Takeaway: Kicking the can down the cliff is good – for now.

As quickly as the quantitative RISK MANAGEMENT signals told us to get defensive last Thursday, they were telling us to get offensive as of this Monday. Back in a Bullish Formation, the US equity market (SPX), likes what it sees with regards to this latest #KeynesianCliff compromise. Highlights include:


  • The marginal tax rates for the wealthiest ~2% of Americans (i.e. individuals making more than $400k per year and households making more than $450k per year) have reverted back to the Clinton-era peak of 39.6%;
  • These income thresholds will also be applied to an increase of the capital gains and dividend tax rates to 20% from 15%;
  • The estate tax rate will rise +500bps to 40% while maintaining the existing threshold of $5 million;
  • The AMT will be permanently fixed;
  • Unemployment benefits will be extended by one full year; and
  • The $110 billion sequester of spending cuts will be delayed for two months – just in time to be used as political leverage during pending debt ceiling “negotiations”.


Regarding the aforementioned “negotiations”, President Obama has repeatedly stated that he refuses to negotiate with Congressional Republicans on meaningful entitlement reform amid debt ceiling talks. Moreover, he continues to stress that further deficit reduction must come via his politically-compromised definition of a “balanced” approach. Having caved to some degree already, we highly doubt the GOP brass sees eye-to-eye with Obama on either stance.


As a result, you are officially invited to look forward to more political theater in t-minus ~8 weeks (on the off chance you didn’t get your fill this past holiday season). Only this time, the stakes are much, much higher – an unlikely, but potential US sovereign default.


Looking deeper into the latest fundamental RESEARCH signals, this deal to avert the full plunge of the Fiscal Cliff is positive for the US and global economy on an immediate-term TRADE and intermediate-term TREND basis – particularly relative to the now-moot fiscal doomsday scenario. This morning's sequential acceleration in the ISM Manufacturing PMI to 50.7 in DEC (from 49.5 prior) is also positive and supportive of our directionally-positive views on global growth.


On a long-term TAIL basis, however, this deal is likely to be viewed by many as explicitly bearish for the US dollar – particularly relative to expectations of meaningful fiscal reform. By some estimates, this latest deal is good for only $600 billion of deficit reduction over the next 10 years – a sharp decline from previous negotiations in the area code of $4 trillion.


As we have said time and time again, what’s bad for the US dollar is also bad for sustainable economic development, as well as the long-term prosperity of the US economy. Two critical factors that continue to register near-perfect inverse correlations to USD debauchery in our model are current POLICY volatility and uncertainty regarding future POLICY. The confluence of those factors tends to get manifested in two very distinct ways:


  1. Shortened economic cycles; and
  2. Amplified financial market volatility.


Prepare your proverbial “anchor” for both in about a couple of months. For now, enjoy the melt-up as we kick off what is sure to be an eventful 2013. Best of luck out there!


Darius Dale

Senior Analyst



GOLD: Pressure On Pawns

As commodity prices continue to deflate as growth stabilizes, we think that gold is likely to continue to fall in price and that will act as a headwind for pawn operators like EZ CORP (EZPW) and Cash America (CSH). It’s not just falling gold prices that will create problems for pawns going forward; gold volume also plays a significant role in the equation. Consider the “Cash 4 Gold” craze thats occurred over the past few years. With fewer customers coming in to sell gold, pawns that rely on gold and jewelry as a substantial part of their revenue will feel the pressure immediately. It’s important to keep an eye on the first quarter of 2013 as companies like CSH and EZPW are likely to feel the pain.


GOLD: Pressure On Pawns - image001

Macau Hits It Big

Macau closed 2012 out with a bang, with monthly gross gaming revenue up 20% year-over-year to HK$27.4 billion. Our estimates were that December would be up a strong 12% and that was before the month started; clearly our estimates were conservative. The killer growth can be attributed to higher VIP hold as well as other factors. 


There is now a serious issue regarding the smoking restrictions for casinos in Macau that has now taken effect. It appears the government is taking this very seriously and has already issued a number of fines on the first day of the ban. We expect that this will have an impact on hold percentage over time; if people have to go to a designated area or outside to smoke, that takes them away from the tables.


Macau Hits It Big - macauhold

HedgeyeRetail: SSS & ICR Pre-announcement Scoreboard

With the turn of the New Year so to comes ‘Pre-announcement Season’ with Sales Day and the annual ICR XChange conference set to take place over the next two-weeks – tomorrow and January 16-17th respectively. Historical context provides an interesting picture and precedent of pre-announcements over this period. As such, we’ve updated our pre-announcement scoreboard reflecting the more notable retail companies that will be present in Miami.

Companies that have issued positive releases are highlighted in green while those with less positive news are highlighted in red and reaffirmations of prior outlooks in grey. It’s worth noting that last year marked a significant increase in the number of pre-announcements from the sample set below jumping to 26 compared to a typical range of 12-18 between 2008-2011. The incremental delta came primarily from companies not participating in Sales Day more than doubling to 16 compared to ~7.5 on average during the prior four years. We expect this year’s pre-announcement activity like last year to be at least as active as we’ve seen in recent years.

If history is any indication, PVH, GCO, NWY, BGFV, and ASNA are most likely to pre-announce results over the next two weeks. The following are the only companies to never issue guidance: CAB, OXM, SHOO.

Other notable new additions and departures relative to last year’s ICR schedule include the additions of KORS, TUMI, TJX, and exclusions of FINL, BWS, SKX, MW.



HedgeyeRetail: SSS & ICR Pre-announcement Scoreboard   - ICR Preann 1 2 13




As we head into 2013, our perspective on casual dining versus quick service remains unchanged; we continue to favor QSR as over-supply, higher fixed-cost structures, waning consumer perceptions, and changing competitive dynamics hamper the performance of casual dining.  Add to these original components of our thesis the fact that Darden has signaled its intention to begin a price war, and we believe that investors should be highly selective when taking long positions in casual dining.


Below we go through some of the calls we made in 2012 and what our view is on those stocks from here. 





Buffalo Wild Wings was the first call we made in 2012.  Our timing left a lot to be desired but, as the chart below illustrates, the stock underperformed over the course of the year.   Our thesis ultimately played out and, while we would wait for a higher entry point, we still believe there is more downside to this name.  The current price target being forecast by the street seems overly optimistic and we expect more opportunities in this name, on the short side, down the road.


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  BWLD is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $73.66 and $76.64, respectively. 


KEY IDEAS AND LEVELS - bwld index vs cd


KEY IDEAS AND LEVELS - bwld share price



Darden Restaurants is a great company but we identified its shares as being overvalued in July when we published our highly-contrarian blackbook, “DRI: THE UNTHINKABLE SHORT CASE”.  While management has highlighted one possible solution that we highlighted in our blackbook, the company’s heretofore-over-protected margins, it will likely take several quarters for the turnaround to take hold.  The rate of unit growth, specifically, is counter-productive to delivering strong returns on incremental invested capital.  We remain bearish on DRI although the easy money has been made with the dividend yield now at 4.44%.


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  DRI is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $47.54 and $51.17, respectively. 


KEY IDEAS AND LEVELS - dri index vs cd







Yum! Brands is our most recent long idea in the restaurant space.  We held a conference call on 11/29 which outlined our bullish stance.  We continue to see YUM as an attractive opportunity on the long side in 2013.  The company is better-diversified than SBUX and MCD, in our view, and the recent sell off provides a compelling entry-point for investors looking for an intermediate-to-long-term position in global retail.  An improving US business should continue to complement strong international unit growth in 2013.  Recent news related to a KFC China chicken supplier and its excessive use of antibiotics in its feed has pushed YUM shares lower but we see the most important fundamentals related to the stock as positive from here.


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  YUM is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $67.45 and $68.81, respectively. 


KEY IDEAS AND LEVELS - yum index vs cd





Jack In The Box was our favorite quick service stock this year.  From May, we were highlighting what we saw as an asymmetric setup for JACK shares over the next three years.  We still believe that the core components of that thesis are firmly intact and, as a bonus, skepticism of our thesis is as high as ever.  After the most recent earnings call, we published on 11/20 that we believe there is upside in the stock to $40 over the next three years, by our fundamental analysis.   


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  JACK is in a bullish formation with near-term TRADE and intermediate-term TREND support at $27.88 and $27.11, respectively. 


KEY IDEAS AND LEVELS - jack index vs cd


KEY IDEAS AND LEVELS - jack levels



Brinker has been one of our best ideas over the last couple of years but, of late, it has not been working as well as we would like.  EAT remains our favorite stock in casual dining but, given industry-wide factors, we would advise patience on the long side as the full impact of Darden’s price war and other factors are felt across the group. 


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  EAT is in a mixed formation with near-term TRADE support at $30.21 and intermediate-term TREND resistance at $31.93. 


KEY IDEAS AND LEVELS - eat index vs cs





Howard Penney

Managing Director


Rory Green

Senior Analyst





As you probably know, Macau set a record for monthly GGR:  HK$27.4 billion, up almost 20% YoY.  You may recall that we thought December would be up a still strong 12% before the month started and that estimate proved conservative.  We should have the detail in the next day or two but we’ve heard consistently that VIP hold was likely higher than normal which may have contributed significantly to the YoY growth.


Market shares were mostly unchanged from last week with the exception of Wynn gaining some share back, mostly at the expense of MPEL.  For the full month, LVS and MGM were the winners relative to trend while Wynn and SJM were the losers.


We’ve got some initial feedback on the smoking restrictions that went into effect on 1/1/12.  The Macau government is taking the restrictions seriously and had some Dep’t of Health officials on hand.  It’s only been 2 days but our sources on the ground have indicated that traffic remains strong and while there have been some fines issued to players, the implementations have gone fairly smoothly.  It is very early and we suspect the real impact will be seen in the productivity and efficiencies and hold percentage.





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