In preparation for PENN's F1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "March was clearly better than January and February, and we can talk about weather, we can talk about timing and tax returns, we can talk about the payroll tax. January and February clearly were not good months for our industry as a whole. And March, we saw a bit of recovery. Now, there couldn't have been pent-up demand from weather. Weather and timing of tax returns are two things that you would think would be just a timing issue and would come back in March. So I don't know that we're prepared to call March a consumer recovery, but it was certainly nice to see at the very least that some of the lost business from the first half of the quarter came back in March. From what I hear, we're not alone in saying that."
  • "One thing that you notice is if you start in either Sioux City or in Kansas City area and start to work yourself east, as some of the snowstorms start there in the middle of the country and move their way across, we have a little bit of a weather exposure issue there. We've talked about that in February. But when we get a snowstorm, it doesn't affect one property. It tends to come across and affect 8 to 10."
  • "The acquisition there of Harrah's St. Louis I talked about earlier, that closed in November. We've decided to invest about $60 million in that property (this year); some new slot machines, some new carpets, facelift."
  • [Youngstown/Dayton tracks] "Racing Commission has decided that they think we need more seats for the racing section of those businesses. So the process is a little bit on hold at this point. We're not changing the opening date from 2014, while we seek a resolution there."
  • [Jamul agreement]  "Important to note, we are a manager-developer for that property. The $360 million, the tribe is going to seek to finance that separately from us. We have agreed to backstop it. Assuming that the tribe can finance it at better rates than what we've offered them, then they will do so and that will reduce our risk of course. But we will backstop if they can't, and we think that we have a reasonable management agreement in place and we think that it could be a good business for us."
    • "We could cross market with our M Resort, which gets a lot of drive-in business from California. The steps there, the NIGC is reviewing the management agreement right now. We need to get approval on that and then we have some other agreements with Caltrans and some utilities type agreements to work on. We hope to be under construction there towards the end of this year."
    • "Any investment that we would make upfront, it would not be in the form of equity; it would strictly be debt. There is a structure in place that Lakes was involved in this process before and they have in the neighborhood of $60 million of debt. And any debt that we put in would come before theirs and so we get paid back from free cash flow."
  • "With Columbus, I'm not spending any time worrying about where Columbus is going to end up. It's going to be fine. It's showing sequential growth. It's showing increased visitation. It's showing improvements in the slot customer base. Clearly the fact that Scioto was out first in the market with very aggressive marketing upfront was not ideal. The reality is, over the long term – and I don't mean years, I mean a few more months, I think you'll see the Columbus property really come into its own in terms of getting an appropriate level of market share."
  • "One of the things right now is, people need to keep in mind, is that when they look at the numbers that we're seeing in St. Louis, we've probably got almost 500 or 600 machines out of commission currently and the fact that there is a good amount of construction noise going on. It's not that disruptive, at least for now, but it does have some kind of an impact."



  • "In both Toledo and in Columbus we do expect in January to show sequential growth month-over-month in our slot volumes. So we are making progress."
  • "As we look at the 18 properties that were showing year-over-year results, half of those properties are now experiencing the effect of new supply. As we look at that effect, as we expected, we are losing trips to this new supply in various markets. But the average quality of the player that has stayed with us has actually improved a bit, and we're able to respond to the newer business volumes and the newer and updated trip frequencies."
  • "The one thing on the first quarter assessment of where we are, we looked last year, and we were fortunate to have just tremendous winter weather in our markets. So I think we factored in more of a normal winter going through the first quarter, and we also obviously factored in the fact that we don't have 29 days in February like we had last year."
  • "I think in central Ohio the primary issue is market penetration and getting into new households. We have to do a better job of introducing our new facility on the west side of town to more and more customers. I don't think it's saturation, clearly not in central Ohio. And I don't think it's saturation in northwest Ohio either, because you look at the Detroit market in the fourth quarter, they were only down 3%. Our numbers in the Toledo market really represented regional growth for that part of the Midwest."
  • "I would expect corporate overhead to come back to a more normal level, probably on a normalized basis somewhere around $80 million would be our expectations."
  • "Regarding what we're seeing in terms of reinvestment, it was noticed that our competitor in Columbus outspent us four to one in the month of December with promotional slot play. And we are going to respond and have responded in the fight zones we think are there for those customers. But I don't think you're going to see that have a material effect on margins in the Columbus market. And in Toledo, we're a little bit more by ourselves there; Detroit is an hour away north, and Cleveland is a couple hours to the east. We are looking at, again, the fight zones, but any increase in reinvestment will be done very thoughtfully with a disciplined test and control process to make sure that it is going to enhance EBITDA."
  • "Looking at 2013, we're expecting $275 million of project CapEx and roughly $97.9 million worth of maintenance CapEx for next year. Looking at the first quarter, I would break that down that we expect to spend roughly $49.4 million on project CapEx in the first quarter and $27.2 million of maintenance CapEx."
  • "There's been some tough markets down in the Gulf Coast; and obviously Baton Rouge is under pressure due to the competition in Baton Rouge, which is very – Baton Rouge historically has very high margins, which when you're under severe revenue pressures, are difficult to maintain. We're certainly doing a, I think, an incredible admirable job. It doesn't mean we don't have some more room for improvement. And then Tunica has been a bit of a rough market as well especially in the fourth quarter."
  • [Softness in market] "It certainly is more at the lower end with less trips, the retail consumers.  We are seeing some trip decline throughout all the segments of the business.  Some of that is due to cannibalization. But generally the big issue and the majority of our loss of business volumes have been at the retail end."
  • "Given the locations of the Horseshoe downtown Cincinnati facility and the Northville facility up in the Cleveland market, we do not think in our modeling and in our guidance, in our expectations that that's going to affect the business in central Ohio, which is a couple hours away drive time. Our expectations and our thoughts around central Ohio really are focusing in on the 1.8 million people in the Columbus MSA."

Tough Spot: SP500 Levels, Refreshed

Takeaway: Sometimes my risk management signals front-run what will become my fundamental research views. Sometimes they are head-fakes.



The research reasons for taking down my gross long exposure into last week’s highs, and not ramping that up (yet) again here on red aren’t there. The risk management signals are. Sometimes my signals front-run what will become my research. Sometimes they are head-fakes.


That’s what makes this 1557 level a tough spot. It’s my immediate-term TRADE line – is it support (Friday and Tuesday) or is it resistance (Monday and Wednesday)? Inquiring stock market operating minds want to know (including my own). I don’t know.


Away from 1557, across my core risk management durations here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1601
  2. Immediate-term TRADE support = 1540
  3. Intermediate-term TREND support = 1515


In other words, even if 1557 snaps, we have a big landing area of support (where I wrote a note titled “Buyem” at 1540 a few Friday’s ago). So what to do now? Just wait and watch – I think the market does a pretty good job telling us where to make the big moves.


#StrongDollar, Down Gold/Oil/Copper is a fantastic pro-growth research signal for Consumption assets. Our Q2 Global Macro Themes deck goes through the research views on that. This note is all about the risk management levels, what I am thinking right now, and why.




Keith R. McCullough

Chief Executive Officer


Tough Spot: SP500 Levels, Refreshed - SPX

Morning Reads From Our Sector Heads

Keith McCullough (CEO):


Carney to Leave Canada Policy Unchanged in Final Forecast (via Bloomberg)


Josh Steiner (Financials):


Bond Hedge Fund 5:15 Capital to Close Down, Return Money (via Bloomberg)


Fed doves stand by stimulus, though one has bright outlook (via Reuters)


Rob Campagnino (Consumer Staples):


Hedge funds' gloom on ags reaches record high (via Agrimoney)


Todd Jordan (GLL):


Carnival to spend millions to make ships more reliable (via USA Today)


Brian McGough (Retail):


Target’s Pricing Strategy: One Penny Higher Than Wal-Mart (via Sourcing Journal Online)


Macy's Appeals Martha Decision (via WWD)


Howard Penney (Restaurants):


New Salads and Cool Wraps at Chick-fil-A Starting April 29th (via GrubGrade)


Analyst's upbeat on Buffalo Wild Wings (via Nation's Restaurant News)


Kevin Kaiser (Energy):


Commodities Traders Brace for Transparency While Staying Private (via Bloomberg)


Matthew Hedrick (Europe):


Brazil inflation: Surging tomato prices create political headache (via BBC News)



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Getting Longer

Client Talking Points

Can It Hold?

1556 is a line we've been watching in the S&P 500. If this line can hold after today, we'll likely buy the index. There is no resistance all the way up to 1601. That's a lot of room to grow. Volume is up, volatility is down and the S&P is holding steady. These three factors make for a perfect storm of sorts that allows us to start getting long stocks and specifically, the S&P 500.

Keeping Focus On Consumption

We remain bullish on consumption and bearish on commodities. The fact of the matter is that there is an exodus in commodities and investors and traders sell the sector in an attempt to preserve capital. The people who fled commodities and will move into things like equities and treasuries. As commodity prices go down and your family sees the benefits of lower gas prices and cheaper food at the grocery store. They WILL buy more when prices come down and that in help drives global growth.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.


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


"Aussie Dollar failing at 20mda resist and breaking 50mda support. Policy can't fight move in copper, PGMs. CAD + AUD to test May '12 lows" -@timseymour


"There is always more misery among the lower classes than there is humanity in the higher." -Victor Hugo


Germany auctions 10-year bonds at record low yield of 1.28%.


The Macau Metro Monitor, April 17, 2013




There will be no tax imposed on casino winnings for the first 20 years following the establishment of casinos in Taiwan, Minister Yang said.  Yang, in charge of drafting a bill stipulating regulations for the operation of casinos, said that the bill was expected to be approved by the Cabinet by the end of this month and referred to the legislature for deliberation.


The government is required to draft the legislation by the tenets contained in the Offshore Islands Development Act.  Independent Legislator Chen Hsueh-sheng has been applying pressure on the issue since the passage of a referendum to allow a casino to be built in Matsu, his constituency, in July last year.


At an inter-governmental agency meeting, the Ministry of Finance (MOF) finally gave its consent to the tax exemption after the Ministry of Transportation and Communications (MOTC) insisted it was necessary.


A Cabinet official, who asked to remain anonymous, said that an idea is being floated among officials to allow casinos to be built within the planned “Free Economic Pilot Zones,” a project to test incremental economic and trade liberalization.  Gambling on Taiwan proper is prohibited by the Criminal Code, but the Offshore Islands Development Act exempt the outlying islands from this ban.



Table and slot count at the end of Q1 2013 was 5,749 and 16,406, respectively.

Macro Evolution

This note was originally published at 8am on April 03, 2013 for Hedgeye subscribers.

“The book of nature is written in the language of mathematics.”



More so than in any other year since we started the firm (2008), we are getting tons of questions from clients about our process – specifically, how we’ve applied breakthroughs in modern chaos theory (fractal math) to our global macro risk management process.


What’s interesting about answering these questions is that there is no silver bullet book you can read. No, they don’t teach this in business school (yet) either. I built the process on mathematical principles that are relatively new. When I want to consider evolving the process, I don’t read Jeremy Siegel – I dive into behavioral science, applied math, big history/data, etc.


Of the top 3 books that have inspired me on the interconnectedness of the Global Macro ecosystem, Eric Chaisson’s Cosmic Evolution (2001) is one of them. If you are looking to learn about my framework, all you have to do is read his Preface and Prologue. Unless you are in the business of not constantly re-learning how to operate in markets, I guarantee you can’t put this book down after 20 pages.


Back to the Global Macro Grind


Change is good. So is being long gamma. Convexity in market pricing works on the upside too. And being long a market that continues to make higher-lows (on no-volume down days), and higher-all-time-highs on up days, works for me.


Much to the Crisis-Mongering and bit-coin advertising business chagrin, the SP500 made another fresh all-time closing high yesterday at 1570. That puts the SP500 up +10.1% for the YTD.


But, but (the most commonly used word when I keep telling people I am bullish on Asian and US Equities), “look at copper, coal, corn and…” Yes, precisely – that’s why we think both US Consumption Growth and Consumption oriented Equities are going higher.


To review how the Macro Evolution gods have scored the YTD, there are massive divergences developing between:


A)     Consumption assets

B)      Commodity assets


And no, an asset doesn’t have to be an asset class – that’s what people call something like Gold, after it’s gone up for 12 straight years. For the YTD, being long Gold (or Gold Miners) is what I call a liability.


#StrongDollar is driving this – there are both positive and negative correlations associated with this breakout in the US Dollar Index. For starters, let’s look at Countries (major macro equity Style Factor):

  1. US Equities (SP500) +10% YTD vs Brazil (Bovespa) -10% YTD
  2. UK (FTSE) +10% YTD vs Russia (RTSI) -6% YTD

So, Russia is not Brazil, but both are in an irrelevant #OldWall acronym (BRIC), and neither of these stock markets like it at all when Metal, Food, and Oil prices deflate.


In fact, this morning there’s a headline on Bloomberg that says “Gazprom Falls Under $100B, Putin Frets.” I know, poor Putin. But seriously, who the hell cares about Russians fretting over US Consumption taxes at the pump and their Cypriot laundry?


Enough about that – let’s look at the US Equity market and dig down beneath the ecosystem’s crust to look at another important quantitative Style Factor – Sector Style Risk:

  1. US Healthcare Stocks (XLV) +17.2% YTD
  2. US Consumer Staples (XLP) +15.1% YTD
  3. US Consumer Discretionary (XLY) +11.8% YTD
  4. US Basic Materials Stocks (XLB) +2.4% YTD

Yes, ‘one of these things is not like the other, one of these things just doesn’t belong’ (when you are modeling fractals you can go right batty at night, so listen to Romper Room tunes and you’ll be fine).


One of these things (Basic Materials) is being impacted by who wins/loses under a pervasively #StrongDollar macro environment.


But, but –


1.       “Copper and Coal and Corn going down is a bearish demand signal …”

2.       “Consumer Staples outperforming is a defensive signal… “

3.       “Italian Elections, Cypriot Chariots of Fire, and North Korean Chubby Wubby, are big risks…”


C’mon man. Let’s get real here.

  1. Commodity Deflation = good for corporate input prices and real (inflation adjusted) consumption growth, globally
  2. Consumer Staples companies (especially Food, Restaurants, etc.) have massive y/y margin expansion opportunities
  3. Crisis-Mongering about Korea? Join the club – CFTC SPY net long position hitting YTD lows as Treasuries net longs ramp

I know I’m whipping around and ranting a bit – but if you truly believe in Embracing Uncertainty like we do, you want to do more of that – especially when our globally interconnected signals do.


Contingency – randomness, chance, and stochasticity – pervades all of dynamic change on every spatial and temporal scale… science today is no longer in the prediction business… evolution predicts little of the future, yet strives to explain much of the past.” –Chaisson


Changing our positioning as the ecosystem does. Macro Evolution, Hedgeye-style.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1569-1602, $109.11-111.54, $82.58-83.49, 93.07-96.04, 1.84-1.94%, 12.15-13.41, 933-955, and 1559-1576, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Macro Evolution - Chart of the Day


Macro Evolution - Virtual Portfolio

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