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CHART DU JOUR: SEQUENTIAL LIFT

Takeaway: We expect sequential improvement in monthly Macau trends

Macau GGR monthly projections

 

  • We think July was the near-term bottom with only 1.5% YoY growth
  • September and October should be bang up months with the opening of the 2,500 Sheraton rooms at Sands Cotai Central and the associated marketing
  • Investor sentiment should improve around the market and LVS as its share should continue to rise.

 

CHART DU JOUR: SEQUENTIAL LIFT - macau projections


THE WEEK AHEAD

The Economic Data calendar for the week of the 20th of August through the 24th 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.

 

THE WEEK AHEAD - WeekAhead

 


IL VLT UPDATE

Takeaway: IL soon to be a big market for IGT

IL ESTABLISHMENT LICENSING PROGRESSING IN-LINE WITH OUR RECENTLY RAISED EXPECTATIONS

 

 

Yesterday, the Illinois Gaming Board released a list of all licensees as of August 16th.  The list included 180 licensed establishments, implying approval of an incremental 92 establishments in August.  This implies an acceleration over the 70 licenses granted in July.  To date there have been no established licenses revoked and only 8 establishment have been denied licenses. Currently there are 1,770 pending establishment approvals. 

 

Starting in September, the authorities will actively pursue enforcement against locations operating “grey” machines with locations found in violation of the law charged with Felony action.  Therefore, the increased number of locations licensed in August was in line with our expectation of an acceleration of approvals for legal machines. 
 

Each location can have a maximum of 5 machines so 180 approved locations implies a current maximum market size of 900. We expect that about 1,000 VLT's will get shipped to IL in the September quarter with IGT shipping the majority of those machines. Our best guess is that 3,000 VLTs will be shipped to IL in 2H2012, and by the end of 2013, the market should comprise of about 10,000 units.  Given that we are just in the 3rd month of establishments approvals, its too early to say whether these estimates will come to fruition. We expect that the majority of VLTs will be for sale, with manufacturers providing financing to the route operators.  We are hearing that ASP's should be in the mid to high $12k range. 

 

DETAILS ON PENDING APPLICATIONS: 

  • Distributor: 4 (Cadillac Jack IL, Gametech International, Golden Route, PDS Gaming-IL)
  • Manufacturer: 3 (Cadillac Jack, Gametech, Golden Route)
  • Supplier: 7 
  • Technicians: 35 
  • Terminal handlers: 159 
  • Terminal operators: 17
  • Establishments: 1,770 pending 



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The Effect Of Jobless Claims On The XLF

Takeaway: Looking at the $XLF and the past two years of jobless claims, there's a shocking lack of correlation.

 

If you go back to 2007 and look at the relationship between jobless claims numbers and the Financial Sector SPDR (XLF), there’s not to discuss. Relatively little correlation, nothing to write home about. See the chart below for a visualization:

 

 

The Effect Of Jobless Claims On The XLF  - XLF Jobs

 

 

Now, if you examine the last two years only, you’ll find a more shocking correlation – zero. That’s right, jobless claims and the XLF have had zero correlation over the last two years. What does this mean? It means that even though jobless claims have improved over the last 104 weeks, moving from roughly 488k to 355k, there has not been a higher move in financial stocks.

 

 

The Effect Of Jobless Claims On The XLF  - XLF 2years

 

 

As Hedgeye Financials Sector Head Josh Steiner points out:

 

For reference, that same move has driven a 302 point rise in the S&P 500 (+27.4%). Financials have been and should be more sensitive to changes in jobs than other sectors as their primary P&L driver is credit, which reflects frequency and severity of loss. Frequency of loss is driven by newly unemployed people, which is reflected in initial jobless claims.”


Big Bonds

BIG BONDS

 

 

CLIENT TALKING POINTS

 

BIG BONDS

Keith appeared on CNBC’s Fast Money Halftime Report yesterday and discussed why he’s shorting the S&P 500. In a nutshell, August feels a lot like March. And In March, we went bearish on stocks and bullish on bonds. Thus, we are a buyer of Treasuries and have maxed out our fixed-income asset allocation to 33%. It’s increasingly looking like we’re due for a reversal in equities, especially with the VIX coming precariously close to 13. Short SPY, Long TLT is the name of the game.

 

 

MITT’S OUTCOME

Our Director of Research Daryl Jones wrote an interesting piece this morning comparing the (slight) edge that President Obama has compared to Mitt Romney in terms of the polls and the electoral college. The battleground states that Romney will essentially need to win include: Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Virginia, and Wisconsin. Wisconsin may come easier with the addition of Ryan to the ticket. Jones sees voter engagement as a key factor that gives Republicans an edge. This election cycle, the Republicans are certainly giving it their all in an effort to get Romney into office.

 

A USA Today / Gallup poll earlier this week which showed that 74% of Republicans are thinking “quite a lot” about the election, while only 61% of Democrats are doing the same. You never know, but that could make all the difference.

 

 

CAN YOU FIX SPAIN?

Doubtful. Though the 2-year bond yield slide a few basis points (see our State of the Day below), there’s no economic growth occurring in the country. The IBEX is up +7% over the last three days and is up a whopping +30% in less than a month. That’s short term market rallying, but Keynesian stimulus can only go so far for so long. Spain’s long-term TAIL risk line remains intact at 7835 (resistance).

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  Flat

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“We have to find ways to encourage non-violence, compassion and respect for others’ rights to achieve a better world in the future.” -@DalaiLama

 

 

QUOTE OF THE DAY

“We do not know what we want and yet we are responsible for what we are - that is the fact.” – Jean-Paul Sartre

                   

 

STAT OF THE DAY

Spain’s two-year note yield slid 24 basis points, or 0.24 percentage point, to 3.75 percent


FL: Early Read

Takeaway: Solid qtr as FL heads into a more favorable 2H setup. With $3 in earnings power next year, we expect this one to continue to work higher.

 

Solid quarter out of FL coming in at $0.38 (adj.) vs. $0.34E and in-line with our $0.38 expectation. Top-line growth of +7.2% despite a -3.4% Fx hit suggest concerns over European performance are in check. Comps came in at +9.8% slightly higher than our +9% estimate and well above consensus (+7%). We’ll get more color on the call (at 9amEST), but we suspect domestic comps came in LDD offset by a slight drag from the international business. We’ll get the customary month-to-date comp update and expect it to reflect an acceleration in sales headed into Q3. In an effort to keep this in perspective, August is the easiest comp of the quarter up MSD last year with Sept up HSD and Oct up LDD.


Gross margins and SG&A both came in a hair better than we expected. We expect merchandise margin to account for the 8bps differential coming in at a wash instead of a drag as management suggested despite higher costs reflecting the strength of current demand and product. SG&A was tightly managed leveraging 122bps against the highest incremental spend last year. We suspect the marketing costs accounted for the difference, but expect that delta to moderate in 2H as we head into the key BTS and holiday selling season.


Inventories marked the eleventh consecutive quarter of a positive sales/inventory spread flat sequentially with Q1 at +10% despite higher cost inventory. This puts FL in a very good position to manage merchandise margin challenges near-term and is gross margin bullish for 2H.


It’s also worth noting that the 2H will mark the first time since 2006 that FL reported an increase in net store openings reflecting slowing domestic closures offset by continued international growth – a positive tailwind given better productivity.

FL has emerged from a significantly more challenging 1H with flying colors printing earnings +12% ahead of expectations in each of the last two quarters. Headed into the 2H we’re looking at easing compares and a period where we expect more opportunity for upside in performance. With $2.50 in EPS now in view this year, we expect this one to continue to work higher as investors start looking out to $3 in earnings power next year (we’re at $2.86 vs the Street at $2.64) and the multiple begins to reflect the fact that this ship is no longer run by Matt Serra, but Ken Hicks.


Casey Flavin

Director

 

FL: Early Read - FL S

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%
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