• run with the bulls

    get your first month

    of hedgeye free



“It's been 84 years, and I can still smell the fresh paint. The china had never been used. The sheets had never been slept in. Titanic was called the Ship of Dreams, and it was. It really was.”
-Old Rose


In the quote above from the blockbuster film “Titanic”, an elderly Rose DeWitt Bukater reminisces on the grandeur and splendor of a vessel once described as “unsinkable” – even by God. More deeply, her allusion to the Titanic’s former nickname triggers feelings of grief as she turns to the memories of a lost life that could’ve been so many years ago.


Unfortunately global risk managers don’t have the luxury of dwelling on the past like Old Rose here. We must constantly be playing the game in front of us; this week global markets are tuned squarely to Europe’s bond auctions and statement’s from the region’s leaders on its sovereign debt issues as a proxy for market performance.


Over the short term we’d expect European markets to continue to make gains on the heels of announcements from China (earlier this month) and Japan (on Tuesday) to buy European bonds and statements from EU Economic and Monetary Commissioner Olli Rehn (yesterday) that EU officials are trying to forge a “comprehensive” plan to contain the sovereign debt crisis and from German Chancellor Angela Merkel who indicated a desire to do “whatever is needed to support the euro.”  Rehn also ruled out debt restructuring for Greece or any other euro-area member state.


With this kind of support, it’s no surprise that investors cheered, markets boomed, and the European auctions have found plenty of demand. Yesterday saw substantial outperformance from the peripheral equity markets, with gains from: Spain’s IBEX +5.4%; Greece’s Athex+ 5.0%; Italy’s FTSE +3.8%, as credit markets have improved over the last 3 days.


As we head in to earnings season, MACRO seemed to return to the forefront as the high-profile upside driver to global equity prices as concerns over sovereign debt auctions diminish.  The dampened European sovereign contagion concerns fueled a pickup in risk appetite on the back of a better-than-expected Portuguese bond auction yesterday and Spain’s auction today.  This is leading to outsized gains in the financials around the world.


Yesterday in the US, financials extended their 2011 outperformance with the leadership coming from the banking sector, with the BKX +1.5% and the broader XLF up 1.7%.  Despite disappointing Machinery orders out of the Japan, the Japanese megabanks followed their American peers higher, leading Japan to +0.73%.  Like in the US, the potential for increased dividends is driving equity prices higher as both Sumitomo Trust & Banking and Chuo Mitsui Trust Holdings rose 5% overnight on the potential of higher dividends. 


Macro Icebergs


As we’ve seen throughout market history, it’s typically when everyone is expecting smooth sailing ahead that certain “icebergs” tend to derail things. If we’ve learned anything from the movie “Titanic”, it’s that hubris about our top ideas (the ship) and a disregard for risk (not having enough lifeboats on board) can get us into trouble.


Certainly a few Macro Icebergs are scattered across our domestic waters. How we navigate them individually will be the key to getting paid in 2011; currently, the collective is “full speed ahead”.


Below we’ll highlight one of the largest Macro Icebergs that a) has the potential to capsize our ship; and b) is out of consensus – at least for now:


Municipal Debt Dichotomy


Yesterday we published an intraday report titled: “The Municipal Bond Market: Silent But Deadly” (email if you want to see our work on muni bonds). In it, we took a deep dive at the headwinds affecting this sector of our financial markets and the systemic risk therein. The key takeaways from the article were:

  • Fiscal austerity at the State and Federal Government level and a strong political will in D.C. to avoid bailing out States and municipalities will perpetuate budget woes at the municipal level (together, State and Federal support account for ~34% of municipal budgets);
  • Local governments are running out of room with their accounting “tricks” and are staring at potentially 2-5 years of declining property tax receipts, which are ~26% of their budget;
  • Calls for State defaults are overblown; the real issues lie within the municipalities and municipal authorities across the nation; the States that have the most severe fiscal issues will see a disproportionate number of their municipalities go bust (though bankruptcy is not permitted in 23 States, defaulting on payments to vendors and creditors will be the more likely outcome in many cases); and
  • The equity markets are misinterpreting the recent back up in yields as “growth” and not “risk” and this risk isn’t going away any time soon.

While still largely ignored by consensus, it was certainly interesting to see some big names in our industry come out on both sides of this debate yesterday:


PIMCO’s Bill Gross: “Ultimately, municipal bankruptcies will be at a lower level. I don’t subscribe to the theory that there will be lots of them.” 


JPMorgan’s Jamie Diamond: “There have been six or seven municipal bankruptcies already. I think unfortunately you will see more… If you are an investor in municipals you should be very, very careful.”


“Smooth Sailing Ahead” vs. “Icebergs A’Cometh”.


We certainly aren’t crying wolf for the sake of attention like some analysts with ulterior motives. We don’t do ratings, banking, trading or manage assets; we only get paid for being right. Considering that we’re still in business after three of the most volatile years in the history of financial markets, we’ve been blessed to be more right than wrong over this duration.


For the sake of our economy (yes we are patriots), we hope we are not right on this one. The last thing America needs right now is another financial crisis on its hands perpetuated by blow-ups in the $2.9 trillion dollar muni bond market and Housing Headwinds Part II (not mentioned here; email us for more details). Unfortunately, hope is not an investment process. That’s why we’ll continue to help you navigate these murky waters as Global risk managers.


We’ll discuss these risks and how to play them on the long and short side on our Q1 Quarterly Themes Conference Call tomorrow at 1:00pm. Qualified prospective institutional subscribers please email for more details.


Keep your head on a swivel.


Howard Penney

Managing Director


Matthew Hedrick



Darius Dale





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

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.


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. 


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

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.