Dunkin’ Brands was shorted moments ago in the Hedgeye Virtual Portfolio. The stock is trading higher today. Our fundamental view on the stock remains bearish despite positive sell-side research on the name being published last week.
Dunkin’ bounced off its 12/14 low, buoyed by positive sell-side research reports and an investor presentation released by the company. In our view, the main issue with the company's strategy remains the same: a franchised business like Dunkin’ Donuts needs to accelerate unit growth dramatically in order to meet long term EPS targets. Neither the sell-side research nor the company release of last week provided any incremental disclosure around the company’s backlog of new unit openings. Comps present headline risk to our short thesis but we see this metric as being significantly less relevant than new unit openings for Dunkin’ going forward. As we wrote on 11/29, “WHAT DOES DNKN RUN ON?”, the investor relations section of the Dunkin’ Brands website provides scant evidence of the backlog that we believe will be required to ramp up unit growth sufficiently (to 500 annually from 220-240 guidance for FY2011).
Per Keith’s quantitative model, DNKN’s TRADE line of resistance is currently at $25.43 and the TREND line of resistance is $26.97.
POSITION: Long Consumer Discretionary (XLY)
If you need proof that US Employment and US Consumption enjoy a Strong Dollar, ask an American.
If you need proof that the US stock market is making lower-highs, just pull up a chart. The SP500 is making lower-highs on 2 of 3 risk management durations (TAIL and TRADE).
The question from this time and price is whether we break-out back above TRADE resistance (1231) or break-down below TREND (1207) support?
Across all 3 risk management durations (TRADE, TREND, and TAIL) here are the lines that matter most:
- TAIL resistance = 1269
- TRADE resistance = 1231
- TREND support = 1207
On any rally toward 1231 that fails, I’ll be considering re-shorting the SPY because being long Consumption here can only take this market to another lower-high as long as the Financials and Basic Materials/Energy stocks continue lower.
Keith R. McCullough
Chief Executive Officer
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Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".
Of the charts below, in particular we want to highlight the ECB’s SMP bond purchasing program that bought 3.361 Billion EUR last week in European sovereign issuance! This is notable due to the paltry spend two weeks prior of 635MM EUR, and is supportive of both the strong demand seen in European issuance last week, and the notable decline in peripheral yields late last week. As a reminder, Draghi continues to warn that the SMP is a temporary facility with limited firepower. While the SMP along with the extension of the LTROs should be additive to capital market gains, we don’t see the programs carrying sustained gains over the intermediate term for European capital markets.
Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 94 bps versus last week’s print of 96 bps.
ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding. Last week the facility hit its periodic low, but this level was higher than the previous cycle, indicating growing risk.
European Financials CDS Monitor – Bank swaps were wider in Europe last week for 28 of the 40 reference entities. The average widening was 2.7% and the median widening was 0.3%.
Security Market Program – The ECB's secondary sovereign bond purchasing program bought 3.361 Billion EUR in the week ended 12/16 (versus 635 Million EUR in the previous week) to take the total program to 211.0 Billion EUR.
Raising our December GGR forecast to HK$22.5-23.5 billion
Macau posted another strong week with average daily table revenues of HK$782 million versus HK$719 million last week and HK$717 million for November. For the second straight week, we are raising our full month projection, this time to HK$22.5-23.5 billion – up 23-28% over last year. It appears our near-term pessimism was unfounded.
MPEL and LVS remain the big winners in December thus far, both with market shares well in excess of trend. MPEL was the clear standout this past week, upping its monthly share 130bps from the first 12 days of the month. We are 12% above the Street for MPEL Q4 EBITDA but it now appears that even our estimate may be conservative. LVS appears on track to beat the Street by 4-5% in Macau.
THE HEDGEYE BREAKFAST MONITOR
Comments from CEO Keith McCullough
In a consensus world that was begging for the next Big Government Intervention (and didn’t get it), dead cats can still bounce:
- DEAD CATS – in real-time risk management speak, crashing is defined by draw-downs of 20% or more vs a recent high; while the dead cats didn’t bounce in Asia overnight (China -21% YTD, India -25.2% YTD etc), we’re seeing the higher impact Correlation Crash bounce (European Equities and Commodities), sort of…
- EUROPE – contextualizing a dead cat’s bounce matters; don’t forget last week alone the CAC, MIB, and FTSE were all down between -5.9-6.3%, so a +30-90bps bounce is what it is – another round of lower highs. Fitch downgrading France actually still matters to insolvent French banks who are going to have the negative P&L impact of ratings uplifts going away (higher funding costs).
- COMMODITIES – amidst all of the final countdown to year-end markup fun (or are they markdowns?), Dr Copper is down another -0.7% this morning – that’s pretty sad considering Copper dropped -6.2% last wk; Brent Oil is now in a Bearish Formation w/ immediate-term downside to $101.98/barrel; Gold’s refreshed range = $1.
In between now and the end, Deflating The Inflation through King Dollar will be good for US Consumption. The only problem between now and whenever the Correlation Crash ends is real-time prices.
CMG: Chipotle Mexican Grill’s co-CEO, Monty Moran, is making headlines as a champion of immigration reform. The Wall Street Journal is highlighting Mr. Moran’s interactions with political leaders in Washington D.C. aimed at overhauling immigration policies in the U.S.
BWLD: Buffalo Wild Wings is featured in an article in the Wall Street Journal today, pitching it as a long idea and an alternative to Chipotle Mexican Grill which is, according to the article, too expensive. The author does caution readers on the risk of rising wing prices but highlights higher EPS growth in (full year) 2009 despite elevated wing prices. This article is lacking, in our view, in that it does not highlight the risks to analysts’ expectations which, we believe, are overly optimistic. We remain bearish on BWLD for 4Q and – in particular – 1Q12.
BJRI: BJ’s Restaurants are testing a new limited-menu variant called BJ’s Grill which is about 4,500 square feet, around half the size of a regular BJ’s. One of the most noticeable aspects of BJ’s Grill is the open kitchen, separated from the 150-seat dining room by clear glass, allowing guests full visibility. Servers at the restaurant are piloting the use of wireless hand-held tablets to take orders.
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