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Covering: SP500 Levels, Refreshed

POSITION: Long Energy (XLE)

 

With the SP500 holding my immediate-term TRADE support line of 1337 this morning, I covered-the-dip.

 

We believe that hedge funds should hedge. That’s why I trust the process that has served me better than poorly in the last 4 years – it takes out (some of the) emotion. When you’re in the middle of February and the SP500 hasn’t had a down day of more than -0.57%, that emotion isn’t going away.

 

Across all of my core risk management durations, here are the lines that matter to me most:

  1. Immediate-term TRADE overbought = 1362 (lower long-term high)
  2. Immediate-term TRADE support = 1337
  3. Long-term TAIL support = 1267

My call has been that if we start to see Inflation Readings Accelerate and Growth Readings Slow, the SP500 will make a lower long-term high versus its 2011 closing high of 1363. Today, with all of the high frequency growth data slowing sequentially (China and US Consumer Confidence in particular), I’ll reiterate that view.

 

I’m covering SPY because 1337 holds. If it doesn’t, I won’t be sitting on my hands.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

Covering: SP500 Levels, Refreshed - SPX


THE HBM: COSI, DNKN, RUTH, BWLD

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Comments from CEO Keith McCullough

 

Another day of consensus staring at a Greek tree – the forest of globally interconnected risk ticks on:

  1. CHINA – China just moved into the Top 3 Most Read on Bloomberg this morning for the first time in a while (Greece has dominated news-flow), and given China actually matters to Global Growth, this makes sense. In the last 48 hrs Chinese data did exactly what we said it was going to do: 1. Inflation accelerating sequentially to 4.5% from 4.1% y/y and 2. Growth Slowed, big time, w/ Exports down -0.5% y/y (1st y/y drop in over 2yrs).
  2. FRANCE – we’re short French Equities for the 1st time since late December for 3 reasons: 1. Growth data slowing as inflation data rising 2. CAC failed at its long-term TAIL of 3565 resistance and 3. EUR/USD is bumping up against a wall of resistance at 1.33 (highly correlated to the CAC). European stocks should stop trading on Greek “news” as the economic gravity of the French slowdown becomes more glaring.
  3. 10-year UST – markets tend to push the Pain Trade to its highest pressure points and then put the pain on those who chased. The 10-year yield ripped yesterday all the way up to my 2.03% (intermediate-term TREND line), and then reversed (2.00% this morning and falling). If I’m right and Global Growth slows sequentially as inflation rises here in FEB, I want to be long the long-bond.

 

SP500 continues to make lower long-term highs (below April 2011’s 1363).

 

SUBSECTOR PERFORMANCE

 

THE HBM: COSI, DNKN, RUTH, BWLD - subsector

 

 

QUICK SERVICE

 

COSI: Cosi initiated a consulting agreement with industry veteran Brad Blum yesterday.   Blum will provide consulting services related to branding, product development, merchandising and marketing in a collaborative effort to maximize long-term shareholder value, according to a company press release.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

DNKN: Dunkin’ Brands declined on accelerating volume after reporting a strong quarter, on the surface, but failing to inspire confidence on the earnings call.  We remain skeptical about the long term growth prospects of the company.

 

 

CASUAL DINING

 

RUTH: Ruth’s Chris reported 4Q EPS of $0.11 versus consensus $0.09.  Company-owned comparable restaurant sales for Ruth’s Chris increased to +7.7%.

 

THE HBM: COSI, DNKN, RUTH, BWLD - ruth pod1

 

 

KONA: Kona Grill reported 4Q11 EPS of $0.12 (excluding severance charges of $0.04) versus $0.01 expectations.  4Q same-store sales gained 7.8%.

 

THE HBM: COSI, DNKN, RUTH, BWLD - kona pod1

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

BWLD: Buffalo Wild Wings continues to trade higher, gaining 3% on accelerating volume yesterday.

 

THE HBM: COSI, DNKN, RUTH, BWLD - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 10, 2012


As we look at today’s set up for the S&P 500, the range is 26 points or -1.33% downside to 1334 and 0.60% upside to 1360. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 36 (-444) 
  • VOLUME: NYSE 759.18 (-0.81%)
  • VIX:  18.63 2.59% YTD PERFORMANCE: -20.38%
  • SPX PUT/CALL RATIO: 1.54 from 1.40 (10.00%)

CREDIT/ECONOMIC MARKET LOOK:


10-year UST – markets tend to push the Pain Trade to its highest pressure points and then put the pain on those who chased. The 10-year yield ripped yesterday all the way up to our 2.03% (intermediate-term TREND line), and then reversed (2.00% this morning and falling). If we’re right and Global Growth slows sequentially as inflation rises here in FEB, we want to be long the long-bond.

  • TED SPREAD: 42.36
  • 3-MONTH T-BILL YIELD: 0.09%
  • 10-Year: 1.98 from 2.04
  • YIELD CURVE: 1.73 from 1.78

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am, Trade Balance, Dec., est. -$48.5b (prior -$47.8b)
  • 9:55am, UMich consumer confidence, Feb., P, est. 74.8 (prior 75)
  • 12:30pm, Fed’s Bernanke speaks on housing in Orlando
  • 12:50pm, Fed’s Pianalto speaks on housing in Cleveland
  • 1pm: Baker Hughes rig count
  • 2pm, Monthly Budget, Jan., est. -$34b (prior -$49.8b)

GOVERNMENT/POLITICS:

    • President Obama to sign Ultralight Aircraft Smuggling Prevention Act, joined by former Rep. Gabrielle Giffords
    • Mitt Romney, Rick Santorum, Newt Gingrich speak at American Conservative Union’s CPAC ’12 conference, 10am. AFL-CIO holds counter-demonstration, noon
    • Romney holds town hall meeting in Portland, Maine, on eve of state’s Republican caucuses, 5:15pm
    • House, Senate not in session

WHAT TO WATCH: 

  • German Finance Minister Wolfgang Schaeuble said to have told lawmakers in Berlin that Greece will miss its debt-cutting targets
  • U.S. trade deficit may have widened in Dec. to $48.5b from $47.8b previous month: economists
  • P&G said to have decided it will seek to end sale of its Pringles snack business to Diamond Foods
  • IEA cut its 2012 global oil demand forecast for sixth month as a “darkening” economic outlook reduced prospects for global growth
  • Alcatel-Lucent rose after 4Q results; will offer access to patents through licensing syndicate
  • Barclays said it may miss profitability target set by CEO a year ago
  • Micron Techology holds analyst meeting days after CEO Steve Appleton died
  • Google said to be developing home-entertainment system, WSJ says

 EARNINGS:

    • Calpine (CPN) 6 a.m., $0.04
    • Alliant Energy (LNT) 6 a.m., $0.56
    • Laboratory of America Holdings (LH) 6:45 a.m., $1.53
    • PPL (PPL) 6:58 a.m., $0.61
    • Apollo Global Management LLC (APO) 7 a.m., $1.39
    • Buckeye Partners (BPL) 7 a.m., $0.84
    • Brookfield Office Properties (BPO CN) 7 a.m., $0.25
    • AllianceBernstein Holding (AB) 7:15 a.m., $0.19
    • Flir Systems (FLIR) 7:30 a.m., $0.45
    • Arch Coal (ACI) 7:45 a.m., $0.32
    • Telus (T CN) 8 a.m., C$0.79
    • Emera (EMA CN) 9:48 a.m., C$0.35
    • IGM Financial (IGM CN) 10:35 a.m., C$0.76

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Copper Traders Turn Bullish as Economy Spurs Demand: Commodities
  • Oil Falls From Three-Week High as Greece Counters U.S. Economy
  • Gold Falls a Third Day in London as Commodities Drop on Greece
  • Copper Cuts Fifth Weekly Gain on Record Shanghai Stockpiles
  • De Beers Sales Increase 27% on Higher Diamond Demand, Prices
  • Palm Oil Declines as Malaysian Reserves Fall Less Than Forecast
  • China January Copper Imports Fall From Record; Scrap Slumps
  • Palm Oil Inventories in Malaysia Decline to Five-Month Low
  • Contango in Gas Is Sell Signal for SocGen, Citi: Energy Markets
  • Australia’s Floods May Boost 2012-2013 Cotton Output to Record
  • South Africa to Lure Miners With $40 Billion Boost For Railways
  • Bumi’s Largest Shareholders ‘Confident’ of Ousting Rothschild
  • Chocolate Makers In Love With Valentine Sales: Chart of the Day
  • Copper Traders Bullish on Global Growth
  • IEA Cuts 2012 Oil Demand Forecast on ‘Darkening’ Growth
  • Wheat Set for First Weekly Drop in Four on Record Global Stocks
  • Coffee Rises as Roasters May Tap European Stocks; Cocoa Falls

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


FRANCE – we’re short French Equities for the 1st time since late December for 3 reasons: 1. Growth data slowing as inflation data rising 2. CAC failed at its long-term TAIL of 3565 resistance and 3. EUR/USD is bumping up against a wall of resistance at 1.33 (highly correlated to the CAC). European stocks should stop trading on Greek “news” as the economic gravity of the French slowdown becomes more glaring.


THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – China just moved into the Top 3 Most Read on Bloomberg this morning for the first time in a while (Greece has dominated news-flow), and given China actually matters to Global Growth, this makes sense. In the last 48 hrs Chinese data did exactly what we said it was going to do: 1. Inflation accelerating sequentially to 4.5% from 4.1% y/y and 2. Growth Slowed, big time, w/ Exports down -0.5% y/y (1st y/y drop in over 2yrs).

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 


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Realist Risk Managers

“You have to be realistic even if you’re an idealist.”

-Izzeldin Abuelaish

 

Ideally, the US stock market would never go down (its biggest down day of 2012 = -0.57%). Realistically, that’s not going to happen.

 

Ideally, you can wrap a Global Macro Risk Management Process up in a baby blue Tiffany box and slap a white ‘here’s what will happen in 2012’ bow on it for your clients. Realistically, you need to do the opposite of that and Embrace Uncertainty, every day.

 

The aforementioned quote comes from a book I am in the middle of reading right now called “I Shall Not Hate” – a Gaza Doctor’s story about managing life’s risks – those that are far greater than that of a Greek politician’s career this morning.

 

Back to the Global Macro Grind

 

After spending the last few days risk managing with some of our most thoughtful clients in Boston, I came to the simple conclusion that Greece has become a tree within a forest of globally interconnected risks.

 

The deep simplicity of that conclusion shouldn’t be a surprise. What’s happening to the rest of the world’s Growth and Inflation Expectations certainly didn’t cease to exist because the manic media doesn’t have an analytical process to absorb it.

 

The Top 3 Risk Management Topics our clients wanted to focus on in the last few days had nothing to do with Greece:

  1. Japan’s Sovereign Debt Maturity spike in March
  2. China’s Inflation Rising Post #BernankTax
  3. Down Dollar = Rising Inflation = Slowing Growth

Unlike some pundit spewing their qualitative views, a Realist Risk Manager (a Buy-Sider) is held accountable to real-time risk ticking on their screen every hour of every day. Being early in this business can also mean being wrong. Being late can also mean you blow up.

 

Maybe that’s why Japan was such a hot topic on the road. People are no longer allowed to blow up. Blowing up client moneys in 2008 was, allegedly, what “everyone” (other than those of us who didn’t) missed. Getting tagged for another -10-50% loss of capital in 2011, for some, made 2008 + 2011 a trend. And a 3rdtime probably means prepping your resume for an interview at Chipotle.

 

Why Japan? Why now?

 

We’ve been making this call since 2010, “The Sovereign Debt Dichotomy”, which attempts to simplify trading the short side of stock markets (long CDS) by waiting and watching for the Keynesian policy makers of that country to bump up against the biggest sovereign debt maturity within their economic region. Timing is critical.

 

That’s why we got bearish on Spain, then Italy, then France – in that order – in the order that their respective monthly sovereign debt maturities ballooned. After their stock markets imploded, we covered and got out of the way.

 

In today’s Chart of The Day, you’ll see that Japan’s March Debt Maturity Spike is:

  1. The largest, nominally, that Japan will ever have to bring to market
  2. Larger than any other European debt maturity by a considerable margin

Every client pushed our lynx-eyed Asia analyst, Darius Dale, and I on the next obvious question – why aren’t Japanese spreads and CDS blowing out yet?

 

A: throughout the entire European Sovereign Debt crisis, they didn’t either. They started to when it became clear to the market that their largest maturities couldn’t be absorbed at lower/stable yields.

 

Ideally, everyone would be able to price everything’s risk, efficiently, in real-time. Realistically, markets don’t trade that way. They trade on the expectations and emotions associated with last price.

 

Sometimes markets don’t go down, literally, until the day of the “new news”. Look at China in the last 48 hours:

  1. Inflation Rising = Consumer Price Inflation (CPI) up to 4.5% y/y (versus 4.1% last month)
  2. Growth Slowing = Chinese Exports down -0.5% y/y (down y/y for the first time in 2 years)

On that “news” this morning, US centric stock market investors who are still staring at the tree (Greece), now have to react to “China Slowing” as a Top 3 Most Read Bloomberg story. Unlike the US stock market, which has not yet had a -1% down day in 2012, Hong Kong was down -1.1% on that (Indonesia -1.7%, South Korea -1.3%, etc.).

 

Ideally, I’d like to sleep once in a while. Realistically, that’s not going to happen either. Global Macro market risk never sleeps.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, France CAC, and the SP500 are now $1, $114.12-119.02, $1.31-1.33, 2, 3, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Realist Risk Managers - Chart of the Day

 

Realist Risk Managers - Virtual Portfolio


MGM 4Q11 PREVIEW

February 22nd is a great date for birthdays and should be for earnings too.  MGM is probably a beat and while that is probably expected, 2012 should be a good year on the LV Strip.

 

 

For the first time since Q1 2011, MGM may produce EBITDA solidly ahead of expectations.  We are above the Street, mostly driven by Macau.  Our recent favorable view on the stock has been predicated on a hearty recovery in Vegas, however.  MGM has been and should continue to be the best way to play that recovery.  While Strip RevPAR has been strong for some time and expectations are for continued strength, we think the real delta going forward will be growing slot volume.

 

MGM will report Q4 earnings on February 22nd.  We estimate $2.3BN of net revenue and $502MM of consolidated property level EBITDA.  We also look at wholly-owned EBITDA plus MGM’s pro-rata share of MGM China and City Center, less corporate expense which produces EBITDA of $416MM.  Our net revenue estimate is 5% above the street while our comparable EBITDA is 6% above consensus. 

 

 

DETAIL

 

MGM’s Strip properties should produce net revenue of $1,166MM and EBITDA of $265MM, a little ahead of Street numbers. We mostly assume teens to low 20’s RevPAR growth (which includes resort fees), low single digit casino and other growth, and low single digit expense increases.

  • Bellagio: $286MM of net revenue and $84MM of EBITDA
    • 17% increase in RevPAR
    • 4% growth in casino & other
    • 5% expense growth
  • MGM Grand: $234MM of net revenue and $39MM of EBITDA
    • 23% increase in RevPAR (Paquio fight and 2 Eagles show)
    • 5% growth in casino & other
    • 5% expense growth
  • Mandalay Bay: $186MM of net revenue and $38MM of EBITDA
    • 19% increase in RevPAR
    • 2% growth in casino & other
    • 2% expense growth
  • Mirage: $137MM of net revenue and $24MM of EBITDA
    • RevPAR: $134; 18% increase in RevPAR or 9% adjusted for resort fees
    • 3% decline in casino & other
    • Flat expenses

Other US

  • MGM Grand net revenue of $140MM and EBITDA of $38MM
  • Mississippi net revenue of $116MM and EBITDA of $21MM

MGM Macau should report $738MM of net revenue and $172MM of EBITDA.  Our assumptions in HK$MM’s are:

  • Net casino revenue of $5.7BN and total revenue of $5.8BN
    • Net VIP win of $4,144MM
      • VIP Turnover: 201,750 assuming 8% direct play
      • Hold of 3.16%
      • Rebate rate of 35% or 1.11%
  • Mass table win of $1,154MM
  • Slot win of $406MM
  • Variable expenses of $3,657MM
    • $3,125MM of taxes and gaming premiums
    • $500MM of commissions to junkets
  • Fixed expenses of $625MM
  • $101MM of branding fees

We estimate that City Center will report $63MM of EBITDA on $278MM of net revenues.

  • Aria: $231MM of net revenue and $57MM of EBITDA
  • Mandarin Oriental: $10MM of revenue and ($1MM) of EBITDA loss
  • Crystals: $12MM of revenue and $7MM of EBITDA
  • Vdara: $20MM of revenue and $4MM of EBITDA
  • $4MM of development and administrative expenses

Other stuff

  • D&A: $247MM
  • Net interest expense: $274MM
  • Income from unconsolidated affiliates & non-operating items from unconsolidated affiliates of ($27MM)
  • $34MM of tax credits
  • Minority interest of $39MM

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