CKR reported period 13 and fiscal 4Q10 blended same-store sales today of -6.4% and -6.0%, respectively.  The biggest challenge continues to be at Carl’s Jr., which reported a 9.0% comparable store sales decline for period 13.  Although this -9% number is a 65 bp improvement from period 12 on a 2-year average basis, the full fourth quarter result of -8.7% implies 230 bps of deterioration from 3Q10.  Hardee’s same-store sales decreased 2.8% during period 13, which marked a significant fall off from the prior period with 2-year average trends declining more than 100 bps on a sequential basis. 


The company attributed weakness at both concepts to continued high levels of unemployment, “deep-discount burger wars” and weather.  Specifically, CKR’s CEO Andrew Puzder said, “Both brands' sales results were also significantly impacted by worse weather this year than in the prior year. Carl's Jr., experienced severe rain in its core West Coast markets for most of the final week of the period and Hardee's experienced severe winter weather in several of its core mid-west and southeast markets.”


Despite the impact of weather, CKR’s full year 2010 3.9% blended same-store sales decline came in at the lower end of management's guidance of -3.5% to -4.0%.  Management also reiterated its prior full-year outlook for a 20 to 40 bp decline in restaurant level margin, but provided 4Q10 guidance of 16% to 16.3%, which implies full year numbers will come in toward the lower end of the range.  Relative to fiscal 4Q09’s 18% restaurant margin, this guidance assumes that margins will decline 170 to 200 bps YOY, reversing the prior three quarters of margin growth despite the decline in top-line trends.  We have been saying that it was only a matter of time before gravity would set in. 


During the fourth quarter, management expects about 40 to 50 bps of YOY food and packaging cost favorability to be offset by sales deleveraging on both the labor and occupancy expense lines.  Food cost favorability has helped to stave off margin declines earlier in the year despite the significant demand headwinds with food and packaging costs as a percentage of sales declining 60 bps YOY in Q1, 140 bps in Q2 and 180 bps in Q3.  CKR will begin to lap this benefit in the first quarter of fiscal 2011, making it increasingly more difficult to hold the line on margins.  And as 4Q10 guidance makes clear, even with food costs providing a tailwind in the quarter, margins cannot continue to move higher with blended same-store sales  down 6%.



Howard Penney

Managing Director







Capital Markets Risk Management: Biotech IPO's

While Healthcare and Biotech Capital Raises have had a historic run through the back half of 2009, the IPO calendar, particularly for speculative biotech, has been notably light.


In yesterday’s morning note we suggested you keep the pricing of the Ironwood Pharmaceuticals IPO on your radar as a potential lead indicator for CRO’s and measure of remaining risk appetite as market momentum & sentiment have rolled in the past couple weeks.  The offering, which was expected to price 16.7M shares at $14-16, ended up pricing at $11.25/share – a 30% haircut and the biggest reduction for a U.S. IPO YTD.


The pricing of IRWD is an extension of the 2009 trend in U.S. Healthcare IPO’s which were both infrequent and uninspiring.  Of the nine Healthcare IPO’s debuting in 2009, six have turned in negative absolute performance while underperforming both the XLV and the S&P500. 


Coming out of the 2001 recession, Biotech IPO’s didn’t see a meaningful, more sustained uptick until 4Q2003.  While the deluge of offerings in the 2000, pre-recession period likely exacerbated the drought in the post recession period it's at least noteworthy to point out the lag between the recovery of the market and ^NBI Index and the recovery in the IPO market.  Presently, the success or failure of Ironwood may serve as a Go or No-Go signal for the IPO market and the growing list of prospective offerings backed up in the pipeline.  


Biotech has been on a tear of late, capital raising has continued unabated, and a successful return of the IPO market would serve as an important confirmationary indicator of resurgent investor interest and pending capital investment to the industry. The outcome here holds important consequences for Drug Development Service companies who need biotech allocations to drive growth as the Large Pharma outsource story loses juice.     


IRWD shares were set to begin trading at 11am and we’d like see at least 3 days of volume & price action before vetting the result.  Our next look at the health of the IPO market may come compliments of Anthera Pharmaceuticals who, notably, amended their S-1 this morning to reduce the size of the intended offering.    


Christian B. Drake



Capital Markets Risk Management: Biotech IPO's - US HC IPO Performance


Capital Markets Risk Management: Biotech IPO's - U.S. Biotech HC IPO s



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Boone’s Plan

Position: Short natural gas via the etf UNG


We recently shorted natural gas in our virtual portfolio, on the back of a supply and demand mismatch that we think will build in the intermediate term.  Longer term, though, there are some justifiable reasons to be bullish of natural gas.  T. Boone Pickens provides some interesting rationale for longer term demand for natural gas in the Pickens Plan.


Pickens prefaces the outline of his plan with the point that Americans are addicted to foreign oil, and on that point he is correct.  According to most estimates, the United States uses 25% of the world’s oil despite having only 4% of the world’s population.  Crude oil production in the U.S. peaked in 1970 (Hubbert’s Peak) at 9.7MM barrels per day, has been on steady decline ever since and is now producing less than 4.0MM barrels per day.  Clearly, the U.S. is running out of oil and is becoming increasingly dependent on foreign oil sources.


One of the primary solutions that Pickens, and many advocates of natural gas, offer for as a solution to the issue of foreign oil dependence, is an increased use of natural gas, particular for transportation use.  One on hand, Pickens is an investor who likely has a vested interest in promoting increased use of natural gas, but on the other hand there are some opportunities for natural gas to displace oil.


One example Pickens gives is that 20% of all the oil in the United States is used by 18 wheelers to transport goods around the nations.  Displacing that fleet, with a natural gas fleet, would have a meaningful impact on domestic oil demand.


In contrast to oil, the United States is rich in natural gas. In fact, both production and reserves of natural gas continue to increase in the United States.  The most recent estimates from the Potential Gas Committee, which is the authority that produces estimates every two years, suggests that the United States holds 2.1 trillion cubic feet as of the end of 2008, which is a 35% increase from 2006 (this fact is obviously bearish for price).


Globally, there are roughly ~10MM vehicles that use natural gas.  Most of the vehicles are located in five countries: Pakistan, Argentina, Brazil, Iran, and India.  In aggregate, this is a very small portion of the world’s vehicular population. There are more than ~800MM vehicles in the world currently, so natural gas is just over 1% of the market in focused regions with access to cheap natural gas.


In his recent State of the Union address, President Obama mentioned clean energy no less than 10x, and made the following statement:


“But to create more of these clean energy jobs, we need more production, more efficiency, more incentives.”


At the moment, President Obama likely has other issues to focus on, put the potential for incentives to support cleaner forms of energy are clearly being bandied about within the administration and it is likely that natural gas would be a recipient of some incentives, as it is a cleaner form of vehicular fuel than gasoline (formed from oil). Perversely more incentives for natural gas could actually mean a lower price as production should increase.


While in the longer term natural gas is a logical path for the United States to pursue to displace her dependence on oil and for clean energy purposes, the pathway to increased demand will be lengthy.  Setting aside massive government incentives, which could occur, we need to build a fleet of natural gas vehicles and an infrastructure of distribution.  Neither of which is likely to occur in the shorter term and will require massive investments and time.


While we applaud Boone’s efforts, we remain short Natty.



Daryl G. Jones
Managing Director


Not a bad quarter - exactly in-line with us - although sellside had upped whisper expectations the last couple of days so stock is taking one on the chin. Here is our call transcript.





"Over the past year, we substantially reduced operating costs, completed our last significant construction project and strengthened our balance sheet through a multi-phase debt restructuring. Our efforts in 2009 have created a strong foundation for 2010 that we believe will result in a significant increase in cash available to retire outstanding debt and maintain quarterly dividend payments. We also believe we are well positioned to withstand continuing difficult economic conditions and drive significant growth when the economy improves."

- Gordon Kanofsky, Ameristar's Chief Executive Officer and Vice Chairman



Earning Release Highlights

  • "Ameristar Black Hawk achieved record-breaking financial results as the September 29, 2009 grand opening of our luxury hotel and spa complemented the July 2, 2009 Colorado regulatory changes. Ameristar Black Hawk helped to grow the market by 14.9% when compared to the 2008 fourth quarter, and the property increased its fourth quarter market share on a year-over-year basis from 16.9% to 27.1% as a result of the facility and regulatory enhancements."
  • "On December 28, 2009, the Indiana Department of Transportation announced that it was permanently closing the Cline Avenue bridge near Ameristar East Chicago. The bridge has been closed since November 13, 2009 due to safety concerns discovered during an inspection of the bridge. Closure of the bridge has significantly impacted the property's operating results, and we expect this to continue unless and until improved access to Ameristar East Chicago is developed."
    • "We are working closely with government officials to attempt to mitigate the traffic impact.  Additionally, we will continue to evaluate the property's cost structure relative to business levels."
  • "At December 31, 2009, our leverage and senior leverage ratios (each as defined in the senior credit facility) were required to be no more than 6.00:1 and 5.75:1, respectively. As of that date, our leverage and senior leverage ratios were each 4.87:1."
  • 1Q2010 guidance
    • Depreciation: $27.5-$28.5MM
    • Interest expense, net of capitalized interest: $33-$34MM, incl. non-cash interest expense of approx.$2.8MM
    • Tax rate: 42-43%
    • Capex: $30-$35MM
    • Capitalized interest: $0.2-$0.5MM
    • Non-cash stock-based comp: $2.8-$3.3MM


  • Four properties actually improved their EBITDA margins due to cost management and regulatory benefits
  • They extracted $60MM of savings across their properties
  • Missouri loss limit removal - $6.8MM benefit at least (ie recovered all their lobbying costs) and in Colorado, they think they recovered all lobbying costs in just 3 months from the regulatory benefits
  • Hotel at Blackhawk has been "gangbusters", took 5x their fair share of market growth in that market.
  • Think that 27% is a sustainable level of market share in Blackhawk for them (up from 17% pre-hotel and reg changes)
  • East Chicago: replacing the bridge is at least 3-4 years out.  They are continuing to downsize the cost structure at that property to offset some of the losses from the bridge closure.
  • Anticipate a substantial reduction in debt going forward with proceeds from the significant cash flow they generate from operations now that their capital spending is just maintenance related
  • Once their swaps expire they should experience materially lower interest expense (save $12MM in 2H2010), assuming current LIBOR rates
  • Total capex in the $60-65MM range in 2010 (the $70-80MM in their presentation includes construction payables from 2009 work), spent over $60MM in 2009 on true maintenance capex.


  • No significant change in Jan trends from what they saw in Dec aside from weather related issues
  • Amount in dispute with Colony is not material
  • Not really interested in Riveria's property, but they will be opportunistic. However, they don't see a lot of compelling distressed opportunities, but will be prudent now until they get out of this recession
  • Corporate expense may see a slight increase in 2010
  • Other than seasonality they do believe that Blackhawk can see similar margins that they saw in the 3rd Q.  4Q is always impacted by weather in 4Q.
  • The $25.8MM was maintenance capex in the 4Q
  • "We are out the of the development business for now"
  • Update on the Estate? none
  • Corporate and expense includes the $3.8MM of discontinued project development expenses
  • CIP of $18.5MM at Dec 31 includes construction payables on Blackhawk
  • Market share in Vickburg  - 42-43% in 4Q09.  Where could it go, used to be in the high 40's.
    • Think that 42-43% range is a reasonable expectation
  • What do they consider "compelling" valuation for assets
    • most workouts leave existing equity in place which complicates the distressed situations. Need a 15-20% ROI to get "excited" about doing due-diligence
  • Won't see any more big regulatory changes like what they had in CO & MO but are focused on monitoring smoking bans and the like
  • The impact of the bridge on EBITDA should be about $10-15MM in 2010 vs. their original expectation. In 4Q2009, think that there was a $2-3MM adverse impact on East Chicago due to the bridge closure.
  • Have been marketing the "heck out of the [Blackhawk] property" and its working, but unclear that there was a negative impact on margins because of that - feel like they got a good return on the marketing expense.  Will continue to market heavily there - lots of people in the Denver market are not aware of their property
  • Some of the construction payables are included in the $30-35MM estimate
  • Hopeful that longer term margins at Blackhawk would be better than what they have at Council Bluffs (lower tax rate in CO)
  • Expectation is that dividends will remain flat, assuming that the business remains stable
  • Liquidity update for those people that can't (or are too lazy to) do math and didn't bother reading the release:  Need $60-65MM of cash on hand to operate + $96.5MM+ plus $100MM of R/C powder
  • Original purchase price was $670MM for East Chicago.  Written down by $424MM
  • Step up in promotional dollars in 4Q09? - Part of it is Blackhawk comp rooms, part is East Chicago based on road being closed (necessity to maintain volume). More than likely this is will go for another Q or 2.  In the summer though they can spend less since its peak tourism season anyway at Blackhawk.

Einhorn's Objectivity

In this morning’s Early Look I said that I would post David Einhorn’s full rebuttal.


David does his own work, and I have a great deal of respect for his independent research process. I have not edited any part of his reply to my Early Look note from January 29th, titled “Red Light Risk.”


This is one of the most even-handed and intellectually objective replies I  have had since I started this firm. Some people get very emotional when I stand on the other side of their timing in a position. There is zero emotion in this rebuttal.


Many thanks to DE for letting me pass this along to you, unedited (his comments are in red, within the body of the original text).




"As investors, we can't change the course of events, but we can attempt to protect capital in the face of foreseeable risks."

-David Einhorn


Admittedly, when "bottom's up" we are bottom up investors, but bottom’s up drinkers hedge fund manager David Einhorn proclaimed his new macro mystery of investing faith at the 'Value Investing Congress' on October 19, 2009, I was smiling. Our Hedgeyes call this proactively managing macro risk and I do support Mr. Einhorn's message thanks.


Einhorn and I are about the same age. We both grew up in a hedge fund bubble. For a decade, we were probably both overpaid I can’t speak for you, but even though I have started a valuable business that has created high paying jobs and provided a good value to my customers, I would agree with this.  I feel very fortunate. He still runs money and sometimes my mouth and I run my mouth, so I am thinking that he's probably worth a lot more than me. But what does that mean?


To some in this business, that means a lot. To others, it means nothing at all put me in this group. We all wake up early every morning with a passion to play this game. David's Greenlight Capital now has its macro views. I have mine. Game on much less conflict here, than you think.


The global macro risk manager's job in this business is to acknowledge amber flashing lights, before they go red. It's also being keenly aware of when one of your big "ideas" is everyone else's too. Measuring consensus is part of any repeatable Red Light Risk Management process.


Embedded in our macro risk management process are 3 dominating Global Macro Themes. We change them quarterly, because the math changes daily. As a reminder, my team's current Macro Themes for Q1 of 2010 are:


1.       Buck Breakout (bullish on the US Dollar; bearish on gold) We are bullish on the dollar vs. the yen, euro, & pound.  We like the dollar more than most everything but gold at the moment.  Or maybe we just hate it less than the other currencies.  We are long various European sovereign CDS.


2.       Rate Run-up (bearish on government bonds)  agreed at some point, but no real view on this quarter.


3.       Chinese Ox In A Box (bearish on Chinese equities; bullish on Chinese currency) I would tend to agree, but have no position and no real conviction.  It seems to be working.


I do not know what Einhorn thinks on Macro Themes 2 and 3 but, now that he does macro, he obviously better have a view. That said, I do know that he stands on the other side of me with regards to both the US Dollar and Gold.


In that same speech, Einhorn made the following conclusions about gold:


1.       "Of course, gold should do very well if there is a sovereign debt default or currency crisis."


2.       "I subscribed to Warren Buffett's old criticism that gold just sits there with no yield and viewed gold's long term value as difficult to assess."


3.       "Gold does well when monetary and fiscal policies are poor and does poorly when they are sensible."


After being bullish on gold since 2003, and vehemently bearish on what I labeled the "Burning Buck" in early 2009, I do think I have the credibility associated with understanding the bearish dollar/bullish gold case Agreed. There are many aspects to Einhorn's conclusions that I agree with, but not at every price and every duration. My guess is your current quibble is more about duration than price.  I’d be willing to bet there will come a time where you will like gold at a substantially higher price.


Now, if you really want to manage Red Light Risk in global macro, you better manage those two things dynamically  - price and duration. I have written about this before, but it's worth mentioning again. Duration Mismatch is one of the top 3 risks that has hurt me over the course of my risk management career. We need to monitor it systematically and measure it scientifically. Just as I am still trying to learn and improve (like incorporating more macro thinking), I am hopeful to improve here, as well.


Back to Einhorn's points on gold. On an immediate (TRADE) to intermediate term (TREND) duration (3 weeks to 3 months), gold has not done well in the face of sovereign debt default risks rising. I don’t know.  I wouldn’t say my speech was an important date….but since then gold is up a little and the S&P is down a bit.  It was about 3 months ago. (Since our actual entry, the results have been much more decisively in our favor) Gold is up a lot in Euros, where the sovereign crisis appears to be at the moment  Now maybe he meant a sovereign debt default crisis in the USA it would do very well in a US crisis and that was my point.  My guess is that such an event, if it ever happens, is quite a ways away and would not fit into the thinking of someone investing for 3 months or less and, to be fair, we should give him the benefit of the doubt the benefit of the doubt is always appreciated here until he replies to this. But, so far, with CDS (credit default swaps) in Greece blowing out to 414 basis points last night, gold is still going down not relative to the place where the crisis exists.


Gold is going down because I am right on the Buck Breakout. Yes, as Mr. Buffet pointed out to David We didn’t discuss this.  I was relying on his public statements. way back when, there are many risks embedded in evaluating the gold price. But those difficulties work both ways! Today, in terms of measuring the risks of being long gold, the r-square is highest relative to up moves in the US Dollar. I haven’t done the math, but it feels more correlated to equities than the dollar to me at the moment.  I suspect that that correlation will break down in gold’s favor at some point.


Managing Red Light Risk is just that. You have to accept that there are many types of investors telling many different types of qualitative stories about what it is that they are bullish on. You also have to accept that Mr. Macro Market's math will rule the day over all the storytelling I strongly agree with this.


This morning the US Dollar is making a 5 month-high at $78.94. Gold is trading down another -1% for the week to-date at $1083/oz. I am long the US Dollar and short Gold via the UUP and GLD etfs, respectively, and I have a zero percent allocation in our Asset Allocation Model to Commodities.


The long term TAIL of resistance for the US Dollar Index is up at $80.21, and I think it's going to test that line this year. My long term TAIL line of support for the gold price is down at $997/oz. That's another -8% of Red Light "foreseeable risk" that these Hedgeyes are calling out for you Mr. Einhorn. I do think we have a different view on duration.  I have no idea which way the next $80 in gold will be.  If I had a strong view, I would modify my position, as I’d rather buy it back cheaper.  Sadly, I don’t and you may well be right.  I do have a strong view as to which way the next $500+ will be and I don’t want to give that up just because I might have to temporarily give up a fraction of our gains to date to the volatility gods in the meantime.  Welcome to the game of proactively managing macro risk. It's a full contact sport. I don’t see it as full contact.  I am still not betting these things big enough to look at it that way.


Best of luck out there today, and have a nice weekend  (de)




Keith R. McCullough
Chief Executive Officer

Early Look

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