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PENN’s stock has done well as table games have taken off in West Virginia and some regional markets are finally stabilizing. We think Q3 will come in above guidance and a little ahead of the street.



PENN should beat company guidance and consensus by a decent amount when it reports Q3 earnings next Thursday.  How do we know?  We don’t for sure – we’d have to have inside information to know that – but we do know that numbers have trended a little better and costs shouldn’t be going anywhere, yet.


For Q3, we are projecting EBITDA and EPS of $161 million and $0.37, respectively, versus the Street at $153 million and $0.33.


The introduction of table games in West Virginia and PA should add $40MM of sequential revenues alone to PENN’s 2Q revenues of $598MM and at least $11MM of EBITDA if we assume last quarter’s margins for each respective property.  Aside from WV and PA, PENN’s Mississippi properties and Bangor should have a sequential uptick in revenues.   In addition, most of the racetrack properties should post positive comps.  The rest of the portfolio is not as exciting with mostly flat or slightly down same store EBITDA at most of them.  The two other large positive deltas from last year will be corporate expense – down $9m due to huge lobbying expenses in last year’s Q3 – and lower interest expense.


Conference call commentary will be similar to Q2 in the sense that it will be cautious, but on the margin it should be slightly more bullish.  Table games play is off the charts in West Virginia and PA, and there appears to be a little more certainty and stability in most of the regional markets.


PENN and PNK still look like the regional operators with the most credible investment stories. 


The Macau Metro Monitor, October 15th 2010



A unit of New Cotai filed suit against S'pore developer CapitaLand Ltd, eSun Holdings Ltd. and their unit East Asia Satellite Television Ltd., of breach of contract, inducement of those breaches and unlawful conspiracy over their deal concerning Macao Studio City.  "We are disappointed that these legal proceedings had to be initiated," said New Cotai Chief Executive David Friedman. "However, after making exhaustive efforts to resolve the situation amicably, we believe we had no choice but to take this step to protect our investment and Macao Studio City."  CapitaLand—which has an effective 20% interest in the project—said on Thursday that "eSun has affirmed an indemnity in favor of CapitaLand in respect of any losses which may be suffered by CapitaLand in any legal proceedings" brought by New Cotai regarding the Macao Studio City project.


WHEN WILL IT ALL POP? Intelligence Macau

IM believes that the credit bubble in China may pose a risk to the Macau market as bank loans may bust and consumer credit may spiral out of control. But obviously the question is when will that fear become a reality - if ever?  No one knows but as long as state-run banks continue to pump liquidity into the economy and the bank recapitalizations remain at a slow, steady pace, the VIP and Mass sectors will continue to be strong.



The surge in visitor arrivals to Macau may be due to the easing of independent travel restrictions in China.  Beijing has already shortened the time for visa application process from 1 month down to between 7-10 days since last month. Other provinces have also shown signs of speeding up in terms of the application process.


S'pore's Urban Redevelopment Authority (URA) showed that 911 private homes were sold in September, a 27% MoM drop.  The 911 units sold were also the second lowest monthly sales this year, behind June's figure of 847 units.  The drop follows the latest round of cooling measures from the S'pore govt that took effect on 30 August.

Malthusian Tails

“The power of population is indefinitely greater that the power in the earth to produce substance for man.”

-Thomas Malthus


Any regular reader of our work, especially when Keith is penning the Early Look, is familiar with our work on investment durations.  Our investment process enables us to develop investment ideas on 3 durations: TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less).  We call this our Trade-Trend-Tail Process.


There is, of course, another duration, which I will simply call the longer term.  This is the time frame beyond 3 years.  While it is difficult to make an investment decision today, for an event that will happen beyond 3 years, that doesn’t mean we shouldn’t be contemplating the longer term.  One key force that will shape the longer-term with some predictability is demographics.


One of the most well known and earliest recorded demographers was the Reverend Thomas Robert Malthus.  His primary work on this front was his treatise, “An Essay on the Principle of Population”, which he published in 1798 at the age of 32.  Malthus started with the basic premise that society could not be improved with time, so as population increased, so too would the constraints on that society.  Eventually, a large enough population would not be self sustaining and, as Malthus wrote:


“The superior power of population cannot be checked without producing misery or vice."


In contrast to Malthus, if we have learned anything over the last few centuries it is that the welfare of societies can and will improve with population growth in conflict with Malthus’ primary tenet, but Malthus did leave us with a few salient points: 1) demographics are powerful and 2) changing populations will constrain societies.  Below we’ve outlined 3 key Malthusian Tails that we are focused on.


1.  Marriage Rates in the United States - We wrote an intraday note on this point to our Hedgeye Macro subscribers earlier this week (if you aren’t currently receiving our full product, please email us at to set up a trial); in the last decade we have seen a dramatic shift in marriage status among young adults.  In fact, in 2000 almost 55% of the 25 – 34 cohort was married, while 35% was never married.  Amazingly less than 9 years later, by 2009, only 45% of that cohort was married, while 46% of the cohort was unmarried. 


Naturally, as people marry later, birth rates will decline, which will lead to lower population growth in the future and the ability, or lack thereof, to fund future entitlement programs.  Additionally, and near and dear to our Housing Headwinds call, is that homeownership rates are impacted by this demographic shift.  According to the most recent data from the Census Bureau, homeownership rates are 84.2% for married couples and 50.3% and 59.6% for male and female singles, respectively. 


2.  The Aging Japanese Population – One of our Q4 themes was entitled, Japanese Jugular, which describes our long term negative view of Japan.  Once again, a key driver here is demographics, in particular the aging of society.  In 1985, roughly 10% of Japanese society was over 65 years old.  Currently, almost 23% of Japan’s population is over 65 years old.  The great Keynesian experiment in Japan will likely eventually fail because of this aging of society, and its future demands on the government as it relates to retirement and healthcare entitlements. 


Currently, the ratio of retirees to working-age Japanese is equal to 35.5%.  In just ten years time, that ratio will be equal to 48%.  We’ve likely already seen the negative inflection point in this trend within the last year, as Japan’s pension fund announced it will be increasing its asset sales by a factor of 5x to support pension payment requirements.


3.  The Aging Baby Boomers in the U.S. – Our Healthcare Team, led by Tom Tobin, presented a Black Book on this topic last week, which was titled:  “HEDGEYE HEALTHCARE: AGING OF AMERICA: DEMOGRAPHICS OF DEMAND AND PROFITS IN HEALTHCARE.” (If you are an institutional investor and would like to sample or trial some of their superb work on the Healthcare sector, please email sales@hedgeye.com.)


In effect, the glacial movement of U.S. demographic trends holds specific consequences both for healthcare and the larger economy broadly. For Healthcare investors, the Baby Boomer investing dogma mistakenly centralizes per capita spending as the core driver of the thesis.


While absolute per capita consumption is higher for those in their 70s & 80s, the growth rate of healthcare consumption is slower and there are far fewer people to support it.  The period of greatest acceleration of per capita consumption comes as people age into their 50s - a demographic now in the heart of a secular decline which won’t see bottom until 2018.


Boomer Employment (45-64 yr olds) reached its crescendo in the 1 period with peak earnings and peak disposable income occurring alongside historic lows in unemployment.  Now, with this segment of the working population in deceleration mode, the U.S. workforce nearing a peak in average age, and the echo boomer generation (30-39 yr. olds) years away from peak consumption growth, the healthcare and broader economy face significant long-term headwinds.


At risk of starting off your weekend on too somber of a tone, I will leave you with one last aging quote from Groucho Marx that is counter to our thoughts on demographics:


“Age is not a particularly interesting subject.  Anyone can get old.  All you have to do is live long enough.”


Yours is risk management,


Daryl G. Jones


Malthusian Tails - DJEL

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TODAY’S S&P 500 SET-UP - October 15, 2010


As we look at today’s set up for the S&P 500, the range is 21 points or -0.92% downside to 1163 and 0.87% upside to 1184. Equity futures are trading modestly above fair value in what has been a quiet pre market session with most investors sidelined ahead of Fed Chairman Bernanke's speech at the Boston Fed Conference which starts at 08.15 ET.


Most don't believe Bernanke will say QE is a given, but on the flip side he is unlikely to dissuade the market from the notion that it's coming sometime soon.  Elsewhere, it is a fairly busy session for corporate and macro releases with Sep Retail Sales and Oct Michigan Consumer Sentiment. Advanced Micro Devices (AMD) 3Q rev. beat est.

  • Cubist Pharmaceuticals (CBST) 3Q rev. missed est, guidance narrowed
  • Google (GOOG) 3Q earnings beat est.
  • J.B. Hunt Transport Services (JBHT) 3Q earnings missed est.
  • Seagate Technology (STX) confirmed it got a “primary indication of interest” to take it private.
  • EPS from GE beat consensus, but missed on revenues.



  • One day: Dow (0.01%), S&P (0.36%), Nasdaq (0.24%), Russell 2000 (0.25%)
  • Month/Quarter-to-date: Dow +2.84%, S&P +2.86%, Nasdaq +2.82%, Russell +4.22%.
  • Year-to-date: Dow +6.39%, S&P +5.26%, Nasdaq +7.33%, Russell +12.68%
  • Sector Performance: Financials (1.78%), Materials (0.95%), Industrials (0.58%), Utilities (0.16%), Consumer Disc (0.12%), Healthcare (0.19%),Energy (0.15%), Consumer Spls +0.04%, Tech +0.04%.



  • ADVANCE/DECLINE LINE: -572 (-2104)
  • VOLUME: NYSE - 1110.61 (-12.58%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: EMC +4.48%, Yahoo +4.46% and First Solar +3.89%/Apollo -23.25%, Devry -16.83% and H&R Block -10.08%.
  • VIX: 19.88 +4.25% - YTD PERFORMANCE: (-8.03%)
  • SPX PUT/CALL RATIO: 1.49 from 1.27 +17.00%



  • TED SPREAD: 15.42
  • 3-MONTH T-BILL YIELD: 0.14% +0.01%
  • YIELD CURVE: 2.14 from 2.09



  • CRB: 299.93 +0.06%
  • Oil: 82.69 -0.39% - BULLISH
  • COPPER: 381.55 -0.13% - OVERBOUGHT
  • GOLD: 1,374.80 +0.36% - BULLISH



  • EURO: 1.4053 +0.75% - BULLISH
  • DOLLAR: 76.647 -0.55%  - BEARISH




European markets:

  • FTSE 100: (0.28%); DAX +0.19%; CAC 40 +0.15%
  • Major indices are treading water ahead of Bernanke's speech in Boston.
  • News flow across the continent has been light with trading volumes reported to be light.
  • Weakness across the mining sector on profit taking has offset small gains seen across the financial services space
  • Eurozone Sep Final CPI +1.8% y/y vs prelim +1.8% and prior +1.6%
  • ACEA new passenger car Registrations for the EU+EFTA (18.6%) y/y in Sept

Asian markets:

  • Nikkei (0.87%); Hang Seng (0.40%); Shanghai Composite +3.19%
  • Most markets fell, but tech stocks rose after earnings releases from AMD and GOOG.
  • China bucked the regional trend to post a healthy gain.
  • Hong Kong recovered early losses but still declined.
  • Exporters led Japan down after yesterday’s rise; financials followed their US peers lower

Howard Penney

Managing Director


CONCLUSION: COSI released 3Q10 sales results last night; the results were impressive and support our bullish case. 


Cosi same-store sales results came in strong for 3Q with company-owned stores seeing a 205 bp sequential improvement in two-year average trends as comparable sales grew 6.6% in the quarter.  System-wide same-store sales grew 5.2% versus 3Q09.  In early September, I wrote a note titled, "ALL ROADS POINT NORTH", and these results are right in line with that thesis. 




Howard Penney

Managing Director

What Would Cause Heli Ben to Take QE2 Off The Table?

Conclusion: In analyzing the fine print and market reactions to the latest FOMC minutes, we find potential roadblocks to further easing few and far between. On the flip side, we see that the anticipation of QE2 has grown to a level that opens the door for substantial reporting risk to the downside vs. expectations. In addition, we’ve outlined a mini economic calendar of near-term releases that might surprise meaningfully to the upside or downside, given current market sentiment.


This morning, we got the same question from a couple of our more astute subscribers, asking what would reverse the likelihood of QE2, and perhaps more importantly, market expectations of QE2? The caveat being that this latest melt-up has been fueled by speculation ahead of further easing, so what could erode such speculation, even if just on the margin?


Without doing too much research, we know the quick answer is increased inflation, lower unemployment, and accelerating growth. We are on record stating the latter two of the three options are highly unlikely in the short-to-intermediate term based on our intermediate term forecast(s) for below-consensus GDP growth, negative discretionary spending growth, and declining home values.


Turning back to inflation, we see that Bernanke has turned a blind eye to some of the commodity price headlines of the last several days and weeks. Howard Penney, our U.S. Strategist and Managing Director of Restaurants, pointed a few out in this morning’s Early Look:


(1)   Gold trading at a record high for the second straight day

(2)   Tin trading at a record high

(3)   Cotton at a record high

(4)   Copper at a 27-month high

(5)   Rubber at a 27-month high

(6)   Soybean, Corn and Wheat all approaching 2008 record highs


Since we know Bernanke didn’t see inflation back in 2008 when crude oil was ~$150, for the sake of this analysis, we’re going ignore them alongside the Fed. Digging deeper into their statements, we see that core inflation has trended below the Fed’s target (the latest reading came in at +0.95% YoY in August). Moreover, inflation expectations* have trended below the Fed’s targets as well, which is why they are considering raising the target level of inflation.


We use the asterisk on inflation expectations above because we don’t necessarily agree with their assessment. At best, we’re getting mixed signals from the market: gold at record highs signaling the next hyperinflation vs. yield curve compression signaling disinflation. We leave out TIPS here because the Fed has actually been active in this market, which obviously skews the pricing away from a true market gauge.


To the same extent, the Fed’s actions (or expectations of Fed actions) have caused market participants to front run the Fed by loading up on 10-year treasuries. At yesterday’s auction, 10-year Treasuries yielded 2.475 percent – the lowest since the January 8, 2009 auction! The bid/cover ratio declined slightly, however, to 2.99 from 3.21 in the previous auction. Elsewhere in the Treasury market, we see the spread between 30-year and 10-year Treasuries has widened to a record 138bps, a clear sign of investor demand for medium term Treasuries – the part of the yield curve where QE2 is expected to impact most forcefully.


Elsewhere in the minutes from the September 21st FOMC meeting, we see that expectations also play a key role in deciding when and how forceful to implement further QE2. In light of this, we’ve outlined a mini economic calendar of near-term releases that might surprise meaningfully to the upside or downside, given current market sentiment: 

  • Now through mid-December – 3Q10 corporate earnings season: If JPM’s results were any indication, earnings could continue to disappoint. Monitoring the inflections and deltas within company guidance will be crucial here (as always). Currently, earnings are expected to be reasonably good.
  • October 15th – Bernanke Speaks at the Boston Fed Conference on Monetary Policy in a Low Inflation Environment: Market participants are anticipating further hints of QE2. Likely to not disappoint.
  • October 15th – September CPI, September Retail Sales: CPI may surprise to the upside, given the recent commodity and energy inflation. Despite this, the Fed will be watching for the Core Inflation reading, as always. Apparently U.S. consumers don’t have to eat or drive to work... Given that these costs are going up, Retail Sales ex Food and Energy could disappoint.
  • October 19th – September Housing Starts: Based on Consensus expectations for single-digit housing price declines, any and all housing data could surprise to the downside.
  • October 26th – August Case-Shiller Home Price Index: More so than any other on this list, this release will surprise consensus to the downside, similar to the August 24th Existing Home Sales bomb. The August Case-Shiller data represents contracts signed in April, May, and June – an 8.1% decline from July’s representation.
  • October 29th – 3Q10 GDP: Similar to the Case-Shiller number, this release could shock consensus as well. We forecast a deceleration to +1.3% vs. consensus expectations of an acceleration to +1.9%. The rate of growth will be crucial here, as +1.6% is the line in the sand (2Q10 print).
  • November 1st – October ISM Manufacturing Index: This series has grown increasingly volatile, inflecting twice in the previous four months. Likely to come in in-line with half of investors’ expectations and surprising to the other half.
  • November 2nd – Midterm elections: A Republican rout is priced in and that has been bullish, on the margin, for equities. A Democrat surprise may disappoint current sentiment.
  • November 2nd-3rd – FOMC Meeting: The world’s eyes will be focused here.
  • December 14th – FOMC Meeting: In case they disappointed in November… 

At any rate, it’s clear by all indications that QE2 is getting baked into every market (currency, bond, equity, commodity, etc.). As always, you have to be especially diligent in your risk management when consensus is on one side of the trade. As we stated earlier, QE2 is a near certainty, based on the economic outlook.  If, however, it comes in much lighter than expected, look out. The reflation we’ve seen globally could unwind in a real hurry.


Darius Dale



What Would Cause Heli Ben to Take QE2 Off The Table? - 1

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