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Riding Horses

“Comanches adapted to the horse earlier and more completely than any other plains tribe.”

-S.C. Gwynne


Man is competitive. So am I. As a team, we wake up to this world every risk management morning looking for a better way. That’s progressive. That’s how we evolve as a people. Anyone in this profession who does not get this will be left behind.


The aforementioned quote comes from the American Indian history book I have recently cited, Empire of The Summer Moon. It’s a stiff reminder of how harsh life has been. Not every man who attempted to settle in 18th century Texas was given a sticker.


Since launching our Q3 Global Macro Themes in early July, we’ve been riding the same horse that has had us calling for #GrowthSlowing since March. Our horse uses modern day math and machines. We don’t ask the Old Wall for permission to make calls on the direction of Growth Slowing’s Slope. We let Mr. Macro Market tell us which way our horse needs to ride next.


Back to the Global Macro Grind


Evidently, shorting the SP500 at its 1375 TREND level was a better than bad risk management decision to make. Friday’s -1% selloff in the US stock market came on the heels of both Spain and Italy closing down -6.3% and -4.7%, respectively, week-over-week.


Not to be confused with the fictional storytelling that global growth is “decoupling”, one of our most stealth front-running horses of Global Economic Growth, South Korea’s KOSPI index, told us the same story as structurally impaired Western Europe did. The KOSPI was down -4.3% week-over-week, testing its YTD lows.


This morning, neither Asian nor European Equities are telling you that anything about #GrowthSlowing has changed. Neither is the US bond market. Nor are corporate revenues. Neither are the prices of oil and copper.


Before I come back to touching dogmatic taboo of “growth is fine and earnings are great”, let’s grind through some of the aforementioned risk management signals:

  1. US Equity Futures down 14 handles
  2. Japanese Stocks (Nikkei 225) = -1.9% (down -17% since March, remaining in a Bearish Formation)
  3. Chinese Stocks (Shanghai Comp) = -1.3% (down -13% since May, remaining in a Bearish Formation)
  4. Hang Seng -3.0%, KOSPI -1.8%, and India’s Sensex -1.4% (all Bearish Formations)
  5. European Stocks (EuroStoxx50) = -2.2% (down -16% since March, breaking TREND again)
  6. Spanish Stocks (IBEX) = -4.3% (crashing, down -33% since March)
  7. Italian Stocks (MIB) = -3.3% (crashing, down -26% since March)
  8. Russian Stocks (RTSI) = -3.2% (crashing, down -23% since March)
  9. Oil (Brent) = -3.2% (backing off hard from where we shorted it on Thursday)
  10. Copper = -2.7% (backing off at its intermediate-term TREND line of 3.64/lb, much like the SP500 did)
  11. Treasuries (UST 10yr) = down another -5bps this morning to 1.41% (new lows)
  12. Yield Spread (10s minus 2s) = down another -6bps this morning to 120bps wide (narrowest YTD)
  13. Euro (vs USD) = down, again, testing $1.20 (after snapping its 2010 lows last week and now confirming)

I’ll stop there, at lucky thirteen.


How about that beloved “earnings season”? With almost 200 of 500 companies in the SP500 having reported, at least 50% of them have already missed on revenue expectations (worst quarter since 2008).  Two of the key Sectors in the SP500 (Financials and Industrials) look nothing like the “SP500 is flat for July” as they are down -1.8% (XLF) and -1.4% (XLI) for the month-to-date.


Oh, but never mind the revenues, ‘earnings are good.’ Really?

  1. Earnings are lagging indicator (not a leading one) anyway
  2. Revenues are leading indicators for Growth Slowing’s Slope

As our everything Financials guru, Josh Steiner, wrote in his research note to clients on Friday afternoon, the expectations mismatch between “reported” earnings and revenues is widening to the bearish side of Growth’s Slope:


1.   EPS: 17 out of 33 companies (52%) have beat consensus EPS estimates, while 11 were in line, and 5 have missed. Keep in mind that we are looking at the optical (unadjusted) numbers.


2.   Revenues: 6 out of 33 companies (18%) have beat consensus revenue estimates, while 20 were in line and 7 missed. For reference, we consider 2% or greater above the estimate a beat.


In other words, whether it’s GDP in Spain or the top line revenues of a company, get Growth’s Slope right, and you’ll get a lot of other things less wrong.


Oh, and if you’re in a performance foot race and want to be right instead of less wrong, ride a Global Macro horse.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $103.01-108.16, $83.18-83.99, $1.20-1.22, 5, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Riding Horses - Chart of the Day


Riding Horses - Virtual Portfolio


The Economic Data calendar for the week of the 23rd of July through the 27th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



HedgeyeRetail Visual: Massive E-Commerce Stat

40% of people intend to shop on-line for this back-to-school, per the NRF’s annual survey. This compares to 32% last year, and 21% in 2007. In other words, 42% of the 5-year increase in on-line intent has taken place over the past 12 months. If this survey is accurate, this is big.


Flying in the face of a deceleration in sales out of eBay’s GSI Commerce yesterday, the NRF released its back-to-school survey with surprising results. We usually take many of the National Retail Federation’s surveys and statistics with a grain of salt, but this one is tough to ignore. Per its latest survey, 39.6% of consumers intend to shop online for back-to-school supplies and clothes. While that’s a big number in itself, it is nearly an 800bp acceleration from the 31.7% ‘intent to purchase online’ surveyed exactly one year ago. The rate was 21.4% back in 2007. Translation – ecommerce is accelerating meaningfully. This is why we like companies who are moving forward with a strategy to get 40-50% of sales online. They might not ever get there, but these draconian moves are necessary. Companies that target just 8-10% will be left in the dust.


HedgeyeRetail Visual: Massive E-Commerce Stat - BTS COTD

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Industrial Indicator: CAT in Last Resource Investment Bubble

Chart of the Day: CAT in 70s Resource Investment Bubble

  • Investment in mining and resources in the US and globally at cyclical highs, which has helped capital equipment producers like CAT. 
  • Below, we can see what happened to CAT when the 1970s resource investment boom gave way
  • CAT upped its exposure to these markets with the acquisition of Bucyrus last year, at what looks like the peak of resource investment spending
  • If history rhymes in this investment cycle, CAT holders may be looking at years of relative underperformance


Industrial Indicator: CAT in Last Resource Investment Bubble - cat lt rel




Industrial Indicator: CAT in Last Resource Investment Bubble - perf 7202012

Weekly European Monitor: Bulldoze It!

-- For specific questions on anything Europe, please contact me at to set up a call.


No Current Positions in Europe


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +0.7% week-over-week vs +0.6% last week. Top performers: Denmark +2.6%; Hungary +2.0%; Norway +1.8%; Switzerland +1.7%; Netherlands +1.6%; Greece +1.5%; Germany +1.1%. Bottom performers: Spain -6.3%; Cyprus -5.4%; Italy -4.7%; Finland -0.9%.
  • FX:  The EUR/USD is down -0.74% week-over-week vs -0.50% last week.  W/W Divergences:RUB/EUR +2.46%; SEK/EUR +2.11%; NOK/EUR +1.12%; PLN/EUR +0.49%; CHF/EUR +0.00%; DKK/EUR -0.01%; CZK/EUR -0.51%; RON/EUR -0.79%.
  • Fixed Income:  There was a notable break-out in the Spanish 10YR Yield this week to 7.27%!, or +61bps week-over-week. Greece rose +28bps to 25.50%, and Italy rose +9bps to 6.08%.  France was a notable decliner on the week, falling -19bps to 2.03%.

Weekly European Monitor: Bulldoze It! - 222. yields


Bulldoze It!

There was an interesting article from Bloomberg.com yesterday discussing how Ireland’s National Asset Management Agency, the state agency set up in 2009 to “purge banks of their most toxic commercial property loans, started the destruction of an apartment block for the first time.”


According to the article, Ireland has some 1,850 housing developments that have remained unfinished since the housing bubble popped in 2008.  Approximately 553,000 houses were built in the ten years through 2005, for a country of 4.5MM, and now an estimated 294,000 homes lie empty.


The bulldozing of this block and many more like it is an important step for Ireland and shows a willingness to start over. Getting an economy to a “start-over” spot includes in some cases destroying excess housing supply, but also embracing a level of austerity to reduce fiscal imbalances to healthier levels off which economies can begin to grow again. We’re not saying this process is easy or short, clearly the drag could have generational impacts, but the markets need to clear. It appears, it’s the European politicians, in particular, that don’t want to let this happen.


Today’s conference call of Eurozone finance ministers is a prime example. The group of 17 approved an initial €30 Billion (of the total €100 Billion originally proposed) to recapitalize Spanish lenders, following key parliamentary approvals this week by Germany and Finland.  Once again Eurocrats showed their willingness to issue yet another bailout band-aid, to deflect near-term pressures (and save their jobs) but neglect construction of a longer term roadmap. Spain’s banking loans will come initially from the remaining EFSF, with support by the ESM if Germany signs off on its terms in September, and will be directed at Spain’s Fund for Orderly Bank Restructuring (FOBR) by the end of the month.  


Socialist policy makers of the world unite!? Well if today’s European equity market performance is any indication – indices were down between -1 and -5% on the day and the EUR/USD cross is trading down -1% at $1.2160 – it’s a reflection of investors’ fears that Europe does not have a credible path forward to grow GDP and eventually exit the years of this sovereign debt and banking crisis




The cross broke through out intermediate term TREND line of $1.22. We’ll be monitoring this cross acutely. Our immediate term TRADE range is $1.21 to $1.23.


Weekly European Monitor: Bulldoze It! - 222  euro



Call Outs:


Spain - German Finance Minister Schaeuble told the Rheinische Post newspaper that Spain's government, not its banks, will be liable for the bailout of up to €100B of the Spanish banking sector.


Spain - May revise its GDP estimate for 2013 to reflect a contraction of 0.2% to 0.4% vs its previous forecast for growth of 0.2%.


Italy - Italian Prime Minister Monti expressed serious concern over a potential default by Sicily, which accounts for ~5.5% of Italy's GDP. Monti said in a statement that there were "grave concerns" that the autonomous region could default and noted that he had written to the governor Raffaele Lombardo seeking confirmation that he would resign by the end of the month.


Germany - A monthly survey of funds by Bank of America Merrill Lynch showed that a net 32% of money managers expect trouble in Germany, a sharp reversal since May. Worries may be linked to the Bundesbank's soaring claims (which now stand at €729B) on Eurozone central banks under the ECB’s “Target2” payment system.


Eurobonds/bills - Sharon Bowles, chairwoman of the European Parliament's Committee on Economic and Monetary Affairs, said that Eurobills have a better political chance than Eurobonds. She noted that "They are the most likely," adding that "There are a lot of people who believe they are possible and they would also pass muster under the German constitutional court," a major stumbling block for EU legislation.


Pan-European deposit protection scheme - Sharon Bowles, chairwoman of the European Parliament's Committee on Economic and Monetary Affairs, said that a pan-European deposit protection scheme is unlikely to gain political traction over the near-term due to limited funding availability. She noted that many member-state deposit guarantee funds are only funded after they are needed, adding that most are bankrupt due to recent bailout activity. She also pointed out that more than €10T in total deposits that would have to be insured dwarfs the €700B in ESM firepower.


Italy - The Italian lower house voted on Thursday to approve the ESM, the euro zone's new bailout fund, giving final parliamentary clearance after a vote in the Senate last week.



Risk Monitor:

Sovereign CDS rose across the peripheral countries this week. On a week-over-week basis Spain rose the most, up +26bps to 594bps, followed by Ireland +11bps to 562bps and Italy (+10bps) to 515bps. Germany saw the largest decline (-12bps) to 75bps, followed by Portugal (-8bps) to 827bps.  Both France and the UK fell -5bps on the week, to 168bps and 61bps, respectively.


Weekly European Monitor: Bulldoze It! - 222. cds   a


Weekly European Monitor: Bulldoze It! - 222. cds   b



Data Dump:


Eurozone ZEW Economic Sentiment -22.3 JUL vs -20.1 JUN

EU-27 New Car Registrations -2.8% JUN Y/Y vs -8.7% MAY

Eurozone CPI 2.4% JUN Y/Y vs 2.4% MAY

Eurozone May Current Account +€10.9B vs prior revised +€5.5B from +€4.6B

Eurozone Construction Output -8.4% MAY Y/Y vs -6.3% APR   [0.1% MAY M/M vs -3.7% APR]


Germany ZEW Current Situation 21.1 JUL (exp. 30) vs 33.2 JUN

Germany ZEW Economic Sentiment -19.6 JUL (exp. -20) vs -16.9 JUN

Germany Producer Prices 1.6% JUN Y/Y (exp. 1.8%) vs 2.1% MAY


UK CPI 2.4% JUN Y/Y = lowest level in 2.5 years (exp. 2.8%) vs 2.8% MAY   [-0.4% JUN M/M (exp. -0.1%) vs -0.1% MAY]

UK Retail Price Index 2.8% JUN Y/Y (exp. 3%) vs 3.1% MAY

UK Bank of England votes 7-2 to increase Asset Purchases

UK ILO Unemployment Rate 8.1% MAY vs 8.2% APR

UK Jobless Claims Change 6.1K JUN (exp. 5K) vs 6.9K MAY

UK Retail Sales w/ Auto Fuel 1.6% JUN Y/Y (exp. 2.3%) vs 2.1% MAY

UK Public Sector Net Borrowing 12.1B GBP JUN (exp. 11.2B) vs 16.1B GBP MAY


Italy Industrial Orders -9.4% MAY Y/Y vs -12.3% APR

Spain House Price Index -8.3% in Q2 Y/Y vs -7.2% in Q1   [-2.5% in Q2 Q/Q vs -3.0%]

Portugal Producer Prices 2.7% JUN Y/Y vs 3.2% MAY


Switzerland Credit Suisse ZEW Survey of Economic Sentiment -42.5 JUL vs -43.4 JUN

Switzerland Industrial Production 1.4% in Q1 Y/Y vs 3.6% in Q4

Switzerland Exports -2.6% JUN Y/Y (exp. -1.5%) vs 1.3% MAY

Switzerland Imports -3.1% JUN Y/Y vs 0.9% MAY


Netherlands Consumer Confidence -32 JUL vs -40 JUN

Netherlands Unemployment Rate 6.3% JUN vs 6.2% MAY

Netherlands Consumer Spending -1.9% MAY Y/Y vs -2.1% APR

Ireland PPI 3.2% JUN Y/Y vs 2.0% MAY


Slovenia Unemployment Rate 11.6% MAY vs 11.8% APR

Slovakia CPI 3.7% JUN Y/Y vs 3.4% MAY

Slovakia Unemployment Rate 13.3% JUN vs 13.2 MAY


Turkey Consumer Confidence 91.8 JUN vs 92.1 MAY

Turkey Unemployment Rate 9.0% APR vs 9.9% MAR


ZEW Eastern Europe Economic Survey:


Weekly European Monitor: Bulldoze It! - 222. EE



Interest Rate Decisions:


(7/19) Turkey Benchmark Repo Rate UNCH at 5.75%



The Week Ahead:


Monday: Jul. Eurozone Consumer Confidence – Advance; May Mortgages - Capital Loaned; Mortgages on Houses


Tuesday: Jul. Eurozone PMI Composite, Services, and Manufacturing – Advance; Jul. Germany PMI Services and Manufacturing - Advance; Jun. Germany Import Price Index (Jul. 24-30); Jun. UK BBA Loans for House Purchase; Jul. France PMI Services and Manufacturing – Preliminary, Own-Company Production Outlook, Production Outlook Indicator, Business Confidence Indicator; Jun. Spain Producer Prices


Wednesday: Germany IFO Business Climate, Current Assessment, and Expectations; Jul. UK CBI Trends of Total Selling, Trends of Selling Prices, and Business Optimism; 2Q UK GDP – Advance; May UK Index of Services; Jul. France Business Survey Overall Demand; Jun. France Jobseekers; Jul. Italy Consumer Confidence Indicator


Thursday: Jun. Eurozone Money Supply 3; Aug. Germany GfK Consumer Confidence Survey; Jun. Italy Hourly Wages; May Italy Retail Sales


Friday: Jul. Germany CPI; Jul. France Consumer Confidence Indicator; 2Q Spain Unemployment Rate; Jul. Italy Business Confidence



Extended Calendar Call-Outs:


18-19 October: Summit of EU Leaders



Matthew Hedrick

Senior Analyst




Uncertainty to how much will flow through pre-opening expense makes this a difficult quarter to predict and potentially, to analyze.



Q2 is even more of a wildcard than usual for LVS.  Singapore is always difficult to predict given the lack of public data made available from other jurisdictions.  We’re usually pretty close in Macau (thanks Anna) but the discretion involved in determining pre-opening expense means we could be way off on Sands Cotai Central which opened during the quarter.  Sentiment is lousy but we’re generally below the Street so what to do?  Too much risk either way so we’ll defer until we are wearing our post conference call analysis hats.


Here are our projections:



Our estimate for Macau property-level EBITDA and net revenues is 10% and 5%, below the street at $443MM and $1.49BN, respectively.  More specifically, we’re below the Street on Sands, Venetian and Four Seasons, but above the Street on Sands Cotai Central’s performance –partly because we think that a lot will get tossed in the pre-opening bucket.  Sands and Venetian played unlucky this quarter, FS held a bit above their historical hold, and Sands Cotai Central held high on their baccarat play.  We estimate that EBITDA would have been $8MM lower if Sands held at its historical rate across its properties.




Venetian is projected to report net revenue of $686MM and EBITDA of $249MM, 6% below consensus on both metrics.

  • Net gaming revenue of $587MM
    • $290MM of net VIP revenue    
      • RC volume of $11.1BN, down 17% YoY and 20% QoQ
        • Junket RC volume fell 20% QoQ to $8BN, no doubt as a result of some of the junkets moving over to SCC.  We assume that direct play also took a sequential hit, falling to $3.1BN from $3.8BN the last 2 quarters for similar reasons.  This implies a direct play rate of 28%.
        • Hold rate of 2.61%, which is 30bps below the properties historical hold rate.  We estimate that low hold negatively impacted net revenues by $21MM and EBITDA by $13MM.
      • Rebate rate of 85bps of 33% of hold
    • Mass table revenue of $324MM, up 24% YoY
    • Slot win of $68MM
  • $98MM of net non-gaming revenue
    • $55MM of room revenue ($245 ADR/88% Occ/$215 RevPAR)
    • $18MMof F&B revenue
    • $54MM of retail, entertainment and other revenue
    • $29MM of promotional expenses
  • Variable expenses of $318MM
    • $266MM of taxes
    • $35MM of junket expenses assuming a commission rate of 1.17% (rebate + promoter expense )
    • $24MM of recorded non-gaming expense
  • $95MM of fixed costs, up 3% YoY but down from an estimated $99MM last quarter



We expect Sands to report net revenue of $284MM and EBITDA of $73MM, 7% and 16% below the Street, respectively.

  • Net gaming revenue of $277MM
    • $161MM of net VIP revenue    
      • RC volume of $11.1BN, down 17% YoY and 20% QoQ
      • RC volume of $6.3BN (down 19% YoY) assuming 11% direct play and a hold rate of 2.56%
      • Rebate rate of 84bps or 33% of hold
      • Assuming historical hold of 2.94%, net revenues and EBITDA would have been $15MM and $9MM lower, respectively
    • Mass table revenue of $141MM, down 1% YoY
    • Slot win of $28MM
  • $7MM of net non-gaming revenue
  • $159MM of variable expenses
    • $129MM of taxes
    • $22MM of junket expenses assuming a commission rate of 1.19% (rebate + promoter expense ) or 33%
    • $4MM of recorded non-gaming expense
  • $49MM of fixed costs, up 7% YoY and flat QoQ


Four Seasons


We estimate $258MM of net revenue and $67MM of EBITDA, 11% below the Street on both metrics.    

  • Net gaming revenue of $235MM
    • $275MM of net VIP revenue    
      • RC volume of $9.5BN, up 188% YoY but down 25% QoQ
        • Junket RC volume fell 28% QoQ to $7.7BN, no doubt as a result of some of the junkets moving over to SCC. We assume that direct play took a small sequential hit, falling to $1.7BN from $2BN the last 2 quarters for similar reasons.  This implies a direct play rate of 18%.
      • Rebate rate of 96bps or 33% of hold
      • The historical hold rate at FS has been 2.75%.  Using historical hold rate, we estimate that net revenue and EBITDA would be $9MM and $7MM lower, respectively.
    • Mass table revenue of $40MM, up 9% YoY
    • Slot win of $11MM
  • $22MM of net non-gaming revenue
    • $9MM of room revenue
    • $7MM of F&B
    • $17MM of retail, entertainment and other
    • Promotional expenses of $11MM
  • $210MM of variable expenses
    • $166MM of taxes
    • $35MM of junket expenses assuming a commission rate of 1.22% (rebate + promoter expense )
    • $6MM of recorded non-gaming expense
  • $22MM of fixed costs, up 20% YoY and down $9MM QoQ


Sands Cotai Central


We estimate $266MM of net revenue and $54MM of EBITDA, 9% and 23% ahead of the Street, respectively.    

  • Net gaming revenue of $251MM
    • $214MM of net VIP revenue    
      • RC volume of $7BN
        • Junket RC volume of $6BN. We assume direct play of 15%, which gets us to hold rate of 3.04%. If direct play was 10%, that would imply a hold rate of 3.22%. No direct play, which we view as unlikely, implies a hold rate of 3.58%.
      • Rebate rate of 96bps
      • Assuming theoretical hold of 2.85%, net revenue and EBITDA would be $9MM and $7MM lower, respectively.
    • Mass table revenue of $85MM
    • Slot win of $19MM
  • $15MM of net non-gaming revenue
    • $16MM of room revenue
    • $5MM of F&B
    • $5MM of retail, entertainment and other
    • Promotional expenses of $11MM
  • $145MM of variable expenses
    • $124MM of taxes
    • $16MM of junket expenses assuming a commission rate of 1.18% (rebate + promoter expense )
    • $7MM of recorded non-gaming expense
  • $60MM of fixed costs




We project $777MM of net revenue and EBITDA of $407MM, 2% and 3% below consensus, respectively.

  • Net gaming revenue of $626MM
    • $205MM of net VIP revenue    
      • RC volume of $12.8BN, up 5% YoY
      • Hold rate of 2.85%
      • Rebate rate of 1.25%
    • Mass table revenue of $270MM
      • Drop of $1.2BN, up 7.5% YoY and 22.5% hold
    • $151MM of slot & EGT win
  • $151MM of net non-gaming revenue
    • $77MM of room revenue ($340 ADR/98% Occ/$333 RevPAR)
  • $77MM of gaming taxes and $41MM of GST
  • $245MM of fixed costs, compared to an estimated $243MM in 1Q           




We estimate that Venetian and Palazzo’s net revenues will be $339MM with EBITDA of $88MM, which are 1% and 7% below Street estimates, respectively.

  • Net casino revenue of $100MM
    • Table revenue of $80MM
      • Drop of $443MM, up 5% YoY
        • 18% hold
    • $40MM of slot win
      • $453MM of slot handle, up 10% YoY and 8.8% hold
      • Last year was a very easy comp for LVS with slot handle down 39% YoY as they cut comps too deep
    • Rebates of $20MM or 4.5% of GGR
  • $116.5MM of room revenue - $183 RevPAR (+3% YoY)
  • $138MM of F&B, retail & other revenue
  • $15MM of promotional allowances or 12.5% of GGR
  • 5% YoY increase in operating expenses to $243MM, but down from $256MM last Q




We expect Sands Bethlehem to report $117MM of revenue and $29MM of EBITDA, 7% and 10% above consensus estimates, respectively.

  • $107MM of gaming revenues
    • Table revenue of $34MM
    • $73MM of slot win
  • $10MM of net non-gaming revenue
  • $46MM of taxes
  • $42MM of operating expenses



  • D&A: $224MM
  • Rental expense: $11MM
  • Corp and stock comp expense: $57MM
  • Net interest expense: $63MM

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