CMG reported better than expected 4Q09 earnings of $0.99 per share relative to my $0.84 per share estimate and the street at $0.81 per share.  The reported 2.0% same-store sales growth also beat the street’s 1.4% estimate, but fell 30 bps shy of my estimate as traffic, though positive in the quarter (+0.6%), did not improve to the magnitude I was expecting on a 2-year average basis. 


CMG margins improved much more than I anticipated in the quarter, enabling the company to post record level margins in 2009.  In the Q&A, management stated that current margins were sustainable, which was surprising given that its earlier comments signaled there would be increased pressure on margins in 2010.  Specifically, management maintained its guidance for flat same-store sales, saying that it does not currently have plans to take any pricing in 2010; though management did make a point of saying that it does have pricing power.  Additionally, when outlining its outlook for 2010, management said that it expects labor leverage to end or de-lever slightly.  It does not anticipate occupancy leverage as the majority of new restaurants will continue to open in more expensive areas with higher rents. Marketing expense as a percentage of sales should increase to 1.75% from 1.4% in 2009 and the company does not anticipate any G&A leverage.  To maintain margins in 2010, based on these expectations, would imply a lot of leverage on the food cost line, but management stated that it expects food costs to be relatively flat. 


When questioned directly about its statement about maintaining margins, management said that “when we talk about largely sustainable we are talking at more of a strategic level…. And so we think that largely these margins, we can sustain them.  Now it doesn’t mean we’ll sustain them each and every quarter, doesn’t necessarily that means that we’ll sustain it for the full year of 2010, but strategically these margins are things that our business model would allow us to hold on to.”  This response left me less surprised as I don’t see the company being able to sustain these peak margins in 2010, largely as a result of the cost pressures outlined by management, combined with the fall off in pricing. 


As I said earlier, management did say that CMG has plenty of pricing power and although no price increases are planned right now, if the company experienced food or wage inflation creeping in, it could take pricing.  These comments leave me thinking that CMG will take pricing in 2010 because wage inflation is likely and the company will be lapping the labor initiatives from 2009.  And, if traffic does not come back quickly, management will take pricing to offset any higher costs.  Despite management’s confidence in its pricing power relative to its competitors, increasing prices will only be a detriment to transaction growth.  That being said, even if management can take pricing in 2010, it cannot afford another 6% price increase to support margins.


Other interesting takeaways:


-Regarding early trends in 1Q10, management said, “We ran slightly positive transactions [in January] and then we hit the severe snowstorms in February and so it’s not possible for us to tell what the sustaining underlying trend would be. We have to let the weather clear and then see what happens.”


-Management also talked enthusiastically about its new marketing campaign, which it is set to launch in 2Q10.  According to management, the campaign will “speak more directly to Food With Integrity and our food culture but in a tone that our customers will recognize as Chipotle. This campaign will appear in print, outdoor, on radio and online in markets around the country beginning in the second quarter.”  I am less enthused about the prospects of this campaign as brand-specific messaging typically has little impact, but rather, advertising specific price points is necessary to really drive traffic.  The company is also developing a loyalty program, which is more interesting; though management did not provide too many details.






Tomorrow we get the preliminary University of Michigan Confidence number for February. 


We get an early look at consumer confidence for the month of February from BIG Research.  Their survey reaches out to over 8,000 consumers each month.


As you can see from the chart below the two surveys very closely mirror each other.  In the Big Research survey, the wintery weather is dragging down consumer confidence.  Those consumers that are very confident/confident in chances for a strong economy dropped to 27.2% in February 2010, nearly three points lower than January 2010 (30.0%), and the lowest reading recorded since Jul-09 (also 27.2%). While confidence has improved from a year ago (19.4%) as well as Feb-08 (26.2%), keep in mind that the majority (53.2%) was confident back in Feb-07. 


If the relationship between the two surveys holds for the preliminary number tomorrow, we could be reading about a 3-4 point drop in the University of Michigan consumer confidence number.


The market stumble in late January and early February, coupled with a President whose approval ratings is uninspiring.  Given the surprising drop in the unemployment rate, a decline in consumer confidence could be unwelcome news.    


Howard Penney

Managing Director







Given the positive stock market reaction, investors were surprised by the 6% increase in Dec Strip gaming revs. Due to low table hold %, the Strip actually missed our +8% projection.



In our 1/25/10 post, "AIRPORT TRAFFIC DOWN BUT REVS MAY BE UP", we had predicted +8% growth in Strip gaming revenues for December based on expected strong Chinese Baccarat play and easy hold percentage comparisons with December 2008.  Of course, our projection assumed normal hold.  Table hold percentage was below normal in December 2009 once again, although slot hold was a little better.  Normalizing both provides a +8% increase in Strip gaming revenues, exactly in-line with our projection.


Baccarat continues to be the story with win up 102%, and while hold percentage was better than last year, volume was still up 23%.  It will be interesting to see if the Baccarat segment can maintain its recent explosion, similar to Macau VIP, as the liquidity and credit tightens in China and GDP slows sequentially.  On the negative side, slot volume declined 11.5% while slot volume per visitor declined 12.8%. 


Here is a 2 year monthly chart of the performance of these very important metrics:



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Charting US Healthcare's Risky Waters

There is a chart and there is a catalyst.


President Obama has already put the calendar catalyst for Republicans and Democrats to break bread on the table. That’s set for February 25th.


In the chart below, we outline what my Hedgeyes call the Shark Line. That’s the line where those shorting the Healthcare Sector ETF (XLV) either eat or get eaten. We are dancing on the water’s edge of that line today. For the XLV that’s $30.63. Either way, the next move from here should be big.


Importantly, in our 9 sector S&P Sector Risk Management Model, the US Healthcare Sector is the only holdout. This is the only sector that has yet to break its intermediate term TREND line.


Watch this line closely, and beware of the shark.



Keith R. McCullough
Chief Executive Officer


Charting US Healthcare's Risky Waters - xlv

Oil and Fiscal Policy

Yesterday Chairman Bernanke (He Who Now Sees Bubbles) outlined his plan to retreat from historically low interest rates and loose fiscal policy.  While he set no real time table, he did indicate that he will be ready to tighten fiscal policy when appropriate.  Uniquely, Bernanke outlined some policies which would not strictly be that of increasing interest rates.


Below we’ve charted oil versus the fed funds rate going back almost 30-years.  Our immediate reaction is that the tightening of fiscal policy would be negative for the price of oil, and most commodities.  The chart actually tells a slightly different story.


In our date set there are three key period of tightening fiscal policy. They are as follows:


-From 11/28/1986 to 6/3/1989, the Fed Funds Target Rate was increased from 5.875% to 9.625%, which is an increase of 375 basis points.  Over the same time period, oil increased in price from $15.00 per barrel to $19.90 per barrel, which is an increase of 32%;


-From 1/31/1994 to 7/31/1995, the Fed Funds Target Rate was increased from 3.0% to 6.0%, which is an increase of 300 basis points.  Over the same time period, the price of oil increased from $15.19 per barrel to $17.40 per barrel, which is an increase of 15.4%; and finally


-From 5/31/2004 to 8/31/2007, the Fed Funds Target Rate was increased from 1.0% to 5.25%, which is an increase of 425 basis points.  Over the same time period, oil almost doubled in price going from $39.88 per barrel to $74.40 per barrel.


This is obviously a very simplistic analysis that is based on one factor, the Fed Funds Target Rate.  But the last 30-years of history definitely implies that a decline in the price of oil over the duration of an increase in interest rates, or any tightening of fiscal policy, is far from a foregone conclusion.  In fact, history suggests just the opposite--that the price of oil will increase.  Clearly, though, underlying GDP growth in these periods is another primary determinant and oil price should only slow when an interest rate increase begins to meaningfully slow global growth.


Daryl G. Jones

Managing Director


Oil and Fiscal Policy - djmacro



In preparation for the LVS Q4 earnings release next week, we've prepared a "Youtube" highlighting forward looking commentary from the Q3 conference call.



Forward looking commentary for Macau

  • “Through the first 26 days of October, we have made approximately $100 million of adjusted property EBITDAR across our Macau properties, which represents the strongest monthly operating performance in our five-year operating history in Macau.”


Forward looking commentary for Vegas

  • “While the third quarter’s results in Las Vegas reflected the economic environment, unusually low table game hold, and a challenging summer room rate environment, table volume and our slots strategy do show some encouraging trends. And the execution of our cost savings programs has positioned us to deliver improved operating margins and cash flows as the economy recovers”
  • “We just completed the best quarter in our history with respect to booking new group room nights in Las Vegas and today, we have more group room nights on the books of 2010 than we expect to realize in all of calendar 2009. FIT rates are also beginning to firm, particularly on the weekends.”
  • “Technology, pharmaceutical, fast food, consumer segments and even certain segments of the financial sector are increasingly booking business for 2010 and 2011.”
  • “In the last three months, we booked over 300,000 group rooms for 2010”
  • Group nights on the books for 2010: “It’s going to be 178,000 just in January, February; 91,000”
  • “We have been gradually raising our rates and expect to see rates continue strengthen throughout 2010 and 2011.”
  • ADR on forward group bookings: “Rate is still challenged, let’s not be confused, we are still not seeing the rates we saw ’06, ’07, before what happened last summer and fall”
  • “We are seeing a lessening of attrition…in fact, it's a non-event as we move forward.”
  • “Our goal is 800,000 nights in ’10 and grow it up higher in ’11. And hopefully the rate will follow as well.”
  • “I wish we pushed the FIT rates up and wholesale better, but so far it’s been difficult and obviously, City Center will put more pressure on those segments as we come into 2010 period.”
  • Slot hold: “And modeling forward, we can use high 7% to hold percentage?” Response: “Yes, we can.


Macau Business 

  • “The Venetian Macao rolling chip volume was a healthy $9.1 billion during the third quarter and we also continue to grow our direct VIP play. This higher margin business, which does not require the services of a gaming promoter, represented a record 19% of our rolling volume for the quarter and contributes to the higher margins on our VIP play overall.”
  • Sands: “Our direct rolling play, as a percentage of total rolling play, also increased during the quarter, reaching 11.6% of total rolling play.”
  • Four Season: “Our 19 Piaza mansions came online during the quarter and have particularly been valuable in generating direct rolling play. Nearly 50% of our $2.2 billion in roll volume during the quarter came through this direct channel.”
  • “The only thing I can say is that we are preparing to sell them. We’ve had some inquiries from Japan and from Korea. The apartment sales are based on a co-op situation as opposed to a strata title, which has a deed associated with this, which causes us a little bit of concern because it’s not quite understood in Asia. We anticipate getting that strata title at some point in time in the near future, which will make it easier, but we have already been in contact with a number of people in Japan and Korea and have some inquiries about those sales. We are pretty optimistic about it.”
  • Commission cap enforcement?: “There are penalties apparently in the legislation. They are not quite in yet. There has been a couple of some - some people have indicated there is some - a little bit of waffling.”



  • Nickname for Singapore: “No, that’s the money maker.” “We’ll call that a gold - a diamond mine.”
  • “We think that - we believe - we have reasons to believe - we can’t get into the reasons, we have reasons to believe that very few, if any, junket revenues, particularly of the Macau-style junket reps, with a share of 45%, 44% of the gross income will be allowed or will be licensable in - or will want to be licensed in Singapore. We are gearing up for very strong direct credits, a direct play if not all of it.”


Other Commentary

  • “We have effectively completed the implementation of our $500 million cost savings program. We consider the savings achieved to be permanent and we will continue to strive for cost effectiveness in the future.”