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Capital Flight

“Capital flight is a traditional response to currency collapse.”

-Jim Rickards


During most “bull” markets you see a decisively bullish pattern of rising volumes and fund flows to those markets. Not this one.


Not in Venezuela either. While Chavez has been less subtle about devaluing Venezuela’s currency than Ben Bernanke has ours, at up +121% for 2012 YTD, the fund flows to the Venezuelan stock market are as dead as Keynes too.


The failed political strategy of inflating asset prices via Currency Debauchery is not new. Neither is the hyperinflation sometimes born out of those strategies. As Jim Rickards reminds us in Currency Wars, “In 1922, the inflation turned to hyperinflation as the Reichsbank gave up trying to control the situation and printed money frantically…” (page 59)


Back to the Global Macro Grind


Don’t worry, we don’t have hyperinflation in the USA yet. Nor are we likely to if the Global Macro Ball that is being held underwater (the US Dollar) suddenly pops up. That, last I checked, has Deflated The Inflation in a hurry, multiple times in the last 5 years. So manage your risk accordingly.


People aren’t stupid. If you burn their bucks with broken promises of iQe upgrades over, and over, and over again – they’ll stop giving you their hard earned Dollars to burn. Selling Commodities and Equities into their Q1 tops of 2008, 2010, 2011 proved to be very smart 3-6 month timing decisions. When it comes to the pending flight of your capital, you don’t want to miss that flight.


Last week’s rally in asset price inflation was trivial. As the US Economic data worsened, expectations for iQe4 rose. Whenever that happens – and it has happened multiple times in the last 5yrs – the US Dollar goes down, and asset prices catch another lower volume bid. In context, here’s how that looked last week:

  1. US Dollar = down another -0.6% to $78.71 (down for 6 of the last 7 weeks)
  2. SP500 = up +1.8% (getting back to flat for April, right on time, into month-end)
  3. CRB Commodities Index = +1.4% (led by Natural Gas, up +14% on the week)

Now political people really like to argue with me on this, primarily because I’m holding them accountable for not only Policies To Inflate, but also A) the shortened economic cycles and B) amplified market volatilities born out of their policies.


Fortunately, the data doesn’t lie; politicians do. Growth Slowing again is as obvious as the sun rising in the East. If an un-elected Central Planner in Chief didn’t arbitrarily decide to move the goal posts on January 25th, 2012 (pushing easy money to 2014), I don’t think the US Dollar would have had this decline – and I don’t think US Growth would have slowed like it just did.


Here’s what US GDP Growth looked like in Q1 of 2012:

  1. Q1 2012 GDP slowed to 2.2% from 3.0% in Q4 of 2011
  2. Q1 US Fixed Investment Growth slowed to 0.18% from 0.78% in Q4 of 2011
  3. Q1 US Export/Import Growth accelerated to -0.01% from -0.26% in Q4 of 2011

Ah, the elixir of a Keynesian life – Exports. Yes, in their textbook it says that if you devalue the currency of a country, you will “boost” exports. Ok, sounds good – but it has not and will not work in the United States of America if the broken promise is to keep doing this with the US Dollar testing 40 year lows.


Consumption and Investment drive the US Economy, not Government and Currency Devaluation. If you perpetuate spikes in price inflation, Consumption will fall. If you perpetuate economic volatility, Fixed Investment will slow.


US Consumption = 71% of US GDP. That’s why gas prices matter so much to real (inflation adjusted) US GDP Growth. Sure, Final Retail Sales Growth rose to +1.6% in Q1, but a lot of that simply has to do with prices at the pump going up. Mistaking inflation for growth has been, and will continue to be, the legacy of Keynesian economic forecasters in the Bush/Obama era.


In order to account for inflation adjustments, the US Government estimates what they call the “Deflator” and subtract that price from what you are paying at the gas station, grocery store, etc.


Look at what the US GDP Deflator has done in the last 2 quarters:

  1. Q4 2011 Deflator = 0.84%
  2. Q1 2012 Deflator = +1.5%

You don’t need a Ph.D in applied math to realize that (even if you believe these ridiculously low government “estimates” of inflation in your life) their estimates just almost doubled, on the margin.


On the margin is how real human beings live. It’s also how Globally Interconnected Risk is priced. Paycheck to paycheck, tick by tick – it’s real life for all of us who have to balance a family budget and firm payroll. It’s what most of these conflicted and compromised central planners have never been held accountable to in their working life.


The Fed’s “mandate” = Price Stability and Full Employment. US Jobless Claims just spiked +15% month-over-month (April versus March), and price volatility is plainly evident to anyone with live quotes. It’s time to get real about the credibility of the currency in this country, or we are going to see some serious Capital Flight.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, France’s CAC40, and the SP500 are now $1, $118.94-120.17, $78.66-79.22, 3099-3321, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Capital Flight - Chart of the Day


Capital Flight - Virtual Portfolio


The Macau Metro Monitor, April 30, 2012




S'pore's seasonally-adjusted overall unemployment rate increased from 2%, a 3-year low, in December 2011 to 2.1% in March 2012, missing estimates by economists in Bloomberg News surveys.

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First and foremost, I want to acknowledge that Dunkin’ Brands had a strong quarter.


Dunkin’ Brands posted 1Q12 non-GAAP EPS of $0.25 ex-items versus consensus of $0.23, supported by revenues of $152 million versus consensus of $149 million.  Operating margins came in 130 basis points above consensus of 41.3%.  Total U.S. Dunkin’ Donuts points of distribution increased 3.8% versus a year ago, which was an acceleration from 4Q’s 3.6% year-over-year growth.   Mine is a humbling business and, as I was anticipating a weaker quarter than what the company ultimately reported, I hold my hands up and admit that.


Nigel Travis, as CEO of Dunkin’ Brands, is obviously a successful person but having been in this business for quite some time, I would hazard a guess that he, too, has had some humble moments in his career.  On the back of some strong numbers, DNKN’s CEO did not hesitate to put the boot in, attacking my thesis on the lack of evidence that the company can grow in line with its guidance and the Street’s expectations.  I stand by my prior assertions; as an analyst, it is my job to critically analyze the prospects of the equities I cover.  Management hyperbole abounds in the restaurant industry; I try to seek out facts.  Mr. Travis, however, described my thesis as “nonsense”.  Interestingly, his rant came in response to a question from a different analyst that was raising the same issues I have raised all along.


As clients will know, our view has been centered on a lack of actual, concrete evidence that the backlog of new unit openings is sufficient to support the White Space growth story that the company has been touting.  Either the company has the backlog or it does not.  Before the 1Q12 conference call, management’s guidance on this detail was limited to “the pipeline is really strong” and in my analysis I was fully transparent about where my numbers were coming from – announced Store Development Agreements (SDA’s) within the company’s press releases.   I wrote: 


“The evidence for our view is as follows: announced new unit openings are lagging actual openings, which is leading to a decline in the backlog of potential new units being opened.  Until we are proven wrong by greater disclosure from Dunkin’, we will continue to be bearish on the company’s growth prospects per the announcements of new contracted openings by the company.”


If Mr. Travis believes that this statement amounts to nonsense, that’s fine.  I believe that it demonstrated a transparent, sober and logical approach to a growth story that at that time had been deeply lacking in disclosure.  I understand that news flow about lock up restrictions being waived and continuous selling of stock does not necessarily point to fundamental weakness, but as an analyst dealing with unnecessarily limited information it does not instill confidence.  Without that confidence, I was unable to advise clients to get behind such a richly valued stock and I believed it to be overvalued. 


Nigel Travis’ dismissal of my thesis was most surprising in that it completely ignored his own company’s failure to adequately inform the Street of its backlog.  If 80% of the company’s new units last quarter were in new units, and agreements to open stores in new markets are marked with SDA’s, then perhaps my reasoning was not so off base.  Perhaps it was the best we could do with the disclosure that was made available.  Despite prior failed attempts, I did manage to get on the Dunkin’ call yesterday and asked, following his “nonsense” remark, why there is not greater disclosure about the growth rate of the company’s pipeline.  Mr. Travis’ response to me was that the decision was taken when the company went public, that the pipeline information was not to be released to the public because “it can be interpreted in all kinds of ways”.  Management is protecting the investment community from itself! 


Little by little, against management wishes, more information is surfacing and I am happy to continue to pursue it.  During the prepared remarks, Travis said that the company plans to “accelerate development over the next few years with the goal of 5% net new unit growth”.   This is about as positive as the proverbial piece of string is long.  The company has a goal of getting there and the string has length.  How soon the company can get there is going to be a much more important issue for investors.  


I am yet to see evidence that the growth rate can be achieved.  Sweetened up deals for franchisees in new markets and a clear preference for less disclosure as opposed to more on the part of management is not encouraging. 


Executives gushing about “future demand” is not going to cut it (no offense to any individual CEO).  Looking at the comparable-store sales trend, the two-year average is declining.  High single-digit same-store sales growth is impressive but the change on the margin is not, as it stands, pointing higher.  Despite the lack of importance of comps for a franchised business, it is likely that a continuation of this trend would spur concerns more broadly about the company’s ability to grow.  If comps decline to 5% and bulls capitulate on that, but the pipeline and returns on new units are shown to be healthy, I will be the first to react by advising clients to take advantage of the selling.  As before, I will remain skeptical of this story until I see the data to convince me otherwise.  



Howard Penney 

Managing Director


Rory Green



In preparation for PNK's FQ1 2012 earnings release Tuesday morning, we’ve put together the recent pertinent forward looking company commentary.



Pinnacle Entertainment Announces Agreements to Acquire Majority Interest in Retama Park Racetrack in Texas (4/26)

  • PNK will pay $22.8MM to acquire the 75.5% stake in RPL, comprising a purchase of debt securities and other interests related to Retama Park for $7.8 million and cash consideration of $15.0 million that will be used primarily to refinance Retama Development Corporation's ("RDC") existing indebtedness and to provide working capital.
  • In order to maintain continuity in the operation of Retama Park, the Company intends to provide bridge loans of up to $2.6 million to RDC in the near term, which are to be repaid upon closing of the Company's 75.5% stake purchase with the cash consideration contributed in that transaction.



  • "We are ramping up development and planning efforts for River Downs, and we are about to commence construction on an $82 million expansion at River City."
  • "Growth in trips and spend per visit from our most loyal guests has been a trend we've seen since the launch of
    mychoice in April."
  • "We will be starting a room refurbishing program in Lake Charles later on this year."
  • [Boomtown New Orleans] "And while we're pleased that margins at the property improved about 30 basis points, we believe there is an opportunity to drive profitable revenue growth, and we are implementing some measures to improve the property's performance in 2012."
  • "Bossier continues to be a difficult market.  We believe the market will continue to be under pressure for some time to come."
  • [Belterra] "And while we're pleased how things have started out in the property in 2012, we remain vigilant in our cost structure and our marketing programs to help set up this property for the future. We look forward to the opportunity to leverage our operations at River Downs once we get VLTs there to work in tandem with Belterra in the market."
  • "We are excited about our new facility in Baton Rouge. The project remains on our previously stated budget of $368 million, and we expect to have this facility open by Labor Day this year.  We expect to open sometime in August. We've incurred about $46 million in the fourth quarter of 2011 on the project and expect to spend most of the remaining $212 million through this year."
  • "Turning to Ho Tram in Vietnam, the project is on track and should open by the end of the first quarter of 2013."
  • "And finally, on River City expansion, we will begin construction of the garage later on this quarter. We expect to
    spend $20 million to $30 million out of the $82 million budget in 2012 with the rest of the spending being done in
    2013. We expect the garage construction to cause some disruption to River City this year, and it should come
    online in the early part of 2013. The hotel and the multipurpose room is scheduled to come online in the second
    half of 2013."
  • "We expect to spend between $50 million and $70 million in maintenance and other projects in 2012. The timing of some hotel room remodels, some F&B projects among others will be determined as we move into the year. We do have plans to touch rooms at all our hotels with the exception of the Four Seasons within our portfolio."
  • "As for Reno, as announced during the fourth quarter, we entered into two separate transactions to sell our assets
    there. The transaction that involves a casino resort is tracking to close sometime midyear. The company will
    realize about $13 million at closing. We also granted that same buyer an option to purchase a 27-acre land parcel
    for an additional consideration of $3.8 million. The other transaction, which was completely separate on the
    remaining acreage that we own there, fell through earlier this quarter, and we're in the process of remarketing that
    excess land currently."
  • "In Atlantic City, we have done great progress through the quarter in cleaning up the asset. We will receive a tax
    refund by the end of this quarter of $8.2 million, and we've resolved the Madison House litigation. As a result of
    these things, we expect the carrying costs for this asset to be substantially reduced in 2012 and beyond. We are
    retesting the market for the sale of this asset now that the cash burden to carry the land has been reduced greatly.
    We'll see how Revel opens as that will be – will surely create some buzz around that market."
  • [Belterra bridge opening]  "It's sometime in the first half of this year. But I would tell you it's helped a little bit and worthwhile noting, enough to note on the release and some of the comments, but I would tell you that it's not been a windfall."
  • "We're very careful about not letting corporate expenses creep up."
  • "Certainly, while there are things that will continue to improve this year, and there will be some noise associated
    with the garage at River City, and any disruption that may happen with the hotel refurbishment that we'll touch
    there, we do think that this structure that we have in place is one that is working well, and do think that there are things – most of the things that they've seen on the improvements are things that will be sustainable. And we
    continue to try to improve that structure going forward, and there are things definitively that you'll see that'll
    come through in 2012 that are not yet in those numbers, so."

Two Can Play This Game: FXY Trade Update

Conclusion: We’ve found an attractive price to re-short the Japanese yen, a currency we remain bearish on from a long-term TAIL perspective.


Position: Short the Japanese Yen (ETF: FXY)


This afternoon, Keith re-shorted the Japanese yen in our Virtual Portfolio, which, is up roughly 70-80bps vs. the USD today – mere hours after the BOJ incrementally eased its monetary policy by expanding its Asset Purchase Program by +33% to ¥40 trillion yen!


Global currency markets are clearly sending a negative signal to U.S. policymakers, given that the USD can’t even catch a bid vs. the yen in the face of all that has occurred overnight. Portfolio positioning aside, that is not a good leading indicator for the long-term health of America under the current fiscal and monetary policy setup. And as the U.S. and Japan are highlighting, the international currency war is alive and well.


Digging deeper into the weeds, we can pull out one JPY-bullish nugget from the BOJ’s press release today: they are increasing their long-term inflation forecast (through MAR ’14) by +40% to +0.7% from +0.5% per annum. This puts them within 30bps of their +1% target from an expectations perspective, meaning they are less likely to “pursue powerful monetary easing” (Shirakawa’s own words) at the same pace over the intermediate term. Thus, expectations for BOJ balance sheet expansion over the intermediate term are being reined in, on the margin.


That said, however, the focus of our long-term bearish bias on the yen (woeful fiscal policy aside) has been centered on the changing BOJ board dynamics (still TBD) and Shirakawa’s expiring term, which ends in APR ’13. If the current degree of political pressure upon the BOJ is any indication, he will very likely be replaced with a dove that is highly committed to ending deflation through monetary policy measures – something Shirakawa isn’t fully on board with:


“Monetary policy alone cannot solve deflation… We are conducting policy at an appropriate pace. Easing of course isn’t something we’d continue to do every month.”


In the context of the evolving fundamental story, Keith’s quantitative levels are signaling to us that this is a good price to short the yen via the ETF “FXY”. Risk management levels are included in the chart below.


Darius Dale

Senior Analyst


Two Can Play This Game: FXY Trade Update - 1

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