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Takeaway: Price elasticity of demand at QSR is likely higher this year as grocery inflation slows. $MCD and others have little room for further hikes

Inflation in the grocery aisle is decelerating rapidly.  We continue to see this as an impediment for restaurant companies seeking to protect margins via raising prices.  The Bureau of Labor Statistics released CPI data for the month of July this morning.  The negative spread between CPI for Food Away from Home and Food at Home continues to grow.


In 2011, grocers were forced to raise prices in line with inflation to protect margins.  We believe that the restaurant industry benefitted greatly from the relatively benign level of inflation for Food Away From Home versus Food at Home. 


Looking ahead, we believe that several companies in the restaurant industry will find it increasingly difficult to lap difficult compares over the summer months if the “food value spread” continues to widen.  Management teams at McDonald’s and Jack in the Box, among others, have highlighted this metric as being instrumental in their pricing strategies.  MCD, for instance, is running price in the U.S. at roughly 3%.  With Food at Home CPI decelerating, we believe the consumer may be less willing this year, as compared to 2011, to absorb additional price increases.


CPI DATA SHOWS TOUGH PRICE ENVIRONMENT - food at home vs food away from home cpi


Howard Penney

Managing Director


Rory Green


Golf Claps For Mao







China gets us thinking. It is a country that truly puts the brain to work. While getting coffee with a friend this morning, we pondered just what makes China tick. The provincial governments, the “second” balance sheets – can you trust ANYTHING coming out of this country? The consensus in the West is that China will cut rates! It will provide stimulus! Then the People’s Bank of China comes out and says no, they’re not going to do any of that nonsense. They don’t need Keynesian economics driving up food and fuel prices any further. Oh. Well then that would explain why China stocks continue to crash, down -2% this week.




Shakespeare was a man of tragedy. Come to think of it, the guy was just downright depressing. Hamlet? Macbeth? Romeo and Juliet? Death all around! Kind of reminds us of the stock market. Yeah, it’s cool to be a bull these days with the levels the SPX and Dow are at, but is this sustainable? We don’t think so. Economic numbers and news are going to get worse, not better. This coincides with our #GrowthSlowing theme that we’ve been pushing for some time now. Bailouts and higher commodity prices are certainly not the answer to our woes – everyone can agree with that.




…and you get a lot of other things right. We’ve said this before. And after a nice multi-week fall, the US dollar is now heading to the upside. As a result, the SPX hasn’t gone up in two days. Europeans are playing the quiet game, so what are you going to do for a catalyst? Not even Hilsenrath can spin this one. Instead, let’s see what Romney and Ryan can do to shake up the market over the weekend. Who knows what these two are capable of? It’s certainly better than a President who goes around buying Bud Lights for everyone (and by everyone, he meant the first ten people to bumrush the beer booth). $25,000 down the hole.


More info on ‘Bama Beers here: http://www.indystar.com/article/20120815/NEWS01/120815013/Owner-complains-Obama-s-beer-tent-stop-cost-him-25-000






Cash:                  Flat


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat   








This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TAIL:      LONG            



The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“rhetoric is QE” -@fearlicious




“Why be a man when you can be a success?” – Bertolt Brecht




The Carlyle Group is looking to buy Getty Images for $3.3 billion.





The Macau Metro Monitor, August 15, 2012



Chinese Estates Holdings said in a statement last night that Macau government has decided to “invalidate” the land-concession contracts and related March 2006 amendments concerning its subsidiary Moon Ocean. According to the statement “the chief executive of Macau has declared the previous act of the chief executive of Macau in confirming the approval of the land transfers and the related amendments of the land concession contracts in March 2006 invalid.” 


The land concession in dispute concerns 5 plots of land near the airport in Taipa that were slate for the company’s luxury La Scala residential project.  The head of Chinese Estates Holding, Hong Kong developer Joseph Lau Luen Hung, is slated to stand trial for alleged bribery in a Macau court next month. 



Pawnshops, whose fortune is linked to gaming in Macau is a good barometer of the industry's health. According to one pawn shop owner, “In the (2008) international financial crisis, we were very much affected, and some smaller pawnshops were on the brink of closure. Individual ones even suspended their business temporarily. Now the visitor numbers and casino revenues are slowing down again, we hope it doesn’t last long this time.” 


According to government data, sales of of new private homes in Singapore surged 41.7% MoM in July, reversing the sharp declines seen in May and June. 1,943 units, excluding executive condominiums, were sold in July compared to 1,371 units in June.  


Analysts believe the the rebound in July sales was caused by seasonal factors such as the desire to close transactions ahead of August, known as the quiet "Hungry Ghost" month and lower prices in some segments of the market. Development units priced below S$1,000/SQFT were among the strongest sellers. 


It appears that homebuyers are showing interest in more modestly priced condominium launches.  Despite the recently transaction volume volatility, analysts believe that will remain at a steady pace for the balance of the year. 

Early Look

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Geithner's Growth

This note was originally published at 8am on August 01, 2012 for Hedgeye subscribers.

“There’s a lot of things Congress can do, in the near term, not just in the long run, to make growth stronger.”

-Tim Geithner   


Having spent 54% of his born life in government, growing both deficits and debts as far as the eye can see, US Treasury Secretary Timmy Geithner’s Growth has been, if anything, consistent.


As President Obama goes into full campaign mode, his Top 2 central planners take center stage this week. Our almighty overlord of short-term asset price inflation will speak to commoners and journalists alike after his 215PM FOMC decision. Meanwhile, Geithner has been making his American/European media rounds for the last 24 hours.


The Germans in particular don’t care for the bailout policies to inflate inasmuch as they don’t care for Geithner’s economic partisanship. Now that Timmy is interviewing with Global banking outfits, he needs to be careful to not tell the Europeans what to do. Been there, done that – and he’s been mocked. That can be a bummer when negotiating a post Washington, DC employment agreement.


Back to the Global Macro Grind


To paraphrase Geithner’s latest ideas for both Americans and Europeans alike: ‘We need to do more – more of what has not worked. There’s more of that to do – I believe that “deeply.” Do more.’  


By “more”, he means more #BailoutBull policies for delinquent and/or underwater borrowers (US home buyers and Spanish banking conquistadors alike). By more, he means more government spending. By more, he means Big Government Intervention.


To review what doing “more” of that has done to both our economies and said “free” markets”:

  1. Shortened Economic Cycles (#GrowthSlowing)
  2. Amplified Market Volatility

In the very short-term, while No Volume; No Trust stock markets may or may not get this (depending on the latest rumor induced Viagra Rally in the S&P futures), the bond market understands this across intermediate and long-term durations, big time.


Geithner’s Growth (debt and deficits) slows growth. That’s not a rumor. That’s a fact. That’s why:

  1. 10-year US Treasury Yields continue to make lower-lows since #GrowthSlowing picked up on the downside in March
  2. Russell2000 (broad measure of US liquidity risk and equity exposure) stopped going up on March 26th
  3. That’s why US Equity market volatility (VIX) bottomed YTD on the same day that the Russell2000 topped (March 26th)

Bernanke’s Growth (asset price inflations) slows growth too. For July, this is best illustrated by the SP500’s Sector returns:

  1. Energy (inflation expectations) = UP +4.94%
  2. Consumer Discretionary (growth expectations) = DOWN -0.55%

Again, to review – INFLATION IS NOT GROWTH.


US Consumption represents the 71% that I don’t hear the Democrats talking about inasmuch as I didn’t hear the Republicans talking about it under Bush. That’s the 71% of the US Economy (GDP). And it’s been getting jammed by the likes of Bernanke and Geithner since at least 2006. Policies to debauch the Dollar and inflate oil prices at the pump are a colossal failure of Keynesian sense.


And it’s not just US Consumption Growth that slows when food/energy prices grow. Global Growth does too. Today’s reminder from the Big 3 Macro countries that will report gravity (economic data) for July continue support that:

  1. China’s PMI (manufacturing) hits its lowest level in 8 months
  2. Germany’s PMI hits a fresh YTD low of 43 for July (versus 45 in June)
  3. USA’s PMI is due out later this morning and could easily come in the low 50s (versus 52.9 in June) 

In other words, the other side of “growth” that the Keynesians of the 112th Congress are being chastised to “stimulate” (export manufacturing) isn’t growing either. On a net basis (Exports minus Imports), exports were a negative drag on Q2 2012 US GDP.


After all this cochamamy stimuli “growth” talk and defict/debt spending, both US Consumption and Manufacturing Growth are slowing, at the same time. That’s not progress. That’s regressive. That’s why I still think the only real (inflation adjusted) “growth” solution is not doing more – it’s changing the lineup, and getting these failed central planners out of our way.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1606-1637, $102.46-105.49, $82.21-82.92, $1.20-1.23, and 1364-1385, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Geithner's Growth - Chart of the Day


Geithner's Growth - Virtual Portfolio

Fair or Foul?

“Fair is foul, and foul is fair.”

-Witches, Act 1, scene i


Today in 1057, Macbeth died. This global stock market, meanwhile, is quietly channeling its inner Shakespeare. Tragedy.


How else can you explain markets that are being cheered on to whoever will listen to the complete opposite of what the bull case was for stocks in March? What does it mean when markets go up for 6 straight weeks on no volume, and no one cares?


Fair economic news is now seen as a headwind for stocks and commodities, because the real bull case from here is foul.


Back to the Global Macro Grind


Foul? Indeed. If the bull case for America is more debt, inflated food/energy prices, and bailouts from policies that perpetuate #GrowthSlowing, that’s got a nasty short-term smell to it. It reeks of one of the darkest tragedies in US economic history - the inability of American leaders to learn, change, and evolve our policy making process.


Headline: “Romney/Ryan See Fed QE As Inflation Risk”


Really? C’mon now white boys – stop scaring the gold bugs. You may as well throw granny off her wheel chair while you are at it. There hasn’t been a Republican or Democrat ticket that has explained the relationship between a country’s currency and its People’s Purchasing Power since Margaret Thatcher taught us how to wear the conservative economic leadership pants.


Upward and onward with your centrally planned day…


The SP500 hasn’t gone up for 2 days, primarily because the US Dollar stopped going down for the last 2 days. China didn’t provide begged-for stimuli, Eurocrats are on vaca, and USA is about to have a real economic debate.


Is that Fair or Foul? And, for who?

  1. It’s foul for anything that’s highly correlated to what the US Dollar does in the immediate-term
  2. It’s fair for those of us who still believe in a free market’s ability to price all of our emotional baggage

Can the US stock market handle another 1% down day? How about another 10% draw-down like we saw from the March top to the June lows? All I can tell you is that yesterday’s -0.25% move “off the highs” felt like 1 ton of dog doo in a 10lb bag.


That’s what happens to a market that’s pinned up on short covering, has zero inflows, and is plainly hoping for another plan out of central casting. Once the shorts have all covered, short-term political tragedy is back in play.


If you don’t think Draghi, Rajoy, and Obama have some serious skin in the “but the market is up game” you are, at a bare minimum, unaware of what’s really going on backstage in this world’s political market theater. If you do, you’re probably like me – expecting the foulest of foul political moves to keep markets propped up.


“Fortune, on his damned quarrel smiling,

Showed like a rebel’s whore.”

-Captain, Act I, scene ii


In other news: 

  1. Chinese stocks dropped another -1.1% overnight and are down -2% for the wk as growth continues to slow
  2. Spanish stocks are down this morning after making lower-highs versus their August 7-8 short squeeze top
  3. Russian stocks are down -1.3% this morning as Oil struggles to make new highs (US Dollar up)
  4. CRB Commodities Index failed to overcome long-term TAIL risk resistance (307)
  5. Dr. Copper continues to be a card carrying Chinese growth slowing party member (Bearish Formation)
  6. US Treasury Bond Yields are debating the growth bulls as to whether or not this time is really different

For central planners attempting to “smooth” economic gravity, to grow, or not to grow – remains the question.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and SP500 are now $1, $110.98-115.33, $81.88-82.98, $1.22-1.24, 791-803, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fair or Foul? - Chart of the Day


Fair or Foul? - Virtual Portfolio

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