Huge month with some share shifts, mostly related to hold. Feb promises to be a big month again but there are warning signals ahead.



January marked the sixth month of big y-o-y growth in Macau.  Total revenues grew 63% y-o-y, with VIP leading the charge up 77%, followed by Mass revenues growing 42%, and slot revenues growing 20%.  Melco was the clear share taker in the month, while WYNN was the clear share loser.  Luck was a primary factory for Melco's fortune and Wynn's misfortune.  MGM also gained back what it lost last month in market share while Galaxy did just the opposite. 


As we've written about in several recent notes, February promises to be bring another hot month with the calendar shift of the Lunar New Year and an easy comparison with Feb 2009 seeing a 14.5% revenue drop.  We expect a deceleration of growth in March and balance of the 2010 has comparisons become more difficult and the effects of bank tightening start showing some impact on the broader Chinese economy and trickling down to Macau.  The other issue may be more a big VIP market share battle initiated by SJM.  More on that in an upcoming post.



Y-o-Y Table Revenue Observations:


LVS table revenues up 64% with most of the growth coming from 103% increase in VIP revenues and 21% growth in Mass

  • Sands was up 73%, driven by a 137% increase in VIP and 19% growth in Mass
    • VIP growth was largely driven by easy hold comparisons.  Sands suffered weak hold in January 2009 of around 1.7%, assuming 10% direct play.  If we assume 12% of total VIP play was direct in Jan '10, this implies hold of 3.36% 
    • Junket VIP RC increased 28%
  • Venetian was up 41.5% with VIP increasing 58% and Mass increasing 20%
    • Most growth in VIP was driven by easy hold comparison.  Hold was weak, roughly 2.6% assuming 17% direct play in Jan 2009, vs. an estimated 3.65% hold assuming 20% direct play in Jan '10
    • Junket VIP RC increased 12.6%
  • Four Seasons was up 259% y-o-y driven by 531% VIP growth and 39% Mass 
    • Junket VIP RC increased more than five-fold to $858MM vs $137MM.  In 3Q09 FS also derived 50% of its RC from direct play versus having almost no direct play in 1Q09.  Therefore, if the direct play is material, volumes could be up even more y-o-y than the junket numbers imply


Wynn table revenues were up 27%, almost entirely driven by a 35% increase in VIP, while Mass revenues were only up 2%

  • Junket RC increased a massive 115%, however weak hold coupled with difficult hold comparisons, masked Wynn's share gain on the VIP side.  Assuming 12% direct RC play in Jan 09, Wynn's hold rate was 4.1% vs. 2.6% in Jan 2010 assuming 13% direct play
  • Wynn is battling the the impact of the loss of a VIP operator in mid-December and the departure of property's #2 marketing individual


Crown table revenues grew 144%

  • Altira was down -0.6% (the only property in Macau with lower January revenues) due to challenging hold comparisons
    • VIP RC was up 28% and hold was normal at 2.8%, however, hold was 3.7% last January
    • Mass win was very strong, up 58% y-o-y
  • CoD table revenue was up 83% sequentially, benefiting from better volumes and much better sequential hold
    • Mass ramped 25% m-o-m to $31MM
    • Junket VIP RC grew 24.5% sequentially. 
    • If we assume 20% direct play at CoD (in line with what MPEL said on their earnings call), then total VIP RC would be $3.5BN and hold appears to be quite high, at 3.7%, meaning any extrapolation of the $40MM of EBITDA MPEL did in Jan would result in a gross overestimation of the company's earnings power for 2010 and coming quarter.  If direct play was 20% in December, then the hold would only have been 2.2%. 


SJM continued its hot streak, with table revenues up 78%

  • Mass was up 53% and VIP was up 96%
  • SJM is being very aggressive on junket pricing


Galaxy table revenue was up 32%, driven by a 34% increase in VIP win and a 19% increase in Mass

  • Starworld's table revenue was up 60%, driven by 67% growth in VIP revenues and 21% growth in Mass win


MGM table revenue was up 61%

  • Mass revenue growth was 30%, while VIP grew 72%



Market Share:


LVS share's was up 20bps sequentially at 21.23%

  • Sands' increased 10 bps to 7.1% sequentially
  • Escalators and walkways from Ferry Terminal to competitor Oceanus are not yet complete
  • Venetian & FS share increased 10bps to 14.13%

WYNN's share dropped to 12.9% from 16.5% share in December

  • We attribute the market share change mostly to luck. In January we estimate that hold was only 2.6% while we estimate that December was roughly 3%. Wynn has suffered from poor hold in 3 of the last 4 months, which explains why their average share has been below prior averages
  • Departures discussed above probably hit VIP turnover a bit


Crown's market share increased by 5% from 10.9% in December to 15.9%

  • Like Wynn, hold was largely responsible for the massive share shifts here


SJM's share decreased to 30.9% from 31.9% in December


Galaxy's share dropped slightly to 10.4% from 13.3% last month

  • Starworld's market share fell to 8.15% from 10.4% in the previous month


MGM's share increased to 8.65%, from 6.3% in December



Slot market commentary:

  • Slot win grew 20.7% y-o-y to $80MM
  • Melco's slot win grew 87% y-o-y with the addition of CoD, LVS's slot win grew 21% y-o-y, and MGM's slot win grew 43% y-o-y
  • The other 3 concessionaires had paltry growth in slot win y-o-y, with Wynn's actually decreasing 5% and SJM's only increasing 1%, while Galaxy's increased 9.4%

MACAU JANUARY DETAIL - Macau Total Bac Rev Share  Feb 2010


MACAU JANUARY DETAIL - Macau MM Rev Share  Feb 2010


MACAU JANUARY DETAIL - Macau RC Turnover Share  Feb 2010



February 8, 2009


The post-mortem on last week’s retail sales and subsequent earnings revisions shows us that the group needs to find some way to grind the 27% NTM expected growth for retail higher. Otherwise, I’m open to suggestions as to how a 20x P/E is sustainable.





Let’s take a post mortem on one of the more gut wrenching retail sales days in recent memory. As we all know, numbers came in better than guidance across the board, and largely better than most spoken expectations.  But with the precipitous sell off on the event, it just goes to show that Retail is at a place right now where it needs a LOT of good news to take the group higher in aggregate. We still think that this will be the year marked by a massive bifurcation between the quality and the junk (and some new names will fall in and out of each category).


Despite such solid numbers, and the first uptick in the earnings revision factor in 10 weeks, we actually saw the expected 12-month forward growth rate (bottom up) for retail flatline at 27% -- also the first time since mid-November this rate did not climb. Translation, any continued evidence that the expected growth rate will not grind higher will make it all the more difficult to sustain the 20x P/E for US Retail.










  • In one of the more interesting M&A transactions of late, LA based J Brand Denim was sold to a group of investors led by Star Avenue Capital and Irving Place Capital.  Hollywood agent powerhouse Creative Artists Agency was also listed as an investor.  Given the involvement of the talent agency, we expect we'll be seeing many more celebrities wearing the jeans.  Product placement coming as well…
  • Launching at New York Fashion Week, women's "slimming" intimates brand Spanx is introducing a mens line.  The line of compression undershirts is being marketed as having benefits which include firming the chest, flattening the stomach, improving posture, and eliminating bulk under clothes.  Shape-ups watch out…
  • With Valentine's Day approaching it's worth sharing some "candy" facts.  Nearly 71 million pounds of chocolate candy is sold during the week leading up to Easter. By comparison, only 48 million pounds of chocolate candy is sold during Valentine’s week. Halloween sees the most chocolate candy sales, with nearly 90 million pounds of chocolate candy sold in the final week of October.
  • During the commercial breaks at the Super Bowl last night Dockers paid the big bucks for an interesting advertisement  The 98 second Dockers “I wear no pants” commercial promised free pants at  For those who sought free pants, there was serious disappointment as the website was initially down due to overload of volume and then once you finally got access to the site there was only a chance to win by signing up.  If you want to get a sense of how successful the ad was, just google “dockers free pants.”
  • In what has become a customary move for the company, DICK's Sporting Goods sent an email blast ad for championship merchandise shortly after the Saints won the Superbowl. The email was sent roughly and hour and fifteen minutes after the final whistle. By contrast, the company hit the send button on a similar email only 30 minutes after the New York Yankees won the World Series this past fall. The relative lack of speed to market with the New Orleans Saints email was most likely the result of the lack of certainty over the outcome of the game down to the final minutes. In contrast, the Yankees were  up three games to two at the time, meaning that only they could have clinched that night. The email, titled "Congratulations, New Orleans - Get Your Locker Room Gear Now!", featured a free shipping campaign whereby all eligible purchases over $69 dollars qualified.
  • Following two 10-second spots from Skechers during the game and Reebok marketing its new ZigTech sneakers from a giant yacht docked in Ft. Lauderdale, the toning category got even more exposure over Super Bowl weekend. With a struggle for advertising dollars evident by the abundance of network ads and movie preview spots, there is little doubt SKX was able to negotiate a discount to the ~$3mm 30-second spot sticker price. By using its current campaign for the spots (instead of new creative), we estimate SKX's cost at approximately $1.5-$2mm, or $0.02-$0.03 in EPS.




Bon-Ton Promotes Pair - Kiki Lockwood has been appointed senior vice president and general merchandise manager of ready-to-wear at The Bon-Ton Stores Inc. She succeeds Joyce Armeli, who was named to the same post in the center core and children’s areas. They report to Tony Buccina, vice chairman and president of merchandising for the York, Pa.-based department store group. Armeli replaces Therese Callahan, who is retiring after a more than 40-year career, including the last three years at Bon-Ton. Lockwood joined Bon-Ton in 2002 and had been vice president and divisional merchandise manager of women’s better sportswear. <>


Burberry to Live Stream 3-D Fashion Show - Taking a few cues from “Avatar,” Burberry will live stream its fall runway show in 3-D in four major cities. While models hit the catwalk at the Chelsea College of Art & Design in London on Feb. 23 at 4 p.m., select guests in New York, Paris, Dubai and Tokyo will be adjusting their 3-D glasses in customized screening spaces designed by chief creative officer Christopher Bailey. Attendees in Los Angeles will also catch every last turn, though the start time will be 7 p.m. PST due to the time difference. This five-city visual bonanza will mark the first time a brand has broadcast live simultaneous events in 3-D worldwide. Viewers will be welcomed in New York at Skylight Studios, in Paris at a Colette-hosted event at L l’ecole des Beaux Arts, in Dubai at The Address, in Tokyo at a “Burberry Night” at a yet-to-be-identified club and in Los Angeles at Milk Studios, where Tina Brown of The Daily Beast will host the festivities. <>


Kenneth Cole to Reach Turkey in New Deal - As part of a strategy to further broaden its worldwide business, Kenneth Cole Productions, Inc. inked an exclusive retail licensing deal with The Park Bravo Group, the Turkey-based firm that operates Park Bravo and Park’s stores, and has licensing partnerships with such brands as Nine West, Enzo Angiolini, AK Anne Klein and La Senza for the Turkish market. In the agreement, Park Bravo will distribute and market Kenneth Cole New York men’s and women’s clothing, footwear and accessories in Turkey. The deal will kick off with two Kenneth Cole New York retail stores in Istanbul, slated to open next month. <>


Martin + Osa President Exits - Laura Dubin-Wander, president of Martin + Osa, has left the company, WWD has learned, raising more questions about the future of the specialty division of American Eagle Outfitters Inc. An American Eagle spokeswoman confirmed Dubin-Wander departed a few weeks ago and a new president was not named. Dubin-Wander’s duties were assumed by Chuck Chupein, chief operating officer. Dubin-Wander, who could not be reached for comment, had been Martin + Osa’s president since April 2007. Previously, she had been president of Dana Buchman and Laundry by Shelli Segal. Dubin-Wander also worked at Victoria’s Secret Catalogue as a director of merchandising and as a buyer at J. Crew.  <> lets customers buy clothes when not on its e-commerce site -, an apparel merchant focusing on independent fashion and designers, is targeting fashion shoppers on sites they’re likely to visit and enabling them to purchase products without leaving the page they’re on. It’s doing so through ShopAds, online and mobile display ads from Adgregate Markets that, when clicked, create an entire e-commerce experience—from product page through checkout—within a screen overlay that shows up above a web page. Moxsie is using ShopAds to bring limited-time deals through highly targeted ads on fashion web sites like ShopAds allow Moxsie to acquire new customers and increase brand engagement by allowing impulse shopping from fashion shoppers looking for new styles and deals, Adgregate Markets says.  <>


Ocado May Be Valued at Up to $1.9 Billion in IPO - Ocado, a U.K. grocery delivery company, may be valued at as much as 1.2 billion pounds ($1.9 billion) when it lists shares on the London Stock Exchange in May, the Sunday Times reported, without citing anyone for the information. The company plans to appoint three investment banks by the end of this month to advise on the initial public offering, the newspaper said, citing unidentified London financial “sources”. Goldman Sachs Group Inc., UBS AG and JPMorgan Cazenove are among the frontrunners, the Times said.  <>


Bebe Stores to Debut Kardashian-Inspired Fashion Line - A new apparel collection will launch soon at Bebe stores nationwide, inspired by E! Entertainment reality stars Kim Kardashian, Kourtney Kardashian and Khloe Kardashian-Odom. The line, called Bebe-Kardashians, features dresses, skirts and tops. The collection hits U.S. Bebe stores mid-February and will be followed by an international launch. The apparel retails from $59 to $129. "A partnership and design collaboration with Kim, Kourtney and Khloe is such an innate fit for Bebe," says Manny Mashouf, founder and chief executive officer for Bebe. "They exude an attitude that is exactly what today's modern woman is—or aspires to be—confident, desirable and feminine. All three are in the know and have each contributed in their own way to the design and styling of the Bebe-Kardashians collection." Bebe-Kardashians will debut Feb. 16 during New York Fashion Week at Style360. <>


Super Bowl Sidelines: Commercial Earnings Through the Years -

$311.8 million: spent by Anheuser-Busch, top Super Bowl advertiser, 1

$213 million: total ad revenue from Super Bowl XLIII, 2009

$39 million: total ad revenue from Super Bowl XXIII, 1990

$3 million: cost of a 30-second Super Bowl commercial, 2009

$700,000: cost of a 30-second Super Bowl commercial, 1990

59%: share of U.S. adults planning to watch Super Bowl XLIV

46%: portion of U.S. adults who enjoy the game more than the commercials

13%: share of U.S. adults who enjoy the commercials more than the game

$1 million: Doritos’ award to two unemployed brothers for creating Doritos’ Super Bowl spot in 2009, rated tops in USA Today ad meter



Super Bowl Merchandise and the Bets Behind It  - Shirts on sale the day after the Super Bowl in 2008, won by the New York Giants. Super Bowl items are expected to reach $100 million in sales this year. Though the experts considered the Colts the favorite to win,, a Web operation in Florida that is licensed to sell official Super Bowl merchandise, preordered more Saints material, assuming that the interest would be much greater if the Saints won. The Saints were a better story, said Richard Perel, the company’s vice president for Internet advertising, and they had never even appeared in a Super Bowl, as opposed to the Colts, who last won in 2006. In times past, it was mainly local retailers who had to gear up for the flood of fans thrilled by victory and eager to shop on the day that is the, well, Super Bowl for sports merchandise. The N.F.L. estimates retail sales this year of $100 million in Super Bowl-related merchandise. <>


Reebok Debuts ZigTech - On March 11th, Reebok allows athletes to find out with the highly anticipated launch of ZigTech, the brand’s most technically advanced running and training shoe. ZigTech allows your key leg muscles to do less, so you can do more. Simply put, it’s like an energy drink for your feet.  “Wearing ZigTechs give players a bounce, an energy that lets us train longer with less strain on key leg muscles, like shins. This ultimately enables athletes to stay healthier during the season.” Everything about Reebok’s ZigTech footwear is designed to conserve and return energy to the athlete for a soft and springy ride. The one-of-a-kind ZigTech bottom unit features an innovative, lightweight foam that is engineered into a dramatic, geometric, zig-zag shape. This unique zig-shaped sole absorbs the impact of heel strike and sends a wave of energy along the length of the shoe to help propel the athlete forward with each step.  The lightweight, flexible bottom unit, minimalist upper, and whisper-quiet ground contact also contribute to making ZigTech a new standard in running and training footwear. In fact, by wearing Reebok’s ZigTech footwear, training longer just got easier. The technology causes up to 20% less wear and tear on key leg muscles, especially the shins and hamstrings.  <>


Retail Employment Rises in January - Apparel retailers added 23,600 jobs in January, running counter to a decline in payroll levels nationwide as most employers lacked the confidence to hire full-time workers. Clothing and accessory stores hired 13,300 workers last month to employ a total of 1.37 million. Department stores added 10,300 jobs to reach 1.47 million, the Labor Department said Friday. Department stores, clothing stores and grocery stores led retail industry employment gains, said Sandy Kennedy, president of the Retail Industry Leaders Association. The entire retail sector, including apparel retailers, added 42,100 jobs in January, the Labor Department said. Retailers could be responding to early indications that the job market is on the verge of improving, said Phillip Swagel, visiting professor at McDonough School of Business at Georgetown University and a former economist for the Treasury Department. Wages have started rising, the number of hours worked is beginning to increase and temporary employment picked up, he said.  <>


The Macau Metro Monitor.  February 8th, 2010.




Singapore granted Genting Singapore its gaming license, allowing Resort World's casino to open by next week's Chinese New Year.



Despite Lawrence Ho's comment that a deal with Harrah's is "total nonsense", gaming insiders claim that Harrah's is still working on acquiring Packer's 32.5% interest in Melco Crown but "the paperwork hasn't been signed yet."  Loveman told the Review-Journal in June he wanted to bring the Caesars brand to Macau. He made similar comments to Bloomberg.



The Macau International Airport (MIA) reported 4.8% increase in the passenger volumes this January, and expects increased air traffic during the upcoming Lunar New Year holidays. Airlines are planning to add more flights to mainland China during the Chinese New Year to accommodate the travel demand. Additional flights will fly to popular destinations such as mainland China, Taiwan, Thailand and Japan, the MIA said.


Portuguese channel of Radio Macau reported yesterday, that the SAR government is considering another cash handout scheme again in 2010, but permanent residents may be the only recipients.  The amount of the scheme would likely be the same or slightly greater than the payouts in 2009.  Last year each Macau permanent resident received MOP 6,000 while each non-permanent resident received MOP 3,600 in the scheme. Additionally, in 2009 each local permanent resident received MOP500 worth of health care vouchers. Radio Macau said the health care subsidy scheme will also be retained this year.



The number of visitors during Chinese New Year is expected to increase 10% y-o-y according to Macau Travel Industry Council president Andy Wu Keng Kuong.  Hotel occupancy rate stands at 90% for the Lunar New Year period, a 10% increase over 2009.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.68%

Greenspan Groupthink

“Never ascribe to malice that which can adequately be explained by incompetence.”

-Napoleon Bonaparte


Whether it was watching Alan Greenspan and Hank Paulson on Meet The Press this weekend, or seeing Timmy Geithner interviewed from the G-7 meetings on ABC, I couldn’t help but laugh. At this stage of the game, these guys are actually quite funny to watch.


Paulson is basically on a book selling tour trying to remedy the reality of the reputation that history is assigning him. Whereas Greenspan is just losing it, and Geithner never really got it to begin with.


Maybe in another era we couldn’t analyze these men as effectively. However, today we have YouTube - and that just makes holding these guys accountable much easier. I don’t think there is any malice in their intentions. They should stop getting so defensive when we suggest that they aren’t patriots. They are simply incompetent when it comes to proactively predicting risks and recoveries.


When asked about the risk of the United States of America losing her triple-A credit rating, Geithner said “that will never happen to this country.” Conversely, the senior credit officer at Moody’s, Steven Hess, said: “If the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure.”


Now I am not suggesting that Moody’s or the US Treasury is competent in analyzing risks before they become readily apparent. However, I’d argue that the Moody’s comment was more reasonable. In an America whose officialdom of research is a contra-indicator, everything is relative I suppose…


When discussing risks, didn’t anyone at the school of hard knocks teach Timmy to never say “never”? Ah, right – the poor Squirrel Hunter has never had a job in the real world. I almost forgot. Timmy, as a reminder, Greece’s deficit is 12.7% of GDP, and America’s is quickly approaching 12%.


Greenspan’s embarrassing forecasting track record speaks for itself. When asked for a forecast Paulson generally either pleads the fifth, reminds us that he was a banker, or looks to Greenspan for some confirmation bias. On Meet The Press yesterday, when they were being asked about where unemployment goes from here, all I could think to myself was that I hope the Chinese aren’t watching this.


Everyone and their brother in Washington DC will be worried about the unemployment rate in this country until their fears are entrenched in the rear-view mirror that history always presents. The reality is that Friday’s unemployment report was better than feared, but that doesn’t make it a bullish event for the stock market. Everything has a price.


Greenspan Groupthink argued on Sunday that “it’s important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity.”


This is precisely the kind of group-think that has made the US economy a boom and bust economy since Greenspan and Bernanke took over at the US Federal Reserve. The US stock market is not the only metric for a country’s long term health!


I know it’s somewhat unnatural for the manic media on CNBC to understand this concept; but better than feared economic news can be bad for stocks. Yes, the US stock market is one very important real-time metric for risk managers to absorb into their research process, but it’s certainly not the only one.


Last year we were bullish on anything priced in what we labeled the Burning Buck. For the start of 2010, we have been calling for a Buck Breakout. Now, everything priced in bucks is under pressure because the buck is smarter than Bernanke. The buck is baking in a change in Bernanke’s currently conflicted monetary policy. He needs to raise rates.


Hank Paulson wants everyone to fear the unknown. If I have to hear this guy tell me about “the alternative” to his endowing our great country with his emotionally charged state of 2008 one more time, I guess I am going to just have to keep calling him out on it. The alternative to Paulson and Greenspan Groupthink is exactly what this country needs.


The most obvious unknown today is how the US Federal Reserve signs off on an “emergency level of zero percent” returns for all Americans with a savings account with GDP running up +5.7% year-over-year, CPI (Consumer Inflation) up +2.7% year-over-year, and the unemployment rate rolling over.


Don’t ask an incompetent forecaster for the answer on where unemployment goes from here. They might actually get Washington to keep acting on their reactive opinion.


I was short the SP500 for most of last week, but covered my short position then went long it with the SP500 close to its intraday lows on Friday. I’ll be keeping a trade a trade on the long side of the US stock market as long as we have this circus act leading us down the next path to who knows where.


My immediate term support and resistance lines for the SP500 are now 1058 and 1085, respectively.


Best of luck out there today,





SPY – SPDR S&P 500 — We bought the S&P 500 for the immediate term TRADE on 2/5/10; the long term TAIL of support continues to be bullish.


FXA – CurrencyShares Australia Dollar — Aussi Dollar bulls finally capitulated on the sell side on 2/4/10. We bought FXA as a long term TAIL idea that remains intact, at a price. Glenn Stevens remains our favorite central banker, globally.


XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).


EWG - iShares Germany — We added to our position in Germany on 2/4/10 on the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.  

EWZ - iShares Brazil — The long term TAIL of support for Brazil's Bovespa remains intact. We added to our position and bought EWZ on 2/4/10 on a -6.1% drop in the ETF, because the math is telling us to.

CYB - WisdomTree Dreyfus Chinese Yuan
— The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


EWW – iShares Mexico We do not want to be net long Latin America (Brazil) anymore. Mexico short is a solid compliment to our short position on oil and our concerns about sovereign debt risks.


EWJ – iShares Japan We shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.


UNG – United States Natural Gas Fund Macro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it. 


IEF – iShares 7-10 Year Treasury One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.


EWJ - iShares JapanWhile a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.


The S&P 500 finished higher on Friday by 0.29%.  Intraday the S&P500 for the immediate term was oversold, so we bought the SPY; the long term TAIL of support continues to be bullish.  Continued concerns out of Europe dominate the sentiment as the VIX was up 0.26% for the day and 6% for the week.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (22.29) and Sell Trade (27.02). 


On the MACRO front, January nonfarm payrolls were down 20,000 vs. consensus of 15,000; December nonfarm payrolls saw a significant negative revision to (150,000) from (85,000).  The unemployment rate dropped to 9.7% vs. consensus 10.0%.


On a better than feared unemployment report, the “Buck Breakout” continued putting pressure on commodities and the REFLATION trade.  The Hedgeye Risk Management model has levels for DXY at – buy Trade (79.27) and sell Trade (80.39). 


Despite the dollar rally on Friday, the Materials (XLB) was the best performing sector rising 1.9%.  Over the past month the XLB was the worst performing sector declining 10.7%.   Also seeing a bounce on Friday was the Technology sector (XLK).  Helping to support the move in the XLK was the semiconductors with the SOX up +2.4% on the day. 


The biggest looser last week was commodities with the CRB down 1.93% on Friday and 2.65% for the week.  On Friday oil traded down 2.67% and has now declined for four weeks in a row.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.57) and Sell Trade (74.21).


As we look at today’s set up the range for the S&P 500 is 27 points or 0.75% (1,058) downside and 1.7% (1,085) upside.  Equity futures are currently trading mixed to fair value and off earlier highs as the market is facing a quiet week on the MACRO front.  European sovereign debt issues remain in focus although CDS levels for those countries deemed most at risk of default are trading slightly tighter.


In early trading copper rebounded from a three-month low in London as a decline in the U.S. unemployment rate improved investor confidence in the strength of the global economic recovery.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.77) and Sell Trade (3.06).


In early trading gold is trading higher after declining 1% on Friday.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,055) and Sell Trade (1,090).


Howard Penney

Managing Director















We’ve been writing on the divergence between FSR and QSR of late but yesterday it was the divergence between BKC and YUM that caught my eye.  Yesterday, both YUM and BKC reported calendar 4Q09 EPS and the street’s reaction is clear in the table below. 


YUM greatly underperformed, declining 5.5% on a big uptick in volume as compared to its 30 day average.  On the other hand, BKC significantly outperformed (especially given that the S&P 500 was down 3%), closing up 2.9% also on strong volume.  Just looking at the short interest alone, the street was expecting something different, as reflected in YUM’s short interest at 2.1%, only slightly higher that MCD’s at 1%.  The BKC number, however, is a surprisingly high 11%.  Clearly, part of yesterday’s move in BKC was short covering, as the quarter was not that bad.  Investor reaction suggests that it was better than YUM’s.





While movements in the stock tell us something, the fundamentals seem to confirm it in this case.  YUM, MCD, and BKC, have all seen sharp declines in their U.S. comparable-store sales trends.  It is interesting to note that BKC’s U.S. & Canada two-year comparable-store sales trends actually improved on a sequential basis in 2FQ10, to -0.7% from -0.8% in F1Q10.  YUM’s U.S. comparable-store sales continued to decline on a one and two-year basis in 4Q09 at -8% and -3%, respectively.  This implies a 150 bp sequential decline in two year trends from 3Q09.  MCD’s two-year comparable-store sales trends also deteriorated in 4Q09 but remain positive at 2.6%, down from 3.6% two-year trends in 3Q09.


The respective management teams’ comments on recent conference calls were also informative; MCD and BKC expressed some optimism about trends in January whereas YUM implied no improvement in its U.S. QSR trends.  MCD stated that trends in January were better than in December when the impact from weather was factored out (which they estimated to be -3%).  BKC’s management labeled January a “bifurcated month” where the first two weeks were marred by bad weather but the last two weeks saw traffic bounce “back to positive again” in the U.S.  YUM did not sing to the same tune on their conference call, stating that they would not comment on sales trends in the middle of the quarter in the absence of “a very significant change in results”.   YUM emphasized that Pizza Hut has seen a “dramatic” improvement following the recent focus on value but did not give any update on trends in KFC and Taco Bell, which implies that we won’t see much of a pickup in underlying trends in the first quarter of 2010 from the 4Q09 trends of -8% and -5%, respectively (though comparisons do get easier).


YUM’s international trends have been a cause for concern.  On a sequential basis, for 4Q09, two-year comparable sales trends deteriorated for YUM’s China and International divisions.  Again, based on management’s comments, we are not expecting much of an improvement in the first quarter.  While the respective companies’ reporting methods do not allow for apples-to-apples comparisons of international trends, MCD’s APMEA trends have also shown softness, reflecting weakness in China, but two year trends improved in the fourth quarter from the relatively softer level in 3Q09.  MCD’s two year trends in Europe slowed slightly in 4Q09, but remain above 6%.  BKC’s EMEA/APAC and Latin America trends improved during the quarter on a two-year comparable-store sales basis.


Earlier this week I suggested that YUM’s aggressive capital spending in China over the last four years is starting to have an impact on the sustainability of the current growth rate.  The company went to great lengths on its earnings call to dispel this notion.  Time will tell.


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