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NKE: Fundamentals Are Turning

Times are changing for Nike (NKE) as the company’s fundamentals begin to change. We believe that sentiment will turn on the margin this quarter. Nike’s stock price has traditionally been linked to growth of global futures but recently, that’s changed as you can see in the chart below. Stock growth is heading higher while Nike heads lower. 


Inventories at Nike are converging with gross margins. The company’s gross margins are expected to head higher in the back half of 2012 and could be positive over the next quarter. There’s a lot of hating on NKE right now, but that could soon change.


NKE: Fundamentals Are Turning  - image002


NKE: Fundamentals Are Turning  - image003


NKE: Fundamentals Are Turning  - image004


MPEL beats us and consensus but exactly in-line with our hold adjusted EBITDA estimate


"We have delivered yet another impressive quarter of operating results, with strong year-over-year improvements in operating metrics in our mass market segments at City of Dreams providing us with greater earnings stability, particularly during a period of slowing
market growth in the rolling chip segment."


- Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment




  • On track to open MSC in mid-2015
  • They have entered the syndication stage of their financing for MSC and are also contemplating a high yield financing once the bank debt closes.
  • MSC will have capacity for 500 tables and will focus on main stream mass customers. 
  • EBITDA in Manila will be allocated on a pro-rata basis. Expect both phases to open together in 2014.
  • Assuming a 2.85% hold, EBITDA would have been $210MM an 8% increase on a normalized basis.  Altira's luck adjusted EBITDA was $36MM. CoD was $180MM on a luck adjusted basis (+17% increase).
  • Mass contribution: 75% of their luck adjusted EBITDA (CoD) and 67% of their luck adjusted EBITDA (company-wide)
  • The contemplated high yield notes will not be guaranteed by Melco Crown
  • 4Q Guidance:
    • D&A: $90-95MM
    • Corporate: $18-20MM
    • Net interest: $23-25MM  



  • They are very positive on the Macau market headed into next year. The first few days of November have been quite phenomenal. 
  • Seeing some improvement compared to the last few months
  • Feel like they have one of the more exciting development pipelines in the gaming world: 2014 (Manila); 2015 (MSC), Tower 5 at CoD
  • In order for them to keep improving mass yields at CoD, they need to stay focused on their customers and keep up the quality of the property
  • Their yield on VIP tables is a little lower than some other properties in the market.  Hope to stabilize Altira over the next few quarters and expect to see improvement over the next few Q's.  They have been moving tables from Altira to CoD over the last few months.
  • Continue to examine ways to improve table productivity.
  • Studio City equity:  $825MM ($225MM completion guarantee).  First $800MM will go in pro-rata i.e. 60/40.  The remainder will go in a 100% funded by MCE, subject to the option for minority share holder to put in their 40% of that amount, but MPEL will know that in about six months.  So somewhere from zero to 40% of that incremental amount. 
  • Think that only they and Galaxy will be opening in 2015 and that other projects won't open before 2016
  • The first $150MM has already gone into the Manila project on a pro-rata 60-40 basis
  • Thoughts on dividends from Melco Crown next year and beyond?  They would love a dividend but the Board wants to make sure that the development pipeline are underway and fully funded before they consider dividend payouts. 
  • The shell is already built in Manila and they have been working on the deal for over a year.  What's built in Phase 1 is already set but they will try to make Phase 2 the iconic part of the project. They are happy with what has already been built. 
  • How much of their Mass business is premium Mass vs. "mass mass"
    • The premium mass is roughly 50/50 space wise
    • Margin wise, premium mass has a higher margin than regular mass since it's less competitive
  • Think that Altira's table optimization is almost done but its always a work in process in terms of tweaking the mass/VIP mix
  • Why do they need do to a Sr Note offering for MSC since they are almost net cash positive?  Financing structure at MSC reflects that they 1) don't own 100% of the project and 2) they have 2 other projects that they are working on. 
  • Anticipate spending about $600MM in Manila with $300MM funded through a local loan. 
  • Ph3 of CoD:  will be funded by cash and internally generated funds. Project cost won't be finalized until sometime next year but it will be significant given the huge SQFT.
  • Hold rate on slots also gets impacted on the mix of high roller slots and regular



  • Net revenue of $1,011MM and Adjusted EBITDA of $226MM, coming in 4% ahead of our estimates and 6% ahead of Street
    • CoD: Net revenue of $$737MM and Adjusted EBITDA of $204MM
    • Altira: Net revenue of $$216MM and Adjusted EBITDA of $30MM
  • "The... decline in Adjusted EBITDA .... was driven by lower group-wide rolling chip volumes together with a lower blended rolling chip win rate, partially offset by strong improvements in our mass market table games and gaming machine segments together with our ongoing commitment to control costs."
  • "Altira Macau's underlying operating performance has stabilized following the implementation of our successful table optimization strategy"
  • "In relation to Studio City, we have made significant construction progress, with our piling and foundation work nearly completed, and we have now engaged our main contractor on a fixed price contract basis, giving us greater certainty and control over the project's cost. We also reached a major milestone in relation to the funding for Studio City, with our senior secured credit facilities now in syndication following the recent signing of a commitment letter. We anticipate that our debt financing package, once finalized, together with cash equity contributions from the shareholders of Studio City, will provide us a fully funded project"
  • "Recently signed a cooperation agreement regarding the development and operation of an integrated entertainment and casino complex in the Philippines, further solidifying the key terms and conditions of this exciting development"
  • "Completed a consent solicitation on our existing senior notes which enabled us to, among other things, release an additional US$400 million from the restricted
    payments basket, giving us the ability to more efficiently use our available cash to fund our impressive development opportunities."
  • CoD: "Improvement in Adjusted EBITDA was primarily a result of strong improvements in the mass market segments, including a 30% year-over-year increase in mass table games gross gaming revenue, partially offset by a decline in rolling chip volumes"
  • Altira: "Decrease in Adjusted EBITDA was driven by a lower rolling chip win rate together with reduced rolling chip volumes."
  • Other:
    • Capitalized interest: $2.6MM
    • Cash: $2.1BN
    • Debt: $2.4BN
    • Capex: $107MM

The Reelection

Client Talking Points

The Reelection

Looks like our Hedgeye Election Indicator (HEI) was correct. Our final reading on Monday put President Obama’s chances of reelection at 62.5%. Sure enough, Obama narrowly won the election last night much to the chagrin of the Romney camp. People have lots of questions about what the future now holds and rightfully so. How will the fiscal cliff situation play out? Will Republicans in the House hold the economy hostage over the debt ceiling? What will happen to Geithner and Bernanke? Over the next six months, we’ll have more clarity on the aforementioned situations.

Obama's Market

Obama continuing on as President for another four years will materially affect certain markets. For instance, we believed that a Romney win would have been bullish for the US dollar and bearish for commodities. He also vowed to replace Ben Bernanke as chairman of the Federal Reserve. Now we wait and see if Bernanke will stay put and whether or not the President has any intention of strengthening our currency. People are fed up with higher gas prices (especially after Hurricane Sandy) and food prices. Can the President quell the public outcry or will he stay the course he’s laid out over the last four years? We shall see.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjoys a strong position in a structurally advantaged industry and an attractive valuation.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“if we go over fiscal cliff--everyone in stream gets [a] pony” -@fearlicious



“Money is better than poverty, if only for financial reasons.” -Woody Allen


Electoral Vote Count: Obama: 303 / Romney: 206

Early Look

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CHART OF THE DAY: Much Ado About Nothing


CHART OF THE DAY: Much Ado About Nothing - Chart of the Day

Much Ado About Nothing

“A fool thinks himself to be wise, but a wise man knows himself to be a fool.”

-William Shakespeare


Depending on your political affiliation this morning, last night was either a Shakespearean tragedy or a Shakespearean comedy.  Republicans are obviously sad and Democrats are clearly quite happy.  But, did anyone really win? The President was re-elected with a very small margin and Congress remains in gridlock with a Republican House and Democratic Senate. 


We went into this election launching our Hedgeye Election Indicator (HEI), which attempted to assign a probability to the President getting re-elected based on real time market prices.  In our Q4 themes presentation, we then flagged that all the consensus polls were pointing against Romney.  The key discrepancies we saw to this consensus were the potential for a relatively higher turnout for Republicans and an economy that, based on historical standards, should not have led to a re-election for the incumbent.  In the end, neither Republican turnout nor the economy mattered as much as we expected.


When the political scientists write the story of this election, it will likely come down to a few failures by the Republicans.  First, they didn’t make the economic case strongly or clearly enough against Obama.  Second, a number of demographic groups turned sharply against the GOP, namely women. 


Obama, on the other hand, did a few things very effectively.  His re-election team consistently painted Romney as unfit to be President and the characterization largely stuck -- or at least stuck enough to matter on Election Day.  More importantly, Obama implemented a number of policies that aided him. Indirectly loose monetary policy aided the stock market and inflated some asset classes, which as we show in the Chart of the Day of the Hedgeye Election Indicator aided his re-election chances.  The second key policy was the auto bailout, which mattered disproportionately in the key battleground states.


But now the election is behind us.  To the victors go the spoils, or at least the gloating tweets and Facebook status updates, and to the stock market operators comes another day of playing the game in front of us.  Some questions to consider as a result of this election are as follows:


1)      How will the Fiscal Cliff ultimately play out? The timing on this step up in taxes and step down in government spending is January and no resolution is imminent.


2)       Will the Republicans hold the economy hostage over the debt ceiling again? Based on our analysis, the U.S. is slated to hit the debt ceiling again in early 2013.  With less of a mandate for Obama, it’s unlikely the Republicans in Congress acquiesce on this.


3)      Who will replace Treasury Secretary Tim Geithner?  We’ve made our stance clear on Geithner, we aren’t big fans.  But based on the proverbial writing on the wall, he is on his way out and who takes his spot is very much an open ended question. 


4)      What will Obama’s economic policy look like in 2013 and beyond?  Regardless of your partisan affiliation, you must admit this was and is a very tepid recovery.  Early in his first term, the President will have pressure to do more to stimulate.  How will he juxtapose this with the need to cut government spending?


5)      Is this Chairman Bernanke’s last term? On some level this is irrelevant in the short term as his term doesn’t end until January 2014, so we should expect to see absurdly loose monetary policy until at least then.  As always though, markets will price in a new Fed Chairman before it happens, so determining Bernanke’s replacement will be key to thinking about the future of monetary policy.


We will be digging into these questions and more this morning at 11:00am with Neil Barofsky, the former Inspector General of the Troubled Asset Relief Fund.  By his own admission, Barofsky is a life-long Democrat and as a former senior official in the Treasury Department will have some keen insight into the future of policy in the Obama administration.  We will be circulating dial-in information to our Macro subscribers this morning and if you are not a Macro subscriber but would like to trial the product, ping .


One of our favorite quotes from Barofsky, who wrote “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street”, is the following:


“We need to convince those seeking or trying to retain power that they will not get our votes unless and until they commit to meaningful change of our financial system.”


Regardless of the specific policy path, it is hard not to agree with that quote.


In terms of your portfolios, the biggest immediate term factor to focus on is the U.S. dollar.  As long as Chairman Bernanke is leading the Federal Reserve, monetary policy will remain implicitly dovish.  This is and remains bearish for the U.S. dollar.  Conversely, this is positive for those asset classes that are inversely correlated to the dollar.  Chief among these is gold, which currently has a high 90-day inverse correlation to the dollar. 


Dollar down  and commodities up, sound familiar? As Yogi Berra famously said, “It’s déjà vu all over again.”  Unfortunately for corporations and the stock markets, dollar down means increased input costs and earnings headwinds. 


As my colleague Darius Dale highlighted yesterday, for the 3Q12 earnings season to-date, 59.8% of S&P 500 companies have missed on the top line and 28.7% have missed on the bottom line (388 total). That compares with 57.8% and 26.8%, respectively, in 2Q12. Similar to the political landscape, we would expect more of the same in terms of our Q4 theme of #EarningSlowing.


Our immediate-term risk range for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $108.46-111.44, $3.46-3.53, $80.24-80.85, $1.27-1.29, 1.67-1.75%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Much Ado About Nothing - Chart of the Day


Much Ado About Nothing - Virtual Portfolio

269 – 269

This note was originally published at 8am on October 24, 2012 for Hedgeye subscribers.

“A tie is like kissing your sister.”

-J.C. Humes


How about if America woke up on November 7th and “269 – 269” was the headline on the front of major newspapers? The implication would be that the Electoral College was effectively tied.  This is actually a somewhat plausible scenario in 2012.  It could occur with Obama winning all of Kerry’s states from 2004 and adding New Mexico and Ohio.  Currently, both New Mexico and Ohio, albeit marginally, are in the Obama camp.


In the event of an Electoral College tie, the decision gets handed to the House of Representatives.  Given that the Republicans hold a majority in the House, Romney would then become the next President.   Just as many moderates think that the Tea Party has hijacked the Republican Party, they would now be arguably the key reason that the Republicans gained the Presidency.  After all, if it weren’t for the Tea Party insurgency (for lack of a better word) in the midterms, the Republicans would likely not currently control the House.


Regardless of whether you believe my 269 scenario, it is beyond argument that this race is getting too close to call.  The averages of the major national polls are basically within 0.5 points, favorability ratings of the candidates are basically tied, and neither candidate has a definite edge in the Electoral College. 


There are some credible outliers related to predicting the outcome of the election.  One of these is Professor Ken Bickers from the University of Colorado. He has done an analysis that looks at state level economics as a predictor for the Electoral College.  Currently, his analysis suggests that Romney and Ryan may win up to 330 seats.


We will be joined by Professor Bickers today at 1pm today for a conference call to discuss his analysis.  For institutional macro subscribers, the materials and dial-in will be circulated this morning.  If you are not an institutional macro subscriber, ping sales@hedgeye.com to inquire about access.


Politics matters as it relates to future economic policy, so we have been and will continue to focus closely on this election.  In fact, we would postulate that some of the stock market weakness over the last few days, though largely driven by #EarningsSlowing, is being amplified by increasing uncertainty in political outcomes in the United States. 


Globally, the bigger concern continues to be tepid economic growth.  This morning HSBC’s flash PMI for China came in at 49.1 versus expectations of 47.9.  Even if marginally better than expected, the number remains below 50.  In Europe the numbers were bleaker as the Eurozone Flash PMI came in at 45.3 versus an estimate of 46.5.  The German IFO business climate indicator also disappointed marginally coming in at 100.0 versus expectations of 101.6.  Not surprisingly, the Euro is weak and Spanish yields are backing up this morning, as result.


It is a major policy day today in the United States with an announcement coming from the Federal Reserve.  The FOMC rate decision will be held at 12:30pm today with a Bernanke press conference at 2:15pm. Even though the stock market basically peaked on the day of the last Fed announcement, it is unlikely that even Chairman Bernanke adds more fuel to the fire at this point.  Although if the Fed were to signal they are going to take the money printing press up a gear, that would be the ultimate October surprise.  It may even be bigger news than the October surprise that Donald Trump is purportedly going to reveal on Twitter today. 


Our friends at Bespoke Investment Group actually did an interesting analysis looking at the return of the stock market on the days of Fed announcements in this period of zero interest rate policy.  According to their analysis, the SP500 showed a positive return on 21 out of 31 of those days with an average gain of +0.71. 


Even as history is a guidepost, we would suggest that investors are getting much better at front running the Fed.  This is actually born out in the numbers as in the last year the return on a Fed day is closer to +0.30.  Yes, this is still a positive return, but only marginally so.  Today the setup seems more poised to disappoint as Chairman Bernanke will likely not have much new positive news on the economy, and is also unlikely to further ease.  But, we’ve been surprised by the Fed before . . .


The broader issue with the Fed’s long-term zero interest rate policy is that extreme levels at which certain asset classes are getting priced.  One example is the high yield market.  As one high yield investor emailed me yesterday:


“Our basic premise is that there is massive technical support in the search for yield for the broader HY and leverage loan market driving yields to historically tight levels.  There is such appetite in the loan market that terms are reverting back to 2007 peak levels…new issue spreads are being compressed and covenants are being pulled (45% of new issue is now ‘cov-lite’ vs. 10% last year).  To a large extent this has been driven by the return of the clo…back from the dead…or at least from 2007.  CLO issuance will be $40bn this year, which is more than the last 4yrs combined.”


Now we aren’t ready to make a big call on high yield market just yet, but the red flags raised above are well worth pointing out.  After all, it’s not a tie if you are long high yield at the top.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1699-1741, $107.48-110.71, $79.58-80.16, $1.29-1.31, 1.71-1.82%, and 1409-1426, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


269 – 269 - Chart of the Day


269 – 269 - Virtual Portfolio

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