April may end up at HK$19-20BN



Macau slowed in the past week and we would expect further slowing as we approach the May holidays.  As of April 24th, table gaming revenues month to date were HK$15.5 billion.  Adding a projection for the last 6 days of the quarter and a full month of slots, we estimate total April gaming will finish at HK$19-20 billion, up 44-52% YoY.


In terms of market share, MPEL lost some share in the past week but is still trending well above its 3-month trailing average.  Here are the shares:




It matters when hold is volatile.



We recently cautioned our clients that MPEL may not hit the whisper Q1 EBITDA numbers of over $140 million.  Despite strong top VIP volumes, low hold may crimp margins since at least half of MPEL’s junkets are paid commissions based on volume, rather than revenue.  In these instances, MPEL bears the risk of hold fluctuations.


Currently, we are projecting company EBITDA of $131 million which is actually up from our recent estimate of $126 million but below the whisper expectations and below our previous estimate of $144 million.  We had previously thought that most of the CoD’s junkets were compensated on a rolling volume basis but now believe that it is closer to 50/50 revenue share.  Thus, the bottom line impact of March’s low hold is not as significant as we thought- however, our conclusion remains the same.

Consensus Meets The Hedgeye: Q1 GDP Estimates in Freefall

Conclusion:  With U.S. GDP likely coming in lower than “expected”, we continue to stay long of The Inflation via gold and oil as slower growth will give The Bernank cover to remain Indefinitely Dovish.


My ever astute colleague Darius Dale circulated the attached chart to our internal team earlier today.  It is a chart of Bloomberg Consensus estimates for Q1 Real GDP growth. These estimates have been falling, and falling hard.  Currently, the consensus estimate for Q1 growth is 2.6% and peaked at close to 3.5% in late March of this year.  Now with most of the data in the books, the “sell side” has dropped their estimates dramatically.  After the fact estimate revisions aren’t exactly helpful, but it is endemic of Groupthink on the sell side.


On November 11, 2010, we wrote a note, following a thoughtful discussion with former Peter Orszag, that outlined why GDP growth would likley be lower than expected in 2010 (email us for a copy).  The key reasons were as follows: 

  1. The inventory cycle is going the wrong way in the first part of 2011; moving to net-neutrality towards impact on GDP growth.  As a side note, Orszag noted that the sequential improvement in GDP in Q3 was unintentional as some firms were caught out by the slump in demand during the summer and unintentionally built up inventories in Q3.  That trend, Orszag expects, will reverse itself in Q4 and the early part of 2011. 
  2. The Recovery Act, despite the controversy, added 2%+ to GDP in 1H10.  By design the act was to have all the money “out the door” by the end of September and succeeded in doing so.  Going forward, the cost of the Recovery Act will be net neutral and eventually as it ramps down and, eventually – in terms of cash flow – will be net negative to GDP growth.
  3. The final factor is State and local deficits which are projected to be $100 to $150 billion a year for the next two tears.  Going forward, a much smaller share of which will be offset by federal subsidies, therefore a much larger share will need to be closed through tax increases and spending cuts at the State and local level.   

Coincidentally, right around that time, Hedgeye Macro was sounding the alternative alarm bell of “Growth Slowing as Inflation Accelerates”.


The implications of these key factors are anemic GDP growth (as the sell side is now realizing) and stagnant employment improvement. In aggregate, this likley provides cover for the Federal Reserve to stay Indefinitely Dovish.


Daryl G. Jones
Managing Director


Consensus Meets The Hedgeye: Q1 GDP Estimates in Freefall - 1

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R3: Endorsements, WMT/AMZN, COLM


New Balance makes a major commitment to soccer. Bad for others in Europe. But dollars being diverted away from US is good. Also, thoughts on home delivery, counterfeiting and how NOT to invest in a brand.




New Balance/Warrior Sports to Sponsor U.K.'s Liverpool Soccer Team - Warrior Sports, a unit of New Balance, has reportedly signed a deal worth about $41 million to make uniforms for the Liverpool soccer team. The Times of London said Warrior will replace Adidas and take over production of Liverpool uniforms in time for the 2012-2013 season. The Times of London also said it's the biggest such contract in English soccer history and twice the amount of what Adidas currently pays. The deal would expand the partnership between New Balance and Fenway Sports Group, which owns Liverpool FC, an English Premier League football club, and the Boston Red Sox. New Balance last month became the official footwear and apparel sponsor of the Red Sox. <SportsOneSource>

Hedgeye Retail’s Take: Make no bones about it…this is BIG. A deal of this size is the equivalent of Nike buying the Yankees. The good news here is that it ties up a big piece of New Balance’s sports marketing budget, making it tougher to compete with Nike, Adidas, and UnderArmour for such assets. The bad news is that they’re going heavy into Soccer/Football. They join as another thorn in Adidas’ sand to a lesser extent Nike’s side as a threat to a business that is dominated by such a small number of mammoth brands.  


Wal-Mart Tests Home Delivery - Wal-Mart Stores Inc. is taking on competitive threats from Inc. and other big online retailers by testing out home delivery of groceries. The Bentonville, Ark., retailer launched a new service Saturday in the San Jose, Calif., area called Walmart To Go that allows customers to purchase food, health-and-beauty products, medicine and other basic household goods online and have them delivered to their doorsteps for fees starting at $5. Wal-Mart has begun testing grocery delivery.  A number of other retailers, including Amazon and Sears Holdings Corp., are experimenting with similar sales models, which have become common in Europe and are available in some large U.S. cities, but the business is still largely the domain of smaller retailers in the U.S. Wal-Mart said the home-delivery test was limited to a single market and may not be expanded further, depending on the results. Wal-Mart declined to elaborate. <WallStreetJournal>

Hedgeye Retail’s Take: It’s a stretch to call this a reaction to Amazon. Go to Amazon and check out groceries. You’ll see largely dry goods like Cheerios, bags of salted snacks, and of course, the obligatory helping of Spam. Our sense is that no one will get this model right – ever – under the current food production and packaging system. Many types of food will need very different packaging to space allotted in inbound-Truckloads, warehousing, and ultimate customer-delivery.  Also, the age of inventory becomes even more critical. You can buy a two-year old pair of socks, but not Captain Crunch. We’re not saying that this is destined to fail. In fact, those with the vision and the capital will figure it out.


Borders Said to Be Seeking at Least $50 Million in Additional Financing - Borders Group Inc. (BGP), the bankrupt book chain, is seeking at least $50 million in additional financing as sales trail expectations and publishers demand cash in advance, said two people who have seen the chain’s plans to reorganize. The funds are needed to help Borders emerge from its in- court restructuring, said the people, who declined to be identified because the process isn’t public. The retailer already has a $505 million debtor-in-possession loan, which offers sufficient capital for the next few months, the people said. The retailer may risk liquidation without further investment, easier terms from vendors or a buyer, they said. Some publishers are spurning the reorganization the chain proposed to them privately, said a person familiar with the publishers’ strategy. At least one deems the revenue projections unrealistic because Borders no longer has enough stores to generate those sales, said the person, who declined to be identified because Borders’s presentations aren’t public. <Bloomberg>

Hedgeye Retail’s Take: This is akin to asking Dad for keys to the car a week after you wreck his other one. This is such a textbook example of a company who is being marginalized by content owners, but does not have the power on the distribution side to bridge the gap.


Adidas Announces Deals with Top NFL Prospects - Adidas announced that it had signed endorsement deals with top NFL prospects Von Miller of Texas A&M and Randall Cobb of Kentucky. Miller and Cobb are the latest additions to the Adidas football roster, which includes defensive back Prince Amukamara of Nebraska , running back DeMarco Murray of Oklahoma, wide receiver Titus Young of Boise State, tight end Kyle Rudolph of Notre Dame and wide receiver Jerrel Jernigan of Troy, Eric Berry of the Kansas City Chiefs , C.J. Spiller of the Buffalo Bills , Reggie Bush of the New Orleans Saints, Mario Williams of the Houston Texans and Lawrence Timmons of the Pittsburgh Steelers. <SportsOneSource>

Hedgeye Retail’s Take:  Adidas putting on the pressure in the wake of Nike bidding away the league contract for the 11/12 season. We’ll presume that players are actually doing their jobs by then – though the upcoming season remains unanswered. This is probably the worst time for a star player to be graduating and entering the draft from the player’s perspective – but likely a win for potential endorsers who can probably get them on the cheap.


The Ongoing War on Counterfeits - As the industry’s relationship with the Web morphs into one of both loving and loathing, companies are changing tactics in their fight against counterfeiters, who in turn are becoming increasingly sophisticated. Fashion firms recognize they need a vibrant presence on the Web — from e-commerce to social networking — yet also are finding the Internet is now the primary source for counterfeit goods and sites selling fakes that are proliferating as quickly as daffodils in spring. The numbers illustrate the scale of the fight: last year research firm ComScore said U.S. e-commerce sales totaled $227.6 billion. In 2010, U.S. Immigration and Customs Enforcement valued the global counterfeit market at $600 billion.  As a result, the Internet has become a clandestine conduit for piracy, cybersquatting and counterfeiting, all of which can take legitimate sales away from apparel, beauty and retail companies, according to legal experts speaking at Fordham University’s first annual Fashion Law Institute Symposium earlier this month. And with violators working around the world, rather than simply around the block, fashion companies are seeking remedies wherever they can find them. <WWD>

Hedgeye Retail’s Take: One can argue the flip side as well -- that the internet is allowing smart companies to bring transparency to an otherwise opaque part of the business.  Keep in mind that one of the biggest problems with ‘fakes’ are the ‘not fakes.’ For example… Nike orders 250,000 Air Zoom Elite in each of 4 different colorways. The factory fulfills the order, and makes an extra 1,000 pair of each for the house. These practices are tough to police, and the numbers add up. Internet sales of these products would likely be more transparent than nabbing that dude on the street corner with 5 pairs of size 14s.


Columbia, Sorel to Launch E-Commerce in Canada - Columbia Sportswear Co. announced Wednesday plans to expand its e-commerce business to Canada and select European markets in fall ’11. The Portland, Ore.-based company will launch new websites for its flagship Columbia brand and for Sorel. In addition to Canada, the shoes will be available to customers in the U.K., Germany, France, Italy, Netherlands, Belgium, Austria and Spain. When they debut, the websites will offer information about the features and benefits of the products, full-screen zoom capability, product videos, a product comparison tool, ratings and reviews, as well as a list of independent and online retailers that also carry the brands. <WWD>

Hedgeye Retail’s Take:  Ho-hum. Yes, this is probably a good business decision. But can someone explain to me why a brand as good as Sorel is just now entering Canada? After all, Canadian winters are about 20 degrees colder than we see in the US. This is such a great brand that has been allocated such little capital over time.


Tony Duquette Sues J. Crew  - A leopard might not be able to change its spots, but an interior design firm believes those spots can be trademarked.  Design firm Tony Duquette Inc. last week slapped J. Crew Group Inc. with a lawsuit that alleges the retailer’s leopard-print cardigan infringed its trademarks and constituted unfair competition.  Beverly Hills, Calif.-based TDI, which holds the intellectual property rights of the late designer and artist Tony Duquette, claims in its suit, filed in the Southern District of New York, that J. Crew promoted and sold its women’s “Duquette Leopard Print Sweater” without permission.  The complaint alleges that the plaintiff’s marks are now connected to J. Crew’s product at retail, in advertising and in more than 150,000 online searches from various search engines. <WWD>

Hedgeye Retail’s Take: It’s tough to see a) how the leopard print can be trademarked, but more importantly b) how there’s any way that consumers would associate J Crew with super-duper-high-end Tony Duquette. All that said, despite the legal costs, Mickey is probably smiling right now as we see the newsflow on the ‘problem’.


American Apparel Gets $15M Lifeline - Dov Charney has used up one more of his nine lives. The controversial retailer on Thursday finalized a private placement of shares in American Apparel that gives the company breathing room on its burdensome debt and a cash cushion to finance operations. The move averts a potential bankruptcy for the trendy Los Angeles-based company, which has repeatedly warned in filings that it faced an imminent liquidity crisis. A group of investors led by Toronto-based Michael Serruya acquired $15.2 million in shares of American Apparel, at 90 cents each, a 27.4 percent discount to Thursday’s closing price of $1.24. The deal also includes warrants convertible to another $27 million in shares, also at 90 cents each, that are exercisable over the next 180 days. As part of the deal, American Apparel also won a waiver from Bank of America on a covenant breach on a $58.2 million credit facility that could have immediately become due at the end of this month. <WWD>

Hedgeye Retail’s Take: This looks like a good deal investor group. Now they just need to keep Charney on an extraordinarily  tight leash.  



Knapp Track comparable restaurant sales in March indicate that the casual dining recovery is steadily progressing.  February’s casual dining comparable restaurant sales number was revised downward from 1.6% to 1.4%.  This month’s report shares interesting commentary on gasoline prices and the impact they have on different income brackets and restaurant categories.


Knapp Track preliminary results for March suggest that the casual dining recovery, which took a pause of sorts in the fourth quarter, took hold once more in the first quarter with trends improving throughout the quarter.  March comparable restaurant sales of +1.6% signify a sequential uptick in two-year average trends of 105 basis points.  The revision in January’s trends means that the sequential uptick in two-year average trends in February was 85 basis points.  1Q11 brought a sequential acceleration on comparable restaurant sales, according to Knapp Track, of approximately 140 basis points. 


Comparable guest counts in the casual dining space saw a sequential gain from a revised -0.2% result in February.  March’s preliminary comparable guest counts print of +0.1% remains a concern given that it continues to lag overall sales.  1Q comparable guest counts two-year average trends increased 100 basis points from 4Q to -1%.  That notwithstanding, given the coincident increase in gasoline prices, it is impressive that the trend continues to improve.  Knapp noted that, according to the most recent data available from the Bureau of Labor Statistics Consumer Expenditures (2008 and 2009), gasoline price fluctuations have different impacts on the various income classes.  The impact of the substantially higher gas prices is greatest, according to Knapp’s read on the data, on fast food.  In 2009 (low gas prices), the under $30k income household spend 7.1% of income on gasoline, the $30k-$49.9k household spent 4.7%, the $50k-$69.9k house spent 3.9%, the $70k-$99.9k household spent 3.2%, the $100k and over household spent 2%, and the $150k and over household spent 1.5% on gasoline.  


In addition, Knapp points out that if gasoline prices remain near the current levels, it could reduce overall gains in the restaurant industry by -0.6% for the year.  The year-to-date run up in gasoline prices, on an annualized basis, translates into a drag equivalent to 75% of the $111.65 billion consumer stand to gain from the 2% reduction in Social Security tax in 2011. 


We continue to favor EAT, RUTH, and KONA.



Howard Penney

Managing Director

European Risk Monitor: Debt’s Drag

Position in Europe: Long British Pound (FXB)


As is typical for Mondays, we release our weekly European Risk Monitor. With European markets closed today for Easter holiday, the theme for this week may be wait and watch. Greek risk continues to blow out (see sovereign cds and bank swap charts below) as the contagion threat from peripheral debt continues to drag.  A bailout of Portugal (~ €50-90 Billion) is estimated for mid-May and this weekend’s news flow suggests that despite the massive gain of the euro skeptic/anti-bailout True Finns party in Finland last week, the new government is likely to agree to a bailout in Portugal.


Finnish Finance Minister Jyrki Katainen, who is set to lead the new government, said that there would be a united voice from Finland on its bailout stance and that he personally was in favor of a bailout for Portugal. Interesting, the European Commission’s top economic official, Olli Rehn, is a Finn, so we could see his Brussels influence should disunion on the bailout issue present itself in the coming weeks. In any case, the statements should calm some market fears.


Greece continues to flash a negative divergence among the PIIGS.  The Greek 10YR yield is at a new all-time high of 14.90% as is its sovereign cds at 1442bps, or +84bps day-over-day (see chart directly below). Our European Financials CDS Monitor shows that bank swaps in Europe were mostly wider week-over-week, widening for 25 of the 39 reference entities and tightening for 14 (chart below).


European Risk Monitor: Debt’s Drag - a. sov cds


The EUR-USD also remains strong.  Our immediate term TRADE range is $1.44 - $1.46 and we continue to caution on the headline risk associated with this trade. We stress that the Euro’s advance has come primarily to USD weakness. The US Dollar Index is down for 13 out of the last 17 weeks, and has lost -8.6% of its intermediate-term value in the last 4 months. However, with the EUR-USD bumping up against our resistance level, and the ever present threat of sovereign debt contagion, this is a trade to monitor acutely. 


We remain long the British Pound via the etf FXB in the Hedgeye Virtual Portfolio and bullish on the impact of UK austerity on the currency. The GBP-USD is at $1.65 this morning, up +1.1% week-over-week or +5.8% year-to-date.


Matthew Hedrick



European Risk Monitor: Debt’s Drag - bank swaps

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