Feeling Certain

“You know far less about yourself than you feel you do.”

-Daniel Kahneman (Thinking, Fast and Slow)


Since last Thursday, when I made the call to go to 91% Cash (selling my US Dollar and US Equity positions down to 0%), I’ve re-invested 12% of that Cash (on red) in the Hedgeye Asset Allocation Model, dropping my Cash position back down to 79%.


After I write something like that, you should feel something. ‘Who is this guy? That’s not what I do? I love this guy. He can’t do that. I think he played hockey, etc.’


I don’t know what you are feeling right now. All I know is that the more I think I know about risk management, the less I know. As a result, the best path forward is to Embrace Uncertainty, keep moving, and banging out the early morning reps.


Back to the Global Macro Grind


People on Old Wall Street are funny. Yesterday, at Bloomberg’s China Conference, our rising star Asia analyst, Darius Dale, commented “this is really weird – I just spent the whole day listening to American investors tell me everything that they know about China.”


Where were the people from China?


I don’t know. What I do know is that there are highly intelligent people in this business that tend to think they know a lot more about what they don’t know than they actually do.


This, of course, isn’t new. In Chapter 4 of “Thinking, Fast and Slow”, The Associative Machine, Kahneman takes a step back to remind us that David Hume boiled this down to 3 principles of associative thinking in 1748: “resemblance, contiguity in time and place, and causality.” (page 52)


In other words, since most Perma-Bulls have been blown up by bubbles in the last 4 years, China must be a bubble. It resembles a bubble, right? We’re all here at the China Conference telling one another it’s a bubble, right? And notwithstanding any correlation math, we can all agree that credit bubbles cause bubbles, right?


Right, right.


So, after Gary Shilling’s consensus headline coming out of the Bloomberg Conference was “China Headed for Hard Landing”, Chinese stocks closed up another +2% last night (we’re up +16% on our CAF position since buying it on December 29th, 2011) and the Hang Seng moved to +12.5% YTD!


I’m Feeling Certain now that something hard landed somewhere last night, on a Chinese short sellers head.


Does that mean we run out and buy more China this morning? Of course not. It’s just a simple reminder that if some US centric investors don’t know what they don’t know about their own Macro market moves, how on God’s good earth do investors trust that they can pin the tail on the donkey on a 12 hour plane ride from Newark?


Back to our positioning in the Hedgeye Asset Allocation Model – here it is as of last night’s US market close:

  1. Cash = 79%
  2. International Equities = 9% (China – CAF)
  3. Fixed Income = 6% (Long-term Treasuries – TLT)
  4. US Equities = 6% (Energy – XLE)
  5. Commodities = 0%
  6. International FX = 0%

Feeling Certain about any of these asset allocations or Hedgeye Porfolio  LONG/SHORT positions we take is very hard to do. Feeling Certain that you can flip a switch from expecting Global Growth Acceleration to Deceleration in February is even harder to do.


With hindsight being crystal clear, the only thing I am certain about is how my model has worked over the last 4 years:

  1. When Inflation Expectations start to rise, people confuse commodity and stock market inflations with real-growth
  2. As real Growth Expectations start to fall, Gold, Treasuries, and Volatility start to rise
  3. As inflation expectations rise and growth expectations fall, confusion in markets starts to breed contempt

Confusion is as confusion does. The US stock market went down for 4 straight days after we made the move to 91% Cash last Thursday. After 1 up day in the last 5, the Perma-Bulls are back. But are they? How can you be perma bullish or bearish about anything after the last decade of getting paid to feel certain about everything?


My immediate-term support and resistance ranges for Gold, Oil (Brent), Copper, EUR/USD, Shanghai Composite, and the SP500 are now $1, $110.68-111.89, $3.75-3.83, $1.30-1.32, 2, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Feeling Certain - Chart of the Day


Feeling Certain - Virtual Portfolio


Chipotle put up an impressive top line but missed 4Q11 EPS.  As we wrote last night, the stock needed perfection to keep the upward momentum going. 


Chipotle posted comparable restaurant sales of +11.1% for the fourth quarter along with EPS of $1.81 or 23.1% above 4Q10.  The Street was looking for $1.89 and the stock traded down immediately after the numbers hit the tape.

Below we go through some of our thoughts on the quarter.




Chipotle’s top-line remains impressive although it is worth noting that January comps were approximated to be running at 10.1% by management.  A 10.1% 1Q comparable restaurant sales number would represent the first slow down, on a two-year average basis, in comps since 4Q09. 


What impressed us about the 11.1% number, albeit helped by 1% from favorable weather versus 4Q10, was that price accounted for 4.9% and traffic made up the remainder.  Despite taking price well in excess of Food Away from Home CPI, traffic still contributed more than price to the comp.




CMG: GOOD BUT NOT GOOD ENOUGH - cmg comp detail







Restaurant operating margins grew year-over-year in the fourth quarter as a result of positive sales leverage.  This was offset primarily by food inflation of 9% for the quarter.  As a percentage of sales, food costs did improve sequentially from the third quarter by 90 basis points to 32%.  This was aided by the company shifting from expensive California avocados to avocados harvested from Chile and Mexico.  Food inflation in 2012 is expected to be in the mid-single digit range thanks to some more reasonable avocado, dairy and produce costs.  Beef, chicken, and beans will offset that impact, however, with beef prices in particular expected to gain significantly. 





Store Growth, Outlook, and Returns


With profit margins still strong and the company generating plenty of cash, we are not sounding any alarms for CMG here.  The market is a discounting mechanism and, if results continue to disappoint it would mean continued price losses, we are going to remain neutral on this name until we gain conviction around a catalyst.  The company grew its unit base 13% year-over-year in 2011.


Some comments on outlook:

  • Unit openings in 2012 are expected to be between 155-165, which would imply 13% total unit base growth
  • This growth is being sustained by strong real estate pipeline and increase mix of A-model locations (roughly 30% ’12 openings to be A-model format)
  • Planning on opening a second ShopHouse restaurant in Washington D.C. later in ’12
  • In London, two restaurants (in addition to the two currently open there) are under construction.  The first Paris restaurant is opening in the spring
  • The company is raising price roughly 1% in the Pacific region
  • The board authorized $100m additional share repurchase program


As long as the company is growing successfully, and it has earned the right to grow, we do not expect an abrupt downturn in the stock price.  The chart below, illustrating the Return On Incremental Invested Capital, shows how the CMG growth engine has driven the stock higher over the last few years.   While less-than-perfect results will lead to declines of the order we saw in after-hours trading following earnings, the rich multiple is likely safe as long as the company can continue to drive strong margins and returns.







Howard Penney

Managing Director


Rory Green



In-line quarter with a big boost from luck in Singapore




  • LVS's January Macau total market share: 19.7%
  • 3 growth segments in Macau:
    • Transportation/infrastructure
    • Hotel rooms, through Sands Cotai Central 
    • Chinese urban population
  • Asia opportunities: Japan, Korea, Taiwan, and Vietnam
  • 10th straight sequential gain in EBITDA
  • Selling of LVS's mall operations would erase all debt 
  • Sands Bethlehem:
    • Retail mall grand opening will be Feb 15
    • New meeting rooms will be completed by March 1

Q & A

  • MBS
    • 2011 rolling moving average hold was 2.85%
    • 4Q Normalized EBITDA: $45-50MM benefit
    • 4Q Normalized EBITDA margin: middle of 50-55%; mix was not as favorable as previous Qs and the property also had higher bad debt expense.
    • Premium direct is very concentrated which will create volatility but they are still growing
    • Mass: varies from $1.6MM per day to $4.6MM per day; can get to $5MM per day; 
    • FX was 'stable': $1.21-$1.30 Singapore $; doesn't have a significant impact
    • 80% foreigners
    • Talking to government about getting more hotel rooms due to high occupancy rate
    • Receivable: $650MM
      • Reserve: 18%
      • Normal reserve: Approximate 3-7% of win; for Q4, it was 10%. On an annual basis, it was 6%.
  • Macau
    • Venetian Macau high Q4 margin:
      • Margin was not 'out of the ordinary' and 'is sustainable'
      • Still haven't seen much junket movement there
      • Mass/ETGs will continue to dominate performance there
    • Four Seasons Q4 normalized EBITDA for low hold impact: +$7 or 8MM
  • Las Vegas had a "huge December"
  • Still see upward momentum in Macau and Singapore
  • Dividend will cost ~$800MM a year; stock buyback will cost 'many billions of $s'--that kind of money would be better suited for Asian development/investment
  • "We are in a class by ourselves" and therefore deserve a premium multiple
  • No timing for a potential sale of the Grand Canal Shoppes in Venetian Macau.  Many of their tenants are paying % rents. Temptation is not to sell.  If they are going to sell, it they won't do it for at least two years, when and if growth begins to level off.  Look at the opportunity as a "secret savings account."
  • They think that there is more opportunity to better yield manage their table real estate in Macau and so you may see further investment in that area in 2012
  • They have applied to the government for the development of Site 3 for a 4,000 room development with another mass market casino and separate tower for VIP play.
  • Industry underappreciates the growth potential of Sands Cotai Central - they have a Mountain and Polynesian themed casino
  • They believe that the junkets have an incredible opportunity at the Venetian.  Venetian Macau will continue to grow and grow.
  • How profitable is their non-gaming revenue at Singapore?
    • Margins on F&B - 30%
    • Margins on rooms - 83%
  • Costs continue to grow in Macau and Singapore because of inflation but revenues are also growing so they can maintain margins
  • Think that Sands China board would approve the same dividend that they gave last year in their next meeting. The dividend is intended to be a semi-annual steady dividend
  • High hold doesn't depress RC.  So that's not why their RC was low at MBS. 
  • Sites 5 & 6 - what's left under the table cap and where will the tables come from?
    • Will move tables between Mass and VIP and between properties based on demand
    • They can keep moving around their tables
    • Goal is to yield manage their tables between all their properties
  • If and when they do Site 3, they will get more tables
  • Are the junkets in Macau having any collection issues?
    • No issues on their junket or direct business
  • Why is their slot business outperforming?
    • Believe that they have the best people yield managing their floor
    • Having lots of rooms is an incredible advantage for them 
    • Lots of non-gaming amenities to drive traffic
  • Sands Cotai - which pieces are expected to come out of the box faster?
    • All of their VIP rooms are sold out in Sands Central  - so that will ramp up quickly
    • VIP should start faster, Mass will take a little time to ramp
  • How has the slot floor changed over the last 6 months?
    • Radical and consistent changes all the time
  • Singapore Grand Ballroom space is sold out for 2012



  • The strong cash flow, liquidity and financial position of the company have allowed us to declare a recurring annual dividend. The Las Vegas Sands board of directors declared yesterday an annual dividend of $1.00 per common share to be paid quarterly, with the initial payment to be made on March 30, 2012 to shareholders of record on March 20, 2012.
  • Sands Cotai Central, the first phase of which will open approximately eight weeks from today.
  • Marina Bay Sands produced a record $426.9 million of adjusted property EBITDA during the quarter and an EBITDA margin of 52.9%.
  • Vegas: 
    • Table game drop was up 14.9% 
    • 91% of our occupied rooms during the quarter were sold to cash-paying customers, compared to 82% in the fourth quarter of 2010.
    • REVPAR up 13%
  • Cash: $3.9BN ($7.1MM restricted cash)
  • Debt:$10.03BN
    • Total principal payments in 2012 and 2013, which principally relate to our Singapore Credit Facility, are approximately $455.8 million and $530.0 million, respectively.
  • Capex: $420.9MM, including construction and development activities of $308.0MM in Macao, $73.1MM at Marina Bay Sands, $30.1MM in Las Vegas and $9.7MM at Sands Bethlehem.

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20 Proprietary Risk Ranges

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BYI beats and raises 



"Our recent innovations have resulted in four consecutive quarters of year-over-year revenue and earnings-per-share growth. Numerous of our investments of recent years are now producing good results.”


- Richard M. Haddrill, the Company’s Chief Executive Officer




  • Believe that they eclipsed 20% ship share in the quarter and 20% of Revel's floor
  • Completing their largest iVIEW DM installation at Mohegan Sun
  • Will help one of their customers as they plan the world’s largest slot tournament using their flexible tournament application and iVIEW DM across over 1,000 devices 
  • 531 opening and expansion units rest were replacement units
  • Estimate that NA replacements were up 5% in the quarter YoY industry wide
  • Pro Curve sales exceeded their expectations, which led to higher than expected ASPs and lower margins.  They do not expect similar ASP growth going forward.
  • Continue to expect slight margin improvement in product sales for the rest of the year.  Expect to approach 48-49% margins in the coming quarters.
  • WAP revenue growth in the quarter and Resorts World results exceeded their expectations
  • Higher tax rate was due to a shift in business mix in international jurisdictions
  • The reduction of 25bps of interest rate will save them $1MM per year
  • Leverage below 2x also removes the limit on share buybacks
  • Expect further delays in Italy but there is very little in their FY12 guidance. Close to receiving approval for their systems products for one of their concessionaires but future approvals for other concessionaires could face more delays due to new regulatory requirements that have come up recently. 
  • Gaming operations continues to be a bright spot for BYI
    • Upcoming WAP releases of Grease (Q3) and Michael Jackons (Q4) are on track
  • Seeing good results in Alpha 2 game sales: 2,734 units were sold in NA.  Ship share in new openings continued to increased. 2,197 were replacements.
  • Have had product approval delays in Australia which caused slower rollout in that market than expected.  On the bright side, their operating system got its approval in New South Wales this quarter. 
  • Welcomed Peermont in SA and Valley Forge, PA to their systems family
  • Completed 12 major go lives in the quarter, including first go live in New Zealand
  • This calendar year will be very exciting year for systems - most of the installations will include iVIEW DM
    • Have more than 1600 DM's installed at Mohegan
    • New East coast site is getting ready to open with DM
    • Southern Nevada site going live with DM
  • Seeing positive customer spending momentum across all of their segments
  • Seeking key acquisitions that can benefit from their management expertise 



  • Detail on margin improvement on Pro Curve and new boxes.  Can they really get to high 40's margins?
    • To get to the 48-49% margins, they need more volume and decrease in raw materials
    • Also depends on where they are in the product cycle.  24 months after launch, they reduced the raw materials cost of their Pro Series by 15%.
  • They do have more ROI data on their enterprise bonus applications now that they have had it running at casinos for a while, and it's helping them demonstrate ROI to new customers.
  • New openings in the Q
    • Part of Kansas Speedway
    • Other Kansas property
    • Miami Jai-ALai
    • Shipped portion of Sands Cotai Central units
  • Backlog for Michael Jackson and Grease? Will these be incremental? 
    • The interest so far is very strong - they will not disclose numbers though
    • Pre-launch interest is as high as they have ever seen
    • 700-800 games in 6 months is a very successful run rate typically
    • Given their very small WAP footprint, they don't expect that the cannabalization rate will be very high
  • Just have over 1,000 WAPs
    • IGT has 12k+ and WMS has 3-4k
    • AC Coin, Konami are also in this space
    • So BYI is a very smaller player in this space so there is room to grow
  • Their premium footprint has also been increasing
  • Expect to recognize go live revenues for Sun International and Canada starting this summer and running for several years - so that's not in their FY12' forecast
  • ASP's from the past 2 quarters are more indicative of future ASP's
  • Timeline from IL and Italy?
    • IL - start recognizing revenue in early FY13
    • Italy - start revenue recognition in FY12 but the costs will be higher then revenues as they are carrying a lot of inventory
  • There is not a big difference in domestic vs. international ASPs although more pro curves are sold in NA than international
  • Think that Italy will be slower and a little less profitable to them than they originally thought given all the delays
  • What percentage of game operations is variable vs. fixed? 
    • They are higher weighted towards fixed fees vs. variable since they have a much smaller WAP footprint
    • Saw less seasonal impact in the quarter than usual
    • About 55% fixed, rest variable.  Expect more variable with Grease and Michael Jackson coming online
  • I've never felt better about the business than now - Dick Hadrill
  • Excited about their interactive strategy



  • Repurchased 330k shares in 2Q for $10MM and paid down $19MM of debt
  • Leverage below 2.0x resulted in a 25bps drop in BYI's LIBOR spread on its bank debt
  • Product sales:
    • New units: 3,636
      • International: 25% of total 
    • ASP: $17,201
      • ASP's increased "primarily as a result of product mix, including a heavier sales mix towards Pro Curve during the quarter, and an increase in ASP from international sales."
    • "Gross margin decreased... primarily due to higher costs for the initial production runs of several models of the Pro Series line of cabinets, which were released in late fiscal 2011, and a heavier sales mix towards Pro Curve during the quarter"
  •  Game Ops:
    • Increased due to growth in premium and WAP install base and placements at Resorts World NY
  • Systems increase "due to increases in software and services and maintenance revenues"
    • $18MM of maintenance revenue
    • "Gross margin...primarily as a result of the change in mix of products sold and an increase in maintenance revenues. Specifically, hardware sales were 33 percent of systems revenues, and software and service sales were 33 percent, as compared to 40 percent for hardware and 26 percent for software and services in the same period last year."
  • "SG&A increased... primarily due to increases in payroll, regulatory, and other infrastructure expenses to support key new markets and an increase in bad debt resulting from a general increase in accounts receivable associated with increasing revenues and heavier weighting to international markets. Bad debt as a percentage of revenue remains at approximately 1%."\
  • "R&D increased $1 million primarily due to an increase in payroll."
  • 2012 EPS: $2.25 to $2.45 (raising the bottom end of the range by 5 cents)

M: Has Its Time Come?

I did not like M in 4Q, and I was dead wrong. But the thesis still holds, and we're starting to get indications on the fringes that one of the biggest consensus longs in retail could finally face some intense pressure. 



In hindsight, these Macy's management changes make sense.  Ron Klein, Macy's Chief Stores Officer, and the 4th top executive in the company, is stepping down.  This happened a day after the top management team was paid a cash dividend for a 2-year performance incentive plan. In fairness, it was not an options exercise, or flat-out stock sale. But a dividend that was put to them on a pre-determined date. The verbiage from yesterday's 8k is actually quite clear.


This is however, excellent timing for Mr. Klein. The consensus is looking for a robust 4% top line growth rate at Macy's alongside a peakish 40% gross margin for the next two years. I'll give 'em one or the other, but not both. Our particular concern is the competitive landscape, and the falling dominoes that are being set in motion by JC Penney (and perhaps Sears), as Target, Kohl's, Macy's of the world WILL have a planned response. But their planned response probably does not account for the planned response of others. Welcome to the world of retail.



From Yesterday's 8K

In accordance with the terms of the 2008-2009 stock credit plan, earned performance-based stock credits and time-based stock credits were all subject to two-year and three-year holding periods commencing on January 31, 2010 with their ultimate value to the participants dependent on Macy's stock price. The value of one-half of the stock credits, with dividend equivalents accrued during the holding period, was required to be paid in cash to the senior executives at the conclusion of the two-year holding period (with an automatic payment on or about January 30, 2012). The value of the remaining one-half of the stock credits, with dividend equivalents accrued during the three-year holding period, is required to be paid in cash to the senior executives at the end of the three-year holding period (with an automatic payment on or about February 4, 2013).



The stock credit plan provides that the value of the stock credits is determined on the basis of the average closing price of Macy's common stock as reported on the New York Stock Exchange for the 20 business days preceding a payment date. For the January 30, 2012 payment, this value was $34.25 per share.



The named executive officers received the amounts shown below with respect to the 2008-2009 stock credits for which the two-year holding period ended as of the end of fiscal year 2011. Janet Grove, a named executive officer in the March 30, 2011 proxy statement, retired during fiscal 2011 and is not listed below.



Stock Credit Dividend

Value Equivalent


T. Lundgren $6,357,879.90 $141,850.83

K. Hoguet $1,397,017.43 $31,168.52

T. Cole $1,397,017.43 $31,168.52

R. Klein $1,068,315.73 $23,834.91


This week’s commodity chartbook shows significant gains in grains and chicken wing prices along with declines in beef, coffee, and chicken breast prices.  Below is some commentary pertaining to select commodities and the companies that have exposure to them.  Further on, we show the latest price charts of select commodities. 






Beef prices impact the prices of most restaurant companies but WEN (20% of food and paper spend), JACK (20% of commodity basket), TXRH, and CMG are especially exposed.  Even companies that do not buy beef on the spot market are expecting significant margin pressure due to beef costs in 2012.  The chart of live cattle prices, in the “charts” section of this post, below, shows just how far prices have run. Grain prices gaining over the past couple of weeks do not bode well for investors hoping for a rapid snap-back.




Last Friday, the biannual cattle inventory report on Friday offered no surprise; short supplies and higher prices look likely over the next few months, at least.  The impact of the 2011 drought is obvious in the numbers: cattle numbers in Texas are down by 11% from a year ago, and numbers in Oklahoma are down by 12%. Cattle and calf numbers in Florida, Mississippi, Nebraska and Wyoming were up by 5%, 6%, 4% and 5% respectively.


One point worth noting is that beef replacement heifers were up by 1% year-over-year.  A replacement heifer is a young, female bovine that is raised for the purpose of replacing and improving the cow herd.  This could suggest that producers in certain areas have begun to react to attractive prices by starting the process of expanding their herds.



Beef shipments strengthened for the week ended January 21st by 1,956 metric tons versus the week prior’s 13,128 as Mexico, Japan, and Canada purchased 5,100 MT, 3,000 MT, and 3,000 MT, respectively.



Chicken Wings – BWLD


Traditional chicken wing prices comprise 20% of sales, from a COGS perspective, for BWLD and we expect that the elevated level of wing prices will pressure EPS and bring estimates lower.  FY12 estimates have not moved materially over the last few months, despite a steep gain in wing prices.  4Q11 estimates have gained, and the stock price has traded well over the last few days.  Our thesis on the stock remains intact; we do not think the strong 4Q results which we and the market, obviously, are anticipating detract from our view.  FY12 estimates need to come down, management guidance and tone needs to be revised from prior discussion on FY12 outlook, and the company still does not have the right to grow (fully capitalized sales to investment ratio of 0.91). 




Egg sets are still down ~5% versus a year ago as the food processor industry continues to search for profit.  At the same time, wing prices continue to move higher.







We believe that the food service industry will continue to focus on chicken to offset the elevated levels of beef prices in 2012. 



Wheat/Corn – WEN, TXRH, CMG, PNRA, DPZ


Grain prices have been climbing for the past two weeks.  Bernanke’s sustaining of dollar-bearish monetary policy does not bode well for investors looking for substantially lower feed costs. 




Wheat is trading higher today as cold temperatures in Europe and Russia may damage the winter crop. 

According to the Congressional Budget Office, improving yields in the U.S. over the next ten years should lead prices lower from current levels.  In the near-term, however, lower yields in Argentina continue to support corn prices.  Adversely dry and hot weather conditions are being blamed for the reduction in the Argentine crop.




Demand for grains should remain strong as demand for proteins, globally, remains strong.  In terms of news flow, the supply side of the grains set up has been garnering more attention over the past week.






























Chicken – Whole Breast





Chicken Wings















Howard Penney

Managing Director


Rory Green


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