Takeaway: ASCA is ripe for a value-adding real estate spin-off or at least a re-value through a real estate/free cash flow lens.

Withdrawing from the MA bidding process probably has a deeper meaning. 



Following PENN's announcement that they were splitting the company into a REIT and operating company, we noted in our 12/03/12 post "RE-VALUING ASCA", that ASCA was the most likely candidate to follow suit.  ASCA's announcement that they had terminated its effort to obtain a MA casino license sends a signal that the company may indeed be following along the real estate path.  While there is now doubt that the regulatory environment and bidding process would likely eat into returns, we think there is a longer-term play at work here.  In an environment of declining ROIC for domestic casinos, bad demographics, and generational shifts away from slot gambling, there is significantly more value to be created under a real estate type structure.  We applaud ASCA's decision, one of many smart moves this underrated management team has made.  We believe a REIT spin-off will be yet another.


On Friday afternoon, ASCA announced it was ending its bid for a casino in western Massachusetts.  The company cited "the local selection process, various project requirements and associated costs"  for the decision.  These are all legitimate issues and ones from which not enough casino companies have walked away.  The truth is, with all the value ASCA can create with a REIT spin-off, the hurdle rate to pursue these types of development projects have gone up.  We continue to believe ASCA could be a double from here even without a near-term REIT transaction as investors re-value the company through the real estate lens and focus on free cash flow.


TODAY’S S&P 500 SET-UP – December 3, 2012

As we look at today's setup for the S&P 500, the range is 20 points or 0.72% downside to 1406 and 0.69% upside to 1426.      















  • YIELD CURVE: 1.38 from 1.37

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Corelogic Oct. foreclosures
  • 8:58am: Markit US PMI Final, Nov. est. 51.7 (prior 51.4)
  • 10am: ISM Manufacturing, Nov. est. 51.5 (prior 51.7)
  • 10am: Construction Spending, Oct. est. 0.5% (prior 0.6%)
  • 11am: Fed sells $7b-$8b debt due 12/31/2015-1/31/2016
  • 11:30am: U.S. Treasury to sell $32b 3-mo., $28b 6-mo. bills
  • 12:15pm: Fed’s Rosengren speaks at New York Fed conference
  • 1:40pm: Fed’s Bullard speaks in Little Rick, Arkansas


    • House, Senate in session
    • Secretary of State Hillary Clinton in Prague
    • Democratic Governors to being 2-day conference in Los Angeles
    • Federal Housing Finance Agency closes public comment on plan to create standardized system for issuing mortgage bonds
    • U.S. High Speed Rail Association opens 3-day conference; to discuss California’s plan for $68b bullet train


  • Auto sales may have increased 12% in Nov. to highest monthly pace in 4 years
  • Rupert Murdoch chooses WSJ editor Robert Thomson to lead publishing spinoff
  • UBS said to be close to settlement over Libor-rigging
  • EADS says talks on changes to shareholder structure are ongoing
  • Starbucks in discussions with U.K. Treasury regarding taxes
  • Health Management pressured doctors to admit patients to increase revenue, CBS’s “60 Minutes” reports
  • Carl Icahn’s offer to buy Oshkosh expires at midnight; will drop offer if <25% of shares tendered by deadline
  • Northrop, other defense contractors speak on fiscal cliff in DC
  • Macau gambling rev. climbed 7.9% in Nov. vs est. 8%
  • California may fine makers of mobile apps over piracy: San Francisco Chronicle
  • North Korea continues plans to test long-range rocket, Japan says will shoot it down if deemed necessary
  • Yahoo facing $2.7b non-final verdict in Mexico on charges related to a Yellow Pages listing service


    • Conn’s (CONN) 7 a.m., $0.27
    • Exa (EXA) 4:05 p.m., $0.08
    • Casella Waste Systems (CWST) 4:30 p.m., $(0.09)


  • Crude Trades Near Two-Week High as China Manufacturing Improves
  • Hedge Funds Increase Bullish Bets Most Since August: Commodities
  • Gold Gains as Physical Demand Improves After Price Decline
  • Crop Futures Advance as Demand Increases Amid Supply Concerns
  • Copper Swings Between Gains and Drops on Manufacturing Gauges
  • Sugar Rises for Third Day on Lower Indian Output; Coffee Falls
  • Rebar Jumps Most in Six Weeks on Chinese Manufacturing Data Gain
  • Palm Oil Drops for Fifth Day on Indonesian Stockpile Concerns
  • Oil Bulls Boost Bets as U.S. Economy Strengthens: Energy Markets
  • Russia’s Grain Exports Fall 18% as Wheat Takes Smaller Share
  • Auto Aluminum Gains on Steel Thanks to Tighter Fuel Standards
  • Nickel-Ore Cargoes from Philippines to China Delayed by Storm
  • Goldman Forecasts 7% Return on Commodities in a Year on Energy
  • Rubber Climbs to Six-Week High as China Manufacturing Improves




USD – get the dollar right and you get most things beta right; last wk was the 2nd consecutive down wk for the Dollar (European and US stocks were up for the 2nd consecutive wk as the inverse correlation on a TREND duration remains close to -0.9 b/t USD and SP500).





GREECE – thank goodness this is the bullish catalyst every Monday; after rallying last Monday on whatever the news was, Greek stocks closed the wk down -4.2%, but rally +1.3% to another lower-highs on this morning’s funny money news. Net net, the Athex is down -8.2% from the OCT lower-high.





CHINA – the Chinese get it; Washington update: Geithner’s “deal” includes changing the rules on the Debt Ceiling (rising debt) and raising, not cutting, “stimulus” spending; Shanghai Comp dropped another 1% to a fresh YTD low before the Greek “news”; China crashing again (-20.4% from the March global #GrowthSlowing peak).








The Hedgeye Macro Team




We Build

This note was originally published at 8am on November 19, 2012 for Hedgeye subscribers.

“Together we build.”

-Henry Kaiser


In 1941, “the experts predicted it would take Bedford, McCoon, and their teams six months to build up enough solid ground before they could begin work in the shipyard. It took Kaiser’s men exactly 3 weeks.”


“There was a race … between the Kaiser draftsmen and the field people as to whether we could build it first or the engineers and architects could draw it first.” (Freedom’s Forge, page 131)


That was during WWII. We are in a very different kind of war now – a globally interconnected economic one that is dominated by compromised politicians and theoretical Keynesian draftsmen – but it is a war we free-market libertarians can still win. We, the field people, need to lock arms and build a new foundation for global growth. There’s only 1 big one that we have not tried.


Back to the Global Macro Grind


The difference between us and them is that we believe in a Strong Dollar providing the foundation for a Strong America (1983-1989 and 1993-1999) and a stronger global consumption economy at large.


They have always believed that a weak US currency would drive “strong exports.” We believe that a weak currency drives global food, energy, and cost of goods inflation – that, in turn, slows real (inflation adjusted) global economic growth.


With the US Dollar up for 8 of the last 9 weeks, if the SP500 can re-capture my long-term TAIL line of 1364, together, we can build upon 2 very bullish economic developments:


1.       Food Inflation is deflating

2.       Institutional Commodity gambling is imploding


With the US Dollar up +0.2% last week to $81.26, the Euro continued to weaken and the Japanese Yen got slammed for a -2.2% wk-over-wk decline. Japan is channeling its inner-Krugman (1997 “Print Lots of Money) by attempting to do what the USA did at the Bernanke Top (print money, juice stocks, and eventually fizzle out at another 20yr lower-high in the Nikkei).


Back to Food Deflation last week (and from Bernanke’s Top, 2 months ago):

  1. Wheat = down another -5.5% week-over-week (-7% in the last 2 months)
  2. Soy = down another -4.7% week-over-week (-20% in the last 2 months)
  3. Coffee = down another -1.7% week-over-week (-19% in the last 2 months)

If you eat carbs and drink coffee every morning, that’s good. And it’s really good for the likes of our Top 2 Global Consumption long ideas right now (Starbucks, SBUX and Walmart, WMT) too.


Forget about the USA’s politicized class warfare thing. When you deflate food prices, you save money for at least 99% of the world’s 7,053,206,438 people. With taxes going up on the some-of-us, I like tax cuts like that for the all-of-us.


If you’ve been living large long Oil futures contracts since 2009, you may not like how this story ends. If you’ve been shorting food and energy since September, you are smiling.


Here’s a look at how Institutional Commodity Gambling (CFTC futures/options contracts) is imploding:

  1. Net long contracts (bets on commodity inflation) = down another -17% last wk to 772,512 contracts
  2. Bullish Commodity bets are now crashing, down -42% from the Bernanke Top (SEP14, 2012)
  3. Crude Oil contracts = down another -18% last week (despite Israel/Gaza) to 100,021
  4. Farm Goods = down -22% last week to 415,498 contracts
  5. Corn (biggest component of the Farm Goods basket) = down -14% wk-over-wk to 202,853 contracts
  6. Copper joined Cotton as the 2nd major commodity to move into a net SHORT position

Since I won large in Vegas last week ($736 bucks!), I’ll bet my whole lot that at least 1/2 of institutional investors reading this note will call what I just outlined as a bullish contrarian indicator. On the margin (immediate-term TRADE duration) that’s probably right.


But, as you move out from intermediate (3 months or more) to longer term durations (TREND and TAIL), averaging down into a wildly volatile asset class like commodities can put perma-commodity bulls out of business, fast. So be careful.


From an asset allocation perspective, the most asymmetric long-term risk to all of Global Macro continues to be Strong Dollar. If it manifests itself into the mid-to-high $80 levels (US Dollar Index), you haven’t seen anything in terms of commodity deflation yet.


While it may sound perverse to call deflation bullish, it’s not. Letting free-market prices clear without fiscal and/or monetary price supports is the only big idea we have not tried for the last decade.


I think it’s the only way We Build sustainable consumption growth in both the US (71% of GDP) and global economy. Get the Dollar right, you’ll get long-term growth right. If you want to know how I get bullish on the economy, look no further than that.


Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1704-1723, 106.12-109.98, $80.87-81.45, $1.26-1.28, 1.49-1.64%, and 1335-1364, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


We Build - Chart of the Day


We Build - Virtual Portfolio

Early Look

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Takeaway: We remain bearish on GMCR for FY13

The market move in GMCR on its most recent earnings print was emphatic but there was nothing in the 4Q12 results that led us to believe that our bearish stance on the stock should change.  We have been bearish on the stock since early 2011.




Brian Kelley, formerly of KO, is a respected executive and showed wise judgment, in our view, to get himself paid up front.   The company’s cash flow situation is yet to be resolved and there are several potentially serious issues ahead in the form of SEC investigations and class action law suits.  Green Mountain has been in a downward spiral and investors will be watching closely over the coming quarters to see if Kelly can formulate a plan to solidify the company’s role in the coffee market.  As things stand, there is a large number of questions related to competitive pressures in the brewer segment, margin pressure in the K-Cup business, and the potential for the aforementioned investigations and law suits to yield negative outcomes for the company. 



4Q12 Numbers Flattered to Deceive


GMCR reporting 4Q12 EPS of $0.64 versus consensus of $0.48, along with the FY13 guidance raise, pushed the stock higher on Tuesday after the market close.   We believe that much more clarity is required before we get comfortable with an expected earnings number for FY13. 



Pulling the Goalie?

  • SG&A saved the day in 4Q12.  A 220bps decline in SG&A expenses was instrumental in GMCR offsetting the negative margin impact of increased promotional activity
  • Promotional activity is not a sustainable driver of sales for a business that is already seeing its margins decline


Positives in 4Q12

  • Inventory was brought under control for the first time in 9 quarters
  • FCF was positive as capex came in $100m lighter than expected


Issues Facing GMCR in FY13

  • Competitive pressures due to patent expiration:  The company reiterated several times that this is not a significant issue for the company but the data tells a different story. 
  • Negative K-Cup mix (-2% in 4Q):  Lower ASPs and mix with partner brands  should bring further mix declines going forward as we are only in early stages of transition from wholly-owned brands to private label brands.
  • Promotional Activity:  Gross margins declined 230 bps helped by 100 bps of coffee cost benefit.  Starbucks is taking advantage of favorable input costs to make strategic acquisitions while Green Mountain is using the COGs environment to discount product.
  • Starbucks’ Commitment Issues: We doubt that SBUX has committed itself to a long-term contract with GMCR. Even if that is the case, we know SBUX is not shy when it comes to extricating itself from relationships it does not see as being to its advantage.  The Starbucks Investor meeting on December 5th could shed light on this relationship.


Other Red Flags


Accounting Signals? The surge in deprecation in as a percentage of sales is a potential red flag.  Is the company changing its accounting practices with respect to depreciation?


Vue Appeal?  The company reported $10mm in Keurig Vue sales, down from $20mm in F3Q.  While the company insists the brand will be a slow build, brewer sales declining by 50% sequentially indicates that the rollout has been underwhelming.


Margins Rolling Over?  Neither lower coffee costs nor managing SG&A constitutes a sustainable strategy for expanding margins.


Cash Flow Slow Drip?  CFFO/Net Income is a key metric for Green Mountain as it indicates the proportion of earnings that are yielding cash.  A higher ratio relative to the industry can indicate more conservative accounting, signaling a sustainable level of income.  Any ratio that is nearly flat or negative is generally a concern for us.  The company has moved out of the “danger zone” over the past few quarters but we will continue to monitor this metric.


GMCR VOLATILITY CONTINUES - gmcr cffo net income




GMCR VOLATILITY CONTINUES - gmcr inv growth sales growth


Howard Penney

Managing Director


Rory Green




Takeaway: Another negative datapoint for MGM

  • Assuming normal slot and table hold, we believe October Strip gaming revenue should fall between -5% to -9% YoY. An unfavorable calendar—one less Saturday and Sunday—likely contributed to the decline.  Baccarat, as usual, will be the wild card.
  • McCarran airport passengers fell 1.5% while NV taxi trips fell 3.6% in August— the 4th consecutive month of declines.
  • After a respite in September, we believe, slot volume, the most important Strip metric in our opinion, will resume its downward trend in October.  



FedEx Idea Alert: Degrees of Freedom Skewed To Upside

Takeaway: $FDX is a top long idea. Inventories are flashing a buy signal and cost opportunities could drive significant upside, among other positives.

FedEx Idea Alert: Degrees of Freedom Skewed To Upside



TREND = 88.52

TAIL = 86.23



FDX A Top Long Idea:  FedEx is our top transport idea and we believe it is one of the best investment opportunities in the Industrials sector.  We have put together a Black Book on the Express & Courier Services industry here and written a note detailing how FDX fits into our investment process here.   FDX has many more positive degrees of freedom than negative ones, in our view, and we review the key aspects of our thesis below.


Inventories:  Inventory levels in the broader economy are a key driver of express volumes.  Businesses generally do not pay to express an item that they already have on hand.  Relative to trend, inventories have risen to a level that has historically signaled a good entry point for the Airfreight & Logistics sub-industry.  If you buy cyclicals when times are bad and sell them when times are great, the chart below indicates that it is currently lean times for express carriers like FedEx.  Note that this inventory signal is rare, breaching this level only half a dozen times in the past 30 years and remaining below it for about 86% of observations.


FedEx Idea Alert: Degrees of Freedom Skewed To Upside - 6



FedEx Ground Set to Dominate Industry:  UPS is not the first company to stand at a competitive disadvantage because of uncompetitive union labor costs.  FedEx Ground appears destined to dominate the US ground parcel industry as UPS’s iconic franchise loses share to a more nimble competitor, in our view.  Similar dynamics have occurred in many other unionized industries in recent decades.  FedEx Ground has ~18% operating margins and a clear revenue growth trajectory, positioning the unit to be a significant value driver for shareholders.


FedEx Idea Alert: Degrees of Freedom Skewed To Upside - 7



Express Cost Cuts:  FedEx Express has ~$26 billion in revenue at a rough 4% operating margin run-rate in fiscal 1Q 2013.  UPS and DHL have much higher margins (about 5 points) and there is no reason we see why FedEx cannot match or exceed competitors’ profitability.  Management is targeting ~$1.6 billion in P&L improvement at FedEx Express.  If management hits that target, which looks achievable to us in a normalized operating environment, the value of just the Express division could exceed the firm’s current market value, by our estimates.  We would happily take FedEx Ground for free.


TNT Deal Divestitures:  Since UPS’s future appears to be in express services, we expect the firm to pursue the TNT merger aggressively.  Divestitures of European operations are almost certainly needed to obtain EU antitrust approval for the deal.  FedEx would benefit from a stronger presence in Europe and is the only real buyer for the assets, in our view. 


FedEx Idea Alert: Degrees of Freedom Skewed To Upside - 8



Other Factors:  We also explore the impact of containerized freight rates vs. airfreight rates, airfreight capacity and global trade in our Express & Courier Services Black Book.


Valuation Scenarios Suggest Positive Risk/Reward:  We may be a little early in terms of the inventory cycle, but the cost reductions, FedEx Ground growth and TNT divestitures more than assuage our anxieties.  Our bear case FDX valuation is ~$85, suggesting limited downside from current levels if our thesis fails to play out.  Our base case valuation range of $120-$150 suggests healthy reward potential and upside to ~$180 if our thesis really comes together.   







Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012





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