Raising estimates but leaving price target intact is stinky analysis. What happens when they have to raise estimates again?



Yesterday, BMO raised 2011 and 2012 estimates to $1.65 and $2.09, respectively.  We have two issues with this.  First, the analyst left his price target at $21 and rating at Neutral despite the higher estimates.  With ASCA almost at $23, wouldn't that make the stock a Sell and not a Neutral?  He's been raising estimates fairly consistently on the name but that Neutral rating has been sticky.  Second, his estimates are still way too low.  We think $2 for 2011 is likely.  The only way ASCA does $1.65 is if the economy tanks.  If that's what he is projecting, he should have a Sell on the entire gaming sector which has become synonymous with the term cyclical.


ASCA is not a Wall Street favorite.  Maybe it's because they aren't in Asia.  Maybe it's because they aren't spending a ton of money to drive growth.  Maybe it's just not an exciting story.  So what?  These guys are great operators who are focused on ROI.  Free cash flow is growing faster than EBITDA and it won't be long before the company returns more capital to shareholders above the current 2% dividend yield.  ASCA is one of only a few gaming companies that actually pays a dividend. 


At some point, these analysts will have to raise ratings and price targets as estimates continue to go higher.


Notable news items and price action from the restaurant space including our fundamental view on select names.





Gas prices were highlighted by DRI CEO Clarence Otis on the company’s most recent earnings call (March 25) as being a significant headwind for traffic.  Gas prices are down almost 7% since then and 16% since the peak on April 30th.  If gas prices continue to fall or, simply, not go up during the summer months, casual dining may continue to perform strongly.  As gas prices declined in May, the Knapp Track casual dining same-store sales index accelerated sequentially on a one- and two-year basis.


Cattle futures continue to rise as shorter supplies loom on the horizon, according to


Unrelenting rainfall may have slashed U.S. planting of durum wheat to the lowest level in more than 50 years, fueling a surge in the price of pasta and noodles as mills scramble for supply of the grain. Grain elevators in North Dakota are paying farmers about $14.40 a bushel for durum up from $9.50 a month ago; the peak was $23 reached in February 2008.


The outlook for the consumer - more Americans filed first-time jobless claims last week and consumer confidence fell according to the Bloomberg Consumer comfort index.




  • THI was mentioned in a list of names that Goldman expects to drive EPS growth via buybacks. EAT was not on the list.
  • MCD is planning its second Yuan-denominated bond issue, HKET says.  MCD spokeswoman Vivian Zhang has denied the claim.
  • SONC estimates were raised by Piper Jaffray.  FY11 revenue and EPS are now expected to come in at $546.8 million and $0.56 per share, respectively.
  • WEN opened its flagship restaurant in Moscow, Russia Thursday. The restaurant in Moscow’s historic Arbat District, was opened with festivities to celebrate the quick-service burger brand’s entry into the Russian Federation this month. The Russian Wendy - instead of the wholesome freckle-faced redhead in old-fashioned pantaloons, wears a short dress, bright red-striped stockings and stilettos.

HEDGEYE: For years WEN has been trying to cultivate an “international” growth story.  On the marketing front, upgrading “Wendy” to a sexier look can’t hurt sales…


  • Dunkin’ Brands is teaming up with Marvel Studios to promote “Captain America: The First Avenger.” The tie in — which marks the first time the parent of Dunkin’ Donuts and Baskin-Robins has partnered with a motion picture studio — includes themed menu items, a website where participants can win prizes, and a Facebook promotion.

HEDGEYE: The S1 filing for the IPO shows some of the slowest same-store sales trends in the breakfast category.  I know they are hoping this will give them a boost.  Not likely, movie tie-ins are a relic of the past.

  • When KFC Corporation filed a lawsuit in late April seeking to terminate the agreements of 10 stores owned by John R. Neal, one of its biggest operators, some critics charged that the system was getting back at Neal over his leadership in franchisees' successful lawsuit to secure more control over advertising. Late yesterday, Neal's attorneys filed court documents alleging exactly that - Restaurant Finance Monitor

HEDGEYE: YUM’S issues in the USA are not isolated to KFC franchisees the company has many problems with a number of franchisees across all its USA brands.

  • SBUX - Starbucks celebrated the opening of its 100th outlet in Indonesia on Friday, promising a more aggressive expansion plan in the future.  Jakarta-based retailer Mitra Adi Perkasa, which holds the license for Starbucks in Indonesia, said it planned to open 15 more branches throughout Indonesia by the end of 2011.

HEDGEYE: SBUX remains in the Hedgeye virtual portfolio. 




  • DRI’s Red Lobster concept has seen an improvement in performance due to the four-course menu promotion, according to Wells Fargo.  The company’s outlook on DRI has strengthened as a result.
  • DRI could be facing higher food costs on top of the double-digit inflation being seen in seafood.  Bloomberg reports that pasta prices may surge on curbed durum supply.
  • EAT franchisee ERJ Dining LLC, which runs 122 Chili’s units, has deployed wireless, on-table touch-screen technology at 30 of its restaurants in advance of a full rollout by the company later this summer.




Howard Penney

Managing Director



The Macau Metro Monitor, June 24,2011




Macau Secretary for Transport and Public Works, Lau Si Io has said the Macao Studio City (MSC) project must comply with the 2001 Land Concession contract approved by the Macau government in 2008.  That plan does not contain any gaming elements but does contain hotels, restaurants, residential units, and a film production project, which is "a major component of the property."  However, the secretary has not disclosed whether MSC's developer has applied for gaming tables, stressing that any casino projects are required to meet the 2013 quota where gaming tables cannot exceed 5,500.  Lau confirmed that the government has received the application from the developer to resume construction.


Korea Culture Minister Choung Byoung-gug said that it was time to consider allowing more casinos to admit local Koreans. Currently, only one casino, Kangwon Land in Gangwon Province, admits Koreans.  The government is seeking to allow casinos in the six FEZs (Free Economic Zones) and on Jeju Island to admit Korean nationals in a bid to attract more foreign investment and more tourists.  Under the current law on FEZs, a foreigner can open a casino in the FEZ if he/she invests more than $500MM there to run at least three different types of tourism businesses including a five-star hotel with an international convention center.


The Minister added that if the government decides to take the deregulatory step, facilities like those in Las Vegas--conventions, shopping malls, and entertainment--should be developed along with the casinos.  Choung reiterated that a comprehensive policy plan was required to meet new demands, referring to the deindustrialization in the historical southeastern city of Gyeongju and eastern mountain resort area of Seorak.  “I can clearly say that it is not right for a government to invest in casino businesses... The Korea Tourism Organization has begun reviewing whether to keep running Seven Luck casinos," said Choung.


10 out of 17 casinos in Korea are losing money.  The combined annual sales of the domestic casino industry, amount to 2.2 trillion won, and Kangwon Land accounts for more than half of it. The casino industry has long hoped for the government to lift the ban on Korean citizens’ access to casinos.  In addition, Choung would also like a study on whether to permit casinos on cruise ships.


Galaxy Macau’s opening advertising campaign (HK$28MM) accounted for 57% of hotel advertising in Hong Kong in May.  It was the largest-recorded advertising campaign spending in Hong Kong for a casino hotel opening, beating the previous HK$13.12MM held by the Venetian.  MGM Macau (HK$11.23MM) came in 2nd, followed by Venetian Macau (HK$1.87MM), L'Arc (HK$1.03MM) and City of Dreams (HK$640,000).


Hong Kong tourists are the 2nd largest visitation segment to Macau.



The Transportation Infrastructure Office (GIT) disclosed the budget for the 1st phase of the light rapid transit (LRT) project has increased 46% from the previous 2009 estimate to MOP 11BN.  GIT chief Lei Chan Tong said the higher estimate was a result of "inflation, rising currency exchange rate and continued optimisaztion/adjustments of route designs."

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People Minimize Debt

This note was originally published at 8am on June 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Unlike neoclassical macro theory, which assumes that private-sector corporations are always maximizing profits, it assumes that some companies may respond to daunting balance sheet damage by minimizing debt.”

-Richard Koo


I’m in the middle of reading Richard Koo’s revised edition of “The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.” The aforementioned quote summarizes Koo’s thoughts on what he coined in another book as a “Balance Sheet Recession.”


This morning, ahead of this Greek confidence vote, I want to do a little extending and pretending of my own with Koo’s conclusions – you know, just to get the intellectual juices going.


Let’s pretend for a moment that the American Consumer is Koo’s “private-sector corporation.” Then, let’s extend ourselves into the fictional land of nod and go as far as to assume that people, instead of companies, minimize debt when you scare the hell out of them.


I know, I know. This Mucker guy is coming up with some radical economic theory over here on the east side of Yale’s campus. But, seriously, I didn’t need to get into this academic institution to be told how to think.


Lessons from The Greek Gong Show: America needs to re-think, re-learn, and re-consider what makes this economy tick. It’s not that complicated. First, we need to stop what we are doing and get back to the basics of human behavior.


Behaviorally, if you want to scare the hell out of people, just fear-monger about “Great Depressions.” That’s Bernanke’s bailiwick. That’s why Washington loves him. That’s why he was appointed by a modern day Republican and cheered on by a modern day Democrat.


Modern day Western economics are partisan. Both Republicans and Democrats pin their hopes on Keynesian economists. Hope, alas, is not a long-term risk management process. Both Bush and Obama had to learn this lesson the hard way. Bernanke’s “confusion” and “frustration” with the economy is finally breeding contempt.


As Koo appropriately notes in the Preface of his 2009 Edition of “The Holy Grail of Macroeconomics”, “I realized that no constructive discussion could occur until I proved that some of the “lessons” from the Great Depression that underpin their views are themselves wrong.”


Koo’s realization is an extension of Nasim Taleb’s idea of a “Narrative Fallacy ( “The Black Swan”, 2007), where Taleb alludes to humans having a propensity to build stories around facts.


The fact of the matter is, and I’ll say this for a 3rd time this morning, when you scare the hell out of them, People Minimize Debt.


Again, people are different than countries – particularly socialist ones. Only a moron would look to solving his or her solvency problems by Piling More Debt Upon Debt, like Greece, Japan, and America have.


Back to this morning’s reality show of extend and pretend, here’s what the Fiat Fool in Chief of Greece had to say this morning ahead of the Greek confidence vote:


“We are determined as a country, as a government, to be on track with the program, to move forward, to do what is necessary, in order to put our country into a fiscally much more viable position.”


Seriously. This guy is serious about maximizing debt until he blows his country’s balance sheet, bond, and stock markets to smithereens.


Global Markets are obviously very nervous about lying Greek politicians. Never mind what the Greek stock and bond markets do today. Don’t forget that the Greek stock market was down -35.6% in 2010 and has crashed, again, down another -27% since rallying to lower-high in February 2011. Markets discount future events.


What got us here is something I have been writing about since 2007. What is going to get us out of it isn’t doing more of what’s imploding the Greek, Portuguese, and Irish markets – Politicians Maximizing Debt.


In the meantime, the entire world is watching and Global Growth Is Slowing. This is largely a function of people being afraid. In the real world, confidence matters.


That’s why US demand for mortgages, stocks, and commodity exposure is falling. That’s why US stock market volumes have been bone dry on this 3-day rally to lower-highs. It’s the Debt Maximization Experiment of the Keynesians, stupid.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1532-1548 (we remain long GLD), $91.29-97.63 (we remain on the other side of the Goldman Oil Bulls), and 1259-1291 (we have no position, but a bearish bias at the top end of the 1291 range).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


People Minimize Debt - Chart of the Day


People Minimize Debt - Virtual Portfolio

Chinese Cowboy

“We ride and never worry about the fall – I guess that’s just the cowboy in us all.”

-Tim McGraw


My Thunder Bay Bear boys and I are big country music fans. Tim McGraw’s “The Cowboy In Me” is one of our favorite songs. I’ll be heading up to the homeland for some time with the family tomorrow. I’m looking forward to slaying the great Canadian Walleye with my buddies Luch, Gunner, and RM.


The Cowboy In Me” hit #1 on the Billboard Hot Country Singles charts immediately after McGraw’s duet with Jo Dee Messina “Bring On The Rain” did in 2001. Sometimes a bear needs a lot of rain before he gets hungry to buy.


I bought Chinese stocks (CAF) on June 16th … and I must say, not many people agreed with that. I actually don’t think I agreed with it either. But I bought them anyway.


“The things I’ve done for foolish pride

The me that’s never satisfied”


That’s a small part of the why. Most people who know me well know that I love to compete. Sometimes that’s hurt me in this business. Most of the time it’s been my greatest asset. During the sometimes that it isn’t – it’s usually because I am letting my pride get in the way of my process.


“Sometimes I’m my own worst enemy

I guess that’s just the cowboy in me”


Back to the Global Macro Grind


This morning’s bullish immediate-term TRADE action in Asia was led by the biggest rally Chinese stocks have seen in 4 months. The Shanghai Composite Index was up a big +2.2% (up for the 4th consecutive day).




The actual data was bad (the HSBC PMI print came in at 50.1, an 11 month low). But bad data in China isn’t new. The leadership call to action of Chinese Premier Wen last night was. Away from the #1 Bloomberg headline this morning being some version of European socialist hope for Greece, one of the   “Most Read” stories was about the Premier’s comments about Chinese inflation:


“I am confident prices will be firmly under control this year.”


Now I typically don’t believe a Chinese politician inasmuch as I don’t trust an American one, but the actual inflation data we’ve been modeling into our Chinese Consumer Price Inflation (CPI) forecast for the back half of 2011 is in line with Premier Wen’s forecast.


On the 2 things that really matter to Chinese stocks – Growth and Inflation – here’s Hedgeye’s call for the 2nd half of 2011:

  1. Growth Slows At A Slower Rate (+7-9% GDP growth instead of 10-12%)
  2. Inflation Starts To Deflate (4-5% CPI instead of 5.5-6.5%)

If we are right on Growth and Inflation, the only big thing left to solve for is Monetary Policy. Premier Wen’s comments also have a huge implication for Chinese interest rates – Deflating The Inflation (Hedgeye Q2 Macro Theme) means he can STOP raising rates!


On Chinese Monetary Policy, here are the facts:

  1. China has raised interest rates 4x during La Bernank’s policy to inflate cycle
  2. China has not raised interest rates in 11 weeks
  3. China’s swap spreads are already discounting an arrest of interest rate hikes

So what does The Cowboy In Me do with that?

  1. I BUY Chinese stocks (CAF)
  2. I SELL Chinese currency (CYB)

If my Macro Team continues to be right that:

  1. The US Dollar is done going down (for now)
  2. The CRB Commodities Index and Oil are going to keep going down (for now)

Then Premier Wen and I are probably going to be right. Deflating the Inflation in the CRB Commodities Index and WTI Crude Oil has been -10.8% and -19.5%, respectively since May.


Deflating The Inflation will be good for US Consumers inasmuch as it will be for Chinese consumers. Between now and then, Chinese stocks have much more upward potential to this trade than US stocks do. The SP500 is still lathered with The Inflation Trade (Financials, Energy, Basic Materials), and The Correlation Risk to US Dollar UP is much more severe to the SP500 than it is to the Shanghai Composite.


Does my craw constantly consider the time and price relationship between being long China (CAF) and short US Equities (SPY)? Of course. Managing risk in the most globally interconnected marketplace that investors have ever faced is the game that we are in.


But I won’t wake-up every morning worried about the guys who are playing this game with hope and fear as their governor. I have enough on my plate in not letting my pride get in the way of my own process.


“The face that’s in the mirror when I don’t like what I see

I guess that’s just the cowboy in me”


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1511-1532, $90.44-95.11, and 1, respectively.


Enjoy your weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Chinese Cowboy - Chart of the Day


Chinese Cowboy - Virtual Portfolio

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