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Fade Beta: SP500 Levels, Refreshed

POSITION: no position

 

Yesterday’s head-fake was more important than the one we observed on October 31st (primarily because both VOLUME and VOLATILITY signals at 1275 were more bearish than they were at 1285).

 

As a reminder, my core risk management model has 3-factors – PRICE, VOLUME, and VOLATILITY.

 

With VOLUME signaling down -25% and down -13% moves on Monday (1261) and Tuesday (1275), respectively (versus the average VOLUME day in my immediate-term TRADE duration), today’s ramp in early morning volume is not good.

 

Neither is VOLATILITY making higher-lows as PRICE makes lower-highs on my intermediate-term TREND duration.

 

Here are the lines that matter from here: 

  1. TAIL resistance = 1268
  2. TRADE resistance = 1255
  3. TREND support = 1216 

If you take out the 2 hours of yesterday’s trading, this is pretty much the same risk management setup I gave you 24 hours ago. From here, I’m going to Fade Beta in this 1 range.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fade Beta: SP500 Levels, Refreshed - SPX


WEEKLY COMMODITY CHARTBOOK

The important commodities, at least for the food and restaurant industries, moved higher over the last week.  Despite the dollar strengthening over the past week, commodities went higher including those that typically trade with an inverse correlation to the greenback.

 

Please scroll down for charts detailing the trends of individual commodities.

 

 

STOCK THOUGHTS

 

Corn - WEN, TXRH, CMG, SAFM

 

Corn is an important for all companies in the restaurant industry, not only those I mentioned in the heading.  Corn prices gained again over the last week, even as the dollar gained, as the USDA crop progress report indicates that 87% of the harvest for the top 18 corn-producing states is complete.  The USDA also cut its corn harvest estimate by roughly 1% from its previous forecast.  The expected yields, per the USDA are now at 146.7 bushels per acre, down 1.4 bushels from the October forecast.  If this yield were to come about, it would be the lowest yield since 2003.

 

BeefWEN, TXRH, CMG

 

Texas is the state most associated with the drought that has plagued cattle farmers this year but ranchers in Arkansas are now stepping up the rate at which they are culling their herds.  The quality of the calves being sold is also down, according to market participants interviewed by cattlenetwork.com.  With grain too expensive to maintain herd sizes through the winter, and small rain showers having no material impact on soil conditions, farmers are downsizing their herds drastically. 

 

While this is boosting supply in the near-term, for FY12 it may mean even higher prices.  Consumer may expect higher retail prices in the grocery aisle but, as WFM noted in its earnings call last week, passing on inflation in meat prices has proven difficult.

 

ChickenBWLD

 

Chicken wing prices have continued their march higher.  As we wrote recently, food industry experts’ commentary as well as our own analysis gives us confidence that BWLD could have year-over-year inflation in wing prices beginning in the first quarter of 2012.  Replicating the 3Q11 strategy of driving comps via a promotion will likely be difficult in 2012 if the company faces significant inflation.  Some industry experts see $1.50 wings next year and sustained year-over-year inflation versus 2011 next year.

 

Coffee – SBUX, DNKN, PEET, CBOU, THI, MCD

 

Coffee prices moved higher over the last week after the previous seven days’ decline.  Despite the crisis in Europe and the strengthening dollar, coffee prices gained 2.3% over the last week as coffee exports from Brazil fell to 3.1 million bags in October from 3.5 million a year prior.  A University of Sao Paulo research group, Cepea, is stating that the 2012-13 harvest may still be a record, despite concern that dry weather and frosts earlier in the year could have hampered crop development.

 

WEEKLY COMMODITY CHARTBOOK - commod 119

 

 

CORRELATION TABLE

 

WEEKLY COMMODITY CHARTBOOK - correlation table 119

 

 

CHARTS

 

Coffee


WEEKLY COMMODITY CHARTBOOK - coffee 119

 

 

Corn

 

WEEKLY COMMODITY CHARTBOOK - corn 119

 

 

Wheat

 

WEEKLY COMMODITY CHARTBOOK - wheat 119

 

 

Beef

 

WEEKLY COMMODITY CHARTBOOK - beef 119

 

 

Chicken – Whole Breast

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast 119

 

 

Chicken Wings

 

WEEKLY COMMODITY CHARTBOOK - chicken wings 119

 

 

Cheese

 

WEEKLY COMMODITY CHARTBOOK - cheese 119

 

 

Milk

 

WEEKLY COMMODITY CHARTBOOK - milk 119


 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


MPEL YOUTUBE

In preparation for MPEL's Q3 earnings release Thursday morning, we’ve put together the recent pertinent forward looking company commentary.

 

 

MELCO CROWN EYEING HK LISTING BY INTRODUCTION-IFR (10/07/11)

  • According to IFR, MPEL is considering listing in Hong Kong by way of introduction, instead of selling stock, because of current market conditions.

 

YOUTUBE FROM Q2 CONFERENCE CALL

  • [House of Dancing Water] “The show while operating at above break-even on a stand-alone basis also generates a meaningful ripple effect throughout the whole business, including higher property visitation, improved hotel and food and beverage metrics, as well as provides a significant contribution to our gaming business through, amongst other things, adding key customers to our database to drive profitability and future growth.”
  • 3Q guidance:
    • D&A: $85MM
    • Corp expense: $20MM
    • Net interest expense: $30MM
  • “On the competitive outlook side with Galaxy Cotai opening, it certainly has moved the center of gravity further into Cotai and I think we have benefited from that.”
  • [Macau Studio City] “Effectively a three-year process. And we previously said that we hope to restart construction sometime before the end of Q1 of 2012.”
  • “We’ll probably put the additional tower (Phase III of City of Dreams) on the back burner for now.
  • [Within the mass segment] “This year, the percentage on our premium mass is somewhere about 50% to 60%.”
  • “I think going into the third quarter, we plan on keeping operating expense essentially flat with what we’ve seen in the second quarter. So, we’ll fully benefit from any VIP or mass market top-line growth that we can generate.”
  • [2013 Table cap] “So I think if you read between the lines, only new builds from now until 2013 will get those tables. So, I think we’ve sensed 5 and 6 opening up next year and the year after that, that’s where the allocation of tables will be. So from our internal perspective with regards to City of Dreams and Altira, and I think Ted alluded to it early on, we are continuing to yield up the business and we are trying to operate and utilize the tables as efficiently and as profitably as we can.”
  • “We have some claims in terms of opening one to two junket operators, but due to some labor issue, we have to move those opening to the third quarter.”
  • “Unlike some of our competitors who are still waiting for their land grant, as I pointed out earlier on, the previous owners of the Studio City project had already commenced construction a few years ago and had put in significant piling and foundation work, work that was worth over U.S.$100 million. So for us right now is really a process of recommencing and getting the necessary approvals to restart construction. So, it’s a much less complex and complicated process than what others would be looking at.”

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LIZ: Q3 Quick Take

 

No major surprises in LIZ’s numbers to note this morning before the call. Fundamentals appear largely in-line with our expectations and management’s outlook for both 2011 and 2012 adjusted EBITDA remains unchanged. That said, there was also little by way of updates regarding several items that that we expect to be discussed in more detail on the call at 10am:

 

These include:

  • What if any corporate expenses related to the legacy Partnered Brands now divested are expected to be carried forward. Assuming there are some, what is the plan and timeline for when we can expect these to be eliminated.
  • An update regarding debt reduction – particularly the timing of when the volatile Eurobond might be settled.
  • As a non-cash tax payer and with the Mexx deal now completed, we should also get an update re the size of NOLs. 

The bottom-line is that there is no change to our view based on this release and we continue to think the company’s 2012 EBITDA guidance looks conservative. We’ll follow up as warranted after the call.

 

Call at 10am (code: 22874487)

 

 

Casey Flavin

Director


IGT: WHAT’S DOWN WITH THAT GUIDANCE?

Solid quarter but “disappointing” guidance.

 

 

“Management is sandbagging”.  “Guidance is conservative”.  We’ve all heard it many times from the sell side – always when a buy rated stock provides disappointing guidance.  We, however, really mean it!  Look, we don’t have an axe to grind either way with IGT.  We’re not trying to justify a Buy rating.  Our call the last few months has been on BYI, not IGT.  However, we’ll call a spade a spade and say that IGT is sandbagging.  Guidance should’ve been 10 cents higher in our opinion.  We lay it out below.

 

The quarter can be summed up as having very strong top line results for both product sales and gaming operations (solidly ahead of consensus) somewhat offset by disappointing gaming operations margins and higher operating expenses.  We think management may be managing earnings a bit here.  We’ve seen it from them before.  With that level of revenues, EPS should’ve been a lot better.

 

 

FQ4 ANALYSIS

 

Product revenues came in 19% ahead of our estimate due to better unit sales while gross margins were in-line with our estimate.

  • We estimate that IGT’s share rose to 40% in September – their best market share quarter since June 2008 (IGT would like to send out a special thanks to WMS)
  • Domestic units shipped exceeded our estimate by almost 3,000 units
    • Replacements were 1,200 units better than we estimated due to higher share (we estimate 39% share vs. high 20's share average over the last 6 quarters)
    • New units were 1,750 better than we estimated due primarily to the earlier than expected recognition of shipments to the 2 Kansas casinos opening in 1Q12 which we estimated accounted for 1,500 shipments
    • Replacement units for the quarter look like they were in-line with our original estimate of 13k for the entire market – marking an 11% YoY improvement.  We estimate that the YTD improvement in replacements is 13% with replacements tracking at 41.6k through September 30th vs. 37.7k shipped in the first 9 months of 2010.
    • International product revenues were $8MM above our estimate but gross profit was $1MM below our estimate. We suspect that this is due to the lower margins from the Entraction acquisition – which contributed to revenue but delivered no profits in the quarter.

IGT: WHAT’S DOWN WITH THAT GUIDANCE? - international

 

Gaming operations revenue was $8MM above our estimate while gross profit was $6MM below our estimate, after adjusting for the $4.8MM IP settlement charge.

  • Better revenues were driven by improvements in WAP yields per day due to better game performance on fresh product.  However, WAPs do have lower margins since the games are largely licensed titles with royalty payments and jackpot funding expenses.
  • The quarter also got a boost from better than expected shipments to international markets –including shipments to CAGE
  • Adjusted for the negative impact from rates and the IP charge, ‘normalized gross profit’ margin would have been 59% - below the 62% rate where IGT had been tracking for the first 9 months of the year.  We suspect that next year’s guidance has a similarly conservative margin.

Other stuff:

  • SG&A was $13MM above our estimate – largely due to higher commissions from better product sales

 

ADDRESSING IGT GUIDANCE


IGT’s guidance for 2012 is pretty conservative in our opinion:

  • Excludes their signed contract to ship 7,200 units into Canada. If half those units ship in F2012 than that will add 5 cents to IGT's results
  • Flattish to slight uptick in the replacement environment. Unless current trends massively reverse, this is unlikely. For the TTM ended 9/30/2011 we estimate that 54k replacement units shipped in NA, a 12% YoY increase. Assuming just a 10% increase would add over 5,000 units to the market in IGT's fiscal 2012 and assuming that IGT can garner a 35% share that's another 2 cents a share.
  • Flatish new and expansion opportunities in IGT's fiscal 2012 vs. 2011.  We're not sure how that's possible, there were less then 12k new and expansion units shipped into NA for the TTM ended 9/30/11 and we estimate over 18k excluding any new units to Canada, Ohio VLTs, IL and counting 2 of 4 Ohio casino shipments. Assuming IGT get's 35-40% share of these openings we get another 3 cents
  • These 3 items account for roughly 10 cents of EPS. 

IGT’s install base and yields should show improvement YoY, however, we did take down our gross margins to 59%.  We also assumed a 30% variable component to SG&A.  All in, we get to $1.10/share for 2012. 


THE HBM: CBOU, CAKE

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

According to the National Bureau of Statistics, the annual inflation rate in China decelerated to 5.5% in October from 6.1% in September. 

 

Hedgeye Financials posted this on today's MBA Mortgage Purchase Applications print - "The MBA Purchase Index rose 4.8% last week, bringing the series to an index level of 173. In spite of this improvement, purchase application levels remain roughly 5% below their rates from the summer. At the current rate, applications will finish the year roughly 10% lower than 2010. We reiterate that this has a direct read through to prices."

 

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: CBOU, CAKE - subsector fbr

 

 

QUICK SERVICE

 

CBOU: Caribou Coffee reported 3Q EPS after the close yesterday of $0.07 versus expectations of $0.06.  Comps increased 4.1% and FY11 and FY12 guidance of $0.39-$0.41 and $0.48-$0.51, respectively.  Consensus is at the high end of both ranges.

 

 

CASUAL DINING

 

CAKE: Cheesecake Factory says it’s doing nearly anything it can to lower costs without cutting portions during a time of high commodity-price inflation.  “We have to balance the need to protect margins with the even greater desire to grow guest counts”, said CFO Douglas Benn.  WSJ

 

THE HBM: CBOU, CAKE - stocks 119

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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