UA: Low Quality Beat


UA’s Q3 EPS of $0.88 came in above printed expectations of $0.83E, but the quality of the beat was low due to a $0.04 tax benefit. A real number was closer to $0.84. We were at $0.83, and true market expectations were for a number starting with a 9. This has been one of our top short ideas as the market is underestimating the margin risk for UA to right-size it's growth profile long-term. There's nothing in this release that makes us change that view.


Here are our key takeaways ahead of the 8:30 call:


What We Liked:

  • Incremental footwear revenues were the key driver of +42% top-line growth above our expectation of 37% with the difference in footwear alone accounting for an additional 5% growth. This supports improved trends that we’ve highlighted with recent share gains in the athletic channel with UA finally piercing the 1% market share mark.
  • Other SG&A spend (product innovation etc.) was up +36% consistent with last quarter and slightly higher than we expected. We would have liked to see marketing spend higher as well (see below), but at the end of the day UA needs cutting edge product to sell and this line drives that engine.

What We Didn’t Like:

  • Inventories are still high up +63% yy on +42% revenue growth compared to +73% last quarter. The increase last quarter was attributed to the need to better service demand, an earlier build of ColdGear apparel for the fall/winter season, and the transition of hat’s and bag business in-house. Inventory levels up over 60% for the third quarter in a row has us increasingly concerned in the in the obvious -- which is the direction of Gross Margins. 
  • The absence of an initial 2012 outlook. The company provided its initial view on 2011 in its Q3 release last year and the year before management spoke to it in their opening remarks. If they don’t offer a view in their prepared remarks, you can rest assured they’ll be asked in the Q&A.
  • Marketing spend ratio of 10.4% was the lowest in 5-years. Sure, it’s due in part to higher sales, but we know that endorsement spending is up, which means that media and consumer facing marketing is down – not what we want to see as a 2012 revenue driver.
  • Apparel came in softer than we expected. This doesn’t give us any reason to think that our concern re Q4 apparel revs is unwarranted.  
  • We highlighted the growth in footwear, but timing is playing a role here. Yes, the latest running product is starting to gain traction – a definite positive after several years of disappointment, however the mention of “earlier y/y shipments of basketball product” indicates a shift at play here compared to a much higher level of sustainable demand.
  • The $0.04 tax benefit in the quarter – it boosts the headline number, but is meaningless to true underlying performance.

We’ll be back with more as warranted after the call.


UA: Low Quality Beat - UA S 10 11


Casey Flavin



It's all about Las Vegas!  Just kidding. 



Macau may disappoint the Street but it all comes down to Singapore where expectations are all over the place.  We were initially worried that management had raised the bar too high on Singapore.  You may recall such comments as "Q3 VIP volumes at the end August had already reached Q2 levels".  However, at least one analyst tried to temper expectations yesterday as September hold percentage may have been a bit low.  Management has a lot of flexibility - and uses it - in determining the hold impact.  As usual, we will try and get you an impartial and unbiased estimate of the hold impact.  For now, we are somewhat agnostic on the stock going into Thursday's Q3 release.


Here are our projections:





We estimate that LVS’s 3 properties will do $1,143MM of net revenue and $364MM of property level EBITDA in 3Q11.  Luck did not smile upon LVS’s properties this quarter – with all three holding low in the 3rd quarter.  We estimate that low hold cost LVS $30MM in net revenue and $18MM of EBITDA on the VIP side.  We’re pretty sure some of that bad luck was offset by good luck on the Mass side, but we’ll have to wait and see until they report that detail.


We estimate that Sands Macau will report $318MM of net revenue and $87MM of EBITDA, which is 5% below the Street.

  • Net gaming revenue of $309MM
    • VIP Net table win of $136MM, negatively impacted by low hold
      • RC volume of $7.7BN, assuming 12% direct play and 2.6% hold
      • Rebate rate of 84bps or 32% of hold
      • Normalizing for hold, gross win would have been $18MM higher and net win would have been $12MM higher.  EBITDA would have been $7MM better.
    • Mass win of $146MM
      • $728MM of drop and 20% hold
    • Slot win of $27MM
  • Net non-gaming revenue of $9MM
    • Promotional expenses of $11MM or 3.5% of net casino revenues
  • $181MM of variable expenses
    • Taxes: $146MM
    • Junket commission and gaming premiums: $29MM
  • $4MM of non-gaming expenses
  • $46MM of fixed expenses in-line with last quarter

We estimate that Venetian Macau will report $671MM of net revenue and $229MM of EBITDA, which is 6% below the Street.

  • Net gaming revenue of $580MM
    • VIP Net table win of $230MM, negatively impacted by low hold
      • RC volume of $12.2BN, assuming 21% direct play and 2.7% hold
      • Rebate rate of 81bps or 30% of hold
      • Normalizing for hold, gross win would have been $19MM higher and net win would have been $13MM higher. EBITDA would have been $8MM better.
    • Mass win of $292MM
      • $1,120MM of drop and 26% hold
    • Slot win of $58MM
  • Net non-gaming revenue of $91MM
    • Promotional expenses of $24MM or 3.5% of net casino revenues
  • $325MM of variable expenses
    • Taxes: $265MM
    • Junket commission and gaming premiums: $47MM
  • $22MM of non-gaming expenses
  • $95MM of fixed expenses

We estimate that Four Seasons/Plaza will report $154MM of net revenue and $48MM of EBITDA, which is in-line with the Street.

  • Net gaming revenue of $131MM
    • VIP Net table win of $78MM, negatively impacted by low hold
      • RC volume of $4.4BN, assuming 41% direct play and 2.7% hold
        • This would mark the second sequential quarter of YoY declines.  We expect that 4Q will see a turnaround in VIP volumes with Neptune opening up its rooms any week now and then Sun City opening by year end.
    • Rebate rate of 89bps or 33% of hold
    • Normalizing for hold, gross win would have been $7MM higher and net win would have been $5MM higher. EBITDA would have been $3MM better
    • Mass win of $42MM
      • $119MM of drop and 35% hold
    • Slot win of $11MM
  • Net non-gaming revenue of $23MM
    • Promotional expenses of $10MM or 7.5% of net casino revenues
  • $78MM of variable expenses
    • Taxes: $66MM
    • Junket commission and gaming premiums: $9MM
  • $7MM of non-gaming expenses
  • $20MM of fixed expenses




We estimate that MBS will produce $785MM of net revenue and $434MM of EBITDA this quarter, which is 10% higher than the Street.  Based on our tax revenue through August, we believe that the Singapore market is on track to do S$2BN of revenue this quarter and MBS has a good shot of capturing more than 50% of the GGR this quarter despite lower sequential hold.

  • Net gaming revenue of $634MM
    • VIP Net table win of $223MM
      • RC volume of $14.7BN, up 43% YoY and 20% sequentially.
      • 2.8% hold – the average hold for MBS since opening has been 2.7%
      • Rebate rate of 1.23%
      • Normalizing for hold, gross win would have been $7MM higher and net win would have been $5MM higher. EBITDA would have been $3MM better.
    • Mass win of $275MM
      • $1.3BN of drop and 22% hold
    • Slot win of $136MM
      • $2.5BN slot handle, 5.4% win rate
  • Net non-gaming revenue of $151MM
    • Promotional expenses of $40MM or 21% of non-gaming revenues
    • $65MM of hotel revenues
  • $143MM of variable expenses
    • Taxes: $135MM
  • $208MM of fixed & non-gaming operating expenses, up a little from $201MM last quarter




We project LVS’s Las Vegas operations will produce $318MM of revenue in 3Q11 and $80MM of EBITDA, which is 4% ahead of the Street.

  • $104MM of net casino revenue
    • Slot win of $36.2MM flat QoQ
      • Handle down 37% YoY to $418MM but up sequentially from $412MM
      • Win %: 8.7%
    • Table win of $83MM
      • -5% YoY table drop ($453MM), 18.3% hold
  • Gross gaming revenue of $119MM and a rebate equal to 3.3% or $14.7MM compared to $15.6MM last quarter
  • $214MM of net non-gaming revenue
    • $106MM of room revenue
      • RevPAR: $164 (up 6% YoY)
        • Occupancy: 88%
        • ADR: $187
  • $126MM of F&B, Retail and other revenue, up 15% YoY
  • Promotional expenses equal to 15% of gross gaming revenue or $18MM
  • Gaming taxes of $8MM and total operating expenses of $230MM, down slightly from $232MM last quarter




We estimate that Sands Bethlehem will report 3Q11 net revenue of $110MM and EBITDA of $28MM

  • $70MM of slot revenue, $30MM of table revenue


  • D&A: $206MM
  • Rental expense: $10MM
  • $50MM of corporate and stock comp expense
  • Net interest expense:  $51MM

CHART OF THE DAY: Irrational Expectations


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Irrational Expectations

“Hope is nature’s veil for hiding truth’s nakedness.”

-Alfred Nobel


In one of the more ironic moments of 2011, Professor Tom Sargent from New York University won the Nobel Prize of Economics.   Sargent was awarded the Nobel Prize for his work on rational expectations.  In effect, this is the theory that postulates that policy makers cannot systematically influence the economy via predictable policy changes.


This idea, of course, flies in the face of the current philosophy of the leading central bankers around the world and, in particular, Chairman Bernanke.  In the guise of transparency, not only does Chairman Bernanke foreshadow most of his moves, but he now also holds a quarterly press conference to further alert the market as to his future intentions.  Undoubtedly, wherever he is now, Alfred Nobel is finding this moment in economic history somewhat ironic.


The concept of “too big to fail” has now wholly pervaded the economic landscape.  Sargent, as the key proponent of rational expectations, has some interesting thoughts related to failure.  His views likely do not reflect “the conscience of a liberal”, like those of his Nobel Laureate counterpart Paul Krugman, but they do offer some interesting counterpoints to the current debates in economic policy circles.  In a June 2010 interview with the Minnesota Fed, Sargent made a number of noteworthy comments relating to the European debt situation, specifically:


“Remember that under the gold standard, there was no law that restricted your debt-GDP ratio or deficit-GDP ratio. Feasibility and credit markets did the job.


Here is what went haywire. In the 2000s, France and Germany, the two key countries at the center of the Union, violated the fiscal rules year after year.


So, a number of countries at the European Union economic periphery—Greece, in particular—violated the rules convincingly enough to unleash the threat of unpleasant arithmetic in those countries. The telltale signs were persistently rising debt-GDP ratios in those countries.


The banks located in the center of the euro area, France and Germany, hold Greek-denominated debt, so a threat of default on Greek government debt threatens the portfolios of those banks in other European countries. Because it is the lender of last resort, now it is the ECB’s business.


France and Germany stay “holier than thou” from beginning to end, and always respect the fiscal limits imposed by the Maastricht Treaty. They thereby acquire the moral authority to lead by example, and the central core of euro-area countries are running budgets that without doubt are balanced in a present-value sense. Therefore, the euro is strong. The banks of the core countries,  so the banks in France and Germany are not holding any dodgy bonds issued by governments of dubious peripheral countries that have adopted the euro but that flirt with violating the Maastricht Treaty rules.


In this virtual history, the ECB could play tough and let the Greek government default on its creditors by renegotiating terms of the debt. For the euro, letting the Greek bondholders suffer would actually be therapeutic; it would strengthen the euro by teaching peripheral countries that the ECB means business.”


In Sargent’s models the threat of failure is critical, whether it be for institutions, countries, or individuals, because it is exactly this threat that will shape future behavior and reform.


Relate to Sargent’s comments, one of the more surprising global macro moves since the start of October has been the sharp rally in the EUR-USD going from a low of 1.31 in early October to 1.39 this morning.  This is an expedited move of more than 6% in about three weeks.  In the highly correlated world of global markets, this expedited move has had an impact. In the same period,

  • Brent Crude Oil is up +11.9%;
  • West Texas Intermediate Crude Oil is up +21%;
  • Copper is up +14.1%;
  • SP500 is up +14.1%; and
  • Euro Stoxx 50 is up +12.1%

One of our key three themes for Q4 is Correlation Crash.  So far, on the expedited move up in the Euro, and down move in the dollar, the crash has been to the upside this quarter.  The more accelerated the move to the upside, though, the more increased the risk for an eventual correction to the downside.  A risk that heightens every day in our notebooks.


Our view has been that the recent surge in the EUR-USD is a function of both short covering, which obviously builds upon itself, and also Irrational Expectations as it relates to outcomes in Europe.  The best fundamental support we can point for our views is in comparing yields on Italian 5-year government bonds versus the comparable duration German bunds.  Given this spread is at its widest point in the last decade, the read-through, despite some recent manic moves in global markets, is that the European situation is far from solved.


The theory of rational expectations would suggest that by bailing out Europe in ever-growing increments, market participants will begin to expect ever-growing bailouts, which, over time, should negatively impact the EUR-USD.  Further, the continued safety net created by European officials won’t adequately underscore the fiscal sobriety that is ultimately required in Europe for a truly healthy currency.  It is akin to bringing a drunk friend water and comfort food every morning after his drinking binge.  In doing so, you are not exactly encouraging his or her sobriety.


In the short term, market prices can bring us hope, but they are often “hiding truth’s nakedness.”


Daryl G. Jones

Director of Research


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Exotic Tails

This note was originally published at 8am on October 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Patterns replicate through time and manifest on each level because it is a grand unified manner in which all things move.”

-Martin Armstrong


While I am certain that there are plenty Market Practitioners who have adapted to their ecosystem in the last 5 years, uncertainty in Global Macro markets continues to reign supreme.


This is actually a good thing – whoever thinks that they can be certain about a central planner’s ability to suspend economic gravity is probably feeling more uncertain about that by the day.


Chaos Theorists Embrace Uncertainty. It’s what drives our process. No matter what you think about Nassim Taleb, Martin Armstrong, and Ray Dalio, I’m fairly certain that they don’t particularly care. These gentleman have capitalized on proactively preparing for tail risks by simply not allowing themselves to be certain of anything until both Time and Patterns make whatever that is obvious.


Yesterday, it became fairly obvious that 56 exotic animals running down a man’s driveway in Zainesville, Ohio was a risk. There were 18 tigers, 17 lions, and 8 bears. The owner of the fancy pets had shot himself after his wife left him.


In response, a politician in Ohio stated, “this was an accident waiting to happen.”


Ya think?


Exotic Tails of “risk” in Global Macro markets? What we see on the screens today, they are not. Like this whacko with his “pets”, the risks are plainly obvious to anyone who isn’t paid to be willfully blind. They have been since mid-July and early August (see Chart of The Day – when Copper’s TAIL broke).


Up until that intermediate-term 2011 point, these TAIL risks had been becoming more obvious for years. Since October 2007, the SP500 has lost 22% of its value and would need to rally +28.2% “off the lows” to get back to the Perma Bull Breakeven.


Time and Patterns


They take time to manifest and you need to do a tremendous amount of cycle research, across risk management durations, in order to appreciate that at any given time things can blow up.


The US stock market is in the process of either bottoming or blowing up. I could go either way with this really (that’s why I’m hedged; 12 LONGS and 10 SHORTS in the Hedgeye Portfolio). There are no rules against changing your mind. There’s just time and space.


From a timing perspective, the situation in Europe could blow up any day. If it does, no one should be surprised. The monkeys you see swinging from their journalistic rumor trees throughout the trading day are compounding systemic risk for the sake of their short-term careers – and if it suddenly goes bad out there, as Jack Hanna said yesterday in Ohio, “you can’t tranquilize attack monkeys in the dark.”


Short-term vs Long-term


A Keynesian’s answer to accepting responsibility for policy recommendation is that “in the long-run, we are all dead.” Well, unfortunately, for those of us who have successfully managed 5 down US stock markets in the last 12 years (2000, 2001, 2002, 2008, 2011), and seen net US jobs added over the span of this past decade = ZERO, in the short-run, people die too.


What would have happened if these Bengal tigers found a way to survive the night and hit the Streets of Ohio? Ask the monkey who didn’t make it past the end of the driveway…


This is the point. We have all of this Global Macro risk all compartmentalized in cages now. Or at least we think we do. No one can get out. So no one gets hurt.


No one loses their political life. Everyone gets fed their “fair share.”


Until someone opens the cages…


And, then… since no one saw any of this coming – we’ll be on the precipice of another Great Depression again unless we all huddle back into captivity, take our commoner’s wage, and like it.


Yesterday I raised our US Equity position in the Hedgeye Asset Allocation Model to 6% from 3% (we’ve upped our beta by going long Consumer Discretionary, XLY, and selling Utilities, XLU).


I’m bullish on the US Dollar and, in the end, I believe that Americans are smart enough to realize that a Strong Dollar = Strong America.


In the long-term, Time and Patterns agree with me on this. Martin Armstrong says that it’s “the reason life perpetuates through what is called a system of self-referral.” George Soros calls it “reflexivity.” We call it Mr Macro Market.


No matter what you want to call it, it is all based on the most relevant mathematical discovery since relativity. So don’t let the Keynesians call what you see out there today, tomorrow, or the next day, an Exotic Tail.


My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Oil (bullish TRADE; bearish TREND), German DAX (bullish TRADE; bearish TREND), and the SP500 (bullish TRADE; bearish TREND) are now $1621-1664, $80.09-89.11, 5605-6194, and 1201-1221, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Exotic Tails - Chart of the Day


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TODAY’S S&P 500 SET-UP - October 25, 2011


What a difference a few days of Fed heads whispering about policies to inflate makes.  As we look at today’s set up for the S&P 500, the range is 35 points or -2.81% downside to 1219 and 0.00% upside to 1254. 




Yesterday, Keith shorted the SPY today for the first time in October. He did that because it was immediate-term TRADE overbought and still broken from a long-term TAIL perspective (1266 is TAIL resistance). "If 1219 holds, I have no problem covering the short position and getting longer again."


TRADE: all 9 sectors are now bullish from an immediate-term TRADE perspective. That’s not new as of today – it was new last week. The only thing that was new today was that Healthcare (XLV) joined 4 other Sectors in the Bullish TRADE and TREND camp (XLY, XLU, XLK, and XLP).


TREND: for the YTD, the Top 3 Sectors are 3 that we like on the long side: Utilities (+10.8%), Consumer Discretionary (+6.7%) and Healthcare (+6.7%). On a pullback I’d be buying all 3 of those Sectors and continuing with the Short Financials and Cyclicals (XLF, XLB, and XLI).




THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: 1991 (-248) 
  • VOLUME: NYSE 927.32 (-22.09%)
  • VIX:  29.26 -6.58% YTD PERFORMANCE: +64.85%
  • SPX PUT/CALL RATIO: 2.24 from 2.12 (+5.63%)




  • TED SPREAD: 41.52
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.25 from 2.23    
  • YIELD CURVE: 1.95 from 1.93


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45 a.m./8:55 a.m.: ICSC/Redbook Retail sales
  • 9 a.m.: S&P/Case-Shiller 20 City MoM% est. 0.1% from 0.05%; YoY est. (-3.5%)
  • 10 a.m.: Consumer Confidence, est. 46.0, prior 45.4
  • 10 a.m.: House Price Index, M/m, est. 0.2%, prior 0.8%
  • 10 a.m.: Richmond Fed, est. 0, prior -6
  • 11:30 a.m.: U.S. to sell 4-week bills
  • 1 p.m.: U.S. to sell $35b 2-year notes
  • 4:30 p.m.: API inventory


  • Banks are pushing back against European leaders on the size of losses they are ready to accept on Greek bonds.
  • Apple TV project is being led by Jeff Robbin, the software engineer who built iTunes, according to 3 people with knowledge of the project
  • President Obama in S.F., appears on Tonight Show with Jay Leno
  • Rick Perry announces plan to reform tax code
  • House Speak Boehner speaks on U.S.-Russia relationship, 1:30 p.m.

COMMODITY/GROWTH EXPECTATION                                             


INFLATION – does a 24 hour +6.1% move in the price of oil matter heading into Halloween and Thanksgiving weekend? Don’t ask Dudley – this is the most singular factor in my model that slowed US GDP growth in Q111, so watch this and the policy rhetoric that backs it very closely. I don’t think it holds as the US Dollar has a ton of support at its TREND line of 75.37. But in the land of the Fiat Fools, anything can happen.


THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • Inflation Peaking in U.S. With Most Prices Tumbling: Commodities
  • BP Profit Drops Less Than Expected as Dudley Boosts Asset Sales
  • Uranium Deals Prove Most Lucrative on Nuclear Demand: Real M&A
  • Thai Floodwaters Rise Near Bangkok, Testing City’s Defenses
  • Bangkok River Swells to Record as Floods Reach Thai Capital
  • Oil Rises to 12-Week High as Demand Signals Spur Bull Market
  • Ivanhoe Mines Calls Lure Traders Speculating on Buyout: Options
  • Car Carriers Profit on Record Demand as Shipping Falls: Freight
  • Gold Advances for a Third Day as Europe’s Debt Woes Spur Demand
  • Copper May Rise on Indications Demand Remains Steady in Asia
  • Oil Supplies Climb From 20-Month Low in Survey: Energy Markets
  • BlackRock Says Gold Takeovers May Gain on Price Outlook
  • Caterpillar Earnings Top Estimates as Economy Recovers
  • AngloGold Says Gold Can ‘Easily’ Rise to $2,200 an Ounce
  • Nestle Investigates Report It Shortchanges Farmers in China
  • Australia Says Mining Tax Laws to Match Deal With Industry
  • Copper Gains as Much as 1.4% to $7,742.25 a Ton, Reversing Fall
  • Copper Extends Biggest Two-Day Gain Since January 2009
  • Caterpillar’s Earnings Signal Exports to Boost U.S. Expansion
  • Corn Gains for Second Day as Demand Rises After Price Decline



THE HEDGEYE DAILY OUTLOOK - daily currency view



EUROPE – still no resolution on the 2 things that matter – timing and sizing of the bazooka – and time is running out. Every European equity market has failed at TREND line resistance again this morning. On a positive note, Greece isn’t down another -5% this morning. Euro resistance huge 1.39-1.40 and while there were plenty of hedge funds short Euros, the last 21 days has had to shake plenty of people out.


THE HEDGEYE DAILY OUTLOOK - euro performance




CHINA – after getting smoked last week (-4.7%), posts its 2nd day “off the lows”, leading gainers in Asia alongside Thailand, closing +1.7%, but unable to capture 2424 TRADE line resistance. Hong Kong posted its worst export # in 2 years (down -3% y/y for SEP, nasty).


THE HEDGEYE DAILY OUTLOOK - asia performance




THE HEDGEYE DAILY OUTLOOK - mideast performacne



The Hedgeye Macro Team

Howard Penney

Managing Director