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Will the company be able to maintain momentum in the U.S. from February’s strong results?


McDonald’s is expected to report before the market opens tomorrow and, along with its earnings for the first quarter, management will be disclosing details on its March sales trends.  On a year-over-year basis, there should not be any significant calendar impact other than March 2009 having on extra Sunday compared to March 2010.  In Europe, however, results in March 2009 were adversely affected by the shift in Easter-related holidays from March 2008 to April 2009. 


As usual, I would like to provide my view on comparable sales ranges for each of MCD’s geographic segments as indicators of what I would rate as GOOD, NEUTRAL, or BAD results based significantly on 2-year average trends.


U.S (facing a 5.6% compare, including a calendar shift which impacted results by -1.0% to -1.8%, varying by area of the world):


GOOD:  Any result greater than 1.0% would be received as a good result because it would imply that the company was able to maintain its momentum from February when you account for the impact from the 2008 leap year.  For reference, a 1.0% print would result in a slight acceleration in 2-year average trends from last month to about 3.8% when you account for last year’s calendar shift.  MCD’s 2-year average trends typically far-exceeded 3% but during the past six months, trends have been disappointing.


NEUTRAL:  Roughly flat to 1.0% implies 2-year average trends are about even with February, but still remain above prior month trends.


BAD:  A negative result would imply that February’s stronger result was only a 1-month aberration.  A -1% result would point to

two-year average trends that again fell below 3%.



Europe (facing an easy 2.9% compare due to Easter holiday shift, which impacted March ’09 by 2% and a calendar shift which impacted results by -1.0% to -1.8%, varying by area of the world):


GOOD:  Above 6% would signal a return to 6.0%-plus 2-year average trends when you account for both of last year’s calendar impacts, after coming in a little lighter for the last few months. 


NEUTRAL:  +3.5% to +6% would signal that 2-year trends are about even with both February levels and the prior few months.  While this level is neutral with respect to sequential trends, it would indicate continued softness in the Europe business compared to the most part of 2009 when 2-year average trends were consistently in the 6.0% to 8.0% range.


BAD:  Below +3.5% would indicate that trends have sequentially deteriorated further from February levels. 



APMEA (facing a 5.4% compare, including a calendar shift which impacted results by -1.0% to -1.8%, varying by area of the world):


It is important to remember that MCD began its significant promotional activity related to accepting coupons issued by other QSR competitors at its China stores (as we wrote about on 2/26/10) on February 24th.  This promotion was expected to run through March 23rd so it will be interesting to see the impact on March numbers.


GOOD: Better than 7% would signal that 2-year average trends have remained strong for three consecutive months after December’s disappointing 2-year average number.  


NEUTRAL:  Roughly 5% to 7% would indicate that 2 year-trend slowed slightly from the prior two months.  Some deceleration may be expected following February when the company’s results were helped by the celebration of Chinese New Year.


BAD: Below 5% would imply 2-year average trends that have slowed significantly from the prior two months.  Below 1% would point to trends even with the weak results we saw in December.



Howard Penney

Managing Director



Pasteurized Ignorance

“No matter how busy you may think you are, you must find time for reading, or surrender yourself to self-chosen ignorance.”



According to the Pew Research Center’s latest study on “Teens and Mobile Phones”, more than half of teens in America send 50 or more text messages a day (33% send more than 100 messages a day) and almost 75% of 12-17 year olds in America have cell phones. If you didn’t know we live in a crack-berry culture of sound-bites, now you know.


While Americans are definitely finding time to read, the question remains one of focus. What are you reading? When are you reading it? How do neurological factors in your brain affect the emotional side of decision making based on what you just read?


Adults in the investment business do their fair share of headline reading as well. Unfortunately, the pressures that have been institutionalized by short term performance measurements have rendered the historical context behind what we think we are reading into a collective warm boil of Pasteurized Ignorance.


On this day in 1862, French chemist Louis Pasteur created the first successful pasteurization test. Per our friends at Wikipedia, “pasteurization aims to reduce the number of viable pathogens so they are unlikely to cause disease… the process was originally conceived as a way of preventing wine and beer from souring.” This sounds like something that the world’s $80 Trillion derivatives market might need.


Since 2000, when Congress released the derivatives/leverage hounds, financiers have been getting plenty punch drunk on the profits that came along with the ignorance associated with Opacity’s Child (derivatives). All the while, American tax payers have been battle scarred from a decade of booms, busts, and dry heaves.


When I think about Goldman, Lehman, or Bear selling the Street this stuff, I just think of it for what it is. Heck, I’m a “sophisticated investor”, and I should know that derivatives don’t trade over the counter. They do not uphold the principles of transparency that a “free” marketer is sauced up on. And, given that everything else in our society is being posted to Twitter, there is no reason to believe that the rules of a conflicted and compromised derivatives market won’t be changing.


That’s it. That’s my take on Goldman Sachs. I really could care less about incompetent analysts at the SEC voting 3-2 on this being fraud. I really don’t care about Goldman’s EPS report this morning either (they crushed the number, reporting $5.59/share in EPS vs. $4.14 expected… and yes, they made a lot of money in fixed income and derivatives trading). I currently have no position in GS. I’ll short it when I am not being asked to 100x an hour. I’ll short it when it’s up and I see my price.


All I really care about is the history of the derivatives market in America and whether or not this mega-phone sound-bite provides the political capital for re-regulation of Pasteurization’s Ignorance. There is a long history of required reading here. A lot of it started with ex-Goldman Co-Chairman, Robert Rubin, being the Treasury Secretary. In the end, numbing it down to a French dude named Fab’s trade isn’t going to be the real public debate.


So onto the next…


Pasteurizing the Washington/Wall Street concept of risk management is the more important task for today. In less than 48 crack-berry hours, the Manic Media has completely forgot about sovereign debt, inflation and, well, pretty near everything! Because people ignored the microbial growth in their drink prior to 1862, certainly didn’t mean that the worms ceased to exist.


Here’s the grind on what our Hedgeyes are seeing globally this morning:

  1. Despite a recovery day in the USA, Japanese and Chinese stocks didn’t rally last night and are now both broken from an immediate term TRADE perspective
  2. India sees the ‘V’ in Inflation that we talked about on our Q2 Themes call. India went ahead and raised rates for the 2nd time in a month last night.
  3. Thailand has been getting tagged, dropping 10% in a straight line since April 7th on domestic unrest, and finally had a big up move last night, closing +4.6%.
  4. German ZEW (confidence) hit a 6 month high this morning and German stocks continue to outperform the likes of Spain which is trading down again this morning.
  5. UK inflation zoomed higher to +3.4% y/y growth in their CPI report for March. Yes, at Hedgeye we call this Inflation’s V and its born out of countries with fiat currency. 
  6. Greek bond yields are shooting to record wide spreads versus German Bunds (472 bps wide for 10yr paper) after the Germans reminded us they don’t trust the Greeks. 
  7. Brazil’s stock market broke its immediate term TRADE line of support on the Bovespa yesterday (that line = 70,006).
  8. Gold is starting to flag bullish again (bullish TRADE line of support = $1124/oz) in the face of sovereign debt and inflation risks mounting, globally.
  9. The IMF is proposing a new “bank tax” at the G-20 meetings that started last night.

While we can certainly suck Pasteurized Ignorance from the vacuum of headlines about Goldman that are on the tape this morning, that’s not going to do us a whole heck of a lot of good where it matters. Goldman being regulated will matter, but that’s not just something that’s going to affect Goldman.


While he testifies on Capitol Hill today, Tricky Dick Fuld will remind all Americans that we cannot run this country like a Lehman trader would his P&L. Thankfully, those days and ideologies will soon be gone. Or at least I hope they are. Hope, alas, is not an investment process but all that I have left that the 75% of this country’s 12-17 year olds who text one another are going to find a better way.


My immediate term support and resistance lines in the SP500 are now 1177 and 1214, respectively.


Best of luck out there today,



Pasteurized Ignorance - milk



The Macau Metro Monitor, April 20th, 2010



According to Steve Jacobs, Sands China is to go ahead with the sale of apartments in its Four Seasons complex in Cotai.

The company aims to obtain US$1.2-$1.4 billion (MOP9.6-11.2 billion) or more from the sales. ''Rest assured that we are acutely aware of the amount of value that can be unlocked through the sale of those apartments and it is the top of our agenda for 2010....'We believe there is ample interest from high net worth individuals from China, Korea, Vietnam and Japan.'' Jacobs said. 


Meanwhile, Sands China is ''actively engaged'' in looking for expansion opportunities in Asia. ''Japan remains incredibly attractive to us. We believe there'll be a tender sometime in the near future... 'We clearly have [Thailand] on our top-tier opportunities. But it's nothing that would be between now and this time next year.'' Jacobs said. 


On construction at sites 5 and 6 in Cotai, Jacobs revealed that between 2,000 and 4,000 workers recently resumed work.

The Sands China CEO said that the company postponed a contract signing ceremony with a contractor, which was scheduled for March 29, because ''we've got a series of announcements coming up, so it made more sense to bundle them all together.'' Once site 5 and 6 are operating, Jacobs expects Sands’ market share of Macau gaming revenues to increase to 30-35%. In March, the company had a market share of 19%, according to Lusa. Jacobs said the new properties can increase the non-gaming revenues for Sands China to 20-25% in two to three years, versus 12% now.

''As we move to develop sites five and six... it would be in the not-too-distant future that non-gaming would become the majority of our profitability,'' he said.


GAMING TAX REVENUE UP 60% macaubusiness.com

In 1Q2010, Macau registered a budget surplus of MOP 12.9BN (105% YoY), while direct taxes from gaming rose 60% to MOP14BN and represented 86% of the public finance revenue. The Government’s total revenue rose 54.9% to MOP16.39BN.



Local casinos were a major source of reports of suspected money laundering received by the Financial Intelligence Office (GIF) between years 2007 and 2009, the chairman of the Macau Institute of Financial Services (IFS), Antonio Felix Pontes, announced yesterday. In the past three years, the GIF received a total of 2,719 suspicious transaction reports, of which 58.3% (1,584) were from casinos and 40.6% came from the banks (1,101).

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The market's post reactionary bounce to the GS news on Friday lacked conviction.  Clearly we are seeing much broader damage in the secondary stocks, with the S&P 500 up 0.45% and the NASDAQ and the Russell 2000 declining yesterday.  The trend toward RISK AVERSION and a number of other conflicting forces were at work to underpin the lack of overall direction in the market yesterday.


The earnings calendar and the M&A trends continue to be a net positive for the broader market.  So far in this earnings season, 26 of 28 S&P 500 companies have beat earnings so far in 1Q10.  On the MACRO front, headwinds continue to blow from both Greece and China, which is putting pressure on the RECOVERY trade and particularly the commodity-related equities. 


Volume declined 28% day-over-day and the VIX declined 5.5%.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (17.04) and sell TRADE (19.62). 


The Hedgeye Risk management models are still showing Utilities (XLU) is broken to both TRADE and TREND, while Healthcare (XLV) is broken on TRADE.


Yesterday only two sectors outperformed the S&P 500 - Financials (XLF) and Healthcare (XLV).   The XLF rallied 1.0% yesterday as the banking index (BKX) improved by +1%.  Citi was a strong performer after the bank reported strong 1Q results.  The trust names benefited from the more defensive tone in the market, along with a favorable mention in this weekend's Barron's.  Regional names were among the laggards with the KBW regional index up only 0.5%. 


The RISK AVERSION trade helped some of the more defensive sectors to outperform after losing out to the BETA shift trade last week.   Most notable was the Healthcare (XLV) and Consumer Staples (XLP).  Within the XLV, managed care provided a big boost for the healthcare sector, with the HMO +2.8% on the day. 


Additionally, a stronger dollar is putting some pressure on the REFLATION trade and the commodity-related sectors.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (79.65) and sell TRADE (81.71). 


While the materials (XLB) traded flat yesterday, it’s has fallen 1.3% over the past week.  Contributing the demise of the XLB, over the past two trading sessions the Chinese market has declined 5%, the biggest two-day drop in eight months.  The government continues to take additional steps to rein in speculative buying in real estate.  Steel stocks came under outsized pressure with the NYSE ARCA Steel Index declining 1.3% yesterday, after falling nearly 4.6% last week.


The CRB declined 1.0% yesterday as oil continues to decline.  OIL traded down 2.1% yesterday and 4.8% over the past two days.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (79.93) and Sell TRADE (83.46). 


In early trading, gold is trading at a two-week low, but lacking conviction on the downside.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,124) and Sell TRADE (1,150).


In early trading, copper rose from a three-week low in London on signs of stronger consumption trends in Japan.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.49) and Sell TRADE (3.64).


In early trading, equity futures are trading above fair value in a follow-through of yesterday's positive finish helped by earnings from Citi and news the SEC was split on whether to sue Goldman Sachs. 


Today, Fed Chairman Bernanke testifies at a House Financial Services Committee hearing on public policy issues raised by the bankruptcy examiner's report on Lehman Brothers.  Treasury Secretary Geithner and US SEC Commission chairman Schapiro also testify at the hearing.  As we look at today’s setup, the range for the S&P 500 is 37 points or 1.7% (1,177) downside and 1.4% (1,214) upside. 


On the MACRO calendar today:

  • API Crude Inventories
  • ABC Consumer Confidence

Howard Penney

Managing Director













Hedge Fund Refugee’s Cash Cow: Transparency


For the first time in almost three years, the growth in total retail hires has turned positive.  This shouldn’t come as a surprise given the positive sales recovery that has been in place for two quarters, but it’s worth noting for a couple of reasons: 


First, the productivity gains we’ve seen across most of the space have in some part been at the expense of headcount reductions and reduced store labor hours.  This is evident in the charts below, although what stands out to us is the duration of the prolonged hiring malaise.  Clearly retail hiring has been in a multi year secular decline until now. 


Secondly, in looking ahead we’d note that this is a clear sign that retailers are feeling better (and understaffed).  While it makes perfect sense to see hiring pick up against a commensurate rise in sales, we do wonder how much further the hiring will actually go.  The risk of staffing up against a still uncertain topline is one of the bigger risks we see.  This especially holds true after such a short and unprecedented period of EBIT expansion driven in large part by cost containment. 


With cost of goods also creeping higher, this is just another sign that peak EBIT margins may be unsustainable if sales don’t remain robust.


Brian McGough





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