prev

Time to Fail

This note was originally published at 8am on October 13, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming …”

-Theodore Roosevelt

 

I’ll admit that my peak athletic days are behind me.  At my best, I was a middling college hockey defenseman with a propensity for extended stays in the penalty box.  My worst probably came last night in a beer league hockey game in Hamden, CT.  Nonetheless, my hometown of Bassano, Alberta has invited me back to speak at the annual Sportsmen of the Year Dinner, so my athleticism is, apparently, still appreciated somewhere.

 

In a shift of athletic gears, this summer I joined the New Haven Lawn Club and officially began my tennis career.  Certainly I’ve played tennis before, but not on clay courts attired completely in whites.  As many of you know, tennis clubs are typically populated by people that have spent a good chunk of their lives, well, populating tennis clubs.  Needless to say, this Alberta farm boy was a little overmatched this summer.   In fact, my summer was spent failing and, often, miserably so.

 

Personally, I’ve never believed failure to be a bad thing.  Now sure, losing or failing doesn’t give you the warm fuzzies inside, but failing and adapting ultimately sets you up for greater success.  In a 2008 commencement address to Harvard, author J.K. Rowling, who made a billion dollars for her Harry Potter series, adroitly summed up the benefits of failing when she said:

 

“So why do I talk about the benefits of failure? Simply because failure meant a stripping away of the inessential. I stopped pretending to myself that I was anything other than what I was, and began to direct all my energy into finishing the only work that mattered to me.”

 

As it relates to Europe sovereign debt, the one solution that has not been seriously considered is failure.   Instead, the key solution from almost every Eurocrat and talking head, is to continue to support and promote a broken banking system and failed monetary union.  There are other possibilities: let Greece fail, let other sovereigns fail if they can’t get their house in order, and let heavily exposed banks fail. 

 

The validation of the failure strategy at least partially comes in comparing the credit default swaps of Italy, Portugal and Ireland from July 1st, 2011 to today.  Respectively, Italian swaps are up 140%, Portuguese up 38.2%, and Irish down -3.2%.  Now to be fair, Ireland hasn’t failed, but three of largest banks, Allied Irish, Irish Life & Permanent, and Bank of Ireland have experienced “credit events” and, as a result, Ireland’s credit worthiness has improved, on the margin.

 

A more pressing question facing stock market operators is: will this current stock market rally fail?  In the near term, the key driver of the stock market will likely be corporate earnings reports.  To sustain positive price momentum, companies will need to both hit their estimates and also maintain future guidance.  Currently, according to Bloomberg consensus estimates, 2012 consensus expectations for EPS for the SP500 is $106.15, which implies 16% year-over-year growth in earnings.

 

Certainly, that type of earnings growth is possible for the SP500, but it is highly contingent on underlying economic growth.  Currently, our view is the economic growth will be in the sub-1.0% range in 2012.  In the last thirty years, there have been five years of 1%, or less, GDP growth in the U.S.  On average, in those years, SP500 earnings declined -18.3% y-o-y.  Thus, unless economic activity accelerates in the U.S., it is highly unlikely that 16% y-o-y growth in earnings is met.  Assuming the Hedgeye view of economic growth is correct, there is substantial downside to current 2012 consensus earnings estimates.  History would suggest, as outlined above, that 2012 earnings could be too high by at least one-third.

 

Alongside earnings growth, there is of course the quality of earnings.  J.P. Morgan kicked off the earnings debate this morning with an EPS number of $1.02 that, at first blush, seems solidly above consensus of $0.92.  The questions as always, though, relates to the quality of earnings, and $0.29 of EPS was a “benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads.”  So, if we back out the benefit to JPM’s earnings from widening of their credit spreads, EPS declined -27% year-over-year.  Yikes !

 

The more pressing failure in global macro land this morning is the failure of the Chinese to maintain high exports to Europe. To be fair, in aggregate Chinese exports overall were up 17.1% in September, which is a formidable number.  Unfortunately, exports to Europe, Chinese largest trading partner, declined substantially, sequentially from 22% year-over-year in August to 9.8% in September.  As the Chart of the Day below shows, this is the second slowest year-over-year growth rate of Chinese exports to Europe in 18+ months.

 

Chinese economic activity is clearly slowing, but in our purview it is still too early to call for massive Chinese easing.  As my colleague Darius Dale wrote yesterday:

 

“All things considered, it could be a while before China pulls the trigger on the monetary easing front. Merely using 2008 as a semi-comparable reference, we saw that China waited a full six months for confirmation of flat-to-down sequential CPI growth and a -380bps reduction in YoY CPI before cutting interest rates in early September of that year.”

 

Certainly though, growth doesn’t slow forever and whether by monetary stimulus or organic means, the positive catalyst we will be looking for is growth accelerating, on the margin.  So far though, it is too early to bet on that. 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Time to Fail - DJ time to fail

 

Time to Fail - VVP dj



Romney Risk

“Risk means more things can happen than will happen.”

-Elroy Dimson (quote from “The Most Important Thing”)

 

I received a tremendous amount of feedback on my Yale Economics Department note from yesterday. Your diverse and critical thoughts have provided my team a tremendous opportunity to see plenty of perspectives. For that, we thank you.

 

Yale didn’t write me back, yet.

 

Maybe tonight in Las Vegas the dogma that is academia’s Keynesian Economics will hear some louder drums. I am probably the least connected person in American and European politics (and I’d like to keep it that way), but there is heightening probability that Mitt Romney talks more explicitly about firing Ben Bernanke at tonight’s Republican debate. That would be very bullish for the US Dollar.

 

Strong Dollar = Strong America. Period.

 

That’s my long-term call and I’m sticking to it. Like you saw yesterday, when the US Dollar strengthens, we Deflate The Inflation. That’s good for the American Consumer. This happened in September, and the Michigan Consumer Confidence reading rose.

 

With the US Dollar down for the 1stweek in the last 5 last week, inflation expectations at the pump rose, and that same American Consumer Confidence reading fell (57.5 OCT vs 59.4 SEP).

 

This may sound like a perverse relationship (stocks and commodities down make the country more confident), but the US stock market isn’t the electorate anymore. You can only plunder your people so many times.

 

I’m not a Republican, but this is what the Republicans are going to say about this for the next year:

 

Bernanke has overinflated the amount of currency that he’s created… QE2 did not work… it did not get Americans back to work.” –Mitt Romney

 

Whether the Keynesians want to admit this or not, monetary and fiscal policy drive the value of a country’s currency. If I’m too “young” to be “trusted” on that, ask the biggest hedge fund manager in the world who has made money for his clients during both the 2008 and 2011 Growth Slowing draw-downs. That was not Steve Cohen – it was Ray Dalio.

 

If you don’t want to ask any of us who have had this right what is going wrong, fine. But don’t expect The People to trust you. They aren’t as willfully blind to the academic dogma that has driven both Bush and Obama to devalue the currency in exchange for short-term asset price inflations. They may not be able to communicate it concisely yet – but I would not bet against them.

 

Back to the Global Macro Grind

 

China doesn’t trust Japanese, American, or European monetary policy. They seem keen on proving that they have better ideas to lead the next generation of global capitalists. Can communists be capitalists? If “capitalists” leading America can behave like socialists, why not? It’s all name calling anyway.

 

At the same time that our markets are begging the Europeans for bazookas to socialize bank losses, I hear a lot of whining in this country. It’s not the kind of whining that the Chinese in particular are used to seeing from us. It’s time to stop. Reset. And Reload. It’s time to start winning again.

 

Despite a lot of people in the hedge fund community fear-mongering about China falling off a cliff like Europe has, here’s how China’s Q3 GDP report looked last night:

  • Real GDP growth slowed in 3Q: 9.1% y/y vs. 9.5% prior;
  • YTD Real GDP growth slowed in 3Q: 9.4% y/y vs. 9.6% prior;
  • Industrial Production growth accelerated in September: 13.8% y/y vs. 13.5% prior;
  • Retail Sales growth accelerated in September: 17.7% y/y vs. 17% prior; consistent with our call for a shift on the margin towards consumption-led growth; and
  • YTD Fixed Assets Investment growth slowed in September: 24.9% y/y vs. 25% prior.

Not great. But not bad.

 

On the margin, these are still sequential decelerations so we are waiting on the sidelines to buy Chinese stocks again. Everything that really matters in Global Macro happens on the margin.

 

If you look at the data coming out of the rest of Asia in the last 24 hours, it’s actually quite bad:

  1. Singapore Exports for SEP down -4.5% y/y vs +3.9% AUG
  2. Australian Vehicle Sales for SEP down -1.3% y/y vs +4.6% AUG
  3. Japanese Department Store Sales for SEP -2.4% y/y vs -1.7% AUG

So, with Global Growth Slowing and the US Dollar strengthening (two of our key Macro Themes), there is a generational amount of Correlation Risk that remains in Global Macro markets.

 

While our American-made definition of Real-time Risk Management most certainly considers many more things that can happen than will happen, we are not trying to be alarmist. Neither are we holing up on campus with dogmas. We are standing here on the front lines of the fight trying to get to the right answers for this country before the wrong assumptions driving policy make that too late.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $84.11-89.12, and 1187-1229, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Romney Risk - Chart of the Day

 

Romney Risk - Virtual Portfolio


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

WYNN Q3 PREVIEW

In the realm of Macau gaming, WYNN’s Q3 should be lackluster.  Time for a special dividend.

 

 

We estimate that Wynn will report $1,317MM of revenue and $388MM of EBITDA when they report 3Q Wednesday after close – a little ahead of Street estimates.  Market share declines, China macro concerns, and “lackluster” Q3 results may not be enough to get investors juiced.  The announcement of a special dividend would help but even that is pretty much expected by the Street.  While WYNN is the high quality gaming play, we struggle to find a catalyst for near-term stock appreciation.

 

 

Detail:

 

Wynn Macau

 

We project Q3 Wynn Macau revenues of $947MM and $307MM of EBITDA, 2% and 3% higher than consensus, respectively

  • $890MM of net casino revenue – down 4% sequentially, but up 42% YoY.  It is not unusual for Wynn to have a seasonally weaker quarter in 3Q vs. 2Q in Macau.
    • Gross VIP win of $907MM and net VIP win of $630.5MM
      • Assuming 8% direct play, we estimate $30.7BN of direct play and 2.96% hold
      • Rebate rate of 90bps or 30.5% of the win rate
    • Mass win of $196MM
    • Slot win of $63MM – a pretty large fall off from $75MM last quarter
  • Non-gaming net of promotional expenses of $58MM compared to $53MM in 2Q
    • $40MM of promotional expenditures in line with the last 3 quarters
    • $97MM of non-gaming revenues
      • $27MM of room revenue
      • $25MM of F&B
      • $46MM of retail, entertainment and other revenue
  • Variable expenses of $518MM
    • $455MM of taxes
    • $57MM of junket commissions (above the rebate rate), or a 41.2% RevShare – in-line with last quarter
  • $26MM of non-gaming expense
  • $95MM of fixed expenses compared to $99MM in 2Q and $85MM in 3Q10

 

Wynn Las Vegas

 

We expect another quarter of outperformance vs. expectations at Wynn’s Las Vegas properties.  We expect Wynn Las Vegas to report $370MM of revenue and $99MM of EBITDA, 3% and 6% ahead of consensus, respectively.

  • $140MM of net casino revenue
    • Table win of $124MM assuming a 5% YoY decline in drop and 24% hold
    • $176MM of slot win assuming 5% YoY growth in handle and 5.8% win rate
    • $26MM of discounts or 15.8% of gross casino win – compared to 15.9% in 2Q and 15.1% in 3Q10
  • $88MM in room revenue
    • $230 ADR and 88% occupancy – equating to a 9.5% YoY RevPAR increase
  • $125MM of F&B revenue and $57MM of revenue from entertainment, retail and other
  • $41MM of promotional allowances or 29% of net gaming revenue – compared to $43MM in 2Q11 and $43MM in 3Q10.
  • Total operating expenses of $271MM compared to $258MM in 2Q11 and 3Q10. Expenses are typically higher in the 3Q compared to the 2Q for Wynn Las Vegas – at least over the last 3 years .
    • We expect casino expenses to increase 3% YoY to $73MM compared to $70MM and a 2% YoY in 2Q11
    • $33MM in room operating expenses (5% YoY increase) or a CostPAR of $87 

THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP - October 18, 2011

 

It’s easier to say that markets aren’t moving on “fundamentals” until they do.  Singapore said it yesterday, and both the Koreans and Aussis said it again last night (dept store sales in Korea went negative y/y for SEP at -6.5% while vehicle sales in Australia dropped to -1.3% y/y in SEP vs +4.6% AUG); Our Big Macro call for 2011 remains Growth Slowing – and, like in 2008, some US centric investors are still missing this when staring at the Dow.  Earnings matter and the 3Q11 earnings season is not off to a good start. The financials (JPM, WFC, and C) have led us lower so far and I don’t expect things to improve as we get into lower quality EPS from BAC and MS.

 

As we look at today’s set up for the S&P 500, the range is 42 points or -1.15% downside to 1187 and 2.34% upside to 1229

 

SECTOR AND GLOBAL PERFORMANCE

 

In Chaos Theory, time and patterns dominate.  With time, history has proven that a Strong Dollar equates to a Strong America (lower unemployment and higher consumption). Today, with the US Dollar up for the 4thweek in the last 5, the Sector Studies continued to heal. Bottoms are processes, not points.

 

With time, 3 of 9 Sectors have now gone bullish TRADE and TREND: Utilities (XLU), Tech (XLK), and Consumer Discretionary (XLK). That’s the good news. The bad news is that 6 of 9 Sectors (and the SP500 itself) are bearish TREND – and TRENDs override TRADEs.

 

THE HEDGEYE DAILY OUTLOOK - hrmsv

 

THE HEDGEYE DAILY OUTLOOK - bpgm1

 

THE HEDGEYE DAILY OUTLOOK - hrmsp

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1887 (-3923) 
  • VOLUME: NYSE 905.53 (+6.89%)
  • VIX:  33.39 +18.24% YTD PERFORMANCE: +88.11%
  • SPX PUT/CALL RATIO: 1.40 from 1.70 (-17.69%)

 

CREDIT/ECONOMIC MARKET LOOK:

 

FIXED INCOME: massive 1 day move in 10s (UST), down -17bps day-over-day and yield curve compresses the same

  • TED SPREAD: 38.55
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 2.18 from 2.26     
  • YIELD CURVE: 2.05 from 1.71

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:15 a.m.: Fed’s Rosengren gives welcome remarks at Boston Fed conference
  • 8:30 a.m.: Producer Price Index, est. 0.2%, prior 0.0%
  • 9 a.m.: Net long-term TIC flows, est. (-$20b), prior $9.5b
  • 10 a.m.: NAHB Housing Market, est. 15, prior 14
  • 11:30 a.m.: U.S. to sell $30b 4-wk, $25b 52-wk bills
  • 1:15 p.m.: Fed’s Bernanke speaks in Boston
  • 4:30 p.m.: API inventories
  • 6:30 p.m.: Fed’s Lockhart speaks in Tenn.

WHAT TO WATCH:

  • Citigroup closing proprietary-trading unit that incurred losses in 3Q as regulators prepare to restrict banks from making bets with shareholder cash.
  • France’s Aaa rating under pressure as debt crisis has led to “deterioration” of govt. finances, Moody’s said last night
  • Bank of America said to move derivatives from its Merrill Lynch unit to subsidiary flush with insured deposits; move said to divide FDIC, Fed
  • President Obama continues on day two of bus tour through North Carolina, Virginia to promote $447b jobs proposal
  • Republican candidates, minus former Utah Governor Jon Huntsman, debate in Nevada tonight, 8 p.m.

 

COMMODITY/GROWTH EXPECTATION                                             

 

COMMODITIES: like Hang Seng and Europe all fail at TREND levels; Oil and Gold failing at $89.12 and $1686 is explicitly bearish for both

 

THE HEDGEYE DAILY OUTLOOK - dcommv

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Tallow Replaces Crude Oil as Biofuels Head to War: Commodities
  • Energy Bonds Offer Haven From Europe on Oil Bet: Credit Markets
  • Gold Declines With Equities on Europe Crisis, China Concerns
  • Gas Beating Oil in Shipping as Users Expand Stockpiles: Freight
  • Crude Oil Supply Climbs a Second Week in Survey: Energy Markets
  • Commodity Speculators May Face New Limits After CFTC Vote Today
  • China Copper Output Drops From Record as Economy Slows
  • Copper Declines as China Grows at Slowest Pace in Two Years
  • Wal-Mart Asia Chief Takes Over China Stores Amid Pork Probe
  • Australian Wheat Reserves May Near Record on Rail Shortage
  • Shell Oil Purchase Sparks OGX Outperformance: Brazil Credit
  • China’s Corn Imports May Jump to 20 Million Tons, Olam Says
  • China’s September Steel Output Falls to Lowest in 7 Months
  • Shipping Jumps as Iron-Ore Rout Spurs Demand: Chart of the Day
  • Soybeans, Corn Drop as China Grows at Slowest Pace in Two Years
  • Gold Falls From Three-Week High on Dollar’s Rally; Silver Drops
  • Oil Drops for a Second Day on China Growth, U.S. Supply Forecast
  • Freeport’s Grasberg Output at 50% of Capacity, Saleh Says

 

CURRENCIES                                                        

  

THE HEDGEYE DAILY OUTLOOK - dcurrv

 

EUROPEAN MARKETS

 

EUROPE: could be worse; basically DAX and CAC both failed at their TREND levels 24hrs ago and are correcting to TRADE line support

 

THE HEDGEYE DAILY OUTLOOK - bpem1

 

ASIAN MARKETS

 

CHINA: GDP has been slowing for 3 quarters so this isn't new, but Chinese stocks drop another -2.3%, Hang Seng down -4.3%, India -2%

 

ASIA: plain ugly move in the Hang Seng on the heals of the China data w/ HK snapping what was a very brief stint > TRADE support

 

THE HEDGEYE DAILY OUTLOOK - bpam1

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - me

 

The Hedgeye Macro Team

Howard Penney

Managing Director


EAT: TRADE UPDATE

EAT was bought this afternoon in the Hedgeye Virtual Portfolio.

 

Keith bought Brinker in the Hedgeye Virtual Portfolio.  Hedgeye’s Macro Team has been ahead of the strengthening dollar and the “deflating of the inflation”.  This has been bullish for American consumers as gasoline prices have come down, thereby taking up a smaller share of their expenditures and allowing for more discretionary spending. 

 

This morning, we posted a note on the Knapp Track casual dining trends for September improving sequentially from August and expressed our view that this was bullish for EAT.  We believe that the quarter finished strongly for Brinker and that the benefits of the remodeling program are continuing to help drive profitability. 

 

As the chart below shows, by Keith’s quantitative model the TRADE and TREND lines are at 20.61 and 22.61, respectively.

 

EAT: TRADE UPDATE - eat levels

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next