A Tax Increase We Can Sink Our Teeth Into

On Friday, the FDA published two rules (broad descriptions copied below from the FDA website) with the goal of reducing the risk of food-borne contamination in both processed food and farm food.  The rules are out for public comment for a 120 period.

These two rules (and three others to follow, below as well) are at the core of the Food Safety Modernization Act signed into law by President Obama in 2011.

  • Preventive Controls for Human Food: This rule sets safety requirements for facilities that process, package or store food for people. (There is a separate, upcoming rule for animal food.) The rule will require that food facilities implement “preventive controls,” a science-based set of measures intended to prevent food-borne illness.
  • Produce Safety: The food-safety law requires that science-based standards be set for the production and harvesting of fruits and vegetables, and FDA is proposing such standards for growing, harvesting, packing, and holding produce on farms.

Rules yet to come:

  • Foreign Supplier Verification for Importers: This program will require importers to verify that foreign suppliers are following procedures that provide the same level of health protection as that required of domestic food producers. About 15 percent of the food consumed in the U.S. is imported, including about 49 percent of fresh fruit and 21 percent of vegetables.
  • Accredited Third Party Certification: The accreditation of third-party auditors would help ensure that food producers in other countries comply with U.S. food safety laws.
  • Preventive Controls for Animal Food: This is the implementation of preventive controls at animal food facilities that are similar to those proposed for human food.

As with everything in life, there is a cost, and we have seen estimates ranging from $500 million to just over a billion in terms of annual costs to be borne by farmers and food manufacturers.  I doubt that anyone knows for certain and initial estimates are almost certainly hopeful guesstimates.  Ultimately, as is the case with most regulation of this type, the cost will be passed on to the consumer.  When examining the cost, keep in mind that there has been a substantial expense over the course of the past decade in terms of voluntary recalls, lost sales and even legal expenses in the wake of food-borne illness in with products ranging from cantaloupes to refrigerated dough to spinach to peanut butter.

The Centers for Disease Control and Prevention estimates that approximately 48 million people in the United States each year get sick, 128,000 are hospitalized and 3,000 die from food-borne illness.  The calculus then boils down to this – are Americans willing to spend $4 per year, per person (assuming an annual cost of $1.2 billion) to avoid a 1 in 6 chance of getting what is usually a pretty nasty illness, and a chance, although significantly less, of succumbing to something much, much worse?  It makes sense to us and we appreciate the need to move food safety standards in this country out of the 1930s.


Have a good week.


Robert  Campagnino

Managing Director





TAP – Keep Your Eye on the Puck

Shares of TAP (Molson Coors Brewing Company) may get a lift with the news that the NHL owners and players have reached a tentative agreement on a CBA framework.  With short interest at 2.4 days to cover, it wouldn’t be a surprise to see some weak shorts cover on news that represents a volume benefit to the company’s operations in Canada.  Further, the stock is cheap – 10.8x P/E and 9.1x FCF - making it one of the least expensive stocks across our consumer staples coverage.


However, it is inexpensive for some very good fundamental reasons, as outlined below.  While we aren’t a fan of shorting cheap stocks, neither are we fans of buying cheap simply because it is cheap – we prefer to wait for the right signals, so we would caution investors not to get caught offside if TAP sees some short covering.  Comfortable that we have gotten Hedgeye off to a good start in terms of weekly hockey references, we expand on our view on the fundamental issues facing Molson Coors below.

Volume weakness in Canada as a result of the NHL’s protracted labor dispute is only one of the issues facing the company at this point.  In the company’s most recently reported quarter (Q3 2012, back in November) we saw a decline in consumer demand across multiple geographies.  In the United States, for example, distributor inventories are simply too high as the company has shipped ahead of consumption, a condition that will have to correct itself beginning in Q4.  In the company’s newly acquired Central European business, weak economic conditions drove a 1.5% volume decline in the quarter that appears to have only accelerated toward the end of the quarter and through the start of Q4.  Further, the business, when acquired, had a very healthy margin structure that we view as likely unsustainable.  The United Kingdom has been a basket case as a beer market for a time as a weak economy, rising taxation, a smoking ban in pubs and competition from other alcoholic beverages (cider, for example) have hurt beer trends.  While estimates have come down to reflect these factors, we believe that further negative revisions to consensus estimates ($3.97 in ’13) are likely.

One last point we need to mention - Molson Coors CEO Peter Swinburn mentioned back in November that Molson Coors would be seeking financial compensation from the NHL to cover the impact the lockout has had on the company.  The validity and potential amount of that type of claim is unknown at this point, but it is certainly clear to us that Molson Coors lost a good chunk of an important cold weather driver of beer sales in Canada.


Have a good week.


Robert  Campagnino

Managing Director





Q4 estimates going higher


Following the receipt of the December detailed numbers for Macau, we are adjusting our Q4 property estimates higher for Galaxy, LVS, MPEL, MGM, and WYNN as follows:




Certainly, hold played a big role in the estimate hikes.  In December, MPEL was the only company that held below its normal level.  Nevertheless, Mass growth was strong across the board in Q4 and Mass drives profitability.


We’ve updated the consensus as best as we could but you resourceful buysiders probably have a better consensus estimate than we do.  Nevertheless, we believe we are above consensus EBITDA estimates for all of the Macau operators with the exception of Wynn.  MPEL looks like it will generate the largest beat in percentage terms.


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Takeaway: December was never the issue for us but hurdles remain for Q1

December was never the issue for us but hurdles remain for Q1



As we suspected, high VIP hold contributed significantly to December’s strength.  Rather than the 20% actual YoY growth, we estimate that if hold was normal, GGR would’ve gained a still strong 13-14%, slightly above our original 12% projection.  We have to estimate Direct VIP play so hold % is also an estimate.  Mass growth was once again impressive – up 32% and in-line with the recent trend.


Every operator held above normal on their VIP business.  We also suspect that Mass hold % was above normal for the market and particularly for MGM.  With the exception of Wynn, each operator also generated significant YoY growth in GGR.  Wynn’s VIP rolling chip and VIP revenue both fell YoY although the property eked out a 4% gain in Mass.  Not surprisingly, Sands China’s properties generated the best YoY growth at 52% but MGM’s 34% growth was surprising although certainly hold-aided.


Here are some observations before we put out our more detailed note:


Direct play adjusted hold was 3.18%

  • The highest since we have been tracking direct play #s (May 2010). 
  • If hold was 2.85%, then growth would have been 13-14% vs. 20%

Actual numbers came in better than projected

  • Mass:  +3% better
  • Slots:  +10% better
  • RC volume:  +3% better- actually improved almost 5% YoY – best growth since Feb 2011

Company Observations

  • Sands China
    • Gained 20bps of share.  We estimate that they held at 3.14% - high but in-line with the market this month
    • Unlike last month, the driver behind share gains was VIP RC share.  Mass share declined MoM.
    • For the 6th month in a row, Sands YoY GGR growth led the market at 52% led the market.  Mass grew 48%, which is impressive, but only earned LVS 4th place behind MGM, MPEL, and Galaxy this month.
    • VIP growth was the strongest among all 6 concessionaires for the consecutive month at 55%, and VIP RC growth also led the market for the 7th consecutive month at 46%
  • Wynn Macau
    • Wynn continued to struggle this month with GGR 10%- the worst performance of the 6 concessionaires
    • Estimated hold was 3.1%, below the market but above normal
    • Wynn was the biggest loser in term of market share this month losing 1.8% to just 10.3%
    • The loss in market was driven by losses in the VIP RC share which fell to just 10.8% - the lowest point since November 2007
  • MPEL
    • MPEL had a pretty good month, considering that they were the only concessionaire that held below 3% this month. 
    • GGR growth was 13% and market share only dipped 20bps to 13.5%.
    • Impressively, MPEL’s Mass revenues grew 56% YoY - just behind Galaxy for the top spot
  • MGM
    • A very strong month, party driven by high hold of 3.55%
    • GGR growth was 35% which earned them 2nd place behind LVS
    • Mass revenues grew an impressive 51%, coming in 3rd place behind Galaxy and MPEL.
    • VIP chips grew 10% YoY, ahead of the 9% market growth
    • Market share bounced back to 10.9%, above the company's 6-month and 2011 average
  • Galaxy
    • Galaxy’s share increased to 18.2%, up 2% MoM, the largest market share gainer in December
    • Galaxy held high in December, at an estimated 3.39% across their two properties
    • However, December marked the 5th month in a row where their VIP RC growth was negative. Galaxy was only one of two concessionaires that experienced YoY declines in VIP RC growth in December.
    • Galaxy took the top spot for Mass growth at 59%, with strong growth across both of their owned properties
  • SJM
    • Held their ground with GGR growth of 18% and normal hold of 3.03%
    • Mass growth was 9% YoY and VIP RC growth was 12%







The Economic Data calendar for the week of the 7th of January through the 11th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.





Gold Short - Staying With It

Takeaway: Gold is now confirming that it is in a quantitative Bearish Formation.

This note was originally published January 04, 2013 at 11:19 in Macro

POSITIONS: Short Gold (GLD) and Gold Miners (GDX)


The bear case for gold just got a lot better this week.


Gold (and Bonds) do not like it when the slope of growth moves from slowing to stabilizing. Why would they? That’s the end-of-the-world type stuff.


From a long-term perspective, we think Gold is a bubble that’s already popping. We only make that claim when something is making a series of lower long-term highs (see the chart below).


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


  1. Intermediate-term TREND resistance = 1699
  2. Long-term TAIL resistance = 1671
  3. Immediate-term TRADE resistance = 1665


In other words, Gold is now confirming that it is in a quantitative Bearish Formation (bearish TRADE, TREND, and TAIL).


Since it’s way over-owned by Institutional Money Managers who had never owned if before (ostensibly because they were bullish on growth and other productive assets at the time), and the fundamentals (Global Growth and US Employment Growth stabilizing) are confirming our quantitative signal, we are staying with it.


If you’d like our longer form bearish research notes on Gold that we published in Q412 under our Q4 Global Macro Theme “Bubble #3”, let us know.




Keith R. McCullough
Chief Executive Officer


Gold Short - Staying With It - GOLD

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