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SBUX: Starbucks reported a solid quarter after the close but failed to reach expectations.  The stock is trading down -1.7% in pre-market trading despite having reported EPS of $0.50 versus consensus of $0.49.  U.S. comps came in at 9%, which represented a sequential deceleration in two-year average trends.  With coffee costs locked through 1HFY13 (March), the top-line is the key variable from here.  Management raised the lower end of the FY12 EPS guidance range by $0.03 to $1.78-$1.82 but consensus is looking for $1.84.  Despite the impressive statistics around consumer loyalty, K-Cup pack shipments, and progress in China, the Street’s expectations being ahead of the company is dictating price action this morning.


THE HBM: SBUX EARNINGS, COSI, YUM - sbux consolidated


THE HBM: SBUX EARNINGS, COSI, YUM - sbux americas pod1


THE HBM: SBUX EARNINGS, COSI, YUM - sbux emea pod1






Comments from CEO Keith McCullough


The #BernankTax will be trending on a Twitter handle near you  - that’s what a policy to inflate is:

  1. The Bernank Tax – Good morning America; you’re still seeing zero on the rate of return on your savings accounts and everything you put in your mouth or car is going up in price – try not to chomp on too many shiny rocks. Copper is up +14% for the YTD! Brent Oil prices are pushing for $112 and US Consumption stocks did not act well either yesterday or on good news (MCD and SBUX eps).
  2. GERMANY – these guys have to be smiling from ear-to-ear; they effectively gave the world’s Keynesian central planners the bird for 6 months and now the German DAX is up +11.1% YTD, busting a move above my long-term TAIL line of 6503 (DAX). Import Prices in Germany dropped in DEC to 3.9% y/y vs +6.0% NOV, so look for that price pressure to come back in Jan/Feb (BernankTax)
  3. JAPAN – how’s that 20yr Keynesian experiment treating you? We’ll have an in depth research note out on Japan again today; JGBs and Yens are not acting like we should be ignoring this risk like the Old Wall has – may be a bigger risk than Europe’s sov debt within 6 months. Shorting both Japanese Yen and the Nikkei on green days (FXY and EWJ).


Immediate-term TRADE range for the SP500 is now 1. I’m looking for a GDP miss vs heightened expectations at 830AM.









COSI: Cosi reported company-owned comparable restaurant sales of +0.9%.





YUM: Yum’s Taco Bell is starting a new breakfast menu in 10 western states and will begin to offer the menu in the east of the U.S. in 2013.






AFCE – up nicely following the preannouncement


KKD – up 8.5% in the past month and 9.8% YTD


CBOU – Hard to fight momentum with this stock in now up 23% YTD


CMG – 2/1 EPS date


WEN – Caught a downgrade this am 2/1 by UBS – good call ahead of the analyst day.  We remain negative on TRADE


GMCR – The competition is heating up! Up 10% YTD




BJRI – nothing new

CAKE – surprise move here but should trade in line with the market into the 2/10 EPS








Howard Penney

Managing Director


Rory Green



The Bernank Tax

“This book is chiefly addressed to my fellow economists.”

-John Maynard Keynes


This morning’s Early Look is chiefly addressed to anyone looking for an alternative to the Keynesian Economic Dogma that’s failing us. The aforementioned quote is the opening sentence of Keynes’ “General Theory” on economic Storytelling of 1936.


After blowing up his personal accounts by levering himself up on the long side of commodities (rubber, corn, etc.) in the late 1920s, Keynes lost the confidence of not only The People, but of the politicians. The latter constituency is not easy to lose!


The “General Theory” ended up being an alternative for academic economists to opine on versus Marxism. It wasn’t a Global Macro market practitioner’s framework or anything that resembled real-world (or what we call Prices Rule) economics.


That’s why it’s so critical for Ben Bernanke to fear-monger politicians today with threats of the “alternative” scenario. That’s also why he, like Keynes, is losing The People. We can only watch people getting paid at The Great Davos Depression for so long until we figure out we’re the ones paying for the champagne.


Speaking of popping out of bed feeling a little bubbly, this morning I am going to formally start calling Ben Bernanke’s Japanese 2.0 policy The Bernank Tax.


Why am I calling it a tax? Because that’s exactly what it is – whether it’s a tax on the hard earned savings accounts (interest income) of Americans and/or a food/gas tax that a family in India is going to have to incur as a result of debauching the world’s reserve currency – it’s a tax on Global Consumption. Period.


Back to the Global Macro Grind


The Bernank Tax was also a tax on YTD stock market returns yesterday. As the US Dollar fell, the Old Wall did exactly what Bernanke is daring them to do – bid up Inflation Expectations (Gold, Oil, TIPs, etc.). Stocks opened strong in the morning, then went red by the afternoon as Growth Expectations started to fall.


Get the slope of Growth and Inflation Expectations right, and you’ll get a lot of other things right.


What’s going to make this really interesting is that The Bernank Tax is going to become a hot potato for President Obama now in the General Election. Provided that Romney figures out the marketing message, what is Obama going to say if/when the US stock market starts going down on US Dollar down days?


That’s not part of the Keynesian playbook, fyi. But it’s measurable – in real-time. And maybe that’s why Obama is making the best decision I have ever seen him make from an economic leadership perspective – getting rid of his fiscal Dollar Debaucherer in Chief, Timmy Geithner.


Now I know that you know that my Storytelling on this matter is getting pretty tasty. This is my counterpunch to one of my investment mentors, Warren Buffett, and his “my poor Secretary should pay lower Taxes” thing. Where’s the fair-share in him only paying her $60k, by the way?


As is the case with all non-fiction Storytelling, here are the inverse correlations, across durations, between what the US Stock Market (SP500) has done versus the US Dollar Index (USD) in the last 3 years: 

  1. 3-year = -0.68%
  2. 1-year = -0.22%
  3. 4-month = +0.44% 



That sneaky little Mucker got them didn’t he!


Huh? What the math is telling you here (and yes we get these are correlations, but we also get that the longer-term causality of cheap money only amplifies my point) is that for the last 3 years, the Fed’s go-to move of debasing the US Dollar worked (dollar down = stocks up).


But a funny little thing started happening on the way to the Hedgeye forum in the last 4 months… Since the thralls of September 2011, as the US Dollar started to stabilize/strengthen (from a 40-year low), so did the US Employment, Confidence, and Consumption picture (also from 40 year-lows).




If you haven’t heard this story from a Paul Samuelson and/or any of the Keynesians who are still brave enough to parade their charlatan textbooks around an Ivy League campus yet, I can give you 50 million copies (textbook revenues) of reasons why.


Never mind the rest of the debate – this point about The Bernank Tax on the citizenry is very simple to understand. If you want to tighten your duration inside of the last 4 months on this, have at it. Here are more inverse correlations between SP500 and USD: 

  1. 30-day = +0.04
  2. 60-day = +0.31
  3. 90-day = +0.23 

Yep. Instead of US stocks going up on dollar down days, they’re starting to go up on dollar up days. Makes sense. While, in the long-run, we may all be dead - in between now and then, we all have to pay for things with real dollars to live.


The Bernank Tax doesn’t yet cap what Charles Ketterring called the one thing no one has ever been able to tax, “thinking.”


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1, $110.57-112.41, $1.29-1.32, $78.91-80.26, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Bernank Tax - Chart of the Day


The Bernank Tax - Virtual Portfolio



TODAY’S S&P 500 SET-UP – January 27, 2012


As we look at today’s set up for the S&P 500, the range is 23 points or -0.64% downside to 1310 and 1.11% upside to 1333. 












  • ADVANCE/DECLINE LINE: -61 (-1622) 
  • VOLUME: NYSE 866.56 (4.35%)
  • VIX:  18.57 1.42% YTD PERFORMANCE: -20.64%
  • SPX PUT/CALL RATIO: 2.03 from 1.87 (8.56%)


The Bernank Tax – Good morning America; you’re still seeing zero on the rate of return on your savings accounts and everything you put in your mouth or car is going up in price – try not to chomp on too many shiny rocks. Copper is up +14% for the YTD! Brent Oil prices are pushing for $112 and US Consumption stocks did not act well either yesterday or on good news (MCD and SBUX eps).

  • TED SPREAD: 50.73
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 1.95 from 1.93
  • YIELD CURVE: 1.74 from 1.72

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP (Q/q) (Annualized), est. 3.0% (prior 1.8%)
  • 8:30am: GDP Price Index, 4Q A, est. 1.9% (prior 2.6%)
  • 8:30am: Core PCE (Q/q), 4Q A, est. 0.9 (prior 2.1%)
  • 8:30am: Personal Consump, 4Q A, est. 2.4% (prior 1.7%)
  • 9:55am: U.Mich, Jan. F, est. 74.0 (prior 74)
  • 10am: Fed’s Dudley to speak on regional economy in NY
  • 1pm: Baker Hughes Rig Count


    • President Obama, VP Biden to address House Democratic Caucus annual retreat in Cambridge, Md.
    • 8am: Quinnipiac University releases results of poll of likely voters in Florida’s Republican primary on Jan. 31
    • 10am: Labor Dept. releases annual data on U.S. union membership
    • House meets in pro forma session, Senate in session


  • U.S. economy probably expanded in 4Q by 3%, fastest pace of 2011, as consumer spending picked up and companies rebuilt stockpiles, economists est.
  • Former U.S. Treasury Secretary Larry Summers said in interview in Davos the recovery in the U.S. economy is underway, though it is not yet at “escape velocity.”
  • Omnicare PharMerica bid unlikely to get U.S. approval, NY Post says
  • FDA decision possible today on Amylin/Alkermes’s diabetes drug Bydureon
  • More than 70% of investors said attack on Iran’s nuclear facilities would create only a short-term disruption in oil markets: Bloomberg Global Poll
  • World Economic Forum


    • Newell Rubbermaid (NWL) 6:30 a.m., $0.38
    • Altria Group (MO) 6:58 a.m., $0.49
    • Alliance Holdings GP (AHGP) 7 a.m., $0.83
    • AO Smith (AOS) 7 a.m., $0.64
    • Alliance Resource Partners (ARLP) 7 a.m., $1.78
    • DR Horton (DHI) 7 a.m., $0.05
    • Ford Motor (F) 7 a.m., $0.25
    • Honeywell International (HON) 7 a.m., $1.04
    • IDEXX Laboratories (IDXX) 7 a.m., $0.63
    • Legg Mason (LM) 7 a.m., $0.25
    • Procter & Gamble (PG) 7 a.m., $1.08
    • Dominion Resources (D) 7:30 a.m., $0.64
    • NextEra Energy (NEE) 7:31 a.m., $0.91
    • T Rowe Price Group (TROW) 7:32 a.m., $0.69
    • Moog (MOG/A) 8 a.m., $0.74
    • Chevron (CVX) 8:30 a.m., $2.85
    • NuStar GP Holdings LLC (NSH) 8:43 a.m., $0.31
    • NuStar Energy (NS) 8:45 a.m., $0.31


  • Gold Bulls Ascendant Amid Biggest Rally Since 1980: Commodities
  • Copper Advances as Stockpile Orders Jump to Eight-Year High
  • Crude Heads for Weekly Gain; Total Sees $100 Support for Brent
  • Cocoa Extends Gains in London After Stockpiles Drop; Sugar Rises
  • Rubber Drops, Paring Weekly Gain, as Data Raise Growth Concern
  • Gold May Rise in London as Low Interest Rates Support Demand
  • Commodities Open Interest Dropped Most in Three Years in 2011
  • Rusal May Cut Aluminum Output 6% in Next 18 Months, CEO Says
  • Rubber Seen Driven by China Demand Recovery, StanChart Says
  • Indonesia’s Kharisma Sells 4,500 Tons of Palm Oil (Table)
  • Cattle Herd Drop to 1958 Low Boosting Cost for McDonald’s, Tyson
  • Palm Oil Seen Declining 5.2% by February: Technical Analysis
  • Copper to Stall as Record Prices Spur Mining: Chart of the Day
  • Commodities Daybook:  Oil Heads for First Weekly Gain in Three
  • Corn Heads for Biggest Weekly Gain in Five; Soybeans Advance
  • Palm Oil Posts Weekly Decline on Concern Over Malaysia Exports









GERMANY – these guys have to be smiling from ear-to-ear; they effectively gave the world’s Keynesian central planners the bird for 6 months and now the German DAX is up +11.1% YTD, busting a move above my long-term TAIL line of 6503 (DAX). Import Prices in Germany dropped in DEC to 3.9% y/y vs +6.0% NOV, so look for that price pressure to come back in Jan/Feb (BernankTax).





JAPAN – how’s that 20yr Keynesian experiment treating you? We’ll have an in depth research note out on Japan again today; JGBs and Yens are not acting like we should be ignoring this risk like the Old Wall has – may be a bigger risk than Europe’s sovereign debt within 6 months. Shorting both Japanese Yen and the Nikkei on green days (FXY and EWJ).










The Hedgeye Macro Team




The Macau Metro Monitor, January 27, 2012




The number of junket operators reached an all-time high of 219 in 2011, up 13% YoY.  The last peak in junket operators was in 2007, when there were 186 registered junkets.  With 34 casinos in the SAR, there is an average of six licensed junkets for every casino. 


By contrast, industry estimates of the number of unlicensed junkets working in Macau under the umbrella of those who are officially registered range widely, from several thousand to more than 10,000.


Bad CYQ4 for any other company, but not that bad for WMS.



“Reflecting the quarterly sequential improvements in unit shipments, revenues, diluted EPS and cash flow from operations, and the ongoing improvements in the pace of jurisdictional approvals for our newest products, we believe the inflection point in our operating and financial performance is now behind us”


- Brian R. Gamache, WMS Chairman and Chief Executive Officer




  • Believe that their quarterly ship share increased sequentially and expect to realize continued ship share gains 
    • We agree but then again they always experience a sequential share increase from the September to December quarter
  • Think that they can get to previous ship share levels
    • We disagree - it's not going to happen for many reasons
      • Better competition
      • They were very under-represented on older floors and therefore got an outsized portion of the replacements - now that their floor share has normalized, their replacement share should be closer to their new share.
  • Think that they will get high teens ship share in new openings
  • Alberta: WMS selected to replace 25% of VLTs - shipping in 1H13'
  • Manitoba and Saskatchewan are also expected to announce RFP results over the next few months
  • 1,500 unit deal they got with a large casino operator will be shipping end of FY12
  • New participation products introduced in 2H12 will feature new 'hooks' and player life features
  • Networked gaming: continue to grow their global presence - WAGE-NET connects 900 games worldwide.  Goal is to be installed in 100 locations worldwide by their fiscal year-end.
  • Their online strategy is to move to B2B once they demonstrated their success on their own site
  • $16MM of savings achieved in SG&A in the last 6 months 



  • They aren't selling their participation games.  Typically, for every two games they install, one comes out, but this time they only got 1 for 1.  They have a 1,900 unit backlog now and are hoping that 50% of those are incremental. 
  • 15% of their product mix was premium vs. 25% a year ago and that coupled with competitive pressures, resulted in a small YoY decrease in pricing. They don't think that prices are going to be declining for the longer term.
  • Their 1,500 unit placement wasn't that unusual in terms of what they normally get
  • Average revenue per day is a combination of the economy and better competitive content.  A little softer than they thought but hope for an uptick in 2H12.
  • Hope to be flat YoY in their install base
  • Participation backlog is 70% new themes and 30% refreshes
  • Expect sequential margin improvement in product sales - not YoY
  • When will the shipped but not recognized units be recognized? 
    • 2H12 - unclear if it will all be next quarter
  • Their litigation settlement benefit was in interest and other income
  • Their online strategy has always been to move from B2C to B2B
  • Will be spending roughly the same on the participation swap out as last year- $65-70MM but that number will decline in FY13
  • The benefit from cost reductions will be less in the back half since costs cuts are going to start lapping
  • 55 new games approved in F1H'12
  • One aspect of the revenue recognition policy wasn't met; hence, the deferral
  • CPU Next-3 is launching on Aladdin first in Q4 and then a whole bunch of games in F13'.  When they released CPU Next 2 that was a catalyst for them to gain a lot of share. 
  • Legislator in Australia has proposed nationalizing gaming.  Therefore, operators have to cut back a bit on purchasing as they wait to see if there are going to be nationalized rules implemented.
  • 1,500 unit deal - recognized in the quarter that they ship as game sales
  • Where did the international sequential unit growth come from?
    • Macau: Sands Cotai Central opening
    • Argentina and Latin Am has been particularly active
    • Europe remains slow but ICE show was promising
  • They sell their international units in USD so there is no FX benefit
  • This past quarter they bought back stock with cash - the draw on their line was from last quarter
  • They see growth in the online space
  • The refreshed gaming operations products are all outperforming the games that they are replacing
  • When they had 30% ship share, they got too aggressive on their product development schedule; so basically started developing product that was "too forward looking" which made the products difficult to approve and digest by their clients. 



  • WMS reports $0.27, missing consensus by 3 cents when you exclude the litigation settlement benefit. 
  • Reached agreement with a major multi-site casino operator to replace 1,500 Bluebird gaming machines with Bluebird2 and xD units
  • "Surpassed 800,000 unique log-in users for Player’s Life Web Services in January 2012"
  • “We expect quarterly sequential improvements in revenues and operating margin to accelerate in the second half of fiscal 2012, as the return to a more ratable schedule for the development and ongoing commercialization of innovative new products continues, as we realize the benefit of increased demand from new casino openings, and as we maintain our disciplined focus on improving operational execution and cost containment. These improvements are expected to drive year-over-year growth in both total revenue and operating margin in the second half of fiscal 2012. We believe the continued improvements and operational progress will lead to an even stronger year in fiscal 2013 for WMS.” 
  • "Momentum for the commercialization of our forward-thinking network gaming system continues to gain traction with more than 50 casinos around the world now running our networked gaming solutions on their slot floors"
  • Product sales:
    • 4,846 units recognized and 5,803 shipped
      • NA: 2,759; with 2,200 replacement units
        • There were "957 additional new units for new casino openings and expansions that were shipped at the customers’ request, but not recognized as revenue in the December 2011 quarter"
      • International units: 2,087
        • YoY decline primarily attributed to Mexico and Australia
    • ASP: $16,325
      • YoY price decline "reflecting the competitive marketplace and a lower mix of premium games"
    • Bluebird xD units: 34% and mechanical reel products: 13%
    • Used games: 1,600
    • Conversion kits: 5,000
  • Gaming operations: EOP install base of 9,282 at an average revenue per day of $67.62
    • So much for stabilization in game operations - this quarter saw another sequential decline of over 300 units and YoY yields fell by 9%. The company claims that these are normal seasonal declines and that the unit drop is attributable to the already disclosed product delays.
    • Lower YoY gross margins "reflecting unfavorable jackpot expense experience and increased costs from the networked gaming and online gaming businesses that were launched within the last twelve months"
  • "WMS expects to achieve sequential growth in its installed participation base and average revenue per day in both the March and June 2012 quarters." 
  • "Company expects its effective tax rate in the second half of fiscal 2012 to be 36%-to-37%."
  • "During the three months ended December 31, 2011, the Company purchased $9.6 million of its common stock, or 500,449 shares, under its share repurchase authorization"
  • Outlook:
    • "WMS expects to achieve further quarterly sequential growth in revenue and operating margin in both the March and June 2012 quarters, leading to year-over-year growth in the second half of fiscal 2012"
    • "WMS continues to believe fiscal 2012 annual revenue will be below fiscal 2011 revenue" 
    • "Annual operating margin is expected to improve year over year due to the Company’s cost containment and restructuring initiatives."
    • "Expect that sequential growth in the second-half of the fiscal year will be driven by improvements in the flow of approvals for new products, modest growth in the gaming operations business and an improvement in new unit demand from new casino openings. The Company does not expect revenue in fiscal 2012 from the opening of the Illinois VLT market or from the VLT market in Italy." 
    • "Only limited improvement in the industry replacement cycle in calendar 2012." 
    • "R&D spending in fiscal 2012 is targeted to approximate 13-to-14% of total annual revenues." 

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