On Monday, October 29th at 1:00pm EST, the Hedgeye Macro Team and Restaurants Team will be hosting a Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website ( His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends.  This call will be instructive for investors focused on the following names within restaurants and food processing:


Food Processing Tickers:


Topics will include: 

  •  Supply side - planting intentions and farmer's economics
  • Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
  • General long term trends to think about for farming - utilization, fertilizers, seed evolution
  • Thoughts on USDA projections, and their historical accuracy and what the implications are now
  • View on supply, demand, key drivers and prices for:
    • Corn
    • Wheat
    • Soybeans
    • Cattle
    • Chicken

Please contact if you would like to trial our research or obtain access to this conference call. Current subscribers of our Macro and/or Restaurant verticals will receive the dial-in information automatically.  



Good's Background


Darrel Good has a comprehensive understanding of the agricultural markets and economic implications. "There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."  

  • Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
  •  Good and two other faculty members developed a seminar called "Price Forecasting and Sales Management"
  • One of the founding members of the farmdoc team
  • He writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
  • Current research includes:
    • Evaluation of the pricing performance of agricultural market advisory services
    • Evaluation of USDA production and price forecasts
    • Evaluation of pricing performance of Illinois corn and soybean producers  



Howard Penney

Managing Director


Rory Green




Quarter was solid with good Macau commentary.  Special dividend was sizable and probably in the whisper range but the announcement came early.



Stock will be up this am and it probably should be.  The quarter was solid with some surprisingly strong volumes in Las Vegas.  Wynn is clearly taking share on the Strip both in slots and the tables.  The Macau performance was almost exactly in-line with our projections (way to go Anna!) but the forward commentary was bullish.  Wynn’s share is down so far in October but that is likely due primarily to hold.  More importantly, management made positive comments that trends are getting better especially with the liquidity conditions of the junkets.


The question is where do we go from here?  We remain positive on Macau, so directionally we’re biased on the upside for all the Macau stocks.  However, we see stronger company catalysts elsewhere (LVS and MPEL) and until Wynn Cotai opens, market share will remain under pressure.  We’re on the sidelines for now on WYNN.



Dividend no longer just Special:

Wynn announced a special dividend of $7.50 payable to shareholders of record on November 7th.  This year's special represents a 50% increase in what was paid out in 2011. While most investors expected a dividend in this range, the surprise came in the timing.  Last year the special dividend announcement came on November 2nd, after the Company’s shareholder meeting and was payable to shareholders on record right before Christmas on Dec 21st.


In addition, WYNN doubled its regular quarterly dividend from $0.50 to $1.00/share.  Given the hefty 3.5% yield, the increase in dividend should attract a new set of income oriented investors.



Wynn reported net revenue of $911MM which was 2% below our estimate, while Adjusted EBITDA of $292MM was 1% higher than we estimated.   

  • Net VIP table win was $14MM lower than we estimated
    • RC volume fell 12% YoY and 9% QoQ, but was $560MM better than we estimated due to direct VIP RC play coming in at 10% vs. our estimate of 8%
    • Hold was 12bps lower than we estimated, resulting in gross table win that was $15MM below our estimate
    • The rebate rate was 30.4% or 94bps, in-line with our estimate
    • We estimate that all junket commissions & rebates were 42.2%, a little lower than we estimated and impressive in the current “aggressive” promotional environment that Wynn described.  However, we won’t know for sure until Wynn Macau files.
    • The property’s historical hold rate since opening, inclusive of this quarter, has been 2.93%.  Using the historical hold rate, net revenues would have been $29MM lower and EBITDA would have been $8MM lower.
  • Mass table win was $3MM better than we estimated
    • Drop declined 3% YoY and was 5% less than we estimated but the win % was 1.8% better
    • We believe that higher mass hold rates are sustainable and therefore, we no longer normalize for high hold on mass
  • Slot win was in-line with our estimate
    • Slot handle was down 11% YoY
    • Hold was 5.4%, 40bps better than we estimated
  • We  estimate that fixed expenses totaled $101MM, $1MM below our estimate and down $1MM QoQ


Las Vegas

Las Vegas revenues and EBITDA exceeded our estimate by 2% on both metrics and beat the Street’s EBITDA estimate by 10%. The beat came from strong volumes on both tables and slots and better F&B revenues.

  • Net casino revenues were $3MM above our estimate
    • Table drop grew 17% YoY vs. our estimate of 10% growth but hold was 1% lower than we estimated, resulting in table win being $4MM above our estimate
    • Slot win was $6MM better than we estimated
      • Slot handle was 8% better than we estimated and win % was 40bps higher at 6.4%
  • Total gaming discounts and promotions totaled 21% of gross casino win, higher than the 17.7% discount rate in 2011 but lower than last quarter’s rate of 22%



Takeaway: HOT's quarter was weaker than the headline suggests and in-line with our thesis of weakening lodging fundamentals. 4Q outlook below Street



While the headline number was strong, if you look beneath the surface of Starwood’s quarter, it appears that fundamentals are decelerating.  The beat in the quarter was driven by better residential sales at Bal Harbour and lower SG&A. 


Factors that contributed to operating cash flow that was $11MM above our estimate:

  • Residential gross margin was $12MM above our estimate ($17MM vs. $5MM).  We’re not sure why there is a $5MM gap between Residential earnings and GM
  • Fees were $2MM above our estimate, driven by $5MM of higher amortization of deferred gains, termination fees and other one-time fees, offset by lower mgmt, franchise and incentive fees
  • $5MM of lower SG&A expense.  SG&A decreased 1% YoY vs management 2012 guidance of a 4-5% increase
  • Offset by:
    • Owned, leased and JV came in $5MM lower
    • Vacation ownership came in at $5MM 



  • Owned, leased and consolidated JV
    • Revenue was disappointing but cost discipline helped mitigate some of the impact to the bottom line
    • Reported (non same-store) margins on owned, leased and consolidated JV’s was unchanged YoY
    • We estimate that room revenues declined 4% while F&B and other revenues were down 2% YoY.  The declines are largely a reflection of asset sales.  RevPOR was $324.91, essentially flat YoY.
    • CostPAR was $266.05, down 0.2% YoY.  FX obviously helped keep costs down – not just revenues.  We estimate that without FX, CostPAR would have increased around 4%.
  • RevPAR came in lower than we estimated on an absolute $ basis across the board.  A lot of this is FX but still, numbers were disappointing.  We clearly can’t model SS so our numbers aren’t apples to apples.
  • Fee income came in 1% above our estimate and 2% below the Street; the mix was lowish quality.  Base, franchise and incentive fees grew 8% YoY, below management guidance of 9-11% growth.
    • Base fees of $88MM, increased just 2% YoY.  We expected more growth given the 8% increase in managed rooms.
    • Franchise fees of $53MM, were up 10% YoY, $1MM better than we expected.  Franchised rooms grew 4% YoY.
    • Incentive fees were $1MM above our estimate, at $39MM
    • There were $21MM of amortization of gains included in “Other Management & Franchise Revenues”
  • VOI was in-line.  The business looks stable with a 4% increase in average price per vacation units sold, offset by a 1% decrease in signed contracts and lower tour flow
    • Margins improved 90bps YoY
  • Bal Harbour sales of $67MM and profit of $12MM came in ahead of management’s guidance of $5MM in profit contribution
  • SG&A was lower than we expected- kudos to HOT for managing the quarter. This marks the second Q of YoY declines in SG&A.
  • HOT repurchased 1.6MM shares in the Q.  Despite the recent buybacks, basic shares still increased by 3MM since 2011 and diluted shares are up by 1MM.
  • More notably, HOT increased its regular dividend by 150% to $1.25/year, representing a 2.3% dividend yield
  • Other observations:
    • New brands like Aloft & Element are becoming a smaller driver of new room growth
    • EPS was aided by higher equity earnings, slightly lower interest expense and $1MM of gains
  • 4Q outlook is below consensus even taking into account this quarter's asset sales. 

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Client Talking Points


There are plenty of mini-bubbles out there to take note of and recognize. Everything from shipbuilding to capital expenditures in industrials; all you have to do is look for the clues to help guide you. Mining spending is another one that’s about to pop. Companies like Caterpillar, etc. are realizing that #GrowthSlowing is very much a part of earnings season, like it or not. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.


Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“Norway Tells Largest Sovereign Wealth Fund to Buy on Dip” -@JohnLothian


“The love of truth lies at the root of much humor.” -Robertson Davies


US jobless claims come in at 369,000.

CRI: Get in Now

Takeaway: No change to our thesis. We expect this to play out in Q4 and into 1H F13.

CRI beat and we’ll give them that. We went into the quarter and outlined in our CRI Black Book on 10/15 that we didn’t expect a miss due to an inflection in margins (i.e. product costs turn favorable), but that we expect the reality of our thesis – lack of product differentiation resulting in pricing/margin pressure – to play out more visibly in Q4 and into 1H F13. There is no change to our call. If the stock is up today on Q3 numbers, now is the time to short it. (please contact  if you are interested in seeing the full details of our call and CRI Black Book)

  • Wholesale numbers came in significantly lighter than expected offset in part by International results with stronger profitability driven by higher gross margins accounting for stronger EPS.
  • Notably, CRI’s Q4 outlook calls for sales over 200bps higher than consensus, but EPS a penny lighter. This suggests significant margin weakness relative to expectations. If this is indeed related to sell-in at Carter’s wholesale (i.e. JCP) it suggests sales are coming at substantially lower margin. It also begs the question of what happens following sell-in when accounts start pressing CRI on margin at the same time.
  • In addition to Q3 wholesale sales turning negative for the first time in 9 quarters, retail comps remain a concern. Both Carter’s and OshKosh decelerated meaningfully on a 2yr basis despite a more favorable setup and comps get much tougher over the next 2 quarters. Growth at retail continues to be driven almost entirely by lower productivity new store growth and e-commerce. Given the lack of product differentiation across channel, we expect this impact on owned-retail to continue.
  • Inventories were good though the sales/inventory spread turned down sharply in quadrant 1 reflecting the full integration of Bonnie Togs. Excluding BT, inventories were up +11% last quarter so the -3% inventory growth this quarter is sequentially positive.
  • Given the mixed Q4 guidance, our primary focus on the call will be 1) how much of the incremental lift in Q4 sales is lower margin wholesale business, and 2) where are AUR trends shaking out now that the company has gone dark on disclosure just at its outlook would suggest that pricing is under fire.

CRI: Get in Now - CRI S


Kentucky Fried Politics

This note was originally published at 8am on October 11, 2012 for Hedgeye subscribers.

“The American people do not think the system is fair, or on the level.”

-Joe Biden


Forget #BigBird. The world’s tweeters will shift to whose political chicken gets fried tonight in Danville, Kentucky. It’s a good thing there’s no bubble in partisan US politics.


In terms of political ironies, the aforementioned quote is a beauty. It’s how MSNBC’s Chris Hayes kicks off Chapter 3, “Moral Hazards”, in the most recent book I have been reviewing, “Twilight of The Elites.”


While I’d love to debate Hayes and/or my boy Biden on their respective concepts of “fairness”, here’s something Hayes wrote that I completely agree with: “ … we cannot have a just society that applies the principle of accountability to the powerless and the principle of forgiveness to the powerful. This is the America in which we currently reside” (page 102).


Back to the Global Macro Grind


With the SP500 down for the 4th consecutive day, we got longer yesterday, for a trade. To be clear TRADEs (3 weeks or less) in our model are not to be confused with TRENDs (3 months or more). TRADEs get overbought and oversold. TRENDs (like #EarningsSlowing) last longer.


Some people don’t like the whole Duration Agnostic thing. Some people love it. I don’t wake-up every morning looking for love or loathing. I focus on doing what I can do to make our risk management process more dynamic and repeatable, across durations.


From an immediate-term TRADE perspective, at $630 AAPL was evidently oversold on Tuesday. What was oversold on Wednesday?


1.   Tech (XLK) – First, understand that this S&P Sector ETF is 1/5 AAPL, so buying XLK yesterday gets me more of what I really want - in a slowing growth scenario, I want to buy the cheap growth that I can find.  


2.   Utilities (XLU) – If I am going to buy what’s getting smoked in October (Tech), I also want some asymmetry on the long side in owning something that works if Tech doesn’t. Utilities are one of the top performing S&P Sectors since The Bernanke Top.


3.   Gold (GLD)Hedgeye Playbook long, for a trade, here as the US Dollar Index moves to immediate-term TRADE overbought. Remember, get the US Dollar right, and you’ll get a lot of other things right.


Yes, one of our intermediate-term TREND Themes for Q4 is Bubble #3 (Commodities), but that doesn’t mean I can’t fully embrace understanding what people do with bubbles (they chase them when they are green), and trade the risk of the position both ways.


Gold’s long-term TAIL risk (3 years or less in duration) is much more daunting than its intermediate-term TREND risk. Why?

  1. TAIL risk = lower long-term highs from the $1900/oz zone (2011 all-time highs) make a bubble look like a bubble; look backwards
  2. TREND support = Gold has recently proven to test its YTD highs established in February ($1794); that keeps mo mo bulls in it
  3. TRADE range = $1758-1792; you don’t have to be bullish or bearish to understand that; it’s just math

Agreed. It’s a lot harder to keep countervailing thoughts, across durations, in your head than being perma – but that’s precisely why I think about risk that way. The market doesn’t care about your politics or your positioning.


So, if I sell Gold at $1792, it will probably be because it’s immediate-term TRADE overbought, the USD is immediate-term TRADE oversold, and Romney’s momentum in the polls keeps firing Bernanke in play (no Bernanke is not good for Gold).


Back to Tech…


I’m not a techie, but I have built a #WallSt2.0 firm that’s been able to monetize Twitter. So you can just call me social. Risk managing Tech (XLK) is not for the faint of heart, but where it closed yesterday illustrates the Duration Mismatch of price momentum quite well:

  1. Tech (XLK) = down -2.5% for the month of October is the worst performing Sector of the 9 in the S&P Sector Model we track
  2. Tech (XLK) = up +18.1% YTD is the 3rd best performing Sector in the S&P for 2012
  3. Tech (XLK) = has a heavy weight in AAPL (20.73% of the ETF) and AAPL is up +58.25% YTD

So, if you want to get Tech (XLK) right, you probably have to get AAPL right. That’s why timing and factoring your position risk matters.


Now some people pay a lot of attention to what is up for the YTD. I personally couldn’t care less. My net wealth (and most people who don’t measure it on Old Wall’s calendar bonus schedule) compounds or is drawn-down, daily.


If AAPL is up +58.25% YTD, but down 10% in a straight line (from The Bernanke Top in September) from where your money manager bought it for you, you need to be up +11.1% (from the down 10%) to get your money back to break-even. That’s not Kentucky Fried Politics. That’s just risk management math.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Tech (XLK), and the SP500 are now $1758-1792, $112.54-115.05, $79.43-80.03, $1.28-1.30, 1.68-1.76%, $30.02-30.69, and 1429-1448, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Kentucky Fried Politics - Chart of the Day


Kentucky Fried Politics - Virtual Portfolio

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