PNK wants this deal so a forced sale of properties to comply with the FTC is likely.



The big catalyst for PNK has gotten less attractive thanks to Big Government.  The FTC’s ruling yesterday will likely force PNK to divest assets in Lake Charles and St. Louis and delay the closing until the end of the year.  Forced sales are rarely value creating for the seller and this situation could be even worse - there just aren’t a lot of buyers.  We calculate $2.50 to $3.00 per share in lost value although some of that was reflected in the stock yesterday.


We assume PNK will divest its Lumiere Place in St. Louis and the yet to open Ameristar Lake Charles.  Assuming 7x 2015 EBITDA multiples and the time value of the delay, we project the “new” deal will cost the stock $2.50-3.00 in value.  The multiple for Ameristar Lake Charles is debatable and could even be considered high.  Texas is likely to legalize casinos at some point, in the future, which would likely decimate the profitability of these border town casinos.  PENN has indicated in the past that it is not interested in the Lake Charles market because of this threat.  For this reason and its similar concentration as PNK in St. Louis, we do not believe PENN would be a buyer of these properties.


The deal is still worth doing, in our opinion, and PNK seems to believe the same.  However, even with the 8% drop in the stock yesterday, we are less positive than most with the stock at $19.  While we’ve been right on the fundamentals, we’ve been wrong on the stock.  However, the catalyst has been pushed off and sentiment could turn negative.  Here are some of our thoughts:

  • PNK is doubling down on a space that faces the huge secular headwind of dying customers.  Baby Boomers appear to be the last generation of slot players.  Approximately 90% of regional gaming profits is derived from slots.  We’ve written extensively on the demographics and the lack of younger players.  Slot volumes continue to fall despite better economic conditions.  We’re not sure how regional gamers can overcome this potentially disastrous trend.
  • Yes, housing is getting better but the wealth effect takes time to build.  We’ve also written extensively on the strong impact of housing prices on gaming revenues over the last 15-20 years.  The statistical relationship is there but we feel it will take time and continued increases in home prices for this correlation to resume.  It hasn’t yet.
  • Texas – we think it’s inevitable.  Over 60% of PNK’s property EBITDA is derived in Louisiana.  Sure, this percentage will fall with the ASCA buyout and Ameristar Lake Charles divestiture but leverage is going way up.
  • May might look better in the regional markets but June is likely to move back into negative SSS territory.  Slot volumes are not going to surge anytime soon in our opinion which makes estimates still look aggressive.  Following the acquisition, leverage will increase to 6.0-6.5x which will look even worse in a declining estimate environment.   
  • We don’t believe PNK can cut the full $55 million in corporate expense out of ASCA.  It may not be widely known that ASCA actually allocates some costs to corporate that most operators push out to the properties.  This accounting treatment contributes to industry high property margins but also higher corporate expense as a % of revenues.  We think $35-40 million in expense reduction is the right number. 
  • The FTC delay increases the probability of a competing bid

Gong Show Rages On

Client Talking Points


The certified central planning gong show continues as this little critter called volatility enters the matrix for #WeimarNikkei bulls. Yen strengthens toward 100 with 10yr JGBs rallying to 0.88% (down 4bps). Nikkei tumbles -5.2%;  overnight, down -13% in the last week. Happy month end.


With the USD/YEN oversold, Gold is overbought, and Oil turns south first – this is what US consumption #GrowthAccelerating bulls want to see. Brent Oil is -8% YTD, but we haven’t seen bulls capitulate like I think they did in Gold. Failing at $103.98 TRADE resistance helps the bear case.


Holding all lines of support on the US Dollar Index during this week’s correction. Higher-lows and higher-highs is what we call healthy. EUR/USD looks like an interesting short again at 1.30. We’ll consider putting that on this morning after we see the river card (jobless claims).


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.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 


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.

Three for the Road


"We're short both the Yen and JGBs: I don't get asked why I'm not long Nikkei anymore"



"I believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one's strengths and weaknesses are." - Ray Dalio


10,000,000: The estimated number of people who watch Netflix without paying a dime.

Mercy Calling

This note was originally published at 8am on May 16, 2013 for Hedgeye subscribers.

“Nothing emboldens sin so much as mercy.”



US stock market bears and Gold bulls alike are begging for mercy this morning, and we will give it to them. I am getting my first coordinated overbought (SP500) and oversold (Gold) signal of 2013. Both signals are explicitly linked to an overbought one in the US Dollar Index. #StrongDollar, on behalf of the 99% of us, we salute you.


The aforementioned quote is one of my favorites in Shakespeare’s Timon of Athens. When I read it in college, I glazed right over it. When I re-read it in William Silber’s Volcker – The Triumph of Persistence, I smiled. I have had 2 feet on the floor, every day, for 5 years competing with sell-side research that doesn’t have the downside I do if I start to get things really wrong. I don’t want mercy.


Volcker believed in mercy – but he also believed free market actors needed to understand and feel pain. After the Policies to Inflate of the 1970s , Volcker reminded Dan Cordtz on ABC in 1980 that “people need to change their expectations and their behavior, and that is always an uncomfortable process.” (Volcker, pg 198). So was being long “inflation” and/or commodities for the next 7-8 years.


Back to the Global Macro Grind


Bernanke, of course, doesn’t have the spine to say anything remotely close to what Volcker did throughout the early 1980s. And the sad reality of our centrally planned market lives (after Bernanke) is that someone like Janet Yellen or Turbo Tax Timmy won’t either.


But, as my man Einstein, would say – everything is relative. And the probabilities continue to mount that both the Japanese and Europeans will be more dovish than anyone at the Fed is allowed to be; particularly when we see a 6% handle on US unemployment.


American confidence in government was so beaten down by Nixon, Carter, and Arthur Burns (the 1970s version of Bernanke), that by the time 1982 rolled around consensus couldn’t believe that #CommodityDeflation served as a tax cut. Growth stabilized and:

  1. Gold kept getting hammered as #GrowthAccelerating became clearer in 1982-1984
  2. Oil prices went straight down – the average price per barrel under Reagan = $16.53!
  3. US Dollars ripped the #EOW America camp a new one (average USD Index = $115.25 under Reagan)

No this isn’t an I love Reagan thing. Have mercy on me, please. US politics makes me sick, blah! If the US Dollar Index were to scream +37% to the upside (from today’s price), and Oil were to crash (like down more than 80% from here), would you be happy?


That’s what I am talking about when I say #StrongDollar, Strong America. Russian oligarchs, Middle Eastern Kings, and American Oil/Mining execs might disagree with me on that. Just a bit.


What’s in your wallet? How much Gold are you going to bring to buy beers at tonight’s Bruins game? The shiny metal expectations of a Ben Bernanke to Infinity and Beyond world are fading folks. Gold is crashing (-25% since that epic policy day for Bernanke in September of 2012, when Cramer proclaimed “I love Gold here!”); smoked again this morning, -1.5% to $1372/oz.


Here are my big mercy signals (immediate-term TRADE overbought and oversold) born out of this USD/Gold capitulation:

  1. US Dollar Index = immediate-term TRADE overbought at $84.21 (remains in a Bullish Formation)
  2. Gold = immediate-term TRADE oversold at $1370 (remains in a Bearish Formation)
  3. SP500 = immediate-term TRADE overbought at 1660 (remains in a Bullish Formation)

Overbought and oversold is as prices do. So I could be wrong on this (i.e. early) by 1-2 days or I could be really right. The entire point about my risk management process is making mercy decisions when the pain points to the highest probabilities I can model.


The hardest thing to do in this game is wait on your pitch. I still swing at outside pitches way too often. Whenever I do, it’s either my emotions or our research views that get the best of me. For those mistakes, I have no one to blame but myself.


The easiest thing to do in Global Macro is ride trends. The big moves (particularly at bifurcation points in policy) tend to be more glacial than you see in single stocks. Gold went up for 12 straight years don’t forget. Unwinding #EOW (end of the world trade) will take time.


Process Review - our risk management model is Duration Agnostic. That means we contextualize the short term within the long-term:

  1. TRADE = 3 weeks or less (our immediate-term risk ranges live in this time frame)
  2. TREND = 3 months or more (our best backtests live here – i.e. the calls we tend to get the most right)
  3. TAIL = 3 years or less (usually our best rate of change signal, only when the TREND agrees with it)

So, Bullish Formations are securities that are bullish on all 3 of our core durations (TRADE, TREND, and TAIL) and Bearish Formations are just the mirror opposite of that.


Gold is the mirror opposite of the US Dollar and the SP500 right now. That’s why we are very loud and consistent about our views on all 3 of these big macro moves. Get the US Dollar right, and you tend to get a lot of other big things right.


Getting the mercy pain points right is a very immediate-term risk management exercise. I do all of that timing/probability work underneath the hood myself. I used to tar basement walls for my Dad too. I like getting my hands dirty (if someone pays me to). Mercy Calling is a dirty job, but someone has to do it.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1370-1446, $100.18-103.98, $82.93-84.21, $1.28-1.30, 100.21-103.39, 1.86-1.99%, 12.23-13.87, 971-993, and 1633-1660, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Mercy Calling - Chart of the Day


Mercy Calling - Virtual Portfolio

Early Look

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Weimar Nikkei

“Economics is haunted by more fallacies than any other study known to man.”

-Henry Hazlitt


That’s the opening sentence to one of the best introductory books on markets that you’ll ever read: Economics in One Lesson. Hazlitt wrote the book in 1962, then republished it again in 1979. The quote is timeless. It’s also cyclical.


Our everything Japan Jedi, Darius Dale, and I spent the day seeing clients in Boston yesterday and we had some colorful debates about what both the New York Times and The Economist are all of a sudden championing as “Abenomics.”


To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears. Never mind a country that starts doing it with a quadrillion in debt, there has never been a country in the history of humanity that has devalued their way to long-term economic prosperity. Championing Japan’s economics today is the equivalent of cheering on the Weimar Republic circa 1924.


Back to the Global Macro Grind


The exciting thing about getting long the Weimar Republic’s stock market in the early 1920s is that you would have crushed it on the long side. The devastating thing was the other side of the trade – The People, their liberties, and purchasing power got crushed too.


Try some anti-gravity (economic or physical) exercises at home, and let me know how it ends. As a general rule, what goes up comes down, fast. The Yale Economics Department didn’t teach me that, btw. Incredibly, Keynesians believe they can “smooth” gravity.


The Weimar Nikkei was down another -5.2% last night. It’s down -13% from its Policy To Inflate high of May 22. That’ll leave a month-end mark. So will the implied volatility this kind of a move perpetuates throughout our interconnected global macro ecosystem.


What is a Policy To Inflate?

  1. A Policy To Inflate is an explicit (and implicit) strategy to debauch and devalue the currency of your people
  2. Bernanke is the “innovation/communication” dude who taught the Japanese to roll this out (without calling it what it is)

How do you devalue?

  1. As Bernanke’s boy, Paul Krugman, suggested to the Japanese in 1997, you need to “PRINT LOTS OF MONEY”
  2. And, ideally, have your conflicted/compromised politicians spend their brains out on borrowed moneys, at the same time

Then you have to overlay the almighty “communication tools” (i.e. central planners whispering inside info to “consultants” who then tell fund managers and/or bark about how much more you can print if/when you feel like the stock market needs more juice).  


This communication tool thing has the potential to be a lot more powerful today than it was for the Germans in the 1920s, primarily because the distribution pipe for our conflicted/compromised media is exponentially larger.


Remember, any lie can live for as long as people are dumb enough to believe it. I don’t think the media is as dumb as they are cornered. If they don’t broadcast this Fed, BOJ, and ECB propaganda, they lose access to the only meaningful content they have left.


BREAKING NEWS: central planner A says B to reporter C in the WSJ and/or English Major D @CNBC – markets react!


People who are paid to believe lies inspire us. So we are going to publish the Hedgeye Risk Management Top 10 things a hard core Bernankian is going to tell you in a meeting about the benefits of 0% interest rates and burning your currency.


At the top of the list will be things like “exports”, “competitiveness”, etc. These aren’t new arguments. But what’s fascinating about them is that they are the same fear-mongering and regressive arguments that central planners have been making since the 1920s.


Losers make excuses when their plans aren’t working. For Abenomics to work, we need to see sustained real (inflation-adjusted for local currency) economic growth.


In the short-term, they might get the illusion of that – it’s called inflation. In the long-run, what do they care about what they really get? On that score they’d agree with Keynes too; in the long-run they (and the Weimar Nikkei) will be dead.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, Nikkei225, and the SP500 are $1, $101.06-103.98, $83.31-84.61, 100.41-103.69, 2.01-2.18%, 12.35-15.11, 130, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Weimar Nikkei - Chart of the Day


Weimar Nikkei - Virtual Portfolio



TODAY’S S&P 500 SET-UP – May 30, 2013

As we look at today's setup for the S&P 500, the range is 33 points or 0.45% downside to 1641 and 1.56% upside to 1674.             










  • YIELD CURVE: 1.83 from 1.82
  • VIX closed at 14.83 1 day percent change of 2.42%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP Q/q, 1Q revision, est. 2.5% (prior 2.5%)
  • 8:30am: Pers. Consumption, 1Q rev., est. 3.3% (prior 3.2%)
  • 8:30am: GDP Price Index revision, 1Q, est. 1.2% (prior 1.2%)
  • 8:30am: Core PCE Q/q revision, 1Q, est. 1.2% (prior 1.2%)
  • 8:30am: Init. Jobless Claims, May 25, est. 340k (prior 340k)
  • 8:30am: Cont. Claims, May 18, est. 2.970m (prior 2.912m)
  • 9:45am: Bloomberg Consumer Comfort, May 26 (prior -29.4)
  • 10am: Pending Home Sales M/m, April, est. 1.5% (prior 1.5%)
  • 10am: Pending Home Sales Y/y, April, est. 12.8% (prior 5.8%)
  • 10:30am: DOE Energy Inventories
  • 10am: Freddie Mac mortgage 30-yr
  • 10:30am: EIA Natural gas storage
  • 11am: DOE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 1pm: U.S. to sell $29b 7Y notes


    • House, Senate not in session
    • 8:30am: U.S. Chamber of Commerce holds panel discussion on “Big Data”
    • 11am: FERC Commissioner Philip Moeller, Duke Energy CEO Jim Rogers, participate in U.S. Energy Assn annual mtg and public policy forum
    • 11am: Treasury Sec. Jack Lew, HHS Sec. Kathleen Sebelius, Acting Labor Sec. Seth Harris, CMS Administrator Marilyn Tavenner release annual reports from Social Security, Medicare trust funds
    • 1:30pm: House Transportation and Infrastructure Cmte hold field hearing on freight transportation challenges in southern Calif., implications for nation


  • Buffett’s MidAmerican Energy to buy NV Energy for ~$5.6b
  • Alcoa’s credit rating cut to junk as aluminum price drops
  • Dish boosts Clearwire bid to $4.40/shr, topping Sprint offer
  • GE Capital CEO Neal may step down, WSJ reports
  • Fiat said to ready $10b in financing to buy Chrysler
  • Costco 3Q profit beats est.
  • NYT said to consider BuzzFeed-style sponsored stories
  • Smithfield sale likely to pass U.S. security review, lawyers say
  • PetroChina said to sell stakes for cash to spend abroad
  • Hulu’s intl chief quits ahead of potential sale of site
  • KKR said to hire Ex-CIA Chief Petraeus to lead institute at firm
  • Google’s Motorola plans to sell made-in-Texas Moto X by Oct.
  • Takeda sues to block generic Dexilant sales by Impax, Sandoz
  • Euro-area eco. confidence increased in May
  • Japanese stocks enter correction, extending last wk’s plunge


    • Big Lots (BIG) 6am, $0.61
    • Joy Global (JOY) 6am, $1.56 - Preview
    • Royal Bank of Canada (RY CN) 6am, C$1.32 - Preview
    • Sanderson Farms (SAFM) 6:30am, $0.71
    • Express (EXPR) 7am, $0.36
    • Ship Finance International (SFL) 8:24am, $0.29
    • Golar LNG (GLNG) Bef-mkt, $0.34
    • Golar LNG Partners (GMLP) Bef-mkt, $0.48
    • Esterline Technologies (ESL) 4pm, $1.25
    • Lions Gate Entertainment (LGF) 4pm, $0.44
    • Guess? (GES) 4:03pm, $0.08
    • Palo Alto Networks (PANW) 4:03pm, $0.05
    • Splunk (SPLK) 4:05pm, $(0.06)
    • Pall (PLL) 5pm, $0.73
    • Copart (CPRT) 5:17pm, $0.49


  • Wheat Drops as Japan Suspends U.S. Imports on Modified Crops
  • Copper Users Squeezed as Glut Clogs Warehouse Lines: Commodities
  • Gold Rises for Second Day on Gain in SPDR Assets as Dollar Falls
  • Copper Advances as Weakening Dollar Stokes Demand From Investors
  • WTI Trades Near Four-Week Low as Supplies Gain Before OPEC Meets
  • Monsanto Modified Wheat Not Approved by USDA Found in Field
  • Robusta Coffee at 5-Month Low on Vietnam Prices; Sugar Advances
  • Iron Ore Seen at $100 by Morgan Stanley Offers Chance to Buy
  • Coal Ban to Spur China Gains as Indonesia Hurts: Energy Markets
  • Rebar Tumbles to Eight-Month Low on Chinese Overcapacity Concern
  • Cocoa Set for 2-Month Low on Support Breach: Technical Analysis
  • EU Energy Spend May Fall Short Without Carbon Fix, IHS Says
  • Maersk’s 8.4 Billion Bananas Key for Profitable Ships: Freight
  • Japan Halts Some U.S. Wheat Imports on Gene-Altered Crops






















The Hedgeye Macro Team












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