It’s been awhile since we haven’t been way above the Street for quarterly earnings.



There are many things to like about the LVS outlook:  strong growth in two very profitable Asian markets, potential recovery in Las Vegas, and the prospect of new Asian markets.  Maybe unfortunate for the stock, investors are well aware of the prospects.  As we wrote about a few weeks ago, for the first time in a long time, consensus estimates do not appear conservative, starting with Q4.


We’re actually slightly below the Street on LVS’s 4Q results.  We estimate that LVS will report $659MM of EBITDA this quarter, which is 2% light of consensus.  While this wouldn’t be a huge miss, we believe that anything short of a nice beat would be disappointing given the momentum behind this name – not to mention the rich valuation.


We’re in-line in for Vegas and a little below consensus on everything else… read below for more details and the math behind our numbers.



Las Vegas


We estimate that Venetian and Palazzo will produce $316MM of net revenues and $78MM of EBITDA

  • Net casino revenues of $134MM
    • 6% growth in slot handle and slot win of $54MM
    • 4% growth in table drop, with normal hold of 19%, for total table win of $101MM.  Last year Vegas table hold was only 17% (same as last quarter)
  • $226MM of non-gaming revenue (compared to $215MM last quarter) and $44MM of promotional expenses (compared to $41MM last quarter)
  • Operating expenses of $238MM (compared to $232MM last quarter) up 15% YoY



We estimate that Sands Bethlehem will report $79MM of revenues and $15MM of EBITDA (5% below the Street)

  • Slot revenue of $62MM / win % of 7.3%
  • Table revenue of $14MM, Oct and Nov revenues totaled $9.7MM



We estimate that Sands will report net revenues of $317MM and EBITDA of $81MM (4% above consensus)

  • VIP net win of $154MM
    • Assuming 14% direct play, RC volume of $7.4BN, up 12% YoY
    • Above normal hold of 3.05%
    • Gross win of $226MM and a rebate of 98bps (32% of hold)
  • Mass win of $132MM and slot win of $25MM
  • $20MM of non-gaming revenue and $14MM of promotional expenses
  • $182MM of variable expenses, $4MM of non-gaming expenses and $50MM of fixed expenses
    • 3Q10 fixed expenses were $50MM

We estimate that Venetian will report net revenues of $658MM and EBITDA of $214MM (in-line with consensus)

  • VIP net win of $254MM
    • Assuming 23% direct play, RC volume of $12.5BN, up 24% YoY
    • Hold appears normal at 2.9%
    • Gross win of $363MM and a rebate of 87bps (30% of hold)
  • Mass win of $270MM and slot win of $54MM
  • $111MM of non-gaming revenue and $31MM of promotional expenses
  • $182MM of variable expenses, $21MM of non-gaming expenses and $100MM of fixed expenses
    • Implied fixed expenses were $96MM for 3Q10 and $111MM in 4Q09

We estimate that Four Seasons will report net revenues of $105MM and EBITDA of $22MM (43% below consensus)

  • VIP net win of $53MM
    • Assuming 44% direct play, RC volume of $3.8BN, up less than 1% YoY
      • Junket RC volumes were actually down 22% YoY
    • Direct business is booming  and the junket business is weaker because they lost share from Jack Lam – which was down $1BN for the year
    • Low table hold of 2.2% didn’t help- although 4Q09 also suffered from low hold of 2.12%
    • Gross win of $363MM and a rebate of 87bps (30% of hold)
  • Mass win of $28MM and slot win of $7MM
  • $25MM of non-gaming revenue and $8MM of promotional expenses
  • $58MM of variable expenses, $5MM of non-gaming expenses and $20MM of fixed expenses
    • Implied fixed expenses were $20MM for 3Q10 and $18MM in 4Q09



We estimate that Marina Bay Sands will report net revenues of $558MM and EBITDA of $302MM (5% below consensus)

  • VIP net win of $156MM
    • RC volume of $10.8BN, up 5% sequentially
    • Normal table hold of 2.8%
    • Gross win of $301MM and a rebate of 1.35% (in-line with last quarter)
  • Mass win of $211MM and slot win of $94MM
  • $129MM of non-gaming revenue (compared to $101MM in 3Q10) and $32MM of promotional expenses
  • $105MM of variable expenses and $150MM of fixed expenses
    • Implied fixed expenses were $145MM for 3Q10


TODAY’S S&P 500 SET-UP - January 13, 2011

Equity futures remain close to fair value in what has been a quiet morning as we await fresh MACRO catalysts ahead of the earnings season.



  • 8:30 a.m.: Initial jobless claims, January 8, est. 410k, continuing claims est. 4088k
  • 8:30 a.m.: Producer price index, December, M/m est. 0.8%, ex. food and energy est. 0.2%
  • 8:30 a.m.: U.S. trade balance, November, est. -$40.5b
  • Net export sales (cotton, corn, soy meal, soybeans, soy oil, wheat), Jan. 6
  • 10:30 a.m.: EIA Natural gas storage change, Jan. 7, est. -149
  • 1 p.m.: U.S. sells $13b 30-yr bonds
  • 1 p.m.: Fed Chairman Ben Bernanke speaks at FDIC panel on small business lending


  • Jury selection begins for Mattel vs MGA Entertainment trial over the origins of its rival’s Bratz dolls.  Mattel’s $100m verdict was thrown out on appeal last year
  • Drug makers, led by Pfizer, pushing for U.S. guidelines to let them post more tweets and online videos without violating marketing rules for print, radio and television
  • AIG said it is set to issue 75m warrants to shareholders by Jan. 19 as it works to repay the $182.3b U.S. rescue
  • U.S., France, Germany and the U.K. need to control their spending on pensions and health care to keep their debt burdens stable over the long term - according to Moody’s
  • Alliance Bernstein Holding LP (AB) CFO John Howard to leave.  Edward Farrell named interim CFO
  • American Capital Agency (AGNC) filed for 18m-Shr secondary; sees EPS for Qtr ex items >$1.20 vs est. $1.21
  • Blackboard (BBBB) completed acquisition of Presidium; sees 1Q adj. EPS 24c, unclear how compares with est. 34c
  • Mercury Computer Systems (MRCY) acquired RF Maker LNX for $31m upfront
  • Universal American Financial (UAM) sees year sales $5.65b vs est. $5.68b


  • One day: Dow +0.72%, S&P +0.90%, Nasdaq +0.75%, Russell 2000 +0.83%
  • Last Week: Dow +0.84%, S&P +1.10%, Nasdaq 1.90%, Russell +0.53%
  • Month-to-date: Dow +1.54%, S&P +2.25%, Nasdaq +3.18%, Russell +2.26%
  • Sector Performance - BULLISH (EVERY SECTOR IS POSITIVE) - Financials +1.7%, Energy +1.2%, Tech +0.9%, Materials +0.9%, Industrials +0.9%, Consumer Spls +0.8%, Utilities +0.5%, Healthcare +0.5%,Telecom +0.5%, Consumer Disc +0.3%   


  • ADVANCE/DECLINE LINE: 1274 (+722)  
  • VOLUME: NYSE 963.60 (+2.09%)
  • VIX:  16.24 -3.85% YTD PERFORMANCE: -8.51%
  • SPX PUT/CALL RATIO: 1.29 from 1.90 (-32.30%)  


Treasuries were weaker today with the pickup in risk appetite. However, some support came from a strong $21B auction of 10-year notes.

  • TED SPREAD: 16.32 0.203 (1.260%)
  • 3-MONTH T-BILL YIELD: 0.15%     
  • YIELD CURVE: 2.79 from 2.73


  • CRB: 334.88 +1.03%  - up over 3% so far this week
  • Oil: 91.86 +0.82% - trading -0.28% in the AM
  •  Oil rose for a second day, as investors’ demand for riskier assets gained with advancing equity markets.
  • COPPER: 441.15 +1.44% - trading -0.82% in the AM
  • Copper Slides as World Bank Predicts Weakening of Chinese Economic Growth
  • GOLD: 1,383.70 +0.10% - trading -0.36% in the AM
  • Gold Buying Shows RBI Losing `Never Ending' Inflation Battle: India Credit


  • Corn Surges to 30-Month High After USDA Cuts Supply Estimates; Wheat Gains
  • Rio Tinto Declares Force Majeure at Australia Aluminum Smelter on Flooding
  • Oil Trades Near 27-Month High on U.S. Stockpile Decline, Alaska Pipe Plans
  • Cocoa Slides for First Day in Five on ICCO Forecast for Increased Supply
  • Steel Output in India May Decline as Australia Floods Reduce Coal Supplies
  • Nickel Supply to Swing Back to Surplus in 2011, Sumitomo Metal Mining Says
  • Lundin Agrees to Combine With Inmet in $9.1 Billion Canadian Mining Deal
  • Cotton Outlook Cut 10% by National Australian Bank After Deadly Flooding
  • India Must `Copy' China, Build Food Stockpiles to Cool Prices, Adani Says
  • Sri Trang Refiles Plan to Sell Shares in Singapore With Rubber at Record
  • Coal at 28-Month High to Beat Oil, Gas on Australia FloodS


  • EURO: 1.3083 +0.88% - trading +0.44 in the AM
  • DOLLAR: 80.031 -1.01% - trading +0.01% in the AM


  • FTSE 100: (0.17%); DAX: +0.02%; CAC 40: +0.41% (as of 7:30 EST)
  • European markets trade mixed with peripheral European markets again leading gains ahead of more peripheral debt sales and the uneventful interest rate decisions at both the BOE and ECB.
  • Spain up 2.6% announced a successful 5-year auction, with yields significantly above the previous auction and market participants await the results of Italy's debt auction.
  • Advancing and declining sectors are even at 9-9, with banks +3% the best performers while basic resources down 2% are leading the decliners.
  • France Dec final CPI +2% y/y vs con +1.9%
  • UK Nov Ind Prod +3.3% y/y and con +3.4%
  • UK Nov Manf Prod +5.6% y/y vs con +5.3%


  • Asian markets rose today on gains overseas and a successful bond auction in Portugal.
  • Australia rose 1.5%, as the Queensland floods’ impact was less damaging than feared for major insurers.
  • Megabanks followed their American peers higher, leading Japan to up 0.73%. But the rise was limited when core machinery orders came in well below expectations. Japan November core machinery orders (3.0%) m/m vs survey +1.6%.  Sumitomo Trust & Banking and Chuo Mitsui Trust Holdings rose 5% each when an executive said the combined entity may offer a higher dividend payout ratio than the individual banks do.
  • HSBC was the biggest lift for Hong Kong for the second day in a row. Tsingtao Brewery, seen as having margins that will be hurt as food prices go up, fell 3%.
  • China increased slightly on strength in oil stocks. Sinopec and Petrochina put on 2% and 1%, respectively. Software companies did well when China’s state council confirmed long-held expectations that it will promote the software and integrated circuit industries.
  • South Korea ended with a small loss when the Bank of Korea surprised people by raising rates 25 bp to 2.75% in a bid to fight inflation. Financials rose. 

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The Macau Metro Monitor, January 13, 2011


New Singapore property measures, effective Friday, include:


1) Increasing the holding period for imposition of Seller's Stamp Duty (SSD) from the current three years to four years

2) Raising the SSD rates to 16%, 12%, 8% and 4% of consideration for residential properties which are bought on or after Friday, and are sold in the first, second, third and fourth year of purchase respectively

3) Lower the Loan-To-Value (LTV) limit to 50% on housing loans granted by financial institutions regulated by MAS for property purchasers who are not individuals

4) Lower the LTV limit on housing loans granted by financial institutions regulated by the Monetary Authority of Singapore from 70%to 60% for property purchasers who are individuals with one or more outstanding housing loans at the time of the new housing purchase


U.S. Federal Budget Deficit . . . Not Getting Better

Conclusion:  The U.S. Federal budget deficit sees little improvement with the December numbers reported today.  The Congressional Budget Office’s estimates for the deficit will likely be going much higher when its new projections come out in the coming weeks.


Positions: Long the U.S. Dollar via UUP; Short 1-3YR Treasuries via SHY


While the U.S. budget deficit for December came in line with consensus at a deficit of -$80BN, the question is really whether consensus matters.  As it relates to the budget deficits, we would argue that where the number comes in versus consensus is really irrelevant as compared to the degree of change sequentially and on a year-over-year basis.  The key takeaway for the first three months of the federal budget year is that deficit issue is not getting better.


As it relates to the key line items for the first quarter of the fiscal year, this is what was reported: 

  • Expenditures continue to grow and for the first quarter are up 3% on a y-o-y basis;
  • Net interest expense on debt is up 9.5% y-o-y and is now almost 7% of total government expenditures (we are seeing the negative impact of more debt and higher interest rates); and
  • Finally, if we normalize for TARP, the overall deficit for the first quarter is -$372BN, which is an increase over -$369BN in the same period last year.

To be fair to the federal government, they offered that a number of timing issues that may be distorting this year’s numbers versus last year (calendar issues and the timing of insurance payments).  From our perspective, we would expect these timing issues to normalize over the course of the year and have no real way of backing them out.  Therefore, when we look at the numbers we normalize for 1-time payments or expenditures only, which in the case of our analysis are TARP and payments to GSEs.


A key take away from this report is that the Congressional Budget Office is going to have to take up its budget deficit projections for fiscal 2011.  The last update on annual budget projections came in August of 2010 and fiscal 2011 was projected to have a budget deficit of -$1,066BN, which would have been more than ~ -$230BN less than the actual budget deficit in fiscal 2010, or a 17% improvement.  Given that we are seeing minimal improvement in the deficit the CBO will likely have to dramatically take up its estimates for this year and perhaps the next couple years.  The new estimates are expected to be released later this month and will be a catalyst to be focused on.


Just as a refresher, the current budget deficit projections for the next three years are: 

  • 2011 - $1,066BN;
  • 2012 - $665BN; and
  • 2013 - $525BN

These projections will be going higher, and likely dramatically so in the coming weeks.


This report and its implications that future estimates need to go higher will be coming at a very opportune time for Republicans in Congress who have made deficit reduction one of their hallmark issues heading into the 112th Congress.  This report only adds more credibility to the case of deficit hawks like Ron Paul who will have the conch in coming weeks.


Daryl G. Jones
Managing Director

The Muni Bond Market: Silent But Deadly

Conclusion: The $2.9 trillion municipal bond market is poised to make headlines and rattle global financial markets in 2011. Keep this threat front and center on your “white board” of interconnected risk.


Position: Short Muni Bonds via the etf MUB


Quite frankly, it amazes us at Hedgeye how little attention investors are paying to interconnected risk over the last 2-3 months. While the trajectory of US economic fundamentals over this time frame can be debated, we don’t see any signs of abatement in some key domestic risks playing out literally right under our collective noses.


Housing Headwinds, originally introduced back in 2Q10 by Josh Steiner, our Managing Director of Financials, continue to matriculate. US housing prices are declining at an accelerating rate in 3 of the 4 indexes we track – even from depressed levels of comparison. We expect something in order of 15-20% further downside by year’s end.


The Muni Bond Market: Silent But Deadly - 1


Identifying the interconnectedness of this risk as it relates to the muni bond market leads us to another interesting chart. Local Government Property Tax Receipts grew +7.7% YoY in 3Q10, the second consecutive quarter of growth. Since their tax assessments and property appraisals operate on a ~3YR lag, this trend is not sustainable, as State & Local Property Tax Receipts correlate positively with a 0.97 r² to the S&P/Case-Shiller Home Price Index when lagged three years.


The Muni Bond Market: Silent But Deadly - 2


The Muni Bond Market: Silent But Deadly - 3


Given that local governments collect roughly 97% of all Property Tax Receipts, representing ~26% of their revenue, we smell trouble on the way for already-strained municipal budgets. Further exacerbating budgetary headwinds is the accelerating amount of fiscal austerity going on at the State and Federal levels, roughly 30% and 4% of municipal government revenues, respectively.


Since January 1st (LESS THAN TWO WEEKS), we’ve seen a drastic amount of fiscal conservatism and budget-slashing proposals at the State & Federal level. Some highlights include (not at all limited to): 

  • FEDERAL: $100B in spending cuts proposed by House Republicans from non-defense, discretionary spending;
  • CA: $12.5B in spending cuts proposed by new Governor Jerry Brown which targets: $1.7B in healthcare, $1.5B in welfare, $1.4B in public universities and community colleges, 10% of all employment costs – each with the intention of approval by March; Additional proposal pushing an extension of 2009’s “temporary” tax increase ($9.3B); Recently ordered the recall of ~48k government-paid mobile phones, which could save ~$20M;
  • IL: Just passed a +67% income tax increase, upping the State income tax rate to 5% from 3% through 2014;
  • OH: Pushing legislation that would ban strikes by public school teachers and a proposal to prevent State-financed social workers from forming unions;
  • NJ: Proposal to undue a 9% pension increase which was enacted in 2001;
  • NY: Proposal to save $200-$400M by implementing a one-year freeze for State workers and a proposal to cut $2.1B in Medicaid outlays in FY12;
  • TX: Plans to cut $4.3B from spending on education and health & human services; and
  • WI: Pushing legislation that would prevent public sector employees from forming unions and bargain contracts. 

Just last week, House Budget Committee Chairman Paul Ryan (R. WI) had this to say on the prospect of a Federal bailout for a distressed States:


“We are not interested in a bailout… Should taxpayers in frugal states be bailing out taxpayers in profligate states? Should taxpayers in Indiana, who have paid their bills on time, who have done their job fiscally, be bailing out Californians, who haven’t? No, that’s a moral hazard we are not interested in creating… If we bailed out one state, then all of the debt of all of the states is not just implied, it’s almost explicitly put on the books of the federal government.” 


In all reality, the likelihood of the Federal government having to bail out a US State in this fiscal year or the next is extremely low (no disrespect to Meredith Whitney, who is calling for 50-100 “meaningful defaults in 2011 on the order of “hundreds of billions of dollars”). In fact, no State has defaulted since Arkansas did back in 1933.


Where this hard line on future aid really impacts the US economy is at the municipal level, where both State aid and Federal support are running dry after two years of stimulus spending. Given this headwind and the upward trajectory of interest rates, we do believe there is a substantial risk for a meaningful amount of local governments and local authorities to default or declare bankruptcy in 2011. By meaningful, we mean enough to make negative headlines and rattle the US debt market, which has far-reaching implications beyond that.


The Muni Bond Market: Silent But Deadly - 4


According to Chapman & Cutler, as Chicago Law firm, only five municipalities sought bankruptcy protection in 2010 (-50% YoY), with the largest being a South Carolina toll road restructuring $300M. We are essentially witnessing (with some ignoring) the calm before the storm. It’s important to note that we don’t think all municipal issuers are created equal; there will certainly be a dichotomy formed amongst issuer credit quality – much like there is in Europe’s Sovereign Debt Dichotomy (PIIGS vs. Germany, Sweden, and Norway).


In light of the Municipal Debt Dichotomy, some of the biggest buyers of municipal debt (including Berkshire Hathaway, Liberty Mutual and Allstate Corp.) have been using the current “calm” as an opportunity to decrease their exposure, unloading muni bonds to some investors who view the 5.67% average YTM as “an excellent source of yield” and “a terrific bargain”.


The Muni Bond Market: Silent But Deadly - 5


When it all said and done, everything has a price. What makes this game fun is figuring out what that price will be at the end of a specified duration. Over the intermediate-term TREND, we at Hedgeye think muni bond yields are poised to continue their upward trajectory at an accelerating rate in the face of material deteriorations in their fundamentals. How much this shakes global financial markets is a question we will attempt to answer each day along the way.


Darius Dale


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