TODAY’S S&P 500 SET-UP - August 17, 2011


A “V-bottom” and low volume follow for 3 days does not a bottom make.  Bear market bottoms are processes, not points – and as long as the math in my multi-factor, multi-duration, model says sell, I’ll keep saying sell.  The number one question Keith has been getting is “when do you buy.” I think the Pain Trade has shifted to DOWN (as opposed to UP) and until the questions are ‘where do we stop selling’, Growth Slowing and Stagflation won’t be fully priced in.  As we look at today’s set up for the S&P 500, the range is 41 points or -1.66% downside to 1173 and 1.78% upside to 1214.




Yesterday was the 10th consecutive day where all 9 Sectors in the S&P Sector Model flashed bearish on both TRADE and TREND durations.  Remember, the S&P500 rallied off oversold lows last week but was still down week-over-week for the 3rd consecutive week. The 3 Sectors that continue to look the most bearish are the ones that fit our Macro Themes of Growth Slowing and Stagflation like a glove:

  1. Financials (XLF) – led yesterday’s decline (as they have since April) = down -18.9% YTD (we’re short XLF)
  2. Basic Materials (XLB) – look as bad as Dr. Copper is starting to look = down -10.4% YTD
  3. Industrials (XLI) – down another -1.4% today; buying cyclicals at a cyclical top has risk = down -9.9% YTD


THE HEDGEYE DAILY OUTLOOK - daily sector view

THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: -1525 (-4073)  
  • VOLUME: NYSE 1132.58 (+2.46%)
  • VIX:  32.85 +3.07% YTD PERFORMANCE: +85.07%
  • SPX PUT/CALL RATIO: 1.40 from 2.10 (-33.15%)



FIXED INCOME: Yield Spread (UST) continues to compress this morn (10s-2s = 204bps) = explicit signal that US Growth is still slowing.

  • TED SPREAD: 27.75
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 2.23 from 2.29    
  • YIELD CURVE: 2.03 from 2.10

MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage Applications
  • 8:30 a.m.: Producer Price (MoM), Jul, est. 0.1%; prior -0.4%
  • 10:30 a.m.: DoE inventories
  • 11:30 a.m.: U.S. to sell $20b 12-day cash mgmt bills
  • 1:20 p.m.: Fed’s Fisher (Dallas) speaks in Texas


  • Dell said on call last night it saw some consumer demand weakness in June, moving into 3Q; cut year sales forecast. Watch Intel, Seagate, H-P stocks in supply chain
  • Merkel, Sarkozy rebuffed calls for joint euro borrowing to end debt crisis, saying greater economic integration needed first
  • President Obama continues his bus tour with town halls in Atkinson and Alpha, Illinois
  • Vice President Biden in Asia, stops in Beijing first



COMMODITIES: Dr. Copper remains broken from a Hedgeye TAIL perspective and we remain long Silver.


THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • No Double-Dip Yet With U.S. Economy Punching Up Growth Figures
  • Singh Targets China’s 7 Days With $60 Billion: Freight Markets
  • Oil Climbs From Two-Day Low as U.S. Gasoline Inventories Decline
  • Record LNG Imports by India Signal Rising Prices: Energy Markets
  • Barclays’s Todd Edgar Said to Leave After 2 Years to Start Fund
  • Gold Gains for Third Day in London as Debt Concerns Spur Demand
  • Copper Rises as Chinese Buying Draws Down LME Inventories
  • Some Rare Earth Prices Will ’Collapse’ on Oversupply, Miner Says
  • Rio Tinto Halts 2 Pilbara Iron Ore Mines After Fatality
  • Woodside Profit Beats Analysts’ Estimates on Lower Oil Tax Bill
  • ENRC First-Half Profit Rises 29% on Higher Commodity Prices
  • Commodity Prices Being Driven by Supply Scarcity, Barclays Says
  • Wheat Rises for Third Day as Dryness May Reduce U.S. Seeding
  • Peppers Wilt as Barley Drowns for Farmers Who Can’t Tap Tax Aid
  • Copper Gains as Stockpiles Decline on China Buying: LME Preview
  • Milk-Powder Prices Tumble to 12-Month Low as Demand Ebbs
  • Commodity Traders’ $1 Million Bonus as Oil Doubles



THE HEDGEYE DAILY OUTLOOK - daily currency view



  • EUROPE: crashes in European Equities from YTD peaks: Italy -32%, France -28%, Spain -23%, Germany -21%
  • UK Jun ILO unemployment rate +7.9% vs consensus 7.7% and prior 7.7%
  • UK Jul claimant count unemployment change 37.1k vs consensus 20.0k and prior revised to 31.3k from 24.5k

THE HEDGEYE DAILY OUTLOOK - euro performance



  • ASIA: could have been worse overnight, but my signals say it will get a lot worse; particularly in Japanese and Korean stocks


THE HEDGEYE DAILY OUTLOOK - asia performance






Howard Penney

Managing Director


Keith shorted PNK in the Hedgeye Virtual Portfolio.  In addition to a lousy quantitative setup, PNK looks to be in a difficult spot in a deteriorating macro environment. 



Keith shorted PNK in the Hedgeye Virtual Portfolio at $12.49.  According to his model, TRADE resistance is only 2% above where he shorted it and TRADE support is 18% below.  While Keith is bearish on PNK from a technical perspective, the macro environment could cause some problems for PNK and investor sentiment surrounding the name.  If the Hedgeye macro view comes to fruition - stagflation - domestic gaming will come under pressure.  Gaming has proven to be an incredibly cyclical industry.  Sentiment could turn worse for PNK as it is the only domestic gaming company that is not in a deleveraging mode and not generating free cash flow.  That opens the stock up to a higher degree of multiple compression.




PNK has been a great story - we've been a big cheerleader - as management has done a terrific job with margin expansion.  With success, however, comes higher expectations.  Full year Street estimates are finally appearing reasonable rather than ridiculously low so the catalyst of continued quarterly blowouts may be behind the company (6 in a row).  With consumers struggling and 2H regional gaming trends already disappointing here in July, we struggle to find a positive catalyst.


Now, PNK had a pretty good july due in part to high table hold but domestic gaming revenue trends overall have already been disappointing.  As shown below, we estimate July gaming revenue in the mature regional gaming markets (aka riverboat markets) should decline slightly more than 1%.  We look at monthly sequential revenue based on the previous 3 months, adjusted by a historical seasonality factor.  Most of the riverboat states that have reported for July have posted same-store gaming revenues below our model, which would indicate sequential revenues have slowed.




It still wasn’t a good quarter, but not far off from our numbers – in-line on a hold adjusted basis.



There wasn’t a whole lot of love for the numbers that Genting reported this past Friday morning.   One of the issues is that the market had unrealistic growth expectations for Singapore (see our "Singapore 1Q Review," 5/16/2011) and the 2nd sequential decrease in RC volume was disappointing and likely unexpected.  Analysts also likely failed to fully adjust for the high hold that Genting experienced last quarter – which not only boosted their numbers but overall market growth.  With the difficult comparison, this quarter was set up to disappoint. 


We generally think that the Singapore gaming market will experience moderate growth until junkets are licensed which will provide some lift to the VIP RC volumes.  Much of the growth opportunity is in ramping up non-gaming revenues and normalizing margins on non-gaming amenities.  As long as people keep expecting Macau-like growth, we expect that results may continue to disappoint, although at 9.5x 2012 EBITDA, Genting Singapore isn’t exactly expensive.


So what happened in 2Q11?

  • Singapore Integrated Resorts Gross Gaming Revs (GGR) declined 5.6% QoQ
  • Average hold since 1Q10 has been 2.96% - this quarter hold was only 2.82% which dampened growth.  If we use the average hold rate for the last 3 quarters, sequential growth from 1Q to 2Q was 2% and 3% from 4Q10 to 1Q11.
  • Genting lost share QoQ due to difficult hold comparisons and a big drop in RC share
    • Since MBS opened, Genting’s average share of RC has been 58%; it dropped to 52% this quarter.
      • This is probably the most disconcerting takeaway from the quarter, although we should have expected share to migrate toward 50% over time.


2Q Details (in Singapore $s unless otherwise noted):

  • Net gaming revenue of $584MM and estimated GGR of $854MM
    • The difference between gross and net gaming revenues consists of VIP rebates, gaming points (loyalty points) for Mass, and GST
    • VIP RC: $16.4BN and hold of 2.66% for a gross win of $437MM
      • Rebate rate of 1.24% or $204MM and $15MM of GST taxes
  • We estimate that Mass drop was $1.4BN, roughly flat QoQ and slightly above MBS’s number according to the management
    • 19.5% win rate and Mass gross win of $273MM and net Mass win of $222MM
    • GST of $18MM
    • Gaming points of $33MM or 2.4% of drop
  • Slot & EGT handle of $3BN and win rate of 4.8%
    • Management mentioned that RWS’s hold is just below 5% and that their handle was a little better than MBS’s
    • Win rate on slots is over 7% while the win rate on EGT’s is between 2.2-2.5%
    • Non-gaming revenue of $132MM
      • Room revenue of $33MM
      • USS revenue of $78MM
      • F&B and other revenue of $21MM
      • We estimate that fixed expenses were flat QoQ


  • Assuming normal hold, we expect 3Q11 EBITDA of S$407MM and net revenue of S$774MM
  • For FY11, we expect EBITDA of S$1.78BN and Net revenue of S$3.3BN, 9% below and 1% above the Street, respectively.

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Sarkozy/Merkel Meeting Leads Markets Lower

HD/LOW: Mind The Sentiment


Yeah yeah…we all know the differences in the comp spread and relative operating performance. The market knows that too. But LOW will not roll over and play dead. There’s no doubt it is having execution issues and is losing share to Depot as HD focuses heavily on its core. But HD was a year early (2009/10) in reaccelerating both store level capex and SG&A per square foot. Now it is benefitting. LOW’s uptick in investment spending over the past 12 months during a time of weakness in its business (and botched execution) has been particularly painful. Bigger picture, we like this space given the catch-up in deferred maintenance as the housing market continues to suffer. Would we buy either today? No. But the relative trajectory in revenue and margins is likely to turn in LOW’s favor over the next six months. On weakness, that’s where we’d look first.

HD/LOW: Mind The Sentiment - 8 16 2011 12 52 41 PM

HD/LOW: Mind The Sentiment - 8 16 2011 12 53 31 PM

HD/LOW: Mind The Sentiment - 8 16 2011 12 54 19 PM

HD/LOW: Mind The Sentiment - 8 16 2011 12 54 57 PM



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