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It appears that every manufacturer survey out of late indicate more downward pressure on profit margins as producers are still having some difficulty passing “inflation costs” thru the supply chain. 


As a result, we continue to believe that EPS expectations embedded in S&P 500 (which is a lagging indicator) are too high; inflation slows growth, raises the cost of goods sold and lowers margins.  The resulting stagflation implies a lower multiple for the S&P 500.  As the chart below shows, expectations are past all-time highs in terms of EPS forward twelve-month earnings and actual earnings are also at peak levels.  While expectations are pressing higher and higher (the red line below shows the Street’s expectations roaring higher and higher), actual earnings have been lagging higher but – as I stressed earlier – earnings are cyclical lagging indicators.  They were in early 2009 when Hedgeye’s market-view was bullish and they remain so today.  Inflation, and its impact on earnings, cost of sales, and multiples, is the factor to watch at this juncture. 





The evidence of this was made clear in today’s Empire Manufacturing Index.  The report showed that prices paid (highest level since mid-2008 and the second highest ever) for inputs rose by a “median 5%” over the past 12 months, with manufacturers only planning to raise their own prices by a “median 4%.”  And that’s assuming they can get away with it!





As the economic recovery has progressed, and the easy-money policy in Washington has been unrelenting, the rise of cost pressures has been inevitable and manufacturers are feeling that pressure in the supply chain.  This time around it is occurring at a time when consumer confidence is stagnating and improvements in the labor markets are slowing.  Further complicating things is the inventories index which climbed to 10.8, its highest level in a year.   


On the positive side, the survey revealed that managers were more upbeat about the future and the hiring index climbed to the second-highest level on record.  This consistent with a number of consumer confidence readings we see that points to “future expectations” being well ahead of the reality of the “current conditions.”  However, expectations have been outstripping current conditions for some time now. 


Howard Penney

Managing Director

European Risk Monitor: Peripheral Aid and the Storm Cloud of Strauss-Kahn

Positions in Europe:  Long Germany (EWG)


A court today denied IMF head Dominique Strauss-Kahn bail and remanded that he be placed in custody until the next grand jury hearing on May 20th under claims he sexually assaulted a chamber maid in a Manhattan hotel room over the weekend. The IMF preempted the court’s decision and replaced Strauss-Kahn with first deputy John Lipsky as acting Managing Director yesterday; however, the timing of the incident collides with the beginning of two day meetings of Eurozone finance ministers to discuss additional funding for Greece and existing loan terms for Ireland and Portugal. With the IMF funding around one-third of European bailout packages, the departure of Strauss-Kahn creates near-term consternation as the region’s periphery remains mired in sovereign debt contagion.  We expect the EUR-USD to trade in a band of $1.41 to $1.44 over the immediate term TRADE, and maintain a support level around $1.40 over the intermediate term TREND as the European community continues to fiscally backstop the Eurozone (see chart below).


European Risk Monitor: Peripheral Aid and the Storm Cloud of Strauss-Kahn - mm1


The EUR-USD declined -1.4% week-over-week in a week that showed increasing inflation readings and strong Q1 GDP reports versus expectations, particular in Germany and France, gaining 1.5% and 1.0% quarter-over-quarter, respectively. However, the common currency remains volatility against a backdrop of headline risk, including current negotiations that hint Greece could receive another €60 Billion on top of the €110 Billion bailout issued in May 2010. Our stance remains that kicking the can of debt down the road doesn’t end well, however that won’t spell decimation for the common currency over the near to intermediate term. 


A few near-term catalysts to keep on your screen as it relates to the EUR-USD pair that may influence its movement within a band include:

  • Any decision, if any, on additional Greek funding from the Eurozone finance ministers’ meeting beginning today
  • State elections in Spain on May 22nd that could jeopardize PM Zapatero’s power
  • The ongoing US debt ceiling debate (May 16 until the end of June = White hot political calendar for USD)

Our European Risk Monitors continue to reflect a significant risk premium to own Europe’s periphery, however risk has largely abated over the last week. Greek 10 year bond yields are hovering around 15.5%, and gained 14bps day-over-day, however sovereign Greek CDS backed off 165bps w/w (see chart below).  Further, risk continued to fall into the announcement of Portugal’s €78 Billion bailout package and recent confirmation that the Finns will acquiesce to the bailout terms. The 10YR Portuguese government bond yield fell 74bps w/w.


European Risk Monitor: Peripheral Aid and the Storm Cloud of Strauss-Kahn - mm2


Our European Financials CDS Monitor shows that bank swaps in Europe were evenly split last week, widening for 19 of the 39 reference entities and tightening for 19, with one flat.


European Risk Monitor: Peripheral Aid and the Storm Cloud of Strauss-Kahn - kk1

European Risk Monitor: Peripheral Aid and the Storm Cloud of Strauss-Kahn - kk2


Strauss-Kahn’s ruling will also impact French politics, as he was expected to announce his presidential candidacy under the Socialist Party at the end of the month. Going into this weekend, Strauss-Kahn was the most popular candidate to challenge Sarkozy into April/May 2012 presidential elections, with approval polls suggesting he led Sarkozy by as much as 5%.


We remain constructive on German fundamentals and expect the country to lead the region. We’re long Germany in the Hedgeye Virtual Portfolio via the etf EWG and believe the country’s fiscal conservatism leaves it in a strong defensive position as sovereign debt contagion within the region persists. Over the last days we’ve seen Greece and Spain break their TRADE and TREND lines, with the UK’s FTSE breaking its TRADE and TREND lines just today. Our models show TREND support for the FTSE at 5,953 and TREND support for the DAX at 7,100. Stay tuned.


Matthew Hedrick



Slowing growth is the story.  Hold-aided Genting increasing its market share lead.



The Singapore gaming market generated US$4.9BN (S$6.5BN) in gross gaming revenues over the 4 trailing quarters.  Over the same period, Macau casinos took home US$25.7BN and Las Vegas casinos reported US$5.8BN in gaming revenues.  On an EBITDA basis, S’pore market cashed in S$3.0BN (US$2.3BN).  Relative to 4Q, S’pore 1Q revenues jumped almost 10% to a new quarterly record of S$1.9BN, the highest QoQ growth rate among the three markets.  However, Rolling Chip (RC) hold was high (3.3% vs a TTM rate of 3%) during the quarter which contributed virtually all of the QoQ growth. 


In terms of market share, Genting came out on top again in Q1.  As the charts below show, Genting increased its lead over LVS in EBITDA and revenue share since Q4 due mainly to high hold.  However, LVS regained 10 percentage points in VIP RC share after Genting reported an 18.5% sequential  drop in VIP RC.  The company blames high hold for some of the sequential drop explaining that players wager less when they are losing. 


So where do we go from here?  Expectations have been so high for the S’pore market in 2011 that modest growth (5-10%) for the rest of the year may not be enough to satisfy the Bulls.  The 5% sequential drop in market VIP RC in Q1 is concerning (comparatively, Macau has not seen a QoQ drop in VIP RC since Q4 2008), and the junket licensing catalyst may not happen any time soon.  Mass has been relatively flat since the sequential jump in 3Q 2010.  Slots have exhibited decent sequential growth but that growth rate has slowed substantially.  Of course, Golden Week may reverse these trends temporarily, but we would not be surprised to see some disappointed bulls expecting Macau type growth.


SINGAPORE Q1 REVIEW - singapore 1


SINGAPORE Q1 REVIEW - singapore 2


SINGAPORE Q1 REVIEW - singapore3


SINGAPORE Q1 REVIEW - singapore 4


SINGAPORE Q1 REVIEW - singapore 5

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No change to HK$22-24 BN projection for May.



Macau table gaming revenues totaled HK$11.7 billion for the first 15 days of the month.  The pace slowed dramatically from Golden Week with average daily table revenues falling from HK$899 million in the first 10 days down to HK$528 million.  A drop off is not surprising given the Golden Week impact on the first 10 days.  We still think total gaming revenues projects out in the HK$22-24 billion range for the full month (+33-45% YoY growth), including slots.  Absent the Galaxy Macau contribution (opened yesterday), which is not in these numbers, we would be leaning toward the low end of the range.  However, Galaxy Macau is likely to spur incremental visitation so we are sticking with our original projection. 


The only significant market share move from last week was Wynn, giving up significant share mainly to SJM.  No doubt luck played a role but we are starting to wonder if WYNN can maintain its stock price momentum in the face of lower market share, new competition from Galaxy Macau, slowing market growth, and the later opening date of Wynn Cotai to 2015.




Malcolm Knapp released estimated casual dining comparable restaurant sales for April over the weekend.  Casual dining companies have seen solid 1Q results but the sequential slowdown indicated by Knapp Track data for April could point to a more difficult 2Q sales environment.


Estimated comparable restaurant sales growth in April was +1.6%.  Final March comparable restaurant sales growth was +2.4% (versus the prior estimate of +1.9%).  The sequential decline from March to April, in terms of the two-year average trend, was -55 basis points. 


Comparable guest counts in the casual dining space grew +0.2% in April on a year-over-year basis.  The final March guest counts growth number was +0.40% (versus the prior estimate of -0.10%).  The sequential decline from March to April, in terms of the two-year trend, was -75 basis points.


If this latest Knapp Track data point does, in fact, point to a more difficult 2Q sales environment, it would corroborate with what we are seeing in the broader consumer economy for 2Q to-date.  Below is some text from Friday's Macro post titled, "INCREMENTAL THOUGHTS ON THE CONSUMER":


"Although consumer spending growth remains healthy, the latest retail sales data suggest that growth may be slowing on the margin (including the issues with seasonal adjustment for Easter).  The government reported that sales growth in April disappointed, with core sales growing 0.2% (the weakest result since December 2010.  Yes, rising gasoline prices are taking a toll on sales at retailers and there are some signs that discretionary purchases are beginning to slow.  Department stores and housing related retailers had a poor showing in April, while restaurants may be losing some share to the grocery store channel.  The government’s attempt to increase take home pay from reduced social security withholding is being fully absorbed by higher gasoline prices.  As noted above, the recent job picture is not good and wage income is growing only modestly and that growth is largely dependent on government.  Therefore, the outlook for retail sales has become less certain and the risk to the downside is growing every week."


That gas prices continue to be a concern for restaurant companies was noted by many casual dining and quick service management teams during the first quarter earnings season.  Expectations are for gasoline prices to moderate over the remainder of the year but, if gas price inflation does not moderate, it could have a dampening effect on comps for the restaurant space.  I have previously highlighted CBRL, CAKE, and CPKI as three names that could be negatively impacted by elevated gas prices.


We continue to favor EAT, RUTH, and KONA. 



Howard Penney

Managing Director

CAB: Thoughts on the Credit Book

After seeing CAB's Master Trust Data (which I understand only enough to be dangerous) I looked to Josh Steiner for his color. I was surprised with his response, to say the least.


Cabela's reports April master trust data

  • Gross charge-offs 2.84% vs 2.92% in Mar and 3.30% in Feb
  • Total delinquencies 0.87% vs 0.89% in Mar and 1.04% in Feb
    • 30-59 days 0.34% vs 0.34% in Mar and 0.41% in Feb
    • 60-89 days 0.24% vs 0.27% in Mar and 0.29% in Feb
    • 90+ days 0.28% vs 0.28% in Mar and 0.33% in Feb
  • Payment rate 43.91% vs 42.21% in Mar and 39.21% in Feb
  • Portfolio Yield 20.67% vs 21.68% in Mar and 19.73% in Feb

Josh Steiner: Hedgeye Financials Sector Head

"Credit quality is exceptional in this book. For reference, their NCOs and DQs are below half the levels seen at the majors. That’s obviously not a catalyst of any kind, but it is an interesting observation that their profile is so much better than the country’s as a whole.


Looking at the data, net charge-offs are improving sequentially in line with the industry. Delinquencies, the more important gauge, are essentially flat sequentially though still trending lower. Early-stage delinquencies are the more telling component because that’s the new-new, and those were flat month over month. Payment rate up sequentially. This simply tells you that people were paying more of their bill this month vs. last. For reference, the payment rate is generally the least interesting number that comes out. The yield is down a point sequentially but up vs. Feb. – overall, yields will bounce around a fair amount.


Frankly, I’m surprised by how high yields are relative to these charge-off rates. This must be an extremely profitable, albeit small, portfolio they’re running."