Before we get to the projections, we would like to point out one strange anomaly:  the first 13 days of last year January produced exactly the same table revenue as the first 12 days as this year – HK$11,625 million.  We’ve seen the Macau government use placeholders before so we would caution investors that this week’s numbers may not be reliable.  Typically, placeholder weeks are followed by the volatility one would expect from a catch up month.


Assuming the numbers are real, average daily table revenues grew 1% above the comparable period last year and are up over 8% YTD.  We are reducing our full month estimate from 22-28% YoY growth to 19-25% as a result of the softer week and expectation that virtually all of the incremental gaming revenue from the Chinese New Year celebration will occur in February.  Our estimates for January and February growth remain above the Street consensus.


Anecdotally, we’re hearing that VIP volumes remain high, VIP hold may be a little low, and Mass traffic has slowed from week one to week two.


In terms of market shares, SJM is the big loser while LVS the winner this past week.  Month to date, MGM has moderated but still remains above trend as does LVS and Galaxy.





Bullish on Growth Divergences Yet?

Takeaway: We expect this outperformance to continue, provided that the US Dollar doesn’t breakout versus the Euro.

Any idea what the Top-3 stock markets in the world are year-to-date?


They are all European. Greece, Portugal, and Austria. Incidentally, European Stocks handily beat US and Asian Stocks last week with Spain +5.0% and Austria +4.9% leading #GrowthDivergences.


Bullish on Growth Divergences Yet? - darke44


We expect this outperformance to continue, provided that the US Dollar doesn’t breakout versus the Euro.


Take a look at our #GrowthDivergences Macro Theme for Q1. (Ping for access.)  


Join the Hedgeye Revolution. 


BLMN continues to be on the Hedgeye Best Ideas list as a SHORT.



The likelihood that BLMN reports 5.7% revenue growth and 35% EPS growth in 4Q13 is slim.  The company only reported 1.5% revenue growth and 25% EPS growth, after missing same-restaurant sales, in 3Q13.  The current 4Q consensus EPS estimate for BLMN is $0.27.  We see this number coming in closer to $0.24-$0.25, which will largely depend upon the company's ability to manage the labor line (manager bonuses) in order to mitigate the sales shortfall.


Additionally we see BLMN missing sales estimates by 2-3%.  As it stands, the street is looking for 4Q same-restaurant sales of 2.1%.  We believe this is too aggressive, evidenced by the chart below. 


BLMN: A BLOOMIN' MESS - 1 13 2014 8 44 45 AM




The current bull case for BLMN either goes something like this:


“We believe Bloomin’ Brands should be viewed as a unique and compelling casual dining portfolio, with strong brands across multiple categories.  The portfolio combines the maturity and industry leadership of Outback U.S. along with the growth of Bonefish, Outback International and Carrabba’s.  Looking to 2014, we expect comp outperformance to prevail, and cost savings to be large, supporting high-teens EPS growth. While casual dining remains challenged, we believe the relative strengths of the Bloomin’ portfolio make a compelling long-term investment.”


Or something like this:


“Bloomin’ has the internal same-store sales drivers and margin improvement/productivity initiatives to offset a tough casual dining environment and outperform its peers.”




First, there has NEVER been a successful, much less compelling company in the casual dining sector that consisted of a “casual dining portfolio, with strong brands across multiple categories.”  It doesn’t matter whether you sell fish, chicken, or steak if people aren’t going out to eat.  The best run restaurants focus on doing one thing right.


Second, the casual dining industry is in secular decline.  According to Knapp Track data, after declining -2.6% in 2013, the industry reported its eight consecutive annual decline in same-restaurant traffic.  A company with a portfolio of brands imbedded in an industry in a secular decline is at greater risk of missing the numbers than a company focused on doing one thing right.  Another issue BLMN faces is the fact that the company is trying to grow capacity in the midst of a secular decline in traffic – a strategy that DRI has proven to be a huge mistake.


Third, where is the margin improvement?  Since going public, the company has been telling the story of “improvement/productivity initiatives” which we believe has not materialized.  On a TTM basis in 3Q13, restaurant level margins declined 36 bps as operating margins improved 58 bps.







Howard Penney

Managing Director


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Love Me Some Europe

Client Talking Points


The Yen is up another +0.8% this morning versus the US Dollar to +2.0% year-to-date. This is after being up +0.7% last week with the USD Index down -0.2%. Consensus is not as short Yen as it was, but the net short position (CTFC futures/options) of -130,749 contracts is still enormous.


The 10-year Treasury yield got smoked for a -14 basis point loss last week, and isn’t moving this morning either. Meanwhile, Gold can get interesting on the long side again if the 10-year yield starts making lower highs versus 2.99%. Gold is finally signaling a higher-low of $1195 support.


The Top-3 stock markets in the world year-to-date? They are all European (Greece, Portugal, and Austria). We expect that to continue provided that the US Dollar doesn’t breakout versus the Euro. Take a look at our #GrowthDivergencesMacro Theme for Q1. (Ping for access.)  Yes - we also remain long of Germany. Incidentally, the SPX risk range this morning is 1825-1850.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road


Fun watching guys use macro indicators that went stale 1/2 a decade ago #BalticDry @KeithMcCullough


"Your life does not get better by chance, it gets better by change."

-Jim Rohn


Got #GrowthDivergences? European Stocks beat US and Asian Stocks last week with Spain +5.0% and Austria +4.9% leading. Boom.


“You can’t win a horse race with mules.”

-Tim Taylor


This was a weekend of winners and losers.  On the athletic front, I was excited that Yale’s hockey team beat Harvard hockey like a rented mule by a score of 5 – 1 in the inaugural Rivalry on Ice at Madison Square Garden.  (Admittedly, Yale did lose by a wider margin in the alumni game!)  And no doubt my colleague Darius Dale was excited that his hometown Seahawks went into full on beast mode and beat New Orleans 23 – 10.


As it relates to losing, the nation of Israel suffered a major loss with the passing of former Prime Minister Ariel Sharon.  A loss like this of course is on a much greater scale than how any sports team did this weekend.  I’m far from an expert on Israeli politics, but it’s hard not to respect a man who gave everything for his proverbial team.  As a soldier, defense minister and finally prime minister, Sharon fought in or commanded every one of Israel’s major conflicts starting with its 1948 independence war.


Whether it be winning in politics or winning on the field or ice, victory is rarely an event that happens in isolation.  My former college hockey coach, Tim Taylor, used the quote at the start of the note to describe our team when we were doing more losing than winning.   His point is spot on that any great victory, in any field, takes hours of practice, repetition, and preparation.  Nothing in life comes easy and the investment management business is no different.


Back to the global macro grind . . .


One of the big winners in the global asset class race over the past twelve months has been European sovereign debt.  Specifically, both Spain and Italian 10-year yields have come in meaningfully.  This morning the Spanish 10-year yield is at 3.83% and the Italian 10-year yield is at 3.91%.  Both are effectively Euro era lows.


The healing of European credit markets, and the improvement has been meaningful, is part of what is underscoring our relatively bullish view on European equities in 2014.  Ironically, the Financial Times still has a tab called, “Euro-in-Crisis”, despite a marked improvement in the outlook for the Euro.  Also ironically, the five headlines in this section are as follows:

  • Portugal Plans Post Bail-Out Cash Cushion;
  • Investors Warm to Spanish Banks;
  • Too Early To Declare Crisis Over Says Draghi;
  • Draghi Can’t Keep Euro Down For Long; and
  • Portugal Enjoys Huge Demand in Debt Sale

The conclusion from those headlines, and much our analysis, is that if the Euro-crats can actually get out of the way we might have a meaningful recovery in Europe.


Speaking of winners and losers, the employment report on Friday threw many U.S. focused economists for a loop and also reinforces our Q1 2014 macro theme of #GrowthDivergences.  Friday’s employment report, which showed non-farm payrolls increasing +74K month-over-month to close 2013, was a disappointment versus prevailing expectations and an outlier verses the balance of higher frequency labor market data. 


Indeed, in the context of the broader labor market data, where the preponderance of evidence remains positive with the ADP private employment estimate, initial jobless claims, and the ISM Manufacturing and Non-manufacturing employment indices all reflecting moderate, ongoing improvement, the BLS data sits as a single negative outlier. 


With 273,000 people out of work due to bad weather (vs. an average of 166K over the prior five December’s) weather was held out as the biggest distortive factor and a favorite pundit talking point post the December release.  


Our retail and restaurant analysts have highlighted weather as a drag on traffic over the last month as well, so we’re inclined to accept that unusually inclement weather did, indeed, have some negative drag – with the largest impact across hours worked and construction/transports/trade employment.    


The other favorite talking point was the continued retreat in Labor Force Participation Rate (LFPR) which dropped another 19bps sequentially to 62.79% from 62.98%, driven by a net drop in the total labor force of -347K (-490K unemployed plus +143K increase in employed).  The continued drop in the LFPR remains in excess of that implied by demographic trends (which we’ve written about previously) and should remain an intermediate term issue as the labor market continues to grapple with higher structural unemployment driven primarily by the stubbornly, persistent elevation in long-term unemployment.  This point is highlighted in the Chart of the Day.


Further, the LFPR may seen another step function lower over the next couple months if congress fails to renew jobless benefits for the ~1.3M individuals who lost unemployment benefits at 2013 year end.   Perversely, perhaps, if those individuals drop out of the labor force, the unemployment rate will show improvement at the expense of a further depression in the participation rate. 


The other, somewhat disappointing metric in the release was average hourly earnings – which slowed 20bps sequentially to 1.80% year-over-year.   You can’t spend it if you don’t got it and if the savings rate holds little upside and the current iteration of the wealth effect is muted compared to historical precedent, then middling, sub 2% growth in income (ie. capacity for consumption) isn’t the path to winning for a domestic economy still beholden to consumption for 70% of GDP. 


Our immediate-term Risk Ranges are now:


10yr UST Yield 2.85-2.98% 


VIX 11.84-13.95 

USD 80.11-81.12

Gold 1195-1256


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research



#Winning - Chart of the Day


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