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Jelly Donuts

“A jelly donut is a yummy mid-afternoon energy boost.”

-David Einhorn


On a flight to Dallas, Texas yesterday, I was reviewing My Pile and re-read David Einhorn’s Op-Ed from May 3rd, 2012 in the Huffington Post titled “The Fed’s Jelly Donut Policy.” Loved it.


I love donuts, burgers, and beers too. What I don’t love is pretty clear – Ben Bernanke’s post 2009 Policies To Inflate rank right up there at the top of my no-love list alongside listening to Giraldo Rivera and watching figure skating.


What I also love is the debate. I love to argue; particularly with people that don’t. How else do we hold these charlatans accountable? How else are we going to challenge the perceived wisdoms of their economic policies? How else are we going to evolve and progress?


Alongside Ray Dalio (Bridgewater Associates) and Seth Klarman (Baupost Group), I consider David Einhorn (Greenlight Capital) one of the thought leaders of Wall St 2.0. Stylistically, while Einhorn is often compared to Warren Buffett (“value guys”), I think he’s currently  evolving his investment process at a much faster pace. Einhorn does macro – he shorts things too.


Einhorn isn’t politically polarized like Buffett has become. He is able to evaluate macro risks objectively (what the Fed should do and balance that with his opposing thoughts of what the Fed will do). He’s embraced Behavioral Finance, writing openly about fear and greed. He also understands that the stock market is not the economy, and that “valuation” is not a panacea.


On Bernanke’s failed policies, here’s my abbreviated version of Einhorn’s Op-Ed:


“The blame lies in his misunderstanding of human nature. The textbooks presume that easier money will always result in a stronger economy, but that’s a bad assumption… it is simply misguided thinking that persists among the Fed Chairman and other government ivory tower thinkers. They do not understand or relate to the prime component of capitalism and a free market: greed.”


“The Fed does not understand investor psychology: if you want to get people to sell bonds and buy stocks, the best way to do that is to show them that bond prices can, and do, fail… there is nothing that slows the economy faster than rising oil prices… In light of this, I cannot understand why we are even discussing let alone hoping, for Qe3.”


Agreed, Mr. Einhorn. Agreed. Hope is not a risk management process. Neither is doing more of what didn’t work. Enough of the yummy intraday stock market rallies on iQe4 upgrade rumors already. After 3 of these suckers, Americans have a “tummy ache.”


Back to the Global Macro Grind


Strong Dollar = Deflates The Inflation = Stronger Consumption. That remains our bull case for not only the US and Global Economy, but for their Equity market multiples.


Yesterday’s US Services ISM report (May) was one of the most constructive we have seen on the Prices Paid front since December:

  1. US Services ISM of 53.7 (May) vs 53.5 (April) stopped slowing – that’s better than bad
  2. Prices Paid (within the ISM Services report) dropped -7.1% month-over-month to 49.8 (vs 53.6)
  3. Employment dropped -6.2% month-over-month to 50.8 vs 54.2

So, employment is bad and getting worse. But A) you know that B) so does the bond market and C) employment is a lagging (as opposed to a leading), indicator. Real-time market prices are also leading indicators.


In other words, if you are begging for Bernanke’s iQe4 Upgrade this morning, you are begging for prices paid to go back up at the pump – and you are begging for the leading indicator on real (inflation adjusted) economic growth to continue to slow.


Begging isn’t leadership. It’s un-American.


Our process hasn’t changed in scoring how the real world works. Unfortunately, neither has the Washington and Old Wall Street consensus. These people don’t have a risk management process. This is what they do. So it will be very interesting to see how the political pressure for Bernanke to bailout everything from Europe to Morgan Stanley looks in the coming days and months.


Bailing out Europe through the Washington, DC based (and US tax payer backed) IMF? Yep, I’m thinking Einhorn will lead from the front and have a few things to say about that too.


In the meantime, the SP500 recapturing our long-term TAIL line of support (1283) yesterday should be as bullishly received as it was bearish when it snapped on the downside.


Yes, “risk” changes faster than you can bang back another Jelly Donut. That is the game we are in, so play it.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $96.21-103.11, $82.03-83.35, $1.22-1.25, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Jelly Donuts - Chart of the Day


Jelly Donuts - Virtual Portfolio


McDonald’s will release May sales results on Friday before the market open.  The price action in the stock is indicating a degree of investor skepticism heading into the summer months.  With price running at 3%, it will be a tall order for the company to maintain the impressive traffic growth that the company has produced over the last year or so.


McDonald’s was one of our favorite names in the restaurant space in during 2011 (from April onward, before that we were bearish and wrong).  On April 24th, 2012, we wrote that “we see plenty to be concerned about” regarding the top line going forward and that our “conviction on the top-line continuing to meet consensus is tenuous at best”.  Following the April sales release, growing risks to the top line heightened our concern and we think that the May sales release will once again disappoint investors.  With price running at roughly 3% in the United States and 2-3% in Europe, the company will need to drive substantial gains in traffic to meet consensus estimates and we lack confidence that the pipeline of promotions for the summer months is sufficient.  Beverage promotions over the past two years have been instrumental in driving traffic yet management has been placing far less emphasis on beverages in their recent communications with Wall Street (earnings calls) than in years prior.


Below we go through our take on what comparable restaurant sales numbers will be received as good, bad, and neutral by investors.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).


Compared to May 2011, May 2012 had one additional Wednesday, one additional Thursday, one less Monday, and one less Sunday.  As a result, we expect a slightly negative calendar shift to impact the headline number. 



U.S. - facing a relatively easy compare of 2.4%, including a calendar shift of between -1.5% and +0.5%, varying by area of the world:


GOOD: A print of higher than 4.5% would be received as a strong result by investors as it would imply a sequential acceleration in the calendar-adjusted two-year average trend as well as 1.5% of mix/traffic growth on top of the 3% of price that the U.S. business is running.  With growth slowing globally and economic uncertainty mounting in the U.S., we think that this would be a strong result given the current environment and lack of promotions that can replicate what frappes and smoothies achieved last year.  We are anticipating a print of 4% for U.S. comparable store sales growth in May.


NEUTRAL: A print of between 3.5% and 4.5% would be considered neutral by investors, in our view, as it would imply two-year average trends that are roughly flat on a calendar-adjusted basis. 


BAD: A result of less than 3.5% would imply a significant slowdown in two-year average trends and would likely cause the stock to sell off further.  While we do believe that McDonald’s sales trends are slowing, we do not think a number as low as 3% is likely.


MCD SALES PREVIEW - mcd preview may



Europe - facing a relatively easy compare of 2.3%, including a calendar shift of between -1.5% and +0.5%, varying by area of the world:


GOOD: A print of more than 5% would be considered a strong result as it would imply two-year average trends level with those seen in April on a calendar-adjusted basis.  Given the weakness in MCD’s Europe business in recent months, and the ongoing crisis there, we are not holding Europe to a high standard.


NEUTRAL: A print of between 4% and 5% would be received as neutral by investors, in our view, as it would imply some stabilization in two-year average trends.


BAD: A number below 4% would imply a substantial deceleration in two-year average trends.



APMEA - facing a compare of 4.3%, including a calendar shift of between -1.5% and +0.5%, varying by area of the world:


GOOD: A result of 4% or higher would be received as positive by investors as it would imply a significant acceleration in two-year average trends.  Yum Brands has been trading poorly in recent days on fears of a slowdown in China sparked by a disappointing PMI number for May.  We are still holding APMEA to a high standard given that slowdowns in this metric do not necessarily correspond to a top line deceleration for McDonald’s.


NEUTRAL: A print between 3% and 4% would be received as neutral by investors as it would imply two-year average trends roughly in line or slightly better than those seen in April.


BAD: Comparable restaurant sales growth of less than 3% for the McDonald’s APMEA division would imply a continuation of sluggish two-year average trends. 


Howard Penney

Managing Director


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Hold was a little low but not much, so VIP volumes were indeed disappointing.  June looks good, however.



Hold was a little low but not much, so VIP volumes were indeed disappointing.  However, hold was significantly below last year's.  We estimate that total direct play this month accounted for 7.0% of the market, compared with 6.0% in May 2011.  The total VIP market held at 2.90% vs. 3.13% in May 2011.  Accounting for direct play and theoretical hold of 2.85% in both months, May revenues would have increased 14% YoY.  As we’ve discussed, the timing of Golden Week likely had a significant impact on YoY growth, probably around 5%.  Going forward, we expect June YoY growth to accelerate to the high teens, assuming normal hold.


While growth decelerated across all segments, Mass continued to show robust growth.  VIP volume and slot revenue slowed to 9% compared with 23% and 26%, respectively, over the prior 6 month period.  Mass grew 25% YoY, compared to 40% growth over the last 6 months.  Mass only grew 1% sequentially in May 2012 versus MoM growth of 15% in May of 2011.  This is indicative of the timing shift of Golden Week in 2012.


For the 1st time since July 2009, half the concessionaires (MGM, WYNN, MPEL) posted YoY declines in GGR.  May marked the 2nd consecutive month of GGR declines for Wynn and MPEL.  Poor GGR performance was driven by RC Junket volume declines at 4 of the 6 concessionaires coupled with low hold and difficult YoY hold comparisons.  Part of the deceleration in Mass is due to deceleration of the growth at Galaxy Macau which lapped its May 15, 2011 opening this month.  Unless Sands Cotai Central can pick up some of the slack of the harder comps in the coming months, Mass will likely exhibit robust but slower growth in the foreseeable future.


Clearly, the opening of Sands Cotai has been a disappointment.  Contrary to the build it and they will come expectation, LVS actually lost 80bps of market share in May.  The decrease was largely driven by cannibalization and a low hold of 2.44% across Sands China's portfolio.


In May, Wynn was the largest market share loser, followed by MPEL, Galaxy, and LVS while MGM and SJM were the share gainers.



Y-o-Y Table Revenue Observations

Total table revenue growth slowed to 7% in May, the slowest growth since July 2009.  Mass revenue growth of 25%, compared with 39% growth in the last twelve months.  VIP revenues eked out 3% growth, while Junket RC growth fell below the double digit mark (at 9%) for the 1st time since July 2009. 



Table revenues grew 17% YoY, outpacing the market due to the opening of Sands Cotai Central.  Sands China's portfolio was negatively impacted by low hold which we estimate adjusted for direct play was only 2.44% in May 2012, compared with 3.31% in May 2011.  

  • Sands generated a 15% YoY decline mostly due to low hold coupled with VIP volume declines.  This should be no surprise given the ‘cannibalization’/reallocation of tables to SCC.  The good news is that the entire YoY decline came out of the lower yielding VIP segment.
    • Mass was up 5%
    • VIP tanked 27% YoY, following a 48% drop in April.  We estimate that Sands held at 2.25% in May compared to 2.53% in the same period last year.  We assume $234MM/month of direct play or 11% (in-line with what we saw in 1Q12)
    • Junket RC was down 14%.  This was the 6th consecutive month of YoY declines in VIP RC at the property.
  • Venetian table revenues plunged 32% YoY, driven by low hold, a difficult hold comparison and a VIP RC decline 
    • Mass increased 12% 
    • VIP tumbled 51% while junket VIP RC decreased 10%
    • Assuming 26% direct play in the quarter, hold was 1.96% compared to 3.71% in May 2011, assuming 22% direct play (in-line with 2Q11)
  • Four Seasons continued to perform well, growing 74% YoY even in the face of low hold and a difficult hold comparison 
    • Mass revenues decreased 4%, the 2nd consecutive month of declines
    • Junket VIP RC increased 2.6x YoY and VIP revenues soared 100%
    • If we assume that monthly direct play volume of ~$650MM is in-line with 1Q12 absolute levels, that implies a direct play percentage of 26% and a hold rate of 2.30%.  In comparison, if May 2011 direct play was around 41% then hold is approximately 3.45%.
  • For its 1st full month of operations, Sands Cotai Central produced $135MM boosted by high hold.  If they held at 2.85%, table revenue would have only reached $106MM or $3.4MM/day. This compares to Venetian's first full month of operations of $137MM in September of 2007, CoD's first full month of operations of $124MM in July 2009, and Galaxy Macau's $160MM in June 2011.  
    • Mass revenue of $32MM
    • VIP revenue of $102MM
    • Junket RC volume of $2,567MM
    • If we assume that direct play was 15%, hold would have been 3.39%, compared with April's 2.29%.


Wynn table revenues fell 6% in May, exhibiting the worst table decline of all 6 concessionaires.  Wynn’s hold was below normal but so was last year's comparison.   

  • Mass only grew 4% while VIP dropped 8%
  • Junket RC declined 7%
  • Assuming 10% of total VIP play was direct (in-line with 1Q12), we estimate that hold was 2.51% compared to 2.55% last year (assuming 8% direct play – in-line with 2Q11)


MPEL table revenue fell 7% due to a 30% YoY drop at Altira. MPEL had moved some tables out of Altira and into CoD’s new junket rooms. 

  • Altira revenues fell 30%, due to a 32% decrease in VIP and a decline of 12% in Mass 
    • VIP RC decreased 24%, marking the 6th consecutive month of declines which have averaged 19%
    • We estimate that hold was 2.61%, compared to 2.91% in the prior year
  • CoD table revenue was up 6%, driven by 22% growth in Mass 
    • VIP revenue and RC both eked out a 1% gain
    • Assuming a 16% direct play level, hold was 2.88% in May compared to 2.98% last year (assuming 13% direct play levels in-line with 2Q11)


Table revenue fell 3%

  • Mass was up 7% offset by a 7% drop in VIP
  • Junket RC was down 8%
  • Hold was 3.24%, compared with 3.19% last May.  


Galaxy posted the best table revenue growth of 60%, with Mass soaring 146% and VIP growing 47%.

  • StarWorld table revenues only grew 2% due to a difficult YoY comp
    • Mass grew 79% but was offset by a 3% drop in VIP 
    • Junket RC grew 6%
    • Hold was normal at 2.83%, compared with last May's 3.13%
  • Galaxy Macau's total table revenues reached $356MM, surpassing the prior high of $339MM set in October 2011.  Revenues were up 8% sequentially.
    • Mass table revenues hit $77MM, matching the record high in March 2012
    • VIP table revenue grew 8% MoM to $279MM - a new monthly record
    • Hold was 3.16% 
    • RC volume of $8.8BN, up 18% MoM and a new record


Table revenues declined 3.3%

  • Mass revenue grew 15%
  • VIP revenue fell 7%, while VIP RC dropped 6%
  • If direct play was 7%, then May hold was 3.19% compared to 3.16% in May 2011


Sequential Market Share



LVS share in May was 16.9%, -0.8% MoM.  This compares to a 6 month trailing market share of 17.3% and 2011 average share of 15.7%.

  • Sands' share was unchanged MoM at 3.2%.  For comparison purposes, May share was below 2011's share of 4.6% and 6M trailing average share of 4.2%.
    • Mass share was 5.9%
    • VIP rev share remained at an all-time low of 2.2%
    • RC share decreased 20bps to 2.6%, slightly above the all-time low of 2.4% set in Feb 2012
  • Venetian’s share dropped to 6.0%, the properties' lowest share since its first full month of operations.  2011 share was 8.4% and 6 month trailing share was 8.2%.
    • VIP share decreased 80bps to 3.8% and mass dropped 290 bps to 12.3% - both new lows
    • Junket RC rebounded 50bps from an all-time low to 4.4% 
  • FS dropped 2.1% points to 3.0%.  This compares to 2011 share of 2.2% and 6M trailing average share of 4.2%.
    • VIP share declined to 3.4%.   
    • Mass share was steady MoM at 1.6%
    • Junket RC fell 80bps to 3.4%. May marked the 6th month where volumes exceeded those at Sands Macau.
  • Sands Cotai Central achieved table market share of 4.3% in May
    • Mass share of 4.1%
    • VIP share of 4.4%
    • Junket RC share of 3.5%


Wynn’s share decreased to an all time low of 11.3%, far below its 6-month trailing average of 12.9% and 2011 average of 14.1%.  We expect Wynn’s share to continue to struggle in the face of a ramping Sands Cotai Central.

  • Mass market share was 8.9%, 10 bps above its all-time low
  • VIP market share dropped 2.2% points to 11.9%, only 50 bps away from its all-time low
  • Junket RC share fell to 13.4%, a 50bps decline  


MPEL lost 140bps of share in May to 12.3% which is below their 6 month trailing share of 13.7% and 2011 share of 14.8%.

  • Altira share fell 0.3% points to 3.2%, which was below the property’s 2011 share of 5.3% and 6M trailing share of 4.1%
    • Mass share fell 30bps to 1.4%
    • VIP declined 30bps to 3.9%, the properties’ lowest level since June 2007
  • CoD’s share fell 100bps to 8.9%; below its 2011 and 6M trailing share of 9.3% and 9.4%, respectively
    • Mass market share tumbled 160bps to 9.9% after hitting an all-time property high in April
    • VIP share decreased 90bps to 8.5%
    • Junket RC fell 10bps to 7.8%


SJM was the biggest share gainer in May, up 4% MoM to 29.3% share; in-line with its 2011 average of 29.2% and above its 6M trailing average of 26.8% 

  • Mass market share rose 90bps to 32.7%
  • VIP share jumped 5.1% to 29.1%, its highest level since last May's 32.0%
  • Junket RC share fell to 28.0%, lowest level since Sept 2009


Galaxy’s share dropped back below 20.0% to 19.6%, which was still above its 6-month trailing average of 19.2%

  • Galaxy Macau share increased 40bps to 11.4% - a new high
    • Mass share matched its all-time high of 9.6%
    • VIP share increased 20bps to 12.0%, marking an all-time property high
    • RC share increased 90bps to 11.9%, a new high
  • Starworld share fell 120bps to 7.4%  
    • Mass share gained 40bps to 3.1%
    • VIP share fell 190bps to 8.8%
    • RC share fell 130bps to 9.7%, its lowest level since May 2009


MGM share rose 0.6% to 10.5%, in-line with its 2011 share and above its 6M average of 10.1% 

  • Mass share rose 1% to 8.0%
  • VIP share ticked up 50bps to 10.9%
  • Junket RC ticked up 50bps to 9.9%


Slot Revenue

Slot revenue totaled $145MM in May, matching the all-time high set in January 2012.  

  • As expected, GALAXY grew the most at 73% YoY to $14MM
  • MGM had the second best growth at 34% YoY to $25MM
  • SJM gained 29% YoY to $19MM
  • LVS grew 17% YoY to $39MM
  • MPEL fell 7% YoY to $24M
  • WYNN lost 27% YoY to $23MM







The New Leading Indicator … Wisconsin

Conclusion:  The results from Wisconsin tonight will be an important leading indicator for President Obama’s chance of winning that State.  More broadly, the weak economy continues to lower Obama’s probability of re-election.  In our view, a Romney Presidency will be bullish for the U.S. dollar.

Not surprisingly, the Wisconsin election to recall Governor Scott Walker is not without controversy.  The current rumor coming from the Democratic Party in Wisconsin is that calls are going to voters from Walker supporters telling prospective voters they do not have to vote if they signed the recall.  In fact, Milwaukee County Democratic Chair Sachin Chheda was very explicit in this accusation of cheating and said earlier today:


“This latest lowlife sleaze comes on the heels of countless reports from around the state of various Republican dirty tricks on behalf of Walker. For instance, reports surfaced last weekend that Walker supporters are paying homeowners to post Walker signs on their lawns."


Dirty tricks or not, it appears almost certain that Governor Walker will win the recall vote.   According to InTrade, the electronic prediction market, the probability that Walker will get re-elected is at 93%.  As the chart below outlines, this is up dramatically since early May when the probability was floating around 50%.


The New Leading Indicator … Wisconsin - a. 1


The latest polls from Wisconsin have also validated the InTrade contract.  The Real Clear Politics aggregate has Walker +6.7 and the most recent poll from WeAskAmerica has Walker up +12.   If these numbers hold, then Walker is poised to beat Barrett by more than the +5 margin he won by in 2010. 


From an analytical perspective, Walker’s ability to gain margin in two years can obviously be attributed to his much deeper funding that his competitor.  By most estimates, Walker will have outspent Barrett by margin of 8 – 1. But while funding certainly helps, much of the electorate in Wisconsin actually considers itself increasingly conservative, which is leading to more support at the polls for Walker.  This shift is in part due to their support of Walker’s key mandate, which is fiscal reform in Wisconsin via limiting the collective bargaining rights of government unions.


As it relates to the broad national sentiment, it is difficult to tell at this juncture what the implications of a victory by a Republican in Wisconsin mean, but certainly if Governor Walker wins by a broader margin, it is an ominous sign for Obama in Wisconsin this fall.    Currently Wisconsin represents 10 electoral votes, which will be critical in a tight Presidential race.  Wisconsin has typically been considered a safe state for Democrats as Democratic Presidential candidates have won the state every election going back to 1984.


On some level, even if Walker’s victory in Wisconsin isn’t a leading indicator for the national Presidential race, it certainly appears coincident with Romney’s odds improving and Obama’s odds decreasing.  According to our Hedgeye Election Index (HEI), President Obama’s re-election chances are down to 54.1%.  This is Obama’s lowest reading in five months.  


The New Leading Indicator … Wisconsin - a. 2


The reading on our proprietary index is consistent with InTrade.  Currently President Obama’s probability of getting re-elected on InTrade is down to 53%.  This was his lowest reading since February 2012.  The most recent precipitous drop occurred in conjunction with the employment report last Friday that showed nonfarm payrolls had added a mere 69,000 jobs in May.  


A weak economy is never positive for an incumbent President and, as the data shows, is not good for Obama.   In the chart below, we highlight a series of polls from Gallup that highlight that the economy is front and center in the minds of the electorate.  This chart shows that over the last four months more than 66% of those polled have highlighted the economy as the most important problem.


The New Leading Indicator … Wisconsin - a. 3


To date, President Obama has blamed the current economic woes on former President George W. Bush.  Based on a recent Washington Post / ABC poll, 49% of those polled say they blame President Bush and 34% of those polled say they blame Obama.  So, on some level the electorate agrees with Obama that it is Bush’s fault.  That said, the same poll indicated that 55% of those polled disapproved of the way Obama has handled the economy.


Ultimately this election, as they always are, will be an evaluation of the current administration and not the former one.  Base on his broad approval ratings, the Obama administration’s handling of the economy is keeping President Obama’s approval ratings at a level that makes re-election increasingly questionable.  The table below highlights the average approval rating of past incumbents in the May of their re-election years.  Obama most closely parallels Bush in 2004 and Ford in 1976.  In 2004, Bush won the popular vote 50.7% to 48.3% and in 1976 Ford lost 50.1% to 48.0%.


The New Leading Indicator … Wisconsin - a. 4


As always, as it relates to the Presidential election, it remains the economy that matters.


Daryl G. Jones

Director of Research



HedgeyeRetail: Chart of the Day; Nike Footwear Drivers

Industry Data suggests that Nike footwear within North America is up ~10% YTD. The most notable point to us is that Running is ‘comping the comp’ for NKE – and that’s without FLYKNIT having even hit the market yet (July). Also, Basketball’s resurgence is an obvious price point boost. Take a look at the drivers…


HedgeyeRetail: Chart of the Day; Nike Footwear Drivers - Nike chart of the day

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