The Macau Metro Monitor, October 6th 2010




The Monetary Authority of Macau released new guidelines on residential mortgage loans effective 12/1/2010. The guidelines include a maximum 70% LTV ratio, a maximum 50% debt servicing ratio, and mortgage loans which cannot have a maturity longer than the borrower's retirement age.




Conclusion:  China carried the third quarter relative to expectations, but commodity and labor inflation should take a toll on margins in 4Q10.  Top-line trends in the U.S. and YRI were positive, but continued to decline on a two-year average basis.  It will be difficult for the company to sustain its reported restaurant-level margin growth if trends do not improve in both the U.S. and YRI.

YUM 3Q10 earnings came in relatively in line at $0.73 per share versus the street’s $0.72 per share estimate, and management raised its FY10 EPS guidance to $2.48 from $2.43, matching the street’s full-year estimate.


Relative to expectations, China was the bright spot during the quarter with same-store sales growing 6% versus the street’s 4.0% estimate.  This 6.0% comp growth implies a 300 bp acceleration in two-year average trends from the prior quarter.  Restaurant margin grew 90 bps YOY, which was better than I was anticipating, as a result of both the better-than-expected comp growth and the fact that the company guided to both commodity and labor inflation in the back half of the year, which did not fully materialize in 3Q10.  Although the company did experience higher labor costs during the quarter, it benefited from another quarter of YOY commodity deflation.  That being said, management expects commodity and labor inflation to negatively impact margins in the fourth quarter.  To that end, I would expect restaurant-level margin to decline during 4Q10; though given the company’s strong year-to-date restaurant margin gains, YUM should easily achieve its full-year goal of growing restaurant-level margin in China.


Same-store sales growth came in below expectations in both the U.S. and YRI.  U.S. comparable sales growth was up 1% during the quarter relative to the +2.2% consensus estimate.  Pizza Hut posted another quarter of 8% comp growth, which at first glance, looked very impressive, but it is important to remember that the concept was lapping a -13% number from last year.  Positive comps are impressive in this environment, nonetheless, but two-year average trends decelerated 250 bps from the prior quarter.  This slowdown points to share losses within the casual dining segment given the improvement in two-year average Knapp trends in July and August (and rumored for September).  Please refer to my “KNAPP TRACK: SEPTEMBER (RUMORED) TRENDS” post for more details.


Taco Bell same-store sales came in +3%, which points to better trends on a one-year basis but slowing trends on a two-year average basis relative to 2Q10.  And, KFC just continues to be horrible.  Comps declined 8.0%, implying a 300 bp sequential deceleration in two-year average trends.  Management said that trends at KFC would be soft in the back half of the year as “there is no quick fix.”  YUM has been in the process of a turnaround at KFC for some time now and although the concept sees an occasional quarterly uptick in sales, we are yet to any sustained improvement in trends.  U.S. restaurant margin improved 30 bps YOY despite the sales shortfall, which management attributed primarily to refranchising. 

Comparable sales growth at YRI grew 1% in the quarter, in line with the prior quarter on a one-year basis, but implying a 50 bp slowdown on a two-year average basis. 


On the second quarter earnings call, management guided to stronger sales growth for the balance of the year at YRI, largely as a result of easier comps in the back half of the year, so this sequential slowdown in two-year average trends was disappointing.  The street was looking for 2.3% growth during the quarter.  That being said, restaurant level margin improved 160 bps, which the company again attributed to the impact of refranchising.




Investors seem to buying the "high single digit" corporate rate increase story for 2011.  Think corporate America is buying?



High single digit corporate rate increases for 2011?  That’s what the lodgers are implying and investors seem to be buying.  At best, that’s the starting point for lodging companies during their negotiations.  Someone needs to ask the corporations on the other side of those negotiations what they think.  Actually, we know of at least one very large firm that spends a lot on travel who doesn’t think they should pay one dollar more of rate.


Investors need to understand that it is posturing season.  Lodgers, especially Marriott, were very bullish regarding corporate negotiations on their Q2 conference calls.  We expect the same and more on the Q3 calls.  Marriott and maybe some of the other hotel companies will likely be aggressive in their 2011 RevPAR guidance as well to buttress their negotiating stance that room demand is high. 


However, look for less impressive bottom line guidance.  For one, higher EPS/EBITDA guidance won’t help their negotiating leverage so why not leave themselves cushion if their aggressive RevPAR guidance is not met?  Second, we think CostPOR may be 3-4% higher next year, meaning that rates will need to exceed that level for margins to go higher, as analysts are optimistically projecting.  Our private hotel contacts indicated higher cost expectations for next year which don’t appear to be factored into analysts’ projections.


So why do we think corporate negotiations may not be so one sided as implied by hotel management teams?  For one, a very large financial institution with a huge number of expected travel room nights up for grabs recently sent out a letter to the hotel companies.  If their hotel partners want to keep their "preferred" status (to which over 90% of their room nights get allocated) they won’t be paying more in rates in 2011 than in 2010.  They want their current rates rolled over.  We’re pretty sure they are not alone.  Employees of big companies are the only ones traveling.  These big companies have leverage.  This will be a fierce battle that will end up in the low to mid single digit rates in our opinion.  


Keep in mind that corporate rates are a call option that companies may use if prevailing market rates are above "corporate rates."  Contrary to popular belief, companies do not guarantee any room nights in return but rather historical room nights are used as leverage by companies.  Providing hotel partners "preferred status" is also a leverage tool used to drive deeper discounts.


Disagree with us?  Check out the following analysis by Egencia, Inc. which is Expedia’s corporate travel arm.  Egencia projects 2011 corporate rates to increase only 3%.  Incidentally, some of our private hotel contacts agree with us that absolute dollar RevPAR has actually been slowing for a couple of months which may put added pressure on the negotiations.  We think too many analysts take management’s word as gospel in this department.  Keep this in mind during the upcoming conference call (story telling) season.

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Call recorded on: Tuesday, October 5th, 2PM EDT


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The Hedgeye Macro Team, led by CEO Keith McCullough, detailed Hedgeye's 4Q Key Macro Themes, which are as follows:

  • Japan's Jugular - The Keynesian experiment that is Japan will continue to implode in Q4. The Yen, JGBs, and Nikkei all remain at risk.
  • Krugman Kryptonite - As the Fed signals its intent to use more Krugman Kryptonite (printing dollars/ quantitative easing) we look at both the short and long term implications behind the faulty math of Dr. Krugman.
  • Consumption Cannonball - U.S. consumption will roll over sequentially in Q4 based on our bottom-up consumption model. This is a negative catalyst for our below consensus Q4 GDP domestic growth projections.

To submit questions for the Q&A, please email 




Hedgeye Macro Team

EARLY LOOK: Japan's Jugular

This note was originally published October 05, 2010 at 08:00 in  


“Great spirits have always encountered violent opposition from mediocre minds.“

-Albert Einstein


EARLY LOOK: Japan's Jugular - Einstein





I am currently in the middle of reading Walter Isaacson’s “Einstein: His Life and Universe.” For a young chaos theorist fighting the winds of Washington and Wall Street Groupthink, Einstein’s independence of thought is highly motivating.


Chaos and Complexity Theory are the most important mathematical discoveries since Einstein’s General Theory of Relativity. While we don’t give out our mathematical models here in New Haven, we distribute both their factors (inputs) and themes (outputs).


Like any other dynamic ecosystem in this universe, global markets are constantly changing. As a result, analyzing time, space, and gravity are seemingly rational places to start each and every risk management morning. Trivial points in time like a price-to-earnings ratio are what they are – of very little value to our research.


At 2PM EST today we’re going to introduce the 3 global macro risk management themes that we think will matter most to global investors in the 4th quarter of 2010 (if you are a qualified investor and would like to sign up for the call, please email


For Q4 2010 our Hedgeye Macro Themes are as follows:


EARLY LOOK: Japan's Jugular - 0 q4 THEMES


In sharp contrast to other “top-down” or “global macro” oriented sell-side research that calls everything “long-term”, we focus acutely on time (duration) and space (price). It’s all good and fine to come up with a “long-term” investment thesis (been there, tried that), but if you get time and price wrong, you’re best advised to get a job in academia.


I don’t disrespect academia. I just don’t want my firm, family, or country’s risk management system overseen by academics. Einstein himself would be the first to call out the long-term career risk associated with academic dogma. As markets evolve, we need to evolve the risk management process alongside them.


Living in the violent opposition of mediocre industry standards is one of the tremendous investment opportunities in global finance today. Schumpeter called this creative destruction. God bless the learning opportunities that are born out of the failures of Fiat Fools.


Unfortunately, Washington and Wall Street Groupthink doesn’t get this yet. Neither do the Japanese Bureaucrats who continue to believe that the best way to solve for structurally impaired economic growth is to throw more failed government policy action at the problem.


We’ll go through the why on this with a 68 slide presentation this afternoon, but the bottom line is that what you are seeing from Japan this morning is ultimately an admission that QE (Quantitative Easing) didn’t work.


In fact, after cutting interest rates from ZERO POINT ONE percent (0.10) to ZERO POINT ZERO percent (0.00), the most recent edition of a Japanese Heli-Ben (BOJ Governor Shirakawa) dropped the QE acronym altogether for a new one – CME (Comprehensive Monetary Easing).



EARLY LOOK: Japan's Jugular - japanchart



The best part about CME versus the QE that is sponsored by “New Keynesian Economics” academic dogma (Bernanke, Krugman, Stiglitz, etc.), is that I can actually understand what CME means. It’s very “comprehensive” to see that the Japanese can’t cut interest rates (until they raise them) again.


I’m certain Einstein would be a fan of CME. When failed ideologies like QE meet their maker of gravitational force, the next best step for a failed academic is to stop what they are doing. Then either retire, or change as the facts have. After all, it was Keynes himself that would be asking “New Keynesians”, what do you do now Sirs?


My immediate term support and resistance lines for the SP500 are now 1126 and 1144, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


If the whisper number is to be believed, casual dining sales trends showed strength in September.


The optimistic tone being struck by management teams (PFCB, DRI, MRT) in the casual dining category over the past few weeks resonates with the trend in casual dining sales that began during the summer and is continuing into the fall months.  The whisper numbers for the first three weeks of September, combined with our estimate, leads us to an estimate of 1.5% for the Knapp Track September same-store sales number.  This would constitute an acceleration of 90 bps on a one-year basis and a two-year average trend improvement of 10 bps.  Incidentally, a 1.5% print for September would be the strongest Knapp Track casual dining same-store sales number since August 2007 when a +1.7% result was reported.


Hedgeye’s macro view does not support the thesis that overall consumption will remain robust as we progress over the immediate and intermediate term; however, it is worth noting that the restaurant industry’s share-of-wallet seems to be holding up versus other “discretionary” categories.  I will be posting specifically on share-of-wallet trends within consumer discretionary soon.




Howard Penney

Managing Director

Early Look

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