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Buying Things Well

“Investment success doesn’t come from buying good things, but rather from buying things well.”

-Howard Marks


In Chapter 4 of Howard Marks’ “The Most Important Thing” he discusses a very hot topic at our Yale campus headquarters these days – the relationship between price and value.


American shoppers tend to get this concept much more readily than some American Institutional Investors do. Why? Probably because Americans shop using their own money as opposed to other people’s money. A subtle difference that focuses the mind.


Rather than opining on why I’ve been bearish on the “buy stocks because they are cheap” thesis since the February-April 2011 highs, I’ll submit one more concise thought from Marks that summarizes the crux of the matter:


An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse.” (The Most Important Thing, page 23)


Back to the Global Macro Grind


Today, I’ll probably “sound” as bearish as I sounded bullish covering shorts last Tuesday. Plenty of people can’t reconcile how someone can be that way. They didn’t teach us how to be Duration Agnostic on a Keynesian campus, thankfully.


Plenty of people like to label people in this business too. That’s usually easier than taking the time to understand what it is that they do. We get it. This is Old Wall Street, until it isn’t.


On Wall Street 2.0, there will be Time Stamps.


To review, Hedgeye has made 3 “Short Covering Opportunity” calls in the last 2.5 months:

  1. August 8th
  2. September 12th
  3. October 4th

These were accurate immediate-term TRADE opinions about the relationship between price and value. On October 3rd, the Hedgeye Asset Allocation Model held a 73% position in Cash. On October 11th (before yesterday’s open), my Cash position was 61%.


On Old Wall Street 1.0, there are no Time Stamps. That’s dying on Opacity’s Vine.


Fully Occupied Transparency comes next.


Why be bullish, on the margin, before an +8.7% short squeeze, and be bearish, on the margin, after it? Price/Value matters – and everything about managing risk in a Globally Interconnected Macro market happens on the margin.


I wrote about being multi-factor and multi-duration as a matter of process yesterday. Nothing has changed on that front today. Across my Top 6 Global Macro Factors (and across durations), here’s what I see this morning:

  1. SP500 = bullish TRADE (1167); bearish TREND (1228) and TAIL (1266)
  2. VIX = bearish TRADE; bullish TREND and TAIL
  3. German DAX = bullish TRADE; bearish TREND and TAIL
  4. EUR/USD = bullish TRADE; bearish TREND and TAIL
  5. Copper = bearish TRADE, TREND, and TAIL
  6. 30-year US Bond Yields = bearish TRADE, TREND, and TAIL

So if those who are paid to think in a marketing vacuum want to call me Rosie or Roubini, they can whisper amongst themselves and have at it. No Duration Differentiation. No Real-Time Risk Management.


If you are reading this today, you’re paying for my rants … and on behalf of my research team, I sincerely thank you for having an open mind. We couldn’t Occupy Hedgeye without you.


Having been bearish in 2011 doesn’t mean we can’t help you buy “good things” well. We bought Starbucks in April of 2009 when no one wanted to touch it – that’s an American brand that means something, and will continue to for a long time.


In the last few months we’ve also bought Utilities (XLU), Target (TGT), and Marriott (MAR) well. These are 3 of the 10 LONG positions we have in the Hedgeye Portfolio that do stand the chance of actually being held for the “long-term.” Good balance sheets, dividends, and, most importantly, bought at good prices.


We get Graham and Dodd. It’s not that complicated, really. Buy low. But we also get Buffett and Munger’s #1 rule of investing that supersedes all of the vaunted “value” investing rules – DON’T LOSE MONEY.


Oh, and their second rule of investing is don’t forget rule #1.


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1, $84.42-89.71, 5, and 1167-1212, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buying Things Well - Chart of the Day


Buying Things Well - Virtual Portfolio




TODAY’S S&P 500 SET-UP - October 12, 2011


After markets crash and funds have to liquidate, they have to cover their short positions – subtle but real factor and this short covering bid from Hong Kong to the S&P Futures remains relevant until it doesn’t; a 9-12% rally from bombed out lows is not atypical in a high volatility environment.


Longer term, every TREND line in the Hedgeye macro model is broken.


Earnings is always a hot topic in the bottoms up crowd and my overall point on earnings season is that it’s the riskiest we have “comped” in the last 6 quarters. Everyone and their brother knows “earnings have been good”, but earnings are cyclical, down Dollar has been a tailwind, and the Global Growth cycle has turned.


As we look at today’s set up for the S&P 500, the range is 45 points or -2.39% downside to 1167 and 1.38% upside to 1212




As of last night 6 of 9 sectors are positive on TRADE.  The Question now is can these newly captured TRADE lines of support hold? Earnings and Europe will decide the answer. There has not been a more important earnings season in 2 years and I think the cyclicals remain the liability.


Since the Yield Spread is cyclical, so are net interest margins at the Financials. That’s one of 3 Sectors (Financials, Energy, and Basic Materials) that have not recovered either TRADE or TREND lines of support. Tech has – that’s new. That makes Tech and Utilities the only 2 Sectors that are bullish TRADE + TREND.


Alcoa isn’t exactly a high quality of earnings company. But if the TREND is what the market is already forecasting (7 of 9 Sectors are bearish TREND), Alcoa’s guidance for everything to magically recover sequentially in Q4 (versus Q3 pricing pressure) will likely be met with contempt rather than complacency.









  • ADVANCE/DECLINE LINE: 343 (-2187) 
  • VOLUME: NYSE 882.22 (-0.66%)
  • VIX:  33.86 -0.48% YTD PERFORMANCE: +85.13%
  • SPX PUT/CALL RATIO: 1.90 from 1.96 (-2.78%)



  • TED SPREAD: 39.75
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.18 from 2.10     
  • YIELD CURVE: 1.86 from 1.80

MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage Applications, prior (-4.3%)
  • 10 a.m.: JOLTs job openings
  • 11:30 a.m.: U.S. to sell $30b 4-wk bills
  • Noon: DoE short-term outlook
  • 1 p.m.: U.S. to sell $21b in 10-yr notes reopening
  • 1:15 p.m.: Fed’s Pianalto speaks at Univ. of Akron
  • 1:20 p.m.: Fed’s Fisher speaks at Abilene, Texas
  • 1:30 p.m.: Fed’s Plosser speaks on economy in Phila.
  • 2 p.m.: FOMC Minutes
  • 4:30 p.m. API inventories


  • China said the U.S. currency bill passed by the Senate alleging the yuan undervalued violates world trade rules
  • Slovakia, the only country that hasn’t ratified a revised European bailout fund, headed for a second vote after failing to approve the package yesterday
  • Wal-mart hosts investment community meeting; watch for comments by CEO Duke in am, CFO Holley on possible capex spending
  • Johnson Controls hosts strategy meeting; watch for 2012 EPS, rev.
  • Euro banks may face more stringent pay and bonus rules than rivals in North America, the Financial Stability Board said
  • Wal-Mart Halts Operations at More China Stores Over Labeling
  • ArcelorMittal Unit in Ore-Carrier Talks to Shatter Arctic Ice


COMMODITY/GROWTH EXPECTATION                                                                    





  • Alcoa Profit Misses Estimates as Europe Cuts Aluminum Orders
  • Gold Eclipses Cocaine as Rebels Tap Mining Wealth in Colombia
  • Saudis Lay 2,400 Miles of Rail to Ease Oil Dependence: Freight
  • Record Coal Price Risk Gaining on Australian Rain: Commodities
  • Oil Drops First Day in Six on U.S., Europe Fuel Demand Outlook
  • Gold Gains in London as European Debt Concerns Spur Demand
  • Copper Gains as Shrinking Asian Stockpiles Signal Steady Demand
  • IEA Cuts Oil Demand Forecast a Second Month on Slowing Economy
  • Industry Gas Use Shows Slowest Growth Since 2009: Energy Markets
  • Corn Extends Biggest Gain Since June 2010 on Stockpiles Demand
  • Ship Lines Delay Asia-U.S. Rates Plan on Unpredictable Cargo
  • Treasuries Decline, S&P 500 Advances as Commodity Producers Rise
  • EU Farm Policy Debate Pits Top Recipient France Against U.K.
  • Oil Rises Near Three-Week High as Europe Prepares Bank Support
  • CFTC Said to Have Enough Votes to Approve Speculation Limits
  • IEA Says Commodities No Longer a Separate Asset Class Since 2008
  • Palm Oil Advances a Third Day After Soybeans Rally on Exports




FROM KM - EURO – I wasn’t short it at the bottom; but I did say short it w/ impunity at 1.36 (TRADE line resistance) and I’ll keep saying the same up to the TAIL and TREND lines of resistance (1.39 and 1.43); this is one of the world’s biggest short positions (Paulson getting squeezed there now too), so don’t stress about it; just understand it and manage risk around it.






Slovakia's lawmakers have voted down an expansion of the euro zone's bailout fund ; the government of Prime Minister Iveta Radicova lost a confidence vote.  However, a repeat vote on the EFSF could be held later this week and passed, if the government receives the support of opposition lawmakers from the left-of-center Smer-Social Democracy, or Smer, party. This would likely require a cabinet reshuffling. The repeat vote on the EFSF is unlikely to take place Wednesday as more time for political talks will be needed.






Yesterday, Indonesia joined Turkey and Brazil as Emerging Markets that followed through with “surprise” rate cuts. (We use quotations because Hedgeye Macro clients have been warned of this since April.)  Expect more Deflating the Inflation to continue getting priced into the interest rate and FX markets of EM economies. Indonesia, Philippines, and Malaysia are all preparing or implementing fiscal stimulus to bolster domestic demand.








Howard Penney

Managing Director

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


LVS and WYNN both hit an all-time low in market share.



September gross gaming revenues (GGR) increased 38% YoY to $2.64BN.  With the detail in hand, we can confirm that while growth was strong, the month was negatively impacted by a difficult hold comparison last year and low hold.  Assuming that GM’s direct play level was 4% in September, total direct play this month was 6.0% of the market, compared to 7.6% last year.  The total market held at 2.79% vs. 3.00% in September 2010. Normalizing for hold, September would have increased 47% YoY.  High margin Mass business increased 39% - just slightly lower than the 40-41% growth we’ve seen during the last 4 months.  VIP revenues increased 39%, while VIP Junket RC increased 52% YoY.  Slot revenue growth chugged along at 23% YoY – in-line with last month. 


Below are some other quick observations before we get to the monthly detail:

  • YoY Mass growth remarkably consistent the last few months - around +40% and higher than growth earlier in the year
  • MPEL Mass share down but VIP Rolling Chip and revenue share took a big jump up
  • LVS posted the first negative growth month of any operator since the ugly days of 2009 – somewhat hold related but Mass share was the lowest ever
  • As expected, September was a poor VIP month at Wynn.  Mass was a little better than the previous 2 months but still below the rest of the year
  • Great month for Galaxy despite low VIP hold % - Mass share was terrific while VIP volume was healthy

The Honk Kong operators continue to outperform.  We again would highlight the strength of MPEL relative to Street estimates.  We are currently 20% above the Street for Q3 EBITDA, a little below our prior estimate due to September’s shift from Mass to less profitable VIP.  



Y-o-Y Table Revenue Observations


Total table revenues grew 38% YoY this month, on top of 39% growth las­t September.  September Mass revs rose 39%; VIP revs grew 39%; and Junket RC rose 52%. 


For the first time since July 2009, LVS table revenues actually fell YoY.  Over the past 14 months, LVS’s table revenues have grown at roughly 1/3 of the market’s pace.

  • Sands was down 23% YoY, driven by a low hold. The YoY decline was driven by a 41% drop in VIP slightly offset by 12% increase in Mass
    • Junket RC was up 33%
    • Sands held very low in September and had a very difficult YoY comp.  Adjusted for 12% direct play (in-line with 2Q11), hold was about 1.74%, compared with 3.93% hold in August 2010 assuming 14% direct play (in-line with 3Q10). 
  • Venetian was the only property in the LVS portfolio to be up YoY. Table revenue increased 24% YoY, driven by a Mass increase of 13% and a VIP increase of 32%
    • Junket VIP RC grew 12%
    • High hold and easy comps helped Venetian in September.  Hold was 3.16%, based on 20% direct play vs. 2.53% in September 2010 assuming 23% direct play levels.
  • Four Seasons was down 50% YoY, VIP revenues took a 70% nose dive- mostly hold driven, which was slightly offset by 103% growth in Mass. 
    • Junket VIP RC fell 10% YoY – the worst performer in the market
    • Results were negatively impacted by low hold and difficult hold comparisons.  Assuming 40% direct play (compared to 41% in 2Q11), we estimate hold was just 1.2% compared to 3.3% in September 2010 assuming 41% direct play. Even if the direct play percentage fell to 35% -which wouldn’t surprise us, hold would still have only been 1.25% in September

Wynn table revenues were up 29%, negatively impacted by low hold

  • Mass was up 43% and VIP increased 26%
  • Junket RC increased 47%
  • Assuming 8% of total VIP play was direct (in-line with 2Q11), we estimate that hold was just 2.3% compared to 2.6% last year (assuming 13% direct play – in-line with 3Q10)

MPEL table revenues grew 38%, driven by Mass growth of 36% and VIP growth of 38%

  • Altira revenues rose 34% with Mass growth moderating to just 15% while VIP grew 36%, despite low hold and difficult comparisons
    • VIP RC increased 64% - the most of any mature property in September
    • We estimate that hold was 2.8% vs. 3.5% last year
  • CoD table revenue was up 39%, driven by 41% growth in Mass and 39% growth in VIP
    • Junket VIP RC grew 32%
    • Assuming a 13% direct play level, hold was 3.5% in September compared to 3.3% last year

SJM revs grew 33%

  • Mass was up 27% and VIP was up 36%
  • Junket RC was up 28%

Galaxy table revenues continued its streak of triple-digit gains, +129%; mass soared 272%, while VIP gained 114%

  • StarWorld table revenues grew 28%
    • Mass grew 43% and VIP grew 27%
    • Junket RC grew 43%
    • Hold was high at 3.1% but it was even higher last September at 3.5%
  • Galaxy Macau's total table revenues were $241MM, 13% lower than August's 
    • Mass table revenues rose 7% MoM to $46MM
    • VIP table revenue of $195MM, a decline of 17% MoM with RC volume of $7BN. Assuming 4% direct play, hold was 2.8%.

MGM table revenue gained 46% YoY, the slowest growth since August 2010

  • Mass revenue growth was 30%, while VIP grew 50%
  • Junket RC climbed 58%
  • Assuming a direct play level of 8%, we estimate that hold was 3.0% this month vs. 3.1% in Sept 2010 assuming direct play of 9% 


Sequential Market Share (property specific details are for table share while company-wide statistics are calculated on total GGR, including slots)


LVS share fell 50bps sequentially to 13.7% - another all-time low for LVS. This compares to 6 month trailing market share of 15.4% and 2010 average share of 19.5%

  • Sands' share dropped 1.6% to 3.4%, a new low
    • VIP rev share was only 2.2%, half of August's share
  • Venetian’s share rose 150bps sequentially to 8.5% share
    • VIP share gained 250bps to 7.0%, which is in-line with TTM average
    • Mass share dropped 2% points sequentially to 13% - below the 14% average for the trailing 6 months
    • Junket RC gained 30bps to 4.9%
  • FS share fell 50bps to 1.2%
    • VIP share dropped 70bps to 0.9%, lowest since June 2011
    • Mass share increased 20bps to 2.4%
    • Junket RC declined slightly to 1.3%

WYNN lost the most share for the 2nd straight month with a 1.7% drop to just 11.5%, an all-time low, which is much lower than its 6 month trailing average share of 15% and 2010 average share of 15%.

  • Mass market share was gained 60bps at 10.5%
  • VIP market share plummeted 250bps to 11.4%; WYNN has lost 5.3% share in VIP in two months.
  • Junket RC share rose 60bps to 13.5%, below its 6 month trailing average of 14.9% and 2010 average of 15.2%

MPEL market share rose 1.6% points to 16.1%, higher than its average 6 month trailing share of 15% and 2010 share of 14.6%.

  • Altira share gained 20bps to 5.3%, compared to a 5.6% average share in 2010; 30bps share in mass share offset a 60bps improvement in VIP share. 
  • CoD’s share climbed to 10.7% from 9.2% in August as VIP strength offset weakness in Mass
    • Mass market share declined 2% points to 8% 
    • VIP share soared 2.6% points bps to 11.6%

SJM share gained the most share in September, up 180bps to 29.0%, though it is still below its 6-month trailing average of 30.0% and 2010 average of 31.3%.

  • Mass market share gained 60bps to 36.7%
  • VIP share recouped 2% points to 27.3%
  • Junket RC share fell 140bps to 28.4%

Galaxy slipped 50bps share to 19.6%. September share compares with an average share of 10.9% in 2010 and a 6 month trailing average of 14.6%.

  • Galaxy Macau share gained slightly to 9.5%
    • Mass market share gained 100bps to 7.3%
    • VIP rev and RC share were both flat and up 20bps at 10.3% and 11.0%, respectively
  • Starworld slightly lost share to 9.6%, 50 bps above its TTM pre-Galaxy Macau level.

MGM share lost 80bps to 10.1% due to weaker VIP share. September share compares with an average share of 8.8% in 2010 and a 6 month trailing average of 10.4%.

  • Mass share recovered 160bps to 8.1% but was more than offset by a 150bps decrease in VIP share to 10.6%
  • Junket RC lost 70bps to 9.5%, still above the property’s 2010 average of 8.4% but below its 6 month trailing average of 10.4%


Slot Revenue


Slot revenue popped 23% YoY but was flat sequentially.

  • Galaxy slot revenues exploded 377% YoY but lost 11% MoM to $13MM
  • MGM slot revenues had the second best growth at 33% YoY to $15MM
  • SJM slot revenues grew 12% YoY to $17MM
  • MPEL slot revenues grew 3% YoY to $20MM
  • Wynn slot revenues grew 12% YoY to $20MM
  • LVS slot revenues grew 10% YoY to $31MM








In preparation for HST's Q3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HST’s Q2 earnings call.



  • “The fundamentals of our business remain attractive. Transient demand has recovered to prior peak levels, and group demand continues to improve. As RevPAR is increasingly driven by improvements in average rate, margin growth and flow-through will accelerate. Additions to supply have been restrained and will likely remain well below historical levels for at least the next three years. Construction costs are beginning to increase again, which will further help limit new supply”
  • “We expected our operating results to be significant impacted by substantial renovations at our Sheraton New York and Philadelphia Marriot hotels in the second quarter. Excluding results from these hotels, our RevPAR increase for the quarter would have been 7.6%. In addition, it is worth noting that our comparable hotel results do not include the performance of the $1.7 billion of acquisitions we have completed over the last 12 months, which are performing exceptionally well and have generated an average RevPAR increase of over 18% for the quarter”
  • “Our business mix trends for the quarter were quite favorable as we saw strong demand increases from our higher rated customer segments and solid rate growth across the board. Rate growth in Q2, driven by exceptional growth in transient demand, was the best we had seen since 2007.”
  • “Group demand for the quarter was essentially flat with last year as increases in corporate and association business were essentially offset by reductions in discount groups. The growth in these higher priced segments was even more pronounced in our luxury hotels.”
  • Repositioning: “We expect to spend $220 million to $240 million on these types of projects”
  • “We expect to spend approximately $320 million to $345 million on maintenance capital expenditures.”
  • “We are expecting improved performance in the second half of the year due to less disruption from renovation at our hotels, an improving macroeconomic outlook relative to the first half of the year and solid group bookings for the third and fourth quarters”
  • We will continue to be aggressive, but disciplined, as we evaluate new investments to further enhance the value of our company.”
  • “We’ve seen a big increase in tour groups throughout Europe this year. I think that a better economy in the rest of the world has ultimately contributed to better results in Europe. So I think we may see that trend moderate a little bit for the second half of the year only as we start to move out of the tourist season. But the bottom line is so far … Europe seems to be holding up relatively well”
  • “I think as we also feel that as we look at the group booking pace as it carries into the second half of the year, it does seem to be a little bit stronger, the rate does seems to be growing. So that gives us a fair amount of confidence that things should be a little bit better.”
  • Guidance FY11:
    • Comparable hotel RevPAR: +6% to 7.5%
    • Adjusted operating profit margins: +90 to 120bps
    • Adjusted EBITDA of $1.020 to $1.050BN
    • FFO per diluted share of $0.87 to $0.91 which has been reduced by $0.03 per share for acquisitions, debt repayment and impairment costs
    • “We expect the RevPAR increase to continue to be driven more by rate growth than 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  should help to drive growth in banquet and audio-visual revenues and solid F&B flow through”
    • “We expect unallocated costs to increase more than inflation, particularly for utilities where we expect higher growth due to an increase in both rates and volume, and sales and marketing cost, where higher revenues will increase cost. We also expect property taxes to rise in excess of inflation and property insurance to increase well in excess of inflation due to an increase in insurable values and premium increases in the second half of the year”
    • Regional guidance for 3Q11:
      • San Fran: “continue to outperform our portfolio in the third quarter due to excellent group and transient demand and further ADR increases.”
      • Hawaii: “Slightly underperform the portfolio in the third quarter due to some disruption from renovation activity.”
      • “Tampa hotels to perform very well in the third quarter due to strong group bookings”
      • “We expect our Miami and Fort Lauderdale hotels to have a great third quarter and to outperform the portfolio because of strong group demand which should drive a significant increase in ADR.”
      • “We expect the Phoenix market to significantly outperform our portfolio in the third quarter due to strong group demand and growth in both group and transient rates, particularly at the Westin Kierland which will benefit from the new ballroom.”
      • “We expect our San Diego hotels to underperform the portfolio due to lower levels of group business which will result in weak transient pricing through the summer months”
      • “We expect the Chicago market to perform very well in the third quarter.”
      • “We expect RevPAR for our New York hotels to improve significantly for the rest of the year.”
      • “We expect the D.C. market to continue to underperform the portfolio in the third quarter; however, our urban hotels will continue to significantly outperform the suburban hotels.”
      • “Our Boston hotels are expected to continue to underperform the portfolio in the third quarter due to lower levels of group demand.”
      • “We expect the Philadelphia market to outperform the portfolio in the third quarter as the renovation wraps up and group demand increases”

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