The Macau Metro Monitor, October 12, 2012




Sands China welcomed 1.19 million visitors during Golden Week, a 39% increase YoY.  Occupancy was 100%.  



S'pore GDP in 3Q fell 1.5% QoQ in-line with a Bloomberg News Survey estimate of -1.6%.  On a YoY basis, the economy grew 1.3%.    The Trade Ministry maintained their stance of a modest and gradual appreciation of the local dollar.  “For the rest of the year, growth could be weighed down by the subdued global economic conditions. Expansion in transport engineering and construction will help counter the impact of a slowdown in advanced economies on manufacturing and wholesale trade, and the Singapore economy “remains on track” to grow by 1.5% to 2.5% this year, said the Trade Ministry.



Prime Minister Lee Hsien Loong said his government is still "watching anxiously" the social effects of the integrated resorts in Singapore, even as the resorts have proven successful in terms of business, government revenue and urban planning.  "From a social point of view, we would like to say that it has been alright, but it is early to say, because the casinos have been operating only for two years and a half."  Lee noted that the share of Singaporean casino-goers has stabilized at 1/4, "which is about what we have expected".  The total amount of gambling has stayed about the same after the casinos opened, but the amount of compulsive gambling - "the very extreme cases" - has increased slightly, he added.







The Oracle of Delphi

This note was originally published at 8am on September 28, 2012 for Hedgeye subscribers.

“A great number of people think they are thinking when they are merely rearranging their prejudices.”

-William James


In investing, there is no hiding from your prejudices.  If your prejudices trump your intellectual honesty, then you probably won’t be in this business for long, regardless of whether you are on the sell side, buy side, or the dark side.


Since it is political season in the United States, prejudices are as heightened as they have ever been.   Unfortunately, the nature of the two-party system in the United States has evolved to a state where supporting the party trumps rational analysis.  The political overlords speak and those who are politicized vote according to party lines. But I digress . . .


In reference to the title of this note, the Oracle of Delphi was an ancient Greek figure that was at the height of power around 1600 B.C.  She supposedly spoke for Apollo and answered questions for the Greeks, and foreigners, about many topics including: colonization, religion, war, and power.  The Oracle purportedly knew all and people listened.


For a period of time, the Oracle exerted disproportionate influence over the Greek world and was consulted before every major decision.  Obviously, most of us do not run our organizations or investment teams based on the proclamations of an oracle.  And thank goodness for that. 


Ironically, one of the most effective decision making methods is called the Delphi technique, which involves assembling viable options that are then voted on independently until a quorum is reached.  As Michael O’Malley wrote in a recent blog for the Harvard Business Review:


“As the Marquis de Condorcet ( showed (in the collective wisdom proof), good, unbiased decisions are made if a solution space is well sampled and the final judgment is determined by independent decision-makers. One of the attributes that determines the range of options that bees ultimately consider is genetic diversity. The greater the diversity in the bees' DNA, the more sensitive they are to different conditions and circumstances, and the more options the hive is able to gather. More diverse hives are better at everything and more productive than less diverse ones.”


Thus, the key to effective decision making is to assemble a group of diverse individuals with independent voices. 


The Federal Reserve does not exactly fit this mode as highlighted by the backgrounds of the current board members:


-          Chairman Ben Bernanke – formerly a professor at Princeton and a Ph.D in economics;

-          Vice Chair Janet Yellen – formerly a professor at Berkeley and a Ph.D in economics;

-          Elizabeth Duke – formerly a senior banking executive at various regional banks;

-          Daniel Turollo – formerly a professor at Georgetown and a law degree from Michigan;

-          Sarah Raskin – formerly Commissioner of Financial Regulation for the State of Maryland and law degree from Harvard;

-          Jeremy Stein – formerly professor at Harvard with a Ph.D in economics; and

-          Jerome Powell – formerly Assistant Secretary of the Treasury and law degree from Georgetown.


Clearly, the nature of the Federal Reserve board is more akin to a group of oracles than a manifestation of the Delphi technique.  The key error we’ve made in assessing the Fed’s willingness to continue to ease is that we believed they were “in a box” due to the data and the political cycle.  Groupthink, of course, is not always rational.


Regardless of whether we agree or disagree with the Fed, we are back to playing the game in front of us.  Printing money is inherently an inflationary action and will ultimately slow growth.  As we have seen this year, printing money will also inflate equities until the printing presses stop or they get trumped by growth and inflationary concerns.


On the growth front, yesterday the durable goods report dropped -13.2% in August from the prior month.  Largely, this was driven by a drop in aircraft orders, so there is probably a one-time negative and likely non-reoccurring factor here,  but still it is what it is . . . pretty negative.


As it relates to currency, the Chinese yuan hit a new record versus the dollar this morning at 6.2856.  The pundits are speculating that this is due to strong corporate demand and financial institutions getting out of short positions ahead of the week long Chinese holiday.  While Hedgeye won’t be taking a holiday next week, our man on China, Darius Dale, will be writing the Early Look next week to give an update on China.


Needless to say, we are still on the sidelines as it relates to the world’s second largest economy.  We are also on the sidelines as it relates to the idea that we will see meaningful stimulus from the Chinese in the short term.  Despite this, the Shanghai Composite was up another +1.4% today on the back of being up +2.6% yesterday.  Up +4% in two days is solid, but the anecdotes from China continue to be negative.  On the back of Caterpillar saying construction demand was down -40%, we have Nike saying this morning that demand is worse than expected.


Anemic demand from Chinese is crushing the U.S. coal market.  Currently, metallurgical coal from the Appalachian region is trading hands at $52 or so, while it costs $65 - $75 to produce.  Given these economics it is no surprise that we have recently seen a bankruptcy in the sector with Patriot Coal recently filing for Chapter 11.  In our Q4 themes call next week, we will be discussing more companies that have bagel (bankruptcy) risk.


Regardless of potential bagels, we have plenty of long idea and I’ll send you into the weekend with a couple of our top ones:

  1. Las Vegas Sands (LVS)
  2. Urban Outfitters (URBN)
  3. Paccar (PCAR)

Ping for details.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1769-1785, $111.44-113.17, $79.36-80.36, $1.27-1.29, 1.61-1.71%, and 1434-1453, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Head of Sales and Research


The Oracle of Delphi - Chart of the Day


The Oracle of Delphi - Virtual Portfolio

Beating The Street


Earnings Season truly kicks into full gear with JP Morgan (JPM) and Wells Fargo (WFC) reporting tomorrow morning. Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money this evening to discuss financials, earnings and what the future of the market might hold for investors.


Technology is also becoming worrisome for traders with the Technology SPDR (XLK) down -3% for the month of October and Apple continuing its decline, down -10% from the “Bernanke Top.”


Watch the video posted above for Keith’s full take on the market.

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Risk Managed Long Term Investing for Pros

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Takeaway: $JPM - It looks to us like the company will beat estimates by 4-8 cents net of one time items and DVA, primarily on reserve release (again).

This note was originally published October 11, 2012 at 13:48 in Financials

Key Drivers of the Quarter:


* NIM - Consensus is too bullish. Consensus is looking for 2.46% vs. last quarter's 2.47%. This may be optimistic. In the chart below we take a look at the trendline in JPMorgan's net interest margin since 1Q10. It's been decreasing at a rate of 8 bps per quarter, and should be at 2.39% in 3Q12. We realize the company chalked up a portion of 2Q12's NIM decline to hedge ineffectiveness that should reverse in 3Q. That's possible, and clearly what the street has modeled, but it's also possible that the ongoing QoQ compression in the yield curve robs them of another 8 bps. 




* Loan Growth - Consensus may be too bullish. Consensus is looking for 1.56% sequential loan growth, whereas the trend line would suggest 0.85% QoQ growth. It's certainly possible that the company could have chosen to originate and retain a larger amount of mortgages this quarter. It would make sense to do so - it would help both their NIM and loan growth, and they certainly wouldn't have had to compete aggressively to do so with mortgage volume up 70% YoY in 3Q. That said, the trendline suggests that Consensus is looking for roughly double what the company has delivered in the last 8 quarters.




* Net Interest Income - Consensus is too Bullish. With margin and loan growth expectations rather high, we think the product of those two variables is also too high. Consensus is modeling $11.32 billion in net interest income, but if we're right on margins (down 8 bps QoQ) and loan growth (+85 bps QoQ) then NII should look more like $10.84 billion. That shortfall of $478 million equates to around 8 cents per share after-tax. A more simplistic approach of just trend-lining the NII yields a slightly less pessimistic scenario of -$270 million, or 4-5 cents per share after tax (we show this in the chart below). 




* Non-interest Income - Unclear. Consensus is looking for $13.02 billion, which is up $2 billion from $11.03 billion in 2Q12. Obviously the big wildcard here is how much is being modeled for further CIO losses and how much will there actually be. The company has said to expect another $1.7 billion in losses in a worst case scenario. It's unclear what the street is modeling on this line, making apples to apples comparisons difficult. Mortgage banking will be the other line that should show notable sequential change. We're estimating mortgage banking revenue may be higher by $250-500 million sequentially. Given the uncertainty around CIO, we think investors will be focused on the core numbers here. Outside of a potential CIO surprise (up or down), we see little reason to think non-interest will be a disappointment vs. expectations this quarter.


* Credit - Consensus is too Bearish. Consensus is looking for $1.37 billion in provision expense and $741 million in reserve release. As we published in our H8-based sector preview a few days ago, we think the Street is underestimating reserve release by almost 60%. Collectively, the street is looking for $2.3 billion in reserve release, whereas the H8 is suggesting a number closer to $5.4 billion. If we assume that as a proxy for JPMorgan, then the actual reserve release should be closer to $1.7 billion, or roughly $1 billion higher. This should add roughly 17 cents to the bottom line print vs. expectations.




*Opex - Consensus is about right. Consensus is modeling $15.45 billion in 3Q12 operating expense. This compares with 2Q12 opex of $14.97 billion. The company has given guidance on this line to expect operating expenses to be flat with 1H12 levels, which averaged $15.2 billion, exclusive of $3 billion in litigation reserve build. The rationale given was higher legal costs and mortgage production-related expenses, both of which seem to be playing out as expected based on the news flow intra-quarter. For reference, this is also fairly consistent with the last 10 quarters trendline, which would suggest a 3Q12 opex of $15.6 billion. As such, it looks like consensus may be overestimating operating expenses by roughly $250 million. Obviously there's the potential that the company is guiding conservatively here. 


* Bottom line - Consensus is too Bearish. With all the big pieces being considered, it looks to us like the company will beat estimates by 4-8 cents net of one time items and DVA, primarily on reserve release (again). That said, there will be a eye-popping number of one-time items and adjustments necessary to get from the reported number to the real number. We think the JPMorgan print will set the tone for a generally positive 3Q12 earnings season from the Financials.


* Sector Strategic Outlook. As we see it, there are five key, positive tailwinds for the Financials and only one big headwind. The tailwinds we see are: (1) Political, Romney's momentum is finding its way into multiples, (2) Jobs, jobless claims are moving lower and have a tailwind through February, (3) Housing, collateral values are stabilizing and transaction activity is improving. Autocorrelation is the most important factor in housing, (4) QE Infinity, Financial stocks love QE for multiple reasons: it's inflationary, it bids up their securities holdings, (5) Earnings, as enumerated above, we think the earnings season will be, on balance, positive for the Financials. Against this, we see one very large risk: The Fiscal Cliff. Our macro team has written extensively on this subject. 


From a timing standpoint, we see upside between here to the election driven by earnings, QE and the election, but after the election we would be very cautious until the market has a clear understanding of what to expect from Congress and the President on the Cliff.


Joshua Steiner, CFA



Robert Belsky


FNP: The Y Chromosome

Takeaway: Here's a peek inside a Jack Spade store for those not fortunate enough to have been in one. It's a big idea. $FNP

We think that Kate Spade is one of the most exciting growth stories in retail today. But most people overlook the fact that there is a Y Chromosome element component of Kate Spade. His name is Jack. With less than a dozen stores open thus far, it has justifiably been under the radar. But one thing is unusual about Jack. With so few stores and virtually no critical mass, it is making money.    


A store opened up 5 days ago in New Canaan, CT, and has seemingly gotten off to a very good start. A few thoughts...


1. Only 15-20% of the store is merchandise that falls into the 'murse' category. These guys 'get it' that we cannot expect men to buy leather goods to the same extent that women do. 


2. The biggest takeaway is how pristine the merchandising approach is. Look at t he first snapshot below. They don't simply unpack boxes and fill the shelves and racks with goods. Rather, they have each item in every size on the rack. No more and no less. Your size is there to try on, and then the item you buy comes from the stock room with the original unit going back to the rack. It simply looks crisp and neat. It's an approach that most brands wish they could execute like this.


3. The best selling item in the store is a $750 'hard fabric' jacket that is a collaboration with hunting brand Barbour. Jack takes the product, slims it down, tweaks the colors, and makes the fabric more fashion forward. It's quite impressive. 


4. Great collection of wallets -- all at price points below $100.


5. Most murses are in the $200-$400 range. They're definitely not yet tapping into the upper echelons of price points in leather goods. 


We fully realize that this is a) a single anecdotal view as it relates to Jack Spade, and b) minute as it relates to the bigger issues related to investing in FNP today (ie Juicy blowing up). But great retail concepts are rare. This is one of them.



This is about as clean as it gets. Small, medium and large. If you buy it, they get one from the stock room for you.

FNP: The Y Chromosome - 10 11 2012 3 18 32 PM


Slightly distorted  (thank you iPhone 5) panoramic view of one side of the store.

FNP: The Y Chromosome - js2

The Snuffleupagus Election

Takeaway: The data doesn’t support a Romney Presidency, but the likelihood of a Democratic sweep is likely now off the table.

You would basically have to be in a dark cave in Tora Bora to have not been exposed to the undue attention that has been attributed to Big Bird since the first Presidential debate.  The furor over the yellow feathered Sesame Street character was kicked off when Governor Romney indicated that he would end the funding for PBS, even though he personally likes Big Bird.


The President’s campaign has since grabbed on to that comment and created negative advertisements implying that Romney is focused on Big Bird when he should be focused on more critical issues, like the fat cat bankers on Wall Street.   As one advertisement said:


“Mitt Romney would have you think it’s not Wall Street you have to worry about, it’s Sesame Street.”

Naturally, this line of attack has led to an opening for the Romney camp as well.  On the stump, Romney has now been emphasizing that “the President has been focused on saving Big Bird for the last week when there are important issues to discuss”.


You gotta love politics!


Increasingly, we think Big Bird is much less relevant than Aloysius Snuffleupagus, more commonly known as Snuffy.  As many of you recall, Snuffy was a wooly mammoth without tusks or visible ears on Sesame Street.   For a long time, Big Bird was actually the only character that ever saw Snuffy.  On many levels, Snuffy may be a better metaphor for this election than Big Bird. 


To be clear, the debate, or the Big Bird event, has had a definite impact on the election.   The aggregate polls have swung almost 5 points towards Romney.  The bigger issue may well be that which is unsaid, or unseen, i.e. the Snuffy Factor.  In our view, this could be that the electorate is much more fickly than in prior years.


Ahead of the debate, we were increasingly convinced that Obama would win the election and that the concept of a Democratic sweep was seriously on the table.  Two weeks later, the numbers tell us a very different story.  We’ve outlined some of the key shifts below.


National Polls


In the Hedgeye National Poll aggregate, Romney has gone from being down -4 points prior to the debate to being up +1 post debate.  In the last six national polls taken, Romney leads in three, two are tied, and one has Obama ahead.  This is the first true lead of the race for Romney.  It is likely these national polls narrow again over the coming days.  Nonetheless, this type of a bounce from a debate is basically unprecedented.


The recent poll from TIPP is likely a poll that is very alarming to Democrats and also instructive as to the direction this race is going.  This poll has Romney up +5 among likely voters and has him up an amazing +20 points among independents.   A lead of this size is interesting in that the poll itself polled 39% Democrats and 31% Republicans, so it meaningfully oversampled Democrats.


The Snuffleupagus Election - 1


Electoral College


National polls are often leading indicators for state level polls and we have seen the follow through from Romney’s debate performance.   On September 19th when we held our election outcome call, Obama looked to have 237 Electoral College votes locked.  Currently, based on state level polls, Obama has 201 votes locked and Romney has 181 locked.  That leaves 156 Electoral College votes in the toss up category and a long road for either candidate to the 270 needed to become President.


As we have often said, the road to the Presidency goes through Ohio.  We’ve pasted a chart of Ohio polls below and the story in Ohio is similar to the national race, with the exception being that Obama leads narrowly.  Currently, Obama is +1.3 points in the poll aggregate, though at one point he was up close to +6 points.


The Snuffleupagus Election - 2


Electronic Markets


The electronic predictive markets are the one area in which Obama continues to hold his lead, although it has narrowed considerably. Currently, Obama is at 63% probability of retaining the Presidency.  Prior to the debate he was closer to 75%.  The Iowa futures market, the other prominent electronic predictive market, is also at a 63% probability that the Obama gets re-elected.


Economic Models


Our Hedgeye Election Indicator (HEI) is based on real time economic and market data and it still leans heavily towards Obama.  Similar to the electronic predictive markets, the HEI is currently at 64% and this is just 0.5% below its all-time high.  Intuitively this makes sense as the stock market has been strong and resilient.  Historically, a strong stock market would mean a strong economy, or economic recovery.  Currently, though, there is a disconnect between the stock market economy and the real economy and therefore Obama’s odds may be overstated on the HEI.


In aggregate, there is no doubt that the national race has shifted towards Romney.  It is clear that last week has gone from being a single debate to an event that has changed the course of the race.  Nate Silver, who in our view does an excellent job of analyzing polls, characterized it as follows:


“There is some spotty evidence that Mr. Romney’s bounce may have been as large as five or six points in polls conducted in the 48 hours after the debate, so perhaps the most recent data does reflect something of a comedown for him. But if his bounce started out at five or six points and has now settled in at three or four, that would still reflect an extremely profound swing in the race — consistent with the largest shifts produced by past presidential debates.”


So what is the unknown, or Snuffleupagus, nature of this race? Simply, that neither candidate has won over the electorate.  This fact clearly benefitted Romney in his decisive victory last week.  Conversely, it is also what leaves the door open for Romney.  Currently Obama’s approval rating is 49.8 based on the approval poll aggregate and his favorability rating is 50.8.  Meanwhile, Romney’s favorable rating is 48.5 despite his victory. 


Fickle is as fickle does in a Snuffleupagus Election.


Daryl G. Jones


Director of Research







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