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


As we look at today’s set up for the S&P 500, the range is 15 points or -1.02% downside to 1402 and 0.03% upside to 1417. 











  • ADVANCE/DECLINE LINE: 1566 (304)  
  • VOLUME: NYSE 754.94 (1.79%) 
  • VIX:  14.26 -3.78% YTD PERFORMANCE: -39.06% 
  • SPX PUT/CALL RATIO: 1.72 from 1.96 (-12.25%) 


  • TED SPREAD: 40.14
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.25 from 2.25
  • YIELD CURVE: 1.91 from 1.90 

MACRO DATA POINTS (Bloomberg Estimates): 

  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 9am: S&P/Case-Shiller (Y/y), Jan., est. -3.8% (prior -3.99%)
  • 10am: Consumer Confidence, Mar., est. 70.1 (prior 70.8)
  • 10am: Richmond Fed, Mar., est. 18 (prior 20)
  • 10am: Fed’s Dudley, Kamin to speak at hearing in Washington on Eurozone aid
  • 11:30am: U.S. to sell $35b 4-week bills
  • 12:35pm: Fed’s Rosengren speaks in London
  • 12:45pm: Fed’s Bernanke lectures at George Washington (3 of 4)
  • 1pm: U.S. to sell $35b 2-yr notes
  • 1:20pm: Fed’s Fisher speaks in Choudrant, Louisiana
  • 3:45pm: Fed’s Duke speaks via videoconference on building sustainable communities
  • 4:30pm: API inventories
  • 9pm: Fed’s Bullard speaks at Tsinghua University 


  • President Obama meets with Pakistan PM Yousaf Raza Gillani, says he hopes countries can repair strained ties
  • Nuclear Regulatory Commission holds a briefing on license renewal for research and test reactors, 9am
  • House, Senate in session:
    • Treasury Secretary Tim Geithner testifies on the budget to House Appropriations subcommittee, 10am
    • Natural Resources Committee holds a hearing on impact of rising gasoline prices on U.S. tourism industry, 10am
    • House Financial Services subcommittee hears from New York Fed President William Dudley on Fed aid to the Eurozone, 10am
    • House Energy subcommittee hearing on cosmetics, 10:15 am
    • House Financial Services Committee marks up FHA Emergency Fiscal Solvency Act, 1pm 


  • Home prices in 20 U.S. cities measured by S&P/Case-Shiller probably fell 3.8%, smallest decline in 3 mos., economists est.
  • Obama administration today will defend requirement that Americans obtain insurance or pay a penalty in second of three days of arguments before Supreme Court over health- care law
  • Annie’s, maker of organic and natural packaged foods, boosted its IPO range to $16-$18 ahead of today’s expected offering
  • Michaels Stores, owned by Blackstone, Bain, said to consider filing for IPO as soon as next week
  • Universal Music said to ready three publishing catalogs for sale which may raise as much as $200m
  • United Technologies faces in-depth EU probe into bid to buy Goodrich for $16.5b; UTX says sees closing of deal mid-year
  • RBS up 6% in London after two people familiar with situation said the U.K. govt. held talks with investors, including Middle Eastern sovereign wealth funds, about sale of part of its stake
  • Sharp plans to raise ~$800m in share sale of unit to Hon Hai Precision, three related companies, to replenish capital
  • Rio Tinto weighing sale of diamond assets as part of strategy review 


    • Lennar (LEN) 6am, $0.05
    • Charming Shoppes (CHRS) 6:58am, $(0.02)
    • McCormick (MKC) 7am, $0.53
    • Walgreen (WAG) 7:30am, $0.77
    • Neogen (NEOG) 8:45am, $0.22
    • Oxford Industries (OXM) 4pm, $0.55
    • Exfo (EXF CN) 4pm, $0.08
    • Christopher & Banks (CBK) 4:01pm, $(0.47)
    • Synnex (SNX) 4:02pm, $0.92
    • PVH (PVH) 4:02pm, $1.10
    • Robbins & Myers (RBN) Post-Mkt, $0.75 


  • Russia-Sized Mistakes Driving Corn Prices to Limit: Commodities
  • Oil Near Three-Day High as Equity Gains Balance Supply Increase
  • Soybeans Gain as Dry Weather Hurts Yields in Southern Brazil
  • U.S. Corn Exports to Japan Drop as Brazil, Ukraine Boost Sales
  • Gold May Gain From 2-Week High in London on Fed Monetary Policy
  • Copper May Rise for Third Day on Federal Reserve Policy Outlook
  • White Sugar Slides After India Allows More Exports; Cocoa Rises
  • La Nina Weather Pattern ‘Is Dead,’ World’s Forecasters Say
  • Shell Shearwater Field Pumping Gas After Total’s Elgin Halt
  • Oil Stockpiles Rise to Six-Month High in Survey: Energy Markets
  • Palm Oil Rallies to One-Year High as Vegetable-Oil Supplies Drop
  • Oil-Sands Firm Sells U.S. Debt on Keystone Faith: Canada Credit
  • Cars Sent to U.S. Rise Most Since ‘06 Aiding Wilhelmsen: Freight
  • Oil Stockpiles at Six-Month High in Survey
  • Enbridge Venture Plans New Oil Pipes to Gulf as Keystone Blocked
  • China Aluminum Smelters Undo Alcoa, Rio Cuts: Chart of the Day
  • Fracking Boom Makes U.S. Laggard No More on Greenhouse-Gas Cuts 
























The Hedgeye Macro Team





The Macau Metro Monitor, March 27, 2012




Marina Bay Sands have filed 21 High Court claims against casino debtors this year.  This is the highest reported for a single quarter since MBS opened in April 2010.  The majority of these debtors are understood to be Malaysians who have failed to respond to reminders to make good on what they owe MBS as a result of bad runs at the gaming tables from 2010.



Macau's unemployment rate for December 2011-February 2012 was flat with the previous period (November 2011-January 2012), at 2.1%.  Total labor force was 346,000 in December 2011-February 2012 and the labour force participation rate stood at 73.2%, same as the previous period.


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Obama’s Reelection Chance Jumps to a Record Level – Hedgeye Election Indicator


Obama’s Reelection Chance Jumps to a Record Level – Hedgeye Election Indicator  - Screen Shot 2012 03 26 at 5.27.22 PM



If the US presidential election were held today, President Obama would have a 62.3% chance of winning reelection, according to  the Hedgeye Election Indicator (HEI). President Obama’s likelihood of reelection is up from 60.5% last week, and at its highest level ever, according to the HEI. For some perspective, in October of last year, the HEI calculation showed that the President had only a 44.9% chance of winning, his lowest score on the HEI.



Obama’s Reelection Chance Jumps to a Record Level – Hedgeye Election Indicator  - HEI



Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


One of those market indicators, the VIX, which measures volatility in the stock market, currently stands below 15, which benefits President Obama’s chances in the Hedgeye Election Indicator model this week.


Additionally, the strong performance of the US stock market in general that saw the S&P 500 move to a four-year high Monday, helps President Obama’s reelection chances, according to the HEI.






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Darden reported 3QFY12 EPS of $1.25 was just ahead of consensus $1.24.  Blended US same-restaurant sales for Olive Garden, Red Lobster, and LongHorn Steakhouse came in at 4.1% versus guidance of approximately 4% provided a month ago at the company’s Analyst Day. 


Darden reported a solid 3QFY12 on Friday but there was a lot of noise in the quarter with weather and the impact of an earlier start of Lent this year versus last year.  Less severe winter weather boosted the blended same-restaurant sales number by 200 basis points while Lent positively affected results by roughly 60 basis points (including an astounding 480 basis points at Red Lobster).


Management’s commentary on the macro environment as “choppy” was important; the company sees improving employment being offset by the impact of rising gas prices.  The industry slowed in February, according to management, after a strong holiday and post-holiday season.  Management noted that less severe weather did help results but downplayed the impact somewhat by referring to states such as CA, TX & FL.  In the case of TX, we know from other companies’ commentary and our own research, that adverse weather conditions did impact business in Texas during January 2011 so would argue that a benefit would account for some positive impact on Darden’s Texas restaurants.


In terms of FY13, management will offer more comprehensive guidance on the FY12 call in June but did provide some initial thoughts during Friday’s earnings call, sounding generally bullish but offering little in the way of specifics.


Darden also seems to be stealing a page out of Brinker’s book when talking about the new Olive Garden promotion; Drew Madsen said, “this promotion is representative of our strategy going forward, where we plan to emphasize a broadly appealing platform idea rather than just one or two new dishes.”


The initial improvements in the Olive garden performance are coming from a “more overt value message as well as more affordable core menu dishes” that are pulling customers into the store.  The issue remains how effective the new initiatives are and to what degree the apparent improvements are being helped by the benefit of easy weather.  The new advertising campaign is also a welcome change, but this too needs time to prove itself out.  The biggest challenge to any real improvement in the chain’s performance will be the “bolder improvement initiatives” that include a “remodel that updates and refreshes the dining atmosphere in the 430 non-Tuscan Farmhouse restaurants.”  This suggests that 55% of the chain is suffering from a stale look in today’s competitive casual dining environment. 


Any big leg up in the stock price will likely come from multiple revision based on a stronger secular story from improved same-store sales.  In the short run, the dividend yield and share repurchase will likely keep the shorts on the side lines.  We will look to revisit the story after FY4Q12, which will likely bring a sequential slowdown in same-store sales.


The bottom line for us is that DRI is a strong company supporting a 3.4% dividend yield and that, along with our belief that management will deliver on most if not all of its long term targets, is sufficient to convince us that the longer term TAIL thesis remains intact.  However, the immediate term TRADE and intermediate term TREND prospects of the company are uncertain.  Macro concerns coupled with concept-specific concerns at Olive Garden and Red Lobster concern us over the next few months.  Olive Garden, in particular, is crucial to the stock’s performance given its relative size within the Darden portfolio and we feel that investors need to see an improving top line that is not achieved to the detriment of restaurant operating margins.


Olive Garden


Olive Garden’s 2% 3QFY12 same-restaurant sales growth lagged Knapp Track by approximately 60 basis points which was a sharp sequential improvement versus the prior quarter’s lag of 320 basis points. 


During the quarter, Olive Garden ran two promotions.  The first, baked pasta romana, ran from December through the third fiscal week of January and compared favorably to last year’s lack-luster scaloppini promotion.  The second, which was launched in the fourth fiscal week of January, was the three-course Italian dinner for $12.95.  This promotion succeeded in driving traffic but is also priced $2 higher the promotion from the same period in FY11 (although that promotion was for an entrée rather than three courses).  While 3QFY12 was successful for Olive Garden in that the gap-to-Knapp was narrowed sequentially, next quarter will pose a much sterner test for the chain as the weather benefit goes away.  Management described the environment as “choppy” and this is causing us to remain on the sidelines.


DARDEN THOUGHTS - olive garden gap to knapp



Red Lobster


Red Lobster posted a 6% same-store sales number for 3QFY12, as preannounced, which benefitted by 480 basis points due to an earlier start to Lent 2012 versus 2011.  The 6% number was 340 basis points above the full service industry benchmark but the benefit derived from the Lent shift will reverse in 4QFY12.  Traffic during 3QFY12 was soft, if we adjust for weather and Lent, and it seems that maintaining profitable traffic growth could prove challenging if the effectiveness of promotional efforts is declining.  Soft underlying traffic trends were a surprise given the 4 for $15 promotion that Red Lobster was running in the quarter.


One important concern for Red Lobster is seafood inflation but that is, according to management, going to ease in 1HFY13 and was less acute in 3QFY12 than 1HFY12.  Nevertheless, management not taking any price against seafood led to margin contraction at Red Lobster.  Going forward, the question is whether or not the “broader range of levers” that management alluded to as being core to its sustaining Red Lobster comps is going to be impactful.  Red Lobster has been a strong component of the Darden portfolio during this fiscal year but maintaining that momentum will be difficult in a choppy macro environment.


DARDEN THOUGHTS - red lobster gap to knapp



LongHorn Steakhouse


LongHorn continues to perform well for Darden.  3QFY12 same-restaurant sales growth of 6.7% was 410 basis points above the full service industry benchmark.  Negative mix was one standout from the chain’s results but the successful and profitable efforts to drive lunch business is the primary driver of that trend.  LongHorn is an important growth vehicle for Darden and new LongHorn units continue to exceed sales and earnings hurdles. 


DARDEN THOUGHTS - longhorn gap to knapp



Howard Penney

Managing Director


Rory Green






Hedging The Inflation Trade: EWZ & EWA Combo Trade Update

Conclusion: Our refreshed GROWTH/INFLATION/POLICY outlook points to more downside in both Australian equities and the Aussie dollar relative to Brazilian equities and the Brazilian real over the intermediate-term TREND. Further, we continue to like Brazilian equities on their own merits over the intermediate term – irrespective of this pairing – as a deflating of the inflation provides additional headroom for growth-supportive monetary and fiscal policy amid a baseline backdrop of accelerating real GDP growth.


Virtual Portfolio Positioning: Closed our long position in Brazilian equities (EWZ); and currently short Australian equities (EWA).


Late last week, Keith initiated a long position in Brazilian equities and opened a short position in Australian equities in our Virtual Portfolio (the former has since been booked for a +2.4% gain). While both benchmark indices are fairly levered to the inflation trade, we find that Brazil’s domestic fundamentals are more supportive of equity returns and multiple expansion than Australia’s at this current juncture.


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - 1


Starting from our baseline GROWTH/INFLATION/POLICY model, Brazil’s 2Q12 outlook appears decidedly more positive than Australia’s from an equity investor’s perspective. We are comfortable adopting this baseline scenario in part due to it being confirmed by the latest high-frequency data via the slopes of both countries’ PMI, employment, and inflation statistics.


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - BRAZIL


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - AUSTRALIA


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - 4


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - 5


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - 6


From a foreign exchange risk perspective (both etfs are un-hedged), we continue to see long-term mean reversion risk in the Aussie dollar vs. the U.S. Dollar. For more details regarding this thesis, refer the following notes listed at the conclusion of this note. From an intermediate-term perspective, the Aussie dollar also looks poised to make lower-highs vs. the USD given the AUD/USD currency pair’s preponderance to trade in tandem with commodities and U.S. equities – two asset classes we are explicitly bearish on (short the SPY; ZERO percent allocation to commodities in the HAA). 

  • Trailing 3yr correlation to the CRB Index: +93%; and
  • Trailing 3yr correlation to the S&P 500: +94%. 

Looking at the Brazilian real, there appears to be less downside risk from a mean reversion perspective. The real – which is down -5.8% over the last month vs. the USD amid a politicized commitment to lower the country’s aggregate interest rate burden – is down -8.4% over the LTM and up only +38.5% since its trough financial crisis exchange rate (12/8/08). This compares rather lightly to the Aussie dollar’s +74.9% gain from its trough financial crisis exchange rate (10/27/08).


While the various interest rate markets of both countries are signaling an outlook for continued monetary easing, Australia’s are pricing in decidedly less easing over the NTM – which intuitively makes sense given RBA Governor Glenn Stevens’ reputation as the developed world’s most hawkish central bank chief, as well as Brazilian Central Bank President Alexandre Tombini’s drive to achieve and sustain mid-to-high single digit interest rates in Brazil (with political pressure from President Dilma Rousseff and Finance Minister Guido Mantega).


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - 7


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - 8


Net-net-net, our refreshed GROWTH/INFLATION/POLICY outlook points to more downside in both Australian equities and the Aussie dollar relative to Brazilian equities and the Brazilian real over the intermediate-term TREND. Our quantitative risk management levels on both countries’ benchmark equity index are included in the charts below.


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - 9


Hedging The Inflation Trade: EWZ & EWA Combo Trade Update - 10


Bearish Thesis on the Aussie Dollar:

Bullish Thesis on Brazilian Equities:

Darius Dale

Senior Analyst

Early Look

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