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Much Ado About Nothing

This note was originally published November 07, 2012 at 08:20 in Early Look

“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.

 

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 $1701-1733, $108.46-111.44, $3.46-3.53, $80.24-80.85, $1.27-1.29, 1.67-1.75%, and 1419-1432, 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


EZPW: Going For The Gold

EZ Corp (EZPW) reported fiscal Q4 earnings this week and while profit rose 6.1%, the pawn lender noted that weakness in the gold market is going to put pressure on earnings. Guidance for the december quarter was a full 30% below Street expectations and FY2013 guidance was 13% below expectations.

 

EZPW: Going For The Gold  - image001

 

EZ Corp has two big issues it must deal with. In addition to adverse payday lending regulations in Texas, the company also faces headwinds from gold in their pawn lending business. EZPW noted that jewelry scrapping sales fell 10%, indicative of the weakness in the gold market in terms of volume. Notes Hedgeye Financials Sector Head Josh Steiner:

 

“We’ve recently come to the conclusion that rising gold prices are actually now a negative for the pawn lending industry, a reversal of the trend over the last decade. This is because rising gold prices give rise to growing competition, mainly in the form of “buy-here” gold shops. These pop-up stores are sprouting up everywhere and, on average, pay a slightly higher rate for gold than the traditional pawn operators, which is pressuring volume trends significantly.”

 

We think it’s probably best to steer clear of EZPW, even after today’s titanic sell-off.


CONFERENCE CALL DIAL-IN: WHAT WILL OBAMA DO NOW?

Hedgeye's Macro Team is hosting a call today with Neil Barofsky, former Inspector General of the Troubled Asset Relief Fund (TARP).  Details for the call, including the dial-in information, are below.

 

"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."

                  -Neil Barofsky 

 

We will be hosting an Expert Conference Call with Neil Barofsky, the former Inspector General of the Troubled Asset Relief Fund (TARP). The call will be held today, November 7th at 11:00am EST, to discuss the future path of fiscal, monetary and economic policy under the Obama administration. 

 

Barofsky is intimately familiar with the inner workings of Washington; in late 2008 he was appointed to oversee the Treasury Department's administration of the $700 billion Wall Street/TARP bailout where he remained until his resignation in March 2011. He has become known for his relentless criticism of Treasury officials, including current Secretary of the Treasury, Tim Geithner.  Barofsky has officiated as an aggressive and outspoken overseer monitoring for waste and fraud at the federal level. During his time at the U.S. Treasury, more than $550 million in fraud losses were avoided and $150 million in fraudulent earnings were recovered for taxpayers. Given his extensive experience, we see Barofsky as being well-suited to offer a salient analysis of the policy implications of yesterday's election. 

 

Please dial in 5-10 minutes prior to the 11:00am EST start time using the number provided below.

 

Contact  if you have any further questions.

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 345918#

 



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Today's Conference Call: What Will Obama Do Now?

Today's Conference Call: What Will Obama Do Now? - Obamabanner

 

"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."
                  -Neil Barofsky 

 

 

We will be hosting an Expert Conference Call with Neil Barofsky, the former Inspector General of the Troubled Asset Relief Fund (TARP). The call will be held today, November 7th at 11:00am EST, following the Obama victory to determine the future path of fiscal, monetary and economic policy. 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. 

 

Barofsky is extremely familiar with the inner workings of Washington; in late 2008 he was appointed to oversee the Treasury Department's administration of the $700 billion Wall Street/TARP bailout where he remained until his resignation in February 2012. He has become known for his relentless criticism of Treasury officials, often highlighting Tim Geithner as a particular problem. Barofsky officiated as an aggressive and outspoken overseer monitoring for waste and fraud. During his time as with the U.S. Treasury more than $550 million in fraud losses were avoided and $150 million fraudulent earnings were recovered for taxpayers. Given his experience and knowledge of the treasury it will be invaluable to hear his brutally honest thoughts on the outcome of the election and his insider's perspective on how it will economically effect our country moving forward.

 

 

Please dial in 5-10 minutes prior to the 11:00am EST start time using the number provided below. Contact   if you have any further questions.

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 345918#

 


MPEL 3Q REPORT CARD

Takeaway: If you like Macau as we do you have to like MPEL. While the stock could consolidate over the near-term, we'd be looking for entry points

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL

  • BETTER:  Overall EBITDA beat the Street and our expectations.  While hold was high, luck adjusted EBITDA was right in-line with our adjusted EBITDA estimate.  The outlook is bright and management ws very optimistic about Macau's near-term performance.

TABLE OPTIMIZATION 

  • BETTER:  COD had significantly improved table yields compared with prior quarter.  MPEL sees further upside on table productivity.
  • PREVIOUSLY: "Our rolling chip segment continues to be impacted by our table optimization strategy. This strategy has resulted in further tables being shifted from Altira to City of Dreams, as well as the movement of some tables from VIP to mass during the second quarter of 2012. While somewhat disruptive as it is happening, this initiative should set us up favorably going forward."

HIGH-END MASS MARKET

  • SAME: Despite supply additions (SCC), MPEL's mass table games segment grew 30% YoY.
  • PREVIOUSLY:  "The market-wide mass market table game segment continues to demonstrate strong year-over-year growth, expanding over 33% during the second quarter of 2012. This once again reinforces our mass market focus strategy, particularly at the higher end of the market, which we believe will provide a more stable, loyal, and profitable customer base for the foreseeable future."

STUDIO CITY

  • SAME:  They have entered the syndication stage of their financing for MSC and are also contemplating a high yield financing once the bank debt closes.
  • PREVIOUSLY:  "So again, we're very confident to have gaming as part of this exciting, integrated resort. And I would like reemphasize that after the land grant stage, whether it's us or any of our competitors, we are going down the same route in terms of applying for gaming or gaming tables."

COD MASS HOLD RATE

  • SAME:  3Q mass hold rate came in at 27.4%.  MPEL reiterates mass hold guidance of 25-30%.
  • PREVIOUSLY:  "We said 25% to 30%, and we're quite confident in COD will be very, very high end of that range going forward because of our enhancement of the efficiency on the floor during the last few quarters."

5TH TOWER (PHASE 3) AT COD

  • SAME:  It is a 1.5 million sq ft development (50% larger than Altira).  They are waiting for government approval but hope to start construction on the project by mid-2013. 
  • PREVIOUSLY:  "We are short of rooms at City of Dreams, and tower five has always been in the plan. And given our strength in mass and also the fact that we do need more rooms going forward; we're at 90% plus occupancy every single day of the year not just on weekends. We have completed all of our conceptual designs for that tower. And I can assure you, when it's built, it's going to be the ultimate art piece in Macau....again, it's subject to the government processes because this started as a apartment hotel in the early days, so we do need to have the land re-gazetted. But as soon as that is done, we would like to begin construction of that as early as next year."

VIP

  • BETTER:  There has been no pressure on credit and liquidity remains healthy. MPEL sees some business improvement compared with the past couple of months.
  • PREVIOUSLY:  "We've really spent our time and effort into improving the product of our VIP, knowing that there's been disruption. Inevitably when you renovate a VIP room, you will disrupt the business there. We have to close off sections of it. And I think that's why, on top of the general market trends, you are seeing some slowdown in terms of some of our VIP business."

ALTIRA EBITDA

  • SAME:  Business has stabilized but expect continued improvement in the quarters ahead.  Hold-adjusted EBITDA was $36 million.
  • PREVIOUSLY:  "So with the current run rate, I think we will see some continuous improvement in the EBITDA generated by this property going forward."

MPEL 3Q REPORT CARD - mpel2


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


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