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The primary takeaway from this post is the most important macro indicators are continuing to confirm our bearish stance on casual dining. 


Employment trends within the industry suggest a possible sequential deceleration in same-restaurant casual dining sales. The deceleration of employment growth within casual dining versus quick service and the broader leisure and hospitality industry is worth noting.


Knapp Track Casual Dining sales data track BLS employment growth data for the full-service and leisure and hospitality industries.  Within casual dining, we are bearish on DRI, BWLD, and TXRH




EMPLOYMENT DATA CONFIRMING BEARISH CASUAL DINING STANCE - leisure   hospitality vs full service employment growth



Employment by Age


Employment growth by age cohort implies that quick service restaurants are benefitting from strong employment growth among core consumers while casual dining’s struggles are being caused, at least in part, by decelerating employment growth of one of the sector’s core demographics. 


The chart below illustrates a strong end to the year for employment growth among the younger age cohorts.  Job growth in the 20-24 years of age cohort remained in the 3% range while growth in the number of employed 23-34 year olds accelerated to 1.2% in December from 0.7% the month prior.  This is positive data point for QSR. 


Employment growth among 55-64 year olds remains robust, accelerating to 5.6% in December, but softer trends in the 45-54 years of age cohort is a concern for casual dining. 





Industry Hiring


If we assume that hiring within the restaurant industry serves as a decent proxy for operator confidence, it seems that QSR operators have a very different outlook than casual dining operators.


The continuing sideways trajectory of Leisure & Hospitality employment growth suggests that employment growth in limited service restaurants could be overstretching at this point.  However, with consumers trading down and quick service chains investing in enhancing the consumer’s experience at their restaurants, it is difficult to come to a firm conclusion.


Sequential Moves

  • Leisure and Hospitality: Employment growth at 2.38% in December (+1.7 bps seq acceleration)
  • Limited Service: Employment growth at 4.29% in November (-5.3 bps seq deceleration)
  • Full Service: Employment growth at 1.93% in November (-47.8 bps seq deceleration)



Howard Penney

Managing Director


Rory Green

Senior Analyst


Do You Believe? SP500 Levels, Refreshed

Takeaway: My sense is enough people missed the biggest up week for stocks in a year for me to believe just about anything.



Stocks got immediate-term overbought as bonds got oversold on Friday. Immediate-term TRADE overbought is as overbought does, so just be smart where you make those gross and net exposure decisions. Timing matters.


Do you believe we make a higher-high versus 1466? Or, maybe a better question, did you believe that we could test 1466 before we did? My sense is enough people missed the biggest up week for stocks in a year for me to believe just about anything.


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


  1. Immediate-term TRADE overbought = 1482
  2. Immediate-term TRADE support = 1439
  3. Intermediate-term TREND support = 1419


In other words, the SP500 could drop 20 handles from today’s intraday low as fast as it could tack on another 20 from here. What do you do with that? I say you keep moving and risk manage this tape with a bullish bias until the research factors (#GrowthStabilizing) and/or risk signals change.




Keith R. McCullough
Chief Executive Officer


Do You Believe? SP500 Levels, Refreshed - SPX

MACAU: A December To Remember

December was an impressive month for Macau with high VIP gold and strong gross gaming revenue. With 20% hold growth on a year-over-year basis and mass market growth up 32%, it was a month that really paid off for Macau operators with the exception of Wynn Resorts (WYNN). Sands China’s (LVS) properties generated the best year-over-year growth at 52% but MGM’s 34% growth was surprising although certainly hold-aided. Wynn was the biggest loser in term of market share this month losing 1.8% to just 10.3% while LVS, MGM, MPEL and Galaxy put up strong numbers.


MACAU: A December To Remember - image002


MACAU: A December To Remember - image003

Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012

Takeaway: In true political fashion, legislators have solved the fiscal cliff by kicking it down the road two months to March 1st.

The much heralded 11th hour solution to the fiscal cliff really does very little other than kick the can down the road.  While on one hand, a permanent fix of the Bush Tax Cuts for those making less than $400K, an extension of Unemployment and Extended Benefits and a two month stay on cuts to federal discretionary outlays under sequestration are supportive of growth in the very near-term.  Longer term, the Expiration of the 2% payroll tax deduction, higher capital gains and marginal tax rates on those earning >$400K, and the 3.8% tax increase on investment income legislated under ACA will still serve as a drag on growth, probably to the tune of ~1%.  


Notably, the larger goal of enacting structural policy reforms necessary for driving fiscal sustainability once again went unmet.  The half-measures and patchwork policy enacted as part of the 11th hour accord simply perpetuate the fiscal policy uncertainty that has predominated for the better part of the last few years and served as a negative influence on corporate hiring and capital investment decisions.  Both the debt ceiling issue and a larger agreement over a sequestration alternative remain uresolved and will both come to a head on March 1st.  So similar to last year, we can again look forward to a re-crescendo in congressional discord, brinksmanship and last minute “heroics” over the next couple months.


Below we highlight the main provisions from the American Taxpayer Relief Act of 2012 (ATRA 2012), or the fiscal cliff agreement.  The facts of the accord have been fully discussed elsewhere but we would highlight a number of the key dates and prospective growth impacts of the deal:      


Summary of Main ATRA Provisions:

  • Tax Rates:  Permanent extension of current income tax rates for all incomes below $400K. Marginal Tax rates increase to 39.6% from 35% for individuals making over $400K and couples making over $450K
  • AMT:  Permanently patched.
  • Unemployment Benefits:  extended for another year – expected 2Y cost of ~$30B
  • Payroll Tax Holiday:  The 2% payroll tax holiday enacted in 2010 as a stimulus measure expired for all workers.
  • Capital Gains: Capital gains & dividends would be taxed at 20% for those earning over 400K.  Those earning <$400K continue to pay current rate of 15% on LT gains.
  • Health Law Capital Gains Tax:  ATRA does not change the slated 3.8% tax on investment income imposed by ACA for individuals making $200K or couples making $250K
  • Sequestration:  Provides a stay of 2 months before legislated cuts again take effect. 
  • Extenders:  Some 100 general, individual, Business, Energy & Health related (tax) provisions were passed as part of ATRA 2012.  Some represent permanent fixes but most are 1Y extensions that will need to be re-addressed come year end 2013.


As is outlined in the table below, the impact of the ATRA is decidedly negative on the long run deficit.  According to the CBO’s projections, ATRA will lead to a net increase in the deficit of $3.9 trillion through 2022.  So much for fiscal reform. 


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - ATRA Budget Impact Table





Growth Impact - CBO Analysis:  Late Friday afternoon, the CBO released a follow-on analysis of the expected impacts of the ATRA legislation as enacted (Here).   According to the CBO’s analysis, while the fiscal cliff deal had the net effect of reducing the magnitude of fiscal tightening by 1.5 – 1.75%, the “components of tightening that are still in place and that we estimated will damp GDP growth in 2013 by roughly 1¼ percentage point.”


Payroll Tax Holiday Impact:  The CBO estimated the combined impact of extending the payroll tax reduction and the Emergency Unemployment benefits at ~$108B for 2013 (Here, p. 7, Table 1.).   Separately, the CBO’s final scoring of the ATRA estimated the cost of extending Emergency Unemployment Benefits at ~$22.4B in 2013, implying an ~$86B drag from the 2% increase in payroll taxes in 2013.  This $86B along with the net impact from the 3.8% tax increase on investment income legislated under ACA and reduced consumption stemming from higher capital gains and marginal tax rates on those earning >$400K comprise the principal direct drag to growth for 2013.  


Sequestration:  Sequestration, the across the board reductions to Federal Discretionary Outlays as legislated under the Budget Control Act (BCA), were given a two month stay.  The cuts will take effect beginning March 1st if congress does not reach an agreement on an alternative route for fiscal consolidation.


The DEBT CEILING:  ATRA carries no explicit provisions related to the Debt Ceiling and no discernable progress was made towards reaching a bipartisan resolution on the issue. The Treasury has estimated they have enough accounting maneuverability to extend the debt ceiling timeline for approximately two months.  Geithner provided a hard dollar estimate of $200B in available capacity.  Assuming similar funding requirements, the mid-point of the issuance precedent over the last three years would suggest we have until ~March 1st to reach a debt ceiling accord.  Note that this march 1st date corresponds with the march 1st deadline date for reaching a deal on a sequestration alternative.     


Bottom Line:  By delaying the implementation of sequestration cuts and permanently fixing lower tax rates for all those earning less than $400K, we avoided the full brunt of  the fiscal cliff to the start the year.  However, outside of the tax rate fix we made no substantial progress towards solving the larger outstanding budget issues or in bridging the Dem-GOP divide over spending, Entitlement reform, or large scale Tax Code reformation.   By simply extending tens of general, individual, & business tax provisions - amounting to hundreds of billions of dollars (you can find the itemized cost, estimated by the Joint Committee on Taxation, for the extension of each tax provision Here) - for one year, we managed yet another can kick and ensured ourselves yet another replay of the same debate come year-end 2013.    The Debt Ceiling and impending cuts slated under BCA are part and parcel of the same issue of unsustainable profligacy at the federal level.  These issues remain unresolved, will both come to head on March 1st, and ensure the policy uncertainty and political dynamics that characterized December 2013 and the summer months preceding resolution of Debt Ceiling 1.0 in 2011 will likely  characterize February 2013 as well.  


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - Debt Ceiling Timeline 010713



Investment Considerations:  We got the relief rally, now what?

Outside of an expectation for a clean, non-draconian resolution, it’s hard to make a compelling case for being long the uncertainty of the Debt Ceiling event catalyst in isolation.   We’ve already seen the post-event run-up, the SPX is trading at higher cycle highs, and forward multiples are near the top end of the multi-year range.  Independent of the Debt Ceiling, however, global growth and price signals continue to support a bullish bias towards equities.  Below are a number of the factors we’d like to continue to see trend positively for us to maintain our bullish tilt.        

  1. Price Confirmation:  SPX currently sits Bullish TRADE & Bullish TREND in the Hedgeye Quant model with TREND support down at 1419.  With all nine sectors bullish and the SPX in Bullish Formation, price remains supportive of net long positioning in equities
  2. #GrowthStabilization:  The slope of growth, activity, and employment measures across the EU & APAC regions continues to improve.  From a price, the transition from growth slowing to growth stabilizing represents a buying opportunity within a positive growth inflection. 
  3. Commodity Deflation:  Energy and Commodity deflation represents a real-time tax cut for consumer’s, globally.  A burning Yen, dissention among the ranks at the fed, Geithners departure, and some measure of American fiscal sobriety could all play positively for the dollar and, by extension, augur lower commodity prices for consumers and input costs for business. 
  4. Housing & employment:  Employment growth remains tepid but positive, jobless claims continue to track <385K level necessary for seeing tangible improvement in unemployment, and the positive, reflexive, price ßà demand dynamic continues to drive a parabolic recovery in housing. 
  5. Asset Rotation:  Bond yields have backed up, fund flows to bonds have slowed, and the major move in high yield is now likely rearview with the earnings yield in the SPX now running at a positive spread to the yield on high yield.  If bond investors begin to sniff out 6+% unemployment and look to front run Bernanke, we could begin to see the rotation to equities panglossian stock bulls have been looking for for the past four years.     
  6. Seasonal Adjustments:  Seasonal Adjustments will remain a tailwind to the reported employment & economic data thru February.
  7. Growth Estimates:    Consensus growth estimates for 2013 have tracked the data steadily lower over 2H12 and currently sit at 2% for full year 2013.  While estimates may hold some further downside, a material drawdown in expectations from here may provide a favorable sentiment backdrop provided the above dynamics continue to trend positively.    


Christian B. Drake

Senior Analyst


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - 2013 GDP Estimate 010713


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - SPX Earnings Yield


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - SPX PE 010713



Chinese Rebar On The Rise

Here at Hedgeye, we like to observe the price of Chinese steel rebar. It’s a decent barometer of Chinese construction activity and subsequently, growth. The spot price for Chinese rebar jumped 3% day-over-day and is now back to the highest price since November. Combined with our macro team’s research that signals growth accelerating throughout Asia, rebar is another catalyst that shows that the growth slowing days are over.


Chinese Rebar On The Rise - 3


Here is some more detail on the final December numbers from Macau:




Total table revenues grew 21% in December.  Mass revenue growth was strong at 32%, just a little above the 6-month trailing average of 31%.  VIP revenues grew 16% - the best growth in 9 months.  Junket RC volume grew 9% YoY.  We expect that January’s growth rate will slow to 7-12% growth, due to the smoking restrictions and unfavorable calendary.




Table revenues grew 52% YoY (Mass +48%; VIP+55%), garnering the best growth in the market for the 6th straight month.  We estimate that Sands China held at 3.14% vs 2.86% last year, adjusted for direct play of 19%.  

  • Sands table revenue fell 9% YoY, aided by high hold but hurt by an even tough comparison. 
    • Mass grew 12%
    • VIP was down 20%.  We estimate that Sands held at 3.70% in December compared to 4.01% in the same period last year.  We assume 9% direct play in December vs 11% in December 2011.
    • Junket RC declined 11% YoY, aside from September; 12 of the 13 trailing months have seen YoY declines in RC volume. 
  • Venetian table grew 19% YoY, negatively impacted by low hold but offset by an easy comparison.
    • Mass increased 15%
    • VIP was grew 24%
    • Junket VIP RC increased 14%, breaking 10th consecutive months of declines at Venetian
    • Assuming 30% direct play, hold was 2.70% compared to 2.59% in December 2011, assuming 27% direct play (in-line with 4Q11)
  • Four Seasons continued to perform well, growing 43% YoY, driven by high hold and an easy comparison
    • Mass revenues were flat YoY
    • VIP grew 52% and Junket VIP RC rose 16% YoY
    • If we assume direct play of 16%, in-line with the first 3Q of 2012, hold in December was 3.19% vs. 2.42% in December 2011 when direct play was ~16%
  • Sands Cotai Central produced $169MM in December
    • Mass revenue of $62MM, $1MM lower MoM
    • VIP revenue of $107MM
    • Junket RC volume of $2.83 BN, up 2% MoM
    • If we assume that direct play was 9%, hold would have been 3.46% 



Wynn table revenues fell 10% YoY in December.  Hold was high but last year’s comparison was more difficult.

  • Mass was up 4% YoY– the worst performance of the 6 concessionaires for the 4th consecutive month
  • Wynn was the only concessionaire to record a decline in VIP revenues this month, which fell 13%.  With the exception of September, Wynn has had YoY declines in VIP revenues for the last 8 of 9 months.
  • Junket RC fell 9%, the worst performance of the group.  Aside from a 1% gain in November, 7 of the last 8 consecutive months have been in the red.
  • Assuming 10% of total VIP play was direct (in-line with 3Q12), we estimate that hold was 3.10% compared to 3.21% last year (assuming 11% direct play – in-line with 4Q11).



MPEL table revenue grew 14%, negatively impacted by low hold and a difficult YoY comparison.  Hold across MPEL’s two properties was 2.84% vs. 3.16% last year.

  • Altira revenues grew 11%, with a 21% increase in Mass and a 10% increase in VIP
    • VIP RC increased 13%, breaking its 12th month consecutive streak of losses
    •  We estimate that hold was 3.11%, compared to 3.30% in the prior year
  • CoD table revenues grew 15% YoY, despite low hold
    • Mass revenue grew an impressive 62%, offset by a 2% drop in VIP revenue
    • RC grew 13%
    • Assuming a 15% direct play level, hold was 2.70% in December compared to 3.08% last year (assuming 16% direct play)



Table revenue grew 20%

  • Mass revenue was up 9% and VIP revenue grew 25%
  • Junket RC grew 12%
  • Hold was 3.03%, compared with 2.70% last December



Galaxy table revenues grew 14%.   Mass growth took the top spot with 59% growth.  VIP revenues only grew 3%YoY, despite high hold.  Across its two owned properties, Galaxy held at 3.39% vs. 3.04% in December 2011.

  • StarWorld table revenues fell 2%, marking the 7thconsecutive month of declines
    • Mass grew 57%, offset by a 9% drop in VIP
    • Junket RC fell 11%, marking the 7th month of consecutive declines
    • Hold was normal at 2.84% vs. an easy comparison of 2.76% last December
  • Galaxy Macau's table revenues grew 33%
    • Mass grew 63%
    • VIP grew 25%, while RC grew 8%, breaking a 4 consecutive month streak of declines
    • Hold was high in December at 3.86% vs. 3.34% last  year



MGM table revenue grew 38% in December, aided by high hold. 

  • Mass revenue grew 51%
  • VIP revenue grew 35% on a 10% increase in VIP RC.
  • If direct play was 8%, then December hold was 3.55% compared to 2.90% last year






LVS’s MoM share increased 20bps to 21.0%.  December’s share was better than its 6 month trailing market share of 20.2% and better than Sands’ 2011 average share of 15.7%.

  • Sands' share was flat at 3.7%.  For comparison purposes, 2011 share was 4.6% and 6M trailing average share was 3.8%.
    • Mass share ticked down to 5.3%
    • VIP rev share was flat at 3.0%
    • RC share was 2.4%, down 10bps MoM
  • Venetian’s share ticked up 10bps to 8.0%.  2011 share was 8.4% and 6 month trailing share was 8.1%.
    • Mass share fell 40bps to 13.1%
    • VIP share increased 30bps to 5.9%
    • Junket RC share increased 1% to 5.1%
  • FS was flat at 3.7%.  This compares to 2011 share of 2.2% and 6M trailing average share of 3.2%.
    • VIP ticked up 10bps to 4.6%. 
    • Mass share fell 30bps to 1.6%
    • Junket RC fell 40bps to 4.1%
  • Sands Cotai Central's table market share ticked up 10bps to 5.0% and compares to the 6M trailing average share of 4.5%.
    • Mass share of 6.2%
    • VIP share of 4.5%
    • Junket RC share ticked down 10bps to 4.0% 


Wynn was the biggest share donor in December, losing 1.8% to 10.3% in December.  Wynn’s 2011 share averaged 14.1% and their 6-month trailing share averaged 11.5%.  

  • Mass market share increased 50bps to 8.0%, an all-time property low
  • VIP market share plunged 3.1% to 11.1%
  • Junket RC share decreased 70bps to 10.7%, the lowest level since October 2007



MPEL’s lost 20bps of share in December to 13.5%, below their 6 month trailing share of 13.7% and their 2011 share of 14.8%.  

  • Altira’s share fell 10bps to 4.0%, above its 6M trailing share of 3.9% but below their 2011 share of 5.3%. 
    • Mass share ticked up 10bps to 1.4%
    • VIP fell 20bps to 5.1%
    • VIP RC share fell 20bps to 5.2%
  • CoD’s share fell 10bps to 9.4%.  December’s share was above the property’s 2011 and in-line with 6M trailing share of 9.3% and 9.5%, respectively.
    • Mass market share was flat 11.7%, in-line with an all-time high for the property set in November
    • VIP share was flat at 8.5%
    • Junket share fell 90bps to 9.0%



SJM’s share fell 1.5% to 26.1%.  December’s share compares to their 2011 average of 29.2% and its 6M trailing average of 26.5%.

  • Mass market share fell 1.6% to 28.7%, an all-time company low
  • VIP share dropped 1.4%to 26.0%
  • Junket RC share increased 1.6% to 29.0%


Galaxy was the largest share gainer in December, increased 2% points to 18.2%, below its 6M trailing share average of 18.5%

  • Galaxy Macau share increased 2.5% to 11.0%, positively impacted by 3.86% and an easy comparison in November
    • Mass share increased 70bps to 9.8%
    • VIP share increased 3.3% to 11.5%
    • RC share grew 60bps to 10.2%, reversing 6 consecutive months of share declines
  • Starworld share fell 30bps to 6.2%
    • Mass share increased 90bps to 3.5%
    • VIP share fell 90bps  to 7.3%
    • RC share increased 10bps to 8.7%



MGM gained 1.3% share to 10.9% in December, above their 6M average of 9.7% and above their 2011 share of 10.5%.

  • Mass share increased 1.2% to 8.1%
  • VIP share grew 1.6% to 11.9%
  • Junket RC fell 90bps to 10.5%


Slot Revenue


Slot revenue grew 7% YoY to $145MM in December.

  • LVS took the top prize for YoY growth of 49% to $49MM
  • Galaxy’s slot revenue grew 26% to $19MM, also setting a company record
  • MPEL grew 3% YoY to $24MM
  • MGM slot revenues fell 8% to $20MM
  • WYNN fell 18% to $19MM
  • SJM had the worst YoY performance in slots with a 29% YoY decline to $14MM  







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