As we look at today’s set up for the S&P 500, the range is 23 points or 1.1% (1,058) downside and 1.1% (1,081) upside.  Equity futures are trading above fair value following Wednesday's declines in the wake of Fed Chairman Bernanke's "unusually uncertain" economic outlook.


SBUX, QCOM, and EBAY posted solid results after the close. Today, Bernanke's testimony will be less a factor, as the focus is on corporate earnings, the weekly jobless figures and June home sales. 



  • Eurozone May Industrial New Orders +3.8% m/m vs. consensus +0.0% and prior revised 0.6%
  • UK June retail sales inc. fuel +0.7% m/m vs. consensus +0.5%
  • UK June retail sales inc. fuel +1.3% y/y vs. consensus +1.0%
  • Eurozone July Services PMI 56.0 vs. consensus 55.0 and year ago 55.5
  • Eurozone Jul Manufacturing PMI 56.5 vs. consensus 55.2 and prior 55.6
  • Germany Jul Services PMI 57.3 vs. consensus 54.5 and prior 54.8
  • Germany Jul Manufacturing PMI 61.2 vs. consensus 58.0 and prior 58.4
  • France Jul Services PMI 61.3 vs. consensus 60 and prior 60.8
  • France Jul Manufacturing PMI 53.7 vs. consensus 54.1 vs. prior 54.8
  • France Jul Consumer Confidence (39) vs. consensus (40) vs. prior (39)



China closed up another 1.1% last night, bringing the four day rally to 5.6%.  Copper is up 7.2% over the last four days.       


Following yesterday’s 1.3% decline in the S&P 500, we only have Materials (XLB), Utilities (XLU) and Consumer Staples (XLP) positive on TRADE with XLU the only sector positive on TREND.  Every sector declined yesterday. 


China closed up another 1.1% last night, bringing the four day rally to 5.6%.  Copper is up 7.2% over the last four days and materials (XLB) is positive on trade – it’s all related!


Treasuries were stronger today on the recovery concerns and expectations for a prolonged period of low interest, according to Fed Chairman Bernanke. 


The Consumer Discretionary (XLY) was the worst performing sector yesterday.  The decline was broad-based - the home builders took it on the chin ahead of what we think will be a bearish housing data point this morning.  Notable decliners included MTH (3.3%), HOV (3%), SPF (2.6%) and TOL (2.6%).


On a relative basis, the Industrials (XLI) was the best performing sector yesterday.  TXT was one of the bright spots as both top and bottom-line results for 2Q10 came in ahead of expectations; the company also raised full-year guidance above the Street. Analysts were positive on the strength in manufacturing. 




US STRATEGY – UNUSUALLY UNCERTAIN - levels and trends 721













Fiat Republics

“No one could know it at the time, but 460 years of the free Republic were being brought to an end.”

-Tom Holland, Rubicon


I recently finished reading Tom Holland’s “Rubicon – The Last Years Of The Roman Republic.” After listening to what I thought was a Cato-like inquisition by Senator Shelby yesterday of Ben Bernanke, I decided to focus on reviewing my notes from the Rubicon on my flight to Chicago last night. The parallels between the abuses of political power between then and now fascinate me.


So here I am this morning with my customary 45 minutes to write my rant trying to reconcile why the US futures are up after such a negative turn of intraday events yesterday and ahead of such an ominous pair of economic data points in the US this morning (jobless claims and existing home sales).


The answer, of course, isn’t one that’s US based (that one blew up the bulls yesterday when Bernanke didn’t fold his tent and implement QE2) – it’s the second one that I highlighted in yesterday’s EL as a “very clear and present danger” for my short position in the SP500 (SPY):

  1. Ben Bernanke’s semi-annual Revisionist Forecasting Report to the Senate of Modern Day Rome.
  2. Results for the made-up European “stress tests” that already have a prescribed (positive) outcome.

On the heels of surprisingly positive June economic reports coming out of Europe (some if it because the Euro stopped going down in June; some of it because of the European confidence bred by the World Cup), the rumors are running rampant at this point that the Fiat Fools at the ECB have conducted a successful “stress test.” Shocker.


Is this new “news” to anyone who has been watching the Euro rise +8% from the ashes of the Parity Parrots? Is this new “news” for anyone who has witnessed Europeans successfully pile another 50B plus of more sovereign debt upon debt since mid May? Or is this just part of the final countdown that is perceived to be the economic resolve of the Fiat Republic?


We get how the storytelling goes. We also get how lemmings from CNBC to your local super market and me react to positive price momentum when coupled with a catalyst and a believable story – if you didn’t believe that the Europeans were going to make up positive results to a made-up test, believe it.


Not being short anything European (currency or equities) for the better part of July has certainly been the right risk management move. We’ve focused on shorting both the currency and equities of the US as we think that the storyline of American Austerity will continue to become more forceful than calling Europeans pigs.


Ironically enough, it was Ben Bernanke himself who signaled the end of Fiat Spending Freedoms to America’s compromised and conflicted Senate yesterday – and he’ll be doing it again today in the House. Senator Shelby’s line of questioning was the right one – it was about piling more debt upon America’s structural deficit problem. It was also about calling GSE debt for what it is – sovereign debt.


Shelby isn’t a modern day Cato. He won’t be a martyr, and he certainly won’t have 60 Senatorial Manipulators with daggers cut the proverbial throat that is their Caesarian fear-mongering rule. But he was the first to take an important step towards reminding Americans of their past history as the world’s great Creditor nation. Everything needs to go back to square one. National pride and credibility built on the strength of our balance sheet.


American and European professional politicians may not know it yet, but the proverbial death of their Fiat Republics is nearer today that it was yesterday. Japan’s Fiat Republic has already fallen and professional Japanese politicians have been exiled.


Unfortunately, the bearish part of this story is that America still needs to go through a few more stages of grief. In the end, it took the Roman Empire 44 years, from 88BC when Sulla marched on Rome to 44BC (Caesar’s death), to start moving back towards the Rome that the Romans themselves always understood.


Maybe our great experiment that “government is good” started with Greenspan and ends with Bernanke – while hope is not an investment process, that’s all I have left when it comes to the timing of this Fiat Republic’s fall.


I’ll leave you with Tom Holland’s prescient analogue that can easily be subbed for the American people versus those he described in Rome. It’s as bullish as it has always been:


“To the Romans themselves, who remained a conservative people despite all the upheavals of repeated civil wars, there was nothing startling about the perception that the past might shadow the present. The unique achievement of Augustus, however was the brilliance, with which he colonized both. His claim to be restoring their lost moral greatness stirred in the Romans deep sensibilities.” (Rubicon, page 371)


My immediate term support and resistance levels for the SP500 are now 1058 and 1081, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fiat Republics - US FED


The Macau Metro Monitor, July 22nd, 2010


HSBC is no longer a joint global coordinator for the planned Hong Kong IPO of MGM Mirage, having pulled out of a

US$850m loan for the gaming firm’s Macau unit, according to a source familiar with the deal.


In June, ~3.6 million passengers passed through Changi airport, YoY growth of 19%.  In the 1st half of 2010, Changi Airport saw traffic increase 17% YoY to 20.2 million.



According to a report on, a Netease website, China's finance ministry plans to start implementing a property tax in 2012 on a trial basis.  Shanghai and Chongqing have already drawn up plans for a property tax.  Chongqing Mayor Huang Qifan said the city wants to impose a 1% levy on homes that are three times the average market price.

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Trading In A Range . . . President Obama's Approval Rating

We’ve outlined the Rasmussen Presidential Approval Index going back 18-months below and the interepretation is quite clear.  Since the start of the year, President Obama’s approval has been mired between -10 and -20 on this index (a comparison of Strongly Approve versus Strongly Disapprove), which indicates that between 10 and 20% more Strongly Dissapprove of the job President Obama is doing.  At this point, it seems very unlikely that this range bound negative approval rating will change much heading into the midterms this Fall.  This will not help the Democrats in defending their majority in both houses. 

  • Battle for the House – Currently the Democrats hold 255 seats, the Republicans hold 178 seats, and there are two vacancies.  If the midterms were held today, according to a Real Clear Politics poll aggregate, the Democrats would win 202, the Republicans would win 202, and 31 would be toss ups.  In effect, there is a jump ball for the house, which is huge shift from 2008. 
  • Battle for the Senate – Currently the Democrats hold 59 seats and the Republicans hold 41 seats.  According to a Real Clear Politics poll aggregate, if the election were held today the Democrats would have 48 seats and the Republicans would have 42 seats, with 10 seats being a toss up.  Since only 1/3 of the Senate is up for re-election very two years, this is actually a meaningful shift and once again suggests the potenital for change in power. 

While the potential shift in Congress has been widely bandied about, what is more interesting is the threat to President Obama in 2012.  According to a poll out from Quinnipiac University today, if the 2012 Presidential election were held today 36% of those polled would vote for Obama, 39% would vote for a generic Republican candidate, and the remainder are either undecided or it would depend on the candidate.


In aggregate, the point, which is probably somewhat obvious, is that the Democrats are currently in a world of potential electoral hurt.


In another poll by Fox News (and we do get that Fox News may have some biases), the key issues that Republicans are seen to have an advantage with are outlined below.  According to the poll:


“By double-digit margins, Republicans are seen as the party that would do a better job on terrorism (+16 points), the size of government (+16 points), the federal deficit (+15 points) and immigration (+13 points).”


The implication of this poll, and others that mirror it, are that the Democrats, and President Obama specifically, may try to overcompensate to make up ground in the areas in which they are being perceived poorly.  From our perspective, one key area is likely to be American Austerity. As the drum to cut the budget and narrow the deficit beats louder, the more likely it is that the Democrats shift their stance in attempt to regain approval in these areas.  Politics and the need to get re-elected will ultimately trump the strict adherence to Krugman orthodoxy.


While not technically a politician, Chairman Bernanke sounded the American Asuterity horn today when he introduced the idea of beginning to reduce the balance sheet of the Federal Reserve, which is certainly a slight change of tone, especially versus expectations of further quantitative easing.  In our view, this is likely a precursor to a more gradual political shift from the Democrats towards supporting broad based spending cuts and deficit reductions.


The short term implications of this change in policy would ultimately be a potential for slower economic growth in the short term and it is increasingly looking like the Democrats will need to dramatically shift sentiment in the coming months to retain political control.  A hail mary  pass of American Austerity policy could well be the catalyst.  Certainly though, President Obama needs to do something to break out of his range and help his party’s fortunes in the upcoming midterms.


Daryl G. Jones

Managing Director


Trading In A Range . . . President Obama's Approval Rating - 1


After last quarter, I was somewhat concerned about the company’s ability to continue to surprise to the upside.  And, although SBUX reported an in-line quarter from an EPS standpoint after five consecutive quarters of earnings surprises, the reported 9% growth in U.S. same-store sales relative to the street’s 6.0% comp estimate did not disappoint. 


This 9.0% growth implies a 200 bp sequential improve in 2-year average trends (following the 250 bps of sequential growth in the prior quarter), which was driven entirely by better traffic trends as average check growth held steady on a 2-year average basis.  Traffic was up 6.0% in the quarter in the U.S., which is impressive in this current economic environment.  We will hear from MCD on Friday, but I would venture to say that even with the McCafe Frappes (smoothies were not launched until July) that MCD will not come close to matching Starbucks’ sequential improvement.  International same-store sales growth was up 6.0%, in line with expectations, and flat with the prior quarter on a 2-year average basis. 


U.S. operating margin was up 350 bps to 16.5%, in line with the street’s expectation, whereas International margin came in better than expected, up 280 bps to 10.9% (vs. street’s 9.4% estimate).  As I said after the second quarter, the rate of improvement will slow, but margin growth should continue to materialize from here.  To that end, SBUX is now guiding to the high end of its previously-stated 15%-17% U.S. operating margin range and expects another 100 to 150 bps of growth in FY11.  In the International segment, the company guided to 100 to 200 bps of margin growth in FY11 on top of the 8% to 10% range maintained for this year.  To be clear, these FY11 margin growth goals follow on about 600 bps of YOY growth in the U.S. in FY10 at the high end of the guidance and 180 to 280 bps in the International segment.


Starbucks continues to surprise but my biggest concern here is that expectations have caught up with the company.  Although the company raised its FY10 EPS guidance to $1.22 to $1.23 (from $1.19 to $1.22), the street was already at $1.23 going into the earnings report.  For FY11, SBUX guided to 15% to 20% EPS growth to $1.36 to $1.41 and again, the street is already at the high end of the range at $1.40.   


Howard Penney

Managing Director




Relatively cheap but not that exciting. We see a small Q2 miss relative to consensus.



MPEL may report a small Q2 miss, driven by low hold at City Of Dreams.  We estimate that MPEL will report $567MM of revenue and $84MM of EBITDA, 1% above but 6% below the street consensus, respectively.  MPEL has been quite aggressive with junket commissions and giveaways which probably explains why we are higher on revs but lower on EBITDA, along with the low hold at CoD.  We’re about 2% below consensus EBITDA for the year but in-line with 2011 estimates.  MPEL is trading at 10.3x 2010 and 8.7x 2011.  Not exactly rich, but with all the supply coming online next door to them in 2011 & 2012, there remains a lot of uncertainty.


2Q2010 Detail:

We estimate that CoD will report $314MM of revenues and a disappointing $50MM of EBITDA as their good luck from last quarter did a 180 degree turn this quarter.

  • $11.8BN of Rolling Chip, with 15% coming from direct play, at an estimate hold of 2.3%, producing gross VIP win of $274MM
  • Mass win of $106MM and slot win of $29MM
  • Consensus is $70MM in EBITDA

Unlike its sister property, Altira had good luck for a change this quarter.  This will be the first quarter since 1Q08 where the property held over 3%.  As a result, we estimate that Altira will report $227MM of revenues and $40MM of EBITDA.

  • $9.45BN of RC volume which held roughly 3.2%, producing gross VIP win of $300MM
  • Mass win of $11MM
  • Consensus is $21 MM

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