Three large openings in the spring could impact CYQ4 earnings for the suppliers.



Shipment timing of three large properties opening in March/April will also materially affect supplier market share.  Although the open date is officially listed as May 15th, Revel is likely to [soft] open in late March or early April.  Horseshoe Casino Cleveland and Hollywood Casino Toledo should open in Ohio in March and April, respectively.


It is our understanding that some Revel units may ship in December.  We are hearing Revel was asking for payment terms that were extended more than what’s normal.  One supplier told us that Revel wanted to make no down payment on the machines and asked to pay for them over the course of several years, which means that the company would have to book a large long-term receivable.  It also means that the suppliers could have some revenue recognition issues and would most certainly have to book a reserve.


There seems to be some chatter regarding WMS’s very low market share (~11-12%) at Revel.  While this is clearly another strike against WMS, we would note that the Atlantic City market has a higher concentration of steppers than the rest of the country.  Steppers are not a strong point for WMS, so it’s no surprise that they would have a much lower share at Revel than at other new openings. 


Other Revel tidbits:

  • IGT: 40% ship share and system forecasted to ship in the March quarter
  • Konami: 9-10% ship share; will ship in January
  • BYI thinks that some will ship in December but the orders haven’t gone out yet.  BYI should get a healthy market share since they are strong in steppers.

As it relates to the Ohio casinos, licenses are still pending for operators and manufacturers.  We don’t anticipate any licensing problems or delays since Ohio already hired a 3rd party to help with the licensing process.  PENN, CZR, and the manufacturers are already licensed in other jurisdictions so the consultant can simply repurpose all the information needed for licensing and resubmit that data to Ohio regulators.  We believe that most of the units will ship January or early February for these two facilities.

  • Konami ship share (11.0-12.5%)
  • IGT forecasts shipping to both Ohio casinos in the March quarter

Buying the Gold Blood


Position: Keith bought GLD for the Hedgeye Virtual Portfolio this afternoon at $152.22.


Gold had its largest one-day drawdown since September amidst a strong dollar and forced selling via margin calls; we took the opportunity to buy the blood, as the precious metal hit our long-term TAIL line of support, $152.22.


Most important, the US Dollar is immediate-term TRADE OVERBOUGHT after busting a 2.5% move higher in the last three sessions; given that the 15-day correlation between gold and the US dollar is -0.94, we believe gold will spring back when the dollar stops going up.


And as an aside, we view owning gold is a call option on government and central bank intervention is asset markets.  [Gold rallied 2% on November 30, the day that the world’s major central banks cut and extended swap lines to lower short-term borrowing costs for financial institutions.]  While the timing and scope of such an event is impossible to predict, the probability of further action to ease financial stress increases on the margin as asset prices fall.


Our quantitative setup for GLD is: TAIL line support at $152.22 (0.4% downside) and TREND line resistance at $164.11 (7.3% upside).


Buying the Gold Blood - GOLD


Kevin Kaiser


WMT: Buying


Keith added WMT to the Hedgeye Virtual Portfolio headed into the close. This has been one of our favorites across all durations for the following reasons...

1) US business is inflecting after years of investing to turn the cruise ship. This is partially apparent in WMT outperforming peers this holiday -- in part due to layaway plan, but also due to better alignment outside of consumables.         


2) Great play on stronger dollar heading into 2012. 

3) Street estimates are low next year by 3-4%. Not huge, but meaningful for WMT. 

4) Though not really 'new' is share repo is a part of many investors' thesis, the fact is that the Walton Family is slowly but surely taking the company private. 

5) Sentiment (per our backtested indicator) has never been worse.  


WMT: Buying - WMT trade trend


WMT: Buying - WMT sentiment







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No question Mass is still generating sequential growth but VIP growth looks flattish since June.  Our 2012 growth projection of 10% has Mass leading the charge.



It may sound snobbish for us to turn our nose up to a month where Gross Gaming Revenues (GGR) grew 32% YoY, but November confirmed a negative trend that began around June.  Seasonally adjusted sequentially growth in Junket volumes (Rolling Chip or RC) has been fairly flat since June.  In other words, June was the last month where we saw a non-seasonal jump in GGR. 


RC in June of 2011 only fell 6% MoM while June of 2010 dropped 19%.  Since June of 2011, MoM growth has lagged 2010 significantly.  Using June as the base for each year, the 2nd half of 2011 lag is even more pronounced.  Looking at it a different way, the chart below shows that RC volume was actually lower at the end of November than it was in August on a 3 month moving average.  Since June was the first month of the 3 month average ending August 2011, that roughly confirms the MoM analysis.  Finally, November generated the 3rd lowest RC volume of this year, behind only January and April.  Interestingly, October 2011 – which was a record and viewed as a blockbuster month – experienced the slowest MoM growth since the financial crisis, and that was off of a low September 2011 base. 




2012 Projections 

As can be seen in the above chart, the good news is that the Mass business is still in an upward trajectory.  We expect that to continue.  For 2012, we are projecting Mass growth of 22% but VIP revenue growth of only 6%.  Our RC volume growth estimate is 5%, with approximately 11% growth in the first half of the year and low single digit growth in the second half.  This implies very little sequential growth in dollar volumes from current levels.  Given the macro environment and the tremendous growth in junket liquidity, credit, and volumes over the last few years, we think this is a reasonable, if not conservative, assumption.  While only a 10% YoY total GGR growth year could spook investors, profitability will still be strong and not far from consensus estimates, assuming there is no junket war.  Mass revenue is the key and we see tremendous long-term growth in this high margin business.





Commodities are generating a lot of attention in the capital markets at the moment as the dollar gains.  Corn and wheat gained on the week even as the dollar strengthened.  Chicken wing prices continue to head higher.




Chicken Wings – BWLD


We have been highlighting our short thesis on BWLD for some time.  Based on our analysis, we think the stock could go to $45.  Chicken Wing prices broke through $1.40 this past week for the first time since 2Q10.  Now up almost 20% year-over-year, the increase in wing prices is having an impact on price action in the stock and – we believe – our thesis is gaining credibility as investors realize that a selling food cheaply in an inflationary environment is not a sustainable strategy for restaurant companies.  Olive Garden’s recent results proved to be the catalyst for BWLD but we believe that sentiment has further to fall and some difficult quarters, particularly 1Q12, lay ahead.


SUPPLY: Supply continues to contract in the chicken industry.  For the week ended December 3, commercial hatcheries represented in the 19 state weekly USDA data saw egg sets decline ~6% on a trailing six-week basis.  Production in the industry will continue to contract, year-over-year, for some time as the industry seeks to find its feet after a disastrous year. 


DEMAND:  As demand from food service companies for chicken strengthens (high beef costs), we expect prices to continue higher. 


Below we are including a long term chart of chicken wing prices.  The current spike in wing prices may correct at some point, but the overall trend could continue much higher given the right fundamentals. 







Beef prices remain elevated despite the decline over the last week.  Much of the recent correction in beef prices, it seems, has been related to concerns around the economic crisis in Europe.  For WEN, TXRH, JACK, CMG and others, high beef prices represent a concern for business trends today and in 2012.  While some substitution is likely to bolster chicken prices and slow the increase in beef prices, we believe that beef prices are likely to remain elevated for at least the first half of 2012 absent a massive economic slowdown.  


SUPPLY: The supply picture is bullish for prices as the number of cattle sent to feedlots for fattening fell for the second consecutive months month during November as corn prices continue to pose a hurdle for processors’ profitability.  The impact of the drought in Texas and some surrounding states will also have an impact on supply as farmers try to increase the size of their now-depleted herds.


DEMAND:  October was another excellent month for domestic pork and beef exports, according to the USDA.  With two months to spare, pork and beef exports for 2011 hit a new record of $4.93 billion and $4.49 billion, respectively.   Beef exports are increasing to all regions of the world.  Over the longer term, The United Nations’ Food and Agriculture Organization said that it expects global meat consumption to jump almost 73% by 2050 as populations and incomes grow.





Corn and wheat prices moved lower on the week as concerns around the European crisis persist.  For the restaurant industry, and the broader food industry, corn prices are a key factor in driving input costs.


SUPPLY: Last Friday, the USDA World Agriculture Supply and Demand Estimates led grain prices lower on higher global inventories before the 2012 harvest.   Wheat stockpiles are expected to rise to the highest level since 2000 before next year’s harvest and China’s corn harvest is also expected to be a record crop.


DEMAND:  Slowing exports are persuading some that there is further ground to give up.  Corn seems to be the primary target of the grain bears as feed wheat has become far cheaper than feed corn.  In October, corn exports decreased 9% versus the year prior.  In addition, some analysts are anticipating that hog and chicken producers may use more soybean meal in feed rations due to its relative price versus corn being at its cheapest in more than five years.  This strategy’s effectiveness may fade, however, as weather in South America could bring soybean prices higher in 2012.

































Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast



Chicken Wings















Howard Penney

Managing Director


Rory Green


Bad Santa: SP500 Levels, Refreshed

POSITION: Long Healthcare (XLV), Long Consumer Discretionary (XLY)


Recognizing the 1232 TRADE break yesterday was important. That’s now immediate-term TRADE resistance. Trying to find another immediate-term trading low is not as easy as it was when holding 1232.


Across our 3 risk management durations, these are the lines that matter to me most: 

  1. Long-term TAIL resistance = 1270 (the highs for both 2011 and Q4 likely are in)
  2. TRADE resistance = 1232
  3. TRADE support = 1212 

Breaking 1212, puts 1204 in play (intermediate-term TREND support). On the way down, I want to be buying US Consumption stocks as that’s where you’ll get paid with a Strong Dollar – a less levered and less cyclical America.


With the SP500 down for both November and December, versus late October expectations this is a Bad Santa if I have ever seen one.



Keith R. McCullough
Chief Executive Officer


Bad Santa: SP500 Levels, Refreshed - SPX

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