Scarce Vision

This note was originally published at 8am on November 25, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Capitalism isn’t scarce; vision is.”

-Sam Walton


Get GDP Growth and the US Dollar right and you’ll get mostly everything else right. Happy Thanksgiving.


The US Dollar is up another +0.5% this morning to $79.52 on the US Dollar Index, taking its week-to-date gain to +1.7%, and its cumulative gain since Bernanke signaled the end of Quantitative Guessing II to +8.9% (since April).


Given the generationally high inverse-correlations between the US Dollar Index and everything else, we continue to see what we’ve coined as a Correlation Crash across asset classes as a direct result of this bullish Buck Breakout.


This morning’s Global Macro Grind amplifies the deep simplicity of this risk management point:

  1. S&P Futures are down another 9 handles to 1150 = down -15.6% since the US Dollar stopped going down in April
  2. EUR/USD testing its early October lows of $1.32
  3. European Equities selling off, across the board, to down -22-42% since February-April (pick your country)
  4. Asian Stocks continuing their crash (down > 20% from their YTD highs) with HK and India down -27.5% and -23.5%
  5. Commodities breaking down toward their October lows as the CRB Index’s correlation to the USD = -0.82
  6. Gold is down another -1.1% to $1679 = down -11.6% from its all-time high in August

Correlation does not always imply causality. We get that.


But A) sometimes it does and B) it can be very reflexive in the immediate to intermediate-term.


Keynesian economists/strategists try to avoid Soros’ concept of “Reflexivity” in markets and economies as much as Global Macro investors are avoiding the Hungarian-American’s birthplace this morning (Hungary’s stock market trading down -4.6% after Moody’s cut Hungary’s credit rating to junk).


Academic types have a hard time using markets as leading indicators because they have no experience managing real-time market risk. That’s a problem - a really big problem with US economic policy.


Policy = Causality.


That’s why you’ve never heard Ben Bernanke or Tim Geithner use these 2 words - Correlation Risk – to attempt to explain anything about nothing that’s happening in either Global Macro markets or the economies that underpin them.


Accepting responsibility for causality, after all, would be an admission of failed policy. At least Greenspan admitted this in 2008. Maybe Bernanke will by the time he is retired from the Fed too…


The Germans kind of get this. That’s primarily because they have to. The German People will not give the fiscally conservative leadership of the Bundesbank a hall pass on forgetting the history of hyper-inflation. At least not yet.


German stocks are down another -0.54% this morning, taking the DAX down to 5398 (down -28.2% since the US and German stock markets put in their 2011 YTD highs). If the SP500 was down that much from its April 2011 closing high (1363), it would be trading at 979 this morning. The German People aren’t as hyper about their stock market as our manic media culture is.


If I’ve said this 100 times in the last 4 years, I’ve written and/or said it 1000 times – the immediate to intermediate-term moves in a country’s stock market does not exclusively reflect a country’s long-term health. Currency stability, inflations/deflations, and employment levels are, collectively, much better long-term barometers for purchasing power and prosperity.


I could write a book about that – and maybe I will – but that’s not going to happen in the remaining 10 minutes I have to finish this note this morning. So hopefully it continues to provide a basis for long-term economic debate.


The Scarce Vision that policy makers in this country have displayed over the course of the last decade is not what we should be thankful for this Thanksgiving. What we should all be thankful for is a generational opportunity in America to change that.


My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Brent Oil (bearish TRADE and TREND), German DAX (Bearish Formation) and the SP500 (Bearish Formation) are now $1657-1724, $105.13-109.98, 5243-5657, and 1154-1196, respectively. With the US Dollar immediate-term TRADE overbought today, plenty of market prices will be oversold.


Happy Thanksgiving to you and your loved ones,



Keith R. McCullough
Chief Executive Officer


Scarce Vision - Chart of the Day


Scarce Vision - Virtual Portfolio

The Lighthouse

“Cernowitz proved to be Schumpeter’s lighthouse.”

-Sylvia Nasar


In her outstanding chapter on Creative Destruction, Sylvia Nasar captures the most critical moment of a creative thought by comparing Joseph Schumpeter’s time at the University of Vienna to Albert Einstein’s at the Bern patent office (1).


“It gave one time to think one’s thoughts and, of course, to write them down. It also cut down on the distracting buzz of other people’s ideas.” (Grand Pursuit, page 187)


For the those of us who didn’t blow up other people’s money in 2008 (and again in 2011), we look and feel confident into year-end for good reason. Whether it’s me writing to you at the top of every risk management morning, or you delivering on Warren Buffett’s #1 Rule of Investing (“Don’t Lose Money”) for your families and clients – it’s all one and the same thing. Winning.


Together, we’ve travelled the often broken road of groupthink and we’ve seen the investment stars of bull markets rise and fall.


We are Wall Street 2.0. We are the change people can believe in.


Back to the Global Macro Grind


From what I can discern, there are two very different types of players on this globally interconnected market’s ice right now:

  1. Those who have stayed the course with the fundamental research call of 2011 – Global Growth Slowing
  2. Those who wake up every morning looking for a central planner to bail them out

Watching the US Equity futures trade this morning captures the essence of how short-term the group-thinking associated with the Type 2 Player in this game has become:

  1. At 4AM EST, I jot down in my trusty notebook “China down -3.3% to down -16.9% YTD, testing October lows”
  2. At 6AM EST, headline hits “China cuts reserve requirements, 50 basis points”

First, set aside the fact that few, if any, market sources even mentioned point #1 (no surprise there) and then realize that the S&P futures went from down 8 points to up 8 in a nanosecond of what could be best described as media panting about point #2 on Twitter.


Twitter, you see, is replacing what Old Wall Street calls “the tape.” On Wall Street 2.0, tweeters with analytical competence not only capture the China like headline “news” in real-time but have it synthesized within seconds.


Being fast isn’t being a “short-term” investor. It’s just called being smarter and faster.


Back to the China thread…


Sometimes getting your brain somewhere fast helps you recognize you need to slow down. Doing nothing in a market that’s trading on the “distracting buzz of other people’s ideas” of what the headline actually means is critical. The media’s immediate-term reaction to an alleged 1.3 TRILLION Eurocrat bazooka in late October is a good example of that (i.e. they don’t have one yet).


What does China’s decision to cut reserve requirements on banks mean?


It means China’s economic slowdown is accelerating on the downside, big time. The Chinese act, proactively, when they see a domestic demand problem.


What happens as the #1 unlevered growth engine of the world slows from double digit GDP growth to mid-single digits? You don’t even have to think too hard to figure that answer out. Global Growth Slowing matters to market multiples.



  1. The last time China started cutting reserve requirement rates was September 2008
  2. China continued to cut those rates until December of 2008
  3. US stocks didn’t stop going down until March of 2009

If you didn’t know that most US centric “stock pickers” are growth investors, now you know. As growth slows, stocks fall. Pull up charts of Apple, Amazon, or American Airlines (kidding – just needed another company starting with an A for literary purposes) and you’ll see, quite clearly, what the market is already discounting about Q4 versus Q3 Global Growth and demand.


If you flip a switch back to how that Type 2 Player continues to play the game – the Top 3 Begging For Bailouts headlines they are looking for are now as follows:

  1. European “shock & awe” money printing
  2. Fed getting sucked into to a QE3
  3. China rate cuts

From the vantage point of The Hedgeye Lighthouse this morning, all I have to say about all 3 of those options is that the Type 2 Players better be very mindful of what they wish for. Growth Slowing is a requirement for all three.


My immediate-term support and resistance ranges for Gold, Brent Oil, French stocks (CAC40), Amazon, Apple, and the SP500 are now $1, $108.53-110.59, 2, $177-209, $361-385, and 1147-1203, respectively. Lower-highs across the board.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Lighthouse - Chart of the Day


The Lighthouse - Virtual Portfolio

Early Look

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Despite all the filings and the likely resulting panic, nothing has changed - that is, there will be no additional dilution and no equity raise.



MPEL’s shelf registration last night was required by the Hong Kong Stock Exchange to set up a backstop liquidity provision as part of the dual listing.  Nothing has changed.  This is a necessary step for the Listing By way of Introduction (LBI).  To be clear, there will be NO dilution from the listing and NO new equity.  That filing doesn’t change that. 


If the backstop is utilized, the process involves borrowing shares that ultimately are returned so no new shares are issued.  The shelf registration was not related to the shareholder loan conversion.  That was taken care of in an additional filing:  40 million ordinary shares were converted at US$8.61 per ADS, representing a dilution impact of 0.80%.  This was in line with previous announcements.  To our knowledge, the HKSE recommended that the shareholder loans be converted into equity to increase the perceived independence.


We've already received numerous client inquiries related to the filing, most of them expressing concern that MPEL is raising additional equity.  That is not the case.  Nevertheless, since management must comply with essentially a gag order related to the listing, we don't believe the ramifications (essentially none) of these filings are well understood by the investment community.  The stock may be down on this, but it shouldn't be which may present a buying opportunity.


In preparation for ISLE's FQ2 2012 earnings release Thursday, we’ve put together the recent pertinent forward looking company commentary.




  • “Given the uncertainty of the timing of the resolution of the appeal of the Nemacolin license, we have removed any capital spending related to Nemacolin from our guidance for the timing being. We will reintroduce once the timeline is clear.”
  • “We now expect our project capital for the rest of the year to be approximately $50 million almost solely related to Cape Girardeau. We still expect maintenance capital for the year to also be around $50 million or $40 million incremental after the first quarter.”
  • “We'll recognize income related to the lost profits and property damage in whatever period when the claims are settled with our insurance carriers. We are in discussion with our carriers regarding the claims and hope to have all of them filed within a very near-term. And historically, we've been successful in settling flood claims within a year after they're filed. Our goal is obviously to have them settled as soon as possible, possibly by the end of the fiscal year, but there is no guarantee of that. When the claims are settled, we will be able to include any business interruption income in our EBITDA for debt compliance purposes, much like happened when we settled the Hurricane Katrina claims a few years ago.”
  • “As it relates to the trends in July and August, I think choppy probably is the best way to describe it.”
  • [Pompano margins] “We've anniversaried as far as the tax rate is concerned, but remember we have two new competitors in the market….So I think you're probably looking at a pretty good run rate.”
  • “Pompano is the one property that is the most affected by seasonality for us, so the margins will bounce around a little bit between quarters based on the business volumes of the season.”
  • [Lula] “We have 640 positions on the Coral Reef. Hopefully, September 2, we'll open with 1,100 total. So 460 on the Palm Terrace, which will include about five high limit games, both blackjack and craps, and then some virtual blackjack games. So we have a reopening campaign that's in effect, and most of our impact so far has been on a weekend when we had lower capacity.”
  • “What we've looked at over the last couple of years is there is a higher correlation in our business to the unemployment rate.”
  • [Bally’s systems rollout] “For argument's sake, we're doing about two conversions a year.”
  • [Massachusetts]  “It's not anything that we're actively pursuing.”
  • [Crown Casino sale to New Bossier casino] “The next hurdle or the only really remaining significant hurdle as far as we're concerned is probably the passage of the referendum in Bossier in November [Passed on Nov 19]. Assuming that that passes, we would expect the sale to close then by the end of November and the proceeds, over a matter of time, probably will pretty much end up going back into that property, to some renovations to the Lake Charles property.”


DNKN is trading at 14.75x EV/EBITDA NTM.  The multiple has come in as the float has expanded (secondary) but other higher quality growth names like SBUX and DPZ continue to trade at a discount to DNKN at 11.6x and 11.5x, respectively.


Dunkin’ Brands is in the news today announcing 25 new Dunkin’ Donuts and 2 new Baskin-Robbins locations set to open in Louisiana over the next several years.  As we have written in the past, comparable sales growth is important for Dunkin’ Donuts but, given that the Dunkin’ Donuts business is 97% franchised, new unit openings are far more important for EPS growth. 


The premium multiple assigned to DNKN by the Street, then, is largely dependent on the “white space” growth opportunity that lies west of the Mississippi.  Management has stated its goal to double the store base within 20 years.  In order to do this, the company must build a backlog of stores that will allow them to open 500 stores per year beginning in 2013, up from a projected range of 220-240 in 2011 (more or less flat versus 226 domestic development agreements last year).


The chart below shows two columns; the first illustrates the openings that have occurred over the past three quarters and what the company will need to open in 4Q to meet the midpoint of the 220-240 openings range for 2011.  The second, on the right, indicates the contracted openings that have been announced thus far in 2011.  The announcements of new contracted openings typically guides to the openings happening “over the next several years”.  Below the chart, we have included bullet points detailing the markets and quantity of stores detailed in each announcement of 2011.  It is also worth bearing in mind that announcements do not equal openings; attrition is a very real risk to these numbers.  Like with cash flows, a nearby penny is worth a distant dollar.


WHAT DOES DNKN RUN ON? - dunkinbacklog


  • April 27th, 2011 – Dunkin’ Donuts announced six new restaurants in Cincinnati.  Gilligan Oil Company, LLC, an existing franchisee is the development partner.  The six stores will be added to Gilligan’s set of locations and will be open and operating by 2016.
  • April 27th, 2011 – Dunkin’ Donuts announces five new restaurants in North Kansas City.  The first restaurant will open in 2012 and the remaining four units will be developed by 2016.  An agreement was struck with Savoureux Corporation to develop restaurants.  HEDGEYE: Why is there such a back-loading of the schedule of unit openings in this agreement?
  • August 3rd, 2011 – Dunkin’ Donuts announces development of eleven new restaurants in Little Rock, Arkansas.  Seven units are to be developed in Ft. Smith and Northwest Arkansas by Littlefield Oil Company.  The first restaurant is slated to open in 2012 with the remaining six to open by 2018. The remaining four units are to be opened by Eric McDuffie and Sam Carter in Hot Springs and Benton.  The first unit is scheduled to open in 2012 and the remaining locations are scheduled to open by 2015.  HEDGEYE: Again, why is there such a back-loading of the schedule of unit openings in this agreement?
  • August 3rd, 2011 – Dunkin’ Donuts announces twelve new restaurants in Cedar Rapids, Iowa.  The development agreement was signed with Eastern Iowa Food Service, Inc.  The first restaurant is slated to open in 2012 and the remainder by 2018.
  • October 31st, 2011 – Dunkin’ Donuts announces eighty-six new restaurants in Washington D.C. (really 64 “new” contracts – the 86 included 22 previously contracted restaurants).  15 development agreements were signed over the past year.
  • November 29th, 2011 – Dunkin’ Donuts announces twenty-five new restaurants and two Basin-Robbins locations in Louisiana.  6 development agreements were signed.  The schedules of each developer’s unit openings vary but, similar to the other announcements of 2011, the schedules are back-loaded 4 or 5 years out.

The number of contracted openings is clearly not increasing at the same rate that stores openings are accelerating.  We need to see that backlog grow considerably to gain confidence in management reaching of doubling the store base within 20 years.  The lack of disclosure during the most recent earnings call as to where the backlog stands was, in our view, less than encouraging.  K-Cups may drive same-store sales but if it is earnings growth you are seeking as an investor, we believe there are better vehicles in the restaurant (or coffee) space.


Howard Penney

Managing Director


Rory Green


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