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THE HBM: GMCR, CMG, WEN, AFCE, RRGB

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Initial jobless claims came in at 390k versus consensus 400k and an upwardly revised 400k the week prior.  Rolling claims increased to 400k from 403.5k the week prior.

 

THE HBM: GMCR, CMG, WEN, AFCE, RRGB - initial claims 1110

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: GMCR, CMG, WEN, AFCE, RRGB - subsector fbr

 

 

QUICK SERVICE

 

GMCR: The top line was always going to be the straw to break the back of this one.  Predicting when it was going to be revealed was obviously the key.  Missing earnings and top-line expectations was certainly a negative point but the capex guidance was a major concern for us; the capital intensity of the business should be decreasing as the company grows.  What we have been observing is that the company’s ability to generate cash is less and less believable.  We would also note that the miss should have been bigger; the tax rate was highly favorable 4QFY11.

 

CMG: Chipotle Mexican Grill was upgraded to Hold at Miller Tabek.

 

WEN: Wendy’s reported EPS of $0.05 ex-items versus expectations of $0.04 but comps were slightly disappointing. As we wrote yesterday, the company has longer term issues to resolve but we are positive on the TAIL (three years or less) duration.

 

WEN: Wendy’s was downgraded to Hold from Buy at Deutsche Bank. 

 

AFCE: AFC Enterprises reported 3Q EPS of $0.25 vs consensus $0.23.  Domestic comps increased +1.7%.

 

 

CASUAL DINING

 

RRGB: Red Robin Gourmet Burgers introduced a new burger to their holiday promo line-up, the Sweet Jim Beam Bacon Swiss Burger.  The burger is available through December 24th.

 

THE HBM: GMCR, CMG, WEN, AFCE, RRGB - stocks 1110

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


MPEL 3Q11 CONF CALL NOTES

So analysts raise their estimates into the quarter due to high hold and then claim that normalized EBITDA missed their estimate?

 

 

"I am delighted to announce another quarter of record Adjusted EBITDA and net income for our Company, representing the ninth consecutive quarter of sequential improvement in hold-adjusted EBITDA. These results build on the significant achievements delivered through the first half of 2011 and demonstrate our ability to deliver sustained high-quality results, with strong company-wide performance across all segments, despite the introduction of additional supply in the market."

 

Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment

 

 

CONF CALL NOTES

  • Focused on maximizing the yields of all their gaming and non-gaming amenities
  • The market in Macau remains resilient and visitation remains strong.  Visitation from China is up 39%.  They are particularly bullish on the mass market growth in Macau.
  • Believe that the higher Mass win rate range of 23-26% is sustainable due to a number of initiatives
  • $195MM of EBITDA if they held at 2.85%
  • Increased amortization of land use rights from MSC from $5MM to $11MM
  • 4Q11 non-operating guidance:
    • D&A: $90-95MM
    • Corporate: $18-20MM
    • Net interest expense: $30MM

Q&A

  • They haven't seen any slowdown.  November is seasonally slower so there is nothing unusual there.
  • China tightening - doesn't see any correlation so far between the policy and the market in Macau
  • Still see Mass growth exceeding the growth in visitation
  • Capex outside of MSC: $75-100MM for 2012
  • Confident that MPEL will be an early mover on the construction front for the next new project in Macau.  They are just restarting construction, not starting construction.
  • Table cap: 3% increase in tables per year after 2013.  The government understands that in order for new projects to work, they must have adequate table allocation.
  • Why is their win per table at Mass so much higher than Venetian?
    • They continue to focus on premium mass and high end mass gaming as part of their optimization strategy. 
  • They aren't seeing any traffic pattern or any collection issues on the VIP side
  • They feel like they can finance MSC at the project level and fund their portion through cash on the balance sheet and debt capacity
  • In July, they added a big junket - Neptune to CoD.  They should see a nice ramp as a result over the quarter and year  

HIGHLIGHTS FROM THE RELEASE

  • Net revenue of $1,056 and Adjusted EBITDA of $240.3MM
    • CoD net revenue of $687MM and adjusted EBITDA of $170.5MM
    • Altira net revenue of $329MM and adjusted EBITDA of $79MM
  • "Our Studio City project continues to move closer towards realization. We are nearing the final stages of our design plans, while working closely with the Macau Government to complete the necessary approval process. We also continue to evaluate financing plans in relation to this project, including a bank loan and other debt financing." 
  • "In relation to our previously announced proposed dual-listing on the Hong Kong stock exchange, we continue to work through the necessary steps with the relevant Hong Kong regulators, while at the same time monitoring the market conditions to ensure we maintain full flexibility as it relates to our capital structure."
  • Cash: $1,450.5MM (including US$360MM of restricted cash)
  • Debt: $2.4BN 
  • Capital expenditures: $22.6MM, "of which US$8.1 million related to design and preliminary costs associated with Studio City, US$4.9 million for the development of the new Mocha site, with the remainder predominantly attributable to various projects at City of Dreams."


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Forgetting Memories

“Nothing stands out so conspicuously, or remains so firmly fixed in the memory, as something you have blundered.”

-Marcus Tullius Cicero

 

I didn’t have a chance to watch the Republican Debate last night, but woke up to an email from a Republican operative contact intimating that Gingrich will benefit from Perry leaving the race.  This particular contact has been a vociferous supporter of Perry, so I was surprised by his comment.  After reviewing the transcript and key highlights this morning, I understand his point quite clearly. 

 

In an exchange in which he was asked which three federal agencies he would do away with, Perry confidently indicated that he would do away with the Department of Education, the Department of Commerce, and a third one which he couldn’t remember.   In the first attempt at trying to remember the third agency, he simply ended with “oops”.  In the second attempt, he ended with this statement:

 

                “I would do away with Education, the – Commerce and, let’s see, I can’t.  The third one, I can’t”

 

To Cicero’s point in the quote above, Perry will certainly remember his blunder, even as he couldn’t remember the three agencies. 

 

Normally, one bad exchange in a debate wouldn’t ring the death knoll for a candidate’s campaign.  In the case of Perry, his campaign was already on life support.  As we highlight in the Chart of the Day, the InTrade contract for his gaining the Republican nomination is now at 4.1%.  Not only is this the worst rating since he fully launched his campaign, but Perry is now trailing the embattled Herman Cain who is at 5.6%.

 

In general, last night’s debate likely will not alter the overall makeup of the race for the Republican nomination.  This is still Romney’s race to lose, and in a big way.  On InTrade, Romney is at 71%, while his second closest rival, Newt Gingrich, is at 9.1%.  In head-to-head polls amongst all the leading Republican candidates, Cain has led in some recent polls, but in aggregate since early October, Romney has either been first or second in every poll.  Finally, Romney has the money and team to stay deep in the war of attrition that is the Republican primary season.

 

Assuming Romney does get the nomination, the question is whether he can beat President Obama in a head-to-head matchup.  So far, at least, the numbers suggest that Romney will be the underdog in that matchup.  Currently, according to the Real Clear Politics poll aggregate, Obama, on average, beats Romney by +1.7 points.  To be sure, this is within the margin of error, though much closer than one would expect given Obama has an approval rating in the mid-40s and unemployment has a 9-handle.  Ultimately, as usual, turnout and motivation will be key and if the midterms were any indication, Republican turnout could be huge.

 

Flipping back to the market, undoubtedly yesterday was a day most investing minds would prefer to forget.  The SP500 was down -3.7% yesterday.  In particular, breadth was notably negative with one stock up on the day.  That stock was Bed, Bath and Beyond and the catalyst was a positive call from Cleveland Research.  If Cleveland Research is moving a stock, this is probably a decent flag for another important risk factor: light volume.  No surprise, to Hedgeye at least, financials were the weakest sector with the XLF down -5.4% on the day. 

 

Coincidentally, or not, our Financials Sector Head Josh Steiner held a call with Peter Atwater (former Treasurer of Bank One) yesterday to discuss the key new risks for financials.  Both Steiner and this industry veteran continue to believe that investors are underestimating the long term risks to financials, with Jeffries and MF Global potentially being canaries in the coal mine related to bank hedging.  If you’d like access to our Financials sector and a replay of the call, email sales@hedgeye.com.

 

In Europe, the news and data flow appears to be going from bad to worse.  Front and center is the Italian bond market.  Italy sold €5 billion of 12-month bills this morning with average yield of 6.087%.  This compares to Italy’s last auction October when it sold the same duration of bills at 3.57%.  Further, Italian 10-year yields remain above the 7% line.  The Italian Senate is purportedly “rushing” to pass austerity measures with a vote tomorrow.  The likely outcome of incremental Italian action is accelerating stagflation in Europe.

 

On the last point, the EU lowered its Euro-region growth forecast due to the worsening debt crisis from +1.8% growth in 2012 to 0.5% growth.  Our view continues to be that European growth will likely be negative as inflation begins to accelerate alongside the eventual hum of the ECB printing presses.  Our view of Europe underscores one of our top macro ideas heading into 2012, which is to be long the U.S. dollar.

 

We will be holding our annual best ideas call tomorrow at 11am eastern.  This call will represents the best ideas, both long and short, across all seven of our coverage sectors.  We will be circulating all the materials to institutional subscribers later today.  For those that aren’t current Hedgeye institutional subscribers, please email for details around gaining access to the call.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Forgetting Memories - Chart of the Day

 

Forgetting Memories - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 10, 2011

 

As we look at today’s set up for the S&P 500, the range is 31 points or -0.66% downside to 1221 and 1.86% upside to 1252. 

 

SECTOR AND GLOBAL PERFORMANCE

 

If you were long King Dollar, Long-term Treasuries, and Growth Slowing yesterday, you enjoyed your day – always a bull market somewhere!

 

THE HEDGEYE DAILY OUTLOOK - levels 1110

 

THE HEDGEYE DAILY OUTLOOK - daily sector performance

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -2517 (+1459) 
  • VOLUME: NYSE 1112.51 (+26.47%)
  • VIX:  +36.16 +8.48 YTD PERFORMANCE: +103.72%
  • SPX PUT/CALL RATIO: 2.18 from 1.98 (10.1%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 44.41
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.04 from 1.96    
  • YIELD CURVE: 1.81 from 1.73

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Import Price Index; M/m est. 0.0% (prior 0.3%)
  • 8:30am: Trade balance; est. -$46.0b (prior -$45.6b)
  • 8:30am: Jobless claims; est. 400k, prior 397k
  • 9am: Fed’s Lockhart speaks in Washington
  • 9:45am: Bloomberg consumer comfort; est. -51.0, prior -53.2
  • 10:30am: EIA natural gas storage
  • 10:40am: Fed’s Evans welcome remarks at Chicago banking conference
  • Noon: Fed’s Bernanke speaks to soldiers in El Paso, Texas
  • 1pm: ECB’s Praet Speaks in Chicago
  • 1pm: U.S. to sell $16b in 30-yr bonds
  • 2pm: Monthly budget statement, est. -102.5b, est. $140.4

 

WHAT TO WATCH: 

  • Svenska Cellulosa agrees to buy Georgia-Pacific’s European tissue ops for $1.8b.
  • U.S. trade deficit probably little changed at $46b, economists est.
  • Greek President Papoulias calls meeting with political party leaders for today:
  • U.S. foreclosure filings rose 7% in October to a seven-month high
  • Cisco rating boosted by Deutsche after 1Q EPS, rev. beat est.
  • Deutsche Telekom 3Q Ebitda beat est.
  • Credit Agricole profit trails est. after EU905m Greek writedown
  • The European Commission slashed its euro-region growth forecast for next year by more than half
  • WhaleShark, which distributes online discounts, said to gain funding that values it at as much as $1b
  • PC shipments may fall as much as 3.4% in 4Q following floding in Thailand, IDC says
  • Mitsubishi agreed to pay $5.39b for Anglo American’s Chilean copper unit
  • U.S. Bancorp sued by an Oklahoma police pension fund over mortgage bonds allegations.
  • Italy sells 1-yr bill as 6.087%, most since Sept. 1997

 

COMMODITY/GROWTH EXPECTATION

  • Copper Drops to Two-Week Low as EU Cuts Euro Growth Forecast
  • Gold Falls for Second Day in New York After Gain in Dollar Value
  • Oil Rises Near Three-Month High on Europe Sentiment, U.S. Supply
  • Solar Glut Worsens as Supply Surge Cuts Prices 93%: Commodities
  • Most Refinery Cuts Since ’80s Can’t Help Profits: Energy Markets
  • Noble Falls Most Since 1998, Bond Risk Doubles as CEO Quits
  • IEA Cuts Oil Demand Forecast a Third Month on Weaker U.S., Japan
  • Gold ETF Calls Surging Most Since U.S. Stripped of AAA: Options
  • Palm Oil Jumps to 3-Month High as Stockpiles Decline in Malaysia
  • Transocean Risks Junk Grade as Cash Flow Ebbs: Corporate Finance
  • Soybeans, Grains Decline on Concern Euro Crisis May Slow Demand
  • Gold Exchange-Traded Products Attracted $2 Billion in October
  • Indonesian Tin Shipments Gain for First Time in Four Months
  • Copper Declines to Two Week-Low on Europe
  • Brent Oil to Drop After Failing at $116 Peak: Technical Analysis
  • Asia Naphtha Crack Drops; Hin Leong Buys Fuel Oil: Oil Products

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

CURRENCIES

 

EURO – when our only line of remaining support (TRADE line support of $1.37) snapped yesterday, oh did they snap! Not only is this risk cleanly defined by The Correlation Risk, but a flailing currency perpetuates economic stagflation. European Stagflation is not consensus, yet – but it will be as long as Growth goes negative y/y and these inflation readings continue to accel sequentially.

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

ASIA – Growth Slowing continues to be the #1 factor that US centric investors (and European gawkers) have missed all year and will continue to miss if they don’t start modeling the day-to-day risk in both the Asian high-frequency economic data and what it’s embedding itself into Asian stocks/bonds/FX prices. Hang Seng down -5.3% last night and down -21.9% since April (crashing)

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

The Hedgeye Macro Team

Howard Penney

Managing Director

 

 

 


KSS: Quick Take

What’s not to like? But they’re raising the bar, and probably won’t get paid for it.

 

We have a very mixed read on this KSS quarter. On one hand, it was the mother of all in-line performances – something we’ve grown to know and love (and expect) out of this company. Sales were already a known entity and margins came in virtually in-line. The inventory spread improved year/year and sequentially, making KSS one of the few retailers to post this trend. In effect, it was the opposite of what we saw from Macy’s. That’s notable given that KSS represents roughly 8% of the softlines industry in aggregate – the more sane the industry is on inventories – especially in the mid-tier -- the better. KSS showed yet again, why it sets so many benchmarks for the rest of the industry.

 

But we’re a bit perplexed on guidance. This is a complete and total nit-pick, but why take up 4Q at a time when yy compares are getting tough? With so much uncertainty coming down the pike, why not keep the year even instead of stepping up the Street’s expectations by 5% when we’re already looking at  18 Buys, 6 Holds, and only 1 Sell? Buy-side sentiment is slightly less positive, with 6% of the float short – on the higher side for KSS. But blended together in our Sentiment Indicator, people are still bulled-up on this name. (see chart below).

 

We have no reason to doubt that the KSS will hit numbers in 4Q. There are a lot of factors at play, and it’s way too early to tell. But the ante chip just went up a notch and now KSS HAS TO hit estimates.

 

More after the call.

 

 

KSS: Quick Take - KSS Sentiment 11 10 11

 

KSS: Quick Take - KSS SIGMA 11 10 11


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