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Based on continuing evidence of slowing sales trends in two markets, we are turning bearish on DPZ over the TRADE (3 weeks or less) and TREND (3 months or more). 


Only three years ago, the Street was worried that DPZ’s balance sheet had too much leverage.  The liquidity crisis at the time definitely amplified those fears but the fact remains that deteriorating fundamentals for a heavily levered company can have a severe impact on the financial health, and value, of that company.  We’re not drawing any conclusion that DPZ sales are falling dramatically but industry data from Sales Trac Weekly Data suggests that pizza sales are underperforming in the U.S. for the first two months of 2012 and this morning’s release from Domino’s Pizza UK & Ireland was not encouraging for the global business.  The timing of this slowdown is also interesting given the recent recapitalization that the company undertook along with the payment of a special dividend.


Domino’s new debt structure means that the company is less levered at 5.4x debt-to-EBITDA versus 6.8x in 2007.  With respect to the company’s adherence to the terms of its debt covenants, the company said on a recent conference call regarding the recap that “we estimate our EBITDA would have to drop by over $100 million, or global retail sales would have to decrease by over $1.8 billion versus the levels that we achieved in 2011 before the covenant would be at risk of breaching its primary financial covenants.”  There is a significant amount of financial flexibility in the company’s capital structure but sales softening may heighten the standards to which investors hold the company from a leverage perspective.


Through the first two months of the year, we are seeing pizza category sales growing 3-4% (sequentially down from 4Q trends) with sales trends turning negative during the last few days of February. We are assuming that the category was negatively impacted by weather during 1Q as consumers are have been out and about more than during a typical January/February period.  We will get more data next week regarding March trends but elevated gas prices and continuing warm weather may lead to further disappointing data. 


Today, Domino’s Pizza UK & Ireland reported slightly different same-store sales at +3.5% versus 4.2% in 2011.  Importantly, management hinted at further disappointment possibly coming in the second quarter results, saying, “We may have a softer comparative for the second quarter of the year”.


There is a lot of noise within sales trends this quarter with the weather impact and various calendar shifts that have impacted some company’s reported results.  We are withholding judgment at this point until we gain further conviction but there is evidence of the underlying trend moderating, at least from the strong acceleration that was seen in 4Q11.







Howard Penney

Managing Director


Rory Green




Athletic Apparel: Underlying Trends Improving

Athletic apparel sales improved on the margin last week following 3 weeks of negative growth with the underlying two year trend accelerating. NKE and UA led the pack with notable gains in share.


Apparel Comps were incrementally more difficult last week vs. the week prior with trends getting increasingly less favorable through the end of April. The acceleration in underlying trends last week (and thus comping the comp) was driven by continued strength in Training apparel.


Overall, the 1.3% growth was driven by ASP which was up 3% (units down ~2%). In the athletic specialty channel however, both units and pricing drove the 7.2% growth. We will continue to monitor the 2 yr growth through April as well as ASP expansion given the industry just comp’d pricing being down 0.5% LY with pricing compares getting less favorable through May (see chart below), requiring unit volume to drive top line growth.  


Athletic Apparel: Underlying Trends Improving - Athletic Apparel post


Athletic Apparel: Underlying Trends Improving - apparel 2 yr


Athletic Apparel: Underlying Trends Improving - athletic apparel ASP

Bernanke's War

This note was originally published March 28, 2012 at 07:53am ET.


“The Fed has effectively declared currency war on the world.”

-James Rickards


If his Policy To Inflate persists any longer, Ben Shalom Bernanke is likely to go down in history as America’s last completely politicized head of the US Federal Reserve. When compared to Alan Greenspan, that’s saying something.


During QE1 and then, to a lesser extent, during QE2, I’d have been in the minority making a statement like that. Today, as he sheepishly pushes for QE3, 4, and 5, I have plenty of company.


In Currency Wars , Rickards ends the introduction of his book by suggesting that “in the end the reader will understand why the new currency war is the most meaningful struggle in the world today – the one struggle that determines the outcome of all others.”


The glaringly obvious part of this new American reality is that, deep down, the Fed Chairman is very insecure about this. Why else would the man be engaging in a personal PR War with Twitter and appearing with Diane Sawyer on ABC?


At George Washington University yesterday, the vaunted historian of an era that didn’t have the internet, a globally interconnected Asian economy, or Apple, continued to proclaim his mystery of faith:


“We did stop the meltdown… we avoided what would have been, I think, a collapse.”


Great. Just great. Thanks for saving us from challenging your academic textbook, Ben. Now what about today? What about Burning The Buck back towards 40-year lows  and ripping us a new one with these gas prices 3 years later?


Back to the Global Macro Grind


I’ve fought the Fed before, and won. If no one else wants to strap it on and do this, I’ll officially wear the C and stand on the front lines of this war. If the last 3 weeks of Down Dollar is the best you have Bernanke, game on.


Don’t fight the Fed.” Yep. Got it. That and Madoff’s returns are about as believable as the Hunger Games. On our Q2 Macro Themes call in early April we’ll show you a full slide deck of what fighting the Fed at intermediate-term market turns has saved you:


1.   Q1 of 2008 – when the entire construct of Old Wall Street was begging Bernanke for “shock and awe” interest rates cuts (remember that?), he delivered his constituency the goods by cutting to 0% (but had to scare the hell out of The People to do it).  Easy money then delivered the world’s consumers $150 oil, and one heck of a Consumption Crash.


2.   Q1 of 2011 – after QE1 stocked commodity inflation … and more of that (QE2) perpetuated a huge slow-down in real (inflation adjusted) consumption growth (Q1 2011 US GDP 0.36%), fighting the Fed in Q1 of last year was one of the best Global Macro calls, ever. From Q1 of 2011 to the lows of October, Asia, Europe, US Small Caps, Commodities crashed.


3.   Q1 of 2012 – if you’re selling the hope of Growth’s Slope (slowing), you are in the middle of fighting Bernanke’s War right now.


From America’s perspective, it’s a war on savers and consumers. It’s a war on our Constitution. It’s a war against objectivity, flexibility, and gravity. And, most importantly, it’s a war against Free Market Capitalism.


From the rest of the world’s perspective, let me start with 1 very simple fact – we are talking about the World’s Reserve Currency. That is a privilege, not a political weapon to be abused by an un-elected bureaucrat. That’s what China, India, and Japan have to deal with when they import oil. Food and Energy is what the world actually consumes. And commodities are largely priced in US Dollars.


That’s why every time Bernanke Debauches The Dollar, Global Growth Slows. I don’t know how much more evidence you need of this simple fact – COMMODITY INFLATION SLOWS GROWTH!


Look around you. Away from Apple going up, this is what’s going on in the world this morning:

  1. Asian and European stocks are falling (China and India stopped going up in FEB; Spain is getting smoked, etc.)
  2. Pro-cyclical Stocks and Commodities (Energy stocks, Copper, etc.) are mapping Asian stock market declines
  3. Treasury Bond Yields are falling, again (10-year yield is down -8% in a straight line to 2.20%)

As David Einhorn reminds us, on Wall Street fooling some of the people some of the time happens. But you can’t fool all of the world’s people, all of the time, that rising commodity prices have nothing to do with the world’s currency price in which they are sold. The #1 story on Reuters this morning: “Americans Angry With Obama Over Gas Prices” – they should be angry with Bernanke.


Sorry David Axelrod, you’re not going to solve the world’s anger by “tapping the SPR.” The most obvious way to get oil prices down is by the Fed raising interest rates. Don’t buy that? Or your inflated stock and commodity portfolio can’t afford that? I dare you to buy Oil and/or Gold Futures after you get the inside looksy that Bernanke is going to raise rates on a Sunday night on 60 Minutes.


If you can’t tell, I’ve had it with these conflicted central planners. Politicians in Washington and the halls of Western Academic Dogma that advise their career risk on economic matters can tell stories to students and whoever in the media is gullible enough at this point to believe them – but that will not end this war.


Bernanke’s War is on. And the rest of the world is watching.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Spain’s IBEX, and the SP500 are now $1661-1689, $122.41-124.67, $78.83-79.37, $82.67-84.12, 8101-8395, and 1404-1418, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's War - Screen Shot 2012 03 28 at 10.02.38 AM


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The newly-created Bloomberg U.S. Employment Services Index, comprising the shares of 17 staffing and recruiting companies, has risen 48% since 9/22/11 versus a 31% gain in the Russell 2000.  This follows almost nine months of underperformance, when stocks of these businesses lagged behind the Russell by 28%, according to Bloomberg.



The phasing out of crates from the pork industry, under pressure from animal rights activists, by several major pork producers, could lead to higher prices.


Commentary from CEO Keith McCullough


So, Mr Bernanke, you’re saying you’re still saving us from Great Depression; great… just great – thanks for the gas prices:

  1. ASIA – oil up, growth slows – US Policy to Inflate continues to wreak havoc on the rest of the living world – while the SP500 hasn’t snapped yet, Asian stock markets are starting to (they stopped going up in Feb fyi); China down hard (-2.65%) last night and India down another -0.8%, taking its draw-down to -7.2% on the Sensex since Feb 21
  2. BOND YIELDS – the one bull case I could actually buy into is Strong Dollar + Rising Treasury Yields (at the same time); that would mean #GrowthSlowing is off the table. Not now, not at $106 oil. The US Dollar Index is down for the 3rd consec wk thanks to daily talk show appearances from the Bernank and the 10yr failed, hard, at long-term TAIL resistance of 2.47%
  3. SENTIMENT – literally ever metric I track is bombing out the bears; hedge fund short interest hitting new lows, VIX 14, and now my Spread in the II Bull/Bear survey hits its widest to the bullish side since Q1 of last year at +2900 basis points wide! With only 22.6% admitting to be bearish (new low), I’m happy to go Lone Wolf.

Intermediate-term tops are processes, not points.







THE HBM: YUM, WEN, DIN - subsector





YUM: Yum Brands CEO David Novak is leaving the board of JPMorgan Chase in order to “singularly focus on the continued growth of Yum Brands”, according to a news release from Mr. Novak. 


WEN: Wendy’s has named Craig Bahner as CMO, effective April 2. Previously, Mr. Bahner spent 20 years at Procter & Gamble.




TAST: Carrols Restaurant Group gained 9.4% on accelerating volume.  Yesterday’s gain was on top of a 12% move

Monday on news that the company has agreed to acquire 278 company-owned Burger King restaurants through an asset purchase agreement with Burger King Corp.





DIN: DineEquity, Inc., parent of the Applebee’s and IHOP chains, has confirmed the departure of several top executives in recent weeks, according to nrn.com.  Shannon Johnson, former VP of culinary and menu strategy has left the company as has Petrick Lenow, former executive director of communications at IHOP, and Jim Peros, former senior VP of operations at IHOP, who retired earlier this month.  DineEquity is looking to fill all three positions.


DIN: On a loan conference webcast, DinEquity said that roughly one third of Applebee’s remodels are complete.  DIN says that 50% of Applebee’s remodels will be done by year end.




BWLD: Buffalo Wild Wings declined on accelerating volume following Deutsche Bank downgrading the stock.


THE HBM: YUM, WEN, DIN - stocks



Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, March 28, 2012




Portuguese newspaper Jornal Tribuna de Macau quotes a source close to the process as saying that a formal request for a casino at Macau Studio City was submitted to the Macau government after a statement in early December by Secretary Tam that the government had yet to receive any application to include gaming elements on the project.  The newspaper says there is no government deadline for a decision on the request.



LVS President Michael Leven says LVS will decide in April or May where to build its Spanish casino strip - either in Madrid or Barcelona.  "Madrid is more of a business destination and Barcelona is more touristic but either one could get it.  Economically the two cities are very similar.  Barcelona is a little bit behind because we started studying the project with Madrid."  The complex will reportedly include six casinos, 12 hotels, nine theatres and three golf courses.


TODAY’S S&P 500 SET-UP – March 28, 2012

As we look at today’s set up for the S&P 500, the range is 14 points or -0.60% downside to 1404 and 0.39% upside to 1418. 












SENTIMENT – literally ever metric we track is bombing out the bears; hedge fund short interest hitting new lows, VIX 14, and now my Spread in the II Bull/Bear survey hits its widest to the bullish side since Q1 of last year at +2900 basis points wide! With only 22.6% admitting to be bearish (new low), we’re happy to go Lone Wolf. 

  • ADVANCE/DECLINE LINE: -507 (-2073) 
  • VOLUME: NYSE 730.24 (-3.27%)
  • VIX:  15.59 9.33% YTD PERFORMANCE: -33.38%
  • SPX PUT/CALL RATIO: 2.25 from 1.72 (30.81%)


BOND YIELDS – the one bull case we could actually buy into is Strong Dollar + Rising Treasury Yields (at the same time); that would mean #GrowthSlowing is off the table. Not now, not at $106 oil. The US Dollar Index is down for the 3rd consecutive week thanks to daily talk show appearances from the Bernank and the 10yr failed, hard, at long-term TAIL resistance of 2.47%. 

  • TED SPREAD: 38.94
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.21 from 2.18
  • YIELD CURVE: 1.88 from 1.86 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of Mar. 23
  • 8:30am: Durable Goods, Feb., est. 3.0% (prior -3.7% (revised))
  • 10:30am: DOE inventories
  • 1:00pm, U.S. to sell $35b 5-yr notes 


  • President Obama has meetings at White House
  • House, Senate in session
    • House Energy Committee holds hearing on rising gasoline prices, 9:30am
    • Senate Judiciary Committee holds hearing on special counsel’s report on the prosecution of Senator Ted Stevens, 10am
    • House Appropriations subcommittee hears from Treasury Secretary Tim Geithner on the agency’s budget, 10am
    • House Armed Services Committee holds hearing on security in the Korean peninsula, 10am
    • House Ways and Means Committee marks up Small Business Tax Cut Act
    • House Financial Services subcommittee holds hearing on the MF Global collapse, 2pm
    • Senate Appropriations subcommittee hears from Treasury Secretary Tim Geithner on the Treasury Department’s response to the foreclosure crisis and rising student debt, 2:30pm 


  • U.S. Supreme Court today will consider how much of Obama’s health-care law must be thrown out if justices decide Congress can’t require Americans to buy medical insurance
  • Applied Materials hosts investor day; watch for any update to 2Q forecast, market conditions
  • Archer-Daniels-Midland seeking acquisitions in Europe and India and plans to increase exports from South America
  • MF Global fund transfers to be scrutinized at House Financial Services subcommittee
  • Orders for U.S. durable goods probably rebounded in Feb., rising 3%, as aircraft demand surged, economists est.
  • Bats said to delay discussing new IPO for at least a quarter as CEO cedes chairman role
  • Nokia announces availability of Lumia 800C device in China with China Telecom from April
  • California said to probe planned purchase of EMI Group by Vivendi’s Universal Music and investor group led by Sony/ATV Music Publishing
  • FDA advisory panel begins 2-day meeting on studying heart risks with diet pills, with voting question tomorrow
  • Magic Johnson group wins Dodgers auction with $2b bid 


    • Jos. A Bank (JOSB) 6am, $1.58
    • AuRico Gold (AUQ CN) 7am, $0.14
    • Family Dollar Stores (FDO) 7am, $1.13
    • Huntington Ingalls Industries (HII) 7:15am, $0.94
    • AGF Management Ltd (AGF/B CN) 8am, C$0.27
    • Commercial Metals Co (CMC) 8am, $0.09
    • Unifirst (UNF) 8am, $0.88
    • Lindsay (LNN) 8am, $0.82
    • Paychex (PAYX) 4:01pm, $0.37
    • Red Hat (RHT) 4:05pm, $0.27
    • Verint Systems (VRNT) 4:05pm, $0.68
    • Mosaic Co. (MOS) 4:15pm, $0.69
    • Progress Software (PRGS) 4:29pm, $0.25
    • HB Fuller Co. (FUL) 5:30pm, $0.37
    • Texas Industries (TXI) Post-Mkt, $(0.82) 


  • Rio, BHP Lose Faith in Diamonds Even as Prices Rise: Commodities
  • Crude Oil Declines on Rising U.S. Supplies, Emergency Stocks
  • Sugar Slides as Surplus May Be Nearer on India; Coffee Retreats
  • Copper Declines on Indications Demand Is Slowing Down in China
  • Soybeans Gain on U.S. Acreage Speculation, South America Drought
  • Gold May Decline in London as U.S. Data Curbs Investor Demand
  • Palm Oil Gains for Fourth Day on Concern Supplies May Decline
  • BlackRock’s Raw Supports Glencore’s $35 Billion Xstrata Takeover
  • Obama Power Plant Rule Seen Signaling Demise of ’Old King Coal’
  • Goldman Reduces Three-Month Commodities Outlook to Neutral
  • ADM Plans to Buy Oilseeds Capacity in Europe, India, S. America
  • Transocean Biggest Winner From 28% Jump in Oil Rig Rates: Energy
  • West African Cocoa Premiums Hold Steady Before Start of Harvest
  • Oil Drops From One-Week High on Supplies
  • Palm Oil Seen Climbing 23% on ‘Wedge’ Signal: Technical Analysis
  • China Beats U.S. With Power From Coal Processing Trapping Carbon
  • Glencore Sweetener Lures Xstrata-Wary Lenders: Corporate Finance














ASIA – oil up, growth slows – US Policy to Inflate continues to wreak havoc on the rest of the living world – while the SP500 hasn’t snapped yet, Asian stock markets are starting to (they stopped going up in Feb fyi); China down hard (-2.65%) last night and India down another -0.8%, taking its draw-down to -7.2% on the Sensex since Feb 21.










The Hedgeye Macro Team


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