A HOUSING BOMBSHELL - The issues with employment, housing and policy-induced stock market volatility continue to weigh on economic growth and our overall prosperity.. For the week ending October 14, 2011, the MBA mortgage app composite index fell 14.9% WoW. The purchase index dropped 8.8% reinforcing the downward trend since April. Housing demand continues to struggle as homebuyers remain concerned over further price declines. The refinance index also plunged 16.6%, due in part to a jump up in mortgage rates. 


Headline consumer prices rose 0.3% in September (in line with consensus), but accelerated to 3.9% YoY. The energy index accelerated to 19.6% from 18.5% YoY and food prices accelerated to 4.75 from 4.6% YoY.  Inflation is not raging out of control, but is showing a worrying tendency to stickiness.


As we head into the EPS season the Hedgeye Restaurants Alpha list has MCD, YUM and EAT as LONGS and BWLD, PNRA and DNKN as SHORTS.




Food processing continues to gain ground as we continue to “Deflate The Inflation”.  In that same vein, Keith bought is now long the XLY.  As Keith said yesterday “The US Consumer Discretionary is making a credible threat to establish a bullish TREND as US Dollar strength continues to “Deflate The Inflation”..








Sonic (SONC) 4Q EPS missed estimates and SSS remain challenged.  We cannot get behind the LONG side of this story. Although, comparisons get get very easy next quarter.






Arby's new marketing campaign, featuring the "Good Mood Food" original song, was named one of the worst ads in America by  Arby's "Good Mood Food" was listed as an "original jingle that should be junked."


CMG initiated neutral at UBS - We still have CMG missing estimates this quarter by $0.04.


MCD - Janney franchise survey confirms our bullish thesis on MCD




CAKE EPS AMC the bar is set low for CAKE Consensus EPS growth is 2% on 4% sales growth.  That being said, this is going to be a challenging quarter for the company - The trends in California could be an issue


BWLD EPS AMC - the consensus is at $0.59, which represents 25% EPS growth vs 16% in 2Q11.  The revenue growth estimate of 26% also looks aggressive.


CHUX - announced a sale-leaseback of 50 units to STORE Capital, and plans to use the $105 million from that sale, plus cash reserves, to pay off debt. The stock was up 13.9% on big volume.




Howard Penney

Managing Director



Rory Green


Fighting the Bull

“Bullfighting is the only art in which the artist is in danger of death and in which the degree of brilliance in the performance is left to the fighter's honor.”

-Ernest Hemingway


Keith and a few other members of our senior management team are up at the Pop Tech Conference in Camden, Maine, and as a result I’ve been handed the proverbial hockey stick on the Early Look this morning.  Given that one of the last major Republican primary debates occurred last night, I wanted to touch upon a topic that we all have an opinion or view on: politics.


The most noteworthy news in the Republican political arena in the last few weeks has been the startling decline of Texas Governor Rick Perry.  According to the Real Clear Politics poll aggregate, on September 13th, Perry was at 31.8% in a poll of the major candidates, while Romney was at a distant second with 19.8%.   As of yesterday, Perry’s support had declined dramatically to 12.9%.  As the public has seen more and more of Perry in televised debates, they have seemingly become less and less comfortable with his ability to be President of the United States. 


Last night appears to have been Perry’s best debate showing, though this largely came on the back of a more personal attack on former Massachusetts Governor Mitt Romney related to hiring illegal aliens in his home.  Specifically, Perry stated:


“Mitt, you lose all of your standing from my perspective because you hired illegals in your home.  And you knew for — about it for a year.”


Perry has actually been effective at raising money in this race and according to recent reports currently has more money on hand than Romney.  Money aside, though, Perry appears to have outworn his welcome on the national stage and attacks like the one above are starting to reek of desperation.


Alongside Rick Perry’s rapid decline, the other key surprise in Republican circles has been the rapid ascent of Herman Cain.  In the aforementioned poll aggregate from Real Clear Politics, Herman Cain has gone from barely registering, at 4.2%, to now running a close second to Romney with 23.4% support amongst the Republican field.  As we wrote about Herman Cain a few weeks ago to our Macro Subscribers in a post titled, “This Isn’t Herman Cain’s First Rodeo (Though It Could Be Rick Perry’s Last):


“In the current race for the Republican nomination, Cain has quickly gone from being a long shot candidate to being considered a serious candidate.  This has occurred on the back of a number of straw poll victories, including Illinois, Florida, and at the National Federation of Republican Women.”


Unfortunately for Cain, it all seems like too little too late.  Currently Romney has the fundraising and organizational advantage, as well as the advantage of being a known entity, for better or worse, to voters, so his potential of imploding has limited.  The InTrade market for political futures, which we flagged in the Chart of the Day today, reflects as much about Romney in a 65% probability that he will be the nominee.


On the Democratic side, of course, stands the incumbent, President Barack Obama.   To say Obama is in a world of hurt, currently, would be an understatement.  According to the Real Clear Politics Aggregate, Obama’s approval rating is 43.6% and his disapproval rating 52.0%.  His re-election chances are further thwarted by the fact that unemployment stands at north of 9%.  No incumbent in the history of the U.S. Presidency has been re-elected with approval and economic numbers this abysmal.


On the positive, President Obama still seems to be moderately well-liked.  In fact, despite the extremely negative numbers outlined above, Obama still outpolls all of his potential Republican challengers on a head-to-head basis.  Romney is by far the closest, but still trails by 0.6%.  So, while Obama is down, he is far from out. 


That said, the key missing factor in head-to-head polls is a measure of enthusiasm to vote.  According to a recent CNN poll, some 64% of Republicans say they are extremely enthusiastic to vote compared to only 43% of Democrats.  If this trend sustains, it will be the Republican nominee by a landslide.


The emerging wild card in this race appears to be the Occupy Wall Street movement.  I’ve spent a fair amount of time both researching the movement and visiting their headquarters in Zuccotti Park.  The mainstream media, especially CNBC, has certainly been validating this group with exposure, but so far, to me at least, it is very unclear that this group has the organizational skills or money needed to make an impact.


As well, even if the group does appear, so far, to represent largely leftist interests, they do represent a broad discontent with American elites both on Wall Street and in Washington.  Despite a lack of real leadership, Occupy Wall Street has flourished geographically.  Occupy Wall Street, ultimately, may be a leading indicator that the door remains open for a truly tenable independent candidate to run for President.   Who the candidate would be and where he or she would come from, though, remains to be seen.


I do have a recommended skill set for any third party candidate that enters the Presidential ring, which is that of bullfighting.  Ironically, a good friend of mine from home, Jason Hale, is taking on the political establishment in Alberta in a race for the Provincial legislature and, as you can see from his bio - - he has 10 years of professional bull fighting experience.  Not a bad skill set to have with all the bull in politics these days.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Fighting the Bull - Chart of the Day


Fighting the Bull - Virtual Portfolio

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We’re expecting a solid Q3 report.  What limited visibility there is should be positive.



We expect Starwood to report $237MM of EBITDA and EPS of $0.40 – about 2% ahead of consensus and a little higher than the high end of management guidance for EBITDA.  That, in and of itself, should be a positive but it will really come down to guidance.  We recognize that visibility is not high and management can afford to be conservative given the low valuation and uncertain macro environment.  However, we expect the commentary to be positive.  Lodging fundamentals continue to look more favorable to us than domestic gaming and leisure. 


Here are our Q3 projections:



Q3 Detail

  • 3.8% increase in system-wide rooms
    • 5.7% increase in franchised rooms and 4% increase in managed rooms
  • $437MM of owned, leased, consolidated JV and other revenue and $89MM gross margin
    • $278MM of room revenue, up 2% YoY on a lower room base offset by higher RevPAR
    • $159MM of F&B revenue, up 3% YoY and seasonally down $3MM QoQ
    • CostPAR of $256.54 up 4% YoY  compared to an 8.6% increase last year
  • $193MM of fee and other revenue – driven by system-wide room and RevPAR growth
    • $157MM of management and franchise fees, up 14.6% YoY and in-line with the high end of HOT’s guidance
      • $77MM of base fees, a 15% YoY increase
      • $30MM in incentive fees, up 10% YoY
      • $51MM of franchise fees, up 18% YoY
    • $30MM of amortization of deferred gains and termination fees and $6MM of other revenue
  • $146MM of VOI and residential revenues and $35MM of operating profit – with similar top line growth and margins as 2Q11
  • Other stuff:
    • SG&A: $95MM
    • D&A: $67MM consolidated; $10MM unconsolidated
    • Net interest expense: $53MM; $4MM unconsolidated


The Macau Metro Monitor, October 18, 2011




Secretary Tam said, “I have repeatedly stressed that before 2013 the [maximum] number [of gaming tables] will be 5,500. The  average growth in the total gaming tables will be kept at three percent over ten years after 2013. The government has set a clear policy [for the gaming industry] and at this moment, we see no any special situation that would lead us to change the current policy.”


Tam added that the gaming operators had indeed submitted a number of applications to the government for in increase in the number of gaming tables after the cap was announced.  “However, a social consensus has been reached in Macau that the size of the gaming industry can not be limitless and the government will follow this consensus. I believe that the gaming operators would not want to act against the common wish of the public,” Tam said.


Keith shorted WYNN in the Hedgeye Virtual Portfolio heading into Q3 earnings.



Keith shorted WYNN in the Hedgeye Virtual Portfolio at $137.40.  According to his model, there is TRADE and TREND resistance 3% and 6% above his entry level, respectively. 


As we mentioned in our 3Q preview note yesterday, we don't believe WYNN's Q3 report will set off any fireworks.  The Street is already expecting a special dividend and while the announcement of one could boost the stock temporarily, we wouldn't be surprised to see investors sell on the news.  Going forward, Macau market share declines in both VIP and Mass and fears of a China slowdown could keep the stock in check.