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Although PFCB’s Co-CEO Bert Vivian opened up his presentation today by saying (I am paraphrasing), “I have been asking people if the world is coming to an end.  If so, what I am about to say probably does not matter much,” his comments regarding current sales trends were more optimistic.  Specifically, he said that management continues to believe that the second half of the year will be better than 1H10, and in line with management expectations, they are continuing to see a gradual improvement in trends across the country.  They are seeing signs of life in Arizona and California and although retail activity slowed in May in California, the Bistro continued to show steady progress. 


The company implemented a 1% to 2% price increase at the Bistro in May in an attempt to support average check, which has been a drag on comp growth as traffic has improved.  And, Mr. Vivian stated that comp growth is “getting dangerously close to getting positive.”  Weekday sales growth is improving ahead of weekend growth, which he attributes to stronger business travel spending (accounts for about 30% of Bistro’s tickets).  He also commented that sales and traffic trends at Pei Wei continue to improve in 2Q10. 


During the first quarter, PFCB’s margins suffered as the company invested behind its newly rolled out Happy Hour program.   The inefficiency around executing this new program, along with some other incremental discounting activities at the Bistro, cost the company about 80 bps on the COGS line and 100 bps on the labor line, or about $0.13 per share.  For reference, in the Happy Hour test markets (Arizona and Pacific Northwest), it took about 3-5 months for margins to normalize.  PFCB had said on its 1Q10 earnings call (and reiterated today) that this program would continue to be a slight drag on margins in the second quarter.  However, he said that with a little wind behind the Bistro from a sales perspective, combined with the price increase taken in May, operating margin should get better in the second quarter.


Mr. Vivian also outlined some potential issues, which he referred to as “black clouds”:


Europe…the company is not yet seeing any pressure that he could link directly to the recent issues in Europe.


The Gulf…Longer term, he is more concerned with the potential impact of a slowdown in drilling, particularly in Texas, which is an important state for the company from a sales perspective.



Howard Penney

Managing Director


The Macau Metro Monitor, June 9th, 2010



During the 2010 Global Gaming Expo Asia (G2E Asia), 75% of gaming experts surveyed believe the torrid growth in GGR will last at least until 2013.  Also, Galaxy's Deputy Chairman, Francis Lui, warned of the unsustainable growth in VIP gaming and suggested operators focus on the Chinese middle class, whose spending power may almost triple by 2025.  Furthermore, according to Hong Kong-based consultant Gary Pinge, the Chinese mass-market players will keep coming to neighboring Macau, not to Singapore. “The cannibalisation of these two hubs will be very limited,” assured Pinge. “Only the VIP gamers will fluctuate between different markets,” he explained.


Many experts believe Japan will be the 2nd largest casino market in Asia during the next decade.


CASINO REVENUES TO GO UP 30% IN 2010: DICJ'S DIRECTOR macaubusiness.com

Manuel Joaquim das Neves, the director of Macau’s Gaming Inspection and Coordination Bureau, told Reuters in an interview that GGRs are likely to increase by 30% YoY for 2010.  The previous forecast was a growth rate of 10-15%.




The S&P finished 1.1% higher on a choppy day.  The parts of the market that are leveraged to the RECOVERY trade bounced from an intermediate term oversold condition.  The MACRO headwinds that drove the S&P 500 down 12.7% from the peak remain a constraining factor in our models, as it was a relatively quiet day on the US economic calendar. 


After the close, the ABC Consumer Confidence print was -43 for the week ending June 6th vs. -44 last week.  On Friday, we will get a look at the preliminary U. Of Michigan consumer confidence number, this is expected to improve to 74.5 vs. 73.6.    


Also overnight, China was up 2.8% (down 21.1% YTD) on a Reuters report that the country’s May CPI rose 3.1% year-over-year, May exports grew 50% vs. Bloomberg consensus of 32%, and May new loans were CNY630B vs. Bloomberg CNY600B. The official figures are to be released on June 11th.  China remains a growth story on sale, but timing and price remain important.


Treasuries were weaker yesterday with the focus on this week's auctions, while the dollar index was basically flat on the day.  The Risk Management models have the following levels for the USD – Buy Trade (87.32) and Sell Trade (88.51).  The VIX was down 7.8% and is still in a bullish formation.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (31.91) and Sell Trade (38.34).


The Euro saw a late-morning bounce, but gave back the bulk of its run-up fairly quickly, closing up 0.16% on the day.  The Euro is trading down again today as there is a healthy degree of skepticism regarding EU efforts to restore fiscal credibility in the region.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.18) and Sell Trade (1.21).


Commodity equities were among the best performers today, while financials also fared well with a run-up in the banking group led by the regional names.  The Materials (XLB) was the best performer today, rising 2.3%.  Gold continues to move higher with the XAU up 1.3% on the day. While copper is still in a BEARISH formation, the industrial metals names outperformed, with the copper centric names SCCO up 6.3% and FCX up 4.8% leading the way.  Steel stocks snapped a four-day selloff with the S&P Steel Index up 2.7%. DD rose 4.1% led the chemicals group higher after the company reaffirmed FY10 guidance.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.69) and Sell Trade (2.97). 


Despite the deepwater drilling issues, the Energy sector outperformed.  Coal and E&P names were among some of the notable gainers despite the pullback in natural gas. Natural gas has rallied sharply over the last couple of weeks, up 13.2% in the past week.  The oil services group was a laggard, but still managed a decent bounce with the OSX +0.8%. The deepwater drillers suffered with RIG down 5.8%, DO down 3.8% and NE down 1.4%.


Today OPEC said it will need to pump less crude than previously thought this year as production from outside the group increased more than forecast.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.64) and Sell Trade (74.83).


Technology (XLK) was the worst performer sector yesterday; the XLK declined 4.6% on Friday and Monday.  The semi group has been under considerable pressure, though yesterday it finished well off its worst levels for the session with the SOX down 0.4%.  Upbeat corporate commentary from ALTR +0.1%, which raised the low-end of its Q2 revenue growth guidance range, failed to provide any support


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,221) and Sell Trade (1,242).   


As we look at today’s set up for the S&P 500, the range is 37 points or 2.0% (1,041) downside and 1.5% (1,078) upside.  The Mortgage Bankers Association’s application index dropped 12% last week; the refinancing gauge dropped 14%, while purchases fell 5.7% to the lowest level since February 1997.  We continue to be bearish on Housing in 2H10.


Howard Penney













Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Avoiding Leverage

“A clever person solves a problem. A wise person avoids it.”

-Albert Einstein


There is a big difference between levered and unlevered growth. There is an even bigger difference between growth manufactured by a levered government dollar and private one. Leverage can work both ways. Leverage can also blow you up.


There is a time to take on leverage. There is a time to avoid it. The Fiat Fools of a failed Keynesian ideology of massive government debt financed deficit spending are learning this lesson the hard way. An American or Greek professional politician will tell you he can solve this problem. A wise risk manager will tell you to get out of the way.


If President Obama, Ben Bernanke, and Timmy Geithner don’t start getting serious about America’s leverage ratios, this country is heading down a European style road to perdition. Avoiding Leverage should be the leadership message in this country, not daring us to take on more of it.


The good news is that Western professional politicians don’t have to take my word for it. On the East side of this interconnected global economy, the Chinese, Indians, and Australians are leading by example. They continue to tighten the screws on lending. They continue to teach their citizenry to respect the cost of capital. They continue to remind their people that borrowing short to finance long term debt liabilities is bad.


Consider the explicit warning coming out of our favorite central banker in the world, Glenn Stevens, this morning. At a business meeting of the minds in Sydney, the Chief of the Reserve Bank of Australia delivered the following messages:

  1. “However well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks – such as a fall in income – to a greater extent than would be prudent.”
  2. “Australia’s budgetary position is very different from those in Europe and, for that matter, most countries”
  3. “Public debt is low and budget deficits are under control and already scheduled to decline.”

Notwithstanding that Australia’s housing sector continues to see huge price increases year-over-year, Australians continue to listen to their leadership. Home loan approvals have dropped -25% in the most recent 6 months, diverging big time from the nominal cost of those homes. Why? The cost to finance a home has gone straight up because Stevens raised rates 6 times during what was the world’s cyclical V-shaped recovery!


This is the critical lesson that Stevens is teaching his people – RESPECT THE COST OF CAPITAL – and whatever hard earned capital you sink into these fertile Australian grounds won’t be burned at the stake of some Fiat Fool currency policy.


Moving on…


I don’t know what sadistic calculations the US government is using for my children for either 2011 deficit/GDP or debt/GDP, but however clever these professional politicians pretend to be, I don’t get paid to buy their storytelling. Much like the Japanese, we are being trained to not respect the cost of capital in this country and, as a result, capital will avoid coming to us in the end.


Just to prove that I am not living in the land of nod on this, here are the results of what Americans think:


USA Today/Gallup Poll on top “Perceived Threats to US Future Well Being”

  1. Terrorism = 40%
  2. Federal US Debt = 40%
  3. Healthcare Costs = 37%

Bingo. When it comes to slapping Wall Street’s hands, Americans have been there, done that. They don’t care about professional politicians going for that win as much as they care about the physical and financial safety of their families. Duh.


Finishing in 4th place was Unemployment at 33%, so what’s the calculus to understand here? The clever politicians attempt to solve #3 (Healthcare) and #4 (Unemployment) by levering up #2 (Federal Debt). Nice.


God help us all if another exogenous event like #1 (Terrorism) comes to these American shores, because we have put our country’s balance sheet in an extremely precarious position whereby we can’t finance war without blowing out our deficit well beyond the ratios of Spain or Greece. What we’ve been wise enough to avoid can quickly become a problem.


My immediate term support and resistance lines for the SP500 are now 1041 and 1078, respectively. The stock market is finally getting Bearish Enough on this political mess. It should be. Hopefully we’ll find some change in this country via this market vote.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Avoiding Leverage - Pic

Stock market dives: leading economic indicator, or recurring false alarm?

How 'Bout Them Earnings?

Conclusion: Despite sovereign debt concerns out of Europe getting most of the attention, China still leads the way when it comes to the forward outlook for global growth. With that said, continued slowing in China will not bode well for U.S. Equities – despite a hopeful  2H10 domestic earnings growth story.


We’re setting up to subtract one more point from the bullish case for U.S. equities – earnings. Perma-bulls have been touting the 2H10 EPS growth story as the lone savior for U.S. equities and it looks like that could roll over if China continues to slow.


Our proprietary Hedgeye China Index combines the Shanghai Composite, Hang Seng, and Copper – all of which are leading indicators for global growth – and is one important analytical tool we use to get a read-through on the forward global growth outlook. You’ll note that our index peaked on April 14th – nine days prior to the 4/23 cyclical peak of the S&P 500.


Since then, we’ve seen lower-lows in the Hedgeye China Index – which, much to the dismay of U.S. equity perma-bulls, happens to coincide quite nicely with 2010’s unreported S&P 500 EPS estimates. In fact, the trailing three month positive correlation between the two series is 0.95. That’s an r-squared of 0.91, which, by all statistical measures, is very significant.


Over the last three months, the unfolding of the European sovereign debt crisis has dragged down many global equity markets and the remaining bulls out there are failing to realize is that that issue is not going away any time soon. In fact, we expect a European-style sovereign debt crisis to manifest itself in the U.S. over the next 3-6 months. Combine that with our bearish outlook on U.S. housing prices and the U.S. consumer, and it’s easy to see why the 2H10 U.S. earnings growth story won’t be enough to hold firm the fading bid for U.S. equities.


Darius Dale



How 'Bout Them Earnings? - Hedgeye China Index


How 'Bout Them Earnings? - Hedgeye China Index short term

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