Booking It: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY), Short Consumer Staples (XLP)


After a 30 handle drop in the SP500, I’m booking it.


That doesn’t mean I’m bullish. It doesn’t mean I’m bearish. It doesn’t mean I can’t re-short it either. It just means that we’re holding my most immediate-term TRADE line of support at 1217.


Across our 3 risk management durations, here are the lines that matter most: 

  1. TAIL = 1266
  2. TREND = 1254
  3. TRADE = 1217 

So the intermediate-to-long-term picture still supports selling all rallies that extend themselves toward 1. And, until the immediate-term TRADE is no longer bullish (1217 support), I’ll respect whatever it is that the market sees coming next. As the Keynesian central planners have proven in the last 3 weeks, anything can happen.


If 1217 snaps, there is no support to 1182. So that’s where you’ll see me get as active as I was up at 1258. I’m comfortable being neutral right here and now with 1 Sector ETF on each side.




Keith R. McCullough
Chief Executive Officer


Booking It: SP500 Levels, Refreshed - SPX


In preparation for HOT's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary



"Our conviction [is] that the value of our company is set to rise with an unprecedented and seemingly unstoppable growth in the ranks of a new class of affluent global business and leisure travelers.  This major secular trend will continue to fuel demand for our brands well into the future.”



  • “Occupancies have now reached the point where we expect rates to rise further, and as you expect, higher revenues mean higher margins
  • “With supply already tight in the U.S. and Europe, we foresee strong rate increases not just for the rest of this year, but also for corporate rate negotiations for next year.”
  • “Our leisure business is doing quite well as high-end guests fare better than the economy as a whole.  The strength of our business will mean less inventory sold through costly channels such as OTAs.”
  • “Tour flows steadily improved up 4% and for the first time in nearly four years, realized price increased.  Our vacation ownership team continues to do a stellar job driving sales and generating cash from the business.  We expect more of the same for the coming years.”
  • “Our outlook for the rest of 2011 is robust with solid group and transient pays and with good prospects for rate and margin.  In line with our baseline scenario, we expect REVPAR growth of 7% to 9% in 2012. We’re sticking to our 2011 EBITDA range to of $975 million to $1 billion and I should add that’s in spite of asset sales, which will reduce full-year EBITDA by about $20 million.  We’re also raising our EPS range to $1.67 to $1.77.  We have maintained the outlook range we first provided late last year despite a $25 million to $30 million EBITDA hit from the unexpected events in North Africa and Japan and an additional $20 million in lost EBITDA from asset sales completed in Q2 which were not included in our outlook”
  • “At this point, there is no discernible impact on our business from the much-discussed soft patch in the U.S. economy or the debt limit shenanigans in Washington.  Transient revenue pace, both corporate and leisure, is up double digits in Q3.  Leads are up, group pace is gaining steam and booking windows are lengthening.  So far in July, the momentum of the second quarter has been sustained.  As we’ve said before, rate is a make or break variable this year.  Rate trends are improving as occupancies enter the 70s percent.  Like you, we remain on high alert for any signs of a change in trend.  Since we do not see any evidence of that, our outlook assumes the normal cyclical recovery we have been experiencing in lodging will continue”
  • “The Euro crisis has not impacted our business so far in Europe which is one of our strongest regions in the quarter.  In local currencies, system REVPAR in Europe was up 12%.  Rate was up 5.1% and occupancies up 4.5 points.”
  • “Tour flows have improved while close rates are stable.  Mixed management is improving price realization. Default rates continue to improve and are now back to 2007 levels.  We expect these trends to continue.  We remain focused on cash flow generation with a securitization plan in the fourth quarter.  SVO will generate over $150 million in cash this year and over $700 million in total in the last three years.”
  • “Our SG&A declined in the quarter.  This is partially due to lapping incentive compensation accruals from last year.  We also had some legal expenses last year.  These positives were offset by higher cost of non-U.S. overhead due to the weak dollar.  For the year, we continue to expect a 4% to 5% increase.”
  • “We are more comfortable with the middle of the EBITDA outlook range rather than the high end where many of your estimates currently are.”
  • “On the fee front, North Africa and Japan hurt 2011 management fees by as much as $18 million or the reduction of almost 300 basis points in year over year fee growth.  Two-thirds of the impact is on incentive fees and most significantly in the fourth quarter when these fees were anticipated.  As such, our Q4 fee growth rate will be lower than the trend we have seen in the first three quarters.  Some of this impact is offset by favorable currency translation due to the weak dollar of 200 basis points positive for the year.”
  • “At Bal Harbour, construction is proceeding on schedule.  We’re also on track to receive our TCO in Q4. Our plan is to start closing in November.  Meanwhile, the sales pace is good this year, particularly from Latin-American buyers. Square foot rates realized on new sales are at pre-crisis levels and deposits are much higher, more than 40%. We expect that there will be revenue profits and cash from Bal Harbour in the fourth quarter as we start closings, which are not currently in our outlook.
    • “We’re approaching close to 60% of the value that is already on the contract, and the value we provided you before is north of $1 billion in terms of the condos.  Now there will also be a hotel there that we intend to keep.  We have got deposits already for many of the sales done prior to this year in the 20% range and then more recently our deposits have been much higher than that…more than 40%.  Our indications are very good that the closing rates will be high… The good news is the square footage rates we’re selling at right now are at pre-crisis level….It does vary depending upon the units, but it’s well north of $1,000 and could be north of $1,300 and $1,400 depending upon the unit.”
  • “We expect that ratings will move probably toward the end of this year or into next year and our priority is we have maturities next year, roughly $600 million in public debt as well as there’s some debt on assets which is a small amount, maybe another $50 million or so that can be pre-paid.  So there’s about $615 in prepayments and in repayments that we can make next year.  So our priorities remain, as we’ve said before, healthy reinvestment in our business, reducing our debt levels, and then, of course, returning cash to shareholders”
  • “The group pace in 2012 continues to improve particularly as you’re seeing the booking window lengthen.  Today, it’s still volume driven.  Rate is marginally positive, but as Frits mentioned in his comments, rate on newly booked business in the second quarter was up 9% and for periods beyond 2012, we saw rate increases closer to 13%.  Another interesting thing that we saw during the second quarter was a pretty big shift in percentage of business being booked more than 12 months out.  So we saw very strong pickup in terms of the business being booked for 2013 and beyond.”
  • NOLs: “There’s a fair amount of work underway that we’re comfortable that we will use most if not all of it before the end of the year and essentially be able to realize the value as asset sales are done in the future”
  • “We see a market for 1s and 2s as we’ve been doing, but not a market for a mega sale”

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In preparation for PNK's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • Adding a 200-room hotel, a 10,000 square-foot event center and a covered parking structure to River City
  • Construction scheduled to begin in 1Q 2012 and will be complete in 2H 2013




  • “Regarding customer spend, we are seeing improvements across all our customer’s tiers with higher increases coming from our top three tiers on our players program.  Across all our customer tiers, we are seeing a shift in revenue as the customer base has responded to our shift into focus on profitable revenue, not just revenue.”
  • “The corporate expense included roughly – just shy of $200,000 in severance costs, which we included in those numbers.  And there was some increased corporate overhead associated with some litigation – legal expenses, for a run rate basis for folks out there that are projecting us, somewhere between the first quarter and second quarter it’s probably a decent run rate to use going forward.”
  • “We had $10 million drawn on the facility at the end of the quarter, that it should reflect the lower cost going forward.  We obviously expect to use that facility as we look to build out Baton Rouge and build out River Downs sometime in the next year.”
  • “Trips to Wynn Las Vegas and Royal Caribbean cruises are being made by our guests in the top three tiers. All of these targeted marketing initiatives resulted in double-digit increases in both trips.  In addition to play consolidation and increased trip frequency, reallocation or reinvestment to reward higher value guests led to an 80 basis point decline in marketing expense as a percent of revenue year-over-year.  It’s important to note, and as I mentioned during our last call, the new construct of mychoice with its aspirational rewards will be net neutral to our overall marketing expense.”
  • “We still plan on opening our Baton Rouge facility in the summer of 2012.  We are still expecting that we will be at budget of $357 million, although there is some additional pressure on us due to the delay that we’ve had...If there was a change in that, at this point, we don’t believe it would be significant.”
  • “Marketing is an effort that we have focused on over the last year plus and we’re still in the very early stages of implementing that. That is our largest arguably controllable expense, and so that we very much agree that we’re still in the – at worst, the middle innings.”
  • “We don’t think that Las Vegas is a market today that it make sense for us to be in, and we couldn’t be more pleased with our relationship with Wynn Resorts, and how that’s working out for us.”
  • [Baton Rouge] “We have changed the mix of our casino floor, both with better slot product, with a new poker room that really just recently opened up in the third quarter.”
  • “So far in Baton Rouge has been about $51 million or so this year. The real spend will really start increasing now that we’ve started, and accelerating to the fourth quarter. I would tell you the number is going to be roughly about 75% of what we have left to spend, will happen in the next year.”
  • Q: “On a run rate going forward, we’re still talking $2 million, $3 million a quarter of cash charges related to Atlantic City?”
    • A: At most.


The most important meal of the day.






The Conference Board Consumer Confidence Index declined to 39.8 versus expectations of 46.  The print is the lowest since March ’09.


THE HBM: PNRA, YUM, EAT, RUTH, KONA - confidence 1025



US MBA Mortgage purchase applications index gained +6.4% for the week ended October 21stwhile the total market index gained +4.9%.  These numbers compare to (8.8%) and (14.9%), respectively, during the week prior.





THE HBM: PNRA, YUM, EAT, RUTH, KONA - subsector fbr





PNRA: Panera Bread reported strong 3Q results last night.  See our post from earlier this morning for details.


YUM: Yum! Brands’ acquisition target Little Sheep Group Ltd. dropped by the most in more than a year in Hong Kong trading after saying China’s Ministry of Commerce extended by 60 calendar days the review period of Yum! Brands Inc.’s proposal to buy the company, according to Bloomberg.





EAT:  Brinker reported 1QFY12 earnings this morning.  EPS came in at $0.30 versus $0.27 consensus.  Comps at Chili’s missed, coming in at +1.7% versus the Street at 2.1%.  Blended comps came in at 2% versus consensus at 2.4%.  Restaurant operating margins, despite transaction growth at Chili’s exceeding the comp, came in 170 basis points ahead of expectations.


RUTH: Ruth’s Hospitality Group reported $0.00 in EPS for the third quarter.  Comps for Ruth’s Chris Steak House came in at 2.6% while Mitchell’s Fish Market saw a decrease of -0.7%.  Margins were negatively impacted by 120 basis point related to food and beverage costs.  Beef price inflation was the main driver, in addition to higher prices for dairy, oil and grain-based products.


THE HBM: PNRA, YUM, EAT, RUTH, KONA - ruth pod 1



KONA: Kona Grill reported a strong quarter, beating the Street’s expected EPS of 5c with a result of 6c.  However, the company, but lowered guided to EPS between -$0.01 to +$0.02. Marcus Jundt is returning to Kona Grill, having been appointed to the company’s board as former CAKE executive Michael Nahkunst was named CEO.

PFCB: According to, P.F. Chang’s is seeing interest from PE firms.  Per The Deal, Golden Gate Capital may be one potential bidder.


THE HBM: PNRA, YUM, EAT, RUTH, KONA - stocks 1026


Howard Penney

Managing Director


Rory Green



This note was originally published at 8am on October 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.

“There is no cause for worry.  The high tide of prosperity will continue”.

-Andrew Mellon, June 1928.


Clearly, Mr. Mellon’s statement proved to be inaccurate and untimely. 


Fortunately for him, Irving Fisher stole the limelight with his immortal quote made days before the 1929 crash, “stock prices have reached what looks like a permanently high plateau”.  As John Kenneth Galbraith writes, in reference to Mellon’s statement, in his seminal work titled The Great Crash, “Mr. Mellon did not know.  Neither did any of the other public figures who then, as since, made similar statements…it is not to be supposed that the men who make them are privileged to look further into the future than the rest”. 


Later in The Great Crash, as Galbraith moves to discuss the weeks and days more closely preceding the ultimate stock market collapse of October 1929, he writes, “When markets fell many Wall Street citizens immediately sensed the real danger, which was that income and employment – prosperity in general – would be adversely affected.  This had to be prevented.  Preventative incantation required that as many important people as possible repeat as firmly as they could that it wouldn’t happen.  This they did.”  Here we are, in 2011, and important people are once again turning to preventative incantation.  This time, dare I say it, is different.


As the “roaring twenties” came back down to Earth, the informational resources that were available to Main Street were rather limited.  The New York Times, the Wall Street Journal, Barron’s and other legacy newspapers were the primary source of financial news for the vast majority of shareholders in this country.  Indeed, during the most volatile days of the period leading up the 1929 crash, the tickers in the New York Stock Exchange could not keep up with the real-time prices.


Today, ordinary people are increasingly on par with so-called important people.  Twitter, YouTube, and the acute desire for transparency are ensuring that this trend continues.  Yesterday’s most important geopolitical event highlights this point perfectly.  Muammar Gaddafi was dragged out of a sewer and killed by rebel forces in Libya after, in an ironic twist of events, pleading for mercy. 


One of his captors decided to make a digital recording of the event and, forty-five minutes or so after the dictator was executed, anyone in the world with access to YouTube could see evidence of the event on their mobile phone or laptop computer.  Not only could we watch an historic event unfold in just as timely a fashion as the Secretary of State, we could also see a clip on YouTube of Secretary Clinton being passed a phone with a message informing her of Gaddafi being captured.  Newsreaders in years past may have wondered, “I wonder what it was like?”


“The Veil of Ignorance” is a concept discussed by political philosopher John Rawls in his book A Theory of Justice to frame an unbiased determination of the morality of a certain issue.  Behind the Rawlsian “veil of ignorance”, parties to a debate on a social issue know nothing about their abilities, position in society or preferences.  A less sophisticated interpretation of the phrase could be that a veil exists between Main Street and the elites of Wall Street and Washington.  Movements like Occupy Wall Street and the Tea Party epitomize dissatisfaction with the status quo.  Social media is enabling democracy, however indefinite the aims of some groups may seem.


Social media is to democracy what the Bloomberg terminal was to finance.  Like the investors of the late 1920’s that had to wait until the ticker on the floor caught up with market prices, voters at the time were also deprived of the information flow that we are benefitted with.  Preventative incantations, in the US, Europe and elsewhere, are fact checked and debated by main streeters everywhere.  It has been said that deliberation is the essence of democracy and, if that is true, technology is the engine behind democracy today.


 I can’t claim to have visited Zuccotti Park to decipher exactly what it is that the Occupy Wall Street movement wants, but I would imagine that a higher jobs rate might assuage some of the dissatisfaction they are feeling.  Inequality is certainly a large theme of the protest, but a lack of jobs while corporate profits and cash balances remain so high seems to be central to what is causing discontent along all parts of the political spectrum. 


Chief Executive Officers, like politicians should be to voters, are accountable to their shareholders.  Growing profits and increasing shareholder returns are primary goals of any CEO.  Does it make sense, then, to leave so much cash on the sidelines earning little-to-nothing?  The easy answer is no, but most executives don’t want to risk the hard earned capital either.  So what is a CEO to do - wait and watch?  Here are some comments from CEO’s on the current economic environment:


Steve Wynn, CEO Wynn Resorts: “I cannot predict what healthcare costs are going to be, what regulatory load they are going to heap on us, what new taxes or other burdens this insatiable governmental appetite for money from the citizens will take us to.”


Paul Coghlan, CFO Linear Technology Corp: “Customers continue to be very cautious and are concerned over general global macro economic conditions. They acknowledge in-demand opportunities, but are in a wait-and-see mode. They're running tight inventories and order to the low end of our lead times.”


Stephen G. Newberry, CEO Lam Research Corp:  “Since our June quarter call, macro-economic uncertainty has continued, including concerns over European debt issues and ongoing struggles in the U.S. with high unemployment and a growing budget deficit.”


All in all, it is clear that neither the stimulus nor preventative incantations from American or European politicians are reassuring those that matter – the job creators.  Voters, too, can now see the impact – or lack thereof – of politicians’ lip service.


At Hedgeye we are trying to build a business that catches the wave of transparency that is changing how events unfold and are perceived. In 1929, political elites shifted blame and responsibility to each other with little fear of meaningful exposure, at least not in the immediate term. 


Today, their successors are not afforded that buffer.  In 1929, Joseph Stagg Lawrence’s book Wall Street and Washington, attempted to expose government policy and the impact it had on the prosperity of the nation.  Today, the same aim, if it is to gain traction, has to be synthesized within the construct of social media.  That is where Hedgeye is going. 


While hope is not an investment process, we hope that this time it is different.


Function in disaster; finish in style,


Howard Penney





Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%