Strong margins in St. Louis and low corporate expense drives beat.


 "As we move further into 2012, we look to build on our record 2011 performance and remain focused on driving shareholder value.  Through the evolution of our mychoice program, additional capabilities within our technology infrastructure, incremental cost efficiencies throughout the enterprise, and execution of projects in our growth pipeline, we believe 2012 will be another year of significant growth for our Company."


- Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment



  • Remain committed to cost cuts and margin expansion. Feel like there is still room to remove non-revenue generating expenses,especially from marketing.
  • Maintain balance sheet health, liquidity, and financial flexibility
  • MyChoice:
    • Top tier grew 44% in membership YoY
    • 34% of their total members migrated up one tier - with the greatest migration to the mid tier
    • More improvements to MyChoice coming in April
  • Spend per visit were up slightly and trips were down slightly
  • Belterra and St Louis saw an increase in both spend and trips
  • Worth per available room grew 5%.  Consolidated occupancy moved up to 84%.
  • Belterra: 16.1% market share; gained 135bps of market share and was the only property to increase admissions in the market
  • Key takeaways:
    • MyChoice continues to be the focal point of their marketing program
    • Sees increase spend per visit for their loyal players
  • Will start a room refurbishment program at L'Auberge soon
  • Have a hard time growing revenues at Boomtown New Orleans.  They will be implementing some cost controls.
  • Bossier: Believe that the market will continue to be under pressure
  • Belterra: Helped by challenges that one of their competitors faced due to a temporary bridge closure
  • Believe that the VLTs issue in Ohio will get resolved in 2012
  • Garage construction at River City will cause some disruption at the property
  • Boomtown Reno: will get $13MM on closing 
  • Carry costs for AC will be much lower in 2012 and beyond. They are retesting the market for the sale of the asset.


  • L'Auberge impact of floor improvements? 
    • 12% of the floor out of pocket in the quarter
    • Cost of additional labor to make up for the disruption
    • Disruption ended right before NYE's
    • This has been the first floor update the property has had since opening 7 years ago
  • Touched a bunch of areas around Lake Charles and will start a room refurbishment in 2012.  The rooms are due for a face lift?  It will have an impact not to have the rooms available all of the time. 
  • They do expect margin expansion in 2012
  • New Orleans: Have seen a tailing off of revenues over the last 4-5 months.  They are very much engaged in driving profitable revenue growth.  Replaced all the carpeting at the property.  They are also continuing to take cost out of the business.  He's bullish on N.O. and thinks that they can do better there in 2012.
  • Minimum $125MM VLT investment required in Ohio.  They will clearly meet/exceed the minimum investment requirement. Still working on scope of the property. 
  • Expect to be open in Baton Rouge prior to Labor day in full fashion - sometime in August
  • The bridge closure hasn't been a windfall but has helped a little
  • River Downs: Market is very much centered around Cincinnati...Will pay attention to what happens in Kentucky and that will impact investment there.
  • Margaritaville will be on their side of the river.  Introduced a new brand concept for Boomtown in early 2011. 
  • In Vietnam, the government is working on finalizing a tax rate for that market, but expect it to be a reasonable rate. 
  • Corporate expense in the quarter?
    • They are religious about removing non-value added expenses, including corporate.  They have also settled a number of items. 
    • In the past, a lot of properties functioned individually and they changed that to allow properties realize improvement by using scale of the organization
  • The Madison house issue was settled and lowered their assessment in AC and therefore will have lower property taxes
  • Big focus on being shareholder friendly. Believe that their current team can handle more assets and leveraging their skill set over a large base of operations.
  • St Louis, 10% decline in YoY expenses? 
    • Have a service pod, based in St Louis, helping all of their mid west properties
    • Thinks that most of the improvements seen so far will be sustainable in 2012
    • Need to take into account some seasonality though
    • Some construction disruption will impact them. They are adding some rooms there - 200 in the 2H of 2013
  • They do not have an obligation to put in any more capital into ACDL.  They do need to raise additional capital ( a working capital facility) 
  • All the changes they are implementing are not one time 
  • They are going out for hard pricing on the River City hotel
  • RevPAR was up 5% in the quarter
  • Belterra's market includes Hollywood, Rising Sun, Horseshoe in Louisville
  • Closely engaged at their online gaming options



  • "Fourth quarter revenue and Consolidated Adjusted EBITDA growth was primarily driven by the continued solid performance of the Company's St. Louissegment, which consists of River City Casino, Lumiere Place and Four Seasons Hotel & Spa.  Operational improvements at L'Auberge Lake Charles, Belterraand Boomtown Bossier City properties, as well as a significant reduction in corporate overhead, also contributed to the results."
  • "The St. Louis segment continued to ramp up during the fourth quarter, with further maturation of River City and expense discipline across both properties."
  • "L'Auberge Lake Charles' fourth quarter 2011 performance is impressive considering the disruption from the casino floor improvements made during the quarter.  We completed the replacement of all casino carpeting and slot bases and renovated the property's high limit slot and table game areas to better accommodate L'Auberge Lake Charles' higher end guests.  As a result of these projects, the property's average slot count was reduced by 203 units or 12.7% during the fourth quarter, including a closure of the high limit slot room for 70 days.  Additional operating expenses were incurred in an effort to minimize the impact of the casino floor refresh program on guest experience."
  • "In the fourth quarter of 2011, Boomtown New Orleans began to face difficult comparisons due to elevated local economic activity created by the Deep Horizon oil spill cleanup and recovery efforts late last year.  We have made significant strides containing costs to mitigate the effects of changing market dynamics in New Orleans, but we recognize additional efforts are needed to drive profitable revenue increases at Boomtown."
  • "Corporate overhead expense reductions were driven by efforts to eliminate non-value added expenses at the Company's Las Vegas headquarters, as well as a ramp up of cost savings related to the Company's shared service center supporting our properties in the Midwest and Louisiana."
  • "In the first quarter of 2012 we will begin the first phase of an $82 million expansion at River City by commencing construction on a 1,700 space covered parking garage. A comprehensive plan will be implemented to minimize disruption to the property during construction of this first phase.  Construction of the second phase, comprising of a 200-room hotel tower and a multi-purpose event center, will commence at the end of 2012 and is scheduled for completion in late-2013."
  • "Opening of L'Auberge Baton Rouge by Labor Day 2012."
  • "Construction on the Ho Tram Strip project in Vietnam by Asian Coast Development (Canada) Ltd., in which the Company acquired a 26% ownership stake in August 2011, also continues to make significant progress.  The first phase of the development, the MGM Grand Ho Tram, is scheduled to open by the end of the first quarter of 2013." 
  • AC update: 
    • "In December 2011, Pinnacle reached an agreement with the Madison House Group to terminate its lease obligations in Atlantic City. "
    • "In December 2011, Pinnacle reached a settlement on property tax appeals with the City of Atlantic City." Which will result in an $8.2MM cash refund in 1Q12
  • Sale of Boomtown Reno expected to close by mid 2012. Buyers have a 1 year option to purchase the gaming license and adjacent land.  PNK no longer expects to close on a separate transaction to sell the access land and will continue to market it. 
  • "During the first quarter of 2012, the Company committed to invest $2.0 million in Farmworks, a land re-utilization project in Downtown St. Louis.  Pinnacle will receive credit for approximately $10 million towards its obligation to invest $50 million in St. Louis as a result of this transaction."
  • "In October 2011, the Company entered into a settlement with the Port of Lake Charles whereby the Company swapped land parcels and will receive $2.5 million of credits on its L'Auberge Lake Charles property rent payments. The Company recorded a gain of $3.2 million in its 2011 fourth quarter operating results related to this settlement. This gain is reflected in write-downs, reserves, and recoveries."
  • 2012 Capex: 
    • Maintenance: $50-70MM
    • Expansion: $230-240MM
  • "Capitalized interest in the 2011 fourth quarter, related to the Company's L'Auberge Baton Rouge growth project and ACDL investment, was $5.1 million."








According to the Office for National Statistics, the number of people claiming jobless benefits in the U.K. during the month of January rose by 6,900 to 1.6 million, the highest since January 2010.



Comments from CEO Keith McCullough


Consensus news-flow is still focused on Greece, weird:

  1. JAPAN – the Nikkei busted a surprisingly bullish move = +2.3% overnight as the Yen remained under central planning pressure (-0.2% at 78.15 USD/YEN); the Nikkei getting squeezed like France’s CAC did right up to its long-term TAIL of resistance (TAILS: Nikkei = 9397, CAC = 3556) is what it is – largely a Pain Trade that tends to capitulate as the end of the rally nears. We’re long China, short Japan.
  2. OIL – Brent or WTI, take your pick – both are in what we call a Bullish Formation (bullish TRADE, TREND, and TAIL) – and both have a systematic ability to infect (slow) Consumption growth both in the US and around the world. Feels like Q1/Q2 of 2011 all over again where consensus is still anchoring on the last 2 quarters of US GDP growth being good (it was).
  3. 10yr – the bond market says Growth Slowing is a bigger problem than inflation rising. UST 10yr is now breaking my only line of remaining support (1.96%) into a Bearish Formation (bearish yields on all 3 risk mgt durations – TRADE, TREND, and TAIL), so this will be a very interesting day. Bond yields breaking down have front run US Growth expectations for a long time now.


S&P futures excited about something that I can’t see. Last price doesn’t lie though; neither do lower long-term highs.












GMCR: Green Mountain has announced an expansion of its line of Keurig Single Cup Brewers with the addition of the Keurig Vue brewer.  The Keurig Vue brewer is designed with the ability to brew “stronger, bigger, and hotter”.


SBUX: Starbucks will open stores in the majority of Target stores across Canada.  Under the terms of an agreement between the two companies, 125-135 Target locations will feature Starbucks licensed stores.


PEET: Peet’s Coffee reported 4Q EPS of $0.42 versus $0.43 consensus.  COGs (coffee and milk) weighed down earnings but management backed its 2012 outlook.  The company expects to earn between $1.70 and $1.80 per share, which implies 14% to 21% growth over 2011 EPS of $1.49.  The company guided to 4% coffee inflation in 2012.


MCD: The Ukrainian Journal is reporting that the second busiest McDonald’s outlet, after the Moscow Pushkin Square location, is in Vokzaina Square in Kiev.







RRGB: traded down -1.6% on accelerating volume.





Howard Penney

Managing Director


Rory Green




TODAY’S S&P 500 SET-UP – February 15, 2012


As we look at today’s set up for the S&P 500, the range is 15 points or -0.41% downside to 1345 and 0.70% upside to 1360. 











  • ADVANCE/DECLINE LINE: -815 (-2422) 
  • VOLUME: NYSE 743.55 (8.92%)
  • VIX:  19.54 2.63% YTD PERFORMANCE: -16.50%
  • SPX PUT/CALL RATIO: 1.53 from 2.38 (-35.71%)



10yr – the bond market says Growth Slowing is a bigger problem than inflation rising. UST 10yr is now breaking our only line of remaining support (1.96%) into a Bearish Formation (bearish yields on all 3 risk mgt durations – TRADE, TREND, and TAIL), so this will be a very interesting day. Bond yields breaking down have front run US Growth expectations for a long time now. 

  • TED SPREAD: 39.08
  • 3-MONTH T-BILL YIELD: 0.11%
  • 10-Year: 1.94 from 1.94
  • YIELD CURVE: 1.67 from 1.65 

MACRO DATA POINTS (Bloomberg Estimates):

  • 5:30am: Bank of England releases growth, inflation forecasts
  • 7am: MBA Mortgage Applications, prior up 7.5%
  • 8:30am: Empire Manufacturing, Feb., est. 15 (prior 13.48)
  • 9am: Net Long-term TIC Flows, Dec., est. $45b (prior $59.8b)
  • 9:15am: Industrial Production, Jan, est up 0.7% (prior up 0.4%)
  • 9:15am: Fed’s Fisher speaks in San Marcos, Texas
  • 10am: NAHB Housing Market index, Feb., est. 26 (prior 25)
  • 10:30am: DoE crude inventories,e st. build 1600k (prior build 304k)
  • 2pm: FOMC minutes from Jan. 24-25 meeting 


    • Treasury Secretary Tim Geithner, Defense Secretary Leon Panetta, HHS Secretary Kathleen Sebelius, other Cabinet officials testify before Congress on Obama budget, 10am
    • Chinese Vice President Xi Jinping delivers address at U.S.- China Business Council luncheon, noon
    • Senate, House in session 


  • U.S. industrial production may have accelerated 0.7% in Jan., economists est., would be biggest gain in six months
  • German, Franch 4Q GDP beats ests., Italy slips into recession; euro-area economy shrinks 0.3%
  • Obama tells Xi China’s rise comes with duty on trade, rights
  • Yahoo-Alibaba talks falter as investor steps up pressure
  • U.S. investigating Goldman analyst on insider tips, WSJ says
  • Berkshire takes Liberty Media, DaVita stakes as Weschler joins
  • LightSquared to be blocked by FCC after U.S. interference report
  • Citigroup, others release monthly credit-card delinquencies, charge-offs
  • Nasdaq, Bats websites attacked; trading systems unaffected
  • China pledges to invest in Europe’s bailout funds, hold euros
  • Goldman Sachs Technology and Internet Conference includes presentations from Microsoft, Cisco, eBay 


    • Cimarex Energy (XEC) 6 a.m., $1.31
    • Cenovous (CVE CN) 6 a.m., $0.53
    • Calumet Specialty Products (CLMT) 6:30 a.m., $0.48
    • WellCare (WCG) 6:30 a.m., $1.19
    • Amtrust Financial Services Inv (AFSI), 7 a.m., $0.63
    • Comcast  (CMCSA) 7 a.m., $0.42
    • Deere (DE) 7 a.m., $1.24
    • Incyte (INCY) 7 a.m., ($0.41)
    • Abercrombie & Fitch (ANF) 7 a.m., $1.12
    • Henry Schein (HSIC) 7 a.m., $1.12
    • Avista (AVA), 7:05 a.m., $0.45
    • Penske Automotive (PAG) 7:25 a.m., $0.41
    • Owens Corning (OC) 7:30 a.m., $0.48
    • Watsco (WSO), 7:30 a.m., $0.34
    • Scana (SCG) 7:30 a.m., $0.78
    • Atlas Air Worldwide Holdings (AAWW) 7:37 a.m., $1.91
    • Devon Energy (DVN) 7:55 a.m., $1.49
    • Six Flags Entertainment (SIX) 8 a.m., ($0.86)
    • Dr Pepper Snapple (DPS) 8 a.m., $0.74
    • Dean Foods (DF) 8 a.m., $0.23
    • Mine Safety Appliances (MSA) 8:30 a.m., $0.59
    • Allete (ALE) 8:30 a.m., $0.57
    • Clearwire (CLWR) 4 p.m., ($0.37)
    • Itron (ITRI) 4 p.m., $1.00
    • Stifel Financial (SF) 4 p.m., $0.43
    • NetApp (NTAP) 4 p.m., $0.58
    • Trinity Industries (TRN) 4:01 p.m., $0.44
    • CBS Corp (CBS) 4:01 p.m., $0.53
    • Hanesbrand Inc. (HBI) 4:01 p.m., $0.51
    • Inc (ACOM) 4:01 p.m. $0.34
    • Athenahealth (ATHN) 4:01 p.m., $0.24
    • Equinix (EQIX) 4:01 p.m., $0.46
    • Netlogic Microsystems (NETL) 4:02 p.m., $0.37
    • Glimcher Realty Trust (GRT) 4:02 p.m., $0.21
    • Jarden Corp. (JAH) 4:05 p.m., $0.91
    • Morningstar Inc. (MORN), 4:05 p.m., $0.56
    • Russel Metals (RUS CN) 4:05 p.m., $0.40
    • Agilent Technologies (A) 4:05 p.m., $0.69
    • National Health Investors (NHI) 4:07 p.m., $0.76
    • Marriott Internationa (MAR) 4:10 p.m., $0.47
    • Tesla Motors (TSLA) 4:10 p.m., ($0.62)
    • Intrepid Potash (IPI), 4:15 p.m., $0.30
    • C&J Energy Services (CJES) 4:15 p.m., $0.91
    • Avis Budget Group (CAR) 4:15 p.m., $0.06
    • Regency Energy Partners (RGP) 4:15 p.m., $0.13
    • Kinross Gold (K CN) 4:15 p.m., $0.21
    • CF Industries Holdings (CF) 4:18 p.m., $6.82
    • Nvidia Corp. (NVDA) 4:19 p.m. $0.24
    • Delphi Financial Group (DFG) 4:20 p.m. $0.88
    • Agnico-Eagle Mines (AEM) 4:30 p.m., $0.47
    • ION Geophysical (IO) 4:30 p.m., $0.16
    • CenturyLink (CTL) 4:48 p.m., $0.61
    • Federal Realty Investment Trust (FRT) 5 p.m., $0.98
    • Oceaneering International Inc (OII) 5 p.m., $0.52
    • MEMC Electronic Materials (WFR) 5:03 p.m., ($0.08)
    • Georgia Gulf Corp. (GGC) 5:09 p.m., $0.12
    • Energy Transfer Partners (ETP) 5:09 p.m., $0.66
    • Sun Life Financial (SLF CN) 5:10 p.m., (C$0.60)
    • Goldcorp (G CN) 5:15 p.m. $0.60
    • Energy Transfer Equity (ETE) 5:15 p.m., $0.42
    • Terex Corp. (TEX) 5:27 p.m., ($0.25)
    • Cliffs Natural Resources (CLF) 5:42 p.m., $1.43
    • Vectren Corp (VVC) 6:01 p.m., $0.57
    • Vulcan Materials (VMC) 6:12 p.m., ($0.37)
    • Manning & Napier (MN), postmkt, $0.25
    • Westport Innovations (WPRT), postmkt, ($0.20)  



OIL – Brent or WTI, take your pick – both are in what we call a Bullish Formation (bullish TRADE, TREND, and TAIL) – and both have a systematic ability to infect (slow) Consumption growth both in the US and around the world. Feels like Q1/Q2 of 2011 all over again where consensus is still anchoring on the last 2 quarters of US GDP growth being good (it was). 

  • Coal Miner Turns Dealmaker at London Metal Exchange: Commodities
  • Paulson Joins Tudor Selling SPDR Gold Shares as Soros Buys
  • Crude Oil Advances as China Pledges Help on European Debt Crisis
  • Commodities Climb to Six-Month High as Growth May Revive Demand
  • Wheat Gains as Frost May Curb Ukrainian Production, Exports
  • Cocoa Rises as Olam Says Beans Have ‘More Upside’; Coffee Gains
  • Gold May Rise After China’s Pledge to Aid Europe Weakens Dollar
  • Copper May Rise on Chinese Vow to Help Resolve Euro Debt Crisis
  • China Steel Price Shows Asia Optimism Overdone: Chart of the Day
  • Oil Refiners to Have Surplus Capacity in 2012, Barclays Says
  • Brent Oil May Rise to $120 on Low Spare Supply, Goldman Says
  • Asia Naphtha Refining Profits Reach Two-Week High: Oil Products
  • Drillers Trailing High Yield Amid Fracking Boom: Canada Credit
  • Chavez Misses $10 Billion a Month Curbing Oil Spending: Energy
  • Nickel May Test Lower End of Range Trading: Technical Analysis
  • Vancouver Could Handle More Kinder Morgan Oil, Port CEO Says
  • Iran Oil Premium Defies Analysts Rejecting Risk: Energy Markets 















JAPAN – the Nikkei busted a surprisingly bullish move = +2.3% overnight as the Yen remained under central planning pressure (-0.2% at 78.15 USD/YEN); the Nikkei getting squeezed like France’s CAC did right up to its long-term TAIL of resistance (TAILS: Nikkei = 9397, CAC = 3556) is what it is – largely a Pain Trade that tends to capitulate as the end of the rally nears. We’re long China, short Japan.











The Hedgeye Macro Team


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The Macau Metro Monitor, February 15, 2012




According to data from the Urban Redevelopment Authority, 1,872 units of new homes, excluding executive condominiums (EC) were sold in January 2012, more than double the 632 units moved in December.


Wobbly Understanding

“Even sophisticated researchers have poor intuitions and a wobbly understanding of sampling effects.”

-Daniel Kahneman


That quote comes from Chapter 10 of “Thinking, Fast and Slow” where Kahneman discusses both the Law of Small Numbers and what he calls a Bias of Confidence Over Doubt. After a day like yesterday, I had to re-read that.


Reading and re-reading my notes is what I do. I don’t read books without marking them up. I haven’t gone a market day in almost 13 years where I didn’t systematically take notes by hand on market prices. It’s not perfect. But I have yet to find a better learning process.


Re-think, Re-build, Re-learn. It’s not only my advice for the political leaders of this country, it’s the advice that I rinse and repeat with my team each and every risk management day. If you’re not finding a better way, you’re falling behind.


Back to the Global Macro Grind


I was almost certain that the SP500 was going to finally snap my immediate-term TRADE support line of 1345 yesterday. It did, but it didn’t close there. Closing prices matter more in my model than intraday ones.


Math matters. So do emotions. If you can find a way to harness both, you’ll probably make less mistakes than I did earlier in my career.


Dan Kahneman and his former thought partner, the late Amos Tversky, came up with what they contextualized as “strongly worded” advice for researchers like us. They suggested we consider our “statistical intuitions with proper suspicion and replace impression formation by computation whenever possible.” (Thinking, Fast and Slow, page 113)


Re-read that. It’s really good.


I can’t count the amount of investment research meetings that I have been in over the course of my career where someone just goes off with their qualitative observations. It’s probably endemic to the industry I follow most closely (Global Consumer), but I still don’t get how a billionaire can sit across the table from me talking about the deal he got on a fire-pit at Costco.


Over the years, after making plenty of qualitative assumptions that turned into quantified P&L mistakes, I’ve tried to cleanse myself with the “proper suspicion” of pretty much everything I think. My risk management governor is a repeatable quantitative overlay that captures real-time price, volume, and volatility signals.


No matter what we think we know, the market often has a not so funny way of thinking otherwise.


Obviously if you change the duration embedded in that thought, you come up with price disconnects that you, the great researcher, can capitalize on. But if your process aspires to be Duration Agnostic (measuring risk across different durations, all at the same time), you’ll see that you probably don’t know what you don’t know about a lot of things. That’s why I usually defer to last price.


Let’s isolate the SP500 and consider it across our 3 core durations (TRADE, TREND, and TAIL):

  1. Immediate-term TRADE support = 1345 and resistance = 1360 (we call this our immediate-term range)
  2. Intermediate-term TREND resistance = 1363 (April 2011’s closing high)
  3. Long-term TAIL support = 1267

Now if you are day trader or Warren Buffett, you could very well read into my risk management conclusions in completely different ways. If you are not Duration Agnostic, you probably should. Unfortunately, the market doesn’t care about our individual investment styles.


What happens when you overlay a fundamental Global Macro Research View

  1. US, European, and Japanese fiscal and monetary policies drive currencies
  2. Currencies drive immediate-term correlations in market inflations/deflations
  3. Inflations/Deflations drive real (inflation adjusted) Consumption Growth (71% of US GDP)



What if you have to think, fast – and slow, about all 3 durations (TRADE, TREND, and TAIL) and all 3 fundamental factors (Policy, Inflation, and Growth) – all at the same time?


I call that being Multi-Factor, Multi-Duration. I also call that Wall St 2.0.


Embracing Uncertainty and accepting that (unless we are trading on inside information) we all have a Wobbly Understanding about what is going to happen to our positioning next is what gets me right fired-up every morning. It’s my opportunity to improve the process.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Nikkei225, and the SP500 are now $1, $116.35-119.95, $1.30-1.33, 78.86-79.79, 8, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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