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The Macau Metro Monitor, March 1, 2012




"We believe we have the necessary package of agreements with the government which we need to provide assurance of success. We're just finalizing the last components of [Europa Vegas, the €17bn (£14.3bn) project ]," said LVS CEO Adelson.   Last week Adelson was in Spain again, looking at a vast beachfront stretch of land close to Barcelona's airport that has been offered to him despite environmental protection orders.


Both Madrid and Barcelona hope Europa Vegas will have the same success that Adelson has had in Singapore and Macau.  But opposition politicians in both cities are worried. "We don't agree with this sort of economic model, which would create a tax haven that comes close to being a form of slavery," said a socialist Madrid regional deputy José Quintana.  Local bishops in Madrid are rebelling against the project. "As a recent parliamentary session pointed out, gambling addiction brings with it an increase in illegal acts, suicides and bankruptcies," the bishopric of Alcalá said in a note to parishioners.



Februrary GGR came in at MOP 24.286BN (HK23.58 BN, USD3.04 BN), up 22.3% YoY.




TODAY’S S&P 500 SET-UP – March 1, 2012

As we look at today’s set up for the S&P 500, the range is 9 points or -0.20% downside to 1363 and 0.46% upside to 1372. 












  • ADVANCE/DECLINE LINE: -949 (-985) 
  • VOLUME: NYSE 1111.24 (47.25%)
  • VIX:  18.43 2.62% YTD PERFORMANCE: -21.24%
  • SPX PUT/CALL RATIO: 2.48 from 1.33 (86.47%)



USD – get the big moves in the Dollar right, and you’ll get a lot of big things beta right. We moved to 27 for 28 in our all-time long/short USD calls yesterday (tire pump), and if you didn’t know that Gold, Basic Material Stocks, etc have correlation risk to the big up/down days in USD, now you know. We sold USD into the close as it remains below $79.06 TREND line resist.

  • TED SPREAD: 40.80
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 1.93 from 1.94
  • YIELD CURVE: 1.72 from 1.68

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, Jan., est. 0.4% (prior 0.5%)
  • 8:30am: Personal Spending, Jan., est. 0.4% (prior 0.0%)
  • 8:30am: Jobless Claims, wk of Feb. 25, est. 355k, (prior 351k)
  • 9:45am: Bloomberg Consumer Comfort, wk of Feb. 26, (prior -38.4)
  • 10am: Construction Spending, Jan., est 1.0% (prior 1.5%)
  • 10am: ISM Manufacturing, Feb., est. 54.5 (prior 54.1)
  • 10am: 30-yr mortgage rates from Freddie Mac
  • 10:30am: EIA natural gas storage change
  • 12:30pm: Fed’s Lockhart speaks on economy and banking in Atlanta
  • 11:30pm: Fed’s Williams speaks at economic forecast dinner in Honolulu


  • President Barack Obama speaks on economy in Nashua, N.H.; visits NYC for fund-raiser
  • CFTC hosts Day 2 of discussion on protecting customer funds
  • House, Senate in session:
    • Senate Appropriations Committee hears from Housing Secretary Shaun Donovan on his agency’s budget request, 9:30am
    • House Science, Space and Technology hears from Energy Secretary Steven Chu on R&D budget request, 9:30am
    • Senate Banking Committee receives the semiannual monetary policy report from Fed Chairman Ben Bernanke, 10am


  • Feb. retail sales may gain 3.5%, Retail Metrics says, helped by warmer-than-avg. weather, Presidents, Valentine’s Day holidays
  • Light-vehicle sales in Feb. may have run at 14.2m SAAR, matching Jan.; watch to see how gas prices impact mix
  • Fed Chairman Bernanke heads before Senate for second day of testimony; no signal yesterday that economy needs addl monetary boost
  • Yelp IPO expected to price after the market closes; seeking to raise as much as $100m
  • ISDA Determinations Committee to examine whether credit event happened with Greece, affecting credit-default swaps
  • ISM factory index may have climbed to 8-mo. high of 54.5 from 54.1 in Jan.,economists est.
  • U.S. homes in or nearing foreclosure accounted for 24% of residential purchases in 4Q, up from 20% in 3Q: RealtyTrac
  • Shell filed an injunction seeking timely review of Alaska exploration plans
  • China’s manufacturing index rose to 51.0, third straight month of gains
  • Bank of America considering new checking-account fees: WSJ
  • Tata Communications considering a bid for Cable & Wireless; Vodafone also evaluating offer for network operator
  • European inflation accelerated in Feb. to 2.7% from 2.6% in Jan. as oil prices rose


    • Bombardier (BBD/B CN) 6am, $0.12
    • Royal Bank of Canada (RY CN) 6am, $1.14
    • Toronto-Dominion Bank (TD CN) 6:30am, $1.77
    • Martha Stewart (MSO) 7:30am, $0.06
    • Kosmos Energy (KOS) 8am, $0.11
    • George Weston (WN CN) 8am, $0.98
    • Kroger (KR) 8:45am, $0.49
    • Esterline Technologies (ESL) 4pm, $0.75
    • Ascena Retail Group (ASNA) 4:02pm, $0.67
    • National Bank of Canada (NA CN) 4:30pm, $1.82
    • Foot Locker (FL) 4:45pm, $0.51



GOLD got gold? Into its 12th straight up year, plenty of people do - so do we. The line in the sand that matters to us is $1691 – that’s our TREND line – below it, we're a seller – above it we buy. Its pure momentum driven by the Bubble in Keynesian Economics so we'll just call that out for what it is. The risk for Gold is Bernanke losing his job, so watch Romney’s momentum.

  • Iron Ore Extends Bull Market as Supply Growth Drops: Commodities
  • Saudi Oil-Rig Use Soars as Obama Pressed on SPR: Energy Markets
  • Brent Oil Rises a Second Day as Iran Risk Counters Supply Gain
  • Gold Rebounds Above $1,700 After Bernanke’s Comments Spark Rout
  • Commodities Give Best Returns First Time Since July on Iran Risk
  • Copper Advances as Manufacturing Growth Strengthens in China
  • Wheat Falls as Storms in U.S. May Moisten Soil; Soybeans Drop
  • Robusta Coffee Increases on Supply Concerns; Cocoa Advances
  • Gold Offering No Lifeboat for Iran Oil Sales: Chart of the Day
  • Impala Continues Rehiring Workers as Protesters Block Routes
  • Japan Says in Talks to Start Importing LNG From Continental U.S.
  • Keystone Oil Pipeline Seen Raising Gas Prices in Midwest: Energy
  • Iran Suffers ‘Crippling Effect’ of Sanctions on Trade, Banking
  • Thai Rice Stocks to Surge as Yingluck Extends Purchase Program
  • U.S. Was Net Oil-Product Exporter in 2011
  • Cheap U.S. Corn May Spark China Import Binge: Chart of the Day
  • Silver May Climb to Record on Haven, Industry: Chart of the Day















INDIA – out with the Keynesian textbooks - we define economic stagflation like yield curves do – when inflation is running higher than nominal growth. India has it right now. Sensex down another -1.1% overnight, snapping its TRADE line of 17,683 (that’s new). Countries that are net short oil are in for more pain like they incurred in Q211. Brent hold my $122.21 support.










The Hedgeye Macro Team



Grains were up over the last week while beef declined.  The trend in beef prices is still positive, however, as grocery store beef prices re-set record highs and global demand for U.S. beef remains strong.  Here is a table showing the trends for the commodity monitors we track.    At the end of the post, we supply stacked line charts of each of the commodities below for the last few years of data. 







Gas prices continue to rise, the question is at what point it really starts to impair consumption if it has not already.  Last Friday in NYC, Darden CEO Clarence Otis said, “I would say as we look back, we don't think the current levels, $4 current gas prices, no longer represents sticker shock. And so as we think about this improving trend that the industry has been on over the last two years that trend has been despite the fact that we've seen these levels before. And so, I think people especially at the income demos that we're talking about $4 … we don't see huge effect.  We didn't see it the last time, which I think was roughly 12 months ago if I am not mistaken.”


WEEKLY COMMODITY CHARTBOOK - retail gasoline prices





Grains: Wheat and corn prices gained over the past week as shortfalls elsewhere in the world have led to investors buying U.S. grains


Corn:  U.S. corn futures are trading strongly on growing export demand… Many dynamics are currently being factored into corn prices including gas prices, gasoline consumption, and ethanol margins, the U.S. Dollar, and demand from China…  The USDA’s projections indicate that U.S. corn prices at the farm level are expected to average $5 a bushel for the ‘12/13 marketing year…  The USDA’s calculations suggest that a combination of higher yields and higher acreage will generate an almost 2 billion bushel increase in US corn production come fall.


Wheat:  Supplies are at record levels… prices are down -15.1% year-over-year despite gaining 3% this past week as concerns mounted around reduced acreage in Ukraine and freeze damage to wheat in Eastern Europe, Ukraine, and Southern Russia. 


Beef: Global demand for beef remained strong in the first two months of the year, continuing to track above year-ago levels… Weather is improving prospects for farming in areas of Texas but some areas, like the Panhandle, are still suffering from adverse weather… Experts expect it will take a year for pastures to recover, however… the US cattle slaughter rate has declined below 600k per week in three of the last four weeks as fewer cows enter market… Slowing cattle placements in January slowed, confirming a continuing tightening of beef supplies


Chicken: Egg sets placements continue to contract at around the same rate, according to the Broiler Hatchery report released by the USDA today.


WEEKLY COMMODITY CHARTBOOK - egg sets vs wing prices




Beef: Most companies are expecting beef cost inflation to be up mid-to-high single digits versus last year


TXRH: We expect approximately 8% food inflation in 2012, primarily due to higher beef costs…on the beef side we do have fixed price – pricing arrangements in effect for over 90% of our beef costs in 2012.


CBRL: To the continued pressure on ground beef prices and other commodities partly offset by lower average dairy and produce prices, along with benefits from our supply chain initiatives, we expect cost of sales to increase 60 basis points to 80 basis points over 2011 to near 26% in 2012.


RUTH: We project 2012 beef inflation to be between 5% and 8%. We currently have purchase agreements for beef representing approximately 30% of our needs through August of 2012, which represents an approximate 7% premium compared to the prior years.


CMG:  While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans. Beef costs will be especially challenging due to protracted supply shortages, despite recent reductions in grain prices.


MCD: As we look at our guidance for 2012, we've built another mid-teens increase for beef, expecting that the dynamics in the marketplaces that we see, and are expecting, will continue.


DRI:  U.S. beef production will continue decline though over the next 24 months, placing continued upward pressure on beef prices because of the slow economic recovery hamburger and value oriented beef, cattle beef are in high demand and can be priced accordingly by the packers. At Darden we purchased mainly tenderloins and other premium steakcuts, while we expect pricing for our beef products to increase by 12% our pricing has been tempered by consumers' resistance to record higher retail prices for premium stakes and the resulting shift to value oriented cuts and as you can see beef is approximately 14% of our cost basket … We have 75% of our beef requirements contracted for fiscal 2012 and 40% of the June to December usage under contract for fiscal 2013.


SONC: One item to note is that we recently locked in our beef contract for calendar year 2012… given the potential for beef costs going even higher, which there are a lot of reports out there that speculate that could happen, that we chose to go with making this more of a known quantity here, and the idea of having a set price for the next 12 months, we feel like would be good for our business, adds some predictability to the business.



Coffee: Prices are now down -24% versus last year


PEET: We expect 2012 coffee costs to rise 12% instead of last year's 42%.


SBUX: We've taken advantage of the recent declines in the C-price to lock in more of our coffee needs for fiscal 2013. We now have six months of our fiscal 2013 requirements secured at costs moderately favorable to 2012.



Dairy: CAKE, DPZ, PZZA, TXRH and others could benefit from favorable cheese costs this year


TXRH: The volatility around that 8% estimate for food cost inflation would really be driven by produce and dairy.  Those are of the biggest components that we float around the market, and that's about 15% to 20% of our total cost of sales.


CMG: While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans.





























Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast



Chicken Wings















Howard Penney

Managing Director


Rory Green


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Volcker Rule comments: The good, the bad, and the ridiculous


Here is our quarterly update on slot ship share.



IGT appears to be gaining traction even if the September pull forward is normalized.  Konami was also a big winner in 2H 2012.  It comes as no big surprise that WMS was a big share donor in the second half of 2012, while the other top 5 manufacturers gained share at its expense. 


WMS’s share fell 5% in 2H11 to 19% which represented an acceleration of the 4% share loss WMS experience in 1H11.  Most of the hit that occurred in 3Q11 when their estimated ship-share fell to just 15%, down 8% YoY.  WMS’s 4Q recovered to an estimated 22% (down 2% YoY) if we include the 957 deferred units that were shipped but not recognized in the December quarter.  Excluding the 957 deferred units, WMS’s ship share in 4Q would have been 17%, down 7% YoY and 16% for 2H11.  WMS ended the year with 21% ship-share and we believe that WMS’s ship-share in 2012 will also be around 20%.  1H12 will likely be a period of share loss for the company.  As we wrote on WMS: NOT OUT OF THE WOODS YET on 01/27/12, we continue to be concerned by WMS’s pattern of pulling forward demand.  Despite the recognition of the sale of 800 Maryland units in 1Q12, we estimate that WMS’s share will drop to 17% - largely due to the deferred units counted in 4Q11.


IGT picked up the most share in 2H11.  We estimate that IGT’s ship share increased 2% YoY to 30%.  All of its ship share gains were driven in Q3, when estimated ship-share reached 40% - their best market share since 2Q08.  IGT’s 4Q ship share plummeted to only 21%, driven by the pulling forward of demand into their year-end September quarter.  However, combined, those quarters showed an increase.  For the year, IGT’s ship share also increased 2% to 30%.  With all of the new openings in 2012, IGT should generate an increase in ship share since they usually get higher market share of new openings and they are the only game in town when it comes to video poker.  We estimate that 1Q12 ship-share will be 34% for IGT.


Konami, BYI, and ALL gained between 80-110bps of market share in 2H11.  Konami gained 110bps of market share due to a very strong December quarter where its share spiked to 18%.  Part of the spike in 4Q share was because Konami didn’t recognize any Kansas units in the 3rd quarter, which is also why their ship share decreased YoY in 3Q.  For the year, Konami’s ship share increased to 15%, up 2% YoY.  We believe that further ship share gains will be a challenge for Konami.  The company could experience a ship share decrease in 1Q12 since 1Q11 ship share was a record 20% for the company.


BYI gained 90bps of market share in 2H11 to 15% with all of the gains skewed to the December quarter.  We believe that December share gains of 2% YoY were driven by strong video content and a greatly improved Alpha 2 box.  For the year, BYI’s ship share was flat YoY at 15%.  BYI should continue to be a share gainer in 2012, with high-teens ship share.


For the first time in a long time, ALL gained market share in NA.  2H11 ship share increased 80bps to 13%.  While ALL does not break out the quarterly detail, they did say that shipments were back-end loaded towards 4Q.  Of the 4.4k units shipped in 2H11, we assume that about 2.5k where shipped in 4Q11, implying 4Q share of 15% vs. 13% in 4Q10.  Like all the other manufacturers, ALL’s strongest ship-share quarter coincided with their fiscal year end. We assume that ALL should be able to maintain their ship-share of 12% in 2012. 




As expected, Jack in the Box provided a comprehensive update on the business model and the direction the company is heading over the next three years. 


We still believe that there is upside in JACK’s cash flow multiple (EV/EBITDA) from the current 7.4x EV/EBITDA level to a range of 8-9x which implies, at its midpoint, 28% of upside from current levels.  Yesterday’s Investor Conference was the coming out party for the new Jack in the Box, Inc.  As the company nears the end of its refranchising program at Jack in the Box, investments in menu, service and the store base have driven sales and traffic growth.  We are confident that the company is heading in the right direction over the next three years with stabilization of cash flow and a strong growth vehicle in Qdoba.


Jack in the Box is at the tail end of a six-year restructuring that has defined Linda Lang’s stint as CEO thus far.   The stock has traded sideways for much of Lang’s tenure as management has endured a long six years of transforming the company into a more franchised business model.  A more franchised business model is now set to reward JACK with less exposure to volatility in commodity prices.  The question is now whether or not the investment community will revalue the earnings and cash flow stream in line with valuations of other largely franchised restaurant companies. 


The fact that yesterday’s Investor Conference was the company’s first since 2008 was a positive in itself.  Our expectations were for management to provide investors with a clear vision for the company’s future growth prospects now that the cash flow generation is set to pick up significantly.  The 1,000 foot view that the company provided for investors included:

  • Operating EPS of at least $2.00 by 2015, or roughly double the expected operating EPS for FY12.
  • Free cash flow of ~$75 million beginning in FY15
  • Shifting from maintenance to growth in capital spending focus
  • 15-20% growth in Qdoba stores through FY15. Long-term target of 2,000 domestic units versus ~600 restaurants today.

This general outlook is strong, in our view, as it offers investors clarity on the source and diversity of future earnings growth and stability of cash flows.  The EPS guidance is conservative, given that it assumes no stock repurchases with the free cash flow generation that the company is set to achieve over the next few years with the target being $75 million on an annual basis by FY15. 





Doubling the company unit base of Qdoba is set to aid an increased diversification of earnings for JACK over the next three years.  As management illustrated yesterday, the pathway to at least $2.00 in operating EPS by 2015 is anticipated to come from a broad range of growth vehicles.  The chart, below, illustrates this 100% growth in operating EPS.


JACK: SOLID OUTLOOK - jack eps growth





The company’s sources of cash flow are Jack in the Box company-owned restaurants, Jack in the Box franchise restaurants, and Qdoba.  The company JIB locations have higher AUV’s and higher restaurant operating margins.  The concept is not highly penetrated on a national level so we do see opportunity for expansion of the company-operated base.  The JIB Franchise business was described by management as an “annuity-like” source of cash flow for the company.  The company collects both royalty fees and, in 90% of cases, rental fees from franchisees.  Again, given the lack of penetration of the brand on a national level, there is potential for expansion and the company bears no exposure to cost inflation.  The profit flow-through on incremental sales is “near 100%”.  Qdoba is a growing focus of JACK’s management team, which expects the concept to account for 25% of FY15 EBITDA versus 14% in FY11.





After a six year cash drought of cash burn, JACK is set to ring in a new era of Free Cash Flow generation.  In terms of shareholder returns, this is an important point.  Having negative cash flow was, in our view, a key factor in keeping investors on the sidelines over the last three years.


JACK: SOLID OUTLOOK - jack vs xly





Qdoba leverages the company to a fast-growth segment of the QSR space and, as such, will account for a larger share of capital expenditure going forward.   As the table below shows, as Qdoba stores mature, they tend to perform at higher restaurant operating margins.  Further, with AUV’s north of $1mm, margins approach 25%. 


JACK: SOLID OUTLOOK - qdoba unit economics



The strong cash-on-cash returns (21.3% versus 16.2% at JIB) generated by Qdoba are spurring management to focus its capital spending on Qdoba over the next four years.  The chart below shows clearly that the company’s spending is set to shift from remodels and maintenance of Jack in the Box to growth of the Qdoba business.


JACK: SOLID OUTLOOK - jack capex





1QFY12 comparable restaurant sales at JIB grew 5.3%, representing the sixth consecutive quarter of positive comp growth for the concept.  The increase in 1QFY12 was driven by traffic growth of 2.8% and a 2.5% increase in average check.  The strength was, according to management, broad-based with each of the major markets posting increases in sales, traffic, and average check.  For 2QFY12, management guided to 4-5% same-store sales at JIB versus +0.8% last year.  System-wide sales are expected to increase 6% in 2QFY12 versus the same quarter a year ago.





Food cost inflation increased 8% for JACK in 1QFY12 and is expected to be roughly 3% for 2QFY12 and between 3% and 4% during 2HFY12.





The immediate-term TRADE range for JACK is $22.99 to $24.43, according to Hedgeye's quantitative models.  The intermediate term TREND line is $21.02.


JACK: SOLID OUTLOOK - jack levels


Howard Penney

Managing Director


Rory Green




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