Earnings Deluge

“This tends to leave us less prepared when the deluge hits.”

-Nate Silver


If you think about all of the corrections (2-8%), draw-downs (9-19%), and crashes (20-30%) stocks and commodities have had in the last 5 years, how many of your favorite economists nailed calling all of them?


Almost anyone who is overpaid on the sell-side can tell you a story about why something is going up – but why do they have such are hard time articulating real-time risk on the way down?


Forecasting growth (slowing in Q1/Q2 of 2012) and earnings (slowing Q3/Q4) in 2012 wasn’t easy. But it’s even more difficult to comprehend how people who missed calling both are now telling you this is the “trough” and stocks are “cheap.”


Back to the Global Macro Grind


“Forecasting something as large and complex as the American economy is a very challenging task. The gap between how well these forecasts actually do and how well they are perceived to do is substantial. Some economic forecasters wouldn’t want you to know that.” (The Signal And The Noise, page 177)


How $50-100 Billion in market cap companies like Caterpillar (CAT) and Intel (INTC) miss these very obvious turns in both the global growth and the corporate earnings cycle at this point shocks me.


Does anyone get paid to have learned anything from the cycle turning in late 2007? The Fed can’t smooth the corporate EPS cycle.


In our top Global Macro Theme for Q4 (#EarningsSlowing – ask for the slide deck if you haven’t reviewed it), we contextualize the following:

  1. What coming off the last 5 peaks in corporate margins in the last 100 years looks like (stocks look “cheap” at the peaks)
  2. Why the risk to expectations is more in Q4 and 2013 than what’s staring CFO’s in the face in Q312
  3. Why stocks aren’t cheap if you’re using the right growth, margin, and earnings assumptions

That’s just the long-cycle data. It’s not “tail risk.” Corporate margins peaking as sales growth slows is a very high probability situation that you are seeing come across the tape with each and every Q312 earnings report. This should not be surprising you.


What surprises me is how disconnected the reality of this moment in the cycle has been relative to where the stock market has levitated. If you want to talk legitimate TAIL risk, that spread risk is it.


I often get asked what would change my view. My answer is usually a question – on what, the economy or the stock market? These have been two very different things in 2012 and all of a sudden they are colliding.


“Apres moi, le deluge”


That’s what King Louis the XV said to his mistress, meaning, en francais – ‘after me, the flood.’ And oh did he nail that one! And that’s the point of hitting the end of a long-standing narrative – everything bullish about stocks, oil, and gold at 14 VIX tends to end, fast.


Are the perma-bulls still serious about what they were saying in March (right as #GrowthSlowing took hold)?

  1. US GDP Growth +3-4% (US GDP = down 69% from Q411’s 4.10% to 1.26% reported most recently)
  2. Earnings are “great” (they were at the Q1 2012 top; but Q312 has been the worst in 3 years)
  3. Stocks are “cheap” (sure, if you use the wrong numbers)

Given the data, I doubt it. That would be a joke. And clients aren’t laughing. From Denver to Kansas City, Boston, Maine, and San Francisco (this morning), I have been on the road speaking with clients for the last month. They are getting very concerned about Q4 of 2012 through Q2 of 2013 – and they should be. They’ve seen this movie before.


The real reason stocks and commodities were straight up since June was the Fed. Since the Bernanke Top (September 14, 2012), the SP500 has had a 3% correction. What would make it a 9-19% draw-down from that “buy everything high”? Re-read the last 600 words, then factor in an Obama win, and then add a US Debt Ceiling being bonked in January, right before we hit the #FiscalCliff.


And remember, after stocks were up “double-digits YTD” in October of 2007, le “deluge” had a heck of a time finding its trough.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $108.22-110.84, $79.06-80.16, $1.29-1.31, 1.71-1.82%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Earnings Deluge - Chart of the Day


Earnings Deluge - Virtual Portfolio

HEI: Obama’s Slips Further

Romney appears to keep gaining strength as the President’s chances of being reelected fell 60 basis points week-over-week to 64.3%. We expect a multi-percentage point drop next week with the recent decline in the stock market acting as a catalyst. 


Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


President Obama’s reelection chances reached a peak of 64.5% on September 24, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.


HEI: Obama’s Slips Further  - HEI


NEW HAVEN, CT --- Hedgeye Risk Management, a leading independent provider of real-time investment research and ideas, today announced that industry veteran Rob Campagnino will join the firm as Managing Director of Consumer Staples.

Campagnino has nearly 20 years experience in the industry and the last 5 years on the buy side at some of the top hedge funds in the business, including PioneerPath, Diamondback Capital, and Searock Capital.  Prior, he was a senior equity analyst at Prudential Securities where he was consistently Institutional Investor ranked.  Before Prudential he was at Sanford Bernstein as an equity research associate covering food, beverage, and retail.  Campagnino has a MBA from Columbia and AB in Economics from Duke.


Keith McCullough, CEO of Hedgeye notes “We’re thrilled to have Rob champion our Consumer Staples effort and add to our growing platform; he brings experience across investment analysis and corporate, a stellar track record, and a history of thinking independently on behalf of his clients.  To that end, we’re confident that his standards and expertise will hold up to our client’s expectations, and our reputation.” 


Director of Research at Hedgeye, Daryl Jones, adds “With the addition of Rob, we now have one of the pre-eminent consumer focused research franchises in the business. As a result, we are poised to continue to accelerate recent market share gains.”


Hedgeye Risk Management will officially launch its Consumer Staples sector research and services to subscribers in November 2012.


In his new role at Hedgeye, Campagnino will become a key member of the firm’s highly regarding research roster, which includes Keith McCullough (Strategy), Daryl Jones (Macro and Energy), Brian McGough (Retail), Todd Jordan (Gaming, Lodging & Leisure), Howard Penney (Restaurants), Josh Steiner (Financials), Tom Tobin (Healthcare) and Jay Van Sciver (Industrials).  The firm has rapidly expanded to over 50 people since it launched in April 2008.





Hedgeye Risk Management is an online financial media and research company that operates as a virtual hedge fund.  Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world’s most regarded research analysts – united around a vision of independent, un-compromised real-time investment research as a service.  Visit for more information.

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MPEL should report Q3 EBITDA above the Street 



We are projecting that MPEL will report $988 million of net revenue and $217 million of EBITDA, in-line and 2% ahead of consensus, respectively.  On a hold adjusted basis, our EBITDA estimate goes to $210 million, assuming 2.85% hold, and $211 million if we use the historical averages of Altira and City of Dreams.  This compares to the Street at $213 million which should be an estimate of absolute EBITDA.  Note that consensus EBITDA has climbed from $204 million in the past two weeks to $213MM, due in part to the slightly higher hold percentage. 



3Q Detail


We estimate that City of Dreams will report $740MM of net revenues and $198MM in EBITDA (2% above consensus)

  • Our net casino win projection is $720MM
    • VIP net win of $438MM
      • Assuming 15% direct play, we estimate $19.5BN of RC volume (down 4% YoY) and a hold rate of 3.14%
      • Using CoD’s historical hold rate of 2.91%, EBITDA would be $12MM lower and net revenues would be $43MM lower
    • $245MM of mass win, up 31% YoY
    • $38MM of slot win
  • $20MM of net non-gaming revenue
    • $22MM of room revenue
    • $13MM of F&B revenue
    • $21MM of retail, entertainment and other revenue
    • $37MMM of promotional allowances or 65% of gross non-gaming revenue or 5.1% of net gaming revenue
  • $429MM of variable operating expenses
    • $349MM of taxes
    • $67MM of gaming promoter commissions in addition to the rebate rate of 90bps (we assume an all-in commission rate of 1.24%)
  • $25MM of non-gaming expenses
  • $87MM of fixed operating expenses up 6% YoY and down $2MM QoQ

We project $215MM of net revenues and $31MM in EBITDA for Altira (1% above consensus)

  • We estimate net casino win $209MM
    • VIP net win of $281MM
      • $10.9BN of RC volume (17% YoY decrease) and a hold rate of 2.63%
      • Using Altira’s historical hold rate of 2.80%, we estimate that EBITDA would be $6MM higher and that net revenues would be $19MM better
    • $27MM of mass win, up 15% YoY
  • $3MM of net non gaming revenue
  • $153MM of variable operating expenses
    • $123MM of taxes
    • $27MM of gaming promoter commissions in addition to the rebate rate of 94bps (we assume an all-in commission rate of 1.19%
  • $3MM of non-gaming expenses
  • $28MM of fixed operating expenses in line with 1Q

Other stuff:

  • Mocha slots revenue and EBITDA of $34MM and $8MM, respectively
  • D&A: $95MM (guidance of $90-95MM)
  • Interest expense: $25MM (guidance of $23-25MM)
  • Corporate expense: $20MM (guidance of $18-20MM)


All signs point to a down YoY quarter in Singapore GGR


  • Gross Lettings (paid and comped room nights) in Singapore were down almost 5% YoY QTD through August.  As shown in the chart, GL and GGR track each other closely.
  • We’re pretty sure Genting Singapore played unlucky in Q3 and probably lost volume share to LVS’s Marina Bay Sands (MBS)
  • Our Q3 MBS estimate is for flat EBITDA.  While there could be some downside, we believe any significant deviance from that number is likely due to low hold.



Takeaway: To be, or not to be, priced in – remains the question.

POSITIONS: Short Industrials (XLI)


To be, or not to be, priced in – remains the question.


I don’t think the economy (#GrowthSlowing in Q1/Q2 or #EarningsSlowing here in Q3/Q4) has been priced into the stock market all year. But that’s just me. Some people think the Fed has had nothing to do with the stock market not being the economy. Right.


Finally, the storytelling is hitting a fork in the road. The economy is colliding with both sectors and stocks (one at a time), and now we’re hearing the pundits who missed calling growth and earnings slowing to begin with say “it’s priced in.” Right, right.


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


  1. Immediate-term TRADE resistance = 1442
  2. Intermediate-term TREND support = 1419


In other words, if and when fundamentals matter (they did Friday), there’s no reason why we shouldn’t test my 1419 line. Will that be this week, next, or in November? I don’t know. But the probability of that occurring is rising, not falling.


While some may forget the corporate margin cycle topping in Q3 of 2007, few will forget the SP500 was down -4.4% in November of 2007.  When the stock market was up “double digits YTD” in October 2007, a few things apparently weren’t priced in.


Keep your head on a swivel out there. Risk happens fast.




Keith R. McCullough
Chief Executive Officer



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