prev

EYE ON GLOBAL MACRO

For the week ending February 25, 2011.

 

This week we’re rolling out for the first time our version of a summary product designed to help keep you up to speed with our latest research and our current thoughts on both topical and non-consensus issues.

 

Given that this is our first take, we’d love to hear your thoughts on if this is something you find valuable and how we can improve it to better suit your needs. If there’s anything you’d like us to add/omit, let us know. Please reply with any feedback at your earliest convenience.

 

The format is as follows: 1) Commentary from team members; 2) Highlights from this week’s Q&A on the Morning Macro Call; 3) Asset Allocation update; and 4) Quick summaries of select Macro research notes and updates to select Quarterly Macro Themes.

 

TEAM MEMBER COMMENTARY

 

Keith McCullough – Strategy

CALLOUT OF THE WEEK: On the margin, the biggest risk factor in my macro model that fortified itself this week is that growth is slowing sequentially in the United States. For the last 3 months, the high-frequency data on Global Growth Slowing (Asia in particular) has been more pronounced than US Growth Slowing. Inflation is both a policy and a consumption tax in America and the consumer stocks are starting to reflect this reality.

OUT OF CONSENSUS WATCH:  With all eyes focused on the impact of Global Inflation Accelerating, we now have a consensus that understands the immediate-term impact of rising oil prices. What I don’t think is a consensus focus anymore is the heightening probability of the second wave of the US Housing crisis. Mortgage applications remain abysmally low and New Home Sales data for January remained very weak.

 

Daryl Jones – Geopolitics; Commodities

CALLOUT OF THE WEEK: Soft commodities are beginning to trade on supply and demand fundamentals in the short term.  Two examples are corn, which is up +4.65% in the last month, and oats, which is down (-6.9%) in the last month.  Despite common top down drivers like USD weakness and global consumption patterns, shorter term supply fundamentals are dominating and leading to price divergence.

OUT OF CONSENSUS WATCH:  With much national media attention focused on State level budget battles, March 4th looms large in Washington.  This is the date that Congress decides whether to extend the current budget, until a new budget can be agreed on.  Current political rhetoric suggests a deal is not close, so a shutdown of the Federal government is realistically imminent.

 

Matt Hedrick – Europe

CALLOUT OF THE WEEK: With the PIIGS still some of the top equity market performers YTD, we caution on the mean reversion trade. Credit yields continue to signal the risk premium to own sizable sovereign debt leverage. The EUR made recent gains vs. major currencies alongside a more hawkish tone from policy makers over the last weeks; we continue to like countries and currencies with active independent central banks (SEK, CHF, and GBP) as the USD continues to get debauched by Bernanke and Co. 

OUT OF CONSENSUS WATCH: Italy could be one southern European country in particular to see a mass exodus of refugees to its shores given the uprisings in Northern Africa. Officials in Brussels believe as many as 750K could attempt to cross the Mediterranean, but Libyan estimates put the figure as high as 2 Million (of a population of ~6.4 Million Libyans).  Italy already faced an influx of over 5K Tunisian refugees following the country’s regime change.  Clearly, policing an influx of these proportions would be a huge tax on the Italian state. 

 

Darius Dale – Asia; Latin America; State & Local Governments

CALLOUT OF THE WEEK: After today’s dead-cat bounce, most of Asia’s equity markets remain broken on a TRADE and TREND perspective. We caution against buying the dips and growth storytelling at these prices. If we wanted long exposure to Asia, we would prefer to do so through the currency market (IDR, SGD, and HKD).

OUT OF CONSENSUS WATCH:  The last thing cash-strapped State & local governments need at this stage of the budget cycle is deceleration in US growth (lower tax receipts) due to higher inflation. Dollar debasement perpetuates both sides of the economic cycle…

 

MORNING MACRO CALL HIGHLIGHTS

 

Every morning at 8:30AM EST, we host a live conference call with clients whereby Keith’s 15 mins of prepared global macro commentary is followed by 5 mins of live Q&A (if you need a dial-in code, please email us a ; the call is also podcasted on our website each morning by 9:00AM). Below is a sample of some of the better questions we received this week (answers paraphrased).

 

2/23:

Q: Your 1340 resistance level for the S&P 500 looks like it was dead on. How much downside should we expect from here based on how overextended the market was/is in your model?

A: We need to test 1307 in the next 48 hours, which would be a 3% correction. From an intermediate term TREND basis, support is way down at 1251, which, from its peak, would be a 7-7.5% drawdown.

 

2/24:

Q: What’s the house view on Middle East and oil at these levels?

A: Both conflict in the Middle East and current crude oil prices are sustainable. From an immediate-term TRADE perspective, however, oil is overbought. We’d be buyers of WTI around TRADE support at $89.50.

 

2/25:

Q: Walk us through in detail how Feb 2011 rhymes with Feb 2008 – particularly from a sentiment and expectations perspective. Walk us through all the bearish macro fundamentals that would keep you from buying US equities should the market appear it wants to test its TREND line of support.

A: “Flows”, ample liquidly, and “you can’t be in cash b/c of inflation” were all offered as reasons to buy equities [at the top]; consumer confidence was peaking [it wound up being a contrarian indicator in ‘08]; and inflation choking off a great run in private consumption growth all rhyme when comparing early ’08 to early ’11. Accelerating inflation (Trashing Treasuries), slowing consumption growth (Consumption Cannonball), and deflating housing prices (Housing Headwinds) are all reasons we are negative on equities for the intermediate-term TREND. We will not buy and hold dips b/c we believe valuation is NOT a catalyst in a market where the Global Macro backdrop suggests growth is slowing and inflation is accelerating.

 

ASSET ALLOCATION MANEUVERS 

  • Cash: 58% vs. 58% 1wk ago vs. 64% 1mo ago
  • US Equities: 6% vs. 6% 1wk ago vs. 6% 1mo ago
  • Int’l Equities: 6% vs. 6% 1wk ago vs. 0% 1mo ago
  • Commodities: 6% vs. 6% 1wk ago vs. 6% 1mo ago
  • Int’l FX: 24% vs. 24% 1wk ago vs. 18% 1mo ago
  • Fixed Income: 0% vs. 0% 1wk ago vs. 6% 1mo ago 

SUMMARIES OF SELECT RESEARCH & QUARTERLY THEMES

 

To access the full reports, please copy/paste the associated links into the URL of your browser.

 

Housing Headwinds Part II:

2/22: Joshua Steiner: Home Price Declines Gaining Steam: All Markets Weakening Except For DC: https://www.hedgeye.com/feed_items/11959 

  • Case-Shiller 20-city home prices this morning fell -1.0% MoM and -2.4% YoY on a non-seasonally adjusted basis. We expect home prices will continue to fall at an accelerating year-over-year rate through July 2011, and will continue to fall in absolute terms thereafter.
  • Eleven of the 20 markets are now at new lows on an NSA basis, up from nine last month.  19 of the 20 markets fell MoM (Washington D.C. was the exception with a 0.3% MoM gain) and 18 of the 20 markets were lower YoY.
  • The Corelogic Home Price Index fell -1.8% MoM and -5.5% YoY.  This was an acceleration on both metrics.  At the current pace of MoM change (even without continued acceleration), the Corelogic HPI will hit a new low next month. 

Consumption Cannonball:

2/22: Brian McGgough: Retail: 3 Stages of Grief: https://www.hedgeye.com/feed_items/11970 

  • One thing we find consistently surprising are managements’ comments about how “if all else fails, the consumer will absorb the cost of inflation.” In retail, that is almost never the case.
  • Based on what the retailers, brands, and manufacturers are saying, the consumer will need to grow the size of their wallet by 3-5% on like-for-like product this year, and fork it all over to maintain peaky profit margins on so/so businesses.
  • What do Wal-Mart, VFC Corp and to a degree Macy’s all have in common? They’re forecasting healthy consumer spending in 2011 without meaningful margin erosion. How in the world can they do this with 87% of the year left to go and we’re two months away from the point where the highest raw material headwind the modern retail industry will hit margins? 

2/23: The Gadhafi--Berlusconi Trade: https://www.hedgeye.com/feed_items/11999 

  • We view Italy’s outsized energy exposure (via ENI) to Libya as a critical force weighting to the downside of its equity market, or the etf EWI with its heft ENI weighting
  • We’ve long been critical of the Italy’s excessive debt leverage and have been short Italy via the etf EWI at times over the last 6 months in the Hedgeye Virtual Portfolio. Now, we see even more short-term downside pressure for Italy’s FTSE MIB given the country’s exposure to the precarious state of Libya.
  • The FTSE MIB is trading between a rock and a hard place. It is trading above its TREND line of support at 21,193, but recently broke through what was its TRADE line of support, and is now resistance, at 22,709.

Japan’s Jugular: 

2/23: Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities: https://www.hedgeye.com/feed_items/12001

  • Though we covered our oversold short position in Japanese equities today in the Hedgeye Virtual Portfolio, we remain outwardly bearish on Japan’s intermediate-term TREND and long-term TAIL.
  • This morning we covered our short position in the EWJ for a gain. We’ll look to re-short Japanese equities on a bounce back up to its immediate-term TRADE line of resistance at 10,909.
  • Watching how US equities trade will be critical here, as both markets have been the beneficiaries of the “flows” into relative “safe havens”. If 1,307 in the S&P 500 doesn’t hold or if it can’t close above 1,330 in the immediate term, the probability of a meaningful bounce in Japanese equities dwindles. 

2/24: Early Look: Mr. Money Man: https://www.hedgeye.com/feed_items/12008

 

For the week-to-date, here’s your US Dollar/Commodity Inflation score: 

  • US Dollar Index DOWN -0.33% for the week-to-date (down for 7 out of the last 9 weeks)…CRB Commodities Index UP +1.7% to 347 (making a series of fresh weekly closing highs all the while).
  • LONGS - Dollar denominated food and energy inflation, currencies of countries with hawkish central banks, financials in socialized countries that have made banks too big to fail.
  • SHORTS - Sovereign Bonds of countries with deficit and currency devaluation central planners, currencies of countries with dovish central banks, emerging markets.

2/24: Pavlov’s Bell: SP500 Levels, Refreshed: https://www.hedgeye.com/feed_items/12026

  • Right now, the SP500 is trying to make up its mind between a  -2.6% correction (1308) and a -6.9% drawdown (1251). If the SP500 closes below 1308, we’ll say a -6.9% intermediate-term peak-to-drawdown is a probable risk.
  • If the SP500 can close above 1308, a lower-high of immediate-term TRADE resistance at 1330 is still our line.
  • Pavlov may very well have taught everyone to buy every dip – but that doesn’t mean everyone is still going to be a winner. 

2/25: Could The Turmoil in the Middle East Be Bearish for Oil?: https://www.hedgeye.com/feed_items/12049 

  • We are long OIL in the Virtual Portfolio as price continues to confirm this position, but longer term, as history shows us, political liberalization could actually support growing production.
  • A lot would have to happen for Western Oil companies to up investment in less stable regions like Iran and Libya, but both Iraq and Russia do provide some credence to the idea that production, over the longer term, could grow if the ultimately outcome is the spread of democracy and rule of law.
  • While the price of oil is still more than $40 from its all time high, it is very close to highest February close of $101.78 in February 2008.  This abnormal and non-seasonal price movement emphasizes the powerful price move we are seeing. 

Enjoy the rest of your weekend,

 

The Hedgeye Macro Team


The Week Ahead

The Economic Data calendar for the week of the 28th of February through the 4th of March is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - hey1

The Week Ahead - hey2


Geopolitical Risk Update: Asia says, “Don’t forget about us!”

Conclusion: While Gaddafi, Wisconsin, and Greece continue to dominate the geopolitical risk headlines, some of Asia’s largest economies are currently dealing with uprisings of their own. Each, to varying degrees, has the potential to heat up substantially in the coming days and weeks.

 

Position: Short Emerging Market equities via the etf EEM.

 

While the conflict in MENA and the recent volatility associated with global crude oil prices appropriately garner the bulk of investor attention, that doesn’t mean geopolitical risk ceases to exist elsewhere. Given, we detail below three scenes in Asia where current uprisings have the potential to accelerate in the coming week(s):

 

CHINA: Cold For Now

 

LinkedIn Corp. has become the latest social networking site to be blocked in mainland China after a user, “Jasmine Z”, posted comments that explicitly stated Tunisia’s Jasmine Revolution should be spread throughout China. Additionally, the user set up a forum whereby others in the discussion group could post their opinions. The Chinese government’s suppression here puts China in direct contention with recently-enacted US foreign policy:

 

“The US will help people in oppressive internet environments get around filters, stay one step ahead of the censors, the hackers, and the thugs who beat them up or imprison them for what they say online.”

-Hillary Clinton, US Secretary of State, Feb. 2011

 

We doubt Washington D.C. has the political will to get in between China and its citizens; we will point out, however, that any reneging on the US’s hard stance on this topic could potentially undermine their efforts and influence in MENA negotiations.

 

Elsewhere in China, demonstrators continue to make a push for weekly demonstrations at 13 locations throughout the country after the initial gatherings on Feb. 20 failed to produce more protestors than police. China’s Foreign Ministry Spokesman Ma Zhaoxu had this to say regarding the demonstrations:

 

“It is the Chinese people’s common aspiration to safeguard social and political stability, promote social harmony, and safeguard our people’s livelihood… No one can force or sway our resolve.”

 

Translation: We will continue to suppress any uprising and the US/UN rhetoric will not factor into our decision.

 

All told, the situation remains fairly muted in China at this point, and given the recent wage increases and the potential for the next five-year plan to focus exclusively on raising broad living standards throughout the country, we don’t see this as a situation that will get out of hand.

 

INDIA: Warm; Poised to Heat Up?

 

On Feb. 3, we published a report titled, “Falling Like a BRICk: Is India the Next Egypt?”; in the report, we detailed the similarities between India’s economy and the now-falling MENA States. Furthermore, we highlighted the #1 risk that could propel Indian citizens to do their best Tunisian/Egyptian/Libyan impersonations: accelerating inflation.


We’ve been vocal about the RBI’s poor effort to adequately resolve India’s inflation issue (instead of raising rates, they spent the bulk of 4Q10 buying back gov’t bonds to increase liquidity in its banking sector). Now India is in a scenario whereby food and energy inflation is spilling over into “core” inflation as producers and retailers hike prices throughout the economy – and this is before $112 Brent crude oil gets factored into corporate decision-making.

 

As we’ve maintained for the past few months, high and rising food, fuel, and now “core” inflation in an economy where ~830 million people live on less than $2 per day is a sure recipe for social unrest – and now India is getting exactly what the RBI has “cooked” up. Led by the country's trade unions, thousands of workers have convened on the nation’s capital this week to protest rising food prices, low wages, and job insecurity.

 

And this is with +9% YoY GDP growth. Imagine what the scene would look like if Indian GDP growth slowed by 100-200bps over the next 6-9 months…

 

Monday (2/28) will be a critical day for the direction of social instability in India, as Finance Minister Pranab Mukherjee unveils the government’s FY12 budget. The budget is expected to be filled with food and fuel subsidies for low-income citizens, as well as guaranteed work programs for over 41 million of its poorest rural families.

 

The expectations for massive stimulus for the low-income segment of the Indian populace have been set; any “miss” relative to these expectations could potentially incite further unrest among Indian voters – many of which have been turning away from the ruling Congress Party in the recent polls due to corruption and unpalatable inflation, among other things.

 

All told, the Indian government cannot afford for the budget to miss expectations or for it to get derailed via further legislative gridlock. Opposition to the alleged graft of former Congress Party officials has stalled the legislative agenda and made the final parliament session of 2010 the least productive in 25 years!

 

The opposing Bharatiya Janata Party’s insistence on a parliamentary probe of the alleged graft has finally resulted in capitulation by Prime Minister Manmohan Singh, who finally agreed to the probe earlier this week, understanding just how important it is for India to get the upcoming budget bill through parliament:

 

“We can ill afford the situation that our parliament is not allowed to function during the critical budget session… It is in these special circumstances that our government agrees to setting up a joint parliamentary committee.”

-Indian Prime Minister Manmohan Singh, Feb. 22, 211

 

Special circumstances indeed... We’ll continue to monitor this situation closely, as the current demonstrations have the potential to go from “warm” to “very hot” in a heartbeat.

 

KOREA: Dry Ice Hot

 

In what is likely the wackiest news of the week, it appears South Korea is stirring the pot of its northern neighbor, attempting to incite a Jasmine Revolution-style uprising designed to overthrow the Kim regime. Its military has dropped over three million leaflets containing information regarding the pro-democracy revolts in the MENA. In addition to the leaflets, the South is also flying in rice, clothing, medicine, and working radios (with the intention of keeping them up to speed on the uprisings).

 

While the South Korean military declined to comment, other officials did chime in with clues as to where this may potentially be headed:

 

“North Korean people’s protests may also be able to bring a change to the regime… South Korea’s military and government should also be ready for any revolt inside North Korea.”

-Song Yong Sun, Member of the National Assembly’s Defense Committee

 

While it’s too early to tell if this latest attempt at psychological warfare will successfully incite a massive uprising in North Korea, we do believe it is of upmost importance to keep this risk on your radar. As we saw last year with the North’s sinking of the South’s naval warship Cheonan in March and its November shelling of Yeonpyeong, tensions can heat up on this peninsula in a real hurry. And perhaps more so than Libya or Egypt, any real outbreak here brings with it a great deal of global geopolitical risk, as the US and Japan remain firmly behind South Korea and China (albeit less firmly) stands behind the North.

 

Let us not forget that a) North and South Korea are still technically at war (and have been since 1950); and b) nuclear weapons (or merely talk of nuclear weapons) have the potential to be a factor here.

 

While it’s much, much too early to even assign the slightest thousandth of a percent to the probability that a nuclear conflict ensues here, we do think it’s important to keep the Korean peninsula on your screens as a place where significant geopolitical risk could erupt rather quickly.

 

Darius Dale

Analyst


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

ISLE YOUTUBE

In preparation for ISLE's FY3Q11 earnings release Monday, we’ve put together the pertinent forward looking commentary from ISLE’s FY2Q11 earnings call.

 

 

YOUTUBE

  • Our improved performance was fueled by our continuing efforts to improve flow through by focusing on profit enhancement programs, including continuing cost containment efforts and refining our marketing programs.”
  • “We are cautiously optimistic that the economy is beginning to recover, but slowly.”
  • We expect maintenance capital for the rest of the year to be about $22 million. And we expect to probably expend about $10 million towards the Cape Girardeau project between now and the end of our fiscal year, primarily related to completing some land acquisitions and design cost.  We fully expect that the funding will come from our free cash flow from operations and draw on the existing credit facility”
  • Pompano potential: “I think that these results are probably indicative of what we can see going forward.”
  • Texas gaming: “It was a lot more active I’m going to say about six months ago, but relatively recently we haven’t heard anything”
  • “Our biggest problem in Black Hawk has been our midweek business. When you have 500 incremental rooms in the market, they were going after the same customers midweek that we are, and it’s highly competitive. So what we have been working on is, how do we drive that midweek business, particularly since we don’t have any convention space that we can use to drive midweek meeting or convention business? How do we do that? And how do we strengthen our acquisition programs?”
  • “For almost two years now… we’ve had pressure on the Bettendorf property, in particular, because of construction on the I-80 bridge. And after 19 months of that bridge being impacted negatively in one fashion or another, last month it finally reopened again, and what that did is it opened up our very profitable secondary markets in Illinois. So we’re starting to see those markets recover again, and we’re also starting to see our weekend business recover again. We were trying to do everything that we could to drive database business midweek because of the bridge issues, and we’re now able to benefit from some of that increased retail play again. The other thing that we did very successfully in the quarter in Bettendorf is utilize the Quad-Cities Convention Center. We did a very aggressive entertainment schedule in the quarter, and we also benefited from an increase in midweek convention business.”
  • “The pressure on Davenport has primarily been as a result of the competitive situation. Our Illinois competitor has been very, very aggressive in the mid-tier segment of the database, which is where we’re seeing the most pressure in Davenport. We’ve been able to maintain strong relationships with the upper end of the database, but again, it’s tough when a competitor is throwing a lot of money at you.”
  • “The biggest improvement obviously came from the tax decrease in Florida. And as I was saying to Larry, I mean, I think that what we’re seeing down there is indicative of trends that we’ll see in the future. When you look at the rest of the portfolio, though, we did see margin improvement at nearly all of our properties; I think it was eleven of fourteen. And this was as a result of, number one, an increase in retail business at nearly all of our properties, which we think is another sign that the economy is starting to slowly recover. But it’s also very, very targeted marketing programs. At almost every one of our properties, we really focused on driving midweek business. And it’s also our cost containment programs, which we have continued at all of our properties.”
  • “As to Mojito Pointe, if anybody spends $450 million in your market, it is going to impact you.
  • “Nemacolin [is] about approximately a $50 million project in that market, so it’s not that large. We believe that even with Nemacolin, incrementally, that between the credit facility, and we still generate a fairly significant amount of free cash flow on an annual basis, that the way these projects lay out and the different construction periods of the two projects, that between free cash flow and the revolver we would anticipate funding them both through those sources. We’ve also mentioned that we’re very aware that in the coming months, sometime over the next period of time here, that it’s likely that we’ll be redoing our senior credit facility. The maturity of the revolver is July of 2012. The term loan’s 2013, and we’ve mentioned several times we’re always looking for the right time and the right way to address that and extend that out. I don’t want to – I think it’d be premature to talk about anything in Davenport at this time.”
  • “This is a company that has over $100 million of NOLs.”
  • Nemacolin: “Our agreement is that we would provide for the build-out of an existing facility that’s already there. We would pay to expand that facility and pay for all the FF&E and the renovation that goes into it. There’s a base fee and then a percentage of revenue to the resort, and then we get the rest of the profit or the EBITDA after that fee’s paid. We anticipate that the fee would probably be somewhere around $350,000 a year or something like that.”
  • “We’re definitely seeing benefit from Alabama closures. But that’s still, obviously, a highly volatile situation, and we’re waiting to see what plays out in Alabama. It is still a very highly competitive market. We’re still seeing some double-digit declines out of the Pensacola market, which has traditionally been a very strong market for us, as a result of the increase in gaming in Florida. And one of the things that is not reflected in what you’re seeing in Biloxi for the quarter is we actually lost one of our biggest special events as result of the oil spill in the Gulf, and we still posted those numbers, so they did a good job.”
  • Caruthersville: “Well, you’ve got a lot of noise in the numbers. There was a $935,000 tax adjustment in the second quarter last year. So if you had looked at the quarter apples-to-apples,  we actually would have been up almost 13% in EBITDA.”
  • Lake Charles: “We have completely revised and revamped our marketing programs there. We have eliminated unprofitable marketing programs. We’ve focused on driving more midweek business. We are seeing some pressure in the market. The market obviously declined in the quarter. We’re seeing some pressure in the market from the secondary markets, particularly Houston, which was down significantly for us. We do have some competitive pressure midweek. Some of our competitors are actually going out and doing midweek promotions, which is something that they haven’t done in the past. But I think for the quarter, the property did an excellent job in terms of containing their costs and marketing smarter.”
  • Q: “Do you expect once Delaware North closes on Jumer’s that they’ll get a little more rational in terms of marketing there and that’ll help give your property there?”
    • A: “We generally see when a property is being marketed that there is an increase in promotional expense. Obviously, you’re trying to drive the top line. So there is usually a rationalization of the expenditures in the market when you see a property like that transact. We’re certainly hoping that that’s the case.”
  • “If we feel that conditions are right in the future, or if there’s a catalyst to raise equity in the company, there might be another attempt to bring in a slug, whether or not it would be as much as we talked about this summer, who knows. I think that would determine on what all we have in the pipeline when, and how the market stacks up.”
  • “For the year, close to half of our maintenance capital is spent on slots or slot related, including conversion kits and stuff like that. “

The Bounce: SP500 Levels, Refreshed...

POSITION: no position in SPY

 

“A hard fall means a high bounce... if you're made of the right material.”

-Anonymous

 

There be bulls in these parts. This bounce is made of what’s made the last 2.5 months so bullish – higher prices.

 

But make no mistake, these be lower-highs – both on a long-term TAIL and immediate-term TRADE basis. And while an immediate-term breakout above the 1308 line of resistance was proactively predictable, we don’t want to mistake today’s low-volume bounce for something that we should chase. A close above my refreshed immediate-term TRADE line of resistance of 1325 would change that, potentially.

 

Here are a few other things to think about in the immediate-term: 

  1. Monday is month-end, so there’s plenty of reason to believe we could see 1325 with month end markups
  2. Monday is after the weekend, so anything priced into oil risk premium can change
  3. Volatility (VIX) remain well above my TRADE (15.59) and TREND (18.11) lines of support (bearish for US Equities, from a price) 

No one said hard falls can’t be proactively prepared for (last Friday I had 14 LONGS and 15 SHORTS). No one said you should short-and-hold after hard falls either (this Friday I have 14 LONGS and 7 SHORTS). I’m just saying that the best strategy from here is to keep managing your gross and net exposures aggressively as Big Government Intervention perpetuates price volatility.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Bounce: SP500 Levels, Refreshed... - 1


CZR 4Q10 CONF CALL NOTES

Caesar's reported a 5.1% YoY increase in Adjusted EBITDA; however, excluding the $23.5MM property tax accrual included in the IL/IN region, Adjusted EBITDA actually declined 1.7% YoY.

 

 

HIGHLIGHTS FROM THE RELEASE

  • "The company's 2010 fourth-quarter revenues increased approximately 1.0 percent to $2,121.0 million from $2,099.1 million in the 2009 fourth quarter, due primarily to revenues associated with our February 2010 acquisition of Planet Hollywood, offset by the continuing impact of the weak economy on customers' discretionary spending. However, certain markets, including Las Vegas, have shown signs of stabilization and improving operating margins."
    • Same store net revenues declined 2.4% YoY in 4Q10 compared to a 2.7% YoY in 3Q2010
  • "During the quarter, we initiated a new program to streamline our operations further, and I'm confident we will end this year with an even leaner, more efficient and responsive organization"
  • "While most markets in which we operate showed modest revenue gains or stabilization in the fourth quarter, Atlantic City did remain challenged"
  • "Our new joint venture with Rock Gaming, LLC, broke ground earlier this month on casino projects in Cleveland and Cincinnati that will operate under the Horseshoe brand name.  The two casinos combined will offer about 4,100 slot machines, 180 table and poker games, and exciting dining, retail and entertainment venues to an
    estimated 14 million visitors annually." Both projects are expected to open in 2012, pending receipt of required regulatory approvals."
  • "On a consolidated basis, when compared with the respective periods of 2009, visitation by our rated players decreased 5 percent for the fourth quarter 2010 and decreased 1 percent for the full-year 2010. The amount spent per rated-player trip increased approximately 1 percent for the fourth quarter 2010 and decreased approximately 2 percent for the full-year 2010. Average daily room rates and occupancy were generally flat for both the fourth quarter and full-year 2010."
    • 4Q Las Vegas YoY trends: 
      • "Visitation by our rated players increased 15%"
      • "Amount spent per rated-player trip decreased 5%"
      • "Hotel occupancy remained above 90 percent"
      • Hotel revenues increased 16%: Occupancy +3.5%; ADR: Flat
    • 4Q AC YoY trends:
      • "Visitation by our rated players decreased 9%"
      • "Amount spent per rated-player trip decreased 5%"
      • Hotel revenues remained relatively flat: Occupancy -3%; ADR: +4%
    • 4Q all other US markets YoY trends:
      • "Visitation by our rated players decreased 8%"
      • "Amount spent per rated-player trip increased 4%"
  • IL/IN: "Revenues in the region increased for the 2010 fourth quarter from the 2009 comparable period, primarily due to increased visitation... Income from operations prior to consideration of impairment charges, and property EBITDA increased for the fourth quarter and full year of 2010 from the 2009 periods as a result of reduced marketing expenses and the benefit of a $23.5 million property tax accrual adjustment recorded in the fourth quarter 2010."
  • "Revenues from our managed properties decreased for the fourth-quarter and full-year 2010 due to the continued impact of the current economic environment on our managed properties. Revenues from our international properties for the fourth-quarter and full-year 2010 increased from 2009 due to increased visitation and increased spend per trip at our Uruguay and London Clubs properties."

 

CONF CALL NOTES

  • Group bookings are strong in Las Vegas
  • In the US, they remain committed to legalization of online poker on the federal level
  • Implemented priority Prism system that allows them to customize marketing programs
  • Significant opportunities remain to streamline their organization and cut more costs
  • 2010 was a challenging year for CZR and the gaming industry
  • For the first time, both revenues and property EBITDA increased... 
    • Not if you exclude the Planet Hollywood acquisition and the tax accrual... oh well gotta love creative accounting GAAP measures
  • New $153MM cost saving initiative by end of 2011
  • I love how they mention the reasons behind their property level EBITDA but manage to exclude the single largest driver of the increase - since it's a one time item that should never be in adjusted EBITDA to begin with
  • The $23.5MM tax adjustment was related to the Hammond property

Q&A

  • 1Q2012 opening of the temp facility in Cleveland and a 4Q2012/1Q2013 opening of the Cincinnati property. $65MM was contributed to the JV so far.
  • Think that stabilization is their ambition in AC given the regulatory changes there. Think that Revel will reinvigorate Showboat and that they need to reposition Bally's.
  • $550MM of cash at OPCO and no R/C draw
  • 2011 Capex plan? $425MM - includes maintenance and growth capex including OH and equity into the LINK project and Octavius Tower ($100-150MM of their equity + financing raise that they announced)
  • RevPAR growth in LV ex PH: Occupancy was up 3pts and ADR was down 1%.  They are against resort fees.
  • Group booking trends in Vegas:
    • Began seeing a pickup of group booking trends a year ago. Both volumes and pricing are much improved from what they saw in 2008-2010.
  • They are working very hard to make their marketing spend more efficient. In AC they have been substantially cutting back on marketing.
  • Why is now the right time to invest in Vegas?
    • They are not trying to game good timing, rather they are trying to attract customers to their strip real estate that has suffered from loss of visitation.  Think that the Wheel will drive a lot of traffic - ala the London Eye.
  • Believe that people's desire to visit their facilities hasn't diminished but their ability to spend has... believe that spend per visitor is starting to rebound a little
  • Planet Hollywood acquisition is really helping them draw more traffic to Vegas 
  • Thinks that the London Eye does 3MM visitors a year - each which pay $20 to take a ride. Intend to offer a more modern version and offer F&B.  Believe that this will be a highly remunerative project.  The Stratosphere also is a big draw.
    • Retail area will have 190,000 SQFT of leaseable space
    • Wheel capacity 10MM / year
  • Update on i-gaming legislation:
    • They would prefer to focus on the federal level until those efforts are exhausted
    • He is cautiously optimistic that they can have a successful passage of online poker in this congressional session
    • If the federal effort is not successful, then they can go the State route. However, given the lack of liquidity, the State efforts are limited unless a number of states legalize and join efforts.
    • US poker market is about $6BN with no promotion from the large operators
    • Think that it would be a fixed cost driven market with high margins
  • Thinks that New Orleans should have a great 2011 - with lots of events and big resurgence of tourism
  • MS has been very tough. Tunica is in its 5th year of decline.
  • Business in Chicago is a monster and that market is quite vibrant
  • St Louis has had too much supply, but is starting to see some stability
  • The competitive behavior has been quite favorable. ASCA has done some innovative work on their marketing front.
  • How did they identify another $150MM of cost savings?
    • Consolidation of mgmt activities in AC and Tunica, marketing activities in the midwest region
  • Strength in the Asian play in Vegas continues to be very strong
  • $220MM tax return was received in the 4Q but not at HET OPCO
  • What are they doing to get that incremental spend per visitor?
    • In Vegas - they are trying to make their network of properties more valuable to their players - trying to incentivize players to see them in multiple properties during their visit

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.

next