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In 2009, at the height of the financial crisis, the theme of the Darden Analyst Meeting was “Riding Out The Storm”.  The company could recycle that theme for this year’s Analyst Meeting but the company’s recent troubles have been self-inflicted. 


This morning, Darden guided to 3Q EPS of $1.00-1.02 versus the Street at $1.12.  We continue to expect EPS of $3.00 for FY13 versus $3.39 consensus.  The table below highlights the shortfall, in terms of consensus, of the pre-released same-restaurant sales results released by Darden this morning. 


DRI STILL RIDING OUT THE STORM - dri sss vs consensus



Capital Allocation


For a company of Darden’s size, following a growth mandate, it’s important for the company’s shareholders that the Return on Incremental Invested Capital metric is not declining steadily over time.  As the chart below illustrates, that has been the case.  For our position on the stock to change, we would need to see a stop to the growth of The Olive Garden and Red Lobster concepts and a slowing of the growth of LongHorn Steakhouse.  This will enable management to improve operations and restaurant-level performance.  We estimate that, since the end of 2009, Darden has spent over $2.35 billion in CapEx to generate only $198 million in incremental EBITDA.  That is not sustainable and shareholders should be seeking a change in philosophy from management: from “growth” to “prudent capital allocation”. 





Cutting the Fat


Darden has a hefty corporate structure, which is appropriate given that it manages over 2,000 restaurants within eight different concepts.  In trying to gauge whether or not the company is run efficiently, we have considered SG&A spending per store versus other operators within the industry.  While the G&A of Brinker may not be completely comparable to the SG&A line item of Darden, it is interesting to note that the aforementioned line item of Darden’s, on a per store basis, is almost twice that of Brinker, also on a per store basis.  If Darden can approach the efficiency level of Brinker in terms of its SG&A spending, we estimate that the benefit could be as much as $400 or $2.25 per share.



Whale Hunting Private Equity Firms


If difficult decisions are not made, it is likely that this company ends up in the hands of private equity with the company being broken into two pieces: Olive Garden and Seasons 52 (Italian) and Red Lobster, Eddie V’s and LongHorn (Steak and Seafood).  The other brands would likely be sold with Yardhouse going public.  To-date, there has been little pressure on management from shareholders to make any difficult decisions but, as the stock price goes lower, pressure is sure to follow.



The Upcoming Analyst Day


We are expecting management to stick with the party line during the Darden Analyst Meeting next week:

  • New Menus at Red Lobster and The Olive Garden
  • Remodel initiatives at The Olive Garden
  • Discounting
  • New leadership at the brand level
  • Inflation expectations
  • Growth initiatives
  • Supply chain efficiencies


We will know more about management’s vision for the future next week.  Unfortunately for those that own the shares, we don’t anticipate an increased focus on the core business and the issues therein.  We expect $3.00 in EPS for FY13 versus consensus of $3.39.  The road to recovery is not going to be easy for Darden but getting serious about fixing the core business is the sign that they are on the way.



Howard Penney

Managing Director


Rory Green

Senior Analyst


Strong quarter drives stock price in and out of the quarter.  Improving fundamentals, strong cash flow, and potential new markets keep us excited.



We think Q4 was the first of many solid quarters from Genting Singapore.  So even though the stock is up 20% since we turned bullish following our trip there in December, we remain positive.  The company is building a warship of cash as capex subsides, earnings are stabilizing, and the promise of new Asian markets may move to the forefront in the coming months.


While Genting Singapore’s EBITDA missed our estimate primarily due to hold, gaming volumes were better than expected.  Mass and slot revenue exceeded estimates.  VIP RC volume grew 56% vs. our estimate of 35% growth but hold was below the company’s historical average of 3.19%, so on the margin, gross VIP revenues were only 5% ahead of our estimate.  Better GGR was offset by higher rebates, GST, gaming points, comps/MVP's & other which rose to 37% of GGR from under 34% the in 2Q and 3Q12.



4Q12 Detail:

  • Gross gaming revenue of S$998MM on net gaming revenue of S$627MM
    • Rebates, GST & mass marketing points of S$371MM; equal to 37.2% of GGR , a large increase from 3Q12 at 33.7% and 27.7% in 4Q11
    • Gross VIP revenue of S$363MM and net VIP revenue of S$190MM
      • Just to clarify, when the Company says that Net RC revenues are 28% of Net Casino revenue, they are not just referring to the rebate on VIP but ALL discounts offered on gaming play (ie, Rebates, Mass points, GST, comps, MVP’s and other).
      • 56% of GGR
      • RC turnover: S$18.6BN up 56% YoY (51% market share)
      • Hold rate: 3.0%
    • Mass win of S$285MM up 2% YoY and flat QoQ
      • Drop of S$1.19BN and hold of 24%
  • Slot & ETG win S$155MM
    • Handle up 2.5% YoY to S$2.98BN
  • Non-gaming revenues were a little better than we estimated
    • We estimate that the Marine Life Park contributed $7MM of revenues to the quarter
      • $29 ticket pricing, but the actual price is closer to $23 due to the number of package deals being sold.
  • Expenses:
    • Gaming tax: S$88.6MM
    • Bad debt charge: S$43MM or 7.7% of Gross VIP which was in-line with the 2012 average but up YoY
    • Estimated fixed costs: S$206MM up from S$169MM in 3Q12 and S$195MM in 4Q11


TODAY’S S&P 500 SET-UP – February 22, 2013

As we look at today's setup for the S&P 500, the range is 16 points or -0.70% downside to 1513 and 1.77% upside to 1529.  














  • YIELD CURVE: 1.74 from 1.73
  • VIX  closed at 15.22 1 day percent change of 3.68%

MACRO DATA POINTS (Bloomberg Estimates):

  • 10:30am: Fed’s Powell, Rosengren speak in New York
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 1pm: Baker Hughes rig count
  • 6:30pm: Fed’s Tarullo speaks on regulation in New York


    • Obama hosts lunch mtg w/ Japanese Prime Minister Shinzo Abe
    • Defense Sec Leon Panetta attends NATO mtg in Brussels
    • 8am: HHS, FDA to discuss, vote on pre-mkt approval of NeuroPace Responsive Neurostimulation System
    • 3pm: Sec. of State John Kerry meets with Japanese Minister of Foreign Affairs Fumio Kishida


  • Gardner Denver to release earnings, may update on sale
  • KKR said to offer ~$3.68b for Gardner Denver
  • Bernanke said to minimize asset-bubble concern at dealer meeting
  • Boeing said to present battery redesign for 787 to FAA
  • Tosoh develops material that may help solve B787’s battery issue: Nikkei
  • Bausch & Lomb owner Warburg Pincus said to seek banks for IPO
  • BOE, PBOC discussing 3yr pound/renminbi swap arrangement
  • S&P probe by Massachusetts said to extend to post-crisis ratings
  • Euro-area economy to shrink, Spain deficit widened, EU says
  • Elan plans $1b share repurchase
  • German IFO business confidence rises more than forecast
  • China’s new home prices rise for 3rd month
  • ING to name Ralph Hamers CEO
  • Alcatel-Lucent names Michel Combes CEO; France said to weigh stake
  • EMA Preview: Glaxo, Sanofi, Pfizer, J&J, Roche, Takeda
  • 85th annual Academy Awards ceremony to take place Sunday
  • Anschutz Entertainment bids are below asking price: NY Post
  • Bernanke, Italian Election, Oscars: Wk Ahead Feb. 23-March 2


    • Enerplus (ERF CN) 6am, C$0.12
    • Gardner Denver (GDI) 6:30am, $1.35
    • Barnes Group (B) 6:30am, $0.51
    • Eldorado Gold (ELD CN) 7am, $0.15
    • Cyberonics (CYBX) 7am, $0.39
    • Interpublic (IPG) 7am, $0.53
    • Selectome REIT (SIR) 7am, $0.72
    • Abercrombie & Fitch (ANF) 7am, $1.96 - Preview
    • NV Energy (NVE) 7am, $0.07
    • Mobile Mini (MINI) 7:30am, $0.30
    • HMS Holdings (HMSY) 7:30am, $0.26
    • Warner Chilcott (WCRX) 7:30am , $0.73
    • Charter Communications (CHTR) 8am, $0.06
    • Pinnacle West Capital (PNW) 8am, $0.17
    • Washington Post (WPO) 8:30am, NA


  • Nickel Narrows Biggest Drop Since 2011 as Slump Attracts Buying
  • Sugar Traders Most Bullish Since October on Ethanol: Commodities
  • Soybeans Head for Longest Rally Since April on Chinese Demand
  • Gold Cuts Third Weekly Drop as Slide to 7-Month Low Spurs Demand
  • Brent Crude Rises, Paring Biggest Weekly Decline Since December
  • Coffee Rises as Investors May Cut Bearish Bets After Price Drop
  • Soybeans Held at Brazil Ports Boost Prices in China, Wilmar Says
  • China’s Grain Supply in ‘Structrual Shortage’, Minister Says
  • Gas Curve Shows Export Profit as Obama Hosts Abe: Energy Markets
  • Crude May Fall as Weak Demand Boosts Inventories, Survey Shows
  • India Seen Raising Cooking Oil Import Taxes to Protect Growers
  • U.S. Forecasts ‘Modest Further Rise’ in Gasoline Prices at Pump
  • Gasoline Rally Seen Fueling U.S. Stock Losses: Chart of the Day
  • Record Sugar Output in India’s Top Grower Seen Curbing Imports



















The Hedgeye Macro Team





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Witness Fear

“In the taiga there are no witnesses.”

-Dersu The Trapper


That’s the opening volley from a book I just cracked open, The TigerA True Story of Vengeance and Survival (by John Vaillant). The “taiga” is not to be confused with the Amur Tiger. Both are to be feared, in different ways.


The taiga is where these killers prowl, in “the mixed broad leaf and conifer forests of Siberia.” As for the Siberian tiger itself, people “fear it, revere it, tolerate it, and sometimes hunt it.” (pg 19)


If you want something to scare the hell out of you, I’m betting that one of these hungry cats does it better than this market can.


Back to the Global Macro Grind


If I take you out back into the black bear bushes of Thunder Bay, Ontario (in the dark, with no crackberry or gun) I bet I can scare the hell out of you too. To be clear, there are times to fear – and yesterday wasn’t one of them.


After banging the top-end of our immediate-term risk range (immediate-term TRADE overbought on Tuesday, where we sold at 1530 SPX), the US stock market corrected for 2-days (from the all-time high in the Russell2000) and people were freaking out.




Or are they freaking out because they missed a +177 point move in the SP500 from the November lows, chased the February high, then got snow plowed? People have baggage, I get it. But let’s get real here – nothing about our bull case has changed.


To review:

  1. We are bullish on global #GrowthStabilizing (especially in Asia and the USA, not France)
  2. We are bullish on both US Housing and US Employment (Existing Homes Inventory reported -25% y/y yesterday!)
  3. We are bearish on Commodities, particularly Gold, Silver, and Food

So, if you want to get bearish on something, get bearish on something that’s actually gone down for more than 48 hours. Commodities and their related equities have been a relative train wreck for not only February, but since Bernanke’s Top.


Since Bernanke’s money printing top (September 14, 2012 - #timestamp it):

  1. The CRB Commodities Index (19 commodities composite) is down -8.7%
  2. And in the last 3 months, Gold and Silver are down -8.7% and -13.9%, respectively
  3. Wheat, Cocoa, and Corn are down -14.7%, -15.3%, and -6.8% in the last 3 months too

And if you don’t care on Cocoa (I don’t) and are a little shorter-term than that with a US stock market focus:

  1. For FEB to-date, Basic Materials (XLB) is down -3.3%
  2. The SP500 is +0.3% for the month-to-date

Wanna get nuts? I can get nuts. I can rip into a 40yr US Dollar Debauchery cycle rant like you have never seen. I can throw more historical data at you on what perpetuated the all-time highs in Commodities (2011) than you can shake a stick at. I can yell. I can scream. I can probably even win a butt-kicking contest versus a one-legged commodity bull on this, dammit!


(interviewing for Santelli’s job, so thanks for reading that)


Back to reality – I keep getting asked “well, Keith what about your call on US Dollar Correlation Risk from 2010-2012.” A: correlations in markets are never perpetual, and it’s 2013.


What do I mean by that? It’s just math. Here’s what’s happening in our immediate-term TRADE correlation model (vs USD):

  1. CRB Commodities Index vs USD correlation = -0.98! (uber negative correlation)
  2. Eurostoxx600 vs USD correlation = -0.68
  3. SP500 and MSCI Asia (Equities) vs USD correlations = +0.13 and +0.55 (note, they are positive)

So stop freaking out. Like the Reagan (1) and Clinton (1) US #GrowthStabilizing (then eventually accelerating) periods, Strong Dollar can become a pro-growth signal. Oh, and China likes Strong Dollar, down food prices too. Don’t you?


If you want to get scared, fear the biggest thing of all that can screw this all up - the government.


Out immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, and the SP500 are now $1, $112.59-117.02, $80.63-81.53, $1.31-1.33, 92.87-94.39, 1.97-2.05%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Oh Snap

This note was originally published at 8am on February 08, 2013 for Hedgeye subscribers.

“I hated every minute of training, but I said, ‘Don’t quit. Suffer now and live the rest of your life as a champion.’”

-Muhammad Ali


Winning is never easy.  It requires early mornings and working hard.  That is true regardless of what your field of competition.  It may be producing research, it may be investing, it may be athletics, and so on.


Last night I joined the men of Ivy League Football for a few cocktails post the dinner they hold every two years.  Now I’m going to admit it, I definitely would have preferred to continue to sleep in this morning (so, yes, perhaps I had too many cocktails), but the only type of winning I understand is that which requires getting up and grinding. So here I am.


As usual when I get up, I’m greeted by a few emails from my colleague Keith McCullough regarding the global macro news and data flow.  The most notable one this morning related to the Stoxx 50, which is the “blue chip” index for Europe. (Think Dow Jones with a few more names.)  His email simply stated, “The Stoxx 50 snapped.”


For those of you that have been subscribers for awhile, you know that the price of securities and indices in our model are critical to determining future outlook.  When something snaps, that is not a good thing for those investors that are long of that market.  So, yes, as it relates to Europe, oh snap indeed.


Should any of us be surprised that the blue chip European index has snapped this week? Well, not really given that the European Union leaders were all convening in Brussels and that T.V. cameras were omnipresent.  In fact, according to the news releases this morning, they actually pulled an all-nighter last night.  I was out late with the boys from the grid iron, but I certainly didn’t pull an all-nighter, so kudos to them.


That said, the fundamental problem with politicians getting too much air time is that it is usually not great for equity returns.  Or, really, any asset price returns.  The funny thing about policy and policy makers is that they actually do influence markets and sometimes to a greater degree than they realize.  The perfect recent example of this phenomenon is the Japanese Finance Minister, Taro Aso.


Mr. Aso has been quite explicit since coming into office that he believes Japan needs to devalue and create inflation.  That is obviously all fine and good, until the market corrects more than said policy maker hopes.  As it relates to Mr. Aso and the Yen, it seems that has happened this morning.  According to this Aso:


“It seems that the government's policies have fueled expectations and the yen weakened more than we intended in the move to around 90 from 78.”


Markets are funny critters, aren’t they? They often do more than we expect.  (And sometimes less for that matter.)


This morning, there is a fair amount of pin action. As Keith also highlighted this morning:


“Plenty of cracks in my country level TRADE and TREND signals (Equities) now – tops are processes, not pts:


1.   FX WAR – Draghi is now trying to do precisely the opposite of what helped Germany recover, jawbone the Euro back down; overlay the slope of German economic recovery w/ the Euro in the last 3 months and you will see the pt western academics don’t get – currency has a POSITIVE correlation to growth expectations.

2.   INDIA – India’s Sensex joins the KOSPI (and Italy, France, Spain, Brazil) as the latest Equity market to snap my immediate-term TRADE line of 19,839 support. In isolation, I wouldn’t bother w/ a signal like this – but when the big country indices start to pile up, I move. Took down our Global Equity asset allocation yesterday.


3.   10YR  - the long bond looks almost identical to the VIX on price/volume/volatility factors – both signaled their first higher-lows of the yr in the last 48hrs. The upside down of that now makes last week’s closing high for the 10yr of 2.01% immediate-term TRADE resistance. Brent Oil > $115 is a headwind to global growth. Period.”


Incidentally, if you are not on the Direct from KM email list, ping sales@hedgeye.com and let them know you want to be upgraded.


As for the points above, the most noteworthy callout from my seat is that the Indian equity market has also snapped.  When equity indices start to snap, it is time to reduce equity exposure. 


Despite some of these major indices snapping, not all is negative this morning.  In fact, China reported some solid economic data.  Specifically, Chinese trade data for January  beat expectations as exports rose +25% versus estimates of +17.5% and imports were up +28.8% versus estimates of +23.5%.  Those are darn good numbers, even if it is the year of the snake!


I’m going to cut it a little short this morning as I’m sure many of you are busy prepping for the snow storm.  As always, let us know if you need help with anything.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1651-1684, $115.78-118.03, $79.79-80.29, $1.33-1.35, 92.20-94.29, 1.92-2.01%, and 1492-1516, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


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