European PMI Hits Sub-50

Today’s data around the horn.


Positions in Europe: Short EUR-USD (FXE); Short Italy (EWI); Short UK (EWU)


The numbers speak for themselves, but today’s initial August Manufacturing and Services PMI figures from the Eurozone, Germany, and France, show not only a slide versus July, but French and Eurozone Manufacturing fell below the 50 mark, indicating contraction, and Services held just above the mark for the Eurozone and Germany. This move however isn’t new—we indicated a downward inflection in the high frequency data from Germany beginning in March—and we expect more downside on the intermediate term as Europe fumbles with facilities/solutions to address sovereign debt contagion.   


European PMI Hits Sub-50 - a. pmi


ZEW Confidence

The current of declining sentiment was confirmed by today’s ZEW survey results. Germany’s Current Situation fell a monster 37 points to 53.5 AUG vs 90.6 JUL and the 6-month forward looking Economic Sentiment gauge dropped to -37.6 AUG vs -15.1 JUL, the lowest level since December 2008 and the biggest drop since July 2006. Eurozone Economic Sentiment also plunged, to -40 AUG vs -7 JUL.


European PMI Hits Sub-50 - a. zew


Swiss Miss

Over recent months we’ve discussed how strong Swiss exports figures defied the strength in the CHF versus the EUR and USD.  Swiss Export and Import data out today for the month of July showed a negative inflection of -3.0% month-over-month versus +3.8% in May. We’d expect a tail off in the months ahead from the currency impact (though perhaps a pop in August on easy comps) as the SNB struggles to make much of a dent in the value of the CHF versus major currencies since it indicated it would intervene on 8/10. Imports rose 0.1% in July M/M versus 1.0% in June, pushing the Trade Balance to 2.83B CHF in July.


Calendar Events

(8/24) France will unveil austerity measures that will include budget cuts and higher taxes on the highest income earners. HE: Could the terms arrest the threats on France’s AAA credit rating? Both government bond yields and sovereign CDS have moved higher in recent weeks.

(8/26) Spain is expected to unveil further austerity measures estimated to produce savings of 5B EUR. HE: The heat is on Spanish lending institutions and economic fundamentals remain bleak. More uncertainty may surround political transition as PM Jose Zapatero has called for early elections on  November 20th, four months early, and made clear that he will not seek a third term as Socialist Party head.  So long as the ECB’s SMP is buying Spanish bonds, yields should come in. This however, will not last in perpetuity.  Last week the ECB bought €14.3B vs €22B two weeks ago—two huge sums considering that before two weeks ago the SMP had only purchased €74B since May 2010.

(9/7) Germany’s constitutional court will hear cases against the constitutionality of the country’s previous bailout packages to Greece, Ireland, and Portugal. HE: While the German government insists that it has not broken any laws, and the case should be overturned, we’ll be watching for any tangential implications for the EFSF or European Stability Mechanism (beg. in 2013).


For more on our risk management outlook on Europe, see yesterday’s post titled “European Risk Monitor:  Summer’s Uncertainty”.


Matthew Hedrick

Senior Analyst

Bad Is Good Again?: SP500 Levels, Refreshed

As Wall St. gets back to cheering on negative economic data in hopes of more short-term performance boosting stimulus out of the Fed’s annual retreat to Jackson Hole this Friday, we thought we’d take the opportunity to update you with our latest quantitative levels and thoughts as it relates to some key items on the reporting docket for the rest of the week.


Tomorrow (8/24): The Congressional Budget Office (CBO) will release an updated version of their Budget and Economic Outlook at 9:30am EST. The key metrics to watch for are deltas in their GDP estimates. Per the previous outlook, the CBO was forecasting YoY growth in real GDP of +2.7% in 2011, +3.1% in 2012, +3.4% from 2013-16, and +2.4% from 2017-21.


We’ve been on record several times stating that their assumptions are rather pollyannaish in the context of the long-term trend in U.S. economic growth (+1.6% over the last 10yrs; +2.8% over the last 30yrs) – bubbles in internet technology and U.S. housing/household consumption included!


The key takeaway here as it relates to financial markets are potential markups to our long-term debt/GDP and deficit/GDP statistics, as growth (the denominator) falls, causing a further reductions in tax receipts that boosts cumulative deficits and debt (the numerators). According to the CBO’s previous outlook:


“All told, if growth of real GDP each year was 0.1 percentage point lower than is assumed in CBO’s baseline, annual deficits would be larger by amounts that would climb to $68 billion in 2021. The cumulative deficit for 2011 through 2021 would rise by $310 billion.”


Look for incrementally hawkish rhetoric out of the political right the event the CBO walks down their growth assumptions closer to the economic reality of an economy still driven by a fear-mongered (see: Bernanke’s pledge to hold rates at ZERO through mid-2013) and deleveraging consumer. Such Policy Pong will continue to be the main driver of the omnipotent EUR/USD exchange rate.


Friday (8/26): The second reading/first revision of 2Q11 U.S. real GDP is due out Friday morning. Until the BEA demonstrates some measure of stability in their analytics, we continue to flag potential downside to consensus expectations of +1.1% QoQ SAAR. It’s worth repeating that GDP in 1Q11 was revised to the downside by -81%! Moreover, it’s not just 1Q11; the agency has a long history of consistently printing elevated advance GDP estimates that ultimately wind up being revised downward at a later date when investors are paying less attention to them. Per an April 2011 Economist article:


“… during the ten years to 2008, America’s quarterly GDP growth rate was, on average, revised down between the first and final published estimates by an annualised 0.5 percentage points. In contrast, GDP figures in the euro area were revised up by an average of 0.3 points.”


The S&P 500 Index remains bearish from a TRADE, TREND, and TAIL perspective. Our refreshed immediate-term TRADE range is 1,097-1,161.


Buy/cover low; sell/short high.


Darius Dale



Bad Is Good Again?: SP500 Levels, Refreshed - 1


Gaming, lodging, and cruise stocks have taken a beating.  A walk down memory lane suggests they could go a lot lower.



With fears of double dip percolating in the investment community, or potentially even worse - stagflation as predicted by our Hedgeye Macro team - we thought we’d take a trip down memory lane.  So think back to the dark, dark period of March 2009 – specifically March 9th– when the world was about to fall apart.  March 9th, of course, represented the low of the market (since 1997) and the stocks in my universe. 


In this note, we take a look at where multiples were at that time and where they are now.  The conclusion is that most stocks can fall significantly and still not reach previous low multiples, although there are some stocks that are fairly close to those lows.  We’re not saying these stocks are going to go back to trough multiples but we also would caution those who are making claims of “limited downside”.  Investors always seem to forget how low stocks can go.



Gaming Supply


Along with cruise lines, the gaming supply companies appear have the to the least downside.  This is not surprising given the low financial leverage and relatively low fixed cost leverage of these businesses.  WMS is actually trading slightly below the trough valuation.  Investor expectations have turned WMS into a mature company from a pure growth company to the point where the stock is on its back.  This may be one stock where we can say there is “limited downside”.


HOW LOW CAN YOU GO? - gaming supply


Major Market Gaming Operators


The big operators appear to have the most downside to their valuation lows.  Part of the explanation here is that there were a couple of near bankruptcies – MGM and LVS – and MPEL had to pull off a refinancing.  Not surprisingly, the equity of MGM would go to zero at the March multiple.  The company was very close to bankruptcy and estimates were way too high back then.  The stocks of WYNN and LVS could fall over 40% back to the trough multiple.  MPEL has the least downside to trough and that is before considering that current estimates for NTM are 10-15% too low, in our opinion.




Regional Gaming Operators

Regional gaming companies have been decimated in the past month or so.  PNK and ASCA are only 7-8% above their trough multiples.  However, due to significant financial leverage, the stocks would fall 18% and 28%, respectively, to reach those trough multiples.  Aside from the higher absolute leverage, ASCA may be the safer play since they are in aggressive deleveraging mode while PNK is still expending cash.  From this analysis, PENN seems to have the most downside.  Surprisingly, the company’s EV/NTM EBITDA was a full turn below the other stocks in the group in March of 2009.  However, even if one assumes that 5x was an anomaly, PENN’s multiple could still fall 26% and not be below 6x.  The stock has about 50% downside to reach the 5x multiple.


HOW LOW CAN YOU GO? - regional



Another sector that’s been crushed as of late is lodging but stocks still seem to have a long way to fall.  The exception is MAR.  Relative investment sentiment for MAR was considerably worse before the recent stock market correction.  We think it is somewhat unwarranted and that MAR’s defensive business model leaves it less vulnerable to a downturn.  We project only 15% downside in the stock to reach the trough valuation versus 31% for the entire group.


HOW LOW CAN YOU GO? - hotels




What’s interesting about the cruise lines is how cheap these stocks were at the trough on a P/E basis.  RCL and CCL traded at only 5.5x and 8.0x, respectively, on NTM estimated EPS.  Even if we use actual EPS over that time, P/E’s for both companies were only 0.5x higher.  When it comes to market crashes, valuation clearly doesn’t matter for the cruise line stocks.  People will sell this discretionary sector at ridiculously low multiples.


HOW LOW CAN YOU GO? - cruisers

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Q3 should be even better on a hold adjusted basis.



MPEL reported $216MM in Q2 EBITDA, beating the Street’s Q2 EBITDA estimate by $41 million (24%).  Net revenues were spot in-line with our estimate (above the Street) but EBITDA beat us by 20%.  On a hold adjusted basis, Q2 EBITDA was $185MM.


Luck played a role in the strong quarter.  Altira VIP held at 3.1% versus a normal range of 2.7-3.0% which positively impacted EBITDA by $15 million.  Also, MPEL's properties held well on the volume junket business and less so on the revenue share which is a favorable scenario for profitability.  Mass finally held at a normal rate.  We had modeled $180 million with higher hold at Altira but not the favorable hold mix at the volume junkets.  We estimate each generated an incremental $15 million in EBITDA for a total of about $30 million.  Since we had modeled the former but not the latter, on an apples to apples basis, MPEL beat us by about $20 million. 


Clearly, hold was not the only story.  Margins were very strong even ex the hold dynamics.  The Mass mix was more favorable, which boosted margins.  It also appears that the company has reduced its cost structure.  In 1H11, they have been focusing more on the premium Mass business which has a little less promotional expense attached to it.  Promotional expenses were $11MM lower than we estimated and have been steadily declining as a % of casino revenue over the past 2 years  Dare we say that MPEL is moving toward industry type margins?  This would be significant for future EBITDA.


Going forward, with $185 million as a base and Q3 trending higher than Q2 on the revenue side, we think $190-195 million in Q3 EBITDA is a good, conservative range.  The Street is currently at $160 million.  If these margin gains are sustainable, we may be raising our estimates even further.


MPEL BLOWS Q2 OUT - ebitda



WSM: Quick Take


Weak comps, downtick in sales/inventory spread, and lower guidance. Not good. But the stock is hated, comps are getting easier, and key businesses are stabilizing.

  • 2Q print was negative on the margin for WSM. But interesting dynamics shaping up.
  • Missed 2-4% comp guidance with a 1.4%. Guided down 3Q down by a point to 1-3%, and 4Q by 1.5pts to 2%-3.5%.
  • Even though WSM is higher end, the weak comps in company-retail were not a big surprise given the weakness we’ve heard from the Target’s and JC Penney’s of the world.  While Kohl’s noted strength in Home two weeks back, it was due to Electronics and Bedding – areas where WSM doesn’t play too heavily.
  • Financials looked relatively clean for WSM.
  • Nothing looked funny in SG&A
  • Tax rate Ok
  • WSM amped-up its guidance for pulling back on its catalogue business. 3Q guidance there for (-8-9%) vs prior of (-2-3%). This is great to see.
  • E-commerce business still very healthy, and a recent flattening in growth appears to have bottomed.

Sentiment on this name is still relatively poor (1 out of 22 analysts have a ‘Buy), though not quite as weak on the buy side. See our Sentiment Indicator below.


WSM: Quick Take  - WSM Top1 8 11


WSM: Quick Take  - WSM 2 8 11


WSM: Quick Take  - WSM 3 8 11


WSM: Quick Take  - WSM 4 8 11


WSM: Quick Take  - WSM Guid 8 11





Great quarter and estimates need to go up considerably - $185m hold adjusted run rate and Q3 trends better than Q2. Street at $155m for Q3



"These results represent another strong quarter for our Company, driven by significantly improved operating  performance across all areas of the business. Our second quarter results reflect record consolidated EBITDA on record setting gaming volumes for our Company. Our overall profitability continues to reflect our various cost containment initiatives that help drive strong operating leverage."


- Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment




  • Net Revenue of $960MM and EBITDA of $216MM
    • CoD: Net revenue of $608MM and EBITDA of $151MM
    • Altira: Net revenue of $311.5MM and EBITDA of $73MM
    • Mocha Slots: Net revenue of $32MM and EBITDA of $10MM
  • Cash: $1.4BN (including $368MM of restricted cash); Debt: $2.4BN
  • Capex: $8.5MM
  • "The show has entertained over 700,000 guests with occupancy levels above 90% on average per show. The House of Dancing Water has significantly reinforced City of Dreams' entertainment proposition and has  generated meaningful positive ripple effects throughout the business, including higher property visitation, hotel occupancy rates, and gaming spend."
  • "We have successfully completed the acquisition of a 60% interest in the Studio City project on Cotai.  We continue to work on our design plans and are currently evaluating financing plans, including a bank loan and other debt financing, to fund this project."
  • "We are also excited about the recently announced dual listing proposal. Upon completion of our Hong Kong initial public offering, our dual listing will provide our existing shareholders with much enhanced liquidity and will also broaden the Company's investor universe."



  • Committed to growing their mass market revenues, especially premium Mass. Non-gaming amenities continue to drive visitation and spending
    • Cubic and House of Dancing Water continue to drive brand recognition
    • HDW operates at a B/E level but helps drive traffic and gaming volumes
  • Continuing to work on hotel yield management and other cost control efficiencies to help drive margins
  • Believe that the MSC location will provide them with a competitive advantage
  • Continue to see strong GGR growth in Macau.
  • Growth in Chinese visitation continues to outstrip visitation growth from other regions
  • Their Mass GGR growth far exceeds the market growth rate, despite increased supply/competition
  • Hold Adjusted EBITDA with 2.85% hold across the junkets would have been $185MM 
  • Their new facility allows them more flexibility at a cost of a small increase in rate.  There were some charges related to the refinancing in the quarter.
  • Guidance for 3Q
    • D&A: $85MM
    • Corporate: $25MM
    • Net Interest expense: $30MM (including the impact of various corporate transactions)



  • Pretty happy with Q3 so far
  • With the opening of GM, the center of gravity has moved more towards Cotai and they have benefited from that
  • MSC: 36 month process to open the facility from when they commence construction. Prior owners put in $100MM of capex into the project already.
  • The reason that they are so excited about MSC is their location right by the Lotus Bridge which should be open 24 hours. So they would have extremely high foot traffic at that property.
  • Really looking to keep their operating expenses in check and leverage their scale as they have 3 operating units in Macau.  Initiatives in premium mass should also help their mix.
  • PH3 of CoD is going on their back burner for now, but still think that they will need additional rooms there at some point in the future
  • In 1H11, they have been focusing more on the premium Mass business which has a little less promotional expense attached to it.  Hence, the better margins.
    • Promotional expenses were $11MM lower than we estimated and have been steadily declining as a % of casino revenue over the past 2 years
    • This year, within the mass segment, premium mass accounted for 50-60% (last year was 60%); hence, grind business accounted for 40-50% of the mass business.
  • CoD hold adjustment
    • The hold was pretty close to 2.85%, but they had favorable mix in the quarter between RC and Revshare - which had a $7MM benefit
  • Any change in commission rate or operating expenses?
    • No change in the commission rate, just mix shift in volumes
    • Players rebates were flat sequentially
    • Promotional expenses were tighter
  • Have higher utility expenses in 2Q over 1Q. They also have to book a higher bonus provision on higher volumes.  Going into 3Q, they intend to keep operating expenses flat QoQ.
  • Table cap will last until March 2013, and post March 2013, they would increase it 3-5% - so only new builds will get those tables.  Therefore, they are trying to yield up their tables as you can see from higher win per tables.
  • Deceleration in RC volumes?
    • Had to move the opening of some junket rooms until 3Q so that impacted their growth in 2Q
  • They have faith that the Macau government will grant them the necessary number of tables at MSC to make the project viable.  For them, it's really about getting the necessary approvals to restart construction vs getting gazetted. Their process is a much less complicated one.

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