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




  • [East Chicago] “We’ll lap the bridge closure this month; it was about November 14 last year that the bridge was shutdown. We’re continuing our attempts to strengthen the property by proceeding with the renovation of the hotel rooms and working with the state and the city in planning various road improvements that should enhance access to our property to some extent.”
  • “We think the second quarter was an outlier and the third quarter of 2010 pretty well reflects what East Chicago can generate, now that the competitive environment has normalized.”
  • “At this point, 42% of the debt is fixed and 58% is now floating net of variable rate.”
  • “Our Q4 2010 estimate for non-cash stock based compensation expense is $3.2 million to $3.7 million. For the year, we are anticipating 13.8 million or 14.3 million. Our blended federal and state tax rate is projected to be between 46.5% and 47.5% for the fourth quarter and between 43.5% and 44.5% for the year.”
  • “Capital spending for the remainder of 2010 is expected to wrap up slightly and be in the range of 26 million to 31 million, which is about double what we have been spending for the first three quarters of 2010. This will all be in the maintenance cap area. Net interest expense in Q4 is expected to be approximately $26.5 million.”
  • “Non-cash interest expense is expected to be between 2.6 million and 3 million for Q4. Assuming LIBOR remains steady, which we believe it will, interest expense should decrease year-over-year in Q4 by about $7.5 MM due to the swap agreements expiring in July. And on the dividend front, assuming Board approval, we currently expect a fourth quarter dividend payment.”
  • “So we’re spending a little bit of money to renovate the hotel rooms in East Chicago to maintain the competitiveness of that property, and we’ll be adding on 106 rooms at our Kansas City property to enhance its competitiveness, particularly with the new competitor opening in Wyandotte County, Kansas.”
  • “Part of the goal from the debt reduction perspective is to position our credit situation for refinancing in another year or so. Once we get to the end of ‘11, the beginning of ‘12 we’re going to have to restructure the revolver, and we want to have debt levels such that we’ll be able to restructure the debt at attractive rates.”
  • “CapEx is roughly going to be in the same range next year as it will be for this year--give or take $5 million. We have indicated that we would probably start the additional rooms in Kansas City this year, obviously it won’t be finished in 2011. So, you won’t see a return on that in ‘11. We expect to get  areturn on what we spend in the slot area. So, there is something there, but most of the money that we will be spending next year, will start with the hotel in Kansas City and then room rehab in East Chicago.”
  • “I think one of the areas that has been hampered more than any other in the economic downturn has been some of the transient play. So I’d like to see some of that come back. That’s a pretty profitable line of business for us.”


TODAY’S S&P 500 SET-UP - February 8, 2011

Equity futures are trading above fair value as investors continue to see upside potential for equities buoyed by the FED.  US equities finished higher Monday on a very quiet day.  Without any large negative geopolitical or economic headlines market participants focused on company specific M&A and earnings for direction.  As we look at today’s set up for the S&P 500, the range is 25 points or -1.44% downside to 1300 and +0.45% upside to 1325.



  • 7:30 a.m.: NFIB Small Business Optimism, Jan, est. 94
  • 7:45 a.m.: ICSC Weekly Sales, Feb., est. 50.3
  • 8:45 a.m.: Fed’s Lacker speaks on economy in Newark, Delaware
  • 8:55 a.m.: Redbook Weekly Sales
  • 10 a.m.: JOLTs job openings, Dec., prev. 3,248
  • 11:30 a.m.: U.S. to sell $22b in 52-wk bills, $35b in 4-wk bills
  • Noon: DoE short-term energy outlook
  • 1 p.m.: Fed’s Lockhart to speak in Alabama
  • 1 p.m.: U.S. to sell $32b in 3-yr notes
  • 1:30 p.m.: Fed’s Fisher to speak in Dallas
  • 4:30 p.m.: API inventories
  • 5 p.m.: ABC Consumer Confidence, Feb. 6, est. -40


  • Confidence among U.S. small companies rose in January to the highest level in three years, as the outlook for sales and profits improved, a private survey found. The National Federation of Independent Business optimism index increased to 94.1, the highest since the recession began in December 2007, the Washington-based group said today. The reading was lower than the average 100.7 during the last expansion that started in November 2001.
  • Microsoft CEO Steve Ballmer plans to extend a management reshuffling aimed at adding senior product executives with an engineering background, two people with knowledge of the decision told Bloomberg. Changes may be announced this month. 
  • Big Lots is exploring strategic options, including a possible sale, and is working with Goldman Sachs, a person with knowledge of the situation told Bloomberg
  • President Obama is considering seeking aid for state unemployment insurance programs burdened by debt because of high unemployment rates, according to a person familiar with the discussions. Obama will seek delay of state tax increases, suspension of interest payments on state debt, person said on condition of anonymity before 2012 budget is released Feb. 14.
  • Advent Software (ADVS) sees 1Q rev. $74m-$76m vs est. $74.4m
  • Becton, Dickinson (BDX) 1Q rev. misses est.
  • Exide Technologies (XIDE) Sees 4Q adj. Ebitda up Y/y
  • Gartner (IT US)4Q adj. EPS, rev. beat ests.
  • Healthcare Services (HCSG) 4Q EPS missed est. by 1c after record close
  • LPL Investment Holdings (LPLA) 4Q adj. EPS, rev. beat ests.
  • NYSE Euronext (NYX) 4Q EPS beat est., oper. rev. Fell Y/y
  • Principal Financial (PFG) 4Q oper. EPS missed est. 
  • Veeco Instruments (VECO) 1Q adj. EPS, rev. outlook below est.


The more defensive sectors – Consumer and healthcare – underperformed, while sectors more leveraged to the recovery – financials and industrials – lead the way higher. Perfect = 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.57%, S&P +0.62%, Nasdaq +0.53%, Russell +1.03%
  • Month-to-date: Month-to-date: Dow +2.27%, S&P +2.56%, Nasdaq +3.11%, Russell +3.46%
  • Quarter/Year-to-date: Dow +5.05%, S&P +4.88%, Nasdaq +4.94%, Russell +3.15%
  • Sector Performance - (8 sectors down and 1 up): - Financials +1.46%, Industrials +0.94%, Utilities +0.64%, Energy +0.58%, Tech +0.50%, Consumer Discretionary +0.53%, Materials +0.54%, Consumer Staples +0.14%, Healthcare (0.15%)


  • ADVANCE/DECLINE LINE: 1173 (+1180)  
  • VOLUME: NYSE 879.63 (-4.43%)
  • VIX:  16.28 +2.20% YTD PERFORMANCE: -8.28%
  • SPX PUT/CALL RATIO: 1.85 from 1.85 (-0.21%)


Treasuries: were weaker except for the long bond, which saw its yield decrease by ~2bps

  • TED SPREAD: 17.30 +0.304 (1.788%)
  • 3-MONTH T-BILL YIELD: 0.16%
  • YIELD CURVE: 2.90 from 2.91


  • CRB: 337.46 -0.43%  
  • Oil: 87.48 -1.74% - trading -0.82% in the AM
  • COPPER: 457.50 -0.10% - trading -0.61% in the AM  
  • GOLD: 1,349.15 +0.11% - trading +0.31% in the AM  


  • Oil fell to the lowest level in a week as talks between the government and opposition politicians helped ease tensions in Egypt, reducing concern that supplies will be disrupted. 
  • Natural gas dropped 4.8%, the biggest decline in three months, as forecasts showed milder weather next week, reducing demand for the heating fuel. 
  • After the worst January for precious metals in two decades, investors still have a $102 billion bet on higher prices, hoarding more gold than all but four central banks and more silver than the U.S. can mine in almost 12 years.
  • Copper backed away from a fresh record high on Monday, its sixth in as many sessions, as prices fell under the weight of a firmer U.S. dollar and began to show some signs of fatigue from the latest bull-run
  • Corn closed lower after a choppy session, rising to a new long-term high in early moves on talk that China would boost imports this year, pressuring dwindling U.S. grain stocks. 
  • Wheat prices rose to fresh highs as news that top buyer Egypt had entered the market after nearly a month-long absence boosted dealers' confidence after weeks of unrest. 
  • Barley output in Germany, Scandinavia and Eastern Europe has been hit due to heavy rainfall, while Russian growers experienced a heatwave. A study from Grocer magazine recently predicted that brewers will be forced to raise the average cost of a pint by 30 pence, due to the rising cost of commodities.


  • EURO: 1.35.44 -0.27% - trading +0.65% in the AM
  • DOLLAR: 77.720 -0.02% - trading -0.40% in the AM 


  • FTSE 100: (0.11%); DAX: +0.31%; CAC 40: +0.16%; IBEX: +0.28% (as of 06:15 EST)
  • European markets trade mixed having fluctuated either side of unchanged for much of the session.
  • The euro-region rescue fund should be empowered to bail out banks and buy bonds on the market even though it’s “highly unlikely” that the debt crisis will spread to either Spain or Italy, according to Bank of Italy Director General Fabrizio Saccomanni.
  • With minimal regional economic news, earnings dominated the market, with BMW Group January unit sales and Toyota raising guidance aiding autos +2.3% and basic resources +2.0% buoyed by Xstrata and ArcelorMittal. Travel & leisure up +0.7% was the third best performing sector.
  • Germany Dec Industrial Output (1.5%) m/m vs consensus +0.3% and prior revised (0.6%).  Economy ministry says decline is due to cold weather.  Economy ministry says outlook is still positive. Manufacturing output -0.1%; Basic goods output -3.1%; Investment goods output +3.3%; Consumer goods output -1.3%; Energy output +0.3%; Construction output -24.1%
  • Egypt’s Central Bank Intervenes to Support Currency.  Egypt’s credit risk falling to lowest level since anti-govt. protests began two weeks ago, international borrowing costs dropping as the nation’s biggest political crisis in three decades eases.
  • Danish banks may face wave of consolidation after country’s latest lender insolvency left some bondholders in the lurch, straining efforts to raise funds just over four months after state withdrew its guarantee.
  • Irish Finance Minister Brian Lenihan said govt. pressing for “substantial discount” on EU20b ($27.2b) of unsecured senior bank bonds, push resisted by ECB, in debate on RTE television last night.
  • ECB President Jean-Claude Trichet said yesterday that Ireland needs to press ahead with fiscal austerity measures, imposing “haircuts” on investors isn’t part of the plan


  • Nikkei +0.41%; Hang Seng (0.29%); Shanghai Composite (closed)
  • Asian stocks fluctuate as gains by financial companies on earnings are tempered by losses among Taiwanese technology.
  • Australia up 0.45% - positive results from National Australia Bank, which rose 2% on the day.  On the flip side Macquarie Group edged down after forecasting earnings will decline in H2.
  • Hong Kong slipped -0.29% - property developers fell on a report that the government will make more residential land available next FY.
  • Taiwan fell -0.37%, but HTC rose 1% on announcing $87M of acquisitions.
  • South Korea fell -0.58% on worries about policy tightening in the region.
  • China will reopen tomorrow after its Lunar New Year break.
  • China raised key interest rates for the third time since mid-October after growth accelerated and inflation stayed above 4%.  The benchmark one-year lending rate will increase to 6.06% from 5.81% effective tomorrow
  • Japan December current account surplus +30.5% y/y to jpy1.195T vs cons jpy1.159T. January M3 +1.8% y/y..

Howard Penney

Managing Director




MCD is scheduled to report its January sales results before the market open tomorrow, the 8th of January.  Compared to January 2010, January 2011 had one less Friday and one additional Monday. 


Below I go through my view on what sales results the Street will receive as “GOOD”, “BAD”, and “NEUTRAL” for each region.  To recall, December’s results constituted a significant sequential slowdown from October in the U.S.  As I detailed in my recent Black Book on MCD and the company’s prospects for 2011, specifically in the U.S., I believe that this year will see a significant slowdown in sales.  While this may not spell disaster for January (there is plenty of time in 2011 for my scenario to play out), I am below the street’s estimates. 


Before digging into the ranges for MCD comps, I think it important to address the key macro factors that are likely to impact results.  Firstly, gas prices on a national basis were up 13.7% year-over-year in January, and up 3.3% versus December 2010.  Secondly, given the importance of McDonald’s drive thru to their sales, the stormy weather that caused so much disruption may turn out to have been a factor.  It is important to note, however, that Eric Levine, Hedgeye Director of Retail, wrote last week in his roundup of January’s retail same-store sales results that “the weather was barely mentioned as an excuse.  Only a handful of retailers including Costco, BJ’s, JCP, and HOTT cited the impact of stormy weather on the month and actually quantified it.”  There is historical precedent, however, within the restaurant space for snow storms having negatively impacted restaurant sales.  The snow storms of December 1998 and January 1999 had negatively impacted the results of many QSR operators in the Midwest.


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.  On a calendar-adjusted basis, consensus estimates are calling for two-year average trends trending roughly level with December in the U.S., down in Europe, and up in APMEA.



U.S.- Facing an easy -0.7% compare (including a calendar shift which impacted results by -0.4% to +1.0%, varying by area of the world):


GOOD: A print of roughly 4.5% or higher would be perceived as a good result, implying that the company has improved two-year average trends from December.  Consensus is at 4.4% for MCD U.S. comps in January.  I believe that merely meeting these expectations would be well-received by investors.   I believe a print somewhere in the NEUTRAL range detailed below is most likely, but I expect a greater proportion of the slowing that I have projected for the U.S. in 2011 to take place after compares step up in difficulty from March onward.  At that stage, I expect a starker divergence to emerge between my projections and those of the sell-side.


NEUTRAL: Roughly 3.5% to 4.5% implies a two-year trend approximately level with the calendar-adjusted two-year average trend in December.   A print in this range may convince some investors that MCD’s top line trends are robust versus the 2.6% print in December.  I would caution, however, that the compare is significantly easier in January than it was in December. 


BAD: Below 3.5% would imply two-year average trends that had slowed from the calendar-adjusted two-year average trends in December which had, in turn, sharply declined from November’s results.   A result this far south of expectations, obviously, would be negatively received by investors.





Europe - facing a +4.3% compare, (including a calendar shift which impacted results by -0.4% to +1.0%, varying by area of the world):


GOOD: A print of approximately 3% or higher would imply two-year average trends significantly higher than those seen in December.  While two-year average trends would remain significantly below the 2010 average in the event of a +3% print, at the very least this would imply a significant bounce back from December’s disappointing result.  Consensus is for a Europe comp of +3.7%.


NEUTRAL: Between roughly 2% and 3% implies a sequential increase from calendar-adjusted two-year average trends in December but would be significantly below Street expectations.   Additionally, two-year average trends would be markedly lower than those seen in for the majority of 2010.


BAD: Below 2% would imply trends, at best, slightly higher than those seen in December and, of course, a one-year number far, far below Street expectations.



APMEA – facing a 4.3% compare (including a calendar shift which impacted results by -0.4% to +1.0%, varying by area of the world):


GOOD:  A result of roughly 4.5% or higher would imply two-year average trends roughly in line with or better than results seen in December.  Additionally, such a result would likely reassure investors that the bounce back in December from November’s result was not a head fake. 


NEUTRAL: Between roughly 3.5% and 4.5% would imply two-year average trends roughly in line with, or slightly below, the strong results in December. 


BAD: Below 3.5% would imply a significant slowdown from December’s result.



Howard Penney

Managing Director

COH: Still the Same Questions

Nine trading sessions have passed since Coach reported its 2Q results and nothing from a fundamental perspective has changed in our view.  What has changed is Keith's perspective on the shares, which were once again added to the firm's virtual portfolio on the short side. 


Here's a recap of our thoughts (questions) following the handbag maker's recent report:


On an absolute basis, Coach’s F2Q was a pretty good quarter.  The topline was better than expected (NA comps up 12.6% vs. a whisper of 8-9%) and quarterly EBIT margins of 35.9% by all accounts remain tops across the entire apparel, retail, and luxury sectors.  Growth clearly remains the top priority for management with square footage expected to increase by 10% (vs. 8% LY) driven by aggressive expansion in China, new moves into Europe, and modest growth in the US supported by a resurgent men’s initiative.  Cash generation is also a strong point as it always has been.  The company ended the quarter having repurchased $388 million worth of stock, with $940 million on its balance sheet and no debt. 


The “growth” story and the cash are hallmarks of Coach and factors that certainly shouldn’t be ignored.  However good this may be, we come away from the quarter with more questions than answers on two fronts. First, is the Street really prepared for extremely challenging gross margin hurdles over the next three quarters after barely printing a gross margin gain of 15bps on an easy LY compare? And secondly, if SG&A growth remains high to support the company’s growth initiatives, will be there be meaningful earnings leverage in the near-term to satisfy those that are accustomed to consistent upside? Couple these unanswered questions with the fact that inventories ended the quarter up 36%, a full 17 points higher than sales growth and we believe there may be more risk than reward in the near term.  While the SIGMA chart is not a perfect predictor by any means, this pattern is turning out to be a classic setup for future downside.


COH: Still the Same Questions - coh 2q

European Bank Swaps Fall

Position: Long Sweden (EWD); Short Italy (EWI), and Euro (FXE)


Below we include a portion of a product offering from our Financials’ team, the Weekly Risk Monitor for Financials, that tracks CDS across global banks. The table below covers major banks throughout Europe and the trend week-over-week was down, with a mean move of -18bps or -5.4%.  As a follow-up to a post we wrote on Sweden on 2/2 titled “Buying Swedish Fish”, Swedish banks maintain their relatively low risk premium, a further positive indicator of present strength and additional confirmation that fears associated with their past leverage to the Baltic states are rearview.


Spain, on the other hand, and despite a positive (downward) move in CDS week-over-week, remains on our screens due to the uncertainty in the size and timing of the government’s bid to capitalize (or convert) its lenders.


You’ll remember that late last month Spain’s government set a September 2011 deadline for lenders to raise their core capital ratios to 8% (or 10% for the cajas, or savings banks).  Finance Minister Elena Salgado said that Spanish banks require no more than €20 Billion of extra capital to meet these targets, however Moody’s estimated the number as high as €89 Billion. Although the country has a bank-rescue fund, known as FROB, there’s still much uncertainty about the absolute value in funding needed and the ability of the lenders, especially the cajas, to raise debt in the market.


Matthew Hedrick



European Bank Swaps Fall - bank1

European Bank Swaps Fall - bank2


We wouldn’t read too much into the first week’s numbers but they are not good.



The week before and the first few days of Chinese New Year (CNY) are usually slow.  We are hearing that overall market hold percentage may have been low and it certainly was at Wynn and MGM (possibly below 1% at both).  Macau was very crowded on Saturday and Sunday and that is likely to continue.  The strong CNY-related VIP play likely began in earnest on Sunday, which is not included in these numbers.


Our concern is that some analysts/investors may be expecting close to a HK$20bn month while we think HK$17-18bn is more likely even with strong CNY volumes this week.  MPEL continues to have the most upside relative to expectations, in our opinion.  Wynn’s market share should bounce back nicely.  We are hearing their numbers were extremely strong the last two days.



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