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THE MGM ROLLERCOASTER

It’s up, it’s down, it’s up again.  Here’s a playbook for what promises to be a volatile month of trading.

 

 

What do you get when you mix high short interest, high leverage (operating and financial), transactions, depressed earnings, and a big valuation?  If you guessed stability, you lose! 

 

MGM will likely report earnings the first week of May.  We think it will be just ok.  Expectations seem to be pretty high though, particularly given the Street’s rate surveys and management’s RevPAR commentary.  We have little doubt that strong YoY convention activity drove rates meaningfully higher in Q1 but our concern is more on the casino side.  Street projections of mid-single digit growth in MGM’s Las Vegas casino revenue looks aggressive to us. 

 

Having said that, we are not too much below the Street for wholly owned Las Vegas EBITDA.  Our Q1 estimate is $225 million versus the Street around $235 million.  Whisper expectations may be higher and that is why we are concerned.  We will have a more detailed earnings preview out soon.

 

So stock is going down right?  Not so fast.  MGM Macau is humming and yesterday’s IPO announcement and deal with Pansy Ho is an overall positive.  Operating control should be good for MGM and good for the property.  Moreover, WYNN should report before MGM and we are expecting a huge quarter out of Wynn/Encore Las Vegas.  That should get investors juiced for MGM, given its significant Strip exposure.  However, we think WYNN will be the Vegas anomaly and MGM’s results may disappoint.


QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET

QE, Claims, and the Market

Inspired by a chart our macro team published last week showing Fed Treasury purchases and commodity prices, we show the impact of the Fed's Treasury and MBS purchases on the S&P and on claims.  We observe in the charts below that the three series move in tandem.  We see two plausible interpretations of this data.

 

1) Quantitative Easing drives claims down, which fuels an increase in the market.

2) Quantitative Easing drives the market higher, which decreases claims.

 

Regardless of which interpretation of this data you subscribe to, the reality is that QE2 ends in June, which cuts off this process at the source. The data suggests that in the absence of Fed purchases, the market and claims tread water or deteriorate. For this reason primarily, we are cautious on the Financials space overall heading into the summer months.

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - Fed

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - S P

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - S P and Fed 

 

Initial claims rose 30k last week (27k after the upward revision to last week's preliminary report).  This pushes claims back above the threshold of 400k that we watch as the trigger level for unemployment to fall.  Rolling claims rose 6.25k to 395.75k. 

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - raw claims

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - raw raw

 

The Bureau of Labor Statistics noted that the week following the end of a quarter usually sees an increase in claims.  The week after the end of each quarter is marked with a white arrow in the chart below.  Clearly, there is a seasonal pattern here.  Last week, claims increased by more than the typical seasonal amount, which flowed through into the seasonally adjusted numbers and drove the 30k increase.

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - NSA

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 4 bps tighter than 1Q.  The current level of 273 bps is slightly tighter than last week (276 bps).

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - 2 10

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: 1Q S'PORE GDP; CAP ON LABOUR GROWTH; SMOKING BILL; TOUR/HOTEL STATS; NORTH KOREA CASINO

The Macau Metro Monitor, April 14, 2011

 

 

S'PORE ECONOMY CONTINUES TO GROW Channel News Asia, Strait Times

Singapore 1Q GDP rose 8.5% YoY, beating estimates of 5.7% growth. On a seasonally-adjusted, annualized basis, the economy grew by 23.5% QoQ.  The Ministry of Trade and Industry said the strong growth was driven by the manufacturing sector, particularly in the electronics and precision engineering clusters, which benefited from a pick up in business investment in the region.  Meanwhile, the Monetary Authority of Singapore (MAS) said that economic activity is likely to be sustained at a high level for the rest of the year even with inflation concerns.  To combat inflation, MAS said the exchange rate policy band will be re-centered below the prevailing level of the SGD/USD, which suggests a higher S'pore $.

 

LABOUR FORCE TO GROW BELOW 10 PERCENT YEARLY: GOVT macaubusiness.com

According to Secretary Tam, the overall total labour force (including imported labour) must not increase by more than 10% per year.  The restrictions are needed due to “concerns over the use of social resources”.  Macau’s current unemployment rate is below 3%, with the Monetary Authority saying that the territory has already achieved full employment.
 

INDOOR SMOKING BILL PREPARED FOR FINAL VOTE Macau Daily TImes

The smoking bill is ready for final reading even though the issue of whether to exempt casinos from the smoking ban is still not fully resolved.  Nonetheless, it’s likely the law will be approved.  There is no date set for the vote.


PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR FEBRUARY 2011 DSEC

Visitor arrivals in package tours increased slightly by 0.5% YoY to 466,843 in February 2011. Visitors from Mainland China (332,349), Hong Kong (19,880), Japan (19,453) and Malaysia (9,191) decreased by 1.2%, 1.5%, 11.4% and 9.0%, respectively.  Visitors from Republic of Korea (25,596); Taiwan (24,895) and India (8,374) increased by 85.0%; 16.0% and 61.2% respectively.

 

Total number of available guest rooms of the hotels and guest-houses increased by 1,146 (+6.1%) YoY to 20,083 rooms.  Hotels and guest-houses received 600,248 guests in February 2011, +3.7% YoY, with the majority coming from Mainland China (55.1% of total) and Hong Kong (18.8%).

 

MOUNT KUMGANG MULLS OPENING CASINO TO LURE MAINLAND TOURISTS Macau Daily News

After the exclusive operation right of a casino granted to Hyundai Corporation in Mount Kumgang was terminated, North Korea plans to set up a casino to lure Chinese tourists. Currently, there is only one casino in the country located in Rason, which is exclusively open to foreigners.  The Chinese government has previously banned residents from going to Rason’s casino.  The feasibility of a casino in Mount Kumgang remains uncertain.


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TALES OF THE TAPE: MCD, SBUX, CBRL, CAKE, CMG, PNRA, KONA

Notable news items and price action over the past twenty-four hours, along with our fundamental views on select names.

  • MCD Japan has cut its full year profit estimate by 28% in the aftermath of the earthquake/tsunami disaster.
  • SBUX Coffee Japan LTD cut its full year earnings forecast for the period ending 3/31/2011 by 28%.
  • CAKE was reiterated “Neutral” at Piper Jaffray.
  • CMG gained 2.6% on accelerating volume.
  • PNRA gained 2.4% on strong volume.
  • KONA declined 3.8% on accelerating volume.

 

TALES OF THE TAPE: MCD, SBUX, CBRL, CAKE, CMG, PNRA, KONA - stocks 414

 

Howard Penney

Managing Director


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - April 14, 2011

 

Peru fell 6.2% bringing the biggest three-day decline since October 2008 to 12% on concern opposition candidate Ollanta Humala will win the presidential runoff in June and expand government control of the economy.   Year-to-date the market is down 20% making it the world’s second-worst performer after Egypt.  As we look at today’s set up for the S&P 500, the range is 17 points or -0.34% downside to 1310 and 0.96% upside to 1328.

 

SECTOR AND GLOBAL PERFORMANCE

 

Yesterday, the Financials broke TRADE and TREND.  We now have 5 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND.    

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 101 (+1599)  
  • VOLUME: NYSE 900.85 (-5.13%)
  • VIX:  16.92 -0.99% YTD PERFORMANCE: -4.68%
  • SPX PUT/CALL RATIO: 1.68 from 1.50 (+12.59%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.48 -0.250 (-1.100%)
  • 3-MONTH T-BILL YIELD: 0.06% +0.01%
  • 10-Year: 3.49 from 3.52
  • YIELD CURVE: 2.74 from 2.75 

 

 MACRO DATA POINTS:

  • 8:30 Initial Jobless claims
  • 8:30 PPI
  • 9:45 Bloomberg Consumer Comfort

 

WHAT TO WATCH:

  • Ford may slow or stop production in Asia this month due to Japanese-made-part-shortage - Detroit News
  • Justice Department, SEC looking into Libor rigging - WSJ
  • US foreclosures decline (35%) y/y in March according to RealtyTrac

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • European Union Wheat Struggle Means No Relief From Near-Record Food Prices
  • Copper Falls for Fourth Day on Concern China Tightening May Erode Demand
  • Crude Trades Near Lowest in Two Weeks as Gains on Gasoline Supplies Fade
  • Soybeans Decline as Brazil Increases Exports, China May Sell From Reserves
  • Gold Trades Little Changed at $1,457.57 an Ounce, Paring Earlier Advance
  • Sell Silver as Gold Ratio Signals Slump, Commodity Broking's Barratt Says
  • Uranium Producers in Takeover Play as Assets Exceed Share Price: Real M&A
  • Gold Producers' Stocks Are Cheap, Former BlackRock Fund Manager Birch Says
  • BRIC Leaders Say Increasing Commodity Prices Pose Threat to Global Growth
  • Dwindling Cattle Herds Garner Ranchers Subsidized Loans: Argentina Credit
  • China Developer Seeks Approval for $157 Million New Zealand Farms Purchase
  • Europe Commodity Day Ahead: Glencore to Raise up to $11 Billion With IPO  

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • European equity markets moved lower from the open, with the exception of Ukraine and Hungary. 
  • Peripheral markets were among the leading fallers on continuing debt worries - Russia, Greece Italy and Spain leading the way down
  • Irish Central Bank Says Sovereign Debt Concerns Remain and pose threat to euro growth
  • Central bank cuts 2011 Ireland GDP forecast to 0.9% vs. 1% and sees Ireland 2012 GDP at 2.2%
  • The FTSE and DAX holding intermediate-term TREND lines of support, while Greek stocks look like they could start to crash, again.

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA PACIFIC MARKTES:

  • Asia saw broad based weakness, albeit controlled; pricing in a US growth slowdown
  • China fell 0.26% after a rumor that March inflation was 5.3-5.4%; the official figure is to be announced tomorrow.
  • India rallied hard up 2.25% 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 414

 

 

Howard Penney

Managing Director


Serfdom's Road

This note was originally published at 8am on April 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is seldom that liberty of any kind is lost all at once.”

-David Hume

 

I shifted reading gears this weekend from Lincoln (“Team of Rivals”) and Bastiat (“The Law”) to Jefferson (“Undaunted Courage”) and Hayek (“The Road To Serfdom”). From a research perspective, I think it’s important to draw on history’s lessons in order to contextualize where we might be going next. While socialist leanings have impregnated our economic policies, liberty has not yet been lost.

 

Inasmuch as it was critical for investors to consider alternatives to Big Government Intervention strategies of the 1970s, it most certainly is now. If you didn’t know that Debauching Dollars perpetuates The Inflation, now you know.

 

Before I start digging into some of F.A. Hayek’s thoughts in “The Road To Serfdom”, let’s take our noses out of our text-books and consider some real-time market prices – here are some of the major week-over-week moves in Global Macro from last week:

 

Currencies

  1. US Dollar Index = DOWN -1.3% to $74.86, closing on its YTD lows and down for 11 of the last 15 weeks.
  2. Euro = UP +1.4% to $1.44 versus the USD, closing at its YTD high after having its best quarter ever against the USD in Q12011.
  3. Canadian Dollar = UP +1.1% at $0.95 versus the USD, closing at its YTD high and remains a good way to be long Global Inflation.

Commodities

  1. CRB Commodities Index (19 commodities) = UP +2.2% at 368, registering fresh weekly closing highs for the YTD (+11%)
  2. Crude Oil = UP +4.5% to $112.79/barrel, setting a new 32 month high and a new YTD high of +23.4% in 2011!
  3. Gold = UP +3.2% to $1474/oz, locking in a new all-time high – and, as we like to say at Hedgeye, all-time is a long time!

Countries (Equities)

  1. USA = DOWN -0.3% with the SP500 closing -1.1% off its February 18th, 2011 YTD closing high of 1343.
  2. China = UP +2.1% with the Shanghai Composite locking in a higher-high for 2011 YTD of +7.9%.
  3. Russia = UP +0.7% with the Russian Trading System (RTSI) moving into the #1 spot in Global Equities YTD at +19.9%.

There were obviously many other moves across global asset classes (i.e. global bond yields rising alongside inflation expectations) that mattered as well, but as a Chaos Theorist my job is to deliver you the deep simplicity of the point.

 

The point is correlation risk to the price of the US Dollar. That’s why I started with Currencies - because that’s where policy lives. The Inflation is an American policy. Whether The Bernank and Timmy Geithner want to be willfully blind to this or not, their monetary and fiscal policies are driving inflation through a US Dollar devaluation.

 

Not everyone agrees with this assessment. Not everyone likes being held accountable either. But if Americans want to tell the world with a straight face that Serfdom’s Road is the best path to prosperity – the rest of the world is just going to keep walking further and further away.

 

F.A. Hayek was not a fan of socialism or centrally planned economies. Neither am I. He wrote this many moons ago (1944) about “free markets”, but I think it’s worth re-reading, slowly – “the freedom of our economic activity which, with the right of choice, inevitably also carries the risk and the responsibility of that right.”

 

Never mind the privilege associated with giving one currency (USD) the “reserve currency” right. Never mind one man (The Bernank) abusing that right. There are risks and responsibilities associated with all that is a “free market” to begin with. Without accepting these risks and responsibilities at face value, President Obama, you are starting to blur the lines between political and economic freedom.

 

The good news here is that Americans are going to have this debate about Big Government Intervention, debts, and deficits out loud for the entire world to see. If you listen to Harry Reid or John Boehner long enough, you might say that’s really bad news too – but transparency is progress – if only it reveals how ridiculously politicized our economic policies and planning have become.

 

Hayek’s spite for central planning was born out of watching the Germans debauch and devalue their way to hyperinflation (1920s) and new left-leaning ideas coming out of Britain in the 1930s (Keynes).

 

“Hayek cited the new enthusiasm for socialist planning in Britain as an example of such misguided ideas. The economists who had paved the way for these errors were members of the German Historical School, advisors to Bismarck in the last decades of the 19th century.” (Hayek, “The Road To Serfdom, page 4)

 

I’m not a Keynesian. I’m not an Austrian. I am Canadian American. And I am looking forward to engaging in this generational economic debate. Is America going to entrench herself in a Hamiltonian posture of federal controls? Or is America going to revive her individual freedoms embedded in a Jeffersonian resolve?

 

I don’t know the answers to these questions. But I do know the risk management that will be required in taking either of these paths. The path to the dollar devaluation of the Keynesian Kingdom leads to Serfdom’s Road. And while I doubt I’ll feel that personally, the 44 million Americans on food stamps who are out there fighting The Inflation policy every day, sadly, will…

 

My immediate-term support and resistance lines for the SP500 are now 1320 and 1339, respectively. On a week-over-week basis I drew down the Cash position in the Hedgeye Asset Allocation Model last week to 40% versus 43% in the week prior. My allocation to US Equities is now 6%.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Serfdom's Road - Chart of the Day

 

Serfdom's Road - Virtual Portfolio


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