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Not Easy

This note was originally published at 8am on January 17, 2013 for Hedgeye subscribers.

“I found the PM not easy to talk to.”

-Eleanor Roosevelt


That’s what Eleanor Roosevelt said about her dinner discussions with Winston Churchill in the early 1940s. That’s what I’ve heard plenty of analysts say over the years in this business about their PMs too.


From a leadership perspective, what makes a good PM (Portfolio Manager)? What makes a great one? I’d love to hear your thoughts, because my sense is that there is a best practices answer developing. We are all hostage to the narrow scope of our own personal experiences and confirmation biases.


Of all the hedge fund PMs I’ve had the opportunity to work with, I’d say that Jon Dawson (former Dawson Samberg) was the easiest to talk to. When you are a young analyst, that’s helpful – having a good coach helps you learn. As you mature into a senior analyst, then a junior PM, it’s easy to start talking to yourself.


Back to the Global Macro Grind


This game isn’t easy. That’s why I like to play it out loud. It’s the ultimate test of the mind. You have to be disciplined but flexible; aggressive, but calm; and patient, but nimble.


Staying in it to win it on the long-side of both US (and Global) Equities for the last 6 weeks hasn’t been easy. The first 17 days of January have left the SP500 stuck right at a 5-year closing high of 1472. I have 6 points of immediate-term upside left.


Contextualizing what that means to me doesn’t start with valuation – it starts with price performance:

  1. From the recent freak-out Fiscal Cliff low (NOV15) of 1353, the SP500 is up 119 pts (+8.8%)
  2. From the Bernanke Top (SEP14 intraday top of 1474), the SP500 is down 2 handles
  3. From the all-time SP500 high (OCT2007), the SP500 is still down -5.9%

Since buying tops isn’t cool (if you bought the SEP14 top, you had to slog for 4 months and be up +8.9% to get back to break-even), you want to be really careful when a market starts signaling that is might be done making higher-highs.


Particularly if you are paid to beat a relative performance bogey, that’s precisely why it’s so hard for PMs to sell-high, and then buy everything back lower. How do you know when a market is going to put in an immediate or intermediate-term top?




Now I am hardly suggesting my PM process is perfect on this front, but it’s better than bad. It’s been built out of making mistakes. And if you ask any absolute return PM in this business with a good to great long-term track record, I guarantee you they tell you this: the key to performing is eliminating big mistakes.


So let’s try to not do that.


If the market takes another run at the bears today, it may very well turn out to be as big a beta mistake being really long US Equities for the next 3 weeks as it was being short them for the last three.


I’m not just randomly choosing this morning to say that – my signals are all about price/volume/volatility:

  1. Last night was the 1st night in the last 10 trading days that my S&P Sector Model wasn’t what I call “perfectly bullish”
  2. Yesterday’s close also featured a fresh new negative-divergence with the Russell2000 not making a higher-high
  3. Since the prior closing high for the Russell (884) was an all-time high, that might matter – all-time is a long time
  4. Healthcare (XLV) signaled its 1st lower-high in my model of the year (it’s the #2 Sector at +4.5% YTD)
  5. Financials (XLF) signaled its 2nd consecutive lower-high in my model for the yr (it’s the #1 Sector at +4.6% YTD)
  6. US Equity Volume registered a bearish signal (SP500 tested making new highs on a down -19% volume signal)
  7. US Equity Volatility (VIX) signaled immediate-term TRADE oversold at 13.16
  8. US Equity Market Breadth was negative (44% advancers vs 52% decliners) with the SP500 at the highs

Apple had a 1-day move that explained some of this market skew (Nasdaq up vs Russell down). And that’s where having a quantitative view on a big index name like AAPL helps contextualize the rest of what I am being told to look at.


Since the core principle of how I think about risk management is to Embrace Uncertainty, I don’t know (and don’t really care to attempt to predict), what my signals are going to tell me. I have learned to shut-up, and just listen to them.


It’s not easy to listen. But, as my man Hemingway said, “I like to listen. I have learned a great deal from listening carefully. Most people never listen.”


Our immediate-term Risk Ranges for Gold, Oil (Brent), Corn, US Dollar, USD/YEN, UST10yr Yield, and the SP500 are now $1664-1684, $109.08-110.85, $7.12-7.41, $79.33-79.98 (USD is overbought), 88.06-89.85 (we re-shorted Yen via FXY yesterday), 1.81-1.89%, and 1466-1478, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Not Easy - Chart of the Day


Not Easy - Virtual Portfolio


Today we shorted McDonald's (MCD) at $94.74 a share at 10:07 AM EDT in our Real-Time Alerts. Rising Oil prices are a new headwind to Global Consumption Growth and MCD is immediate-term TRADE overbought.


TRADE OF THE DAY: MCD - image001


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • BETTER - Very strong quarter in Asia with hold adjusted EBITDA in excess of consensus.  While volumes are usually inflated when hold is low (players play longer when they are winning), they were quite exceptional in Singapore and Macau.  We calculate hold adjusted EBITDA do be a little lower than management's calculation, but still strong enough to beat our hold adjusted estimate for Q1.




  • SAME:  Sheraton is doing very well.  They are fully booked for the upcoming Chinese New Year.
  • PREVIOUSLY:  “Holiday Inn is running at extremely high rates. The Conrad has more demand than it has supplies and the Sheraton just opened recently last month and we're doing splendidly at the Sheraton."


  • SAME:  Still believes the retail malls are worth $9-10 billion.  They are not in any hurry to sell them.
  • PREVIOUSLY:  "We've got about $9 billion to $10 billion today. And I'm not going to sell Macao until we finish the bridge which is next month, in December, and we let in the cross traffic....If it does impact it well, I think we could probably reach another billion or maybe more....In terms of monetizing it, we should wait until we get the approval for the Tropical Mall and we put the new retail in Lot 3. So we're still in the midst of that in any event, this is a good turn. There's a good cap rate."


  • BETTER:  Still sees very significant growth ahead for retail stores in Macau.  
  • PREVIOUSLY:  "We also have 26 more stores opening in the Four Seasons, 43 more stores opening and five in Cotai Central, and the potential of an 800,000 square foot, 300 store mall next to the Sheraton on the Tropical Garden space. So there's a lot more retail to mature for us to essentially maximize that retail facility."


  • SAME:  SCC EBITDA came in-line with the Street.  Margins of 22% were 4% points better sequentially.
  • PREVIOUSLY:  "Sands Cotai numbers are good, but they can be better. Again, the margins are hurting a bit due to a lack of premium mass."





  • SLIGHTLY WORSE:  mass drop fell 3.2%.  LVS sees growth potential to add more customers in this segment in 2013.
    • "We're implementing new marketing programs to both the premium mass market and VIP markets, beefing up our sales force and investing in aircraft. The customers we are targeting with these efforts will come from the areas surrounding Singapore: Indonesia, Malaysia, Thailand, and the wider Southeast Asian region as well as from Hong Kong, Taiwan, China, Japan, and Korea, and Vietnam."
    • "We're putting a team on the ground, incentives on the ground to try to drive more of that premium mass customer into Singapore, more tourist-driven and we think it's going to be very successful. We have started that a few months ago. We're looking to put a lot of boots on the ground and our belief is that's the growth in Singapore in the near future."


  • MUCH BETTER:  VIP RC was up 53% to $16.5 billion.  They did not see much change in VIP concentration relative to last quarter.     
  • PREVIOUSLY:  "I think it's stayed pretty flat....Singapore looks like a $45 to $50 billion annualized gold market at this time... We don't fear the credit side. We just would like to see more demand in the right kinds of customers. So our bigger challenge, very candidly, is going to be to make sure that premium mass growth returns again. That's the margin 65% plus we'd like to get back to and that's the segment we're really focusing on as far as we think there's short-term appreciation hope."


  • MIXED:  Slot handle fell 2% YoY, however, LVS sees a recovery in slot volumes going forward.  Mall revenues gained 12% YoY.  Convention, Retail and Other revenues fell 0.7% YoY.
  • PREVIOUSLY:  "Slot revenue has decreased by 8% this quarter... because of a decrease in local play. This concerns us and we are putting strategies in place in terms of how we can replace that business with additional business that we're after. The hotel room and MICE businesses have performed exceptionally and are operating at near capacity. There is rarely an empty room in the Marina Bay Sands these days. Retail has also grown meaningfully and we are in the process of developing additional dining and entertainment offerings in our mall."





  • SAME:  LVS is still very interested in this opportunity and are waiting patiently. 
  • PREVIOUSLY:  "In Japan, we are awaiting legislation, which is supposed to be submitted in April to the Diet. After that, there will be an approval process for a year or maybe two as it goes through the Japanese procedures. We're looking at sites in both Osaka and Tokyo and we continue that investigation and have people hired on the ground working on our behalf."





  • BETTER:  LVS paid a special dividend of $2.75 per share and a recurring dividend of $0.25 in 4Q.  Las Vegas Sands has increased the recurring quarterly dividend of the company by 40% to $0.35 per common share, or $1.40 per common share per year, beginning in 1Q 2013
    • PREVIOUSLY:  "We have every intention of increasing the dividend in the years ahead as our business and cash flows continue to grow."

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Takeaway: LVS firing on all cylinders and should continue to gain share

While the hold adjusted EBITDA is probably a little lower than that given by management, it's hard to find fault in this strong quarter


"I am pleased to report that our quarterly results reflect both strong revenue and cash flow growth and the steady execution of our global growth strategy.... The prudent management of our cash flow, including the ability to both invest in future growth and to increase the return of capital to our shareholders, remains a cornerstone of our strategy."


- Mr. Sheldon G. Adelson, chairman and chief executive officer



  • Mass table game productivity increased marketably in 4Q in Macao.  Mass table efficiency up 33% to $9,726/win per table per day.  
  • Had 5MM visitors to their properties in Macao in the month of December alone
  • Opened the pedestrian bridge between SCC and FS
  • Retail sales increased by 45% on the second floor of FS since the opening of the bridge. Sales on other levels also increased. 
  • Their RC volume at MBS was their second best month on record. If they held normal, they would have produced $406MM of EBITDA
  • The Parisian will be their 4th property on the Cotai Strip. They have received requisite approvals and are started construction on that site.
  • Retail mall business in Asia generated $110MM of NOI. Think that they are worth $9-10BN. 



  • MBS - the market in Singapore is a very concentrated market so there is a lot of volatility there. They are more focused on the premium mass business there.
  • The $406MM doesn't adjust out for the $24MM charge in the quarter so the actual normalized EBITDA would have been $430MM
  • Sheraton Tower is 100% booked for CNY. All of their properties are 100% booked for CNY.  They think that they will continue to gain share in that market.  Very bullish on Macau.
  • Timing on sale of the retail operations?  They have made no decision in terms of timing on a disposition of the mall real estate. Still have a long way to go on building that business. They are planning on doing another shopping center in Macau. Stand alone 300,000 SQFT mall plus more space at the Parisian. Only reason to move faster is if they thought that the cap rates were going to change. They can sell the existing retail and then have an agreement to sell the future real estate at a pre-determined cap rate. 
  • Is Singapore VIP getting more concentrated or less in terms of players? It remains unchanged. They do see some growth on the premium mass side. They want to move to a more tourist mix of business away from locals.
  • The payment cycle on receivables in Asia is just a longer cycle than in Vegas.  They feel comfortable with their ability to collect. The Singapore region is the toughest place to collect and they don't have that junket buffer. Collected $12MM of the $16MM in the drop this past Q. Reserve is almost 30% of the receivables balance.  Want to get the reserve to about 35%. Collections have been very consistent. Collect 95-97% of amounts outstanding when you go out 6 months. 
  • Venetian Macau had some renovation disruption from the work at the Piazza club - they had 29 fewer active rolling tables. Tough to say if they recaptured that business at their other properties. Don't think that the 29 tables out of service had a big impact on the Q. That property remains the jewel of their portfolio.
  • How to think about the hold % in the Singapore? Still thinks that 2.7-3.0% range is appropriate for MBS - they use the mid-point of the range. Only difference is that the market in Macau is just much deeper. Singapore is just a more volatile market.
  • What was the $24MM tax assessment in Singapore for? 1/3 of the assessment pertains to 2011 and the balance is to 2012.  The 2012 assessment doesn't all pertain to 4Q obviously but the full year.
  • What are they doing to continue to drive table efficiency in Macau? Only at Venetian do they feel the balance between VIP and mass is right.  They have an opportunity to do a lot better across the rest of their portfolio. Focus on the Peninsula is premium mass. At Four Seasons they are doing amazing on the premium Mass tables. Also need more slots there.
  • SCC: Has the lowest win per unit there but should see dramatic improvement with the opening of additional rooms. Their room, food and gaming operations put them in a strong position to do better. They are one of the players in the true "mass" business. That's a great business for them. They have basically a monopoly in that market given their table count.
  • There will be no conclusion about the growth of tables in the years to come. No firm commitment on who will get how many tables at any of the new build casinos. It will be some period of time before the government makes any firm commitment.They are confident that the government will treat them fairly as everyone else. They already own the land on Lot 3. 
  • Goal is to keep growing in Singapore. It's hard to know exactly how large. There is a large tourist market that they can tap. 
  • They are of the opinion that most US markets are either saturated or over saturated. 
  • Have people in Japan on a constant basis. 
  • All of the restrictions are on live tables; none on ETGs and slots. Reception is very favorable to ETGs and they keep getting better. They are very bullish on ETGs. Estimating an all in cost of $2,6BN for the Parisian. Of that they will use $700MM of SCL cash and the rest will be financed. 2013: $400MM, 2014: $1BN and 2015: rest in 2015. 
  • They are still building up their reserve balance from the current 29% to a goal of 35%. 
  • The Chinese people are curious about foreign locations so they believe that the Effiel Tower Design will be very well received. (Felix Wang at Hedgeye very much agrees with this assertion).  The only place that the Chinese want to get to more then Venice is to Paris. They think that the Parisian is even better designed than the Venetian.



  • LVS missed 4Q estimates due to a miss in Singapore and Vegas, offset somewhat by a big beat in Macau
  • "The Company's Board of Directors increased the...quarterly dividend by 40% to ...$0.35 per share payable in March of 2013"
  • "The quarter's adjusted property EBITDA and EBITDA margin were unfavorably impacted... by lower table games hold (approximately $90.2 million adjusted property EBITDA impact), as well as an additional $24.0 million property tax assessment at Marina Bay Sands."
  • Sands China: Net revenue of $1.97BN and Adjusted EBITDA of $620MM
    • Venetian: net revenue of $843MM and adjusted EBITDA of $331MM (3.25% hold)
    • FS: net revenue of $296MM and adjusted EBITDA of $90MM (2.68% hold)
    • SCC: net revenue of $491MM and adjusted EBITDA of $108MM (3.13% hold)
    • Sands: net revenue of $315MM and adjusted EBITDA of $83MM (3.29% hold)
  • MBS suffered from low hold of 2.14%
    •  Net revenue of $717MM and adjusted EBITDA of $302.5MM
  • Vegas: net revenue of $308MM and adjusted EBITDA of $53MM (17% hold)
  • Capital expenditures:  $386.5 million, including construction and development activities of $243.7 million in Macao,$117.4 million in Las Vegas, $21.3 million at Marina Bay Sands, and $4.1 million at Sands Bethlehem.


We like this company but are less sold on the stock.


Panera Bread’s shares have been among the worst-performing in quick service restaurants over the last 6 months.  As the chart below illustrates PNRA shareholders have been suffering; until recently, PNRA was the only QSR stock with a negative return over the last half-year (YUM has also slipped into the red on a six-month basis).  Considering this, alone, suggests that perhaps the stock is worth buying.  We believe the fundamentals say “not yet”.  Besides, depending on the duration one takes into account, any narrative can be told.   Since early 2011, the stock is up roughly 60%.


PNRA BREAD NOT QUITE BAKED - pnra underperformance



Fundamental View


One of our chief concerns with Panera Bread is its ability to continue to generate positive traffic over the next three quarters.  Over the past four years, comp growth has increasingly depended on pricing.  1Q13 is facing a difficult compare versus a year ago when weather boosted same-restaurant sales by 200 bps.  We believe that 1H13 consensus expectations may be overly optimistic from a same-restaurant sales perspective.  The company continues to build its marketing effort and we expect a similar increase in 2013 to that of 2012 to-date.  The company’s catering business can potentially capture incremental traffic but we think there is a limit to how additive this initiative can be.  The greatest source of leverage for the company is the marketing budget.  By raising its marketing spend as a percentage of sales, PNRA can drive incremental traffic.  With marketing at a mere 1.5% of sales, there is room to run before the company falls in line with industry norms.  Guidance for 2013 is for that number to rise from 1.5% in 2012 to 1.7%. 


With the average check at (roughly) $10 for lunch, Panera is now competing with the casual dining chains that are pushing lunch price points at $6-$7. 




PNRA BREAD NOT QUITE BAKED - pnra cumul px traffic



While there are plenty of positives to draw on, the fact that capex is growing so rapidly (with sequential acceleration), while sales growth seems to be rolling over, is a cause for concern.  The company continues to generate strong Returns on Incremental Invested Capital but sequential deceleration has not historically been a good sign for stock price performance.   If sales growth continues to diverge from capex growth, returns will continue to decelerate.  We will be watching this name closely through 4Q12 EPS but, for now, ROIIC and our macro team’s quantitative model (below) indicate that it is premature to be long this stock.



PNRA BREAD NOT QUITE BAKED - pnra sales vs capex growth






Howard Penney

Managing Director


Rory Green

Senior Analyst



In preparation for WYNN's 4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "Our volumes in Las Vegas are satisfactory and improving slightly, ever so slightly. And we've been enjoying the advantages of being a niche operator so our average rates are higher. And we're satisfied with our hotel, food and beverage, and gaming results under the circumstances, considering what's going on in the country."
  • "We feel the strain of competition in certain areas like a high-limits slots where our brethren at Cotai have done a very nice job in their high-limit slot rooms, which has caused us to revisit our high-limit slot area and that will be fixed shortly where we'll be, as usual, prettier, I hope, than the other guys....It should be finished, hopefully, by Chinese New Year next year, by February, March next year."
  • "We all know that credit has tightened in the marketplace [Macau] and so I think we've been probably more prudent than we had been in the past. And we've always had a conservative philosophy and we continue that. Consequently, our collection rates haven't suffered."
  • "We have a brand new stunning junket space that is going to open [the 1st week of November]."
  • "We're giving away as much in promotional allowances in a casino as we can afford."
  • [Daily Macau opex run rate] "I see that [$1.2MM]  as what I would call a pretty steady run rate."
  • "We're not under pressure with labor at the moment in our foundation work. But we're not in that heavy period that you're familiar with,  when you're pouring concrete and when you're using hundreds and hundreds of electricians and plumbers and sheet-rockers and concrete finishers. Then the people on the job start to get to 2000-3,500 people a day. Right now the foundation can't absorb that kind of labor. So we don't have any problem, nor do I see us having a problem in the next 12 months."
  • "You are seeing more credit from the junket operators, everyone's feeling a little better than they were a few months ago and it's reflected in the region....what I can tell you is things feel stable in Macau."
  • [Wynn Cotai[ "We think that we're going to start by the end of November, next month, the actual pile, the caisson construction."
  • [Cotai financing] "Most of the spending (75%) will be from mid-2014 till mid-2016 like most projects. So we actually have enough capital on hand to finish the project today. Could be some further financings just for balance sheet optimization in 2013 or 2014, but today we're in really good shape."

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