Commentary from CEO Keith McCullough


Most Read (Bloomberg) = Apple – it’s a good thing the US Equity market’s narrowing rally doesn’t depend on its momentum:

  1. INDIA – positive price momentum on the Sensex is nowhere to be found = down another -1.3% last night after the Indian government revealed more about its mounting deficit issues (-5.9% of GDP and rising); countries who are short oil are going to be in a world of hurt on a real inflation adjusted growth basis (India down -6.5% from its Feb 21 top)
  2. OIL – both Brent and WTIC continue to hold all immediate-term price momentum lines of support and this will continue to be the most relevant Global headwind to real inflation adjusted growth going forward. I have no idea how some of the bulls are getting to +3% US GDP in Q1 and Q2; its mathematically impossible in our model using the right GDP Deflator
  3. TREASURIES – monster breakout in bond yields last week – was it the YTD top or can they hold; the intermediate-term TREND line of support for the 10yr = 2.03% and now immediate-term TRADE support = 2.12%.

My immediate-term TRADE range for the SP500 is now 1.





THE HBM: YUM, MCD, OSI, CAKE - subsector





YUM: Yum Brands was initiated Outperform at Oppenheimer. The price target is $82.


MCD: McDonalds has apologized to Chinese consumers following the exposure of food safety scandals on Thursday.  Sophia Luan, Vice President of McDonald’s in China, said, "As a member of the managerial staff, I’m very sorry for the loopholes in our system. I apologize to our customers. From today, we will rectify operations of more than 1,400 outlets in China, not only this one."




WEN: Wendy’s gained 2.6% on accelerating volume.


PEET: Peet’s coffee continues to benefit from declining coffee costs.





OSI: The parent company of Outback Steakhouse has filed documents with the Securities and Exchange Commission that indicate a possible IPO. 


CAKE: The Cheesecake Factory has unveiled fresh new menu items. Chicken ingredients feature prominently; we believe this trend will continue as operators seek to avoid the inflation in beef prices.






Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, March 19, 2012



Sands Cotai Central will officially open on Wednesday April 11th with 600 Condrad suites and 1200 Holiday Inn rooms. To date, LVS has invested $8BN in Macau.



According to Francis Lui Yiu Tung, the vice-chairman of Galaxy Entertainment Group, Phase II of Galaxy Macau will double the properties' size. Additions will include more non-gaming amenities including an increased focused on MICE business as he believes that Macau will become an important convention and meeting destination over the next 5 years.   


This Friday, GM is opening The Pavilion, a new high limit slot machine area for the premium mass gaming market. On March 30, the property will officially open its China Rouge members–only private club.


Mr Lui also confirmed that Galaxy has been in talks with Zhuhai authorities to invest in a resort on Hengqin Island.



According to, in 2011, Macau hotel prices increased 9% to HK1,607, making it the most expensive of Chinese cites; including being HK337 ahead of Hong Kong's ADRs.



On March 11, a joint sting by police in Macau and Liaoning and Guangdong provinces ended in the arrest of 30 suspects involved in abducting women and forcing them into prostitution; the largest human trafficking bust since June 2008. More than 20 of the women being forced into prostitution were released from captivity in Macau.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Be ready for guys selling their own books   



We were in Las Vegas last week and our takeaways don’t necessarily jive with some of the common wisdom in the investment community.  Here are some pitches by guys pimping their own pads likely to be heard this week out at the conference.  Our responses are in italics:

  • “WMS is going to punt badly again”
    • We disagree – 2H fiscal 2012 looks in line to better
    • Sentiment is awful
    • Investor meetings likely to be positive on the margin
  • “MGM is so leveraged to the recovery.  Upside will be massive”
    • Growth is not explosive and companies only expect modest growth
    • Street looks aggressive beyond Q1
    • Not sure Street is taking into account the likely food and healthcare inflation
  • “MPEL is going to do a dilutive equity deal”
    • We don’t think so
    • The Macau Studio City joint venture is more likely to sell equity at the project level
  • “The WYNN short is NOT overcrowded”
    • Yeah it is
    • We agree that WYNN faces some market share challenges in Macau but the market is just so damn strong
  • “All gaming stocks go up into the opening of new properties.  Gotta buy LVS.   Gotta buy PENN”
    • Both stocks have been strong – especially LVS – but so has the group
    • That’s the first thing the new pimple faced analyst at Consensus Capital learns
  • “IGT’s online strategy is flawed.  They will be competing with their customers”
    • Wait that was Gary Loveman that said that
    • IGT’s international pitch may finally be gaining some traction


The Knapp Track numbers from February were, on a two-year average basis, stronger than January’s. 


Malcolm Knapp released his Knapp Track casual dining sales numbers for February this weekend.  He cited weather as an important factor in the results; highlighting Texas, the Midwest, and the eastern region of the country as areas where the harsh weather of last year made for particularly easy compares in 2012 to-date.  On February 22nd, we highlighted data from the National Operational Hydrologic Remote Sensing Center in order to approximate the year-over-year difference in snow coverage in three regions: the Midwest, the East Coast, and the South.  We would make to statements about the Knapp Track numbers at this point.  First, it will difficult to ascertain the true underlying trend in this data set until April’s results emerge.  Second, traffic trends are disappointing when we consider that weather is boosting sales quite substantially in 1Q12.


Estimated Knapp Track casual dining comparable restaurant sales grew 2.8% in February versus a final accounting period number of 3.3% (prior estimate 3.2%) in January.  The sequential change from January to February, in terms of the two-year average trend, was +50 bps.


Estimated Knapp Track casual dining comparable guest counts declined -0.1% in February versus a final accounting period number of 1.2% (prior estimate 0.5%) in January.  The sequential change from January to February, in terms of the two-year average trend, was +35 bps.


It is disappointing to see traffic trends so soft even with the benefit of weather.  CPI for Food Away from Home clearly shows that prices are being raised more than last year at restaurants but the cushion that operators have at their disposal in terms of pricing (CPI for Food at Home versus CPI for Food Away from Home) is shrinking.  Companies facing high levels of cost inflation in 2012 (we would highlight TXRH and BWLD) may have to choose between margin and continued top line strength although we will have to wait until the weather impact falls off before becoming certain.  Please refer to our note, titled “BWLD UPDATE”, for our current thoughts on BWLD.


FEB KNAPP TRACK - food at home vs food away from home


Howard Penney

Managing Director


Rory Green


The Trick

This note was originally published at 8am on March 05, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The trick was to focus narrowly… on numbers: lot number, number of bidders, paddle numbers, bid steps.”

-Benjamin Wallace


I’ve recently jumped into The Billionaire’s VinegarThe Mystery of the World’s Most Expensive Bottle of Wine – and, I must say, I can’t put the book down!


The aforementioned quote scrapes the surface of British wine critic and auctioneer Michael Broadbent’s process. Born in 1927, Broadbent “was twenty-two before he tasted a top wine”, but started out in the business by simply “taking notes on every wine he tasted. He never stopped.” (page 27)


Neither have I.


Back to the Global Macro Grind


I have 1-2 pages of hand-written notes of every market day of my working life. I’m not saying that makes me anything other than what it makes me – maniacal about my process. The way that I learn is through repetition. If I write down market prices, risk management levels, and economic data points every day, I have a much higher probability of not missing something.


That’s The Trick.


As far as I can tell (so far), The Trick to this game is not missing when the big things, like Growth and Inflation, are changing. That’s why, in principle, our Macro Models are grounded in Chaos Theory – we embrace the uncertainty that each day brings, because we have no idea what is going to be the proverbial grain of sand that knocks down that perfect pyramid of market expectations.


For the last 3 weeks I have been calling out Growth Slowing As Inflation Accelerates as the #1 risk factor that’s changing on the margin. Changing doesn’t mean the market realizes it instantaneously like a Janet Jackson moment at the Super Bowl. The difference between what’s changing on the margin and when markets are forced to react to it is time.


Get time and price right, and you’ll get mostly everything in the market right. Looking at last week’s Global Macro Performance Divergences, here’s where you didn’t want to be long:

  1. Small Cap US Stocks (Russell 2000) = down -3.0%
  2. India’s stock market (BSE Sensex) = down -1.6%
  3. The Euro (vs the USD) = down -1.9%
  4. CRB Commodities Index = down -1.5%
  5. West Texas Intermediate Crude Oil = down -2.8%
  6. Gold = down -3.7%

Now if you were long the Venezuelan stock market (+8.6% on currency devaluation) or the US Dollar Index (+1.3% after Mitt Romney solidified the Republican base in Michigan and Arizona), you were just fine last week.


Or were you?


The Trick about markets is that the tricks are always changing. Causality and correlation are very often two very different things, but Correlation Risks can sneak up on you like a Chinese Growth Slowdown in the night.


China Slowing?


Apparently both the data that we have been discussing since we sold our long China (CAF) position on February 16thand the guys running the joint agree – China’s long-term GDP growth rate looks like it’s going to be a lot lower than the +9-12% it’s been tracking since 2009. China’s Premier Wen guided to a 7.5% number for 2012. Global markets didn’t like that.


In addition to the guide down of Chinese Growth Expectations, here was the Asian economic data that mattered most on the margin overnight:

  1. Chinese Services PMI dropped to 48.4 in FEB vs 51 in JAN
  2. Chinese Vehicle Sales are tracking down -3% year-over-year for 2012 YTD (worst start to a year since 2005)
  3. Australian Services PMI got smoked to 46.7 in FEB vs 51.9 in JAN

I know. That data can be tricky when you convince yourself that the bad January data in Asia was all about the Lunar calendar – until the February data rolls in even worse!


To be fair, some of the data for Asia in February has been as good as you should expect it to be with the calendar shift. But the problem from here isn’t January’s calendar or what your run-of the mill Keynesian economist is going to tell you about rising oil prices not impacting real (inflation-adjusted) growth. For markets, it’s all about time, price, and expectations.


The Trick is to keep moving out there – across countries, currencies, commodities, etc. – and keep risk managing your gross and net positioning to account for multiple durations across multiple factors.


I’m not saying I see everything early. I’m saying quite the opposite really – I really have no idea what I am going to say about a market’s risk parameters until I write everything down in my notebook in the morning.


My immediate-term support and resistance ranges for the Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1691-1735, $120.57-123.64, $79.03-79.51, and 1356-1376.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Trick - Chart of the Day


The Trick - Virtual Portfolio

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.