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In preparation for PENN’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from its Q4 earnings call and subsequent conferences.




  • “The first half of the quarter I would say, was pretty challenging in terms of weather. The second half it’s been a lot better, and I think so when you average it all out it’s sort of in-line. But I think it’s going to be interesting to see what sort of the consumer holds for us in the next couple of months here, because looking forward you can sort of wave that away, that sort of rebound that we saw in the second half of the first quarter due to pent-up demand. We won’t have that excuse in the second quarter. And so we’re going to be interested to see where the consumer spending trends lie. So far so good in terms of what we’re seeing, at least as we end March. The fourth quarter – in terms of same-store sales – was the first quarter that we were up in terms of same store spending over the last three years. So hopefully that trend continues over the next four quarters.”
  • M Resorts
    • “Well, we pointed out earlier that the 28,000 slot machines that we have in our portfolio, in our footprint, and when we add in the capacity that we expect to bring from the three new greenfield projects plus the M Resort which again will consolidate probably in the – at the end of the second quarter this year. You’re talking about a 32% increase in slot machines and hopefully a similar or greater increase in profitability for us.”
    • “M Resort, basically kind of an old story, but we acquired all of the debt in October of 2010 for $230 million. We have reached an asset purchase agreement with the Marnell’s. We are really just waiting for regulatory approval from the state of Nevada. We’re getting indications that that will probably happen in June, maybe in May, and then obviously, we would go ahead and close out the facility at the time.”
    • “We’ve already booked, the M Resort only has 390 rooms. And we have already booked about 2000 room nights, and we’re only halfway through that marketing cycle. So I think, we are feeling, we are feeling pretty good about this acquisition and the return potential, subject to regulatory approval of course.”
  • Ohio
    • “It’s probably more likely than not at this point those VLTs are legalized at the tracks in Ohio.”
    • “There is going to be no smoking in Ohio.”
    • “We’re in a process right now where we think by April – we’ve got our construction permits filed with the state. They owe us a response by April, but obviously Ohio and Columbus has been a very difficult process to say the least.”
  • “ We generated free cash flow of $301 million last year. We think that number is going to rise to $340 million this year.”
  • “We are very focused on margins. This last year has been probably the single focus from an operations perspective on how we can improve our operating margins, and it has been a tough environment. Obviously, the economy is not exactly robust. But we’ve been able to do a nice job over the last year, and I think you’ll continue to see us make some progress in that area certainly going forward.”
  • “And then Perryville opened up in September. We basically planned to spend $98 million, we had spent roughly $86 million. The bulk of that will get spent as we finish up our billings from the construction folks down through the first quarter and maybe even a little bit into the second quarter.”
  •  “Kansas is in a race with Toledo right now to see who opens first. Kansas is about three weeks ahead of Toledo right now.”
  • “Our project CapEx spending is going to be approximately $340 million or $350 million in 2011.”
  • “As it stands today and I am not saying that our stock is overvalued by any stretch, but it’s not as compelling obviously as it would be if it was in the lows 20s. And I would point out, even back in ’08 from a debt perspective, we had roughly $1.2 billion available to us at the time. We could have purchased more, but Peter’s first and my first concern is let’s not be over leveraging ourselves, let’s make sure that the company is going to be viable and that we are not putting ourselves in a position like some of our competitors have done in the past where we’ve gone out and bought back a bunch of shares and then had to turn around and reissue them at a lower price. We find that to be rather counterproductive.”



  • “We’re seeing flat year-over-year kind of spending behaviors across most of our businesses. And our outlook for 2011 is more of the same. We are not seeing any downward trends that we saw maybe a year ago, that has stabilized. But we are not seeing any strength and any rebound in the consumer to any note. So we’re flat, we continue to expect it to be along those lines until we see the fundamentals of the macroeconomic conditions improve, which we haven’t seen yet and that’s how we’re thinking about 2011.”
  • “With regard to Lawrenceburg, we already expect competition coming in the Cincinnati market with Rock’s development. They are going to have their groundbreaking, I believe, later this week. And we expect late ‘12, early 2013, they are going to be opening. So we know ‘11 and ’12 are going to be the last two years where we’re not facing competition there. I think the land-based casino in Cincinnati will be more of a competitive threat to us than what River Downs may do or what may happen elsewhere in that market and we’re trying to manage that business with the expectation it will get smaller in 2013.”
  • “What we’re seeing out there in all these regional markets is a rational environment for promotional spending. We’re not seeing any of these markets that are having any of our competitors trying to capture share with increased marketing reinvestment.”
  • “Looking forward to next year, we’re expecting CapEx in the first quarter to be $108.4 million with new projects representing roughly $70.2 million and maintenance CapEx of roughly $26.9 million. And for the year – and then on top of that, is $11.3 million for the Hollywood – our expected contributions for the Hollywood Kansas Speedway. And for the year we’re looking at roughly $289 million in new projects, $88.5 million in maintenance CapEx, and $71.1 million for the Hollywood Kansas Speedway joint venture which totals up to $449.2 million.”
  • “Corporate expense [yearly run rate] is roughly $78 million.”
  • “And with regard to slot capital, I don’t think, Steve, much has changed in 2011 as we’ve thought about it in years past. It’s still about 60% of our total maintenance capital which gets us to refresh about one-seventh of the floor across the enterprise. So, nothing really has changed. We’re going to continue to keep our product fresh; and relative to our competitors, I’m very confident that we’re not going to be behind any slot product that’s out there in a competitive environment.”
  • [Casino Rama] “No, the contract formally ends in July. We’re in the process right now of negotiating an extension, which we think is going to be a bridge to the RFP process for complete new re-bid activity. But since we don’t yet have the contract or the extension formally signed and we haven’t finalized the terms, we’re basically not including that in our guidance at this time. Obviously when we give next quarter’s guidance if we’ve managed to nail this thing down, then obviously we’ll put it in because we’ll have a good handle on what the term is and what the fee structure is.”
  • [Back-end increase in 2011 depreciation guidance] “The full year impact from obviously there’s the M, there is also the Perryville, there’s the addition in Joliet, which just came online. We’ve also got full year impact from the Charles Town and Penn National."


The Macau Metro Monitor, April 20, 2011




Another cash handout is coming.  In 2H 2011, every permanent resident will receive MOP 3,000, while each non-permanent resident will receive MOP 1,800, according to Macau CEO Chui.  This follows the HK government's announcement of a HK $6,000 handout to each adult permanent resident.


Chui also said he would submit to the Legislative Council additional measures to curb speculative trading in the housing market.  They include the introduction of a special stamp duty and tighter mortgage lending.


The Louisiana Municipal Police Employees Retirement System is seeking LVS to sue its own directors to recover damages, because directors failed to ensure management was operating properly in China.  The latest lawsuit was filed Monday in U.S. District Court for Nevada in Las Vegas against CEO Adelson and a number of officers.



The Infrastructure Development Office (GDI) is concerned that the development of the HK-Zhuhai-Macau Bridge could be delayed by 6 months due to a court ruling by the HKSAR Court of the First.  The court ruled that the HKSAR director of environmental protection, Anissa Wong Sean Yee, should not have granted permits for the construction and operation of the bridge’s boundary crossing facilities, and a 12 kilometer link road.  The HKSAR Transport and Housing Bureau said the target of completing and commissioning the bridge by 2016 was still viable.

Currency Crash

This note was originally published at 8am on April 15, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It would be very advantageous to allow the currency to appreciate as a way of controlling inflation.”

-George Soros, April 10th, 2011


That’s a very simple but critical comment Soros made last week at the Bretton Woods meetings in New Hampshire. He wasn’t talking about the US. He was talking about China.


He or she – whoever the overlord of policy making may be – should be thinking long and hard about what a US Currency Crash not only means for The Inflation that’s priced in US Dollars, but what they can do to fight it for the sake of their starving citizenry.


US Currency Crash?


It’s in motion folks – and if it happens, I think it happens in the next 3 months.


That should read as a bold statement, because it is… And the best way to put a picture with that prose and turn up some volume will be to dial into our Q2 Global Macro Theme conference call today at 11AM EST (email sales@Hedgeye.com if you’d like to participate).


As is customary, Big Alberta and his Hedgeye knights have prepared the anchor with a 50 slide presentation that will lock us into making the risk management calls that we don’t think you can afford miss.


As a reminder, with the intermediate-term TREND overlay of Growth Slowing As Inflation Accelerates, our Q1 Global Macro Themes were:


1.  American Sacrifice  - a scenario analysis and calendar of catalysts for the US Dollar

2.  Trashing Treasuries – long of The Bernank’s Inflation, short US Treasuries

3.  Housing Headwinds II – part deux in the Josh Steiner chronicles of the best Housing work on Wall Street


This morning’s call will focus on what an expedited US Currency Crash could look like and the following Q2 Global Macro Themes:


1.  Year of The Chinese Bull

2.  Deflating The Inflation

3.  Indefinitely Dovish


While we realize we have a target on our foreheads for calling out places like The Lehman Brother, The Bear Stearn, and The Banker of America, we have grown accustomed to it and we wear it with pride.


Living a risk management life of consensus and strong buy versus maybe buy it after we tell our super duper clients to sell into you isn’t a life to live. At Hedgeye, the name on the front of our jerseys mean more than the ones on our backs. We don’t make contrarian calls for the sake of being contrarian. We make these calls because we think they have the highest probabilities of being right.


Maybe we’re a little artsy with our Soho office. Maybe we’re a little jocky with our dressing room in New Haven. But when we make a call, there is no maybe – it’s long or short – and it’s on the tape.


On the Currency Crash call, I’ll save the juicy details for 11AM. We didn’t need to have a super secret one-on-one in Washington with a “consultant” to the professional politicians to make this call either. Over the last 3 years we’ve made 19 long and short calls on the US Dollar – and we’ve been right 19 times – so we’re going to stick with the process on that.


On The Chinese Bull


Oh what a sexy call this one is going to be. The Hedgeyes versus the former roommate of a Yale Hockey player – Jim Chanos. We were bullish on China in 2009, bearish on China in 2010, and now we’re going to ride shotgun on this red bull before consensus does.


Last night’s Chinese GDP growth report beat our already above consensus estimate, coming in at +9.7%. While that’s a sequential slowdown versus the Q4 2010 China GDP report of +9.8% - that’s a deceleration in the slowdown – and on the margin, which is what matters most in making Global Macro calls, that’s what we call better than bad.


When better than bad is cheap (which Chinese equities are on an absolute and relative basis to both themselves and Asian Equities overall), that’s when shorts have to start covering. When better than bad is cheap and price momentum turns positive – that’s when Wall Street has to chase the asset’s price performance.


More on that and why we think Chinese inflation is setting up to deflate from the Elm City during our conference call. If it’s the beginning of the quarter, it’s Global Macro Theme time at Hedgeye.


My immediate-term support and resistance lines for oil are now $105.41 and $109.24, respectively (we bought our oil back this week at $106). My immediate-term support and resistance lines for the SP500 are now 1308 and 1325, respectively (we’re short the SP500).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Currency Crash - Chart of the Day


Currency Crash - Virtual Portfolio

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In preparation for Marriott's Q1 2O11 earnings release after close tonight, we’ve put together the pertinent forward looking commentary from its Q4 2010 earnings call and subsequent conferences/releases, including commentary from the guide down on March 28th.



Post Earnings Business Commentary

  • Demand in international markets has been robust and international systemwide RevPAR is expected to increase 11% in constant dollars in 1Q 2011.
  • The company expects its worldwide systemwide 1Q RevPar to increase approximately 7%, at the low end of the company's 7 to 9% 1Q guidance.
  • MAR reiterates the company's diluted earnings per share guidance for 1Q of $0.24 to $0.28 per share.
  • “In February, [we] had guided to a North America number of 6% to 8%. And although North America is still strong and the business is still strong, there were a few things that changed that we think North America will come in at 5% to 6% instead of 6% to 8%, still strong but lower than the lower end of that guidance”
  • “What changed from our expectations in February:”
    • “In New York City a lot of supply came on. We were expecting that supply, that was no new news, but it came on at rates that were lower and weaker than we had anticipated, so as many of you know, we were the rate leader in New York where we had pushed rates first and had moved our rates up and had been aggressively moving our rates up in New York. And as this supply came on at the lower rates, it slowed that process down which we weren’t anticipating when we gave guidance. And then New York also had weather. As all of you know it had quite a few snowstorms that slowed the pace down as well and we have a very big footprint in New York.”
    • “In Washington, DC, you had a little bit of noise for about a month on the government shutting down and that slowed down. You have a lot of government contractors in Washington, DC and they slowed down their meetings and slowed down some of their transient while they waited to see what was going to happen with the government. The good news is the government kind of settled down and extended the budgetary process, so that noise is kind of out of the system now but during the quarter it was there.”
    • “Atlanta had some weather.... we have several large, big-box hotels, multi-thousand room hotels, and we saw the pace of in the quarter for the quarter small group bookings did not materialize at the same level we were expecting.”
  • “We saw good group bookings in December, we saw good group bookings in January and we used that as our basis to set our guidance for the full first quarter. Although February came in good– group bookings were up 15%, it was not at the expectation levels we had thought it would be as we set our guidance.”
  • “Transient is fine. I think what we’re seeing there is if you look at our Select-Service it’s coming in where we thought it would be which is mostly business transient as you think about it.  It was more of this short term in the quarter for the quarter group bookings that had more of the effect of still having a good quarter of 5% to 6% but instead of the 6% to 8%.”
  • “We gave guidance and talked about adding 35,000 rooms this year. We’re on target to do that, 9,000 of those are AC Hotels, which we successfully closed March 1st, that joint venture. That’ll add 9,000 AC by Marriott hotels: 80 in Spain where we had very little representation.”
  • “As far as what we’ve seen in Japan, you know we have very little presence in Japan. I think our total fees in 2010 was about $12 million, $13 million. We have about 10 hotels there, so not a big effect to us. What we have seen is business move out of Japan into Beijing, Shanghai, some into Singapore, a little bit into Thailand, meetings, things that were going to happen in Japan have moved over.”
  • “The Middle East, we have about 30 hotels in the Middle East. Our fees in 2010 were about $37 million, so not a big footprint there. The outbound traffic there would be mostly to Paris in the summer time. That’s typically wealthy Middle Easterners so we’ll see what the effect is there. But Paris is a very strong market so it will absorb anything that would change there, I think.”
  • “We’ve been very aggressive in the first quarter with share repurchase and we’ll continue to do that throughout the year as we have this excess $1 billion of cash.”



  • “Our new points product has been very well received by customers. Timeshare demand correlates highly with consumer confidence, which is coming back. New construction starts in the timeshare industry are very low as the industry continues to absorb existing inventory.”
  • “Looking further ahead, while we don’t expect the new company to be investment grade in the near term, we do expect that it will continue to securitize its consumer notes receivable and should require little additional incremental capital.”
  • “We’re roughly two-thirds of the way done with special corporate rate negotiations for 2011, and the resulting rates for the completed accounts are running up at a high single-digit rate over 2010 prices. Special corporate customers also tell us that they expect to be traveling more in 2011.”
  • “Roughly 35% of our pipeline rooms are under construction and nearly 20% are awaiting conversion.”
  • “For 2011, we expect Adjusted EBITDA is expected to climb 12% to 18% for the full year.”
  • “The first quarter reflects slower growth than the full year, largely due to timing issues for G&A and Timeshare. The first quarter 2011 G&A increase reflects a tough comparison to a $6 million guarantee reserve reversal and unusually low incentive compensation in the prior year quarter. For Timeshare, lower interest income and rental profits will likely depress results in the first quarter, but favorable development profit reportability and solid cost controls should yield much stronger earnings in the remainder of the year.”
  • “We assume about $500 million to $700 million in investment spending in 2011 including $50 million to $100 million in maintenance spending. Total investment spending in 2010 was about $400 million. We will be disciplined in our approach to capital investments and repurchases, but expect to return cash to shareholders if attractive investment opportunities do not appear.”
  • [2011 investment spend] “That amount is mostly committed at this point in time.”
  • “We know that the securitization debt will go with the timeshare company.”
  •  [Mix] “I think just shy of about 40% [group] for full-year 2011.” 
  • “Probably two-thirds or so of our group business was on the books as of the end of ‘10 for ‘11 and the balance will be booked over the course of the year.”
  • “The limited service areas, that’s where the supply growth was most significant, and that supply, by and large, completed opening in the early part of ‘10. And so I think we’re starting to see the benefit from a supply side of much less limited service product coming on."
  • “We’ll want a fee structure that is an appropriate incentive for this business to grow with us. And obviously, if we put a fee that is too high on their sales, that potentially cause them to say we’re giving up too big a share of our profits for those, we’re going to tend to run that business away from us sooner rather than later and we basically never want to run that business away from us.”
  • “We do think that we’ve got occupancy growth in most markets in the United States, including secondary and tertiary markets, so we’re starting to see rate growth in most, albeit it’s a bit more modest in the secondary markets than it is in the primary markets at the moment. But it will come.”


Coffee prices bounced once again last week as fears mount that the approaching winter in Brazil may damage crops.  Sugar dropped 5.1% over the past week, and the commodity is now down 24% year-to-date.  In a bearish data point for global food costs, the weather bureau in India said that the monsoon rainfall in the country will be normal for a second consecutive year.  Corn took a small step back last week but remains up 115% year-over-year.  Wheat's price action of late is partly due to the substitution effect which I expect to continue as long as corn prices remain at these elevated levels.





Coffee prices have rebounded strongly of late and will likely cause concern among the coffee names that have been reluctant to raise prices of late, despite elevated coffee costs.  Prices are now up 113% year-over-year.  Starbucks has effectively locked in its coffee costs for the year.  GMCR, according to its most recent earnings call, had locked in six months at fixed prices.  The company said that it will adjust pricing “as necessary”.  PEET passed on price to its customers during the first quarter.  The company did not disclose its current hedging strategy for 2011 (as of 3Q10, we know PEET had locked in 40% of its 2011 coffee needs), but management said it expects coffee costs to climb nearly 30% YoY.





Wheat prices rose in step with corn over the last week, supported by news that about 38% of the winter-wheat crop was in poor or very poor condition as of April 17, up from 36% a week earlier and 6% a year earlier, according to the Department of Agriculture.  Dry weather in the past week from central Kansas to Texas also hurt crops.  For companies like Panera, which does have wheat costs largely locked in for 2011 roughly flat versus 2010, prices remaining this elevated could result in a price increase in the back half of this year.





The Hedgeye Energy team published an interesting note last week on gasoline consumption trends showing signs of a 2008 repeat.  Specifically, once gasoline prices broke through the $3.60 barrier in 2008, year-over-year gasoline consumption declined for 30 straight weeks.  The surging prices at the pump are causing demand destruction in the consumer economy.  This is not lost on management teams; the concern expressed by DRI during its recent earnings call is telling and I expect BJRI and CAKE management to mention this topic during their earnings calls tomorrow.  Restaurant chains with a high level of exposure to gas prices are likely to suffer as prices press towards $4.  We are focused on companies with direct exposure to elevated gasoline prices, such as CBRL, and companies that have a high proportion of stores based in markets where prices at the pump are a strong factor (California), such as CAKE. 





Chicken wing prices continue to plummet.  BWLD is set to benefit further from the decline and year-over-year favorability looks, from the chart below, to be all but certain for the remainder of 2011. 





Howard Penney

Managing Director


MCD will announce sales numbers for March, along with their earnings for 1Q, on Thursday morning before the market open. 


There was no difference between the number of weekdays and weekend days in March 2011 versus March 2010.  March 2011 had one less Monday, and one additional Thursday, compared to March 2010.


As a reminder, February’s U.S. result was in line with my neutral range of 2-3% and well below the Street’s expectation of 3.6%.   I have been bearish on MCD since the latter stages of 2010, and published a Black Book detailing my thesis in January.   For some time, I have been cognizant of the significance of MCD’s sales results in March.  March represents a significant step-up in the difficulty of the compare for U.S. same-store sales; March 2010 comparable restaurant sales came in at 4.2% versus February 2010 at 0.6%.  While MCD is a global company and it is crucial to monitor trends in all geographies, results from the U.S. division remain the primary driver of the share prices.  As I stressed in the MCD Black Book, the U.S. market still represents about 45% of operating income.  A comparable restaurant sales number below consensus in March would mark the sixth consecutive month of disappointing top-line results in the U.S. 


Below I go through my take on what numbers will be received by investors as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts. 



U.S. - Facing a difficult +4.2% compare (including a calendar shift which impacted results by -1.5% to +0.2%, varying by area of the world):


GOOD: A print above 1% would be perceived as a good result, implying that two-year average trends accelerated significantly in March on a sequential basis.  Two-year average trends declined sequentially in December, and were roughly flat in January and February.   I believe that a strong acceleration in two-year trends, as would be implied by a comparable sales print of +1% or higher, will be necessary to fully reassure investors of the strength of the core business in the U.S.  It is important to note that, at this juncture last year, frappes and smoothies had been rolled out to 90% and 20% of the system, respectively. 


Last year consumer confidence was trending higher through 1Q10 and management cited consumer confidence “getting better over the last couple of months” as a key factor (along with more company-specific drivers) for top-line growth in the quarter.  Looking at the University of Michigan Survey of Consumer Confidence chart, one can see that sentiment improved by 1.52% in 1Q10 but declined by 9.4% during the first quarter of 1Q11.


MCD: MARCH SALES PREVIEW - univ mich consumer conf 419


NEUTRAL: A print between 0% and 1% would be perceived as a neutral result.  While the low end of this range would still imply sequential growth on a two-year basis, it would be a concern if anything less than a significant step-up were achieved following three disappointing months.  I believe that a print in the neutral range is most likely, with a bias toward the lower end of the range.  The street is currently forecasting 1.7% comp growth.


BAD:  A comparable restaurant sales result less than 0% would clearly be a great disappointment to investors and would demand a dramatic revision of sell-side sentiment on this name (which would be long-overdue, in my opinion).  I believe that a negative number is far more likely than most appreciate but, again, anticipate a comparable restaurant sales number in the neutral range detailed above.  It is important to remember that a sequentially flat two-year average trend would imply a negative result in March.




MCD: MARCH SALES PREVIEW - mcd vs consensus us comps



Europe – Facing a difficult +5.9% compare (including a calendar shift which impacted results by -1.5% to +0.2%, varying by area of the world):


GOOD: A comparable restaurant sales number of 4% or higher for the Europe division would be received by investors as a good result.  A print at this level would imply two-year average trends approximately 30 basis points (at most) below those seen in February, which was a particularly strong month for MCD’s European business.  While the U.K. was mentioned as a strong market during the 1Q10 earnings call, along with Germany and Spain, it is important to note that Retail Sales in the U.K. during March showed the worst fall in sales for any month in at least 16 years.


NEUTRAL: A print between 3% and 4% would be received as neutral by investors as it would imply roughly flat-to-slightly-down two-year average trends which, I believe, would be in some ways expected given the fragility of the European consumer and the difficult comparison from a year ago.  I believe a print toward the lower end of this range is most likely. 


BAD: A print below 3% would imply two-year average trends significantly below those seen in February.  Given the impact of austerity measures and the softness of retail sales across much of the Eurozone, not just in the U.K., there is a possibility that comparable restaurant sales come in below 3%.  StreetAccount consensus is calling for a print of 3%.



APMEA – Facing a 2.8% compare (including a calendar shift which impacted results by -1.5% to +0.2%, varying by area of the world):


GOOD: A result of 3% or higher would be received as a positive result for APMEA.  The earthquake/tsunami in Japan as well as, to a lesser extent, the knock-on effects of the flooding in Australia, is likely to depress results this month.  MCD Japan reported results of -7.3% for March.


NEUTRAL: A result between 2% and 3% would be perceived as neutral by investors. 


BAD: A result of less than 2% would be poorly received by investors.  Not only would it imply a sharp drop in two-year average trends, but the number would also fall short of the street’s 2.0% estimate, which is allowing for the tragic events in Japan.



Howard Penney

Managing Director

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