CMG reported another quarter of upside surprises on both the top and bottom lines.  Earnings came in at $1.52 per share versus the street at $1.31 per share and comps came in +11.4% relative to the street’s 8% estimate.  On a two-year average basis, this +11.4% comp implies an 185 bp acceleration from the prior quarter and the company said the same-store sales growth was driven primarily by traffic.


Restaurant-level margins improved 220 bps YOY.  Relative to my earnings expectations, the biggest upside was driven by the higher-than-expected comp growth (I was modeling 9% growth).  As a result of this impressive top-line growth, the company got leverage on every line of the P&L, outside of G&A, which was higher YOY due to a manager’s conference during the third quarter and higher YOY stock based compensation expense.  For reference, the company had guided to no leverage on the food, labor and other operating expense lines.


Management slightly raised its full-year comp guidance to high single digit growth from its prior range of mid to high single digit growth.  For FY11, CMG’s initial guidance includes low single digit comp growth and 135 to 150 new units, which implies about 12% to 14% unit growth, in line with FY10 expectations.


Howard Penney

Managing Director

Scorching The Snake

This note was originally published at 8am this morning, October 21, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We have scorched the snake, no killed it.”

-Shakespeare (Macbeth)


The proverbial snake in the common man’s wallet is inflation. In this day and age of globally interconnected prices, governments can scorch it, but they can’t kill it - not when Western Fiat Fools wake up every morning trying to debauch their currencies for short-term stock market pops.


China scorched the serpent on Tuesday when it raised interest rates. The way that this works is very simple. Use monetary policy as a blow-torch on the way up (rate hikes) like Greenspan and Bernanke have used it as a blunt instrument on the way down (rate cuts). Glenn Stevens at the Reserve Bank of Australia is a modern day king cobra killer in this regard. He doesn’t get paid to be willfully blind. That’s why his citizenry trusts him.


Sadly, one day of snake scorching this week doesn’t a TRADE or TREND make. As soon as bad US economic data rolled through the leg hump machine yesterday, US stock market cheerleaders were right back at it begging Bernanke for more Quantitative Guessing. The Burning Buck went straight back down and commodity and stock prices went straight back up.


For all of you “deflation” fans out there, here’s a New Hedgeye Economics equation to jot down in your notebooks:


QG = i


That’s it. It’s that simple. Quantitative Guessing = global inflation.


Score this like you would scrabble points and mark-your-score-to-market at the end of every day by measuring what asset prices do on an inverse basis to the Burning Buck.

  1. Tuesday: US Dollar UP +1.7% = CRB Commodities Index DOWN -2.0%
  2. Wednesday: US Dollar DOWN -1.4% = CRB Commodities Index UP +2.4%

Cool, eh?


Not so much if you are part of the starving people in this world who the perma-bulls are quick to point out demand a lot of what their favorite companies in their portfolios make. But very cool for Wall Street and Washington types who really could give a damn about anything other than where the US stock market closes at month-end ahead of a mid-term election. It’s all about the short-term bonus baby.


Enough about the Fiat Fools who have mortgaged America, let’s go back to the leader in this global macro game of Monopoly: China.


Last night, the Chinese reported more of what our Hedgeyes have been calling for since Q1 of this year – a Chinese Ox In A Box (economic growth slowing as the Chinese focus on proactively tightening the screws on speculative lending and price inflation).


Here’s a Chinese data check:

  1. GDP growth slowed sequentially (quarter-over-quarter) to 9.6% in Q3 versus 10.3% in Q2 (versus +11,9% in Q1)
  2. Industrial Production growth slowed sequentially (month-over-month) in September to +13.3% from +13.9% in August
  3. Consumer Price Inflation accelerated again sequentially (month-over-month) in September to +3.6% from +3.5% in August

Net, net, what this means is that both economic lines in our model (Revenues = GDP and Cost of Goods Sold = inflation) continue to go the wrong way. Chinese economic growth has slowed to a 1-year low as inflation has accelerated to a 2-year high.


Ok. So what do you do with that?

  1. Realize that it’s not new “news” – Chinese growth has been slowing and inflation accelerating since Q1.
  2. Respect that, despite the slowdown, the Chinese government still has the political backbone to fight inflation and raise interest rates
  3. Stay long the Chinese currency because it, unlike America’s currency, has credibility (we have a 12% long position in Chinese Yuan, CYB)

Can you imagine Ben Bernanke raising interest rates as GDP growth is slowing and inflation accelerating? Can you imagine anyone in Congress understanding that a strong currency and positive rate of return on a citizenry’s savings gives more spending dollars to those conservative savers? Can you imagine anyone in a position of power on Wall Street or in Washington Scorching The Snake?


Here’s a brain Teaser for Timmy Geithner for his plane ride to Seoul, Korea and this weekend’s G-20 meetings:


If China has 1-year interest rates at 2.50% and the US has 1-year interest rates at 0.21%, which country has the higher probability of empowering their citizenry of savers with more money in 1 year?


I’m in Maine at a non-Groupthink Inc. conference for the next few days. This morning’s 9AM session is called “Thinking Wrong” … At a bare minimum, America’s snake oil salesman “economists” can’t accuse me of thinking inside the economic box they’ve put their people in.


My immediate term support and resistance lines for the SP500 are now 1173 and 1186, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Scorching The Snake - snake

Blame Canada! Contemplating Economic Outperformance North of the Border

Conclusion: While we have no position, we have a bullish stance on the Canadian Loonie versus the U.S. Dollar based a number of economic metrics.  The first nation of hockey is good at more than hockey it seems.

In 1995, the Wall Street Journal wrote that Canada was “an honorary member of the Third World in the unmanageability of its debt problem.”  Not surprisingly, Canada’s currency reflected this out of control debt and deficit issue and was commonly known as the Northern Peso, due to its weakness vis-à-vis other first world currencies.  In fact, the Wall Street Journal bottom ticked the Canadian Dollar, which is outlined in the chart below, as Canada slowly but surely got its fiscal house in order and its currency reacted accordingly.


At its zenith, Canadian debt-to-GDP was 120%, of which 70% being federal and 50% being provincial.  As a result, Canada’s credit rating was downgraded to AA, and its currency, the eponymous Loonie, could not catch a bid.   In 1995, enter Finance Minister Paul Martin of the Liberal party and some dramatic reforms and the currency was off the races and a steady climb to parity with the U.S. Dollar. (For the second time in the last 30-years, the Canadian Dollar is now worth more than the U.S. Dollar, and was last trading at 1.027 U.S. Dollars per Canadian Dollar.) 


Blame Canada! Contemplating Economic Outperformance North of the Border - 2


Finance Minister Paul Martin had clearly not been reading his New York Times, as he took a path of austerity instead of implementing additional government stimulus.  The key measures that Martin put in place to right the Canadian financial ship, were as follows:


• Federal government employment was reduced by 14%;

• Federal grants to the provinces were reduced by 14%;

• Spending cuts were 4 ½ times tax hikes.

• Canada’s welfare system was dramatically modified;

• Corporate taxes were cut by almost a third; and

• The General Services Tax (GST) was instituted to pay for the tax cuts described above.


In essence, Canada cut spending and improved the corporate tax environment, which narrowed the deficit and reduced government borrowings.  The result of these measures, much to the chagrin of Keynesians, is that Canadian has dramatically outgrown its industrialized peers from 1995 onwards.


We continue have a positive view Canada’s economy for a number of key reasons, which as are as follows:


1. Commodities – The natural derivative of a declining U.S. dollar is inflation, especially an inflation of those commodities priced in U.S. dollars.  In the case of Canada, this means oil.  Canada’s oil reserves, particular due to its vast Alberta Oil Sands, are virtually incomparable globally.  In fact, when utilizing the reserves in Alberta’s Oil Sands, Canada has almost 180BN barrels of reserves, which is second only to Saudi Arabia.  As the U.S. dollar declines, the asset side of Canada’s balance sheet inflates via its oil reserves.


2. Free marketers in power – Alberta native and current Canadian Prime Minister Stephen Harper is in his second term with a minority government, but his Conservative party won an increased share of parliamentary seats the second time around and has popular momentum.  One of the key economic accomplishments of Harper’s term was to finalize free trade negotiations with European Free Trade Association.  Recently, Harper also appointed my former colleague from Onex Corporation, Nigel Wright, as his Chief of Staff.  Wright is a long time partner at Onex, Canada’s largest private equity firm, and is solidly pro-business and in favor of free markets.  As the Prime Minister’s Chief of Staff is oft called the second most powerful position in Canada, Wright will have influence, which should be positive for the Canadian economy and continue the small government policies of Harper.


3. Unemployment – While the Canadian economy is not yet firing on all cylinders, it is also not going down the Road of Economic Perdition as is currently being followed by the United States.  Canada’s banks did not over leverage themselves in the housing market and are considered some of the healthiest in the world.  As a result, capital has continued to flow naturally, versus artificial infusion via quantitative easing, and therefore Canada has seen a gradual improvement in its unemployment rate, which we have charted below.  For the first time in almost 30-years, Canada’s unemployment is below that ofthe United States’, and by almost a full 2%. 


Blame Canada! Contemplating Economic Outperformance North of the Border - 1


On the negative ledger, the most negative factor facing Canada may well be the fact that its largest trading partner is the United States.  As of 2009, 73% of Canada’s exports were sent to the United States and 63% of Canada’s import came from the U.S.  Canada cannot hide from an economic slowdown in the United States.  Nonetheless, we’ll take Canadian on the relative trade (and in the next Olympic hockey final).


We would also advise U.S. policy makers to set aside their Krugman Krpytonite and take a look at Canada’s fiscal turnaround in the mid 1990s.  She’s a better case study than Japan, to be sure.


Daryl G. Jones

Managing Director

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Given the financial and operation leverage, BYD's quarters are wildcards and Q3 is no exception. Underlying fundamentals don't appear to be getting worse but they don't seem better either.



We continue to search for reasons to get positive on BYD considering the almost universal hatred for this stock in the analytical community.  Unfortunately, we are coming up snake eyes for now.  There are reasons not to short it, however: business is stabilizing, bank negotiations look like they are going well, and the free cash flow yield is very high.


The stock had a 10% move on 10/8 when the August Nevada numbers came out showing the LV locals market grew 3% YoY.  Well, that really didn't excite us because gaming volume actually fell 4% which was right in line with what our model was projecting based on the seasonally adjusted performance of the prior 3 months.  In other words, August fundamentals neither accelerated or decelerated from recent trends as can be seen in the following chart.




While everyone seems to be focused on YoY comps, we try and look at historical seasonal patterns and adjust results to view the sequential performance.  Given the volatility over the past two years, even two year comps are not that meaningful.  Overall regional gaming trends seem to be following the same pattern as the locals.  Seasonally adjusted revenues are exhibiting flattish sequential growth.  At least business is stable.  Here are our Q3 estimates. 



BYD 3Q Projections: 

  • Las Vegas locals revenue of $146MM and EBITDA of $30.4MM
  • Downtown Las Vegas revenue of $54Mm and EBITDA of $7MM
  • Midwest & South revenues of $189MM and EBITDA of $41MM
  • Borgata revenue of $211MM and EBITDA of $53MM
  • Other:
    • Corporate expense: $10MM
    • D&A: $37MM
    • Share of Borgata D&A: $18MM
    • Share based comp: $3MM
    • $1.1MM of deferred rent
    • $27MM of interest expense , plus $12.4MM at Borgata
    • $10MM of MI

UK Fiscal Determinism and Monetary Indecision

Conclusion: Fiscal consolidation, issued in detail by the Spending Review yesterday, will benefit the UK’s long-term economy, however over the intermediate term austerity should squeeze the consumer and dampen growth prospects. We do not have an investment position in the UK; and we’re standing clear of an investment position in the UK as rising inflation encourages stagflation.



It’s been an important week of economic releases in the UK. Below we highlight the UK Spending Review, Bank Levy, and developing macroeconomic outlook.


Spending Review


Yesterday’s release of the Spending Review by Chancellor George Osborne detailed the 4 year plan to slash the country’s £156 billion deficit to 2% of GDP; although the country’s austerity measures have largely been priced into the market, the Spending Review reinforces the country’s commitment to fiscal consolidation, captured by Chancellor Osborne statement that the country needs to “stay the course” of spending cuts. While we applaud the discipline to cut wasteful spending, the UK economy is by no means out of the woods (more below under Economic Outlook). 


Here are a few highlights from the Spending Review:

  • £81 billion cut from public spending over the next 4 years.
  • 490,000 public sector job cuts over the next 4 years.
  • Pledge to maintain spending on National Healthcare Service (universal healthcare) and Foreign aid.
  • 7% cut in funds for local governments by 2015.
  • Estimated 20% cut in most government departments.
  • All UK companies are set to benefit from a gradual cut in corporation tax over the next four years, from 28% now to 24% in 2014.
  • Debt interest payments will be lower by £1 billion in 2012, £1.8 billion in 2013, and £3 billion in 2014.
  • The state pension age for men and women will reach 66 by the year 2020, from 60, saving over £5 billion a year by the end of the next Parliament.
  • Child Benefit to be removed from families with a higher-rate taxpayer. The Office for Budget Responsibility has upgraded estimates of savings from the measure to £2.5 billion a year, from around £1 billion. Child Benefit will now continue to be paid until a child leaves full-time education at the age of 18 or even 19.
  • £30 billion to be invested in transport projects over the next four years, including £14 billion to fund maintenance and investment in railways (*more than was invested during the past four years).

Bank Levy


Today, the government drafted legislation on a permanent Bank Levy that is expected to generate revenue of ~ £2.5 billion annually. The levy would apply to UK banks, building societies, and UK operations of foreign banks with more than £20 billion in liabilities.  While Germany and France also said over the summer that they’d consider similar charges on banks, currently the UK’s unilateral levy puts competitive risk on its financial sector.


The levy is a win from a populace perspective, due to the strong outcry on banker compensation and as Mark Hoban, Financial Secretary of the Treasury, puts it, the levy ensures that “banks make a fair contribution in respect to the potential risk they pose to the British financial system and wider economy.”


The exact details of the levy on individual banks have yet to be finalized; however analysts expect it to hit hardest at Barclays, RBS, HSBC, Standard Chartered, and Lloyds.


Economic Outlook


As we noted in our post on 10/8 titled “UK and Inflation’s Ugly Head”, PM David Cameron and his government are now at a crossroads as austerity measures in the UK squeeze the consumer via higher VAT, lower wage, and fewer job opportunities, while inflation continues to rear its head among slower growth prospects into year-end and in 2011. Cameron and Co. may well have to do more than fiscal consolidation to encourage growth over the intermediate term.  Here’s the set-up we see:

  1. Go the likely route of the US (and potentially the Eurozone) in issuing some form of QE2, ie printing money which should further inflate prices and potentially depreciate the Pound, and/or
  2. Raise the benchmark interest rate to quell inflation, but risk further choking off growth

In either case we see downside growth prospects over the next 18 months. 


The release of the BoE Minutes from the October 6th and 7th meeting on Tuesday show that the Committee opposed raising the interest rate 25bps from the current level of 0.5% by a majority of 8 to 1.  Andrew Sentence continues to believe that the Bank must head off inflation, which is already above the target at 3.1%, by raising the interest rate, a position we agree with.  The minutes suggest there was little support for QE, except for Adam Posen who sees a need to head off deflation.  The Committee agreed that bank credit availability remains tight and that while business are cash heavy, they are choosing not to deploy it.  They see further downside risk to the broader economy due to fiscal consolidation, as weaker income growth and spending roll over alongside confidence.


Given the outlook for stagflation, we’re going to wait and watch to see how Cameron’s government steers the economy over the intermediate term. We successfully traded the GBP-USD in our Hedgeye Portfolio via the etf FXB. We sold the position on 10/8 for a gain of +1.9%. We think that the big gain in the currency pair came in the month of September into early October (see chart below). 


Matthew Hedrick



UK Fiscal Determinism and Monetary Indecision - gbP



In-line with us but well above the Street. Here are our notes from PENN's Q3 conference call. 



"Third quarter revenue, EBITDA, net income and EPS surpassed guidance and reflect the combination of higher than anticipated contributions from new gaming offerings at two properties and our commitment to achieving operating efficiencies, and undertaking rational marketing programs and spending throughout the organization. Our properties' third quarter EBITDA exceeded guidance by $12.0 million pre-tax, or $6.9 million after-tax, amounting to $0.06 per diluted share upside relative to our guidance."

- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming




  • "Notably, third quarter 2010 property level EBITDA margins, excluding pre-opening costs of $2.8 million at Hollywood Casino Perryville, rose to 28.5% compared with 27.8% in the same period in 2009 and 27.0% in the 2010 second quarter. The significant margin increase is attributable to the further rationalization of our marketing and promotional offers to customers as well as the benefit of operating leverage related to the incremental revenue being generated at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course following the placement of table games at these properties during the quarter."
  • Acquisition and development update:
    • "Last month, we established a joint venture that will own and operate in Texas the Sam Houston Race Park in Houston, the Valley Race Park in Harlingen and a planned racetrack in Laredo, subject to regulatory approval and certain other closing conditions."
    • "Broke ground in August on Hollywood Casino Toledo, are proceeding with design, planning and environmental remediation activities related to Hollywood Casino Columbus ahead of a planned groundbreaking early next year, and have commenced construction of Hollywood Casino Kansas City."
    • "Early in the current quarter, Penn National purchased all the outstanding debt of M Resort from Bank of Scotland for $230.5 million... Since announcing the debt purchase, we have been in a constructive dialog with the property's equity holders regarding ownership and future operations."
  • "The Company repurchased 1,117,610 Penn National common shares at an average price of $23.21 during the third quarter."





  • Comment on the margin improvement "surprise" in West Virginia
    • They already started "smarter marketing" programs at PA & WV. They did expect margin improvement on the business in PA given the lower tax rate on tables and also saw business move from electronic table games to live tables games at a lower tax rate. Also saw a lot of un-rated play which is always more profitable.
  • Is there room for margins to continue to improve in PA & WV?
    • Hesitant to say that there will be improvement from here
  • M Resorts timeline and gameplan?
    • They own the debt today, not the property
    • Allows them to leverage their new database
    • Sees significant upside there
    • YTD revenues $106.5MM and EBITDA was $9.5MM through August
    • Drew down the R/C for $145MM and the rest of the PP came from cash on the balance sheet
    • Think that over time they can get this property to produce a nice investment for them
    • The current management team has continued to improve results at the property QoQ.  They also believe that their current customers would enjoy going to this property
  • What kind of EBITDA did they assume on M when they acquired it?
    • N/A
    • Feel very comfortable that they will be able to improve results at the property to produce a good return for their shareholder in the foreseeable future
    • They have 390 rooms there that they are struggling to fill and their database can help them do that. At the very least, they can fill those rooms during shoulder periods with gamblers vs. low quality guests.
    • The majority of their database will still want to stay on strip but there are only 390 rooms to fill here
  • Maryland win per unit per day was higher than what they were looking for.  How to think about the property on a run rate basis?
    • Has started to stabilize in October. Still very early to give an indication of where win per unit will settle out. It's meeting their expectations
  • Louisiana?
    • Have an advantage in terms of certainty of financing and execution
    • Not prepared to announce any capital plans.  They are looking at an existing boat that would be a good fit (not one that they currently own)
  • Capitalized interest was $1.6MM
  • Depreciation in Perryville?
    • Not a lot on $93MM
  • Doesn't think that someone that acquires Green Valley Ranch can actually invest enough money to make it nicer than M Resorts.  Not worried that someone will acquire it and make it better per se. It's already a really good property.
  • In Ohio - Gaming Commission will have its first meeting on Monday to swear in new members. Following meetings will be post election.
  • VLT's at tracks? Lottery commission is continuing to put together rules and regulations on how VLTs will function. They do support slots at tracks.
  • M Resorts timeline?
    • Stepped into the banks shoes. Sorting through their options. Whatever they do will require approval from the Nevada gaming commission - hopefully by 4Q2010
  • Maryland and Texas will be money losing ventures but are willing to incur that cost for a period of time until they decide otherwise. Hopes that TX follows PA's example.  Texas is in front of the racing regulatory commission for approval now.  The timeline there is for 2Q2011.
  • Cash at 9/30 $237MM
  • Capex: $74.1MM with $51.8MM in new project spend, $22.3MM of maintenance spend
  • In 4Q: 89.7MM of capex - $69.3MM of new project capex
  • Charles Town - how big can that market get?
    • Seeing very strong play. Table limits are high. Play has been strong and stable over the last few months - have seen no erosion in play so far.  Unclear how much better it gets from here.
  • Lawrenceburg a little under pressure?
    • 3Q was the anniversary of their refurbishment. Have a competitor whose asset is up for sale and has been very promotional to boost the numbers into the sale process. Will not follow suit.
  • Still seeing a bumping along the bottom across most of their properties. They are doing a better job managing their expenses and that's where they have seen margin upside
  • Public polls have shown that it will be a tight race in Arundel. Think that voters originally intended to have slots at the track, not at the mall. Think that the mall has traffic issues and is an inappropriate location. Think that the Baltimore Sun - who is in the pocket of Cordish - has exhibited "shameful" behavior. They can move faster to open slots at their sites and their site is already zoned and entitled.
  • Promotional environment in other markets - Kansas City market got better as the quarter progressed. Chicagoland has been fairly stable. Tunica has continued to be very promotional.  Other markets it has been reasonable - and PNK has actually been pulling back.
  • View on regional M&A?
    • Always interested in quality properties at a fair price
    • Pricing is likely to be too rich for them
  • Zia - they have seen higher price of oil drive the feeder markets that go into that market which is why they are seeing YoY growth there
  • What are they prepared to spend on lobbying in TX?
    • They are part of a coalition there. Always want to spend as little as possible
    • Think that is it goes to a vote that voters are in favor of gaming
  • Think that they will see YoY margin expansion in the 4Q, hesitant to go into 2011 now
  • Texas acquisition is not closing in 4Q
  • Think that markets are still tight and consumers are still not spending in most of the places they operate. It's still tough.
  • Alton and Aurora were clean quarters. Joilet - they had anniversaried the reopening of that facility. Saw declines there coupled with unusually low hold on tables which impacted results. Did continue to cut promotional spending there. Joilet will have a transformation in the 4Q with the full reopening and rebranding to Hollywood.
  • There is nothing that would preclude them from applying for the Laurel Park asset on Nov 3rd.  They think that the government will want to move as quickly as possible to get the process underway. The government has made it clear that slots belong at Laurel - can have an RFP out in 30 days.
  • Columbus - any concerns that the project will be delayed beyond 2012.
    • Still on schedule to finish up remediation in Feb.  Expect to break ground at the end of 1Q2011.
  • M is not their final goal for a strip property.  That said they don't think they will be acquiring anything there anytime soon
  • They are including the interest from the M debt but none of operating results in their guidance

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