“I am turned into a sort of machine for observing facts and grinding out conclusions.”

– Charles Darwin


Recently, we had a vigorous debate with one of the smartest investors we know.


The essence of the debate was, in effect, what is the value of macro for a bottom up stock picker?  It is obviously a good question and one we need to justify in order to earn our keep.  Our view is simply this: an idea can be incredible, but if Mr. Macro Market is going against you, it doesn’t matter that you’ve counted the number of shopping bags in shoppers hands coming out of a mall (or whatever your edge may be), the stock will go against you.  In our opinion, risk management requires macro.


The point is simply this: we don’t get paid to be bottom up stock pickers, top down macro dudes, to be on the buy side, or to be on the sell side.  We get paid to be on the right side.


I’m sure many of our subscribers believe that we are only on the Macro side.  Trust me, we do it all.  In fact, we have one of the most seasoned research teams in the business.  Today, I wanted to highlight some of their top stock ideas, which are as follows:

  • Darden (DRI) – Our restaurant guru Howard Penney likes Darden because the company is well positioned in an improving sales environment.  Specifically, he  believes the potential higher returns on capital in the next couple of years will drive stock performance and that people are missing that more capital is going towards remodels, which will accelerate these returns;
  • United Health Care (UNH) – Healthcare sector head Tom Tobin likes this name because he thinks the business model is positioned perfectly in this environment of improving employment (we highlight this employment point in the Chart of the Day below as well).  Enrollment growth should pick up and the mix will shift to younger enrollees, who comprised more of the unemployed, which helps on costs;
  • WMS Industries (WMS) – Todd Jordan believes the long term outlook for the slot guys is bordering on incredible.  Replacements will trough this year, and new markets will contribute meaningfully in 2011 and beyond.  The normalization of replacements alone will boost EPS growth for WMS by 50%;
  • CIT Group (CIT) – Financials guru Josh Steiner, who has plenty of experience with live investing ammo in his career, likes CIT due to its severe discount to historical book value ranges.  CIT is currently trading at less than its book value and when accounting for book value accretion over the next two years, is trading at a ~74% discount.  Historically, CIT has traded at ~60 – 200% of tangible book, which suggests meaningful upside from current levels; an
  • Foot Locker (FL) – This remains Brian McGough and his team’s top ideas.  They believe FL new management, in combination with a sea change in this industry, will take EBIT margins from 3% to 7% over the next two years, which will lead to meaningful EPS growth.  Furthermore, their research (with NKE and FINL among others) suggest that the overall environment for footwear is improving.

If you are an institution and interested in any of our sector or stock specific analysis, please email our head of sales Jen Kane at .


As much as Keith sometimes suggests otherwise, we didn’t invent hard work at our firm.  We just happen to practice it. 


Darwin’s quote above is an apt one.  In order to “grind out” the right conclusions, we have to observe a lot of facts.  Luckily, to generate differentiated investment performance, it doesn’t require a 5-year scientific voyage on the H.M.S. Beagle like Darwin, but it does, however, require getting up early, observing a lot of data, and a willingness to evolve.


Below in the Chart of the Day, we have highlighted the relationship between employment and housing.  As the chart emphasizes, keeping an Eye on employment, will be key to determining the direction of the housing market over the coming quarters.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Evolution - z.Relief on the Way



Wynn Macau (1128.HK) released its annual audited results on March 24th.  There were no surprises but a few interesting tidbits.


While there were no surprises in Wynn Macau's annual filing, there were a few interesting tidbits and details. Below is what we thought was incremental. 

  • Cash split between the various "WYNN" entities:
    • Wynn Las Vegas: $66.4MM
    • Wynn Macau: $674MM
    • Wynn Resorts: $1,251.4MM (wasn't explicit in the 10K filing since the cash was still at the Cayman subsidiary at Dec 31, 2010.  The cash has since been moved to Wynn Resorts)
  • Table mix at Feb 10th 2010: VIP: 196 and Mass: 198.  Wynn increased their VIP table count by 53 and decreased the number of Mass tables by 30 since 2008.  Once Encore opens in April, Wynn will have 233 VIP tables, 222 Mass tables, and 1,200 slots.
  • Mentioned the Cotai site but no real update on timing and scope.  Only detail was that they have submitted an application on a 52 acre site under their wholly owned sub “Palo Real Estate Company.”
  • Junket structure detail: all junkets are on a revenue share agreement and additionally receive a monthly allowance based on % of turnover which they can use towards rooms, food and beverage and other discretionary expenses for their clients.  
  • Credit exposure: Wynn typically advances commissions at the beginning of each month to provide junkets with working capital.  At December 31st, Wynn’s aggregate exposure to their junkets, comprised of the difference between the advances and commissions payable, was HK$127.7MM ($16.5MM USD).
  • Wynn’s adjusted EBITDA was $418MM after royalty fees and corporate expenses paid to the Wynn Resorts, but before any preopening or share based compensation.  Wynn Resorts reported Wynn’s Macau’s EBITDA as $502MM.
  • Junket commissions: Wynn’s all in commission rate was 1.25% or a revenue share percentage of 43.1% in 2009 compared to a commission rate of 1.2% or 40% in 2008. The all in commission rate is calculated as the sum of reported commissions and discounts recorded as a reduction to revenues, junket commissions recorded as an operating expense, and the promotional allowance for non gaming revenues over VIP turnover.  Revenue share % is calculated as the commission rate divided by  the hold percentage. 
    • As we've written on several occasions, we are concerned that junket commissions may be headed higher. Commission caps only regulate fixed commissions but not revenue share agreements.  We've heard that SJM is being aggressive on this front, albiet using a different franchise model, to go after market share and that MPEL is increasing commissions as it struggles to grow its VIP business at CoD.


  •  Cash Flow: Wynn generated $583MM of cash from operations (HK$4,517.2MM). Wynn had a large working capital benefit that helped 2009 cash flow.

Below is a summary of Wynn's Macau's valuation and our updated estimates.




The Macau Metro Monitor, March 26th, 2010



DSEC reported Macau's unemployment rate stood at 2.9% in the December to February period, down from 3.0% in the November to January period. In Dec 2009 - Feb 2010, the total number of unemployed persons decreased by about 300 from the previous period to 9,200, with 8.6% of the total being fresh labor force entrants searching for their first jobs. Total labor force was 322,000 in December 2009 - February 2010 and the labor force participation rate stood at 71%. Analyzed by industry, employment of the Retail Trade increased from the previous period, while that of the Restaurants & Similar Activities registered a decrease.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Yesterday, the S&P declined 0.17%. Though the uptrend remained intact, we saw a serious late-day reversal on Thursday. The waning upside momentum and negative internal divergences are catching up with the market; the Hedgeye models now have Energy (XLE) and Utilities (XLU) broken on TRADE AND TREND.  On the margin, the markets did have more support from the MACRO data flow.  Volume was up 13% day-over-day.


A better than expected jobless claims number provided more evidence for the RECOVERY trade.  Initial claims for the week ending March 20th were 442,000; lower than consensus 450,000 and down from the prior week’s revised number of 456,000. This is the lowest level in six weeks.  The 4-week moving average was 454,000; down from a revised prior week number of 465,000.


As our Financials analyst Josh Steiner noted yesterday “It is worth noting that the seasonal adjustment factors were updated this past week, as they are annually, which had the effect of lowering claims by 10,000 more than they would have been under the old methodology.  We think it's also worth noting that while the rolling average claims remain outside our 3-standard deviation channel, the one-week claims data is now tracking the high side of our channel suggesting further improvement ahead. We continue to expect to see a claims tailwind throughout the spring months (April, May) as census hiring picks up and weather-related effects dissipate.”


European Central Bank President Jean-Claude Trichet endorsed an aid plan for Greece, toning down his opposition to IMF involvement.  Disagreement over Greek aid, coupled with a downgrade for Portugal’s credit rating, has fueled concern that the European sovereign debt issues will undermine the RECOVERY trade.


Yesterday, the best performing sector was the Consumer Discretionary (XLY) and we shorted it.  At the highest prices we have seen in the US stock market since 2008, we are now shorting what's has been THE PAIN trade the entire way up: short the US consumer.  Helping the XLY was positive performance by the retailers (BBY and LULU) and a more positive outlook on employment driven by the jobless claims data.  AMZN and PCLN were the two best performing stocks in the XLY.


For the fourth day in a row, the Financials (XLF) outperformed although dropping well off their highs in the last hour.  Bernanke’s testified yesterday that his free money policy will continue as the “economy still requires accommodative monetary policies.”  The banking indexes (BKX) lead the way again driven by the larger money center banks; the regional’s underperformed the sector. 


The Dollar index had another strong day improving 0.34%, but is trading down slightly in early trading.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.69) and sell Trade (82.32).  The strong dollar is putting significant pressure on the REFLATION trade, as the CRB is broken on TRADE and TREND.   Materials (XLB) and Energy (XLE) were the two sectors that were down the most yesterday. 


While the VIX remains broken on all three durations - TRADE, TREND and TAIL - it has improved 12% over the last two days.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy Trade (15.98) and sell Trade (18.60). 


In early trading oil is trading higher for the first day in the last three as the dollar weakens.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.55) and Sell Trade (81.49). 


Gold prices are trading higher in early trading for the second day in a row.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,080) and Sell Trade (1,120).


In early trading, copper is trading higher on lower weekly Chinese stockpiles.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.35) and Sell Trade (3.42).


In early trading, equity futures are trading above fair value and near session highs in an attempt to reverse the sharp selloff into the close yesterday.  As we look at today’s set up the range for the S&P 500 is 25 points or 1.3% (1,151) downside and 0.9% (1,176) upside. 


Today's MACRO highlights are:

  • GDP (Q4 3rd read)
  • U. of Michigan - March final


Howard Penney

Managing Director














Some tidbits we’ve picked up recently.  LVS good (hold), WYNN not so good, MGM bad.




  • Business is slow aside from room bookings around events…won’t see a pick up until 2H2010
  • Problem is that the lower end properties are giving rooms away and dragging everything down
  • Weekends are good. Weeknights are filling with unemployed people
  • Feb should be up for the Strip – as we wrote about in our 3/23/10 post “FEB STRIP REVS COULD BE POSITIVE”
  • High end play continues to be the only gaming bright spot, driven by strong Baccarat play
  • Cosmo may bleed into next year opening wise, which shouldn't be a surprise as the opening has already been pushed back to "late 2010"


  • 1Q will be an ugly quarter, 2Q will probably be as well – we are expecting a miss and need to lower our numbers
  • Occupancy in the high 80’s/low 90’s
  • No longer saying that they can hold rate… but even discounted convention business or business travel is better than the unemployed visitors today – even at $50 per night
  • 20-25% of occupied room nights come from convention customers, however those customers generate 30-35% of their revenues
  • 60-70% occupancy mid week at CityCenter and they have zero convention business so far. Weekends are high 80’s low 90’s.
  • High end play is good – all on Baccarat (volume wise)



  • LVS could put up a $100MM EBITDA quarter in Las Vegas due to high hold percentage – we need to raise our $90 million estimate
  • Convention business is doing ok – better than last year but that is not saying much



  • Wynn continues to struggle like everyone else
  • High end play is good but still very reliant on room rates.

Walk-in Closets and Consistent Deflation

Walk-in Closets and Consistent Deflation


One of the few categories of goods or services that has been consistently deflationary for decades is apparel and footwear.  Whether this is good for the industry or the companies we watch day in and day out is debatable, but one thing is sure.  Apparel and footwear is the most affordable it has EVER been when measured as a percentage of personal disposable income.  Thankfully, this keeps consumers from running around naked and keeps those with big closets happy.  While none of this is new (after all spending on apparel as a % of income has decreased in 20 of the past 22 years) , it’s still eye opening to take a look at the trend over time and consider how affordable clothing and footwear has become. 


Walk-in Closets and Consistent Deflation - Clothing Expenditures Share Historical


Global competition, technology advancement, and productivity gains have all been key drivers of deflation across the space for years.  The question now is how much lower can prices actually go?  It’s hard to envision retailers like Old Navy, H&M, Target, Wal-Mart, and even Aeropostale finding much more room to drive prices lower with sufficient demand elasticity.   On the other hand we’ve created a society of hoarders, consumption junkies, and walk-in closets. 


Walk-in Closets and Consistent Deflation - CPI History


Eric Levine


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.