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Issac on Path to Shock the Consumer

Takeaway: Isaac does not appear to be a comparable scale hurricane to Katrina, but Isaac will likely drive gasoline prices higher in the short term.

If there is one thing we have noticed about tropical storms and hurricanes, it is that when they are built up aggressively by the main stream media they typically disappoint in terms of their scale.  With comparisons to Katrina, tropical storm Isaac may already be in this category of being overhyped.  Nonetheless, Isaac is on his way and will, at the very least, disrupt oil and natural gas production in the Gulf of Mexico for a period of time.

 

According to the National Hurricane Center (NHC), Isaac is very likely to evolve from a tropical storm into a hurricane over the warm waters of the Gulf of Mexico.  The current projection from the NHC is that Isaac will be a Category 1 hurricane, based on the Saffir-Simpson scale of hurricane activity, with winds between 74 and 95 miles per hour.  Katrina was a Cat 5 storm with winds above 157 miles per hour.  The unseasonably warm temperature in the Gulf of Mexico is the wild card that could strengthen Isaac beyond Cat 1.

 

The computer models being run by the NHC, as outlined in the map below, show Isaac making landfall by late tomorrow evening or early Wednesday morning.   By midday Wednesday, the storm will be fully landed.  The likely landing location is the 300-mile stretch from the bayous of southwest New Orleans to the edge of the Florida panhandle.

 

Issac on Path to Shock the Consumer - 1

 

Even if Isaac does take land as a more moderate storm, it appears to have a similar trajectory as Katrina and may well be on track for New Orleans by late Tuesday or early Wednesday based on its projected speed of 14 miles per hour.  A key risk being touted by the NHC is that Isaac may make landfall coincident with high tide, which would lead to excessive flooding.

 

The larger risk, especially for an increasingly tepid consumer, is the impact of the storm on energy prices over the next couple of months.  As it relates to exposure from Isaac:

  • The Gulf Coast is home to 23% of U.S. oil production and 44% of refining capacity;
  • In total, more than 346 oil platforms (58% of the total) and 41 rigs (54% of total) have already been evacuated;
  • Currently, 1.0MM barrels per day is shut in (78% of GOM oil production) and 48% of gulf natural gas production ; and
  • Based on Hedgeye’s count, more than 1.1 million barrels of refining capacity will be taken offline in Lousiana, including a 490,000 barrel facility in Garyville, Lousville.

On the positive side of the equation, most refiners are built to withstand up to Cat 2 hurricanes.  Therefore, unless Isaac accelerates beyond its current Cat 1 projection, long term damage to refiners or oil production facilities is unlikely.

 

In the chart below, from Forbes, we show the active oil platforms in the Gulf of Mexico.  Based on Isaac’s current path, the storm will travel directly through the heart of the oil producing region of the GOM.

 

Issac on Path to Shock the Consumer - 2

 

In the last chart we highlight the spiking of gasoline prices that occurred in conjunction with Katrina.   Gasoline prices spiked almost 50% and remained elevated for a couple of months.  With national gasoline prices, according to the most recent data from the Energy Information Administration, at $3.72 per gallon, a price shock from this level would be catastrophic for the U.S. consumer.  Undoubtedly, it would also create a very negative situation for the President Obama heading into the November election.

 

Issac on Path to Shock the Consumer - 3

 

So, even if Isaac is being overhyped, the storm’s path and intensity over the next two days will be critical in assessing whether there will be long term damage and subsequently elevated energy prices in the coming months. 

 

 

Daryl G. Jones

Director of Research

 

 

 

 


IDEA ALERT: BUY LVS

Takeaway: A cheap stock with a number of catalysts

Keith bought LVS in the virtual portfolio at $42.05.  

 

 

LVS TRADE range:  $41.99-44.47.  TREND support:  $39.69


LVS is way down off of its $60+ high reached in April of this year owing to a halt in VIP growth in Macau, a rough start from Sands Cotai Central (SCC), and slowing growth in Singapore.  With the stock down 30%, we believe concerns have been adequately discounted in the stock.  However, there are signs that VIP is picking back up in Macau and the SCC performance has improved.  Singapore expectations have moderated to only slight EBITDA growth for 2013 which might actually be too low.

 

The stock trades at 11x 2013 EV/EBITDA, close to a historical low.  Meanwhile, there are a number of positive upcoming catalysts.  The opening of 2,500 Sheraton rooms at SCC should provide a big boost.  Sheraton is probaby the top hotel brand in China and combined with the associated marketing and potential infusion of junket liquidity, should provide more market share juice for LVS as well as grow the market.  Additionally, with its significant free cash flow - enough to easily fund another Cotai project - and low overall leverage, we think LVS could announce a stock buyback.  For the market, look for continued sequential improvement in YoY growth off of the July low.

 

 

IDEA ALERT:  BUY LVS - LVS


MASSIVE INCREASE IN HOLD PERCENTAGE

Takeaway: Mass is on a roll and higher hold is the new normal.

Mass gaming revenue has been on a tear yet visitation growth has been fairly modest.  What’s going on?  Aside from misleading visitation data which we will get to, the Macau Mass tables have been holding at an increasingly higher rate.  As the following chart shows, average Mass hold percentage grew from around 18% in 2Q07 to over 27% in Q2 2012 – and it’s not luck.

 

MASSIVE INCREASE IN HOLD PERCENTAGE - hold

 

So what’s driving hold percentage higher?  The consistency of the up move suggests luck is not a factor.  We believe players are playing longer (more hands) and bringing more cash with them.  Our experience in Las Vegas is that hold moves higher in good economic times and down in bad.  Unlike the VIP business where hold is measured as a % of roll, there is no way to measure roll in the Mass sector so the denominator in the hold calculation is simply cash converted to chips.  So hold will theoretically climb if velocity of play goes up.  On the other hand, if players are cautious they may still take out the same amount of chips but spend less time gambling.  Thus, the denominator would be the same but the player would lose less.

 

There are likely other factors at work driving Mass hold higher.  Refined rewards programs and customer database marketing have been providing more and better incentives for longer play.  A better mix of higher end players also helps.  We’ve seen this occur in other more mature markets as well. 

 

Higher hold is not the only driver.  As seen in the above chart, estimate Mass volume has been growing nicely, albeit below the rate of revenue growth.  Yet visitation growth remains modest as shown below:

 

MASSIVE INCREASE IN HOLD PERCENTAGE - visit2

 

So what’s causing this phenomenon?

  • Higher Mass hold percentage discussed above
  • Hotels running at high capacity on the weekends so lower-end Mass getting shut out
  • Better yield management from the casinos so lower-rated players getting less
  • Higher table minimums – both City of Dreams and Galaxy Macau have successfully pursued this strategy to focus on the Premium Mass business
  • More of a Mass to VIP mix in the hotels – again a yield management strategy which improves margins
  • Visitation data is not perfect – we’ve heard that the Macau government has cut down on its citizens crossing the borders for short visits to buy cheaper goods.  Visitation data reflects re-entry back into Macau.  Also potentially impacting visitation is fewer visas available for tour groups that are primarily non-gaming visitors.
  • Visitation from outer provinces is growing but lower-end players in the close-in provinces are getting shut out due to yield management

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Now What? SP500 Levels, Refreshed

Takeaway: Now What? Sometimes the answer to that question is another series of questions.

POSITIONS: none in Sector or US Equity Index ETFs

 

Now What? Sometimes the answer to that question is another series of questions.

 

Will we continue to make lower-highs? What if we make a higher-high on no-volume? What if Bernanke drives for Oil $150 and a Weimar #GrowthSlowing redo?

 

I don’t know. From a US Equity beta risk management perspective, all I can tell you is where I buy/cover and where I sell/short.

 

Across the core durations in our model, here are the lines that matter to me most: 

  1. Immediate-term TRADE overbought = 1419
  2. Immediate-term TRADE oversold = 1402
  3. Intermediate-term TREND support = 1389 

Simplicity born out of complexity.

 

The Fed, ECB, and their Bailout Beggars would have to embrace uncertainty before accepting how chaos theory drives our real-time decision making.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Now What? SP500 Levels, Refreshed - SPX


European Banking Monitor: Moving Away From Risk

Takeaway: Germany, France, Italy and Spain all saw material widening in their sovereign swaps last week. Winners were Portugal and Ireland.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

* Europe takes a breather from its rally. Germany, France, Italy and Spain all saw material widening in their sovereign swaps last week. Rising uncertainty around both Germany's economic health and Spain and Italy's ability to manage through the crisis without recession-inducing austerity commitments weighed on the continent's outlook. The relative winners this week were Portugal and Ireland. Portuguese and Irish sovereign swaps tightened by 53 bps and 8 bps, respectively.

 

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If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

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Security Market Program – For the 23rd straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 8/24, to take the total program to €208.5 Billion.

 

Following President Draghi’s conference call remarks on 8/2 in which he addressed rising yields in the periphery and said that the ECB “may undertake” non-standard  measures, the market continues to be disappointed – there has been no buying.

 

We also think it’s unlikely that we’ll get definitive color on secondary peripheral buying at the ECB’s next meeting on Thursday 9/6, however this is the next immediate catalyst. Instead, we expect Draghi to be on hold with rates and will likely not act (buy) until after there’s clarity from the German Constitutional Court’s decision on the ESM and fiscal compact on 9/12. Improving preliminary PMIs from Europe and the CPI on hold at 2.4% help support this position.

 

European Banking Monitor: Moving Away From Risk  - aa. smp

 

European Financials CDS Monitor German bank swaps widen while Spanish bank swaps tighten. 

 

European Banking Monitor: Moving Away From Risk  - aa. banks

 

Euribor-OIS spread – The Euribor-OIS spread tightened by 4 bps to 22 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Moving Away From Risk  - 11. euribor

 

ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Moving Away From Risk  - aa. facility


SOLID WEEK IN MACAU

Average daily table revenues were a strong HK$775 million last week, down from the HK$996 the prior week, but the 2nd highest since Golden Week in May.  For the full month of August including slots, we have narrowed our projection range to HK$25.5-26.0 billion, up 6-8% YoY.  We continue to believe that July marked the low of the year and September YoY growth should be better than August.  We are hearing of a little more liquidity for the junkets here in August and more activity on the Mass floor.  Obviously, we are closely monitoring the China macro situation.

 

SOLID WEEK IN MACAU - macau1

 

LVS lost share in the past week, probably due to hold, but its share is in-line with the 3-month average.  We expect share to go back up even before the September 20th opening of the Sheraton rooms.  MPEL seems to be having the best month of the bunch when measured by market share gains. 

 

SOLID WEEK IN MACAU - macau2

 


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 80.33%
  • SHORT SIGNALS 78.49%
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