Month End: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Financials (XLF)


Moving off of ZERO percent asset allocation to US Equities on Friday (bought Utilities) was me acting on a signal that in the immediate-term I was going to be wrong (last week) and we were not going to re-test the prior August closing lows on the no QG3 news.


So now I’m still short Financials (XLF), long Utilities (XLU) and looking for my level to short the SP500 (SPY). Interestingly, but not surprisingly, I’ve had to re-model the upward bound of the immediate-term TRADE range multiple times this week. Primarily that’s because 2 of 3 factors in my core model (Price and Volatility) are pushing the upward bound higher at an accelerating rate.


Gravitationally, this makes sense. The market tends to rise and fall to the most immediate-term point that imposes the most amount of pain on the highest amount of market participants.


With month end markups in motion here (not including August data, since April the SP500 has averaged +0.7% price performance in the last 6 days of the month vs down -4.5% down in the first 6 days of the new month) and the 3rdfactor in my core model (Volume) not confirming this price rally, I’m now in wait and watch mode – selectively shorting single stocks and waiting on my SPY price.


Across all 3 durations, this market is still broken/bearish with the following resistance lines: 

  1. TRADE = 1234
  2. TREND = 1292
  3. TAIL = 1263 

The most bullish news I can give you is that we have taken out the most immediate-term call for a lower-YTD-low (below 1119). My immediate-term TRADE range is now 1, and I’ll manage risk around that range until 1203 is violated on the downside. If it breaks, I suspect the move down from there in the SP500 will be as swift as this 6 day move up.


Big Government Intervention continues to A) Shorten Economic Cycles and B) Amplify Market Volatility.



Keith R. McCullough
Chief Executive Officer


Month End: SP500 Levels, Refreshed - 1


Notable macro data points, news items, and price action pertaining to the restaurant space.






The August slump in consumer confidence, first indicated by the University of Michigan and Bloomberg Weekly Consumer Comfort data, was confirmed yesterday by the Conference Board Consumer Confidence Index which came in at 44.5 versus expectations of 52.





Food processors and QSR stocks outperformed peer subsectors yesterday.  Food retail was led lower by Winn-Dixie, which corrected after a significant increase in the stock price ahead of earnings post-close on Monday.


THE HBM: MCD, KKD - subsectors fbr





MCD is changing its strategy in China to accommodate changing conditions in the industry, according to China Daily.


KKD is stepping into the coffee wars in a big way with three new signature coffees debuting this week, and a new marketing campaign set for Friday.  According to, the 669-unit, Winston Salem, N.C.- based chain will offer its signature house blend, dark roast and house decaf varieties just as the competitive coffee market is dominated by the likes of Dunkin’ Donuts, Starbucks and McDonald’s.


The “better burger” revolution!  According to Technomic which has labeled the upstarts in the sandwich category the "better burger" chains have taken over the top slots on their list of fastest growing limited-service burger restaurants, including places likeShake Shack (133% growth), Smashburger (116% growth) and Mooyah Burgers & Fries (54.5% growth).


THE HBM: MCD, KKD - stocks 831



Howard Penney

Managing Director


Rory Green



The data is in.



Despite the rhetoric, total commissions have not been rising in Macau.  Maybe they will if LVS turns aggressive next year (see our 08/29/11 note “LVS: SHOWING AGGRESSION”), but overall commission rates were down in 1H of 2011 both on a percentage of revenue and rolling chip basis.  The following chart shows the junket commission trends.  Note that hold percentage was below normal in 2009 which caused the spike in the blue line in that year since the junkets structured on a percentage of rolling chip still get paid the same amount regardless of hold.




The charts below show the composition, by company, of all-in commissions between the straight junket commission, the rebate that goes back to the player, and non-gaming giveaways.  The first analyzes the dynamics on a revenue share basis, the second as a percentage of rolling chip.  Two main takeaways:  Wynn remains the least aggressive – no surprise here – and higher commissions have not been the driver of the strong growth we’ve seen at City of Dreams. 


Here are our observations:

  • Wynn maintained the most profitable VIP business on the Street by the least to acquire it
    • Rebate rate of 85bps of RC or 30.5% of win in 1H11 (88bps/29.3% in 2010)
    • Junket commission of 20bps of RC or 7.1% of win in 1H11 (20bps/6.8% in 2010)
    • All-in rate including comps  of 118bps of RC or 42.35% in 1H11 (122bps/40.6% in 2010)
  • MPEL and MGM were tied in 1H11 for paying the most for their VIP business.  MGM had the highest on a RC basis, while MPEL got the top prize on a % of win basis. 
    • MGM paid the highest rebate rate of 106bps of RC or 35% of win in 1H11. MGM has actually had the highest rebates since 2008 (103bps/35% in 2010)
    • MPEL paid the highest junket commission of 30bps of RC or 10.8% of win in 1H11. MPEL has consistently had the highest junket commissions since 2008 (36bps/12.25% in 2010)
    • MGM had the highest all-in rate including comps of 140bps of RC in 1H11 (137 in 2010) while MPEL has the highest all-in rate including comps as a % of win of 46.7% (46.9% in 2010)
  • LVS hold the prize for deriving the largest % of its revenues from non-casino revenues, however, given the scope of their business they also have the largest non-gaming comps.
    • LVS non-casino comps were 16bps of RC volume or 5.3% of win in 1H11 (18bps/6.2% in 2010). LVS has consistently been the highest non-casino comper since 2008, however, comps as a % of win and RC have been steadily declining since 2008.
  • MPEL’s non-casino promotional expenses as a % of RC and win are the lowest on the street
    • Comps were 7bps of RC or 2.6% of win in 1H11 (9bp/3.1% in 2010)






The Macau Metro Monitor, August 31, 2011




MPEL plans to launch its HK IPO in October.  Rumors indicate up to US$500MM may be raised.



Border crossing at the Gongbei border reached 600,000 in the last weekend of the summer holiday. The Gongbei port has accumulated up to 16MM passengers during the summer holiday.  Expansion plans for the Gongbei border will be sped up to improve the border crossing experience of travelers.



DICJ director Manuel Joaquim das Neves forecast 2011 Macau GGR growth above 35%.  In April, Neves had said 2011 growth would be between 20-30%.  Neves also stressed that, as Macau’s gaming regulator, he is inevitably inclined to have “a conservative outlook”.


The forecast proposed by Neves would place casino revenue for the final four months of this year at less than MOP 83BN, up by only 17.5% from the same period of 2010.



DICJ director Manuel Joaquim rejected yesterday's leaked US diplomatic cable saying, “It’s not impossible but it is very difficult to conduct money laundering in local casinos. We have had no such problem so far. People might think it’s possible to simply buy some chips at a casino and then trade them at another counter but it’s not. Gamblers must prove they played and that they won that amount and casinos have to write a check with the winner’s identification."


“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter.  But now I would like to come back as the bond market.  You can intimidate everybody”.

-James Carville


Markets are intimidating and they don’t wait for anyone. Nor do they owe anyone a return, as Keith likes to say.   


When James Carville made the above quote, he was referencing the melt up in 10-year yields in the early stages of Bill Clinton’s first term as president.  Bond investors, at the time, were concerned about federal spending.  Subsequent efforts by the Clinton administration to control the deficit, which helped to strengthen the dollar, led to the bond investors’ fears being assuaged: yields trended lower and stocks surged, for the most part, during the remainder of Clinton’s stint as Commander in Chief. 


Markets are at least as intimidating today as they were in the early 1990’s, when real-time prices forced the government to sober up.  In the age of social media, where information is more accessible than ever, anyone can be a part of the debate.  In general, I would argue, this is good for the country as it allows a broader range of views to be heard by a broader range of people.  Popular consensus, in a way, is changing on a tick like real-time market prices, thanks to the democratization of information.  For the political players in Washington, this is intimidating.


Although real-time communication is becoming the norm, certain members of the financial community will likely resist that move and, like others before them across industries that have resisted positive change, they will be left behind.  The Federal Reserve’s inability to prop up equity prices in perpetuity has set alarm bells ringing in Washington this year as Hedgeye’s call for Jobless Stagflation, induced by ineffective Keynesian policies, has manifested itself.  For now, it appears that policy-makers are sticking to their guns, but to the extent that real-time prices and economic data continue to weigh on sentiment, the time for the incumbent players to act could be limited.


Despite Charles Evans’ best attempts, yesterday on CNBC he ignored the fact that markets discount future events (like the cessation of QE), and equity markets have declined globally on expectations that the global economy is slowing.  In the U.S., the primary source of pessimism (and ultimately the primary potential for renewed growth) is the consumer.  Despite trillions of dollars of government spending, consumer’s expectations for an improved economy have not changed significantly over the past three years.   


Yesterday’s bomb of a consumer confidence number from the Conference Board came as no surprise to anyone.  In an effort to look for a positive in what was a decidedly negative report, the stat that stood out the most to me was that more than half of consumers expect the stock market to be lower in a year, the first time that has been true since March 2009.  However, this is not March 2009, this is 2011.


In my view, there are four primary ailments that need to be addressed for a consumer recovery to take place.


(1)    The political machine in Washington, D.C. is broken.


This one is obvious.  The debt and deficit debate put the spot light on everything that is wrong with Washington politics.  Dylan Ratigan recently expressed the frustration many Americans are feeling during his rant on MSNBC during which he accused legislators of being “bought”.  Howard Schultz, the CEO of Starbucks, seemingly agrees as he is encouraging business leaders to just say no and stop funding the madness via political donations.  Ratigan, for his part, has shown no mercy for either side of the aisle.  During his now famous rant, Ratigan accused Democrats of “kicking the can down the road until 2017” and “screwing” future generations by not offering long-term solutions for extractions from the economy.  Turning to Republicans, he stated that they simply want to “burn the place down” and pursue a negative agenda.


(2)    Perpetually low rates is killing confidence


Easy money creates bubbles which have a severe impact on consumer confidence given that consumers are usually the last to the party.


(3)    The Keynesian policies of the FED is slowing GDP growth


Quantitative Easing is inflationary!  While Mr. Evans was on CNBC, refusing to admit that QE2 was inflationary, it was obvious that he was ignoring inconvenient facts while admitting only those that suited his stance.  Markets are discounting mechanisms and hinge on expectations; the longer-term view of QE2 is highly conclusive; the result was a weakened dollar and a 29% surge in the CRB index over the past twelve months.  Stagflation is back and it is scaring the public.


(4)    The Government inflates the data to build up expectations only to be shot down with constant downward revisions


The most glaring example of this is seen in the BEA's use of "deflators." The BEA is telling us that they believe that inflation over the prior two quarters has been running at annualized rates of 2.5% and 2.7% respectively and the annualized inflation rate for the prior four quarters was just barely over 2%.  You tell me!!  Is it really plausible that over the last 12 months we saw net inflation of barely over 2%? 


On Monday, the government reported that personal spending increased 0.8% in July.  This was a 100 basis point improvement from the month prior.  Consumption is accelerating despite numerous headwinds.  I have become very cynical about government data and it does require a leap of faith to assume that the government has accurately captured what is happening in the real economy.


Despite a significant downturn in equity prices during August, the S&P 500 is now 10% “off the lows” into month-end.  The market faces a difficult macro calendar in September including another attempt from the Obama administration to jump-start the economy.  One thing Obama knows is that markets are ready-and-able to tell him if he is not doing the right thing.  Coming up to the election, the incumbent president needs a win, but solutions to the problem of Jobless Stagflation and ideological dogma in Washington, D.C. are what the market of popular consensus is demanding. 


Function in disaster; finish in style,

Howard Penney





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