"McGough likes it closer to the long-term TAIL line of support ($191); TREND resistance remains intact at $217." -KM
THE HEDGEYE BREAKFAST MONITOR
Personal Income growth in September came in at +0.1% versus expectations of +0.3% while Personal Spending came in at +0.6%, in line with Street expectations. PCE Core came in at +1.6% y/y in September versus +1.7% expectations. Consumers are decreasing their savings rate to spend. This is not sustainable but, as we have seen in the past, stimuli can come via many different levers. Nevertheless, the slow quarter-over-quarter personal income growth – worst since 2009 – is a looming cloud over the economic data this morning.
One of the top stories on Bloomberg this morning is titled “Restaurants Lift Prices to Catch Food-at Home Inflation”. As we have been highlighting for some time, restaurants have some room to raise prices given the much bolder price hikes being taken in the grocery aisle. The article is an interesting read, highlighting the “low cost entertainment” that eating out represents.
ARCO: Arcos Dorados reported third quarter earnings and cut its revenue and EBITDA growth ranges. Company sees full-year revenue growth 21-23% and adjusted EBITDA growth of 14-16%.
EAT: Brinker was the target of many skeptics over the past 24 or 36 hours. Sterne Agee’s take on the stock was known yesterday but republished in Barron’s subsequently. As we had suspected before seeing the details, caution on “Brinker’s ability to grow top line on a sustainable basis” is the reason behind the downgrade. We take the other side of that bet, see our post from yesterday.
MRT: Morton’s Restaurant Group reported a 3Q loss of -$0.11 versus expectations of -$0.112. Comps came in at +5.1% which, as the chart below illustrates, implies a decline in two-year average trends. On beef prices, Morton’s sees 5-10% inflation in 2012 but “have no real basis” for that number yet other than the bullishness they perceive from the beef processors on their pricing power. Even as beef prices continue to go higher, MRT has 70% of beef needs for 2011 on a floating basis. 70% of 4Q needs are contracted, however. In terms of demand and/or mix, Morton’s has not seen any substitution to seafood or other substitutes. Of course, the consumer profile at Morton’s is not analogous to the general U.S. consumer but it is an interesting data point nonetheless that could indicate further pricing power for the brand. Wall Street and Corporate America layoffs may be changing this however.
CPKI: Golden Gate Capital has closed its latest fund at $3.5 billion, according to the NYT. The fund had purchased a wide range of companies over the last twelve months, including California Pizza Kitchen.
THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP - October 28, 2011
We’ve just seen the biggest 4 week rip in US stocks in 40 years and that’s a long time. As we look at today’s set up for the S&P 500, the range is 24 points or -1.45% downside to 1226 and 0.42% upside to 1290.
SECTOR AND GLOBAL PERFORMANCE
Keith traded SPY as well as he could have this week (short Monday at 1258, covered Wednesday 1227, re-shorted Thursday 1290) but got killed in the long US Dollar position:
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITIES - with USD down hard, I’m happy I wasn’t short anything Commodities yesterday, but looking at the short side again today as the core 3 lines of resistance (CRB Index TREND = 327, Oil’s TAIL of $93.87, and Copper’s TREND of 3.91 remain intact).
MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:
US DOLLAR – closing below my 75.37 TREND line of support on a meltdown day for the US Dollar Index (squeeze in the Euro) is the #1 factor in all of my Global Macro model (the USD has a -0.95 and -0.97 inverse correlation to US and European stocks, respectively = one way risk that works both ways). If the USD can’t recover by TREND line in the next 3 weeks, I’m out.
ASIA – after closing down -4.7% last week, China closed up every day this week… having fun w/ the China is going away thesis yet? We have not been in that camp, but we do think Chinese GDP doesn’t bottom sequentially until Q1 of 2012, so watch the Shanghai Comp closely now that it has recovered it’s TRADE support line of 2411 (still bearish TREND up at 2563.
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The Macau Metro Monitor, October 28, 2011
SINGAPORE PRIVATE HOUSING PRICES MODERATE Channel News Asia
Prices of private residential properties increased by 1.3% in 3Q 2011, lower than the 2.0% rise in 2Q 2011. This was the eighth consecutive quarter in which the rate of increase in overall private housing prices had moderated, according to the Urban Redevelopment Authority (URA).
Cries of bad luck are starting to ring hollow. So VIP hold needs to be adjusted but high Mass hold is normal?
Q3 was a strong one for LVS. We don’t want to take away from that. We’ll leave the question of whether it was as good as the whisper expectations. However, the company’s recent pattern of providing hold adjusted EBITDA adjusted only for VIP hold is misleading, in our opinion. Swings in Mass hold can be impactful too, even more so on profitability given the higher flow through.
So despite all the talk of low hold, we estimate “bad luck” only impacted EBITDA by $6MM across all 3 regions. That might matter for a company like Isle of Capri but for LVS with over $900 million of quarterly property level EBITDA, was it even worth a discussion?
So let’s move on to what does matter. Singapore VIP volumes were terrific and the October commentary was impressive. However, despite the conference call drooling by the bullish analysts, should the Q3 numbers really be a surprise? LVS indicated at their analyst day that they had already eclipsed Q2 VIP volume levels by the end of August. With that math in mind, it wouldn’t have been a stretch if Q3 volumes grew 50% QoQ. They actually grew 36%.
Macau beat our estimate due primarily to a higher percentage of Direct VIP business which is good for margins. Of course, as they try to stem the market share declines in junket VIP, margins may suffer. However, if they are successful, the revenue upside should more than offset the margin decline. We think Venetian/Four Seasons has already begun to advance junket commissions on a two month basis (versus 15-30 days) to boost the business. November should be telling.
Here is our detailed commentary on Q3:
Property net revenue across LVS’s 3 casinos came in 2% above our estimate while EBITDA came in 7% stronger. Despite Sheldon’s assertion that EBITDA would have been $11MM higher if not for poor hold, when you adjust for higher than ‘normal’ Mass hold, we estimate that hold only negatively impacted EBITDA by $1MM and revenue by $3MM.
Sands net revenue was $12MM lower than our estimate and EBITDA was $10MM lower due to what appears to be higher fixed expenses but was likely due to an unlucky mix (i.e. lower hold on the RC junket play).
Venetian’s net revenues were 3% above our estimate while EBITDA was 11% better than we estimated. While VIP hold was low, we suspect that the mix may have been favorable and Mass held better than ‘normal’. Net/net we don’t think that hold had any impact on EBITDA this quarter at the Venetian.
Four Season’s net revenue was 9% above our estimate while EBITDA was $11MM higher or 22%.
MARINA BAY SANDS
MBS revenues came in 1% above our estimate while EBITDA was 5% ($20MM) lower than we estimated - $6MM of which was due to one-time charges. Despite EBITDA being lower than we estimated, we must admit that it’s hard not to be impressed by the massive growth in RC volumes and by the Sheldon’s assertion that October saw an acceleration in current trends. On the flip side, the incremental revenues came at a cost – namely, much higher rebates, promotional expenses and higher fixed expenses.
Las Vegas revenues came in 10% above our estimate while EBITDA was 24% better
This note was originally published at 8am on October 25, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Hope is nature’s veil for hiding truth’s nakedness.”
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,
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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