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This note was originally published February 21, 2013 at 14:46 in Gaming

Both were up in Q4 but Singapore VIP volume surged while Macau grew only modestly.  Prior to Q4, the correlation was much higher.


  • Singapore 4Q VIP rolling chip (RC) volume soared 50% YoY while in Macau, 4Q VIP volume only gained 5% YoY.
  • Correlation between Singapore RC volume and Macau RC volume prior to Q4 was 0.86
  • Low hold usually drives higher volumes since people keep playing when they win.  Singapore held very low in Q4 while Macau was close to normal.  Singapore's a relatively new market so VIP business should grow faster than that in Macau.
  • Genting today was upbeat regarding VIP volume growth while Macau's VIP volume growth thus far in 2013 has been subdued
  • It remains to be seen if Singapore is taking VIP share from Macau. 




Recent Data Supports Improving Consumption

Takeaway: Housing, Labor market trends, commodity deflation and a bullish USD still have has us leaning positive on consumption.

Investor conviction remains capricious, two down days do not a bear market make, and known unknowns don’t matter until they do – as evidenced by the resurgent concerns over sequestration and sustainability of consumer demand in the face of rising gas prices and negative tax adjustments. 


Below we highlight some of the recent consumer related data points & where we shake out, on balance, from an investment positioning perspective.   


Housing:  Yesterday’s Housing Inventory & Price data was decidedly positive.  Existing Home Inventory, a primary leading indicator of future prices,  declined 24.7% y/y to 1.74M units and now sits some 50% below the 2007 peak.  Inclusive of today’s inventory data, our pricing model now points to a 13.2% increase in home prices over the next year. 


On the other side of tight supply is pricing and the NAR reported median home prices rose by 12.2% y/y in January, marking a 13th consecutive month of acceleration.  To the extent that housing price-demand dynamics are reflexive, which we believe they are, rising prices should drive demand which, in turn, should drive further pricing gains as a virtuous demand-price cycle that characterizes Giffen goods plays itself out.     


A continued rise in home prices holds the potential for stimulating a broad based wealth effect with positive impacts for consumer demand.   CBO has previously estimated the impact of a 10% decline in home prices to be $55-191B with respect to consumer spending and -0.4 to -1.4 percentage points with respect to GDP growth.   


Conversely, realized TTM home price gains and a further continuation of current pricing trends could be expected to contribute +40bps, on the low end, to end consumption over the NTM.  Increased housing wealth and the flow through to consumer spending sits as perhaps the largest potential, discrete offset to the -0.45% to -0.55% expected drag on GDP from sequestration.   


Source: Hedgeye Financials

Recent Data Supports Improving Consumption - inv lt


Recent Data Supports Improving Consumption - inventory px model


Real Earnings:  Yesterday's BLS data showed Real Weekly Earnings accelerated to +0.27% y/y in January.  While its hard to pin a bullish thesis on that level of anemic wage growth, on the margin, 3 straight months of positive growth are better than the negative growth in real wages that has characterized the better part of the last two years.  


Recent Data Supports Improving Consumption - Real Weekly Earnings 022113


Oil/Gas Prices:   Commentary around the consecutive days of rising gas prices streak has showered ubiquitously from financial media sources over the last week.  Indeed, Oil prices having been sitting as the largest remaining macro headwind to domestic and global consumption growth, in our view.  The last two days, however, have seen energy prices inflect to the downside.  From a quantitative perspective Brent Oil has is broken TRADE with immediate term downside to $112.59. 


The inverse relationship between USD appreciation and energy and commodity deflation remains pronounced across durations, and with the U.S. dollar still bullish in our model, the balance of risk remains to the downside for Oil prices and, in turn, gas prices on a short lag.  Real Earnings growth should benefit by extension as well as the inverse relationship between real earnings growth & commodity inflation over the last 5 years has been distinct.


As a reminder, our most basic US dollar based economic flow model remains: 


USD Higher --> Energy/Commodities lower --> Real Earnings/Real Growth Higher  


As simplistic as this is, it’s the factor dynamic we’d like to see perpetuate itself for us to remain constructive on sustainable, real growth from here.  


Recent Data Supports Improving Consumption - Inflation vs Real Earnings Feb


Recent Data Supports Improving Consumption - USD vs CRB


Jobless Claims:  Yesterday’s initial Claims data confirmed that labor market trends continue to strengthen as the 4-week rolling average in NSA claims registered further sequential improvement, printing at -4.2% Y/Y vs. -2.7% Y/Y the previous week.  


Source: Hedgeye Financials

Recent Data Supports Improving Consumption - JS 2



Income Tax Refunds:  The delay in the IRS processing of income tax refunds, and the impact to consumer spending, has been the other favorite media talking point of late. To put some numbers around it, as of the latest treasury data (feb 19th), individual income tax refunds are down $27.26B y/y (down 24.2%) while business tax refunds are essentially flat y/y.    The delay in refund processing may be exaggerating any existent weakness stemming from the payroll tax increases, but this is ultimately a timing issue.  Any related weakness should resolve itself and reverse over the next few months. 


Federal Tax Receipts:  Withheld payroll taxes are up greater than 10% fiscal YTD (against a run rate of ~2.5% for most of last year).  The move higher is partially explained by a pull-forward in compensation in December ahead of impending tax law changes and partially explained by the actual, enacted tax law changes in January.  We’ll have to wait on the February Treasury Statement to get a clearer read on income growth as the confluent impact of these dynamics wane, but Net-net, income tax receipt growth looks like its running 50-100 bps ahead of last year’s pace.  We’ll get the February update on 3/12.


On balance, with housing & labor market trends remaining positive and energy prices breaking down alongside a bullish setup for the dollar, we remain positive on domestic consumption.  


Christian B. Drake

Senior Analyst 



CAGNY Day 4 – Call it a Tie – Four Solid Presentations

I am going to call this last group of CAGNY presentations a four way tie – I know, it’s a dodge, but four very good companies that put forth compelling long-term value propositions for investors.  If pressed, I am going with L’Oreal because I appreciate a sense of humor when delivering what is, at the end of the day, pretty dull material.


L’Oreal (OR FP)

Nice sleek, black background presentation that was fitting for a very French company that is the market leader in beauty.  The company competes across all beauty segments, with the exception of direct sales (by design, according to CEO Jean-Paul Agnon, followed up with a backhand comment directed at AVP).  And the new word for the day is “Universalisation” – globalization that respects local identities.  Good strategy, bad word, but the strategy is what is important.  The company has had five chairmen in 100 years, and you get the distinct impression that the company doesn’t do anything without thinking about the long-term implications.  The company is becoming less dependent upon the Eurozone for sales.  The company’s goal is to outgrow the market every year and has largely achieved that in the recent past.  China play?  Yup – the company is the fastest growing beauty company in “new Asia” (excluding Japan).  Very solid presentation of a good global growth story in an attractive category – if the stock traded in the U.S. market, it would probably trade 2-3 P/E turns higher.


Colgate (CL)

“Why we are positioned for 2013 and beyond.”  The company has a long history in emerging markets and less than 50% of its profits in developed markets.  Colgate took its traditional victory lap, highlighting numerous return metrics over the course of distant and recent history.  The presentation moved next into a discussion of innovation – the company has a strong pipeline across geographies and business segments.    Interesting discussion of expanding distribution opportunities in emerging markets (India highlighted).  Consumer engagement at the retail level is very valuable, and can debate the value of that type of spend versus spending on traditional media – not a wholly unreasonable position, in my view.  Credit where it is due – 25 presentations behind us, and Colgate is the first one that discussed pricing as a strategic core competency.


Estee Lauder (EL)

Global growth, fueled by innovation – opening slide for Estee.  Prestige beauty should grow at 4-5% per year going forward (3% in ’13), EL plans to stay ahead of the market.  What is driving growth – the usual, emerging markets where we are seeing women joining the middle class at an increasing rate.  I am pretty “innovated out” in terms of listening to the topic, but EL has created an interesting presentation highlighting its capabilities as a global research and development organization – science based approach to global beauty.  Most detailed discussion of this key theme that I have heard at the conference, and I have heard all of them.  Interesting contrast with PG and ENR here – a significant cost savings program that is underway while the top line is still healthy.


The Coca-Cola Company (KO)

2020 Vision – profitable sales growth, focus on economic profit (I guess CLX isn’t the only company to have figured this one out).  Global non-alcoholic beverages are an attractive industry because of – you guessed it – favorable demographics arising from growing global middle class.  The consolidation of the global bottler network can provide the platform for long-term profitable growth.  The company lays out a compelling thesis as to why it is in a position to capture the continued growth in non-alcoholic beverages.  I would say a productive presentation, if somewhat dry – even with the rum and Coke plug toward the end of the presentation.


Safe travel home,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Expert Call: Professor Steve Keen

“Economics is too important to leave to the economists.”

  • Steve Keen


Hedgeye’s Macro Team hosted a call today with Steve Keen, renowned professor of economics and finance. at Australia’s University of Western Sydney.  Keen calls himself a “post-Keynesian” and is critical of today’s dominant neoclassical economics, which he calls inconsistent and unscientific.  Keen was hailed as “the economist who most cogently warned of the crisis” of 2007.  Alas, this recognition came in 2011.  The Real-World Economics Review said Keen’s work “is most likely to prevent future crises.”  Professor Keen may not be at the top of the list of candidates likely to replace Tim Geithner, but he graciously made himself available to our clients in an exclusive presentation.


Debt: The Real Thing

Professor Keen says contemporary economic theory rests on a misunderstanding of the roles that banks, debt and money play in an economy.  Economists didn’t see the financial crisis coming because they don’t understand that banks create leverage within the economy.  Neoclassical economists view banks as intermediaries who loan deposited cash.  Superstar neoclassical economist Paul Krugman says that when banks loan out savings deposits, it does not lead to an increase in demand.  This is because he assumes increases in debt automatically are offset by increases in the assets within an economy.  


But the balance between assets and liabilities is an accounting definition, not an economic truth, and Keen says debt is added to income to dynamically increase the money supply, spurring demand.  Keen defines “effective demand” as income, plus the change in debt.  When this debt-inflated money supply is invested, it leads to growth in an economy.  When it is used instead for speculation, it can lead to disaster.


Keen says private sector debt is completely ignored in policy debates, in the press, and in the work of most academic economists.  In a healthy and growing economy, private sector debt stokes growth by fueling demand in excess of the cash income in an economy.  


When private sector debt flows from economic goods to speculative investments – when the capitalist stops building factories to employ workers and starts building time-share developments on abandoned farmland – it causes prices of speculative goods to inflate.  Price inflation in speculative assets attracts more investment, which creates profits that are used to leverage and create more debt, which is further re-invested in the speculative goods.  This is the bizarre economic concept of a “Giffen good,” an item that is in more demand the higher the price goes, and becomes unattractive as the price goes down.  If you think this makes no sense, you’re right: just look at the stock market, where rising prices climax in a “melt-up” of panic buying, while price drops precipitate a flush-out as investors sell their losers in despair.


Work by Hedgeye Financial sector head Josh Steiner indicates that housing may behave like a Giffen good.  Steiner’s analysis implies that rising house prices cause increases in demand, which meshes with Professor Keen’s observation that increases in mortgage debt have an 85% correlation to increases in house prices.  


Keen also finds a close positive correlation between increases in margin debt, and increases in stock prices.  The higher the price of a stock goes, the more investors can borrow against it.  The more they borrow, the more stock they buy.  It should be obvious that this is a vicious cycle that invites disaster.  


Keen says the economic crisis can be explained simply by comparing private sector debt with public sector debt.  Private sector debt rose steadily as a percentage of GDP from 1993, then started to decelerate after 2007.  Professor Keen’s charts show clearly that public sector debt starts to increase at an accelerated rate in 2008-2009, as private sector debt is decreasing.  The annual change of private sector debt peaked at well above $4 trillion, dropping to an annual decline of $3 trillion in two years, a huge decline that chopped some $7 trillion out of the economy.  


Rising private sector debt is good for the economy until it isn’t, and then it can be disastrous.  There is a very high .94 negative correlation between private sector debt and unemployment.  Meanwhile, rising unemployment is .82 positively correlated with increases in public sector debt.  In short: rising unemployment causes governments to borrow, rising government debt creates economic activity, which creates jobs.  When there are enough jobs, there is excess income in the private sector, which makes them comfortable enough to start borrowing again.  Which creates jobs.  The definition of a virtuous cycle.  I think you have the causality backwards here: Normal debt levels affect the prices of goods and services.  Abnormal debt levels spill over into the prices of speculative goods.  Left to spiral out of control, increases in debt create instability which ultimately leads asset prices to crash.  When that happens, private sector debt retrenches quickly and severely. 


Meanwhile, government debt expands naturally to fill the void when private sector debt retracts.  Keen says politicians who harp on debt reduction are wrong on two counts: they don’t recognize that government debt is reactive, and that the government is not so much in control of levels of debt in the economy.  Worse, says Keen, despite Professor Bernanke’s fame as a scholar of the Great Depression, politicians and economists alike have not learned the lessons of history.  Efforts in the late 1930s to control the deficit sparked massive private sector deleveraging, which caused unemployment to nearly double, to 20%.  Says Keen, the only thing that bailed out the economy was WW II.  He fears the stage has been set for a repeat of the scenario, as policy makers try to rush to deleverage our economy.  

Keen says we are in the midst of a massive private sector deleveraging which could stretch out for twenty painful years, because policy makers refuse to take bold steps.  Excess debt will not be eliminated efficiently because the ways to accomplish this are politically dicey.


The simple answer is for the US to admit we made a whopper of a mistake by financing massive Ponzi schemes in the housing and stock markets.  The government could neutralize those mistakes by giving large quantities of cash to people in debt.  They would then pay down their debts and spend whatever was left over.  (You may recall, this was the original intent of the TARP program, to bail out troubled mortgages.)  Keen says our economy can’t get back to sensible levels of debt because timid policies will keep us locked in for the next 20 years.


Keen says it is not possible to clean up excess debt with a policy of 2% inflation – inflation has to approach ten per cent in order for it to take a meaningful bite out of public sector debt.  But no one can propose such a policy because it violates government and academic economists’ theories, because people fear inflation, and because Democrats and Republicans alike are caught in the shared fallacy of deficit reduction.  


Keen says the only way we will avoid a “lost 20 years” of deleveraging is if we are confronted with a phenomenon that hits us the way the Second World War stimulated our economy.  Keen muses that perhaps a major climate change event could scare the bejesus out of Americans and get us moving, but he is not very sanguine on the prospects of anything radical happening.


Until, and unless, such a galvanizing event comes around, Keen says policy steps that could grapple head on with our economic woes are too scary – politicians perceive the risk to their own careers as greater than the risks to the nation.  The situation will not change until that perception reverses.

Missing The Point

Client Talking Points

What Me Worry?

People sure have made a lot of noise over the past two days with the market not closing in the green. It’s really funny, because the S&P 500 is still up above 1500; looks like the permabears are upset because they missed the +177 point move to the upside in the S&P 500 from the November lows. These days, people will say the craziest things just to make their position hurt a little less. We’re bullish on #GrowthStabilizing and the US dollar, which is good for consumption which helps boost stocks. We’re also bullish on US housing and US employment. As for the commodity game, that’s where our bearish stance lies. Gold, silver and food we are particularly bearish on. Perhaps the stock permabears should switch their asset class; maybe then they’d get something right.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“Studies show, Caffeine can cause you to be more open-minded to viewpoints that contradict your own.” -@petenajarian



“The public will believe anything, so long as it is not founded on truth.” -Edith Sitwell


CRB Commodities Index is down -4% for the month. Strong Dollar = Weak Commodities.


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

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