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Don't Lie To Me

“We have the ability to lie – not just to others, but also to ourselves.”

-Dan Ariely


As I was flying back from the Fortune Brainstorm Conference last night, I was grinding through the back half of Ariely’s The (Honest) Truth About Dishonesty thinking about his aforementioned quote. With Twitter policing the pundits in real-time, and the fun cops (SEC) taking some “smart money” guys down, do we really have the ability to lie in this profession like we used to?


I like Ariely’s book because I have my own self deceptions that we’ve been building a firm around this vision of unearthing the Old Wall’s storytelling for over half a decade now. But that’s hardly the total truth. Reality is that the tectonic industry plate-shift from opacity to transparency is much bigger than I’ll ever be. I’m just a Mucker on the front lines of it all.


Wall Street was a closed-network that paid a massive premium for inside information, front-running, etc. Now that is dying on opacity’s vine as an open-network (Twitter is The New Tape) transcends accountability. There are no more “grey areas” to compound returns in. The crowd can see most things now; it can quickly conclude what is black and white.


Back to the Global Macro Grind


“We want explanations for why we behave as we do and for the ways the world around us functions. Even when our feeble explanations have little to do with reality. We’re storytelling creatures by nature, and we tell ourselves story after story until we come up with an explanation we like…” –Dan Ariely (pg 165)


So, let me tell you a story this morning…


And allow me to start with the non-fictional parts, which are called market prices. Isn’t that where I should begin? Or should I begin with a thesis on where the last market price should be? Stylistically, there’s a critical difference.


The difference is where your storytelling starts…


There’s a clear divide between how we attempt to risk manage macro market moves and how some on the Old Wall do. Never mind starting with a macro theme or thesis, some just skip all of that and hire guys who gets told by other guys what Bernanke and Co. are going to say next (yes, almost the entire old boy network is still guys).


Do I think our Global Macro Themes are good lines of storytelling? Sure. So do our clients. Increasingly I’m hearing that’s really because we don’t start with an insider’s whisper or a theme at all – we start with the market’s last price.


To review, when I say we start with last price:

  1. I’m contextualizing the market’s last price within 3 core risk management durations (TRADE, TREND, and TAIL)
  2. TRADEs are 3 weeks or less; TRENDs are 3 months or more; TAILs are 3 years or less
  3. Context (TRADE/TREND/TAIL) is dynamic (i.e. it refreshes every 90 minutes of new price/volume/volatility data)

In other words, that’s where my storytelling starts – with my own pictures of the market’s message; not with where I want the market to be. Then my analyst team and I work backwards on things like long-cycle data, mean reversion risks, catalysts, etc. in order to probability weight whether or not there are any themes to discern.


Does this risk management process prevent me from making mistakes? Of course not. From a macro risk manager’s perspective though, I’d say that having the humility to start my every day with what Mr. Market thinks has prevented me from making the really big macro mistakes. But that’s just my version of the story.


In other news, #StrongDollar is still bad for Gold bulls:

  1. US Dollar Index = +0.4% yesterday; Gold -2%
  2. Immediate-term TRADE correlation between USD and Gold is still -0.91
  3. Long-term TAIL risk correlation between USD and Gold is still -0.87

I can tell you some great stories about #StrongDollar, Strong America – and I can remind you that the combination of #RatesRising and #StrongDollar is both the enemy of Gold and growth fears…


But I’ve already used up my best content on that.


The market’s 2013 macro message is trumping pretty much everything the Old Wall consensus wanted it to be. If you waited for the super secret insider whisper that Bernanke is going to taper, you were late. Mr. Market didn’t lie to me.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.47-2.71%


VIX 11.89-13.46

USD 81.98-82.85

Gold 1

Copper 3.11-3.21


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Don't Lie To Me - Chart of the Day


Don't Lie To Me - Virtual Portfolio


This note was originally published July 11, 2013 at 14:51 in Restaurants


Despite the significant volatility the company has faced since December 2012, YUM’s long-term growth story remains intact.  Yesterday’s earnings release suggests that the fallout from the chicken supply scandal and Avian flu issues are abating. 


Though we will wait for further confirmation on the near-term duration, we remain confident that the long-term upside for YUM shares represents an attractive opportunity for investors willing to look past the near-term issues.  The talk of the earnings call today quickly transitioned away from the poor results in China and toward the timing of the expected recovery in sales and margins. 




2Q13 Recap

The stock traded sideways as expected.  YUM reported 2Q13 EPS of $0.56 (-16% YoY) vs. Street consensus of $0.54.  During the second quarter, YUM demonstrated impressive COGS and labor controls.  The company maintained its guidance for the balance of 2013, including a 4Q turnaround in China same-store sales trends and a mid-single digit decline in 2013 EPS.  Importantly, trends in China continue to improve with June same-store sales down only 10% after coming in down 20% in May.


Other 2Q Highlights

  • The effective tax rate, prior to one-time items, decreased from 23.9% to 22.1%. This decrease positively impacted EPS results by 2%.
  • Same-store sales grew 1% at YRI and 1% in the U.S.
  • Both YRI and the U.S. had 80bps of restaurant margin expansion.
  • Operating profit declined 63% in China, while it increased 12% and 4% in the YRI and U.S. divisions, respectively.
  • China restaurant level margins fell 500bps in the quarter to 10.6%. 
  • Total international development included 315 new restaurants, with 76% of this development occurring in emerging markets.



The largest short-term risk to the YUM story comes from the built in expectations that China will turn the corner in 4Q13.  China’s June sales trend was only down 10%, indicating that sales are beginning to recover and moving in the direction of current expectations.  With Pizza Hut’s June same-store sales coming in at 6%, it is clear that the brand continues to build momentum.  Although the KFC numbers leave much to be desired, the comps appear to have bottomed out earlier this quarter.  Same-store sales have improved over the course of the quarter, moving from down 26% in April to down 13% in June.  We believe that China is on track for flat to positive same-store sales trends coming out of 3Q13 and positive trends early in 4Q13.    





Rest of the World

The YRI and U.S. segments of the business continue to be solid performers and contribute to YUM’s growth profile.


YUM’s YRI Division reported 1% same-store sales growth, led by 5% same-store sales growth in emerging markets.  This performance was somewhat offset by weakness in the developed regions where same-store sales fell 1%.  

  • Emerging markets system sales grew 12%, driven by 8% unit growth and 5% same-store sales growth.
  • Developed markets system sales grew 1%, driven by 1% unit growth; this number was partially offset by a 1% decline in same-store sales due to weakness in Japan and the UK.
  • Restaurant margin increased 0.8% and operating profit grew 12% in the region.
  • YRI is on track for a record amount of openings this year and continues to benefit from recent asset sales.
  • Opened 205 new units in 50 countries, including 129 new units in emerging markets.


YUM’s U.S. Division reported 1% same-store sales growth, led by 2% and 3% same-store sales growth at Taco Bell and KFC, respectively.  Taco Bell continues to be one of the strongest brands in the QSR segment.  The brand was able to increase same-store sales despite facing a 13% comparison from last year.  Same-store sales fell 2% at Pizza Hut in the second quarter. 

  • USA same-store sales increased 1%.
  • Taco Bell same-store sales increased 2%.
  • KFC same-store sales increased 3%.
  • Pizza Hut same-store sales decreased 2%.
  • Restaurant Margin improved 0.8%.
  • Operating profit increased 4%.










Similar to the rest of the restaurant industry, YUM’s valuation appears stretched.  We intend to issue a report card on YUM’s road to recovery as the company continues to report monthly same-store sales trends in China.  YUM’s long-term development plans in China remain intact, particularly as the company begins to focus on establishing Pizza Hut locations in lower tier cities.  We believe that the Street will soon shift its focus away from the recent negative results in China and will begin to focus on 2014 and the timing of a margin recovery.









Howard Penney

Managing Director





In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance



  • IN-LINE:  Low hold in Vegas and Singapore prevented LVS from meeting our estimates. While management was bullish about Macau, they were more subdued regarding the outlook for Vegas and Singapore

LVS 2Q 2013 REPORT CARD - l1





  • BETTER:  win per table per day reached almost $17,000 (21% YoY) even as average tables grew by 74 
  • PREVIOUSLY:  "We're yielding at the Venetian $12,000-plus a table last quarter. Obviously, we need more tables going forward. Even if we're doing 400 tables, we probably could use another 50 or 100. The junket yields are just down across the market because no matter who you are, you're not getting the yield per table. But we just simply follow the trends. It's hard to predict, but the good news is the government's very helpful, allowing you to move tables around."


  • SAME:  Parisian is on track to open in late 2015
  • PREVIOUSLY:  "Based on our current construction schedule and subject to timely government approvals, we're still targeting the opening of The Parisian for late 2015."




  • BETTER:  VIP volumes grew 25% YoY.  Mgmt attributed the strong performance to $1MM bets.
  • PREVIOUSLY:  "Our VIP business remains okay. I mean, we did have a great quarter, $18 billion, but we always tell people it's a very concentrated segment that you can't predict quarter-to-quarter. It's $1,000 – $2,000 accounts that really matter in that segment. So, it's highly concentrated."


  • SLIGHTLY WORSE:  Mass win per day declined slightly YoY to $4.51MM 
  • PREVIOUSLY:  "We'd like to target to get that mass market business back up to about $4.6MM or more a day."


  • WORSE: mall revenues fell 4% YoY.  As more retail opens up, mgmt believes occupancy should improve.
  • PREVIOUSLY:  "The mall continues to get better and better, and we leased that during a rather difficult time. And as we keep changing out tenants, that gets better by the day and that's a wild asset. The upside of that mall, I think, is yet to be seen."


  • SAME:  slot handle was flat as the market continues to be pressured by govt restrictions on local play
  • PREVIOUSLY:  "Slot segment continued to show weakness. And that's because Slots is primarily driven by the local market, which has not recovered."


  • SAME:  expects a bill in November.  There may be a restriction that limits the time to build the new casino to two years.
  • PREVIOUSLY:  "There's a lot of noise about Japan, about 100 people in the legislature wanting to get legislation as early as November."

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In-line quarter after adjusting for Singapore low hold. Management very bullish on Macau




  • 4.6 million visits to Sands China, 40% increase YoY
  • 2Q Macau VIP RC share 17.4% vs 14.8% year ago
  • Venetian Macau leads in Macau visitation 
  • Sands Cotai Central visitation (40,000 visits per day) increased 142% YoY
  • Parisian Macau substructure under construction; based on timely govt approvals, timing for opening is late 2015
  • Korea still has potential
  • Madrid - still need govt approvals and finalization of land grants

Q & A



  • SCC ramp up:  big driver was mass business; cross-traffic between SCC and Venetian continues to build; 
  • SCC hotel occ lower yoy:  as they get more retail, occupancy should increase
  • Four Seasons condo sales:  lining up project mgmt and sales team; no further govt approvals needed
  • Consumer trends:  going in right direction; macro concerns in China not affecting Macau 
  • Junket operators extending credit? Does not believe strong VIP growth is driven by credit
  • Mass table yields:  flattish even as number of mass tables increases; will keep on adding mass tables 
  • Slot ETG yields declining as number of ETGs decline; still believe $1BN ETG market as an aggregate
  • Four Seasons:  transitionary period; moving into premium-mass, direct play business  
  • Better infrastructure driving Macau visitation growth; excited about HK-Zhuhai-Macau bridge
  • Labor shortages?  No.


  • Low Singapore hold %:  5th quarter below 'average' - no concerns about that; will go back to 2.85% over time
  • VIP Volume:  $1MM bets are contributing to the strong volume; still same source of customers (mainly Mainland China/Hong Kong); 
  • Slot ETG: govt more restrictive of local play; have been challenging (less S'pore visitation offset by more visitation by Mainland Chinese, Indonesian); remains confident there will be some growth there


  • Las Vegas needs to grow ADR, optimistic on 2014; gaming dependent on high-end Asian players; slot/table businesses have been 'mediocre'
    • CZR has been undercutting LVS, WYNN in room rates
  • CFO search:  in final stages
  • Japan:  gaming bill will be submitted in November; there may be a limit where the casino has to be built in two years

RAI Results Mention E-Cigs and The FDA on Menthol

On what continues to be nasty volume trends across the cigarette industry, RAI reported relatively solid results in Q2. Despite volume declines of -6% (above the industry average of -6.1%) and RAI's total market share down 0.3% to 26% versus the prior-year quarter, the company was able to offset volume declines by pricing and strong performance from Camel and Pall Mall, its two growth brands in the premium and value categories, respectively, and positive results from Camel SNUS (80% market share) and moist-snuff leader Grizzly that saw brand share up 1.0% in the quarter.


We’re optimistic on RAI’s 2H performance due to the migration and growth of smokeless tobacco and e-cigs as contributing factors offsetting declining cigarette volume trends and tougher comps in the back half of 2013.


We do expect cigarette volume declines to persist. The company expects volumes to decline 4-5% for the year and cited such contributing factors as: ongoing weakness in the economy, high unemployment, higher retail prices, and tougher comps given lower volume declines last year (-2.3%), and growth in smokeless tobacco and smoke-free technologies like electronic cigarettes (e-cigs).



On e-cigs: the company looks to continue to invest in its e-cig brand VUSE in the back half.  Interestingly, it opened its earnings call by underling that it’s excited that VUSE is expanding into its first major market, Colorado. In the Q&A, the company noted that VUSE will grow to have a commanding presence in the e-cig market, already out in 500 retail stores in the first week, with a flavor profile it calls superior to its competitors.


On industry trends, it claims it’s too early to talk about the consumer response, but said retailers are extremely positive. It noted that while e-cigs have strong trialing, so far the conversion is low. RAI also said that while its products may have product displays at retail that are available to the customer, it’s a clerk-assisted sale with the actual product housed behind the counter.



On Menthols and the FDA: Yesterday the FDA released a second review on menthol cigarettes that essentially reached the same conclusion of its first: menthol cigarettes appeal disproportionately to younger smokers and are more addictive than other cigarettes. This is noteworthy given that one-third of RAI’s total cigarette volume is menthol.


RAI took numerous questions on its outlook and strategy given the announcement, but its only main response was it will continue to review the proposed rule making before responding. 


In response to the first report, Big Tobacco filed its own report with the FDA, making the case that menthols pose no different risk to public health than any other cigarette and therefore should not be subject to special regulation. It also sued the FDA over the experts it had appointed to the Tobacco Products Scientific Advisory Committee tasked with the 2011 study.


We’ll be monitoring both the regulatory and company actions in response to this release.



Results: On the quarter, EPS beat consensus by one cent at $0.84. Revenue was lighter at $2.18B vs the Street at $2.19B, and increased 0.1% versus the prior-year quarter. RAI repurchased 3.1 million shares for $150MM.  On the year, RAI reaffirmed EPS ex-items of $3.15-3.30.



Matthew Hedrick

Senior Analyst

China: Dour Indeed

Consistent with our recent work, the Chinese growth outlook for the remainder of the year appears rather dour indeed.


China: Dour Indeed - China PMI


This is evidenced by this morning’s data, which showed manufacturing growth hitting an 11-month low in July. Asian markets were mostly lower on the news, with the Shanghai Composite falling 1.3%.


The consensus response (i.e. “Must… Stimulate… Now…”) remains largely offsides. Pulling forward railway construction won’t move the needle on Chinese growth. In reality, all it does is create a vacuum of reduced outlays to muddle through on the back-end. 


Still, we don’t want to be short anything that even remotely resembles a stimulus package. The buy-side is trained to buy stimulus now, and ask questions later.


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