In preparation for ISLE's FQ3 2012 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • Completed the sale of Grand Palais Riverboat, Inc. including the smaller of the Company's two riverboats in Lake Charles to Bossier Casino Venture LLC for $15 million.  Concurrent with the sale the Company has consolidated its operations onto the remaining larger riverboat and will operate with 1,262 slot machines, 40 table games and eight poker tables.


  • "We will finish interior upgrades to the Grand Palais Casino in Lake Charles in the middle of December and are finishing completing the designs for the refurbishment of our Lake Charles Hotel."
  • "We've already commenced the re-brand of our Vicksburg facility to our Lady Luck brand, a $4.5 million project that we expect to be substantially completed shortly after the end of our fiscal year. We are also pleased with our progress in Cape Girardeau and are approximately one year away from our anticipated opening day."
  • "We expect capital expenditures of around $60 million in the last half of the year with approximately half of that going in Cape Girardeau."
  • [Davenport] "We are currently still having conversations with the city's preferred developer, although that process has slowed.  As a result, we have opened up that process to have conversations with some other potentially interested parties."








The ICSC chain store sales index remained consistent with modest spending growth and continued seasonal volatility.  Last week, the index gained 3.0% (4 week moving average is now 0.7% vs -0.4% last week), reversing the prior week’s -2.0% decline. Year-over-year improved modestly to 3.2% from 2.8% (4 week MA improves to 3.4% from 3.3%).  Unusually warm weather and Valentine’s day helped to offset rising gasoline prices.


Comments from CEO Keith McCullough


Finally, Top 3 Most Read (after Greece at #1) = Oil Rising at #2 and China Slowing #3 – the rest of the world didn’t cease to exist!


  1. GROWTH – pick your overnight economic data point, from German PMI slowing sequentially in FEB to 50.1 vs 51 JAN to Taiwan Exports dropping -8.6% y/y in JAN, I think we’re just getting started here. What happens on the margin m/m matters most. Inflation, from these levels, slows growth.
  2. INFLATION – Italian CPI +3.2% y/y JAN (stagflation), India CPI pops to +7.7% JAN vs 6.6% DEC, and Hong Kong CPI up to 6.1% JAN vs 5.7% DEC –these are all JAN numbers that don’t include this rip in the CRB Index, Oil, etc in FEB.
  3. YEN – complete meltdown on our immediate-term TRADE duration w/ the Japanese Yen in free-fall, accelerating to the downside this morning to 80.16 vs USD. At the same time, short-term UST’s are spiking above my TREND line of 0.26% and 10s are above the critical 2.03% line this morn. Big sov debt maturity spike in Japan in March.

Got Sov Debt risk in Japan and the USA? Just when everyone stopped thinking running deficit and debt levels like this didn’t matter? These are risk mgt questions that don’t have tidy answers, unfortunately. I get paid to ask them when markets do.






THE HBM: PZZA, CAKE, TXRH - subsecotrs




PZZA: Papa John’s reported 4Q EPS of $0.65 versus $0.62 consensus.  Comps missed, coming in at 1.7% versus 4.3% consensus for North American system-wide comparable sales.  EPS guidance for 2012 was reaffirmed $2.33-2.43 versus consensus $2.44.




JMBA: Jamba gained +6.1% on accelerating volume yesterday.




CAKE: Cheesecake Factory reported a low quality beat.  Favorable tax and an extra week were essential to the $0.53 4Q EPS number versus $0.52 expectations.  The outlook for unit growth was also altered as some opening dates have been pushed out.  The guide down for 1Q and lack up guide up on the full year, despite raising FY12 comp guidance, were the two main points that drove the stock down post market.  See our CAKE post from this morning for further details.


CAKE: Cheesecake Factory was reiterated “Buy” at Sterne Agee.  The PT remains $36. 


TXRH: Texas Roadhouse reported 4Q EPS of $0.18 versus consensus $0.16.  Comparable restaurant sales came in at +5.6% in 4Q.


THE HBM: PZZA, CAKE, TXRH - txrh pod1







CBRL: Cracker Barrel gained 4% on accelerating volume yesterday after strong earnings before market open.

KONA: Kona continues to get hit on strong volume.





Howard Penney

Managing Director


Rory Green




The premarket look at the stock is down 5%.  We think this price is a good opportunity to buy the stock for a trade.  The intermediate and longer term TREND and TAIL, respectively, is less certain.  Many questions remain around sales and margin trends in 2H12.


As the industry fundamentals continue to improve (benefiting from better weather) putting up a clean quarter is a must in this environment.  In this context CAKE did not deliver on the 4Q11 numbers.  EPS benefitted from a favorable tax settlement and an extra week also added approximately $0.05.  While CAKE will never be a comp store sales story, the top line performance was strong.  Comps were +2.7% including 1.7% traffic and 1% average check.  Despite comps coming in 70 basis points above expectations, the lack of flow through meant that the targeted EPS growth could not be achieved without the help of an extra week.


CAKE: INVESTORS SAY “SHOW ME” - cake vs icsc


CAKE reported $0.53 adjusted EPS versus consensus of $0.52 but neither our model, nor consensus we believe, was anticipating how the company would reach that target.  The 4Q11 results are reminiscent of the CAKE of old, when the company could not seem to put it all together.  That is not to say that the concept is highly flawed but it is an expensive concept to execute consistently.


Some of the issues that stand out are:

  1. Guided 1Q12 EPS $0.34-0.36 versus $0.40 consensus based on 2-3% comparable sales growth.  Sales guidance for 1Q12 of $435-440 million negatively impacted by extra week in 4Q negatively impacting revenues. 
  2. Despite raising FY12 comp growth guidance range by 50 bps to 1.5-2.5%, EPS guidance was unchanged at $1.80-1.90. Higher labor costs are expected to impact margins along with impact of extra week in 4Q11.
  3. Revised FY12 U.S. openings from 7-10 to 7-8 due to third party issues and the openings have merely “shifted out a bit”, according to management.
  4. Pre-opening expense of $3 million in 4Q11 in support of two additional restaurant openings.  Who spends that kind of money on preopening costs?  Only CAKE!!
  5. 4Q results included an impairment charge of three previously impaired restaurants of 1.5 million. 
  6. A favorable settlement of a lawsuit filed against the IRS resulted in the company recording interest income of $719,000 and a credit to the tax provision of $1.1 million relating to the settlement.


The key question for investors in this stock is whether or not they believe that management will be able to deliver on FY12 expectations despite effectively preannouncing that 1Q will come in lower than many have been expecting.  As we progress through 2012, the compares on both the revenue and margin lines become sequentially more difficult. 


The company guidance of 2-3% SSS this far into 1Q12 suggests that the current trends remain in place.  2.5% comp growth in 1Q12 implies two-year average trends 30 basis points above 4Q levels.  The company will need to execute from a top line perspective with higher labor costs and tax rate (28-29%), offset by commodity cost inflation rolling off, set to negatively impact EPS growth this year.   ICSC chain store sales (chart above) are implying a slight slowdown in quarter-to-date numbers and we will continue to monitor this trend as the quarter progresses. 


The premarket look at the stock is down 5%.  We think this price is a good opportunity to buy the stock for a trade.  While the negative reaction to the quarter was not misplaced, we do believe that the company remains healthy.  There is a lot of uncertainty and investors will be seeking reassurance on the full year prospects during the next earnings call on 4/25. 






Howard Penney

Managing Director


Rory Green


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Too Strong?

This note was originally published at 8am on February 08, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I would think we do a Quantitative Easing 3 if the Dollar gets too strong.”

-Larry Fink


Wow. Larry Fink is the CEO of Blackrock – they run $3.5 Trillion in client assets – and after a +101% move in US stocks from the 2009 low, he told Bloomberg yesterday that “investors should be 100% in Equities.”


Game on.


Fink is probably a good guy. We probably have a few things in common too. For one, we both started our careers at First Boston. He eventually ran their bond department. I eventually left.


Evidently, one thing that we do not have in common is the concept of Wall St 2.0 Global Macro Risk Management. There’s tremendous responsibility in being trusted with real-time recommendation. Time and price really do matter. With my own money, I’d never be 100% in anything – never mind stocks, after their best start to a year in decades.


The other thing Fink and I don’t have in common are political aspirations. He’d like to replace Geithner as head of the Treasury. I’d rather be a one-legged duck swimming in a circle.


When you consider the aforementioned currency quote within the context of where some of this country’s thought leaders are relative to my Strong Dollar = Strong America vote, Fink and I are not even in the same area code of having a debate.


Is my opinion Too Strong? After testing 40-year lows during Qe2 of last year, was the US Dollar Too Weak? Is Larry Fink’s view of arresting gravity and not letting America’s currency trade at its non-Fed intervention free-market price Too Strong?


So many critical questions. So little time left.


Back to the Global Macro Grind


With Santorum sweeping 3 states last night, President Obama’s probability of re-election (Intrade contracts) are going up and the US Dollar Index is going down. It sounds like Fink’s goal in advising Obama will be to keep the Dollar down. I guess if you’re in the business of seeing asset prices inflate, that makes some sense.


But does it make sense for American Savers and Consumers?


You tell me. I’m already telling you what I think. It’s no different than what I thought when Larry Fink was bullish on US Equities in February of last year. US Dollar Debauchery drives inflation. Inflation slows real GDP growth.


Now if you take Bernanke or the US government’s word for it, we don’t have inflation. Notwithstanding the fact that Bernanke cites a US inflation calculation that has been changed 9x since 1996, the “deflator” in this past quarter’s US GDP report was only 0.4%.


What does that mean?

  1. Q4 US GDP Growth for 2011 was reported at 2.75%
  2. Q4’s “Deflator” (you subtract inflation from the reported number for a real GDP #) was 0.39%
  3. With Consumer and Producer Price inflation running 10x that 0.39% “deflator”, US GDP was grossly overstated

I don’t use the word “grossly” very loosely. Neither does Clarium Capital’s Peter Thiel use the word “fraud” casually. Last night, like two non-Keynesian ships in the night, Thiel (founder of Pay Pal) and I were on separate sides of Yale University’s campus hosting spirited discussions with students and faculty about the alternative debate to currency debasement (he called Keynes a fraud).


Back to these feisty little critters called Inflation Expectations that slowed US GDP Growth in its tracks at 0.36% in Q1 of 2011 (yes, before the Europe that every guy who was wrong on his 2011 US GDP forecast by 60-80% blamed), here are some facts:

  1. US stocks haven’t had 1 down day of more than 0.57% in 2012 YTD (yes, stock prices are inflating)
  2. Brent Oil is trading at $116.35/barrel this morning = up +6.5% since Bernanke debauched the US Dollar on January 25th
  3. Gold has gone from $1622 on the morning of January 25th(pre FOMC statement) to $1749 this morning = +7.8%

If someone wants to explain to me that markets aren’t expecting the Chairman of the Federal Reserve to inflate, I’m ready to debate them in any public forum – any time, any place.


Russian stocks (driven by expectations of Petro-Dollar prices = Dollar Down, Oil Up) are up another +1.3% and up +19.5% YTD! Both the central banks of Australia and South Korea have come out in the last 48 hours and said no more rate cuts with inflation running higher. India, who is highly dependent on foreign oil, just saw its yield curve go back to flat as inflation expectations ramped.


I could (and do) go on, and on, and on about this … because the data that supports it does…


The bottom line is that people who get paid (including me because I am long Energy (XLE) and Gold) by inflation expectations rising are the same people who generally say there is no inflation.


Calling that out for what it is isn’t Too Strong. It’s called the truth. Respect and leadership in America isn’t allocated by your title. Its earned each and every day. There may be bailouts for people losing client capital. But there is no bailout for losing credibility.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1736-1766, $112.71-116.85, $1.30-1.32, $78.59-79.09, and 1327-1354, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Too Strong? - Chart of the Day


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CHART OF THE DAY: Legislating Inflation


CHART OF THE DAY: Legislating Inflation - Chart of the Day

Legislating Inflation

“Inflation is taxation without legislation.”

-Milton Friedman


Since one of America’s chief champions of free-market capitalism, Milton Friedman, died in 2006, we’ve had Ben Bernanke running the US Federal Reserve. Bernanke has never raised interest rates. Never is a long time.


The Bernank’s fans (most of them get paid by inflation) will tell you that, in the short-run, Legislating Inflation is what we need to stop The Deflation (i.e. free-market prices falling). In the long-run, I think that conflicted and compromised policy for the few will be dead.


It’s a good thing President Obama is considering a cut in the US corporate tax rate today – because Bernanke’s 2014 cheap money policy is imposing a Consumption Tax on the 71%.


Back to the Global Macro Grind


The way that my Keynesian Economics professors at Yale taught me to calculate US GDP Growth is as follows:


GDP = C + I + G + (X-M)


C = Consumption. That’s 71% of US GDP. Genius calculus will reveal rising “export/manufacturing” doesn’t budge the GDP number.


So, if you have a Policy To Inflate via US Dollar Debauchery, you are putting a Consumption Tax on the American People. Most human beings who drive to work, pay for their kids to go to school, and feed their families get this.


Yesterday, the US Dollar Index was down another -0.45%.


At the same time: 

  1. Oil was up another +2.5%
  2. Gold was up another +2.0%
  3. Energy Stocks led SP500 advancers at up +0.7% 



On the day, the SP500 barely closed up (+0.07%).


So, this whole Legislating Inflation thing that is occurring both fiscally (no budget yet; no deficit discipline either) and monetarily, is only good for the US stock market to a point.


This revelation, of course, is not new. Almost the exact same thing happened to commodity and stock prices into the highs of February 2011. All the while, Obama’s central planning advisors (David Axelrod, Larry Summers, Tim Geithner, etc) couldn’t believe that US Growth slowed like it did in Q1 of 2011 (down to 0.36%!).


How? Who? Why?


After you calculate the C + I + G + (X-M), you have to subtract what we call the “Deflator” from the GDP number. As inflation rises, the deflator gets bigger, and yes, sorry, real economic growth (adjusted for inflation) gets smaller.


This is why we are so intensely focused on the marginal relationship between Growth and Inflation. Since everything that matters in Global Macro is priced on the margin, this is what we need to solve for within the aforementioned GDP equation.


My call here is as crystal clear as it was at this time of last year. From this time and price, Inflation Expectations Rising Will Slow Growth sequentially (as in month-over-month). Markets typically don’t like that.


Where’s the Inflation Rising data? 

  1. Hong Kong’s Consumer Price Inflation rose to 6.1% in JAN vs 5.7% DEC
  2. India’s Consumer Price Inflation rose to 7.7% in JAN vs 7.5% (WPI) DEC
  3. Italy’s Consumer Price Inflation stayed sticky at 3.2% JAN vs 3.2% DEC 

Where’s the Growth Slowing data? 

  1. Germany’s manufacturing PMI stopped improving in FEB at 50.1 vs 51.0 JAN
  2. Japanese Exports plummeted to -9.3% y/y in JAN and Japan printed their largest monthly trade deficit ever!
  3. Taiwan Exports were down -8.6% y/y in JAN (lowest demand reading since 2009) 

*Some obvious points about all this data: A) its Global Macro data, not Greek, B) there’s plenty of January data here instead of February and C) the inflation data (causal in slowing real growth) has only accelerated to the upside here in February.


So, do we suspend all disbelief and chase 3-year highs in US Equity prices because the Dow is approaching a big round number? If I’m paid to do it with other people’s money, I might roll the bones on that. Then again, I might not.


Until we stop Legislating Inflation to cheer on stock and commodity markets (David Axelrod), we won’t A) stop seeing shortened economic cycles and B) amplified market volatility.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1, $118.72-121.78, $1.30-1.33, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Legislating Inflation - Chart of the Day


Legislating Inflation - Virtual Portfolio

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