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In January, Y/Y CPI growth for Food at Home decreased by 70 basis points to 5.3% from 6.0% in December.  CPI for Food Away from Home gained 20 basis points to 3.1% from 2.9% in December. 


This is a trend that we are continuing to monitor closely.  2011 was a year where restaurant margins were impacted by inflation but, due to strong top line trends, rising food costs did not have as severe an impact on earnings as some were anticipating.  Management teams in the grocery space took significant levels of pricing during 2011 and we believe that this was a factor in helping restaurants attract customers.  Food Away from Home CPI was far more benign as restaurant companies prioritized traffic over margin.   Our view in 2012 is that, if the spread between these two CPI data points continues to narrow, the competitive benefit that the restaurant companies enjoyed in 2011 will shrink and any exposure to inflation will be felt more acutely on the bottom line. 


As JACK CFO Jerry Rebel said on a recent earnings call, management teams pay close attention to this data when thinking about pricing so we will continue to monitor these trends closely.


CPI – JAN FOOD AT HOME SLOWS AS AWAY FROM HOME PICKS UP - food at home vs food away from home cpi white



Howard Penney

Managing Director


Rory Green




Big beat probably in the stock



Galaxy should again exceed Street numbers for Q4.  However, given the big run in the stock recently, it probably won’t be much of a surprise.  Our Q4 estimate of HK$14.2BN in revenue and $2.2BN of Adjusted EBITDA is 4% and 21% higher than consensus, respectively. 


Galaxy is up 36% YTD so expectations have risen.  That combined with worries about slowing growth in Macau, share losses in February, and the opening of Sands Cotai Central, we wouldn’t necessarily be running out to buy the stock at current levels.





Like last quarter, Galaxy’s casino operations should benefit from high hold.  Using theoretical hold of 2.85%, we estimate that luck benefited gross revenue by HK$1.3BN and EBITDA by HK$392MM.


Galaxy Macau


We are estimating Q4 revenue of HK$7.6BN and Adjusted EBITDA of HK$1,330MM.  Our revenue and EBITDA estimate are 30% and 39% ahead of consensus, respectively. 

  • Gross gaming revenue of $7.4BN
    • HK$5.7BN of gross VIP win
      • RC Volume of HK$168.3BN
      • Hold: 3.4%
      • Assuming theoretical hold of 2.85%, gross VIP win would be HK$925MM lower and EBITDA would be HK$330MM lower or HK$1BN – still 4.5% above consensus
    • Mass win of HK$1,375MM
    • Slot win of HK$275MM
  • Net non-gaming revenue of $246MM
  • Rebate & commission rate of 1.35% of turnover or 39.7% of win or HK$2.27BN
    • We assume 60% of the VIP business is revenue share based and 40% is RC based
  • Gaming premium of HK$32MM
  • HK$111MM of non-gaming related direct expenses
  • Fixed costs of HK$1BN


We estimate that Starworld will report revenue of HK$6,050MM and Adjusted EBITDA of HK$796MM, 4% and 15% ahead of the Street, respectively. 

  • Gross gaming revenue of $5.9BN
    • HK$5.4BN of gross VIP win
      • RC Volume of HK$174.5BN
      • Hold: 3.1% compared to a hold of 2.9% (excluding this last quarter) since opening
      • Assuming theoretical hold of 2.85%, gross VIP win would be HK$400MM lower and EBITDA would be HK$62MM lower or HK$734MM – still 6.5% above consensus
    • Mass win of HK$499MM
    • Slot win of HK$60MM
  • Net non-gaming revenue of $117MM
  • Rebate & commission rate of 1.4% of turnover or 45.5% of win or HK$2.45BN
  • Gaming premium of HK$16MM
  • HK$29MM of non-gaming related direct expenses
  • Fixed costs of HK$450MM

Other stuff

  • City Club contribution of HK$68MM
  • Construction materials revenue of HK$473MM and EBITDA of HK$128MM
  • Net corporate costs of HK$132MM
  • D&A: HK$275MM






Comments from CEO Keith McCullough


Two of the Top 3 Most Read (Bloomberg consensus) still staring at the tree (Greece) – meanwhile the rest of the world doesn’t cease to exist:

  1. SINGAPORE – when the Prime Minister of Singapore warned of a “rough landing” in China last wk, our research team was buzzing about it – they should have been; Singapore is a leading indicator for Global Growth – and Singapore’s Exports for JAN just dropped to negative y/y! (-2.1% vs +9.0% DEC). Chinese Growth is slowing – I sold my China Equities (CAF) long (bought it in DEC) yesterday
  2. OIL – never has Oil trading > $100/barrel not slowed both US and Global Consumption Growth. Maybe this time is different. Maybe it isn’t. Brent Oil busting to new highs this morning on a weak US Dollar and institutional performance chasing squarely focused on buying inflation protection.
  3. JAPANESE YEN – biggest currency drop not discussed by consensus media, maybe ever – and ever, as you know, is a long time. The Yen is literally straight down for the month of FEB. Down 4% is a monster move for a major currency. I think this is front-running the Sovereign Debt Maturity spike that’s pending in March. When I was saying this about the Euro breaking down hard in April 2011, that was the early signal too…

Covered SPY short at 1341, and re-shorted it into yesterday’s close. I think we keep making lower long-term highs vs 1363.









GMCR: Green Mountain Coffee was raised to “Buy” at Dougherty & Co.  The twelve month price target is $80 per share.




COSI: Cosi declined 2.9% on accelerating volume yesterday.





PFCB: P.F. Chang’s was upgraded to Outperform by RBC.  The price target was raised from $37 to $45.


KONA/PFCB:  Kona COO Larry Ryback has resigned from the company and will leave by March 2012 to take up the post of COO of P.F. Chang’s Bistro division.


BJRI: BJ’s restaurants reported EPS of $0.34 versus consensus $0.32.  Comparable sales for 4Q11 increased 5.1%.


DRI:  Darden was reiterated “Buy” at UBS.




TXRH, PFCB, DRI, EAT, CBRL, & DIN: All gained on accelerating volume yesterday.  PFCB traded at 4.5x average volume following earnings.  We are bullish on the stock.





Howard Penney

Managing Director


Rory Green



Early Look

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Cognitive Strain

This note was originally published at 8am on February 03, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1721-1779, $110.84-112.36, $1.30-1.32, 2282-2344, and 1318-1333.


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

The Healthcare Fix

“Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not seek to fix the blame for the past. Let us accept our own responsibility for the future.”

-John F. Kennedy


Keynesian dogmas are often criticized at Hedgeye.  While fiscal and monetary policy is often the target for critics, health spending is often ignored.   Perhaps it is easier to comment on growth and inflation metrics in the broader economy than it is in the healthcare sector.  But the similarities are apparent.  Over the last 50 years government health spending has coincided with rising medical inflation and slower growth.  Maybe it is time to try something different.


The health reform debate has a long history, but one that has generally ended with rising demands on public financing.  As of today, government payments account for over half of the total medical spending today in the United States.  Medical spending finds itself again as central issue in the current political debate.  


For all of the public support for the health sector, or because of it, affordability and access continue to be the chronic platforms of the debate.   Since 1999, family insurance premiums have risen at over 8% per year and 3X the rate of wage growth, rising from $5,791 in 1999 to $15,073 in 2011 (Kaiser Family Foundation).  At this rate of increase, a family policy will cost $22,000 in 2016 and $32,000 by 2021.  Meanwhile, the employee share of insurance premiums has risen while wage growth has been stagnant. But worst of all, access is shrinking.  Out of pocket expenses and deductibles make it unaffordable for many to seek care, while of those insured by Medicare and Medicaid, physicians refuse these new patients 13.7% and 28.2% of the time, respectively.


We are hopeful that President Obama’s Affordable Care Act will produce all that has been promised by the President and the Congressional Budget Office, namely improvement in access, lower costs, and reduced federal deficit.   For reasons we won’t elaborate on here, we believe The Affordable Care Act, while different in the details, will have the similar outcome as past expansions of government health spending.  We expect the legislation will reduce access, drive medical costs higher, and worsen the deficit. 



It is cliché at to say health spending rises faster than broad measures of inflation such as the Consumer Price Index.  Despite the widespread belief that this is driven by an aging population, the surprise finding far less spoken about is the miniscule contribution an aging population makes to annual medical inflation.  According to a 2006 study of hospital care, the annual contribution to hospital spending from an aging population is 0.74% (Banker et al, Health Affairs 2006).  In other studies of total medical spending, the aging contributes only 0.50%.  Removing the demographic fallacy, the conclusion should be to focus on prices. 


Putting this in the populist context of Apple and its $108B in fiscal 2011 revenue, an annual price increase on the $2.6T Health Economy adds $130B in additional revenue, or cost, to the system, with a corresponding “value” that is impossible to compare.



We find it a shame that the healthcare sector is entering its second decade of decelerating growth and lower multiples yet enjoy more government support, more regulation, while Americans have a profound need than ever before.  We’d love nothing more than see routine 5% annual price increases and $130B in new spending turn itself into a new industry to analyze.  Unfortunately prices are going up, and the system remains broken and ineffectual.



My bookshelf is cluttered with too many books on how to fix healthcare that I have spent too much time reading.  Many offer intelligent alternatives.  Many are diligently researched.  But all of them lack a simple and practical solution.  Here’s my simple solution: create a National Health Score, or a credit score for your health. 



A National Health Score would convert well known patterns of per capita medical spending and creates a national underwriting table.  With a Health Score, creating a price for a health insurance policy for an individual is turned into a function of age and a few simple risk factors.   Additionally, remove the risk of catastrophic event by insuring and caring for those rare events separately.


On an individual basis, the Health Score would focus an individual on factors they can control.  A  42 year old father of 2, who is overweight, has high cholesterol, and is a tobacco user should pay more than a healthier 42 year old.   However, if by his own effort he slims down, quits smoking, and improves his Health Score, he should pay less.  By consolidating the risk factors into a Health Score and using it to set the monthly premium, an individual has the “skin in game” that consumer directed healthcare advocates so desire, but its centered on things the individual has control over. Over time, the system benefits from lower long term costs.



The fact that the existence of a three tier system is accepted so calmly in the United States (private insurance, government, none) while we lead the globe in per capita health spending at close to $8,000 per capita, should be alarming.   With a Health Score in hand, legislators and policy will be allowed to turn to how much support an individual receives and how to improve the aggregate Health Score of the population. 



The reality for the vast majority of people is that a serious episode of care is a rare event.  For a hospitalization, the percentage of people are admitted to a hospital in a given year is in the single digits.  For those between the ages of 18 and 44, the rate is 5.9%.  For those between the ages of 45 and 64, the rate is 6.9%.   The downside of course is when you find yourself in the group that goes to the hospital.  The high cost of the care, which carries a mean expense of $11,433 and $20,252 for these two age groups, can harm many, and bankrupt others, and make health insurance prohibitively expensive after an individual does get sick.   By treating people who find themselves unlucky enough to have a major episode, they should be considered a separate group and insured and cared for that way. 


The prognosis for the Health Sector is not good.  Decades of expanding government spending appears set to continue.   Growth will continue to decelerate, multiples will move lower, while government expenditure rises to new highs.  Consumer trends will continue to rise in importance, and pricing leverage will continue to wane.  I’ll continue to play the game in front of me, but I am hoping for something different.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $117.81-120.28, $79.06-79.67, and 1, respectively.


Thomas Tobin

Managing Director


The Healthcare Fix - The Healthcare Dollar 2 EL


The Healthcare Fix - Virtual Portfolio

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