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THE M3: MGM IPO; SO NOT LEAVING; WEN COMMENTS; LOAN QUOTAS

The Macau Metro Monitor, November 15th, 2010

 

MGM MACAU TO LIST UP TO 25 PERCENT OF CAPITAL macaubusiness.com

CEO Jim Murren announced that MGM Macau is targeting to sell up to 25% of its capital in its HK IPO.  “We're going to list 20-25% of the total enterprise. I can't predict very specific in terms of timing but I can say we're ready”, Mr Murren told China Daily.  Mr Murren also said that MGM Resorts International will open hotels in Beijing, Sanya, Tianjin, Chengdu and Shanghai from 2011 to 2014. The Beijing property will be the first to open, in August 2011.

 

AMBROSE SO NOT LEAVING SJM macaubusiness.com

SJM CEO Ambrose said he is not leaving the company.  As SJM's third largest shareholder, So offered no explanation for his stock sale.  He reiterated SJM's interest in Macau Studio City but still believes that "Macau peninsula is the centre of gaming."  So expects the government to decide on the company’s request for a plot of land near Macau Dome “by the end of the year”, but noted that SJM isn’t “in a hurry to build in Cotai”.


WEN JIABAO URGES MACAU TO FOCUS ON SOCIAL AFFAIRS Intelligence Macau, Macau Daily Times

Premier Wen stressed the importance of closing wealth gap in Macau and addressing the inflation risk in housing and public goods. Wen said, "The Guangdong-Macau cooperation framework will further promote the ties between Macau and the Mainland. The Mainland will impose a significant impact on Macau's development and therefore I hope the [SAR] Government can be well-prepared and outline a [thorough] planning accordingly."

 

MORE CHALLENGING INFLATION FACTORS AT PLAY THIS TIME SCMP, Intelligence Macau

If history is any guide, more rate rises, loan quotas and price control could be planned as China combats inflation, particularly rising home prices.  IM believes if lending quotas become a reality, it could be a major headwind for Macau.


KNAPP TRACK: CASUAL DINING RECOVERY

Conclusion: Knapp Track comparable restaurant sales trends in October indicate that the casual dining recovery remains intact.  As per our recent research on EAT (see yesterday's note "EAT - BADGE OF HONOR), we see Brinker as a way to play this trend.

 

The Knapp Track preliminary results for October suggest that the casual dining recovery seen in the third quarter has continued into 4Q.  October casual dining comparable-store sales came in at +1.6%, the strongest print since August 2007, and traffic declined 0.9%.  Trends have been improving sequentially for most of 2010.  On a two-year basis, October comparable-store sales declined 1.6%, which was a 105 basis point improvement versus the two-year trend in September.  In terms of comparable guest counts, on a two-year basis, October saw a 95 basis point improvement versus the two-year trend in September. 

 

Knapp highlighted the number of initial jobless claims trending down as being a positive for casual dining sales and I would agree with that. However, it is important to note that while the most recent report indicated a significant improvement, there is still some way to go before the four-week rolling average reaches the 375-400k range we are looking for before unemployment can begin to improve.

 

KNAPP TRACK: CASUAL DINING RECOVERY - initial claims

 

Howard Penney

Managing Director


WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 10 improved / 5 of 10 worsened / 4 of 10 unchanged
  • Intermediate-term (MoM): Positive / 3 of 10 improved / 4 of 10 worsened / 3 of 10 unchanged
  • Long-term (150 DMA): Negative / 0 of 10 improved / 7 of 10 worsened / 2 of 10 unchanged / 1 of 10 n/a

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - summary

 

1. US Financials CDS Monitor – Swaps were negative in the US last week, widening for 27 of the 29 reference entities. 

Tightened the most/widened the least vs last week: SLM, PMI, RDN

Widened the most vs last week: C, ACE, TRV

Tightened the most vs last month: AXP, MET, CB

Widened the most vs last month: COF, PMI, MBI

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - us cds

 

2. European Financials CDS Monitor – In Europe, the pattern was the same for bank swaps.  Swaps widened for 36 of the 39 reference entities and tightened for only 3.    

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - euro cds

 

3. Sovereign CDS – Sovereign CDS decreased 7 bps on average last week as swaps eased off their highs on the news that Ireland is in talks with the EU.   

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates rose sharply last week, closing at 8.06 on Friday.  

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - high yield

 

5. Leveraged Loan Index Monitor – After weeks of putting in new YTD highs, the leveraged loan index failed to rise last week.  The series closed the week down a point from its level last Friday. 

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - lev loan

 

6. TED Spread Monitor – Last week the TED spread fell slightly, closing at 16.0 bps.

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index rose 5.1 points, closing at 26.8.

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields arrested their climb, ending the week 7 bps below last week’s close.

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - greek bonds

 

9. 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.  Pricing data was not available for Friday.  As of Wednesday, spreads rose sharply to close at 166 bps.     

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - markit

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index fell 18 points, closing at 231 versus 250 the prior week.  

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - baltic dry

 

Joshua Steiner, CFA

 

Allison Kaptur


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Your Greatest Victories

“Never forget that sometimes your greatest victories can come from your greatest defeats.”

-Drew Brees

 

Last week was a great week for global macro risk managers. By week’s end, with correlation risk to the US Dollar running at all-time highs (Dollar UP = stock, bonds, commodities, etc. DOWN), a gigantic global mean-reversion trade captured victory.

 

With the US Dollar Index recouping +1.9% of its value (week-over-week), here were some of the major correlation moves:

  1. SP500 = -2.1% (the market’s worst week in the last 3 months)
  2. Russell 2000 = -2.3% (we covered our short position last week)
  3. Euro = -2.9% (we shorted the FXE on 11/4 and remain short it)
  4. Commodities (CRB Index) = -3.2% (intra-week we moved up our asset allocation from zero to 3%)
  5. Oil = -2.3% (no position – we sold our oil on 11/3)
  6. Gold = -2.2% (no position)
  7. Copper = -1.3% (no position)
  8. Volatility = +12.9% (we sold our long VXX position on strength last week)
  9. 2-year US Treasury yields = +13 basis points or +35% to 0.50% (we remain short SHY)
  10. 10-year US Treasury yields = +26 basis points or +10% to 2.79% (we remain long PPT)

Putting price moves in context is always critical. Having been short the Burning Buck from June 7th to November 2nd, I get the bear case (DEFICITS + DEBT = CONGRESS). Inclusive of the US Dollar closing UP for the 2nd consecutive week, it’s important to acknowledge that the Debauched Dollar is still down for 19 out of the last 24 weeks and has plenty to prove before it regains any semblance of credibility.

 

That said, THE risk management question this morning is: Can a TRADE higher in the US Dollar become a TREND?

 

TRADE, in Hedgeye speak = 3 weeks or less. Whereas a TREND = 3 months or more. Global macro TRENDs back-test with much higher batting-averages in our risk management model than TRADEs. However, all TRENDs start as TRADEs, so you have to be Duration Agnostic.

 

I bought the US Dollar (UUP) in the Hedgeye Portfolio on November 4th and I remain long of it this morning. Consensus is still short the US Dollar and I can assure you that consensus is not comfortable with that position.

 

Here are the lines that matter in my model for the US Dollar Index:

  1. TRADE = $77.11
  2. TREND = $80.69

What that means is that what was immediate-term resistance for the US Dollar ($77.11) is now support and there really is no significant resistance (provided that the USD Index continues to make higher-lows) up to the TREND line of $80.69. In other words, there’s another +3.2% upside from Friday’s closing price of $78.08 and, consequently, plenty of correlation risk over the intermediate term for anything priced in US Dollars.

 

So what can keep an immediate-term bid to the Debauched Dollar?

  1. The Euro going down on legitimate sovereign debt risks rising (Ireland, Spain, Greece, Italy, Portugal, etc.)
  2. Fed Heads continuing to get hawkish on the margin (Jeffrey Lacker joins Kevin Warsh and Tom Hoenig this morning)
  3. US Treasury Yields continuing to breakout to the upside (2-year yields charging higher again this morning to 0.53%)

I’m not looking for bullish catalysts – these simply are bullish USD catalysts - particularly when you consider the “Bye-Bye, Bear” cover story that Barron’s was running on November the 1st. Bernanke’s QG (Quantitative Guessing) experiment has been YouTubed by the entire free and communist world at this point. If you didn’t know that QG = inflation, now you know. US inflation reports (PPI and CPI) will accelerate again sequentially when reported this week.

 

It’s a mathematical fact that Dollars are priced as a basket of other currencies, so I don’t think I’ll get much pushback on the Euro DOWN trade equating to US Dollar Index strength. I’ll definitely get pushback on the Fed Head thing – after all, the cornerstone of the Bull case on US Equities is built on Begging Bernanke for free moneys as insiders make their highest levels of sales since December.

 

On that not so little squirrel hunting signal that the world calls Mr. Bond Market however, it will be very difficult for people to ignore these immediate and intermediate-term breakouts in US Treasury Yields. This is very new. And the risks in the Treasury market are very real.

 

The 30-year bond has been breaking down, big time, since mid-October. Long-term interest rates breaking out in the US as sovereign yields spike in Europe were 2 of the main risk factors associated with my getting out of stocks and commodities altogether in late October. While some of my greatest 2010 defeats came in the first week of November, the greatest victories in global macro risk management are potentially on the come.

 

My immediate term support and resistance levels for the SP500 are now 1188 and 1211, respectively. I remain short the SP500 (SPY).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Your Greatest Victories - USD


THE DAILY OUTLOOK

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

As we look at today’s set up for the S&P 500, the range is 23 points or -0.93% downside to 1188 and 0.98% upside to 1211.  Equity futures are trading little changed to fair value in the wake of last week's post QE2 pull back. Today we have October Retail Sales and September Business Inventories in what will be a busy week with Fed Chairman Bernanke's speech at the ECB conference on Friday looking like a key highlight.

  • Aastrom Biosciences Inc. (ASTM) filed $75m mixed securities shelf
  • Accelrys (ACCL) said it will buy back as much as $6m in shares by March 31
  • Fortune Brands (FO) may work on a breakup plan with Pershing Square Capital Management, WSJ reported Nov. 12
  • Naugatuck Valley Financial (NVSL) and Southern Connecticut Bancorp (SSE US) mutually agreed to terminate merger deal
  • Novartis (NVS) may rise to $65 by 2013 as new drug portfolio overcomes expiration of existing patents, Barron’s says
  • Vale (VALE) may rise to the mid-$40s due to economic growth in China, increasing commodity prices, Barron’s reported

 PERFORMANCE

  • One day: Dow (0.80%), S&P (1.18%), Nasdaq (1.46%), Russell (1.68%)
  • Month-to-date: Dow +0.67%, S&P +1.35%, Nasdaq +0.43%, Russell +2.26%;
  • Quarter-to-date: Dow +3.75%, S&P +5.08%, Nasdaq +6.32%, Russell +6.38%;
  • Year-to-date: Dow +7.33%, S&P +7.54%, Nasdaq +10.98%, Russell +15.01%
  • Sector Performance: Consumer Staples (0.49%), Utilities (0.82%), Consumer Discretionary (1.04%), Industrials (1.17%), Healthcare (1.25%), Energy (1.47%), Tech (1.40%), Financials (1.65%), and Materials (2.23%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Fortune Brands +7.76%, NVIDIA +5.32% and Disney +5.27%/CF Industries -6.34%, DR Horton -5.42% and Office Depot -5.08%.

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE:1977 (-1108)  
  • VOLUME: NYSE - 1013.04 (+6.69%)
  • VIX: 20.51 +10.57% - YTD PERFORMANCE: (-4.94%) - BEARISH TREND
  • SPX PUT/CALL RATIO: 1.22 from 1.64 +25.42%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 16.67 0.710 (4.448%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • YIELD CURVE: 2.25 from 2.21

COMMODITY/GROWTH EXPECTATION:

  • CRB: 303.60 -3.57%
  • Oil: 84.88 -3.34% - BULLISH
  • COPPER: 389.80 -3.26% - BULLISH
  • GOLD: 1,365.15 -2.89% - BULLISH

CURRENCIES:

  • EURO: 1.3691 +0.27% - BEARISH
  • DOLLAR: 78.082 -0.17%  - BULLISH

OVERSEAS MARKETS:

 

European markets:

  • FTSE 100: (0.33%); DAX: (0.08%); CAC 40: (0.22%)
  • The Irish Independent reported that Ireland is considering asking the EU for funds for its banks, avoiding State funding.
  • Mining shares were amongst leading fallers on economic growth concerns and a broadly stronger US dollar.
  • There were limited EPS results and no major regional economic data is scheduled today, with the focus on US retail sales later in the session.

Asian markets:

  • Nikkei +1.06%; Hang Seng (0.81%); Shanghai Composite +0.97%
  • Markets closed mixed.
  • Banks led Japan higher, as the market was boosted by a weaker yen and stronger-than-expected 3Q10 economic growth.
  • Hong Kong declined even though it got some support from mixed outcomes for property stocks.
  • China closed +1.0% higher reversing earlier losses after bank shares rallied late in the session
  • Japan Q3 real GDP +0.9% seq vs +0.6% survey. Annualized real Q3 GDP +3.9% y/y vs survey +2.5%. September revised industrial output (1.6%) m/m vs (1.9%) initial reading and (0.5%) seq.  September capacity utilization index (1.1%) m/m vs (0.9%) seq.

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



IGT G2E NOTES

Notes from the IGT presentation yesterday at G2E

 

General Commentary

  • Best game content ever in IGT's history
  • Reduced leverage from 3x to 2.4x
  • Centerstage games are doing well
  • Core products - Reel Edge product (combo or skill and chance) will appeal to younger customers - had an order during the demos
  • Hot releases included: Dark Knight, Ghost Busters, etc
  • 2nd competitor in the biz only has 55% of the breadth that IGT has in products
  • Grew global biz 21% this year, which was one of the best growth years. 11% CAGR over the last 10 years. They are deciding to focus on where the growth is - not in NA replacements
  • Despite flat R&D, they increased their product output

Chris Satchell, CTO

  • Increasing leverage of their R&D dollars.  Moved from 11 cabinets to 7 cabinets 
  • Down to 1 production technology
  • Increase leverage of 3rd party technology
  • Improve quality of products and platforms
  • They have increased the pace of bringing games to market by leveraging 3rd party resources.
  • Systems story
    • Finally leveraging their investment by focusing on applications
    • Side games through sbx, tax application, connecting the online and landbased casino worlds
    • Increasing their addressable markets by not having to go to full ethernet.

Patti Hart, CEO

  • Goal is to reduce reliance on NA replacement cycle by improving game ops yield and improve and broaden systems offerings
  • International is growing faster, so it just makes more sense
  • Focused on driving higher ROIC by listening to customers and sharing in efficiencies and leveraging new content distributions
  • Online gaming and mobile gaming opportunities- recently formed a new stand alone division

Q&A

  • How are they going to grow international biz if they keep exiting businesses?
    • Those businesses weren't contributing to the bottom line. Allowed mgmt to focus on better businesses. Australia did very well; Asia and Latin America and South Africa all did well this year.
  • In the systems business, they are focused on leveraging their sbx capabilities. For Europe, they are looking to build a lighter version of sbx for that market. Have 20-25% of the international market.
  • R&D - 63-65% is spent on applications and games; 30% of the rest is on systems, rest is on online, etc. Allocation hasn't changed but efficiency has improved.
  • Expect growth in all international regions. They are decentralizing their salesforce to be closer to their customers. Improving localization piece to make it faster and less costly. Business is moving more into an RFP process too - so they are trying to systematize that too.
  • Thoughts on US shipshare? Aren't taking their eye off the ball in the US. They are just trying to move away from being so US focused. They're just saying that they have the biggest opp to grow internationally.
  • Room to improve: ROIC, game ops, international growth, systems wins, operating margin/cash generation improvement
  • Interactive division
    • Focused on making money in the UK.  Businesses are so separate that US customers don't even know that they have online games.
    • When the UK legalized online gaming, the market grew from $0.4bn (2004) to $3.3bn in 2010
    • Italy - from $1bn in 2008 to $2bn in 2010
    • Partially legal/in process of legalizing: Canada, Italy, France, Australia
    • Potentially legal within 3 yrs: Spain, Denmark, S Africa, Belguim, Czech, Greece, Netherlands
    • Early stage discussions: US, Mexico, Argentina, Brazil, China, Germany
    • Expect 5x growth over the next 3 years in their addressable market
    • UK online demographics: 58% 18-35, 23% 36- 45; 12% 45-55; only 7% over 55 vs. 61% being +55 in the land based slot biz
    • Wagerworks : 10 yrs online and 8 years mobile. Over 10bn wagered since 2005, over 1.5bn transactions in calendar 2009. Have run over 3000 tournaments and contests for their customers. Registered 2mm players. Have over 100 online /mobile patents. Most importantly, they have the best online games.
    • As of 12/09, they provide most of the top 10 games in the UK online casinos. Have 120 online games. Do business with: Unibet, Gala Group, Betfair, 888, Party Gaming, Rank, Paddypower, Virgin Casino, Sky Vegas, Victor Chandler, William Hill, etc
    • Compelling growth drivers
      • Lots of upside in bringing their land content to mobil apps; most of their casino land customers are thinking about developing an online presence; legalization of new markets- incremental profit of new markets should be high bc localization isn't expensive; entry of their casino operators 
    • Thinks that land entrants would be very successful bc they already have brands and large databases
    • Have 200 dedicated online staff
    • How do the economics work? Revenue share is the norm and this is in the game ops business - in other revenue - so you can cap it at least - it's really small.
    • They have online video poker products
    • In Canada - they are leaning towards legalizing everything
    • Incremental set up expenses as this business grows over the next few yrs?  They have 200 people today - mostly in San Fran and UK; looking for personnel to grow to 300 over the next year. US not expected to legalize in the next year.
    • They derive most of their revenues from content, not platforms.
    • UK online casino market is $800mm and as a supplier, they are one of the largest
  • Game demos:
    • Skill games (for sale w/ 10 fee). Rollout in mid-Jan. Expect GLI approval. Mid-Jan field trials start in Nevada.  Have preorder already.
    • Game ops: ghost busters, dark knight(3q)
    • Puppy stampede - and a host of new mld games.
    • Hangover game on the Sex&City-like cabinet. Will come out in Q3 with the sequel release.

 

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