Takeaway: Higher margin slots and Mass significantly outpacing VIP

  • While August VIP improved on July, it was still slightly down
  • Mass continues to crank despite China’s economic difficulties
  • Slots becoming a real contributor to profits




Takeaway: Global growth is slowing at an accelerating rate.



  • With the inclusion of this morning’s swath of global PMI data, we continue to receive confirmation that our call for global growth to slow is proving accurate.
  • Looking ahead, we see the confluence of downside risks to growth as being both more probable and more impactful over the intermediate term.
  • Those risks include, but are not limited to: Fed policy-sponsored commodity price inflation; a renewed debt ceiling debacle in the US and a potential government shutdown in Japan – the world’s third largest single-nation economy; inadequate Fiscal Cliff resolution; and a continued deceleration in global industrial production as Chinese policymakers surprise consensus expectations for economic stimulus to the downside. Further austerity measures and/or financial market contagion is likely to continue weighing on the slope of European growth as well.
  • From our purview, the key question to debate from here is not whether policymakers are poised to deliver more [failed] stimulus policies, but rather if the reflexive and interconnected nature of the global economy starts to perpetuate an acceleration to the downside with respect to real GDP growth over the intermediate term.  


Each month as a small part of our rigorous Global Macro research process, we amalgamate a broad sample of global PMI readings to get a data-driven sense of how global growth is trending on a sequential basis. The analysis includes 23 readings from 14 countries and/or economic blocs and we measure the absolute level of the indices and the sequential deltas on a median basis to produce a top-down look upon trends across the global economy.


As we allude to above, global growth continues to slow and the median reading of 48.6 (from 49.3 in JUL) implies that global growth broadly slowed at an accelerating rate in AUG. Only the US’s ISM Non-Manufacturing Index isn’t included in the current sample (to be released tomorrow at 10AM); there is a fair amount of risk that it surprises consensus expectations of a -0.1 point decline to the downside, especially in the context of an +8.7% rip in the average national retail price for gasoline during the month.




Looking to the future, weakness across several key New Orders indices implies to a degree that there is additional contraction to come in the coming months, absent a rebound in end demand over the immediate-to-intermediate term – something our team does not view as a probable event. The respective New Orders Index has been sub-50 for three consecutive months in the US, for four consecutive months in China and in back-to-back months in Singapore. Furthermore, each country posted the lowest reading in AUG in its respective cycle (US’s lowest since APR ‘09, China’s lowest since NOV ’11 and Singapore’s lowest since JAN ’12).




All told, the evidence supports our bearish thesis on global growth and we continue to warn of downside risks to global economic growth with respect to the intermediate-term TREND. Moreover, we don’t view the widely-held “it’s contrarian to be bullish” stance as anything more than a broad-based attempt to reckon with the cognitive dissonance that is a result of investors being bullishly positioned on US equities in the face of consistently-bad economic data.


For a refresher on our TREND and TAIL thoughts on global growth, please refer to the following notes:


  • DEBUNKING THE STRUCTURAL BULL CASE (8/15): We see downside risk in the US equity market over the intermediate term as the structural bull thesis is riddled with shortcomings.
  • THINKING OUT LOUD RE: GLOBAL GROWTH (8/10): New data points, including negative revisions to the official growth forecasts out of Singapore and Hong Kong, affirm our bearish conviction on the slope of global growth with respect the intermediate-term TREND duration. Applying a longer-term lens, would argue that the incessant policy responses out of the global central planning cartel over the last ~5yrs have set us up for broadly weak economic fundamentals for the foreseeable future.
  • ARE US EQUITIES SUFFERING FROM COGNITIVE DISSONANCE? (8/8): We see a similar see a similar pattern in consensus storytelling and a similarly-asymmetric price setup as we did in the previous occurrences of our being bearish at cyclical tops in the US equity market and “risky assets” broadly (1Q08, 1Q10, 1Q11, 1Q12).
  • GLOBAL G/I/P UPDATE: THREE QUICK HITS FOR THE ROAD (8/3): Global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.
  • CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY (7/25): We continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations. Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently.
  • HAVE US CORPORATE EARNINGS GONE TOO FAR? (7/20): When analyzed outside the vacuum of short-termism associated with quarterly reporting, US corporate profit margins appear particularly overstretched – from both an operational and a social perspective. This has potentially dire implications for corporate earnings growth over the long term.


Darius Dale

Senior Analyst

Lower Highs: SP500 Levels, Refreshed

Takeaway: The storytelling out there on why the market isn’t going straight down is fascinating.

POSITIONS: Short Small Caps (IWM)


The storytelling out there on why the market isn’t going straight down is fascinating. It was in mid-March too. Growth is slowing, globally, at an accelerating rate (inflation policies do that) and the only big part of the bull case that’s left is bailouts.


All the while, like it did in March-April, the broader market continues to make lower-highs on lower and lower volumes. Imagine they took APPL out of the SP500; then the storytelling would get really good.


Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1407
  2. Immediate-term TRADE support = 1401
  3. Intermediate-term TREND support = 1367


In other words, provided that 1401 holds, the market’s range can easily remain tight (1). That 17 point range is less probable on a close below 1407; and a close below 1401 puts 1367 in play, faster.


Central planning is so exciting!



Keith R. McCullough
Chief Executive Officer


Lower Highs: SP500 Levels, Refreshed - SPX

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The Relationship Between TMO and FDX

Takeaway: FedEx's revised quarterly outlook spells trouble for TMO as global shipping volumes decrease.

FedEx (FDX) slashed its quarterly outlook yesterday, citing the global economic slowdown as a catalyst for slowing growth. That made us look at the relationship between FedEx shipping volume and Thermo Fisher Scientific’s (TMO) industrial focused Analytical Instruments business. With TMO shares up +27% year-to-date and up +16% alone in the last 3 months, the company is vulnerable to a move to the downside.


In the FedEx press release, FedEx only commented on their earnings guidance which they reduced to $1.37-$1.46 from their June guidance of $1.45-$1.60.  With the off-month reporting, we looked at both FedEx as a leading indicator for TMO (0.78 correlation) and peer UPS coincidently, (0.73 correlation). Take a look at the two charts below. Both the FDX and UPS charts show a decline in both business segments from Q212 onward.



The Relationship Between TMO and FDX - TMO FDX



The Relationship Between TMO and FDX - TMO UPS



If shipping volumes are the indicator of what’s to come, things are not bright for TMO going forward. We are currently short TMO in our Healthcare position monitor.


Takeaway: LVS looks great over the trade and tail durations.

Keith bought LVS in the virtual portfolio at $40.93   



LVS is way down off 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 price cut by a third, we believe concerns have been adequately discounted in the stock.  However, there are signs that growth is picking back up in Macau and that SCC's performance has improved.  We believe September Macau GGR growth will accelerate sequentially from August's +6% and July's +2%. 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 starting September 20th.  Sheraton is probably 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.   



STRIPPING: Is Las Vegas Back On Track?

Takeaway: Paying attention to slot metrics from the latest Strip data, Vegas has a ways to go before it's truly back on track.

Nevada’s July revenue data is set to drop next week and at first glance, gaming revenue will look strong. This would normally be a positive after continuously tepid numbers coming out of Las Vegas over the summer. But ultimately, our Gaming, Leisure and Lodging team believes slots are the most important metric that reflects Vegas growth and we expect another decline in the numbers on a year-over-year basis.


Slot data has been negative since April and July should represent the fourth straight month of consecutive declining slot volume in a period where the Vegas strip should be recovering. That certainly doesn’t work in favor for companies with high exposure to Vegas numbers like MGM Resorts (MGM).



STRIPPING: Is Las Vegas Back On Track?  - July Vegasstrip