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MACAU: COMMISSIONS TICK UP

Junket commissions remain consistent but all-in commissions tick up

 

 

The data is in.  Once again, we have seen a sequential uptick in all-in commissions, from 2H11 to 1H12.  Whether we look at commissions as a % of win or as a % of RC, the conclusion is the same.  However, we would argue that % of win is a more relevant metric since the majority of junkets and almost all the large ones are paid on a revenue share basis.

 

The charts below show the composition, by company, of all-in commissions among the straight junket commission, the rebate that goes back to the player, and non-gaming giveaways.  The first analyzes the dynamics on a revenue share basis, the second as a percentage of rolling chip.  

 

Main takeaways:  

  • The gap between the lowest and the highest all-in commission rate widened to 4.95% in 1H12 from 3.97% in 1H11 on a % of win basis and to 34bps from 22bps on a % of RC basis.  We believe this is directly a result of increased competition.
  • WYNN remains the least aggressive in its commission policy.  From 2008 to 1H11, the spread between the average all-in commission rate paid by WYNN vs. average of LVS, MPEL & MGM narrowed from 7.81% to 2.67%.  It gapped out again to 3.79% in 1H12.   
  • MPEL still offers the largest junket commission but until 1H12, they consistently had the lowest comps on non-gaming amenities.  That changed this interim period with non-gaming comps increasing to 3.68% of win up from 2.56% in 1H11 and 2.62% for all of 2011.  MPEL maintained one of the lower rebate rates which is surprising given the relatively large direct premium play business at City of Dreams.

Other observations:

  • Rebate rates
    • The average rebate rate for 1H12 was 32.8% (as a % of win) or 97bps (as a % of RC) vs. 32.3%/94bps in 1H11
    • WYNN had the lowest rebate rate in 1H12 at 30.2%/81bps
    • MGM had the highest rebate rate in 1H12 at 34.6%/121bps
  • Junket commission  
    • The average junket commission increased 2% in 1H12 vs 1H11 on a % win, and 4% on a RC basis to 8.2%/24bps
    • WYNN continued to offer the lowest commission rate  of 7.1%/19bps
    • MPEL continued to offer the highest commission rate of 9.2%/27bps
  • Comped non-gaming amenities
    • The average non-gaming comps increased 14% in 1H12 vs 1H11 to 4.5% as a % of win and to 13bps as a % of RC.
    • For a change, MGM offered the lowest comps at a rate of 3.25%/10bps
    • LVS continued to offer the highest comps at a rate of 5.85%/17bps, which is not surprising given that they have the largest % of their revenue base coming from non-gaming amenities.
  • The all-in commission rate
    • The average all-in commission rate increased to 45.53% in 1H12 from 44.35% in 1H11 on a % of win basis and from 1.29% to 1.35% on a RC basis
    • On a % of win basis, LVS paid the highest all-in rate at 49.2% in 1H12
    • On a % of RC basis, MGM was the biggest spender at an all-in rate of 1.48% in 1H12
    • WYNN held the line at 42.69%/1.14% in 1H12

MACAU: COMMISSIONS TICK UP - commission3

 

MACAU: COMMISSIONS TICK UP - commission1

 

MACAU: COMMISSIONS TICK UP - commission2


A Deceptive Rally

 

Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money this evening to discuss market moves and what lies ahead over the coming weeks. Mario Draghi’s announcement that the ECB would participate in “unlimited” bond buying was the de facto catalyst for today’s massive rally in US stocks. Keith believes this one day rally is not an indicator of things to come, however. If tomorrow’s jobs report is positive, the US dollar could catch a bid.

 

Sell the losers, ride the winners and remind yourself that growth continues to slow as evident in this week’s FedEx announcement and performance of cyclical names. Watch the above clip for Keith’s take on the market and more.


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance

Takeaway: Beef prices are likely to trend higher for the long term $BLMN $TXRH $WEN $JACK

Beef was the outlier, versus other food commodities, over the last week as it gained 5.8%.  Grains also dropped over the past week on Hurricane Isaac bringing rain to some, but far from all, states affected by drought in the U.S.  However, it seems that downside may be limited as futures trading suggests that the market is betting on demand accelerating for grains on the back of the past two weeks’ price declines.  Coffee prices continue to decline as supplies, on a global basis, seem abundant.  Output in major coffee producing countries, such as Brazil, as well as inventory levels, are indicative of abundant supply which should help maintain a favorable cost environment for the coffee chains over the next year or so.

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - commod

 

The Drought

 

Drought in the U.S. captured the attention of investors this summer as it drove grain prices dramatically higher.  It seems that the knock-on effects of the drought are likely to be long lasting.  The U.S. Drought Monitor’s latest weekly report was released this morning and indicated that Hurricane Isaac had brought some relief to some afflicted areas but others actually deteriorated over the last week.  Oklahoma’s drought condition actually worsened.  States towards the eastern part of the corn belt showed drastic improvement; nearly half of Arkansas was in the most extreme drought condition last week but, by this morning’s reading, that percentage is down to 12%.   Illinois, Indiana, Kentucky, Missouri, and Ohio all saw improvements in drought conditions due to Isaac.

 

 

Where’s the Beef?

 

Last year’s drought had an impact on the supply of beef within the U.S. and, far from allow farmers to embark on the path to replenishing their herds, 2012 has proven to be even more challenging.  Now, it seems more certain that livestock supply may be impaired for years as higher grain prices continue to take a toll on chicken, beef, and pork processors.  Beef costs have not risen in step with grain prices as more cattle have been pushed to the feedlots, but increased herd culling is likely to maintain the negative trajectory in beef supply.  Longer-term, this will likely pressure the operating margins of companies with exposure to beef costs.

 

 

Select Company Guidance

 

WEN:

  • Total commodity basket +4-5% in 2013, beef a “big part” of that increase
  • Mgmt’s conversations with experts takeaway: long-term supply-demand imbalance
  • Beef is 20% of WEN spend

BLMN:

  • Basket expected to gain 3-4% for FY12, including 10% gain in beef prices
  • Beef prices expected to gain 10% in FY13 again
  • Beef is 30% of BLMN spend
  • Company believes it has room to take more price at Outback, currently at 1-2% range

JACK:

  • Beef costs expected to be sequentially higher from where they were most recently (+5% yy)
  • Lapping elevated beef costs in 1QFY13 (Dec) and 2QFY13
  • Beef is 20% of JACK spend

 

Macro Callout

 

As we did last week, we are calling out gasoline prices again as the year-over-year increase seems likely to grow at least over the near-term.   For Cracker Barrel and, to a lesser extent, other casual dining chains, this is a very important driver (or destroyer) of demand among consumers, on a year-over-year basis.

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - gasoline

 

Correlation


 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - correl

 

Charts

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - crb foodstuff

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - corn

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - wheat

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - soybeans

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - live cattle

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - chicken whole breast

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - chicken broilers

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - chicken wing

 

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COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - milk

 

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - cheese

 

<chart15>

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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.

GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY?

Takeaway: Global inflation readings are likely on the rise over the intermediate term.

SUMMARY BULLETS:

 

  • While we aren’t necessarily calling for a demonstrable uptick yet, we do anticipate that reported inflation statistics will trend higher over the intermediate term.
  • Monetary easing out of both the ECB and Federal Reserve is likely to continue to be bearish for the USD and bullish for commodity prices – the former over the most immediate of TRADE durations and the latter over the TRADE and TREND durations.
  • Over the long-term TAIL, however, Europe’s monetary expansion and economic stagnation is likely to continue narrowing the spread between traditional EUR and USD fundamentals and that should continue to weigh on EUR/USD cross.

 

VIRTUAL PORTFOLIO POSITIONS: Long the US dollar (UUP); Short the euro (FXE).

 

IS THE GLOBAL TREND OF REPORTED DISINFLATION OVER?

In recent research notes, we’ve been calling for the economic tailwind of reported YoY disinflation to end as of JUL/AUG CPI readings. That is precisely what we’ve seen across a handful of economies in Asia and Latin America – where a growing multitude of central banks have already suspended their easing biases.

 

  • Of the handful of AUG CPI reports that have been released across Asia and Latin America to-date, Australia, Philippines, Taiwan, Brazil, Colombia and Peru all reported accelerating YoY readings; Thailand and Indonesia’s YoY readings were flat MoM, suggesting a bottoming process is underway.
  • Over the past month, the benchmark policy interest rate has only been reduced in only two of the 21 countries we actively follow across both regions (Brazil and Colombia). A few of our competitors have consistently alluded to “globally coordinated easing” in support of their bull theses; unfortunately, the data no longer supports this claim.

 

In the following chart, we take the YoY percentage change of monthly average prices across a variety of commodity markets and indices. From this, we are able to demonstrate that the trend of commodity price disinflation/deflation peaked in JUN. Moreover, in holding the current average for SEPT flat through year-end (a generous assumption given the threat of more central planning), the slope of the aforementioned YoY trends is demonstrably hawkish and will act as a tailwind for directionally-hawkish global CPI readings, on the margin, throughout 2H12 and 1H13. As always in Global Macro, what matters most occurs on the margin.

 

GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY? - 1

 

In the following chart, we plot our arithmetic mean (yellow line from chart above) against the median YoY CPI reading of the US, Eurozone and China and the relationship is both obvious and tight. Interestingly, you can see that commodity price pressures have gone from being largely coincident with these readings in early 2010 to leading by 1-2 months – which is precisely what we’d expect, given the role of commodity prices across global supply chains.

 

GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY? - 2

 

Net-net-net, our conclusions from the aforementioned data analysis are two-fold:

 

  1. Global commodity prices were supportive of reported disinflation, globally, up until JUL/AUG ‘12. Now commodity price trends are supportive of hawkish CPI readings, on the margin.
  2. The more central planning that continues to get priced into commodity markets (particularly food and energy prices), the more hawkish global CPI readings will become over the next 3-6 months. The Chinese know this and explicitly highlighted this risk in the PBOC’s latest quarterly monetary policy report.

 

We’re early in calling for this fundamental inflection point, just as we were early in 4Q10 making our post-QE2 call “Growth Slows as Inflation Accelerates” [globally]. We were also ahead of this current trend of reported disinflation with our theme “Deflating the Inflation” (introduced in 2Q11). We expect to be out front in preparing for the turn this time around as well, as our process has not changed. That’s certainly a lot more than we can say about the consensus bull case over the past few months.

 

ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY?

The fact that the EUR/USD cross traded up into and through Draghi’s aggressive attempt to counter market fears of the “reversibility of the euro” speaks volumes to how a throng of market participants may be trading the euro – on fear, not fundamentals. While certainly difficult to quantify, there is an argument to be made that a large number of EUR short positions across the hedge fund universe are betting on the currency’s ultimate demise.

 

GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY? - 3

 

If this wasn’t the case, it can also be argued that the market might otherwise be positioned net long of the EUR, as it remains a more sound currency than the USD on traditional fundamental metrics (monetary and fiscal policy; balance of payments). Moreover, the Eurozone has maintained its fundamental advantage even throughout its current financial and economic crises!

 

GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY? - 4

 

GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY? - 5

 

GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY? - 6

 

Consider two mature companies, A and B, where Company A has substantially healthier operating margins and posts greater returns on equity and assets, but is a candidate for bankruptcy because it can’t rollover its debt due to its creditor(s) being in financial distress. Absent the bankruptcy risk, we’d argue that the vast majority of investors would favor “Company A” over “Company B”. Moreover, we think there is a reasonably large segment of the multi-trillion dollar FX market that sees the EUR as “Company A”. Jim Rickards, author of Currency Wars and recent co-host of a Hedgeye Macro conference call falls squarely into this camp.

 

That being said, however, we are well aware that markets rarely, if ever, trade purely on their trailing fundamentals; expectations, fear, greed, sentiment and liquidity all play a major roles in price formation. In this vein, we argue that one cannot simply ignore the “bankruptcy risk” embedded in Europe’s common currency. As our European analyst, Matt Hedrick, routinely highlights in his research, the economic and social divides between Europe’s core and the peripheral countries aggressively call into question the sustainability of the euro experiment.

 

Net-net-net, given its obvious fundamental advantages, anything the Eurocrats do to protect the EUR from going away or at least to extend its shelf life is likely to continue to be bearish for the USD over the TRADE duration – even if their strategies involve monetary expansion! From a TREND and TAIL perspective, the aforementioned fundamental advantage could obviously inflect to the USD’s favor if a Strong Dollar = Strong America message is adopted by US policymakers or if the Eurocrats ever decide to pull the plug on the common currency (an outcome we do not currently view as probable).

 

The key takeaway from our thought experiment is that the monetary easing out of both the ECB and Federal Reserve is likely to continue to be bearish for the USD – the former over the most immediate of TRADE durations and the latter over the TRADE and TREND durations. Over the long-term TAIL, however, Europe’s monetary expansion and economic stagnation is likely to continue narrowing the spread between traditional EUR and USD fundamentals and that should continue to weigh on EUR/USD cross.

 

Darius Dale

Senior Analyst


When Schwab Sells

Takeaway: Chuck Schwab's recent insider selling of $SCHW stock is a warning sign that the stock may encounter trouble very soon.

Insider transactions can be a barometer of what’s to come vis-à-vis stock price movements and company health. In the last five years, Charles Schwab (SCHW) founder Chuck Schwab has sold off several large blocks of stock. In 2012, he's made 3 significant sales. He sold $55.5 million in April, 2012 preceding a 15% drop over the next 6-7 weeks, and in July and August of this year sold a further $30 million, bringing his April through August, 2012 sales to $85.5 million.

 

We’d say this is a clear warning sign of things to come and the outlook for the back half of 2012 for SCHW. He has a solid track record of getting rid of stock before significant sell offs and his latest transaction appears to be no different.

 

 

When Schwab Sells - chuckschwab Selling

 


CHART DU JOUR: BYI RECEIVABLES

IGT remains the least aggressive

  • Closing the circle of examining customer financing by the suppliers, BYI is more aggressive than IGT but way below WMS in terms of financing to its customers
  • Given BYI’s large systems business, some of the trade and notes receivables also represents consumer financing for that segment.  This inflates the receivable size vis-à-vis product sales.
  • BYI's use of financing has generally been on an up trend although this past quarter was slightly down sequentially

CHART DU JOUR:  BYI RECEIVABLES - BYI


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