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From our understanding, Wynn is holding only around 2.6% thus far in August, which explains some of the sequential market share loss.



We continue to think the Macau narrative for Wynn may soon turn to Encore and the seemingly lack of incremental contribution from the sister property.  Market share will likely be a focus.


In July, the Wynn properties posted a disappointing market share of 15%, the lowest full month share since Encore opened in April.  Through the 8/15, Wynn's share fell further, to only 12.8%.  By contrast, Wynn's June market share was 17.4% and averaged 14.2% in the 12 months prior to Encore opening.


Our sources indicated that Wynn's August hold % fell to 2.6%, below a Wynn's average hold of of 3% since 2007.  We calculate that if Wynn's hold was 3%, its market share would have been 14% in the first half of August.  14% is not good enough either.


We recognize that we don't have the data yet to normalize everyone's share so this analysis is not as useful as it could be.  However, what is clear is that Wynn is on track to post its second straight month of disappointing market share with Encore.  Given the overall market strength, this may not matter but at some point, overall growth will slow and market share will become a more important metric in the eyes of investors.  At that point, a narrative of disappointing ROI from Encore may be the story that will start to be told.


Burger King is scheduled to release earnings tomorrow pre-open, here is a look at guidance and key focus points.


I continue to hold my view that trends at MCD are impeding its fellow mature hamburger chains from posting better-than-expected results.  Commodity prices, (beef, pork, and wheat in particular) are trending higher and this will make it difficult to maintain margins in the second half of calendar 2010. 


Burger King introduced a new premium product, Fire-Grilled Ribs, to major markets in May.  Despite my initial skepticism, reports indicate that sales of the product have been going well.  Also, the higher price point must be assuaging the painful squeeze franchisees endured during the $1 Double Cheeseburger promotion. 



  • Per StreetAccount, the Street is anticipating a US & Canada system comparable store sales number of -1.7% which would imply a sequential slowing of two-year average trends of 85 bps
  • To maintain or sequentially improve two-year average US & Canada system comparable store sales trends, BKC will need to print a number of 0% or better


  • As it relates to fourth quarter fiscal 2010 worldwide system comparable sales, the company expects worldwide system comparable sales to improve sequentially compared to the reported third quarter fiscal 2010 worldwide system comparable sales of negative 3.7 percent.
  • April traffic in the U.S. continues to be positive while comp sales, albeit negative, have been slightly better than March.  “Cautiously optimistic” outlook for sales in the rest of the quarter.
  • Over the “long term”, average annual worldwide comparable sales growth of 2 to 3%.
  • Over the “long term”, average annual revenue growth of 6 to 7%.
  • No EPS guidance due to continued consumer uncertainties.
  • U.S. food costs are expected to increase 4% in the fourth quarter versus last year, primarily driven by an increase in beef prices offset by a decrease in contracted chicken costs and other commodity decreases.
  • The company is on track in both net new restaurant openings and on restaurant reimaging initiatives.  The guidance at the start of the fiscal year was for net restaurant growth, over the “long term”, of 3 to 4%.
  • In June, management took down the net restaurant growth number for FY10 from 150 to 300 to 230 to 250 due to exiting the Israeli market


  • Food costs increased during the 3QFY10 quarter due primarily to a 9% jump in beef costs


Howard Penney

Managing Director

Getting Ready To Short Natty

Conclusion: While it is not quite at our price, natural gas is broken from a quantitative perspective and negative fundamentals continue to build and loom.


While I was out on vacation last week, the research machine at Hedgeye continued to grind forward.  Our Energy Sector Head (who is launching next month) Lou Gagliardi, continued to hit the team with updates from the global oil patch.  Lou forgets more about the energy industry in a day than most of us will ever know, so his thoughts are always insightful and worth reading. I’ve borrowed from his notes to outline our key negative fundamental case for natural gas in the report below.  In summary, the bearish case is threefold: growing inventory, accelerating production, and likelihood of a future step down in future demand.


Production – Over the past five years in the United States the advancement of drilling technology has allowed domestic gas producers to dramatically ramp up production due to the ability to access more diverse natural gas basins, in particular shale areas.  As a result of this advancement in technology, we have seen a step up in the amount of natural gas produced in the domestic United States.  Both 2008 and 2009 showed domestic production levels of north of 20 million Mcf for the full year.  The last time we saw this type of production was in 1974!  As a result of technology and massive shale development, we are in a new paradigm of natural gas production in the U.S., which will serve to keep a lid on the upside to the price of the commodity.  We have highlighted this point in the chart immediately below, which shows monthly production going back to 1997.


Getting Ready To Short Natty - 2


Looking forward production growth is also poised to accelerate in the U.S. based on rig count.  Since March 5, 2010, rig count has been growing on a year-over-year basis.  In fact, since the second week of July, rig count in the U.S. has been up more than 40% versus last year every week and currently there are 985 natural gas rigs operating in the U.S.  The more drilling that occurs, the more that future production will grow.


Inventory – Natural gas stocks closed this week at 3,012 Bcf, which surpassed the 3,000 Bcf mark for the first time since January 1, 2010.  While we are heading into the period in which there are seasonal builds of natural gas, storage levels remain at the high end of their 5-year range. The five year maximum for the most recently reported week is 3,142 Bcf, the five year minimum is 2,816, and the average for that period is 2,816.  Currently, inventory in the U.S. is sitting at 7% above its 5-year average, and just 4% below the maximum.


The maximum levels of natural gas in storage occurred last year.  In fact, on August 31, 2009, natural gas hit a record for August of 3,352 Bcf in storage, but currently levels are slowly inching towards those levels.  Interestingly, despite the fact the inventory levels are nearing 2009 record levels and production is poised to accelerate given rig activity, the price of natural gas is well above levels of 2009.  In fact, the September 2010 contract is currently priced about 49% higher than the expiration price of $2.84/MMBtu for the September 2009 contract.


Demand – Given that natural gas is a domestic based commodity, it is primarily driven by economic growth within the United States (and also coal prices which lead to switching in power plants).  As we have aggressively been articulating, we believe the U.S. economy is poised to slow sequentially, which will be negative for energy consumption.  Slow growth in the U.S. has a negative impact on natural gas price.  In fact, as we wrote on August 11th, 2010:


“We also took a quick look at the returns of natural gas, the commodity which is priced domestically and most directly impacted by U.S. economic growth.  Not surprisingly, the results were very similar.  For this analysis we were only able to look at the past 10-years of data, but in the four years with the highest GDP growth in that period the average year-over-year price gain for natural gas was +16.8%, while in the four years with the lowest GDP growth prices declined an average of (-3.4%) year-over-year.”


The statistic above is likely not surprising given that more than 1/3rd of natural gas use in the United States is used for industrial purposes, which are highly dependent on economic growth.


In the chart below, we’ve highlighted a price chart of natural gas with its TREND line at $4.49 as of the open today.  While we aren’t short currently, given the negative fundamental backdrop and bearish quantitative set up, we will likely be looking to short at, or around, that level.


Daryl G. Jones

Managing Director


Getting Ready To Short Natty - 1

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EARLY LOOK: The Deuce - Chart 1



"Nobody can really guarantee the future. The best we can do is size up the chances, calculate the risks involved, estimate our ability to deal with them and make our plans with confidence."
- Henry Ford II

Staying as far away as I can from America’s professional politicians on Washington’s Sunday talk shows, this morning I’m rolling with an outstanding risk management quote from the man they called “The Deuce”, Henry Ford’s grandson, Henry Ford II.
According to my good friend who is currently working for Ford, Henry Ford II “doesn’t quite get the historical credit he deserves and is often remembered for his personal gruffness and feud’s with Lee Iacocca in the 1970’s, but his leadership and accomplishments during his era at Ford were amazing.”
After serving in the Navy in WWII, Henry Ford II came home to rid his family’s company of complacency and bureaucracy. He may not have been as “experienced” or as “polished” as some of America’s corporate executives are today, but as President of the Ford Motor Company (1945-1960) then CEO (1960-1979), he definitely sized up chances, calculated risks, and executed his plans with confidence.
Ford came public under Henry Ford II’s leadership in 1956. Don’t worry, I’m not wasting this morning’s missive on General Disaster’s pending IPO.  Instead, I’m going to get right into the math associated with last week’s macro market moves and focus specifically on the impact of another deuce – the US Dollar not going down for the 2nd week in a row!
Now before we get into some Dollar correlations, let’s first realize this: a deuce does not a TREND make. In our TRADE, TREND, and TAIL risk management process we are wed to 3s. In order for us to start thinking about shifting a strategy point of view (like covering our short position in the USD), we need to see at least 3 consecutive weeks confirm the direction of price.
Last week the US Dollar Index was barely up week-over-week (by +0.13%) for just the 2nd week in the last 12, closing out the week at $83.06. This followed the prior week’s significant +3.2% week-over-week move off of its recent 12-week low after Ben Bernanke didn’t give into the Fiat Fools begging for quantitatively easing America into becoming the debt-laden bureaucracy of Japan.
Measuring the math associated with a US Dollar Index not going down on our most immediate term risk management duration (TRADE = 3-weeks or less) is actually quite revealing.
The following are the 3 most negative TRADE (or inverse) correlations to the US Dollar:

  • SP500 = -0.97
  • Crude Oil = -0.94
  • Commodity Index = -0.93

Here are the 3 most positive TRADE correlations to the US Dollar (again, using 3-weeks or less as our duration):

  • Coffee = +0.85
  • Cotton = +0.79
  • Gold = +0.75

In other words, the decision by the Fed NOT to obliterate the credibility of America’s currency in one fell swoop has really hammered US stocks and the price of oil. The size of the Fed’s balance sheet actually contracted for once last week by $13.9B to $2.32 TRILLION.
Maybe not so ironically, prices at the pump going down also lifted US Consumer Confidence. In the last 2 weeks, despite stocks going down, the ABC/Washington Post Consumer Confidence reading has improved from minus -50 to minus -45.
In the very immediate term, could it be that The Deuce  of Dollar UP has provided Americans with some things that they really want?

  1. The value of their currency stopped burning.
  2. The price of oil is down -8.6% in the last 2 weeks.
  3. The probability of their least favorite American politician being voted out keeps going up.


Food for thought on a Monday morning in America where all that is conventional wisdom about the Fiat Republic’s dollar devaluation policy is ripe for change. It’s time we “estimate our ability to deal” with change and start leading this country with confidence.
My immediate term TRADE support and resistance lines for the SP500 are now 1059 and 1087, respectively.
Best of luck out there today,

August’s Turn

Our call has been for an inflection in European data in August to the downside.  Today, PMI Manufacturing data showed a significant decline in Germany and for the Eurozone average. Services also fell in France and the Eurozone, while German Services continued their steady gain.  We contend that Manufacturing and Services numbers from Europe, especially Germany, France, and the UK, will trend downward throughout the remainder of the year.


As we’ve outlined in previous notes, our thesis for this slowdown includes: 

  1. August Data - we expect to see a sequential slowdown (month-over-month) in the fundamental data following the exuberance of the World Cup.
  2. Headwinds  - European markets will be pinned against significant macroeconomic headwinds in the back half of 2H10, including suppressed growth, consumer demand, and confidence as a result of government austerity measures.
  3. Housing - continued downward pressure on the housing market, in particular in Spain and the UK.
  4. Legacy - ongoing uncertainty about European sovereign debt, including bank exposure to sovereign debt, which was largely unaccounted for in the 91 bank stress test, as well as continued fiscal and political weakness throughout the region (Greece and Hungary in particular).

Matthew Hedrick


August’s Turn - m1


August’s Turn - m2


Last week, 2 of the 8 risk measures registered positive readings on a week-over-week basis and 6 were negative.  The metrics mostly showed modest declines, with the TED spread the only significant bright spot.  


Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (29 companies)

2. CDS for large European Financials (39 companies)

3. High Yield

4. Leveraged Loans

5. TED Spread

6. Journal of Commerce Commodity Price Index

7. Greek Bond Spreads

8. Markit MCDX


1. Financials CDS Monitor – Swaps were modestly negative last week.  Swaps tightened for 9 of the 29 reference entities, while 20 widened.    Conclusion: Negative.


Widened the most vs last week: AXP, AIG, MMC

Tightened the most vs last week: MTG, UNM, MBI

Widened the most vs last month: JPM, BAC, PMI

Tightened the most vs last month: MET, MBI, PRU




2. European CDS Monitor – In Europe, swaps for 22 of the 39 reference entities widened and 17 tightened.   Conclusion: Negative.


Widened the most vs last week:  Erste Group, KBC Group, Bank of Ireland

Tightened the most vs last week: DnB NOR, Sberbank, Svenska Handelsbanken

Widened the most vs last month: Intesa Sanpaolo, Societe Generale, Hannover Rueckversicherungs

Tightened the most vs last month: DnB NOR, Nordea Bank, Svenska Handelsbanken




3. High Yield (YTM) Monitor –High Yield rates were almost flat last week, rising 1 bp. Rates closed the week at 8.48% versus from 8.47% the week prior. Conclusion: Negative.




4. Leveraged Loan Index Monitor – The leveraged loan index rose 1 point last week, closing at 1492 versus 1491 the week prior, its second week with almost no change.  Conclusion: Positive.




5. TED Spread Monitor – Last week the TED spread continued to fall, closing at 18 bps versus 22 bps the prior week. Conclusion: Positive.




6. Journal of Commerce Commodity Price Index – Last week, the index fell 1 point, closing at 12.73 versus the prior week’s close at 13.65.  Conclusion: Negative.




7. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 27 bps, ending the week at 1075 bps versus 1048 bps the prior week. Conclusion: Negative. 




8. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads rose last week, closing at 220 versus 213 the prior week.  Conclusion: Negative.




Joshua Steiner, CFA


Allison Kaptur

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%