Asian PMI's Disappoint

Conclusion: After analyzing the recent spate of Asian economic indicators, we remain bearish on the intermediate-term slope of global growth and expect that to continue weighing on financial markets throughout. Moreover, Asia is forcing consensus to address the question: “Even if Santa Claus' sack is not filled with coal (a big "if"), what happens in January and beyond?”


Over the last few days, we’ve received a bevy of PMI reports out of Asia from varying sources. Needless to say, the bulk of the releases left a great deal to be desired in the direction of a forthcoming rebound in global growth – one of the primary factors determining the direction of Global Macro beta.


Asian PMI's Disappoint - 1


China, which consensus anchors on as an “engine of global growth” in times of improving global fundamentals or speculation around monetary easing, has taken a backseat to Europe in recent weeks – conveniently alongside some fairly nasty economic data. Unfortunately, just because the Manic Media chooses to ignore bad data out of China doesn’t mean China ceases to exist.


To the tune of bad data, China’s services PMI joined its recently-released manufacturing PMI in contraction territory, falling to 49.7 in November from 57.7 prior. While an eight-point drop into contraction-mode seems meaningful, we are cautious to point out the risk in running with this data point as a super-negative indicator, as China non-manufacturing PMI is not seasonally-adjusted. That said, however, at 49.7, the Nov ’11 reading is the second-lowest November reading since the dataset began back at the start of 2007.


Asian PMI's Disappoint - 2


In addition to China, Hong Kong and Singapore, which remain Asia’s two most-sensitive economies to global growth, also showed some nasty deltas in their most recent PMI surveys as well (see aforementioned table). As demonstrated over the last two global growth cycles, Singapore and Hong Kong lead global GDP by 1-2 quarters, meaning we’d expect to see the sour data coming out of both economies confirmed by larger economies that are closer to the end of the supply chain (such as the U.S. and E.U.) on a 3-6 month lag. From a common sense perspective, that makes sense – Asia produces our orders and then ships them to us; we then stock the shelves and consume. Only someone hoping for Santa Claus would make this relationship out to be more complicated than that.


Asian PMI's Disappoint - 3


All told, we remain bearish on the intermediate-term slope of global growth and expect that to continue weighing on financial markets throughout. In this macro-driven market(s) it is wise to avoid fighting the Global Macro fundamentals!


Darius Dale


European Pin Action: SP500 Levels, Refreshed

For those that were cheering for central bank intervention as a way to buoy global equity prices, the last few days have rewarded them.  On Wednesday of last week, the major central banks made a joint announcement that they had agreed to lower interest rates on dollar swaps. Since Wednesday, the SP500 is up +4.7%.


With the announcement of intervention behind us, the key focus will be the pin action in Europe this week and there are a number of key calenedar events to keep front and center:


1. Geithner arrives in Frankfurt tomorrow


2. ECB interest rate announcement on Thursday


3. EU meeting on Friday


Both equity markets and even bond markets in Europe are presupposing a solution to come in the next couple of days.  Rumors are rampant as to the size ($1 trillion? $2 trillion?) and nature (ECB backed? IMF backed?), but one thing is for sure, if clarity doesn't come this week, then it is unlikely that equity rally will be sustained through year-end.


The SP500 remains below both our TRADE and TAIL lines of resistance at 1,259 and 1,270, respectively.


Daryl G. Jones

Director of Research


European Pin Action: SP500 Levels, Refreshed - SPX

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The Yum! Brands press release this morning raising guidance combined with the list of presenters at this week’s annual investor meeting tells us that Yum!, once again, is going to be talking growth.  I like to think of it as the global “white space” opportunity.  Yes, I’m taking a cheap shot at the bull investment case for Dunkin’ Brands, because DNKN is being propped up by a very weak case for its “opportunity” in the US.  Dunkin’ Brands is a global company but not to the extent of Yum!, McDonald’s or Starbucks.  Yum! Brands’ growth profile and sustainability outlook are superior to those of Dunkin’ Brands yet, on an EV/EBITDA NTM basis, it trades at 11x versus DNKN at 14.5x.


Yum! Brands’ theme for this week’s investor meeting is, “On the Ground Floor of Global Growth…China and a Whole Lot More.”  With respect for 2012, there is no change in the company’s earnings per share growth of at least 10%.  The familiar refrain of “opportunity to dramatically improve performance” is becoming the motto of the US Division.  While the US Division has been a disappointment for investors over the past five years or so, it is becoming less relevant over time.  The company has already reached its target of a 3:1 international operating profit-to-US operating profit ratio by 2015 albeit due to the shrinking of US profits rather than the growth of the international profitability. 


Below are some of the components of today’s updated guidance from the company:


Outlook – CHINA - operating profit growth of 15%.

  1. Double-digit units growth
  2. System sales growth of at least 13%
  3. Same-store sales growth of at least 5%
  4. Operating (G&A) leverage


Outlook - Yum! Restaurants International - operating profit growth of 10%.

  1. New unit development of 3 to 4%
  2. System sales growth of 6%
  3. Same-store sales growth of at least 2 to 3%
  4. Margin improvement and G&A leverage

HEDGEYE: If we get an update on China’s SSS in 4Q11, it will provide some cushion against those that are negative on the impact of China’s slowing economic growth impacting trends at KFC China.



Outlook - U.S. operating profit growth of 5%.


HEDGEYE: The million dollar question is, “how do they get to this target?”  While its might be the 11th straight years of hitting the 10% earnings goal, the U.S. has not been a great help to the company in that regard. 



The following is a list of presenters that will be speaking at the YUM investor conference in NYC on Wednesday:

David Novak, Chairman & CEO


HEDGEYE: Mr. Novak will give the Yum! cheer and another glowing overview of the company and its “white space” opportunity.  My guess is that he will touch briefly on the USA, but the only real news in the domestic business is that Pizza Hut is seeing some real success in November from the introduction of the “Big Dinner Box” promotion.



Rick Carucci, CFO


HEDGEYE: Mr. Carucci will go through the numbers which, we believe, will likely be impressive.



Mark Chu, President & COO - Yum! China

Angela Loh, Chief Marketing Officer - Yum! China

Lily Hsieh, CFO - Yum! China


HEDGEYE: China defines YUM and the company has the numbers to prove it.  If there is any news from China on Wednesday it will be that SSS trends in 4Q11 are “VERY” strong



Micky Pant, CEO – YRI

Martin Shuker, GM - KFC UK

Ivan Schofield, GM - KFC France


HEDGEYE: YRI represents a significant growth opportunity for YUM, 2012 will also have a restructuring componient that will incrementally help margin and profits in 2012.



Niren Chaudhary, President - Yum! India


HEDGEYE: Mr. Chaudhary is the current “rock star” at YUM with his recent promotion to President of Yum! India, a role in which he will be reporting directly to Mr. Novak.  This message from India will be yet another “white space” opportunity for YUM and the growth rate is accelerating.  



Greg Creed, CEO - Taco Bell US


HEDGEYE: I don’t want to minimize the importance of Taco Bell, but unless they give us a story about improving “the core” first, all the other initiatives are just noise.  





Howard Penney

Managing Director


Rory Green



A modest gain in Strip revenues expected despite tough slot and table hold comparisons.




Based on the latest airport/taxi data and assuming normal slot and table hold percentages, our predictive model estimates Strip revenues grew 1-3% in October.  McCarran Airport October passenger traffic rose 4.5% YoY, while Nevada October taxi trips increased 8.2% YoY. 


Volume growth was likely better than our revenue projection due to tough hold comparisons.  We project total gaming volume ex Baccarat in October grew 7% YoY.  As we mentioned in, “YOU TALKIN’ TO ME” (11/22/11), total gaming volume ex Baccarat has a statistically significant relationship with taxi trips.  October table win growth, however, would only be in the low digits because of a difficult hold comparison last October.


Going forward, November faces a difficult slot comp since hold was abnormally high last year.  The table business is up against low volumes last year but with normal hold.




Growth may slow down to 15-20%



Average daily table revenues were only HK$668 million in the first 4 days of December versus HK$717 million for November.  While early, we are currently projecting HK$21-22 billion in total GGR for December which would represent a YoY increase of only 15-20%.  Remember that December faces a difficult hold comparison from last year.  


The first 4 days’ revenues are a little disappointing especially considering that 2 out of the 4 days were weekend days.  However, it’s only 4 days and we are hearing that Wynn is holding low so far in December.  We also expect Wynn to continue to see volume share declines.  LVS continues to make headway with its new junket program with share jumping 400bps from recent trend.  MGM was the other standout so far in December.




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