CHART OF THE DAY: The Long Walk of European Debt Maturities


CHART OF THE DAY: The Long Walk of European Debt Maturities -  chart of the day

Long Walks

“It is odd to reflect that the prime advocate of a classless society had this early succeeded in making two classes of workers and in marking the difference so clearly with substantial rewards to one class.”

-Slavomir Rawicz


For those of you haven’t read Salovmir Rawicz’s book, The Long Walk, it is well worth your time.  The book tells the story of the author and six fellow prisoners who escape a Soviet labor camp in Yakutsk in 1941. The escapees travel over 4,000 miles through the Gobi Desert, Tibet, and the Himalayas to finally reach British India, and their freedom, in the winter of 1942. 


Last week I surveyed our team for their top book recommendations for 2011 and this book was recommended to me by our newly hired Managing Director of New Business Development, Bob Brooke.  After a brief description of the book, Bob ended his note with the apt, “Hard work is easy.”  In the context of an escape from a Soviet labor camp in Siberia, Bob’s point is a fair one.  Our daily grind through the global markets is certainly easy in comparison to the struggles many on this planet face every day.


On that note, I would like to officially welcome Bob to the Hedgeye team.  After obtaining a degree in economics from Yale, Bob went on to an illustrious professional hockey career, which began playing with the U.S. Olympic Hockey Team in Sarajevo and then tours of duty with the New York Rangers, Minnesota North Stars, and New Jersey Devils.   Bob then went on to get his MBA from Harvard and has spent the last few decades working and building businesses at CSFB, RBC Capital Markets, and Sanford Bernstein.  At Hedgeye, he will be leading many of our new business initiatives and he can be reached at .  


The reason I highlighted Rawicz’s quote above, versus the many noteworthy quotes in the book, is because it emphsaizes the power of free markets.  The Soviet authorities needed cross country skis and in order to find the prisoners who had ski making skills, they had to offer increased pay, which in the case of a Soviet labor camp was nothing more than a doubling of rations.  Incentives are at the very foundation of free market systems.  While the Soviets could easily have used coercive incentives, they opted to use higher remuneration for what they perceived as a more critical skill set (that of ski making). 


Interestingly, incentives on an individual basis are often quite successful, but where they often fail is at the nation state level.  As we survey the global macro landscape, the key issue currently is sovereign debt in Europe.  While European debt concerns took a respite at the end of last year, they are again front and center, and rightfully so.  In the Chart of the Day below, we’ve highlighted some key debt maturities in Europe in 2011. Broadly, there are massive refinancing needs in Europe this year, highlighted by Italy and Spain.  It will be interesting to see if certain nations within Europe can be incentivized to get their fiscal houses in order in the coming year.


The Long Walk of Sovereign Debt is, of course, not limited to Europe.  In fact, CMA recently released its Q4 Sovereign Debt Credit Risk Report and highlighted its view of the top 5 riskiest countries, which were:

  1. Greece - $330BN in 2009 GDP
  2. Venezuela - $337BN in 2009 GDP
  3. Ireland - $227BN in 2009 GDP
  4. Portugal - $227BN in 2009 GDP
  5. Argentina - $310BN in 2009 GDP

The collective GDP of these highest at risk countries is $1.4 trillion, which in aggregate would make them the 10th largest country by economic output in the world (just ahead of Canada).  So, while on an individual basis these countries may have little impact, in aggregate they matter big time.


Beyond these hot spots, the key economies to watch in coming months will be Italy, the seventh largest economy in the world with a GDP of $2.1 trillion, and Spain, the ninth largest economy in the world with a GDP of $1.5 trillion.  The CDS market for both these nations is flashing Default Danger as Spanish 5-year CDS is trading at 359 basis points and Italian 5-year CDS is trading at 256 basis points.  This is up 237% year-over-year for Spain and 180% year-over-year for Italy . . .


As it relates to the calendar, The Long Walk of Sovereign Debt begins this week with the following auctions:


1.       Today: The Netherlands is pitching about 3.5 billion euros of debt. 


2.       Tomorrow: Portugal plans to borrow as much as 1.25 billion euros, repayable in October 2014 and June 2020. Germany seeking 7 billion euros. 


3.       Thursday: Spain will auction as much as 3 billion euros of five-year bonds. Italy will market securities maturing in 2026 and 2015.


As always, the market will ultimately be the arbiter in the coming days, weeks, and months as to whether Europe can survive The Long Walk of Sovereign Debt.


Yours in risk management,


Daryl G. Jones


Long Walks - EL Chart Debt 


Potentially the highest Q4 earnings upside in gaming



It should be no surprise to our readers that we are expecting a significant Q4 beat over consensus on all metrics.  We’ve been consistently touting Wynn’s surging Macau market share over the past 3 months.  Not only has the market exploded in Q4 but Wynn’s share has risen 150bps from the first 9 months of the year and 210bps from Q3 to 16.0% in Q4. Importantly, Wynn’s highly profitable Mass business was up 43% YoY in Q4.


We are projecting Wynn to report $1.2BN of revenues and $316MM of EBITDA, 15% ahead of Street revenue and 20% above EBITDA expectations.   Our EPS estimate is now a whopping $0.83, 54% ahead of consensus.  Not surprisingly, our above Street estimates can be attributed entirely to outperformance in Macau, while our Vegas numbers are in-line with consensus.


Here are the details:


WYNN Macau

We estimate that Wynn Macau will report net revenues of $885MM and EBITDA of $263MM.  Below are some of the details behind our estimates.

  • VIP net table win of $608MM
    • Remember that Wynn generates the highest flow through on junket revenue in the market due to low commission rates
    • Assuming 12% direct play, we estimate that WYNN’s RC volume grew 66% YoY or 29% sequentially, reaching $28BN. Wynn  added (2) junket rooms in the quarter which contributed to the growth
    • Hold was above normal at 3.1% - much higher than last year’s easy 2.7% hold
    • We assume a rebate rate of 0.93% or 30% of hold
  • Mass table win of $170MM, up 45% YoY and 23% sequentially
  • Slot win of $61MM
  • Non-gaming revenues of $80MM and promotional expense of $33.5MM
    • Non-gaming expenses of 20.4MM
  • Variable expenses of $492MM, consisting of taxes, gaming premiums, junket commissions and doubtful accounts
  • Fixed expenses of $110MM compared to $102MM in 3Q2010 and $78MM in 4Q09

WYNN Las Vegas

We estimate that Wynn Las Vegas will report net revenues of $328MM and EBITDA of $72MM.  Below are some of the details behind our estimates.

  • $141MM of net casino revenue
    • 7% YoY increase in table drop to $587MM and $123MM of table win, assuming 21% hold (compared to 23% last quarter and 19% last year, respectively)
    • 3% YoY decrease in slot handle offset by higher YoY hold of 5.9%, producing slot win of $42MM
    • Gaming discounts of 15% of gross win
  • $236MM of non-gaming revenue and $49MM of promotional expenses
  • 3% increase in casino expenses to $71MM – flat with 3Q expenses and total operating expenses of $257MM (compared to $258MM in 3Q2010)

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TODAY’S S&P 500 SET-UP - January 11, 2011

Equity futures are trading above fair value having extended early gains in response to a rebound on European markets after the WSJ reported Japan will join China in providing assistance to the Eurozone by buying EFSF bonds.


After the close Alcoa (AA) reported $0.21 vs. Reuters $0.19, though sales of $5.65B missed forecasts.



  • 7:30 a.m.: NFIB small business optimism, December., est. 94.5
  • 8:30 a.m.: Fed’s Charles Plosser speaks on economic outlook in Philadelphia
  • 10 a.m.: Wholesale inventories, November. est. 1%
  • 11:30 a.m.: U.S. sells $22b 52-week bills; 1 p.m. sells $32b 3-yr notes
  • 12 p.m.: DOE outlook (crude, mogas, diesel, natgas), Jan.
  • 2 p.m.: Fed’s Narayana Kocherlakota speaks in Wisconsin
  • 4:30 p.m.: API inventories, January. 7
  • 5 p.m.: ABC consumer confidence, January. 9


  • Verizon Wireless will introduce its iPhone at an event in New York today
  • Presidential spill commission scheduled to release its final report at 10 am DC time 
  • Facebook will ask a court today to enforce a settlement which resolved claims that its founder Mark Zuckerberg stole the idea for the social-networking company from classmates at Harvard University
  • Autonation December 2010 Retail New Vehicle Unit Sales Up 12%
  • Tiffany Sees Year Adj EPS $2.83-$2.88, Saw $2.72-$2.77,Est $2.77
  • Advanced Micro Devices (AMD) said Dirk Meyer resigned
  • Alcoa (AA) posted 4Q sales that trailed est.
  • Apollo Group (APOL) posted 1Q EPS that exceded est.
  • J.C. Penney (JCP) names Michael Dastugue as CFO, replacing Robert Cavanaugh  
  • Nvidia (NVDA) made licensing pact with Intel
  • Spectrum Control (SPEC) missed 4Q forecast 
  • Stryker (SYK) 2010 prelim. adj. EPS toped ests.
  • WD-40 (WDFC) 1Q adj EPS, rev. below ests.; reiterated FY11 forecast

PERFORMANCE: Consumer Staples is BROKEN on TRADE

  • One day: Dow (0.32%), S&P (0.14%), Nasdaq +0.17%, Russell +0.48%
  • Last Week: Dow +0.84%, S&P +1.10%, Nasdaq 1.90%, Russell +0.53%
  • Month-to-date: Dow +0.52%, S&P +0.96%, Nasdaq +2.07%, Russell +1.01%
  • Sector Performance - (only 4 sectors positive) - Tech +0.14%, Industrials +0.14%, Materials +0.12%, Consumer Staples +0.02%, Consumer Discretionary (0.08%), Financials (0.25%), Healthcare (0.23%), Energy (0.41%), Utilities (0.55%)  


  • ADVANCE/DECLINE LINE: 76 (+444)  
  • VOLUME: NYSE 955.35 (-12.31%)
  • VIX:  17.54 +2.33% YTD PERFORMANCE: -1.18%
  • SPX PUT/CALL RATIO: 1.59 from 1.79 (-11.15%)  


Treasuries were stronger; curve was flattish

  • TED SPREAD: 115.81 -1.015 (-6.032%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%    
  • YIELD CURVE: 2.73 from 2.74


  • CRB: 326.85 +0.90%
  • Oil: 89.25 +1.39% - trading +0.35% in the AM
  • Oil rose for a second day, as investors’ demand for riskier assets gained with advancing equity markets.
  • COPPER: 426.45 -0.42% - trading +1.61% in the AM
  • Copper Gains for First Day in three as Japan Plans to Buy Euro-Region Bonds
  • GOLD: 1,371.43 +0.26% - trading +0.93% in the AM
  • Russia may add to gold reserves


  • Gold Must Exceed $2,000 to Be Considered in a Bubble, Deutsche Bank Says
  • Sugar Rises for Third Day on Report Algeria Waived Duty; Coffee Advances
  • Alcoa Sees `Headwinds' in Growth in China Aluminum Use as Car Demand Slows
  • Rain in Victoria, New South Wales This Week Threatens Wheat Crop, ANZ Says
  • Australian Floods Push Coal Price to Two-Year High; Cotton, Sugar Crop Cut
  • Alaska Pipe Closure May Draw Oman, Russia Oil to U.S. West Coast Refiners
  • Asia Exports Cooling Damps Outlook for Commodity Shippers: Freight Markets
  • Australian Cotton Shippers Say Loss Estimate May Climb if Rain Continues
  • China's First Overseas Gold Fund Raises $483 Million, Lion Management Says
  • Corn Rises for Second Day as Dry Weather Hurts Argentine Crop; Wheat Gains
  • India Won't Import Sugar After Scrapping Tax Amid High Prices, Sucden Says
  • Rubber Advances to Record as 33% Jump in China Car Sales May Boost Demand


  • EURO: 1.2941 +0.26% - trading +0.21 in the AM
  • DOLLAR: 80.881 -0.16%% - trading -0.01% in the AM


  • European Markets: FTSE 100: +1.31%; DAX: +0.82%; CAC 40: +1.16%
  • European markets trade higher as reports that Japan will buy Eurozone debt to be issued this month improved sentiment toward peripheral Europe.
  • Portugal is trading up +2.06% after the Finance Minister says country does not need a bailout and its Prime Minister has scheduled a news conference as investors await news ahead of a bond auction tomorrow.
  • Eastern Europe trading higher except Slovakia and Estonia


  • Asian Markets: Nikkei (0.3%); Hang Seng +1.0%; Shanghai Composite +0.4%
  • Asian markets were mixed today, with caution reigning ahead of government bond auctions in Europe.  Taiwan, China and South Korea were up on the day.
  • Hong Kong reversed two days of declines closing up 0.99%.
  • China rose 0.44% after falling in the morning on a report that banks plan to cut lending by 10% this year, anticipating reduced credit from the central bank. Property stocks ended higher despite a report that Shanghai is likely to impose a property tax on second home buyers during Q1.
  • South Korea managed a small rise of 0.36% despite caution ahead of a central bank policy rate decision 13-Jan. Samsung Engineering rose 4% on saying it had won a $410M order to build a chlorine production plant in the US. LG Electronics edged down on a report that it will build a white goods factory in Brazil to come online next year.
  • Australia bounced off of lows to finish flat, with a move to defensive stocks like Telstra and Woolworths helping the climb back. Australian insurers fall on speculation claims will increase as Queensland floods worsen.
  • Japan fell slightly -0.29% - exporters fell on a stronger yen.
  • Japan November composite index of coincident economic indicators +1.4 points m/m. November index of leading economic indicators +3.3 points m/m.
  • China 2010 new bank lending CNY7.95T vs target CNY7.50T.
  • China 2010 M2 +19.7% vs target +17%.  

A New Congress . . . Now What?

Conclusion:  The outlook for the 112th Congress looks as contentious as we’ve seen.  The sleeper political move of the year could be an increase in the popularity of President Obama as the public gets increasingly frustrated with the political statements in Congress and the President stays above the fray.


An interesting thing has happened since the midterm elections, President Obama’s popularity has improved despite the devastating loss of seats by his party.  According the Real Clear Politics aggregate, President Obama’s disapproval rating reached its highest on September 26th, 2010 at 51.2.  While on October 17th, his approval rating reached the trough of 44.2.  While there are likely a number of mitigating factors, President Obama’s disapproval rating is well off its peak and his approval rating is well off its trough as they are now at 48 and 46.2, respectively.


Undoubtedly a major reason for this improvement is simply due to the fact the election is in the rear view mirror and Republicans have stopped their constant assault on the Obama administration and an evaluation of its performance.   Meanwhile, the approval rating for Congress remains at abysmal levels.  In fact, the most recent poll for Congressional approval from Gallup showed 17% of respondents approving of Congress and 83% disapproving for a negative spread of -66%.


This poll coincides with polls relating to whether voters think the country is on the right track or wrong track, which are also making all-time lows.   Below we’ve highlighted a chart of the aggregate right direction / wrong track polls and these ratings are at the lowest of the Obama administration with a full 65% of respondents suggesting that the country is on the wrong track.  Interestingly, the results of these polls comes at a time when Obama’s approval is improving, albeit marginally, and Congressional approval is staying close to all-time lows.  The implication of this is that whether Congress is controlled by Republicans or Democrats is somewhat irrelevant, their job performance is weak and is viewed as such.  Therefore the question with the beginning of the 112th Congress is . . . now what?  (Symbolically, and perhaps ironically, the Republicans started the new congress with a reading of the Constitution.)


A New Congress . . . Now What? - RCP Poll


From the Republican perspective, there seem to be a number of key priorities, which include:


1)      Reining in spending -  Speaker Boehner has already made some aggressive statements on the spending side of the U.S. budget ledger and has indicated that no legislation will be passed with any earmarks.


2)      Repealing healthcare – After addressing spending, the key focus of the Republican-led Congress will clearly be to either repeal or defund the healthcare reform bill.


3)      Jobs – While both parties approach this from different perspective, the 9.4% unemployment rate in the United States is the key economic issue facing the nation.  It is also the issue that will likely lead to the most direct evaluation of the success of Congress.


Certainly, the first two priorities are hot button issues.  Reining in spending will be unpopular as it will likely require some dramatic cuts to current government programs and employment and a hard look at mandatory programs, such as Social Security.  It will also require a serious discussion about expanding the federal debt ceiling from $14.3 trillion as spending and federal debt have become a real focus of the electorate.  While an expansion will surely occur, it will only come after serious public debate and discussion.  Already, the White House has thrown down the political gauntlet saying it would be “catastrophic” if Congress did not raise the ceiling.  


The repeal of the healthcare bill will be challenging since the Republicans do not control the Senate or the Presidency, but they have so far indicated that it is their intention to push this issue as far as possible.  Interestingly, the U.S. electorate is not overwhelmingly supportive of a repeal according to the most recent Gallup poll, which showed that 46% of those polled wanted it repealed, 40% wanted it to stand, and 14% had no opinion.  The Democrats and, in particular, the President are not going to let the landmark legislative accomplishment of the last two years go away without a fight, despite its low popularity.  In recent days, House Majority Leader has drawn the line in the sand saying:


“At a time when we need to everything in our power to encourage job creation, the healthcare law hangs around the necks of businesses small and large.”


This was responded to by Stephanie Cutter on the White House website where she wrote:


“Repealing the Affordable Care Act would hurt families, businesses, and our economy.”


Most interesting from the early days of the new Congress is that neither party has offered a comprehensive plan to improve the dismal employment numbers in the U.S., which is likely the most pressing economic issue and the most important political issue as it relates to future approval of Congress. 


In the coming weeks and months as we see heightened political debate over the budget, debt ceiling, and potential repeal of the healthcare bill, we should expect Congressional approval to continue to remain mired at absurdly low levels, if not track lower.  As of now, it is difficult to expect much from the new Congress other than continued ineffective politicking.   This could lead to the sleeper move of the political year, which is a gradual uptick in approval of the man in the oval office, who may just be able to stay above the fray.


Daryl G. Jones
Managing Director

Framing Belgium’s Political Strife

Political and social strife are nothing new to Belgium; however, the failure of talks last week to build a new coalition government following political gridlock since elections in June 2009 has severely weighed on the country’s investment risk.


In the chart below we show the Belgian 10 YR bond yield alongside the country’s 5YR CDS spread. Both reflect the rising risk premium to own Belgian debt, a risk that has developed over the last year alongside political instability. And now due to this political gridlocked the country has not addressed any fiscal consolidation measures (austerity) like its neighbors, which has investors concerned given that Belgium has the third highest public debt as a percentage of GDP in the EU at ~96.2% in 2009, behind Greece and Italy.


Framing Belgium’s Political Strife - belgium


Reflecting this risk, and the uncertainty of a meeting King Albert II has tomorrow with Johan Vande Lanotte, a Socialist from Flanders and author of last week’s failed constitutional compromise (who also resigned after the failed talks), the Belgian 10YR yield is now at a new high of 4.21% (or a 1.4% premium spread over German paper, the highest since January 2009).  


To understand the main political disagreements of the government one must understand the divided make-up of the country as well.  These lines include Language and Culture: Dutch is spoken to the north (Flanders) while French is spoken in the south (Wallonia); Economy: more robust and profitable to the north; and Politics: The New Flemish Alliance is the dominate party of Flanders and calls for independence, while the Socialist are the largest party in Wallonia and call for a stronger central government.


In finer terms the disagreements center around political control of the Brussels suburbs, regional control of government services, and the transfers of tax revenue from Flanders to Brussels and Wallonia.


On the hot issue of tax revenue, and given that Flanders is far richer than Wallonia, there’s real divide on just how tax revenue should be allocated. As an example, The New Flemish Alliance wanted more than 40% of it returned to the regions, while the socialists proposed around 25%.


While Belgium is not at the stage of a Greek or Irish Tragedy, there’s room for concern given the sudden swings in investor confidence around Europe’s sovereign debt issues.  Belgium has forecast a budget deficit of 4.8% in 2010 (above the EU’s mandated ceiling of 3%) and 4.6% in 2011, yet Belgium needs to save an additional €1.8 billion to meet a EU target of cutting the deficit to 4.1% of GDP in 2011.


Slightly better news could come on Wednesday when Yves Leterme, currently Belgium's caretaker Prime Minister, is expected to publish an annual economic report with a 2010 deficit below 4.8%.


Even so, the quarrels developing within the country present investment risk that should be monitored. In the context of Europe, we add Belgium to the list of PIIGS that present downside investment risk, including to the common currency. We covered our EUR-USD position via the etf FXE on 1/6. We remain long Germany (EWG) and short Italy (EWI) in the Hedgeye Virtual Portfolio.


Matthew Hedrick



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