The Tin Man Cometh . . . We See A Bullish Long-Term Set Up In Tin

Conclusion: Even as home prices in the United States continue to deflate, various commodities globally are in inflation mode.  Specifically, tin is set up bullishly from a fundamental perspective, which will impact the COGS of electronics makers and packaging.


Tin is not a commodity that we have spent a great deal of time focused on over the last couple of years, but with a hat tip from a client we respect and due to the addition of stalwart intern Isaiah DeLeon-Mares who has been digging in on tin recently, we believe we have identified some long-term bullish fundamental dynamics for this commodity.  Now we are not so naïve as to suggest that we are early to this story as the price of tin is up more than 50% YTD, but the longer-term supply and demand dynamics are intriguing.  As a result, we could be in the early days of a bullish tin cycle. 


The primary use of tin is as solder, the fusable metal alloy, which is utilized for making electrical connections. (In 2002, tin replaced lead as the primary component in solders in Europe and Asia, which drove up the demand for tin.) Therefore, the primary end market for tin is the production of electronics, such as cell phones, personal computers, MP3 players, and so on.  In North American and Europe, packaging (think tin cans) is one of the key drivers. Asia uses almost twice as much tin as the Americas and Europe combined, and more than 2/3rds of this tin is used in solders for electrical connections.  Not surprisingly, China is the largest consumer of tin globally at ~40% of all global tin use.  In aggregate, tin is only about a $7BN annual market and roughly 1/20th the size of copper, but remains a critical input into many key consumer products.


Unlike other metals, almost 50% of tin is mined locally by individuals or small scale miners.  From a company perspective, the top 10 companies produce about 70% of the world’s tin production and this has remained relatively stable over time.  Currently, the United States does not produce any tin and has not produced any meaningful amounts of tin since the late 1980s.


As we look at the tin market, we see three key factors that make us bullishly inclined.  These are: 

  1. Inventory is low – As highlighted in the chart below, inventory has fallen off dramatically over the course of the past year on the LME.  Currently stocks on the London Metals Exchange for tin are at 13,160 tonnes, which is down almost 50% y-o-y.  While tin inventories are slightly off their lows of early October, this dramatic decline in tin inventories signals a current global imbalance in which demand is, and has been, outstripping supply.  Specific to this point, PT Timah, the Indonesian state-controlled tin producer and second largest tin producer in the world, reported total tin inventories at the end of September that amounted to only 10,063 tonnes.  This was the lowest amount of tin recorded since 2000 by PT Timah. At the peak of the last 10 years, PT Timah had almost 4x that amount of tin inventories.  This dramatic and accelerated reduction in global tin inventories is noteworthy.
  2. Consumption accelerating – According to industry estimates, tin demand in aggregate should be up more than 15% in 2010 versus 2009.  Specifically, in 2009 global consumption was ~300,400 tonnes and is expected to be more than 345,000 tonnes this year.  The most recent data from the United States, which only accounts for ~10% of global tin demand but a much larger percentage of global imports, support this as consumption of tin in the U.S. was reported to be up 10% in May 2010 over May 2009. (May is the most recent data point provided by the U.S. government.)  A key potential future catalyst would be if the U.S. mandated the use of a greater tin percentage use in soldering.  As an example, when Asian and Europe implemented a shift from solder with 60% tin to solder with 97.5% tin in 2002, global tin demand jumped 20%. 
  3. Production broadly in decline – Tin production peaked globally in 2005 with 325,000 tonnes and has been in steady decline ever since.  This is driven be a number of factors, which include more stringent sanctions restricting mining in key production countries such as Indonesia and China, and broad lack of resources globally.  Interestingly, the world’s largest producer of tin, China, is also the largest consumer of tin and recently became a net importer.  Despite higher tin prices outside of China, producers are limited as to the amount they can export by the government because of the internal demand requirements. In addition, we did an analysis of the nine largest producers of tin globally and based on their most recent annual numbers, six of those producers are showing declines in production.  The decline in production in 2010 is being partially driven by a 1-time event of substantial rain in Indonesia, which the Indonesian government estimates has led to 20% decline in production, or ~20,000 tonnes for the full year. 

Currently, it is estimated that the world supply and demand deficit is 17,000 tonnes this year, which will be narrowed by Indonesia coming fully back online. Even when Indonesia does become fully productive again, the long-term supply and demand mismatch will still be sustained absent broad production increasing globally, which seems unlikely based on current trends.  Accelerating demand, constrained production, and tight inventories are a good set up for any commodity.


The tin man cometh? Indeed.


Daryl G. Jones

Managing Director


The Tin Man Cometh . . . We See A Bullish Long-Term Set Up In Tin - 1


McDonald’s: Denis Hennequin, head of McDonald’s European operations, is leaving the company to become an executive director of Accor on December 1st after which, on January 15th, he will take over as CEO.  This is a blow to MCD; Hennequin began working for the company in 1984 as an assistant store manager and has an impressive track record. 


Cosi: Cosi continues to be one of my favorite long ideas.  As I have been writing over the past number of weeks, the company’s shrink-to-grow strategy will effectively streamline the business and increase shareholder returns over the next few years.  Sales trends are improving during all day-parts and operational initiatives are gaining traction.  At present, the stock is outperforming the QSR category in terms of share price gains on a 1 day, 30 day, and 60 day basis. 


Dine: Dine Equity reported strong results for 3Q10. Having eased balance sheet concerns by refinancing debt during the third quarter, their overall business was bolstered by Applebee’s revitalization strategy and later opening hours.  DIN’s results certainly provide a challenge to Brinker but I am holding firm in my conviction that Chili’s will take significant market share from here as their own changes are implemented throughout their system.


Peet's Coffee: Peet's reported a strong quarter after the close.  This is one of the better long-term growth stories in the space and growth will accelerate in FY11. 


TALES OF THE TAPE: MCD - stocks 113




Howard Penney

Managing Director

Professional Politicians Beware

"We must all strive to find common ground to support the middle class, create jobs, reduce the deficit and move our nation forward."

-Nancy Pelosi, November 2nd, 2010


While it will take many days for the final tallies to come in, it looks like our prediction will hold and that massive Republican turnout has driven a net gain in House seats of 65+ for Republicans.  According to Nate Silver over at the FiveThirtyEight blog (one of the more accurate electoral statisticians we follow):


“Our current projection is that Republicans will finish with a total of 243 house seats: this would reflect a net gain of 65 from Democrats. The range of plausible outcomes is fairly small: our model thinks there is roughly a 90 percent chance that the G.O.P.’s total will eventually be somewhere between 64 seats and 66.”


As it relates to our prediction in the Senate, we were off slightly as a number of major Democratic candidates did marginally better than expected, in particular Harry Reid in Nevada.  Currently, Alaska, Colorado, and Washington are still too close to call, but even if these States all go Republican the Democrats will still retain at least 51 seats in the Senate.  Nonetheless, the Democrats should lose a net 7 seats.


Since it seemed statistically unlikely that the Republicans could take the Senate, the story of the night is really the massive seat losses in the House.  To put it in historical context, this will likely be the largest seat loss in a midterm election for any party since 1938 under President Roosevelt, when the Democrats lost 72 House seats and 7 seats in the Senate.  Clearly, the electoral results today are indicative of a strong statement being made by the American people.


The obvious conclusion from these results is that this is a repudiation of the Obama agenda.  While we would be naïve to not agree at least partially with that, more broadly this looks to be a referendum on politicians themselves.   To wit, given a historical incumbency advantage of almost 90%, the last three congressional elections of 2006, 2008 and 2010 have shown accelerated volatility of incumbent losses.  Specifically, in 2006 the Democrats gained 30 seats in the House, in 2008 the Democrats gained 22 seats, and in 2010 the Republicans will likely gain back 65 seats.  In a span of four years, we have seen massive volatility between the parties and the relative support from the electorate.


The chart of the day, which is posted below, underscores the key reason why this occurring.  This chart highlights broad congressional approval.  Currently, 73.8% of voters disapprove of Congress!   If you were a professional politician yesterday and didn’t understand the implications of that yesterday, today you do in spades. 


We’ve used a quote from Nancy Pelosi at the top of the note today to further emphasize our point regarding the popularity of professional politicians.  While Pelosi retained her seat, her approval rating across the country as Speaker of the House was 29% heading into yesterday’s election.  Her brief statement last night, assuming it is not just rhetoric, is actually what politicians collectively need to work towards for this nation.  More broadly, the message this morning is clear from Americans, they are tired of rhetoric. 


While the Republicans will take a few victory laps over the next few days, the gauntlet is now thrown to them.  They have been given at least a nominal agenda and the next two years will be a test as to whether they can work with the President to move the country forward.  The questions we would ask are: what is next for monetary policy, what can be done about the burgeoning budget deficit, and how can we address the escalating sovereign debt situation of the federal government?  As Paul Rand stated in his victory speech last night:


“When I arrive in Washington, I will ask them, respectfully, to deliberate upon this. We are in the midst of a debt crisis and the people want to know why we have to balance our budget - and they don't.”


To take a deeper dive on some of these questions and to test the mettle of the rhetoric we will be hearing over the coming weeks, Keith and I will be hosting a call next Wednesday November 10th at 1PM with Peter Orszag, former Director of the Office of the Management and Budget.  This call will be a similar format to the one we held with our friend Karl Rove in September.  Peter will present for 20 – 25 minutes and he will then take questions for the duration of the call. 


If there is anyone in the nation who understands what can and cannot be done to reduce the budget deficit, it is Peter Orszag.  If you would like to join this call and are an institutional subscriber, or would like to trial our institutional service for the call, please email Jen Kane at .  The budget deficit is one of the most pressing economic issues facing the United States; therefore we think this call will be a valuable use of your time.


To Rand’s point in his victory speech last night, the people of America are asking a lot of questions.  The next two years will be a test as to whether the professional politicians are finally ready to answer the people with more than rhetoric. Needless to say, our Hedgeyes will be watching.


Yours in risk management,


Daryl G. Jones

Managing Director


Professional Politicians Beware - DJ EL

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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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