European Round-Up: PMI Services Fall; Swiss Rate Cut; EUR-USD Levels

Positions in Europe: Short EUR-USD (FXE); EU Financials (EUFN); Covered Italy (EWI) and UK (EWU) on 8/1


Eurozone PMI Services Fall

In line with our call for growth slowing across Europe, Eurozone Services PMI for the month of July came in lower, confirming a downward trend over the last 3-4 months that we also saw with July Manufacturing PMI figures (see chart below). With the 50 line marking expansion (above the line) and contraction (below), Manufacturing across Europe has taken a larger hit than Services over the intermediate term, and the results show that even Europe’s economic stalwarts were not immune to the downtrend: German and French Services fell to 52.9 and 54.2, respectively.


While Italy improved month-over-month to 48.6, the country remains grounded under the 50 line; risks to Italy’s economy remain its (in)ability to finance its sovereign debt; its banking industry’s leverage to the periphery; and political indecision (including the terms of its austerity package) of the Berlusconi government. We covered our position in Italy via the etf EWI on 8/1 for a +7% gain. We continue to believe that the region’s sovereign debt contagion will remain a significant drag on consumer and business optimism and impair growth into year-end across much of the region.


European Round-Up: PMI Services Fall; Swiss Rate Cut; EUR-USD Levels - 1. PMI Services



Shifty Swissy

Today the Swiss National Bank (SNB) unexpectedly cut the 3M Libor Target Rate to 0.00% from 0.25% (a level it had been at since March 2009) and said it will "significantly increase the supply of liquidity to the Swiss franc money market, including by expand banks' sight deposits at the SNB from currently around 30 billion CHF ($39.35 billion) to 80 billion CHF." 


Unknown is the extent to which the SNB sells the CHF from its reserves. 2009 and 2010 showed that the SNB’s intervention was largely unsuccessful in depreciating the CHF against major currencies, and we think this time around is no different.  Today’s cut did push the CHF down against major currencies in the intraday morning session by 1-3%, however we think that CHF strength will resume as a safe haven from the volatility in the Eurozone and its common currency over the intermediate term.


For reference, over the last 3 months, the CHF-EUR is up +14% and the CHF-USD pair gained +11%. As we show in the chart below, over a three year period, the CHF-EUR is up +49% and CHF-USD has gained +37%!  Sooner or later this strong CHF vs the EUR and USD will erode exports. While we’ve yet to see this ytd, it’s a risk that must be weighing on SNB President Philipp Hildebrand in today’s move. Unfortunately, given the larger macro forces in the region, we think Hildebrand and the bank are largely handcuffed to use monetary policy as a tool to influence the direction of the CHF.


European Round-Up: PMI Services Fall; Swiss Rate Cut; EUR-USD Levels - 1. CHF



Levels on EUR-USD

The EUR-USD has whipped around in the last weeks on the US debt ceiling debate. We continue to highlight that the EUR-USD will see immediate term support in a band of 1.41- $1.45 as EU officials support the region’s fiscal imbalances with bailout band-aids at every step.  However, should we break through our intermediate term TREND level of $1.43 and immediate term TRADE support level of $1.41, we see long term TAIL support all the way down at $1.28, or -9.2% from $1.41.  Be aware of this quantitative set-up as sovereign debt contagion risk looms with the larger players of Italy and Spain moving to the forefront. 


European Round-Up: PMI Services Fall; Swiss Rate Cut; EUR-USD Levels - 1.EUR USD


Matthew Hedrick



PNK lit it up again. It gets more difficult from here on out.



"Pinnacle's healthy second quarter results, including a 510 basis point improvement in Consolidated Adjusted EBITDA margin, reflect the significant improvements we are driving throughout the organization.  Through operating efficiencies, industry-unique revenue growth strategies, and a focused commitment to offer quality entertainment experiences and enhanced guest relationships, we continue to strengthen Pinnacle's competitive position"


- Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment. 



  • "The property level improvements and lower corporate expense contributed to an improvement in Consolidated Adjusted EBITDA margin"
  • "While still early, the mychoice program is off to a very solid start and contributed to our strong second quarter results.  We believe this innovative program will drive further progress over the balance of 2011 by increasing play consolidation at our properties, attracting new in-market customers and generating continued yield improvements on our marketing spend."
  • "Our shared services operating arrangements for both the St. Louis and Louisiana markets are proving effective in leveraging management experience and excellence across multiple properties.  When combined with operating leverage on the higher revenue levels, we have seen significant Adjusted EBITDA improvement that has outpaced our growth in revenues."
  • "Recent changes include modifications to our casino floors, including the addition of a poker room at L'Auberge du Lac and the relocation of the poker and high-limit rooms at River City.  We have also re-examined our restaurant mix, and recently rebranded the steakhouses at both River City and L'Auberge du Lac, and converted the former steakhouse at Lumiere Place into the new Stadium Sports Grill and Bar.  Also at L'Auberge du Lac, we recently opened a new beach entertainment area.  Each of these enhancements are proving popular with our guests and offer examples of our focus on increasing guest loyalty by ensuring our casino properties remain fresh which furthers their position as entertainment destinations of choice in our markets.
  • "Construction on the Company's L'Auberge Casino & Hotel Baton Rouge project in Louisiana recently fully resumed.  Despite construction delays caused by several months of unusually high water levels, the Company continues to expect L'Auberge Baton Rouge to open in the summer of 2012.  As of June 30, 2011, approximately $273 million of the $357 million construction budget (excluding land and capitalized interest) remains to be invested."
  • "Our development pipeline also benefited from the recent legislative approval of up to 2,500 video lottery terminals at Ohio racetracks, including at our River Downs Racetrack in southeast Cincinnati.  We are currently creating a master development plan to re-develop River Downs into a premier racing and gaming entertainment destination for guests in the region."
  • "On August 2, 2011, Pinnacle amended its existing credit facility.  Among other items, the Company extended the credit facility's maturity to August 2016 from March 2014 , reduced the interest rate spread for any outstanding borrowings by 125 basis points, and amended leverage covenants to reflect Pinnacle's financial strength and accommodate its planned growth pipeline.  Additionally, the size of the credit facility was increased to $410 million from $375 million."


  • St. Louis:  The top-line growth is due to increase in customer spend, cross marketing efforts, and myChoice launch
    • Shared services is really driving top line and margins in the quarter, despite tepid overall market growth
  • Some increased corporate overhead associated with corporate and legal expenses.  Somewhere between 2Q and 1Q is a good run rate to use going forward.
  • Had bad luck at Belterra which negatively impacted their results in May
  • Used $65-70MM in their daily operations
  • New facility lowered their borrowing costs by 125bps compared to their last facility
  • $41MM of capex - $27MM of that was Baton Rouge - rest was maintenance
  • In AC they had to go through an accounting review - had a $3MM writedown at AC
  • MyChoice - will be net neutral to their marketing expenses but they are refocusing on higher value customers
    • Strong play consolidation let to an 18% increase in the spend per visit at L'Auberge
    • St. Louis: double digit growth in the VIP segment
    • Belterra - double digit growth in rated play. In June, VIP rated hotel room nights increased 62% YoY
    • All properties saw increases in spend per occupied room YoY
    • Seeing a very favorable reaction from high end customers and more efficient leveraging of marketing spend
    • 18% increase in RevPAR


  • Ohio continues to move forward toward the legalization of VLTs. Still need to reach an agreement with the horsemen and how that agreement will be implemented. Think that they will reach a decision in short order - this year.
  • Continue to focus on how they can improve the business. They are still in the early stages of implementing improvements to their marketing efforts.  So they are in the middle innings of their improvements.
  • Covenants for new agreement provide them meaningful cushions
  • Capex for 2011: Other than Baton Rouge - their other capex projects are small
  • Their priority is to make sure that their existing properties are operating as efficiently as they can be
  • They aren't focused on having a property in Las Vegas - they are very pleased with their agreement with Wynn Resorts
  • Any one time items in the quarter? No, expect that MyChoice will continue to help enhance their results regardless of various events that they have
  • In AC they filled out an expression of interest which they submitted to the NJ control board. They want to keep their options open but that asset continues to be for sale.
  • Thoughts on the weaker than expected economic data that's coming in?
    • Trying to focus on the thing that they can control and the economy is not one of those things
  • What probability is there of another international development announced over the next 18 months
    • “can’t really answer that”
    • We are still a development company though, not just an operating company
  • It's not clear how much of the improvement at L'Auberge is driven by the economy vs their initiatives
  • Baton Rouge - spend will accelerate into the 4Q - $75% of what is left to spend will happen in the next year
  • Write down of $5MM in the quarter?
    • When they canceled Sugar Cane Bay, they donated some land to the City of Lake Charles.  The transfer of that asset occurred in 2Q
  • In AC - $14MM was a non-cash writedown of existing asset, the balance has to do with ongoing operations there and legal expenses.  On a run rate basis, there are $2MM of so of run rate expenses.  Said that $2-3MM was too high.
  • They have a very significant NOL, so they are not a large tax payer at the federal level. 
  • A normal tax rate would be 40% but some of that would be shielded by NOLs
  • No meaningful updates on smoking bans in their states

JCP: Covering TRADE


Keith covered his JCP TRADE in the Hedgeye Virtual Portfolio for a nice gain with the stock breaching his immediate-term oversold level of $30.06 this morning. As outlined yesterday on our JCP conference call and in our black book, we remain uber bears on the fundamental story. Keith will be back on this one.


JCP: Covering TRADE - JCP VP 8 3 11



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Notable price action and news items from the restaurant space.






Corn and wheat fell over the last day as investors speculated that a slowing U.S. economy may cut into demand. Beef prices are likely to be supported by the abandonment of corn crops in Texas as 99% of the Lone Star State is in one level of drought or another by the last week of July.  With farmers turning off water and abandoning parts, or whole fields, of corn, we see this only as supportive of extended elevated prices in beef.




  • DNKN is hosting its earnings call for 2Q earnings at the time of writing.  2Q earnings were released earlier this morning with net income down 60 bps year-over-year.  Comps were up 3.2% in the U.S.   Dunkin’ Donuts derives 97% of its revenue from the U.S.  We see the revenue, operating income, and net income growth as being far below those of SBUX despite the massive differential in the stocks’ respective valuations.  We are not convinced by the DNKN growth story, particularly at this price.
  • PEET reported strong EPS for 2Q, beating expectations solidly with $0.38 versus consensus EPS of $0.32.  The company raised full-year revenue guidance as revenues also beat convincingly in the quarter.  EPS should be towards the higher end of the previous guidance range of $1.43 to $1.50, according to management.
  • PZZA missed consensus expectations in the second quarter with EPS of $0.47 versus $0.48.  The company reaffirmed EPS of $2.02 to $2.12 for the year versus consensus of $2.12 but stated that it expects the current competitive pricing and promotional environment in the pizza category and the unfavorable impact of projected commodity cost increases, most notably cheese, to continue throughout the rest of the year.



  • DIN reported disappointing 2Q earnings, posting $0.90 ex-items versus consensus of $1.02.  The stock sold off over 18% yesterday.
  • DIN was upgraded by Morgan Keegan this morning to “Outperform”.
  • PFCB was downgraded to "Sell" from "Buy" at Argus Research.




Howard Penney

Managing Director


Rory Green



The Congressional Comb-over

This note was originally published at 8am on July 29, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Every man's life ends the same way. It is only the details of how he lived and how he died that distinguish one man from another.

-Ernest Hemingway


Keith was on CNBC this morning, so as I was mulling over topics for the Early Look last night and this morning and my initial thought was to completely avoid discussion of the debt ceiling debate.  It has become the one of the most overhyped factors in global markets and it is a little depressing to analyze the political shenanigans going on in Washington.   Nonetheless, I’m at my keyboard in the Taft Mansion on Yale’s Campus this morning (more commonly known as the global headquarters of Hedgeye Risk Management) and I feel compelled to comment.


As many of you are now discovering, Speaker Boehner is having serious issues garnering votes for his debt and deficit plan.  The vote was scheduled yesterday and is now postponed.  It seems the Tea Party is not on his political side, despite fear mongering from the White House that Christmas will be ruined if a long term debt deal is not passed in short order.   I can’t say I agree with the Tea Party on everything, but I will give them credit for a conviction of their beliefs.


The debt limit deadline is August 2nd, which is now four days away.  Between now and then, how this plays out is really anyone’s guess.  It seems likely the Tea Party will acquiesce and a deal gets passed in the House, although as we saw yesterday evening, even that is uncertain.  If that does occur, Senate Majority Leader Reid and President Obama have been adamant that they will not support any bill that has a two-step process and that doesn’t extend the debt ceiling past the 2012 election.


Regardless of the two-step process in the Boehner bill, the Boehner and Reid bills have dramatic differences regardless.  At face value they are talking about similar numbers, the Boehner plan, in total, is looking for more than $2.7 trillion in cuts, while the Reid plan is proposing almost $2.2 trillion in deficit cuts.  While those numbers are in the same area code, the methodology for getting to the cuts is dramatically different. 


The Reid plan only has $710BN in real budget cuts, the remainder of the deficit reduction plan comes from the winding down of the wars in Iraq and Afghanistan.  Setting aside the differences in process, that leaves us with a $2 trillion difference in the nature of deficit cuts between the parties.  That’s one mother of a compromise for four days.


Stepping back to the longer term, we need to keep in mind that both of the current bills proposed are really nothing more than Congressional Comb-overs.  As a refresher, Merriam Webster describes a comb-over as follows:


“An arrangement of hair on a balding man in which hair from the side of the head is combed over the bald spot.”


As a man who sports a comb-over, I can vouch that is an apt description.  The sneaky thing about a comb-over is that while you can comb your hair over, the rest of the world can usually tell that there is a bald spot lingering beneath.


In the chart of the day, I’ve shown what I mean graphically by comparing proposed Reid plan discretionary spending cuts as a percentage of the estimated deficit.  Similar to many a bad business plan, the Reid plan is very back end loaded (by the way, so is the Boehner plan).  In fiscal 2012, the discretionary spending cuts as proposed by Reid ramp from 2.2% of the CBO’s projected deficit to 14.0% of the CBO’s projected deficit by 2020.


The other key assumption to keep in context when considering the currently proposed Congressional Comb-overs are the GDP growth assumptions proposed by CBO.  In the projection period used in my analysis in the attached chart, the federal government budget years from 2012 to 2020 at an average real GDP growth rate of 2.9% per year.  This compares to the actual real GDP growth rate over the last ten years of 1.7%.  Obviously, future deficits will be much higher if growth in the next decades tracks similar to the last decade.


While the political drama in Washington has been entertaining over the last few months, we need to keep in mind that even when the compromise is reached, the current bills proposed are merely covering up long term budget deficit issues that will again need to be addressed in the next 12 – 18 months.  Therefore any short term positive stock market reaction should be taken with a grain of salt in the context of continued long term issues.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


The Congressional Comb-over - Chart of the Day


The Congressional Comb-over - Virtual Portfolio

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