Housing: Positive Outcomes

Yet another positive data point for the housing market this week as the latest foreclosure numbers from CoreLogic show distressed housing supply continuing to shrink. October foreclosures fell to 58,000 from 70,000 in October 2011 showing a year-over-year decline of 17%. The number of mortgaged homes relative to foreclosures has been steadily increasing and we see that as an ongoing positive development.


Housing: Positive Outcomes - housing


We’re changing our tune on Macau.  While we continue to expect a strong December, there are a number of near-term hurdles that investors may not be focused on.



Slowing growth has been a worldwide theme that the Macro boys at Hedgeye have nailed.  Our Macau specific analysis complemented the Macro work nicely in predicting the halting growth in GGR this summer.  Following a period of accelerating growth this Fall, we’re ready to project another difficult period for Macau.  Why?  Well, it’s not just because we like to go against consensus.  There are a few issues that we don’t think the Street appreciates fully:


  • China Crackdown – The WSJ reported today that China may be tightening the screws on large cash transactions as it pursues anti-corruption measures.  Obviously, this could impact the Macau VIP business which most certainly benefits from money laundering.


  • Smoking Restrictions – Okay, this one people know about but we feel like they are a little too complacent regarding the potential impact.


  • Plateauing Mass Hold Percentage – We don’t think people realize how much rising hold has contributed to the strong Mass growth generated over the past few years.  While the current hold percentage should be sustainable, it probably won’t elevate more.


  • Performance of SSE – We’ve found a statistically significant relationship between the performance of the Shanghai Stock Exchange and Macau GGR.  The relationship peaks at a lag of 4-5 months which doesn’t bode well for early 2013 GGR.



We’ve seen alarmist articles like this before, but we think today’s WSJ story has teeth.  Certainly, the new Chinese government was going to make some noise since corruption is a big issue with the populace.  While we don’t think this will be a permanent issue for the Macau operators, the junkets and VIP players are likely to lay low for at least the near-term.  This will no doubt negatively impact the VIP business over the near-term.



As we pointed out in our 11/12/12 post, “SMOKIN IN THE BOYS ROOM”, it looks like there will be no more delays in the 50% smoking ban for all Macau casinos.  The implementation of the new smoking rules will be enforced in early January.  Once implemented, we believe there will be a major impact on the main gaming floor, particularly for mass-centric LVS and SJM.  Lower table efficiency and higher labor costs will also result from this new smoking rule.  Investors should begin to discount an impact this month.



On the mass side, there may not be more luck coming for the casinos.  With Mass hold % plateauing, revenue growth is likely to slow.  As we wrote about in our 11/26/12 post, “CHART DU JOUR: THE END OF THE MASS HOLD TAILWIND?” over the past four years, mass revenue growth has significantly outpaced volume growth as mass hold rates climbed higher and higher. 


True, Mass hold % can be difficult to analyze as there are many factors.  One factor is whether or not the casino includes cage cash (and not just table cash) in its calculation of drop.  That has probably had an impact as more chips are now taken at the cage than before due to security measures implemented by some of the casinos.


Mass hold % has stabilized over the past 3 quarters and increases over time were achieved through dealer efficiencies, better targeted marketing, and table rationalization and productivity. However, the smoking ban could have a negative impact on productivity and efficiencies which would could also negatively impact Mass hold rate. That also means future mass revenue growth will rely more on volume growth, which hasn’t been nearly as robust by a wide margin as seen in the chart below.





An update of our analysis seen in “MACAU: THE SSE MATTERS” (9/5/2012) continues to show that the horrendous performance of the Shanghai Stock Exchange (SSE) does not bode well for Macau gaming revenues.  VIP RC (on a 3-month lag) has a 64% correlation with SSE, while Mass revenues (on a 4-month lag) has a 48% correlation with SSE.  This would suggest slowing growth in Macau GGR for the next 6 months. 





The chart clearly displays our view of slowing growth.  While most investors are focused on the VIP slowdown – a fairly long trend already underway – not enough seem to be paying attention to the presence of some potentially meaningful governors on Mass growth.  The smoking ban, moderating Mass hold percentage, and the recent lousy performance of the SSE could restrict growth. 


The rate of Mass growth should continue to decelerate all year long, culminating in full year YoY growth of only 9% versus 32% in 2012, according to our model.  By mid-year, VIP growth could begin to exceed Mass in some months.  If we’re right, 2013 margins and EBITDA could disappoint analysts given the significantly better profitability inherent in the Mass business.  VIP is always a wild card and it remains to be seen how long of an impact the reported Beijing crackdown could have on Macau. 




Darden is down today on the company issuing EPS guidance for 2QFY12 of $0.25-0.26.   We have been bearish on DRI since July and we believe the indications are that our thesis is playing out.


Tectonic Shift in Expectations


Based on poor results for 2QFY13 to-date, Darden revised its FY13 combined U.S. same-restaurant sales growth (OG, RL, LH) guidance from +1-2% to -1% this morning.  Sales growth guidance for the year was lowered to 7.5-8.5% versus 9-10% prior while EPS guidance was lowered to $3.29-3.49 versus $3.76-3.90 (consensus is at $3.87).





No Easy Way Out


CEO Clarence Otis, commenting in this morning’s release, stated that the quarter’s offers were “largely consistent in nature with what we've promoted successfully in the past” but that the promotions “not resonate with financially stretched consumers as well as newer promotions from competitors”. 


We continue to hear the same messages from management as its hit-and-miss top-line record continues.  In fact, as we stated in our Black Book in July, “lately, it has been more miss than hit”.   More promotion-dependant sales are failing to provide the consistency that investors are seeking in a stock with Darden’s reputation.  The CMO leaving in November was a sign that things were not going too well



Pleasing All of the Investors, All of the Time


One of the core facets of Darden thesis has been that it is improbable that the company can continue to appeal to such a wide array of investors through such a wide array of attributes.  Financing unit growth at a time when the existing system’s performance is less-than-reassuring seems to be an attempt to be everything to everyone: paying dividends, buying back stock, and continuing to grow while maintaining a strong balance sheet. 


We believe that Darden’s true free cash flow (CFO less capex, dividends, buybacks) will remain under pressure.  A reduction in the company’s dividend could be forthcoming absent a turnaround at its largest two chains, Olive Garden and Red Lobster. 


Our contention has been, and remains, that management is focusing on too many things at once.  A la Brinker in 2010, we would like to see this company focus on attacking the middle of the P&L.  Until then, we are likely to remain bearish but will be publishing more on this stock, and casual dining, in the coming days.







Howard Penney

Managing Director


Rory Green









Early Look

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Buy Consumer: SP500 Levels, Refeshed

Takeaway: If oil (and food) continues to deflate, consumers get a real-time tax cut. That’s bullish, for consumers.

POSITIONS: Long Consumer Discretionary (XLY), Short Industrials (XLI) and Utilities (XLU)


I have no idea what the next government catalyst is going to be, but those who begged for more government have no business whining about it.


The only thing I know is that if oil (and food) continues to deflate, consumers get a real-time tax cut. That’s bullish, for consumers. Period.


Across our core risk management durations, here are the lines that matter to me most:


  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE support = 1404
  3. Long-term TAIL support = 1366


In other words, if 1404 holds, a re-test of 1419 on the upside is probable. A close above 1419 would be explicitly bullish. On the downside, if 1404 doesn’t hold, it’s a long way to 1366. But that long-term TAIL support is good to have underneath.


Keep moving out there,




Keith R. McCullough
Chief Executive Officer


Buy Consumer: SP500 Levels, Refeshed - SPX

HMA: Truth Be Told?

The 60 Minutes investigation into healthcare costs has thrust Health Management Associates (HMA) into the spotlight. The report alleges that HMA pressured doctors to admit as many patients as they could regardless of actual medical needs. It also states that nearly half of the company’s revenue comes from Medicare and Medicaid.



HMA: Truth Be Told?  - ERvisits



Overall, 12.9% of emergency room visits are admitted to a hospital. That percentage encompasses different patients, payor types and other factors that vary greatly. HMA’s admissions target rate is 20%, nearly double the industry norm. Evidence shows that the company pushed its doctors to find reasons to admit patients regardless of their medical condition. Computer programs automatically admitted patients and ordered tests before being seen by a physician. HMA says that their admission rates are near or below the industry average.


HMA’s stock hasn’t been affected by the investigation but that can easily change if the allegations have legs. Hedgeye Healthcare Sector Head Tom Tobin notes that the government will have a tough time proving HMA is guilty but if successful, the company will face an enormous fine:


“Medicare billing fraud under FCA regulations carries a 3X damages award plus a civil charge per case, which quickly spins into A LOT OF MONEY if HMA is found to be guilty.” 


Repairing The Eurozone

The sovereign debt crisis in the Eurozone has cooled off in the mainstream media lately, but the situation is far from being fixed completely. 10-year bond yields have declined significantly from the heightened levels experienced in June of this year. Greece, Portugal and Italy remain the biggest at-risk countries for investors and Germany and France continue to plow forward without any hiccups. Keep an eye on maturing debt for various countries in 2013 as some (particularly Italy) have nasty situations they must face.


Repairing The Eurozone - EuropeRates

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