Long term hurdles remain but we’ve got some reasons to believe these stocks could outperform over the short term.



September and December were horrible months for regional gaming companies.  Q3 earnings were impacted but Q4 will likely prove far worse.  The bad news:  regional gaming faces a long-term secular headwind of demographics so growth will continue to be difficult to achieve.  The good news:  December’s swoon was more math driven than a further deterioration in demand.  The upshot:  despite very poor weather, January should outpace very low expectations and mark an upward trend, culminating in a potential flat February.  By comparison to December, a flat February will make these stocks look like growth companies.


So bad news seems reflected in the stocks:

  • All states have released December GGR – cat’s out of the bag
  • Earnings have come down dramatically – buy side even lower we think
  • Stocks have been blasted YTD
  • BYD pre-announced yet stock climbed 10% on Friday
  • Investors are expecting an even worse January given the weather



With the bad news mostly in – there is a risk of further 2014 estimate reductions during earnings season – it may not take much for a reversal with the right catalyst.  Our regional gaming model predicts sequential improvement December to January (even with the weather) and from January to February which could actually be flat YoY.  A couple of positive data points could be the short term tonic these stocks need.


What happened to these once loved real estate plays?


Since the11/15/12 PENN announcement that it was splitting into a REIT and an operating company, regional gaming stocks exploded.  Lost through the new real estate lens was the fact that regional gaming revenue growth was lagging badly behind other consumer sectors despite a growing economy.  Earnings estimates have consistently shrunk over the same period.  Investors didn’t care until the states released September gaming revenues (down 9% in the aggregate) and companies generally missed earnings expectations.  However, the stocks came surging back through the end of the year.




This time it’s different


Pushed on by a bad stock market and the bad December GGRs, investors punished regional gaming stocks.  BYD, PENN, and PNK are down 12%, 20%, and 20%, respectively, YTD as can be seen in the chart above.  The December (and September) downtowns were entirely predictable and similarly, a January/February recovery may be in the works. 

In our October 10/31/14 note “OCTOBER SURPRISE”, we correctly predicted the October rebound from the awful September – also correctly predicted.  On January 3, we released “THE DECEMBER SURPRISE” calling for a near 10% decline in December regional gaming revenues”.  What is our point?  Our point is that our model works and the model is now predicting sequential improvement in January despite the bad weather and – hold on to your seat – actual flat YoY February.  Hooray!  See below.




Bad demographics should continue to pressure regional gaming revenues.  Younger generations are just not interested in slot machines.  We’ve written extensively about this secular headwind so we won’t rehash here.  However, these volatile stocks can move significantly with ‘on the margin’ catalysts.  We think the emergence of 2 sequentially better data points will be those catalysts.  BYD, PENN, PNK should all benefit.


BYD probably maintains the most upside if they can fix operations.  Their properties run at significantly lower margins and revenue per gaming position than the competition in most of the company’s markets.  A senior management addition or change is probably necessary to affect the turnaround but no doubt the potential is there.  Since BYD pre-announced EPS already, it is the lower risk play into earnings.  Not surprisingly, PENN is furthest from its recent peak and without a real estate angle, is a pure play on regional gaming with no real estate angle.  The luster has worn off of PNK – the Wall Street darling of the bunch until recently.


Client Talking Points


The biggest hedge fund net short position in currency markets is being unwound and the Nikkei is getting royally crushed on that. It's down another -4.2% overnight on a 30 basis point FX move to -14% year-to-date! Ugly. At the same time, Japanese Government Bonds continue higher (0.59% 10year), signaling a probable sequential peak in Japanese growth in Q413.


Some people apparently bought the #Sochi catalyst. No, that was not a smart decision. Russia’s Trading System leads European losers this morning, down another -0.6% to -11% year-to-date, The Ruble looks like bloody hell and Brent Oil is one of the few major commodities that remains decisively broken in our TREND/TAIL model.


So... U.S. stocks get totally slammed yesterday (biggest 9-day decline since November 2011 for the Russell 2000 which was drubbed -7.4%). But wouldn't you know! The CRB Commodities Index went UP on that! The CRB Index is now +1.4% year-to-date versus Consumer Discretionary (XLY) which has been pummeled -8.7%. We stand by our #InflationAccelerating macro call. On the margin it mattered.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.


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.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


If my $SPY TREND line wasn't broken, I'd buy the damn-bubble; but it is, and bubbles pop @KeithMcCullough


"We are still masters of our fate. We are still captains of our souls."

-Winston Churchill


Amazon is considering raising the price of Prime membership by as much as $40, hoping it can strike the right balance between managing rising costs and scaring away customers. Prime members get 2-day shipping on a large number of Amazon items at no extra cost, plus the ability to borrow Kindle books and stream movies. Prime currently costs $79 a year, but that might jump to $99 or even $119.

U.S. Economy Update Call: What Is Priced In?

U.S. Economy Update Call: What Is Priced In? - usclient


Hedgeye's Macro Team will be hosting a flash call updating our U.S. Economic Thesis on Wednesday, February 5th at 11:00am EST.


We'll provide an update to our 1Q14 Macro Investment Themes of #GrowthDivergences and #InflationAccelerating, while highlighting the current quantitative setup for domestic equities, bonds, and the $USD. We will review how to be positioned for slowing growth and rising inflation as well as host a live Q&A Session at the end of the call. 




  • #GrowthDivergences:  Since our call on 1/9/14, the incremental fundamental data has continued to reflect a deceleration in the slope of domestic growth.  We'll survey the latest income, housing, manufacturing and consumption data and the implications for equity and asset class positioning. 
  • #InflationAccelerating:  Long inflation expectations and #GrowthSlowing has been the positioning playbook YTD with the CRB commodities index accelerating, Utilities and Healthcare leading sector performance and low short interest, low Beta, and large Cap style factors driving relative equity out-performance. We'll discuss whether to remain long this trend.     



  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 944389#
  • Materials: CLICK HERE (slides will be available approximately one hour prior to the call time)


Please email for details.

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

February 4, 2014

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Got A Shovel?

“In the real world, action and reward go together.”

-Greg Berns


Greg Berns is part of a stealth movement in America – he’s a neuroeconomist working in the Department of Psychiatry and Behavioral Sciences at Emory University in Atlanta, GA.


John Coates introduced me to Berns in a chapter called Thrill of The Search in The Hour Between Dog and Wolf. Coates went on to suggest that “when the Theory of Relativity dawned on Einstein, he must have had the mother of all dopamine rushes… dopamine, like noradrenaline, does a lot more than motivate the brain: it prepares the body for action” (pg 139).


Was your mind and body prepared for this selloff in US and Japanese equities? I can tell you one thing, my back is in spasm. But I think that has more to do with shoveling snow than being long Japan’s Mother’s Index (-18% in two days). Through action and reward, #History, #Math, and #Behavorial economics continue to be the three pillars of our learning process. Risk happens fast.


Back to the Global Macro Grind


In addition to the crash in Japan’s widely held brokerage index, the Nikkei got crushed for another -4.2% lost last night, taking it to -14% for 2014 YTD. How many hedge funds were snowed into the short Yen, long Nikkei trade last year? Lots.


How many stayed long the Russell 2000 at the all-time high? That was only 9 trading days ago, don’t forget. And while I am certain that everyone on CNBC nailed it, for the rest of us a -7.4% nine day correction from an all-time peak provides a bit of a rush too!


The last time the US stock market had this sharp of a 9-day decline (Russell2000 = down -9.1% in 9 days in November of 2011), Ben Bernanke’s resolve was simple – print, print, print. So remind me why Janet Yellen won’t do the same?


If we get one more economic data point that crashes like yesterday’s New Orders component of the ISM did, remind me why the Mother of All Doves won’t:


A)     Stop the tapering

B)      Talk up more quantitative easing


Setting aside the eureka reality that commodity markets inflating and slowing real-consumption growth don’t give the Fed or the Bank of Japan what they are promising The People (sustainable growth), why won’t Yellen go back to the same old saw?


Maybe, just maybe, Mr. Macro Market is already front-running her on this. I know, while markets front-running our central planning overlords has been the only game in town now for the last half-decade, why would they be doing so again?


Humor Mr. Macro Market for another minute and play this probable (not to be confused with definite) scenario out:

  1. US #InflationAccelerating continues to slow real-inflation adjusted growth
  2. As US #GrowthSlowing freaks out the Fed, they whisper “no-more-taper” to Hilsenrath
  3. Whispers start to bury the Dollar again, Food and Gold prices continue higher yet again, and …

Growth slows even faster!


Oh, and by summer time they’ll be whining about “inequality” at Jackson Hole without accepting that Policies to Inflate only pay those who are long of coffee futures and mortgage-backed-securities, while they pulverize the poor.


Back to how bad that Institute for Supply Management’s (ISM) manufacturing report was yesterday:

  1. Headline ISM dropped -10% sequentially (month-over-month) to 51.3 JAN vs 57 DEC
  2. New Orders in the ISM crashed -20% month-over-month to 51.2 JAN vs 64.4 DEC
  3. Prices Paid in the ISM (inflation in costs) ripped +13% from 53.5 in DEC to 60.5 in JAN  

Yes, since I’m so plugged in politically, I rigged the numbers to fit our Top Global Macro Theme of #InflationAccelerating like a glove. But don’t tell anyone I get this inside info or I’ll have to change the name of my firm.


Again, to review, this wasn’t all about the “weather”:

  1. Inflation (prices) rose, fast, month-over-month… and…
  2. Growth (orders) fell, even faster in kind

So enjoy the “green arrows” this morning. I am sure this market will bounce on no-volume again until we get the next US consumption #GrowthSlowing data point (tomorrow) in the ISM Services report for January.


With the CRB Commodities Index +1.4% vs. Consumer Discretionary (XLY) stocks -8.7% YTD, bulls can blame the weather. But that is the score. In the real world, if you don’t shovel your driveway and get to work, you probably won’t get paid that way either.


Our immediate-term Global Macro Risk Ranges are as follows:



Nikkei 139

VIX 16.98-21.79

USD 80.80-81.45

Nat Gas 4.91-5.41

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Got A Shovel? - CortisolRising


Got A Shovel? - rtas

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.