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TODAY’S S&P 500 SET-UP – March 6, 2014

As we look at today's setup for the S&P 500, the range is 31 points or 1.38% downside to 1848 and 0.28% upside to 1879.             










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.38 from 2.37
  • VIX closed at 13.89 1 day percent change of -1.49%

MACRO DATA POINTS (Bloomberg Estimates):


• 7am: RBC Consumer Outlook Index, March (est. 50.4)

• 7:30am: Challenger Job Cuts y/y, Feb. (prior 11.6%)

• 8:15am: Fed’s Dudley at Wall St. Journal event in New York

• 8:30am: Non-Farm Productivity, 4Q final, est. 2.2% (pr 3.2%)

• 8:30am: Initial Jobless Claims, Feb 28, est. 336k (prior 348k)

• 9:45am: Bloomberg Consumer Comfort, March 2 (prior -28.6)

• 10am: Factory Orders, Jan., est. -0.5% (prior -1.5%)

• 10am: Freddie Mac mortgage rates

• 10:30am: EIA natural-gas storage change

• 12pm: Household Change in Net Worth, 4Q (prior $1.922t)

• 1pm: Fed’s Plosser speaks in London

• 6pm: Fed’s Lockhart speaks in Washington



    • President Obama to speak on economy, healthcare
    • 9am: House Foreign Affairs Cmte hears Treasury, State, USAID officials on U.S. foreign policy, Ukraine
    • 9:30am Jack Lew testifies on FY15 budget at House Ways & Means Cmte
    • 9:30am: Defense Sec. Chuck Hagel at House Armed Svcs Cmte
    • 10am: House Small Business workforce subcommittee holds hearing, “ObamaCare and the Self-Employed: What About Us?”
    • 10am: Medicare Payment Advisory Commission meets
    • 12pm: Airline Pilots Assn President Lee Moak discusses state of airline industry at National Economists Club
    • Election Wrap: Romney backs Ernst in Iowa, Texas Primary


  • EU to consider Ukraine sanctions; Russia spurns U.S. diplomacy
  • Buffett cuts bond allocation as Berkshire warns on low yields
  • Bouygues offers $14.4b cash for SFR to rival Drahi’s bid
  • IMF said to demand greater say on Greek banks in ECB wrangle
  • GM weighs increasing South Korean car exports to Australia
  • Sinclair TV ownership model said targeted for breakup by FCC
  • Darden cancels analyst, investor mtg amid pressure: Reuters
  • Virgin America CEO Cush sees IPO late 3Q: Reuters
  • Jack Lew testifies on FY15 budget proposal
  • Feb. U.S. retail sales likely “lackluster,” hurt by weather
  • VTB cancels NY forum as U.S. relations over Ukraine sour
  • Multi-billion dollar LNG plants at risk over fuel price tussle
  • Rolls-Royce says DOJ probing bribery allegations: Telegraph


    • Canadian Western Bank (CWB CN) 8:30am, C$0.65 - Preview
    • Ciena (CIEN) 7am, $0.06 - Preview
    • CST Brands (CST) 7am, $0.51
    • Joy Global (JOY) 6am, $0.65 - Preview
    • Kroger (KR) 8:45am, $0.72 - Preview
    • Pinnacle Foods (PF) 8am, $0.58
    • SNC-Lavalin Group (SNC CN) 8:27am, C$0.64
    • Stage Stores (SSI) 6am, $0.99
    • Staples (SPLS) 6am, $0.39 - Preview


    • Alon USA Energy (ALJ) 6pm, ($0.14)
    • Ambarella (AMBA) 4:05pm, $0.19
    • Analogic (ALOG) 4:15pm, $1.20
    • Checkpoint Systems (CKP) 4:02pm, $0.31
    • Constellation Software/Can (CSU CN) 4:30pm, $2.50
    • Cooper Cos. (COO) 4:01pm, $1.46
    • Finisar (FNSR) 4pm, $0.44
    • Fresh Market (TFM) 4:02pm, $0.42
    • H&R Block (HRB) 4:03pm, ($0.11)
    • Korn/Ferry International (KFY) 4:01pm, $0.34
    • Quiksilver (ZQK) 4:01pm, ($0.06)
    • Spectrum Pharmaceuticals (SPPI) 4pm, ($0.11)
    • Thor Industries (THO) 4:15pm, $0.34
    • W&T Offshore (WTI) 5:20pm, ($0.14)


  • Ukraine’s Revolutionary Farmers Back Home in Time to Plant Crops
  • Chinalco’s Sun Sees Aluminum Industry ‘Shakeout’ as Prices Drop
  • WTI Falls for Third Day as U.S. Oil Supplies Gain; Brent Stable
  • Syrup Sours as Rules Menace World’s Oldest Branding: Commodities
  • Palm Reserves in Malaysia Falling to Five-Month Low; Prices Rise
  • Copper Trades Below One-Week High Amid China Growth Concern
  • Gold Trades Below Four-Month High as Investors Weigh Ukraine
  • Coffee Tops $2 in Surge to Two-Year High on Brazil Drought Woes
  • India Mills Cut Sugar Production Estimate 4.8% to 23.8 Mln Tons
  • Off-Radar Iron Ore Exports Helping Hasten Global Market Glut
  • Frackers May Gain From U.S.-EU Free Trade Accord, Opponents Say
  • Europe’s Russia Gas Flows Jump to Month High as Buyers Hoard
  • Crude Gains Evaporate as Russia Seen Too Big to Sanction: Energy
  • Sugar Mills in India Reduce Output Estimate as Rains Hurt Yields

























The Hedgeye Macro Team














March 6, 2014

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Price-Fixing Crisis

This note was originally published at 8am on February 20, 2014 for Hedgeye subscribers.

“Government policy is the primary cause of the financial crisis.”

-John Allison


That’s “fundamental theme” #1 in one of the most important post 2008 market crisis books – Chairman (and former longstanding CEO of BB&T Bank), John Allison’s The Financial Crisis and The Free Market Cure.


As I was taking a few pseudo vaca days with my kids (if you own a small business in America, there are no bailouts – no real vacations either – and real capitalists like that), I was struck by the simplicity of what hasn’t changed in this country – government price fixing.


Price-Fixing Crisis - go2


Yep, that’s what Allison and anyone who has studied economic #history calls it too (plenty of big time capitalists like Charles Koch agree). That’s what “forward rate guidance” by the Fed really is; it’s also what Presidential executive orders on minimum wage hikes and Policies to Inflate via currency devaluation are. Inflation is an un-elected tax that politicians aren’t accountable to. That’s why they cheer it on.


Back to the Global Macro Grind


Who needs to cheer for Latvia’s hockey team when you can wake up in America watching the Treasury Secretary (Jack Lew) whine about taxes (consumer price inflation) on European consumers being “too low.” Heck, the descendent of Geithner and Wesley Mouch is egging on the Japanese to burn its currency at the stake too.


Not to be outdone, the Congressional Budget Office is now analyzing what Obama thinks is his only way out of the tax he and Bush had the Bernanke impose on America’s poor (Down Dollar, Food/Energy Inflation) – wage inflation. My brother runs a McDonald’s franchise – ask him how many new stores he’ll be interested in opening if food costs rip and his “poor” employees cost him 10-20% more…


In other central planning news, Venezuela is “expelling” US diplomats this morning for “undermining the government.” Evidently some of these Americans aren’t yet socialist enough. Argentina and Venezuela are realizing the other side of currency devaluation, debt-rising, and #InflationAccelerating this morning – it’s called social unrest.


#InflationAccelerating? Who the heck does this Canadian think he is making that call without the government’s approval?

  1. US Dollar is down again this morning = down for 3 consecutive weeks, and now negative for 2014 YTD
  2. CRB Commodities Index (19 commodities) was up another +1.1% yesterday to a fresh 52-wk high of 302 (+7.9% YTD)
  3. Natural Gas is up (again!) this morning to $6.20 = +46.7% YTD (they don’t have heat or air conditioning in Washington)

I know, I know. It’s all the weather. Wages, Rents, Schooling – Facebook paying $16B for “WhatsApp”, Candy Crush going public – all of it!


But, but, the US stock market (SP500) is only down -1.1% YTD. And:

  1. Slow-growth Gold is +9.3% YTD
  2. Slow-growth-yield-chasing Utilities (XLU) are +5.9% YTD
  3. Lever-yourself-up-long Real Estate (REITS) are +7.5% YTD

Yep. As #InflationAccelerates, 71% of the US economy (consumption) gets A) taxed and B) slows:

  1. US Consumer Discretionary Stocks (XLY) are -3.2% YTD
  2. Consumer Staples Stocks (XLP) are -3.4% YTD
  3. Financials (XLF) are -2.2% YTD

But, don’t worry about it – when the weather improves, it’s all coming back – all of it.


Wait a minute. Will the spring in the Northeast change US monetary and fiscal policy? Or, as the economy slows, will Lew and Yellen quintuple down on the Down Dollar, Down Rates, House Flipping American Dream?


How’s that working out for Barney Frank and Ben Bernanke btw? US Mortgage Purchase Applications were down another -6% last week (after being down -5% in the week prior), testing post 2008 crisis lows. Imagine that, as the purchasing power of Americans falls alongside interest and savings rates, there are less lemmings this time who are going to join Than Merrill’s “Flip This House!”


John Allison’s book is a Top-10 on my shelf because he explains the basics of economics that we attempt to articulate each and every risk management morning. Two more of his “Fundamental Themes” are:

  1. “Government policy created a bubble in residential real estate”
  2. “Almost every government action taken since the crisis started (even those that may help in the short-term) will reduce the standard of living in the long-term”



And sometimes the short-term morphs into the long-term a lot faster than consensus government policy apologists think…


Our immediate-term Macro Risk Ranges are now:


SPX 1809-1848

Nikkei 14083-14992

VIX 12.76-16.99

USD 79.82-80.51

Natural Gas 5.34-6.22

Gold 1291-1336


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Price-Fixing Crisis - Chart of the Day


Price-Fixing Crisis - Virtual Portfolio

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Last night, Malcolm Knapp released sales results for February, estimating that same-restaurant sales and guest counts declined -1.5% and -4%, respectively, versus February 2013.  On a two-year basis, same-restaurant sales and guest counts declined -3.5% and -5.2%, respectively. 


February also marked a period of sequential deterioration.  The results imply a sequential deceleration of 13 bps and 119 bps for same-restaurant sales and guest counts, respectively.  On a two-year average basis, the results imply a sequential deceleration of 200 bps and 200 bps for same-restaurant sales and guest counts, respectively.


Knapp noted that only one of four weeks in February had positive same-restaurant sales and guest counts. Weather continued to be widespread and fluctuating issue during the month, particularly hitting the first week hard.  Parts of the East Coast and Midwest once again fell victim to the harsh weather.


We will release more data when Black Box Intelligence reports, including any revisions to company specific 1Q14 same-restaurant sales estimates in February.



Howard Penney

Managing Director



Setting up for Q1 beat but FY2014 guidance better than we thought. Japan?




  • Wholly-owned business performed in-line in 2013
  • Relaunched Penny Lane at 4 LV properties in November
  • Penny Lane now in place at 12 BYD properties; seeing better response by Penny Lane
  • Earliest debt maturity is 2018
  • Open to more acquisitions
  • Wilton Rancheria:  early stage design work under way 
  • Interested in Japan
  • Online gaming:  Borgata has 1/3% of market
  • Discontinuing quarterly guidance for Borgata
  • October- mid Nov: strong trends
  • Casual players visitation declined outside of Nevada
  • Top-tier players doing well
  • LV Locals
    • reduced marketing spend by $2MM.  Improved operating margins by 120bps.  Non-gaming promising area of growth
  • Downtown
    • Hawaiian charter service running much more efficiently
    • Optimistic on Downtown business in 2014
  • Midwest & South
    • $9.3MM one-time property tax adjustment at Blue Chip
    • Winter weather has been a record
    • Severe weather reduced EBITDA by $3MM
    • Delta Downs:  notable bright spot, posted double digit EBITDA growth; annual records for EBITDA, rev, and coin-in.
  • Borgata
    • Below expectations
    • Unusally low hold in December reduced EBITDA by $3.6MM, higher property tax decreased EBITDA by ~$2.1MM in the quarter and $8.4MM for the year, and bad weather impacted EBITDA by $1MM
    • Borgata/PartyPoker:  43% share of I-gaming, 85% of online players have not had rated play in the last 2 years
    • Significant uptick in promotional spending, although Borgata have not matched the increase
    • In Feb, launched online/mobile platforms for 1st 3G/4G devices
  • December:  redeemed $950MM 2015 note
  • Peninsula has expanded FCF by $100MM
  • $1.1 bn tax loss carryforward (couple of dollars per share)
  • Cash:  $268MM at Boyd, $27MM Peninsula, $17MM Borgata
  • Boyd senior leverage:  4.2x (covenant 5.0x)
  • Boyd total leverage:  6.5x (covenant 8.5x)
  • Peninsula leverage:  6.3x (coventnat 7.0x)
  • Borgata's covenant EBITDA was $121.8MM compared to acquired minimum level of $110MM
  • 2014 maintenance capex:  $125MM ($15MM Peninsula, $25MM Borgata)
  • Final Phase of Kansas Star will cost $20MM
  • 2014 guidance
    • Total D&A:  $255-$260MM (Boyd:  $130MM, Peninsula $72MM, Borgata $55MM)
    • Total interest expense:  $300MM (Boyd: $155MM, Peninsual $75MM, Borgata $70MM)
    • Deferred Rent:  $4MM
    • Pre-opening:  $5MM
    • Share-based compensation:  $16MM
    • Shares outstanding:  110MM
    • Do not expect weather to be an issue going forward.  $8MM in quarterly and annual impact
    • Expect LV Locals rev and EBITDA growth to be similar to that in 2013
    • Downtown Locals: minimal EBITDA growth
    • Midwest/South expect growth in 2H 2014
    • Borgata EBITDA similar to 2013 - does not include I-gaming or lower property taxes
    • Corporate expense:  $55MM  

Q & A

  • LV Locals why flat revenue despite market up?  False positive in December #s.  No major change in direction or slope of LV market.  Have to look at Jan/Dec together.
  • Hotels have benefited from increased convention business on Strip, particularly in March
  • Midwest/South Cannibalization:  a lot of disruption from weather; lapping Shreveport competitor in June
  • NJ I-gaming:  ramping slowly but nicely
  • Bad weather will impact EBITDA by $8-10MM in 1Q 2014
  • Japan:  exploring options
  • Regional acquisitions:  fewer opportunities but looking
  • AC market :  closing of Atlantic Club had no impact on Borgata
  • Selling assets?  Open to it
  • Acquired IP in the low $30MM EBITDA; today, it is #2 in Biloxi and generating above $30MM

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