Are You In the Herd?

This note was originally published July 19, 2011 at 08:31 in

“Nothing is more obstinate than a fashionable consensus.”

Margaret Thatcher


Most stock market operators, particularly those trained in the dark art of short selling, have an understanding of the concept of herd mentality.  The expression “herd mentality” describes how people are influenced by their peers to adopt certain behaviors.  Herding around perceived fundamentals has led to some of the most spectacular bubbles of the last fifteen years – the internet, real estate, uranium, and so on.  Interestingly, we may be at the beginning of the end of the most spectacular financial bubble of our lifetimes: sovereign debt.


Just over two years ago, on April 8th, 2009, Keith and I attended a guest lecture at the Yale Law School by former Treasury Secretary Robert Rubin.  For better or worse, Keith and I have never worshipped at the Church of Rubin, though many current and former U.S. policy makers are considered his protégées - including the venerable Timothy Geithner and Larry Summers - so his philosophy certainly influences current U.S. policy.  At that time two years ago, the Hedgeye team was digging deep into sovereign debt issues and were naturally struck by one specific quote from Rubin’s lecture:


“There is no risk of any defaults on sovereign debt globally."


In hindsight, Rubin pretty near top ticked the global sovereign debt markets with his Fashionable Consensus.

Last week, we introduced Policy Pong as one of our three Q3 2011 investment themes.  On a global level, Policy Pong refers to the batting back and forth of Keynesian monetary and fiscal policies between Europe and the United States.  Our view on the world’s two key reserve currencies, the Euro and the U.S. Dollar respectively, is directly influenced by the intermediate outlook for policy from each region. 


In the U.S., the policy debate over the debt ceiling is critical to watch, but the U.S. Treasury market is telling us emphatically that no default is imminent.  In fact, yields on 10-year treasuries are near year-to-date lows at 2.92%, while credit default swaps for 10-year treasuries are trading at 64 basis points versus 59 basis points on December 31, 2010.  Despite heightened rhetoric, it is likely that the Republicans and Democrats will reach a Fashionable Consensus, which in the intermediate term is positive for the U.S. dollar versus the Euro.


Are You In the Herd? - Chart of the Day


There is no doubt that the herd is negative on European sovereign debt. In fact, with Greek 5-year CDS currently trading at 2,568 basis points and recent media reports suggesting that Greek debt could be written down by 80%, the case could be made that investors are too bearish on Greece.  As it relates to the outlook for Europe more broadly though, Greece, at less than 2% of European Union GDP, is not the best indicator for contemplating the next move in the Euro currency or the Eurozone economy.  So, the question remains, is the herd bearish enough on the Euro and European sovereign debt issues?


We are currently short of the Euro / USD via the etf FXE in the Virtual Portfolio. The key component of this thesis is that we believe that the ECB will be forced to shift its monetary policy stance due to both slowing growth in Europe and accelerating sovereign debt issues, primarily in Italy.  Currently, credit default swaps on 5-year Italian bonds are trading just north of 300 basis points, which is slightly better than Lebanon at 358 basis points and Vietnam at 344 basis points.


This acceleration in the price of Italian credit default swaps has been underscored by the rapid increase in yields on Italian government debt.  As an example, the yields on Italian 10-year bonds are currently at 5.79%, an increase of almost 100 basis points from the start of July.  Rapidly accelerating interest costs are an issue for Italy because it has debt-to-GDP of north and 110% and interest-payments-as-percentage-of-GDP are north of 4.8%, according to recent ECB reports, which is second only to Greece at 6.7%.


Rather than viewing the European Union holistically, sovereign debt investors are rightfully evaluating each sovereign issuer on its own merits.  Conversely, the ECB is seemingly evaluating the next interest rate move on what is best for the healthy economies in Europe, in particular Germany.  Unfortunately for the one size fits all policy makers at the ECB, the GIPSIs (Greece, Ireland, Portugal, Spain, and Italy and so named for their wandering fiscal policies) are collectively more than 25% of Eurozone GDP and have credit default swaps government debt yields that are saying “No Más” to Trichet’s hawkish stance.


(For those sports fans, the best analogy is Sugar Ray Leonard versus Roberto Duran when Duran quit mid-fight, which occurs at 1:35 of this video:


The second derivative issue of sovereign debt in Europe relates to the European banking system and the impending collateral call on European banks.  Our ever insightful Financials Team lead by Josh Steiner wrote a note yesterday titled, “European Debt Crisis: Where the Bodies Are Buried (The 13 Most Exposed EU Banks), with the following key takeaway:


“We find that there are numerous European banks with over 100% of their Core Tier 1 Capital committed to either PIIGS commercial loans or PIIGS sovereign debt holdings. For example, we found that 18 of the 40 largest European banks held 100% or more of their Core Tier 1 Capital in PIIGS sovereign debt or commercial loans. In 13 of these cases, the banks held more than 200% of their Core Tier 1 Capital in PIIGS sovereign debt or commercial loans.” 


Is it Fashionable Consensus to be short of the Euro? Perhaps, but our research, risk management, and obstinance are telling us to stick with it.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Are You In the Herd? - Virtual Portfolio


We’re expecting LVS to report a slight beat after the help of high hold in Macau. Singapore could be the standout, finally, after a few quarters of “disappointing” results.



We don’t think LVS will match WYNN’s standout quarterly release from last night.  We’re even more confident that MPEL overpowers all Macau operators for Q2, particularly LVS.  The Street looks a little light to us in Macau and Singapore and a high in Las Vegas.  Wynn’s blowout in Las Vegas may not carry over to Venetian Las Vegas.  As always, LVS has a lot of moving parts and high expectations so it’s particularly difficult to predict the post earnings stock reaction.  Expectations are likely to be even higher after Wynn reported last night so we are a little cautious.  A bigger beat than expected in Singapore could be the only hope for a positive move in the stock.




We estimate that LVS’s Macau properties will report property level net revenue of $1,183MM and EBITDA of $394MM, 2% and 6% ahead of Street estimates.   Sands and especially Venetian played lucky, while FS suffered from poor luck.   All in, we estimate that lady luck helped LVS’s Macau properties by $65MM on the net revenue front and by $34MM in EBITDA. 



We estimate that Sands will report $339MM of revenue and $105MM of EBITDA, 2% and 8% ahead of consensus, respectively.

  • Net gaming revenue of $331MM benefiting from high hold
    • Gross VIP table win of $240MM and $163MM net
      • Table drop up 4%, to $7.5BN, assuming 10% direct play, and hold of 3.2%
      • We estimate a hold benefit of $26MM on gross revenue, $18MM on net revenue and $10MM on EBITDA
  • Mass table revenue of $139MM (assume 15% increase in drop and 20% hold)
  • Slot win of $29MM (assume 18% increase in handle and 6% win rate)
  • Net non-gaming revenue of $8MM and expenses of $4MM
  • Variable expenses of $188MM
    • Taxes of $159MM
    • Gaming commissions in excess of the rebate of $18MM
    • Fixed expenses of $42MM – in-line with 1Q and 5% below 2Q10


We estimate that Venetian will report $729MM of revenue and $262MM of EBITDA, 7% and 9% ahead of consensus, respectively.

  • Net gaming revenue of $647MM benefiting from high hold
    • Gross VIP table win of $452MM and $317MM net
      • Table drop up 30% YoY, to $12.7BN, assuming 18.5% direct play, and hold of 3.5%
      • We estimate a hold benefit of $89MM on gross revenue, $62MM on net revenue and $36MM on EBITDA
  • Mass table revenue of $279MM (assume 15% increase in drop and 27% hold)
  • Slot win of $52MM (assume 5% increase in handle and 7% win rate)
  • Net non-gaming revenue of $82MM and expenses of $20MM
  • Variable expenses of $346MM
    • Taxes of $305MM
    • Gaming commissions in excess of the rebate of $21MM
    • Fixed expenses of $101MM – flat with 2Q10

Four Seasons

We estimate that Venetian will report $116MM of revenue and $27MM of EBITDA, 17% and 25% below consensus, respectively.

  • Net gaming revenue of $95MM hurt by low hold
    • Gross VIP table win of $71MM and $46MM net
      • Table drop down 32.5% YoY, to $3.3BN, assuming 40% direct play, and hold of 2.2%
      • We estimate hold dragged down gross revenue by $22MM, net revenue by $15MM and $12MM on EBITDA
  • Mass table revenue of $38MM (assume 31% increase in drop and 30% hold)
  • Slot win of $11MM (assume 70% increase in handle and 7% win rate)
  • Net non-gaming revenue of $21MM and expenses of $7MM
  • Variable expenses of $61MM
    • Taxes of $47MM
    • Gaming commissions in excess of the rebate of $11MM
    • Fixed expenses of $21MM compared to an estimated $19.4MM in 1Q11 and $28MM in 2Q10



We estimate that MBS will report $640MM of net revenue (in-line with Street) and $338MM of EBITDA (3% higher than the Street).

  • Net gaming revenue of $500MM
    • Gross VIP table win of $292MM and $162MM net
      • Table drop of $10.4BN and hold of 2.8%
  • Mass table revenue of $223MM (assume $1,006MM of table drop and 22% hold)
  • Slot win of $116MM
  • Net non-gaming revenue of $130MM ($162MM net of $32MM of promotional expenses)
  • Variable expenses of $113MM
    • Taxes of $106MM
    • Fixed expenses of $180MM compared to an estimated $182MM in 1Q11



We estimate that LVS’s US operations will report in-line results of $416MM of net revenue and $102MM of EBITDA


Las Vegas

We estimate that Venetian and Palazzo will report combined revenue of $314MM and EBITDA of $77MM, slightly below street estimates.

  • Net gaming revenue of $101MM
    • Table win of $76MM
      • Flat YoY drop of $417MM and ‘normal’ hold of 18.3%
  • Slot win of $38MM
    • 30% decrease in slot handle to $470MM and 8% win rate
    • Non-gaming revenue of $235MM
      • $117MM of room revenue
        • 93% occupancy and ADR of $196
  • F&B, retail and other revenue of $119MM
  • $22MM of promotional allowances
  • Operating expenses of $229MM, up 13% YoY and comparable to 1Q11 operating expenses of $233MM

Sands Bethlehem

We estimate that Sands Bethlehem will report net revenue of $102MM and EBITDA of $28MM, 23% and 9% above consensus, respectively.

  • Casino revenue of $92MM
    • Table win of $24MM
    • Slot win of $68MM
    • Non-gaming revenue of $10MM
    • $41MM of taxes and $33MM of operating expense 




In preparation for HST's Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HST’s Q1 earnings call.




  • “Transient segment, business trends continue to be positive, with an overall average rate increase of 6.2% for the quarter, driven by an 8% increase in our premium and corporate segment and a 5 plus percentage increase in our special corporate segment.”
  • “Group business, we benefited from a demand increase of 4% at an average rate increase of more than 2%, resulting in an overall Group revenue increase of 6.4%. The main driver for these results was a 24% increase in demand from our higher-rated corporate Group business, as that segment continues to recover ground loss in the downturn. Our association business, which has longer booking lead times, was off this quarter by 17%, but it is expected to recover significantly over the course of the remainder of the year. Every segment of our Group business experienced average rate growth, and all but the corporate segment are now exceeding 2007 rate levels. However, given that overall Group demand is still more than 13% behind 2007 levels, we were still expecting to see an increase in Group business drive our recovery.”
  • “Our booking pace outlook improved over the course of the quarter, especially in March, and exceed 2010 in our booking pace from last quarter. We expect overall Group revenues to increase meaningfully this year”
  • “For the full year, we expect to spend approximately $230 million to $250 million on these types of projects.  For the full year, we expect to spend $300 million to $325 million on maintenance capital expenditures.”
  • “We expect that our disposition activity will pick up in the second half of 2011 and become even more active in ‘12 and ‘13. With that being said, our guidance currently does not assume any dispositions.”
  • “We remain optimistic that the economy will continue to pick up steam this year.  As the recovery continues, we expect demand to remain strong and average rates to keep improving, as our business mix shifts the higher rate of business segments”
  • “We expect comparable hotel RevPAR will increase 6% to 8% for the year, with adjusted margins increasing 100 to 140 basis points.  It is worth noting that we expect the second half of the year will exhibit better relative performance than the first half on both the RevPAR and margin front, as we expect to be more significantly affected by renovation work in the first and second quarters.  Now we anticipate that pricing will be better during the latter stages of the year.”
  • FY 2011 Guidance: “Adjusted EBITDA of $1.01 billion, to $1.045 billion, an FFO per share of $0.88 to $0.93.”
  • “Over the next three quarters with the expectation of a full year common dividend of $0.10 to $0.15 per share.”
  • Regional RevPAR guidance for 2Q11:
    • San Francisco: “continue to outperform our portfolio… due to excellent Group and transient demand and further ADR increases”
    • San Diego: “underperform the portfolio due to fewer citywide and overall reduced group demand only partially offset by improvements in transient demand and rates.”
    • “We expect Hawaii to have an outstanding second quarter due to further improvements in group and transient demand as well as increases in ADR.”
    • New Orleans: “underperform the portfolio … due to a decline in group demand”
    • Phoenix: “outperform our portfolio… due to strong corporate group demand and ADR gains”
    • Boston: “underperform the portfolio…due to the reduced citywide demand and the displacement of business as we wrap up our meeting space renovation at the Sheraton Boston.”
    • San Antonio: “great second quarter and to outperform the portfolio because of strong group demand, which should drive a significant increase in ADR”
    • “With the renovations continuing into the second quarter, we expect our New York hotels to continue to underperform our portfolio, however, we do believe that our New York hotels will have a great third and fourth quarter”
    • “The Philadelphia market will continue to struggle in the second quarter due to the renovation of the hotel, which is expected to be completed in August of this year. However, we expect our Philadelphia hotels to have a strong second half of the year.”
  • “On a full year basis for 2011, hotel level bonuses are expected to be roughly flat relative to 2010.”
  • “In the first quarter of 2011, cancellation and attrition fees were well below the levels (in 1Q10 which were elevated), the typical level, and that trend’s expected to continue throughout 2011”
  • “Looking forward to the rest of the year, we expect the RevPAR increase to continue to be driven more by rate growth and occupancy, which should lead to strong rooms flow through, even with growth in wage and benefit costs above inflation.”
  • “We expect some increase in group demand as well as higher quality groups, which had helped to drive growth in banquet and audio-visual revenues and solid F&B flow through, particularly in the second half of the year, as payroll tax and bonus expense comparisons become easier.”
  • “We expect unallocated costs to increase more than inflation, particularly for utilities, where we expect higher growth due to an increase in rates and volumes and sales and marketing costs, where higher revenues and implementation of new sales and marketing initiatives will increase costs. We also expect property taxes to rise in excess of inflation.”
  • “I think we will be opportunistic about selling some of our larger hotels, but I think the focus initially will really be as you were suggesting on the non-core assets”
  • “Washington was one of the markets that held up the best in the downturn. So it declined the least. As all these different markets start to work their way back to where they were before and then move beyond that, we’ve generally assumed that Washington growth would be fine in a historical context but in the short-term would likely be lower than certainly markets like New York, Boston and San Francisco, but not because it’s not a healthy market, but because the overall level of decline there was just lower.”
  • Q: “Guidance on corporate expense is $99 million versus last year’s $108 million. How do you account for that being down?”
    • A: “One of the bigger factors is just the way that our compensation program works. The amount of shares that we earn depend upon primarily on our relative performance compared to the rest of the market, and at this point in the year we tend to just use target for a number and then we refine that number as we get later into the year. Last year, because we performed so well against NAREIT and so well against the lodging companies that are in our index, our compensation was higher, and that’s why you saw the number being higher”

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Notable news items and price action from the restaurant space as well as our fundamental view on select names.





Corn futures climbed in Chicago as speculation grew that hot weather in parts of the U.S. will curb supplies.  The U.S. is the world’s largest producer and exporter of corn.


European coffee stockpiles climbed 11% to 12.7 million bags on May 31 from 11.46 million bags on April 30, according to the European Coffee Federation.  Coffee prices have been in a downward trajectory during July, but remain up 52% year-over-year.





Food processors continue to underperform as their costs remain high.  Looking at commodity prices over the past week, there seems to be ample volatility across the board and we would expect that to continue to pressure the food processors.






  • CMG is reporting after the close.  Consensus comps are +8.6%, consensus EPS is $1.68, and revenue is $558.3M.  Goldman is advising buying an August $330 straddle ahead of a possible EPS miss.
  • MCD June U.S. comp sales estimate was increased to 7.3% at Janney.



  • KONA continues to blaze a trail higher, gaining 3.7% on accelerating volume.  It is, by far, the best performing stock on one week, thirty day, and ninety day durations.
  • MSSR and BOBE both gained on accelerating volume.




Howard Penney

Managing Director


Rory Green



TODAY’S S&P 500 SET-UP - July 19, 2011


As we look at today’s set up for the S&P 500, the range is 18 points or -0.34% downside to 1305 and 1.04% upside to 1319.







THE HEDGEYE DAILY OUTLOOK - global performance


THE HEDGEYE DAILY OUTLOOK - daily sector view




  • ADVANCE/DECLINE LINE: -2139 (-2789)  
  • VOLUME: NYSE 874.26 (-18.58%)
  • VIX:  20.95 +7.27% YTD PERFORMANCE: +19.17%
  • SPX PUT/CALL RATIO: 1.99 from 2.48 (-20.03%)



  • TED SPREAD: 23.68
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.94 from 2.94
  • YIELD CURVE: 2.57 from 2.57



  • 7:45 a.m./8:55 a.m.: Weekly retail sales: ICSC/Redbook
  • 8:30 a.m.: Housing starts, est. 2.7%, prior 3.5%
  • 8:30 a.m.: Building permits, est. (-2.3%), prior 8.2% (revised
  • 11:30 a.m.: U.S. to sell $28b 4-wk bills
  • 7:30 p.m.: Fed’s Hoenig speaks on monetary policy, agriculture



  • Investor confidence in Germany drops more than forecast in July as euro-area debt crisis worsens
  • Zillow prices its IPO after the close today, may value the company at ~$460m
  • Spain sold EU4.45b ($6.3b) of treasury bills, just below its maximum target, as its financing costs surged
  • Gold surged to record, surpassing $1,610-oz. as it climbed for 12th straight day




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Record Profits for Miners as Shipping Cost Slumps on Glut: Freight Markets
  • Oil Gains in New York as U.S. Supplies, China Demand Counter Europe Debt
  • Copper Advances to a Three-Month High as U.S. Housing Starts May Increase
  • Sugar Climbs on Smaller Crop in Top Producer Brazil; Cocoa Prices Decline
  • Gold May Rise, Extend Longest Winning Streak in Nine Decades, on Debt Woes
  • Onahama Copper Smelter Struggles to Restart After Japan Quake, Radiation
  • African Swine Fever Close to Russia’s Western Borders Threatening EU Pigs
  • India Yet to Decide on Allowing Wheat Exports, Farm Secretary Basu Says
  • Corn Futures Advance as Persistent Hot Weather in Midwest Threatens Yields
  • Booming Cotton No Boon to African Farmers Milked by Government, Monopolies
  • Zhongpin Says Report on Overstated 2010 Sales was Based on ‘Faulty’ Facts
  • Barclays Capital’s Yingxi Yu Leaves Commodity Research Team in Singapore
  • Thai Rubber Output to Gain as More Trees Begin Production, Exporter Says
  • Potash Cartel’s ‘Cupboard Is Bare’ for India After China Pact, Mosaic Says




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: good day to put your shorts back on; crashing markets bounce to inconsequential lower-highs; resistance: IBEX = 9984, MIB = 19559

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: mixed overnight; China down -0.7% but India up +0.8%; Asian markets don't think $IBM is a new long idea

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director


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