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TODAY’S S&P 500 SET-UP – April 30, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -0.88% downside to 1391 and 0.33% upside to 1408. 











    • Down from the prior day’s trading of 1071
  • VOLUME: on 4/27 NYSE 787.79
    • Increase versus prior day’s trading of 0.97%
  • VIX:  as of 4/27 was at 16.32
    • Increase versus most recent day’s trading of 0.49%
    • Year-to-date decrease of -30.26%
  • SPX PUT/CALL RATIO: as of 04/27 closed at 2.21
    • Up from the day prior at 1.31 


GROWTH – slowing, sequentially, is now a reported fact – but Treasury Yields (10yr 1.93%) and Equity Markets (making lower-highs, globally, since Feb-March) have been very stealth in discounting that before the Sell-Side has. This morning’s South Korean Export number was awful at flat y/y (ie no growth).


STAGFLATION – politically, it’s harder to say we have that in the USA right now (b/c of how we calculate GDP and inflation) than it is to say they have it in Europe. In Italy, the CPI was reported at +3.8% y/y for April, which is nauseatingly high relative to the no growth in Italian GDP (or France, Spain, etc). Brent oil $119 is a consumption killer. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.92
    • Down from prior day’s trading of 1.93
  • YIELD CURVE: as of this morning 1.67
    • Decrease from prior day’s trading of 1.68 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, Mar., est. 0.3% (prior 0.2%)
  • 8:30am: Personal Spending, Mar., est. 0.4% (prior 0.8%)
  • 9:45am: Chicago PMI, Apr., est. 60.5 (prior 62.2)
  • 10:00am: NAPM-Milwaukee, Apr., est. 53 (prior 51.8)
  • 10:30am: Dallas Fed Manu. Act., Apr., est. 8 (prior 10.8)
  • 11:30am: U.S. to sell $30b 3-mo., $28b 6-mo. bills
  • 5:30pm: Fed’s Fisher speaks on jobs in Beverly Hills, CA 


    • Japanese Prime Minister Yoshihiko Noda visits White House to discuss U.S.-Japan Security Alliance, economy and trade
    • President Obama to speak at Building and Construction Trades legislative conference
    • House, Senate not in session
    • Supreme Court issues orders only


  • Collective Brands said to select group made up of Wolverine World Wide, Golden Gate Capital as leading contender to buy co.
  • Warner Chilcott said to be weighing options including possible sale after receiving interest from strategic, private-equity buyers
  • Spain’s economy enters second recession since 2009
  • LightSquared said to receive weeklong extension from creditors
  • Consumer spending in the U.S. probably climbed 0.4% in March as incomes  grew, economists est.
  • Occupy Wall Street demonstrators plan marches across the world tomorrow calling attention to what they say are abuses of power, wealth
  • Chrysler’s Dodge Dart overcoming snags before start of production, will have high-mileage version ready in 3Q
  • Apple uses offices in states other than California, countries outside the U.S. to help minimize its overall tax burden: NYT
  • Yahoo urged shareholders not to back board nominees put forward by holder Third Point
  • Boeing will ship all four 787 composite-plastic Dreamliners to Air India, the carrier that demanded $1b in compensation after production delays
  • Apple, Google deserve to be part of Dow Jones industrial average: Barron’s
  • Goldman Sachs Asset Management Chairman Jim O’Neill reported by Sunday Times to be a candidate for Bank of England governor
  • Accretive Health said yesterday it’s working with advisers to address concerns raised by Minnesota AG that it puts bedside pressure on patients to pay bills
  • Haemonetics agreed yesterday to buy blood-collection business of Pall Corp. for $551m in cash
  • Apple said to have held talks to let subscribers of Epix movie chanel watch films on its set-top box
  • Starwood Hotels plans to re-enter Iraqi market almost 20 years after exiting as a result of Gulf War
  • BOX Options Exchange won approval April 27 to become a U.S. securities exchange
  • Dewey Leboeuf said to end Greenberg Traurig merger talks
  • Analysts predict U.S. shares will rise this year to boost the S&P 500 to record, even as Wall Street strategists say the best is already over for American equities
  • No U.S. IPOs expected to price: Bloomberg data
  • Week Ahead : U.S. Jobs, French Debate, Buffett: April 30-May 5 


    • CNA Financial (CNA) 6am, $0.68
    • Humana (HUM) 6am, $1.55
    • Loews (L) 6am, $0.90
    • LyondellBasel (LYB) 6am, $1.04
    • Watson Pharmaceuticals (WPI) 7am, $1.59
    • Harman International Industries (HAR) 8am, $0.67
    • UDR (UDR) 8am, $0.34
    • DiamondRock Hospitality Co (DRH) 8am, $0.07
    • Mercury General (MCY) 8:30am, $0.68
    • Canadian Oil Sands Ltd (COS CN) 4pm, C$0.54
    • SBA Communications (SBAC) 4pm, $(0.18)
    • Veeco Instruments (VECO) 4pm, $0.22
    • Anadarko Petroleum (APC) 4:01pm, $0.83
    • Hologic (HOLX) 4:01pm, $0.33
    • CNO Financial Group (CNO) 4:02pm, $0.13
    • Plum Creek Timber Co (PCL) 4:02pm, $0.24
    • Shutterfly (SFLY) 4:02pm, $(0.21)
    • PMC-Sierra (PMCS) 4:04pm, $0.05
    • PartnerRe (PRE) 4:04pm, $2.01
    • Forest Oil (FST) 4:05pm, $0.20
    • Enbridge Energy Partners (EEP) 4:08pm, $0.37
    • Flowserve (FLS) 4:09pm, $1.61
    • Herbalife (HLF) 4:10pm, $0.81
    • McKesson (MCK) 4:10pm, $2.06
    • FMC (FMC) 4:30pm, $1.85
    • Masco (MAS) 5pm, $(0.01)
    • Suncor Energy (SU CN) 10pm, C$0.81
    • Jacobs Engineering Group (JEC) Post-Mkt, $0.74 


  • Speculators Miss Biggest U.S. Corn Sale Since 1994: Commodities
  • Wheat Drops as U.S. Crop Development Accelerates; Soybeans Fall
  • Brent Oil Heads for First Monthly Drop Since December on Demand
  • Copper Falls 0.5% to $8,376 a Ton; Nickel Declines, Tin Gains
  • Gold May Gain as Lower Borrowing Costs, Debt Crisis Spurs Demand
  • White Sugar Rises as Lower Prices May Spur Demand; Coffee Falls
  • Mercuria Said to Hire Perkins as Agriculture Head in Singapore
  • Palm Oil Drops to Pare Monthly Advance on Higher Output Concern
  • U.S. to End Fuel Exports as Oil Discount Disappears, Facts Says
  • Hedge Funds Cut Bullish Gasoline Bets on Prices: Energy Markets
  • Roomier Pig Pens May Bolster Pork Prices as European Output Ebbs
  • Merkel’s Green Jobs Drive Faltering With Cuts for Solar: Energy
  • Record-High Gasoline Burdens Consumers as Europe Fights Slowdown
  • Funds Miss Biggest Corn Sale Since 1994
  • Fortescue Seen Luring Anglo-to-Glencore on China Iron: Real M&A
  • China Forestry Logging Assets Hold Value, Investor Carlyle Says
  • Crude April Trading Range Tightest Since 1995: Chart of the Day 





US DOLLAR – whether people want to admit it or not, the US economic data was bad last week (jobless claims and GDP) – if the only thing left keeping asset prices afloat is the hope for iQe4, that’s dicey. We’ve seen this movie before – holding the USD down like a ball under water (down 6 of the last 7 wks) ends in deflationary tears when it pops back up.


















The Hedgeye Macro Team


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.


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."

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