Keith shorted PENN in the Hedgeye Virtual Portfolio at $35.29.  According to his model, there is TRADE and TREND resistance at $35.91 and $37.44 respectively.  



A long-time regional gaming darling by Wall Street, PENN has lost some of its luster and is facing some formidable challenges—cannibalization, a large capex budget, new competition, and slowing growth.  Contrary to what management said on its 3Q conference call, PENN seems to be feeling the heat from the new Rivers casino that opened in mid-July.  As the chart below shows, PENN’s market share in Illinois has tumbled to its lowest level since June 2009 (Joliet fire) and its total gaming revenues in the state fell 10% YoY in October.




In addition, PENN’s two largest properties by revenue generation—Hollywood Casino at Charles Town Races and Hollywood Lawrenceburg—have seen growth stagnate recently.  Since the table anniversary, Charles Town and the West Virginia market have only grown in the low-single digits.  The same can be said about table games revenue at Hollywood Casino at Penn National Race Course, which after a fast start, has stabilized at $3MM/month.  Performance may decline at that property in the coming months as more competition comes online in the Delaware River Valley e.g. Revel, Arundel Mills, Valley Forge.  


It doesn’t help PENN that overall regional gaming performance has gotten off to a miserable start in 4Q.  While the bulls will point out that an unfavorable calendar in October (one less Friday vs a year ago) accounted for the underperformance, we believe even if state revenue numbers improve, PENN will likely be a laggard rather than a leader.








Notes below from CEO Keith McCullough


Get the US Dollar right, you’ll get most other things right. That’s been our call since May.

  1. SINGAPORE – these guys are now being as explicit as we have seen them since 2008 about Global Growth Slowing (the Monetary Authority of Singapore: “The world economy and financial system are at their most fragile state since the 2008-2009 global financial crisis”); both HK and India continued to crash overnight (down -25.3% and -22.2% respectively from YTD tops)
  2. SPAIN – center right government = austerity = European Stagflation; if Singapore thinks they only to +1-3% GDP growth in 2012, the Europeans could be down -2-4% GDP in no time. European stocks getting rocked and now all major European tapes back in Bearish Formations (bearish across all 3 of my risk management durations); Greece -60% since FEB
  3. SANTA – really red for November to date equity returns and I’ll look forward to hearing what the Tom Lee camp thinks about that into month end. The bull markets I see are in the US Dollar (UUP), Long-term Treasuries (TLT), and Growth Slowing (FLAT)

The only line of big support left for the SP500 = 1203. A close below that puts the YTD low back in play.





THE HBM: MCD, PNRA, JACK, PFCB - subsector fbr





MCD: McDonald’s and Target have dropped egg supplier Sparboe Farms due to an undercover video by the animal rights group Mercy for Animals which, according to media reports, showed “mindless animal cruelty”. 


PNRA: Panera Bread has entered into an MOU on proposed settlement of class action law suit.  $5M has been set aside

for payment of claims and, according to the company, this figure was not included in the 4Q guidance.


JACK: Jack in the Box raised to “Buy” at DA Davidson.





PFCB: At its analyst meeting in Arizona on Friday, P.F. Chang’s said that the company is expecting 4-6% inflation in 2012.  According to the CEO, Richard Federico, 2012 revenue is a “wild card”.


THE HBM: MCD, PNRA, JACK, PFCB - stocks 1121



Howard Penney

Managing Director


Rory Green




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Instructing The Masses

This note was originally published at 8am on November 16, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If the masses were going to run the world, they would need a lot of instruction.”

-Sylvia Nasar


That’s a quote from Nasar’s recently published book “Grand Pursuit” where she explains how one of Yale’s “great men”, J. Willard Gibbs (chemist, mathematician, physicist), thought about a globally interconnected world at the turn of the 20th century (page 147).


The late 1800s and early 1900s were a very formative time for the study of economics. That’s when mathematicians got involved. Quantifying the qualitative is important. The fear-mongering styles of Malthus, Carlyle, and Marx were replaced by new lines of thinking from the likes of Marshall, Schumpeter, and Fisher. Re-thinking was good.


Since then, we’ve had a long, hard, muddle through nerdy economic debates about Hayek vs Keynes, Rand vs Bureaucrats, and Capitalism vs Socialism. But we really haven’t evolved the process by which we apply modern day math (Chaos and Complexity Theory) to how we’re thinking about economies and markets.


Since Chaos Theory is the most relevant mathematical conclusion since relativity, I think there is plenty of re-working and re-thinking to be done. Instructing The Masses on how markets work will take time. It’s time that I am personally willing to make.


Back to the Global Macro Grind


One of the gaping voids that’s obvious to anyone who has studied a Yale or Princeton economics textbook is the behavioral side of markets that plays such a critical role in the decision making of market participants. Kahneman, Tversky, and Taleb have all contributed significantly to qualifying the impact psychology has on markets, but we are still in the very early days of applying these learnings.


Quantifying sentiment is very difficult. I’ve been on the road seeing clients from Denver to Kansas City to San Diego, Boston, and New York in the last 6 weeks – and the #1 question I get is “what are you hearing.”


What I am “hearing” and what my risk management models are seeing are quite often very different things. But since our industry has effectively become one gargantuan front-running exercise of trying to beat the market’s beta, it’s a question that modern practitioners of asset management have to constantly evaluate.


What’s sentiment right now?


Well, from a Global Macro perspective, there’s not one answer that fits nicely in a baby blue box with a Tiffany bow on it. Sorry. Asian stock markets continued to fall, hard, last night. China was down another -2.5%, and India remains under inflation’s pressure (Sensex down another -0.6%). The Euro, European Bonds, and European Equities remain a mess.


From a US stock market “sentiment” perspective, one of the best contrarian readings I can give you is measured by looking at the spread between Bulls and Bears in the II Survey (comes out every Wednesday):

  1. In late September, the spread was bearish (meaning more Bears than Bulls) on the order of -1900 basis points (19%)
  2. After October’s rally (the biggest ever in US stock market history), the Bullish to Bearish spread flattened to even
  3. This morning, the spread has widened to +1500 basis points (Bulls 47.4% minus Bears 32.6% = +15%)

And while that’s only 1 factor I’m observing in my multi-factor, multi-duration, risk management model – my spidey senses say that sounds just about right. Hedge Funds fear being short. Mutual Funds fear missing Santa Claus. Central planners fear-monger.


Back to where I started this morning’s note, I think we’re a lot smarter than staring at the futures on TV this morning looking for an emotional direction. Mediocre minds are not going to lead us anywhere but lower. We need to be the change we all want to see in our analytics.


While Big Government Interventionists and the ad dollars that support them think that all of this is going to end according to their central plan, globally interconnected markets have a not so funny way of getting in the way of that…


My Top 3 globally interconnected points confirming Asian, European, and North American stock market weakness this morning are:

  1. Chinese Demand: Hong Kong trading down -2% well below TREND line support of 20,297 on the Hang Seng
  2. Dr Copper: down another -1% to $3.48/lb, remaining in what we call a Bearish Formation (bearish TRADE, TREND, and TAIL)
  3. US Treasury Yields: continue to signal that both US and Global Growth are slowing (TRADE resistance for 10-yr yields = 2.15%)

Of course the Euro collapsing versus the US Dollar remains the #1 Correlation Risk factor affecting Global Macro markets. But you already know that – because our Instructing The Masses since founding the firm in 2008 has been consistently backed by the math.


My immediate-term support and resistance ranges for Gold, Oil, France CAC, German DAX, and the SP500 are now $1747-1810, $96.92-100.33, 3037-3176, 5820-6089, and 1237-1269, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Instructing The Masses - Chart of the Day


Instructing The Masses - Virtual Portfolio


The Macau Metro Monitor, November 21, 2011



3Q GDP grew a seasonally-adjusted 1.9% QoQ, missing estimates of 2.0% growth.  Retail sales weakened, falling for the first time in seven months in September, while growth in credit-card billings has slowed, signaling spending at hotels, restaurants and department stores may moderate.  Singapore Ministry of Trade and Industry (MTI) said the economy will likely weaken in 4Q alongside deteriorating external macroeconomic conditions and a pullback in biomedical output growth.


MTI also mentioned that 2012 growth may slow to 1-3%.  Furthermore, the government’s 2012 GDP forecast “does not factor in downside risks to growth, such as a worsening debt situation or a full-blown financial crisis in the advanced economies,” it said. “Should these risks materialize, growth in the Singapore economy in 2012 could come in lower than expected.”



Oct CPI increased 6.71% YoY and 0.58% MoM.



Total spending (excluding gaming expenses) of visitors reached MOP 12.1 BN in 3Q 2011, +25% YoY; per-capita spending of visitors amounted to MOP 1,633, an increase of 7% YoY.  The average length of stay of visitors was identical to 3Q 2010, at one day.  

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