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Magnificent Investing

“Another thing that freaks me out is time.  Time is like a book.  You have a beginning, a middle and an end. It’s just a cycle.”

-Mike Tyson


This week I enjoyed a few days off in the Banff and Lake Louise region of Alberta in the heart of the Canadian Rockies.  As part of my tour, I hiked up to view the Takakkaw Falls in Yoho National Park.  The falls are the second highest natural falls in Canada at 245 metres.  In Cree, the word Takkakaw is loosely translated to mean “it is magnificent” and is an apt description of this natural wonder.


Interestingly, while much of North American is being adversely impacted by record hot temperatures, Western Canada seems to be thriving.  Specifically, the crops appear to be in excellent condition.  In fact, the Canadian Wheat Board issued its first crop outlook for the 2012 – 2013 season and in it said the following:


“Wheat fundamentals are favorable to prices. World wheat production is forecast to fall by over 40 million tonnes to 646 million tonnes.  A weather-related shortfall in Russia, Ukraine, and Kazakhstan is the main driver behind the global production decline. The U.S. corn belt has been hit by a severe drought, resulting in dramatic declines in corn and soybean production potential.”


We Canadians are known for our subtleness and this report from the Canadian Wheat Board is no exception.  To translate: it is going to be a record year for Canadian farmers because of shortage of supply of both wheat and corn globally.  This shortage of supply is primarily being supported by drought like conditions in both the U.S. and key growing areas in Europe. As a result, many agricultural commodity prices have been in a mini bull market.  As an example, the corn ETF, aptly named CORN, is up more than 50% in the last two months. Being on the right side of a trade like this is what I would call: Magnificent Investing.


Personally, I haven’t studied global warming enough to either be a proponent or opponent, although this year certainly gives some credence to the concept. That said, Keith and I have at times discussed our longer term investment view of Canada and even presented this view to various municipal governments across Canada.  A key component of this view is obviously the vast resources of Canada as typified by the agricultural production capabilities and the Saudi Arabia like oil resources in Alberta.  But another important potential tailwind for Canada is weather patterns.


UCLA Geography Professor Laurence C. Smith has done much of the work that underscores our long term investment view of Canada.  In his book, “The World in 2050: Four Forces Shaping Civilization’s Northern Future”, Smith highlights some of the key forces driving economic share gains of the Northern Rim Countries, or as he calls them NORCs.  A key point in his thesis related to NORCs is that their share of crop production will increase dramatically if and when the world becomes warmer because they will be less directly impacted by an increase in temperature.  His prediction is for this trend to really have an impact by 2050, even though it sounds a little like 2012 . . .


No doubt climate cycles can be challenging to invest around, though industrial cycles can be much more predictable and create longer term (in our models TAIL duration) investable fundamentals.  Our recently hired Industrials Sector Head Jay Van Sciver has spent more than a decade on the buy-side and a key component of his investing framework is that if you get the industrial cycle right, you’ll get a lot of other things right.  An example he uses in his presentation is being on the right side of U.S. electrical transmission infrastructure investment cycle.  A couple of points to consider:

  • In the down cycle from Q1 1992 to Q1 2000, the SP500 returned 243%.  In that same period, the primary players in this industry, Copper Industries, Hubbell, and Thomas & Betts, returned on average 25%.
  • In the up cycle from Q1 2001 to Q1 2012, when investment in transmission infrastructure was accelerating, the SP500 was up 51%.  Meanwhile, the key players noted above were all up more than 300%.

I’ll say it again, if you get the cycle right, you’ll get a lot of other things right.


Van Sciver’s launch presentation on June 27th was a bearish call on the airline cycle.  Call him lucky or good, but as we highlight in the Chart of the Day, airline stocks have basically been in free fall since he launched.  In fact, speaking of Magnificent Investing, one of his least favorite names, UAL, is down almost -20% in that period.  His next deep dive will be on the global truck OEM market and he will be hosting a conference call on August 16th to discuss. Ping us at or contact your sales person if you are an eligible institution and would like to join this call and review Van Sciver’s work.


In our global macro research, a key theme we’ve been hammering on for the last few years has been the global debt super cycle.  An important point of this cycle is that as government debt accelerates past 90% debt-to-GDP, economic growth slows.  This morning’s data from Europe does little to change our debt cycle thesis. Spanish 10-year yields are back pushing that 7% line at 6.98% and so there’s no surprise that the IBEX 35 is down -1.9%.  Further, German June exports were down -1.3% year-over-year and German industrial production was down -0.3%.  Clearly, even a relatively well situated country like Germany cannot escape the growth slowing debt cycle.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $107.34-111.83, $81.89-82.69, $1.23-1.24, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Magnificent Investing - Chart of the Day


Magnificent Investing - Virtual Portfolio


TODAY’S S&P 500 SET-UP – August 8, 2012

As we look at today’s set up for the S&P 500, the range is 26 points or -1.45% downside to 1381 and 0.40% upside to 1407. 











SENTIMENT – two beauty signals registering in the last 24hrs w/ the VIX testing long-term TAIL support (14-15) again and the II Bull/Bear Spread spikes back up to +1810bps wide to the bull side (Bears have been eviscerated from the spread, down to 25.5% vs 27.7% last wk). Big drawdowns in the last 5yrs happen after all the weak shorts have been squeezed out. 

    • Up versus the prior day’s trading of 765
  • VOLUME: on 08/07 NYSE 727.94
    • Increase versus prior day’s trading of 12.48%
  • VIX:  as of 08/07 was at 15.99
    • Increase versus most recent day’s trading of 0.25%
    • Year-to-date decrease of -31.67%
  • SPX PUT/CALL RATIO: as of 08/07 closed at 1.33
    • Down from the day prior at 1.54 


  • TED SPREAD: as of this morning 34
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.62%
    • Decrease from prior day’s trading of 1.63%
  • YIELD CURVE: as of this morning 1.36
    • Down from prior day’s trading at 1.37 

MACRO DATA POINTS (Bloomberg Estimates) 

  • 7am: MBA Mortgage Applications, week Aug. 3 (prior 0.2%)
  • 8:30am: Nonfarm Productivity, 2Q P, est. 1.4% (prior -0.9%)
  • 8:30am: Unit Labor Costs, 2Q P, est. 0.5% (prior 1.3%)
  • 10:30am: DoE Inventories
  • 11am: U.S. Fed to purchase $1.5b-$2b notes in 2/15/2036 to 5/15/2042 range
  • 1pm: U.S. to sell $24b 10-year notes 


    • House, Senate not in session
    • FDA advisory panel meets to discuss uses, limitations of in vitro dissolution testing, receive update on draft guidance for industry on biosimilars, 8am
    • IRS holds meeting on proposed regulations, fees imposed by Patient Protection and Affordable Care Act on issuers, 10am
    • International Trade Commission to vote on Ferrovanadium, Nitrided Vanadium imports from Russia, 1pm
    • Air Line Pilots Association holds annual safety forum, 8:30am 


  • McDonald’s sales growth may be slowest since 2009
  • Greece outlook revised to negative by S&P; ratings affirmed
  • Disney profit rises 24% on “Avengers” as rev falls short
  • Standard Chartered probe said to require up to $700m
  • Knight Losses Spur Tighter Automated-Trading Rules From SEC
  • J.C. Penney puts at record vs peers before earnings
  • Ford expands into China heavy truck market with acquisition
  • German exports fell in June as crisis curbed euro-area demand
  • King seen cutting U.K. outlook as BOE stays open to stimulus
  • Apple says Samsung document shows application icons copy IPhone
  • Rio Tinto 1H net beats est.
  • ING Groep 2Q net misses est.


    • Lamar Advertising (LAMR) 6am, $0.15
    • DISH Network (DISH) 6am, $0.66
    • Air Canada (AC/A CN) 6am, C$(0.01)
    • EchoStar (SATS) 6am, $0.08
    • NRG Energy (NRG) 6:45am, $0.18
    • PPL (PPL) 6:53am, $0.41
    • Alpha Natural Resources (ANR) 7am, $(0.35)
    • BCE (BCE CN) 7am, C$0.81
    • International Flavors & Fragrances (IFF) 7am, $1.03
    • Carlyle Group (CG) 7am, $(0.04)
    • HollyFrontier (HFC) 7am, $2.24
    • Molex (MOLX) 7:30am, $0.38
    • Apollo Investment (AINV) 7:30am, $0.21
    • Brookfield Infrastructure Partners (BIP) 7:30am, $0.34
    • Ralph Lauren (RL) 8am, $1.78
    • Macy’s (M) 8am, $0.64; Preview
    • Computer Sciences (CSC) 8:13am, $0.22
    • Liberty Interactive (LINTA) 8:30am, $0.24
    • Finning International (FTT CN) 8:55am, C$0.46
    • Liberty Media - Liberty Capital (LMCA) 10:45am, $0.73
    • Allscripts Healthcare Solutions (MDRX) 4pm, $0.18
    • Onex (OCX CN) 4pm, NA
    • MEMC Electronics (WFR) 4:01pm, ($0.04)
    • Jack in the Box (JACK) 4:01pm, $0.35
    • MBIA (MBI) 4:01pm, $0.07
    • News Corp. (NWSA) 4:02pm, $0.32
    • Monster Beverage (MNST) 4:05pm, $0.61
    • Keyera (KEY CN) 4:05pm, $0.40
    • Canaccord Financial (CF CN) 4:05pm, (C$0.04)
    • Universal Display (PANL) 4:05pm, $0.25
    • CenturyLink (CTL) 4:12pm, $0.62
    • Dun & Bradstreet (DNB) 4:14pm, $1.43
    • Kinross Gold (K CN) 4:15pm, $0.17
    • Continental Resources (CLR) 4:15pm, $0.74
    • Yamana Gold (YRI CN) 4:29pm, $0.21
    • Canadian Apartment Properties REIT (CAR-U CN) 5:05pm, C$0.36
    • Integrys Energy Group (TEG) 5:07pm, $0.41
    • Sun Life Financial (SLF CN) 5:10pm, C$0.08
    • Franco-Nevada (FNV CN) 5:15pm, $0.28 



COPPER – the Doctor says he’s out; Copper testing its 1st duration of resistance (3.43 TRADE resistance) and failed this morning, moving lower by -0.7% after the 10yr UST yield backed off yesterday’s highs. Another #GrowthSlowing signal born out of $111 Oil. 

  • Coal to Drop as Steel Output Slows in BHP Setback: Commodities
  • Gas May Revisit $2 as Drop in Supply Glut Slows: Energy Markets
  • Clive Said to Miss July Commodities Rally as Brevan Gains
  • Sugar Reserve in India at Four-Year High Set to Help Exports
  • Rubber Tumbles to Lowest in Almost Three Years on Slowdown Risk
  • Oil Drops From Two-Month High in New York as U.S. Demand Eases
  • Soybeans, Corn Slide as Rain May Revive Drought-Stricken Crops
  • Gold Declines in London as Stronger Dollar Curbs Investor Demand
  • Copper Falls as Factory Report May Stoke Debt-Crisis Concern
  • Sugar Falls to One-Month Low as Supplies Improve; Cocoa Climbs
  • Electricity Seen Overstating China Slowdown as Services Rise
  • Copper Traders Make $839 Million Bet on China Boosting Demand
  • Alpha Posts $2.23 Billion Quarterly Loss After Taking Charges
  • Gold in Euros Seen Climbing to All-Time High: Technical Analysis
  • Commodities Daybook: Coal Set to Slump as European Demand Wanes
  • Taiwan Sugar Buys 23,000 Tons Corn, 12,000 Tons Soybeans
  • Zinc, Lead Traders Probably Added to Bets on Falling Prices














CHINA – Chinese stocks agree; after a paltry “rally” on no volume, the Shanghai Comp closed up, barely, +0.16% last night – but, more importantly, failed at an our immediate-term TRADE line of 2166 resistance; watching that and KOSPI, very closely here. Haven’t been short anything Asia on the meltup, thank god.











The Hedgeye Macro Team

Four Percent

This note was originally published at 8am on July 25, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Without continual growth and progress, such words as improvement, achievement, and success have no meaning.”

-Benjamin Franklin


Last night I attended a launch party for the first book to be released from the Bush Institute, which is the non-for-profit that President George W. Bush started after leaving office.  The launch was held at the Canadian Consulate in Manhattan, so I felt right at home.  The book, for those of you who haven’t read the news clippings, is called, “The 4% Solution: How Can America Regain Its Economic Strength?”


In the Chart of the Day, we show real year-over-year GDP growth going back to 1945.  The moral of the story is that four percent GDP growth is no small task.  Since World War II, the average year-over-year GDP growth in the U.S. has been right around 3%. Over the last decade, of course, it has been significantly lower.


In the forward to the book, the former President Bush makes no bones about the fact that growth began to slow under his tenure.  In fact, he writes:


“While the causes of the 2008 crisis will be debated by scholars for decades to come, we can all agree that excessive risk taking by financial institutions, irresponsible decisions by lenders and borrowers and market-distorting policies all played a role.  The question now is which policies should we adopt to fix the problems, speed the recovery, and lay the foundation for another long, steady recovery.”


Obviously, it is a worthy question, especially in the short term as we wake up to even more incremental data points that growth is and will slow both in the U.S. and globally.  Some of these include:


1.   Company specific reports – I’d like to include Apple in this since the company “disappointed” the consensus estimates of the Old Wall, but the reality is that Apple still sold 26 million iPhones (good for 28% year-over-year growth) and iPad sales grew more than 80% year-over-year.  In aggregate, though, corporate earnings, especially on the top line where it matters, have been validating a slowing global economy.


2.   European yields – Over the past couple of weeks, European sovereign debt yields in the periphery have gone to new highs.  Specifically, Spanish 10-year yields, even if marginally off their highs of the morning, are north of the 7.5% line.  The implication of this signal is that European governments need to do two things, both of which will slow growth in the short term, cut more spending and likely add more debt to their balance sheets to stay solvent.


3.   Consumer confidence – The global economy is driven by consumer spending.  The latest negative data point comes from South Korea.  This morning South Korean consumer confidence fell to the lowest level in five months.  Unless consumers globally have confidence, they won’t spend and economic growth will remain anemic.


Despite the global economic malaise that is being reinforced every morning, President Obama’s re-election chances remain relatively positive.  In fact, a NBC News / Wall Street Journal poll out this morning shows that President Obama holds a 10-point lead on the question: who would make a better Commander in Chief? At the same point four years ago, a Pew poll showed that McCain led Obama on the same question by 15 points.


This perspective is confirmed by our Hedgeye Election Indicator that shows Obama’s re-election chances are at 57%.  This corresponds with the Presidential predictive market at InTrade that shows a similar reading with Obama having a 57.3% re-election probability.  So, what does Romney have to do to narrow this race?  According to the partisan crowd last night, he has to move the discussion away from Bain Capital, focus entirely on the economy, and introduce a differentiated economic plan to get the U.S. economy back on a growth trajectory.


A consensus view of many of the economists last night, albeit they were more conservative leaning, is that economic policy will fail if it is thought of as a welfare policy.  On some level, it is hard not to disagree with this point.  While we harp on it daily, relying on government to be the solution is, in fact, the problem.  To wit, I received a morning note today from a friend that runs a large institutional trading firm.  His note led off by saying that European markets and U.S. futures are “holding on” in hopes of government / central bank action.  How sad is that?


I’ll answer my own question: it is very sad.  Nonetheless, we have to play the game in front of us.  So for those of you who are looking for a government related catalyst of one kind or another, there are few dates to keep in mind:

  1. Aug 1st – Federal Reserve meetings in the U.S.;
  2. Aug 23rd – 25th – The annual central bankers confab in Jackson Hole; and/or
  3. September 13th – Federal Reserve meets again.

You want catalysts? We got catalysts!


Unfortunately, government induced catalysts don’t do much for inducing real and sustainable growth, even if they do at times arrest economic gravity.  Although according to some recent analysis from our own Josh Steiner, even that point is questionable.


The most recent round of short selling bans in Europe made Josh look back at the last times governments intervened in the free markets to ban short selling.  On August 8th, 2011, France, Italy, Spain, and Belgium banned short selling.  The Euro Stoxx Bank Index went on to lose 21% over the next month.  Even more noteworthy was the SEC short selling ban on September 8th, 2008 of the financial sector, which led to subsequent 76% decline in financials over the next six months.


So, what’s my plan for growth? For the central banks and central planning governments to do one thing: stop.


Our immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1569-1599, $99.45-103.98, $83.36-84.17, $1.20-1.22, and 1329-1349,


Best of luck out there today,


Daryl G. Jones

Director of Research


Four Percent	 - Chart of the Day


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  • Their margin achieved this quarter is a record for the company
  • Grand Lisboa:  Mass growth 25.5%; 35% growth in VIP revenue.  They are remodeling some space on level 9 & 10 to create more VIP capacity.
    • ADR:  HK$2131/ Occupancy: 93%
  • Cotai:  They are working at full speed on the project design



  • Oceanus performance:  1H results were encouraging overall and on a table basis. Volume increased 12.9% sequentially in 1Q but then decreased QoQ in the second Q due to a suspension of gaming tables
  • Grand Lisboa is capacity constrained on Mass
  • Luck in 2Q?  Held at 2.86% in1Q and 2.92% in 2Q at Grand Lisboa.
  • Chips in circulation increased by $500MM YoY, mainly due to the commissioning of new junkets buying into new chips
    • Increased VIP tables from 354 to 372
  • Competitive landscape?
    • Seeing pressure on the mass since they have limited room product so they are struggling to maintain their share
    • Their non-gaming margins are getting squeezed due to increased F&B costs
  • Policy is dividing out 50% of their profit 
  • Have a limited physical capacity to add mass tables on the main gaming floor. They are taking 40 tables from 3rd party operators and 200 staff members into Grand Lisboa.  They already reduced the number of slots to make room for more mass tables. Will see that they can get more cash from their VIP tables. 
  • Third party agreements have thresholds that they need to meet and that will give them an opportunity to take back some tables. It's not a hard and fast rule though. Their relationships are deeper than that.



(note that all $ figures are in HK$ for the 6M ended June 30, unless otherwise noted) 

  • 2Q12 results: 
    • Gaming revenue: $19.3BN, -1% YoY
    • Adjusted EBITDA: $1.9BN, +5% YoY
  • Total Group revenue of $39.3BN (+3% YoY) gaming revenue of $39BN (+4% YoY),  and Adjusted EBITDA of $3.8BN (+9% YoY)
    • Mass table revenues: +15% YoY to $11.7BN 
    • VIP revenues: -0.5% to $26.5BN
    • Slot revenue: +3.2% YoY to 769.2BN
  • Mass market table share: 32.4% and VIP table share of 27%
  • Casino Grand Lisboa Adjusted property EBITDA and profit grew by 22.2% and 22.5%, respectively
  • "618 VIP gaming tables in operation with 29 VIP promoters, as compared with 609 VIP gaming
    tables and 32 VIP promoters as at 31 December 2011."
  • Mass tables: 1,157 vs. 1,166 at Dec 12
  • "SJM had 3,769 slot machines, operating in 14 of SJM’s casinos and in three slot halls, as at
    30 June 2012 as compared with 3,910 slot machines as at 31 December 2011."
  • Cash: $22BN
  • Declared interim dividend of $0.10/share for the 6M ended 6/30/12



The trend could not be any more clear


  • In F4Q, WMS’s new unit sale revenues declined 11% YoY while total receivables increased 22%.  On a FY basis, new unit sale revenues fell 17% and total notes receivable increased 22%.
  • Over the last 3 years, new unit sale revenues have declined from $375MM to $334MM, or 11%.  At the same time, total notes receivable have climbed from $151MM to $325MM, or 116%.
  • Within the total notes receivable bucket, long-term receivables have been growing at an alarming rate from just $8MM at June '08 to $122MM in June '12.  Over the last 3 years, long-term receivables have increased more than three-fold.




In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • WORSE:  While overall EBITDA was in-line with reduced expectations, business trends have certainly worsened since the Q1 conference call.  Q3 RevPAR looks like it will go negative.  However, the precipitous drop in the stock price had already incorporated the softness.  Management's comments about the environment improving post quarter end was surprising.  We'll see how it plays out.





  • LITTLE WORSE:  There was a patch of softness from May-June that led to drop off in in the year for the year convention bookings.  MGM's convention mix for 2012 is trending at about the 14-15% mix level (2011 mix was 14.7%) which is below where they wanted to be.  2013/2014 bookings have not been impacted, however.
  • PREVIOUSLY:  "We expect convention mix to increase YoY during 2Q [at least +1%], and most notably our convention pace is up significantly in 2013 and 2014.  We expect convention mix to be flat to slightly up year-on-year this year."


  • SAME:  LV REVPAR rose 5% YoY. 
  • PREVIOUSLY:  “Based on our current booking trends, we expect a mid single digit RevPAR growth in the second quarter."


  • WORSE:  3Q REVPAR will be down slightly with weakness in bookings in May/June.  It's too early to make a call on how 4Q will shake out 
  • PREVIOUSLY:  "We continue to believe that RevPAR growth for the year will be at least mid-single digit with potential upside coming from the in the year, for the year convention bookings and retail segment strength.  It's a combination of both, slightly more occupancy."


  • SAME: ~3,300 rooms have been completed to date, with the balance expected to be completed by September
  • PREVIOUSLY:  "Our MGM Grand room remodel program continues to progress nicely with roughly 2,300 rooms completed and that project is on budget and on time to be completed by September of this year."


  • BETTER:  Aria occupancy reached an all-time high of 92.7%; quarterly REVPAR also reached a record of $187.  Much of the hotel growth is occurring in the more profitable cash segment.  Convention business at Aria for 2013 remains robust.
  • PREVIOUSLY:  "Looking out for the next two quarters, room bookings [at Aria] are significantly outpacing last year. We expect occupancy in the second quarter to be the highest ever for ARIA driven by continued growth in convention business as our world-class convention space continues to gain traction in the marketplace. Convention business is also robust for 2013."


  • SAME: CityCenter 2Q margins came in at 25.2%
  • PREVIOUSLY:  [CityCenter margin] "You can expect the margin to be about 25%."



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.