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PENN/BYD: REGIONAL CASINO COMEBACK

Takeaway: Q3 earnings look good and we see a solid start to Q4 for the regional gaming operators – PENN/BYD.

Entering a “less bad” era?

CALL TO ACTION

Regional gaming stocks look poised to bounce higher heading in and through Q3 earnings.  Regional trends were better than the math predicted and certainly better than Street expectations for August.  Anecdotal sources and the math suggest September and October will be more of the same which could lead to Q3 earnings beats and positive conference call commentary regarding the start to Q4. Of note, Q4 2014 and Q1 2015 are very easy comps due to last winter's polar vortex and a potential El Nino this winter.  With little REIT conversion frothiness (PNK), we believe PENN and BYD are the best ways to play the short term regional resurgence.

Q3 EARNINGS BEATS

Owing to conservative guidance (finally), easy comparisons, and slightly improving fundamentals, we think PENN and BYD should beat Street Q3 EBITDA and EPS expectations:

 

PENN/BYD: REGIONAL CASINO COMEBACK - 333

IMPROVING REGIONAL GAMING TRENDS

As can be seen in the following chart, the 2nd derivative of regional gaming growth has been positive since December 2013.  Moreover, August demand was better than we expected and, optically, September and October should look even better.  Certainly, much of the “strength” is due to easy comparisons and monthly volatility and we still harbor long-term demographic concerns.  However, company guidance was conservative for Q3 as are Street estimates.  Thus, Q3 earnings look very beatable and while forward guidance may remain conservative, the tone should be more positive. 

CONCLUSION

State gaming figures will be released starting next week and we expect August’s momentum to continue.  Analysts will likely begin raising Q3 estimates which should lead to higher stock prices for PENN and BYD.  PNK also could benefit but that stock seems event driven at this point as investors await the REIT spin decision.  PENN/BYD momentum could carry through the earnings calls and into November when the States release October figures.  Finally, stay tuned as Q4 2014 and Q1 2015 are very easy comps due to last winter's polar vortex and a potential El Nino this winter.


Retail Callouts (9/30): Retail Sales Trends, KATE/COH/KORS, EBAY

Takeaway: Retail growth slowing at measured pace. KATE’s stock is under pressure, but nobody sent e-commerce biz the memo – it’s on fire. eBay’s 180.

ECONOMIC DATA

 

Takeaway: Slight deceleration to +3.6% yy vs. +4.1% last week. But as always, we'll always look at the underlying trend -- evidenced by the 2 and 3-year run rate -- which is a much better gauge of the real directional health of the retail climate. Is it collapsing? Absolutely not. But we remain in a measured multi-week downtrend, suggesting that the peak has probably past.  

 

Retail Callouts (9/30): Retail Sales Trends, KATE/COH/KORS, EBAY - 9 30 chart1

 

Retail Callouts (9/30): Retail Sales Trends, KATE/COH/KORS, EBAY - 9 30 chart2

 

 

COMPANY HIGHLIGHTS


KATE's stock can't seem to catch a bid. But nobody sent that memo to the company's online business. Its trends are eclipsing those of Kors and Coach.

 

Retail Callouts (9/30): Retail Sales Trends, KATE/COH/KORS, EBAY - 9 30 chart3

 

Retail Callouts (9/30): Retail Sales Trends, KATE/COH/KORS, EBAY - 9 30 chart 4

 

 

EBAY - eBay & PayPal to Become Independent Companies in 2015

(http://www.ebayinc.com/in_the_news/story/ebay-paypal-become-independent-companies-2015)

 

  • "eBay Inc.  today said its Board of Directors, following a strategic review of the company’s growth strategies and structure, has approved a plan to separate the company’s eBay and PayPal businesses into independent publicly traded companies in 2015, subject to customary conditions. Creating two standalone businesses best positions eBay and PayPal to capitalize on their respective growth opportunities in the rapidly changing global commerce and payments landscape, and is the best path for creating sustainable shareholder value, the company said."

 

Takeaway: Game, Set and Match: Icahn. Seriously, what happened to EBAY's "PayPal + eBay Better Together" PR blitz?  Talk about a 180 for CEO John Donahoe and the Board. Check out this Fortune article from just seven months ago. The following quote is a good one, but the whole article is a good read -- showing just how quickly executives at even the largest companies can change their mind (or have it changed for them).

 

Donohoe on Spinning off PayPal:  "Everyone’s like, you have to spin off PayPal. Everyone wants PayPal. We have PayPal! We have what everyone wants! Now, I believe this is the best way to grow PayPal. And part of my challenge and part of what I will be spending time on is getting this message out clearly."

 

(http://fortune.com/2014/03/10/ebays-john-donahoe-talks-icahn-conflicts-and-100-stock-price-someday/)

 

 

OTHER NEWS

 

WMT - Instagram CEO and Co-Founder Kevin Systrom Joins Walmart’s Board of Directors

(http://news.walmart.com/news-archive/2014/09/29/instagram-ceo-and-co-founder-kevin-systrom-joins-walmarts-board-of-directors)

 

  • "Wal-Mart Stores, Inc. announced that its Board of Directors has appointed Kevin Systrom, an entrepreneur, software engineer and co-founder of photo-sharing service Instagram, as a new member of the company’s Board, effective Sept. 26. Systrom became the 15th member of the Board and will also serve as a member of the company’s Technology and eCommerce Committee and its Compensation, Nominating and Governance Committee."

 

JCP - J.C. Penney's Rating Outlook Now Stable

(http://www.wwd.com/fashion-news/fashion-scoops/penneys-rating-outlook-now-stable-7958725?module=Retail-latest)

 

  • "Moody’s Investors Service has raised the rating outlook for J.C. Penney Co. Inc. to stable from negative."
  • "The ratings agency said the change in outlook was due to the “successful completion of $400 million senior unsecured notes” to fund the partial tendor offers for Penney’s notes due between 2015 to 2017."

 

FDO - Family Dollar to match competitor ads

(http://www.chainstoreage.com/article/family-dollar-match-competitor-ads)

 

  • "Family Dollar Stores Inc. launches its “Ad Match Promise” program on Sept. 30. When presented with a local competitor’s printed advertisement, Family Dollar stores will match the competitor’s price."

 

AAP - American Apparel Names Scott Brubaker Interim CEO

(http://www.wwd.com/business-news/human-resources/american-apparel-names-brubaker-interim-ceo-7955672?module=hp-topstories)

 

  • "The embattled American Apparel Inc. named Alvarez & Marsal executive Scott Brubaker interim chief executive officer Monday."
  • "Brubaker takes over from former chief financial officer John Luttrell, who stepped up after founder Dov Charney was sidelined amid allegations of misconduct."

 

OR - APPOINTMENT TO THE EXECUTIVE COMMITTEE OF L’ORÉAL

(http://www.loreal.com/press-releases/appointment-to-the-executive-committee-of-loreal.aspx?mediaType=cp)

 

  • "Barbara LAVERNOS is appointed Executive Vice-President Operations (sourcing, production, supply chain) and member of L’Oréal’s Executive Committee as of November 1st, succeeding Jean-Philippe BLANPAIN."
  • "A graduate of l’École des Hautes Etudes d’Ingénieur, Barbara LAVERNOS, aged 46, joined L’Oréal in 1991 as a buyer at the Aulnay factory, before becoming Head of Purchasing at the Ormes factory for make-up and perfume."

 

India to See First Juicy Couture Stores in 2015

(http://www.wwd.com/retail-news/specialty-stores/india-to-see-first-juicy-couture-stores-in-2015-7957983?module=Retail-latest)

 

  • "The first Juicy Couture stores in India are expected to open in fall 2015."
  • "That’s according to Darshan Mehta, president and chief executive officer of Reliance Brands Ltd."
  • "Reliance, a key distributor in India for the premium-to-luxury fashion categories, will open the stores under a newly inked licensing agreement with Authentic Brands Group, which owns the intellectual property assets of Juicy."

 

ANF - Report: Judge rejects Abercrombie CEO pay settlement

(http://www.chainstoreage.com/article/report-judge-rejects-abercrombie-ceo-pay-settlement)

 

  • "A federal judge has reportedly rejected an Aug. 29 settlement of a lawsuit over the pay received by co-CEO Michael Jeffries. According to Reuters, U.S. District Judge James Graham in Columbus, Ohio, said shareholders belonging to the City of Plantation, Florida Police Officers' Employees' Retirement System, who challenged the $140 million in pay and additional travel expenses Jeffries has received since 2007, give up too much in the settlement."

Is the Sales Environment Improving for Restaurants?

Takeaway: Things appear to be getting better, on the margin, for restaurants. All eyes will be on September's data release.

Black Box same-store sales and traffic trends have been encouraging to-date in 3Q, with July and August same-store sales up +0.5% and +2.1%, respectively.  Although traffic during these two months remained negative, both numbers improved sequentially on a two-year basis.  In many respects, August was the strongest month of sales data we’ve had in over two years.  Is this the start of a trend?  Potentially, but we’ll wait for September’s sales and traffic numbers before we turn outright bullish.  Negative traffic remains an issue, but the key takeaway here is that, on the margin, the macro environment seems to be improving for restaurants. 

 

Is the Sales Environment Improving for Restaurants? - 9 30 2014 8 39 24 AM 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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Japan, Russia and Volatility

Client Talking Points

JAPAN

Abenomics is a centrally planned Policy To Inflate = higher cost of living, not real economic growth; Japanese Household spending -4.7% year-over-year in AUG as real wages fell -2.6% year-over-year. These are the facts.

RUSSIA

Maybe Japan and Europe just aren’t being aggressive enough! Russian Rubles are -14% in the last 3 months, its stock market is crashing, and now they need to “defend” the currency? #History has seen this devaluation movie many times.

VIX

Most of this ultimately plays out in both volatility and liquidity space, so stay with our playbook = long Global Macro volatility and liquidity – short illiquidity (small caps) with impunity… and manage the risk of trading ranges.

Asset Allocation

CASH 58% US EQUITIES 2%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 26% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

Shares of Bloomin’ Brands have enormous potential upside says Hedgeye’s Howard Penney| $BLMN

http://app.hedgeye.com/media/1285-shares-of-bloomin-brands-have-enormous-potential-upside-says-hedgeye-s-howard-penney-blmn ...via @HedgeyeHWP

@Hedgeye

QUOTE OF THE DAY

Laughter is wine for the soul - laughter soft, or loud and deep, tinged through with seriousness - the hilarious declaration made by man that life is worth living.

-Seán O'Casey

STAT OF THE DAY

303, the number of yards that the New England Patriots gave up in the first half in last night’s 41-14 loss to the Kansas City Chiefs. 



Tech Bubble?

“This is the real world, homie, school finished.”

-Kanye West

 

That’s the opening quote to the latest business book I have cracked open, The Hard Thing About Hard Things, by Ben Horowitz (of Andreessen Horowitz fame).

 

Unlike most of the #behavioral and #history books I’ve been citing throughout the year, this one has a much more #bubbly feel to it. I’m only four chapters in but, suffice it to say, I don’t agree with some of Horowitz’ business building and leadership principles.

 

Maybe it’s because his parents were communists. Maybe it’s because I’m a knucklehead athlete. I’m not sure. I’m just certain that all of the techie “valley” culture and the Keynesian Economics school stuff isn’t playing out according to plan, in the real world.

Tech Bubble? - Bubble bear cartoon 09.26.2014

 

Back to the Global Macro Grind

 

Another one of the 2014 Tech Bubble’s “he’s got mad dough, bro” darlings who is selling his book these days (Peter Thiel) made headlines yesterday in telling Fox Business anchor Deidre Bolton that it wasn’t, well, a Tech Bubble.

 

Thiel, who blew up his hedge fund, multiple times (buying stocks in 2008, shorting them in 2009, etc.) is as academically intelligent as I can be hockey-head dumb, went on to say that it’s not a bubble in stocks because there is a bubble in bonds.

 

To be specific, Thiel said “I’m investing in Tech stocks to hide from the government bond bubble.” “So”, I replied (in tweet terms to @peterthiel) “I’m hiding in the Long Bond so that I can be short the Tech Bubble.” #timestamped

 

Got #Bubbles?

 

We do. On our Q4 Macro Themes Call we have a whole slide deck full of these suckers. If you’d like to be educated on some #history and #context of the current components of the US stock market bubble, please join us this Thursday at 1PM EST.

 

While there is plenty of low-quality junk debt in this world that we would consider #bubbly, the upside to fully understanding how all of this might end (Japanese style) is that the mother of all bubbles (Japanese Government Bonds) has been inflating for decades.

 

While I’m not sure if Thiel joined the ranks of the many who have a higher IQ than I and shorted Japan’s debt because the country’s Keynesian Abenomics experiment was going to fail, the only failure in the real world was not being long those bonds.

 

Homies, here’s the point:

 

  1. In the face of failing economic policies, Japan, Europe, and USA have only one option – moarrr #cowbell
  2. As these central planners attempt to artificially inflate economies, they simply inflate asset prices
  3. As asset prices (Tech Bubbles) inflate, so does the cost of living associated with those assets (CA real estate)
  4. As the cost of living rises to pain thresholds consumers cannot overcome, the economy surprises on the downside
  5. Then, central planners respond with moarrr #cowbell

 

I’m sure Kanye West can come up with a song that’s more clever than what this really is. But I’m pretty sure that the 60% of Americans who have negative real wage growth (read: falling purchasing power) since the Fed engaged with its Policy To Inflate get it.

 

So do the Japanese. Here’s the latest on that Eastern front:

 

  1. Japanese Real Wages -2.6% year-over-year in August (vs. -1.6% y/y in July)
  2. Japanese Household Spending -4.7% year-over-year in August (vs. -5.9% in July)

 

In Mucker rapper terms, that is called getting train wrecked.

 

Oh, and if you aren’t into Burning Yens and Euros, there’s this other devaluation story to update you on this morning – Russia:

 

  1. The Russian Ruble dropped -14% in the last 3 months (versus a basket of Dollars and Euros)
  2. The Russian Trading System Index (its stock market) is crashing, -19.1% YTD
  3. And the Ruskies are going to now “defend” their currency by raising interest rates!

 

As it has, across centuries, this is how the Keynesian School of QE and/or Currency Devaluation ends – epically. I’ll have no problem shorting Treasuries (our call for all of last year) when our research and risk management signals tell me to do so.

 

But, in the meantime, I’ll stay long of Long-Term Treasuries (via TLT, which has a total return of +17.1% YTD) and short of small cap illiquidity and social tech bubbles via anything that is getting smoked in TAM terms right now.

 

While the over 40% of IPO’s that are crashing (down 20% or more from peak) aren’t all techie related, both in # of issues and in market cap terms, the froth of this #Bubble in US growth expectations is as big as when Horowitz’s first company almost went bankrupt.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.46-2.56%

SPX 1

RUT 1097-1132

VIX 13.81-16.75

EUR/USD 1.26-1.29

WTI Oil 91.69-94.98

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Tech Bubble? - 09.30.14 10Yr vs. case shiller san fran


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