TODAY, FEB. 4, 2011 10AM EST


Valued Client,


5-10 minutes prior to the 10 AM EST start time please dial:

(Toll Free) or (Direct)
Conference Code: 569781#


To access the "Analyzing the Geopolitical Chessboard" materials please click here


To submit questions for the Q&A, please email .




Join Hedgeye's CEO Keith McCullough and Managing Director Daryl G. Jones, who will be joined by Yale Professor Charles Hill for a discussion of recent events in the Middle East and an analysis of the major risks associated therein. The topics being covered will include: 

  • What are the sources of the Jasmine Revolution? How important is inflation?
  • Is the Jasmine Revolution going global? If so, where should we look next for popular upheaval?
  • How will a change in Egyptian leadership (shift in power to the Muslim Brotherhood) shape U.S. influence in the region?
  • What is the future of the Arab and Israeli relationship?
  • Are their implications as it relates to Iran and nuclear proliferation?
  • As these events unfold, how will they impact global markets?  

Please contact if you have any questions. 



The Hedgeye Macro Team

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With normal hold, MBS would’ve missed the Street.  Relative to estimates, Singapore is no longer the positive outlier and that is the crux of our thesis.



LVS posted a strong Q4, at least relative to consensus.  The problem is that whisper numbers were higher.  With an 18x EV/EBITDA multiple, estimates need to go significantly higher to grow into the multiple.  That is the issue we have with this stock.  For the first time in 5 or 6 quarters, our estimates are not 20% or so higher than consensus.  In fact, if hold was normal across its Asian properties, LVS would’ve missed the consensus EBITDA projection.


Absent from the conference call discussion was the high hold, although management did volunteer a lot of commentary regarding the low hold at Four Seasons.  In terms of our expectations, the high Mass and VIP hold at MBS was not anticipated.  We estimate it contributed almost $20 million of incremental EBITDA.  Even with the high hold, the upside to our estimate was only 1% at the property which leads credence to our view that EBITDA upside may be restricted to Macau and there are better ways to play Macau.

Las Vegas

Vegas revenues of $310.6MM were 2% below our estimate while EBITDA of $80.6MM was$3MM better than our estimate.  As mentioned on their conference call, Sands has implemented a shift in strategy in Las Vegas by cutting promotional spending and comps.  While this negatively impacted RevPAR stats, this strategy seems to be paying off on the bottom line.

  • Promotional spending as a % of GGR declined to 18.4% this quarter from a 32% average YTD run rate.  We’re guessing that the lower occupancies and GGR were negatively impacted by this decline.
  • Total operating expenses increased 11% YoY to $230MM (compared to $232MM in 3Q10) and $207MM in 4Q09



On an aggregate basis, higher than normal hold across Mass and VIP revenues benefitted Macau revenues and EBITDA by $16MM and $18MM, respectively.


Sands revenues of $319MM were $2MM above our estimate while EBITDA of $93.4MM was $13MM better than our estimate. 

  • While net gaming revenues were spot in-line with our estimate, non-gaming less promotional spending was $2MM better.  Promotional spending declined to 3.4% of net casino revenues from a YTD average of 4.2%
  • Normalizing for slightly high hold, revenues would have been $14MM lower and EBITDA would have been $2MM lower
  • Direct play was 15%, up from 14% the last 2 quarters
  • While we won’t know until the Sands China quarterly release is out, we suspect junket commissions were lower this quarter
  • Fixed costs were also $5MM below our estimate

Venetian revenues of $661.5MM were 0.6% above our estimate while EBITDA of $235.6MM was 10% better than our estimate. 

  • Direct play decreased to 19% of total VIP RC from a range of 21-24% YTD. We assumed that the direct play would be in 23% - in-line with the last 2 quarters, which is why our hold rate assumption was 8bps lower.
  • If we were to use the mid-point of LVS’s normal VIP hold of 2.85%, revenues and EBITDA would have been $17MM and $3MM lower, respectively
  • Mass drop only grew 6% YoY, lagging Macau mass market table revenue growth of 31%. Mass hold of 28.2% almost 4% above the prior 7 quarter average.  Using the prior 7 quarter average, gaming revenues would have been $36.5MM lower and EBITDA would have been impacted by about $22MM
  • Net gaming revenues were $12MM below our estimate but were more than offset by higher non-gaming and lower promotional expenses
  • Same with Sands, we suspect junket commissions were lower this quarter at the Venetian
  • Fixed costs were also $5MM below our estimate

Four Seasons revenues of $92MM were 13% below our estimate while EBITDA of $12.2MM was $9.6MM lower than our estimate. 

  • Direct play was 54% - higher than the 43% we had estimated.  As a result, hold was a lot lower than our 2.17% estimate – which accounts for the majority of the EBITDA miss vs. our estimate
  • Low VIP hold negatively impacted revenues by $60MM and EBITDA by roughly $14MM.
  • Mass drop appears to have plateaued at $99MM since 1Q2010.  Mass hold of 33% was 8% above the 11 quarter trailing average of 25%.  Using the 11 quarter average, revenues would have been $8MM lower and EBITDA would have been $5MM lower.
  • Net net hold issues negatively impacted revenues by $52MM and EBITDA by $9MM


MBS revenues of $558MM were in-line with our estimate, while EBITDA of $306MM was 1% better.

  • While slot handle was better than we estimated, mass drop and VIP RC were weaker
    • RC volume actually decreased by 21% QoQ
  • “Normal” VIP hold of 2.85% would have negatively impacted revenues by $21MM and EBITDA by $10MM
  • “Normal” Mass hold would’ve negatively impacted Mass EBITDA by $8-10MM
  • Non-gaming revenues were $3MM higher than our estimate while promotional was $3MM lower
  • Rebates were 1.31% ( flat to 3Q)
  • Fixed expenses were $153MM (vs. $148MM in 3Q)


Notable news items and price action over the past twenty four hours.

  • Kraft’s lawsuit over Starbucks’ plan to end an exclusive distribution agreement will receive expedited review from the U.S. Court of Appeals for the Second Circuit.  SBUX says that Kraft violated several provisions of the pact, like properly stacking shelves with its coffee, which allows it to end the deal. SBUX is trading well despite commodity pressure.
  • GMCR gained on accelerating volume following strong earnings results after the close on Wednesday.  This was a day in the sun for GMCR but SBUX, in my view, will take more and more of their market share as time goes on.
  • CHUX reported its sixth straight quarterly loss as higher commodity and operating costs weighed on margins.  4Q revenue came in at $183.5m versus an expected $185m.  The company guided to revenue of $260-$266m for 1Q versus consensus at $267.4m.
  • DRI increasingly likely to buy a new chain over the next couple of years, according to Janney Capital Markets.  California Pizza Kitchen, BJ’s Restaurants, and Yard House are three of the chains mentioned in the report.  DRI might buy something, but not any time soon.
  • BWLD appointed James Schmidt to the newly-created position of chief operating officer, with immediate effect.
  • WEN is the best performing QSR stock over the past week and up every day since the analyst meeting on big volume.
  • DPZ declined on accelerating volume.  The stock received some publicity lately with SAC buying shares but we see three quarters of difficult top line compares and cheese prices up 33% YTD and 19% YoY.
  • MCD releasing sales on 2/8.  The company guided to 4-5% global same-stores sales.  The USA continues to slow, Europe accelerated sequentially and APMEA slowed sequentially.



Howard Penney

Managing Director

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Known Unknowns

"Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know.”

-Donald Rumsfeld


A few nights ago, I participated in a panel on CNBC’s The Kudlow Report to discuss the outlook for the U.S. equity markets.  Interestingly, my co-panelists were an actor, Tommy Belesis, who was featured in Wall Street II and Lee Munson, who is not an actor, at least professionally, but is a veritable Jim Carey wannabe.  Larry asked all three of us about Egypt and both of my co-panelists suggested the spread of democracy would be a great thing for the markets.  Call me a nerdy hockey player from Yale, but my response was a bit more nuanced.


Stepping back for a second, I tend to agree that the proliferation of democracy is a positive force in this world.  (Hopefully that goes without saying.)  From a pure geo-political risk perspective, there are very few examples of modern democracies going to war.   Thus, the more democracies there are globally, the more likely it is that there will be less armed conflict between nation states.  This is a positive when considering a risk premium to apply to certain equity markets.


As it relates specifically to Egypt, the view I articulated the other night is that the outcome is very uncertain.  We don’t know that this is the onset of flourishing democracies in the Middle East.  Further, we don’t know what the unintended consequences of a regime change in Egypt will be.  As Former Secretary of Defense Rumsfeld notes above, the outcome of this historic last month of protests in the Middle East is, at best, a “known unknown.”


The benefit in having our headquarters at the Taft Mansion on Yale’s Campus is more than just easy access to Yale Hockey games at historic Ingalls Rink, but also easy access to Yale’s academic engine.  To the last point, we are hosting a call at 10 a.m. for institutional subscribers and prospects with Yale Professor Charles Hill.  The title of the call is “Analyzing the Geopolitical Chessboard: Is This Checkmate for American Influence in the Middle East?” If you’d like to join us for the call, please ping sales at .


Rather than acting, we decided to bring in an expert to discuss the situation in the Middle East and North Africa.  Professor Hill teaches the Grand Strategy class at Yale, and is the former Chief of Staff of the State Department, an advisor to former Secretary of State George Shultz, and former Secretary-General of the United Nations Boutros Boutros-Ghali.  Needless to say, Professor Hill forgets more foreign policy strategy in a day than most of us will ever know.


Currently, the primary issue as it relates to U.S. foreign policy in the Middle East is centered on the future of Egypt, which has been a long standing ally of the United States in the region.   After the 1973 Arab-Israeli War, Egyptian foreign policy shifted under Anwar Sadat, who opted to pursue a peace process with Israel, which he believed was in the best long term interest of Egypt.  As a result, the U.S. has been a major sponsor of both military and economic aid to Egypt.  In fact, Egypt is the second largest non-NATO recipient of military aid from the United States after Israel.


From an economic perspective, Egypt is the 27th largest economy in the world and, perhaps more importantly, controls the Suez Canal, which connects the Mediterranean and Red Seas.  The key benefit of the Suez Canal from a global economic perspective is that it allows water transportation from Asia to Europe without the need to circumvent Africa.  In aggregate, the Suez Canal carries almost 8% of the world’s sea trade.


Egypt’s strategic and economic importance can obviously not be understated in global affairs, and whilst it is difficult not to support popular protests against a non-Democratic regime, such as the one run by Hosni Mubarak in Egypt, as risk managers we also need to understand the alternatives.  If Mubarak was nothing else, he was a strong American ally in the region.


The debate over the future of Egypt currently centers on the role in which the Muslim Brotherhood will play.  The Muslim Brotherhood is the world’s largest and oldest Islamic political group, and was actually founded in Egypt in 1928.  Currently, the Brotherhood is banned in Egypt, but in the post-Mubarak era, the Brotherhood will have a role which could shift Egyptian foreign policy quite dramatically.  In fact, a leading member of the Muslim Brotherhood, Muhammad Ghannem, recently said to the Arab Press, “The people should be prepared for war against Israel.”


There are some that believe the Muslim Brotherhood is an effectual organization.  This was best articulated by Scott Atran, author of "Talking to the Enemy: Faith, Brotherhood and the (Un)making of Terrorists", in the New York Times yesterday when he wrote:


“Ever since its founding in 1928 as a rival to Western-inspired nationalist movements that had failed to free Egypt from foreign powers, the Muslim Brotherhood has tried to revive Islamic power. Yet in 83 years it has botched every opportunity.”


On the other side of the debate is Dr. George Friedman from STRATFOR who recently wrote:


“The demonstrations open the door for the Muslim Brotherhood, which is stronger than others may believe. They might keep the demonstrations going after Hosni leaves, and radicalize the streets to force regime change. It could also be the Muslim Brotherhood organizing quietly. Whoever it is, they are lying low, trying to make themselves look weaker than they are — while letting the liberals undermine the regime, generate anti-Mubarak feeling in the West, and pave the way for whatever it is they are planning.”


As for where Hedgeye stands, we covered our short Egypt position yesterday (via the etf EGPT) in our Virtual Portfolio.

Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Known Unknowns - mass

CHART OF THE DAY: A Known Assumption --- Geopolitical Risk is Over After Egypt



CHART OF THE DAY: A Known Assumption --- Geopolitical Risk is Over After Egypt -  Chart of the Day

Men of Conformity

This note was originally published at 8am on February 01, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I would rather be a man of conviction than a man of conformity.”

-Martin Luther King, Jr.


When I read, I flag pages and write in them. It’s my way of taking some time to get lost in thought and scribble about what lessons history might provide me in preparation for today. Last night, as I was finishing "The Autobiography of Martin Luther King, Jr.", I found that timeless leadership quote.


It’s certainly not a quote for modern day American politicians. As King goes on to say on page 342, “… there comes a time when one must take a position that is neither safe, nor politic, nor popular, but he must do it because Conscience tells him it is right.”


While I can’t imagine that Presidents George Bush or Barack Obama have a conscience that would lead them to believe that burning America’s currency at the stake is right, there are certainly many Men of Conformity who have been advising them by example of cowardice.


Whether you think Henry VIII clipping his citizenry’s coins caught up to him in the end, or whether you think that modern day American Presidents backing fiscal and monetary policies that debauch America’s dollars will equate to many globally interconnected consequences, no man, woman, or child will ultimately make the call on either. History will. And in this case, I’d rather be the man who sides with history’s lessons.


Before I dig in on the unintended consequences associated with a debasement of the world’s reserve currency, let’s look at what the US Dollar has done across multiple durations:

  1. Immediate-term TRADE (3 weeks or less): down, literally, almost every day since the President’s State of the Union Address and the Fed’s January FOMC statement.
  2. Intermediate-term TREND (3 months or more): up for 7 out of 8 weeks post US Midterm election promises, but down for 5 out of the last 6 weeks on the probability increasing that those promises are broken.
  3. Long-term TAIL (3 years or less): lower-highs and lower-lows -a national embarrassment.

Now if you can show me one man in an American position of fiscal or monetary policy setting power who shows any conviction in backing a strong US Dollar – just one man – I’ll readily accept this claim and consider why he has had no impact on the US Dollar where it matters – on the tape.


If you’ve studied economic history across long-dated cycles (yes, beyond The Ber-nank’s preferred point-in-time academic dogma of the great depression), you’ll already have learned that currency crashes and inflation are globally interconnected risks.


In fact, most modern day risk managers who have read Reinhart & Rogoff’s "This Time Is Different" have learned that there is a pattern that has repeated across 8 centuries of economic data. A simple way to consider this would be to re-read, rethink, and re-learn the lessons Reinhart & Rogoff outline in Part IV – Banking Crises, Inflation, and Currency Crashes where the sequence of chapters are as follows:

  1. Chapter 10 – Banking Crises (America has been there, done that)
  2. Chapter 11 – Default Through Debasement (America bailed some of these currencies (stock prices) out, but the national story is far from over)
  3. Chapter 12 -  Inflation and Modern Currency Crashes (America is in motion on this front – and in some cases, cheering it on)

So rather than reacting to the next country that erupts into social chaos against governments who are lying to them about real-world inflation, my advice would be for both the President of the United States and his Keynesian advisors to do the required historical reading. Remember gentlemen, conviction or not, a successful national currency landing will depend on whether your preparations meet this opportunity.


All is not yet lost. With some conviction and focus, America can arrest the social unrest associated with Global Inflation Accelerating – but this can no longer be willfully neglected. Again, for the 44 million Americans on food stamps, it’s time.


If you don’t think it’s time, take a gander at this morning’s Global Macro grind:

  1. The CRB Commodities Index (19 commodity basket) was up another +1.8% yesterday closing at its highest levels since October of 2008.
  2. Inflation, as measured by the CRB basket, is up +29% since Ben Bernanke opted for Quantitative Guessing II in Jackson Hole, WY.
  3. Dr. Copper is hitting a record high this morning at $4.48/lb (all-time records aren’t deflationary are they Mr. Ber-nank?)
  4. Oil prices are breaking out again to new intermediate-term highs with WTI Oil breaking out above our immediate term TRADE line of $90.21
  5. Food prices, measured by the UN’s basket, continue to hit all-time highs – from corn to rice, yes, this is a crisis for the world’s poor.
  6. South Korea’s inflation rate shot up to +4.1% in JAN versus 3.5% in DEC
  7. Indonesia’s inflation rate continues to rise with CPI for JAN 7.02% versus 6.96% for DEC
  8. Brazil’s CPI is now tracking up +11.5% y/y in JAN versus 11.3% in DEC
  9. Ivory Coast, which is seeing massive inflation in Cocoa prices, became the 1st country to default on their debt overnight ($2.3B in Eurobonds)

And again, for those fans of the Fiat Fools who say this has nothing to do with a humble looking bald man with a beard, that’s just a charlatan’s way of ignoring the math. Here are the refreshed inverse correlations between the US Dollar Index and major global food prices:

  1. Cocoa = -0.91
  2. Wheat = -0.90
  3. Rice = -0.88

Notwithstanding that US farmers are planning to plant the fewest acres of rice since 1989 (they make more money planting things like corn), and the global supply shortages we are seeing associated with flooding and/or countries engaging in revolutions, the simple reality here is that mostly every major food staple in the world is keying off of what the US Dollar does every day – and yes, Mssrs Obama and Bernanke, that Burning Buck stops with you.


My immediate term TRADE lines of support and resistance for the SP500 are now 1276 and 1297, respectively. I remain long of inflation and bought my Sugar (SGG) back in the Hedgeye Portfolio yesterday. Being long inflation also means being short bonds and emerging markets.


Being long inflation is an explicit conviction that the Ben Ber-nank will remain a Man of Washington Conformity.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Men of Conformity - obama

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