• run with the bulls

    get your first month

    of hedgeye free


Eye on Trust...

One of our head correspondents in Asia wrote me a note this morning saying Keith "if they protest in Singapore..."

For those of you who have never been, they don't strike or protest much at all in Singapore. If they do, they take care of business in a park allocated for protests called "Speakers' Corner" - it's basically the only outdoor space where the government of Singapore signs off on public criticism.

If Wall Street thinks they are free and clear of all of the compromises that are associated with lying to and/or misleading Asian investors, they better think long and hard about that again...

  • This, I fear, is only the beginning. It can take a lifetime to earn people's trust, and a few stupid decisions to lose it.
Reuters Picture by Vivek Prakash


As you can see my last few posts, I’m getting positive on Macau. Look, the near term is challenging, no doubt, and the Q3 earnings releases won’t look pretty. However, the intermediate and long term fundamentals are unmatched anywhere else in gaming. There is significant excess demand and Beijing controls the spigot through visa restrictions. If you believe, like I do, that Beijing will be supportive of controlled, moderate growth than you have to be positive on Macau and the Macau stocks. My top down industry perspective is buffeted by Keith McCullough’s macro analysis. Research Edge is positive on China!

Timing and how to invest are the issues. The timing of Beijing’s next move is not clear but I’m fairly certain it will be a positive one. In the meantime, the monthly numbers will not look great. To me, that is not important. The other tricky part is how to play Macau from a public equity perspective. Each company has its issues: WYNN is losing market share, LVS has liquidity issues, MGM Macau is less than 5% of MGM’s EBITDA, and all three have Las Vegas exposure. MPEL will likely report a disastrous Q3 but is a Macau pure play and may be interesting after the quarter.

  • In terms of market share, the charts to the right analyze the sequential change in market share for the major properties/players by total baccarat revenue and VIP turnover. We are looking at VIP turnover separately because small changes in hold percentage can swing revenue dramatically. Turnover is a better indicator of underlying demand. Additionally, with escalating junket commissions as of late, it is instructive to examine the impact.
  • The notable Q3 deviants from Q2 on the positive side are the LVS properties; Sands and Venetian. Junket commissions at these properties are now among the highest in the market which will show up negatively in the margins. MGM also raised junket commissions and gained share sequentially. On the downside, MPEL’s Crown and Wynn lost meaningful share. Crown’s junket partner, AMAX, pulled back on credit relative to Q2. Wynn has been stubborn on its commission rates, rightly or wrongly, and lost share in Q3. Q3 revenues could disappoint when WYNN announces Q3 earnings in a few weeks.
  • Looking at total baccarat revenue market share, including VIP and mass market revenues, the sequential trends were similar to VIP turnover, with a few, subtle differences. Wynn Macau’s revenue share did decline but less than its share of VIP turnover. Wynn held at about its average VIP percentage but Crown and Galaxy’s hold percentage was much lower than average in Q3 which drove the market hold percentage below average. Wynn’s mass market revenue share was roughly flat Q2 to Q3. LVS held close to average so VIP turnover drove its sequential increase in market share.

Casual Dining – Some Positive News…

According to the Lundberg Survey, the national average price for self-serve, regular unleaded gas fell $0.35 to $3.30 a gallon on October 10 from $3.65 two weeks earlier. This marks the largest recorded decline in the average price of a gallon of gasoline in the U.S. as consumer demand continued to wane and oil prices slide. October 10th’s $3.30 a gallon was the lowest national average price since March 21, 2008. Prices peaked on July 11 at $4.11 and have since fallen by $0.80. Diesel fuel fell $0.21 to $3.95 a gallon, which is the first time since March that it has been below $4.00 a gallon. According to Trilby Lundberg, “Plummeting oil prices and caving gasoline demand have combined to bring the biggest retail gasoline price cut in the history of the market. We've been doing this 58 years. This is truly the biggest price drop."

This drop in gas prices should offer some relief to casual dining operators who experienced a significant decline in same-store traffic growth in July (down 6.2% year-over-year) at the same time gas prices climbed off of their recent lows in March. Although increased gas prices is just one of the many challenges facing the casual dining industry today, lower gas prices should give consumers one more incentive to go out to eat, which is an incremental positive for the group.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Adidas: Don’t These Guys Learn?

Adidas is buying Ashworth, a maker of mid-priced golf apparel, for $72.8mm or a 10% premium to Friday’s close. The market loves the deal. I simply don’t get it. Does ROIC matter to this company?
First off, Ashworth has no EBITDA, and is burning cash every day that it remains in business. EBIT margins peaked in ’04 at 10%, but has steadily crept to -8% as it grew its moderate brands into expensive company-owned retail stores (note SG&A ratio went from 31% to 42%). That’s a component of retail 101 this company ignored (and cannot easily fix).

Cash flow valuation here is useless (bc there is no cash flow), so I think that the best thing to do is to look at book equity, which is where this deal looks cheap at 88%. My only reservation is that most of this value is finished goods, and my confidence in the quality of inventory is not high. In addition, we need to consider the forward lease obligations of $75mm (which most people fail to do).

I guess what shocked me the most is that Adidas does not do well when it buys assets that 1) it needs to fix, and 2) overlap with existing businesses (like Taylor Made). Remember Reebok? $3bn invested in another brand that went away. If Adidas had invested that in its own brand, it would not be getting crushed in the US market today.

So why did they do this? My sense is that it is to leverage the fact that Ashworth has the license to make Callaway apparel. To say that Ashworth has done a poor job there is an understatement. Can Adidas make this work and leverage its TMaG infrastructure? Probably. But as a shareholder I’d rather see the company invest half that amount in its own brand and drive higher EBIT, better brand awareness, and better ROIC.

China Exporting Capitalism?

The most positive macro economic data point of the day came out of that really big country with a lot of people, China. Remember them?

Chinese exports grew sequentially, on a month over month basis, and shot up to +21.5% y/y in their September report this morning. This acceleration from August isn’t that surprising given that the country is no longer halted due to Beijing’s Olympic lockdown.

With a trade surplus of another $29B, the Chinese have what the rest of the world needs – cash. Sitting on $1.8 Trillion in currency reserves would be a pretty safe spot for even the likes of the antiquated Hank the Tank Paulson. Unfortunately for the USA, we may have to get down on our knees and beg for China to keep buying our bonds with that cash. If they don’t… you should have scary thoughts. The biggest asset bubble yet to pop is that of US Treasuries.

Cash is king, and the Chinese wanna be capitalists are on the prowl with it. Remember, they allow short selling now!

We are China via the FXI and EWH exchange traded funds. Our levels on the Shanghai Composite Index have been reviewed and here’s where the bullish lines are in our model:

"Trade" bullish > 2166.59
"Trend" bullish > 2512.11

This longer term chart of China should tell you one thing. There is plenty of runway here!

Keith McCullough
Research Edge LLC

SP500 Levels, Refreshed: Don't Sell Too Soon!

Below we have painted the lines for the new range we see in the SP500. Buyem at 842.33, and Sellem at 1018.89.

This isn't rocket science, but it is math.

Patience pays.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%