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Contra-indicator Alert

Client Talking Points

CHINA

The great deceleration in growth continues.   Alongside a sequential slowdown in industrial profits in June, the Chinese Central Government looks to be passing the growth-slowing buck a bit this morning with the government ordering a “nationwide audit of government debt” down to the local government and village level.  The markets didn’t like the move with Chinese equities adding to double digit YTD losses (-1.7% to -11% YTD).   China remains in a Bearish Formation (bearish TRADE/TREND/TAIL) and we remain out of the way of Chinese stocks. 

OIL

Oil’s advance took a respite last week and remain red this morning despite Saudi Prince Alwaleed’s weekend commentary cautioning against increasing production capacity in the face of flagging demand.  Domestic consumption is the primary beneficiary of down energy prices, but we remain in no man’s land here with Brent holding above it’s $105.86 TREND line of support.  Meanwhile, someone was betting big on a big oil event that didn’t materialize, as net long positioning in CFTC futures and options contracts moved to its highest ever – yes, ever is a long-time.  

UST 10YR

With the Nikkei, China, and S&P futures down, 10yr yields haven’t moved a beep 2.56%.  The bond market has front-run the equity market more times than not over the last 5 years.  Is the long end of the curve sniffing out another upside surprise in the jobs report on Friday? Don’t rule it out. The Initial claims data continues to register accelerating improvement and consensus has been on the wrong side of the strong growth call all year. 

Asset Allocation

CASH 38% US EQUITIES 23%
INTL EQUITIES 14% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

HCA

 Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

Buy Homes, Rent Stocks @KeithMcCullough

QUOTE OF THE DAY

"if BOJ's quantitative easing is seen as financing debt, this could lead to rise in yields" Haruhiko “Captain Obvious” Kuroda

STAT OF THE DAY

Contra-indicator alert.  Net long (Speculative) Positioning in Crude oil is at the highest level ever at 334,094 contracts. 


WYNN 2Q 2013 REPORT CARD

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:  IN LINE

  • The headline was a miss from Consensus but the Street was too high in Macau given the monthly numbers.  Vegas performed very well even after excluding the $12m favorable adjustment to the receivable allowance.  July is off to a great start for Wynn despite lower market share.  While not a raging bull, overall we feel better about the WYNN story following the release and call.

 

PROVISION FOR DOUBTFUL ACCOUNTS

  • BETTER:  WYNN recorded credits to the provision for doubtful accounts in 2Q. The adjustment was $14.9MM, consisting of a $12.2MM credit at Wynn Las Vegas and a $2.7MM credit at Wynn Macau.
  • PREVIOUSLY:  "Provision for doubtful accounts, this is about the appropriate run rate. There's maybe a little more going forward. So it fluctuates as we get large collections in Macau that are fully reserved and we feel pretty good with this run rate."

LAS VEGAS ROOMS

  • BETTER:  REVPAR was $233, up 4.7% YoY.  WYNN continues to see non-gaming drive Vegas growth.
  • PREVIOUSLY:  "Looking out over the rest of the year, we also see that, that's a pattern that we feel confident that is going to continue to repeat itself. And then, if we're looking out to grow out into 2014, which we've always talked about as what we felt the best as far as where we knew the room contribution was really going to bounce back in that segment. 2014, its way ahead of pace of where we actually thought it would be."

COTAI BUDGET

  • SAME:  Maximum budget is $4 billion.  Projected to open by Chinese New Year 2016.
  • PREVIOUSLY:  "The budget is still just under $4 billion and 6 million feet."

WYNN ENCORE NEW AREA

  • SAME:  Well-received response to the new high-limit rooms
  • PREVIOUSLY:  "We continue to upgrade our high-limit areas. We just opened a new high-limit slots area as Phase 1, with 96 slot machines. And we're opening up our Phase 2 with another 50 machines this weekend, in time for the May holiday.

MASS

  • SAME:  Mass (table + slots) experienced low hold in June but that has been corrected in July.  WYNN sees July mass win up 22% YoY and 13% sequentially.
  • PREVIOUSLY:  "Our mass business overall is very healthy. Our high-limit (mass/slot) business remains strong, so we're pretty confident going forward."

MONDAY MORNING RISK MONITOR: SETUP STILL FAVORABLE / PLS JOIN US FOR OUR 11AM CONF CALL

Takeaway: The intermediate term FIG setup remains favorable with only a handful of minor watch areas. Short-term XLF upside modestly exceeds downside.

***** EXPANDING COVERAGE TO U.S. ASSET MANAGEMENT STOCKS *****

CONFERENCE CALL TODAY 11 am

 

Please join us for a conference call today, July 29th at 11am EDT, to discuss our top ideas and the outlook for the

U.S. Asset Manager space. The dial-in and materials for the call are below.

 

This call will be the inaugural roll-out of Asset Management coverage by Jonathan Casteleyn, CFA, CMT.

Stocks that will be covered on today's call: (BLK, BEN, LM, IVZ, TROW, JNS) 

 

  (Toll Free) or (Direct)
Conference Code: 948342#

There will be a 90+ page slide deck for today's call. The link to the deck is here: Slide Deck

 

 

Key Takeaways:

Last week was rather unremarkable from a risk monitoring standpoint. We saw modest widening in US Financial credit default swaps (+4 bps) and a 21 bps increase in high yield rates to 6.17%. Also, there is a modest, but consistent, rising trend in the TED Spread over the last few weeks - a measure of systemic risk in the US banking system. Outside of these three areas, however, most of the rest of the world is behaving pretty well. On an intermediate term basis, we continue to see a lot of positives. Note the preponderance of green in the middle columns (MoM) of our summary table below. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged

 • Intermediate-term(WoW): Positive / 9 of 13 improved / 2 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Positive / 3 of 13 improved / 0 out of 13 worsened / 10 of 13 unchanged

 

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1. U.S. Financial CDS -  Bond insurer, Assured Guaranty (AGO) saw its swaps widen 48 bps last week as follow through the Detroit situation. Interestingly, the municipal bond credit default index, MCDX, actually tightened by 2 bps last week. Otherwise, swaps were generally wider, though for the most part only narrowly. Overall, swaps widened for 23 out of 27 domestic financial institutions last week.

 

Tightened the most WoW: MTG, SLM, JPM

Widened the most WoW: AGO, TRV, MBI

Tightened the most WoW: AIG, GNW, SLM

Tightened the least MoM: AGO, UNM, MBI

 

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2. European Financial CDS - Russia's megabank, Sberbank, saw its recent trend of tightening swaps come to an end, with a 17 bps increase last week to 224 bps. Sberbank swaps effectively reflect Brent crude oil prices. Bank swaps followed the lead of respective sovereign swaps, for the most part, with Spanish and Portuguese swaps tightening noticeably. UK bank swaps also tightened last week by an average of 7 bps.

 

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3. Asian Financial CDS - A relatively uneventful week for Asian Financials, with swaps widening by an average of 1 bp and a median of 2 bps. Daiwa saw the largest WoW move, at +6 bps.

 

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4. Sovereign CDS – Sovereign swaps were tighter across the board last week, led by Portugal (-53 bps), Spain (-19 bps) and Italy (-16 bps). The U.S., Germany and Japan were all tighter by 1-2 bps as well. 

 

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5. High Yield (YTM) Monitor – High Yield rates rose 21.2 bps last week, ending the week at 6.17% versus 5.96% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 0.5 points last week, ending at 1805.25.

 

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7. TED Spread Monitor – The TED spread rose 0.5 basis points last week, ending the week at 24.7 bps this week versus last week’s print of 24.17 bps.

 

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8. Journal of Commerce Commodity Price Index – The JOC index rose 0.9 points, ending the week at -0.33 versus -1.2 the prior week.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

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10. ECB Liquidity Recourse to the Deposit Facility – Deposits were essentially unchanged last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

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11. Markit MCDX Index Monitor – Last week spreads tightened 2 bps, ending the week at 91.05 bps versus 93.03 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

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12. Chinese Steel – Steel prices in China rose 0.6% last week, or 20 yuan/ton, to 3470 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

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13. 2-10 Spread – Last week the 2-10 spread widened to 225 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.7% upside to TRADE resistance and 1.4% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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WYNN 2Q 2013 CONFERENCE CALL NOTES

Headline miss but actually not a bad Q. July commentary was positive.

 

 

CONF CALL 

  • WYNN COTAI
    • Maximum Cotai project cost (all-in including pre-open and cap int of $500m): $4 billion, could be a little less
    • Projected to open CNY 2016
  • Ex credit adjustment in 2Q 2012, Macau would have been up a little bit YoY
  • Little behind in slot (hold, not coin-in)
  • Mass win: July up 22% YoY and up 13% sequentially 
  • EBITDA share: 16% 

 

Q & A

 

  • Concession renewals:  comfortable being in Macau 
  • Macau VIP margins:  held less than 2% in direct play, held high on junkets. mix negatively impacted margins
  • Mass:  hold issues in slots and mass tables in June; that has corrected in July
  • Half of cash investments is in Macau
  • International Vegas breakout:  table win - 52% Asian, 24% Latin, 24% domestic;  $25-30MM of the $177Mm slot win is international
  • Vegas:  Upside to margins due to increasing international exposure
  • Macau Premium-mass segment:  hyper competitive; not competing in the high discounting/promotional environment
  • Mild construction impact in Macau; 600 room refurbishment in Wynn Tower - will be finished in late October
  • Capital allocation:  $1 in dividend per quarter; if excess CF, board will decide.  Cotai project:  $200MM accordian structure Libor +175bps
  • Philly/Boston:  5-6 applicants in Philly; MA - ongoing suitability investigations
  • Investments:  Philly $900MM ($300-400MM equity):  Boston $500-550MM ($300MM equity)
  • High-end slot limit rooms:  very-well received; catching up to competition
  • Missing out on rising table minimums in Cotai?  Not much impact.  Average bet at WYNN is pretty high.
  • Non-gaming will drive Vegas business; can withstand the competition; MGM throws plenty of money at customers
  • Vegas recovery?  Vegas doing better YoY but wouldn't say a recovery yet.  Additional capacity that came online during recession was badly timed.
  • Not having a 'real recovery' in the US
  • China macro impact:  very cautious with credit and collections but have not seen the impact
  • Sees visitation pick up in Guangdong areas;  getting more people to stay longer
  • Cotai capex contribution:  $300MM to date; expect another $300MM for rest of 2013; $1 billion in 2014; vast majority of rest in 2015/2016 - will utilize 30% of FCF
  • Cotai Features:  Wynn Palace - name of hotel; lake/fountains similar to Bellagio; capture light-rail traffic through gondola
  • Japan:  no comments; interested in Tokyo and Osaka 

BIG WEEK IN MACAU AND OTHER OBSERVATIONS

Pulls the market back to trend (that's a good thing)

 

 

Macau is back on track for another 20% (give or take) growth month.  We remain bullish on Macau.  The near-term momentum is strong and we believe there is cushion in both the VIP and Mass business to offset the China macro issues.

 

Average daily table revenues (ADTR) grew 50% YoY this past week and up 13% over June’s ADTR.  With only 3 days left in the month, it’s pretty safe to say that July was a good month for the Macau operators.  We are raising our full month GGR growth projection (includes slots) to +19-21% YoY, up from 14-19%. 

 

The strength this past week looks volume driven both in the VIP and the Mass segments. While not included in the table games numbers, we are hearing the Electronic Table Games seem to be surging and could provide a boost above our slot forecast of HK$1.15 billion in July revenues. 

 

In terms of market share, July has been a big month for LVS and Galaxy.  LVS's share of 22.8% is not only above the 3 month trend but grew 170 bps month-to-date in only one week.  The big boxing match held at the Venetian on Saturday night probably drove most of the increase.  We heard the Mass floor at the Venetian was packed and it's safe to assume that a number of top VIPs were present as well.  The match featured the very popular boxer Zou Shiming who was the first Chinese fighter to ever medal at the Olympics.  We can only imagine how successful the Manny Paquio fight will be in November.

 

MPEL remains well below its recent share trend and Wynn and MGM are trending slightly lower.  LVS likely took share from all 3 operators, especially MPEL on Saturday.  MPEL is likely holding below the market but we also think that Altira had a couple of bad volume weeks.  However, MPEL remains one of our top picks along with MGM and LVS.

 

BIG WEEK IN MACAU AND OTHER OBSERVATIONS - mmm1

 

BIG WEEK IN MACAU AND OTHER OBSERVATIONS - mmm2


Gravity's Wisdom

This note was originally published at 8am on July 15, 2013 for Hedgeye subscribers.

“Wisdom is not wisdom when it is derived from books alone.”

-Horace

 

Horace was the prominent Roman poet during Augustus’ reign. He died at the age of 56, in 8 BC. Despite his fear that his “books would eventually become food for vandal moths” (The Swerve, page 84), his wisdoms didn’t die alongside him.

 

History teaches those of us who care to study it more than we’ll ever be able to know. The more I read, the more I realize that I know very little. History also gives me a tremendous appreciation for both empathy and context.

 

If you can’t empathize with another person’s perspective, how can you criticize it? If you can’t contextualize today within yesterday, how can you handicap where we may be going next?

 

Back to the Global Macro Grind

 

Given that I have a degree in Keynesian economics, I feel relatively comfortable disagreeing with many of its assumptions. Admittedly, doing it with my own money instead of theorizing from a textbook helped expedite my learning process.

 

“Don’t think, just do” is something else that Horace wrote. But just doing isn’t enough. You have to be held accountable to what you are doing. Learning from your mistakes is an invaluable lesson. Doing it with other people’s money is called responsibility.

 

I suggest both the Fed and the President of the Unites States consider that when affecting either the value of our currency and/or the risk-free rate of return on our hard earned savings. On both major factors, there is responsibility in their policy recommendation.

 

How does this tie back to the US economy?

  1. Monetary and Fiscal Policy is causal to A) the value of a currency and B) the risk-free rate of return on that money
  2. Since WWII, there has never been a sustained US economic growth period without #StrongDollar and #Rising Rates

So why fight history? That’s what Bernanke is currently trying to do. If you are a Bernanke fan, at a bare minimum, you have to acknowledge that he is trying to “smooth” the pace of US Dollar gains and #RatesRising at this point. Why should we let him?

 

In the very immediate-term, we know what an acceleration in #StrongDollar and #RisingRates does:

  1. It smokes Gold and related #CommodityBubbles
  2. It beats down on Treasuries and related Bonds
  3. It eats into slow growth #YieldChasing investments (MLPs, Utilities, Junk Bonds, etc.)

And that’s all bad for who? Bingo – those who are long 1, 2, and 3. Meanwhile, who gets paid?

  1. Consumers - #CommodityDeflation = Tax Cut
  2. Savers – risk free rates of return on Savings accounts go up, finally
  3. Growth Investors – oh yes folks, this one is stealth

The first two compensation pools of people are obvious. Those populations, by the way, are much larger than the partnership group at PIMCO that gets paid in size if Bonds outperform growth stocks in perpetuity.

 

The third constituency is for crazy people like me. You know, people who don’t wake up every morning trying to scare the hell out of you, burn your currency, and hand your tax-dollars over to bankers who pay themselves. We are Growth Investors.

 

Whether I’m investing in a low-dividend yielding big cap growth stock like Starbucks (SBUX) or private growth company like Hedgeye, it’s all the same bet. We aren’t betting on the end of the world. We are betting on brands and people. We are betting they grow.

 

Put another way, here’s how the market has been scoring this for the last month:

  1. Consumer Discretionary (XLY) stocks +5.1% versus Basic Materials (XLB) stocks -0.8%
  2. Low Yield stocks (i.e. growth stocks) are +5.1% in the last month and +26.3% YTD
  3. Top 25% EPS growth stocks (SP500) are +4.9% in the last month and +23.7% YTD

Bernanke, you got a problem with that?

 

I didn’t read this in your Keynesian Econ 101 book, bro. It’s on the tape. This is not only consistent with the 1983-1989 (Reagan) and 1993-1999 (Clinton) bi-partisan periods of US growth investing (where US GDP averaged over +4% during each period), it’s been a consistent market message for the last 180 days. Read and respect its message.

 

For the last 6 months, here are the #StrongDollar correlations to major market moves:

  1. SP500 = +0.75
  2. Commodities (CRB Index) = -0.78
  3. Gold = -0.74

No, no, no. The Mucker is not considered a wise man in Washington. Nor does he want to be. But please, my friends, please - don’t let an un-elected body of perceived wisdom at the US Federal Reserve mess this one up again. The gravity of Mr. Market’s wisdoms have spoken. They are the most pro-growth signals we have seen in years. Only your government can mess this one up this time.

 

I’ll be hosting our Q312 Global Macro Themes call at 11AM EST this morning. Ping Sales@Hedgeye.com if you’d like access.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.44-2.77%

SPX 1642-1690

VIX 13.01-15.04

USD 82.45-83.88

Oil 106.48-110.29

Gold 1210-1298

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gravity's Wisdom - Chartoftheday

Gravity's Wisdom - vp 7 15


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