Equilibrium's Test

“Only in equilibrium can we not distinguish past from future.”

-Eric Chaisson


If it appears that I have been back and forth on the US stock market all week, that’s because I have been. The nature of any non-linear ecosystem of colliding factors is often just that – uncertain.


Remember, I think of markets in terms of chaos theory and thermodynamics. Markets have blasts of entropy (the price paid when the complexion of the overall market’s energy changes), but they also oscillate back and forth from equilibrium.


What does that mean? Markets are built to confuse. That’s why they impose a lot of pain on a lot of people at the same time. “If not periodically checked, entropy will tend toward a maximum in any system” (Cosmic Evolution, pg 25). Think about that in terms of Gold.


Back to the Global Macro Grind


When my Research and Risk Signals are aligned across durations, it’s easy to make buy/sell decisions. When my front-runner (my immediate-term TRADE duration) whips back and forth between bullish and bearish, making decisions gets a lot tougher.


That’s where the SP500 and VIX are today – and they are hyper correlated:

  1. SP500 = bearish TRADE (1557 resistance); bullish TREND (1515) support
  2. VIX = bullish TRADE (14.27 support); bearish TREND (18.89 resistance)

We also call this Duration Mismatch (i.e. when one duration’s signal has a different conclusion than the other). I get less concerned about our fundamental research view when the TRADE is bearish than when the TREND is – when both are bearish, I short the market.


That’s why bearish TRADE/TREND setups are our Best Short Ideas:

  1. COMMODITIES (CRB Index) = bearish TRADE (289 resistance); bearish TREND (298 resistance)
  2. GOLD = bearish TRADE (1496 resistance); bearish TREND (1641 resistance)
  3. FCX (Freeport McMoran) = bearish TRADE ($31.92 resistance); bearish TREND ($34.18 resistance)
  4. YEN (vs USD) = bearish TRADE (95.87 resistance); bearish TREND (91.17 resistance)
  5. ITALY (MIB Index) = bearish TRADE (15,991 resistance); bearish TREND (16,313 resistance)

It’s a lot more profitable to get bearish about these things when they initially confirm TRADE/TREND breakdowns than it is shorting them after big drops. Obviously the big stuff (Commodities, Gold, Yen) has been breaking down for almost 6 months now, so you want to be proactive in managing the mean reversion risk associated with the immediate-term Risk Range. Bearish TRENDs bounce.


What is the immediate-term Risk Range?


That’s what I consider the most probable range of price within an immediate-term (3 weeks or less) time frame. Since time and space changes, so does my model.


It’s dynamic – meaning I tweak it throughout every day for my volatility and volume assumptions. If you think of it like an engine, I need to monitor accelerations and decelerations and be both proactive and reactive (i.e. I need to manually change the gears).


To use the SP500 as an example:

  1. My immediate-term Risk Range = 1
  2. My immediate-term TRADE line = 1557
  3. So, I could buy it A) at the low-end of my range (1539) or B) buy it on a breakout > 1557

Since every move I make is #timestamped in real-time, you can see that over the years I’ve evolved. I am more and more indifferent than I have ever been on buying oversold signals versus buying breakout signals.


Theoretically, you’d always like to buy something lower and sell it higher. Sometimes that’s dead wrong (lower can go lower and lower). If the front-runner (TRADE line breakdown of 1557) continues to confirm and attacks the TREND line (1515), and you’re buying it all the way down, you A) better have deep pockets and/or B) a longer-term investment time horizon.


One of my favorite lines on that score is Jeff Gundlach’s coarse description of an “investor” – a trader who is underwater. And when I really think that through in terms of how I risk manage my research team’s best ideas – that’s dead on. If I buy something, I want it to be the right spot. Being too early is also called being wrong.


Astrophysicist, Eric Chaisson, says “the greater the randomness or disorder, the greater the entropy” (pg 24). Agreed. But, in my process at least, it’s a lot easier to make decisions when entropy is obvious than it is when equilibrium is testing my patience.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1, $97.58-102.91, $82.26-83.12, 95.87-101.91, $1.29-1.31, 1.68-1.76%, 14.27-17.46, 899-929, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Equilibrium's Test - Chart of the Day


Equilibrium's Test - Virtual Portfolio


Yes, that is likely a positive signal.  Looking through the hold-adjusted lens, MGM Macau had a bang up quarter.



Q1 earnings two weeks from today should be a positive catalyst for MGM. We’re in-line with the Street for Vegas but higher for Macau on a hold-adjusted basis.  MGM Macau held low in Q1 at the VIP tables but volumes were terrific  - its best quarter ever.  CEO Jim Murren appearing on CNBC ahead of earnings today at 10:15am today is probably a signal of a good upcoming quarterly announcement.


We remain concerned with the longer-term outlook for domestic gaming as we’ve discussed ad nauseam (sorry to be repetitive but we think it’s some damn good analysis).  However, it does appear that there is some near-term stability in Las Vegas as management will no doubt discuss on their earnings call.  But Macau was the real story in Q1.  Quarterly hold-adjusted EBITDA could exceed $200 million for the first time.


We estimate that MGM will report $2.3BN of net revenue and $516MM of consolidated property level EBITDA.  We also look at wholly-owned EBITDA plus MGM’s pro-rata share of MGM China and City Center, less corporate and stock compensation expense which produces EBITDA of $466MM.





We project MGM’s Las Vegas Strip properties to produce net revenue of $1,184MM and EBITDA of $273MM.  We believe RevPAR is up 1.5% YoY, flatish YoY casino and other growth and low single digit (1-2%) operating expense declines.

  • Bellagio:  $282MM of net revenue and $72MM of EBITDA
    • 2% RevPAR increase
    • -2% growth in casino & other
      • 1Q12 had low hold according to MGM but casino & other revenues increased 16% YoY
    • 2% expense decline
  • MGM Grand:  $241MM of net revenue and $50MM of EBITDA
    • 2% increase in RevPAR
    • 2% increase in casino & other
    • 2% decline in YoY expense growth
  • Mandalay Bay:  $183MM of net revenue and $45MM of EBITDA
    • Flat YoY RevPAR
    • 3% increase in casino & other
    • 2% decrease YoY expenses
  • Mirage:  $155MM of net revenue and $33MM of EBITDA
    • 2.5% RevPAR increase
    • 5% increase in casino & other
    • 1% increase in expenses
  • Other US
    • MGM Grand Detriot net revenue of $138MM and EBITDA of $40MM
    • Mississippi net revenue of $121MM and EBITDA of $23MM

MGM Macau is projected to report $737MM of net revenue and $180MM of EBITDA

  • If MGM Macau held at its historical average of 2.95%, we estimate that the property would have reported EBITDA of a whopping $205MM.
    • We think Rolling Chip volume set a quarterly record for MGM Macau including an incredible month of March.  RC climbed 16% and 38% in Q1 and March, respectively.
    • Volumes tend to rise when hold is low and that was certainly the case here
    • We estimate Mass revenues climbed 28%

Our assumptions in HK$MM’s are as follows:

  • Net casino revenue of $5.6BN and total revenue of $5.7BN
    • Net VIP win of $3.4BN
      • VIP Turnover: 205,900 assuming 9% direct play
      • Hold of 2.70%
      • Rebate rate of 38.5% or 1.04%
    • Mass table win of $1.6BN
    • Slot win of $573MM
  • Variable expenses of $3,581MM
    • $3,064MM of taxes and gaming premiums
    • $495MM of commissions to junkets
  • Fixed expenses of $700MM

We estimate that City Center will report $66MM of EBITDA on $277MM of net revenues

  • Aria:  $222MM of net revenue and $53MM of EBITDA
  • Mandarin Oriental:  $13MM of revenue and $1MM of EBITDA
  • Crystals:  $14MM of revenue and $9MM of EBITDA
  • Vdara:  $23MM  of revenue and $6MM of EBITDA
  • $6MM of development and administrative expenses

Other stuff:

  • D&A:  $226MM (vs. guidance of $227MM)
  • Corporate & other:  $41MM (guidance of $40-45MM)
  • Stock Comp:  $9MM (guidance of $9MM
  • Net interest expense:  $234MM
  • Income from unconsolidated affiliates & non-operating items from unconsolidated affiliates of ($24MM)
  • $6MM of tax expense
  • Minority interest of $59MM

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TODAY’S S&P 500 SET-UP – April 18, 2013

As we look at today's setup for the S&P 500, the range is 31 points or 0.84% downside to 1539 and 1.16% upside to 1570.            










  • YIELD CURVE: 1.48 from 1.47
  • VIX closed at 16.51 1 day percent change of 18.27%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init Jobless Claims, April 13, est. 350k (est. 346k)
  • 8:30am: Cont Claims, April 6, est. 3.075m (prior 3.079m)
  • 9am: Fed’s Kocherlakota speaks in New York
  • 9:30am: Fed’s Lacker speaks on credit in Charlotte, N.C.
  • 9:45am: Bloomberg Economic Expectations, April (prior -4)
  • 9:45am: Bloomberg Consumer Comfort, April 14 (prior -34)
  • 10am: Philadelphia Fed, April, est. 3.0 (prior 2.0)
  • 10am: Leading Indicators, March, est. 0.1% (prior 0.5%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $2.75b-$3.5b in 2020-2023 sector
  • 11am: Bank of Canada’s Carney speaks in Washington
  • 12pm: Fed’s Raskin speaks in New York
  • 1pm: U.S. to sell $18b 5Y TIPS
  • 4:15pm: Asmussen, Rehn, Dijsselbloem speak in Washington


    • 10am: Senate Armed Svcs Cmte hears from Dir. of Natl Intelligence James Clapper, Defense Intelligence Agency Dir. Michael Flynn on threats
    • 10am: Senate Health and Labor Cmte hears from Labor Sec. nominee Thomas Perez at confirmation hearing
    • 11am: President Obama speaks at interfaith service in Boston
    • 11:30am: House Speaker John Boehner, R-Ohio, holds briefing
    • 1pm: State Dept hears public’s final comments on Keystone, which would carry tar sands from Canada to U.S. Gulf Coast
    • House to vote on H.R. 624, Cyber Intelligence Sharing and Protection Act, which White House threatened to veto


  • G-20 draft affirms pledge to avoid competitive devaluations
  • Herbalife unlikely to hire new auditor before investor meeting
  • PBOC’s Yi says yuan trading band to widen in near future
  • Japan March exports exceed analyst ests. after yen slide
  • Wells Fargo urges judge to dismiss U.S. mortgage loan fraud suit
  • SEC to move past financial crisis cases under new chairman
  • American Express profit beats est. as card spending climbs
  • SEC sues Schottenfeld trader Mancuso over Goffer insider tips
  • Biggest cinemas delay ‘Iron Man’ ticket sales in Disney dispute
  • Explosion hits Texas fertilizer facility, unknown number dead


  • BB&T (BBT) 5:45am, $0.68
  • WESCO International (WCC) 6:15am, $1.14
  • KeyCorp (KEY) 6:17am, $0.19
  • Fifth Third Bancorp (FITB) 6:30am, $0.39
  • AutoNation (AN) 6:45am, $0.64
  • Hubbell (HUB/B) 6:58am, $1.09
  • Danaher (DHR) 6am, $0.76
  • UnitedHealth (UNH) 6am, $1.14 - Preview
  • Morgan Stanley (MS) 7:15am, $0.56 - Preview
  • Sonoco Products (SON) 7:30am, $0.53
  • Verizon Communications (VZ) 7:30am, $0.66 - Preview
  • Fairchild Semiconductor (FCS) 7:30am, $0.05
  • PrivateBancorp (PVTB) 7:30am, $0.29
  • Watsco (WSO) 7:30am, $0.33
  • Baxter International (BAX) 7am, $1.05
  • Omnicom (OMC) 7am, $0.75
  • People’s United Financial (PBCT) 7am, $0.18
  • Penn National Gaming (PENN) 7am, $0.65
  • PepsiCo (PEP) 7am, $0.71 - Preview
  • Philip Morris International (PM) 7am, $1.34 - Preview
  • TransForce (TFI CN) 7am, C$0.26
  • Alliance Data Systems (ADS) 7am, $2.52
  • Pool (POOL) 7am, $0.05
  • Snap-on (SNA) 7am, $1.34
  • PPG Industries (PPG) 8:11am, $1.54
  • Syntel (SYNT) 8:30am, $1.03
  • Amphenol (APH) 8am, $0.86
  • Freeport-McMoRan (FCX) 8am, $0.71 - Preview
  • Peabody Energy (BTU) 8am, $(0.14) - Preview
  • Blackstone Group (BX) 8am, $0.53
  • Sherwin-Williams (SHW) 8am, $1.09
  • Union Pacific (UNP) 8am, $1.96 - Preview
  • Cypress Semiconductor (CY) 8am, $0.01
  • Nucor (NUE) 9:01am, $0.24 - Preview
  • Home BancShares (HOMB) 9:15am, $0.61
  • Ultratech (UTEK) 9am, $0.49
  • Acacia Research (ACTG) 4pm, $0.50
  • Align Technology (ALGN) 4pm, $0.23
  • Cubist Pharmaceuticals (CBST) 4pm, $0.32
  • Chemed (CHE) 4pm, no est.
  • Chipotle Mexican Grill (CMG) 4pm, $2.13 - Preview
  • Hub Group (HUBG) 4pm, $0.42
  • Associated Banc-Corp (ASBC) 4:01pm, $0.25
  • B&G Foods (BGS) 4:01pm, $0.37
  • Google (GOOG) 4:01pm, $10.67 - Preview
  • Microsoft (MSFT) 4:02pm, $0.68 - Preview
  • Capital One Financial (COF) 4:05pm, $1.62
  • E*TRADE Financial (ETFC) 4:05pm, $0.12
  • International Business Machines (IBM) 4:05pm, $3.05
  • Cepheid (CPHD) 4:05pm, $(0.02)
  • Forward Air (FWRD) 4:05pm, $0.39
  • Intuitive Surgical (ISRG) 4:05pm, $3.97 - Preview
  • Electronics for Imaging (EFII) 4:05pm, $0.32
  • EastGroup Properties (EGP) 4:05pm, $0.77
  • Restoration Hardware Holdings (RH) 4:06pm, $0.61
  • Advanced Micro Devices (AMD) 4:15pm, $(0.17)
  • City National (CYN) 4:15pm, $0.92
  • Celanese (CE) 4:30pm, $0.78
  • Glacier Bancorp (GBCI) 4:30pm, $0.28
  • Valmont Industries (VMI) 5:30pm, $2.52
  • Western Alliance Bancorp (WAL) Aft-mkt, $0.21
  • Cytec Industries (CYT) Aft-mkt, $0.87 


  • Copper Poised to Enter Bear Market as Industrial Metals Slide
  • Nickel Rout Seen Easing With Output Costs Breached: Commodities
  • Gold Gains as Price Drop Lures Buyers, Economic Data Falls Short
  • Goldman’s Contrarian Currie Foresaw Gold Collapse Paulson Missed
  • Brent Rises From Nine-Month Low; No Emergency OPEC Talks Seen
  • Copper Set to Enter Bear Market on Demand Concern: LME Preview
  • Gold Tumble Stokes Demand From Indian Bazaars to Chinese Malls
  • Gold’s Worst Plunge Since 1983 Ends 12-Year Bull Run: Timeline
  • Palm Oil Advances as Decline to Lowest This Year Seen Excessive
  • Gold’s Deviation to Stocks Tips Equities Rally: Chart of the Day
  • Oil Firms Break Promise on Biofuels as Chevron Defies California
  • BHP Billiton Cuts CEO Pay as Mining Industry Profits Decline
  • China’s Poultry Feed Demand to Slump 20% on Bird-Flu Outbreak
  • Copper’s Drop ‘Not Sustainable’ Near Term, NAB’s Knight Says























The Hedgeye Macro Team












Today we shorted Dollar General (DG) at $51.68 a share at 3:49PM EDT in our Real-Time Alerts. Dollar General is immediate-term TRADE overbought and McGough doesn't like the top-line compares pending.




Below, we go through our thoughts on this upcoming earnings season in order of release dates.


Chipotle Mexican Grill (CMG) 4/18: We would stay away from this stock on the long side as expectations for the second half of the year have become aggressive. Price performance has been strong during the year to-date and the company has benefitted from decelerating inflation. Pending further indication that returns are bottoming, we are remaining on the sidelines. The street is expecting SRS of 1% in 1Q13. One key question is whether management will raise prices in 2H13 to protect margin. We think this is a likely move.


McDonald’s (MCD) 4/19: We’re bearish on McDonald’s and are hosting a call on April 25th to go through our bearish thesis in greater detail.  One concern that we have expressed for approximately a year is the self-inflicted wounds that are having a negative impact on operational efficiency and, as a result, speed of service. This has been a factor behind the decline in the core business that the Street, anticipating an acceleration in trends during the second half of 2013, doesn’t seem to be embedding in its expectations.  In Europe, many of the issues that hurt the company in 2012 are still present in 2013. The most important European market, Germany, continues to experience economic malaise and the FX outlook is also a headwind for the stock given the thigh exposure to Europe from an operating income perspective (~40%).  We believe the company has ample means to manage the EPS number for 1Q13, but expect a negative revision of earnings expectations as the year progresses. The stock has broken higher from $85 with no supporting increase in earnings estimates. The 1Q13 consensus estimate of $1.26 or 3% EPS growth looks aggressive, but the company has many levers to manage the number.



Brinker (EAT) 4/23: We’re bullish on Brinker’s stock as one of the best ways to play our macro team’s bullish Strong Dollar, Strong America theme (Down Commodities, Up Consumption).  EAT represents the best way to play casual dining on the long side, in our view, particularly if macroeconomic growth continues to stabilize. The Street is estimating that Chili’s SRS will be -0.9%, implying a Gap-to-Knapp of 40 bps. We expect the company to beat the current expectation of $0.69, or 15% versus the year prior, in EPS for 3QFY13. 


Yum! Brands (YUM) 4/23: We’re bullish on this stock for the long-term TAIL duration but, due to current headlines in China, it is not an easy time to be long the stock. Looking past the near-term, we believe that YUM represents the best growth stock in the restaurant space. Ongoing negative news flow from China is likely to weigh on sentiment into earnings.


Panera Bread (PNRA) 4/23: We’re bearish on PNRA, having recently held a call with clients (reply to this email for replay, materials) outlining our bearish bias on the stock. We believe that traffic and price/mix expectations for the remainder of the year are unlikely to be achievable in tandem; consensus is likely to be disappointed by comparable sales growth in 2013.


Bloomin’ Brands (BLMN) 4/24: This Company is one of the most overvalued names in casual dining. Earnings have been boosted by the impact of the recent refinancing but top line trends continue to be slower than some have been expecting. The stock has momentum, currently, and is supported by a bullish sell-side. Continuing operational improvements are needed for the company to maintain its premium valuation and we would remain on the sidelines into earnings.


The Cheesecake Factory (CAKE) 4/24: In February, we pitched CAKE long during Hedgeye’s 2/11 Best Ideas call and the stock has performed strongly since, up 11%. Strong top-line momentum has supported the stock. 4Q12 same-restaurant sales grew 1.3% at The Cheesecake Factory and declined -3.2% at Grand Lux Cafe.  Consensus is looking for +0.7% and -0.9%, respectively, in 1Q13.  consensus expectations for 14% EPS in 1Q13 and the FY13 seem very achievable.  One of the more underappreciated parts of the CAKE story is the emergence of the international business.


Dunkin’ Donuts (DNKN) 4/25: We are positive on DNKN heading into the earnings announcement. We expect Dunkin' to be a solid performer over the near-, intermediate-, and long-term durations (TREND, TRADE, TAIL).  A significant portion of the company’s new unit growth is being driven by existing franchisees and we expect the franchisee base to strengthen as weaker operators fall away from the system.  This improving employment picture and deflation in coffee costs should provide a boost to the franchisee base and management’s earnings.


Starbucks (SBUX) 4/25: We remain bullish on Starbucks as headwinds related to employment and input costs support the top and bottom lines, respectively, in CY13. We expect management to strike a confident, bullish tone on the 2QFY13 earnings call as the improving job market in 1Q likely gave management increased reason for optimism. We see Starbucks as having the highest degree of leverage, of all companies in the restaurant space, to an improving job market.


BJ’s Restaurants (BJRI) 4/26:  We believe BJRI will continue to underperform as erratic same-restaurant sales growth weighs on expectations. On 4/2, we wrote a note advising clients to stay away from this still-loved stock despite the eye-catching underperformance versus the S&P 500.  A strong Chili’s is bad for BJ’s, particularly as some of that strength is likely coming from the new flatbread items on offer at the Brinker-owned chain. We expect the multiple to remain in the 8-10x EV/EBITDA range unless traffic recovers in the next couple of quarters.


Texas Roadhouse (TXRH) 4/29: We are bearish on TXRH as the stock is ahead of the company’s fundamentals. Relative to the two-year run rate of 5% in 4Q12, consensus seems to be conservative at a 2.3% estimate for 1Q13 same-store sales.  TXRH unit level returns are some of the lowest in the industry and as a result don’t generate significant ROIIC.  We don’t see the leverage in the business model that will allow the company to grow EPS 12% in 1Q13.


Buffalo Wild Wings (BWLD) 4/29: We have backed away from our bearish stance on BWLD given the decline in chicken wing price and improving consumer environment in the U.S.  Our most pressing concern is that the company is trying to managing food costs to a specific margin. We have seen in the past that this can cause operational issues for BWLD. Specifically the company’s aggressive pricing strategy in late 2012 will likely have a negative impact on traffic trends, which may cause the cash flow multiple embedded in the stock to contract.


Wendy’s (WEN) 5/8: Wendy’s is in no man’s land. We like the long-term TAIL thesis that CEO Emil Brolick and his management team will begin to generate consistently positive traffic trends at Wendy’s but the stock seems to be ahead of the fundamentals at this point. Significant cash flow demands will continue to impact free cash flow as the onerous task of fixing the asset base is undertaken.



Howard Penney

Managing Director


Rory Green

Senior Analyst


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