Conclusion: I expect 3Q EPS and guidance to be helped by the weak dollar but a sales rebound is necessary in Europe and APMEA to restore confidence after a poor August showing.  The US likely remained strong in September, up 5-6%, but I would expect trends to slow on a two-year average basis going forward as the incremental smoothie sales should fall off in the colder months.  As it stands today, 2011 is going to be a challenge for MCD, particularly as reported comparisons get increasingly more difficult come March.


Having covered MCD for nearly 17 years, I was struck by the retirement of MCD’s head of investor relations Mary-Kay Shaw.  Before Mary-Kay took the helm, Mary Healy sat in the hot seat during some very difficult times at the company, and she retired when the stock was in the mid-20’s; just before the company took off on this incredible run.   Mary Healy had an unfortunate sense of timing!  Perhaps the departure of Mary-Kay Shaw is a negative omen for MCD given the run the stock has been on and how difficult a year 2011 is shaping up to be.  The way I see it, Mary-Kay Shaw may prove to have a better sense of timing.


McDonald’s is scheduled to report its September sales numbers, along with its 3Q10 earnings results, before the market open on Thursday, October 21st.  September 2010 had one less Tuesday, and one additional Thursday, than September 2009.


Below I go through my take on what numbers will be received by the street as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts.  To recall, August same-store sales numbers showed maintenance of trends in the United States and softness in Europe and APMEA. 



U.S. (facing a 3.2% compare, including a calendar shift which impacted results by -0.2% to +0.2%, varying by area of the world):


GOOD: 5% or greater would be perceived as a good result because it would imply that the company was able to improve U.S. two-year average same-store sales by ~15 bps on a sequential basis, when adjusting for calendar shifts, off of an already improved August trend.  This would be a strong number when compared to the results thus far in 2010, with only July coming with a higher number: +5.7% (albeit aided by a positive calendar impact of 0.4% to 1.3%, varying by area of the world). 


NEUTRAL: Roughly 4% to 5% implies two-year average trends that are approximately in line with those seen in August.  I would be disappointed to see a number in the low end of this range, however.


BAD: Below 4% implies that two-year average trends deteriorated on a sequential basis from August.  Given that the U.S. was the only market to maintain sequential two-year trends in August, it would be a bad sign for MCD if the U.S. market were to slow from here. 



Europe (facing a difficult 6.9% compare, including a calendar shift which impacted results by -0.2% to +0.2%, varying by area of the world):


GOOD:  A print of 2.5% or higher would be viewed positively because it would imply a sequential gain of ~100 bps in two-year average trends in Europe.  While this would be the lowest print of the year outside of August, it is worth bearing in mind that August’s 2.2% print was on the back of a 3.5% print in August 2009; September 2009 saw a jump in same-store sales to +6.9% in Europe.  A GOOD result in Europe would suggest that last month was a blip rather than a beginning of a more protracted malaise.  A significant acceleration in two-year trends from August’s soft result would likely be required to convince the street.


NEUTRAL: A result of 1.5% to 2.5% implies sequential trends held relatively level in Europe during September.  While even the low end of this range would imply a marginal increase in sequential two-year average trends, last month’s print of 2.2% was the lowest of the year. 


BAD:  Less than 1.5% would be the worst headline number since February 2009.  While a sequential slowdown in two-year average trends will be avoided unless comps slip below +0.45%, such a significant decline from August’s print would be disconcerting.  However, maintaining two-year average trends from August is not that encouraging either as it implies that the softness was not the result of a one-month issue.



APMEA (facing a 5.3% compare, including a calendar shift which impacted results by -0.2% to +0.2%, varying by area of the world):


GOOD: 4.5% or higher would imply a sequential increase of ~40 bps versus August.  Following August’s disappointing print, and declining two-year average trends, this would be a positive for investors.  While 4.5% is typically a low print for APMEA, September 2009 presents the most difficult comparison since May.  The May 2010 result was +3.8%, which translated into a 50 bps gain in two-year average trends. 


NEUTRAL: 3.5% to 4.5% would result in two-year average trends being maintained from their August levels. 


BAD:  Below 3.5% would imply a significant slowdown from the lackluster print in August and could raise investor concerns about MCD’s APMEA business.






Howard Penney

Managing Director

Bull/Bear Battle: SP500 Levels, Refreshed...



If the SP500 closes below 1170 today, this selloff heightens the probability of my compressed-crash call.


As a reminder, I’ve been calling for a 33% chance of what I called “A Heavier Crash” on September the 29th. This email is by no means is meant to be a victory-lap. Probable doesn’t mean likely… but heightening probabilities need to be monitored, acutely.


So what would a Heavier Crash look and feel like? I’m in print saying that “the most probable scenario that the perma-bulls would consider improbable is a 1-3 day correction on the order of -5.4% to -6.9%.”


Notwithstanding the bad karma that’s associated with any October 19th (1987’s crash), there is a very high probability that a TRADE line breakdown through 1170 puts the 1144 line back in play on the downside. From yesterday’s 1184 close, that would be a -3.4% correction – not a compressed crash – but… and there’s always a but… there are still plenty of days left in October… and bad US housing data is on the docket for next week.




Keith R. McCullough
Chief Executive Officer


Bull/Bear Battle: SP500 Levels, Refreshed...  - 1

The Electoral Scorecard . . . Democrats More Secure in the Senate

Conclusion: While the House looks like a runaway for the Republicans, the Senate is looking more and more secure for the Democrats.


We noted, with interest, Mark Zandi's (from Moody's comments on Bloomberg this morning that, "Washington is the center of the economic universe." While we certainly do not believe it should be, it is the sad truth that the policy makers in Washington have inordinate impact on the markets these days, especially as it relates to the potential for further quantitative easing.  As such, we wanted to update our predictions heading into the upcoming midterms.


From a top down perspective, not much has changed for the Democrats.  President Obama's approval rating, according to the poll aggregate at Real Clear Politics, is effectively as low as it has ever been with a 44.7 approval rating and a 49.2 disapproval rating.  The negative spread is -4.5. The approval rating of the President has worsened over the last couple of weeks as he has hit the campaign trail and is likely to deteriorate further in the coming weeks as Republicans ramp up advertising spending.  As it relates to the outcome of the midterms, this is about as good a leading indicator for the results as there is when it relates to party preferences.


This strong aversion to Democrat candidates is also seen in the Generic Congressional vote, which polls generic preferences.  Similar to the President's approval rating this poll, also according to the Real Clear Politics poll aggregate, is at close to its worst levels as well.  Currently, only 41.2 percent of those polled prefer a Democratic candidate, while 48.2% prefer the Republican candidate.  This is a positive spread of 6.9 for the Republicans.  These preference are also underscored by a Republican base that is very motivated to vote during these midterms.  As we've previously noted, more Republicans than Democrats voted in the primaries than in any period since the Great Depression!


In the House, a Republican takeover is all but a foregone conclusion.  Currently based on district level polling, it appears that the Republicans will safely win 213 seats and the Democrats will safely win 179 seats.  The remaining seats, some 43, are currently considered toss ups.  The Republicans will only need to win 5 of the 43 seats that are toss ups to gain the 218 seats needed to claim a majority, or just over 10% of the toss ups.  Looking at the underlying momentum, of the seats that have recently shifted, 12 seats have shifted to the Republican side and only 2 have shifted to the Democratic side.  If those trends continue 37 of the seats currently considered toss ups could go Republicans, which would mean the Republicans would have 250 seats.  The last time a party lost this many seats in the midterm was the Democrats under President Roosevelt in 1942 when the Democrats lost 55 seats.


Over in the Senate, the race is much closer and the Democrats have a good a chance of retaining control. This is, of course, partially due to the fact that only 1/3 of the Senate is up for re-election every two years.  Polling at the state level currently suggests that the Democrats will have 48 seats, the Republicans will have 45 seats, and 7 seats are currently too close to call. The race that most recently shifted was the Kentucky Senate race between Republican Rand Paul and Democrat Jack Conway, which shifted from leaning Republican to too close to call.  With this shift the Intrade contract, which allows speculators to bet on whether the Democrats will retain the Senate, has been trading close to the 60% line.


The wild card over the next few weeks will be spending and turnout and with the recent inflows of capital into Republicans coffers, we should see continued gains in the coming weeks.


Daryl G. Jones

Managing Director

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Today’s announcement of China’s central bank raising rates seems to have spooked the Macau gaming stocks. Historically, higher rates have been good for gaming revenues in Macau.



The Macau gaming stocks listed in the US and the S&P are taking a bruising today following the announcement that China increased benchmark rates by 25bps.  We think WYNN and LVS are expensive and October growth may disappoint recently elevated expectations.  However, recent history shows that higher rates have been good for Macau gaming revenues, not bad.


This morning we took a look at the last three years of Macau revenue data and regressed it on the China 1-yr Lending Rate.  We found that the correlations between interest rates and total gaming revenue, Mass gaming revenue, and Rolling Chip volume were all around 0.75.  That is a positive 0.75, not a negative correlation.  Moreover, interest rates were statistically significant in explaining the changes in gaming revenues with the highest t-stat present in the Mass to Interest rate equation.




Our macro view at Hedgeye is that higher interest rates and currency valuations are conducive to higher consumer spending.  This would explain the positive correlation with Macau gaming revenues and especially Mass gaming revenues.  We understand the liquidity argument that VIP revenues are driven in part by the availability of credit.  Higher interest rates do not necessarily mean less liquidity.  China appears to be awash in cash with capital still flowing in.  We do think the liquidity certainly needs to be monitored closely but for now we are not worried about a 25bp increase in rates.


MPEL looks to be most unduly penalized today since it is a pure play on Macau.  However, recent market share gains and market growth should lead to significantly better Q3 EBITDA and EPS than currently projected by analysts.  This should finally be the quarter that MPEL beats, and estimates move higher.

R3: JCP, Uniqlo and Handbags


October 19, 2010


Against a backdrop of increasing M&A chatter, a study out of the NRF suggests a 2% increase in consumer spending this holiday season – sounds optimistic to us.





- With luxury leather goods in short supply, it’s not terribly surprising to also note that prices may be on the rise.  Rumor has it that Chanel is raising prices a second time on the Jumbo handbag by about $300, taking the price to $4,000.  Price changes are expected to take effect in February.


- Like it or not, Uniqlo is selling men’s jeggings this fall season.  The 100% cotton, tapered and stretchy pants look like jeans from afar but like sweatpants up close.  Given that Uniqlo is a one store operation here in NYC, it will be interesting if ANY other retailer picks up on this trend.  Chances are this one stays in Manhattan.


- The NRF estimates that the implication of a VAT would decrease retail spending by $257 billion in its first year of implementation.  They also estimate it would negatively impact retail sales by 2.5 trillion over the following 10 years.  Recall that the VAT idea is being discussed as a means to close the budget gap.





JCP Fights Back With Poison Pill - J.C. Penney Co. Inc. chairman and chief executive officer Myron E. “Mike” Ullman 3rd and the rest of its board sent a missile back to activist investor William Ackman on Monday by adopting a shareholder rights plan, or poison pill, that would make it prohibitively expensive for anyone to take over the retailer without the consent of the board. If Ackman ups his stake or if anyone else hits the 10% mark, the rest of the shareholders would get the opportunity to buy a portion of a preferred share of the company for $130. The effect would be to lessen the stake of the would-be acquirer, who can’t participate in the plan, and to jack up the overall price tag by astronomical proportions.With a poison pill in place, Ackman can no longer simply offer to buy shares from other stockholders and gain control at the firm. He would have to come up with an offer that was sweet enough to get the board to remove the poison pill. <>

Hedgeye Retail’s Take: As we stated from the very beginning we believe this will be a long drawn out process which could last for a year.  Score one for JCP and its advisors, but we are sure there is more to come.  Next step is likely Ackman reaching out the board with some sort of strategic plan or proposal.


Golden Gate Capital PE Explores Orchard Brands - Private equity firm Golden Gate Capital is exploring options, including a possible sale, for its portfolio firm Orchard Brands, which operates a slew of apparel brands sold mostly in direct channels. Based in Beverly, Mass., Orchard Brands, which generates more than $1.1 bn in annual revenues, is the umbrella firm that owns catalogue and Internet brands including Blair, Haband and Norm Thompson. Two nameplates, Appleseed’s and Draper’s & Damon’s, operate retail locations. <>

Hedgeye Retail’s Take: While the aggregate sales of the combined entity is impressive (if not surprising) and the company has expertise in the direct channel, it’s exposure to catalog business is noteworthy if not concerning. For the first time in a while we’re actually seeing a sale by a PE firm and not a purchase (or rumor of).  With CWTR having trouble, now might be as good as any time to sell yet another business catering to an older female demographic.


Sugar Inc. Buys A Private Sale Fashion Site - Sugar Inc., which operates web sites that sell apparel, shoes and beauty products, has bought, a private sale site with 500,000 registered members focused on sales of high-end designer apparel and accessories. The purchase price was not disclosed. Sugar Inc. will keep as a separate brand. Sugar operates, where consumers can shop for apparel and related items sold by various retailers. <>

Hedgeye Retail’s Take: With more than 17mm unique visitors monthly, this ‘diversified women’s media company’ has the platform to make a discount luxury sale concept work – particularly one that offers only premium luxury brands like Keep an eye on Gilt which remains the largest, most established private-sale brand that has yet to change hands from the original investor group.


US Shoppers' Holiday Spending Plans Offer Glimmers of Hope - Americans will increase holiday- season spending by 1% this year as they shop less at discounters and focus more on quality and service, a trade group said. U.S. consumers plan to spend an average $688.87 on holiday- related shopping, more than last year’s estimated $681.83, according to a survey conducted for the National Retail Federation by BIGresearch. Of the total, $518.08 will be spent on gifts, up 2.1 percent from 2009, the survey showed. The findings are consistent with Washington-based NRF’s prediction for a 2.3 percent gain in U.S. holiday sales.


Hedgeye Retail’s Take: Prospects of increased buying on tighter inventories suggests a backdrop for a more benign promotional environment – reality might be a different story. By the time consumers hit main street for holiday shopping the market is unlikely to be at new highs since April. In fact, in light of our Consumer Cannonball theme here at Hedgeye, we wouldn’t be surprised to see to spending down yy once the consumer is saddled up at the register.


UK Retailer Blacks Leisure Approached by PE Firms for Possible Takeover - Black Leisure has reportedly appointed corporate finance advisory firm McQueen to oversee a potential bidding process from two possible takeover approaches by PE firms. <>

Hedgeye Retail’s Take: The company’s posted a brief letter from the board this morning confirming takeover speculation surrounding the UK’s leading outdoor retailer. This hardly comes as a surprise. After embarking on an aggressive turnaround plan in early 2008, the company appears to be at an inflection point having exited its unprofitable Boardwear business and now seeing better than corporate average sales at its new concept stores. Given its leading position in the UK market, the question now is if domestic U.S. based sport retailers are among those inquiring.


Fujian Tanneries to Shut Down - China’s Fujian provincial environmental protection authority said a new pollution control program will be soon launched in the region, causing a number of small tanneries in the cities of Fuzhou, Zhangzhou, Quanzhou and Putian to face closure in the near future. Polluting tanneries with a production capacity of less than 30,000 pieces of cow leather or equivalent will be the first to be shut down. Factories producing fewer than 100,000 pieces will be eliminated by 2012 and those produce fewer than 300,000 pieces will be closed by 2015. The authority is trying to persuade tanneries to move to specially designed leather zones where proper effluent systems have been established so that the pollution level can be easily monitored. <>

Hedgeye Retail’s Take: Few manufacturing processes have such a devastating environmental impact as tanning. As China cleans up its production facilities i.e. tightening capacity and demand continues to shift toward India, there is little indication that leather is likely to see a deflationary environment in the short-to-intermediate term.



We had a conversation with Genting Singapore management last night and our notes are summarized below.



Management seems to be trying to manage expectations for the quarter.  They are aware that the stock has gotten “expensive” and want to make it clear that they don’t see a ton of growth on the gaming end of things until there is clarity on junkets getting licensed.  We think their comments may be posturing and “managing expectations” because there should be some growth even without junkets.

  • Q3 tends to be the slowest period in Asia.  August is called “Hungry Ghost Month” for the Chinese in Singapore as they don’t really do much that month and this year, it also corresponded with Ramadan.  This holds true for their lodging and casino business.  Usually Q1 & Q3 are the weakest quarters and Q2 & Q4 are the strongest.
  • Flat earnings is the goal for Q3.  Although we pointed out that that would imply an increase sequentially and that if trends were truly flat, then things should be down and they agreed.  We’re a little confused on what they are trying to signal.
  • Universal is continuing to run at 8,000 capacity until they open their 2 new rides in the 1Q2011.  Given the existing rides, they can’t increase capacity without making the queue lines too long.  They are currently sold out every day.  Otherwise the queue lines will be too long.  Once Journey to Madagascar and Battlestar Galactica open, they will be able to run at full capacity – 12-13k/day.  They won’t be able to run at full capacity (25k) until Transformers opens and they don’t have a date set yet for that ride - although they are thinking late 2011/early 2012.
  • Won’t comment on any client activity (i.e. the articles about rich businessmen losing lots of money at the 2 IRs).  Henry Kwack – already settled with them though. The media tends to sensationalize the rest.
  • On the gaming side - thinks that things are getting a little softer – especially on the Mass market where people are trying both casinos. Some of the novelty factor is wearing off.  Expect Mass Market to flatten out for the next few quarters and don’t expect the VIP market to grow until the junkets get licensed.  They have sponsored about 20 junket applications.  Some of them have moved onto the interview stage. Should be hearing from the government on licensing by early next year.  As far as they know, Sands doesn’t have any junket applications pending.  Since the licensing process takes 12-16 months, even if Sands wants junkets, they will be about a year behind RWS.
  • 3Q2010 results will be published on Nov 11th
  • Expect Q3 to be 50/50 VIP/ Mass
  • They are indeed taking on more risk than usual on the credit side since they don’t have junkets. When their junkets come into the market they will give them 1.4% all in commission rate. They aren’t experiencing substantial collection issues.  Giving 90 days credit.
  • The impact of Golden Week is a lot more pronounced in Macau than it is in Singapore given that it's driven by Chinese players.  It’s not as “off the charts” as Macau.  38-40% of business from Malaysia, followed by Indonesia, HK/ China.
  • If there are no junkets, they think that growth will come mostly from non-gaming. 
  • MBS rumors:  Big issue they have is that they don’t understand the market as much as RWS does.  Have a little problem with accessibility – infrastructure around the area is still being developed and it’s very hard leaving the casino – there just aren’t enough cabs.  Thinks that they have management issues – there have been a lot of changes on the senior level. 
  • Think that in the 3rd quarter they will still have a slightly larger share than MBS - but it will even out by 4Q2010/ 1Q2011.

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.