TODAY’S S&P 500 SET-UP - December 8, 2010


As we look at today’s set up for the S&P 500, the range is 33 points or -1.45% downside to 1206 and 1.25% upside to 1239.  Equity futures are trading mixed to fair value following Tuesday's up-and-down session which left major stock indices little changed on the day. Of note yesterday, 10 and 30 year T-bond yields hit 5-and-half month highs in reaction to the extension to tax cuts. Moody's warned that the tax cut extension, if made permanent and no offsetting measures were put in place, could put downward pressure on the US Aaa credit rating.

  • AeroVironment (AVAV) 2Q EPS 1c vs est. loss-shr 6c
  • Mitcham Industries (MIND) 3Q EPS 7c vs est. 6c
  • Men’s Wearhouse (MW) sees 4Q adj. loss-shr wider than est.
  • Netflix (NFLX) CFO Barry McCarthy to leave
  • Orexigen Therapeutics (OREX) OREX’s diet pill wins FDA panel backing
  • Starwood Property Trust (STWD) plans 20m-shr secondary
  • Texas Instruments (TXN) narrows 4Q EPS, sales forecast 
  • Costco (COST) posted 4Q EPS that beat est.


  • One day: Dow (0.03%), S&P 0.05%, Nasdaq +0.14%, Russell (-0.03%)
  • Year-to-date: Dow +8.93%, S&P +9.74%, Nasdaq +14.51%, Russell +22.23%
  • Sector Performance: Energy (-0.38%), Tech +0.12%, Materials +0.13%, Consumer Discretionary 0.05%, Telecom (0.03%), Industrials 0.27%, Financials 0.16%, Consumer Staples 0.56%, Utilities (0.67%), and Healthcare 0.06%


  • ADVANCE/DECLINE LINE: 16 (+580)  
  • VOLUME: NYSE 1622.36 (+101.88%)
  • VIX:  17.99 -0.17% YTD PERFORMANCE: -17.02%
  • SPX PUT/CALL RATIO: 1.29 from 1.32 -2.37%


  • TED SPREAD: 16.93 -0.102 (-0.569%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%  
  • YIELD CURVE: 2.61 from 2.53


  • CRB: 315.62 -0.53%
  • Oil: 88.69 -0.77%
  • COPPER: 404.95 +1.04%
  • GOLD: 1,408.650 -0.44%


  • EURO: 1.3302 +0.04%
  • DOLLAR: 79.857 +0.36%




  • European markets have fluctuated either side of unchanged in a relatively tight range after hitting their highest levels in over two years yesterday.
  • Participants assessed Ireland's austerity budget and the lack of quantitative action by EU finance ministers as worries over the regions sovereign debt crisis refuse to go away.
  • Commodity prices saw profit taking after sharp recent gains.
  • Advancing sectors lead decliners 11-7 with insurance the leading gainer, whilst personal & household products led fallers.
  • The Irish equity market is little changed, whilst peripheral markets including Spain +0.6% and Italy +0.8%, led the regions gains.
  • Bank of France Nov industry sentiment indicator 107 vs prior 104, Bank of France raises Q4 GDP forecast to +0.6% vs prior estimate +0.5%



  • Asian markets were mixed today.
  • Japan advanced on a softer yen.
  • Taiwan finished flat.
  • South Korea declined slightly as falls in shipbuilders outweighed gains in tech stocks.
  • Australia declined, but Aston Resources gained 5% on selling a stake in a mine to Itochu.
  • China fell on worries about higher interest rates. Railway stocks were strong on reports that the government plans to invest $600B in high-speed rail networks.
  • Chinese banks fell 2% on a belief that China will raise interest rates this weekend, and deposit rates may go up faster than lending rates do.
  • Japan October current account surplus ¥1.436T, +2.9% y/y. October machinery orders (1.4%) m/m vs (0.1%) consensus.

Howard Penney

Managing Director


THE DAILY OUTLOOK - levels and trends12.8












THE DAILY OUTLOOK - copper12.8





While we believe that CityCenter will succeed in getting an amendment to its credit facility, the road there should be interesting and expensive. 



Beginning in June 30, 2011, CityCenter's $1.8BN credit facilities' financial covenants will kick in and barring anything short of a miracle, they will surely not meet the current 5x maximum leverage covenant.  Almost all of the gaming amendments that we've seen over the last 18 months have involved a substantial reduction in size, an increase in interest expense, and a host of other restrictions.  Given that MGM's current credit facility restricts them from making any material ($50MM limitation) equity investments in CityCenter, and we seriously doubt that Infinity World is chomping at the bit, reducing the facility size is clearly not an option for CityCenter.  This may be a positive.


The other issue is that a substantial minority of the CityCenter bank debt holders are funds, which are not interested in the "relationship" or IPO fees and are therefore not as likely to play softball with MGM in the negotiation process.  We believe that CityCenter will need to find bank lenders to take out the fund holders as part of the amendment process.  This may be just one of the reasons that MGM postponed the IPO of MGM Grand Macau since they need to keep the carrot out there.  In addition to finding fresh bank capital, CityCenter may also need to make a number of other concessions to lenders to get an amendment through, including:

  • All future cash condo sale proceeds will go toward debt reduction instead of to MGM and Infinity World - not that MGM was likely to see any cash from condo sales in the foreseeable future given that that they had almost $750MM of distributions that needed to be paid out ahead of them
  • An agreement to sell the Crystals Mall over the next 18 months with proceeds going towards debt reduction
  • Potential sale of non-core assets (i.e. anything but Aria)
  • Normally, we would say an increase in interest expense, although in this case at a run rate of $60MM of EBITDA, the property is nowhere close to covering its interest expense
  • No distributions to MGM or Infinity World until leverage runs to earthly levels... basically, not anytime in the foreseeable future

In return for these and other concessions, we believe that CityCenter will get a waiver of their financial covenants and possibly another extension of the agreement which expires April 2013.


Bottom line, even if CityCenter EBITDA reaches $250MM over the next few years, MGM or its shareholders are unlikely to see a cent of cash from CityCenter ...paper profits will have to suffice.


Revolving Consumer Credit Still Sinking, but Nonrevolving Credit Shows Growth


Just-released October G.19 data showed another decline in revolving credit, along with significant downward revisions to earlier data points.  G.19 measures non-mortgage consumer credit: credit card, auto and student loan debt.  While the month-over-month decline in revolving credit was not as severe as the September print (-13.0%, revised down from -12.1%), it remains far from healthy. Revolving credit (i.e. card debt), the piece we are most focused on, fell -8.4% (MoM annualized) to $800B.  Currently, the peak to trough decline in revolving consumer credit stands at -17.8%, or $173B.


The ongoing deleveraging by the consumer is alive and well. Contrary to media reports that the principal driver of deleveraging is actually charge-offs, charge-offs represent less than half of the deleveraging that we've seen in consumer credit to date. This marks the 25th consecutive month in which aggregate credit card debt has declined.  Prior to this contraction, the longest drawdown in consumer revolving credit lasted just five months.   


Nonrevolving credit (auto and student loans) rose 6.8% in October vs +7.6% in September (revised from +7.9%).  With the strength from nonrevolving credit leading the way, overall nonmortgage credit increased for the second month in a row, rising 1.7% (MoM annualized).











Overall bank loans have declined 12% since the peak in late 2008, as seen below in the H.8 series. 





The Financials with the greatest exposure to credit card receivables are shown below, including JPMorgan (JPM), Bank of America (BAC), Citigroup (C), American Express (AXP), Capital One (COF), and Discover (DFS).





Overall, total non-mortgage credit increased 1.7%, or $3.4B, as shown in the following charts.







Joshua Steiner, CFA


Allison Kaptur






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This note was originally published at 8am this morning, December 07, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Everyone has a plan 'till they get punched in the mouth.”
- Mike Tyson


There have been a lot of interesting Mike Tyson quotes over the years, some fit for print, others less so, but this one seems apropos for the times. The Fed tells us they have a plan, and they’re implementing it. So far, the markets seem to like it. Let’s see how their plan fares once they get punched in the mouth.


This summer we introduced our bearish thesis on housing with our 100-page report entitled: “How Low Will Housing Go in 2H10 and 2011”. In that report we laid out our three separate home price models: our supply model, our demand model, and our combination supply & demand model. The output of those models forecast home price declines ranging from high single digits to 20%+ over the next 12-18 months. How have we fared so far? As the chart at the end of this note shows, the four major home price series that we track (Case-Shiller 20 City, Corelogic, FHFA, and Existing Home Sales Median Home Price) are all heading south. After peaking in the April/May timeframe on the strength of the tax credit, three out of four home price series are now solidly in negative year-over-year territory. The lone holdout, Case-Shiller, is a 3-month rolling average, which is why it lags the other series in reflecting the degree of slowdown. The next few months of Case-Shiller data will show a comparable negative trend.


For reference, the Corelogic series is the series now used by the Federal Reserve. How has the Fed’s preferred series fared? According to Corelogic, home prices have rolled from being up +4.3% YoY in May 2010 to being down -2.8% YoY in September 2010, a negative -7.1% swing in four months. Looking month-over-month, the Corelogic series was down -1.8% sequentially in September (the most recent data available), which translates to the fastest rate of decline since February 2009.


The supply and demand imbalances were at the root of our housing call this past summer and nothing has changed on that front. The market is more dislocated today than it was when we made the call in the summer. At the time we made our call in June there were 3.99 million homes on the market for sale and existing home sales were running at a rate of 5.37 million, which equated to 8.9 months of supply. Today, there are 3.86 million home on the market for sale (October), while existing home sales are running at a rate of 4.43 million, which equates to 10.5 months of supply. Existing home inventory peaked at 12.5 months of supply in July. Based on our conclusion that home prices take one year to fully respond to supply and demand imbalances, we would expect to see July 2011 be the low watermark for year-over-year price trends in housing. The more important takeaway, however, is that between now and July 2011 the trends should continue to get worse. While it is possible that the market’s “bad news is good news” mentality will persist and ongoing weakening in home prices will simply translate into greater and greater expectations for further quantitative easing, we continue to think that bad news is simply bad.


Another point to consider is the impact QE2 is having on the housing market. While recent demand statistics have been modestly upbeat (i.e. October pending home sales up 10.4% month-over-month), the reality is that mortgage rates have backed up sharply in November. The Bankrate 30-year conforming mortgage index has ballooned from 4.20% a month ago to 4.70% yesterday. For reference, a 50 bp backup in 30-year rates has a 5% negative effect on affordability.


It’s also worth pointing out that no amount of stimulus or quantitative easing seems to increase banks’ willingness to underwrite residential mortgage loans. In the most recent Senior Loan Officer Survey released November 8, the net percentage of lenders tightening access to prime mortgage credit rose to +9.3% from -5.5% quarter over quarter meaning that the average American is now finding it more difficult to get a mortgage than they were over the summer. The trend was similar for access to nontraditional mortgage credit: +9.5% of respondents reported tightening standards, up from +4.5% last quarter. This isn’t helped by the fact that banks are currently engaged in trench warfare with Fannie & Freddie as well as the entire private-label MBS universe over mortgage putbacks. Further, there are 8.5 million borrowers who have either been foreclosed or are currently non-performing on their loan. This is a large slice of the overall homeownership pie that has been semi-permanently eliminated from the buyer pool (7 years for most lenders to look past a mortgage default). All of this has cast a pall over banks’ willingness to underwrite new mortgages.


Many investors forget just how slippery the slope of negative home prices can be. Falling prices don’t happen in a vacuum: they have two insidious offshoots. First, they generate a tangible negative wealth effect. For reference, for all the excitement resulting from the upward move in equities recently, consider that as a rough rule of thumb, every 100 points of upside in the S&P is roughly equivalent to a 5-6% rise in home prices based on there being total direct equity wealth of $10.8 trillion and total residential housing wealth of $17.1 trillion. That said, the wealth associated with housing is much more broadly felt as 65% of American families are homeowners, a far higher proportion than those with material equity wealth. Second, negative home price trends increase pools of underwater borrowers. We have shown that there are presently 11.3 million borrowers (20% of all borrowers) who are underwater. 4.9 million of whom are underwater by more than 25%. A 20% decline in home prices from here would increase those who are underwater to 21.9 million (46% of all borrowers) and those underwater by 25% or more would rise to 9.4 million (20% of all borrowers). Laurie Goodman, a Senior Managing Director with Amherst Securities, one of the leading providers of mortgage data analytics, has shown that loans with LTVs greater than 120% are currently defaulting at an annualized rate of 19.1%, while those with LTVs between 100-120% are defaulting at an annualized rate of 11.3%. Those are scary statistics when one considers that there could be 22 million borrowers in a negative equity position with a 20% drop in home prices from here.


The real question is, what will a 20% drop in home prices feel like for the markets and for the consumer? Our guess is that it will feel a lot like getting punched in the face by Mike Tyson.


Josh Steiner

Managing Director


GETTING PUNCHED IN THE FACE - early look home price compendium

Ireland’s Tiffany Box

Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI)


As the trading day winds down in the US, Ireland’s parliament is going late into the session to vote on the government’s 2011 austerity package, which aims to shave €6 Billion off the budget, and reduce the country’s 11.6% deficit/GDP in 2010 (or 32% including bank liabilities). Importantly, the passage of the austerity package is contingent on the bailout guarantee of €85 Billion from the EU/IMF. Initial live updates on the session suggest that the first of four possible votes on the budget has passed, with the possibility that the vote could spill over to tomorrow.


European equity indices rose today in anticipation of the passage (Ireland’s ISEQ gained +1.72% today) and the EUR-USD has given up its morning gain to currently trade at $1.3284. Our TRADE levels for the EUR-USD are $1.29-$1.33.


Even if the budget is passed, Cowen’s Fianna Fail party, which is carrying a very slim parliamentary majority of 2 votes going into the vote, faces reelection. Cowen has called for elections next February, however given the extreme pressure from the opposition parties of Fine Gael and Labour to immediately step down, flash elections shouldn’t be ruled out. 


A look at the most recent opinion poll from the Irish Sun clearly reveals how far Cowen’s party has fallen out of favor:  Fianna Fail received a mere 13% support, versus Fine Gael 32%, Labour 24%, Sinn Fein 16%, independents and others 11%, and Greens 3%.


Worthy of mention is that the EU has given Ireland an additional year, until 2015, to return its budget deficit below the Union’s mandate of 3% of GDP. While investors may give the country’s capital markets more short-term breathing room, if Greece is any example, and we think in this instance it is a good one, the risk premium to own its debt should remained elevated over at least the intermediate term.  Further, we believe that bloated sovereign debts of peripheral countries will pose significant challenges as these governments still require debt servicing to meet their fiscal imbalances. This will certainly have downside implications to the common currency.


Ireland’s Tiffany Box - cc


Increasingly we expect the focus to turn to Spain and Italy, countries with their own sovereign debt and deficit imbalances that represent far greater economies than Greece, Ireland, or Portugal.  Our models indicate that both Spanish and Italian equities remain broken on immediate term TRADE and intermediate term TREND durations, decidedly bearish indicators.


Matthew Hedrick



Our meetings in Singapore signal optimism.



Following meetings in Singapore, we think it’s safe to say that business levels are very high at both Marina Bay Sands and Genting.  The casinos were very busy as were the common areas of both properties.  The tone of the meetings were very bullish.  In fact, we think MBS will easily eclipse $300 million in EBITDA in Q4 versus our previous projection of $289m, which is in-line with consensus.  We also now believe there is upside to our S$412m EBITDA estimate for Genting Singapore and consensus of S$403m.


Given the growth profile of the market, we are not overly focused on market share but both management teams definitely were.  Genting reiterated its statements from Q3 conference call that they would maintain or gain market share.  LVS firmly believes it will continue to grow its share from Q3 levels.  Until junkets are approved, we would definitely side with LVS on this one as the property appears further from maturity.  However, Genting is currently sponsoring 24 junket applications.  We think junkets could grow the market by 10-15%.  LVS is not sponsoring any junkets currently but will piggyback the licensing process for some junkets after if and when they get approved.  The LVS wait-and-see approach is safer and lower cost but will allow Genting to own the junket market for 6-12 months upon approval from the Singapore government.  Timing of approval is a major uncertainty and our best case is in 1H 2011 but we, and the operators for that matter, have very little conviction on timing.


Overall, we think the market can grow 10-15% without junkets, over the next 12-18 months.  Mass is probably more mature at this point than VIP.  However, both properties have more amenities coming which should result in Mass growing at a healthy premium to GDP growth.  VIP, especially when aided by the junkets, is less tapped.  The Singapore customer base – mostly Mass – probably won’t grow much, thus inhibiting Mass versus VIP. 


Overall, we didn’t see/hear much negative.  On to Macau!