GOLD: Pressure On Pawns

As commodity prices continue to deflate as growth stabilizes, we think that gold is likely to continue to fall in price and that will act as a headwind for pawn operators like EZ CORP (EZPW) and Cash America (CSH). It’s not just falling gold prices that will create problems for pawns going forward; gold volume also plays a significant role in the equation. Consider the “Cash 4 Gold” craze thats occurred over the past few years. With fewer customers coming in to sell gold, pawns that rely on gold and jewelry as a substantial part of their revenue will feel the pressure immediately. It’s important to keep an eye on the first quarter of 2013 as companies like CSH and EZPW are likely to feel the pain.


GOLD: Pressure On Pawns - image001

Macau Hits It Big

Macau closed 2012 out with a bang, with monthly gross gaming revenue up 20% year-over-year to HK$27.4 billion. Our estimates were that December would be up a strong 12% and that was before the month started; clearly our estimates were conservative. The killer growth can be attributed to higher VIP hold as well as other factors. 


There is now a serious issue regarding the smoking restrictions for casinos in Macau that has now taken effect. It appears the government is taking this very seriously and has already issued a number of fines on the first day of the ban. We expect that this will have an impact on hold percentage over time; if people have to go to a designated area or outside to smoke, that takes them away from the tables.


Macau Hits It Big - macauhold

HedgeyeRetail: SSS & ICR Pre-announcement Scoreboard

With the turn of the New Year so to comes ‘Pre-announcement Season’ with Sales Day and the annual ICR XChange conference set to take place over the next two-weeks – tomorrow and January 16-17th respectively. Historical context provides an interesting picture and precedent of pre-announcements over this period. As such, we’ve updated our pre-announcement scoreboard reflecting the more notable retail companies that will be present in Miami.

Companies that have issued positive releases are highlighted in green while those with less positive news are highlighted in red and reaffirmations of prior outlooks in grey. It’s worth noting that last year marked a significant increase in the number of pre-announcements from the sample set below jumping to 26 compared to a typical range of 12-18 between 2008-2011. The incremental delta came primarily from companies not participating in Sales Day more than doubling to 16 compared to ~7.5 on average during the prior four years. We expect this year’s pre-announcement activity like last year to be at least as active as we’ve seen in recent years.

If history is any indication, PVH, GCO, NWY, BGFV, and ASNA are most likely to pre-announce results over the next two weeks. The following are the only companies to never issue guidance: CAB, OXM, SHOO.

Other notable new additions and departures relative to last year’s ICR schedule include the additions of KORS, TUMI, TJX, and exclusions of FINL, BWS, SKX, MW.



HedgeyeRetail: SSS & ICR Pre-announcement Scoreboard   - ICR Preann 1 2 13



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


As we head into 2013, our perspective on casual dining versus quick service remains unchanged; we continue to favor QSR as over-supply, higher fixed-cost structures, waning consumer perceptions, and changing competitive dynamics hamper the performance of casual dining.  Add to these original components of our thesis the fact that Darden has signaled its intention to begin a price war, and we believe that investors should be highly selective when taking long positions in casual dining.


Below we go through some of the calls we made in 2012 and what our view is on those stocks from here. 





Buffalo Wild Wings was the first call we made in 2012.  Our timing left a lot to be desired but, as the chart below illustrates, the stock underperformed over the course of the year.   Our thesis ultimately played out and, while we would wait for a higher entry point, we still believe there is more downside to this name.  The current price target being forecast by the street seems overly optimistic and we expect more opportunities in this name, on the short side, down the road.


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  BWLD is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $73.66 and $76.64, respectively. 


KEY IDEAS AND LEVELS - bwld index vs cd


KEY IDEAS AND LEVELS - bwld share price



Darden Restaurants is a great company but we identified its shares as being overvalued in July when we published our highly-contrarian blackbook, “DRI: THE UNTHINKABLE SHORT CASE”.  While management has highlighted one possible solution that we highlighted in our blackbook, the company’s heretofore-over-protected margins, it will likely take several quarters for the turnaround to take hold.  The rate of unit growth, specifically, is counter-productive to delivering strong returns on incremental invested capital.  We remain bearish on DRI although the easy money has been made with the dividend yield now at 4.44%.


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  DRI is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $47.54 and $51.17, respectively. 


KEY IDEAS AND LEVELS - dri index vs cd







Yum! Brands is our most recent long idea in the restaurant space.  We held a conference call on 11/29 which outlined our bullish stance.  We continue to see YUM as an attractive opportunity on the long side in 2013.  The company is better-diversified than SBUX and MCD, in our view, and the recent sell off provides a compelling entry-point for investors looking for an intermediate-to-long-term position in global retail.  An improving US business should continue to complement strong international unit growth in 2013.  Recent news related to a KFC China chicken supplier and its excessive use of antibiotics in its feed has pushed YUM shares lower but we see the most important fundamentals related to the stock as positive from here.


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  YUM is in a bearish formation with near-term TRADE and intermediate-term TREND resistance at $67.45 and $68.81, respectively. 


KEY IDEAS AND LEVELS - yum index vs cd





Jack In The Box was our favorite quick service stock this year.  From May, we were highlighting what we saw as an asymmetric setup for JACK shares over the next three years.  We still believe that the core components of that thesis are firmly intact and, as a bonus, skepticism of our thesis is as high as ever.  After the most recent earnings call, we published on 11/20 that we believe there is upside in the stock to $40 over the next three years, by our fundamental analysis.   


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  JACK is in a bullish formation with near-term TRADE and intermediate-term TREND support at $27.88 and $27.11, respectively. 


KEY IDEAS AND LEVELS - jack index vs cd


KEY IDEAS AND LEVELS - jack levels



Brinker has been one of our best ideas over the last couple of years but, of late, it has not been working as well as we would like.  EAT remains our favorite stock in casual dining but, given industry-wide factors, we would advise patience on the long side as the full impact of Darden’s price war and other factors are felt across the group. 


Quantitative View: The second chart, below, highlights our macro team’s quantitative view of the stock.  EAT is in a mixed formation with near-term TRADE support at $30.21 and intermediate-term TREND resistance at $31.93. 


KEY IDEAS AND LEVELS - eat index vs cs





Howard Penney

Managing Director


Rory Green

Senior Analyst





As you probably know, Macau set a record for monthly GGR:  HK$27.4 billion, up almost 20% YoY.  You may recall that we thought December would be up a still strong 12% before the month started and that estimate proved conservative.  We should have the detail in the next day or two but we’ve heard consistently that VIP hold was likely higher than normal which may have contributed significantly to the YoY growth.


Market shares were mostly unchanged from last week with the exception of Wynn gaining some share back, mostly at the expense of MPEL.  For the full month, LVS and MGM were the winners relative to trend while Wynn and SJM were the losers.


We’ve got some initial feedback on the smoking restrictions that went into effect on 1/1/12.  The Macau government is taking the restrictions seriously and had some Dep’t of Health officials on hand.  It’s only been 2 days but our sources on the ground have indicated that traffic remains strong and while there have been some fines issued to players, the implementations have gone fairly smoothly.  It is very early and we suspect the real impact will be seen in the productivity and efficiencies and hold percentage.





A New Year

Client Talking Points

Over And Out

Now that the fiscal cliff has narrowly been avoided, we can get back to what really matters. It’s truly a shame that the political class held Americans hostage with their absurd demands instead of serving the people who elected them to office in the first place. But such is life. 2013 is a new year and a time for new beginnings. We can now put our focus back on trading the markets using our process: fundamental research combined with quantitative risk management. We stick to this process and in return, we move forward. 

The Growth Game

Growth has stopped slowing and is now stabilizing. That’s just a matter of fact. The great commodity bubble that the Federal Reserve helped create is now deflating. Things like gold, oil and corn can go a lot lower and that’s good for the American consumer when they visit the pump or go grocery shopping. We’re long consumption growth, short commodities. That’s the name of the game and how you play it right now.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.


Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“mkts ignoring tee-up for what will be worse fight 2 mos from now on debt ceiling.” -@ianrosen


“By the time we've made it, we've had it.” -Malcolm Forbes


In the 257-167 vote to avoid the fiscal cliff, 172 Democrats and 85 Republicans favored the bill; 16 Democrats and 151 Republicans opposed it.

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