prev

REGIONAL TRENDS LIKELY WORSENED AUGUST

With IL, IN, and IA already reported, August is looking worse than July on an absolute basis, after adjusting for seasonality.

 


As we did for lodging – yes, 10% RevPAR growth in August actually represented a slowdown – we’ve taken a look at sequential regional gaming trends on an absolute basis.  Of course, we adjust for seasonality since August is typically a better than average month but slower than July while September is one of the slowest months of the year.  Ignoring YoY changes is prudent in our opinion given the extreme volatility over the last two years. 

 

Seasonally adjusting the July actual revenues yield August regional gaming revenues of $1.047 billion, up 2% over last year.  However, Illinois, Indiana, and Iowa have already reported August, and they were all disappointing relative to July.  Plugging in those actual numbers, we arrive at a new estimate of $1.029 billion, flat with last year.  But that assumes that Louisiana, Mississippi, and Missouri are also not disappointing.  Since the regional markets tend to be impacted by the same macro factors, those three states could come in lower.  Thus, we believe August gaming revenues may come in at -1% to -3%. 

 

Based on July, the seasonality model would’ve projected September to be up almost 2% but if we are right on August, that would lower our September estimate to -2% and our October estimate to -4%.  Looking further ahead, November could be the first positive YoY month, but just barely, while December has more cushion and should be a positive growth month.  Nevertheless, these don’t sound like recovery numbers just yet.

 

REGIONAL TRENDS LIKELY WORSENED AUGUST - regional final


Covering our S&P 500 Short

This note was orinigally published at 3:02pm ET for Risk Manager Subscribers.  To receive Macro Select Content, and our Virtual Portfolio positions in real-time, please sign-up for a 14-day free trial or as a RISK MANAGER subscriber.

 

 

 

__________________________________________

Position Changes Today: Covered SPY, Bought EWG

I attempted to explain this today in my EL titled “Feeling Strange”, but I think it’s worth repeating. Duration Mismatch crushes performance and the best way to avoid it is having a Duration Agnostic risk management process.
 
As a reminder, we have 3 core durations that we manage risk around: TRADE, TREND, and TAIL.
 
Currently, the SP500 is bullish from an immediate term TRADE perspective (support = 1085)
and bearish from an intermediate term TREND perspective (resistance = 1144). That means that we can be mentally malleable enough to admit that the immediate term upside in the SP500 is more probable than the immediate term downside. Be sure not to confuse this with pretending you are going to be the next Buffett – keep a bullish TRADE a trade.
 
Both the DATA (ABC confidence, MBA mortgage apps and jobless claims) and the SP500’s PRICE support this immediate term bullish view. You might say, heh last week you shorted the SPY and how can you change your mind that quickly? Well, for starters, I didn’t have this week’s DATA or PRICES in my back pocket when I made that move earlier last week. The key to risk management isn’t being wed to a view that was based on prior DATA and PRICES.

If next week’s DATA turns back to bearish and the SP500 breaks 1085 again, I’ll short SPY again. As is customary, all my moves are on the tape – I have done nothing but cover and buy positions in the Hedgeye Portfolio since 11:02AM on September 3rd.
 
If the SP500 closes above our immediate term resistance line of 1107, I see heightened probability of this pain trade taking us all the way back up to another lower-high of 1123. And from a bearish intermediate term TREND perspective, nothing will have changed other than immediate term DATA and PRICES.

 

 

Covering our S&P 500 Short - chart1

 

 
Stay transparent my friends,
KM


Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...

Position Changes Today: Covered SPY, Bought EWG

 

I attempted to explain this today in my EL titled “Feeling Strange”, but I think it’s worth repeating. Duration Mismatch crushes performance and the best way to avoid it is having a Duration Agnostic risk management process.

 

As a reminder, we have 3 core durations that we manage risk around: TRADE, TREND, and TAIL.

 

Currently, the SP500 is bullish from an immediate term TRADE perspective (support = 1085) and bearish from an intermediate term TREND perspective (resistance = 1144). That means that we can be mentally malleable enough to admit that the immediate term upside in the SP500 is more probable than the immediate term downside. Be sure not to confuse this with pretending you are going to be the next Buffett – keep a bullish TRADE a trade.

 

Both the DATA (ABC confidence, MBA mortgage apps and jobless claims) and the SP500’s PRICE support this immediate term bullish view. You might say, heh last week you shorted the SPY and how can you change your mind that quickly? Well, for starters, I didn’t have this week’s DATA or PRICES in my back pocket when I made that move earlier last week. The key to risk management isn’t being wed to a view that was based on prior DATA and PRICES.

 

If next week’s DATA turns back to bearish and the SP500 breaks 1085 again, I’ll short SPY again. As is customary, all my moves are on the tape – I have done nothing but cover and buy positions in the Hedgeye Portfolio since 11:02AM on September 3rd.

 

If the SP500 closes above our immediate term resistance line of 1107, I see heightened probability of this pain trade taking us all the way back up to another lower-high of 1123. And from a bearish intermediate term TREND perspective, nothing will have changed other than immediate term DATA and PRICES.

 

Stay transparent my friends,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Market Macro: SP500 Levels, Refreshed... - 1


Early Look

daily macro intelligence

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.

CHART: Three Currency Monte

The chart was extracted from a note dubbed "THREE CURRENCY MONTE" issued to Risk Manager Subscribers earlier today, September 9, 2010.  Sign up for a free-trial or subscribe for access to the note, Macro Select updates and the real-time portfolio.

 

__________________________________________________________________________________________________

The past couple of days have provided some interesting commentary and data points out of Asia and the U.S. as it relates to the yuan, the yen, and the dollar. We remain bullish on the Chinese yuan from a TAIL perspective, bearish on the U.S. dollar from a TAIL perspective and bearish on the Japanese yen from a TREND perspective.

 

 

CHART: Three Currency Monte - Screen shot 2010 09 09 at 1.23.57 PM


COSI - ALL ROADS POINTS NORTH

I recently met with CEO Jim Hyatt at a COSI in NYC.

 

Normally when you schedule to meet a restaurant executive at a store they pick one that has recently been renovated.  For my meeting with Jim, he picked a store on 6th ave in NYC that is actually under renovation (it was going to get a new coat of paint that night).

 

How fitting that our first meeting should be at that location; the store serves as a perfect metaphor for the stock.   The perception of passersby in the street, and of investors on Wall Street, is that the store and stock, respectively, are undergoing renovation.  What the street does not see yet is how good things are going to look when it is finished.  I have never met Jim before but he seems to be the right person for what is needed at COSI - a restaurant operator. 

 

By way of background, Jim was a multi-unit Burger King franchisee and was recruited to join Burger King's corporate operations in 2002.  From 2002 until his promotion to Chief Operations Officer in 2005, his responsibilities at Burger King included Senior Vice President, Operations Services and Programs; Senior Vice President, U.S. Franchise Operations; and Executive Vice President, U.S. Franchise Operations.  Mr. Hyatt was Executive Vice President & Global Chief Operations Officer of Burger King Corporation from August 2005 until joining Cosi in September 2007.

 

Cosi has had a rocky time as a public company.  First, it went public before it was ready and it was owned and operated by executives who only knew how to grow the store base.  With an overly-aggressive store grow came a corporate infrastructure that did not allow the company to make money.  As I see it, the old management team never figured out the operating model but they continued to open stores regardless.  Needless to say, a disaster ensued but that is all history.

 

Since joining in 2007, Jim’s operating mentality has been to right-size the ship - close unprofitable stores and get the cost structure of the company better aligned.  In addition, he needed to get all the units operating under one common platform.  Unfortunately, between the time he joined and the results he is posting today, the consumer environment got significantly worse. 

 

While we are still looking at a difficult consumer environment, the company that has spent the last three years focused on operations and profitability and they should reap significant rewards from their efforts.  We are only now just seeing the fruits of all that work and there is still much to do. 

 

COSI operates in the more upscale “quick casual” segment of the industry which is seeing better trends than other segments in the restaurant industry.  Like others in the “quick casual” space COSI offers a comfortable and contemporary atmosphere.  It’s a restaurant that appeals to young generations who want to relax, eat, and use their mobile devices.  Not to mention that the signature bread creates customer loyalty.

 

For 2Q10, system same-store sales increased 3.1% with franchise sales up 2.6% and company-owned sales up by 3.3% (traffic increased 3.1% in the quarter).  On the 2Q10 earnings call COSI reported that July was up 8% and represented the fifth consecutive month of positive same store sales.  I believe that August and September will make it seven straight months. 

 

The improvement COSI is seeing in the top line is coming from all day-parts: catering, breakfast, lunch, snack and dinner.  The biggest winner on a percentage basis is breakfast with growth well above 8%.  More importantly, next week in Chicago COSI will be testing online ordering and online catering.  If all goes well, the online ordering initiative will be rolled out by the end of November.  Early indications are that this could accelerate same-store sales or, at a minimum, give strong visibility for same-store sales growth well in to 2011 and 2012.  

 

The current growth in same-store sales is also being driven by increases in, and more efficient use of, marketing dollars.  With the help of a new advertising agency, COSI has increased spending on “out-of-store” media to increase awareness of the brand and drive incremental traffic.  COSI also has a newly designed website, menu boards and a new social media team in place to drive the marketing effort. 

 

Given the current sales trends and the appeal of the COSI concept, it will not be long before the franchise community is on board.  The better the numbers the company puts up the increased likely hood the company can refranchise stores to new franchisees and see growth from the existing franchise base.  I would also not be surprised to see the company sign a couple of foreign franchise agreements.  

 

If we assume a 45% flow-through on every additional sale coming through the store base and 8%+ same-store sales (and take into account the company’s ability to control costs), there is a very high probability that the COSI will be profitable in 3Q10.

 

Lastly, Jim offered up his 2020 vision for the company.  With the backdrop of a concept with a strong operating model, unit growth will occur over time.  So where does he see the company in 2020? He believes that COSI will have 500 stores in the U.S. and 150 overseas.

 

COSI - ALL ROADS POINTS NORTH - cosi pod1

 

Howard Penney

Managing Director


Three-Currency Monte

Conclusion: The past couple of days have provided some interesting commentary and data points out of Asia and the U.S. as it relates to the yuan, the yen, and the dollar. We remain bullish on the Chinese yuan from a TAIL perspective, bearish on the U.S. dollar from a TAIL perspective and bearish on the Japanese yen from a TREND perspective.

 

Position: Long the Chinese Yuan (CYB); Short the U.S. Dollar (UUP); Short the Japanese Yen (FXY)

 

The past couple of days have provided some interesting commentary and data points out of Asia and the U.S. as it relates to the yuan, the yen, and the dollar. While certainly not points of inflection within the broader context, we do think these incremental nuggets are worth consideration when formulating your intermediate-to-long-term currency outlook.

 

China:

 

The latest unverified rumor out of China is that the central bank may allow the yuan to start trading versus the Russian ruble within 2-3 weeks. The rumor is based on a circulating central bank document which is proposing to allow Chinese banks to apply for ruble trading. Currently, China only allows trading of its currency with the U.S. dollar, Hong Kong dollar, Japanese yen, the euro, and the British pound and Malaysian ringgit. Extending these agreements to countries like Russia and potentially Brazil will increase cross border trade using the yuan, which more than doubled in 2Q10 vs. 1Q10 to 48.7 billion yuan ($7.2 billion). Natural byproducts of that include further upward pressure on the yuan and further downward pressure on the U.S. dollar, as it becomes less relevant internationally on the margin. We expect that to be bullish for commodity prices over the long term.

 

Japan:

 

Data from Japan’s Finance Ministry shows that China bought more Japanese bonds than it sold in July for the seventh straight month (a sequential acceleration: net purchase of 583.1 billion yen in July vs. 457 billion yen in June). Unfortunately for Japan, this comes at a time when the yen is near a 15 year high vs. the U.S. dollar, creating massive negative implications for Japanese exporters absent Japanese government intervention in the FX market – which Japanese Finance Minister Yoshihiko Noda said he was willing to do yesterday.

 

This “crisis” has Noda essentially begging China to stop, saying today that “it’s inappropriate for China to buy Japanese bonds without a reciprocal ability for Japan to invest in China’s market… I feel strange that China can buy Japanese bonds while Japan can’t buy theirs.”

 

Putting these statements into context, we interpret these comments as Japan saying to China, “enough is enough”, given the economically damaging surge in the yen. Interestingly, a report from Barclays Plc. in Tokyo suggest that China’s purchases of JGB’s consist mainly of short term debt, which is a tactical move of sorts designed to take advantage of a rising yen.

 

China’s reply was in line with their recent displays of international power and influence: “Our management always adheres to security, liquidity, and good value. We will decide whether or not to buy one country’s bonds according to our own needs.” Let us recall that China has nearly liquidated its holdings of short term U.S. Treasury bills (98% decline since peak holdings of $210.4 billion in May ’09) in the context of a Burning Buck. As long as this trend continues (which is likely given Bernanke’s resolve to support the U.S. economy by any means necessary), we expect China to keep providing incremental upward pressure on the yen – further increasing the likelihood of Japanese government intervention to weaken the currency.

 

U.S.:

 

U.S. Treasury Secretary Timothy Geithner said today that China must let the yuan rise more quickly to show trading partners that it’s following through on its promises. He continues: “Frankly, they haven’t let the currency move very much so far. They know that they’re just at the beginning of that process and I think we’d like to see them move more quickly.” We’ve seen from month’s past that China has been reluctant to give in to external pressure regarding the yuan, so we doubt this round of badgering will end differently. It could, however, spur increased talk of anti-dumping legislation out of Washington. Just last week, Obama rejected a plea from U.S. manufacturers to increase duties on imports from China, though a Republican house and a GOP seat gain in the Senate could allow such bills to pick up momentum should the midterm elections end up as we expect.

 

Darius Dale

Analyst

 

Three-Currency Monte - 1


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 80.64%
  • SHORT SIGNALS 78.57%
next