Keith shorted MCD in the Hedgeye Virtual Portfolio.


We have been bearish on McDonalds for some time now and published a contrarian Black Book detailing our thesis in mid-January.   MCD’s core business is in decline and the first chart, below, shows where January’s comparable restaurant sales came in versus expectations.  Our estimates for the rest of the year are also detailed in the chart; clearly we have a pessimistic outlook for the U.S. business which represents approximately 46% of the company’s operating profit.


The second chart details the quantitative set up for MCD at its current level.  The Hedgeye Risk Management quantitative set up shows the nearest intermediate-term support down at $74.12.






Howard Penney

Managing Director


Based on Q4 dollar RevPAR, January should've been stronger.



Following up on our 1/26/11 post, "HOTELS; BLAME THE WEATHER", January Upper Upscale Revpar grew 7.4% YoY.  While that may appear strong on the surface, it was actually a deceleration from Q4.  Seasonally adjusting Q4 dollar RevPAR produces January RevPAR growth 4 percentage points higher than actual.  It's hard to believe poor weather could explain that magnitude of a miss.  Given the high RevPAR volatility over the last three years, we track RevPar on a sequential, absolute dollar basis, adjusted for monthly seasonality.   


Reflecting November-January RevPAR, we project RevPar growth of 10% for February 2011, assuming no sequential growth in seasonally adjusted dollar RevPAR.  Anything below 10% will be indicative of a slowdown.  Thus far, the weekly February RevPar have been trending a tad lower than that.  We continue to believe that February will be the near-term peak for RevPar growth with contraction risk in Q2.





India: Missing Where It Matters Most

Conclusion: Finance Minister Mukherjee’s budget failed to adequately address the #1 issue facing the Indian economy – inflation. As a result, our bearish stance on Indian equities continues unabated. Further, we don't see India meeting its FY12 deficit reduction target as a likely outcome.


Position: Short Emerging Market Equities via the etf EEM.


Though we tactically covered our short position in Indian equities on 2/24 (for a gain), we still remain quite bearish on them at current prices. India’s SENSEX has rallied +1.1% off its lows on 2/24, driven by a confluence of declining crude oil prices (India imports ~70% of its crude oil needs) and hopeful expectations surrounding the unveiling of the government’s FY12 budget, which took place today.


Regarding the budget specifically, it delivered where quite a few investors were hoping it would – on promoting investment in India’s woeful infrastructure. Highlights include: 

  • An additional +23% more spending on roads, ports, and power generation capacity;
  • The limit for foreign institutional investment in debt issued to finance infrastructure projects quintupled to $25B vs. $5B prior;
  • The limit for foreign investment for Indian corporate bonds doubled to $40B vs. $20B prior, with the entire delta reserved for bonds issued by infrastructure companies;
  • Domestic individual investors could purchase up to $450 worth of infrastructure bonds and receive tax-free status on the returns for an additional year;
  • $330M for investing in clusters of farmland with the intent on increasing lentil, palm oil, and vegetable production;
  • Keeping the excise tax at 10%, rather than returning it to its pre-crisis level of 12%;
  • $450M in rural infrastructure spending designed to created 4M tons of warehouse capacity used to store food grain (by March 31, 2012);
  • To further encourage investment in cold-storage capacity, the budget exempts air-conditioning units and refrigeration equipment from the excise duty; and
  • Mukherjee plans to incentivize commercial banks to increase lending to India’s farmers by +27%. 

For perma-bull BRIC-lovers, this bullish-on-infrastructure budget is full of long-term investment opportunities. For those of us that prefer to manage the risk associated with playing the game that’s in front of us, this budget is a flat-out failure, missing where it matters most – reigning in inflation. This budget does very little in combating India’s massive inflation problem, which now shifts the bulk of the onus of suppressing inflation back towards the central bank (think: policy “hot potato”).


To Mukherjee’s credit, his proposed budget “only” calls for a +3.4% YoY increase in spending, which is down substantially from the +20% YoY increases of India’s more recent budgets. On the flip side, however, these recent budgets reflect heavy countercyclical gov’t spending during and in the wake of the global financial crisis.


The fact that India is unable to retract from such elevated levels of gov’t spending shows that India’s ruling elite may be increasingly unconcerned about the strife of its impoverished populous. The reactions by India’s competing politicians (which certainly need to be taken with a grain of salt) underscore this assertion: 

  • “This is an anti-people budget. The budget is targeted at a section of the country who are considered to be the cream of the society. No relief measures have been unveiled to provide relief to the common man.” – Left Front Chairman and Communist Party of India-Marxist (CPI-M) politburo member Biman Bose
  • “The most important issue that is taking a toll on common man is price [increases]. No measures have been taken to tackle it. Rather they have given attention to indirect taxes. And another thing, no measures have been taken for the minority community of India.” – Forward Bloc leader Hafiz Alam Sairani
  •  “This budget is for the rich section of the society, not for the poor people.” – Communist Party of India (CPI) leader and state Water Resource Minister Nandogopal Bhattacharjee 

Less anecdotally, our analysis of the budget leads us to side with the gentlemen above. The budget is rife with tax hikes and income tax deductions that appear more symbolic than impactful in nature: 

  • A new service tax will be levied on air-conditioned restaurants that serve alcohol – in addition to the VAT, which is typically 12.5% for food and 20% for alcohol;
  • Hotels will levy an additional 5% service tax and all room rates will increase by a minimum of +1,000 ($22) rupees per night;
  • A +50 rupees ($1.10) service tax will be levied on domestic airfare and a +250 rupees ($5.50) service tax will be levied on international airfare, with an additional tax for flying business class;
  • A 5% tax will be levied against all services provided by air-conditioned hospitals with greater than 25 beds (essentially all major hospitals in every urban area);
  • The income tax exemption for individual male taxpayers increased +20,000 rupees ($445) to 180,000 rupees ($4,000). For women, the increase brings their exemption level to 190,000 rupees ($4,220). Calculations by consulting firm Deloitte Haskins & Sells suggests these increases amount to a tax saving of ~$45 per year, which is likely to be consumed by the increases in the effective tax rates on many services broadly; and
  • The retirement age drops to 60 from 65 previously and those individuals will maintain tax-exempt status on income less than 250,000 rupees ($5,555). Individuals older than 80 will maintain tax exempt status on incomes up to 500,000 rupees ($11,111). It remains to be seen how many individuals will benefit from this change in tax code. 

All told, taxes are going up, which directly equate to higher consumer prices. $112 Brent crude oil and a currency that is down (-1.3%) YTD indirectly contribute to accelerating inflation as well. As we have seen with the RBI’s decision to engage in Quantitative Easing throughout 4Q10 and early 2011, Indian monetary and fiscal policy continue to be managed in a way that disenfranchises the bulk of India’s population (the World Bank estimates that over 75% of Indians live on less than $2 per day).


Perhaps that is why thousands of protesters continue organizing rallies on the nation’s capital – a trend we expect to accelerate as growth decelerates over the next 6-9 months and inflation remains sticky due to corporate COGS increases being passed through to Indian consumers. Perhaps the worst part of the Finance Minister’s budget proposal is that it forecasts growth to accelerate to +9.25% YoY next year, which implies that corporations are likely to be increasingly comfortable passing through price increases to Indian consumers in an environment of robust growth expectations.


Decelerating global growth, heightened interest rates, and accelerating inflation – particularly elevated crude oil prices – all remain headwinds to Indian GDP growth over the intermediate-term TREND. Perhaps that’s why the SENSEX has diverged from both the government’s and sell-side consensus’ lofty growth projections (down -13.1% YTD).


Darius Dale



India: Missing Where It Matters Most - 1

Early Look

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Ho hum quarter and future




  • "We were able to increase our property EBITDA by about 17% (11% on a same store basis) on increased revenues of only 2.4% in part as a result of the benefits of lower gaming taxes in Florida and because we are providing an improved guest experience, our marketing programs are driving more profitable business, and our team remains focused on fiscal discipline.  The efficiency we have created in our business is demonstrated by the fact that in the markets where we experienced increased revenues the flow through on year-over-year revenue changes was significant, ranging from about 40% in Marquette to a high of 154% in Waterloo. In addition we were able to increase EBITDA in Lake Charles and Biloxi despite revenue declines year over year."
  • "While we have not experienced a wide spread increase in consumer spending, we are capitalizing on specific areas of opportunity in our business, and have therefore been successful in achieving improved financial results. During the quarter we experienced a slight decline in rated visits that was offset by an increase in rated spend."
  • "Capital expenditures during the quarter totaled $20 million, of which $8 million related to Cape Girardeau and $12 million related to maintenance capital expenditures."
  • "The Company expects capital expenditures for the remainder of the fiscal year to be approximately $15 million consisting of $10 million in maintenance capital expenditures and $5 million related to Cape Girardeau."
  • Development Update:
    • Casino Cape Girardeau:
      • "Completed purchase of all land and demolition of existing structures is underway... In the process of selecting a general contractor, we expect to break ground in the summer of calendar 2011. The $125 million project, which will feature approximately 1,000 slot machines, 28 table games, three restaurants, a lounge and terrace overlooking the Mississippi River and a 750-seat event center, remains on schedule to open in late calendar 2012."
    • PA:
      • "In January, the Pennsylvania Gaming Control Board indefinitely delayed its decision on granting the state's final Category 3 resort gaming license... Since that time, two new gaming board members have been appointed and the Company has received no guidance with respect to the timing of any announcement regarding the license."


  • Faced weather issues in Dec and Jan that have continued into February
  • Over 50% of their properties saw higher retail spend.
  • Beginning to look for new COO
  • 79MM on R/C; 357 MM sub notes; 5MM of other debt . Total debt: 1.25 BN
  • Leverage: 6.75x; interest coverage: 2.27x


  • Believes no gaming tax hike for Iowa - not popular with public
  • In November, signed with potential developer for Davenport casino. Quiet period right now.
  • Lake Charles
    • Continue to strengthen customer relationships
    • Niche with little competition
    • Consider Houston secondary/tertiary market - a little lift from high oil prices
  • Vicksburg EBITDA:
    • Pressured from high unemployment
    • Lula-20th cons. quarter of declining gaming revs
    • Natchez - highly promotional market
  • Term loan: All term B
  • Amending revolver? Yes, when they do new credit facility
  • Bridge opening in Thanksgiving benefited Bettendorf results
  • Missouri has been particularly strong. Iowa had a good Q. Pressure continues to be in the South.
  • Biloxi: market continues to be tough; decline in Pensacola market; canceled fishing tournament.
  • Corp exp run rate: lower than expected insurance claims benefited FQ3; for the year, run rate is mid-30s on a cash basis + stock comp (in-line with previous guidance).
  • Stock comp for F4Q: 1.4-1.8 is better range.
  • Cape Girardeau: still in process of selecting a contractor
  • Competitive market:
    • Increased promotional activity in Quad Cities; Jumer's in particular
    • Biloxi, Vicksburg, and Lake Charles - high promotional environment
  • Other accrued liabilities: some swaps, timing of payments
  • Interest expense run rate is in-line with guidance; wouldn't change until construction cycle at Cape Girardeau
  • A good chunk of the improvement in Florida is due to the change in tax rate
  • Increase in retail revenue at about half of their properties which is more a profitable customer for them
  • Iowa removal of smoke exemption for casinos?
    • Tough to read the tea leaves


Looking at recent short interest moves in the restaurant space, it is interesting to note the increase in casual dining short interest versus quick service.  Both have seen increases in this metric, but casual dining continues to be the primary target. 

  • BWLD and EAT saw significant gains in their short interest levels over the past two weeks. 
  • PFCB short interest had been ticking down but the last two readings have shown that investors are continuing to short the stock, even with the short interest at elevated levels.
  • CMG saw an uptick in short interest as inflation concerns impact sentiment around the name.
  • GMCR saw a downtick in short interest over the past two weeks in reported data terms (settlement date 2/15) but I would submit that the recent decline in the share price (-5.65% since 2/15) suggests that sentiment around the name may be changing.
  • PEET short interest was driven higher as the continuing gains in coffee costs got the attention of the investor community.

SHORT INTEREST UPDATE - rest short interest


Howard Penney

Managing Director

Risk Monitor: European Bank Swaps Widen

Position: Long Germany (EWG); short Emerging Market (ESR)


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 mostly wider, tightening for 15 of the 39 reference entities and widening for 24, particularly for Greek banks.


Risk Monitor: European Bank Swaps Widen - top1 

Risk Monitor: European Bank Swaps Widen - top2


The European credit markets continue to be an important indicator of risk for us. As the chart of 10YR government bond yields below presents (and in sharp contrast to the continued outperformance of the equity market of the PIIGS year-to-date) yields continue to trend higher, a reflection of the risk premium to own the debt and deficit imbalances of these nations.


Risk Monitor: European Bank Swaps Widen - top3


In the Hedgeye Virtual Portfolio we sold our long position in Sweden (EWD) today with the country immediate-term overbought. We’ll buy back the position on the next pullback. We continue to like the country’s growth profile; proactive rate adjustments to manage inflation (particularly housing related); and believe that the SEK will appreciate alongside rate hikes and as a safe haven versus the uncertainty with the EUR and USD.


We covered our EUR-USD position via the etf FXE on 2/25 with the ECB continuing to signal a more hawkish stance on inflation. We see the EUR-USD overbought for a TRADE (3 weeks or less) at $1.38 with support at $1.36.


We shorted more Emerging Market exposure today via the etf ESR as inflation crushes consumption's growth.


To keep on the calendar:

  • Wednesday (3/3) the EU announces methodology for its second round of bank stress tests
  • Thursday (3/4) the ECB announces its Refi rate decision

Matthew Hedrick

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