In preparation for PENN’s Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from PENN’s Q3 earnings release/call and subsequent conferences.

Post Earnings Conference Commentary

  • “I think going into 2011, you will probably see our CapEx about the same as it was this year. It won’t go up and in fact, it may go down a little bit. And the reason that is the case is that, over the last decade, let’s say, the price of the slot machine boxes have gone up pretty dramatically. I mean we – I think at the beginning of this decade they were probably in the 8,000 to 10,000 range and now we are looking at boxes in the $18,000 range. And I think that what we’ve decided to do is we’ve started to look a little bit more closely at our slot machine purchases to say, okay, here is what we are paying for the slot machines, here is the type of win per units that we are getting on the slot machines, they are not increasing. And in fact with additional competition that comes on the feature, win per units may go down. And so we have to adjust the number of slot machines that we actually are serious about replacing on a go-forward basis. So that’s why I think with going forward, you will probably see our number, our slot maintenance number about the same, of course slightly less than it is right now.”
  • “Gaming spend per visit and visits... have been pretty flattish on an absolute level for quite some time. I think probably what you’ll see going into the fourth quarter and the first quarter of next year is that those numbers across the country will be flattish for the first time in a long time.”
  • “What we’ve seen with West Virginia is ... numbers sort of rise and then continue to rise, and I think that has been surprising to us. I mean, I think normally when we go and we model these type of expansion opportunities, we think that table games should add about 15% to 20% or maybe 10% to 15% of your total casino win, and this one was closer to 25% for Charles Town and it continues to ramp…. We just recently added in November, a steakhouse there. I am not sure if you saw that when you were on your trip there, but we just added that. And we are – in the spring, we are going to add an entertainment venue as well and I think once we have the full package, I think we’ll be able to even further mine and market that high end table game customer, the Charles Town.”
  • [M resort] “The transfer of ownership... that’s probably going to be a first quarter, maybe early second quarter event.”
  • [Ohio slots] "The new Governor Casich ran on a platform of not increasing gaming taxes. And so when you think about what are your options in terms of reducing the budget there or the deficit, gaming is got to be one of them. And so potentially he is using this study period as a way to sort of shore up his base and find a way where additional gaming at the tracks can be palatable. He may come back and say that it’s not possible. And so I think either way, we’ll probably find out sometime by the middle of this year or by 2011."
  • “We’re encouraged by the fact that some of the numbers that we’re seeing out of some of the major Las Vegas locals operators like Station have been closer to flattish in the third and fourth quarter now on the revenue and EBITDA line rather than the double-digit declines that you’ve seen over the last two or three years. And I think that that’s probably where you stand going forward is sort of flattish to maybe modest inflationary type growth going forward in that market.”
  • [Casino Rama contract] “We’re going to be part of the new management contract there or at least we want to be a player there. We want to be potentially chosen there, and that’s probably an April or May of 2012 event.”

Q3 Conference Call

  • [Margins in Pennsylvania & West Virginia] “I’d be hesitant, though, to say that there’s going to be further improvement going forward from what you saw in the third quarter, given all the noise of the introduction of the new offerings at these two businesses.”
  • “Looking into the fourth quarter, we’re looking at total CapEx for 89.7 million, which we’ve broken down between new projects of roughly 69.3, and maintenance CapEx of roughly 20.4 million.”
  • “Some of the competitors have actually started to pull back [on marketing/promotional spending], noticeably Pinnacle, which we’ve seen in the markets we compete head-to-head with them....which is encouraging to see.”
  • “I certainly believe we’re going to see year-over-year margin improvement in the fourth quarter, Steven, as we continue to do that and fine-tune it. I would be hesitant to go into 2011 that far out until we have more data points into the fourth quarter to talk about how the P&Ls are looking in these businesses, but certainly I’m confident that you’re going to continue to see margin improvement in the fourth quarter.”


The Macau Metro Monitor, February 2, 2011



The Genting Board of Directors announced that RWS has obtained syndicated secured credit facilities for up to S$4.1925BN. The New Facilities comprise S$3.5BN in term loan facilities and S$0.5 BN in revolving credit facilities from 19 lenders and a S$192.5MM banker's guarantee facility from DBS Bank Ltd. and Oversea-Chinese Banking Corp Limited.


MGM Macau announced a 5% salary increase for all non-management team members, starting March 1.


Notable news items/price action from the past twenty-four hours.

  • DRI is a “Buy” at current levels, according to JP Morgan.  The restaurant company is considering some “nontraditional opportunities” such as college campuses and airports, according to Darden executives during their annual investor-analyst day.
  • MCD Japan SSS rose 2.2% in January.   This is a significant sequential slow down from December’s +11.6% number.
  • WEN share price gained on strong volume as the company’s plan to sell Arby’s and focus on its core business continues to be viewed positively by the investment community.
  • DPZ shares rose on accelerating volume as expectations rose for pizza sales during the Super Bowl increased.  According to media reports, Pizza Hut expects to sell a record 2 million pies on Super Bowl Sunday and Papa John’s expects to sell 1 million pizzas in the U.S.
  • SBUX and YUM also gained on accelerating volume as MCD, GMCR, BAGL and COSI declined on accelerating volume. 
  • BWLD gained on accelerating volume, rising 3.8% and outperforming the casual dining space.  TXRH and EAT also gained on accelerating volume.



Howard Penney

Managing Director

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CHART OF THE DAY: Social Unrest...

Social unrest occurs when people can't afford the "luxury" of eating.


CHART OF THE DAY: Social Unrest... -  chart of the day

Luxury Things

“Poverty wants some things, Luxury many things, Avarice all things.”

-Benjamin Franklin


Yesterday, one of our young Jedi analysts at Hedgeye, Kevin Kaiser, sent me a highlight from “The Grocer” (an industry trade rag) that inflating food prices are making ordinary breakfast items like orange and apple juice a “luxury.”


Now a Wall Street analyst at a sell side investment bank would find a way to dress this data point up with a pig’s lipstick and call it an “affordable luxury”, whereas someone working for The Ber-nank in DC probably calls something like breakfast “non-core” or “free.” But we simpleton, non-recipients of government bailout moneys, just call it what it is – inflation.


Six months ago we didn’t have Global Inflation Accelerating

  1. We had a US Dollar Index that wasn’t being debauched (+7.7% higher at $83)
  2. We had a CRB Commodities Index (19 commodity basket) that was -30% lower in price
  3. We didn’t have Quantitative Guessing Part Deux either

While I’ll be the first to admit I remained too bearish on US Equities in December of 2010 (but appropriately bearish on emerging markets and bonds), I’ll also be the first to remind the fire engine index-chasers of all the emails they were sending me on August 24th of 2010 that I was “crazy” to be covering my short positions in the SP500 (SPY), Russell2000 (IWM), and Consumer Discretionary stocks (XLY).


Back then, free markets pricing in a strong US Dollar and low inflation was a bullish signal to buy US Equities. Today, you have the latest Big Government Intervention scheme Debauching the Dollar and perpetuating higher inflation. Back then, I dropped my Cash position to 46%. Today, I’ve raised it to 67%. All the while, understanding that I’m not one of these perma-bulls who needs to be invested trying to get back to a 2007 high-water mark gone bad.


Yesterday, we saw a new high-water mark established in the real-world inflation reading. With the US Dollar getting burned at the stake (down 1% on the day, making a move towards a 6 month low), the CRB Commodities Index was hitting a freshly squeezed 6-month high. All Luxury Things considered, if you are one of the 44 MILLION Americans who lives on food stamps, how do you like them apples?


Now setting aside the inconvenient truth that there’s never been a global economic powerhouse that has devalued its way to prosperity, let’s give the ole Ber-nank a little something to bring to his dance with America’s new Chair of the US Financial Services Sub-Committee on Domestic Monetary Policy, Ron Paul, on February 9th. Here are the 6-month price percentage moves in some of the things people need to live with:

  1. Cotton = +125.7%
  2. Sugar = +82.6%
  3. Corn = +59.0%
  4. Coffee = +41.4%
  5. Rice = +40.5%
  6. Oats = +36.6%
  7. Copper = +36.1%
  8. Lumber = +33.8%
  9. Oil = +25.1%

Yeah, I guess for the sake of professional policy makers in DC who get dinner for free and a car service to work, I should stop there. To make the Top 10 things that may or may not be considered Luxury Things, you really need to have inflated on the order of +25% or more. Pork bellies are only up +10.7% in the last 6 months – so go have yourself some powdered Keynesian Kool-Aid with some sausage links for lunch and like it.


Over that same 6-month period:

  1. The Buck has Burned almost 6% lower and now has an inverse correlation to the price of rice and wheat of -0.91!
  2. The 112th Congress jacked up America’s Budget Deficit projections by 34% (CBO upward revision from August to January)
  3. The countries most affected by global inflation (Asia, Africa, and the Middle East) have started to display some fairly evident social unrest

So where does that leave the almighty American Consumer? That’s easy, pull up some charts of US Consumer stocks – and pull up some big ones like Proctor & Gamble (PG), McDonalds (MCD), and Target (TGT).


Sure, since most people in this business read points of view in terms of how it directly addresses their personal positioning, I’m sure you can find me some US Consumer stocks that used to look like Coach (before the man-purse idea didn’t fly Captain Lew to the moon), but overall, Consumer Staples (XLP) and Consumer Discretionary (XLY) are the 2 worst sectors in the entire US stock market all of a sudden for a reason, down -1.84% and -0.97% in the last 3 weeks of trading, respectively.


On a more positive note, this morning The Mu-barak turned on the internet. So now all of our Egyptian friends can start tweeting Hedgeye’s 6-month table of real-world inflation to their friends again. Social networking tools are going to continue to revolutionize the transparency and accountability standards that The People of this world hold their governments to. That’s a Luxury Thing of personal liberty that I can believe in.


My immediate term TRADE lines of support and resistance for the SP500 are now 1290 and 1308, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Luxury Things - unrest

Munis: Flurry, Blizzard or Avalanche?

This note was originally published at 8am on January 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“No snowflake ever falls in the wrong place.”

- Ancient Zen Proverb


Both the title of this morning’s Early Look and the quote above are very apropos for the current weather gripping New Haven, CT and much of the northeastern United States. Though the mounds of snow which line our streets are several feet high, it’s “business as usual” for those of us who refuse to blame our disappointments on things like “the weather”.


Addressing the quotation specifically, the saying above traces its origins to Zen, a school of Mahayana Buddhism. Per our friends at Wikipedia, what distinguishes Zen from other schools of Buddhism is its search for enlightenment through self-realization in Dharma practice and meditation rather than a reliance on text and intellectual reasoning.


In the asset and risk management industry, an overreliance on intellectual reasoning can get us into trouble, as we often lean towards the conviction we receive from our data analysis and channel checks versus what may or may not be blatantly obvious. In fact, we’ve all been trained to fade the obvious – even sometimes to a fault.


This brings up an interesting topic that is gathering momentum in the marketplace: Muni Bonds. The divergence in sentiment between retail investors and institutional investors seems to get wider by the day, as one group (retail) rushes to avoid what is perceived by some to be a pending crisis while the other (institutional) finds current valuations as a definite reason to “fade the obvious”:

  • Yesterday, it was reported that retail investors withdrew an additional $1.9B out of muni bond mutual funds. Though down from last week’s record $4B redemption, the trailing four-week average increased slightly to $2.3B. All told, the last eleven weeks saw a cumulative outflow of $22.5B, according to Lipper FMI. That’s ~22.5% of the roughly $100B poured into the funds from January 2009 – October 2010. Yes, there’s another side to the Bush Tax Cut extension trade…
  • Amidst the selling by retail investors, asset managers have used the latest backup in yields as a buying opportunity to lock in exceptional tax-adjusted rates, sending average yields on G.O. muni bonds down (-16bps) wk/wk, as measured by the Bond Buyer 20 Index. To a lesser extent, revenue bonds were bid up as well, with yields falling (-5bps). This was the first weekly decline in muni bond yields in four weeks.

To state it bluntly, we don’t see current prices for muni bonds as an investable opportunity to “fade the obvious”. We’re neither brave nor smart enough to get in the way of a potential wave of defaults, restructurings and credit downgrades (emphasis on potential, as we disagree with Whitney that $50-$100B worth of defaults is a foregone conclusion).  You don’t need defaults for the price of a bond to go down.


Even for those brave investors who possess the analytical firepower to find value in the muni market at current yields – including the highly-regarded Lyle Fitterer – we think many of them may actually be using faulty data in their analysis. Fitterer, the top muni bond fund manager of the last decade, remarks, “The baby has been thrown out with the bathwater”; as such, he’s using the current back up in yields as a buying opportunity for specific revenue bonds.“If a State were to file bankruptcy, I have a bond with a dedicated revenue stream,” he says.


Fitterer’s comments beg the question, “What’s a revenue bond worth when it doesn’t meet its revenue target?” Probably the same as an equity that misses estimates amid bullish sentiment: less. While we’re not yet calling for a spate of “misses” across the nation, we do think the confluence of slowing domestic growth, rising interest rates and a rapidly deteriorating housing market will weigh heavily on the finances of States, municipalities and municipal authorities alike in 2011:

  1. Consistent with our Consumption Cannonball theme, we expect consumer spending to roll over in 1H11. Sales and income tax receipts combine for ~55-60% of State and local government revenues. Deteriorating fundamentals = bad for muni bonds.
  2. Consistent with our Trashing Treasuries theme, accelerating inflation on the strength of a Debauched US Dollar continues to support rising US Treasury bond yields. The Ber-nank may not see inflation, but the global bond market sure does. A rising interest rate environment = bad for muni bonds.
  3. Consistent with our Housing Headwinds Part II theme, we think US housing prices could end up down (15-20%) by the time the July 2011 Case-Shiller data rolls in (early fall). Property tax receipts make up roughly 26% of local government revenues, though they are typically assessed on a 2-3 year lag. Regardless, municipalities across the nation are running out of headway to finagle with their accounting. US housing wasn’t exactly robust over the last 2-4 years. The oncoming wave of lower property tax receipts = bad for muni bonds.

Speaking of borderline accounting fraud, a very alarming trend has emerged over the course of the most recent economic downturn. Rather than lie about their deteriorating finances, a growing number of municipalities have opted to hide them instead.


A recent study done by DPC DATA Inc. revealed that over 56% of municipal issuers did not file a financial statement in any given year between 2005 and 2009. Over 33% of them skipped filing in three or more of the past five years. In the latest year (2009), the percentage of non-filers jumped +360bps to 40.2%. An additional 30% filed “extraordinarily late” that year, according to the analysis.


It’s tough to analyze what you can’t see. Moody’s Managing Director of Public Finance, Robert Kurtter, agrees, saying on CNBC’s Squawk Box that 2/3rds of all muni issuers are unrated (1/14). And even if they we’re “rated”, we’re not buyers in blind faith of America’s ratings agencies!


Regardless of your perception of the fundamentals, the “snow” is falling in the muni bond market and the thick coat of snow accumulating serves as a metaphor for the opacity that’s associated with issuer finances. When the ice melts in the coming months, will you be holding a bag full of “unforeseen” risk because you bought the first dip after a 30-year bull market in muni bonds? We definitely won’t be – that’s for sure.


Remember, no snowflake ever falls in the wrong place.


Darius Dale



Munis: Flurry, Blizzard or Avalanche? - red