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Too Strong?

“I would think we do a Quantitative Easing 3 if the Dollar gets too strong.”

-Larry Fink


Wow. Larry Fink is the CEO of Blackrock – they run $3.5 Trillion in client assets – and after a +101% move in US stocks from the 2009 low, he told Bloomberg yesterday that “investors should be 100% in Equities.”


Game on.


Fink is probably a good guy. We probably have a few things in common too. For one, we both started our careers at First Boston. He eventually ran their bond department. I eventually left.


Evidently, one thing that we do not have in common is the concept of Wall St 2.0 Global Macro Risk Management. There’s tremendous responsibility in being trusted with real-time recommendation. Time and price really do matter. With my own money, I’d never be 100% in anything – never mind stocks, after their best start to a year in decades.


The other thing Fink and I don’t have in common are political aspirations. He’d like to replace Geithner as head of the Treasury. I’d rather be a one-legged duck swimming in a circle.


When you consider the aforementioned currency quote within the context of where some of this country’s thought leaders are relative to my Strong Dollar = Strong America vote, Fink and I are not even in the same area code of having a debate.


Is my opinion Too Strong? After testing 40-year lows during Qe2 of last year, was the US Dollar Too Weak? Is Larry Fink’s view of arresting gravity and not letting America’s currency trade at its non-Fed intervention free-market price Too Strong?


So many critical questions. So little time left.


Back to the Global Macro Grind


With Santorum sweeping 3 states last night, President Obama’s probability of re-election (Intrade contracts) are going up and the US Dollar Index is going down. It sounds like Fink’s goal in advising Obama will be to keep the Dollar down. I guess if you’re in the business of seeing asset prices inflate, that makes some sense.


But does it make sense for American Savers and Consumers?


You tell me. I’m already telling you what I think. It’s no different than what I thought when Larry Fink was bullish on US Equities in February of last year. US Dollar Debauchery drives inflation. Inflation slows real GDP growth.


Now if you take Bernanke or the US government’s word for it, we don’t have inflation. Notwithstanding the fact that Bernanke cites a US inflation calculation that has been changed 9x since 1996, the “deflator” in this past quarter’s US GDP report was only 0.4%.


What does that mean?

  1. Q4 US GDP Growth for 2011 was reported at 2.75%
  2. Q4’s “Deflator” (you subtract inflation from the reported number for a real GDP #) was 0.39%
  3. With Consumer and Producer Price inflation running 10x that 0.39% “deflator”, US GDP was grossly overstated

I don’t use the word “grossly” very loosely. Neither does Clarium Capital’s Peter Thiel use the word “fraud” casually. Last night, like two non-Keynesian ships in the night, Thiel (founder of Pay Pal) and I were on separate sides of Yale University’s campus hosting spirited discussions with students and faculty about the alternative debate to currency debasement (he called Keynes a fraud).


Back to these feisty little critters called Inflation Expectations that slowed US GDP Growth in its tracks at 0.36% in Q1 of 2011 (yes, before the Europe that every guy who was wrong on his 2011 US GDP forecast by 60-80% blamed), here are some facts:

  1. US stocks haven’t had 1 down day of more than 0.57% in 2012 YTD (yes, stock prices are inflating)
  2. Brent Oil is trading at $116.35/barrel this morning = up +6.5% since Bernanke debauched the US Dollar on January 25th
  3. Gold has gone from $1622 on the morning of January 25th(pre FOMC statement) to $1749 this morning = +7.8%

If someone wants to explain to me that markets aren’t expecting the Chairman of the Federal Reserve to inflate, I’m ready to debate them in any public forum – any time, any place.


Russian stocks (driven by expectations of Petro-Dollar prices = Dollar Down, Oil Up) are up another +1.3% and up +19.5% YTD! Both the central banks of Australia and South Korea have come out in the last 48 hours and said no more rate cuts with inflation running higher. India, who is highly dependent on foreign oil, just saw its yield curve go back to flat as inflation expectations ramped.


I could (and do) go on, and on, and on about this … because the data that supports it does…


The bottom line is that people who get paid (including me because I am long Energy (XLE) and Gold) by inflation expectations rising are the same people who generally say there is no inflation.


Calling that out for what it is isn’t Too Strong. It’s called the truth. Respect and leadership in America isn’t allocated by your title. Its earned each and every day. There may be bailouts for people losing client capital. But there is no bailout for losing credibility.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1, $112.71-116.85, $1.30-1.32, $78.59-79.09, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Too Strong? - Chart of the Day


Too Strong? - Virtual Portfolio


TODAY’S S&P 500 SET-UP – February 8, 2012

As we look at today’s set up for the S&P 500, the range is 27 points or -1.49% downside to 1327 and 0.52% upside to 1354. 











SENTIMENT – to a degree, the Fink comment (he was bullish in Feb of last year too) summarizes a lot about where sentiment is going right now – it’s a chase. With the VIX testing 16 (the level selling Equities has paid off for 4yrs) and this morning’s II Bullish/Bearish Spread (survey) hitting its widest Bullish Spread since April of 2011, we can argue about anything in the rear-view here, but +2300 basis points wide (Bulls vs Bears) is very very wide.

  • ADVANCE/DECLINE LINE: 389 (929) 
  • VOLUME: NYSE 728.98 (6.08%)
  • VIX:  17.65 -0.62% YTD PERFORMANCE: -24.57%
  • SPX PUT/CALL RATIO: 3.12 from 1.78 (75.28%)


  • TED SPREAD: 44.37
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 1.98 from 1.97
  • YIELD CURVE: 1.73 from 1.73

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Apps, week of Feb. 3 (prior -2.9%)
  • 10:30am: DoE inventories
  • 10:40am: Fed’s Williams speaks in San Ramon, California
  • 1:00pm: U.S. to sell $24b 10-yr notes


  • House in session, Senate not
    • House Ways and Means Committee holds hearing on how accounting rules affect how businesses evaluate tax policy, 9am
    • House Energy and Commerce subcommittee holds hearing on cybersecurity, 9:30am
    • House Financial Services subcommittee holds hearing on proposal to remove the head of the Consumer Financial Protection Bureau from the board of the FDIC, 10am
    • House Science, Space and Technology Committee holds hearing on the recommendations of a panel assessing the nation’s nuclear future, 10am
    • House Oversight Committee holds hearing on union political contributions, 10am
    • House Financial Services subcommittee holds hearing on proposals to limit the extraterritorial effect of the Dodd-Frank law, 2pm


  • Greek PM negotiations with party leaders continue; Athens missed another deadline to secure second aid package
  • McDonald’s releases January sales information at 7:58am; watch for commentary on food inflation. Buffalo Wild Wings the latest to say it may raise menu prices this year.
  • Caesars completed IPO that gives casino chain market value $1.13b
  • Roche says it’s disappointed by Illumina $5.7b bid rejection, open to negotiations
  • Yahoo board shakeup adds to pressure on co. to reach Asian assets sale: Susquehanna
  • Amazon.com, Viacom may announce web-video deal this week, Reuters says; watch Netflix
  • Rick Santorum beat Mitt Romney in presidential nominee contests in Missouri, Colorado, Minnesota


    • Cognizant Technology Solutions (CTSH) 6 a.m., $0.77
    • TMX Group (X CN) 6 a.m., $0.84
    • Agrium (AGU CN) 6:30 a.m., $2.02
    • Coventry Health Care (CVH) 6:30 a.m., $0.64
    • Wyndham Worldwide (WYN) 6:30 a.m., $0.44
    • Level 3 Communications (LVLT) 6:45 a.m., $(1.12)
    • Intact Financial (IFC CN) 6:55 a.m., $1.11
    • Apartment Investment & Management Co (AIV) 7 a.m., $0.41
    • CVS Caremark (CVS) 7 a.m., $0.89
    • Ingersoll-Rand (IR) 7 a.m., $0.66
    • Moody’s (MCO) 7 a.m., $0.49
    • Sprint Nextel (S) 7 a.m., $(0.38)
    • Time Warner (TWX) 7 a.m., $0.87
    • IntercontinentalExchange (ICE) 7:30 a.m., $1.69
    • Reynolds American (RAI) 7:36 a.m., $0.69
    • ProLogis (PLD) 7:51 a.m., $0.40
    • Ralph Lauren (RL) 8 a.m., $1.68
    • Computer Sciences (CSC) 8:30 a.m., $0.58
    • Groupon (GRPN) 4 p.m., $0.03
    • Akamai Technologies (AKAM) 4:01 p.m., $0.40
    • Kimco Realty (KIM) 4:01 p.m., $0.30
    • tw telecom (TWTC) 4:01 p.m., $0.10
    • Fidelity National Financial (FNF) 4:03 p.m., $0.19
    • News Corp. (NWSA) 4:03 p.m., $0.34
    • Whole Foods Market (WFM) 4:03 p.m., $0.60
    • Cisco Systems (CSCO) 4:04 p.m., $0.43
    • Ingram Micro (IM) 4:05 p.m., $0.55
    • Everest Re Group Ltd (RE) 4:05 p.m., $(0.92)
    • Visa (V) 4:05 p.m., $1.45
    • Plains All American Pipeline (PAA) 4:06 p.m., $1.50
    • Prudential Financial (PRU) 4:06 p.m., $1.76
    • Cincinnati Financial (CINF) 4:15 p.m., $0.58
    • Equifax (EFX) 4:19 p.m., $0.67
    • FMC (FMC) 4:30 p.m., $1.37
    • General Growth Properties (GGP) Post-Mkt, $0.27



OIL – ze almighty Petro Dollar makes ze world go round, eh. My oh my, Brent Oil busted a move above our long-term TAIL line of resistance this week and didn’t look back, trading $116.35/barrel this morning = +6.5% since Bernanke’s Policy to Inflate through 2014 was introduced on Jan 25. Wow. Thanking the heavens that we just sucked it up and bought Energy (XLE) and Gold (GLD). This won’t end well for the other 90% of Global Consumers.

  • Aluminum Over Copper for Cables Helps Rusal, Alcoa: Commodities       
  • Oil Rises to One-Week High After Decline in U.S. Crude Supplies               
  • Corn Rises Before USDA May Lower Estimate for World Inventories       
  • Copper Rises, Heads for 20-Week High as China Supports Housing           
  • Natural Gas Declines to Lowest in a Week Before Storage Report             
  • Ivory Coast Cocoa Shippers, Officials Agree on Industry Reforms              
  • Gold May Advance a Second Day as Weakening Dollar Spurs Demand    
  • Corn Imports by S. Korea to Rebound in 2012 as Hog Herd Recovers        
  • BHP Has M&A Capacity as Xstrata, Glencore Combine, CEO Says               
  • Encana Worst Energy Performer on Natural Gas Bet: Canada Credit        
  • EOG Channels Enron Roots While Outperforming Chesapeake: Energy  
  • Fuel Oil’s Best Quarter Seen on Refinery Work: Energy Markets               
  • China Books Supertanker to Ship Iran Crude Amid Looming Oil Ban          
  • Gold May Extend Biggest Gain in Two Weeks     
  • Sugar Gains as Surplus May Narrow on Record Demand; Cocoa Falls       
  • Wheat Price in Japan May Dip Most Since 2009, Cutting Food Costs         
  • Glencore’s Glasenberg Gets Back to His Marc Rich Trading Roots              









RUSSIA – Putin loves this Dollar Down = Oil up thing (so does Fink – he wants Geithner’s job and says we need Qe3 if the “dollar gets too strong”); the Russians are running neck and neck with the Greeks with their stock markets inflating +19.5% and +20.2% respectively for 2012 YTD. We’ve seen this movie before – inflation expectations slow growth, and we expect most of those who missed that LY to disagree with us again.













The Hedgeye Macro Team


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We were dead wrong on 4Q and this squeeze higher definitely hurts.  2012 is far from a done deal, however.


BWLD printed $0.73 4Q11 EPS which was six cents above the street.  $0.04 was due to a favorable tax rate but, that said, the top-line was exceptional.  Our short thesis on the stock was based largely on increasing costs and margin compression in 2012.  While we did see compression in operating margins in 4Q, the top line strength rendered that less relevant than we had anticipated it to be.  We have been consistent in our view that 1Q was the quarter where Buffalo Wild Wings would be hurt by sky-high wing prices and we still believe that inflation will be a factor in 1Q results.  What we were not ahead of, however, was quite how strong the top-line would be for BWLD.  Clearly the company is having great success driving the top line though advertising and successful new unit openings and this, at least for now, is more than enough to satisfy investors.  With 1Q to-date comps at +12.9%, the stock’s reaction is understandable but we believe the surge will subside a little tomorrow as some – albeit tangential – issues around the quarter are worked into the equation. 





Company-owned comparable restaurant sales grew +8.9% versus consensus of +6.3% while franchise comps came in at +5.9% versus expectations of +5.1%.   As an additional positive, management disclosed that 1Q to-date comparable restaurant sales are running at +12.9%.  4Q new unit volumes grew by 53% year-over-year and the company is expecting 60 new locations in 2012.


Advertising was effective for BWLD in 4Q as the company bought media in additional markets while raising its social media presence.  Alongside record viewing of NFL football this season, advertising was highly impactful for the company and we underestimated this in our thought process around how the top line would shake out.


Another factor we were wrong on was the impact of gift cards.  The holiday gift card program was extended, particularly in retail outlets, and this helped more than double gift card sales during the 2011 holiday season.  For 1Q to-date, gift card redemption has accounted for roughly 3% of comparable restaurant sales growth.  Management stated that redemptions of gift cards, which are generally purchased around the holiday season, tend to be focused through the first couple of months of the year.


BWLD: OUCH - bwld pod1




Restaurant operating margin came in at +8.4%, which was down 50 basis points year-over-year and 30 basis points below consensus.  If there was one sign of potential trouble from the quarter, it was this; margins declining on an 8.9% comp with commodity costs flat but turning into a headwind in 1Q is a cause for concern.


Cost of sales came in at 29.4% of sales or 60 bps higher than last year.  Traditional chicken wings were at $1.42 per pound for the quarter, 5% below 4Q10’s average price of $1.49.  Traditional wings comprised 20% of restaurant sales while boneless wings made up 18% of sales in the fourth quarter.  For the first two months of 2012, traditional wing prices are averaging at roughly $1.89 per pound versus $1.22 a year ago, an increase of 55%.  Management was not giving any firm guidance as to how this inflation would be dealt with but did say that strong same-store sales growth and new unit openings would continue to help the company manage through the inflationary pressures.


Other factors driving 4Q11 operating margin were labor, which was flat year-over-year as a percentage of sales, occupancy costs, which declined by 60 bps year-over-year, D&A, which was flat, and G&A, which was 8.8% of sales or 9.2% lower than 4Q10.




The tax rate benefitted EPS by $0.04, coming in at 27.8% versus 32% last year.  This benefit was due to unexpected tax credits.


2012 Outlook

  • Potential  price benefit in 1Q roughly 1.8%
  • Will increase advertising presence in national and local media during college basketball season
  • Excluding traditional wings, commodity inflation estimated to be ~4% higher than 2011.
  • Company expecting leverage over labor and operating expenses with high same-store sales trends.
  • Maintaining 20% EPS growth guidance for 2012.



This was a strong quarter from a top line perspective.  Comps and new unit volumes were far better than we had modeled.  However, going forward it is important to think about how this flows through to the bottom line to generate EPS growth.  Operating margins did contract year-over-year despite the strong top line trends and we see costs increasing in 1H12 from 4Q11.  Inflation will be high during the first half of the year and, while management did say that additional pricing is something being contemplated for 2012 that could have an adverse impact on traffic.  With a normalized tax rate, a rolling off of the expanded gift card strategy, and higher costs, management will need double digit comps to achieve 20% EPS growth.  We clearly got this one wrong for 4Q but that is not to say that the risks for holders of this stock have been eliminated. 



Howard Penney

Managing Director


Rory Green



Our crystal ball is telling us that some margin compression may be in LVS’s future.  



While everyone is focused on the weekly and monthly top-line numbers out of Macau, we think margin pressure is building, particularly for LVS.  Labor pressure will hit all Macau properties this year and potential upward pressure on commission rates/player rebates, and junket credit could also hurt margins.


Starting with the obvious, Four Seasons is likely to experience the most compression.  Before LVS transformed the Four Seasons into a primarily junket property, about 40-50% of VIP play at the property was driven by direct play.  For the last few years, Four Season’s all-in commission expense (including rebates) was running at under 1.1% and at least 10bps below their sister properties.  LVS recently struck pretty aggressive deals with several junkets and specifically with Neptune.  So the incremental business is coming in at a materially lower gross margin and VIP revenues are comprising a larger component of the pie – both of which should pressure margins.  Based on January’s low hold and assuming normal hold in February and March, we estimate EBITDA margins of 21% in 1Q12 and 25.5% for the full year. This compares to 33.4% in 1Q11 and 32.1% for 2011.


For Sands Macau and the Venetian, we expect mild margin compression caused by:

  • Slowing market growth and cannibalization from the opening of Sands Cotai Central
  • Labor inflation, exasperated by the opening of Sands Cotai Central
  • Pressure from junket commission consolidation

In the 4th quarter, we saw a few signs of margin creep:

  • Given the huge incentive rents being paid in 4Q, one would’ve expected better margins at Venetian and Four Seasons
  • YoY fixed costs increase at Sands and Venetian
    • Sands Macau saw the 3rd straight quarter of YoY cost increases following deep cost cuts in 2009 and holding expenses flat in 2010.  We estimate that fixed costs increased 12% in 4Q and 6% for the year.
    • After 11 quarters of fixed cost decreases, it looks like costs increased in Q4 by 3.5% YoY.  Prior cost cuts at Venetian were achieved through better expense and inventory management including the reduction of tables from 850 tables at opening to 577 tables at year-end.
  • Rebate rates shot up at Sands and Four Seasons
    • At Sands, rebates increased to 37% from 33% in 4Q10.  For the year, rebates increased to 36% from 33% in 2010
    • At Four Seasons, the 4Q rebate rate was 35% of win or 92bps vs. 28% for the first 9 months or 85bps


McDonald’s will release January sales tomorrow before market open. 


McDonald’s has been one of our favorite stocks in the restaurant space and the company continues to take share from competitors domestically.   This month is not expected to yield any huge surprise as management guided to 5.5-6.5% global same-store sales for January during the earnings call on 1/24. 


Below we go through our take on what numbers will be received by investors as good, bad, and neutral MCD comps numbers by region.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).


Compared to January 2011, January 2010 had one less Saturday and one additional Tuesday.  We expect a negative calendar shift as a result.


U.S. – facing a compare of +3.1%, including a calendar shift of between -1.3% and -0.4% varying by area of the world:


GOOD:  A print of higher than 7% would be received as a good result as it would imply a sequential acceleration in two-year average trends on a calendar-adjusted basis.  Additionally, 7% is above the guided range for global January comps and, since the U.S. business represents 45% of the operating income of the company, healthy trends in the domestic market are good for the stock. We expect the US comp to come in at 7%.


NEUTRAL: A print of between 6-7% would be received as neutral as it would imply two-year average trends that are roughly flat on a calendar-adjusted basis.  Expectations for MCD are lofty as the sell off on strong 4Q11 results indicated, and any signal that things are slowing on the margin may lead to further declines in the stock.


BAD: A result of less than 6% would imply a slowdown in two-year average trends on a calendar-adjusted basis and, therefore, would likely be received as a poor result by investors.





Europe – facing a difficult compare of +7.0%, including a calendar shift of between -1.3% and -0.4% varying by area of the world:


GOOD:  A result of 4.0% or higher would be received as a strong result as it would imply two-year average trends higher than those seen in December on a calendar-adjusted basis.  We are holding Europe to a high standard in our estimates as economic weakness has seen consumers seek out the value McDonald’s offers.


NEUTRAL:  A print between 3% and 4% would be received as neutral by investors, in our view, as it would signal a stabilization, rather than further expansion, of two-year average trends.


BAD:  A Europe comp of below 3% would be received as a bad print by investors as it would imply a slowdown in two-year average trends.  The consensus estimate for Europe comps is at 3.72%, per Consensus Metrix.


APMEA – facing a compare of 5.2%, including a calendar shift of between -1.3% and -0.4% varying by area of the world:


GOOD:  A result of 7% or higher would be received as a good result by investors as it would imply two-year average trends that are roughly flat on a calendar-adjusted basis.  The Chinese New Year fell on January 23rd in 2012 versus February 3rd in 2011 so we expect a positive impact from that on the company’s China business.  YUM also mentioned on its earnings call this morning that its business performed well in January. 


NEUTRAL: A result of between 6% and 7% same-store sales in January would be a neutral result for APMEA.


BAD:  A print of less than 6% in January would imply a significant slowdown in two-year average trends in APMEA on a calendar-adjusted basis.


Howard Penney

Managing Director


Rory Green


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