The NFIB Small Business Optimism Index rose in October for a second month, implying less pessimism on the outlook for sales and the economy. The Index climbed to 90.2, the highest level since June, from September’s 88.9 and consensus expectations for October of 90.  The NFIB’s Chief Economist sounded cautious in his statement, however, saying “It’s hard to call it a recovery with unemployment about as bad as it was at the recession bottom.”





THE HBM: MCD, YUM, SBUX, DNKN, CBRL, MSSR - subsectors fbr





MCD: McDonald’s printed 5.5% global same-store sales for October versus expectations of 4.5% and guidance of 4-5%.  The U.S. division saw comps grow 5.2% versus consensus of 3.7%.  MCD Europe comps grew 4.8% versus the Street at 4.2% and APMEA came in at 6.1% versus expectations of 5.4%.  If growth is slowing in Asia and Europe is sliding into the Mediterranean, mid-single digit one- and two-year trends are better than bad.


THE HBM: MCD, YUM, SBUX, DNKN, CBRL, MSSR - mcd us oct11


THE HBM: MCD, YUM, SBUX, DNKN, CBRL, MSSR - mcd europe oct


THE HBM: MCD, YUM, SBUX, DNKN, CBRL, MSSR - mcd apmea oct



YUM: Yum! Brands’ Little Sheep acquisition has been approved by China’s commerce ministry.  The acquisition cleared China’s anti-monopoly laws.  Little Sheep is a hot-pot restaurant chain that operates in more than 400 restaurants in China.  The acquisition was worth HK$4.4 billion (US$566 million), according to Bloomberg.


SBUX: Starbucks is rolling out mobile payments in Canada today.


DNKN: Dunkin’ Donuts announced 12 new restaurants in Des Moines, Iowa. The first is slated to open in 2012 and the last in 2018.





CBRL: Cracker Barrel today began mailing its proxy statement for the company’s Annual Meeting of Shareholders to be held in December.  Chairman Michael Woodhouse also sent a letter to the company’s shareholders urging them to elect the company’s nominees to the Board of Directors and to vote against the election of Sardar Biglari.  The company’s track record, in terms of creating shareholder value over the last few years, may spur shareholders to seek some new direction.


MSSR: Tilman is to purchase McCormick and Schmick’s for $8.75 per share in cash.  This is approximately a 29% premium to the closing price yesterday.





Howard Penney

Managing Director


Rory Green


FOSL: Quick Hit


FOSL reported Q3 EPS of $1.09 above its revised guidance of $1.00-$1.03 following the realization that the company’s string of five consecutive quarters of 30%+ top-line growth was coming to an end. This stock has been a lightning rod since. Here are a few takeaways from the release along with an updated SIGMA for clients interested/involved in the stock:



  • Clockwork SIGMA with sales/inventory spread improving on the margin. The last two quarters reflects progress that you’d expect from a mature company and suggests a return to a positive sales/inventory spread near-term.
  • Europe wholesale sales growth reaccelerated on both a 1yr & 2Yr basis. APac decelerated sequentially, but remained flat on a 2yr basis. Combined these regions account for ~40% of total sales.
  • Gross margins of 55.9% came in slightly better than expected versus guidance of ‘just above 55%’ with Q4 now expected to be flat yy. There aren’t many companies in retail that are through the other side of contracting gross margins already.


  • North American wholesale and FOSL’s DTC sales (~60% of total) both decelerated sharply in Q3. Notably, e-commerce was flat in Q3 down compared to 20%+ in each of the first two quarters of F11 – putting FOSL in the ranks of JCP with an underperforming .com business. We realize that sales in the channel were up over 60% last year, but they were up over 55% in Q4 as well so it doesn’t get much easier next quarter.
  • Q3 results and updated FY outlook implies the company is taking down Q4 by $0.03 despite increasing the FY outlook by $0.03 (beat Q3 by $0.06, taking Q4 down $0.03).
  • FOSL is the first company to revise its outlook lower due to a stronger dollar.

Management didn’t provide its update to 2011 until the Q4 call last year so we would expect the same on the 9am call. As a former ultra-growth darling of retail, eyes will be on this one today.


FOSL: Quick Hit - FOSL SIGMA 11 8 11


FOSL: Quick Hit - FOSL sentiment 11 8 11


Casey Flavin



This note was originally published at 8am on November 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A plague o’ both your houses!”

-Mercutio, Romeo and Juliet


Mercutio’s immortal phrase was aimed at the houses of Montague and Capulet whose feuding led to the tragic sequence of events that make up one of Shakespeare’s most famous and timeless pieces.  The phrase has been resurrected ever since to express frustration, typically with two opposing sides of an argument. 


Franklin Delano Roosevelt, following a bloody clash between striking steel workers and the Chicago Police Department that came to be known as the Memorial Day Massacre of 1937, said that “The majority of people are saying just one thing, ‘A plague on both your houses’”.   Today, among the dearth of political leadership in Washington at such a time of crisis, many in the country are saying the same to the respective political parties.


Frustration is usually a transient feeling, sooner or later dissipated by resolution, compromise, apathy, or distraction.  As being poor became a way of life for many during the Great Depression, it seems frustration is now becoming a core component for not only the American existence, but for many people around the world. 


Conspiracy theories abound regarding the Federal Reserve and the degree of corruption that exists in America’s economic and political institutions but, Ben Bernanke’s assertion that the slow pace of economic growth is “frustrating” seems genuine to me.  I think frustration is something the country can relate to.  However, it was nearly unconscionable to me that he would used the phrase of a “bit of bad luck” when referring to the spike in oil prices and the dampening effect it had on economic growth this past year.  It was clear to us at Hedgeye that the Federal Reserve’s own policies were significant drivers of higher oil prices.       


Another political plague exists today in Europe as the never-ending saga of the sovereign debt crisis rambles on.  It has long been said by European officials that the union must be preserved and that the respective futures of the member states are inextricably linked, by both circumstance and by law.  I would view the former as being somewhat subjective and the latter as being, as was shown when Brussels consented to bailouts that may or may not be forbidden by the Maastricht Treaty, completely open to interpretation if the situation demands it.  A dramatic series of events is needed and the one certainty is that there will be pain.  Listening to politicians bending logic and essentially wasting further time with tired old solutions is becoming frustrating for Europe’s people.     


When President Obama was elected in 2008, he had successfully campaigned on a message of change.  I, like many other Americans, was taken by the message and the delivery, but it’s not possible for one person to change a compromised political system and this country is realizing now that there will be no quick fix.


This realization is all the more daunting when one considers that many of the same actors are in the same roles that they’ve been in for years.  Geithner and Bernanke are some of the most obvious examples but recent news of John Corzine possibly being culpable in the collapse of MF Global following his claim that thirteen years ago he “understood the flaws” at Long Term Capital Management better than anyone is equally disheartening.   


If repeating the same action again and again and expecting a different result is the definition of insanity, to use Einstein’s quote, then surely entrusting the same players with the same or similar responsibilities and expecting different results is also a folly.   In this respect, Wall Street and Washington D.C., are frustrating their shareholders and voters to no end.


The cast iron dogmas of the sphere of investing, as those of the policy world, are being exposed as useless.  We believe that a flexible, nimble, and data-driven investment process is essential to surviving the turbulence that is visiting the financial markets with greater and greater frequency as the unpredictable actions of governments continue to cause uncertainty.  Clearly some of the old guard in Wall Street, and Mr. Corzine is one example, have not learned to invest prudently. 


Over recent weeks, predicting whether macro factors or earnings were to be the driving force behind stock performance on any given day has been a fool’s errand.  With the wisdom of hindsight, however, I can say that macro factors have been more of a focus than earnings over the past month.  The “Greece Doesn’t Matter” television pundits have been quiet of late.  Soon the earnings season will be over and a new macro season starts.  Our “King Dollar” thesis is going to be one that we monitor closely with a minefield of catalysts heading into the holiday season.  Hedgeye has been highly accurate in calling the US Dollar over the last three years and, as Keith likes to say, “if you get the dollar right you get a lot of other things right.” 


Just as Wall Street needs a change in leadership, our policy makers need to step aside and allow new leaders to win back the confidence of the country.  The Federal Reserve’s forecast for GDP growth in 2011 is now 1.6%-1.7% versus 2.7%-2.9% prior and 2.5%-2.9% versus 3.3%-3.7% prior for 2012.  In a year, according to the Federal Reserve’s updated economic projections, the unemployment rate is scheduled to be 8.6%.  The Federal Reserve’s track record is less-than-satisfactory, so those projections certainly should not be relied upon and are likely overly-optimistic.  A mere 40 basis points of improvement in the unemployment rate is certainly frustrating.   40 basis points is of little use to the 46 million Americans now depending on food stamps for sustenance.


I can respect the experience that many of the policy makers in Washington possess and would love to someday hear or read any of their perspectives on what went wrong in the last few years.  However, given that this country is currently embroiled in a sort of economic Vietnam, I believe that the coach – President Obama – will ultimately be judged harshly for not having brought in new players in key economic policy roles.  Experience can be good but it isn’t necessarily always helpful.  As Robert Benchley said, “A boy can learn a lot from a dog: obedience, loyalty, and the importance of turning around three times before lying down”. 


Function in disaster; finish in style,


Howard Penney


FRUSTRATED - EL Chart 11.3


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If you thought WMS was a “show-me” stock before FQ1…



Even we were too aggressive on the numbers.  In our quarterly preview, we expressed the opinion that FQ1 was likely to be another weak quarter and that management would likely be unsuccessful in convincing investors that the story isn’t broken.  What we didn’t expect was that FQ1 would be an absolutely pitiful quarter.  On the bright side, it’s hard to imagine the quarterlies getting much worse.  CEO Brian Gamache’s characterized his company’s situation this way: “WMS has reached an inflection point."  We would say “hopefully, WMS has hit rock bottom.”


Excluding unusual charges, WMS produced $0.23 of EPS this quarter, 20% below materially reduced projections.  Not only did WMS miss for the 3rd time in a row but they once again lowered their forward numbers.  But now guidance is “conservative”.  In the penalty box, show-me stock lost all credibility; what the heck is going on?  Pick your description, they all apply, and management isn’t talking their way out of this one.


Product sales were $19MM below our estimate, although on the bright side gross profit was only $7MM below our estimate

  • New unit sales were almost 1,500 lower than we estimated with International sales just slightly more disappointing than NA sales
  • Not only were NA unit sales than our estimate, but they included 930 new units – about 700 of which came from Kansas.  We weren’t modeling the majority of those shipments for another quarter given that neither facility is opening until the March quarter and we typically assume that shipments for large openings occur one quarter in advance of an opening.  WMS must have jumped through some serious hoops to ship all their units early.  Without pulling forward Kansas, the quarter would have been even uglier.  BYI’s NA shipments only had about 150 new units – almost all from a partial shipment to Kansas Speedway - and we'll have to wait and see what IGT reports tonight. 
  • We estimate that WMS’s ship share plummeted to just 18% in the quarter.  While the F1 is normally WMS’s weakest ship share we just didn’t think that we’d see an 8% sequential drop – 5% is usually the norm.  Again, if the early shipments to Kansas were excluded or only partially shipped, share would have been even lower at roughly 13-15%.
  • Gross margins and revenues got a nice lift from the sale of an unusually high number of conversion kits which have mid to high 80’s margins. 

Gaming operations revenue and gross margin were both 6% below our estimate largely due to lower average win per day as well as more attrition in the install base than we expected.

  • Given the approval of numerous titles in the quarter, we didn’t expect an almost 280 unit sequential decline in the install base when WMS just lost 550 units in all of FY11.
  • Average win is typically flattish from the June to September quarter – we modeled a $1.50 sequential decrease which clearly underestimated the degradation in yields.

On the bright side, there was a YoY 15% decrease in R&D spend - despite management adamantly claiming they would never cut R&D -marking the first YoY decrease in R&D since March 2006.  Normalized G&A was also $2.5MM lower than we estimated decreasing 11% YoY.


TODAY’S S&P 500 SET-UP - November 8, 2011


Top 3 on Bloomberg this morning: Olympus (fraud), Berlusconi (out?), and Cain (groping?). Nice!  As we look at today’s set up for the S&P 500, the range is 13 points or -0.49% downside to 1255 and 0.55% upside to 1268. 






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: -306 (+942) 
  • VOLUME: NYSE 782.75 (-9.14%)
  • VIX:  29.85 -1.03 YTD PERFORMANCE: +68.17%
  • SPX PUT/CALL RATIO: 2.30 from 1.57 (+46.30%)




US TREASURY Yields – only up 3bps day over day to 2.03%, the long end of the US treasury market couldn’t care less about some of the lowest volume beta chasing rallies US stocks have ever seen. The 2011 call on Growth Slowing remains buy the long-bond (TLT)

  • TED SPREAD: 44.14
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.04 from 2.06    
  • YIELD CURVE: 1.79 from 1.84


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30 a.m.: NFIB Small Business, est. 90.0 (prior 88.9)
  • 10:00 a.m: IBD/TIPP Economic Optimism, est. 41.0 (prior 40.3)
  • 10:00 a.m: JOLTS job openings, (prior 3056)
  • 11:30 a.m: U.S. to sell $35b 4-wk bills
  • 1:00 p.m.: U.S. to sell $32b 3-yr notes
  • 1:00 p.m.: Fed’s Kocherlakota speaks in Sioux Falls, S.D.
  • 1:30 p.m.: Fed’s Plosser speaks on monetary policy in Philadelphia
  • 4:30 p.m.: API inventories


  • Election Day in the U.S. includes referendum in Ohio on collective bargaining rights
  • Jefferson County Commission will consider filing the nation’s biggest municipal bankruptcy
  • Olympus said 3 executives helped conceal decades of losses by paying higher fees to takeover advisers
  • OPEC releases estimates on global oil demand, 8:30 a.m.
  • U.S. Chamber of Commerce releases qtr economic briefing, 9 a.m.
  • President Obama travels to Philadelphia
  • New York City Mayor Michael R. Bloomberg will join the Center for American Progress and the American Action Forum for a discussion on deficit reduction in Washington. 10 a.m-11 a.m



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Oil Rises to Three-Month High on Signs of Shrinking U.S. Stocks
  • Cargo to U.S. Dropping for First Time Since End of 2009: Freight
  • Damaged U.S. Corn Crop Pressures Global Food Supply: Commodities
  • Gold Drops After Reaching 7-Week High on European Debt Risk
  • Carbon Plan Passed by Senate as Gillard Seeks Public Support
  • Stocks Gain, Euro Pares Drop as ECB’s Stark Predicts Crisis End
  • Copper Advances First Day in Three on Strike, Inventory Drop
  • Diesel Supply Falls to 31-Month Low in Survey: Energy Markets
  • Copper May Slip Below $7,635 a Ton: Technical Analysis
  • Palm Oil Climbs to Seven-Week High as Production Poised to Slow
  • Buy Corn, Sell Wheat in 2012 as Gap Set to Narrow, Bowler Says
  • Copper May Advance on Signs of Reduced Supplies: LME Preview
  • Gold May Decline as Rally to Six-Week High Spurs Investor Sales
  • AB Foods Sees Sales, Profit Gaining as Commodity Costs Ease
  • Coca-Cola Hellenic Profit Falls on Higher Commodity Costs
  • Oil Climbs to Three-Month High on Possible New Leaders in Europe
  • Hedge Funds Curb Wagers for First Time in a Month: Commodities




THE HEDGEYE DAILY OUTLOOK - daily currency view





ITALY – oh the drama – with bond yields only down -4bps d/d to 6.62% and Italian Equities still in full crash mode (down -33% since 2011 YTD highs, despite these fun little short squeezes “off the lows”), other than having an Italian running the ECB buying everything he can that is Italian sov debt here, what else do we need? Silvio says “look into my eyes”…



THE HEDGEYE DAILY OUTLOOK - euro performance





JAPAN – on a huge fraud (Olympus) the Nikkei broke its only remaining line of TRADE support (8835) and sliced back down to -15.3% for the YTD; plenty “value” investors bought Japan on the “tsunami recovery” thesis – hearing crickets on that thesis now…



THE HEDGEYE DAILY OUTLOOK - asia performance









  • UN Report May Show Iran Is Moving Closer to Nuclear Bomb
  • Gulf Keystone Upgrades Volumes for Shaikan Discovery
  • Russia Says Timing of UN Report on Iran Nuclear Weapons ‘Wrong’
  • Gulf Keystone Revises Shaikan Resources to 8b-13.4b Barrels
  • Lavrov Says Iran Attack Would Be ‘Very Serious Mistake’: Reuters
  • Mubadala Development Owns 9.85% of Swedish Auto, Filing Shows
  • Doha Bank Considers 2012 Acquisition in Emerging Market
  • Medvedev Condemns Israel’s ‘Dangerous’ Threat of Iran Strike
  • Iran Ready And Able to Build a Nuclear Bomb, UN Watchdog Warns the Wor
  • Mol Advances Most in Week After Iraqi Oil Estimate Upgrade
  • Gulf Times (QA): Fresh clashes in Bahrain
  • Econ Times (IN): Russia warns against military strike on Iran - The Econo
  • Aramco Cuts Asia Oil Differentials, Lifts U.S.: Persian Gulf Oil
  • Zain Iraq Hires Advisers for Initial Public Offering: FT
  • Iran on Verge of Building Nuclear Weapon, Washington Post Says
  • Syrian Opposition Calls Homs ‘Disaster Area’ Amid Siege
  • Oil rallies to seven-week high ahead of IAEA report on Iran


The Hedgeye Macro Team

Howard Penney

Managing Director