get mostly everything else right. As bad as I looked being long the US Dollar last week is as good as my team looks this week. The US Dollar has put on an impressive +3% move, recovering its TREND line of support (75.37 on the US Dollar Index), and mostly every asset class price that’s inversely correlated to that has fallen, hard.


Since I shorted the SP500 on Thursday at 1290 (Time Stamp), US stocks have had a straight down correction of -5.6%, taking the SP500’s correction from its 2011 YTD high (April) back to a double digit loss (-10.6%). Longer-term, like Japanese stocks, the SP500 has crashed from its all time peak (down -22.2% from October 2007). Bull market?


With all but 3 country stock market indices in the entire world negative for the YTD, this is obviously not a bull market in equities. It’s a bull market in long-term US Treasuries. It’s a bull market in volatility. But these asset classes are pricing in very Unequal Economic Outcomes.


Update on the Eurocrat Bazooka:


This morning Old Wall Street’s finest brokerages tried to fire the first mini-missile of EFSF bond issuance from Ireland, and had to abort mission! Given that this was the 1st €3B of €600 or so BILLION of these fiat issues coming down the pike, I’d say that’s really not good.


Inclusive of attempts to ban short selling, ban CDS trading, and ban gravity, European markets have already been telling you how this sad story of Keynesian spending and leverage ends…

  1. Germany’s DAX snapped its TREND line of 6112 yesterday and is crashing again (down -22% from its 2011 peak)
  2. France’s CAC never recovered its TREND line of 3403, and continues to crash (down -26% from its 2011 peak)
  3. Greece’s Athex Index never recovered a risk management line of consequence in the last 12 weeks (down -56% from its 2011 peak)

Never mind the €2-3 TRILLION Bazooka, these professional politicians can’t sell the world on €3B in bonds!


The European Sovereign Bond market gets this obviously. In fact, they didn’t suspend disbelief like stock market people did last week either. Italian and French sovereign debt yields continue to make a series of higher-highs, reminding you that piling-debt-upon-debt-upon-debt structurally impairs economic growth.


Setting aside the differences between Europe, Japan, and the US, that’s the story of the Fiat Fools that isn’t getting its “fair share” of air-time, yet (Obama’s team is working on rectifying this inequality). The part about causality. The part that would require these central planners to accept responsibility for the bigger problem than maybe even the banks themselves – Growth Slowing.


If Growth Slowing takes Europe’s economy into the negative 1-3% GDP zone as inflation spikes into the +3-6% range, what do you get?


European Stagflation.


Stagflation earns the lowest multiple for stocks (read: in the 1970s, the SP500 traded at 7x earnings 3 different times in the same decade). Why is that so? Simple: the combo of Growth Slowing and Margins Compressing is the kiss of the “value” investor’s death.


That’s the bad news. And it’s a European problem that perversely could result in a Strong US Dollar which, in turn, would Deflate The Inflation in America (think commodity prices). In the long-term, while these are very Unequal Global Macro Outcomes relative to how the central planners of the 2011 Fiat were thinking, this should only perpetuate global economic volatility in the short-term.


As for the “price stability”, stay tuned for the Bernank’s latest on that at his 1230PM EST press conference.


My immediate-term support and resistance ranges for Gold (bullish TRADE and TREND), Oil (bullish TRADE; bearish TAIL), German DAX (bearish TRADE, TREND, and TAIL) and the SP500 (bullish TREND; bearish TAIL) are now $1, $91.16-93.87, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Unequal Outcomes - Chart of the Day


Unequal Outcomes - Virtual Portfolio


November GGR will fall MoM and growth will slow sequentially.  That in and of itself should not be alarming.



November may be a telling month for Macau as it can be considered very normal.  There are no holidays to boost revenues.  However, November may also bring some volatility and confusion and potentially disappointing investor sentiment.  The month should display a substantial decline from October’s record results and YoY growth rate.  However, the sequential slowdown shouldn’t ring alarm bells unless it is more severe than our projections.  We use two methodologies to derive expected November Gross Gaming Revenue (GGR) YoY growth of 25-30%.


1) November GGR would rise 30% YoY to just under HK$22 billion based on September and October GGR, seasonally adjusted.  We analyze seasonality based on revenue from the previous 2 months, adjusted by seasonal factors, for mass revenue, hold-adjusted VIP revenue, and slot revenue.




2) Using the average daily revenue of the last two weeks of October and taking into account the number of weekend and weekdays, we project November GGR to grow 25% to just over HK$21 billion.


With October growing 40% to HK$26 billion, we believe a 15-20% sequential decline may concern some people.  However, we would consider it “as expected” and not indicative of a credit/liquidity/macro fueled slowdown.  October was an outstanding month with a rocket ship golden week that contributed to full month GGR growing 26% over September.  Hopefully, investor expectations are appropriately in check.



TODAY’S S&P 500 SET-UP - November 2, 2011


72 handles and -5.6% lower in the SP500 from where we shorted them at 326PM EST on Thursday – now what?  As we look at today’s set up for the S&P 500, the range is 35 points or -0.43% downside to 1213 and 2.44% upside to 1248. 






THE HEDGEYE DAILY OUTLOOK - daily sector performance


THE HEDGEYE DAILY OUTLOOK - global performance





Bullish sentiment increases to 43.2% from 40.0% in the latest US Investor's Intelligence poll; Bearish sentiment down to 36.8% from 37.9%

  • ADVANCE/DECLINE LINE: -2153 (-245) 
  • VOLUME: NYSE 1329.21 (+16.29%)
  • VIX:  32.92 +16.05% YTD PERFORMANCE: +95.89%
  • SPX PUT/CALL RATIO: 2.29 from 3.02 (-23.99%)




TREASURIES: just ran the "but growth is good" camp right over as 10yr yields snap my TRADE line of 2.11% support

  • TED SPREAD: 43.68
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.01 from 2.17    
  • YIELD CURVE: 1.78 from 1.92


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage, prior 4.9%
  • 7:30pm: Challenger Job Cuts
  • 8:15am: ADP Employment, est. 100k, prior 91k
  • 10:30am: DoE inventories
  • 12:30pm: FOMC Rate Decision
  • 2:15pm: Bernanke speaks at Fed press conference


  • European leaders convene emergency talks today to tell Greece there is no alternative to budget cuts imposed in bailout plan
  • Greek PM Papandreou said referendum on Europe’s rescue package will confirm the nation’s membership of the euro
  • Bill Ackman said he isn’t pushing for sale of Canadian Pacific Railway



Gold continues to hold TREND line support - new range = 1; back to bullish bias in our model


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • MF Global Funds Are All Accounted For, Lawyer Tells Judge
  • Top Gold Forecasters See Rally to Record by March: Commodities
  • Paulson Clients to Pull Less Than 8% in Year-End Redemptions
  • MF Global Didn’t Segregate Client Collateral, CME Group Says
  • Greenlight’s Einhorn Bets Mining Companies Will Beat Gold
  • Oil Gains on European Debt Talks as U.S. Fuel Stockpiles Decline
  • U.K. Oil Service Stocks Cheap Vs Brent Price: Chart of the Day
  • Copper Gains for First Day in Three as LME Stockpiles Decrease
  • Gold Gains for Second Day as Debt Crisis Increases Haven Demand
  • Oil Falls a Fourth Day on Concern Greek Vote Raises Default Risk
  • Saudi Top-Oil Premiums Set to Drop With Naphtha: Energy Markets
  • China Copper Demand Growth to Slow Further, Antaike Says
  • Bell Financial Seeks to Transfer Positions With MF Global
  • Sumitomo Forecasts Copper Price Drop, Seeks Iron and Coal Assets
  • Soybeans Climb on Speculation 17% Slump May Attract Importers
  • Kinross Misses Gold Rally With October Plunge: Canada Credit
  • Copper Climbs in London Before U.S. ADP Jobs Report: LME Preview
  • Freeport Says Milling at Indonesia Mine Suspended Since Oct. 22
  • Oil Falls a Fourth Day on Concern Greek Vote Raises Default Risk




EURO – get the EUR/USD pair right and you’ll get mostly everything else right – that’s glaringly obvious right now in our correlation risk model. I covered the short EUR position at TRADE line support of 1.36 yest and will look to re-short 1.39-1.40 TAIL resistance after the ECB doesn’t cut as much as hoped tomorrow. Bernanke debauchery day for the USD side of the trade will be in full effect for today too.


THE HEDGEYE DAILY OUTLOOK - daily currency view





Inclusive of a generational squeeze, remember Germany's DAX and France's CAC are down -22% and -26%, respectively from their YTD highs


EUROPE: major breakdowns in the DAX and CAC not recovered this morn; after this last lift in the Euro; European stocks to resume crash


FRANCE – not only did the CAC40 fail at my TREND line of 3401 resistance in the last week, but now it has moved right back into a Bearish Formation (bearish TRADE, TREND, and TAIL) – given that French banks and their super sovereign rating all need to be downgraded further, this makes sense; don’t forget the CAC is still crashing (down -26% from its YTD high inclusive of the squeeze)


THE HEDGEYE DAILY OUTLOOK - euro performance




ASIA: stealth move continues in China with stocks up +1.4% on the A-shares and up 7 of the last 8 days; Japan not good.

Australia September building approvals (13.6%) m/m vs cons (4.5%).



THE HEDGEYE DAILY OUTLOOK - asia performance







The Hedgeye Macro Team

Howard Penney

Managing Director



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Weekly Asia Risk Monitor: Dominant Trends Still Intact

Conclusion: The short term, beta-chasing melt-up we saw across global macro markets last month wasn’t enough to change our conviction on the dominant macro trends within this region.



Positions in Asia: Short the Aussie dollar (FXA); Short a basket of emerging-Asia currencies (AYT).



Not surprisingly, Asian equity markets are down across the board week-to-date, declining -1.8% on a median basis. The interconnected global melt-up we saw in October largely failed to register higher intermediate-term highs, as Asian equity markets remain down -2.5% and -11.3% on a 2mo and 3mo basis, respectively. The same sequence of price action can be applied to Asian currencies as well, falling -1.2% on a median basis in the week-to-date vs. the USD, and down -3.6% and -4.3% on a 2mo and 3mo basis, respectively.


Across the region’s sovereign debt markets, the Reserve Bank of Australia’s interest rate cut and nasty growth data out of Hong Kong are driving the largest deltas. Australian 2yr and 10yr yields have fallen -13bps and -14bps, respectively, in the week-to-date. Hong Kong’s 10yr yields have declined by -14bps as well in the week-to-date, collapsing the territory’s 10s/2s spread by the same amount. 5yr CDS have widened +16.8% on a median basis in the week-to-date and the dramatic tightening we saw in October (-23.3% on median basis) failed to make lower intermediate-term lows vs. the past two (+16.9%), three (+45.2%), and six (+49.7%) months.


Across Asian interest rate swaps markets, we continue to see our themes of Deflating the Inflation and Global Growth Slowing take market interest rate expectations lower. Notably, Chinese 1yr on-shore swaps have declined a full -85bps in the prior 2mo and are down another -16bps in the week-to-date as expectations for PBOC monetary easing grow seemingly larger by the day. Another callout here is that in spite of the broad-based optimism we saw across global equity markets in October, we didn’t see a pick-up in expectations for tighter monetary policy across Asia (1yr swaps advanced only +1bps on a median basis over the last month). What this tells us is that through the noise of the manic media-influenced equity market(s), the aforementioned Global Macro trends remain intact.



Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:


Growth Slowing:

  • China’s manufacturing PMI came in at a rather weak 50.4 in October (vs. 51.2 prior) – the lowest reading since February ’09! What’s worse, the forward-looking subcomponents (new orders, new export orders, and order backlog) all declined sequentially to near-50 or sub-50 levels.
  • Japanese export growth slowed in September to +2.4% YoY vs. +2.8% prior. Additionally, Japanese small business confidence edged down in October to 46.4 vs. 47.2 prior.
  • Hong Kong money supply growth (M3) went negative for the first time in years in September, falling -0.4% YoY. This happened in 2Q08 and was largely flat-to-down on a YoY basis until 1Q09. This is yet another stealth data point to consider when pondering where global growth might be headed over the next 3-6 months.
  • Taiwanese real GDP growth slowed in 3Q: +3.4% YoY vs. +5% prior – a two-year low. Manufacturing PMI ticked down in October to 43.7 vs. 44.5 prior.
  • South Korea’s manufacturing and non-manufacturing business surveys both ticked down in November to 82 (vs. 86 prior) and 84 (vs. 86 prior), respectively.
  • New Zealand’s NBNZ business confidence and outlook surveys both dropped in October to 13.2 (vs. 30.3 prior) and 26.1 (vs. 35.4 prior), respectively.

Deflating the Inflation:

  • Japanese CPI slowed in September to flat YoY vs. +0.2% prior.
  • Chinese input prices PMI sub-index ticked down in October to 46.2 vs. 56.6 prior – the first sub-50 (contraction) reading since March ’09!
  • South Korean CPI slowed in October to +3.9% YoY vs. +4.3% prior.
  • Indonesian CPI slowed in October to +4.4% YoY vs. +4.6% prior.
  • Australian CPI, core CPI, and PPI all slowed in 3Q to +3.5% YoY (vs. +3.6% prior), +2.3% YoY (vs. +2.6% prior), and +2.7% YoY (vs. +3.4% prior), respectively. An unofficial TD Securities gauge of inflation showed continued cooling of late: +2.6% YoY in October vs. +2.8% prior.
  • New Zealand’s CPI slowed in 3Q to +4.6% YoY vs. +5.3% prior.

Sticky Stagflation:

  • Chinese Premier Wen Jiabao reiterated that China will continue to maintain firm controls within the property market and that the country will ease policy at a “suitable time and [to an] appropriate degree”. We’ve been in print saying that we likely won’t see China loosen meaningfully without at least one quarter of sequentially contracting CPI alongside slowing YoY headline inflation trending down towards the State Council’s +4% target. The latest reported inflation data would suggest we’re at least 3-4 months away.
  • China’s banking regulatory body, the CBRC, granted approval to some banks to issue debt in order to fund incremental loan issuance to Chinese SMEs. Elevated inflation continues to keep the Chinese government from coming to the rescue of its ailing small businesses in a meaningful way.
  • Thai CPI accelerated in October to +4.2% YoY vs. +4% prior. The acceleration makes the Bank of Thailand’s monetary policy strategy that much harder, given that they just lowered their 2011 GDP forecast by -36.6% to +2.6%. Rapidly slowing economic growth is supportive of easing, but current CPI readings and an increase to their 2012 inflation forecast requires additional prudence per Assistant Governor Paiboon Kittisrikangwan.

King Dollar:

  • Japan intervened for the third time in the year-to-date to weaken the yen in the spot currency market. Finance Minister Jan Azumi pledged to continue taking “bold action against speculative moves in the market” as the “one-sided speculative moves that don’t reflect the economic fundamentals of [Japan’s] economy.” His lack of understanding on the relative nature of exchange rate determination continues to make Japanese bureaucrats flat-out wrong here, as our analysis shows the yen is being driven solely by “fundamentals”.
  • The Reserve Bank of India raised interest rates for the 13thtime since the start of 2010 (+350bps in the current tightening cycle) and signaled that if the “inflation trajectory conforms to [their] projections” over the next few months (our models suggest this is the most likely scenario), the RBI is likely done tightening monetary policy. India’s benchmark repo rate now stands at 8.5%.
  • Consistent with our outlook since 2Q, the Reserve Bank of Australia finally broke and lowered interest rates by -25bps (now at 4.5% on the overnight cash rate). In explaining the decision, RBA Governor Glenn Stevens cited all the things we’ve been hitting on for months: slowing Asian demand, a weakened domestic labor market, Europe’s Sovereign Debt Dichotomy, and retrenchment in the domestic consumer and corporate sectors. Interbank cash rate futures are currently pricing in a 74% chance the RBA lowers by another -25bps in December.

Eurocrat Bazooka:

  • Chinese Vice Finance Minister Zhu Guangyao confirmed our belief that China would not be a source of “dumb capital” for the EFSF, publically demanding more details about the “technicalities” of the fund. Additionally, China Investment Corporation (sovereign wealth fund) Chairman Jin Liqun said that “Europe is not really short of money” and publically challenged the European populace to “work harder”, “longer”, and “be more innovate”.


  • Japanese manufacturing PMI ticked up in October to 50.6 vs. 49.3 prior.
  • Indian manufacturing PMI ticked up in October to 52 vs. 50.4 prior.
  • South Korean manufacturing PMI ticked up in October to 48 vs. 47.5 prior.
  • Australian manufacturing PMI ticked up in October to 47.4 vs. 42.3 prior.


  • The epic flooding in Thailand (92 billion cubic meters of water) have forced closures of 10,000+ factories and caused structural damage to plants and farmlands currently estimated at $4.6 billion. The closures are noticeably impacting the supply chains of Japanese corporations like Toyota and Sony, helping drag Japanese industrial production down in September to -4% on both a YoY and MoM basis.


Darius Dale



Weekly Asia Risk Monitor: Dominant Trends Still Intact - 1


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 2


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 3


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 4


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 5


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 6


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 7

The Fall of the Arab Spring

Conclusion: The first chapter of the Arab Spring is complete.  In the short term, religious governments will likely take root in the region, which will have important foreign policy considerations for the West.  In the longer term, demographic trends suggest the Arab Spring will have legs.


In the last few months, the Arab Spring has been shifted to the back burner for the media with the acceleration of the European debt crisis.  Even without the daily focus of the Western media, events in the Middle East continue to unfold and are worthy of our consideration.


Stepping back for a second, the key catalyst for the Arab Spring was the Jasmine Revolution in Tunisia.  The protests in Tunisia began on December 17thwith the self-immolation of Mohammed Bouazizi (after police confiscated his unlicensed food stand).  In Tunisia, the initial protest ended with President Ben Ali fleeing the country on January 14th.  Subsequently, we highlighted in a note on January 27th, which was titled “No Longer in the Tail . . . Jasmine Revolution Being Exported”, that this civil unrest would spread broadly across the region, and it has.


The current output of the Tunisian-exported Jasmine Revolution is as follows: 

  • Revolutions in Egypt and Tunisia;
  • Civil war in Libya;
  • Civil uprisings in Syria, Bahrain and Yemen;
  • Two government leaders, in Iraq and Sudan, indicating they would step down;
  • Major protests in Iraq, Jordan, Algeria, Morocco  and Oman;
  • More minor protests in Western Sahara, Saudi Arabia, Sudan, and Kuwait, and Lebanon. 

Arguably, there is at least a symbolic tie-in to the Occupy Wall Street protests that have proliferated across North American.  Although, as of yet, the Occupy Wall Street group has yet to establish that they are truly representative of the majority, let alone the entire “99%”, like their Arab counterparts.


To be fair, part of the reason that media has shifted its focus from the Arab Spring is that major protests have become less plentiful.  Yet, the elixir of future civil unrest in MENA certainly remains.  First, the region is incredibly young, by some estimates 65% of the region is below 30 years of age with above average population growth rates.  Second, the region is grossly under-employed with an estimated 25% of the youngest working-age demographic unemployed.  Finally, the gap between the rich and poor, as measured by the Gini coefficient, is higher in MENA than in any other region in the world.


Even as the potential for future civil unrest remains in MENA based on basic demographic trends, the second derivative effect of the Arab Spring is beginning to manifest itself.  This is the transition from autocratic rule to democratic rule.  The unintended consequences of this shift are that the newly elected governments could be less friendly to the West and, over time, less stable.  This is especially true if political reform is rushed and occurs with little economic reform.


Due to a long nascent political culture in MENA, secular political parties will take time to build and then function effectively.  In the shorter term, religious-based parties will have an advantage given their history and organizational power through their religious leaders.  As a case in point, the Muslim Brotherhood has a history in Egypt that pre-dates the Mubarak government.


Currently, the three countries that have seen the most dramatic shifts in power, Egypt, Tunisia, and Libya, seem poised to become ruled by non-secular political parties.  In Tunisia, an Islamist party, Ennahda, was elected to power in the first election post-Ben Ali.  Next is Egypt, with general elections planned for this month, where the Muslin Brotherhood has been organizing for years, if not decades, for this moment and are poised for a strong showing.  Finally, in Libya, acting Prime Minister Abdurrahim el-Keib has indicated he would like to hold elections within a year, but one of his first acts was to “declare an Islamic state.”


From an investment perspective, we have highlighted in the attached chart the implications of perceived future turmoil.  The attached chart shows the price of WTI, Brent, Copper, and the CRB Index since roughly the beginning of the Arab Spring, just over a year ago.  In that time, Brent has vastly outperformed its commodities peers as competitive flow of sweet crude as been curtailed due to the Libyan civil war, giving Brent an underlying bid.


None of this is at all to suggest that Islamic states will be negative for the West, or negative for peace in the region.  Certainly, though, this shift is critical for us to flag and keep front and center on our risk monitors.  Longer term, even if there is a lull in civil unrest currently, the call of “ash-shab yurid isqat an-nizam”, or “the people want to bring down the regime”, is likely still in early days in MENA.


Daryl G. Jones

Director of Research


The Fall of the Arab Spring - DoR chart1


DNKN did report a relatively strong quarter (with a few holes)  today, with the obvious exception being the implication from the secondary offering announcement that the equity sponsors want out ASAP.  This news was not very surprising to us given that the stock is the most expensive in the restaurant universe.


The line of questioning that the Street took with management is often insightful and on the DNKN call today, as with the EAT call last week, the dialogue was focused strongly on one area. For Dunkin, comparable store sales and K-Cups were the most touched upon topics.  We believe that the significance of comps and K-Cups is overemphasized by some; Dunkin’ Donuts is a franchise business model and the growth of its footprint is a far more meaningful driver of earnings.  With respect to unit growth, the quarter was a little disappointing.  To hit the mid-point of the target net unit opening range for the year of 220-230 new points of distribution, 107 net new openings are required in the fourth quarter.


Below are the top takeaways from the quarter:


  1. The company reiterated its goal to more-than-double Dunkin' Donuts' footprint in the USA to reach 15,000 locations over the next 20 years.  The company failed to disclose any details on its backlog of stores.
  2. In 3Q11, Dunkin' franchisees opened 57 net new locations; 70% of that development took place outside of the core markets.  But they are narrowing our projection of net new Dunkin' locations in the U.S. this year to 220 to 240 versus the previous wider forecast of 200 to 250. Its represents an acceleration from the net 206 restaurants in 2010, but a long way from reaching the 450 annual run rate needed to get the 15,000 target.
  3. On the call they said they have actively begun recruiting franchisees for markets in Texas, Colorado, New Mexico, Oklahoma and Nebraska, but do not expect new Dunkin' restaurants to open in any of these markets until early 2013.  On the call they said “we are focused on keeping our development pipeline build,” but fell short of revealing any numbers. 
  4. For the quarter, revenue growth of 13.3% far exceeded the system-wide sales growth of 8.3%.  According to the company they “offer our franchisees the opportunity to extend the term of their original franchisee agreement. And usually, when we do that, we can charge a fee associated with it.”
  5. It appears that the company booked a couple million in supply chain product designation/incentive fees this quarter, as well as $2M in refranchising gains, from where terminated stores are resold by DNKN at a profit.
  6. Dunkin International is not providing any real incremental growth to the overall organization.
  7. The management team does not really see SBUX’s move in to K-Cups as a competitive threat.


All in all, we do not see DNKN’s story as being compelling on the long side.  The equity sponsors are clearly not enthused and we contend that the Dunkin’ Donuts business model, as it currently operates in the US, is not viable west of the Mississippi and will not be for quite some time.  The hub-and-spoke model that the brand uses in existing markets would require a lot of capital to replicate in brand new markets.  For now, the donuts and other baked foods cooked at commissaries in existing markets will be flown into new markets frozen.  Whether or not that passes muster with consumers, the run-rate of new store openings needs to escalate rapidly in order for the guidance of a footprint of 15,000 domestic locations within 20 years is to be reached.  The lack of disclosure concerning the backlog is the biggest red flag from the quarter.






Howard Penney

Managing Director


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