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Short Selling Opportunity II: SP500 Levels, Refreshed

POSITION: Long Energy (XLE), Short SP500 (SPY)


Am I a day, week, or month early? I don’t know. Being early is called being wrong. Been there, done that.


If you’re not right and the fundamental framework of your position changes, you should change. Today’s lagging indicator (US Employment Report) is a January number that reflects a lot of why I was bullish for the 6 weeks running into last week’s US Dollar Debauchery.


From here, I think inflation expectations continue to rise and growth expectations continue to slow. If that changes, I will. But like February of last year when I made this call, you don’t get the February slowdown data in the January numbers.


Across all 3 risk management durations, here are the lines that matter to me most right now: 

  1. Immediate-term TRADE overbought = 1343 (that’s where I shorted SPY again this morning)
  2. Immediate-term TRADE support = 1321
  3. Long-term TAIL support = 1267 

With the long-term TAIL intact, you should naturally be asking me why Newt and the SP500 can’t fly from here to the moon from here. I tend to get these questions after rallies, not before them. It’s just human nature.


Provided that the US Dollar’s immediate-term TRADE remains bearish and we keep making lower long-term highs on lower and lower volume studies in the SP500, I’ll stay with this call.


Long inflation, short growth.




Keith R. McCullough
Chief Executive Officer


Short Selling Opportunity II: SP500 Levels, Refreshed - SPX


Buffalo Wild Wings is reporting next week and the CEO, Sally Smith, just appeared on CNBC sounding bullish about Superbowl weekend.  We think 4Q numbers will be strong but we are looking for the forward looking guidance and earnings call commentary.


Keith shorted BWLD in the Hedgeye Virtual Portfolio. We know 4Q is likely going to be a strong quarter.  We are concerned about FY12 and believe estimates need to come down.  This is not a consensus call; zero analysts have sell ratings on this stock.


Buffalo Wild Wings, along with the rest of the space, is trading higher today as jobs data for January indicated that the employment situation continues to improve in the U.S.  The CEO of BWLD also appeared on CNBC this morning and her commentary on Super Bowl Sunday was bullish.  Smith saying that the company “has dealt” with chicken wing prices does not convince us that expectations for FY12 are appropriately aligned. 


Traditional wings make up ~20% of sales for BWLD and wing prices are at extremely elevated levels.  This morning, Smith said that the company has “dealt with” wing prices in the past.  This may be true but our view is that the Street’s expectations have not dealt with the impact of wing prices on BWLD’s earnings very well in the past.  Our view is that FY12 EPS remains high and the growth story is not as secure as the stock’s high multiple suggests.


BWLD: TRADE UPDATE - bwld levels


Howard Penney

Managing Director


Rory Green




Second time's a charm?






  • Ticker: CZR
  • Range: $8-$10
  • Offering: 1.8M Shares (100% primary)
  • Deal Size: $16MM
  • Over-allotment: 15% all primary
  • Pro-forma Market Cap: $1.125BN
  • Pricing: February 6th 
  • Apollo/TPG not selling any shares in IPO/ subject to a 270-day lockup
  • Selling primary shares equal to 1.4% of the total will facilitate the listing of 29% of the shares
    • The 1.4% of the shares issued in the IPO and 18.8% of the shares will be immediately tradeable post IPO
    • 8.9% of the share will be subject to a 180-day lockup (Company & 50% of Co-investor shares)
    • All of Paulson's shares (9.9%) will be listed concurrently with the IPO and not subject to lock up


  • Going public will allow them to deliver
  • Investment in CZR's will give investors exposure to:
    • Recovery of CZR's existing facilities
    • New CZR's development
    • Expect to get Baltimore license and a casino there in 2013/2014
    • Option on online poker
    • Option on Asia development (If and when new markets get approved and if CZR wins a license in those markets)
  • Launched an amend and extend proposition yesterday, which will extend maturities from 2015 from 2018. Listing of equity itself would help them deliver as well.
  • Core business recovery:
    • What has changed since 2007? 
      • Total of $2BN of investments
        • Added CZR's Palace expansion
        • New Horsheshoe Hammond
        • Planet Hollywood
      • Competitive changes (increases)
      • New projects/ developments
    • Bottom line they think that they can get to $3BN
  • Las Vegas recovery is well underway with positive momentum across all the key metrics
    • CZR's cash room rates troughed at $85/night and was $92 in 2011 and still improving
    • Occupancy troughed at 90% and improved to 96% in 2011
  • Atlantic City has been a very tough market and just reversed 39 months of declines in December.  They are continuing to work on efficiencies there.  Believe that they can get their $1.5BN business to a 20% margin
  • Regional market results have been generally stable to slightly improving.  
  • The Back To Peak slide...yes if you only they had a 40% increase in ADR they could get $200MM of EBITDA in Vegas... IF.... 
  • Anticipate adding $250MM of EBITDA from their pipeline efforts opening from 2012-2014 with little balance sheet impact
  • WSOP & US Online Poker opportunity
    • Have taken advantage of markets where gaming is legal in UK and France. When Poker Stars and Full Tilt were shut down, it benefited them
    • They also acquired a social gaming platform to distribute their brands - Playtika, developer of social gaming applications on Facebook 
    • Slotomania is on Facebook, 4 Russian social networks, iphone and ipad. IGT payed $500MM for Double Down. They have 2x as many users and monitize their users just as well as Double Down. They are launching their platforms on ipad and iphone. Slotomania is one of the top grossing apps across all mobile platforms and Facebook.
    • Launching CZR's casino application within a week (currently in beta testing) and it will linked to CZR's rewards
    • Party.BWIN's stock pop based on the their MGM/BYD announcement boosted their market cap by $600MM and they think that they deserve a similar option value that Party is getting. 
    • While they are confident of the prospect of federally legalized online poker, it is already happening at the state level
  • Real difference between this IPO and last one is that there are two real comps for the value of their options
    • IGT/Double Down for their mobile gaming business
    • Party.BWIN stock move based on their option to enter US
  • Amend and extend underway
    • Did an amend and extend for $1,2BN last year on their term loan
    • This current deal is seeking to extend at least [$2.4BN] of their term loans through 2018 from current 2015 maturities

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We will have a more detailed post up on employment data pertaining to the restaurant group later this morning.  Nonfarm payrolls came in at 243k versus 140k consensus.  The unemployment rate came in at 8.3%, below consensus 8.5%.  This is a positive for consumer confidence, since the unemployment rate is the most often cited labor statistic in mainstream media, but there are a lot of moving parts behind the final print. One worth monitoring is the Labor Force Participation Rate.  In January, it fell to 63.7% from 64%.  This may not seem material but, as the second chart below shows, adjusting the LFPR to the ten year average (January ’02 through January ’12) implies a much higher unemployment rate for January.









Coffee prices in Brazil, the world’s largest producer, declined this week as growers sold after holding onto beans in a bid to boost prices, according to sources quoted by Bloomberg.  Prices are declining on speculation that global supplies will improve with large crops in Brazil and Vietnam.




THE HBM: JOBS, MCD, PEET, SBUX - subsector





PEET: Peet’s coffee was upgraded to Outperform by Baird.


MCD: McDonald’s paid a record low on 30-year bonds – just 3.7% - as it tapped the debt market for $750 million in a two part offering.


SBUX:  “Starbucks can follow Satan if they want to”, says USA Christian Ministries head Steven Andrew in a statement addressing the company’s support of gay marriage in Washington State.  If Christians unite behind his cause, he predicted, Starbucks would lose 80% of its clientele.




GMCR: Earnings short squeeze.  High level of short interest in this stock and yesterday was a painful day for the shorts.


COSI: The CEO bought stock a couple of days ago.   This stock is up over 27% over the past week.


WEN: Gained yesterday after a strong sell off after the Analyst Day. 


YUM:  Besides news in the media about the salmonella incident in Oklahoma that media reports are attributing to Taco Bell, there was no news on YUM.


CMG: EPS just was not good enough for this priced-for-perfection stock.


BAGL: The Chief Marketing Officer left the company.







BWLD: This stock is trading well into earnings next week.  4Q results are likely to come in strong but, in our view, the forward looking commentary needs to bring FY12 expectations lower.


KONA:  Management changes are disruptive to operations.





Howard Penney

Managing Director


Rory Green




Sorry to quote Homer Simpson but you know Wynn’s stock is in trouble when Steve starts the call raving about their new website.


WYNN is clearly not a hedge fund favorite right now and normally, we’d love to take the other side of that.  But really, what is the positive catalyst?  High short interest and low expectations may limit the downside to pretty much where the stock traded up from yesterday or maybe a little worse.  Q4 was not great but where we go from here is the real question.


Last night, WYNN held an uncharacteristically boring conference call.  Where was the political rant?  Where was the unbridled optimism?  Where were the dumb analyst questions?  Oh wait, there were plenty of those.  Anyway, the uninteresting nature of call was probably a preview into the next few years at Wynn.  Without any new projects underway, WYNN will be an operations and cash flow harvesting story.  The stock is probably priced that way too which makes it uninteresting to us, long or short. 


Wynn is a terrific operator and a value creator, no question.  Right now, he is a little bit of a victim of his own success in Macau until Wynn Cotai opens.  Wynn Macau/Encore is running close to full capacity now and is likely to continue to lose share and generate subpar and subdued growth in the coming years.  Vegas should have some nice growth, but it’s just not that material to the overall results of the company.  In the meantime, the catalysts are external:  Government approval of Wynn Cotai, potential legalization of gaming in Japan or Korea, and the RFP process in MA.



Q4 Details:

Wynn reported net revenue of $1.34BN and Adjusted EBITDA of $381MM (post corporate but before stock comp), missing consensus by 1% and 4%, respectively.  Macau missed by 2% despite holding well across both VIP and Mass, while Vegas EBITDA missed by 9%.  After the snoozer of a conference call, we’ll spare you the boring line by line and skip to the more interesting tidbits/non-obvious observations.



  • Hold boosted net revenue by $71-89MM and Adjusted EBITDA by $22-32MM
    • If you assume theoretical hold of 2.85%, the hold benefit to VIP was $69MM on net revenue and $20MM on EBITDA.  Using Wynn’s average hold since opening (ex 4Q11) of 2.94%, this gets you to a hold benefit of $50MM on net revenue and $10MM on EBITDA.
    • Mass also held well at 30.4% vs. the 27.4% TTM average.  We estimate that the incremental 3% of luck helped net revenue and EBITDA to the tune of $21MM and $12MM, respectively.
    • Direct play was 11% and rebates were 95bps or 30% of win
    • Single-digit midget growth as the property hits up against capacity constraints
      • VIP RC: 7%
      • Mass drop: 4%
      • Slot handle: 8%
      • Estimated 14% increase in fixed operating expense


  • This is only time, aside from 2008, since opening where 4Q table drop decreased QoQ
  • Slot handle was disappointing which is surprising given the strong reported Strip results
    • Wynn could be losing share to MGM
    • Lower occupancy likely hurt the slot performance
    • Rebates/Casino discounts were 19.7% of gross casino win, compared to 17.3% in 4Q10 and 17.4% in 3Q11
    • Occupancy actually decreased YoY and RevPAR only increased 2.7% and was the lowest since the property opened.  On the positive side, it looks like promotional allowances/ comps decreased $44MM or 30% of net casino win from 32% last year.

Not Now

This note was originally published at 8am on January 31, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“How soon ‘not now’ becomes never.”

-Martin Luther


Don’t worry, I’m not going to go off on the Protestant Reformation of 16thcentury Europe this morning. I’m going to give some much simpler advice re: chasing any asset price higher today – Not Now. Most things will get marked-up into month-end.


That’s not to say I didn’t think yesterday at 9:51 AM wasn’t a good time to buy. With the SP500 testing 1301 (down 32 points, or -2.4% from last Thursday morning’s 1333 high), that’s where I bought Energy (XLE), taking my Cash position down from 91% to 85% and taking up my US Equity position in the Hedgeye Asset Allocation Model from 0% to 6%.


Some people get all fired-up about this whole TimeStamping thing we do. It’s really nothing to get emotional about. It’s just what we do. We like to make calls and be held accountable to the timing of those calls. We call it the score.


Back to the Global Macro Grind


These German dudes and dudettes have to be right fired-up this morning. In the face of the entire world begging them to bail out the dysfunctional; and after watching the American media chastise them for not being able to do the “right thing” – they just kept saying Not Now to just about everyone who no longer needs Luther’s Latin translation for the word never.


How is the economic model of German fiscal conservatism scoring? Here it is, head-to-head, versus Italy:

  1. Germany Unemployment = 6.7% JAN vs 6.8% DEC = 20-year low
  2. Italy Unemployment = 8.9% JAN vs 8.8% DEC = 8-year high

What’s in your wallet?


Again and again and again, we’ve tried to remind our audience that the strength of a country is not explicitly reflected by the daily moves of her stock market. Ask the Germans who lived through a 1920s stock market hyper-inflation about that.


If you don’t have a policy to fear-monger your citizenry into believing that saving is evil, you might just build a national confidence and pride that reflexively equates to more stable employment and consumption.


In the US, we’re getting closer to figuring this out. Or are we? Romney’s monetarily conservative message seems to be picking up some momentum in Florida and, at the same time, it still looks like President Obama can change fiscally.


Yes We Can. But will he?


Instead of being politically polarized by the debate, I think the world’s vote on this will continue to be on the tape each and every day, ticking, via the sequential momentum in the US Dollar Index.


If you haven’t noticed, in the last few weeks, the US Dollar has lost a statistically significant amount of momentum:

  1. US Dollar Index = down -3.1% since its intermediate-term top of $81.53 in mid-January 2012
  2. US Dollar Index = up +8.2% since testing a 40-year low during the thralls of Qe2’s policy to inflate (April 2011)

To be crystal clear on this, the correlation to asset prices between the US Dollar Index and everything else in Global Macro right now is unclear.


In sharp contrast to April 2011, when the inverse correlation between US stocks and the USD was tracking in the -0.8-0.9 range, today’s 120-day correlation is actually a positive +0.44 and US Equity Volatility (VIX) has an inverse correlation to USD of -0.59.


In other words, before The Bernank Tax last week, the Fed was out of the way and we saw a stabilization/strengthening of the US Dollar over the course of the last 3-6 months that:


      A) firmed up US Confidence, Employment, and Consumption (71% of GDP)

      B) started to tone down one of the biggest risks to returns in any business – expected price volatility


American Progress by simply having Bernanke and Geithner out of the way – fancy that. Americans were/are getting it done without the heavy hand of government help. No matter what your politics, that’s just good.


What would not be good for the US economy or stock market (again, two very different things) would be a breakdown in the US Dollar Index of $78.03 intermediate-term TREND support and a breakout in US Equity Volatility (VIX) above TRADE line resistance of 20.86. That would really fire up the price of oil. Copper is already up +12.5% YTD!


Not Good. Not Now.


As you can see in the long-term chart of US Stocks (SPX) vs Equity Volatility (VIX):

  1. The SP500 is making a series of lower long-term highs
  2. The VIX is making a series of higher long-term lows

The charts look Japanese because the long-term Bush/Obama Keynesian Policies have been. That chart also summarizes the societal American Zeitgeist about markets and the central planners infecting them.


Is President Obama prepared to tell Ben Bernanke to get out of the way and let American Savers earn a rate of return on their fixed incomes? Not Now. While hope is not a risk management process, I can only pray that doesn’t mean never.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, German DAX, and the SP500 are now $1691-1751, $110.61-111.89, $1.30-1.32, $78.70-79.75, 6456-6503, and 1306-1324, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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