THE M3: SITES 7 & 8

The Macau Metro Monitor, September 7th 2010




Acting CEO Michael Leven said that "there is no reason to believe that a subsequent application by any third party will take precedence" over Sands’ rights to develop sites 7 and 8.  Leven explained that Sands China had previously submitted a detailed development application to the Macau government detailing plans for the two sites.  “Subsequent to that application, we have obtained site investigation and consolidation licenses from the government, which authorized us to enter the site and carry out the substantial works that have to date been completed,” Leven said.  “Our consultants have continued to pursue the development application in a timely manner,” Leven said. “We have received no indication from any relevant department that our applications are not proceeding in the usual course.”  Meanwhile, Macau’s Land, Public Works and Transport Bureau has denied receiving any letter from SJM expressing interest in Cotai’s parcels 7 and 8.

Someone Gets To Be Canadian

“Somebody gets to be smart and somebody gets to be dumb. If we win, it'll be because of the President. And if we lose, it'll be because of me.”

-Karl Rove  


Yesterday afternoon at our offices in New Haven, CT, Daryl Jones and I hosted former White House Deputy Chief of Staff and Senior Advisor to President George W. Bush, Karl Rove, for a political strategy conference call.


For the record, before you call me a raging Republican, remember that I am neither a Democrat nor a Republican. I am Canadian (with a green card and an American son who has much better chances of wearing his country’s Olympic hockey jersey on this side of the border!).


I, like most immigrant small business owners in this country, fundamentally believe in doing the best I can to provide for both my American family and American employees. This includes analyzing and understanding US political policy as it is going to affect markets and my firm’s future.


If I couldn’t stand Karl Rove’s politics, I’d still have invited him to our offices to meet with us. How else would a Risk Manager of both global market strategy and local payroll-punching get to the right answers?


It turns out that Rove was perfectly analytical and proactively prepared with plenty of math. The data, after all, doesn’t lie as much as some of America’s current politicians do. That said, the data can still change before the mid-term elections in November.


Daryl Jones will publish a more in depth research note later on today that covers some very interesting intermediate to long term US political strategy topics that we dug into with Mr. Rove in our Q&A session (the changing US electorate, small business healthcare spending, taxes, etc.).


For now, I’ll spare you having to watch the DVR version of this weekend’s Meet The Press where CNBC’s money-honey-mini, Erin Burnett, espoused her unqualified US political strategy thoughts about how the economy has seen the “stimulus really work” and give you some proactive political predictions that you can hold Karl Rove to: 

  1. The Republicans will win the House by a wider than expected margin.
  2. The Democrats will cede at least 8 seats to the Republicans in the Senate.
  3. The anti-incumbent vote in America will be pervasive theme. 

“Anti-incumbent” means anti any professional politician in Washington who sold you a bill of dry heaves in the most recent election, or as Mr. Rove called them, incumbent politicians with a “D” after their name who are perceived to be easiest to blame. Shock-and-awe, eh? A Republican strategist concluding that the Democrats are going to get rolled over in the mid-terms!


Well, take it from one Canadian with an American family looking to be on the right side of this immediate term TRADE rather than get stuck in the partisanship of being wrong and blaming someone else’s politics for it – I think Rove’s got this one right.


If you’d like the slide deck that backs Rove’s analysis and the replay of the conference call, please email . I’ll be happy to print the most analytical rebuttal to Mr. Rove’s conclusions, provided that you let me print your name on the analysis like he did with his. This is the only way I know to strap on the accountability pants folks. I’d much rather be proven wrong here than remain wrong…


Whether we like politics or not, we all have to play the risk management game that’s in front of us. To spend or not to spend more taxpayer moneys on “stimulating” the economy, remains the question.


The SP500 was down -1.2% yesterday to 1091, taking its cumulative decline since its YTD high on April 23rd to -10.4%, and its YTD loss for 2010 to -2.2%. Was yesterday’s weakness related to an expectation mismatch associated with an alleged “better than expected” employment report on Friday? Or was it based on another partisan “spending plan” of $50 BILLION that Americans don’t buy into?


Plenty more questions remain for the Fiat Spending Bulls this morning than there are answers. I don’t need Karl Rove to remind me of that. My immediate term support and resistance levels for the SP500 are now 1086 and 1107, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Someone Gets To Be Canadian - 1


McDonald’s is scheduled to report its August sales numbers before the market open tomorrow.  August 2010 had one less Saturday, and one additional Tuesday, than August 2009. 


Below, I go through my take on what numbers will be received as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts.  To recall, July same-store sales exceeded street expectations and I fully expect that August will also surprise to the upside.   



U.S. (facing a relatively easy 1.7% compare, including a calendar shift which impacted results by -0.7% to -0.8%, varying by area of the world): 


GOOD:  5% or greater would be perceived as a good results because it would imply that the company was able to improve U.S two-year average same-store sales (by ~30+ bps) on a sequential basis.  This would be a strong number in light of the average same-store sales figures for 2010, but it is clear that McDonald’s top-line has stepped up meaningfully and I actually expect a print of 7% or more for August.  This would be far in excess of the current consensus same-store sales number of 4.4% for the U.S. August results.  Smoothie sales continue to be strong; while a result of 5% or greater would be received positively by the Street, a number of 7% or more is in play. 


NEUTRAL:  Roughly 4% to 5% implies two-year average trends that are approximately in line with those seen in July.  I would view this range with a positive bias and expect any neutral result to fall in the upper quintile.  Lower than that would be slightly disappointing. 


BAD:  Below 4% would indicate that two-year trends have deteriorated on a sequential basis.  Following two consecutive strong months of top-line performance in the United States, it would be disappointing if two-year trends were to slow from here.  Sales of smoothies, said on the 2Q earnings call to be “blowing away high-end projections”, remained “top contributors” to sales growth in July.  I expect that sales of smoothies and core products improved on a sequential basis in August.



Europe (facing a relatively easy 3.5% compare, including a calendar shift which impacted results by -0.7% to -0.8%, varying by area of the world):



GOOD:  6.5% or better would be a good result for MCD’s Europe operations as it would imply a level two-year trend following a strong month in June.  While a print of 6.5% would actually be a sequential slowdown in trends of approximately 10 bps, it would represent the highest same-store sales results since September 2009.


NEUTRAL:  5.5% to 6.5% would imply two-year average trends that had declined slightly below those seen in July.  This would be received as NEUTRAL because July trends were particularly strong on a two-year basis, therefore a deceleration, provided it is only marginal, would not be viewed with much disappointment.


BAD:  Below 5.5% would imply two-year average trends that have declined sharply from July’s results.  The Street is expecting a number of 5.2%, but it seems that the global business has been performing strongly and exceeded expectations in July – I believe it will once again do so in August.




APMEA (facing a relatively easy -0.5% compare, including a calendar shift which impacted results by -0.7 to -0.8%, varying by area of the world):


GOOD:  A print of 10% would imply trends roughly in line with those seen in July.  Any improvement would, of course, be well-received, but a print that sustains the strong improvement in July from June’s poor number would be viewed positively.  


NEUTRAL:  Comparable-store sales of 8% to 10% would result in two-year average trends slightly below those seen in July but still above the lower level implied by June’s result.  On a one-year basis, this range also implies a number far in excess of the disappointing APMEA sales results of March, April, and May.   


BAD:  Same-store sales of 8% or less would imply a significant sequential slow down from July’s trends.  Additionally, if the result is in the region of 7.5% or lower, it would imply results even worse than June on a two-year average basis.  The Street is expecting a number of 7.4%.  I believe this is conservative given that a print of 7% would yield a two-year average number of 3.6% - a mere 20 bps over the trough December two-year number. 




Howard Penney

Managing Director

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EARLY LOOK: Accept Uncertainty

This note was originally published at 8am this morning, September 7, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.



EARLY LOOK: Accept Uncertainty - Van Gogh




“For my part I know nothing with any certainty, but the sight of the stars makes me dream.”
-Vincent van Gogh
Back to the grind this morning. I’ll try to kick things into gear by keeping this tight. I’ll start where I always do, utilizing real-time market prices and the governing principles of chaos theory in our macro models. Managing risk in this increasingly interconnected global marketplace always starts with accepting uncertainty.
Chief of the Reserve Bank of Australia, Glenn Stevens, had this to say overnight as he kept Aussi rates unchanged at 4.5%:
“With growth in the near term likely to be close to trend, inflation close to target and with the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate for the time being.”
Crisp, concise, and the to the point. To be sure, saying “somewhat uncertain” was pointed directly at Ben Bernanke who calls today’s global economy “unusually uncertain.” Altogether, global risk managers and central bankers alike should simply accept uncertainty in what it is that they do.
While I’m not certain about what it is exactly that Bernanke does in managing multi-factor and multi-duration global macro risk every day, I am certain about what it is that Congress does whenever they have an economic problem to solve for – spend.
Taking President Bush’s lead in increasing government spending, President Obama introduced another $50 BILLION in stimulus spending over the long weekend. This isn’t a political point – it’s a mathematical one. As you increase the numerator (spending) and the denominator continues to shrink (GDP), the ratio of US deficit/GDP goes up.
While there was some sort of sadistic fanfare associated with a 9.6% unemployment rate in this country being “better than expected” on Friday, we are going to look at the current intermediate term TRENDS in both US employment and consumption for what they are and we’re going to cut our US GDP growth estimate from 1.7% for Q3 to 1.3%.
What are the main macro signals in the US marketplace that continue to flash slowing growth?
1.      US Currency – the US Dollar was down last week for the 12th week of the last 14, losing another -1.1% of its uncertain value as the world’s reserve currency. Perhaps the President’s plans for additional stimulus leaked into week’s end. You tell me.


2.      US Bond Yields – after rising from its YTD lows last week, the interest rate on 10-year US Treasuries are falling again this morning back down to 2.65%. Notwithstanding that our intermediate term TREND line of resistance remains much higher (up at 3.01%), the reality here is that the bond market doesn’t lie about US GDP growth; politicians do.


3.      US Equities – after a big rally from oversold lows (we covered most of our short positions between August 24th and 25th walking through the math associated with the 1040 level being an important level to book gains on the short side), the SP500 remains bearish from an intermediate term TREND perspective. Our Bear Market Macro line in the sand remains 1144, and we have immediate term TRADE resistance at 1107.

This isn’t to say that there aren’t other countries, currencies, and commodities in this world that won’t do well in this uncertain macro marketplace (after being bearish on them for the first half of 2010, we are long Chinese equities via the CAF). This is simply an opportunity to recognize that there is nothing “unusual” about how currency, bond, and equity markets in the US are correlating.
What could change our view that US GDP growth is slowing?
1.      Weekly Jobless claims dropping, sustainably, below 390,000.

2.      Weekly MBA mortgage applications showing some semblance of a demand signal for US Housing (as opposed to the lowest levels of demand since 1997).

3.      Weekly price performance of US currency, US Treasury bonds, and US stocks changing their intermediate term TRENDS for at least 3 consecutive weeks.

What could change our call for American Austerity (Q3 Hedgeye Macro Theme)?
1.      Slowing US government spending

2.      Accelerating US GDP growth

Unfortunately, despite the “sight of the stars” of the northern lights last week, I am certain that I see neither government spending nor growth in America changing their respective bearish paths this morning.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer



Data from the Bureau of Labor Statistics today were positive, on the margin, for Quick Service restaurants.


Unemployment has been a thorn in the side of restaurant stocks but quick service restaurant chains have suffered more than most.  This is, of course, due to their heavy reliance on the younger age cohorts who have been impacted severely from this recession from an employment standpoint.   MCD, SONC, JACK, BKC, YUM, WEN and other quick service operators have mentioned high levels of unemployment (especially among young people) as being a primary impediment to same-store sales growth. 


The most recent data from the BLS indicates that those falling into the 20-24 years age group have seen a year-over-year uptick in employment levels for the first time since September 2007 when the Employment Level, on a seasonally adjusted basis, for 20-24 year olds grew by 0.22%.  MCD will still be making life hard for the other QSR chains, but this data point is a positive on the margin.




Howard Penney

Managing Director

Bear Market Macro: SP500 Levels, Refreshed...

Not a lot has changed in the last few weeks. We stressed the oversold lows of the immediate term TRADE down at 1040 and have since recovered to yet another lower-intermediate-term high. Last week’s volume was anemic.


In the chart below we show that the Bear Market Macro line of intermediate term TREND resistance remains intact up at 1144 and we have another lower-high of resistance established at 1107.


If you are looking for good news, there is an immediate term TRADE line of support that’s developing in the 1086-1088 range. If you are looking for bad news, watch what happens to this market if that 1086-1088 range fails to hold on a closing basis (no support to 1028).




Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - S P

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