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Equilibrium's Test

This note was originally published at 8am on April 18, 2013 for Hedgeye subscribers.

“Only in equilibrium can we not distinguish past from future.”

-Eric Chaisson


If it appears that I have been back and forth on the US stock market all week, that’s because I have been. The nature of any non-linear ecosystem of colliding factors is often just that – uncertain.


Remember, I think of markets in terms of chaos theory and thermodynamics. Markets have blasts of entropy (the price paid when the complexion of the overall market’s energy changes), but they also oscillate back and forth from equilibrium.


What does that mean? Markets are built to confuse. That’s why they impose a lot of pain on a lot of people at the same time. “If not periodically checked, entropy will tend toward a maximum in any system” (Cosmic Evolution, pg 25). Think about that in terms of Gold.


Back to the Global Macro Grind


When my Research and Risk Signals are aligned across durations, it’s easy to make buy/sell decisions. When my front-runner (my immediate-term TRADE duration) whips back and forth between bullish and bearish, making decisions gets a lot tougher.


That’s where the SP500 and VIX are today – and they are hyper correlated:

  1. SP500 = bearish TRADE (1557 resistance); bullish TREND (1515) support
  2. VIX = bullish TRADE (14.27 support); bearish TREND (18.89 resistance)

We also call this Duration Mismatch (i.e. when one duration’s signal has a different conclusion than the other). I get less concerned about our fundamental research view when the TRADE is bearish than when the TREND is – when both are bearish, I short the market.


That’s why bearish TRADE/TREND setups are our Best Short Ideas:

  1. COMMODITIES (CRB Index) = bearish TRADE (289 resistance); bearish TREND (298 resistance)
  2. GOLD = bearish TRADE (1496 resistance); bearish TREND (1641 resistance)
  3. FCX (Freeport McMoran) = bearish TRADE ($31.92 resistance); bearish TREND ($34.18 resistance)
  4. YEN (vs USD) = bearish TRADE (95.87 resistance); bearish TREND (91.17 resistance)
  5. ITALY (MIB Index) = bearish TRADE (15,991 resistance); bearish TREND (16,313 resistance)

It’s a lot more profitable to get bearish about these things when they initially confirm TRADE/TREND breakdowns than it is shorting them after big drops. Obviously the big stuff (Commodities, Gold, Yen) has been breaking down for almost 6 months now, so you want to be proactive in managing the mean reversion risk associated with the immediate-term Risk Range. Bearish TRENDs bounce.


What is the immediate-term Risk Range?


That’s what I consider the most probable range of price within an immediate-term (3 weeks or less) time frame. Since time and space changes, so does my model.


It’s dynamic – meaning I tweak it throughout every day for my volatility and volume assumptions. If you think of it like an engine, I need to monitor accelerations and decelerations and be both proactive and reactive (i.e. I need to manually change the gears).


To use the SP500 as an example:

  1. My immediate-term Risk Range = 1539-1570
  2. My immediate-term TRADE line = 1557
  3. So, I could buy it A) at the low-end of my range (1539) or B) buy it on a breakout > 1557

Since every move I make is #timestamped in real-time, you can see that over the years I’ve evolved. I am more and more indifferent than I have ever been on buying oversold signals versus buying breakout signals.


Theoretically, you’d always like to buy something lower and sell it higher. Sometimes that’s dead wrong (lower can go lower and lower). If the front-runner (TRADE line breakdown of 1557) continues to confirm and attacks the TREND line (1515), and you’re buying it all the way down, you A) better have deep pockets and/or B) a longer-term investment time horizon.


One of my favorite lines on that score is Jeff Gundlach’s coarse description of an “investor” – a trader who is underwater. And when I really think that through in terms of how I risk manage my research team’s best ideas – that’s dead on. If I buy something, I want it to be the right spot. Being too early is also called being wrong.


Astrophysicist, Eric Chaisson, says “the greater the randomness or disorder, the greater the entropy” (pg 24). Agreed. But, in my process at least, it’s a lot easier to make decisions when entropy is obvious than it is when equilibrium is testing my patience.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1303-1399, $97.58-102.91, $82.26-83.12, 95.87-101.91, $1.29-1.31, 1.68-1.76%, 14.27-17.46, 899-929, and 1539-1570, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Equilibrium's Test - Chart of the Day


Equilibrium's Test - Virtual Portfolio


Not to take away from a very good quarter – better than we expected - but we’re coming up with a smaller hold adjusted number.



Q1 was a very strong quarter for LVS but we want to highlight a few things that stood out to us for the Q.  We calculate a net $17 million hold benefit in the quarter across LVS’s properties.  Immaterial yes, but materially different on a property by property basis from what LVS provided in their press release.  The differences can be seen in the table below.  Our respective methodologies primarily differ in that LVS uses theoretical hold for VIP of 2.85% while we use historical averages by property.




So we actually calculate a net hold benefit to the quarter, primarily relating to our use of the historical hold average of 2.70% at MBS versus 2.85% by management.  MBS generated $426 million of hold adjusted EBITDA, in our opinion, versus a $451 million number provided by management.  We would even argue that our number is probably aggressive given that volumes are likely pushed higher when punters play lucky (hold is low).  However, it’s impossible to determine the amount of excess play driven by low hold.  Overall, our hold adjusted property EBITDA estimate is $1.151 billion, $40 million below management’s estimate.   


The big picture here is that even with our lower estimate for hold adjusted EBITDA, this was a great quarter for LVS.  We’re positive on LVS over the long haul so don’t take our commentary as a slap against the company or the stock.  We just like to do our own analysis rather than accept any management's calculations as fact.  Call it healthy skepticism and we feel like we treat both our favorite and least favorite companies with the same approach.


Other Takeaways

  • Las Vegas:  A very unprofitable quarter in Entertainment (Tim McGraw show) drove down EBITDA despite a big increase in other non-casino revenue and good hold on the tables
    • Revenues were $27MM higher while EBITDA was $2MM lower YoY
    • Hold was 3.6% better in 1Q13 vs. 1Q12 (which was also higher than normal)
  • Macau:  Hold adjustment - why our math is different
    • Historical hold rate across all the properties since 2007 has been 2.90%
    • We don’t lump all the properties together but use historical hold for each property.  Flow-through varies across different properties since the mix of Rev Share and RC commission is different as is the level of direct play
    • We don’t have perfect information: don’t know the luck split between RevShare & RC junkets or the exact rebate to direct players; we don’t know the junket commission rate until the filings come out – that also impacts flow-through calculations
  • Despite the addition of tables, fixed expenses look like they declined across all of Sand’s China’s mature properties
  • Looks like Sands Macao shifted the mix of its slots more towards ETG’s as handle increased nicely but win rate continued to plunge to just 3.7%
  • The slot business at Four Seasons is all over the place.  Slot revenues more than doubled from 3Q12 to 4Q12 and round tripped in 1Q13.  After slot handle increased 44% YoY in 4Q; 1Q13 slot handle fell 7% YoY
  • FS direct play keeps shrinking as well.  It was down to 11% this quarter vs. 14% last quarter and 16% last year…and closer to 40% of total VIP roll in 2011.  RC volumes also declined 25% - the first decline in 5 quarters
  • Despite the addition of 2,100 rooms early in the quarter, net non-gaming revenues barely increased – less than 3% QoQ at SCC
  • MBS:
    • Rebate rate was 1.3%
    • Fixed expenses actually declined 2.6% YoY
    • Doubtful accounts were in-line with the last 3Q’s

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Unstable Systems

“Certainty does not necessarily hold for unstable systems.”

-Eric Chaisson


Markets and economies are unstable systems. They could be less unstable if governments just left them alone – but that’s not going to happen, so Embrace Uncertainty. By changing a few words in a FOMC or an ECB statement, a central planner can change your life.


For the growing base of the gainfully employed trying to sell you certainty, I am becoming the anti-christ. I kind of like that. My team’s work is grounded in history (context), math (process), and evolution. Government forecasters are more like Newtonian navel-gazers.


The biggest risk to Bernanke (Fed), Draghi (ECB), and Kuroda (BOJ) policies isn’t the policy itself; it’s the expectation embedded in their forecasts that drive those policies . No one actually trusts that these guys will ever get it right – we’re all just trying to front run them.


Back to the Global Macro Grind


“When a system is orderly (that is, low in entropy and rich in structure), more can be known about that system than when it is disorderly and high in entropy” (Cosmic Evolution, pg 49). That’s a great way to characterize what the modern day market system is not (orderly).


Expectations drive volatility. Unless you are the guy on the other end of the phone getting inside information on a central planner’s next big move, there is nothing orderly about market expectations. Everything can change, fast.


For now, the only thing that’s been changing really fast (down Gold, Oil, etc.) is the expectation that Bernanke is going to be able to devalue the dollar in perpetuity. That expectation has two big year-over-year parts:

  1. ABSOLUTE – both US fiscal and monetary policy expectations are tighter, on the margin
  2. RELATIVE – both ECB and BOJ fiscal/monetary policy expectations are looser, on the margin

And, unless the collective consensus that is America’s new transparency/accountability/trust transmission mechanism (Twitter) fails at demanding more of what has been working in the US economy (and at the pump, and in the stock market, and in terms of home price appreciation) for the last 4 months, I expect to see more of the same on those two big parts throughout the coming months.


Remember, this isn’t like the April/May ‘sell and go away’ calls that Hedgeye has made, literally, every year for the last 3 years (2010, 2011, 2012 #timestamped). The spring/summer of 2013 is more like 2009 where:

  1. Q109 #StrongDollar drove #CommodityDeflation (lower prices at the pump into the spring/summer into Q209)
  2. Consumption #GrowthAccelerating (from Q109 to Q2/Q3 2009) when consensus didn’t expect it

Our proprietary Hedgeye GIP (Growth/Inflation/Policy) Model has not changed since 2008. That’s why we were as bullish in March of 2009 on the US Consumption #GrowthAccelerating front as we are now. Competitively speaking, the good news is that Old Wall’s models didn’t change either.


What was different in 2010, 2011, and 2012 (coming out of Q1 versus 2009), wasn’t our model – it was what makes an already (and endemically) unstable market system more unstable – incremental government policy expectations (ie. multiple QEs).


In each of the last 3 years, Bernanke imposed a Dollar Devaluation Policy on global market expectations in Q1:

  1. Inflation expectations then rose, sequentially, from Q1 to Q2
  2. Markets front-ran the Fed, chasing food/oil prices higher from Q1 to Q2
  3. And, rising inflation (sequentially) slowed real inflation-adjusted consumption growth

Then… the Fed’s finest, in their vigilant pursuit of selling their employers (politicians) “stability” and certainty, had to whisper sweet nothings to the old boys throughout the market swallows of the summer. Then… ta-dah… another QE coming out of Jackson Hole… markets (especially Gold) ripped… economy did nothing… etc. etc. etc.


Unfortunately (for him), that’s all Bernanke’s historical baggage to deal with now. I’m personally done with the guy. Away from some family weddings, the best news of my 2013 summer is that he’s not going to be in Jackson Hole this year.


When I read yesterday’s FOMC statement, I breathed a sigh of relief. My life is uncertain enough. Having a little more certainty that this man is going to be doing nothing for the next little while made me sleep easier. I hope it did the same for you too.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1, $98.41-103.92, $81.42-82.53, $1.29-1.32, 97.11-100.53, 1.63-1.73%, 12.91-14.96, 918-955, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Unstable Systems - Chart of the Day


Unstable Systems - Virtual Portfolio


Huge volume quarter but low hold holds back revs and EBITDA.


The first quarter’s performance was largely affected by a much weaker win percentage in the premium players’ business despite a significant increase in the premium players’ rolling volume. The non-gaming business continued to perform well, registering a healthy growth of 17%




  • Premium player volume increased 38% YoY and the highest level of volume ever achieved at the property
  • They are also enhancing their gaming rewards program 
  • China's economy expanded below market expectations and believe that near-term growth will be muted
  • Tourist arrivals in Singapore are only expected to grow at 3-5% vs. a 7% growth rate experienced over the past few years. Tourist spend is also expected to slow.
  • They are putting measures in place to better manage their costs and foster efficiencies in light of the tight labor market
  • Plan to acquire or develop similar businesses to leverage their competancies



  • Optimism on VIP volume expressed on the last call has manifested in their best volume Q ever. However, moving forward, they are more cautious given the noise coming out of China.  Also Malaysia is going through an election process.  The political situation there is also uncertain. Therefore they are a little more cautious for the next 2 quarters.
  • The strength in VIP volume was spread over February and March, January was pretty weak as usual as it's the month before CNY
  • VIP hold was 2.12%
  • Mass segment:  Non-rolling win grew mid-single digit level, slot win was flat. 
  • Credit: They are not pulling back but are being a little more cautious
  • Market share detail for Mass:  47% share
  • Japan: On April 24th there was a meeting of the bipartisan committee headed by a very influential person (expert chief secretary to the previous LDP governemnt). This is the first time they are seeing such senior officials in the bipartisan committee. They believe that this is a sign that the bill will be moving forward. PM Abe also said that casinos would be good for the country. Feel like they will put the legislation to a vote this Fall. The Upper House elections will be over in July and at that point the LVP will have a majority and so the vote should occur October/November. Think that there is a 70-80% chance that the legislation goes through. 
    • Legislation would then indicate which regions could have gaming - that could take 12 months
  • If they held at 2.85% their EBITDA would have been S$400MM
  • Genting has been making small write-offs - not as significant as MBS.  The new Casino Control Act allows them to make write-offs. Previous process involved a difficult application process. There should be more (small) write-offs this year.
  • How are their efforts coming along in developing the premium mass players?
    • Commissions are in the form of comps - don't see them increasing the costs of tapping that market. Think that there is more potential to tap that market for players that are within a 3-4 hour flight from there
  • Commissions have been quite steady over the last 3 years
  • Any change from the diversity of VIP players?  Demographics are more or less the same to what they have been seeing. That said they are still trying to grow the market from North Asia - Macau is closer to them so they don't come to Singapore much. So at the moment SE Asia is really the focus of premium mass player attraction.
  • Mass Market side hold rate: 24-25%. The higher win % is a manifestation of the table mix. As the casino becomes more or less mature, this rate is "normal"- don't expect it to go much higher
  • VIP RC increase:  Most of the growth came from new customers. There wasn't much of a change in geographical mix.
  • Casino Control Act does not address junkets or their ability to lend.  Right now the junkets are negligible. 
  • Need junkets that have more working capital and larger customer bases to make a difference.  The 2 they have today are Malayasian and have limited WC and customer bases.
  • 360 moving day average of VIP RC win % is getting to be normalized
  • Any impact from the impact of Solaire?  No
  • Did the rebate cost (absolute) fall QoQ?  No, it was flat.
  • They are not allowed to do revenue sharing agreement by law
  • Their caution towards China is more from a macro perspective vs. what they are seeing in their facility. Hearing that credit extension within China is slowing down. 
  • Their non-gaming amenities also have some flow-through to their facility. People with young families don't go to the casino but other guests do.
  • Amount of regulation between Macau and China are quite different.  For example, the anti-money laundering rule that has come into effect... impacts Singapore more than Macau, while Macau is looking at implementing something similar i.e. some of the players don't like the level of regulatory scrutiny in Singapore and therefore prefer to stick with Macau as their area of play.
  • Yes they have hired an EVP of operations who only looks after non-gaming at this time. Hee Teck also getting older and needs to look for a successor.  But that is not likely going to happen for 2-3 years. Now that they have been in operations for more than 3 years, the Sr mgmt is very good. Increasingly from an operations perspective, he will be stepping back but will stay involved from a marketing and sales perspective so that he can focus on growing the company. Need another major project.  It's in the interest of shareholders for Hee Tek to free up at least 50% of his time to look at new projects. Japan is a major focus but they are also looking in two other major projects. 
  • Genting Singapore's major focus is in Asia
  • Mix between VIP and Mass: 49% VIP/ 61% Mass 
  • 46% share on a gross revenue basis
  • QoQ: 14% VIP RC growth



  • Resorts World Singapore reported S$669MM of net revenue and S$225MM of Adjusted EBITDA and the Group reported revenue of S$670 million and Adjusted EBITDA of S$250MM
  • Looking ahead, there still exists a certain level of uncertainty over the global economy from the lingering effects of the issues facing the United States and Europe, and the lower than expected economic growth in China in the first quarter this year. The economic growth in Singapore is also expected to remain weak this year due to lower than expected growth in the first quarter. In addition, the Singapore Tourism Board has forecast a slowdown in tourist arrivals and tourism spend going forward mainly due to keen regional competition for the same tourism pie and Singapore's tight labour market. Nevertheless, as an integrated resort destination with two mega attractions in a single location, we are confident that our resort will continue to hold its own in the longer term.
  • Being one of the largest employers in Singapore with over 13,600 employees, we face challenges in stabilising an experienced and service oriented work force. We are striving to improve productivity and restructure processes.
  • At the Group level, Genting Singapore’s efforts are focused towards identifying, evaluating and investing in new projects that create greater shareholder value. Over the last six months we have been investing more on human capital at the management level. We will leverage on our expertise, brand, excellent management track record and financial strength to acquire and / or develop similar businesses that will complement our core competencies.
  • Marine Life Park remained popular and attracted approximately 7,400 visitors daily while Universal Studios Singapore recorded an average daily visitation of 8,400. The hotel business continued to register high occupancy rate of 92%, with an average room rate of S$404.
  • In March 2013, we opened our latest family attraction - Sesame Street Spaghetti Space Chase, the world’s first fully immersive Sesame Street indoor themed ride with Elmo and friends.
  • We are enhancing our loyalty programmes to enable us to better service and reward both our gaming and non-gaming customers. RWS Invites, our non-gaming loyalty programme designed to drive loyalty and repeat visitation to our non-gaming facilities, celebrated its first anniversary with enhanced member privileges and benefits.
  • Genting spent a total of S$255.2 million for the purchase of property, plant and equipment, including the purchase of land in the Jurong Lake precinct for hotel development


Blowout volumes in Singapore lead to strong hold adjustd Q1 for LVS. While low hold typically drives higher volumes, the numbers were still impressive



"In Macao, we delivered record financial results, with outstanding growth and strong operating momentum reflected in every segment of our business. We welcomed a record fourteen million visits to our Cotai Strip properties during the quarter, and delivered a record $630.2 million of adjusted property EBITDA from our Macao property portfolio. We remain confident that our market-leading Cotai Strip properties, The Venetian Macao, Four Seasons Hotel Macao and Plaza Casino, and Sands Cotai Central, with their unrivaled hotel inventory of nearly 9,000 rooms and suites, including the world's largest Sheraton, Conrad and Holiday Inn, and 28 million square feet of interconnected Integrated Resort capacity, will meaningfully enhance the appeal of Macao and the Cotai Strip to business and leisure travelers and provide an outstanding platform for growth in the years ahead.


"We also delivered strong financial results in Singapore, with meaningful growth in gaming and non-gaming revenues contributing to a record financial performance. Rolling Chip volume increased 42.2% to reach a property record $18.21 billion, while Hold-Adjusted Adjusted Property EBITDA increased 15.7% to reach a record $451.1 million.


"The prudent management of our cash flow, including the ability to both invest in future growth and to increase the return of capital to our shareholders, remains a cornerstone of our strategy. The company paid a recurring quarterly dividend of $0.35 per common share during the quarter, an increase of 40% compared to the first quarter of 2012."


-LVS CEO Sheldon Adelson




  • Will continue to lead in mass revenues and EBITDA in Macau
  • Mass/slot businesses did well at SCC
  • MBS:  $18.2 rolling VIP volume - a new record
  • Parisian Macau (Site 3): now under construction; still target opening in late 2015
  • Submitted plans to Macau govt of a 2MM sq ft tropical garden mall just south of SCC - targeting specifically for the mass market
  • Madrid - still number of steps left in development process
  • Will increase dividend at LVS and Sands China in the future
  • Will also consider special dividend and a stock repurchase program


Q & A 

  • Singapore
    • Slot volume has been weak, driven by locals market which hasn't recovered
    • Table side is growing because of programs in place to build customer database.
    • Adding 20 hires by the end of 2013
    • Why 4 quarters of low hold? Customers keep winning. Not concerned about this.  Sees 2.8% average for the year.
    • Demographics: Mainland Chinese (70%) and Singaporeans; growth in customers in non-rolling segment; VIP customers are very concentrated.
    • 1st writeoff of reserve balance ($11MM)
  • Macau
    • SCC:  weak on mass tables (super premium, premium mass), relative to the Venetian; but confident that SCC will reach $1.0 BN in EBITDA
      • Putting in additional ~80 tables (underperforming ones); will take 10-12 months
    • Parisian:  less capex than previous forecast;  piling will start in June. Look for late 2015 opening
    • VIP visitation/spending trends:  govt noise hasn't impacted this segment; spend per visit seems to be higher
    • Sees Mass/ETG as the growth opportunity
    • Super premium/premium mass segments are very competitive
    • Venetian slot renovation disruption: not material
  • Japan - lots of noise; November looks like the most likely time to pass legislation; if legislation passes in November, it's a 1-2 year selection progress.  Says Genting/LVS are the top 2 candidates.
  • Cage drop: 25% of total drop; Mass hold consistent in the aggregate across properties
  • Auditor change:  no disagreements, no reportable events, will select new auditor in next 30 days



  • Venetian Macau
    • VIP hold: 3.57%
    • VIP RC volume: -15.4% YoY to $11.67 BN
    • Mass hold: 32.1%
    • Mass Drop: +20.6% YoY to $1.33 BN
  • Sands Cotai Central
    • VIP hold: 3.09%
    • VIP RC volume: $13.62 BN
    • Mass hold: 21.6%
    • Mass Drop: $1.035 BN
  • Four Seasons
    • VIP hold: 2.21%
    • VIP RC volume: $9.48 BN
    • Mass hold: 48.6%
    • Mass Drop: +4.3% to $110.5 MM
  • Sands Macau
    • VIP hold: 2.76%
    • VIP RC volume: $6.379 BN
    • Mass hold:  21.1%
    • Mass Drop:  $763.2MM
  • Marina Bay Sands
    • VIP hold: 2.51%
    • VIP RC volume: $18.207 BN
    • Mass hold: 23.2%
    • Mass Drop:  $1.195 BN
  • Las Vegas
    • Table hold: 27.6%
    • Table drop: -16.8% to $506.4 MM
    • Slot hold: 8.8%
    • Slot handle:  +2.3% to $495.1 MM
  • Sands Bethlehem
    • Table hold: 
    • Table drop: +21.4% to $244.7 MM
    • Slot hold: 7.1%
    • Slot handle: flat at $1.03 BN
  • Unrestricted cash: $2.38 BN
  • Total debt: $9.83 BN
  • Capex: $197.2 MM (Macau construction and development $128.7 MM, $36.1 MM MBS, $31.4 MM Las Vegas, $1.0 MM Sands Bethlehem)

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%