Wide Acceptance

“Wide acceptance of an idea is not proof of its validity.”

-Dan Brown (The Lost Symbol)


I continue to be fascinated by the groupthink that permeates our profession. You’d think that after all that we have been through in the last 5 years, that would have changed as the facts have. Nope.


I’m not talking about Apple. I don’t have the “edge” on that stock that the 58 sell-siders who follow it purport to have. Legitimate “edge” on a stock like that would probably raise one’s risk to wind up wearing an orange jump suit anyway.


I’m talking about the Wide Acceptances we’ve seen in 2012. From Europe is “fine now” (right before Spain started to crash, again) to “Dow 15,000” (cover of Barrons in February right as Global Growth started slowing, again). Fascinating. As a Risk Manager, you shouldn’t be tasked with chasing returns. You should be tasked with disproving every widely accepted thesis impacting your P&L.


Back to the Global Macro Grind


One of the most widely accepted one-liners from the media and sell-side this week has been some version of a Most Read (Bloomberg) headline this morning: “US Stocks Rise Amid Better Than Forecasted Earnings.”


That, of course, is nonsense. Generally speaking, stocks have been falling during this earnings season. Sure, some stocks have risen on better than expected results, but some have been getting tattooed on inline to worse results versus buy-side expectations.


The key to what I just wrote is “buy-side expectations.”


For as long as I’ve been on the buy-side of this game (since 2000), I can’t remember a time when the game wasn’t gaming the game of buy-side expectations.


The sell-side consensus that pundits refer to on “beating expectations” is just a backboard that buy-side pros play against. Consider AAPL expectations: you get multiple sell-side firms slap $1000 price targets on AAPL into March quarter end; the buy-side proceeds to sell stock into that for a -12% AAPL drawdown from April 9th-24th; and presto, the stock is up +9% on an “earnings beat.”


Obviously if AAPL wasn’t going to “beat” the sell-side’s actuall earnings expectations, the US stock market would be crashing this morning. So, we averted one of those. Nice.


Another way to think about a Wide Acceptance of an event or Storytelling line of consensus from the sell-side (the media has no choice but to use them as their research “source”) is to use that event as an opportunity to Fade Beta.


What does Fade Beta mean?


It means that if the market is up or down (beta), allegedly, on a widely accepted idea that has no proof of validity you either:

  1. Buy on red
  2. Sell on green 

I know. That’s some really complex stuff…


Here’s an example of how a Global Macro investor considers Fading Beta today. Start with simple questions: 

  1. Does Apple’s beat mean Growth is no longer Slowing, globally?
  2. Will Apple’s quarter inspire Ben Bernanke to move to iQe4 at his 215PM FOMC speech?
  3. What are Global Macro market prices telling us about questions 1 and 2 in real-time? 

The beauty of our process is that A) we built it ourselves B) it’s repeatable and C) there are specific answers to question #3: 

  1. Hong Kong, South Korea, and India’s stock markets all closed DOWN by the end of the session = #GrowthSlowing
  2. Hong Kong’s Export report for March came in at a startling -6.8% y/y = leading indicator for Global Growth
  3. Singapore’s Export report for March came in at a almost-as-startling -4.3% y/y = nasty
  4. Chinese stocks closed up +0.75% and we think they really work during a Deflating The Inflation (ie no iQe4 from Bernanke)
  5. UK GDP missed and moves back into the official “recession” zone of -0.2% for Q1 = #GrowthSlowing
  6. UK stocks (FTSE) have reversed their early morning Apple gains, barely up on the day
  7. Spanish stocks (IBEX) lead the short-term squeeze rally in Europe (after crashing, again) = low quality signal for bulls
  8. German Stocks (DAX) are up, but need to recover and sustain intermediate-term TREND support of 6688 to be bullish
  9. European bond yields don’t seem to care, at all, about iStuff
  10. Latin American debt, currency, and interest rate risk continues to accelerate in Mexico, Argentina, and Venezuela
  11. Oil prices are pushing higher = the #1 factor in our model for continued #GrowthSlowing, globally
  12. Copper is up small (+0.6%) and remains in a Bearish Formation (bearish across all 3 risk management durations)
  13. Gold is down, again, implying to me that the answer to Question #2 is a no today (Gold goes up when Bernanke devalues)
  14. Treasuries couldn’t care less about the US Equity Futures move; 10yr yields remain in a Bearish Formation at 1.98%
  15. US Treasury Yield Spread (10yr minus 2yr) remains 17bps below where it was when Growth Slowing wasn’t consensus 

Sure, I picked all of the factors that are bearish signals, on the margin, relative to widely accepted storytelling that suggests otherwise. That’s the point. That’s what I do. I don’t change what I do based on what other people are forced to do.


In other news, Donald Trump is going after Scottish Parliament in Edinburgh today for proposing to fire up a wind farm near the ole Don’s latest golf course project. Wide Acceptance from The Scottish People to Mr. Trump’s self-interested whining is not expected.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index and the SP500 are now $1, $118.51-121.60, $79.01-79.46, and 1, respectively.


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer




Wide Acceptance - 1



Wide Acceptance - 2


I was wrong on the stock yesterday but believe that higher estimates will soon be reflected in the stock.



If I was a criminal and privy to inside information that BYD was going to beat the Q1 EBITDA estimate by $7.5m (a 6% beat) and provide in-line Q2 guidance, I’d be poor right now.  BYD closed down 4% yesterday and I would’ve thought up at least 4%. 


The only negative I can see in the quarter was in the LV Locals market.  Even that region would’ve beaten our EBITDA estimate with normal hold.  The problem is the Street was too high, which we knew, since they tend to overreact to the Nevada gaming figures which are gross, not net.  However, our estimates for the other regions and Borgata were so much higher, and ended up being correct, that we thought the good far outweighed the bad relative to consensus.  I guess we underestimated the Street’s disdain for BYD and their ability to so narrowly focus their investment thesis on the one negative.  However, I don’t think the Street can continue to hold back a stock for very long against the fundamental tailwind of higher earnings.


BYD’s commentary about Borgata should’ve pleased a sell-side overly concerned with Revel’s impact on Borgata.  Don’t get me wrong, Borgata will take its lumps and it’s difficult to disprove the bear story with only a few weeks of data.  However, due to demand patterns, we expect the property to beat estimates for the next two quarters before finally succumbing to the slack visitation in the seasonally slow Q4.  We will cross that bridge when we get to it. 


In terms of guidance, it was pretty much what we expected.  Since they resumed providing guidance a few quarters ago, management has developed a pattern of setting a low bar that is easily beatable – strategy followed by IGT, HOT, and others.  Once again, the low bar didn’t exactly jive with their positive forward commentary.  We thought the Street would’ve figured that out by now.  On the Q4 earnings call, they low balled Q1 which seemed obvious at the time.  Indeed, Q1 actual was much better.  We expect the same for Q2.

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The Macau Metro Monitor, April 25, 2012




Steve Wynn says he is “hopeful” that the company’s Cotai land grant could be in place by next week when he is in Macau.  Wynn says he will be in Macau for a number of reasons, one being a meeting with the government.  


Changi Airport passenger traffic grew 15.3% in March.  For 1Q 2012, visitation grew 12.9% YoY.





Visitor arrivals totaled 2,349,703 in March 2012, up by 7.3% YoY.  In the first quarter of 2012, visitor arrivals increased by 7.9% YoY to 6,942,320.  The average length of stay of visitors decreased by 0.1 day YoY to 0.9 day.  Visitors from Mainland China increased by 15.4% YoY to 1,447,564, with those traveling to Macau under the Individual Visit Scheme rising by 10.9% to 555,876.






In preparation for LVS's FQ2 2012 earnings release tonight, we’ve put together the recent pertinent forward looking company commentary.






  • "Our Four Seasons operations are evidence of our successes recently in the Junket area. We believe this is just the beginning of our ability to build the Junket segment throughout all LVS properties, be it Cotai or in the peninsula."
  • "But it's the mass tables that I believe present the most compelling case for the LVS investment in Macau. We will have over 1,000 mass tables before the year is out. Margins in this segment can exceed 40%, which is about roughly 3.5, four times the Junket segment and only we have the key components to the segment's success. One is capacity, which is a place to gamble, obviously; sleeping rooms, which we think are pivotal; and affordable food and retail. And the same attributes which drive mass tables also drive slot revenue."
  • "When we finish with Cotai Central, we'll have over 5,000, almost 6,000, slot/ETG positions. And contrary to opinion of 10 years ago, Asians do like slot machines and ETGs. We think someday this will be a very important market. Again, huge, huge margins and with our rooms and our ability to grow this market, we feel very good about it."
  • "We are the biggest driver of hotel rooms and we'll represent 40% of the market by the time 2013 comes to a close."
  • "We are looking at second-tier junkets, especially out of the North. We are looking to those upper provinces that have been underrepresented, the North and the Far East, and out of Shanghai because we think that's where the growth opportunities present themselves.
  • "We're 19% of the VIP market and 23% of mass gaming tables."
  • "There is a commission war happening in the peninsula in some of the second tier properties.  I don't think it happens in the major properties.  I think commission rates are pretty much, at this point, fixed. We upped ours a notch to get our competitive situation going.  We do bonus you in the back end, but we maintain a very healthy margin. I don't think it's a real issue at this point. Again, one of the problems is we'd like to have more tables, especially, obviously, Wynn, MGM, et cetera. I don't see them increasing commissions, nor would we. And so I don't think commissions are a material problem for the foreseeable future."
  • "I don't see it slowing, I think you're going to see junkets continue to grow."


  • "On the casino side, I would say Sunday through Thursday, capacity is not a problem. The problem comes in on weekends, high demand Saturdays and Saturday nights, Sundays, where you do have 85% usage on the slot machines and table games get maxed out...There's a couple of things you can do to address that. One, obviously you can change limits on the table side, which we do. We're very aggressive in the table limits. Two is we constantly move machines around to do a better job of providing the right machines because even 85% occupancy, in essence, you're sold out because maybe the remaining 15% aren't desirable to the customer."
  • "We have, at this point, no opportunity to add more rooms."
  • "I think more and more mainlanders will find their way to Singapore in the years to come. But again, I think the driver you must keep your eye on is the mass market has been the driver for the most part, the high end is certainly a wonderful place to be as well, but the two together have driven us so far to numbers we never anticipated two years ago. You also should be aware that the hotel runs 90% plus occupancy. The rates exceed US$300 a day. I believe that will continue to grow and grow."


  • "Our average cost of debt is, at the end of 2011 was about 3%. With the recently announced refinancing of our Marina Bay Sands credit facility, that number will go down below the 3% level."





  • "Not that we run our business for market share, but our re-affiliation with Macau's most important gaming promoters can help drive our market share above 25% or even higher in the future. I remember discussing this on a previous telephone call, that I expect that when our new relationships with new junket reps would bring us back to the mid- 20%s."
  • "The junkets we're seeing no issues on the collections side....Same thing on our direct business. We have no issues that we're concerned about whatsoever."
  • "I predict that we're going to outperform the market on the slot ETG."
  • [SCC] "I think I would look for VIP to start faster than mass, but then mass will catch up over time."


  • [Mass win per day]  "We're moving towards $5 million in my opinion. When that happens, I don't know, but I think it's achievable at the $5 million per day."
  • "Saturation point in yielding more on the [mass] floor? No."
  • "The foreigner percentage has increased to about 80%, which is very good because the foreigners come in with more money than the local Singaporeans."
  • "Our margins in rooms run about 83%, our margins in food and beverage close to 30%. The volumes continue to increase and our banquet margins are terrific. We have some pricing opportunities left there, of course. And we are managing our rooms in a way to maximize our room rates all the've got an 83% margin in retail as well. So all these nongaming areas represent significant margin, and they will continue to operate at that level."


  • "The anticipation is that the Sands China Board will approve in June the same dividend as was given out in the first
    quarter. Legally, the shareholders have to approve at the June meeting. The anticipation is that it will be an
    annual dividend given in two slots – one in February, and one in, I think, July."
  • "By the way, if and when we do lot 3 that will be an additional, an additional tables. It's not going to be moving
    around the tables that we have."


Buffalo Wild Wings reported 1Q12 EPS of $0.98 versus $0.95 consensus but missed on the top line.  We do not believe that management’s reiterated 20% EPS growth guidance will be met and, as such, are remaining bearish on the stock. 




1Q12 Company-Owned same-store sales came in at 9.2% which was below consensus of 10.7% and at the low end of the range of analyst estimates, according to consensus metrix.  The 9.2% comp in 1Q implies a sequential deceleration from the 12.9% same-store sales growth that management previously reported for the first six weeks of 1Q.  It is unclear how much of a benefit was derived from the weather benefit in 1Q and the extra day in February due to 2012 being a leap year.  Panera Bread also reported after the close and stated that 200 basis points of its 7.5% 1Q comp was due to the favorable weather conditions.  Gift cards also added 2% to same-store sales.


Revenue Outlook


Same-store sales during the first four weeks of 2Q12 have been growing at 6.7%.  Pertaining to the aforementioned impact of gift cards, it is worth noting that the impact of gift card redemptions tends to be seasonal – typically during the first couple of months after the holiday period.  As a result, we do not expect any significant impact from gift cards over the next couple of quarters.  Management's guidance of 6.7% for 2Q same-store sales, as the chart below highlights, implies the first sequential deceleration in two-year average trends since 4Q10.







The company managed to offset higher chicken wing prices by gaining leverage over Labor, Operating, and Occupancy costs through strong same-store sales.  Cost of Sales increased by 311 basis points as a percentage of Company Sales due to higher chicken wing prices and we expect that headwind to stiffen in the second quarter as wing price inflation is likely to exceed the level seen in 1Q. 


Margin Outlook


Decelerating same-store sales trends will make leveraging the company’s fixed costs at the restaurant level more difficult going forward.  Ultimately, wing price inflation is a known headwind among the investment community but our view is that same-store sales growth will not be sufficient in 2Q or 3Q to leverage fixed costs to the extent needed to fully offset that headwind.  Don Thompson, soon-to-be-CEO of McDonald’s, offered this insightful quote on the weather impact on his company’s top line and entire P&L:


The mild winter weather also benefited sales and traffic…this momentum helped offset some of the headwinds and margin challenges we're facing, due to pressures like commodities that we've mentioned before.


The question from here is whether or not the company can “manage through” elevated COGS in the next quarter. 





We think that Buffalo Wild Wings got out of jail this quarter.  The stock did sell off on the release but we believe that negative estimate revisions are still ahead and there is further downside in the stock.  If wing prices remain elevated, we believe management will be forced to revise full year guidance to the downside, also.


Howard Penney

Managing Director


Rory Green







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