Chart Of The Week: Shark Hunting

“This shark, swallow you whole. Little shakin', little tenderizin', an' down you go. And we gotta do it quick, that'll bring back your tourists, put all your businesses on a payin' basis. But it's not gonna be pleasant.”
-Quint (Jaws, 1975)

Suffice to say, this week wasn't one for the faint of heart. Shark hunting never is…

If you're in the "all in US$ cash" camp, that and gold worked, closing +1.5% and +1% on the week, respectively. If you were in the shark infested waters with us, it was a full contact sport.

The chart below paints the lines where we made calls this week. "Beware Of The Squeeze" (11/12) played out twice over the span of a very volatile 48 hours. From 1PM on 11/13 to the closing bell, we saw a +10.5% squeeze in the SP500, then from 1PM on 11/14 we saw a milder version of the same, but a +4.5% two hour move in the SP500 nevertheless.

We issued 12 sell/short orders on the Hedgeye Portfolio on 11/14. Our get long for the squeeze call was not one that we were going to sit on forever. Just after 3PM on Friday, we issued a note calling out stiff shark bite resistance at SP500 920.

Chinese are eating more food away from home

A USDA Foreign Agricultural report indicated ongoing studies reveal that Chinese food consumption away from home is more significant than anticipated. According to the report, “Consumption patterns in China are in a state of transition, particularly in rapidly changing urban areas. Income growth is allowing households to substitute vegetables, fruit, and livestock products for staple grains. More recently, consumers in China have begun selecting goods based on quality over price and quantity, and food consumed away from home is rising as well.”
  • Specifically, of the food consumed away from home, about 40% is consumed in cafeterias, 20% in restaurants, 10% in fast food venues and another 10% at small food stands. Meat is the leading food category that is consumed outside of the home with over 50% of household meat consumption occurring away from the home. Seafood is number two with over 30% of household consumption outside of the home and about 30% of drink purchases are for away from home consumption. The report goes on to show that these away from home consumption levels rise with increased income.

  • The obvious beneficiary of this shift toward more away from home consumption in China is YUM. China currently accounts for nearly 30% of YUM’s segment operating profit and the company expects this profit contribution to grow to 40% by 2017. A cultural preference for dining out will make it easier for YUM to achieve this goal. YUM’s China same-store sales slowed somewhat in 3Q08 on a sequential basis to 18% (from nearly 30% in both 1Q and 2Q), and the company is lapping a difficult 30% comparison in 4Q08. That being, said the company is well positioned to capitalize on China’s growing economy over time. As incomes rise, YUM will benefit as more people choose to dine out.
  • Starbucks is another company that is betting on China. SBUX expects that China will become its largest market outside of the U.S. and is, therefore, increasing its investments in its China operations. At the end of fiscal 2007, SBUX’s stores in China accounted for 8% of its International store base, and the company more than doubled its FY07 company-operated unit openings in China from the year prior. SBUX’s China business will be helped if the percent of drinks consumed outside of the home continues to grow beyond the 30% level.

Food Consumption Away From Home Differs From In-Home Consumption
Away From Home Consumption By Outlet Type

US Market Performance: Week Ended 11/14/08...

Index Performance

Week Ended 11/14/08:
DJ (5.0%), SP500 (6.2%), Nasdaq (7.9%), Russell2000 (9.7%)

November 08 To Date:
DJ (8.9%), SP500 (9.9%), Nasdaq (11.9%), Russell2000 (15.1%)

Q408 To Date:
DJ (21.7%), SP500 (25.1%), Nasdaq (27.5%), Russell2000 (32.8%)

2008 Year To Date:
DJ (35.9%), SP500 (40.5%), Nasdaq (42.8%), Russell2000 (40.4%)

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Unless G2E shows us a slew of must have new products, 1H 2009 slot sales are going to be ugly. Q2 seems to be the at risk quarter for a number of companies in terms of potential covenant violations. I don’t care what the casino slot managers are telling the slot companies, corporate CFOs are controlling the slot procurement process. Most slot Capex will be pushed back to 2H 2009, if not later.

Slot functionality exceeds the actual average life cycle of 5-6 years by at least 5 years. Slots don’t breakdown. If an operator needs liquidity, they will cut slot Capex. Delaying Capex is the number one consideration for CFOs as they prepare their 2009 budgets. As soon as their budgets are communicated to the slot companies, 2009 guidance should come down. Analysts haven’t yet embraced this reality. As we discussed in our 11/2 post, “CAPEX, COVENANTS, AND CORPORATE CONTROL”, they continue to project roughly 10% revenue growth for WMS and BYI and still positive revenue growth for the slot industry in 1H 2009.

If you don’t believe me, check out the following management YOUTUBE from the Q3 conference calls. Remember, slots comprise the largest portion of maintenance Capex.

BYD Q3 2008
Question: “Do you think you maintenance is sub $100 million right now or can you get away with spending $80 million a year in maintenance?”

Answer: “We can probably at this point run the business sub $100 albeit some of the things that we opportunistically put off we will deal with in future quarters or in the following year.”

LVS Q3 2008
My guess is that LVS may not buy a single replacement slot machine next year given its financial situation.

ISLE FQ1 2008
Guiding $40 million in Capex for this fiscal year, which is about 30% below normal just for maintenance Capex. Next fiscal year will likely be even lower.

ASCA 3Q 2008
“So I guess at this point in time, in that $40 to $50 million range of maintenance CapEx again for next year, obviously subject to change based on the economy.”

The midpoint of the range is 30% below normal levels even before the “based on economy” adjustment.

PENN 3Q 2008
“Well I think maintenance CapEx next year should be between $75 and $80.”

The midpoint of the range is 36% below normal levels, and these guys have liquidity and are underleveraged!

PNK 3Q 2008
Question: Is the $9 million in the quarter sustainable or will that go back up?

Answer: Between 9 and 10, but it was running as high as 11 for a while there. Look, we'd like to get it as low as we can but we're not going to do miracles here. In fact, let me step back. It's an interesting environment we're in, in a lot of ways, especially in the casino business. “A lot of our competitors are in pretty rough shape and we hear the same stories you have that their not buying a single slot machine this year, or their cutting their maintenance CapEx to the bone.”

Harrah’s 3Q 2008
“Maintenance capital expenditure usually runs 4-5 percent of net revenue. That is being reduced to half of the normal amount or less.”

TRMP Q3 2008
Question: I wonder if you can give us a little more clarity as to what minimum maintenance CapEx might be and a sense for what your minimum cage cash could be next year.

Answer: “The CapEx we're going to limit to only essential compliant or life safety issues. We're not anticipating any more than $10 million between the three properties next year for maintenance capital.”

Station Casinos
This bankruptcy candidate may not buy any replacement slots next year.

Not many of these will be sold in 1H next year


The satire of comics and the covers of national news magazines and business publications show what’s making news now. As we know, the market, on the other hand, is a discounting mechanism; it anticipates future events, and reflects them in the current price.

Magazine covers are intended to sell magazines. The related cover story is typically written because that featured topic is resonating with the public at that moment. When a magazine decides something is worthy of its publication’s highest profile, it usually means that trend is reaching a climax.

Why does this work as a contrary indicator? MCD is a classic example. We have included three pictures of magazine covers in this post: two feature MCD and one focuses on SBUX. The two MCD cover stories pictured were published in 1998 and 2007, respectively. Then look at the cartoon from the Seattle post last week.

Just building a mosaic!


My partner, Brian McGough, brought up an interesting tidbit in our morning meeting yesterday. For the first time ever, Canyon Ranch is allowing 2 night stays versus the customary 3 night minimum, a clear violation of the Koch Curve and the theory of triangles.

I had just gotten back from a family vacation in London where I noticed many hotels offering a free room night with every two paid nights. Here, the hotels are incorporating the power of 3 into their marketing pitch. The marketing executives may be pursuing the right mathematical process but a 50% giveaway is a bad signal for the industry. Demand is falling off a cliff, particularly in the gateway cities.

Here is a sampling of hotel promotions:

• Intercontinental Hotel Group - Holiday Inn two-nights-for-one
• Starwood: offering a “pay your birth year” promotion for the second and third nights of a 3 night stay
• Four Seasons: a number of Four Seasons hotels offering a 3rd night free
• Baltimore: City-wide promotion, 3rd night free
• Luxor Las Vegas: Stay 2 nights and get the 3rd night free
• Marriott: 2 nights, third night free at Rive Gauche in Paris

Margins are looking scary. It might be time to call for another 25% reduction in EPS estimates for the hotel owners.

3rd night free: the new marketing fad

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%