TODAY’S S&P 500 SET-UP - November 3, 2010

As we look at today’s set up for the S&P 500, the range is 11 points or -0.80% downside to 1184 and 0.12% upside to 1195.  Equity futures are positive following a mixed opening as investors digest Tuesday's mid-term election results.


Today is the long awaited FOMC meeting, and expectations for QE2, which most now expect will reveal a further $500B in asset purchases over the next 6 months.


But first, there is the ADP employment report plus ISM Non Manufacturing index and Factory Orders.

  • Alaska Air Group (ALK) Oct. traffic rose 15.9% percent and capacity rose 9.1%
  • Approach Resources (AREX) 3Q EPS beat est., rev. missed *Citigroup (C) may sell ~$570m of stakes in CVC funds, 2 people with direct knowledge of the matter tell Bloomberg
  • OpenTable (OPEN) 3Q adj. EPS beat est.
  • Seahawk Drilling (HAWK) says it’s reviewing strategic alternatives, including sale, merger, recapitalization 
  • Sonus Networks (SONS US) 3Q rev. missed est., loss-shr matched est.


  • One day: Dow +0.58%, S&P +0.78%, Nasdaq +1.14%, Russell 2000 +2.05%
  • Month-to-date: Dow +0.63%, S&P +0.87%, Nasdaq +1.04%, Russell +1.37%.
  • Quarter-to-date: Dow +3.71%, S&P +4.59%, Nasdaq +6.96%, Russell +5.43%.
  • Year-to-date: Dow +7.29%, S&P +7.04%, Nasdaq +11.65%, Russell +13.99%
  • Sector Performance: Utilities +1.18%, Energy +1.10%, Consumer Disc +1.14%, Tech +0.98%, Materials +1.04%, Industrials +0.96%, Healthcare +0.96%. Consumer Spls +0.59% and Financials +0.24%
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Harman Intl +12.25%, Medco Health +10.75% and Vulcan Materials +8.54%/ADM -6.59%, Carefusion -5.61% and Marathon Oil -5.30%.


  • ADVANCE/DECLINE LINE: 1441 (+1295)  
  • VOLUME: NYSE - 907.36 (-5.44%)
  • VIX: 21.57 -1.19% - YTD PERFORMANCE: (+0.51%)
  • SPX PUT/CALL RATIO: 1.21 from 2.57 -53.06%  


  • TED SPREAD: 16.53, -0.812 (-4.681%)
  • 3-MONTH T-BILL YIELD: 0.13%    
  • YIELD CURVE: 2.29 from 2.32


  • CRB: 304.98 +1.14% - up 7 of the last 8 days
  • Oil: 83.90 +1.15% - BULLISH  - up 6 of the last 8 days
  • COPPER: 383.90 +1.43% - BULLISH - up 6 of the last 8 days
  • GOLD: 1,356.60 +0.29% - BULLISH - up 5 of the last 8 days


  • EURO: 1.4036 +0.97% - BULLISH
  • DOLLAR: 76.722 -0.74%  - BASING



European markets:

  • FTSE 100: +0.14%; DAX +0.23%; CAC 40 +0.46%
  • Major indices have edged into positive territory led by Banks, Construction and Auto plays.
  • BMW Group Q3 net €874M vs Rtrs €832M, Confirms 2012 targets
  • Societe Generale  Q3 net €896M vs Rtrs €667.5M
  • UK Oct Services PMI +53.2 vs cons +52.5

Asian markets:


  • Nikkei closed, Hang Seng +2.00%; Shanghai Composite (0.47%)
  • Most Asian markets rose, in anticipation of monetary easing from the US later today.
  • Banks led a surge in Hong Kong after Goldman Sachs upgraded the Heng Seng on increased liquidity from QE2.
  • Tokyo was closed for culture day.
  • Australia rose, but banks gave up their early highs in light of a political storm over their profits
  • Australia Sep dwelling approvals (3.7%) m/m vs survey +1.0% 

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














Despite a very entertaining conference call – for a smorgasbord of reasons – WYNN’s quarter didn’t blow us away and we wonder how much upside there is to the numbers.



Was it good enough?  Probably not.  The special dividend was more telegraphed than a Brett Favre pass (this year).  Sure, Macau EBITDA climbed 54% YoY but the market was up huge.  On a sequential basis, Wynn’s Macau EBITDA was actually down 8% versus LVS, MPEL, and MGM, which were up +9%, +86%, and +36%, respectively.


As we’ve written about in the recent past, Encore has just not been that additive.  MGM and possibly Singapore – Wynn has the highest concentration of players from southeast Asia in Macau – have taken share.  Contrary to popular belief, MGM isn’t buying the business through higher commissions.  Rather it is extending more and longer duration junket credit and simply running the property much more effectively – thank you Mr. Kwong.


Macau has a lot of growth and Wynn will flourish.  However, the stock has had a huge run and we don’t see any near term catalysts now that the Golden Week fueled month of October is past and the special dividend has been announced.  More supply is coming on next year and overall market growth is slowing.  Market share may finally be important and on that metric, Wynn may lag.

The following is our analysis of the quarter:



WYNN 3Q 2010 Review


Wynn Macau net revenues were $14MM below our estimate while EBITDA was $7MM below our estimate

  • RC volume was $300MM above our estimate due to an increase in direct play levels to 13% from 11% last quarter
  • Gross win was $2MM better than we estimated but net $431MM was $11MM lower than our estimate due to the rebate rate being 5 bps higher at 89bps of RC or 31% of hold vs our estimate of 29%
    • We calculate rebate as the difference between gross gaming revenues calculated at $821MM and net casino revenues of $627MM (total casino revenues less disclosed casino revenues in Macau)
  • Mass win was exactly in-line although drop was $22MM lower than we thought while hold was 80bps better
  • Slot win was $2MM lower than we estimate due to slightly softer slot handle
  • We estimate that fixed expenses increased to $102MM [either that or we saw a commission increase- won’t know until the filing comes out for Wynn Macau] from $87MM in 2Q2010

Las Vegas net revenue beat our estimate by $8MM and EBITDA by $11MM

  • Table drop was $25MM below our estimate but hold was 3.8% better which is why table revenues beat our number by $16MM. For your reference, the 10 quarter hold average is 20.4%, and using this average, revenues would have been $13MM lower
  • Slot drop decreased 18.6% vs. our estimate of -10%.  Slot win was $7MM lower than our estimate.
  • Casino discounts were 15% of gross casino win or $25MM
  • Operating expenses only increased 1%, helped by declines in bad debt expense, lower SG&A (flat with last Q) and better room margins driven by an uptick in ADR

Other Stuff:

  • D&A was $5MM below our estimate, declining $2MM sequentially despite having a full quarter of Encore Macau depreciation
  • Interest expense was $6MM above our estimate and increased $7MM sequentially


CRI: Opacity In, McGough Out!

I have officially been shut out of an analyst meeting for the first time in my 16-year career. Hey Carter's...there's this crazy little thing called Transparency. It matters, and I suggest you embrace it. Hedgeye is watching, and we see through the opacity of closed-door super-secret investor days.


"Sorry, the room is full."  Really??? Are people really beating down the doors to hike up to Shelton CT in the middle of earnings season for the meeting?  Also -- I worked in IR... No offense, but it was at a company 20x the size of Carter's. I've organized these events. There's no such thing as "no more room."


Can you believe that some companies still selectively pick who is invited to join the club?


If I were a real company with a real strategy and I firmly believed in both my strategic direction and earnings power (which is the case, by the way), I'd want to share MORE information with members of the investment community who are cautious on the story -- or flat-out short the stock. Guess what Carter's... when shorts cover it creates real demand for the stock.


Also, on that day when your stock crashes next year when people realize that the real underlying power is at least 25% below current expectations, or better yet -- if you proactively turn your fortunes around and prove me wrong -- don't you want one of the more influential voices on the Street to change along with the facts and get on board the stock? Do you think just MAYBE that institutions with meaningful buying power will pay particularly close attention? I suggest you ask them.


I'm willing to YouTube myself on all my analysis. Check it out below.



CRI: Opacity In, McGough Out! - c1


CRI: Opacity In, McGough Out! - v2


CRI: Opacity In, McGough Out! - c3


CRI: Opacity In, McGough Out! - c4


CRI: Opacity In, McGough Out! - c5

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Q4 Theme Update - Consumption Cannonball

One of our key macro themes here at Hedgeye in Q4, and for the next several quarters, is the Consumption Cannonball – a period during which government supports subside while expenses ramp creating increasing pressure on the U.S. consumer. Here’s the latest update in light of today’s data from Howard Penney of our macro team:



“First, the ISM prints beats at 56.9 in October (the highest since May) from 54.4, that’s good news.  The contradicting and not all completely good news is that the upside appears to be completely driven by exports having increased 6 points in October while inventories dropped in October.  Not really a positive sign given that exports are such a small part of the economy and that the inventory builds accounted for 1.5% of the 2% GDP in 3Q10 (prior to the upcoming revisions).


What about the part of the economy that does matter, domestic consumption? A few bullet points:

  1. Both personal income and spending weakened in September.  Personal income fell 0.1%: the first decline since last September.
  2. The decline in income was driven by a $25.5 billion reduction in emergency unemployment insurance benefits.  Emergency benefits had boosted transfer income by $20.5 billion in August.
  3. Interest income (due to the Federal Reserve emergency interest rates fell 0.9% for the third straight month.
  4. Tax payments are up, driving disposable income down 0.2%.
  5. Real spending was up 0.1% driven by consumers diving into the savings rates which fell to 5.3% - matching its lowest level in over a year.

The Hedgeye consumer cannonball theme suggests that the next several quarters will be very taxing for the US consumer.  The thesis is based on very difficult year-over-year comparisons as Uncle Sam runs out of crutches and can no longer prop up the consumer.  A key takeaway from today’s data from the BEA is that transfer income is fading and taxes are on the rise.


While corporate profits are strong, the lack of confidence in the direction of the economy is holding back job growth as the unemployment rate will hit 10% before it will hit 9%.  The data continues to bolster our conviction; the private sector cannot make up the slack in income and the economy is experiencing Jobless Stagflation.”



Howard Penney

Managing Director














Toys R Popping Up Everywhere

With the holidays on the horizon, it’s hard to ignore one of the most important gifts of all.  Toys.  Every year approximately 43% of the domestic toy industry’s $21-22 billion in sales occur in the 4th quarter.  Historically, the discounters including Wal-Mart and Target flex their square footage in the toy category to take advantage of the seasonal surge.  Toys R Us also enters the discussion as the sole category killer left in the competitive set.   At this point, TRU is estimated to be the number three player domestically, with annual market share of 16% a point or two behind TGT.  Wal-Mart dominates with a low 30% share.  Furthermore, it’s no secret that the company makes its entire yearly profit in the fourth quarter- a legacy of a fixed cost infrastructure that can only be leveraged during the highest volume quarter.   For most of us who have invested in Toys R Us in the past, we know that the company rarely exceeds expectations with so much pressure put on such a truncated but overly important selling season.  With an impending IPO on the horizon, keeping close tabs on TRU this year will be a clear indicator of what to expect in the future.


It’s no secret that toys are used as a traffic driver as well as a loss leader (at least for the discounters) during the holiday selling season.  With that said Holiday 2010 is shaping up to be one of the most competitive for the category in years.  Interestingly this has little to do with Wal-Mart’s obsession with price rollbacks or Target’s  “half-off” toy sale which began this past weekend.  It also has little to do with Sears’ efforts to put seasonal toy shops in its stores.  The biggest wrinkle in the no-growth toy business comes from Toys R Us and its plans to open 600 pop-up stores for the holiday season.  This represents a massive increase from the 90 temporary locations opened in holiday 2009.  As of now, the majority of the stores are open and ready to leverage TRU’s infrastructure at a very low incremental cost.  In fact, pop-up shops (a.k.a vacant stores with leases measured in months, not years) represent one of the most unique opportunities for TRU in years. 


TRU is looking capture the natural traffic flow that flocks to malls and outlet centers for holiday shopping by locating their pop-ups in these highly trafficked areas.  Stores will be stocked with smaller (who wants to carry a tricycle through a mall?), popular, and high margin SKU’s as the strategy aims to eliminate the need for consumers to make a trip to their local strip mall in search of this year’s Zhu Zhu pets.  The concept makes a ton of sense.  The exact  impact of such an initiative however, is unknown and remains a wildcard for the discounters.  No matter how the results ultimately shake out for TRU, it’s hard to ignore such a dramatic increase in the number of doors peddling toys this year vs. last.  In fact, TRU’s 600 pop-ups overshadow its permanent store base comprised of 483 units. 


Below we attempt to quantify the amount of business that TRU management expects to garner from this strategy.  While this alone is unlikely to wreak havoc on TGT or WMT, it is hard to ignore the fact that toy-driven traffic will be impacted in some way for the discounters.  We look at the impact of the incremental TRU square footage and potential sales from a few different perspectives. 


First we take a look at the potential amount of sales TRU could garner if 100% of the pop-ups were generating sales per foot in-line with the company’s historical 4Q average.  Management recently stated it expects productivity to be on par with that of its core business.  In reality this could be conservative given productivity in malls and outlets is generally higher than off-mall properties, but we’ll consider this a base case for illustrative purposes.


Toys R Popping Up Everywhere - pop up sq ft


Next we take a look at what these incremental sales would represent as a % of TRU, TGT, and WMT’s respective toy business over the 4Q.  In other words, if 100 % of these incremental sales had to come from somewhere (assuming the category is flat and this is a zero sum game), how would it impact each respective business?


Toys R Popping Up Everywhere - retail impact 100


Finally, we make an assumption that the impact of the pop-up shops negatively impacts each retailer’s core business at a level commensurate with the market share that each holds in the category over the holiday season.  Keep in mind that share numbers are different than the annual share numbers given that TRU experiences the largest seasonality vs. the discounters. 


Toys R Popping Up Everywhere - retailer share impact


While there is no sure way to know what the impact of the pop-ups will be on the discount channel, it’s pretty hard to ignore the fact that traffic may in some way be negatively impacted.  This comes at an especially important time for Wal-Mart given management’s renewed confidence in generating a positive same-store sales result for 4Q.  Is the impact of Toys R Us alone going to cause WMT to miss?  Probably not.  However the fact that TRU has the potential to generate an incremental $100-$400 million in revenue from its pop-up strategy is definitely worth watching. Something has to give and in a category with so much share centered on three retailers it may not be easy for any one of them to escape without impact (including TRU cannibalization). If anything, we’ll now be better prepared for the roadshow which is likely to follow the outsized growth TRU expects generate from the pop-up strategy.  


Eric Levine



In between bites, Steve Wynn held an upbeat call except when talking about the US government.  Here is the transcript – minus the munching sounds.




  • "Wynn Resorts also announced today that its Board of Directors has approved a cash dividend of $8 per share on its outstanding common stock...payable on December 7, 2010, to stockholders of record on November 23, 2010. The stock will begin to trade ex-dividend on November 19, 2010."
  • "On November 2 , the Wynn Macau, Limited Board of Directors approved a HK$0.76 per share dividend...payable on December 3, 2010, to stockholders of record on November 22, 2010. In addition, the Board of Wynn Macau, Limited determined the Company will consider paying recurring dividends, with a target yield of 1-3% annually, after a review of the then current financial results during each year and having regard to the terms of the financing documents that Wynn Macau, Limited is party to. The Board of Directors has determined that a target yield of 1-3% annually, will allow Wynn Macau, Limited to maintain ample liquidity to achieve its Cotai growth strategy."
  • Wynn Macau reported net revenues of $671.4MM and EBITDA of $198MM (below whisper expectations that we believe were a little north of $205-215MM range)
    • Hold was normal at 2.88%
  • Wynn Las Vegas reported net revenue of $344.5MM and EBITDA of $76.5MM
  • Cash: $1.9BN; Debt: $3.2BN with $2.6MM at Wynn Las Vegas and $552MM at Wynn Macau.  Post dividend cash will be $1BN and total debt will equal $3.4BN.
  • Capex was $40MM, almost entirely related to Wynn Las Vegas' room remodel



  • "I believe that we've seen the bottom in Las Vegas" and had a nice October as well
  • EBITDA shouldn't be the most important metric - rather cash flow since interest and maintenance expenditures are real expenses
  • $150-160MM in LV at the nightclubs with 40% margins
  • Remodeled Wynn LV rooms are getting ADR premiums
  • They have been the victims of 8% annual increases in healthcare costs. As a result of the HC bill, it will now increase to 11-12%/ year.
  • Cotai - finally have a plan and a building drawn.  They have begun soil testing and will start site clearing soon.  Will show pictures and models in a few weeks.


  • Some of the other fellows are desperate to increase their business in preparation for their IPO.  They made over $90MM in Oct in Macau. Would prefer that their competition adhere to the rules but they will leave that to the government.
  • Won't publish the building cost until their next conference cost - but it will be around $2.5BN. Will be open for business by 2015.
  • Japan strategy and update?
    • A cross party committee has been formed to study the matter and report back to the Diet
    • Exploratory committees are visiting Las Vegas and Macau
    • What happens is murky at best. They need to accept a budget which in itself can cause a crisis and a new election which can change the government.  Over the past 6 years, the average life span of a prime minister in Japan is 1 year.
  • Cotai land concession?
    • You lease the land from the government for a ground rent based on the property description.  The government commits in advance of the land grant.  The final land grant and lease payment is determined by what is being built and the license gets published in the gazette.
    • Final lease execution will occur in a few weeks
    • Will probably do an add-on to their credit facility and use the FCF to fund the majority of it
  • Additional commentary on Vegas bottom?
    • Convention and group is starting to improve and sees more stability
    • Have 65% of their convention room nights on the books for next year. Should return to 18-19% of their room nights and there is some rate improvement there.
  • They like it when their earnings are 50% of their debt
  • They would look at other markets in the interim of Cotai opening but don't want to talk about it now.
  • Trends in Macau - seeing more customers and longer stays
  • Hold percentage in Las Vegas has started to come back - as they get the better customers and better players back in 
  • Will they be adding more junket partners and thoughts on extending credit
    • They do have plans to add more junkets - 2-3 more junkets over the next year and one of which will be added before year end
    • Will not use credit to buy business
  • I don't know why they are so defensive about losing some market share... I mean their numbers are still good but clearly they did lose business
  • Do they think that Cotai will cannibalize Wynn Macau? 
    • No

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