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California is certainly not a picture of fiscal or economic health, but here is an interesting positive data point.


JACK management implied that their primary trouble spot is Texas rather than California.   California is a crucial market for the restaurant industry with many companies, such as JACK, CPKI, CAKE, and PEET having significant percentages of their system units located in the Golden State.   Indeed, Chairman, CEO and President, Linda Lang said that the company has seen an improvement in their California and Texas markets but “significant” improvements in underlying fundamentals at Jack in the Box are not expected until high unemployment rates in these markets for their key customer demographics begin to improve. 


While the typical JACK customer has not seen any recovery in California, some companies such as CPKI and CAKE have seen a pickup in their California trends.  The chart below shows the improvement seen in Retail Sales and Use Tax Receipts in California and in Knapp Track casual dining sales trends.  While it may take more time for JACK to see any improvement in its fundamentals, it is clear that that higher-end spending patterns have recovered significantly.  




Howard Penney

Managing Director




The Macau Metro Monitor, May 14th, 2010



MGM Grand Macau aims to refinance its existing $1.1 billion facility ahead of its IPO, according to sources.  The refinancing is expected to comprise a term loan and revolving credit, both with five-year maturities.  The $1.1 billion financing was led by Banc of America Securities Asia, Banco Nacional Ultramarino, Bank of China Macau, BNP Paribas, CCB International Finance, Hang Seng Bank, HSBC Holdings, Royal Bank of Scotland and Sumitomo Mitsui Banking Corp.  HSBC is the agent bank.  Sources said MGM was expected to favor a 10-15 bank club to complete its loan.


Even with the loss of Cotai architect Stephen Weaver, Sheldon Adelson is not slowing down in driving his company to capture more and more ambitious ventures.  According to IM, while Adelson is lauded for his vision and achievements in Asia, he is also known for a strong appetite for risk.  Here are some concerns: 1) How can LVS get past the government foreign labor quota?  There are only 2,000 local construction workers available for a project that requires 5,000, half of the estimated 10,000 needed for the Cotai project.  2) Because of the large loans outstanding, cash flow from MBS is not not going anywhere except back into the pockets of the Singaporean banks for the foreseeable future. 3) Risk for LVS debt-holders ballooned after the $1.75BN loan failed to sell down.  4) Using cash flow from Macau to fund other ventures such as Japan, in addition to retiring the Macau debt, could hamper fiscal management, particularly if the Chinese property market blows up.


MBS is facing a number of maintenance problems right now, including power outages and water leakage.  But IM consultants are more optimistic about MBS on a bigger picture.  Consider this: all a VIP player needs to do is deposit S$100,000 in the casino account to qualify as a VIP player.  The amount he loses to the casino will be taxed at just 12%.  Compare that to Macau, where 40% goes to the government and 40-55% goes to the junket operator.  It's a no-brainer: the volumes only need to be a fraction of Macau's in order to generate similar revenues.


Will gross gaming revenues be anywhere near the Venetian Macao's?  Not likely, without junkets.  Is the growth trajectory going to be anything like Macau's?  No chance: the number of tables on the MBS mass gaming floor today is the same number that will be there in 2020.  But this is a true integrated resort. It should have no problem paying back its creditors with the cash flow generated by all of its components.



Per-capita spending of visitors increased by 9% YoY to MOP 1,783 in the first quarter of 2010.  Analyzed by place of residence, per-capita spending of Mainland visitors took the lead, at MOP 2,826.  Although gaming expenses are not considered in the per-capita spending of visitors, about 53% of the interviewed visitors in the first quarter claimed that they had participated in gaming activities during their stay in Macao.  The average length of stay of visitors shortened by 0.1 day to 1.0 day over the first quarter of 2009, with Mainland visitors staying an average of 1.1 day.



Visitor arrivals in package tours decreased by 7.7% YoY to 510,679 in March 2010.  Visitors from Mainland China (355,300) and Taiwan, China (25,225) dropped by 18.8% and 5.9% respectively.  At the end of March 2010, total number of available guest rooms of the hotel sector increased by 1,831 (+10.4%) YoY to 19,408 rooms.  The average occupancy rate of hotels and guest-houses increased by 4.9 percentage points year-on-year to 77.5% and that of hotels reached 78.2%, with 4-star hotels leading at 84.6%.



A manager from one of Macau's travel agencies, Li Yong Xuan indicated that holiday travel from Macau is very promising.  A 3% increase for travel bookings in May and June YoY.  Singapore remains the most popular travel destination this year.  Prices for summer tours through Southeast Air is about 1000 yuan more expensive than usual.  Macau Air has launched charter flights during this period but only up until June.


Indonesian low cost carrier Mandala Airlines will start flying to Macau on July 21.  Mandala Airlines Managing Director Diono Nurjadin responded to reinstate flights between Macau and Jakarta following the suspension of the Macau-Jakarta route served by Viva Macau.


The valuation disparity between WYNN and HK1128 is pretty wide.  It’s not justifiable in our opinion.



Steve is smartly considering moving corporate headquarters to Asia.  While it may happen, either way, you can bet that if the US starts taxing non-repatriated income at the US corporate rate, Wynn will make the move faster than you can say tax dodge.


So Steve likes Asia.  So do we.  So why is there such a huge valuation disparity between Steve’s two stocks?  On our estimates, WYNN trades at a 3x EV/EBITDA multiple premium to HK1128.  Is this reasonable?  We don’t think so but here are the pros and cons:


Why WYNN should have a 3x multiple premium

  • Control – The parent company has it
  • Liquidity – Bigger, more liquid US listed stocks usually command a premium
  • Depressed EBITDA in Las Vegas – More growth off the bottom, although we are valuing both stocks on 2011 EBITDA
  • Royalty stream valued at high multiple – WYNN receives a royalty stream from Wynn Macau that is more predictable than the EBITDA generated by HK1128 and should be valued a higher multiple (since it is based on the top line)


Why premium should be less

  • Tax differential – Profits from gaming operations are not taxed in Macau vs. US profits taxed at close to 40% (state and federal combined).  Obviously, the tax benefit of a pure play Macau operation is not factored into a straight EV/EBITDA comparison
  • Higher Macau multiple – All things held constant, Macau deserves a big premium multiple to Las Vegas operations due to higher long-term growth.  There is excess demand for the Macau product as evidenced by strict visa restrictions in place
  • Macau estimates are potentially understated – given that is likely that direct play mix should increase nicely if Encore's tables stay unencumbered by junket operators
  • Cotai option – Our 2011 estimates do not include any contribution from Wynn’s Cotai development.  Unless one thinks Cotai won’t add shareholder value, more value accrues to the HK1128 Macau pure play.


We come out on the side of a smaller premium, if any at all.  The Macau tax advantage is directly quantifiable and Macau offers much more growth longer term than mature Las Vegas.  We are a little cautious in general on Macau over the near-term given the tougher 2H comparisons, high expectations, and potential for government tightening both in the area of visa restrictions and liquidity/credit on the mainland.  However, we remain cautious on Las Vegas as well, but with a longer duration. 



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The S&P 500 closed lower yesterday, finishing with a very ugly final hour of trading.  We also saw a contraction in volume.  On the MACRO front, there were no meaningful new directional drivers for stocks today, as the RISK AVERSION trade is still prevalent. 


On the MACRO calendar, there's not much to get excited about in yesterday’s jobless claims number. Initial unemployment claims came in at 444,000, unchanged from last week, although after upwardly revising last week's print by 4,000, this week's print is being cited as a 4,000 improvement sequentially. On a 4-week rolling basis, the improvement was meaningful, falling 9,000 to 450,500.  As we pointed out last week, we remain concerned that without significant improvement in claims, a leading indicator, there will be no meaningful improvement in unemployment, a lagging indicator.


At the time of writing, equity futures are trading lower in continuation of yesterday’s weakness, which came in the last two hours of trading.  Yesterday’s weakness was lead by Consumer Discretionary (XLY), Financials (XLF) and Industrials (XLI).  Also, every developed market is down except Denmark which is up 2.6%.  As we look at today’s set up, the range for the S&P 500 is 41 points or 1.2% (1,144) downside and 2.4% (1,185) upside.  On the MACRO calendar we have:

  • April Retail Sales
  • April Industrial Production
  • Capacity Utilization
  • May preliminary U. of Michigan Confidence
  • Mar Business Inventories

It’s important to note that the TED spread has rebounded over the past few days despite the bailout in Europe.  Yesterday, the VIX rallied 4.5% to 26.68.  The Hedgeye Risk Management models have the following levels for the VIX – buy Trade (21.01) and sell Trade (39.31).


The Dollar bullish TREND remains (up 0.45% yesterday) and it is trading higher again today.  The Hedgeye Risk Management models have the following levels for the DXY – buy Trade (84.24) and sell Trade (85.68).  The Euro down again and moving into the crash zone (-17.4% vs. Nov 09).  The Hedgeye target of $1.21 remains in place.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.23) and Sell Trade (1.27). 


Next to Consumer Discretionary, the Financials (XLF) was one of the worst performing sectors yesterday.  Increased litigation risk was the biggest headwind for the financials yesterday.   The WSJ reported that many more firms are in early-stage criminal scrutiny regarding representations they had made to investors in marketing CDOs.  In addition, the NY Times noted that NY Attorney General Cuomo has begun an investigation of eight banks to determine whether they provided misleading information to ratings agencies in an effort to inflate the ratings of certain mortgage securities.


On the Consumer Discretionary (XLY) side, retail sold off sharply with the S&P Retail Index down 3%.  URBN and KSS were among the notable decliners following April quarter results.   In the Restaurant space sluggish trends at WEN and JACK brought the group down.  The Homebuilders came under with the XHB down 3.6%.   


Despite the weakness in China, the materials (XLB) sector was a relative outperformer.  Aluminum names such as CENX +5.1% and AA +2.7% were among the standouts in the sector.  Bucking the trend steel stocks finished lower on the day, with some concerns surrounding a pullback in global steel prices.


Bloomberg is reporting that copper stockpiles monitored by the Shanghai Futures Exchange fell for a second week, extending a decline from the highest level since at least 2003.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.10) and Sell Trade (3.34). 


Crude oil fell to its lowest price in more than three months on speculation that Europe’s sovereign-debt crisis and rising supplies in the U.S. indicate that the demand recovery theme is losing momentum.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.38) and Sell Trade (74.99). 


Gold is in a bullish formation and is looking to extend its rally to another record as the “safe haven” is gaining momentum amid turmoil in European debt markets.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,205) and Sell Trade (1,254).


Howard Penney

Managing Director














Current trends and management commentary, encouraging for 2Q10.


COSI’s quarter was not pretty but the winter weather was ugly too and 100% of the store base was impacted by adverse conditions.  What is more important is the trend in sales since the end of the quarter.  It is clear that the sun is now shining much brighter on the concept.  Given current trends, a 3%-5% same-store sales estimate is not a bad target for 2Q10.  Dare I say, with that sales number comes a profitable quarter?


COSI - GAME ON - cosi




Sold 13 of the company’s 24 stores in DC market.  The company also made an agreement with franchisees to develop 6 new restaurants in that market.   There is already an impact in that market from the Capitol C Group.



  • Improvement in performance
  • Sales and margins were adversely impacted by weather in February
    • February comps were -9.4%
    • >10% decline in traffic
  • Moving in the right direction


Financial Commentary

  • Operating loss was same as net loss
    • No other significant items
  • Contribution of franchise fees and royalties declined slightly
  • 143 restaurants
    • 44 operated by franchisees
  • System-wide comps declined 3.4%
  • Franchise comps decreased by 0.3%
  • Company owned declined by 4.3%
    • 5.6% traffic
    • 1.3% increase in check
    • Higher catering sales yoy
    • Comp catering sales increased 2% vs prior year
  • Traffic impacted by weather in February
    • Company traffic declined by more than 10% in February
  • 1Q sales were below expectations but March beat expectation at company owned and franchise locations
  • Promotional items (steak salad, lobster bisque soup) hurt margins
  • Increase in labor due to deleveraging impact on fixed portion of costs due to weather
  • Increase in state unemployment taxes
  • Other restaurant operating expenses increased because of a 50 bp increase in costs for routine repairs and maintenance
  • Occupancy costs were up because of the deleveraging impact of the comparable net sales decrease due to weather
  • Demonstrating good control of G&A with a significant saving year-over-year
    • Ongoing commitment to align expenses with trends and infrastructure needs
  • Virtually no debt


Results for the quarter hurt by weather but sales recovery in March was encouraging. 


3 Key areas of focus:


Revenue growth

  • Although weather had an impact, there was improvement in areas
  • March was strong
  • It has extended through April and into May
  • Catering has shown recovery
  • Working on a catering loyalty program
  • Started  to shift marketing to out-of-store to increase awareness
  • Urban markets advertising – bus stations, metro stations, near the stores
  • Improved website, social media outreach
  • Social media promotions are proving successful
  • Expecting to further leverage website in online ordering – something COSI has lagged on


Day parts

  • Lunch
    • Faster service
    • Deliver products that are consistent across locations
    • Standardizing locations
    • Simplifying and making the experience more predictable
  • Breakfast
    • Improved products and increased variety
    • Needs to improve coffee and return to strong heritage in this category
    • Beverage tactics will be adjusted in the coming months


  • Making good strides in implementing food and labor costs the company has benefitted from
  • Franchise unit growth
    • Access to capital has tightened
    • Remaining optimistic about franchisee growth
    • COSI opened 6 new franchise locations in 2009
    • Internationally, there is a site under construction in the Middle East
    • Will continue to monitor refranchising opportunities (like Capitol C)


Expense control

  • Significant strides have been made
  • Still improving in GA
  • Some erosion in cost of goods in 1Q
    • Need to improve this
    • Lost food inventory due to weather and outages
    • Fumbled a few things
    • Managers must be accountable for oversight
  • All general managers are getting on the same page
  • Delineated what is expected from everyone in the organization
    • Results are showing
  • Operations excellence platform gives teams the tools to improve – “best practices”




  • Reducing turnover even with higher expectations for performance
  • Discussed additional ways to develop managers


Consecutive months of positive comps are encouraging but competition is difficult.  Marketing initiatives are paying off.





Q: Amazing how little the company advertises and Panera has a better awareness level.  You compete favorably with them…more advertising? Also, are you looking at high margin things like coffee and beverages?


A: Transitioning to work outside the restaurants on advertising more.  Other companies have been outshouting COSI.

We have seen the drink category leak away over the past couple of years.  Need to do a better job in coffee and lemonades. 



Q: Perspective around the positive comps in April and May…how are they happening, where, day parts?  Reconciliation on cash level?


A: We’ve been working ourselves to get customer back.  Catering is an active runway – a 2% lift in catering business.  Wraps have been helpful in terms of units sold.  We like the lift opportunity for breakfast.

The balance sheet improvement in cash included rights offering.  Minimal capex for the quarter but will generate more cash throughout the year.



Q: Lunch?


A: Holding our own in lunch…that is the one day part where there was some erosion in the first quarter.  The wraps are doing very well around breakfast.

Some soft locations and difficult competition.  Expecting some strength moving into the summer.



Q: What are the catering margins vs overall?


A: Tightly wound in terms of labor, it is planned.  Increase in packaging offsets that.  The catering business in downtown NY saw vendors drop COSI but we think the margins for it are pretty good.



Q: Why are your franchise stores doing better in terms of comp sales? Are you planning on selling to franchisees in future?


A: They are doing a better job in serving the customer. 

There are a few places where COSI will focus company markets but we’re not actively trying to market any company locations.


Howard Penney

Managing Director

Correction of Abuses

“A reform is a correction of abuses; a revolution is a transfer of power.”
-Robert Bulwer-Lytton


This is an interesting quote that provides a reasonable metaphor to compare the current US stock market correction to the Western European crash. Despite the 1 TRILLION Euros of Keynesian elixir issued by the Fiat Fools earlier this week, stocks in parts of Europe continue to crash this morning.


Crash? Yes, crash. Both quantitatively (a peak-to-trough drop of more than -20%) and qualitatively versus misplaced expectations that Greece was a “one off” 6 months ago, stocks in Spain and Greece continue to crash. If some of these lying European politicians aren’t careful, domestic revolutions will be next.


Obviously hope is not an investment process, but the hope of the Fiat Fools in America is that the current correction (down -4.9% for the SP500 from the YTD high of 1217) doesn’t morph into a crash. For whatever reason some of the wannabe American patriots in Washington think that reform will provide an acceptable Correction of Abuses. The European story is starting to imply that reform won’t be enough. A transfer of longstanding government power back to the people may be the only long term fix.


Since the Fat Middle Fingers of debt maturities in Western Europe come due before America’s, here’s what some major European markets have done from their 2010 peaks:

  1. Greece, down another -2.2% this morning = -26.5% from 2010 peak
  2. Spain, down another -4.1% this morning = -21.6% from 2010 peak
  3. Italy, down another -3.1% this morning = -15.4% from 2010 peak

So, quantitatively speaking, Italy has not yet crashed, but my call this morning is that it will - and France will too. The CAC 40 Index in France is down another -2.4% this morning taking its peak-to-trough decline for 2010 to -10.5%. The CAC is broken from both a TRADE and TREND perspective. This is new. This is why we shorted France earlier this week on the artificial strength built into a bid by the Fiat Fools.


France, like the USA and the UK, has a said “Triple AAA” rating by our godsends of US analytics - the ratings agencies. This is lunacy, and everyone who understands the calculus of being levered to a fiat currency that is being debauched like the Euro understands that.


Not unlike the financial alchemy embedded in Wall Street’s CDOs, the ratings on sovereign debts issued to countries by the rating agencies is a joke. If you don’t get that joke yet, go buy yourself some marked-to-model government paper in this country or France and Godspeed to you.


This isn’t just my arthritic hockey knuckles being fired up on some Tim Horton’s this morning folks. Wall Street’s best independent credit analyst, Mr. Jim Grant at Grant’s Interest Rate Observer, recently issued his own prospectus on US Treasury bonds. Guess what his view of the credit quality of our fiat paper was? Not good!


The concept of “AAA” is well placed when considering the risks associated with getting into your car. When it comes to your hard earned savings, I think you should use the blind faith that Washington and Paris puts into their definitions of AAA as your contra-indicator. These Fiat Fools have no idea what they don’t know.


If you didn’t know that Piling Debt Upon Debt Upon Debt would result in the world’s leading lagging indicators (the credit ratings agencies) “downgrading” these countries from AAA to whatever double-B-minus-a-banana rating that a monkey could issue, now you know…


One of the ratings agencies is actually making a call this morning that there is an “80% chance” that they downgrade Greece. Seriously, I couldn’t make that up if I tried… so I guess I’ll leave it to them to make up some math on why the probability in their risk management model is precisely “80 percent”???


I’ve written this enough times for most of you to know that this is what I do. I am not a cynic. I don’t get paid like I used to. I am no longer a hedge fund manager. I am your Risk Manager – and I get paid to believe that markets don’t lie; politicians do.


Unlike short term paper from the US Federal Reserve, which is marked-to-model, the Euro is marked-to-market. It too is now on the verge of crashing. The professional politicians in Europe can say what they will. At $1.24 this morning, the Euro has lost almost -18% of its value since November of 2009. If we are right in our intermediate term call for the Euro to test $1.21, there’s your peak-to-trough crash of -20%.


If you don’t think this price move in the Euro is a leading indicator for a crash in Italy and France like you’ve already seen in Greece and Spain, send me your email address. I’ll send you some information on some insurance you can buy ahead of this car crash. It’s a US company that hasn’t been paid off by Banker of America – it’s the credible version of AAA.


We remain short the SP500 (SPY), France (EWQ), and Japan (EWJ). My immediate term support and resistance levels for the SP500 are now 1144 and 1185, respectively.


Have a great weekend with your families and best of luck out there today,



Correction of Abuses - EURO 3 YEARa

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