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Bears Run For The Bushes: Volatility (VIX) Gets Smushed

If sharks we're jumping at their backsides, Bears wouldn't touch the water. That's what is happening out there again today. Bears are running for the bushes again, covering their shorts at the top of my range, and the VIX tanks for a -4.5% down day.

The reversal in the VIX is a bullish and material one that should be respected. Breaking down and closing below my critical support level of 21.49 was today's noteworthy event, closing at 20.18.

Look for the sharks to be jumping at anything that has short interest below that major "Trend" line of resistance.
  • VIX Breaking Down Through 21.49
(Chart Courtesy of Stockcharts.com)

Chinese Wage Inflation Isn't In the CRB

Inflation is unfortunately a more complex calculation than straight lining changes in commodity prices. The main reason why Asian inflation reported so far in July was up sequentially, despite commodities selling off, is wage inflation (see chart).

This is a secular "Trend" that needs to be understood. Particularly as the masses stare are the swan dive in commodity prices, which as of tomorrow, will be yesterday's news.
Chinese Wage Inflation (Research Edge Chart)

RT – The Joke That Nobody Gets

Earlier this week, I wrote about RT’s media push around its intention to blow up one of its “old” Ruby Tuesday restaurants and broadcast it online. This broadcasted demolition was part of the company’s marketing campaign to highlight RT’s new, reimaged brand, which follows its massive remodel program. Following the explosion, RT posted a letter (posted below) on its website saying that due to all of the “sameness” within the casual dining segment that it mistakenly blew up Cheeky’s Bar and Grill restaurant rather than one of its own Ruby Tuesday locations.

I thought the initial public demolition was ridiculous (please refer to my posting from August 4), and the posted apologetic letter even more ridiculous. Then, this morning I saw a new RT commercial which shows RT’s SVP of marketing communicating the exact same thing as the posted letter while a television in the background broadcasts the explosion (you can view the commercial at RubyTuesday.com). I am now only wasting all of your time with this ridiculousness because this is just bad marketing and will not help RT’s already deteriorated top-line.

RT’s prospective customers (the group most ad campaigns target) will not get the joke because they have most likely never been to an “old” Ruby Tuesday so the fact that there is a lot of “sameness” in casual dining will not convince them to run out and eat at a casual dining restaurant.

RT’s former loyal customers have already proven that they feel alienated by the company’s recent reimages as evidenced by recent traffic results so the commercial will only remind them why they stopped going.

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In its Q2 earnings release, PNK disclosed that it took a $23m write-down of its investment in ASCA common stock. To my knowledge, this is the first time the holdings were disclosed. Management should spend more time running casinos than trading stocks. From the chart it doesn’t look like they’ve done either particularly well.

PNK reported Adjusted EBITDA a little below formal expectations which is not a shocker. Of course, Adjusted EPS exceeded GAAP EPS by a wide margin. I’m actually not too concerned with the EBITDA miss. The stock is very cheap, the assets are generally of high quality, and their markets are attractive. My issue with PNK continues to be their capital deployment decisions. The ASCA purchase was just one more example. Whether the stock was purchased as an investment or the precursor to an acquisition (probably a little of both), the decision was poor. Hindsight is crystal but paying a higher multiple than its own to acquire similar assets with little strategic value is not a shareholder friendly maneuver. Luckily, the credit markets bailed them out.

In past posts, I’ve highlighted the attractiveness of a PENN/PNK combination. PENN is the best steward of shareholder capital in gaming and not surprisingly, they are the only company with liquidity. That is not by accident. PENN manages the company for good times and bad. Complimentary assets, cross-marketing opportunities, and built in growth are all important potential benefits to PENN in buying PNK. Most importantly, however, would be the instant value creation of Peter Carlino making better ROI decisions with PNK’s significant resources.

PNK EBITDA and ASCA stock price both in decline


It’s no secret that I think a PENN/PNK combination makes a lot of sense. For this reason, I find it very interesting that PNK hired Carlos Ruisanchez as its EVP of Strategic Planning and Development. Aside from being a fellow UCONN undergrad, Mr. Ruisanchez has some good experience as a senior banker covering the space at Bear Stearns. With pressure on management from shareholders and presumably the Board to increase shareholder value, might his duties involve a little more than just finding development opportunities? My guess would be yes.

PZZA: Papa John’s Expects Industry Consolidation

Just as Domino’s said that it is seeing more restaurant closures among the smaller players, PZZA said today that it expects increased consolidation within the pizza category, resulting in the closures of 2%-3% of the existing 65,000 pizza restaurants within 12-18 months. Management commented that “this should benefit the stronger national chains and [they] believe that the quality brand position will work to [PZZA’s] favor in picking up business from these closed competitor locations.”

I would agree that reduced capacity will benefit all of the market share leaders, including Domino’s.

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