"Every strike brings me closer to the next home run."
Someone tweeted that winner’s one-liner from Babe Ruth yesterday while I was scanning my iPad in between meetings in New Jersey and New York. It fired me up. I love a great quote. And I love a great Tweet.
Hitting a Home Tweet out of the park on Twitter is a thing of beauty. Sometimes it’s a tweet that makes you laugh. Sometimes it’s a tweet that makes you cringe. All of the time, tweets are real-time. And that’s where I think Wall Street is going. Real-time, transparency, and accountability. Opacity is dead.
Plenty of people whine about how dysfunctional Wall Street can be. Agreed on the dysfunctional part, but what’s up with the whining? We need to get back to winning in this business. We should embrace the inability of an industry to evolve as a tremendous opportunity for change. And that’s all I have to say about that.
Back to the Global Macro Grind…
My notebook is jam packed with data this morning. From China and Copper breaking out on our intermediate-term TREND duration to US Treasury yields sniffing out an immediate-term TRADE breakout of their own, there’s a lot of interconnectedness to consider.
1. CHINA: Chinese stocks don’t want to go down anymore (they’ve been down for 15 months) and China is going to preemptively print the top-tick in their 2011 inflation (CPI) this weekend. As Johnny-come-latelys on inflation-fear clamor around this, I wanted to be crystal clear that we think Chinese CPI will fall back to 4.5-5% by year-end. Government reported inflation is a lagging indicator.
2. COPPER: Dr. Copper continues to have my back on the long China position (CAF). If Chinese demand was going to go by the way of Sino Forest’s trees, Copper wouldn’t be breaking out above our intermediate-term TREND line ($4.20/lb) like this. Copper prices are ripping again this morn – up to $4.44/lb and +13% since mid-May. China’s share of the world’s copper consumption = 39%.
3. BONDS: Finally, the short-end of the bond market (yields) has finally broken out above my immediate-term TRADE line of 0.42% on the 2-year. Can this hold? If the unemployment print is what the market thinks it’s going to be (better), it will. We’ve sold our long-term bond position (TLT) this week and prefer A) being short short-term bonds (SHY) and B) long a US Treasury Flattener (FLAT) provided that the unemployment # is better.
Got real-time synthesis of Global Macro data?
- SOUTH KOREA: finally showed a slowdown in the rate of inflation of its PPI (Producer Price Index) at +6.2% year-over-year in June. That inflation growth rate was in-line with May’s report and this is bullish, on the margin, for South Korea’s stock market (EWY).
- AUSTRALIA: unemployment remained unchanged month-over-month in June at 4.9% and the Reserve Bank of Australia’s Chief, Glenn Stevens, should be commended for having the spine to raise interest rates for the legions of Australian savers who enjoy a rate-of-return on their fixed income savings accounts and, at the same time, have jobs (La Bernank, take notes).
- BRAZIL: Consumer Price Inflation (CPI) for the month of June was up sequentially to +6.71% versus +6.55% in May and this should serve as a stiff reminder that inflation can still slow growth. The Brazilian stock market has been one of the world’s dogs this week and the Bovespa remains at the bottom of the world’s stock market league tables at down -10.2% YTD.
All the while the more newsy headlines about Pig Paper in Europe and the Audacity of Hope (Obama) on the US Employment front remain center stage. This shouldn’t be a conceptual surprise to anyone. Both American and Western European stock markets are effectively whipping people around like any Fiat Fool Bingo machine should. You can either manage risk around these trading ranges, or you can’t.
On the aroma of Le Papier de Pepe La Pew in Europe:
- SPAIN: issued another 1.5B Euros in 2016 vintage Eurocrat Bonds this morning at a yield of 4.87% versus 4.54% at the last auction. Higher-bond yields are not a surprise, but that doesn’t mean they aren’t bad.
- ITALY: bond yields on Italian 10-year paper are shooting up to 9-year highs this morning (up +10 basis points day-over-day at 5.27%) and one might argue that old Silvio and the boys have a bigger pending problem than hot-tub extra-curriculars revealed. Stay tuned.
- GREECE: oh, yes. They still have people there and they are quite bitter about the formation of their sovereign bond market’s chart resembling the back side of a giraffe’s behind – high and stinky.
Stinky paper is as stinky does, and I guess Einstein would agree that being long the stuff with less stench this morning is simply a matter of relativity. Earlier in the week (when stocks were for sale) I moved my asset allocation to Global Equities to a YTD high (27%) and cut my allocation to Fixed Income from 33% to 18%. I’m not sure if I hit any Home Tweets this week; but I didn’t strike out either.
My immediate-term support and resistance ranges for Oil, China’s Shanghai Composite, and the SP500 are now $95.21-100.07, 2, and 1, respectively.
Have a great weekend and best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP - July 8, 2011
As we look at today’s set up for the S&P 500, the range is 55 points or -2.75% downside to 1316 and 1.31% upside to 1371.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: 1724 (+1347)
- VOLUME: NYSE 843.37 (+2.72%)
- VIX: 15.95 -2.39% YTD PERFORMANCE: -10.14%
- SPX PUT/CALL RATIO: 1.15 from 2.04 (-43.95%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 22.57
- 3-MONTH T-BILL YIELD: 0.03%
- 10-Year: 3.17 from 3.12
- YIELD CURVE: 2.68 from 2.69
MACRO DATA POINTS:
- 8:30 a.m.: Payrolls report; Change in nonfarm payrolls: est. 105k, prior 54k; Change in private payrolls: est. 132k, prior 83k
- Unemployment rate: est. 9.1%, prior 9.1%
- 8:30 a.m.: Net export sales: corn, cotton, soybeans, soy oil, wheat
- 10 a.m.: Wholesale inventories, est. 0.6%, prior 0.8%
- 1 p.m.: Baker Hughes Rig Count
- 3 p.m.: Consumer credit, est. $4b, prior $6.247b
WHAT TO WATCH:
- President Obama meets with House Minority Leader Pelosi to discuss debt talks
- The U.S. Monster Employment Index’s 3-point rise in June brings it to its highest level since October 2008.
- The White House and congressional leaders are signaling fresh openness to a broad debt-reduction deal. Obama plans to meet July 10 with Republicans and Democrats
COMMODITY HEADLINES FROM BLOOMBERG:
- Corn-Crop Stunner for Morgan Stanley Means U.S. is Overestimating Supply
- Oil Heads for Second Week of Gains on Economic Outlook; Brent-WTI Spread
- Gold Drops on Stronger Dollar, Selling After First Weekly Climb in Three
- Cocoa Falls on Speculation Bean Supply Will Be Ample; Coffee Prices Drop
- Rice Climbs to Highest Price Since February as U.S. Acreage May Decline
- Indonesia Poised to Surpass Malaysia as Largest Cocoa Processor in Asia
- Poor Countries Seen Likely to Be ‘Hammered’ by Food Costs, Water Shortages
- Copper May Climb on Speculation Hiring Strengthened in the U.S. Last Month
- India Said to Consider Easing Restrictions on Private Wheat, Rice Exports
- Michael Coleman’s $1.2 Billion Commodity Fund Said to Decline 10% in June
- Aluminum Exports From China Soar to Record Ahead of Expected Rebate Cut
- Tardy Monsoon Rainfall in India Damps Cotton Crop Outlook, Official Says
- Natural Gas’s Six-Month Decline to End on Heat, Hurricanes: Energy Markets
- Sugar Prices May Gain Next Week on Brazil Production Concern, Survey Shows
- EUROPE: Italy getting hammered here -1.6%, Spain doesn’t look much better (broken TREND); as the DAX continues higher +8.6% YTD
- ASIA: continues to look better by the day; Indonesia took the baton last night, closing +1.6%; China up small ahead of known inflation.
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Nike re-signing Michael Vick and UA endorsing Kemba Walker are two high-profile deals. But the underlying risk reward is vastly different. It’s very important to understand the off-balance sheet liabilities at play here. UA’s making a lot of the right moves, but Nike is much lower-risk near-term. Nike still one of our top names. We like UA at a price…a lower one.
Nike and Under Armour have made their latest endorsement bets and each matter, but for different reasons. On Friday, Nike resigned Michael Vick (football) followed by Under Armour announcing the signing of former UConn basketball star Kemba Walker yesterday morning. The terms of both deals were undisclosed, but there are multiple takeaways to consider here:
Nike’s Vick Endorsement:
1) This is a Boom or Bust deal. While the dollar figure may be low, the stakes are high.
2) Terms of the deal were undisclosed, but we know that Vick was earning $2mm when his deal was severed back in 2007. As the first major endorsement since returning to the game from prison, we’ll assume Nike struck this deal at a considerable discount to the prior level – we’d be shocked to see Vick pull down more than $500k, but with outsized incentives if he sells.
3) Some might view this as reputational risk given Vick’s jail time – and the reason behind it (dog fighting). After all, Nike severed the deal when he put on his orange jumpsuit. But let’s face some facts, Nike stood behind Tonya Harding after she and Jeff Gillooly tried to break Nancy Kerrigan’s kneecaps. They also stood behind Tiger after his marital problems, and Kobe after his rape accusation. The fact of the matter is that Nike cares about athletic ability above all else. They’ve never been afraid to put their reputation on the line, and they’re not going to start now. Now that he’s playing again, they’ll put their marketing muscle to work.
4) Keep in mind, Nike just landed the NFL license a deal that likely cost $30-$40mm a year. This certainly prompted Nike to re-evaluate its spend on players in the NFL. It ‘lost’ Tom Brady to UA – but the reality is that if Nike wanted to keep Brady, then it would have. Brady might be great for UA’s brand, but he was very low – if not negative – roi for Nike.
5) How we view this as Nike trading a high-fixed-cost but low-revenue-generating asset in Tom Brady for a call option on a variable cost Vick. Makes sense to us.
UA’s Walker Endorsement:
1) The company is clearly focused on growing its basketball business and presence in the NBA as well as stepping up its endorsement activity in a big way (Michael Phelps, Lindsay Vaughn, etc…).
2) UA signed Brandon Jennings to its first basketball endorsement for a reported $2mm back in 2009 and Cam Newton, the #1 pick in the NFL, just recently for around $1mm. After winning the MVP in the NCAA tournament following UConn’s national championship run, we suspect Kemba signed for somewhere in the ballpark of Jennings-type money – if not more.
3) Interestingly, Kemba was drafted 9th by the Charlotte Bobcats owned by none other than Michael Jordan. There’s hidden value in this deal that simply can’t be measured by a dollar figure alone.
SG&A is usually the first thing that comes to mind when people think about athlete endorsements. But the reality is that the more optimal thing to look at is the change in off balance sheet liabilities. This is a lot like looking at a retailer that is manipulating its leases to increase/decrease its SG&A and comp leverage hurdle.
Take a look at our updated analysis of both UA’s and NKE’s endorsement obligation commitments below.
Nike’s deals are spread very consistently – about 17-18% per year over 5-years.
Under Armour’s, on the other hand, are more front-end loaded with 69% of its obligations due in 3-years or less. This is down considerably from 86% only two years ago, which makes sense given the addition of more long-term contracts. But total commitments are still double vs a year ago. Nike's, on the flip side, are actually down by $400mm (about 10%).
The punchline is that UnderArmour need to execute on these obligations in order to keep margins in the right place. They probably will. But if you own the stock, you should be aware of this.
Nike is the complete opposite.
MPEL, Wynn Macau, and MGM Macau look like the best bets to beat Q2. Galaxy Macau off to a weak start.
Total gross gaming revenues (GGR) were $2.59 billion, up 52% over June of last year. June market hold was 2.77%. If we normalize hold for both June 2011 and June 2010, the market would have grown 56%. VIP hold percentage for the market was actually a little lower than last year and a little lower than normal so the month could’ve been even better. Importantly, high margin Mass revenue grew over 40%, marking its best YoY growth month since May of 2010. Despite the sequential 15% decline from May, June was a terrific month all around. Remember that June is typically slower due to May’s Golden Week celebration, 1 extra day, and high hold. We’ve got our eyes and ears open for a VIP slowdown but so far we haven’t seen it.
In terms of market share, Galaxy was the big winner, obviously, with the opening of Galaxy Macau in mid May. However, the property’s first full month was disappointing. More on this later. Wynn held up the best among the existing concessionaires with its market share actually up slightly in June versus its 6 month average. SJM fared the worst but some of that was due to low VIP hold in June. Probably more importantly, on the Mass side, MPEL actually gained 70bps of share from its 6 month average, representing the only concessionaire other than Galaxy to post a gain. Consensus was that MPEL was most at risk with the opening of Galaxy. Whoops. SJM and LVS led the Mass share decline.
The Galaxy numbers look like a disappointment. We’re pretty sure management was expecting HK$350 million in monthly Mass revenue and they came in at HK$260 million. On a positive note, Starworld was barely impacted. We wonder if investors will make any read throughs to Lots 5/6 and a potential disappointment there too. We’ve maintained that despite the quality of the Galaxy facility, the property could struggle on the Mass side given managements’ relative inexperience in running a Mass property. That now appears to be the case.
After sifting through the June numbers, LVS wasn’t as good as advertised by its total GGR number. VIP hold percentage was very high. VIP chip volume share actually declined 210bps from its 6 month average and was up less than 5% YoY compared to the market at +65%. On a same store basis (excluding Galaxy Macau), market VIP volume still increased 55%. LVS continues to struggle in the junket segment despite its recent efforts. Impressively, MGM, Wynn, and MPEL grew its VIP Chip business 136%, 74%, and 64%, respectively, despite the opening of Galaxy. On the Mass side, those three companies grew their Mass business 31%, 63%, and 63%, respectively, while LVS only grew 23%.
We are still working on updating our models but it appears that all of the US operators will beat consensus Q2 EBITDA estimates handily with MPEL leading the way.
Y-o-Y Table Revenue Observations:
Total table revenues grew 53% YoY this month, compared with 64% growth last June. June Mass revs rose 41%; VIP revs grew 58%; and Junket RC soared 65%. June growth in each table category accelerated from that of May.
For the 4th straight month, LVS table revenues grew the slowest - an unimpressive 12%.
- Sands recovered in June, up 27% YoY, driven by a 29% rise in VIP and 23% increase in Mass
- Junket RC was up 12%
- Sands held pretty high. Adjusted for 10% direct play (in-line with 1Q11), hold was about 3.3%, compared with 2.8% hold in May 2010, assuming 14% direct play (in-line with 2Q10).
- Venetian was up 32% in June, similar to May's growth. Mass rose 27%, while VIP was 34% higher
- Junket VIP RC barely grew, up 3%, even off of an easy -1% comp
- Hold was very high in June at 4.3%, based on 19% direct play (compared with 18.7% in 1Q11). In June 2010, hold was 3.0%, assuming 24% direct play.
- Four Seasons was the biggest loser for LVS, down 65% in total table revenue. VIP revs tumbled 75% but hold was a measly 1.1%, assuming 40% direct play, and hold comparisons were difficult (3.4% hold in June 2010 with 50% direct play)
- Junket VIP RC decreased 8%.
Wynn table revenues were up 34%
- Mass was up 63% and VIP increased 29%
- Junket RC soared 74%
- Assuming 10% of total VIP play was direct, we estimate that hold was 2.7% compared to 3.7% last year (assuming 11% direct play)
MPEL table revenues grew 61%, driven by Mass growth of 63% and VIP growth of 61%
- Altira was up 58% with Mass up 30% while VIP ballooned 60%
- VIP RC soared 58%
- We estimate that hold was 3.1%, similar to that of last year
- CoD table revenue was up 64%, driven by 70% growth in Mass and 61% growth in VIP
- Junket VIP RC grew 70%
- Hold was fairly low, at 2.3% assuming 14% direct play. Last June, hold was also 2.3% assuming 18% direct play.
SJM revs grew 50%
- Mass was up 22% and VIP was up 65%
- Junket RC was up 63%
Galaxy table revenue skyrocketed 124%. Mass went up by 213% and VIP rose by 112%.
- StarWorld table revenues grew 43%
- Mass grew 51% and VIP grew 43%
- Junket RC grew 27%
- Hold was normal at 2.8%
- Galaxy Macau's total gaming revenues were 160MM, 43% higher than May (opened for 16 days)
- Mass table revenue grew to 34MM
- VIP table revenue of 126MM with RC volume of $3,906MM, which means hold (assuming no direct play) was 3.2%.
MGM table revenue was up triple digits again, growing 114%
- Mass revenue growth was 31%, while VIP ripped 148% higher - the highest VIP rev growth among the concessionaires
- Junket RC grew 136%, the 10th straight month that MGM has led in growth for this category
- Assuming direct play levels of 13%, we estimate that hold was 2.7% this month vs. 2.6% in June 2010
Sequential Market Share (property specific details are for table share while company-wide statistics are calculated on total GGR, including slots):
LVS share in June rose 20bps sequentially to 15.8%. This compares to 6 month trailing market share of 16.8% and 2010 average share of 19.5%
- Sands' share rebounded 1.1% to 5.1%, after hitting an all-time low in share last month
- The increase in share was primarily attributed to a 140bps improvement in VIP rev share
- Venetian’s share ticked up 10bps to 9.5% share
- VIP and Mass share were relatively unchanged
- Junket RC decreased 1.2% to 4.2%, a new all-time low
- FS share fell 90bps to 0.9%, tying a record low
- VIP share dropped 110bps to 0.7%
- Mass share decreased 60bps to 1.5%
- Junket RC share rose 10bps to 1.1%
WYNN share gained 2.1% to 15.3%, driven by easy hold comps. June’s share is a little above its 6 month trailing average share of 15.1% and 2010 average share of 14.9%.
- Mass market share increased 60bps to 11.3%
- VIP market share rebounded 2.9% to 16.2% sequentially
- Junket RC share rose 10bps to 15.8%, above its 6 month trailing average of 14.8%
MPEL decreased to 13.9% compared to an average 6 month trailing share of 15.0% and 2010 share of 14.6%.
- Altira regained all the share it lost in May to 6.0%, compared to 5.6% average share in 2010
- CoD’s share fell 1.2% sequentially to 7.8%. lowest since January 2011
- Mass market share was roughly unchanged at 10%
- VIP market share decreased 1.6% to 7.1% while Junket RC share decreased 0.6% sequentially to 7.8%
SJM was the biggest share loser in June, falling 3.3% to 29.1%, below its 6-month trailing average and 2010 average of 31.3%. But hold was only 2.5%, in-line with last year's.
- Mass market share decreased 1.7% to 36.3% while VIP share tumbled 4.5% to 27.5%
- Junket RC share fell 1% to 32.4% from 33.4% in May
Galaxy continued its momentum from Galaxy Macau, gaining 2.2% to 15.4%, its highest share since Oct 2007. June share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 10.7%.
- Galaxy Macau garnered 6.5% market share on a full month of operations, up from 2.9% in May
- Mass market share gained 270bps to 5.6%, VIP share gained 260bps to 6.7% and RC share gained 270bps to 6.1%
- Starworld's market recovered 30bps to 8.1%, just 10 bps below its pre-Galaxy Macau level
- Mass market share gained 70bps to 2.9% while VIP share rose 30bps to 9.7%
MGM's share fell 90bps to 10.5%, erasing its gains from May. June share compares with an average share of 8.8% in 2010 and a 6 month trailing average of 11.2%.
- Mass share decreased 90bps to 7.8%
- VIP share decreased 80bps to 11.2% - still the 2nd highest property share (that we track) after Wynn/Encore
- Junket RC decreased 80bps to 10.7%, materially above the property’s 2010 average of 8.4% and its 6 month trailing average of 10.8%
Slot revenue grew 37% YoY in June to $112MM, down 16% sequentially
- Galaxy slot revenues grew at a white hot pace of 467.2%, reaching $8MM
- Wynn slot revenues fell sequentially to $9MM to $23MM
- MGM fell $4MM sequentially to $15MM
- MPEL’s slot revenue fell sequentially $6MM to $19MM
- SJM’s slot revenues grew $3MM sequentially to $18MM
- LVS continues to grow the slowest at 3% YoY as slot revs fell $6MM sequentially to $26MM
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