Cognitive Strain

“With the fearful strain that is on me night and day, if I did not laugh I should die.”

-Abraham Lincoln


In one of my favorite books, Team of Rivals, by Doris Kearns Goodwin, you get an introspective sense of Lincoln as a human being. To me, his greatest leadership quality was being a realist. That’s different than being an optimist.


If I wasn’t optimistic about my family, partners, and firm, I wouldn’t have invested most of my net wealth into building this company. It wasn’t easy committing free-market capital that could fail during the thralls of 2008. But I wouldn’t have done this if it was. The fearful strain that we bear, night and day, is the most important part of who we are and what we create.


In Chapter 5 of “Thinking, Fast and Slow”, Daniel Kahneman explains the difference between being at Cognitive Ease and experiencing Cognitive Strain. “Cognitive strain is affected by both the current level of effort and the presence of unmet demands.” And “easy is a sign that things are going well – no threats, no major news, no need to redirect attention or mobilize effort.” (page 59)


Easy is as easy does. There is nothing easy about being a leader in this country who has to deal with this market and meet a payroll every month. Don’t ask a talking head or a politician in America about that. They have no idea what it means to sit in this seat every morning embracing the uncertainties of whatever risks the next central plan brings.


Back to the Global Macro Grind


I’m personally experiencing Cognitive Strain this morning – I have to deal with being short the SP500, the daily dirty laundry list of threats to my company’s competitive position, and whatever this power-ball ticket on the US Employment Report brings at 830AM.


And I like it …


There’s no whining in winning. No matter what you throw at my senior management team every morning, we’ll suck it up and turn that into our own positive momentum. There a plenty of good teams in this business. Only the great ones get how to work together.


Back to this short SPY position.


What do I do with it this morning if the employment report is better than expected? What do I do if it’s worse?


Actually, the answer to those 2 questions is precisely why I have the position on – under both scenarios I know exactly what I am going to do. These are the risk management setups that we spend hundreds of hours preparing for. Very infrequently do Short Selling Opportunities like this present themselves with these odds.


That doesn’t mean the market is going to blow up. All it means is that my probability-weighted setup won’t get me run-over if I am wrong. No one ever went broke booking a gain either.


Across my three core risk management durations (TRADE, TREND, and TAIL), here are the scenarios I’m looking at:

  1. SP500 goes up – I wait and watch for 1333, and short it again there (lower long-term high)
  2. SP500 goes up, and up – I wait and watch for 1363, and short it again there (lower long-term high)
  3. SP500 goes down – I wait and watch for 1318 to hold – if it does, I book the gain – if it doesn’t I smile

It’s really not that complicated. There really is no Cognitive Strain associated with the SPY position itself. My personal strain tends to be cumulative. It occurs when everything else about running my company hits me from all directions at once, and then – bang! A central planner says or does something that I didn’t see coming.


I’m not alone in this country thinking about stress this way. I’ll bet that 100% of small business owners agree with me on this. How do I deal with Cognitive Strain perpetuated by the Bernankes and Geithners of this world? Follow me on Twitter, and you’ll figure that out in a hurry. “If I did not laugh,” I’d hand in the keys to this Made in America company to Wesley Mouch.


My immediate-term support and resistance lines for Gold, Oil (Brent), EUR/USD, Shanghai Composite, and the SP500 are now $1, $110.84-112.36, $1.30-1.32, 2, and 1.


Best of luck out there today and enjoy watching some Red, White, and Blue Leadership on the field on Sunday,



Keith R. McCullough
Chief Executive Officer


Cognitive Strain - Chart of the Day


Cognitive Strain - Virtual Portfolio


Soft quarter and boring conference call.  Can't remember when we've said that about WYNN.




  • Really? Opening with their new website...We couldn't even find the webcast on the new site.
  • Operating expense in Macau increased due to a large increase in bad debt expense and some increase in payroll expenses
  • They do feel a lot of competitive pressure in Macau.  Their competitors have really stepped up their game.
  • They are still working hard on their plans in Cotai
  • Cash split is about 50/50
  • CNY levels were a little lower in Vegas than last year partly because of the calendar shift.  According to Steve, people had less vacation time this year.  There was also more choice for their Asian customers so business was spread a bit thinner.
  • Their strategy in Vegas is to identify lodgers that will stay and spend at the property.  $110MM of the EBITDA increase at the Vegas property came from the hotel.
  • They are adjusting their table mix and junket mix to compete better in Macau
  • Galaxy spend a lot of money on the property since opening to improve the property
  • Sands also spent hundreds of millions to make their properties better
  • They are constantly tweaking Macau, but no material capex
  • They call their special dividend special because they are not necessarily recurring
  • Bad debt provision was flat YoY and they are still well north of 50% reserved on their receivables.  Bad debt as a % of receivables are flat.  They are seeing no credit issues in Macau.  They do not use credit as a marketing tool. They give credit out in appropriate amounts to appropriate parties. 
  • The increase in doubtful accounts this year is mostly due to higher levels of play in Las Vegas.  Macau is actually flat.
  • "We've enjoyed Mr Okada's participation for 12 years." They had a sharp disagreement over the Philippines project. Wynn feels like it is not an appropriate investment for Wynn and this created a problem for Okada and stress in their relationship.  Wynn has no interest in doing business in the Philippines.
  • Hope that 2012 comes in at the same level for convention business in Las Vegas.  They are getting a little more rate in the 1st Q but they are worried about the summer time and fear deep discounts there.  Looking forward to a flat year on the convention side.  They are going to be pushing transient rate in 2012. 
  • Tax rate for next year? 
    • Somewhere between 2010 and 2011
  • What is a collection trip? Linda is basically asking their customers to pay up what they owe. Not rocket science Steve Kent.
  • Market share in January?  They are around 13% of the market - and the market has gotten a lot bigger.  They focus on their fair share.
  • Had robust growth in January because of CNY calendar shift.  Not sure about the rest of the quarter.  Last year, they made $62MM in Vegas in February so it's a really tough comparison
  • Their Chinese business connections feel confident in the continuation of the healthy Chinese economy.
  • The Macanese government is ok with inflation as long as there is full employment in the market.  The government suggests annual wage increases to deal with the issue. 



  • Net revenues of $1,344M and adjusted property level EBITDA of $402MM, both a little short of consensus.
    • Macau: Net revenue of $995.5MM and Adjusted EBITDA of $313.1MM
      • Net revenues were 1% ahead of Street while EBITDA was 2% below
      • Benefited from high hold of 3.18%
    • Vegas: $348.4MM of net revenue and $89.1MM of Adjusted EBITDA, 3% and 9% below the street, respectively
      • 1% of rooms were out due to renovations
  • Cash: $1.3BN; $3.2BN of debt ($2.6BN at Wynn Las Vegas and $628MM at Wynn Macau)
  • "Approved a cash dividend for the quarter of $0.50... payable on March 1, 2012, to stockholders of record on February 16, 2012."

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Retail: Keeping It All In Context


January sales appear to have improved on the margin, but let’s take a step back and keep the quarter in context. November kicked off the quarter with sales coming in lighter than expected following Black Friday bullishness. Then December disappointed with more companies guiding down than up. Then we have today’s results with the ratio of beats-to-misses coming in net negative (11 companies missed to 8 beats), but six companies guided Q4 higher while only one (SSI) guided lower. Dizzy yet? Quite simply, from start to finish Q4 has been weaker than originally expected especially in the mid-tier. The negative setup headed into 1H remains unchanged.


In taking a look back through not only the companies reporting monthly comps (an increasingly less relevant sample), but also the broader group over the last three months, we’ve seen 11 of companies lower expectations for the quarter compared to only 4 taking numbers higher. That’s not good. In addition, KSS taking Q4 EPS up by $0.09 after cutting it by $0.30 last month is hardly net positive. Also, let’s not forget JCP taking numbers down by 35% before officially bowing out of the monthly sales game. Take a look at the table below. It tracks company guidance throughout the quarter and the net change versus original expectations, not simply the most recent data point. Among the most notable negative callouts TGT, KSS, and JCP.


Volatility is clearly on the rise and continues to expand the bifurcation between upward and downward revisions. We fully expect this bifurcation to remain present through the 1H at a minimum in an increasingly more competitive pricing environment.


A few additional callouts in January:

  • The High/Low-end performance spread remains divergent though higher-end sales slowing on the margin. Within department stores, JWN +5%, M +2.4%, SKS +10.5% and Neimans +9% remain positive despite both JWN and M comping below expectations in January compared to KSS +0.6%, SSI -0.1%, and BONT -3.5%.
  • Not surprisingly, off-price retailers TJX & ROST were the most positive standouts in January coming +7% and +5% respectively and ahead of expectations. The off-price channel is beginning to emerge as an early beneficiary as the higher-end starts to decelerate and competition at the mid-tier heats up. Both increased their outlook for the quarter as well. Interestingly, ROST was the first retailer to offer up its view of F13 at $3.12-$3.27 vs. $3.21E.
  • Following a very strong December, M missed expectations in January, but raised guidance for the second quarter in a row. Online remains a key driver up +39% in Jan and +40% for the quarter and year.
  • Food/Grocery continues to outperform driving results at discounters. Both COST and TGT reported the food/grocery up HSD and low-teens respectively outpacing all other categories with inflation still up LSD. While both came in better than expected, TGT is the notable callout given the sequential reacceleration in the monthly comp for the first time in four months. Improvements in the Apparel and Home categories were key incremental improvements – especially Home up LSD, positive for the first time since September.
  • January marks the first month ex-JCP. There goes another $18Bn of sales relevance out of the SSS sample.
  • GPS posted negative comps again -4.0%, but more importantly above expectations (-5.3%E). Despite missing comps in the first two months of the quarter, the company is either getting less promotional or more aggressively cutting expenses as the company took Q4 EPS up to $0.41-$0.42 vs. $0.35E. This is more positive for GPS on the margin given just how low expectations are, but our bet is that it's the later and stress amongst its competitors in the mid-tier remains a major overhang.
  • The only commentary on inventory levels came from TGT, TJX, and GPS all of which were positively skewed.
  • At the category level:
    • Handbags and accessories were strong particularly at the high end with JWN, SKS, M, and Neimans all highlighting the category. Good for COH, KORS, and LIZ.
    • Home was another positive callout by TGT, KSS and DDS.


Longs: LIZ, WMT, NKE, RL



Retail: Keeping It All In Context - Guidance Tracker


Retail: Keeping It All In Context - TGT sales grid


Retail: Keeping It All In Context - Total SSS


Retail: Keeping It All In Context - SSS 1 yr


Retail: Keeping It All In Context - SSS 2 yr


Retail: Keeping It All In Context - SSS 3 yr


Retail: Keeping It All In Context - equal weighted SSS


Casey Flavin



Standard earnings release for HOT:  Beat, lower next Q, and keep full year. The fact is, lodging fundamentals remain strong.


"As we look to 2012, it is shaping up to be another record year of room additions and strong REVPAR growth"


- Frits van Paasschen, CEO



  • Headwinds cost them $30MM of EBITDA in 2011, and yet they still made their guidance
  • They are bullish about the coming year and still believe that they are in the early part of the cycle
  • On track to deliver $3/share in cash from the sale of Bal Harbour condos
  • Standout markets are Miami and San Fran.  NY was steady at 7%.
  • Softness is likely to continue in Europe, but Europe only accounts for 14% of their fees and 20% of their owned EBITDA
  • Fastest growing region in 2011 was Latin America and they are the largest player there
  • China RevPAR ex Shanghai increased 14%
  • Japan RevPAR increased 2% 
  • Africa and ME RevPAR was flat - Dubai was +12% offset by Egypt weakness
  • Rising dollar slowed inbound travel to the US from Europe
  • SG&A was up only 2.3% in 2011 and they have no intention to allow for costs to creep back
  • Added 389 hotels, or 8% annual unit additions over the last 5 years
  • SVO deliquencies are back to normal levels- they have several years of inventory to monetize and the team is looking for efficient ways to keep growing that are less capital intensive
  • They have not had a large core customer tell them that they will travel less in 2012 than 2011.  Corporate rates will be up mid-single digits. 
  • Top 2% of their guests account for 30% of their profits
  • 40% of their Elite travelers live outside of the US
  • Offering 24-hour check in for their elite guests and other services will differentiate them and help them maintain and gain guest loyalty
  • Expect to have 200 Westin hotels by YE 2012.  70% of the Westin openings will be internationally located.
  • Assume that the global economy just muddles along with its recovery in 2012 but no blow ups. Their balance sheet is prepared for the worst though. 
  • They have limited their exposure to the Euro at a rate of $1.44 (on a net earnings basis). Their remaining exposure is just 9%.  Expect a difficult year in Europe.
  • China growth ex-Shanghai is in the double digits. Expect a continued recovery in Japan. Don't believe that China will have a hard landing. Assume that China and Asia will continue to grow at the current pace.
  • Optimistic that US travel will return to Mexican resorts.  They assume another robust year of growth in Latin America.
  • Expect lodging recovery to continue in NA but the pace will not be as robust as the 9% rate in 2011
  • December was one of the best group production months 
  • Transient momentum remains steady and strong
  • Rate will be the primary driver of RevPAR growth in 2012
  • Expect LATAM to be above their guidance range and Europe and Africa to be below it
  • Shanghai effect is behind them.  Post March, they will benefit from easier comparisons in ME & Japan, and in the back half Europe will benefit from easy comps.
  • Significant renovations in 2012 will impact results (and asset sales)- by EBITDA $10MM 
  • Net FX drag will be around $7MM net of the hedge
  • In the developed world, their goal is to hold costs flat
  • VOI EBITDA will be roughly flat. They are making some selective investments in inventory for timeshare.
  • Each point of RevPAR = $15MM of EBITDA
  • Bal Harbour: 120 closings are targeted for 2012- with most front half weighted
    • $1300/SQFT average price
    • Project on time and under budget
    • Will not undertake a project of this kind in the future
  • Difficult to calculate Bal Harbour EPS impact so they won't break it on the EPS line
  • Lower interest expense from lower debt is offset by the fact that they can no longer capitalize Bal Harbour expenses
  • There will be no cash taxes paid on Bal Harbour given their tax credits
  • Q1 will have the largest drag from renovations and asset sales - $5MM EBITDA impact.  SG&A growth will also be higher in 1Q than the rest of the year.


  •  Bal Harbour: 
    • 3 year sell out, with pace dropping off markedly after 1Q'12
    • There were some contracts signed in 2006/2007 so unclear how those will play out, but everything they signed post crisis is closing fine
  • How is the financials services fairing and how large is that sector as a % of their business?
    • Consultants are the largest grower in financials
    • Professional services are growing as businesses outsource more
    • Pharma is strong too
    • Financials contributes low to mid teens
  • Why are group ADR's so weak?
    • Group ADRs aren't weak. For new business booked, ADRs are strong.  Business booked in 2011 for 12' have rates up mid-single digits and double digits for more than one year out (booked in 2011)
  •  Why were incentive fees down YoY?
    • Last year a lot of their incentives were loaded into the 4Q because late in the year it became clear that they would hit necessary targets. So the comp was hard. This year they didn't earn a lot of fees in ME & Africa. Adjusting for affected regions, it would have been up 14%.
  • Euro hasn't moved enough to incentivize US travelers to go there. Also the 4Q is a low season for Euro travel so its hard to have a lot of takeaways.
  • Since NY came back first, it has also slowed down - since the comps are hard. There has also been a lot of incremental supply.
  • To the extent they have excess cash, they will return it to shareholders. Their sense is that the new normal will be more volatile and therefore, it's important to have a strong balance sheet.  Fitch was the first to upgrade them today. Expect others to follow suit soon.
  • Cost assumptions for 2012:
    • 2-4% growth in constant dollars on owned
    • Wage rate increases based on agreements
    • Some pressure on property taxes
    • Hopefully no energy expense spikes
    • F&B - due to rising commodity prices they are working to share best practices to group purchasing/procurement
  • Why did they lower the high end of their guidance?
    • They didn't - just some moving items like interest expense and taxes
    • Marginal tax rate on Bal Harbour is 38% so that impacts their taxes
  • Continue to see steadily improvement trends in timeshare. California appears to be slightly better as a source of demand for the West. 


  • "Adjusted EBITDA was $321 million, which included $33 million of EBITDA from the
    St. Regis Bal Harbour residential project"
  • 4Q RevPARs:
    • WW Systemwide SS: 5.9% (5.8% constant dollar)
    • NA Systemwide SS: 7.7% (7.6% constant dollar)
    • WW SS Owned: 5.7% (5.0% constant dollar)
  • "Special items in the fourth quarter of 2011 included a pre-tax charge of $98 million, representing a charge of approximately $70 million related to an unfavorable legal decision, a charge of $14 million related to certain hotel impairments and a charge of $16 million related to costs associated with the early extinguishment of debt. Special items in the fourth quarter of 2011 also included an income tax benefit of $116 million, primarily associated with the utilization of capital losses which had previously been fully reserved and the tax effects of the special items discussed above"
  • "During the fourth quarter of 2011, the Company signed 36 hotel management and franchise contracts, representing approximately 7,600 rooms, of which 25 are new builds and 11 are conversions from other brands. At December 31, 2011, the Company had over 350 hotels in the active pipeline representing almost 90,000 rooms"
  • During 4Q;
    • New hotels added to the system: 28/7,900 rooms
    • Exits: 10/1,600 rooms
  • "Originated contract sales of vacation ownership intervals increased 6.2% primarily due to increased tour flow from new buyers and improved sales and marketing performance. The number of contracts signed increased 4.3% when
    compared to 2010 and the average price per vacation ownership unit sold increased 1.4% to approximately $14,500, driven by inventory mix."
  • "During the fourth quarter of 2011, upon receiving the certificate of occupancy, the sales of 36 units were closed and the Company realized incremental cash proceeds of $74 million associated with these units."
  • SG&A increase "primarily due to a reimbursement of legal costs in 2010 as a result of a favorable legal settlement"
  • "In November 2011, a subsidiary of the Company received an unfavorable legal decision. As a result, the Company recognized a $70 million pre-tax charge. The legal decision is not final and the Company intends to appeal."
  • 1Q12 Outlook:
    • Adj EBITDA, ex Bal Harbour: $205MM to $215MM
    • RevPAR: 
      • SS Company operated: 5-7% constant $ (100bps lower at current FX rates)
      • Branded SS Owned: 4-6% constant $ (150bps lower at current FX rates)
    • Mgmt fees, franchise fees and other: +8-10%
    • VOI & Residential earnings: flat
    • Bal Harbour: $60MM of EBITDA
    • D&A: $73MM
    • Interest expense: $54MM
    • Tax rate: 30%
    • EPS (including Bal Harbour): $0.49 to $0.53
  • 2012 Outlook:
    • Adj EBITDA, ex Bal Harbour: $1,060MM to $1,090MM
    • RevPAR: 
      • SS Company operated: 5-7% constant $ (200bps lower at current FX rates)
      • Branded SS Owned: 4-6% constant $ (200bps lower at current FX rates)
    • Margins at Branded SS owned: +100-150bps
    • Mgmt fees, franchise fees and other: +8-10%
    • VOI & Residential earnings: $150MM to $155MM
    • SG&A: +3 to 5%
    • Bal Harbour: At least $80MM of EBITDA
    • D&A: $300MM
    • Interest expense: $212MM
    • Tax rate: 30% and cash taxes of $100MM
    • EPS (including Bal Harbour): $2.22 to $2.33
    • Capex: $200MM of maintenance, renovation & technology; $375MM of investment projects and committments to JVs
    • VOI (ex Bal Harbour): $125MM of positive CF and Bal Harbour is expected to generate at least $250MM in net CF


Significantly reduced FY 2012 guidance management optimistic about pricing recovering, resilient onboard spending, and no Costa impact on 2013 bookings. More transparency helps investor confidence this morning.




  • 'Confident' Costa Concordia (CC) incident will not have a long-term impact
  • Overall bookings remain down in the mid-to low teens
  • Close-in bookings declined more than farther-out bookings
  • Q2/Q3 2012 - level of uncertainty is high
  • Didn't want to make projections
  • Had anticipated higher yields in Europe due to easy comps pre-CC
  • China opportunity will take some time to pay off
  • 2012 yield: 1-2% yield comes from ship revitalization, international expansion, technology development
  • Had great pricing momentum going into 2012
  • First time, RCL has more non-US customers than US customers
  • 4Q Ticket yield: double digits in Caribbean; Europe yields were down
  • 2011: fuel cost EPS 20 cents; Japan Earthquake/Arab Spring cost 65 cents
  • 2011 pricing: improved slightly more in US than Europe but this is driven more by itinerary mix than economy
  • 2011: Operating cash flow $1.6BN; reduced debt by 650MM
  • Current booking environment:
    • Demand trends still fluctuating
    • All new itineraries were down by 20% following CC
    • Post CC: North American demand recovering steadily to high single digits decline; Europe weaker
  • Extra caution for forward guidance
  • 2013 bookings unaffected
  • Last 5 years, fuel efficiencies have decreased expenses by 18% but due to deployment of ships, fuel expenses will be higher YoY. 
  • 2012 Fuel expense impact: 57 cents higher than 2011; FX rate 20 cents higher
  • Have resumed full marketing programs
  • Non-Caribbean (20%) itineraries are doing well and performing ahead of last year
  • Started to see improvement in bookings this week; some pricing have returned to pre-CC levels
  • No increase in 'cruise rejection rate' through their research
  • Completed Summit revitalization last week
  • Reflection will deliver in Oct 2012

Q & A

  • Has Celebrity resumed advertising?
    • Yes, restarting originally planned 2nd week of Wave Season advertising
  • People seeing CC as an isolated incident
  • Wave Season could be extended
  • Higher Insurance premiums?
    • Nothing dramatic
  • Distribution changes: more weighted towards 1Q 2012; least in Q3; some in Q2 and Q4
  • Deployment initiatives: Voyager of the Seas is going to China; increased capacity in Australia - driving higher fuel consumption and expense
  • Somewhat increased Northern Europe capacity; decreased Eastern Europe capacity; Europe overall capacity is lower
  • Baltic off to good start despite hard comps
  • Would like to get 50% of Arab Spring impact (15/16% less capacity in Eastern Med)
  • Azamara ding well
  • Loyalty program: January sign ups was a record
  • 2012 On board rev: have not seen any notable decline or any decline in ship revenue last few weeks
  • Most of the 1Q volatility will be in March sailings and on-board rev spending
  • Onboard promotion: 50% deposit sale; UK promotion
  • May have a 1Q 2013 bump due to lost January bookings this year
  • Will lower pricing to fill ships but not right now
  • 1st time cruisers: did increase YoY







  • Distribution changes and deployment initiatives will increase NCCs by approximately 300 basis points.  Absent these changes, Constant-Currency NCC excluding fuel are expected to increase approximately 1% to 2% on a comparable basis (flat to 1% As-Reported.)  


  • $1.1BN: cash and undrawn RC
  • Fuel
    • Forecasted consumption is now 55% hedged via swaps for all of 2012 and 47%, 30% and 20% for 2013, 2014 and 2015, respectively.  For the same four-year period, the average cost per metric ton of the hedge portfolio is approximately $521, $518, $575 and $580, respectively.  
  • Capex
    • Based on current ship orders, projected capital expenditures for 2012, 2013 and 2014 are $1.2 billion, $500 million and $1.1 billion, respectively.  The company has one option for a second Sunshine-Class vessel which would be delivered during the second quarter of 2015 that expires in late February 2012.  
    • Capacity increases for 2012, 2013 and 2014 are 2.1%, 2.5% and 0.6%, respectively.

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