July 24, 2013

July 24, 2013 - 724dtr


In preparation for PNK's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "In Lake Charles, we've been performing an extensive room renovation program with approximately 16% of year-over-year room nights out of service. This is particularly impactful on our weekends. The good news is our newly refurbished guestrooms are terrific, and our guests love what we are doing." 
  • "In St. Louis, we are on the homestretch of our $82 million expansion. Our event center, which is the second component of the expansion, will open in June, and our 200-guestroom hotel opens in the fall."
  • "We have a new management team in place at Boomtown New Orleans. We are seeing immediate improvements with multiple metrics at this property.
  • "In Belterra, we believe we have the right strategy in place to maximize our position in a market that continues to experience increasing gaming options. We remain focused on differentiating Belterra with its resort destination positioning and have recently completed an extensive buffet remodel, are in the process of building a new Stadium Sports Bar and we'll undertake a hotel renovation project this year."
  • "Marketing reinvestment, as a percentage of revenue, was flat versus prior year. We continue to be very focused on driving profitable revenue and applying a measured and rational approach to our marketing spend in all markets."
  • "In terms of guest behavior, in January and February, we saw that trips declined at a greater rate than spend per trip. Meaning people came less often, but their spend was pretty much in line with historical play levels. In March and then into April, both trips and spend patterns came back close to prior-year levels."
  • [L'Auberge Baton Rouge] "Guest acquisition continues to be very strong with over 27,000 people visiting the property for the first time during the quarter. Repeat visitation is also very strong, with over 50% of those who have visited returning for a second trip. The hotel continues to be a good story, with occupancy now over 90% and RevPAR increasing over 30% since opening.  We're very pleased in the progress made by L'Auberge, Baton Rouge over the quarter and are confident of the ramp-up of that facility as we continue to go through the rest of the year."
  • "We continue to look for ways to grow the market by leveraging our existing assets, such as the Four Seasons, where we increased casino guestroom utilization by 43% over prior year. And we await the completion of new assets with the Event Center at River City opening in June and the hotel coming online in late September."
  • "We continue to see the impact of new competition in Columbus, affecting visitation. In terms of the Horseshoe Cincinnati opening in March, it's still too early to quantify but thus far the impact has been muted."
  • "On River Downs, demolition of our grandstand and the other older facilities is complete and we have begun construction of the new facilities with a scheduled opening in the second quarter of 2014."
  • "Our team responded well to lower business levels with a focus on cost containment and operating efficiencies."
  • [L'Auberge Baton Rouge] "You should continue to see improved operating margins there as time goes on. As long as we continue to build the revenue we'll have corresponding margins with that revenue."
  • [River Downs] "The heavy spending will start going into the third quarter in reality. And really the fourth and first quarter will be the bulk of it, the fourth quarter of this year and the first quarter of next year with the property opening in the second quarter of 2014."
  • [AC land sale] "It relates to the NOL being created, yes, that will happen as soon as the transaction gets consummated. And our expectations are that that will happen in the third quarter of this year."
  • [Texas] "We don't anticipate there will be any legislation that will move forward this session."
  • "We think that we will be able to de-lever pretty quickly. Not only will we, following capital expenditures both in Lake Charles and River Downs, will we have cash flow to actually pay down debt. But obviously those -- our cash flow base is growing, both by virtue of Baton Rouge maturing as well as River Downs and Lake Charles adding to that base. So we have talked publicly about our targets between 3.5 and 5 times of leverage. We think that we will get there relatively quickly at a faster pace than would be normal because of the dynamics that I just talked about. And really our goal is to get to 4 times or lower within a few years."

Fed Conversations

This note was originally published at 8am on July 10, 2013 for Hedgeye subscribers.

“The one who engages in conversation should not debar others from participating in it.”



That’s one of the many quotes from Stephen Greenblatt’s The Swerve (page 70) that gets the juices flowing. Whether you’re tapping into the minds of the early Greeks (Epicurus = 341-270 BCE) or the arena of debate in the Roman Republic (Cicero = 106-43 BCE), it’s all there.


If you work within an investment culture that demands both constant questioning and collaboration, it’s all there too. Is there any other way to find the truth? Those who put their political pride over the market’s truths have never made good Portfolio Managers, fyi.


Sadly, politicians have provided the Fed, ECB, and BOJ closed forums where un-elected bureaucrats call the shots. While that may have been normal in Stalin’s Russia, it’s not in the area code of what America’s Founding Fathers envisioned. Who really cares about today’s Fed “minutes”? Until the Fed opens itself up to the Dalios and Druckenmillers of the world, they’re not even having a conversation.


Back to the Global Macro Grind


China’s economic data was horrendous overnight. So let’s not talk about the implications of Asian #GrowthSlowing, copper demand collapsing, mining capex bubbles, etc. Let’s start begging for a Bernanke-style bailout for the Chinese economy!


Yeah baby, that’ll do it – look at how well things turned out for every other Asian government that levered itself up since the Ming dynasty. I am hearing the Chinese are really into the whole Krugmanomics idea of turning China’s balance sheet into Japan’s too. Shhh.


To be crystal clear on this, we do not think China will “stimulate” you. Here are Darius Dale’s Top 3 reasons why:


1.   Property Bubble – they are trying to pop it before they get popped like we did (imagine that, learning from US history); property price growth continues to accelerate (+7.4% YoY in JUN; 13 consecutive months of sequential gains)


2.   Rebalancing, Not Levered Growth - Politburo's economic rebalancing agenda (quality of growth now more important than quantity of growth), which they've supported with recent rhetoric and (in)action during the recent credit crunch


3.   Psychology – despite the intermediate-term TREND slowing Chinese growth is still trending in-line to above long-term targets; if growth doesn’t fall off a cliff, new leaders will be reluctant to appear weak in the context of their long-term plan


Unlike team Obama, Geithner, and Bernanke (or Abe, Aso, and Kuroda in Japan), Xi and Li will be in charge for another 10 years. Why on earth would they implement short-term Western-style “stimulation”, when their ultimate goal is for history to respect them long-time?


I know, I know – whatever you do, do not engage in rational discussions about this when you can always defer to trading on the latest Chinese, Eurocrat, of Fed horse whispering rumor. That’s where the vig is at, bros.


The vig?


Yeah, you know – “also known as the juice, the cut or the take…” (Wikipedia definition). Or the amount a Washington “consultant” gets paid for his super secret inside info on what the Fed Minutes are actually going to say today (or what Bernanke is going to whisper next).


Just like Jefferson envisioned, for sure.


In other #StrongDollar, Strong America news, US stocks closed up for the 4th day in a row yesterday, taking the Russell 2000 to yet another all-time closing high of 1,018. For those of you who are still into keeping score for the 2013 bears, that’s +20% YTD.


All-time is also a very long-time, so why not sell some up here? You know, lather yourself up with some booked gains. As our Financials guru (and birthday boy), Josh Steiner, always reminds me, ‘no one ever went broke booking a profit.’


From our process’ perspective, making some sales up here in US Equities is your short-term, high probability, bet because:

  1. PRICE – SP500 is immediate-term TRADE overbought in the 1650-1658 range
  2. VOLATILITY – front-month VIX is immediate-term TRADE oversold around 14.02
  3. VOLUME – has been nowhere to be found on this no-volume meltup (down -13-27% versus our TREND avg)

What goes up on no-volume can come down on no-volume. So, as consensus is forced to chase price again, and again, and again in 2013, just take a deep breath and focus on proactively managing the risk of a very trade-able range (SPY range = 1592-1658, for now).


Despite the “rumors” of being “stimulated” by some Chinese dudes, both the Shanghai Composite and the Hang Seng closed well below their bearish TREND lines of 2,190 and 21,991, respectively overnight.


Oh, and Oil is testing a breakout above our long-term TAIL risk line of $108.36/barrel this morning too. So, Bernanke, before you think about devaluing the Dollar again with a closed network “communication tool”, think about the rest of us who are engaged in open discussions about you while we’re taking your Policy To Inflate in the pump.  


Our immediate-term Risk Ranges are now (we have 12 Macro Ranges in our new Daily Trading Range product too, fyi):


UST 10yr 2.56-2.73%

SPX 1621-1658

Hang Seng 20,124-20,991

VIX 14.02-16.21

USD 83.89-85.09

Oil 105.06-109.39


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fed Conversations - Chart of the Day


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A Thousand Pebbles

“Fragility is the quality of things that are vulnerable to volatility.”

-Nassim Taleb


We have quoted Nassim Taleb a number of times at the start of the Early Look and, admittedly, I didn’t check to see if this was a recycled quoted. Nonetheless, it is a very apropos quote for the topic of today’s Early Look and for contemplating risks in markets generally.


 The title for today’s note comes from a story, which is referenced in Taleb’s most recent book “Antifragile”, that emanates from rabbinical literature (Midrash Tehillim) and is about a king that is angry at his son.  In fact, the king is so angry at his mischievous son that he explodes one day and tells his son he will crush him with a large stone. 


Herein lies the dilemma according to the story: a king who breaks his oath is considered unfit to rule.  The king is now faced with the decision to either crush his son, or to give up his throne.  Luckily before the poor prince was crushed, an advisor (the Hedgeye of the era perhaps?) came up with a solution.  The king should cut the stone into very small pebbles and pelt his son with these pieces.


Taleb’s point in this analogy is to explain how fragility stems from non-linear effects.  That is, if you double the dose, you get more than twice the effect.   By way of a practical illustration, if you have five shots of Jack Daniels, you have a buzz.  But if you have ten shots of Jack Daniels, your wife (or husband) makes the couch up for you to sleep on that night.


Back to the global macro grind . . .


As it relates to non-linear impacts on the global markets as of late, interest rates have certainly had the most critical impact.  In the Chart of the Day, we highlight a slide from our most recent Q3 Theme Presentation that looks at quarter-over-quarter moves in interest rates.  As the slide shows, the move in interest rates in the last quarter was the largest percentage increase in fifty years.  (Yes, the last time this happened Sandy Koufax was pitching for the L.A. Dodgers.)


We were on the road in Europe talking to clients last week and not surprisingly interest rates were a key topic of discussion.  Many of the more astute investors actually narrowed in on this precise point of interest rate volatility.  Our view is that volatility of rate increases will be more benign moving forward, which, as we’ve been stating, should be positive for the U.S. dollar, domestic economic activity and U.S. stocks.


To the extent that volatility picks up, the effects of interest rate increases will be non-linear.  In reality, a move from 1.63% on the 10-year treasury to 2.63%, or an increase of 100 basis points, shouldn’t have a meaningful impact on asset classes or the economy.  The markets become fragile, though, when this 63% back up in rates occurs in a very compressed time period, as it did in May – June.   In pushing the interest rate ball under water, the global central banks have created a set up in which interest rates are very fragile (to use Taleb’s definition).


In addition to the risk of rates increasing at a rate that is highly volatile, the other key focus area of investors in Europe on our visit related to the impact of #RatesRising to housing.  This is certainly a legitimate question as the wealth impact from home price increases is a key reason we are bullish on U.S. consumption.  Specifically, as a consumer’s balance sheet improves via an increasing home price, so too does their confidence, ability to borrow and subsequently spend.


Based on our long run analysis of housing, the recent accelerated move in rates has not altered the fact that the affordability of purchasing a home remains at historic lows.  On the basis of median mortgage payment as a % of median income, the housing market is at 22% and well below the twenty-five year median of 28%.  On the basis of median mortgage payment to median rent, the housing market is at 99%, which is also well below the long run average of 131%.


This is not to say, of course, that housing won’t be impacted by a volatile move in rates, but the housing market is still so depressed based on historical levels it should have the ability to manage through #RatesRising.  June data from the NAR seems to support this as existing home sales were up 15.2% year-over-year and the national median home price in June was up 13.5%.  So yes, housing can do well if rates continue to rise.


Switching to infomercial mode for second, I want to highlight that we will be expanding our U.S. financials research coverage and are launching on U.S. asset management stocks on Monday July 29th at 11am.  Jonathan Castelyn has joined Josh Steiner’s team in a senior role and will be initiating on these names.   As always, we will be actionable and Jonathan will have 2 short ideas and 2 long ideas.  Please email  for access.


Our immediate-term Risk Ranges are now:


UST 10yr 2.47-2.71%


VIX 11.59-13.54

USD 82.01-82.89

Brent 107.21-109.14

Gold 1


Keep your head up and head on the ice,


Daryl G. Jones

Director of Research


A Thousand Pebbles - Treasury L vs NL


A Thousand Pebbles - Virtual Portfolio


We maintain our bullish stance on Wendy’s.


WEN reported 2Q13 EPS results that were $0.02 better than consensus.  More importantly, 2Q13 adjusted EBITDA was $102.1 million versus the Consensus Metrix estimate of $95.1 million.  Same-store sales were +0.4% for company-owned stores and +0.3 for franchised stores versus Consensus Metrix estimates of +1.1% and +0.9%, respectively.  Due to the successful July launch of the Pretzel Bacon Cheeseburger and the recent announcement of strategic operational initiatives, we believe the company is well positioned for the balance of 2H13 and 2014.


Below are some of our thoughts on WEN’s 2Q13 results.



The Big Story

The company announced a plan to sell about 425 restaurants as part of its ongoing brand transformation in order to help optimize its restaurant portfolio.  The company also laid out the anticipated benefits of this initiative:

  • Improved company-operated restaurant margin of 50bps or more
  • Reduced annualized G&A of about $30 million by the end of 1H14
  • Lower annualized depreciation expense of about $30 million by the end of 1H14
  • Higher cash flow due to an increase in rent and royalty revenue, lower ongoing capex, and proceeds from the sale of these restaurants
  • NPC will be a meaningful buyer of the stores, if not all of them 


What We Liked

  • New focus on an asset-light model
  • The company has recognized its operational deficiencies and created a feasible plan to address these issues
  • WEN is trending toward the high end of its full-year outlook for adjusted EBITDA ($350-$360mm) and adjusted EPS ($0.20-$0.22)
  • Strong focus on brand transformation – reimaging, including new restaurants, products and packaging along with a new logo
  • Expect stronger same-store sales in 2H13 and remain on track to achieve full-year same-stores sales growth of 2-3% in North American company-operated restaurants
  • The company raised its annual EPS growth rate target from the high single-digits/low double-digits up to the mid-teens beginning in 2014
  • Wendy’s intends to begin repurchasing shares in 3Q13


Red Flags

  • Although same-store sales numbers improved year-over-year, they fell short of expectations
  • Lost market share in the QSR value landscape, but the outlook is better for 2H13
  • 4Q adjusted EBITDA could be down over 10% year-over-year due to the company’s Image Activation franchisee incentive program
  • 2013 full-year D&A could be up about 15-20%








Howard Penney

Managing Director


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