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We still expect a pretty sizeable beat but PENN stole some of the thunder already. Here is the pertinent forward looking commentary from PNK’s Q1 earnings call and press releases.



May 26: Investment in Asian Coast Development (Canada) Ltd. Conference Call

  • “We have been monitoring the Mississippi River, the water levels, very closely. It appears those levels have peaked. We’re fortunate not to have impact to our operations thus far here in the U.S. other than the previously announced delay of our L’Auberge Baton Rouge project site. We continue to target the summer of next year for that project.”
  • “Our investment provides for a 26% ownership in ACDL, a proportional board representation, which is expected to start-up at two board seats upon closing of the investment. It also gives us management rights through 2058 for a second major integrated resort on the Ho Tram Strip, with a possibility of a 20-year extension beyond that.”
  •  “There are two stages to MGM Ho Tram and there will likely be two stages to the Pinnacle Resort on the Ho Tram Strip. That financing has not been secured and thus will take place for the second stage of MGM Ho Tram that will take place after the first phase opens.”
  • [Project cost] “Well, it will be very similar in scope as far as amenities to what’s getting built as the MGM Ho Tram ($430MM). So, certainly keep in mind that it will be built at a different time. Certainly that wouldn’t be a bad assumption.”
  • [$95MM investment] “The vast majority of that will come from cash on hand.”


Youtube from Q1 Conference Call

  • “New Orleans actually saw the biggest improvements over the quarter, both in terms of its efficiency, as well as improvements in revenue. And that continues into the second quarter.”
  • [Baton Rouge facility] “And as a result, based on the current expectation of the river levels, which continues to be significantly above normal, we are waiting for those waters to recede. Eventually they will. It’s a question of time, and as a result we’re faced with looking at the summer of 2012 versus the first quarter for the opening day of that facility.”
  • [Corp exp run rate] “I think historically, 6.5% to 7% is probably a good run rate.”
  • “As well as some future development we’re going to do over at River City that I think we’re well on our way to getting our fair share. But again, I’ll remind you, our focus is not on market share, our focus is on driving profitable revenue.”
  • “There’s been some increased visits, but it’s mostly on the spend. The spend per visit is up. And we’re just starting to see the early signs of that through this quarter, and it’s continued through the early part of the second.”
  • “You’re right, we’re actually right exactly where we thought we would be as it relates to our marketing spend on a revenue basis. So from that perspective, certainly that’s played out to expectations…We haven’t seen a significant increase in promotional spend by our competitors, not yet.”
  • “We had new brand campaigns, as I mentioned in my remarks for Belterra, Lumière and River City. And all three launched in the first quarter. Those are not a monthly recurring expense, but that’s typically something we do depending on the legs of the campaign every 12 to 18 months.”
  • “I still believe we’re in the early innings in St. Louis.”
  • “I would tell you at L’Auberge, I see a lot of room for continued improvement there just from better managing that asset.  We cancelled our Sugarcane Bay project, and we cancelled it because we believe that there is a lot more than we can yield from the existing facility. If you look at our New Orleans property, we’re continuing to see improvements at our New Orleans property. We have implemented a shared services pod system for Louisiana.
    [River Downs] “And during the racing season, the loss accentuates. So, I think there was some disclosure out there that this property lost in excess of $2 million last year on the EBITDA line, and we have to pare that back somewhat, but it is somewhat limited as far as some of the savings that we’ve had. So, I would think that the first quarter was definitely a partial quarter, but we’re of the view that that number is going to grow a little bit from the first quarter on the losses through the racing season. But you’re going to be in that zip code between, call it, a couple million dollars or so of loss until there is a change in VLTs.”
  • “We’re reconfiguring some of our casinos. We’re putting in a poker room at our L’Auberge property. I mentioned we relocated our high-limit room, both for slots and tables at River City.”


We are expecting an in line quarter tomorrow. Here is some forward looking commentary issued by ASCA since they announced their Q1.


Modified Local Development Agreement (ASCA East Chicago)- June 2, 2011

  • Pursuant to the Modified LDA, for the period beginning June 3, 2011, Ameristar will pay 1.625% of its adjusted gross receipts from operation of the casino ("AGR") to the City of East Chicago, Indiana (the "City") and 1.625% of its AGR to Foundations of East Chicago, Inc., an Indiana not-for-profit corporation ("FEC"), to be used by the recipients solely to support and assist economic development in the City through specified initiatives set forth in the Modified LDA and for reasonable and necessary administrative expenses.
  • The Modified LDA modifies and supersedes in its entirety the prior local development agreement for the East Chicago casino (the "Prior LDA"), pursuant to which Ameristar has been paying 2% of its AGR to FEC, 1% of its AGR to the City and 0.75% of its AGR to East Chicago Second Century, Inc., an Indiana corporation ("Second Century"), with the respective amounts payable to FEC and Second Century being deposited into the two Ameristar segregated bank accounts as described above.

Neilsen stock sale- May 16, 2011

  • Craig H. Neilsen (the "Selling Stockholder"), an affiliate of the Company, has agreed to sell 4,560,055 of its shares of the Company's common stock in an underwritten public offering. The Selling Stockholder currently owns approximately 15% of the Company's outstanding common stock and after giving effect to this offering will own approximately 0.77% of the Company's outstanding common stock. The Company will not receive any proceeds from the offering. The total number of shares of the Company's common stock outstanding will not change as a result of this offering.


Youtube from Q1 Conference Call

  • [East Chicago] “We’re continuing our attempts to strengthen the property by proceeding with the renovation of the hotel rooms there, as well as continuing negotiations regarding the rebuilding of the bridge with the state and local community and we’re cautiously optimistic that that will all work out.”
  • “We’ve controlled costs well and we’ve taken steps to reduce the volatility of our table games play.”
  • “Subsequent to the end of the quarter, with the amount of free cash flow the company’s been generating we were able to retire an additional $15 million in debt by the middle of April, which was just prior to completion of the debt restructuring.”
  • “The effects from the [Craig H. Neilsen] transaction to the company is a reduction in the outstanding number of shares by 45%, which on a weighted-average basis will give us a total share count at the end of this year of about 40.6 million and then at the end of ‘12, 33.5 million shares. It’s created immediate accretion to earnings and free cash flow per share, excluding certain one-time charges that will be recorded in Q2.”
  • “After the $15 million of debt repayments in early April and $4.2 million in outstanding letters of credit, we have $128 million in borrowing capacity under the revolver. Obviously, net of the OID on the senior unsecured notes in the B Term. Assuming quarterly dividends continue at current rates and interest rates don’t significantly change, dividend payment savings from the 45% reduction in outstanding shares will more than offset the cash interest increase we’ll experience from the new credit facility.”
  • “Despite large debt increase, annualized interest expense at current LIBOR rates, is expected to increase only about $6 million on an annualized basis. With the debt reduction we’ll be saving at current dividend rate of about $11 million. So, from an free cash flow perspective, the transaction, and adding the amount of debt that we did, is better than neutral to the company.”
  • [Stock comp] “We should see the numbers go back to $3.5 million, $4 million roughly starting in the third quarter"
  • “Blended tax rate is still expected to be 42% to 43% in the second quarter. CAP spending, we’re still looking at a run rate of about $10 million to $15 million. Interest expense in the second quarter is expected to be between $25 million, $26 million. Non-cash interest is expected to be $1.7 million for Q2 with the new debt structure.”
  • “As a result of refinancing, assuming minimal changes in LIBOR, we now expect full year 2011 leverage expense net of CAP interest to be between $104 million and $109 million, an increase from the previously announced $98 million to $103 million, as I said earlier, of about $6 million in cash interest. The new non-cash interest expense on an annual basis will be approximately $7 million, which is a slight reduction from what it had previously been. Interest expense will decrease year over year in Q2 by $8.5 million, due to the expiration of the swaps we had last year, and they expired in July 2010. We expect to, again, generate significant free cash flows that will allow us flexibility to pay down somewhere in the neighborhood of $40 million to $45 million worth of debt in Q2. The board did declare, for Q2, another dividend at $10.05 on April 29th payable on June 15th.”
  • “In prior quarters you heard us talk a little bit about table games hold being a little erratic. And we’ve taken steps to make sure that that stays a little more stable, and I think we’ve been very successful at that.”
  • [Iowa tax increase proposal] “I still don’t think it’s likely to move forward. I don’t think there’s any movement in the legislature to move forward the governor’s original or revised proposal.”
  • [FY2011 Capex guidance] “I think at the beginning of year in the first call, we indicated the rate was going to be somewhere around $65 million, $70 million for the year including Kansas City’s hotel, the start of Kansas City hotel and some work in Vicksburg on the site stabilization.”
  • “First quarter is always one of our strongest ones. I can’t tell you that we will maintain that margin throughout the entire year, but I do expect that we will continue to have great flow through and have year-over-year improvements as we move through it. Gas prices, it’s hard to really see an impact just yet. Not saying that there might not be some, but we don’t see it in any of our trend lines.”
  • “We don’t have any strategic plan to sell any assets.”
  • [Share count] “At the year end, it’s going to be about a little over 40 million. But this quarter, it’ll be about 38. Third and fourth quarters will be 33.5, 33.6.”
  • “We’d have to say that we’re probably seeing slightly better play from our long-term existing players than seeing any material change in those customers that left two or three years ago when unemployment shot up and basically the recession began.”
  • [ASCA Black Hawk] “I think at the margin levels we currently have based on the size of the hotel, that it probably has entertained the peak and that’ll occur as the economy improves. But based on where the economy is right now, I think that mid 30% EBITDA margin is very attractive for that size facility."




Notable news items, macro data points, and price action pertaining to the restaurant space.





News hitting the tape this morning that consumer spending unexpectedly dropped in June for the first time in almost two years.  A slump in hiring, according to Bloomberg, caused households to retrench.


The ICSC chain store sales index ended its string of gains with a 0.3% decline last week.  Year-over-year growth moderated slightly but remained robust at 4%. The ICSC reported improved customer traffic at discounters.


U.S. comparable sales rose 4.5% in week ended July 30 year-over-year, according to Johnson/Redbook.  Month sales through July 30th were up 4.3% year-over-year, down -0.5% month-over-month.  Redbook sees August comparable sales up 4.6% year-over-year.




Full service restaurant stocks traded well yesterday ahead of TXRH earnings post-close and DIN earnings this morning.  Both earnings reports were a disappointment, however.


THE HBM: DNKN, MCD, SBUX, TXRH, DIN - subsector fbr




  • DNKN’s growth strategy has been questioned by Irwin Barkan, author of “Dunk’d, A True Story of How Big Money is Corrupting the Franchising Industry”.  Barkan rubbishes the “white space opportunities” that the company executives like to highlight, saying that “they’ve been trying to fill up that white space for 30 years”.
  • The coffee names traded strongly yesterday with the exception of SBUX.
  • MCD has entered a five-year IT support deal with Fujitsu.  The IT services provider will roll out “user-exchangeable parts” to McDonald’s 1,200 branches throughout the UK and Ireland.
  • MCD franchisee ARCO reported EPS yesterday.  MCD Brazil SSS +10.2%; NOLAD's (Mexico, Panama and Costa Rica) SSS +9.7%; SLAD's (Argentina, Venezuela, Colombia, Chile, Peru, Ecuador, and Uruguay) SSS +33.1%; the Caribbean division (Puerto Rico, Martinique, Guadeloupe, Aruba, Curacao, F. Guiana, US Virgin Islands of St. Thomas and St. Croix) SSS -0.3%.



  • TXRH posted 2Q earnings last night. EPS came in at $0.22 versus $0.23 consensus.  Sales were in line but the company guided down on full year EPS.  Inflation continues to be a concern.  See our note from this morning for more details.
  • DIN reported 2Q EPS of $0.90 versus consensus $1.02.  Same-restaurant sales for the Applebee’s system were +3.1%.  Two-year average trends were flat on a sequential basis.



Howard Penney

Managing Director


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WMT: Don’t Count Out WMT

We like WMT into any noise around a broker downgrade this morning. Let’s face some facts, doing store checks on a $183bn company isn’t too relevant. They may offer up some nice anecdotes, but we’ll rely on cold hard data.


There’s chart below that shows the spread in Wal-Mart US comps back to the beginning of 2008 vs. US Retail Sales (columns). The line represents the spread between WMT comps less US Retail Sales.


The spread grossly favored WMT at the start of the recession and the consumer started to trade down, but then the economic recovery and the Wal-Mart’s own lack of execution reversed that spread entirely for 4Q09 through 1Q11. What’s notable, however, is the incremental change this past quarter showing a slight downtick in the spread. Hardly consequential, but we look at everything on the margin. And on the margin, this stopped moving against WMT.


If you believe, like we do, that the ‘trade down’ theme for the consumer is still very much alive and likely to accelerate, then WMT is one of the best places to look.


Longer-term (TAIL) we definitely like Target here better. But there’s more risk in that model near-term.

From a TRADE and TREND perspective, stick with WMT.  


WMT: Don’t Count Out WMT - wmt

Institutional Constraint

This note was originally published at 8am on July 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We have many constraints as investors.”

-Seth Klarman


Baupost’s Seth Klarman is no stranger to going to cash. Neither is he shy about telling it like it is about how the game of Institutional Asset Management works. The aforementioned quote has nothing to do with the self-directed individual investor. It has everything to do with Institutional Constraints.


“Constraint”, per Wikipedia, “is an element factor or a subsystem that works as a bottleneck. It restricts an entity, project, or system from achieving its potential with reference to its goal.” Institutional Constraint isn’t what Klarman calls it, but I think he’d agree.


In Grant’s back in Q1, Klarman said “we want short-term performance, and are measured by this. There is enormous pressure from clients for short term performance. Mutual funds compete in a relative space. What’s important is absolute returns. The way people do this is forced mediocrity. To do absolute performance, you have to bet against the crowd sometimes.”


Sometimes betting against the crowd too early makes an investor wrong. Sometimes betting against your current positioning can make you less wrong. In a market like this, where Institutional performance chasing is one of the most misunderstood long-term TAIL risks we’re observing, price levels matter – big time. So does considering them on a multi-factor, multi-duration basis.


What does multi-factor mean?


First, let me tell you what it doesn’t mean:

  1. Point and click 1 factor models of simple moving averages (50 day, 200 day, etc)
  2. Being sucked into the Sentiment Vacuum of 1 topic (Debt Ceiling is the #1, #2, and #3 most read on Bloomberg this morning)
  3. Considering Global Macro risk from the vantage point of 1 country and/or 1 asset class (“what’s the Dow doing?”, c’mon)

Within the construct of Chaos/Complexity Theory (my modern day market practitioner’s answer to stale academic Keynesian Dogma), multi-factor is as multi-factor does. You need to build a risk management process that absorbs multiple price, volume, and volatility signals, across multiple asset classes, and across multiple durations.


If I had 10 Chinese Yuans for every person I’ve met in this business who says “well, the chart looks good”, I’d have a lot more money to fund Hedgeye’s growth. What, precisely, do charts mean? The answer to that is as simple as the deep simplicity Chaos Theory aspires to achieve. The chart looks as good as the math you have embedded in the picture!


If bells weren’t going off in your Global Macro Risk Management Process yesterday, I suggest you get a new one. Here are some of the alarms going off in mine that had me take my Cash position back up to 46% from 37% (where I started the day):

  1. EUROPE – both European stocks and bonds are turning into a proactively predictable train wrecks. Our research catalysts remain crystal clear (accelerating debt maturities for the majors through September) but, more importantly, now all of our TRADE and TREND lines across every major European stock and bond market (ex-Russia) have been broken and confirmed by volume and volatility studies.
  2. USA – stocks broke their intermediate-term TREND line of support (1320 in the SP500) and short-term bond yields finally busted a move above my 2-year yield TRADE line of resistance (0.41%).  Credit risk derived by market morons in Congress will be priced on the short-end of the curve (where Bernanke has tried to mark it to model for 2 years), so watch that 0.41% line like a hawk.
  3. GLOBALLY – China’s Shanghai COMP TREND line = 2831 (broken); India’s BSE Sensex TREND line = 18,578 (broken); German DAX TREND line = 7251 (broken); FTSE TREND line = 5985 (broken); SP500 TREND line = 1320 (broken); Russell2000 TREND line = 827 (broken); WTIC Oil TREND line = 103 (broken); EUR/USD TREND line = $1.43 (schizophrenic).

No one at Hedgeye has ever said 2011 Global Growth or 2H2011 Earnings Expectations were priced properly. If you close your eyes to all of my quantitative and research factoring across asset classes and just focus on those 2  - they are VERY large fundamental factors to consider having market impact above and beyond these yahoos in Congress.


Look, I’m not saying I got all of this right. What I am simply saying is that we, as a profession, can get a lot better at this if we just open our minds to re-thinking risk and re-working our asset allocations as the big factors are changing. The market doesn’t care about our respective investment styles, compensation mechanisms, or Institutional Constraints.


My immediate-term ranges for Gold, Oil, and the SP500 are now $1603-1624, $96.03-100.32, and 1298-1316, respectively. I cut my US Equity exposure to 3% (from 9%) in the Hedgeye Asset Allocation Model yesterday.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Institutional Constraint - Chart of the Day


Institutional Constraint - Virtual Portfolio




TODAY’S S&P 500 SET-UP - August 1, 2011


Large bond fund managers who bet on US “credit risk” are either unwinding that theme or need to now – across the US Treasury curve bonds are breaking out to new YTD highs and the US Dollar is strengthening, making higher-all-time lows.  As we look at today’s set up for the S&P 500, the range is 41 points or -0.93% downside to 1275 and 2.26% upside to 1316.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: +195 (+1223)  
  • VOLUME: NYSE 1110.41 (-8.19%)
  • VIX:  25.25 +6.36% YTD PERFORMANCE: +42.25%
  • SPX PUT/CALL RATIO: 2.41 from 2.30 (4.57%)



YIELD SPREAD – one of the highest conviction  long positions we’ve had in 2011 to express our Growth Slowing theme has been a US Treasury Flattener (FLAT); the Spread b/t 10s and 2s is making a new YTD low this morn as bond yields collapse alongside awful US GDP and ISM reports.


  • TED SPREAD: 16.06
  • 3-MONTH T-BILL YIELD: 0.10%
  • 10-Year: 2.77 from 2.82    
  • YIELD CURVE: 2.39 from 2.46


  • 7:45 a.m./8:55 a.m.: Weekly ICSC/Redbook retail sales
  • 8:30 a.m.: Personal income, est. 0.2%, prior 0.3%
  • 8:30 a.m.: Persona spending, est. 0.1%, prior 0.0%
  • 11:30 a.m.: U.S. to sell $23b 4-wk bills
  • 4:30 p.m.: API inventories


  • McGraw-Hill reiterated it was reviewing its portfolio after holder Jana Partners said it had discussions with co.
  • U.S. light-vehicle delivers in July, to be released later today, may have run at 11.8m seasonally adjusted annual rate, trailing the 12.5m rate in 1H, analysts’ estimate



OIL – it may have been out of the headlines, but that doesn’t mean its daily price/volume/volatility signals cease to exist; with the USD strengthening, WTIC oil has broken its TRADE line of support ($96.21) this morning and that matters since Energy is literally the only S&P Sector left that’s bullish in US Equities on both TRADE and TREND durations


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Gold Advances to Near Record as Slowing Growth Increases Demand
  • Sugar Falls for Fifth Day on Brazilian Exports; Coffee Rises
  • Copper May Climb as Strike Continues at World’s Biggest Mine
  • Bank of Korea Boosts Gold Holdings to ‘Reduce Investment Risks’
  • BHP Copper Miners ‘Optimistic’ on Agreement to End Chile Strike
  • Wilmar Says to Raise Cooking Oil Prices in China by About 5%
  • Coffee Seen Rising 10% in Two Months as Vietnam Delays Exports
  • Mining Takeovers Heading for Record in 2011, Ernst & Young Says
  • Rice May Sustain Rally as U.S. Acreage Declines, Ofon Says
  • Japan Widens Cattle Shipment Ban as Tochigi Beef Contaminated
  • BullionVault Lures Most Funds Since Lehman’s Collapse on Haven
  • Barrick Says Gold to Remain High on China, India Inflation



EUR/USD – remains the currency pair that makes the world’s correlation risk go round and this morning we’ve seen another decisive break-down below our $1.43 TREND line; Europig Equities are getting slaughtered – we have no long exposure to anything European Equities; we are long USD and short EUR


THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: a royal Europig mess continues with FTSE and DAX breaking both TRADE and TREND lines as Italy and Spain collapse (stocks and bonds)
  • UK July construction PMI 53.5 vs consensus 53.0, prior 53.4

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: finally breaking some critical TRADE lines of support; Nikkei and KOSPI in particular down hard through lines that matter last night.
  • Australia June residential building approvals (3.5%) vs cons +2.5%.
  • Japan June wages (0.8%) y/y.
  • Japan June monetary base +15% y/y to ¥113.73T

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director