- Taxi trips were down 3.3% YoY partly due to two fewer weekend days in July
- Table volume ex Baccarat correlates very highly with taxi activity
- Table and slot volumes are likely to be down YoY but low slot and table hold last year make July a likely positive revenue growth month
Takeaway: Taxi data portends low Strip volumes but hold comparisons are very easy
Takeaway: Healthcare providers are gearing up to take advantage of the influx of Medicare/Medicaid customers.
Consolidation in the healthcare sector is on everyone’s mind today with Aetna (AET) buying Coventry Healthcare (CVH) for $42.08 a share – a 20.4% premium. Our Healthcare Sector Head Tom Tobin is not surprised as he sees further consolidation in the industry as a dominant trend going forward. This morning, Tobin noted:
• Consolidation and government revenue are the last reliable sources of growth, but ultimately lower quality given the volatile political landscape.
• AET’s presentation promotes increased government sourced revenue from Medicare and Medicaid.
• Forecast accretion is meaningful, as are costs, and extends for several years to 2015.
• Only a few consolidation candidates remain: HNT, HUM, CI
The real takeaway here is that Aetna is looking to make a Medicaid/Medicare play. Big government is big business. The company thinks that the Affordable Care Act (aka Obamacare) is going to stick around. This reform will cover millions more people under the government Medicaid umbrella, which bodes well for Aetna and others who are deriving revenues from Washington.
Takeaway: August GGR trending +4-10%
Average daily table revenue jumped to HK$996 million from HK$757 million last week and up 47% YoY. By monthly sequential comparison, ADTR was HK$735 million in July. As a result of the strong week, we are raising our full month August GGR projection to $HK25.0-HK26.5 which would represent YoY growth of 4-10%. We continue to believe that July was the near-term low in terms of YoY growth and growth will accelerate sequentially in August and September.
It’s unclear whether hold played a major role in the week’s strength. We have heard anecdotally that the Mass floors have been very busy. Additionally, the junkets appear to be pretty optimistic about the recent activity.
In terms of market share, MGM and MPEL experienced the biggest jump in market share over the past week. However, both companies are close to recent trend. LVS’s share dipped from last week but is still above its recent trend as is WYNN.
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CLIENT TALKING POINTS
PLAYING GAMES IN EUROPE
Last week, European credit default swaps are tightening because Germany’s Angela Merkel came out and spun some positive commentary about the situation in the Eurozone. In these dog days of summer when everyone is on vacation (including volume and volatility), a little bit of discourse is all it takes to get the market excited. Despite European bank swaps widening across the board (Spain, Greece, Italy, etc.), participants are generally breathing a sigh of relief as Europe all of a sudden becomes “better.” The EUR/USD remains at $1.23. Any higher, and it’ll be a bull case. Break $1.23 and in particular, $1.225, and you have a bear case.
THE NEW ISSUE: BONDS
Bond issuance in 2012 is through the roof – it’s like banks and corporations are reproducing like bunny rabbits and the offspring is multi-year paper. Everyone’s doing it, too and with good reason. Refinance with the Fed’s “extended” low rate environment, crank out muni bonds for projects which in turn create jobs. When money is cheap, might as well use it. Looking at the investor side of things, people are desperately chasing yield. They’ll buy anything offering more than 100 basis points it seems like. When your savings account has been collecting cobwebs for the past 5 years and CDs are as pointless as the media format with the same acronym, you need to get creative. For an idea of just how crazy the bond market has become, check out these facts from our research team:
“Firstly, in the municipal bond market in the United States, as of May, issuance is up 70% compared to the same period in 2011. Secondly, in the U.S. corporate bond market issuance is up 5% year-over-year, but has seen a serious acceleration in the last few months with investment grade issuance up 54% and high yield up 30% in July 2012.”
We won’t gloat long here, especially after booking 7 consecutive winning trades last week in the Virtual Portfolio. Facebook (FB) stock tanked last week. On Thursday, Keith went on CNBC’s Fast Money Halftime Report and basically slammed Facebook, saying it could go lower. “Don’t try to catch a falling knife,” he said. Some guests disagreed and said they’d be buying more at “these levels,” which are the time was around $20-$20.50. Friday the stock fell even further and closed at $19.05 a share. Keith thinks it’s going lower and guess what? It probably will.
U.S. Equities: UP
Int'l Equities: Flat
Fixed Income: Flat
Int'l Currencies: UP
TOP LONG IDEAS
NIKE INC (NKE)
Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.
- 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
“Must. Invent. Products. For. Quantitative. Arbitrage. NASDAQ to create 150,000 Indexes this fall: tinyurl.com/9umevyu $$ #valueadded” -@SalArnuk
QUOTE OF THE DAY
“Money talks, so listen to it.” – 10cc, Art For Art’s Sake (1975)
STAT OF THE DAY
$5.7 billion. The amount Aetna (AET) is offering to buy Coventry Health (CVH) for in cash and stock. The move will boost Aetna’s foray into Medicaid and other government-backed programs.
“This is a serious problem, although it is not as dramatic as sort of an epidemic.”
Author Ian Fleming created James Bond, code named 007, in 1953 and subsequently featured him in twelve novels and two short story collections. Bond was an intelligence officer in the Secret Intelligence Service and a Royal Naval Reserve Commander. Fleming based this fictional character on many of the intelligence officers and commandos he met during World War II. Interestingly, the name James Bond came from American ornithologist James Bond, a Caribbean bird expert and author of the definitive field guide Birds of the West Indies. (Don’t worry, I haven’t read it either.)
Over the course of the Fleming’s twelve novels and the twenty-two James Bond movies (the highest grossing series ever at $4.9 billion), Bond utilizes his astute intelligence gathering capabilities, combined with various gadgets, including an exploding attaché case, to save the world from a myriad of threats. If Bond were a research analyst studying today’s markets, the U.S. bond markets may be considered an emerging epidemic in his analytical purview.
Even if not an epidemic, bond issuance levels this year have been staggering. Firstly, in the municipal bond market in the United States, as of May, issuance is up 70% compared to the same period in 2011. Secondly, in the U.S. corporate bond market issuance is up 5% year-over-year, but has seen a serious acceleration in the last few months with investment grade issuance up 54% and high yield up 30% in July 2012. Finally, according to Lipper Research, bond ETFs have seen the eighteenth consecutive month of net inflows.
So, is there is a bond epidemic / bubble? Given the stance of the global central banks to keep interest rates at artificially low levels, it is likely not an epidemic that is going to end in the short term. In fact, we are actually aggressively allocated to U.S. government bonds as we think equities are at an extreme and growth is continuing to slow. Certainly though, James Bond, the research analyst, would be gathering his intelligence and watching and waiting for an opportunity to sell the high yield bond market.
As we show in the Chart of the Day below, which we have aptly named, From the Central Banks with Love, the high yield market is at a generational low in yield. Obviously when studying a corporate bond, there are a number of factors to analyze in determining whether it is overvalued or undervalued. Certainly, the overall interest rate environment is critical, but ultimately the prospects of the company are the drivers of a junk bond’s value, especially given the bond’s inferior position in the capital structure. Therefore, given that yields in the junk bond market are literally at generational lows, it implies that default risk is also close to an all-time low. Personally, I’d need a few James Bond-esque martinis before I’d believe that last point to be an accurate assessment of default risk.
Speaking of bonds, Der Spiegel reported this weekend that the ECB may set a specific threshold to cap periphery bond yields at its meeting in September. The immediate reaction in the European sovereign debt markets is, not surprisingly, positive as credit default swaps are trading tighter across the board. As well, the Spanish 10-year is back down to 6.19%. Even if positive in the short term, broad intervention in a large market speaks to another epidemic, the epidemic of government intervention in the free markets. Random intervention by governments does not build confidence in the markets. And confidence is what is sorely missing in the European debt markets.
In the latest sign that global growth is slowing, the Shanghai Composite hit a fresh three and a half year low this morning. The Chinese equity markets may not always garner headlines in the U.S. financial media, but nonetheless China remains the engine for global growth and as China goes so goes marginal global growth. Thursday will give us some important insights on Chinese and global growth as flash PMIs are reported for China, Europe and the United States.
Keith is back in Thunder Bay this week taking some time off with his family ahead of what is going to be a busy next few months at Hedgeye, so we will be highlighting some of the key calls from our broader research team this week. This will be kicked off this morning with our Financials Sector Head Josh Steiner and our Retail Sector Brian McGough leading our morning client call at 830 a.m. Email if you like to ask them any questions, or get access to the call.
Although we are currently not short it in the Virtual Portfolio, one of McGough’s favorite short ideas has been J.C. Penney. We’ve been consistently short JCP for the past fifteen months and will likely look to re-short when we see our level. McGough had the following to say after JCP’s recent earnings announcement:
“We won't bother with the full financial review. Comps down -22%, dot.com down 33% and a ($0.67) loss pretty much sums that up.
But that's the past. We invest for the future. One thing that matters in investing for the future is believing in who is running the ship. We initially figured that Johnson's Apple halo would have lasted 18-24 months. But about 5-minutes into his commentary today, his credibility stood up, ran out the door, and got hit by a bus.
Last quarter, his level of arrogance around communicating the message was bothersome. He spoke to the Street like we were toddlers, or at least retail novices. He glossed over the bad, and played up whatever positive statistic he could find. A JV mistake for a new CEO.”
As it relates to CEO Ron Johnson at J.C. Penney, or really any CEO of a large public company, perhaps Ian Fleming said it best when he wrote:
“Once is happenstance. Twice is coincidence. Three times is enemy action.”
Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $110.89-115.21, $82.20-82.89, $1.22-1.24, 1.72-1.87%, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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