“If you’ve got a business, you didn’t build that.”
-Barack Obama, July 16th, 2012
Really? I couldn’t make up what the President of The United States said (off teleprompter) yesterday in Roanoke, Virginia if I tried. I guess I should send some wine to Barry and Timmy for keeping Citigroup’s research unit intact. Thanks for the help boys.
Obama went on to say that “somebody else made that happen.” I thought for a minute he was referring to my almighty God. Then I thought again. By somebody, he meant government.
Sadly, the same goes for how Obama, Bernanke, and Geithner think about the US stock market. They fundamentally believe that by not intervening, our markets won’t work. That’s not the America I came to in the early 1990s. That’s just sad. This is a No volume; No Trust market – if you’ve got a confidence and hiring problem Mr. President, you built this.
Back to the Global Macro Grind…
Now that I got that off my chest, onto the American Made Central Planning Hope of The Day – Ben Bernanke’s testimony at 10AM EST in front of our clueless economic overlords in the Senate.
This is actually getting as funny as it is pathetic. Ahead of whatever sweet-nothing Bernanke will whisper about Qe4 today, markets are front-running him again. This has been happening all year. Each rally is shorter in duration, and to lower-highs in elevation.
Commodity markets in particular are straight up into the right. If you are into the Down Dollar Drugs (USD was up yesterday until that bomb of a June US Retail Sales print of -0.5%), that’s where you get your short-term fix. That’s where the boys who jacked 1.05 million commodities options contracts (CFTC data) right back up to their early April highs are looking for some pop.
“Pop, pop, bang!” (Jimmy Braddock’s punching combo in Cinderella Man).
Unfortunately, that’s how it all ends. They’ll get their pop, then its lights out for whatever is left of US Growth. With US GDP Growth this slow, everything on the margin really counts – and the last thing the US (and global) economy needed was a +17% rip in the price of oil since late June on Bernanke Begging.
That’s why we are starting to see the market leaders of both the US economy and US stock market (Technology and Consumer Discretionary) start to lag. While they loved the tax cut of $89 Brent oil in mid-June, they do not appreciate $104/barrel staring them in the face this morning.
With the SP500 down for 7 of the last 8 trading days, this is how the S&P Sector ETF laggards look like for July and Q3 to-date:
- Consumer Discretionary (XLY) = -1.01%
- Technology (XLK) = -1.69%
- Industrials (XLI) = -2.92%
Now if I have been anything since March 12th when we shorted Industrials (XLI) on the #GrowthSlowing call, I have been consistent. My team’s research has also been very consistent on what infects real (inflation adjusted) US Consumption Growth too – the marginal price inflation of food and energy.
Since 71% of the US Economy = Consumption, this is one of the main things you need to get right if you want to get the slope of growth in the US economy right. That’s precisely why the politicians of the 112th Congress have had their policy to inflate food/energy prices all wrong.
Post 2006, Bush had this as wrong as Obama has it now. Don’t forget that both Presidents empowered Bernanke. For Bush, that was then. For Obama, we live in the now. And not letting free-market prices clear for the sake of a broken belief system that central planners can “smooth” economic cycles and suspend economic gravity is now his problem.
Your conflicted and compromised cronies built this environment for small business owners and market participants in America. My team and I have been building our business in spite of you.
My immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar Index, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $100.25-104.02, $82.47-84.03, $1.20-1.23, 6, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
The climb is finally over. After three weeks of watching his reelection chances climb, the growth has stopped. For the week of July 16, 2012, President Obama’s odds of being reelected held flat at 57.8%. It reminds us of the market’s recent performance along with the US dollar last week. There is a lot of work ahead for the President as Romney’s political machine moves into full swing ahead of November.
Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.
Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection. The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.
President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.
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There was a notable acceleration in the underlying $130+ footwear price point growth in June which accounted for 17% of sales throughout the month. Additionally, Basketball (30% of sales within the channel), which typically carries a greater ASP relative to other athletic footwear categories, appears to have been the only category in the channel to also show a sequential acceleration in underlying trends. We expect FL was the primary benefactor of the incremental $130+ strength given it has the greatest exposure to basketball footwear within the athletic specialty subsector.
In preparation for WYNN's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.
Wynn Macau says new casino resort to cost $4 billion (June 4)
- The new casino resort on Cotai will have: 2,000 hotel rooms, 500 gaming tables,10 restaurants, shops, a spa, meeting rooms, a nightclub named “Climax”, and a 3.2 hectare (eight-acre) lagoon in front of the casino.
1Q conference call highlights (May 7)
- "I think everybody knows that we were finally given the green light in the land concession, which will lead to imminent ground breaking in the next few weeks."
- "Bad debt expense was up $8 million and that was all in Macau.... We had a few large accounts that went past 150 days. We have a very conservative accounting policy. If it's 150 days we're fully reserved. And so we had a few large accounts go over 150 days. Our bad debt provision went up. We're 55% reserved in Macau right now and our collections in the second quarter have continued to be very stable and normal."
- [Cotai financing] "We're always conservative so it'll be between 25% to 40% in equity and the rest will be financing that we'll start working on this year. We're only two times levered right now on a net basis."
- "We will prosecute our case for violation of fiduciary duty and conflict of interest until they're resolved. And whether Mr. Okada wants to settle or not and how he would be able to do that is a very serious problem and question for him."
- [In Macau] "We have 52,000 square feet of retail. It's going to 60,000 – it's in the process of going to 60,000, but we had 52,000 at year-end."
- "Special dividends are special dividends. You take those issues as you find them, at the end of the year, and you measure all the other factors, my board weighs our financial condition at the time and the obligations that we've got underway and the more specific schedule of construction... We do have a healthy lead-time and a very strong cash flow in China. So we'll discuss special dividends when it seems appropriate to take them under real live consideration."
- "All the way up until today, is volumes are up over last year in Macau on the VIP side. The market's still very robust.I also think that the customers are coming back to momma. They tried all the other properties and they are going to play where they feel the most comfortable. That's... what I'm seeing now"
- "If you look year-over-year we transitioned a lot of table games from mass to VIP... So our table win per unit in the mass floor was up 27% year-over-year. So ... we're just yielding our floor. We've added more VIP tables and the drop was actually up over 30% year-on-year with -- but win per unit was up 27%. So we're just continuing to see very good volumes on the mass side and also in VIP"
- [LV] "We are, in fact, trying to hold the price. Our cash was okay, but our occupancy was low and that had to do with a decision that we made that impacted us in January. That is part of the strategy here to continue to push the rate.... We're really focused on having the right people in our building, again, people who stay with us, eat with us, see our shows, shop in our stores. And so, we continue to try to press the rate"
- [LV] "We had a couple of technical things that happened during the quarter that probably, had they not happened, and they weren't associated with our pricing – would have probably taken our occupancy up... two or three points"
We're below the Street but so is the whisper
While we're below the Street, we're not making a negative call into the Q. WYNN has fallen 28% since April 27th (shortly after they reported 1Q12 results) and is 44% off its 52 week high. Last week, at least five analysts slashed their estimates for Wynn and many of the other Macau names. Wynn Resort’s stock is now trading at less than 9x 2013, and that’s before any consideration for Wynn Cotai (although it does assume that the 24MM Okada shares stay “redeemed”). We are the first to acknowledge that valuation doesn’t always matter with the Macau names, but this is about as cheap as the company has traded in some time.
We estimate that Wynn Resorts will report $1.28 billion of net revenue and $367MM of EBITDA, 5% and 6% below the Street, respectively. WYNN could actually beat the new lower estimates for 2H12 and even 2013 looks reasonable. July market share has already improved considerably and June was better than May. While we aren’t ready to go long the Macau names until a positive catalyst emerges, valuation suggests that downside from here, while possible and likely probable, could be limited.
We estimate that Wynn Macau will produce $910MM of net revenue and $283MM of EBITDA (5% below consensus)
- Net casino revenue of $853MM
- $587MM of net VIP win
- Assuming 10% direct play, RC volume of $30.8BN
- Down 6% YoY—the first YoY decline since 2Q09; and
- Down 8% QoQ—the first QoQ decline since opening
- 2.74% hold
- Assuming 10% direct play, RC volume of $30.8BN
- Rebate rate of 84bps or 30.5% on a rev share basis
- The properties historical hold rate since opening has been 2.93%. If Wynn held at its historical hold rate in 2Q, net revenues and EBITDA would be $41MM and $10MM higher, respectively
- $587MM of net VIP win
- Mass win of $202MM, a 5% YoY increase but a 6% sequential decline
- Slot win of $64MM, down 14% YoY and 13% QoQ
- $58MM of net non-gaming revenue
- Room revenue: $29MM
- F&B: $25MM
- Retail & other: $50MM
- Promotional allowances: $49MM
- $500MM of variable expenses
- $433MM of taxes
- $58MM of gaming promoter expense assuming a blended commission rate 42.7%
- Recorded non-gaming expenses of $20MM
- Fixed expenses of $108MM, flat QoQ and up 6% YoY
We’re projecting $366MM of net revenue and $100MM of EBITDA for Wynn Las Vegas (8% below consensus)
- Net casino revenue of $130MM and operating margin of $67MM
- Table win of $112MM
- 5% increase in table drop to $561MM
- 20% hold rate
- $42MM of slot win
- 1% increase in drop to $692MM
- 6.1% win rate
- $25MM discounts & rebates or 16% of gross casino win (compared to 18% in 1Q)
- Casino expenses of $72MM, up 3% YoY and 9% lower QoQ
- $278MM of non-gaming revenue
- Room revenue of $89MM
- RevPAR: $206 (ADR: $252/ Occ: 82%)
- CostPAR: $85.26
- F&B: $108MM revenues at a 42% operating margin
- Entertainment, retail, & other: $60MM at a 37% operating margin
- $42MM of promotional spending or 32% of casino revenue
- SG&A: $48MM (compared to $47MM last quarter)
- Corporate expense: $16MM
- D&A: $92MM
- Stock comp: $6MM
- Net interest expense: $76MM
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