TODAY’S S&P 500 SET-UP - December 6, 2011


Another low-volume rally to a lower-high in US stocks as the interconnectedness of Asia’s slowdown gets ignored by consensus (so 2008).  Next catalysts (1) Chinese economic data for November (on Thursday) and (2) an ECB rate cut (also on Thursday).   Both should perpetuate what you see on your screen this morning (weaker Asian equities and weaker Euro).  As we look at today’s set up for the S&P 500, the range is 26 points or -1.84% downside to 1234 and 0.23% upside to 1260. 











  • ADVANCE/DECLINE LINE:  +1681 (+1051) 
  • VOLUME: NYSE 892.77 (+2.29%)
  • VIX:  27.84 +1.16% YTD PERFORMANCE: +56.85%
  • SPX PUT/CALL RATIO: 1.52 from 1.67 (+8.97%)




YIELDS – it’s trivial to realize that European bond yields continue to make a series of higher lows – that now includes German Bund Yields which are trading back up to 2.24% this morn (10s) and +18bps wider than USTs.  Spread risk remains our focus. UST yields are actually lower for the week to date with 10s down at 2.06%, signaling US Growth Slowing sequentially Q4 vs Q3

  • TED SPREAD: 53.90
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.04 from 2.05   
  • YIELD CURVE: 1.77 from 1.80


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:00 a.m.: AICPA releases quarterly CPA survey
  • 7:45 a.m./8:55 a.m.: ICSC/Redbook weekly retail sales
  • 10:00 a.m: IBD/TIPP Economic Optimism, est. 42.0, prior 40.6
  • 10:00 a.m: Fed’s Tarullo speaks at Senate Banking Committee
  • 11:30 a.m: U.S. to sell $35b 4-wk bills
  • 12:00 p.m: DoE short-term energy outlook
  • 4:30 p.m.: API inventories



  • Dubai wants to renegotiate $10B in debt held by state, state-related companies – FT
  • NFL near media deals worth $3.2B/year for eight years, +60% on current deals – WSJ
  • Kraft Foods provides broad details for post-split plans – WSJ
  • MF Global CRO raised concerns to board about company's exposure to European sovereign debt – WSJ
  • Senate Democrats will seek another vote on a payroll tax cut for workers this week
  • Treasury Secretary Timothy Geithner meets with Italian Prime Minister Mario Monti in Milan
  • 1:00 p.m.: Obama speaks at Osawatomie High School in Kansas City, Mo.




TREASURIES: UST 10y yields actually down for the wk to date now at 2.06%; continues to signal consumption growth slows as oil rises

  • Meiji Holdings Slumps After Cesium Reported in Baby Food
  • ‘Beau’ Taylor Said to Lock Fund as Assets Top $1 Billion
  • Carmakers’ $7 Billion Platinum Bill Shrinking Glut: Commodities
  • Japan’s Gold-for-Bonds Offer Could Boost Return By 5.9 Times
  • Singapore Syndicated Lending Surges 91% to Record $38 Billion
  • End of Easy Mideast Oil Means Work for Exxon, BP: Energy Markets
  • Gold Drops Along With Stocks, Commodities on S&P Ratings Review
  • Oil Snaps Two-Day Gain as S&P Threatens Europe Debt Downgrades
  • Palm Oil Output in Malaysia May Drop as Peak Season Closes
  • Shanghai Exchange Seeks Institutional, Foreign Investors
  • Base Metals Decline After S&P Puts Europe on Downgrade Watch
  • South Korea GDP Expands 0.8%, More Than Initially Estimated
  • STX-Vale Mega-Ship to Be Moved at Brazil Port After Leak Found
  • Aluminum Fee to Japan Said Cut by Most in Two Years on Glut
  • Wheat Crop in Australia Set for Record, Swelling Supplies
  • Stocks Rise as Europe Fights Crisis; Euro, Oil Reverse Gains
  • Eagle Bulk Said to Discuss Restructuring Options With Jefferies
  • Bunge May Expand Palm Business Into China Next Year, White Says






EURO – big league failure at the immediate-term TRADE zone of 1.35-1.36 resistance, again, yesterday. We think the EU Summit is a liability now that expectations/hopes are so high – or is it fear? Tough to discern if institutional investors are more afraid of missing a “year-end rally” than understanding what it means if there is no Eurobond (i.e. money printing backstop to bail out German and French banks).










ASIA – Chinese stocks down again overnight, taking out their lows from last week that were established prior to their rate cut (lower-lows) as the rest of Asia continues to print slowing economic data (PMIs) and countries cutting rates (Australia last night) are seeing their markets fall on that news (Australia down -1.3%). Get Growth Slowing right, you’ll ultimately get the stocks right.







  • Arab League Snubs Syria as U.S. Plans Talks With Opposition
  • End of Easy Mideast Oil Means Work for Exxon, BP: Energy Markets
  • BP Has Road Map in Citgo Case to Formula for Oil-Spill Fine
  • KNOC May Spend Up to $4 Billion Next Year to Buy Oil Assets
  • CIMB to Expand in Persian Gulf to Capture Sukuk: Islamic Finance
  • Dubai, State Entities Have $101.5 Billion Debt, Moody’s Says
  • Dubai May Restructure Some State-Company Bonds, FT Reports
  • Moody's: Debt profile of Dubai state-owned corporates has
  • Dubai Shares Drop Most in 2 Weeks on Debt Restructuring Report
  • U.A.E. Bank Loans Exceed Deposits for Second Time This Year
  • Most OPEC States Signal No Need to Alter Quota in Vienna (Table)
  • Taqa’s $1.5 Billion Bond Pricing Shows ‘Large’ Investor Demand
  • Emirates NBD Aims to Sell Islamic Bonds This Month, CEO Says
  • Nakheel Posts First-Half Net of $134 Million as Projects Resume
  • Investcorp Completes Sales of Accuity Holdings for $530 Million
  • Drake & Scull Saudi Unit Wins 352 Million Dirhams Contract
  • Gas Demand to Rise 60% by 2040, Surpass Coal Use, Tillerson Says
  • Dubai eyes refinancing of $10bn in state debt




The Hedgeye Macro Team

Howard Penney

Managing Director


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.



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